FORM
6-K
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Report
of Foreign Issuer
Pursuant
to Rule 13a-16 or 15d-16
of
the Securities Exchange Act of 1934
For
the
month of August, 2007
Commission
File Number: 000-51847
Himax
Technologies, Inc.
(Translation
of registrant’s name into English)
No.26,
Zih
Lian Road, Fonghua Village,
Sinshih Township,
Tainan County
744,
Taiwan,
Republic of China
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F:
|
Form
20-F
|
X
|
Form
40-F
|
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b)(1):
|
Yes
|
No
|
X
|
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b)(7):
|
Yes
|
No
|
X
|
Indicate
by check mark whether by furnishing the information contained in this Form,
the
Registrant is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
|
Yes
|
No
|
X
|
If
“Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): N/A
Himax
Technologies, Inc.
|
Exhibit
|
|
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99.1
|
Himax
Technologies, Inc. Notice of Annual General Meeting of
Members
|
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99.2
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Himax
Technologies, Inc. Proxy Statement
|
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99.3
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Himax
Technologies, Inc. 2006 Annual
Report
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
HIMAX
TECHNOLOGIES, INC.
|
|
|
By:
|
/s/
Max
Chan
|
|
Name:
Max Chan
|
|
|
Title:
Chief Financial Officer
|
|
Date:
August 6th, 2007
EXHIBIT
99.1
Deutsche
Bank Trust Company Americas
Trust
and
Securities Services
Global
Equity Services
|
DEPOSITARY
RECEIPTS
|
August
6, 2007
|
Depositary's
Notice of Annual General Meeting of Shareholders of Himax Technologies,
Inc.:
|
Issue:
|
Himax
Technologies, Inc. / Cusip 43289P106
|
|
Country:
|
Cayman
Islands
|
|
Meeting
Details:
|
Annual General
Meeting of Shareholders of Himax Technologies ,Inc. on August 22,
2007
at the Incubator of Tainan Science Park, Room B101
(International Conference Hall) No. 12, Nanke 2nd
Road, Tainan
Science Park, Tainan County, Taiwan 9:00 a.m. (Local
Time).
|
|
Meeting
Agenda:
|
The
Company's Notice of Meeting including the Agenda and the
Proxy Statement are
attached
|
|
Voting
Deadline:
|
On
or before August 17, 2007 at 3:00 PM (New York City
time)
|
|
ADR
Record Date:
|
June
25, 2006
|
|
Ordinary:
ADR ratio
|
1
Ordinary Shares: 1 ADR
|
In
accordance with
section
4.8 of
the
Deposit Agreement between Holders of American
Depositary
Receipts
(ADRs)
representing Deposited
Shares of
Himax
Technologies, Inc. (the
“Company”),
Holders of
Himax
Technologies,
Inc. ADRs
are hereby notified of the
Company’s
Annual
General
Meeting of Shareholders.
event
a
demand for vote by poll is not timely made in accordance with the provisions
of
this Section 4.8, the Depositary shall refrain from voting and any voting
instructions received from Holders shall lapse and the Depositary will not
represent any Deposited Securities for the purposes of establishing a quorum
accordingly. Voting instructions may be given only in respect of a number of
American Depositary Shares representing an integral number of Shares or other
Deposited Securities.
Upon
the
timely receipt of written instructions of a Holder on or before the ADS Record
Date of voting instructions in the manner specified by the Depositary, the
Depositary shall endeavor, insofar as practicable and permitted under applicable
law, the provisions of this Deposit Agreement, the Company’s Articles of
Association and the provisions of or governing the Deposited Securities, and
provided that the Company has, pursuant to its undertaking set forth under
this
Section 4.8, caused the duly-appointed chairman at such meeting to demand a
vote
by way of poll with respect to each resolution (in accordance with Article
66(a)
of the Company’s Articles of Association), to vote or cause an officer of the
Company duly appointed as representative of the Depositary or such other
duly-appointed person as the Depositary has validly appointed as proxy
(“Authorized Representative”) to vote the Shares and/or other
Deposited Securities (in person or by proxy) represented by American Depositary
Shares evidenced by such Receipt in accordance with such voting
instructions.
