UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20-F
(Mark
One)
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o
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ________________ to
________________
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Commission
file number: 001-31335
HIMAX TECHNOLOGIES,
INC.
(Exact
name of Registrant as specified in its charter)
Not
Applicable
(Translation
of Registrant’s name into English)
CAYMAN
ISLANDS
(Jurisdiction
of incorporation or organization)
NO. 26, ZIH LIAN ROAD, FONGHUA VILLAGE
SINSHIH TOWNSHIP, TAINAN COUNTY 74445
TAIWAN, REPUBLIC OF CHINA
(Address
of principal executive offices)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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Ordinary
Shares, par value $0.0001 per ordinary share
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The
Nasdaq Global Select Market Inc.*
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*
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Not
for trading, but only in connection with the listing on the Nasdaq Global
Select Market, Inc. of American Depositary Shares representing such
Ordinary Shares
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Securities
registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act: None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report.
191,979,691 Ordinary Shares.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP
x International
Financial Reporting Standards as issued by the International Accounting
Standards Board o Other
o
If “Other”
has been checked in response to the previous question, indicate by check mark
which financial statement item the registrant has elected to
follow. o Item
17 o Item
18
If this is
an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
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This
annual report on Form 20-F contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Although these forward-looking statements, which may include statements
regarding our future results of operations, financial condition, or business
prospects, are based on our own information and information from other sources
we believe to be reliable, you should not place undue reliance on these
forward-looking statements, which apply only as of the date of this annual
report. The words “anticipate,” “believe,” “expect,” “intend,” “plan,”
“estimate” and similar expressions, as they relate to us, are intended to
identify a number of these forward-looking statements. Our actual results of
operations, financial condition or business prospects may differ materially from
those expressed or implied in these forward-looking statements for a variety of
reasons, including, among other things and not limited to, our anticipated
growth strategies, our future business developments, results of operations and
financial condition, our ability to develop new products, the expected growth of
the display driver markets, the expected growth of end-use applications that use
flat panel displays, particularly TFT-LCD panels, development of alternative
flat panel display technologies, and other factors. For a discussion of these
risks and other factors, please see “Item 3.D. Key Information—Risk
Factors.”
Except as
discussed in the next two sentences, all translations from U.S. dollars to NT
dollars in this annual report were made at a rate of $1.00 to NT$32.43, the noon
buying rate in The City of New York for cable transfers in NT dollars per U.S.
dollar as certified for customs purposes by the Federal Reserve Bank of New York
on December 31, 2007. NT dollar amounts relating to the estimated fair value per
share of all share-based compensation issued to employees and consultants (as
described in “Item 5A. Operating Results—Critical Accounting Policies and
Estimates—Share-Based Compensation Expenses”) have been calculated based on
historical exchange rates used for our accounting purposes. No representation is
made that the NT dollar amounts referred to herein could have been or could be
converted into U.S. dollars at any particular rate or at all. On June 19, 2008,
the noon buying rate was $1.00 to NT$30.39. Any discrepancies in any table
between totals and sums of the amounts listed are due to rounding.
Unless
otherwise indicated, in this annual report,
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•
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the
terms “we,” “us,” “our company,” “our,” and “Himax” refer to Himax
Technologies, Inc., its predecessor entities and
subsidiaries;
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•
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the
term “Himax Taiwan” refers to Himax Technologies Limited, our wholly owned
subsidiary in Taiwan and our
predecessor;
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•
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“shares”
or “ordinary shares” refers to our ordinary shares, par value $0.0001 per
share;
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•
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“RSUs”
refers to restricted share units;
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•
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“ADSs”
refers to our American depositary shares, each of which represents one
ordinary share;
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•
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“ADRs”
refers to the American depositary receipts that evidence our
ADSs;
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•
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“ROC”
or “Taiwan” refers to the island of Taiwan and other areas under the
effective control of the Republic of
China;
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•
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“PRC”
or “China” for purposes of this annual report refers to the People’s
Republic of China, excluding Taiwan and the special administrative regions
of Hong Kong and Macau;
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•
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“AMOLED”
refers to active matrix organic light-emitting
diode;
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“IC”
refers to integrated circuit;
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•
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“LCOS”
refers to liquid crystal on
silicon;
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•
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“LTPS”
refers to low temperature poly
silicon;
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“OLED”
refers to organic light-emitting
diode;
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“TFT-LCD”
refers to amorphous silicon thin film transistor liquid crystal display,
or “a-Si TFT-LCD;”
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“processed
tape” refers to polyimide tape plated with copper foil that has a circuit
formed within it, which is used in tape-automated bonding
packaging;
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“semiconductor
manufacturing service providers” refers to third-party wafer fabrication
foundries, gold bumping houses and assembly and testing
houses;
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“large-sized
panels” refers to panels that are typically ten inches and above in
diagonal measurement;
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“small-
and medium-sized panels” refers to panels that are typically less than ten
inches in diagonal measurement;
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all
references to “New Taiwan dollars,” “NT dollars” and “NT$” are to the
legal currency of the ROC; and
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•
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all
references to “dollars,” “U.S. dollars,” and “$” are to the legal currency
of the United States.
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Not
applicable.
Not
applicable.
The
selected consolidated statement of income data and selected consolidated cash
flow data for the years ended December 31, 2005, 2006 and 2007 and the selected
consolidated balance sheet data as of December 31, 2006 and 2007 are derived
from our audited consolidated financial statements included herein, which were
prepared in accordance with U.S. GAAP. The selected consolidated balance sheet
data as of December 31, 2003, 2004 and 2005 and the selected consolidated
statement of operations data and consolidated cash flow data for the years ended
December 31, 2003 and 2004 have been derived from our audited consolidated
financial statements that have not been included herein and were prepared in
accordance with U.S. GAAP. Our consolidated financial statements include the
accounts of Himax Technologies, Inc. and its subsidiaries as if we had been in
existence for all years presented. As a result of our reorganization, 100% of
our outstanding ordinary shares immediately prior to our initial public offering
were owned by former shareholders of Himax Taiwan. See “Item 4.A. History and
Development of the Company.” In presenting our consolidated financial
statements, the assets and liabilities, revenues and expenses of Himax Taiwan
and its subsidiaries are included in our consolidated financial statements at
their historical amounts for all periods presented. Our historical results do
not necessarily indicate results expected for any future periods. The selected
financial and operating data set forth below should be read in conjunction with
“Item 5. Operating and Financial Review and Prospects” and the consolidated
financial statements and the notes to those statements included
herein.
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Year
Ended December 31,
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2003
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2004
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2005
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2006
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2007
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(in
thousands, except per share data)
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Consolidated
Statements of Operations Data:
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Revenues
from third parties, net
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$ | 29,050 | $ | 109,514 | $ | 217,420 | $ | 329,886 | $ | 371,267 | ||||||||||
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Revenues
from related parties, net
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102,793 | 190,759 | 322,784 | 414,632 | 546,944 | |||||||||||||||
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Costs
and expenses(1):
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Cost
of revenues
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100,102 | 235,973 | 419,380 | 601,565 | 716,163 | |||||||||||||||
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Research
and development
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21,077 | 24,021 | 41,278 | 60,655 | 73,906 | |||||||||||||||
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General
and administrative
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4,614 | 4,654 | 6,784 | 9,762 | 14,903 | |||||||||||||||
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Sales
and marketing
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2,669 | 2,742 | 4,762 | 6,970 | 9,334 | |||||||||||||||
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Operating
income
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$ | 3,381 | $ | 32,883 | $ | 68,000 | $ | 65,566 | $ | 103,905 | ||||||||||
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Net
income (loss)(2)
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$ | (581 | ) | $ | 36,000 | $ | 61,558 | $ | 75,190 | $ | 112,596 | |||||||||
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Earnings
(loss) per ordinary share(2) and per ADS(3):
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Basic
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$ | (0.00 | ) | $ | 0.21 | $ | 0.35 | $ | 0.39 | $ | 0.57 | |||||||||
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Diluted
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$ | (0.00 | ) | $ | 0.21 | $ | 0.34 | $ | 0.39 | $ | 0.57 | |||||||||
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Weighted-average
number of shares used in earnings per share computation:
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Basic
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116,617 | 169,320 | 176,105 | 192,475 | 196,862 | |||||||||||||||
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Diluted
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116,617 | 173,298 | 180,659 | 195,090 | 197,522 | |||||||||||||||
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Cash
dividends declared per ordinary share(4)
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$ | 0.00 | $ | 0.00 | $ | 0.08 | $ | 0.00 | $ | 0.20 | ||||||||||
____________
Note:
(1)
The amount
of share-based compensation included in applicable costs and expenses categories
is summarized as follows:
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Year Ended
December 31,
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2003
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2004
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2005
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2006
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2007
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(in
thousands)
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Cost
of revenues
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$ | 827 | $ | 291 | $ | 188 | $ | 275 | $ | 422 | ||||||||||
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Research
and development
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11,666 | 4,288 | 6,336 | 11,806 | 15,393 | |||||||||||||||
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General
and administrative
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2,124 | 721 | 848 | 1,444 | 2,182 | |||||||||||||||
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Sales
and marketing
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1,349 | 537 | 1,241 | 1,625 | 2,324 | |||||||||||||||
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Total
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$ | 15,966 | $ | 5,837 | $ | 8,613 | $ | 15,150 | $ | 20,321 | ||||||||||
In 2007,
of the $20.3 million in share-based compensation, $14.4 million was settled in
cash.
(2)
Under the
ROC Statute for Upgrading Industries, we are exempt from income taxes for income
attributable to expanded production capacity or newly developed technologies. If
we had not been exempt from paying this income tax, net income and basic and
diluted earnings per share would have been $52.4 million, $0.30 and $0.29,
respectively, for the year ended December 31, 2005, $59.2 million, $0.31 and
$0.30, respectively, for the year ended December 31, 2006, and $85.6 million,
$0.43, and $0.43, respectively, for the year ended December 31, 2007. A portion
of these tax exemptions expires on March 31, 2009, December 31, 2010 and
December 31, 2012, respectively.
(3)
Each ADS
represents one ordinary share.
(4)
In
November 2005, we distributed a special cash dividend of approximately $0.075
per share in respect of our performance prior to our initial public offering.
This special cash dividend should not be considered representative of the
dividends that would be paid in any future periods or our dividend
policy.
The
following table presents our selected consolidated balance sheet data as of
December 31, 2003, 2004, 2005, 2006 and 2007 and selected consolidated cash flow
data for the years ended December 31, 2003, 2004, 2005, 2006 and
2007:
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As of December
31,
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2003
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2004
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2005
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2006
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2007
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(in
thousands)
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Consolidated
Balance Sheet Data:
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Cash
and cash equivalents(1)
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$ | 2,529 | $ | 5,577 | $ | 7,086 | $ | 109,753 | $ | 94,780 | ||||||||||
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Accounts
receivable, net
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12,543 | 27,016 | 80,259 | 112,767 | 88,682 | |||||||||||||||
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Accounts
receivable from related parties, net
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22,893 | 39,129 | 69,587 | 116,850 | 194,902 | |||||||||||||||
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Inventories
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21,088 | 54,092 | 105,004 | 101,341 | 116,550 | |||||||||||||||
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Total
current assets
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88,245 | 144,414 | 300,056 | 466,715 | 538,272 | |||||||||||||||
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Total
assets
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96,159 | 157,770 | 327,239 | 518,794 | 652,762 | |||||||||||||||
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Accounts
payable
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22,901 | 38,649 | 105,801 | 120,407 | 147,221 | |||||||||||||||
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Total
current liabilities
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43,613 | 52,157 | 160,784 | 153,279 | 185,599 | |||||||||||||||
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Total
liabilities
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43,870 | 52,246 | 160,784 | 153,471 | 190,364 | |||||||||||||||
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Ordinary
shares
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17 | 18 | 18 | 19 | 19 | |||||||||||||||
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Total
stockholders’ equity (1)
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52,289 | 104,860 | 165,831 | 363,927 | 451,309 | |||||||||||||||
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Consolidated
Cash Flow Data:
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||||||||||||||||||||
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Net
cash provided by (used in) operating activities
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(1,593 | ) | (8,688 | ) | 12,464 | 29,696 | 77,162 | |||||||||||||
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Net
cash provided by (used in) investing activities
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(28,915 | ) | 11,001 | (25,363 | ) | (8,927 | ) | (25,019 | ) | |||||||||||
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Net
cash provided by (used in) financing activities
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30,341 | 735 | 14,404 | 81,886 | (67,241 | ) | ||||||||||||||
____________
Note:
(1)
Cash and
cash equivalents at December 31, 2006 increased significantly as compared to
December 31, 2005. This increase was primarily due to net proceeds of $147.4
million received from our initial public offering in April 2006, which also
caused the increase in our stockholders’ equity by the same
amount.
Exchange
Rate Information
The
following table sets forth the average, high, low and period-end noon buying
rates between NT dollars and U.S. dollars for the periods
indicated:
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Noon
Buying Rate
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||||||||||||||||
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Average(1)
|
High
|
Low
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Period-end
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|||||||||||||
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(NT
dollars per U.S. dollar)
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Period
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2003
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34.40 | 34.98 | 33.72 | 33.99 | ||||||||||||
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2004
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33.37 | 34.16 | 31.74 | 31.74 | ||||||||||||
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2005
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32.13 | 33.77 | 30.65 | 32.80 | ||||||||||||
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2006
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32.51 | 33.31 | 31.28 | 32.59 | ||||||||||||
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2007
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32.85 | 33.41 | 32.26 | 32.43 | ||||||||||||
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First
quarter
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32.92 | 33.13 | 32.38 | 33.01 | ||||||||||||
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Second
quarter
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33.13 | 33.41 | 32.74 | 32.83 | ||||||||||||
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Third
quarter
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32.93 | 33.10 | 32.67 | 32.67 | ||||||||||||
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Fourth
quarter
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32.43 | 32.61 | 32.26 | 32.43 | ||||||||||||
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2008
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January
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32.36 | 32.49 | 32.15 | 32.15 | ||||||||||||
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February
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31.36 | 32.03 | 30.90 | 30.92 | ||||||||||||
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March
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30.58 | 31.09 | 29.99 | 30.37 | ||||||||||||
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April
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30.36 | 30.52 | 30.24 | 30.47 | ||||||||||||
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May
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30.59 | 30.99 | 30.36 | 30.37 | ||||||||||||
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June
(through June 19)
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30.36
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30.44
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30.15
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30.39
|
||||||||||||
____________
Source:
Federal Reserve Bank of New York.
Note: (1)
Determined
by averaging the rates on each business day.
Not
applicable.
Not
applicable.
Risks
Relating to Our Financial Condition, Business and Industry
We
derive substantially all of our net revenues from sales to the TFT-LCD panel
industry, which is highly cyclical and subject to price fluctuations. Such
cyclicality and price fluctuations could negatively impact our business or
results of operations.
In 2006
and 2007, approximately 97.6% and 97.4% of our revenues, respectively, were
attributable to display drivers that were incorporated into TFT-LCD panels. We
expect to be substantially dependent on sales to the TFT-LCD panel industry for
the foreseeable future. The TFT-LCD panel industry is intensely competitive and
is vulnerable to cyclical market conditions. The average selling prices of
TFT-LCD panels could decline for numerous reasons, including the
following:
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·
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a
surge in manufacturing capacity due to the ramping up of new fabrication
facilities and/or improvements in production
yields;
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·
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manufacturers
operating at high levels of capacity utilization in order to reduce fixed
costs per panel; and
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·
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lower-than-expected
demand for end-use products that incorporate TFT-LCD
panels.
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An
oversupply of large-sized TFT-LCD panels in 2006 resulted in downward pricing
pressure on TFT-LCD panel manufacturers which, in turn, resulted in similar
downward pricing pressure on us. We could not sufficiently reduce costs to
completely offset the revenue losses from such downward pricing pressure.
Moreover, we were required to extend the payment terms we offered to certain of
our customers, which also negatively impacted our cash flows. There have been industry reports of a
possible oversupply of TFT-LCD panels starting from the fourth quarter of 2008, which could result in downward pricing
pressure on TFT-LCD panel manufacturers similar to the situation in 2006 and we
cannot assure you that we will be able to reduce costs to offset such downward pricing pressure
in the future. During periods of declining
average selling prices for TFT-LCD panels, TFT-LCD panel manufacturers may also
decrease capacity utilization and sell fewer panels, which could depress demand
for our display drivers. As a result, the cyclicality of the TFT-LCD panel
industry could adversely affect our revenues, cost of revenues and results of
operations.
Our
strategy of expanding our product offerings to non-driver products may not be
successful.
We have
devoted, and intend to continue to devote, financial and management resources to
the development, manufacturing and marketing of non-driver products, including,
among others, timing controllers, TFT-LCD television and monitor chipsets, LCOS
microdisplays, and power management ICs. For
example in January 2008 we announced a strategic alliance with 3M to
commercialize LCOS mobile projectors, of which our LCOS microdisplays are a key
component. We devoted, and intend to continue to devote, financial and
management resources to the development, manufacturing and marketing of LCOS
products as we believe end products utilizing LCOS technology could potentially
be a large market. LCOS technology, however, is at a relatively early stage of
commercialization and the producing LCOS products at acceptable yields has
proven difficult. Therefore we cannot assure you that there will be market
acceptance of these LCOS products, or that this strategic alliance with 3M will
be successful.
Developing
of each of our non-driver products requires a significant amount of management,
engineering and monetary resources. Numerous uncertainties exist in developing
new products and we cannot assure you that we will be able to develop our
non-driver products successfully. The
failure or delay in the development of any of these non-driver products or the
low market acceptance of either our products or the end devices using our
products may adversely affect our results of operations and growth
prospects.
We
face numerous challenges relating to our growth.
The scope
and complexity of our business has grown significantly since our inception. Our
growth has placed, and will continue to place, a strain on our management,
personnel, systems and resources. If we are unable to manage our growth
effectively, we may not be able to take advantage of market opportunities,
execute our business plan or respond to competitive pressures. To successfully
manage our growth, we believe we must effectively:
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hire,
train, integrate and manage additional qualified engineers, senior
managers, sales and marketing personnel and information technology
personnel;
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implement
additional, and improve existing, administrative and operations systems,
procedures and controls;
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expand
our accounting and internal audit team, including hiring additional
personnel with U.S. GAAP and internal control
expertise;
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continue
to expand and upgrade our design and product development
capabilities;
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manage
multiple relationships with semiconductor manufacturing service providers,
customers, suppliers and certain other third parties;
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continue to develop and
commercialize non-driver products, including, among others, timing controllers, TFT-LCD
television and monitor chipsets, LCOS microdisplays, and power management
ICs;
and
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manage
our financial condition.
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Moreover,
if our allocation of resources does not correspond with future demand for
particular products, we could miss market opportunities, and our business and
financial results could be materially and adversely affected. Therefore, we
cannot assure you that we will be able to manage our growth effectively in the
future.
We do not expect
to sustain our recent growth rates in revenues or net income, so you should not
rely on the results of recent periods as
an indication of future revenues or net income growth.
Our
revenues and net income have grown significantly since our inception in 2001.
Our annual revenues increased by 37.8% to $744.5 million in 2006 and further
increased by 23.3% to $918.2 million in 2007. Our net income increased from
$61.6 million in 2005 to a net income of $75.2 million in 2006 and then further
increased to a net income of $112.6 million in 2007. We do not expect similar
growth rates in our revenues and net income in future periods. Accordingly, you
should not rely on the results of any prior quarterly or annual periods as
indicative of our future revenues or net income growth or financial
results.
Our
quarterly revenues and operating results are difficult to predict, and if we do
not meet quarterly financial expectations, our ADS price will likely
decline.
Our
quarterly revenues and operating results are difficult to predict. They have
fluctuated in the past from quarter to quarter and may continue to do so in the
future. Our operating results may in some quarters fall below market
expectations, likely causing our ADS price to decline. Our quarterly revenues
and operating results may fluctuate because of many factors,
including:
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our
ability to accurately forecast shipments, average selling prices, cost of
revenues, operating expenses, non-operating income/loss, and tax
rates;
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our
ability to successfully design, develop and introduce in a timely manner
new or enhanced products acceptable to our
customers;
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changes
in the relative mix in the unit shipments of our products, which have
significantly different average selling prices and cost of revenues as a
percentage of revenues;
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changes
in share-based compensation;
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the
loss of one or more of our key
customers;
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decreases
in the average selling prices of our
products;
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our
accumulation of inventory;
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the
relative unpredictability in the volume and timing of customer
orders;
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the
risk of cancellation or deferral of customer orders in anticipation of our
new products or product enhancements, or due to a reduction in demand of
our customers’ end product;
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changes
in our payment terms with our customers and our
suppliers;
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our
ability to negotiate favorable prices with customers and
suppliers;
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changes
in the available capacity of semiconductor manufacturing service
providers;
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the
rate at which new markets emerge for new products under
development;
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the
evolution of industry standards and
technologies;
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product
obsolescence and our ability to manage product
transitions;
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increase
in cost of revenues due to
inflation;
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our
involvement in litigation or other types of
disputes;
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general
economic conditions;
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income
tax regulation changes; and
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natural
disasters, particularly earthquakes and typhoons, or outbreaks of disease
affecting countries where we conduct our business or where our products
are manufactured, assembled or
tested.
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The
factors listed above are difficult to foresee, and along with other factors,
could seriously harm our business. We anticipate the rate of new orders may vary
significantly from quarter to quarter. Our operating expenses and inventory
levels are based on our expectations of future revenues, and our operating
expenses are relatively fixed in the short term. Consequently, if anticipated
sales and shipments in any quarter do not occur when expected, operating
expenses and inventory levels could be disproportionately high, and our
operating results for that quarter and, potentially, future quarters may be
negatively impacted. Any shortfall in our revenues would directly impact our
business. Our operating results are volatile and difficult to predict;
therefore, you should not rely on the operating results of any one quarter as
indicative of our future performance. Our operating results in future quarters
may fall below the expectations of securities analysts and investors. In this
event, our ADS price may decline significantly.
We
depend primarily on eight foundries to manufacture our wafers, and
any failure to obtain sufficient foundry capacity or loss of any of the
foundries we use could significantly delay our ability to ship our products,
causing us to lose revenues and damage our customer relationships.
Access to
foundry capacity is crucial to our business because we do not manufacture our
own wafers, instead relying primarily on eight third-party foundries. The
ability of a foundry to manufacture our semiconductor products is limited by its
available capacity. Access to capacity is especially important due to the
limited availability of the high-voltage CMOS process technology required for
the manufacture of wafers used in display drivers. Although we are in
negotiations with our third-party foundries to enter into long-term supply
arrangements that would guarantee us access to sufficient foundry capacity, we
currently have such arrangements with only one of the foundries. As a result, if
the primary third-party foundries that we rely upon were not able to meet our
required capacity, or if our business relationships with these foundries were
adversely affected, we would not be able to obtain the required capacity from
these foundries and would have to seek alternative foundries, which may not be
available on commercially reasonable terms, or at all, or which may expose us to
risks associated with qualifying new foundries, as further discussed below. Our
results of operations and business prospects could be adversely affected as a
result of the foregoing.
We place
our orders on the basis of our own customers’ purchase orders and sales
forecasts; however, any of the foundries we use can allocate capacity to other
foundry customers and reduce deliveries to us on short notice. It could be that
other foundry customers are larger and better financed than we are, or have
supply agreements or better relationships with the foundries we use, and could
induce these foundries to reallocate our capacity to them. The loss of any of
the foundries we use or any shortfall in available foundry capacity could impair
our ability to secure our inputs, which could significantly delay our ability to
ship our products, causing a loss of revenues and damages in our customer
relationships.
The recent
increase in the prices of certain metals, chemicals, and gasoline and the recent
volatility of foreign exchange rates may have increased costs for the foundries
and semiconductor service providers. This increase in costs could limit their
ability to continue to make the research and development investments needed to
keep up with technological advances. Any increase in costs for foundries and
semiconductor service providers we use could lead to an increase in our cost and
revenue and could limit our ability to lower our costs of revenues. We cannot
assure you that we will be able to continue to reduce our costs and maintain our
profit margins.
Taiwan
Semiconductor Manufacturing Company, or TSMC, and Vanguard International
Semiconductor Corporation, or Vanguard, have historically manufactured
substantially all of our wafers. In order to diversify our foundry sources, we
have begun to use Macronix International Co., Ltd., or Macronix, Lite-on
Semiconductor Corp., or Lite-on, Chartered Semiconductor Manufacturing Ltd., or
Chartered, United Microelectronics Corporation, or UMC, Maxchip Electronics
Corp., or Maxchip (which was spun off from Powerchip Semiconductor Corp. on
April 1, 2008), and Silicon Manufacturing Partners Pte Ltd., or
Silicon, to manufacture a portion of our products. As a result of outsourcing
the manufacturing of our wafers, we face several significant risks,
including:
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failure
to secure necessary manufacturing capacity, or being able to obtain
required capacity only at higher
cost;
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risks
of our proprietary information leaking to our competitors through the
foundries we use;
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limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs;
and
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the
unavailability of, or potential delays in obtaining access to, key process
technologies.
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In
addition, in order to manufacture our display drivers used in TFT-LCD panels, we
require foundries with high-voltage manufacturing process capacity. Of the
limited number of foundries that offer this capability, some are owned by
integrated device manufacturers which are also our competitors. As a result, our
dependence on high-voltage foundries presents the following additional
risks:
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potential
capacity constraints faced by the limited number of high-voltage foundries
and the lack of investment in new and existing high-voltage
foundries;
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difficulty
in attaining consistently high manufacturing yields from high-voltage
foundries;
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delay
and time required (approximately one year) to qualify and ramp up
production at new high voltage foundries;
and
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price
increases.
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As a
result of these risks, we may be required to use foundries with which we have no
established relationships, which could expose us to potentially unfavorable
pricing, unsatisfactory quality or insufficient capacity allocation. Moreover, a
scarcity in foundry capacity could necessitate us making investments in
foundries in order to secure additional capacity, which would require us to
substantially increase our capital outlays and possibly raise additional
capital, which may not be available to us on satisfactory terms, if at
all.
Shortages
of processed tape used in the manufacturing of our products, increased costs of
manufacturing such tape, or the loss of one of our suppliers of such tape may
increase our costs or limit our revenues and impair our ability to ship our
products on time.
There are
a limited number of companies which supply the processed tape used to
manufacture our semiconductor products, and therefore, from time to time,
shortages of such processed tape may occur. If any of our suppliers experience
difficulties in delivering processed tape, we may not be able to locate
alternative sources in a timely manner. Therefore, if shortages of processed
tape were to occur, or if the costs of manufacturing such tape increases, we
would incur additional costs or be unable to ship our products to our customers
in a timely fashion, all of which could harm our business and our customer
relationships and negatively impact our earnings.
The
loss of, or our inability to secure sufficient capacity from, any of our
third-party assembly and testing houses at reasonable and competitive prices
could disrupt our shipments, harm our customer relationships and reduce our
sales.
Access to
third-party assembly and testing capacity is critical to our business because we
do not have in-house assembly and testing capabilities and instead rely on
third-party service providers. Access to these services is especially important
to our business because display drivers require specialized assembly and testing
services. A limited number of third-party assembly and testing houses assemble
and test substantially all of our current products. We do not have binding
long-term supply arrangements with assembly and testing service providers that
guarantee us access to our required capacity. If the primary assembly and
testing service providers that we rely upon are not able to meet our
requirements in price, quality, and service, or if our business relationships
with these service providers were adversely affected, we would not be able to
obtain the required capacity from such providers and would have to seek
alternative providers, which may not be available on commercially reasonable
terms, or at all. As a result, we do not directly control our product delivery
schedules, assembly and testing costs and quality assurance and control. If any
of these third-party assembly and testing houses experiences capacity
constraints, financial difficulties, suffers any damage to its facilities or if
there is any disruption of its assembly and testing capacity, we may not be able
to obtain alternative assembly and testing services in a timely manner. We
typically procure services from assembly and testing houses on a per-order
basis. Because of the amount of time we usually take to qualify assembly and
testing houses, we may experience significant delays in product shipments if we
are required to find alternative sources. Any problems that we may encounter
with the delivery, quality or cost of our products could damage our reputation
and result in a loss of customers and orders.
Shortages
of other key components for our customers’ products could decrease demand for
our products.
Shortages
of components and other materials that are critical to the design and
manufacture of our customers’ products may limit our sales. These components
include, but are not limited
to, color filters, backlights and glass substrates. In the past,
companies that use our products in their production have experienced delays in
the availability of key components from other suppliers. For example, some
TFT-LCD panel manufacturers experienced a shortage of glass substrates in 2001,
2003 and 2004, as well as color filters in 2003, 2004 and 2007. While shortages of components
and other materials critical to the design and manufacture of our customers’
products have yet to significantly impact our business, such shortages could
cause a slowdown in demand for our products and result in a decrease in sales
for our products.
We
depend on three customers for a substantial majority of our revenues and the
loss of, or a significant reduction in orders from, any of them would
significantly reduce our revenues and adversely impact our operating
results.
Our top three customers, Chi Mei Optoelectronics Corp., or
CMO, Chunghua Picture Tubes Ltd., or CPT, and Shanghai SVA-NEC Liquid
Crystal Display Co. Ltd.,
or SVA-NEC, together with their respective
affiliates, accounted for approximately 58.8%, 7.3% and 8.4%, respectively, of our revenues in
2007. The loss of CMO, CPT or SVA-NEC as our customer or a sharp reduction in
sales to any of these
customers would have a
significant negative impact on our business. As discussed below, our sales to
these customers are made
pursuant to standard purchase orders rather than long-term contracts. Therefore, these customers may cancel or reduce orders
more readily than if we had long-term purchase commitments from them. In the
event of a cancellation,
postponement, or reduction of an order, we would
likely not be able to reduce operating expenses sufficiently so as to minimize
the impact of the lost revenues. In the alternative, we may have excess
inventory that we cannot sell, which would harm our operating
results. We expect our
reliance on sales to CMO, CPT and SVA-NEC and their respective affiliates to
continue in the foreseeable future. Therefore, our operating results will likely
continue to depend on sales to a relatively small number of customers, as well
as on the ability of such
customers to sell products that incorporate our products.
The
concentration of our accounts receivable and the extension of payment terms for
certain of our customers exposes us to increased credit risk and could harm our
operating results and cash flows.
As of December 31, 2007, we had
one customer that represented more than 10% of our
accounts receivable balance. CMO, together with its affiliates, represented approximately 68.4% of our total accounts receivable as of
December 31, 2007. Moreover, we have at times agreed to
extend the payment terms for certain of our third-party and related party
customers. We may also grant requests for the extension of payment terms in the
future. As a result, a default by any such customer, a prolonged delay in the payment of accounts
receivable or the extension of payment terms for our customers could adversely affect our cash flow,
liquidity and our operating results.
Our
close relationship with CMO could limit our potential to do business with CMO’s
competitors, which may cause us to lose opportunities to grow our business and
expand our customer base.
CMO is one
of our largest shareholders and has been our largest customer since our
inception. We expect to continue to maintain various contractual and other
relationships with CMO. Our close relationship with CMO could limit our
potential to do business with CMO’s competitors or other TFT-LCD panel
manufacturers, who may perceive that granting business to us could benefit CMO.
Our close relationship with CMO may result in lost business opportunities or may
prevent us from taking advantage of opportunities to grow our business and
expand our customer base.
An
adverse change to our relationship with CMO could have a material adverse effect
on our business.
CMO is one
of our largest shareholders, beneficially owning approximately 13.0% of our
outstanding shares as of June 1, 2008, and is also our largest customer,
accounting (together with its affiliates) for approximately 58.8% of our
revenues in 2007. Our engineers work closely with CMO’s engineers to design
display drivers used in TFT-LCD panels manufactured by CMO. We have entered into
various transactions with CMO in the past, and we expect to continue to do so in
the future. See “Item 7. Major Shareholders and Related Party Transactions.” If
our relationship with CMO deteriorates for any reason, our business could be
materially and adversely affected.
Failure
to attract new customers may limit our growth prospects.
We face
challenges in attracting new customers for our existing products as well as our
new products. Marketing our display drivers to other TFT-LCD panel manufacturers
that have established relationships with our competitors may be difficult.
Moreover, several TFT-LCD panel manufacturers have in-house design capabilities
and therefore may not need to source semiconductor products from us. To sell new
products, we will likely need to target new market segments and new customers
with whom we do not have current relationships, which may require different
strategies and may present difficulties that we have not encountered before.
Therefore, failure to broaden our customer base and attract new customers may
limit our growth prospects.
Technological
innovation may reduce the number of display drivers typically required for each
panel, thereby reducing the number of display drivers we are able to sell per
panel. If such a reduction in demand is not offset by the general growth of the
industry, growth in our market share or an increase in our average selling
prices, our revenues may decline.
Except for
certain small-sized panels, multiple display drivers are typically required for
each panel to function. We are designing higher-channel display drivers to
reduce the number of display drivers required for each panel while achieving the
same resolution. By developing such innovative and cost-effective display driver
solutions, we hope to grow our market share, attract additional customers,
increase our average selling prices and capture new design wins. We cannot
assure you that developing such display drivers with a higher number of channels
will successfully achieve the aforementioned goals. If we fail to attain those
goals, and the decrease in revenues resulting from a reduction in the number of
display drivers that we sell per panel is not offset by an increase in average
selling prices or unit sales, our revenues may decline. Furthermore, there have
been industry reports on the development of panels which do not require external
gate drivers or any external display drivers at all, as the driving functions
are embedded in the panels. If such technology does become commercially
available, the market for our display drivers will be reduced and we could
experience a decline in revenue and profit.
We
rely on the services of our key personnel, and if we are unable to retain our
current key personnel and hire additional personnel, our ability to design,
develop and successfully market our products could be harmed.
We rely
upon the continued service and performance of a relatively small number of key
personnel, including certain engineering, technical and senior management
personnel. In particular, our engineers and other key technical personnel are
critical to our future technological and product innovations. Competition for
highly skilled engineers and other key technical personnel is intense in the
semiconductor industry in general and in Taiwan’s flat panel semiconductor
industry in particular. Moreover, our future success depends on the expansion of
our senior management team and the retention of key employees such as Jordan Wu,
our president and chief executive officer; Dr. Biing-Seng Wu, our chairman;
Chih-Chung Tsai, our chief technology officer; and Max Chan, our chief financial
officer. We rely on these individuals to manage our company, develop and execute
our business strategies and manage our relationships with key suppliers and
customers. Any of these employees could leave our company with little or no
prior notice and would be free to work with a competitor. We do not have “key
person” life insurance policies covering any of our employees. The
loss of any of our key personnel or our inability to attract or retain qualified
personnel, whether engineers and others, could delay the development and
introduction of new products and would have an adverse effect on our ability to
sell our products as well as on our overall business and growth prospects. We
may also incur increased operating expenses and be required to divert the
attention of other senior executives away from their original duties to
recruiting replacements for key personnel.
If
we fail to forecast customer demand accurately, we may have excess or
insufficient inventory, which may increase our operating costs and harm our
business.
The lead
time required by the semiconductor manufacturing service providers that we use
to manufacture our products is typically longer than the lead time that our
customers provide for delivery of our products to them. Therefore, to ensure
availability of our products for our customers, we will typically ask our
semiconductor manufacturing service providers to start manufacturing our
products based on forecasts provided by our customers in advance of receiving
their purchase orders. However, these forecasts are not binding purchase
commitments, and we do not recognize revenues from these products until they are
shipped to customers. Moreover, for the convenience of our customers, we may
agree to ship our inventory to warehouses located near our customers, so that
our products can be delivered to these customers more quickly. We may from time
to time agree that title and risk of loss do not pass to our customer until the
customer requests delivery of our products from such warehouses. In such cases,
we will not recognize revenues from these products until the title and risk of
loss has passed to our customers based on the
shipping
terms, which is generally when they are delivered to our customers from these
warehouses. As a result, we incur inventory and manufacturing costs in advance
of anticipated revenues. The anticipated demand for our products may not
materialize; therefore, manufacturing based on customer forecasts exposes us to
risks of high inventory carrying costs and increased product obsolescence and
may increase our costs. If we overestimate demand for our display drivers or if
purchase orders are cancelled or shipments delayed, we may incur excess
inventory that we cannot sell, which would harm our financial results.
Conversely, if we underestimate demand, we may not have sufficient inventory and
may lose market share and damage customer relationships, which also could harm
our business. Obtaining additional supply in the face of product shortages may
be costly or impossible, particularly in the short term, which could prevent us
from fulfilling orders. These inventory risks are exacerbated by the high level
of customization of our products, which limits our ability to sell excess
inventory to other customers.
If
we do not achieve additional design wins in the future, our ability to grow will
be limited.
Our future
success depends on our current and prospective customers designing our products
into their products. To achieve design wins, we must design and deliver
cost-effective, innovative and integrated products that are customized for our
customers’ needs. Once a supplier’s products have been designed into a system,
the panel manufacturer may be reluctant to change its source of components due
to the significant costs and time associated with qualifying a new supplier.
Accordingly, our failure to obtain additional design wins with panel
manufacturers and to successfully design, develop and introduce new products and
product enhancements could harm our business, financial condition and results of
operations.
A design
win is not a binding commitment by a customer to purchase our products and may
not result in large volume orders of our products. Rather, it is a decision by a
customer to use our products in the design process of that customer’s products.
Customers can choose at any time to stop using our products in their designs or
product development efforts. Moreover, even if our products were chosen to be
incorporated into a customer’s products, our ability to generate significant
revenues from that customer would depend on the commercial success of those
products. Thus, a design win may not necessarily generate significant revenues
if our customers’ products are not commercially successful.
Some
of our semiconductor products are manufactured at only one foundry. If any
foundry is unable to provide the capacity we need, does not deliver
in a timely manner or the quality or pricing terms are not acceptable to us, we
may experience delays in shipping our products or have to incur additional
costs, which could damage our customer relationships and result in reduced
revenues and higher expenses.
Although
we use several foundries for different semiconductor products, certain of our
products are manufactured at only one of these foundries. If any one of the
foundries that we use for a specific product is unable to provide us with our
required capacity, does not deliver in a timely manner or the quality or pricing
terms are not acceptable to us, we could experience significant delays in
receiving the product being manufactured for us by that foundry or incur
additional costs to obtain substitutes. Also, if any of the foundries that we
use experience financial difficulties, if their operations are damaged or if
there is any other disruption of their foundry operations, we may not be able to
qualify an alternative foundry in a timely manner. If we choose to use a new
foundry or process technology for a particular semiconductor product, we believe
that it will take us several quarters to qualify the new foundry or process
before we can begin shipping such products. If we cannot qualify a new foundry
in a timely manner, we may experience a significant interruption in our supply
of the affected products, which could reduce our revenues, increase our expenses
and damage our customer relationships.
Our
products are complex and may require modifications to resolve undetected errors
or failures in order for them to function with panels at the desired
specifications, which could lead to higher costs, a loss of customers or a delay
in market acceptance of our products.
Our
products are highly complex and may contain undetected errors or failures when
first introduced or as new versions are released. If our products are delivered
with errors or defects, we could incur additional development, repair or
replacement costs, and our credibility and the market acceptance of our products
could be harmed. Defects could also lead to liability for defective products and
lawsuits against us or our customers. We have agreed to indemnify some of our
customers under some circumstances against liability from defects in our
products. A successful product liability claim could require us to make
significant damage payments.
Our
display drivers comprise part of a complex panel manufactured by our customers.
Our display drivers must operate according to specifications with the other
components used by our customers in the panel manufacturing
process.
For example, during the panel manufacturing process, our display drivers are
attached to the panel glass and must interoperate with the glass efficiently. If
other components fail to operate efficiently with our display drivers, we may be
required to incur additional development time and costs to improve the
interoperability of our display drivers with the other components.