In
the
event that the Depositary i) timely receives voting instructions from a Holder
which fail to specify the manner in which the Depositary is to vote the
Deposited Securities represented by such Holder’s ADSs or ii) if no instructions
are received by the Depositary from a Holder with respect to any of the
Deposited Securities represented by the ADSs evidenced by such Holder’s ADRs on
or before the ADS Record Date established by the Depositary for such purpose,
the Depositary shall (unless otherwise specified in the notice distributed
to
Holders) deem such Holder to have instructed the Depositary to give a
discretionary proxy to a person designated by the Company with respect to such
Deposited Securities and the Depositary shall give a discretionary proxy to
a
person designated by the Company to vote such Deposited Securities, provided,
however, that no such instruction shall be deemed given and no such
discretionary proxy shall be given with respect to any matter as to which the
Company informs the Depositary (and the Company agrees to provide such
information as promptly as practicable in writing, if applicable) that (x)
the
Company does not wish to give such proxy, (y) the Company is aware or should
reasonably be aware that substantial opposition exists from Holders against
the
outcome for which the person designated by the Company would otherwise vote
or
(z) the outcome for which the person designated by the Company would otherwise
vote would materially and adversely affect the rights of holders of Shares,
provided, further, that the Company will have no liability to any Holder or
Beneficial Owner resulting from such notification.
The
Company hereby undertakes for the benefit of the Holders, and in accordance
with
Article 66(a) of the Company’s Articles of Association, to procure that the
duly-appointed chairman of any such meeting timely make a demand for a vote
by
poll with respect to any resolution for which the Depositary has received and
is
entitled to exercise voting instructions on behalf of the Holders.
In
the
event that the Company does not timely procure the demand for a vote by poll
with respect to any resolution in accordance with the above paragraph, and
no
other Member (as defined in the Company’s Articles of Association) in person or
by proxy has validly and timely demanded a vote on the basis of a poll,
including the Depositary to the extent it is lawfully entitled to do the same,
the Depositary shall refrain from voting and any voting instructions received
from Holders shall lapse without further liability on the part of the
Depositary.
Neither
the Depositary nor the Custodian shall, under any circumstances exercise any
discretion as to voting, and neither the Depositary nor the Custodian shall
vote, or attempt to exercise the right to vote, the Shares or other Deposited
Securities represented by ADSs except
pursuant
to and in accordance with such written instructions from Holders, including
the
deemed instruction to the Depositary to give a discretionary proxy to a person
designated by the Company. Notwithstanding anything else contained
herein, the Depositary shall, if so requested in writing by the Company,
represent all Deposited Securities (whether or not voting instructions have
been
received in respect of such Deposited Securities from Holders as of the ADS
Record Date) for the sole purpose of establishing a quorum at a meeting of
shareholders but only to the extent that the duly-appointed chairman or other
Member (as defined in the Company’s Articles of Association) in person or by
proxy has validly and timely procured the demand for a vote by poll with respect
to any resolution for which voting instructions have been solicited from
Holders.
There
can
be no assurance that Holders or Beneficial Owners generally or any Holder or
Beneficial Owner in particular will receive the notice described above with
sufficient time to enable the Holder to return voting instructions to the
Depositary in a timely manner.
Notwithstanding
the above, save for applicable provisions of the law of the Cayman Islands,
and
in accordance with the terms of Section 5.3, the Depositary shall not be liable
for any failure to carry out any instructions to vote any of the Deposited
Securities.
For
Further Information, contact:
Daniel
Belean
Deutsche
Bank - Depositary Receipts
212
250 6612 (Tel)
212
797 0327 (fax)
EXHIBIT
99.2
PROXY
STATEMENT
This
Proxy
Statement is being furnished pursuant to the Proxy Form for the Annual General
Meeting (“AGM”) of Himax Technologies, Inc. (“Himax” or the “Company”) to be
held on August 22, 2007 at 9:00 a.m. (Taiwan time).