Our
highly integrated products are difficult to manufacture without defects. The
existence of defects in our products could increase our costs, decrease our
sales and damage our customer relationships and our reputation.
The
manufacture of our products is a complex process, and it is often difficult for
semiconductor foundries to manufacture our products completely without defects.
Minor deviations in the manufacturing process can cause substantial decreases in
yield and quality. In particular, some of our products are highly integrated and
incorporate mixed analog and digital signal processing and embedded memory
technology, and this complexity makes it even more difficult to manufacture
without defects.
The
ability to manufacture products of acceptable quality depends on both product
design and manufacturing process technology. Defective products can be caused by
design, defective materials or component parts, or manufacturing difficulties.
Thus, quality problems can be identified only by analyzing and testing our
display drivers in a system after they have been manufactured. The difficulty in
identifying defects is compounded by the uniqueness of the process technology
used in each of the semiconductor foundries with which we have subcontracted to
manufacture our products. Failure to achieve defect-free products due to the
increasing complexity of display drivers and the panel system surrounding them
may result in an increase in our costs and delays in the availability of our
products. In addition, if the foundries that we use fail to deliver products of
satisfactory quality in the volume and at the price required, we will be unable
to meet our customers’ demand for our products or to sell those products at an
acceptable profit margin, which could adversely affect our sales and margins and
damage our customer relationships and our reputation.
We
do not have long-term purchase commitments from our customers, which may result
in significant uncertainty and volatility with respect to our revenues and could
materially and adversely affect our results of operations and financial
condition.
We do not
have long-term purchase commitments from our customers; our sales are made on
the basis of individual purchase orders. Our customers may also cancel or defer
purchase orders. Our customers’ purchase orders may vary significantly from
period to period, and it is difficult to forecast future order quantities. In
addition, changes in our customers’ business may adversely affect the quantity
of purchase orders that we receive. For example, one of our customers
substantially reduced the utilization rate of its production facilities in late
2005 in connection with its renovation plans and, as a result, the quantity of
purchase orders that we received from this customer decreased substantially. In
2006, one of our customers merged with another company. As a result of the
merger, certain design-win projects were discontinued, which forced us to write
off the corresponding inventory prepared based on forecasts provided by this
customer. As shown by these examples, we cannot assure you that any of our
customers will continue to place orders with us in the future at the same level
as in prior periods. We also cannot assure you that the volume of our customers’
orders will be consistent with our expectations when we plan our expenditures.
Our results of operations and financial condition may thus be materially and
adversely affected.
We
depend on sales of display drivers used in TFT-LCD panels, and the absence of
continued market acceptance of our display drivers could harm our
business.
In 2006
and 2007, we derived nearly all of
our revenues from the sale of display drivers used in TFT-LCD panels, and we
expect to continue to derive a substantial portion of our revenues from these or
related products. In particular, display drivers used in large-sized panels
represented approximately 86.7% and 81.9% of our revenues in 2006 and 2007,
respectively. Continued market acceptance of our display drivers is therefore
critical to our future success.
Potential
conflicts of interest with CMO may affect our sales decisions and allocations.
Our chairman also holds key management positions at CMO and may not be able to
allocate sufficient time and resources to both companies.
We have a
close relationship with CMO, which is one of our largest shareholders and has
been our largest customer since our inception. In addition, certain of our
directors hold key management positions at CMO. Jung-Chun Lin, our director,
serves on our board and also holds the positions of director, vice president,
chief financial officer and
chief
accounting officer at CMO. Dr. Biing-Seng Wu, our chairman, is also a director,
executive vice president and chief technology officer of CMO. We cannot assure
you that our close relationship with CMO and the resulting potential conflicts
of interest will not affect our sales decisions or allocations or that potential
conflicts of interest with respect to representatives of CMO will be resolved in
our favor. Moreover, Dr. Biing-Seng Wu, who holds key positions with both CMO
and us, may not be able to allocate sufficient time and resources to both
companies.
Our
corporate actions are substantially controlled by officers, directors, principal
shareholders and affiliated entities who may take actions that are not in, or
may conflict with, our or our public shareholders’ interests.
As of June
1, 2008, Jordan Wu and Dr. Biing-Seng Wu (who are brothers) beneficially owned
approximately 6.0% and 16.8% of our ordinary shares, respectively, and CMO
beneficially owned approximately 13.0% of our ordinary shares. For information
relating to the beneficial ownership of our ordinary shares, see “Item 7. Major
Shareholders and Related Party Transactions.” These shareholders, acting
together, could exert substantial influence over matters requiring approval by
our shareholders, including electing directors and approving mergers or other
business combination transactions. This concentration of ownership may also
discourage, delay or prevent a change in control of our company, which could
deprive our shareholders of an opportunity to receive a premium for their shares
as part of a sale of our company and might reduce the price of our ADSs. Actions
may be taken even if they were opposed by our other shareholders.
Assertions
against us by third parties for infringement of their intellectual property
rights could result in significant costs and cause our operating results to
suffer.
The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights and positions, which results in protracted and
expensive litigation for many companies. We have received, and expect to
continue to receive, notices of infringement of third-party intellectual
property rights. We may receive claims from various industry participants
alleging infringement of their patents, trade secrets or other intellectual
property rights in the future. Any lawsuit resulting from such allegations could
subject us to significant liability for damages and invalidate our proprietary
rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us to
do one or more of the following:
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stop
selling products or using technology or manufacturing processes that
contain the allegedly infringing intellectual
property;
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pay
damages to the party claiming
infringement;
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attempt
to obtain a license for the relevant intellectual property, which may not
be available on commercially reasonable terms or at all;
and
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attempt
to redesign those products that contain the allegedly infringing
intellectual property with non-infringing intellectual property, which may
not be possible.
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The
outcome of a dispute may result in our need to develop non-infringing technology
or enter into royalty or licensing agreements. We have agreed to indemnify
certain customers for certain claims of infringement arising out of the sale of
our products. Any intellectual property litigation could have a material adverse
effect on our business, operating results or financial condition.
Our
ability to compete will be harmed if we are unable to protect our intellectual
property rights adequately.
We believe that the protection of our
intellectual property rights is, and will continue to be, important to the
success of our business. We rely primarily on a combination of patent,
trademark, trade secret and copyright laws and contractual restrictions to
protect our intellectual property. These
afford only limited protection. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to obtain, copy or use information that
we regard as proprietary, such as product design and manufacturing process expertise. As of December
31, 2007, we and our subsidiaries had 364 U.S. patent applications pending,
353 Taiwan patent applications pending and
208 patent applications pending in other
jurisdictions, including the PRC, Japan, Korea and Europe. Our pending patent applications and any
future applications may not result in issued patents or may not be sufficiently
broad to protect our proprietary technologies. Moreover, policing any
unauthorized use of our products is difficult and costly, and we cannot be certain that the
measures which we have implemented will prevent
misappropriation or unauthorized use of
our technologies, particularly in
foreign jurisdictions where the laws may not protect our proprietary rights as
fully as the laws of the United States do. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property. Our failure to protect our intellectual
property effectively could harm our business.
We
are subject to a class action complaint alleging that we failed to disclose
certain information in our initial public offering registration statement. If
the class action is successful, it may have an adverse effect on our financial
condition and operating results.
We are subject to a class action
complaint, filed in the United States District Court for the Central District of
California, for alleged violations of U.S. federal securities laws. The lawsuit asserts claims against us,
our Chief Executive Officer
Jordan Wu, our Chief Financial Officer Max Chan, certain of our directors, as
well as CMO, for allegedly failing to disclose in our initial public offering
registration statement and prospectus certain information concerning
CMO’s inventory level prior to our initial public offering.
The complaint seeks
unspecified damages on behalf of purchasers of our stock pursuant and/or
traceable to our initial public offering in March 2006.
We believe that the
allegations in the class action are without merit, and we intend to vigorously
defend ourselves against
the claims. The outcome of
this class action, like other litigation proceedings, is uncertain. Regardless of its merit, litigation and other preparations
undertaken to defend the class action can be costly, and we may incur
substantial costs and
expenses in doing so. It
may also divert the
attention of our management. If the class action against us is
successful, it may result
in substantial monetary liabilities, which may have an adverse effect on our
financial condition and operating results.
We
may undertake acquisitions or investments to expand our business that may pose
risks to our business and dilute the ownership of our existing shareholders, and
we may not realize the anticipated benefits of these acquisitions or
investments.
As part of
our growth and product diversification strategy, we will continue to evaluate
opportunities to acquire or invest in other businesses, intellectual property or
technologies that would complement our current offerings, expand the breadth of
markets we can address or enhance our technical capabilities. For example, on
February 1, 2007, we acquired Wisepal Technologies, Inc., or Wisepal, a fabless
design company located in Taiwan that specializes in TFT-LCD drivers for small
and medium-sized panels. Under the terms of the acquisition, we issued one share
in exchange for 5.26 shares of Wisepal, and we assumed all of the assets,
liabilities and personnel of Wisepal. Acquisitions or investments that we
potentially may make in the future, including our recent acquisition of Wisepal,
entail a number of risks that could materially and adversely affect our
business, operating and financial results, including:
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problems
integrating the acquired operations, technologies or products into our
existing business and products;
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diversion
of management’s time and attention from our core
business;
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adverse
effects on existing business relationships with
customers;
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the
need for financial resources above our planned investment
levels;
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failures
in realizing anticipated synergies;
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difficulties
in retaining business relationships with suppliers and customers of the
acquired company;
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risks
associated with entering markets in which we lack
experience;
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potential
loss of key employees of the acquired
company;
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potential
write-offs of acquired assets;
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potential
expenses related to the depreciation of tangible assets and amortization
of intangible assets; and
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potential
impairment charges related to the goodwill
acquired.
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Our
failure to address these risks successfully may have a material adverse effect
on our financial condition and results of operations. Any such acquisition or
investment may require a significant amount of capital investment, which would
decrease the amount of cash available for working capital or capital
expenditures. In addition, if we use our equity securities to pay for
acquisitions, the value of our ADSs and the underlying ordinary shares may be
diluted. If we borrow funds to finance acquisitions, such debt instruments may
contain restrictive covenants that can, among other things, restrict us from
distributing dividends.
Risks
Related to Our Industry
The
semiconductor industry, in particular semiconductors used in flat panel
displays, is highly competitive, and we cannot assure you that we will be able
to compete successfully against our competitors.
The
semiconductor industry, in particular semiconductors used in flat panel
displays, is highly competitive. Increased competition may result in price
pressure, reduced profitability and loss of market share, any of which could
seriously harm our revenues and results of operations. Competition principally
occurs at the design stage, where a customer evaluates alternative design
solutions that require display drivers. We continually face intense competition
from fabless display driver companies as well as from integrated device
manufacturers. Some of our competitors have substantially greater financial and
other resources than we do with which to pursue engineering, manufacturing,
marketing and distribution of their products. As a result, they may be able to
respond more quickly to changing customer demands or devote greater resources to
the development, promotion and sales of their products than we can. Some of our
competitors have manufacturing capabilities as well as in-house design
operations that may give them significant advantages such as higher research and
development budgets and the ability to attract highly skilled engineers.
Furthermore, some of our
competitors are affiliated with, or are subsidiaries of, our panel manufacturer
customers. These relationships may also give our competitors significant
advantages such as early
access to product roadmaps
and design-in priorities, which would allow them to respond more quickly to
changing customer demands and achieve more design-wins than we can. In addition,
even competitors with no such strategic associations with
panel manufacturers may resort to price competition to maintain their market
share, which may impose pricing pressures on us, reduce our profitability
or decrease our market share. We
cannot assure you that we will be able to increase or maintain our revenues and
market share, or compete successfully against our current or future competitors
in the semiconductor industry.
We
may be adversely affected by the cyclicality of the semiconductor
industry.
The
semiconductor industry is highly cyclical and is characterized by constant and
rapid technological change, product obsolescence and price erosion, evolving
standards, short product life cycles and wide fluctuations in product supply and
demand. The semiconductor industry has, from time to time, experienced
significant downturns, often connected with, or in anticipation of, maturing
product cycles of both semiconductor companies’ and their customers’ products
and declines in general economic conditions. These downturns have been
characterized by diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling prices. Any future
downturn may reduce our revenues and result in our having excess inventory.
Furthermore, any upturn in the semiconductor industry could result in increased
competition for access to limited third-party foundry, assembly and test
capacity. Failure to gain access to foundry, assembly and test capacity could
impair our ability to secure the supply of products that we need, which could
significantly delay our ability to ship our products, cause a loss of revenues
and damage our customer relationships.
The
average selling prices of our products could decrease rapidly, which may
negatively impact our revenues and operating results.
The price
of each semiconductor product typically declines over its product life cycle,
reflecting product obsolescence, decreased demand as customers shift to more
advanced products and increased competition as more semiconductor producers are
able to produce similar products in larger quantities. We may experience
substantial period-to-period fluctuations in future operating results if our
average selling prices decline. We may reduce the average unit price of our
products in response to competitive pricing pressures, new product introductions
by us or our competitors and other factors. The TFT-LCD panel market is highly
cost sensitive, which may result in declining average selling prices of the
components comprising TFT-LCD panels. We expect that these factors will create
downward pressure on our average selling prices and operating results. To
maintain acceptable operating results, we will need to develop and introduce new
products and product enhancements on a timely basis and continue to reduce our
costs. If we are unable to offset any reductions in our average selling prices
by increasing our sales volumes and
corresponding
production cost reductions, or if we fail to develop and introduce new products
and enhancements on a timely basis, our revenues and operating results will
suffer.
We
have a lengthy and expensive design-to-mass production cycle.
The cycle
time from the design stage to mass production for display drivers is long and
requires the investment of significant resources with each potential customer
without any guarantee of sales. Our design-to-mass production cycle typically
begins with a three- to twelve-month semiconductor development stage and test
period followed by a three- to twelve-month end product development period by
customers. This fairly lengthy cycle creates the risk that we may incur
significant expenses but will be unable to realize meaningful sales. Moreover,
prior to mass production, customers may decide to cancel the projects or change
production specifications, resulting in sudden changes in our product
specifications, further causing increased production time and costs. Failure to
meet such specifications may delay the launch of our products.
Our
business could be materially and adversely affected if we fail to anticipate
changes in evolving industry standards, fail to achieve and maintain
technological leadership in our industry or fail to develop and introduce new
and enhanced products.
Our
products are generally based on industry standards, which are continually
evolving. The emergence of new industry standards could render our products or
those of our customers unmarketable or obsolete and may require us to incur
substantial unanticipated costs to comply with any such new standards. Likewise,
the components used in the TFT-LCD panel industry are constantly changing with
increased demand for improved features. Moreover, our past sales and
profitability have resulted, to a significant extent, from our ability to
anticipate changes in technology and industry standards and to develop and
introduce new and enhanced products in a timely fashion. If we do not anticipate
these changes in technologies and rapidly develop and introduce new and
innovative technologies, we may not be able to provide advanced display
semiconductors on competitive terms, and some of our customers may buy display
drivers from our competitors instead of from us. Our continued ability to adapt
to such changes and anticipate future standards will be a significant factor in
maintaining or improving our competitive position and our growth prospects. We
cannot assure you that we will be able to anticipate evolving industry
standards, successfully complete the design of our new products, have these
products manufactured at acceptable manufacturing yields, or obtain significant
purchase orders for these products to meet new standards or technologies. If we
fail to anticipate changes in technology and to introduce new products that
achieve market acceptance, our business and results of operations could be
materially and adversely affected.
Risks
Relating to Our Holding Company Structure
Our
ability to receive dividends and other payments from our subsidiaries may be
restricted by commercial, statutory and legal restrictions, and thereby
materially and adversely affect our ability to grow, fund investments, make
acquisitions, pay dividends and otherwise fund and conduct our
business.
We are a
holding company and our assets consist mainly of our 100% ownership interest in
Himax Taiwan. Dividends
and interest on intercompany loans that we receive from our subsidiaries in
Taiwan, if any, will be subject to withholding tax under ROC law. The ability of
our subsidiaries to pay dividends, repay intercompany loans from us or make
other distributions to us is restricted by, among other things, the availability
of funds, the terms of various credit arrangements entered into by our
subsidiaries, as well as statutory and other legal restrictions. In addition,
although there are currently no foreign exchange control regulations that
restrict the ability of our subsidiaries located in Taiwan to distribute
dividends to us, we cannot assure you that the relevant regulations will not be
changed and that the ability of our subsidiaries to distribute dividends to us
will not be restricted in the future. A Taiwan company is generally not
permitted to distribute dividends or to make any other distributions to
shareholders for any year in which it did not have either earnings or retained
earnings (excluding reserves). In addition, before distributing a dividend to
shareholders following the end of a fiscal year, the company must recover any
past losses, pay all outstanding taxes and set aside 10% of its annual net
income (less prior years’ losses and outstanding taxes) as a legal reserve until
the accumulated legal reserve equals its paid-in capital, and may set aside a
special reserve.
Any
limitation on dividend payments by our subsidiaries could materially and
adversely affect our ability to grow, finance capital expenditures, make
acquisitions, pay dividends, and otherwise fund and conduct our
business.
Our
ability to make further investments in Himax Taiwan may be dependent on
regulatory approvals. If Himax Taiwan is unable to receive the equity financing
that it requires, its ability to grow and fund its operations may be materially
and adversely affected.
Since
Himax Taiwan is not a listed company, it generally depends on us to meet its
equity financing requirements. Any capital contribution by us to Himax Taiwan
may require the approval of the relevant ROC authorities such as the Investment
Commission of the Ministry of Economic Affairs of the ROC, or the ROC Investment
Commission. We may not be able to obtain any such approval in the future in a
timely manner, or at all. If Himax Taiwan is unable to receive the equity
financing that it requires, its ability to grow and fund its operations may be
materially and adversely affected.
Political,
Geographical and Economic Risks
Due
to the location of our operations in Taiwan, we and many of our semiconductor
manufacturing service providers, suppliers and customers are vulnerable to
natural disasters and other events outside of our control, which may seriously
disrupt our operations.
Most of
our operations, and the operations of many of our semiconductor manufacturing
service providers, suppliers and customers are located in Taiwan, which is
vulnerable to natural disasters, in particular, earthquakes and typhoons. Our
principal foundries and assembly and testing houses upon which we have relied to
manufacture substantially all of our display drivers are located in Taiwan. In
2007, approximately 85.5% of our revenues were derived from customers
headquartered in Taiwan. As a result of this geographic concentration,
disruption of operations at our facilities or the facilities of our
semiconductor manufacturing service providers, suppliers and customers for any
reason, including work stoppages, power outages, water supply shortages, fire,
typhoons, earthquakes, contagious diseases or other natural disasters, could
cause delays in production and shipments of our products. Any delays or
disruptions could result in our customers seeking to source products from our
competitors. Shortages or suspension of power supplies have occasionally
occurred and have disrupted our operations. The occurrence of a power outage in
the future could seriously hurt our business.
The
manufacturing processes of TFT-LCD panels require a substantial amount of water
and, as a result, the production operations of TFT-LCD panels may be seriously
disrupted by water shortages. Our customers may encounter droughts in areas
where most of their current or future manufacturing sites are located. If a
drought were to occur and our customers or the authorities were unable to source
water from alternative sources in sufficient quantities, our customers may be
required to shut down temporarily or to substantially reduce the operations of
their fabs, which would seriously affect demand for our products. The occurrence
of any of these events in the future could adversely affect our
business.
Disruptions
in Taiwan’s political environment could negatively affect our business and the
market price of our ADSs.
Our
principal executive offices and a substantial amount of our assets are located
in Taiwan, and a substantial portion of our revenues is derived from our
operations in Taiwan. Accordingly, our business, financial condition and results
of operations and the market price of our ADSs may be affected by changes in ROC
governmental policies, taxation, inflation or interest rates, and by social
instability and diplomatic and social developments in or affecting Taiwan that
are outside of our control.
Taiwan has
a unique international political status. Since 1949, Taiwan and the PRC have
been separately governed. The government of the PRC claims that it is the sole
government in China and that Taiwan is part of China. Although significant
economic and cultural relations have been established during recent years
between Taiwan and the PRC, the PRC government has refused to renounce the
possibility that it may at some point use force to gain control over Taiwan.
Furthermore, the PRC government adopted an anti-secession law relating to
Taiwan. Relations between the ROC and the PRC governments have been strained in
recent years for a variety of reasons, including the PRC government’s position
on the “One China” policy and tensions concerning arms sales to Taiwan by the
United States government. Any tension between the ROC and the PRC, or between
the United States and the PRC, could materially and adversely affect the market
prices of our ADSs.
If
the U.S. dollar fluctuates significantly against the NT dollar, our
profitability may be affected.
We have foreign currency exposure, and
are primarily affected by fluctuations in exchange rates between the U.S.
dollar and the NT dollar.
Although 99.7% our revenues and more than 97% of our cost of revenues were denominated
in U.S. dollars in 2007, the majority of our operating expenses (including for
research and development, general and administrative, and sales and marketing expenses) are denominated in
NT dollars. For example, in December 2007, more than 50% of our operating expenses were
denominated in NT dollars, with a small percentage denominated in Japanese Yen, Korean Won
and Chinese Renminbi, and the majority of the remainder in U.S. dollars. From time to
time, we enter into forward contracts to hedge our foreign currency exposure,
but we cannot assure you that this will adequately protect us against the risk of exchange rate
fluctuations and reduce the impact on our results of
operations.
A
decrease in the support of the ROC government may increase our tax expenditures
and decrease our net income.
The ROC
government has been very supportive of Taiwan-incorporated technology companies
such as Himax Taiwan. In particular, Himax Taiwan, like many Taiwan technology
companies, has benefited from substantial tax incentives provided by the ROC
government. The ROC Statute for Upgrading Industries entitles companies to tax
credits for expenses relating to qualifying research and development, personnel
training and purchases of qualifying machinery. This tax credit may be applied
within a five-year period. The amount from the tax credit that may be applied in
any year is limited to 50% of the income tax payable for that year (with the
exception of the final year when the remainder of the tax credit may be applied
without limitation to the total amount of the income tax). Under the ROC Statute
for Upgrading Industries, Himax Taiwan was granted tax credits by the ROC
Ministry of Finance at rates set at a certain percentage of the amount utilized
in qualifying research and development and personnel training expenses. The
balance of unused investment tax credits totaled $9.4 million, $19.4 million and
$32.7 million as of December 31, 2005, 2006 and 2007, respectively. In addition,
the ROC Statute for Upgrading Industries provides to companies deemed to be
operating in important or strategic industries a five-year tax exemption for
income attributable to expanded production capacity or newly developed
technologies. Such expanded production capacity or newly developed technologies
must be funded in whole or in part from either an initial capital investment
made by a company’s shareholders, a subsequent capital increase or a
capitalizing of a company’s retained earnings. Beginning April 1, 2004, January
1, 2006 and January 1, 2008, Himax Taiwan has been entitled to three
preferential tax treatments, each for a period of five years, which expires on
March 31, 2009, December 31, 2010 and December 31, 2012, respectively. As a
result of these preferential tax treatments, income attributable to certain of
our expanded production capacity or newly developed technologies is tax exempt
for the duration of these five-year periods. If the ROC government changed the
laws to terminate, decrease or otherwise adversely change such tax incentives,
our tax expenditures could increase, resulting in a decrease in our net income.
For instance, if we did not have this tax exemption, net income and basic and
diluted earnings per ordinary share would have been $85.6 million, $0.43 and
$0.43 for the year ended December 31, 2007, respectively.
We
face risks related to health epidemics and outbreaks of contagious diseases,
including avian influenza and Severe Acute Respiratory Syndrome, or
SARS.
There have
been recent reports of outbreaks of a highly pathogenic avian influenza, or
avian flu, caused by the H5N1 virus in certain regions of Asia, Europe, the
Middle East and Africa. An outbreak of avian flu in the human population could
result in a widespread health crisis that could adversely affect the economies
and financial markets of many countries, particularly in Asia. Additionally, a
recurrence of SARS, a highly contagious form of atypical pneumonia, similar to
the occurrence in 2003 which affected the PRC, Hong Kong, Taiwan, Singapore,
Vietnam and certain other countries, would also have similar adverse effects.
Since all of our operations and substantially all of our customers and suppliers
are based in Asia (mainly Taiwan), an outbreak of avian flu, SARS or other
contagious diseases in Asia or elsewhere, or the perception that such an
outbreak could occur, and the measures taken by the governments of countries
affected, including the ROC and the PRC, could adversely affect our business,
financial condition or results of operations.
Risks
Related to Our ADSs and Our Trading Market
The
market price for our ADSs may be volatile.
The market
price for our ADSs is likely to be highly volatile and subject to wide
fluctuations in response to various factors, including the
following:
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in financial estimates by securities research
analysts;
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conditions
in the TFT-LCD panel market;
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changes
in the economic performance or market valuations of other display
semiconductor companies;
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announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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the
addition or departure of key
personnel;
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fluctuations
in exchange rates between the U.S. dollar and the NT
dollar;
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litigation
related to our intellectual property and shareholders’ lawsuit;
and
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the
release of lock-up or other transfer restrictions on our outstanding ADSs
or sales of additional ADSs.
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In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our ADSs.
Future
sales or perceived sales of securities by us, our executive officers, directors
or major shareholders may hurt the price of our ADSs.
The market price of our ADSs could
decline as a result of sales of ADSs or shares or the perception that these
sales could occur. As of June 1, 2008, we had 190,905,649 outstanding shares, all of which are freely tradable. If
we, our executive officers, directors or our shareholders sell ADSs or shares,
the market price for our shares or ADSs could decline. Future
sales, or the perception of future sales, of ADSs or shares by us, our executive
officers, directors or existing shareholders could cause the market price of our
ADSs to decline.
The
level of investor interest and trading in our ADSs could be affected by the lack
of coverage by U.S. securities research analysts and the lack of investor
materials in the Chinese language.
Investor
interest in us may not be as strong as in U.S. companies or Taiwan companies
that are listed in Taiwan both because we may not be adequately covered by U.S.
securities research analyst reports and because of the lack of investor
materials in the Chinese language. The lack of coverage could negatively impact
investor interest and the level of trading in our ADSs. The interest of both
existing and prospective Taiwan-based investors to hold and trade in our ADSs
may be impacted by the lack of investor materials in the Chinese language and
the time difference between New York and Taiwan. As a result, the liquidity of
our ADSs and the valuation multiples may be lower than if we were listed on a
Taiwan stock exchange.
Although
publicly traded, the trading market in our ADSs has been substantially less
liquid than the average stock quoted on the Nasdaq Global Select Market, and
this low trading volume may adversely affect the price our our
ADSs.
Although
our ADSs are traded on the Nasdaq Global Select Market, the trading volume of
our ADSs has generally been very low. Reported average daily trading volume in
our ADSs for the three month period ended March 31, 2008 was
approximately 758,364 ADSs. In addition, between November 1, 2007 and March
31, 2008, we repurchased a total of approximately $33.0 million of our ADSs
(equivalent to approximately 7.6 million ADSs) from the open market pursuant to
an authorized share buyback program. The repurchased ADSs and their
underlying ordinary shares were cancelled, thereby reducing the number of
outstanding ADSs by 4%, which could negatively impact the average trading volume
of our ADSs. Limited trading volume will subject our ADSs to greater
price volatility and may make it difficult for you to sell your ADSs at a price
that is attractive to you.
You
may not have the same voting rights as the holders of our ordinary shares and
may not receive voting materials sufficiently in advance to be able
to exercise your right to vote.
Except as
described in the deposit agreement, holders of our ADSs will not be able to
exercise voting rights attaching to the shares evidenced by our ADSs on an
individual basis. Holders of our ADSs will appoint the depositary or its nominee
as their representative to exercise the voting rights attaching to the shares
represented by the ADSs. In certain circumstances, however, the depositary shall
refrain from voting and any voting instructions received from ADS holders shall
lapse. Furthermore, in certain other circumstances, the depositary will give us
a discretionary proxy to vote shares evidenced by ADSs. You may not receive
voting materials sufficiently in advance to instruct the depositary to vote, and
it is possible that you, or persons who hold their ADSs through brokers, dealers
or other third parties, will not have the opportunity to exercise a right to
vote.
You
may not be able to participate in rights offerings and may experience dilution
of your holdings as a result.
We may
from time to time distribute rights to our shareholders, including rights to
acquire our securities. Under the deposit agreement for the ADSs, the depositary
will not offer those rights to ADS holders unless both the rights and the
underlying securities to be distributed to ADS holders are either registered
under the Securities Act, or exempt
from
registration under the Securities Act with respect to all holders of ADSs. We
are under no obligation to file a registration statement with respect to any
such rights or underlying securities or to endeavor to cause such a registration
statement to be declared effective. In addition, we may not be able to take
advantage of any exemptions from registration under the Securities Act.
Accordingly, holders of our ADSs may be unable to participate in our rights
offerings and may experience dilution in their holdings as a
result.
You
may be subject to limitations on transfer of your ADSs.
Your ADSs
represented by the ADRs are transferable on the books of the depositary.
However, the depositary may close its transfer books at any time or from time to
time whenever it deems expedient in connection with the performance of its
duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are
closed, or at any time if we or the depositary deem it necessary or advisable to
do so because of any requirement of law, any government, governmental body,
commission, or any securities exchange on which our ADSs or our ordinary shares
are listed, or under any provision of the deposit agreement or provisions of, or
governing, the deposited securities or any meeting of our shareholders, or for
any other reason.
Your
ability to protect your rights through the United States federal courts may be
limited, because we are incorporated under Cayman Islands law, conduct a
substantial portion of our operations in Taiwan, and all of our directors and
officers reside outside the United States.
We are incorporated in the Cayman Islands. A substantial portion of our
operations is conducted in Taiwan through Himax Taiwan, our wholly owned subsidiary, and
substantially all of our assets are located in Taiwan. All of our directors and officers
reside outside the
United States, and a substantial portion of the
assets of those persons is located outside the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in
the United States in the event that you believe that your
rights have been infringed under the securities laws or otherwise. Even if you
are successful in bringing an action of this kind, the laws of the Cayman
Islands and of Taiwan may render you unable to
enforce a United States judgment against our assets or the
assets of our directors and officers. There is no statutory recognition in the
Cayman Islands of judgments obtained in the United States, although a final and conclusive judgment in the
federal or state courts of
the United States under which a sum of money is payable, other than a sum
payable in respect of multiple damages, taxes, or other charges of a like nature
or in respect of a fine or other penalty, may be subject to enforcement
proceedings as debt in the courts of the Cayman Islands
under the common law
doctrine of obligation, provided that (a) such federal or state
courts of the United States had proper jurisdiction over the parties subject to
such judgment; (b) such federal or state courts of the United States did not contravene the
rules of natural justice of the Cayman Islands; (c) such judgment was not
obtained by fraud; (d) the enforcement of the judgment would not be contrary to
the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is
submitted prior to the rendering of the judgment by the courts of the Cayman
Islands; and (f) there is due compliance with the correct procedures under the
laws of the Cayman Islands.
As a
result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or
major shareholders than shareholders of a corporation incorporated in a
jurisdiction in the United States would.
You
may face difficulties in protecting your interests as a shareholder because
judicial precedents regarding shareholders’ rights are more limited under Cayman
Islands law than under U.S. law, and because Cayman Islands law generally
provides less protection to shareholders than U.S. law.
Our
corporate affairs are governed by our memorandum and articles of association,
the Cayman Islands Companies Law and the common law of the Cayman Islands. The
rights of shareholders to take action against directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under
Cayman Islands law are to a large extent governed by the common law of the
Cayman Islands. The common law of the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands as well as from
English common law, which has persuasive, but not binding, authority on a court
in the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are not as clearly
established as they would be under statutes or judicial precedent in some
jurisdictions in the United States. In particular, the Cayman Islands have a
less developed body of securities law than the United States. In addition, some
U.S. states, such as Delaware, have more fully developed and judicially
interpreted bodies of corporate law than the Cayman Islands.
For
example, the Cayman Islands Companies Law differs from laws applicable to United
States corporations and their shareholders in certain material respects which
may affect shareholders’ rights and shareholders’ access to information. These
differences under Cayman Islands Companies Law (as compared to Delaware law)
include, though are not limited to, the following:
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directors who are interested in a
transaction do not have a statutory duty to disclose such interest and
there are no provisions under Cayman Islands Companies Law which render
such director liable to the company for any profit realized pursuant to
such transaction. Our articles of association,
however, contain provisions that require our directors to disclose their
interest in
a
transaction;
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dissenting
shareholders do not have comparable appraisal rights if a
scheme of arrangement is approved by the Grand Court of the Cayman
Islands;
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shareholders may not be able to
bring class action or derivative action suits before a Cayman Islands court except in certain exceptional
circumstances;
and
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unless
otherwise provided under the memorandum and articles of association of the
company, shareholders do not have the right to bring business before a
meeting or call a meeting.
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Moreover,
certain of these differences in corporate law, including, for example, the fact
that shareholders do not have the right to call a meeting or bring business to a
meeting, may have anti-takeover effects, which could discourage, delay, or
prevent the merger or acquisition of our company by means of a tender offer, a
proxy contest or otherwise, which a shareholder may have considered in its best
interest, and prevent the removal of incumbent officers and
directors.
As a
result of all of the above, public shareholders may have more difficulty in
protecting their interests in the face of actions taken by management, members
of the board of directors or controlling shareholders than they would have as
public shareholders of a U.S. company.
Investor
confidence and the market price of our ADSs may be adversely impacted if we or
our independent registered public accountants conclude that our internal
controls over financial reporting are not effective.
The SEC,
as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring public companies to include in their Annual Report on Form 10-K or
Form 20-F, as the case may be, a report of management on the company’s internal
controls over financial reporting that contains an assessment by management of
the effectiveness of the company’s internal controls over financial reporting.
In addition, the company’s independent registered public accounting firm must
report on the company’s internal control over financial reporting. Our
management may conclude that our internal controls over financial reporting are
not effective. Moreover, even if our management does conclude that our internal
controls over financial reporting are effective, if our independent registered
public accounting firm is not satisfied with our internal controls, the level at
which our controls are documented, designed, operated or reviewed, or if our
independent registered public accounting firm interprets the requirements, rules
or regulations differently from us, then it may conclude that our internal
controls over financial reporting are not effective. Furthermore, during the
course of the evaluation, documentation and attestation, we may identify
deficiencies that we may not be able to remedy in a timely manner. If we fail to
achieve and maintain the adequacy of our internal controls, we may not be able
to conclude that we have effective internal controls, on an ongoing basis, over
financial reporting in accordance with the Sarbanes-Oxley Act. Furthermore,
effective internal controls over financial reporting is necessary for us to
produce reliable financial reports and is important to help prevent fraud. As a
result, our failure to achieve and maintain effective internal controls over
financial reporting could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could harm our business
and negatively impact the trading price of our ADSs. In addition, we have
incurred considerable costs and used significant management time and other
resources in our effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act.
Himax
Taiwan, our predecessor, was incorporated on June 12, 2001 as a limited
liability company under the laws of the ROC. On April 26, 2005, we established
Himax Technologies Limited, an exempted company with limited
liability
under the Companies Law Cap. 22 of the Cayman Islands, or the Companies Law, as
a holding company to hold the shares of Himax Taiwan in connection with our
reorganization and share exchange. On October 14, 2005, Himax Taiwan became our
wholly owned subsidiary through a share exchange consummated pursuant to the ROC
Business Mergers and Acquisitions Law through which we acquired all of the
issued and outstanding shares of Himax Taiwan, and we issued ordinary shares to
the shareholders of Himax Taiwan. Shareholders of Himax Taiwan received one of
our ordinary shares in exchange for one Himax Taiwan common share. The share
exchange was unanimously approved by shareholders of Himax Taiwan on June 10,
2005 with no dissenting shareholders and by the ROC Investment Commission on
August 30, 2005 for our inbound investment in Taiwan, and on September 7, 2005
for our outbound investment outside of Taiwan. We effected this reorganization
and share exchange to comply with ROC laws, which prohibit a Taiwan incorporated
company not otherwise publicly listed in Taiwan from listing its shares on an
overseas stock exchange. Our reorganization enables us to maintain our
operations through our Taiwan subsidiary, Himax Taiwan, while allowing us to
list our shares overseas through our holding company structure.
The common
shares of Himax Taiwan were traded on the Emerging Stock Board from December 26,
2003 to August 10, 2005, under the stock code “3222.” Himax Taiwan’s common
shares were delisted from the Emerging Stock Board on August 11, 2005. As a
result of our reorganization, Himax Taiwan is no longer a Taiwan public company,
and its common shares are no longer listed or traded on any trading
markets.
On
September 26, 2005, we changed our name to “Himax Technologies, Inc.,” and on
October 17, 2005, Himax Taiwan changed its name to “Himax Technologies Limited”
upon the approval of shareholders of both companies and amendments to the
respective constitutive documents. We effected the name exchange in order to
maintain continuity of operations and marketing under the trade name “Himax
Technologies, Inc.,” which had been previously used by Himax
Taiwan.
In
February 2007, we completed the acquisition of Wisepal, a driver IC company
focusing on small and medium-sized applications. This transaction further
strengthened our competitive position in the small and medium-sized product
areas and broadened our supplier base, thereby securing additional foundry
capacity, optimizing our foundry mix and further diversifying our technology and
product mix.
On October
12, 2007, we formed Himax Media Solutions, Inc., which oversees our
TFT-LCD television and monitor chipset business with a focus on expanding market
share in the global TFT-LCD television and monitor chipset market.
Our principal executive offices are located at No. 26,
Zih Lian Road, Fonghua Village, Sinshih Township, Tainan County 74445, Taiwan, Republic of China. Our telephone
number at this address is +886 (6) 505-0880. Our registered office in the Cayman
Islands is located at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681 GT, Georgetown, Grand Cayman, Cayman Islands. Our telephone number at this address
is +(1-345) 949-1040. In addition, we have regional offices in Hsinchu and Taipei, Taiwan; Suzhou, Foshan, Ningbo, Beijing, Shanghai and Shenzhen, China; Yokohama and Matsusaka, Japan; Anyangsi Kyungkido, South Korea; and Irvine, California, USA.
Investor
inquiries should be directed to
our Investor Relations
department, at
+886-2-2370-3999 ext. 22618 or by email to jessie_wang@himax.com.tw. Our website is www.himax.com.tw. The
information contained on our website is not part of this annual report. Our
agent for service of process in the United States is Puglisi & Associates
located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
Our ADSs
have been listed on the Nasdaq Select Global Market since March 31, 2006. Our
ordinary shares are not listed or publicly traded on any trading
markets.
We design,
develop and market semiconductors that are critical components of flat panel
displays. Our principal products are display drivers for large-sized TFT-LCD
panels, which are used in desktop monitors, notebook computers and televisions,
and display drivers for small and medium-sized TFT-LCD panels, which are used in
mobile handsets and consumer electronics products such as digital cameras,
mobile gaming devices and car navigation displays. We also offer display drivers
for panels using OLED technology and LTPS technology. In addition, we are
expanding our product offerings to include non-driver products such as timing
controllers, TFT-LCD television and monitor chipsets, LCOS microdisplays, and
power management ICs. Our customers are panel and television makers. We believe
that our leading design and engineering expertise, combined with our focus on
customer service and close relationships with semiconductor manufacturing
service providers, has contributed to our success.
Industry
Background
We operate
in the flat panel display semiconductor industry. As our semiconductors are
critical components of flat panel displays, our industry is closely linked to
the trends and developments of the flat panel display industry.