I. SHAREHOLDER
ADOPTION OF THE COMPANY’S 2006 AUDITED ACCOUNTS AND FINANCIAL
REPORT
The
Company seeks shareholder adoption of the Company’s 2006 audited accounts (the
“Audited Accounts”), which have been prepared under United States Generally
Accepted Accounting Principles, in respect of the financial year ended December
31, 2006. Along with the Audited Accounts, the Company seeks shareholder
adoption of the report of the auditors in respect of the same financial period
(the “Reports of the Auditors”). A copy of each of the Company’s Audited
Accounts and the Reports of the Auditors is included in the enclosed 2006
Himax
Annual Report.
Adoption
of this proposal requires the affirmative vote of a majority of the votes
cast
at the AGM by the shareholders entitled to vote thereon.
The
Board of Directors of the Company (the “Board of Directors”) recommends a vote
FOR this proposal.
II. RETIREMENT
AND RE-ELECTION OF YUAN-CHUAN HORNG AS A DIRECTOR
Yuan-Chuan
Horng will properly retire from his directorship position at Himax to be
eligible for re-election pursuant to the Articles of Association of Himax,
and
he has offered himself for re-election as a Director of Himax. A
retiring Director shall be eligible for re-election.
Yuan-Chuan
Horng has
been the independent director of Himax
since our reorganization
in October
2005. Prior
to our reorganization in October
2005, Mr. Horng served as a director of Himax Taiwan
from August 2004 to October 2005, Mr.
Horng is the general manger of the Finance Department of China Steel
Corporation, a position he
has held since April 2000. He has held various accounting and finance positions
as China Steel Corporation for over 30 years. Mr. Horng holds a B.A. degree
in
economics from Soochow University.
The
affirmative vote of a majority of the votes cast at the AGM by the shareholders
entitled to vote thereon is required for the election of Yuan-Chuan Horng
as a
director of Himax.
The
Board of Directors recommends a vote FOR this proposal.
III.
SHAREHOLDER
APPROVAL OF AMENDMENTS TO ARTICLE 152 AND 154 OF THE ARTICLES OF ASSOCIATION
OF
HIMAX
Articles
152 and 154 of the Articles of Association of Himax Technologies, Inc. shall
be
amended in the following manner as marked:
|
152.
|
Subject
to Articles 153 and 154, a
printed copy of the Directors’ report, accompanied by the balance sheet
and profit and loss account, including every document required
by law to
be annexed thereto, made up to the end of the applicable financial
year
and containing a summary of the assets and liabilities of the Company
under convenient heads and a statement of income and expenditure,
together
with a copy of the Auditors’ report, shall be sent to each person entitled
thereto at least ten (10) days before the date of the general meeting
and
|
|
|
laid
before the Company at the annual general meeting held in accordance
with
Article 56 provided that this Article shall not require a copy
of those
documents to be sent to any person whose address the Company
is not aware
or to more than one of the joint holders of any shares or
debentures.
|
|
154.
|
The
requirement to send to a person referred to in Article 152 the
documents
referred to in that article or a summary financial report in accordance
with Article 153 shall be deemed satisfied where, in accordance
with all
applicable Statutes, rules and regulations, including, without
limitation,
the rules of the Designated Stock Exchange, the Company publishes
copies
of the documents referred to in Article 152 and, if applicable,
a summary
financial report complying with Article 153, on the Company’s computer
network or in any other permitted manner (including by sending
any form of
electronic communication)
|
The
affirmative vote of a majority of the votes cast at the AGM by the shareholders
entitled to vote thereon is required for the amendments to article 152 and
154
of the Articles of Association of Himax.
The
Board of Directors recommends a vote FOR this proposal.
OTHER
MATTERS
As
of the
date of this Proxy Statement, Himax does not intend to present and has not
been
informed that any other person intends to present any business not specified
in
this Proxy Statement for action at the meeting.