Flat
Panel Display Semiconductors
Flat panel
displays require different semiconductors depending upon the display
technologies and the application. Some of the most important ones include the
following:
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Display Driver. The
display driver receives image data from the timing controller and delivers
precise analog voltages or currents to create images on the display. The
two main types of display drivers for a TFT-LCD panel are gate drivers and
source drivers. Gate drivers turn on the transistor within each pixel cell
on the horizontal line on the panel for data input at each row. Source
drivers receive image data from the timing controller and generate voltage
that is applied to the liquid crystal within each pixel cell on the
vertical line on the panel for data input at each column. The combination
determines the colors generated by each pixel. Typically multiple gate
drivers and source drivers are installed separately on the panel. However,
for certain small and medium-sized applications, gate drivers and source
drivers are integrated into a single chip due to space and cost
considerations. Large-sized panels typically have higher resolution and
require more display drivers than small and medium-sized
panels.
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Timing Controller. The
timing controller receives image data and converts the format for the
source drivers’ input. The timing controller also generates controlling
signals for gate and source drivers. Typically, the timing controller is a
discrete semiconductor in large-sized TFT-LCD panels. For certain small
and medium-sized applications, however, the timing controller may be
integrated with display drivers.
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Scaler. For certain
displays, a scaler is installed to magnify or shrink image data in order
for the image to fill the panel.
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Operational Amplifier.
An operational amplifier supplies the reference voltage to source
drivers in order to make their output voltage
uniform.
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Television Chipset.
Television flat panel displays require chipsets that typically contain all
or some of the following components: an audio processor, analog
interfaces, digital interfaces, a video processor, a channel receiver and
a digital television decoder. See “—Products—TFT-LCD Television and
Monitor Semiconductor Solutions—TFT-LCD Television and Monitor Chipsets”
for a description of these
components.
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Others. Flat panel
displays also require multiple general purpose semiconductors such as
memory, power converters and
inverters.
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Characteristics
of the Display Driver Market
Although
we operate in several distinct segments of the flat panel display semiconductor
industry, our principal products are display drivers. Display drivers are
critical components of flat panel displays. As a result, we believe that the
projected growth in the demand for flat panel displays will result in the growth
in demand for display drivers. The display driver market has specific
characteristics, including those discussed below.
Concentration
of Panel Manufacturers
The global
TFT-LCD panel industry consists of a small number of manufacturers,
substantially all of which are based in Asia. In recent years, TFT-LCD panel
manufacturers, in particular Taiwan- and Korea-based manufacturers, have
invested heavily to establish, construct and ramp up additional fab capacity.
The capital intensive nature of the industry often results in TFT-LCD panel
manufacturers operating at a high level of capacity utilization in order to
reduce unit costs. This tends to create a temporary oversupply of panels, which
reduces the average selling price of panels and puts pricing pressure on display
driver companies. Moreover, the concentration of panel manufacturers permits
major panel manufacturers to exert pricing pressure on display driver companies
such as ours. The small number of panel manufacturers intensifies this as
display driver companies, in addition to seeking to expand their customer base,
must also focus on winning a larger percentage of such customers’ display driver
requirements.
Customization
Requirements
Each panel
display has a unique pixel design to meet its particular requirements. To
optimize the panel’s performance, display drivers have to be customized for each
panel design. The most common customization requirement is for the display
driver company to optimize the gamma curve of each display driver for each panel
design. Display driver companies must work closely with their customers to
develop semiconductors that meet their customers’ specific needs in order to
optimize the performance of their products.
Mixed-Signal
Design and High-Voltage CMOS Process Technology
Display
drivers have specific design and manufacturing requirements that are not
standard in the semiconductor industry. Some display drivers require
mixed-signal design since they combine both analog and digital devices on a
single semiconductor to process both analog signals and digital data.
Manufacturing display drivers requires high-voltage complementary metal oxide
semiconductor, or CMOS, process technology operating at 10 to 18 volts for
source drivers and 10 to 45 volts for gate drivers, levels of voltage which are
not standard in the semiconductor industry. For display drivers, the driving
voltage must be maintained under a very high degree of uniformity, which can be
difficult to achieve using standard CMOS process technology. However,
manufacturing display drivers does not require very small-geometry semiconductor
processes. Typically, the manufacturing process for large panel display drivers
requires geometries between 0.13 micron and 1 micron because the physical
dimensions of a high-voltage device do not allow for the economical reduction in
geometries below this range. We believe that there are a limited number of fabs
with high-voltage CMOS process technology that are capable of high-volume
manufacturing of display drivers.
Special
Assembly and Testing Requirements
Manufacturing
display drivers requires certain assembly and testing technologies and equipment
that are not standard for other semiconductors and are offered by a limited
number of providers. The assembly of display drivers typically uses either tape
automated bonding, also known as TAB, or chip-on-glass, also known as COG,
technologies. Display drivers also require gold bumping, which is a process in
which gold bumps are plated onto each wafer to connect the die and the processed
tape, in the case of TAB packages, and the glass, in the case of COG packages.
TAB may utilize tape carrier package, also known as TCP, or chip on film, also
known as COF. The type of assembly used depends on the panel manufacturer’s
design, which is influenced by panel size and application and is typically
determined by the panel manufacturers. Display drivers for large-sized
applications typically require TAB package types and, to a lesser extent COG
package types, whereas display drivers for mobile handsets and consumer
electronics products typically require COG packages. The testing of display
drivers also requires special testers that can support high-channel and
high-voltage output semiconductors. Such testers are not standard in the
semiconductor industry.
Supply
Chain Management
The
manufacturing of display drivers is a complex process and requires several
manufacturing stages such as wafer fabrication, gold bumping and assembly and
testing, and the availability of materials such as the processed tape used in
TAB packaging. We refer to these manufacturing stages and material requirements
collectively as the “supply chain.” Panel manufacturers typically operate at
high levels of capacity utilization and require a reliable supply of display
drivers. A shortage of display drivers, or a disruption to this supply, may
disrupt panel manufacturers’ operations since replacement supplies may not be
available on a timely basis or at all, given the customization of display
drivers. As a result, a display driver company’s ability to deliver its products
on a timely basis at the quality and quantity required is critical to satisfying
its existing customers and winning new ones. Such supply chain management is
particularly crucial to fabless display driver companies that do not have their
own in-house manufacturing capacity. In the case of display drivers, supply
chain management is further complicated by the high-voltage CMOS process
technology and the special assembly and testing requirements that are not
standard in the semiconductor industry. Access to this capacity also depends in
part on display driver companies having received assurances of demand for their
products since semiconductor manufacturing service providers require credible
demand forecasts before allocating capacity among customers and investing to
expand their capacity to support growth.
Need
for Higher Level of Integration
The small
form factor of mobile handsets and certain consumer electronics products
restricts the space for components. Small and medium-sized panel applications
typically require one or more source drivers, one or more gate drivers and one
timing controller, which can be installed as separate semiconductors or as an
integrated single-chip driver. Customers are increasingly demanding higher
levels of integration in order to manufacture more compact panels, simplify the
module assembly process and reduce unit costs. Display driver companies must be
able to offer highly integrated chips that combine the source driver, gate
driver and timing controller, as well as semiconductors such as memory, power
circuit and image processors, into a single chip. Due to the size restrictions
and stringent power consumption constraints of such display drivers, single-chip
drivers are complex to design. For large-sized panel applications, integration
is both more difficult to achieve and less important since size and weight are
less of a priority.
Products
We have
four principal product lines:
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display
drivers and timing controllers;
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TFT-LCD
television and monitor semiconductor
solutions;
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LCOS
products; and
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power
management ICs.
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We
commenced volume shipments of our first source and gate drivers for large-sized
panels in July 2001 and have developed a broad product portfolio of display
drivers and timing controllers for use in large-sized TFT-LCD panels. We
commenced volume shipments of our first display drivers for use in consumer
electronics applications in April 2002, volume shipments of two-chip display
drivers for mobile handsets in August 2003 and volume shipments of single-chip
display drivers for mobile handsets in August 2004. In September 2004, we
commenced volume shipments of our first television semiconductor solutions. We
commenced shipping engineering samples of LCOS products in December 2003 and
started volume shipment in June 2006. We commenced shipping engineering
samples of power management
ICs in October 2006
and started volume
shipments in January 2007.
Display
Drivers and Timing Controllers
Display
Driver Characteristics
Display
drivers deliver precise analog voltages and currents that activate the pixels on
panels. The following is a summary of certain display driver characteristics and
their relationship to panel performance.
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Resolution and Number of
Channels. Resolution refers to the number of pixels per line
multiplied by the number of lines, which determines the level of fine
detail within an image displayed on a panel. For example, a color display
screen with 1,024 x 768 pixels has 1,024 red columns, 1,024 green columns
and 1,024 blue columns for a total of 3,072 columns and 768 rows. The red,
green and blue columns are commonly referred to as “RGB.” Therefore, the
display drivers need to drive 3,072 column outputs and 768 row outputs.
The number of display drivers required for each panel depends on the
resolution. For example, an XGA (1,024 x 768 pixels) panel requires eight
384 channel source drivers (1,024 x 3 = 384 x 8) and three 256 channel
gate drivers (768 = 256 x 3), while a SXGA (1,280 x 1,024 pixels) panel
requires ten 384 channel source drivers and four 256 channel gate drivers.
The number of display drivers required can be reduced by using drivers
with a higher number of channels. For example, a SXGA panel can have eight
480 channel source drivers or four 960 channel source drivers instead of
ten 384 channel source drivers. Thus, using display drivers with a higher
number of channels can reduce the number of display drivers required for
each panel, although display drivers with a higher number of channels
typically have higher unit costs.
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Color Depth. Color
depth is the number of colors that can be displayed on a screen, which is
determined by the number of shades of a color, also known as grayscale,
that can be shown by the panel. For example, a 6-bit source driver is
capable of generating 26 x
26 x
26 =
218,
or 262K colors, and similarly, an 8-bit source driver is capable of
generating 16 million colors. Typically, for TFT-LCD panels currently in
commercial production, 262K and 16 million colors are supported by 6-bit
and 8-bit source drivers,
respectively.
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Operational Voltage. A
display driver operates with two voltages: the input voltage (which
enables it to receive signals from the timing controller) and the output
voltage (which, in the case of source drivers, is applied to liquid
crystals and, in the case of gate drivers, is used to switch on the TFT
device). Source drivers typically operate at input voltages from 3.3 to
1.5 volts and output voltages between 10 to 18 volts. Gate drivers
typically operate at input voltages from 3.3 to 1.5 volts and output
voltages from 10 to 45 volts. Lower input voltage saves power and lowers
electromagnetic interference, or EMI. Output voltage may be higher or
lower depending on the characteristics of the liquid crystal (or diode),
in the case of source drivers, or TFT device, in the case of gate
drivers.
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Gamma Curve. The
relationship between the light passing through a pixel and the voltage
applied to it by the source driver is nonlinear and is referred to as the
“gamma curve” of the source driver. Different panel designs and
manufacturing processes require source drivers with different gamma
curves. Display drivers need to adjust the gamma curve to fit the pixel
design. Due to the materials and processes used in manufacturing, panels
may contain certain imperfections which can be corrected by the gamma
curve of the source driver, a process which is generally known as “gamma
correction.” For certain types of liquid crystal, the gamma curves for RGB
cells are significantly different and thus need to be independently
corrected. Some advanced display drivers feature three independent gamma
curves for RGB cells.
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Driver Interface.
Driver interface refers to the connection between the timing
controller and display drivers. Display drivers increasingly require
higher bandwidth interface technology to address the larger data volume
necessary for video images. Panels used for higher data transmission
applications such as televisions require more advanced interface
technology. The principal types of interface technologies are
transistor-to-transistor logic, or TTL, reduced swing differential
signaling, or RSDS, and mini-low voltage differential signaling, or
mini-LVDS. Among these, RSDS and mini-LVDS were developed as low power,
low noise and low amplitude methods for high-speed data transmission using
fewer copper wires and resulting in lower EMI. In 2005, we introduced two
new display driver interfaces: dual edge TTL, or DETTL, and turbo RSDS.
DETTL enables the interface to function with lower power (below 1.8V),
thus reducing power consumption. Turbo RSDS is an upgraded version of RSDS
which increases the interface frequency from 85MHz to 135MHz, thus
reducing the bus width and panel
costs.
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Package Type. The
assembly of display drivers typically uses TAB and COG package types. COF
and TCP are two types of TAB packages. Customers typically determine the
package type required according to their specific mechanical and
electrical considerations. In general, display drivers for small-sized
panels use COG package type whereas display drivers for large-sized panels
primarily use TAB package types and, to a lesser extent, COG package
types.
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Large-Sized
Applications
We provide
source drivers, gate drivers and timing controllers for large-sized panels
principally used in desktop monitors, notebook computers and televisions.
Display drivers used in large-sized applications feature different key
characteristics, depending on the end-use application. For display drivers for
use in notebook computers, low power consumption is a key feature due to the
portability of notebook computers and the need for long battery life. For
display drivers used in desktop monitors, low cost is more desirable than low
power consumption. For advanced televisions, display drivers must meet the
requirements of larger panels, such as higher data transmission rates, wider
viewing angles, faster response time, higher color depth and better image
performance.
The table
below sets forth the features of our products for large-sized
applications:
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Product
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Features
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TFT-LCD
Source Drivers
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· 384
to 1080 output channels
· 6-bit
(262K colors), 8-bit (16 million colors) or 10-bit (1 billion
colors)
· one
gamma-type driver
· three
gamma-type drivers (RGB independent gamma curve to enhance color
image)
· output
driver voltage ranging from 4.5V to 24V
· input
logic voltage ranging from standard 3.3V to low power 1.5V
· low
power consumption and low EMI
· supports
TCP, COF and COG package
types
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Product
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Features
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· supports
TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized interface
technologies
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TFT-LCD
Gate Drivers
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· 192
to 400 output channels
· output
driving voltage ranging from 10 to 45V
· input
logic voltage ranging from standard 3.3V to low power 1.5V
· low
power consumption
· supports
TCP, COF and COG package types
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Timing
Controllers
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· product
portfolio supports a wide range of resolutions, from VGA (640 x 480
pixels) to Full HD (1,920 x 1,080 pixels)
· supports
TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized output interface
technologies
· input
logic voltage ranging from standard 3.3V to low power 1.5V
· embedded
overdrive function for television applications to improve response
time
· supports
TTL, LVDS and mini-LVDS input interface
technologies
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The
industry trend for large-sized applications is towards low power consumption
notebook computer display drivers, low cost desktop monitor display drivers and
display drivers that can support higher speed interface technologies, have
greater color depth and enhanced color through RGB independent gamma for use in
advanced televisions.
In
December 2007, we introduced Cascade Modulated Driver Interface, or CDMI,
technology, a patented technology for LED notebook panels, benefits of which
include a thin and light form factor, lower material costs and lower power
consumption and supports a resolution of up to 1,920 x 1,200
pixels.
Mobile
Handset Applications
We offer
display drivers for mobile handset displays that combine source driver, gate
driver and other functions into a single chip in various display technologies,
such as TFT-LCD, LTPS LCD and AMOLED. As
mobile handsets become smaller and more compact, customers are increasingly
demanding smaller die sizes and higher levels of integration with source driver,
gate driver, timing controller, as
well as more functional semiconductors such as memory, power circuit and image
processors, integrated into
a single chip. Moreover, mobile handsets must operate for long durations without
recharging the battery. Thus, display drivers with lower power consumption are
desired and we integrated
our proprietary low power driving circuits and Content Adaptive Brightness Control, or CABC, into display drivers in order to extend the battery life. Low
cost is also an important feature as mobile handset manufacturers continue to
reduce cost and customers increasingly seek out cost-effective display
drivers.
The
following table summarizes the features of our products for mobile
handsets:
|
Product
|
Features
|
|
TFT-LCD
Drivers
|
· highly
integrated single chip embedded with the source driver, gate driver, power
circuit, timing controller and memory
· product
portfolio suitable for a wide range of resolutions, including QQVGA (128 x
160 pixels), QCIF (132 x 176 pixels), QCIF+ (176 x 220 pixels), QVGA (240
x 320 pixels), WQVGA (240 x 480 pixels), HVGA (320 x 480 pixels) and a
range of panel sizes from 1.5 to 3.2 inches in diagonal
measurement
· supports 262K colors to 16 million
colors
· supports RGB separated gamma
adjustment
· supports CABC
· supports MDDI (Mobile Display Digital
Interface) or MIPI (Mobile Industry Processor
Interface)
· input
logic voltage ranging from standard 3.3V to low power
1.65V
|
|
Product
|
Features
|
|
· low
power consumption and low EMI
· utilizes
die shrink technology to reduce die size and cost
· slimmer
die for compact module to fit smaller mobile handset designs
· application
specific integrated circuits, or ASIC, can be designed to meet customized
requirements (e.g., drivers without memory or drivers without gate driver
embedded on the chip)
|
|
|
LTPS
Drivers
|
· highly
integrated single chip embedded with the source driver, power circuit,
timing controller and memory
· suitable for a wide range of
resolutions, including from QQVGA (128 x 160)
to WVGA (864 x 480), and a range of panel sizes
from 1.5 to 3.5 inches diagonally
· supports 262K colors to 16 million
colors
· supports RGB separated gamma
adjustment
· supports CABC
· supports CDP, MDDI, or MIPI
· input
logic voltage ranging from standard 3.3V to low power 1.65V
· utilizes
die shrink technology to reduce die size and cost
· slimmer
die for compact module
· ASIC
can be designed to meet customized requirements (e.g.,
gate-less or multi-bank output
driver)
|
The
industry trend for mobile handset display drivers is towards display drivers
that can support high-speed interfaces, have greater color depth and enhanced
image quality as mobile handsets increasingly incorporate multimedia
functions.
Consumer
Electronics Products
We offer
source drivers, gate drivers, timing controllers and integrated drivers for
consumer electronics products such as digital cameras, digital video recorders,
personal digital assistants, mobile gaming devices, portable DVD players and car
navigation displays. We offer an extensive line of display drivers covering
different applications, interfaces and channel output and levels of integration.
Similar to mobile handsets, consumer electronics products are typically compact,
battery-operated devices. Customers are increasingly demanding display drivers
with smaller and more compact die sizes and higher levels of integration with
source driver, gate driver, timing controller, as well as more functional
semiconductors such as memory, power circuit and image processors, integrated
into a single chip. Moreover, display drivers with lower power consumption are
desired in order to extend battery life.
The
following table summarizes the features of our products used in consumer
electronics products:
|
Product
|
Features
|
|
TFT-LCD
Source Drivers
|
· 240
to 1200 output channels
· products
for analog and digital interfaces
· supports
262K colors to 16 million colors
· input
logic voltage ranging from standard 3.3V to low power 2.5V
· low
power consumption and low EMI
|
|
TFT-LCD
Gate Drivers
|
· 96
to 800 output channels
· input
logic voltage ranging from standard 3.3V to low power 2.5V
· output
driving voltage ranging from 10 to 40V
|
|
TFT-LCD
Integrated Drivers
|
· highly
integrated single chip embedded with source driver, gate driver, timing
controller and power circuit
· resolutions
include 480 x 240, 320RGB x 240, 480RGB x 272
|
|
Product
|
Features
|
|
· products
for analog or digital interfaces
· low power
consumption
· CABC function integrated for
backlight power saving
|
|
|
Timing
Controllers
|
· products
for analog or digital interfaces
· supports
various resolutions from 280 x 220 pixels to 1024 x 600
pixels
|
The
industry trend for display drivers used in medium-sized consumer electronics
products is towards higher channels and for the timing controller to be
integrated into the video processor. The trend of display drivers used in
small-sized consumer electronics products is towards single-chip solutions
combining the source driver, gate driver, timing controller and power circuit
into a single chip.
TFT-LCD
Television and Monitor Semiconductor Solutions
Himax
Media Solutions, our subsidiary, provides TFT-LCD television and monitor
semiconductor solutions. Set forth below are the various semiconductor
components that may be utilized in advanced televisions:
TFT-LCD
Television and Monitor Chipsets
Television
chipsets contain numerous components that process video and audio signals and
thus enhance the image and audio qualities of televisions. Advanced televisions
typically require some or all of these components:
|
·
|
Audio Processor/Amplifier.
Demodulates, processes and amplifies sound from television
signals.
|
|
·
|
Analog Interfaces.
Convert analog video signals into digital video signals. Video
decoder and analog-to-digital converter, or ADC, are
included.
|
|
·
|
Digital Interfaces.
Receive digital signals via digital receivers. Digital visual
interfaces, or DVI, and high-definition multimedia interfaces, or HDMI,
are included.
|
|
·
|
Channel Receiver.
Demodulates input signals so that the output becomes compressed bit
stream data.
|
|
·
|
DTV Decoder. Converts
video and audio signals from compressed bit stream data into regular video
and audio signals.
|
|
·
|
Video Processor.
Performs the scaling function that magnifies or shrinks the image
data in order to fit the panel’s resolution; provides real-time processing
for improved color and image quality; converts output video from an
interlaced format to a progressive format in order to eliminate
jaggedness; and supports on-screen display and real-time video format
transformation.
|
We are developing all of the above
components and have shipped our analog TV single-chip solutions in volume. Our
analog TV single-chip
solutions are designed for use in advanced televisions as well as LCOS
applications and our product portfolio includes high-performance chips
that target high-end segments as well as
cost-effective chips which target entry-level segments.
The
following table summarizes the features of our video processors:
|
Product
|
Features
|
|
Analog
TV single-chip solutions
|
· ideal
for LCD TV, MFM TV and LCOS applications
· integrated
with video decoder and 3D comb filter to support worldwide NTSC, PAL and
SECAM standards
· integrated
with VBI Slicer for CC, V-Chip and Teletext functions
· integrated
with TCON and Over-Drive for additional cost-down
· integrated
with high performance scaler, de-interlancer, and ADC
· built-in
HDMI and DVI Receiver
· built-in
Himax 3rd generation video engine which supports variable dynamic video
enhancement features
· output
resolutions range from 640 x 480 up to 1920 x 1080
|
LCOS
Products
LCOS
technology is beginning to migrate into the mass-production stage for some
commercial applications and is expected to be utilized in near-to-eye
applications and mini-projectors. We design our LCOS products at our subsidiary,
Himax Display, which owns and operates a fab for the manufacture of such
products. In January 2008, we announced a strategic alliance with 3M, one of the
world’s leading companies in optics technology, to commercialize LCOS mobile
projectors by combining their proprietary technologies to deliver a complete
mobile projection solution to consumer electronics manufacturers. 3M developed,
and is providing, a miniature LED projection engine that incorporates the
single-panel color filter type LCOS module of Himax Display.
The
following table sets forth the features of our LCOS products:
|
Product
|
Features
|
|
LCOS
modules for near-to-eye, mini and mobile-projector
applications
|
· Color filter type: 0.38"
640 x 360 pixels
(Q720P), 0.44"
VGA and 0.59" SVGA
resolutions
· Color sequential type: 0.38" VGA and
0.59" SVGA
· 8-bit
(16 million colors)
· high
reflectivity and greater than 100:1 contrast ratio
· low
power consumption
|
|
Product
|
Features
|
|
LCOS
modules for projection applications
|
· WXGA
and Full HD resolutions
· 8-bit
(16 million colors)
· high
reflectivity and greater than 1,000:1 contrast
ratio
|
Power
Management ICs
Himax
Analogic, our subsidiary, has three major products: class-D audio amplifiers,
step-up DC-to-DC switching regulators, and white light LED drivers.
|
•
|
Class-D Audio Amplifier.
The audio amplifier receives audio signals from the audio processor
and delivers the amplified audio signals to speaker(s). The input audio
signal is converted into a sequence of pulses with fixed voltage. By means
of a modulated pulse width and an external low-pass filter, the output
audio signal will be “reproduced,” but with larger amplitude. Since a
class-D audio amplifier only switches between on and off instead of
operating in linear mode, there is a very small amount of power consumed
by the amplifier. Therefore, high power efficiency is a class-D audio
amplifier’s major advantage. For those applications that are concerned
about power dissipation, a class-D audio amplifier is an appropriate
choice.
|
|
Product
|
Features
|
|
2.5W/2W
Mono/Stereo Class-D Audio Amp for Portable Devices
|
· 3.3V
to 5.5V input voltage range
· Gain
setting by external resistors or DC voltage
· OCP/OTP/UVL
|
|
9W
Stereo Class-D Audio Amp for TVs and Monitors
|
· 8.5V
to 12.6V input voltage range
· 4
fixed gain selections
· OCP/OT/UVL
|
|
•
|
Step-up
DC-to-DC Switching Regulator. A step-up
DC-to-DC
converter,
also called a
switching
regulator,
integrates an
error
amplifier
and a
pulse width
modulator
(PWM) with a build-in n-channel power MOSFET
(Metal-Oxide-Semiconductor Field-Effect Transistor)
to perform with
high
efficiency and fast transient response in
order to
supply a higher voltage from a lower input voltage
with an
external
inductor and diode.
Electronic devices require
various specific working voltages
on different applications.
However,
there is normally one
or two
common power sources
available. A
step-up
DC-to-DC
converter plays an
important role in
supplying
higher voltage
from lower input voltage
to make
an
electronic
device work
normally. In other words, most
electronic
devices
need a
step-up
DC-to-DC
converter as a
stable working power supplier in various applications.
|
|
Product
|
Features
|
|
TFT-LCD
Step-up DC-to-DC Converter
|
· 2.6V
to 5.5V input voltage range
· Max
boost voltage: 24V
· Programmable
switching frequency
· Programmable
soft-start
|
|
TFT-LCD
DC-to-DC Converter with Operational Amplifiers
|
· 2.6V
to 6.5V input voltage range
· 1.2MHz
current-mode boost regulator
· Linear
regulator controllers for gate driver power supply
· Built-in
14V, 2.4A, 160 mΩ MOSFET
· 5
high-performance operational
amplifiers
|
|
•
|
White Light LED Driver.
The LED driver provides sufficient voltage and current to light up LED
diodes. Moreover, in addition to turning LEDs on, the driver has to keep
the brightness of LEDs uniform and stable. Therefore, voltage boosting and
current sensing are the core functional blocks of a white light LED
driver.
|
|
Product
|
Features
|
|
WLED
Driver for Small/Medium Size Panels
|
Ÿ 2.5V
to 6V input voltage range
|
|
|
Ÿ Built-in
1.3MHz step-up PWM converter
Ÿ Capable
of driving up to 39 LEDs (13 strings of 3 LEDs)
Ÿ Support
200~25KHz PMM dimming control
|
|
WLED
Driver for Notebook Panels
|
Ÿ 4.5V
to 24V input voltage range
Ÿ Built-in
1.3MHz step-up PWM converter (max. boost voltage: 40V)
Ÿ 8
constant current source channels
Ÿ Capable
of driving up to 11 LEDs in serial for each channel
|
Other
Products and Services
We established Himax Imaging Inc., or Himax Imaging, in March 2007 to design, develop and market
semiconductors for CMOS
image sensor applications. To date, Himax Imaging has not generated any revenues.
Core
Technologies and Know-How
Driving System
Technology. Through our collaboration with panel manufacturers, we have
developed extensive knowledge of circuit design, TFT-LCD driving systems,
high-voltage processes and display systems, all of which are important to the
design of high-performance TFT-LCD display drivers. Our engineers have in-depth
knowledge of the driving system technology, which is the architecture for the
interaction between the source driver, gate driver, timing controller and power
systems as well as other passive components. We believe that our understanding
of the entire driving system has strengthened our design capabilities. Our
engineers are highly skilled in designing power efficient and compact display
drivers that enhance the performance of TFT-LCD. We are leveraging our know-how
of display drivers and driving system technology to develop display drivers for
panels utilizing other technologies such as OLED.
High-Voltage CMOS
Circuit Design. Unlike most other semiconductors, TFT-LCD display drivers
require a high output voltage of 10 to 45 volts. We have developed circuit
design technologies using a high-voltage CMOS process that enables us to produce
high-yield, reliable and compact drivers for high-volume applications. Moreover,
our technologies enable us to keep the driving voltage at very high uniformity,
which can be difficult to achieve when using standard CMOS process
technology.
High-Bandwidth
Interfaces. In addition to high-voltage circuit design, TFT-LCD display
drivers require high bandwidth transmission for video signals. We have applied
several high-speed interfaces, including TTL, RSDS, mini-LVDS, DETTL, turbo RSDS
and customized interfaces, in our display drivers. Moreover, we are developing
additional driver interfaces for special applications with optimized speed,
lower EMI and higher system stability.
Die Shrink and
Low Power Technologies. Our engineers are highly skilled in employing
their knowledge of driving technology and high-voltage CMOS circuit design to
shrink the die size of our display drivers while leveraging their understanding
of driving technology and panel characteristics to design display drivers with
low power consumption. Die size is an important consideration for applications
with size constraints. Smaller die size also reduces the cost of the chip. Lower
power consumption is important for many portable devices such as notebook
computers, mobile handsets and consumer electronics products.
Customers
Our customers for display drivers are
primarily panel manufacturers and mobile device module manufacturers, who in
turn design and market their products to manufacturers of end-use products such
as notebook computers, desktop monitors, televisions, mobile handsets and consumer
electronics products. As of December 31, 2007, we sold our products to more than
70 customers. In 2005, 2006 and 2007, CMO
and its affiliates accounted for 58.9%, 55.0% and 58.8% of our revenues,
respectively; CPT and its affiliates accounted for 16.2%, 12.4% and
7.3% of our revenues,
respectively; and SVA-NEC
and its affiliates accounted for 5.6%, 7.3% and 8.4% of our revenues, respectively.
We expect that sales to
CMO, CPT and SVA-NEC and their affiliates will continue to
account for a substantial
majority of our revenues in
the near term.
Set forth below (in alphabetical order)
are our ten largest customers (and their affiliates) based on revenues
for the year ended December 31, 2007:
Chi Lin
Technology Co., Ltd.
Chi Mei
Optoelectronics Corp.
Chunghwa
Picture Tubes, Ltd.
Excel
Asian Taiwan Co., Ltd.
HannStar
Display Corporation
InnoLux
Display Corporation
Perfect
Display Limited
Samsung
Electronics Taiwan Co., Ltd.
Shanghai
SVA-NEC Liquid Crystal Display
TPO
Displays Corporation
Our
customers typically provide us with a long-term (twelve-month) forecast plus
three-month rolling non-binding forecasts and confirm orders with us one month
ahead of scheduled delivery. In general, purchase orders are not cancellable by
either party, although from time to time we and our customers have agreed to
amend the terms of such orders.
Sales
and Marketing
We focus
our sales and marketing strategy on establishing business and technology
relationships principally with TFT-LCD panel manufacturers and increasingly also
with panel manufacturers using LTPS or OLED technologies and also with mobile
display module and mobile handset manufacturers in order to work closely with
them on future semiconductor solutions that align with their product road maps.
Our engineers collaborate with our customers’ engineers to create products that
comply with their specifications and provide a high level of performance at
competitive prices. Our end market for large-sized panels is concentrated around
a limited number of major panel manufacturers. We have also commenced marketing
our products directly to mobile device manufacturers so that our products can be
qualified for their specifications and designed into their
products.
We primarily sell our products
through our direct sales
teams located in Taiwan, China, South Korea and Japan. We also have dedicated sales teams for
certain of our most important current or prospective customers. We have sales
and technical support offices in Tainan, Taiwan. We have regional offices in Hsinchu and Taipei, Taiwan; Suzhou, Shenzhen, Foshan and Ningbo China; Yokohama and Matsusaka,
Japan; Anyangsi Kyungkido, South
Korea; and Irvine, California, USA, all in close proximity to our
customers. For certain
products or regions we may from time to time sell our products
through agents or distributors.
Our sales
and marketing team possesses a high level of technical expertise and industry
knowledge used to support a lengthy and complex sales process. This includes a
highly trained team of field applications engineers that provides technical
support and assistance to potential and existing customers in designing, testing
and qualifying display modules that incorporate our products. We believe that
the depth and quality of this design support are key to improving customers’
time-to-market and maintaining a high level of customer
satisfaction.
Manufacturing
We are a
fabless semiconductor company. We leverage our experience and engineering
expertise to design high-performance semiconductors and rely on semiconductor
manufacturing service providers for wafer fabrication, gold bumping, assembly
and testing. We also rely on third-party suppliers of processed tape used in TAB
packaging. We engage foundries with high-voltage CMOS process technology for our
display drivers and engage assembly and testing houses that specialize in TAB
and COG packages, thereby taking advantage of the economies of scale and the
specialization of such semiconductor manufacturing service providers. Our
fabless model enables us to capture certain financial and operational benefits,
including reduced manufacturing personnel, capital expenditures, fixed assets
and fixed costs. It also gives us the flexibility to use the technology and
service provider most suitable for any given product.
Manufacturing
Stages
The
diagram below sets forth the various stages in manufacturing display drivers
according to the two different types of assembly utilized: TAB or COG. The
assembly type depends on the application of the panel and is determined by our
customers.
Wafer
Fabrication: Based on our design, the foundry
provides us with fabricated wafers. Each fabricated wafer contains many chips,
each known as a die.
Gold
Bumping: After the wafers are fabricated, they are
delivered to gold bumping houses where gold bumps are plated on each wafer. The
gold bumping process uses thin film metal deposition, photolithography and
electrical plating technologies. The gold bumps are plated onto each wafer to
connect the die to the processed tape, in the case of TAB package, or the glass,
in the case of COG package.
Chip Probe
Testing: Each individual die is electrically
tested, or probed, for defects. Dies that fail this test are
discarded.
Assembly and
Testing: Our display drivers use two types of
assembly technology: TAB or COG. Display drivers for large-sized applications
typically require TAB package types and to a lesser extent COG package types,
whereas display drivers for mobile handsets and consumer electronics products
typically require COG package types.
TAB
Assembly
We use two
types of TAB technologies: TCP and COF. TCP and COF packages are both made of
processed tape that is typically 35mm or 48mm wide, plated with copper foil and
has a circuit formed within it. TCP and COF packages differ, however, in terms
of their chip connections. With TCP packages, a hole is punched through the
processed
tape in the area of the chip, which is connected to a flying lead made of
copper. In contrast, with COF packages, the lead is mounted directly on the
processed tape and there is no flying lead.
|
·
|
Inner-Lead
Bonding: The TCP and COF assembly process
involves grinding the bumped wafers into their required thickness and
cutting the wafers into individual dies, or chips. An inner lead bonder
machine connects the chip to the printed circuit processed tape and the
package is sealed with resin at high
temperatures.
|
|
·
|
Final
Testing: The assembled display drivers are
tested to ensure that they meet performance specifications. Testing takes
place on specialized equipment using software customized for each
product.
|
COG
Assembly
COG
assembly connects display drivers directly to LCD panels without the need for
processed tape. COG assembly involves grinding the tested wafers into their
required thickness and cutting the wafers into individual dies, or chips. Each
individual die is picked and placed into a chip tray and is then visually or
auto-inspected for defects. The dies are packed within a tray in an aluminum bag
after completion of the inspection process.
Quality
Assurance
We
maintain a comprehensive quality assurance system. Using a variety of methods
from conducting rigorous simulations during the circuit design process to
evaluating supplier performance at various stages of our products’ manufacturing
process, we seek to bring about improvements and achieve customer satisfaction.
In addition to monitoring customer satisfaction through regular reviews, we
implement extensive supplier quality controls so that the products we outsource
achieve our high standards. Prior to engaging a third party as our supplier, we
perform a series of audits on their operations, and upon engagement, we hold
frequent quality assurance meetings with our suppliers to evaluate such factors
as product quality, production costs, technological sophistication and timely
delivery.
In
November 2002, we received ISO 9001:2000 certification which was renewed in
February 2008 and will expire in February 2011. In February 2006, we received
ISO 14001 certification which was renewed in March 2008 and will expire in 2009.
In addition, in March 2007, we received IECQ QC 080000 and OHSAS 18001
certifications which will expire in 2010.
Semiconductor
Manufacturing Service Providers and Suppliers
Through
our relationships with leading foundries, assembly, gold bumping and testing
houses and processed tape suppliers, we believe we have established a supply
chain that enables us to deliver high-quality products to our customers in a
timely manner.
Access to
semiconductor manufacturing service providers is critical as display drivers
require high-voltage CMOS process technology and specialized assembly and
testing services, all of which are different from industry standards. We have
historically obtained our foundry services from TSMC and Vanguard and have also
recently established relationships with Macronix, Lite-on, Chartered, UMC,
Maxchip and Silicon. These
are among a select number of semiconductor manufacturers that provide
high-voltage CMOS process technology required for manufacturing display drivers.
We engage assembly and testing houses that specialize in TAB and COG packages
such as Chipbond Technology Corporation, ChipMOS Technologies Inc.,
International Semiconductor Technology Ltd., and Siliconware Precision
Industries Co., Ltd.
We plan to
strengthen our relationships with our existing semiconductor manufacturing
service providers and diversify our network of such service providers in order
to ensure access to sufficient cost-competitive and high-quality manufacturing
capacity. We are selective in our choice of semiconductor manufacturing service
providers. It takes a substantial amount of time to qualify alternative
foundries, gold bumping, assembly and testing houses for production. As a
result, we expect that we will continue to rely on limited number of
semiconductor manufacturing service providers for a substantial portion of our
manufacturing requirements in the near future.
The table
below sets forth (in alphabetical order) our principal semiconductor
manufacturing service providers and suppliers:
|
Wafer
Fabrication
|
Gold
Bumping
|
|
Chartered
Semiconductor Manufacturing Ltd.
|
Chipbond
Technology Corporation
|
|
Lite-on
Semiconductor Corp.
|
ChipMOS
Technologies Inc.
|
|
Macronix
International Co., Ltd.
|
International
Semiconductor Technology Ltd.
|
|
Maxchip
Electronics Corp. (which was spun off from Powerchip Semiconductor Corp.
on April 1, 2008)
|
Siliconware
Precision Industries Co., Ltd.
|
|
Silicon
Manufacturing Partners Pte Ltd.
|
|
|
Taiwan
Semiconductor Manufacturing Company Ltd.
|
|
|
United
Microelectronics Corporation
|
|
|
Vanguard
International Semiconductor Corporation
|
|
|
Processed
Tape for TAB Packaging
|
Assembly
and Testing
|
|
Hitachi
Cable Asia, Ltd. Taipei Branch
|
Chipbond
Technology Corporation
|
|
Mitsui
Micro Circuits Taiwan Co., Ltd.
|
ChipMOS
Technologies Inc.
|
|
Samsung
Techwin Co., Ltd.
|
International
Semiconductor Technology Ltd.
|
|
Simpal
Electronics Co. Ltd.
|
Siliconware
Precision Industries Co., Ltd.
|
|
Sumitomo
Metal Mining Package Material Co., Ltd.
|
|
Chip
Probe Testing
|
|
|
Ardentec
Corporation
|
|
|
Chipbond
Technology Corporation
|
|
|
ChipMOS
Technologies Inc.
|
|
|
International
Semiconductor Technology Ltd.
|
|
|
King
Yuan Electronics Co., Ltd.
|
|
|
Siliconware
Precision Industries Co., Ltd.
|
Intellectual
Property
As of December 31, 2007, we held a total
of 231 patents, including 134 in Taiwan, 66 in the United States, 16 in China, 11 in Korea and 4 in Japan. The expiration dates of our patents
range from 2019 to 2027. We also have a total of 353 pending patent applications in
Taiwan, 364 in the United States and 208 in other jurisdictions, including the PRC,
Japan, Korea and Europe. In addition, we have registered
“Himax” and our logo as a trademark and service
mark in Taiwan, China and Japan and the United States.
Competition
The
markets for our products are, in general, intensely competitive, characterized
by continuous technological change, evolving industry standards, and declining
average selling prices. We believe key factors that differentiate among the
competition in our industry include:
|
·
|
customer
relations;
|
|
·
|
product
performance;
|
|
·
|
design
customization;
|
|
·
|
development
time;
|
|
·
|
product
integration;
|
|
·
|
technical
services;
|
|
·
|
manufacturing
costs;
|
|
·
|
supply
chain management;
|
|
·
|
economies
of scale; and
|
|
·
|
broad
product portfolio.
|
We continually face intense competition
from other fabless display
driver companies, including Cheertek Incorporation, DenMOS Technology Inc.,
Fitipower Integrated Technology, Inc., Ili Technology Corp., Leadis Technology, Inc., Novatek
Microelectronics Corp., Ltd., Orise Technology Co., Ltd., Raydium
Semiconductor Corporation,
Sitronix Technology Co., Ltd., SmartASIC Technology, Inc. and Solomon Systech
Limited. We also face competition from integrated device manufacturers, such as
MagnaChip Semiconductor Ltd., Matsushita Electric Works, Ltd., NEC
Electronics Corporation, Oki Electric Industry Co.
Ltd., Renesas Technology Corp., Seiko Epson Corporation and Toshiba Corporation,
and panel manufacturers with in-house semiconductor design capabilities, such as
Samsung Electronics Co., Ltd. and Sharp Corporation. The latter are both our competitors and
customers.
Many of
our competitors, some of which are affiliated or have established relationships
with other panel manufacturers, have longer operating histories, greater brand
recognition and significantly greater financial, manufacturing, technological,
sales and marketing, human and other resources than we do. Additionally, we
expect that as the flat panel semiconductor industry expands, more companies may
enter and compete in our markets.
Our
television semiconductor solutions compete against solutions offered by a
significant number of semiconductor companies including Advanced Micro Devices,
Inc., Broadcom Corporation, Huaya Microelecronics Inc., Mediatek Corp., Micronas
Semiconductor Holding AG, MStar Semiconductor, Inc., Novatek Microelectronics
Corp., NXP Semiconductor, Pixelworks Inc., Realtek Semiconductor Corp.,
STMicroelectronics, Sunplus Technology Co., Trident Microsystems, Inc. and Zoran
Corporation, among others, some of which focus solely on video processors or
digital TV solutions and others that offer a more diversified
portfolio.
For LCOS products, we face competition
primarily from Sony Corporation, Victor Company of Japan, Limited, also known as
JVC, Displaytech Inc., Texas Instruments Incorporated’s digital light processing
technology-based products and Microvision, Inc.’s laser-based products in
mini-projectors and
mobile-projectors.
Insurance
We
maintain insurance policies on our buildings, equipment and inventories covering
property damage and damage due to, among other events, fires, typhoons,
earthquakes and floods. We maintain these insurance policies on our facilities
and on inland transit of inventories. Additionally, we maintain director and
officer liability insurance. We do not have insurance for business
interruptions, nor do we have key person insurance.
Environmental
Matters
The
business of semiconductor design does not cause any significant pollution. Himax
Display maintains a facility for our LCOS products where we have taken the
necessary steps to obtain the appropriate permits and believe that we are in
compliance with the existing environmental laws and regulations in the ROC. We
have entered into various agreements with certain customers whereby we have
agreed to indemnify them, and in certain cases, their customers, for any claims
made against them for hazardous material violations that are found in our
products.
The following chart sets forth our
corporate structure and ownership interest in each of our principal operating
subsidiaries and affiliates
as of June 1,
2008.
The
following table sets forth summary information for our subsidiaries as of June
1, 2008.
|
Subsidiary
|
Main
Activities
|
Jurisdiction
of
Incorporation
|
Total
Paid-in
Capital
|
Percentage
of
Our
Ownership
Interest
|
||||
|
$
(in millions)
|
||||||||
|
Himax
Technologies Limited
|
IC
design and sales
|
ROC
|
81.9
|
100%
|
||||
|
Himax
Technologies Anyang Limited
|
Sales
|
South
Korea
|
0.5
|
100%
|
||||
|
Wisepal
Technologies, Inc.
|
IC
design and sales
|
ROC
|
9.9
|
100%
|
||||
|
Himax
Technologies (Samoa), Inc.
|
Investments
|
Samoa
|
2.5
|
100%(1)
|
||||
|
Himax
Technologies (Suzhou) Co., Ltd.
|
Sales
|
PRC
|
1.0
|
100%(1)
|
||||
|
Himax
Technologies (Shenzhen) Co., Ltd.
|
Sales
|
PRC
|
1.5
|
100%(1)
|
||||
|
Himax
Display, Inc.
|
IC
design, manufacturing and sales
|
ROC
|
23.2
|
88.1%
|
||||
|
Integrated
Microdisplays Limited
|
IC
design and sales
|
Hong
Kong
|
1.1
|
100%(2)
|
||||
|
Himax
Analogic, Inc.
|
IC
design and sales
|
ROC
|
11.2
|
73.7%
|
||||
|
Himax
Imaging, Inc.
|
Investments
|
Cayman
Islands
|
9.5
|
100%
|
||||
|
Himax
Imaging Ltd.
|
IC
design and sales
|
ROC
|
2.1
|
100%
|
||||
|
Himax
Imaging Corp.
|
IC
design and sales
|
California,
USA
|
4.3
|
100%
|
||||
|
Argo
Limited
|
Investments
|
Cayman
Islands
|
9.0
|
100%
|
||||
|
Tellus
Limited
|
Investments
|
Cayman
Islands
|
9.0
|
100%
|
||||
|
Himax
Media Solutions, Inc.
|
TFT-LCD
television and monitor chipset operations
|
ROC
|
34.2
|
80.1%(3)
|
(1)
Indirectly, through our 100% ownership of Himax Technologies
Limited.
(2)
Indirectly, through our 88.1% ownership of Himax Display,
Inc.
(3)
Directly and indirectly,
through our 100% ownership of Himax Technologies Limited which holds
36.2%.
In October 2006, we completed
construction on and relocated our corporate headquarters to a 22,172 square
meter facility within the Tree Valley Industrial Park in Tainan, Taiwan. The facility houses our research and
development, engineering,
sales and marketing, operations and general administrative staff. Construction
for our new headquarters commenced in the fourth quarter of 2005 and was
completed in the fourth quarter of 2006. The total costs amounted to
approximately $25.8 million, of which approximately
$10.2 million was for the land and
approximately $15.6 million was for the construction of the
building and related facilities (which included architect fees, general
contractor fees,
building materials, the purchase and
installation of network,
clean room, and office equipment and other fixtures). We also lease office space in
Taipei and Hsinchu, Taiwan; Suzhou, Shenzhen, Foshan, Beijing, Shanghai and Ningbo, China;
Yokohama and Matsusaka, Japan; Anyangsi Kyungkido, South Korea; and Irvine, California,
USA. The lease contracts may be renewed upon
expiration. Himax Display, our subsidiary, owns and operates a fab with 3,040
square meters of floor space in a building leased from CMO.
Not
applicable.
Overview
We design,
develop and market semiconductors that are critical components of flat panel
displays. Our principal products are display drivers used in desktop monitors,
notebook computers, televisions, mobile handsets and consumer electronics
products such as digital cameras, mobile gaming devices and car navigation
displays. We also offer display drivers for panels utilizing OLED technology and
LTPS technology. We have also expanded our product offerings to include TFT-LCD
television and monitor chipsets, as well as LCOS products and power management
ICs. We primarily sell our display drivers to TFT-LCD panel manufacturers and
mobile device module manufacturers, and we sell our television semiconductor
solutions to television makers.
We
commenced operations through our predecessor, Himax Taiwan, in June 2001. We
must, among other things, continue to expand and diversify our customer base,
broaden our product portfolio, achieve additional design wins and manage our
costs to partially mitigate declining average selling prices in order to
maintain our profitability. Moreover, we must continue to address the challenges
of being a growing technology company, including hiring and retaining
managerial, engineering, operational and financial personnel and implementing
and improving our existing administrative, financial and operations
systems.
We are a
fabless semiconductor company. We leverage our experience and engineering
expertise to design high-performance semiconductors and rely on third-party
semiconductor manufacturing service providers for wafer fabrication, gold
bumping, assembly and testing. We are able to take advantage of the economies of
scale and the specialization of such semiconductor manufacturing service
providers. Our fabless model enables us to capture certain financial and
operational benefits, including reduced manufacturing personnel, capital
expenditures, fixed assets and fixed costs. It also gives us the flexibility to
use the technology and service providers that are the most suitable for any
given product.
As our
semiconductors are critical components of flat panel displays, our industry is
closely linked to the trends and developments of the flat panel display
industry, in particular, the TFT-LCD panel segment. Substantially all of our
revenues in 2007 were derived from sales of display drivers that were eventually
incorporated into TFT-LCD panels. We expect display drivers for TFT-LCD panels
to continue to be our primary products. The TFT-LCD panel industry is intensely
competitive and is vulnerable to cyclical market conditions. The average selling
prices of TFT-LCD panels could decline for numerous reasons, including the
following: a surge in manufacturing capacity due to the ramping up of new
fabrication facilities; manufacturers operating at high levels of capacity
utilization in order to reduce fixed costs per panel; and lower-than-expected
demand for end-use products that incorporate TFT-LCD panels. An oversupply of
large-sized TFT-LCD panels in 2006, resulted in downward pricing pressure on
TFT-LCD panel manufacturers which, in turn, resulted in similar downward pricing
pressure on us. We could not sufficiently reduce costs to completely offset such
downward pricing pressure, and cannot assure you that we will be able to reduce
costs to offset such downward pricing pressure in the future. Moreover, during
periods of declining average selling prices for TFT-LCD panels, TFT-LCD panel
manufacturers may decrease capacity utilization and sell fewer panels, which
could depress demand for our display drivers. As a result, the cyclicality of
the TFT-LCD panel industry could adversely affect our revenues, cost of revenues
and results of operations.
Factors
Affecting Our Performance
Our
business, financial position and results of operations, as well as the
period-to-period comparability of our financial results, are significantly
affected by a number of factors, some of which are beyond our control,
including:
|
·
|
average
selling prices;
|
|
·
|
unit
shipments;
|
|
·
|
product
mix;
|
|
·
|
design
wins;
|
|
·
|
cost
of revenues and cost reductions;
|
|
·
|
supply
chain management;
|
|
·
|
share-based
compensation expenses; and
|
|
·
|
signing
bonuses.
|
Average
Selling Prices
Our performance is affected by the
selling prices of each of
our products. We price our products based on several factors, including
manufacturing costs, life cycle stage of the product, competition, technical
complexity of the product, size of the purchase order and our relationship with
the customer. We typically are able to charge the
highest price for a product when it is first introduced. Although from time to
time we are able to raise our selling prices during times of supply constraints,
our average selling prices typically decline over a product’s life cycle, which may be offset by
changes in conditions in the semiconductor industry such as constraints in
foundry capacity. The general trend in the semiconductor industry is for the
average selling prices of semiconductors to decline over a product’s life cycle due to competition,
production efficiencies, emergence of substitutes and technological
obsolescence. Our cost reduction efforts also contribute to this decline in
average selling prices. See “—Cost of Revenues and Cost
Reductions.” Our
average selling prices are also affected by the cyclicality of the
TFT-LCD panel industry. There have been industry reports of a
possible oversupply of
TFT-LCD panels starting from the fourth quarter of 2008. Any downward pricing pressure on TFT-LCD
panel manufacturers could
result in similar downward pricing pressure on us. During periods of
declining average selling prices for TFT-LCD panels, TFT-LCD panel manufacturers
may also decrease capacity utilization and sell fewer panels, which could
depress demand for our display drivers. Our average selling prices are also
affected by the packaging type our customers choose as well as the level of product
integration. However, the impact of declining average selling prices on our
profitability can be offset or mitigated to a certain extent by increased
volume, as lower prices may stimulate demand and thereby drive
sales.
Unit
Shipments
Our
performance is also affected by the number of semiconductors we ship, or unit
shipments. As our display drivers are critical components of flat panel
displays, our unit shipments depend on our customers’ panel shipments. Our unit
shipments have grown significantly since our inception primarily as a result of
our increased market share with certain major customers and their increased
shipments of large-sized panels. We have also continued to expand our customer
base. Our growth in unit shipments also reflected the significant growth in the
display driver market, as the demand for display drivers grew significantly in
recent years reflecting the strong demand for TFT-LCD panels.
Product
Mix
The
proportion of our revenues that is generated from the sale of different product
types, also referred to as product mix, also affects our average selling prices,
revenues and profitability. Our products vary depending on, among other things,
the number of output channels, the level of integration and the package type.
Variations in each of these specifications could affect the average selling
prices of such products. For example, the trend for display drivers for use in
large-sized panels is towards products with a higher number of channels, which
typically command higher average selling prices than traditional products with a
lower number of channels. However, panels that use higher-channel display
drivers typically require fewer display drivers per panel. As a result, our
profitability will be affected adversely to the extent that the decrease in the
number of display drivers required for each panel is not offset by increased
total unit shipments and/or higher average selling prices for display drivers
with a higher number of channels. The level of integration of our display
drivers also affects average selling prices, as more highly integrated chips
typically have higher selling prices. Additionally, average selling prices are
affected by changes in the package types used
by our customers. For example, the chip-on-glass package type typically has
lower material costs because no processed tape is required.
Design
Wins
Achieving
design wins is important to our business, and it affects our unit shipments.
Design wins occur when a customer incorporates our products into their product
designs. There are numerous opportunities for design wins, including when panel
manufacturers:
|
·
|
introduce
new models to improve the cost and/or performance of their existing
products or to expand their product
portfolio;
|
|
·
|
establish
new fabs and seek to qualify existing or new components suppliers;
and
|
|
·
|
replace
existing display driver companies due to cost or performance
reasons.
|
Design
wins are not binding commitments by customers to purchase our products. However,
we believe that achieving design wins is an important performance indicator. Our
customers typically devote substantial time and resources to designing their
products as well as qualifying their component suppliers and their products.
Once our products have been designed into a system, the customer may be
reluctant to change its component suppliers due to the significant costs and
time associated with qualifying a new supplier or a replacement component.
Therefore, we strive to work closely with current and prospective customers in
order to anticipate their requirements and product road maps and achieve
additional design wins.
Cost
of Revenues and Cost Reductions
We strive
to control our cost of revenues. Our cost of revenues as a percentage of total
revenues for 2005, 2006 and 2007 were 77.6%, 80.8% and 78.0%, respectively. For
the year ended December 31, 2007, as a percentage of Himax Taiwan’s total
manufacturing costs, the cost of wafer fabrication was 49.9%, the cost of
processed tape was 21.6%, and the cost of assembly and testing was 26.8%. As a
result, our ability to manage our wafer fabrication costs, costs for processed
tape and assembly and testing costs is critical to our performance. In addition,
to mitigate declining average selling prices, we aim to reduce unit costs by,
among other things:
|
·
|
improving
product design (e.g., having smaller die size allows for a larger number
of dies on each wafer, thereby reducing the cost of each
die);
|
|
·
|
improving
manufacturing yields through our close collaboration with our
semiconductor manufacturing service providers;
and
|
|
·
|
achieving
better pricing from semiconductor manufacturing service providers and
suppliers, reflecting our ability to leverage our scale, volume
requirements and close relationships as well as our strategy of sourcing
from multiple service providers and
suppliers.
|
Supply
Chain Management
Due to the
competitive nature of the flat panel display industry and our customers’ need to
maintain high capacity utilization in order to reduce unit costs per panel, any
delays in the delivery of our products could significantly disrupt our
customers’ operations. To deliver our products on a timely basis and meet the
quality standards and technical specifications our customers require, we must
have assurances of high-quality capacity from our semiconductor manufacturing
service providers. We therefore strive to manage our supply chain by maintaining
close relationships with our key semiconductor manufacturing service providers
and strive to provide credible forecasts of capacity demand. Any disruption to
our supply chain could adversely affect our performance and could result in a
loss of customers as well as potentially damage our reputation.
Share-Based
Compensation Expenses
Our
results of operations have been affected by, and we expect our results of
operations to continue to be affected by, our share-based compensation expenses.
Our share-based compensation expenses include charges taken relating to grants
of (i) nonvested shares to employees, (ii) treasury shares to employees and
(iii) shares to non-employees. We have since discontinued our practice of the
above-mentioned share-based compensation.
We adopted
a long-term incentive plan in October 2005 which permits the grant of options or
RSUs to our employees and non-employees where each unit represents one ordinary
share. The actual awards will be determined by our compensation committee. We
recorded share-based compensation expenses under the long-term incentive plan
totaling $2.8 million, $14.5 million and $20.1 million in 2005, 2006 and 2007,
respectively. See “—Critical Accounting Policies and Estimates—Share-Based
Compensation Expenses.” Of the total share-based compensation expenses
recognized, $0, $0 and $14.4 million in 2005, 2006 and 2007, respectively, were
settled in cash. We have applied SFAS No. 123 (revised 2004), Share-Based
Payment, or SFAS No. 123R, to account for our share-based compensation plans.
SFAS No. 123R requires companies to measure and recognize compensation expense
for all share-based payments at fair value.
Set forth
below is a summary of our historical share-based compensation plans as reflected
in our consolidated financial statements.
Nonvested Shares Issued to
Employees. In June 2001, November 2001 and January 2002, Himax Taiwan
granted nonvested shares of common shares to certain employees for their future
service. The shares vest five years after the grant date. Employees leaving
Himax Taiwan before completing the five-year service period would be required to
sell these shares back to Himax Taiwan at NT$1.00 ($0.03) per share. The
forfeiture of such nonvested shares is limited to the original number of shares
granted and does not apply to the shares received for stock splits and
dividends. Since none of these shares has vested, we did not record a capital
increase at the time the shares were issued. Share-based compensation expenses
in relation to these nonvested shares are recognized on a straight-line basis
over the five-year service period with a corresponding increase to stockholders’
equity. As of December 31, 2006, the total compensation cost related to the
actual number of nonvested shares that vested had been fully
recognized.
Treasury Shares Issued to Employees.
In 2002 and 2003, treasury shares were issued to employees with a
three-year vesting period. The forfeiture of treasury shares issued to employees
is based on the original number of shares granted and does not include the
shares received for stock splits and dividends. We recognized the difference
between the fair value of these shares and the amount that an employee paid for
treasury shares as share-based compensation expenses on a straight-line basis
over the three-year service period with a corresponding increase to
stockholders’ equity. As of December 31, 2006, the total compensation cost
related to the actual number of treasury shares that vest has been fully
recognized.
Restricted Share Units (RSUs).
We adopted a long-term incentive plan in October 2005. We committed to
pay a bonus to our employees to settle the accrued bonus payable in respect of
their service provided in 2004 and the ten months ended October 31, 2005, which
was satisfied through a grant of 990,220 RSUs on December 30, 2005. We accrued
share-based compensation expenses of approximately $4.1 million and $3.6 million
in 2004 and the ten months ended October 31, 2005, respectively, in connection
with this commitment. All RSUs granted to employees as a bonus vested
immediately on the grant date. The share-based compensation expenses accrued
represents the portion of compensation to employees for their service in 2004
and the ten months ended October 31, 2005 and has been recorded as a liability
and compensation expense reflected in our results of operations for 2004 and the
ten months ended October 31, 2005, respectively.
We made an
additional grant of 1,297,564 RSUs to our employees on December 30, 2005. The
vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested
immediately on the grant date, and a subsequent 25% vested on each of September
30, 2006 and September 26, 2007, with the remainder vesting on September 30,
2008, subject to certain forfeiture events.
We also
made a grant of 20,000 RSUs to our independent directors on December 30, 2005.
The vesting schedule for this RSU grant is as follows: 25% of the RSU grant
vested immediately on the grant date, and a subsequent 25% vested on each of
June 30, 2006 and 2007, with the remainder vesting on June 30, 2008, subject to
certain forfeiture events. No RSUs were granted to our independent directors in
2006 or 2007.
We made a grant of 3,798,808 RSUs to our
employees on September 29,
2006. The vesting schedule
for this RSU grant is as follows: 47.29% of the RSU grant vested immediately on
the grant date, and a subsequent
17.57% vested on September
26, 2007, with the remainder vesting
equally on each of September 30, 2008 and 2009, subject to certain forfeiture
events.
We made a grant of 6,694,411 RSUs to our employees on September
26, 2007. The vesting schedule for this RSU grant is
as follows: 54.55% of the RSU grant vested
immediately and was settled by cash in the amount
of $14.4
million on the grant date,
with the remainder vesting equally on each of September 30, 2008, 2009 and 2010, which will be settled by our ordinary
shares, subject to certain
forfeiture events.
The amount
of share-based compensation expense with regard to the RSUs granted to our
directors and employees on December 30, 2005 was determined based on an
estimated fair value of $8.62 per ordinary share of the ordinary shares
underlying the RSUs. The fair value of our ordinary shares was determined based
on a third-party valuation conducted by an independent third-party appraiser.
The amount of share-based compensation expense with regard to the RSUs granted
to our employees on September 29, 2006 and September 26, 2007 was $5.71 and
$3.95 per ordinary share, respectively, which was based on the trading price of
our ADSs on that day.
RSUs issued in connection with the
acquisition of Wisepal. We made a grant of 418,440 RSUs to former Wisepal
employees in exchange for the unvested stock options held by such employees in
Wisepal. Wisepal’s unvested stock option where each RSU represents one of our
ordinary shares. The vesting schedule for this RSU grant is as follows: 30% of
the RSUs granted vested immediately, and a subsequent 10% vested on September
30, 2007, with the remaining 33% and 27% of the RSU grant vesting on each of
September 30, 2008 and 2009, respectively. The vested portion of the RSUs
granted was included in the purchase cost of Wisepal while the unvested portion
is treated as post-combination compensation expense, the value of which amounted
to $0.9 million.
Determining
the fair value of our ordinary shares prior to our initial public offering
requires making complex and subjective judgments regarding projected financial
and operating results, our business risks, the liquidity of our shares and our
operating history and prospects. We used the discounted cash flow approach in
conjunction with the market value approach by assigning a different weight to
each of the approaches to estimate the value of the Company when the RSUs were
granted. The discounted cash flow approach involves applying appropriate
discount rates to estimated cash flows that are based on earnings forecasts. The
market value approach incorporates certain assumptions including the market
performance of comparable companies as well as our financial results and growth
trends to derive our total equity value. The assumptions used in deriving the
fair value are consistent with our business plan. These assumptions include: no
material changes in the existing political, legal, fiscal and economic
conditions in Taiwan; our ability to retain competent management, key personnel
and technical staff to support our ongoing operation; and no material deviation
in industry trends and market conditions from economic forecasts. These
assumptions are inherently uncertain. The risks associated with achieving our
forecasts were assessed in selecting the appropriate discount rate. If a
different discount rate were used, the valuation and the amount of share-based
compensation would have been different because the fair value of the underlying
ordinary shares for the RSUs granted would be different.
Signing
Bonuses
To
complement our share-based compensation scheme, Himax Taiwan adopted a signing
bonus system for newly recruited employees in the second half of
2006.
Employees
are entitled to receive signing bonuses upon (i) the expiration of their
probationary period and a satisfactory review by their supervisor, and (ii)
execution of a formal “retention and signing bonus agreement.” If an employee
leaves within 18 months (for any reason at all) of having commenced employment
with Himax Taiwan, 100% of the signing bonus will be returned. If an employee
leaves after 18 months but prior to 36 months after commencing employment with
Himax Taiwan, 50% of the signing bonus will be returned.
We believe
that under such a system, we will be better able to retain our employees. The
system is applicable to all newly recruited employees irrespective of their
function or position and is based on a prescribed formula.
For the years ended December 31, 2006 and 2007,
Himax Taiwan paid $3.4 million and $2.6 million,
respectively, in signing
bonuses which was charged to earnings.
Besides Himax Taiwan, signing bonuses were adopted by four
subsidiaries in 2007 and a total of $0.6 million was paid to certain employees of our subsidiaries.
Description
of Certain Statements of Income Line Items
Revenues
We
generate revenues primarily from sales of our display drivers. We have achieved
significant revenue growth since our inception, primarily due to a significant
increase in unit shipments, partially offset by the general trend of declining
average selling prices of our products. Historically, we have generated revenues
from sales of display drivers for large-sized applications, display drivers for
mobile handsets and display drivers for consumer electronics products. In
addition, our product portfolio includes operational amplifiers, timing
controllers, TFT-LCD, television and monitor chipsets, LCOS products for
near-to-eye applications and mini-projectors, and power management
ICs.
The
following table sets forth, for the periods indicated, our revenues by amount
and our revenues as a percentage of revenues by each product line:
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
||||||||||||||||||||||
|
Amount
|
Percentage
of
Revenues
|
Amount
|
Percentage of
Revenues
|
Amount
|
Percentage of
Revenues
|
|||||||||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||||||||||
|
Display
drivers for large-sized applications
|
$ | 470,631 | 87.1 | % | $ | 645,513 | 86.7 | % | $ | 752,196 | 81.9 | % | ||||||||||||
|
Display
drivers for mobile handsets applications
|
31,123 | 5.8 | 52,160 | 7.0 | 75,704 | 8.2 | ||||||||||||||||||
|
Display
drivers for consumer electronics applications
|
18,571 | 3.4 | 28,616 | 3.8 | 66,634 | 7.3 | ||||||||||||||||||
|
Others(1)
|
19,879 | 3.7 | 18,229 | 2.5 | 23,677 | 2.6 | ||||||||||||||||||
|
Total
|
$ | 540,204 | 100.0 | % | $ | 744,518 | 100.0 | % | $ | 918,211 | 100.0 | % | ||||||||||||
|
Note:
|
(1)
|
Includes,
among other things, operational amplifiers, timing controllers, TFT-LCD
television and monitor chipsets, and LCOS products for near-to-eye
applications and mini-projectors, and power management
ICs.
|
A limited
number of customers account for substantially all our revenues. We are seeking
to diversify our customer base and to reduce our reliance on any one customer.
We began recognizing revenues from the sale of display drivers to CPT and its
affiliates in 2002 and began volume shipments to CPT and its affiliates in 2003.
Accordingly, the percentage of our revenues generated by sales to CMO and its
affiliates has decreased gradually since 2002, with the exception of 2007, when
sales to CMO and its affiliates increased due to CMO’s capacity expansion, which
was higher than the industry average. The table below sets forth, for the
periods indicated, our revenues generated from our most significant customers
(including their respective affiliates) and such revenues as a percentage of our
total revenues:
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
||||||||||||||||||||||
|
Amount
|
Percentage
of
Revenues
|
Amount
|
Percentage
of
Revenues
|
Amount
|
Percentage
of
Revenues
|
|||||||||||||||||||
|
CMO
and its affiliates
|
$ | 318,008 | 58.9 | % | $ | 409,697 | 55.0 | % | $ | 539,737 | 58.8 | % | ||||||||||||
|
CPT
and its affiliates
|
87,534 | 16.2 | % | 92,561 | 12.4 | % | 66,694 | 7.3 | % | |||||||||||||||
|
SVA-NEC
|
30,360 | 5.6 | % | 54,272 | 7.3 | % | 76,774 | 8.4 | % | |||||||||||||||
|
Others
|
104,302 | 19.3 | % | 187,988 | 25.3 | % | 235,006 | 25.5 | % | |||||||||||||||
|
Total
|
$ | 540,204 | 100.0 | % | $ | 744,518 | 100.0 | % | $ | 918,211 | 100.0 | % | ||||||||||||
The global
TFT-LCD panel market is highly concentrated, with only a limited number of
TFT-LCD panel manufacturers producing large-sized TFT-LCD panels in high
volumes. We sell large-sized panel display drivers to many of these TFT-LCD
panel manufacturers. Our revenues, therefore, will depend on our ability to
capture an increasingly larger percentage of each panel manufacturer’s display
driver requirements.
We derive
substantially all of our revenues from sales to Asia-based customers whose end
products are sold worldwide. In 2005, 2006 and 2007, approximately 89.4%, 81.4%
and 85.5% of our revenues, respectively, were from customers headquartered in
Taiwan. We believe that substantially all of our revenues will continue to be
from customers located in Asia, where almost all of the TFT-LCD panel
manufacturers and mobile device module manufacturers are located. As a result of
the regional customer concentration, we expect to continue to be particularly
subject to economic and political events and other developments that affect our
customers in Asia. A substantial majority of our sales invoices are denominated
in U.S. dollars.
Costs
and Expenses
Our costs
and expenses consist of cost of revenues, research and development expenses,
general and administrative expenses, sales and marketing expenses and
share-based compensation expenses.
Cost
of Revenues
The
principal items of our cost of revenues are:
|
·
|
cost
of wafer fabrication;
|
|
·
|
cost
of processed tape used in TAB
packaging;
|
|
·
|
cost
of gold bumping, assembly and testing;
and
|
|
·
|
other
costs and expenses.
|
We
outsource the manufacturing of our semiconductors and semiconductor solutions to
semiconductor manufacturing service providers. The costs of wafer fabrication,
gold bumping, assembly and testing depend on the availability of capacity and
demand for such services. The wafer fabrication industry, in particular, is
highly cyclical, resulting in fluctuations in the price of processed wafers
depending on the available foundry capacity and the demand for foundry
services.
Research
and Development Expenses
Research
and development expenses consist primarily of research and development employee
salaries, including signing bonuses and related employee welfare costs, costs
associated with prototype wafers, processed tape, mask and tooling sets,
depreciation on research and development equipment and acquisition-related
charges. We believe that we will need to continue to spend a significant amount
on research and development in order to remain competitive. We expect to
continue increasing our spending on research and development in absolute dollar
amounts in the future as we continue to increase our research and development
headcount and associated costs to pursue additional product development
opportunities.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries of general and
administrative employees, including signing bonuses and related employee welfare
costs, depreciation on buildings, office furniture and equipment, rent and
professional fees. We anticipate that our general and administrative expenses
will increase in absolute dollar amounts as we expand our operations, hire
additional administrative personnel, incur depreciation expenses in connection
with our headquarters at the Tree Valley Industrial Park, and incur additional
compliance costs required of a publicly listed company in the United
States.
Sales
and Marketing Expenses
Our sales
and marketing expenses consist primarily of salaries of sales and marketing
employees, including signing bonuses and related employee welfare costs, travel
expenses and product sample costs. We expect that our sales and marketing
expenses will increase in absolute dollar amounts over the next several years.
However, we believe that as we continue to achieve greater economies of scale
and operating efficiencies, our sales and marketing expenses may decline over
time as a percentage of our revenues.
Share-Based
Compensation Expenses
Our
share-based compensation expenses consist of various forms of share-based
compensation that we have historically issued to our employees and consultants,
as well as share-based compensation issued to employees, directors and service
providers under our 2005 long-term incentive plan. We allocate such share-based
compensation expenses to the applicable cost of revenues and expense categories
as related services are performed. See note 15 to our consolidated
financial statements. Historically our share-based compensation practice
comprised grants of (i) bonus shares to employees, (ii) nonvested shares to
employees, (iii) treasury shares to employees and (iv) shares to non-employees.
We committed to pay a bonus to our employees in respect of their services
provided in 2004 and the ten months ended October 31, 2005, which was satisfied
through a grant of RSUs on December 30, 2005. We accrued
share-based
compensation expenses of approximately $4.1 million and $3.6 million in 2004 and
the ten months ended October 31, 2005, respectively, in connection with this
commitment. We also adopted a long-term incentive plan in October 2005 which
permits the grant of options or RSUs to our employees, directors and service
providers. We granted additional RSUs on December 30, 2005 to our employees and
directors and again on September 29, 2006 and September 26, 2007 to our
employees. Share-based compensation expenses recorded under the long-term
incentive plan totaled $2.8 million, $14.5 million and $20.1 million in 2005,
2006 and 2007, respectively. See “—Critical Accounting Policies and
Estimates—Share-Based Compensation” for further discussion of the accounting of
such expenses.
Income
Taxes
Since we
and our direct and indirect subsidiaries are incorporated in different
jurisdictions, we file separate income tax returns. Under the current laws of
the Cayman Islands, we are not subject to income or capital gains tax.
Additionally, dividend payments made by us are not subject to withholding tax in
the Cayman Islands. We recognize income taxes at the applicable statutory rates
in accordance with the jurisdictions where our subsidiaries are located and as
adjusted for certain items including accumulated losses carried forward,
non-deductible expenses, research and development tax credits, certain tax
holidays, as well as changes in our deferred tax assets and
liabilities.
ROC tax
regulations require our ROC subsidiaries to pay an additional 10% tax on
unappropriated earnings. ROC law offers preferential tax treatments to
industries that are encouraged by the ROC government. The ROC Statute for
Upgrading Industries entitles companies to tax credits for expenses relating to
qualifying research and development and personnel training expenses and
purchases of qualifying machinery. This tax credit may be applied within a
five-year period. The amount from the tax credit that may be applied in any year
(with the exception of the final year when the remainder of the tax credit may
be applied without limitation to the total amount of the income tax payable) is
limited to 50% of the income tax payable for that year. Under the ROC Statute
for Upgrading Industries, Himax Taiwan, Wisepal, Himax Display, Himax Analogic,
Himax Media Solutions and Himax Imaging were
granted tax credits by the ROC Ministry of Finance at rates set at a certain
percentage of the amount utilized in qualifying research and development and
personnel training expenses. The balance of unused investment tax credits
totaled $9.4 million, $19.4 million and $32.7 million as of December 31, 2005,
2006 and 2007, respectively. In addition, the ROC Statute for Upgrading
Industries provides to companies deemed to be operating in important or
strategic industries a five-year tax exemption for income attributable to
expanded production capacity or newly developed technologies. Such expanded
production capacity or newly developed technologies must be funded in whole or
in part from either the initial capital investment made by a company’s
shareholders, a subsequent capital increase or a capitalization of a company’s
retained earnings. As a result of this statute, income attributable to certain
of Himax Taiwan’s expanded production capacity or newly developed technologies
is tax exempt for a period of five years, effective on April 1, 2004, January 1,
2006 and January 1, 2008 and expiring on March 31, 2009, December 31, 2010 and
December 31, 2012, respectively. If
we did not have this tax exemption, net income and basic and diluted earnings
per ordinary share would have been $85.6 million, $0.43 and $0.43 for the year
ended December 31, 2007, respectively.
Critical
Accounting Policies and Estimates
We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial
statements.
Share-Based
Compensation
Share-based compensation primarily
consists of grants of nonvested or restricted shares of common stock, stock options and RSUs issued to employees. We have
applied SFAS No. 123R for our share-based compensation plans for all periods
since the incorporation of Himax Taiwan in 2001. The cost of employee services
received in exchange for share-based compensation is measured
based on the grant-date fair value of the share-based instruments issued. The
cost of employee services is equal to the grant-date fair value of shares issued
to employees and is recognized in earnings over the service period. Share-based compensation expense
estimates also take into account the number of shares awarded that management
believes will eventually vest. We adjust our estimate each period to reflect the
current estimate of forfeitures. As of December 31, 2007, we based our share-based compensation
cost on an assumed forfeiture rate of 11% per annum for awards granted under our long-term incentive plan. If actual forfeitures occur at a lower
rate, share-based compensation costs will increase in future
periods.
When
estimating the fair value of our ordinary shares prior to our initial public
offering, we reviewed both internal and external sources of information. The
sources we used to determine the fair value of the underlying shares at the date
of measurement have been subjective in nature and based on, among other
factors:
|
·
|
our
financial condition as of the date of
grant;
|
|
·
|
our
financial and operating prospects at that
time;
|
|
·
|
for
certain issuances in 2001 and early 2002, the price of new shares issued
to unrelated third parties;
|
|
·
|
for
certain issuances in 2002, 2003 and 2004, an independent third-party
retrospective analysis of the historical value of our common shares, which
utilized both a net asset-based methodology and market and peer group
comparables (including average price/earnings, enterprise value/sales,
enterprise value/earnings before interest and tax, and enterprise
value/earnings before interest, tax, depreciation and amortization);
and
|
|
·
|
for
our issuance of RSUs in 2005, an independent third-party analysis of the
current and future value of our ordinary shares, which utilized both
discounted cash flow and market value approaches, using multiples such as
price/earnings, forward price/earnings, enterprise value/earnings before
interest and tax, and forward enterprise value/earnings before interest
and tax.
|
Changes in
any of these factors or assumptions could have resulted in different estimates
of the fair value of our common shares and the related amounts of share-based
compensation.
Based on these factors, we estimated the fair value per share of
nonvested shares issued to certain employees in June 2001, November 2001, and
January 2002 at NT$4.02 ($0.116) per share and the fair value of 596,897 shares
(adjusted for stock splits) granted to two consultants in 2002 at $68,000. Similarly, we estimated
the fair value per share of employee bonus shares on the date of shareholder
approval to be NT$39.44 ($1.15) per share and NT$67.13 ($1.96) per share in 2003
and 2004, respectively. These employee bonus shares were issued in relation to employee services
provided in 2001, 2002 and 2003, respectively. We estimated the fair value of
treasury shares issued to employees at prices ranging from NT$15.32 ($0.46) per
share to NT$19.93 ($0.58) per share in 2002 and NT$20.17 ($0.58) per share to NT$52.10 ($1.54) per
share in 2003. We estimated the fair value of the ordinary shares underlying the
RSUs granted to our directors and employees at $8.62 per share in 2005. For our
issuance of RSUs in 2006 and 2007, the fair value of the ordinary shares underlying the RSUs
granted to our employees, was $5.71 and $3.95 per share, respectively, which was the
closing price of our ADSs on September 29, 2006 and September 26, 2007,
respectively.
Allowance
for Doubtful Accounts, Sales Returns and Discounts
We record
a reduction to revenues and accounts receivable by establishing a sales discount
and return allowance for estimated sales discounts and product returns at the
time revenues are recognized based primarily on historical discount and return
rates. However, if sales discount and product returns for a particular fiscal
period exceed historical rates, we may determine that additional sales discount
and return allowances are required to properly reflect our estimated remaining
exposure for sales discounts and product returns. We evaluate our outstanding
accounts receivable on a monthly basis for collectibility purposes. In
establishing the required allowance, we consider our historical collection
experience, current receivable aging and the current trend in the credit quality
of our customers. The movement in the allowance for doubtful accounts, sales
returns and discounts for the years ended December 31, 2005, 2006 and 2007 is as
follows:
|
Year
|
Balance
at
Beginning
of
Year
|
Additions
charged
to expense
|
Amounts
Utilized
|
Balance
at
End
of Year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31, 2005
|
$ | 240 | $ | 398 | $ | (457 | ) | $ | 181 | |||||||
|
December
31, 2006
|
$ | 181 | $ | 2,843 | $ | (2,156 | ) | $ | 868 | |||||||
|
December
31, 2007
|
$ | 868 | $ | 1,705 | $ | (2,080 | ) | $ | 493 | |||||||
Inventory
Inventories are stated at the
lower of cost or market
value. Cost is determined using the weighted-average method. For work-in-process
and manufactured inventories, cost consists of the cost of raw materials
(primarily fabricated wafers and processed tape), direct labor and an
appropriate proportion of production overheads.
We also write down excess and obsolete inventory to its estimated market value
based upon estimations about future demand and market conditions. If actual
market conditions are less favorable than those projected by management, additional future
inventory write-downs may be required which could adversely affect our operating
results. Once written down, inventories are carried at this lower amount until
sold or scrapped. If actual market conditions are more favorable, we may have higher operating income when
such products are sold. Sales to date of such products have not had a
significant impact on our operating income. The inventory write-downs for the years ended December 31, 2005,
2006 and 2007 was
approximately $927,000, $5.2 million and $14.8 million, respectively, and are included
in cost of revenues in our consolidated statements of income.
The inventory write-down
was particularly high in 2007 primarily due to excess inventory issues related to
shorter-than-expected
product life cycle for certain products and the revision of
certain customer forecasts, which also partially contributed to decreased
demand as customers shifted to more advanced products.
Impairment
of Long-Lived Assets
We routinely review our
long-lived
assets that are held and used for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. The determination of recoverability is based on an
estimate of undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. The estimate of cash flows is based upon, among other
things, certain assumptions about expected future operating performance, average
selling prices, utilization rates and other factors. If the sum of the undiscounted cash flows
(excluding interest) is less than the carrying value, an impairment charge is
recognized for the amount that the carrying value of the asset exceeds its fair
value, based on the best information available, in