Shareholders
are urged to sign the enclosed proxy form and to return it
promptly. Proxies will be voted in accordance with shareholders’
directions. Signing the proxy form does not affect a shareholder’s right to vote
in person at the meeting, and the proxy may be revoked prior to its exercise
by
appropriate notice to the undersigned. If no directions are given, proxies
will
be voted for the (1) adoption of Himax’s 2006 Audited Accounts and Financial
Reports, (2) re-election of Mr. Yuan-Chuan Horng as a Director and (3) approval
of amendments to Article 152 and 154 of the Articles of Association of
Himax.
|
Himax
Technologies, Inc.
|
||
|
By:
|
/s/ Jordan Wu | |
|
Name:
|
Jordan
Wu
|
|
|
Title:
|
Director
|
|
2
EXHIBIT
99.3
LETTER
TO SHAREHOLDERS
Dear
Shareholders:
2006
was a
remarkable year for Himax as we completed our IPO at NASDAQ and our revenues
and
net income both came in at historical highs. Despite a challenging environment
faced by the TFT-LCD industry, Himax continues to successfully establish
a solid
position in the display driver business. Himax is significantly leveraged
to
unit growth projected for the flat panel display markets, driven by demand
for
products such as LCD TVs, LCD monitors, notebook computers and various small-and
medium-sized applications. We are well positioned to remain a leading
semiconductor solution provider for the flat panel display
industry.
Our
IPO at the end of March 2006 was in-line with our growth plan, as it not
only
strengthened our balance sheet but also served as a global branding event.
Himax
enjoys leading supplier position at several global flat panel makers and
continues to expand our customer base. We will continue to execute
our growth plan while working to increase shareholder value.
As
one of the top display driver suppliers in the TFT-LCD industry, Himax has
a
solid track record of share gains in the global large panel display drivers
segment. According to iSuppli, Himax ended 2006 with 18.9% share in large
panel
display driver revenue globally. While we have accomplished a great deal
in the
past, we believe that the greatest opportunities lie ahead of us.
We
also continue to strengthen our market position in the small- and medium-sized
display driver business as we benefit from the addition of new customers
and
increase in demand as more small- and medium-sized LCD panel applications
are
introduced. Further, we expect to benefit from local driver IC sourcing by
Taiwanese panel makers as smaller fabs were reallocated from the production
of
TV and PC-related panels to small- and medium-sized panels.
In
August we announced the acquisition of Wisepal Technologies. This transaction,
valued at $44 million, resulted in an immediate addition of approximately
6.2
million shares, representing approximately 3.1% of our enlarged share capital.
We are very pleased with the progress of integration of both companies so
far.
We believe the acquisition will greatly strengthen our position in the small-
and medium-sized applications.
Our
first share buyback program was announced to the market on November 2nd.
Since
then, approximately 10 million of the company’s American Depository Shares were
repurchased from the open market for a total of $50 million. The repurchased
ADSs and their underlying ordinary shares had been cancelled, thereby reducing
approximately 5% of Himax’s issued and outstanding shares.
Looking
ahead, we
expect a healthier TFT-LCD environment as our panel customers are looking
to
manage their capacity utilization and maintain inventories at a level where
they
support real demand. Also, with the adoption of high definition format for
LCD
TVs and the introduction of new panel products such as wide screen monitors
and
digital photo frames, new demand is created and we believe Himax will be
one of
the major beneficiaries of the TFT LCD up-cycle.
In
summary, the dedication of our employees and the strength of our technology
and
service have put Himax in a strong position. The industry continues to face
a
challenging period and we are doing our best to work through it. We see strong
revenue growth and stable margins supporting a positive trade as the industry
tightens. We thank you for your support, and we will continue to drive for
excellence and strive to achieve the growth you have come to
expect.
Sincerely,
Jordan
Wu
President
and
CEO
Himax
Technologies,
Inc.
1
ANNUAL
REPORT TO SHAREHOLDERS FOR THE YEAR 2006
|
Contents
|
|
|
Special
Note
Regarding Forward-Looking Statements
|
3
|
|
Selected
Financial Data
|
4
|
|
Information
on
the Company
|
6
|
|
Business
Overview
|
8
|
|
Critical
Accounting Policies and Estimates
|
24
|
|
Operating
Results
|
28
|
|
Directors,
Senior Management and Employees
|
36
|
|
Consolidated
Financial Statements
|
43
|
|
Corporate
Information
|
87
|
2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
annual report
contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although these forward-looking statements, which
may
include statements regarding our future results of operations, financial
condition, or business prospects, are based on our own information and
information from other sources we believe to be reliable, you should not
place
undue reliance on these forward-looking statements, which apply only as of
the
date of this annual report. The words “anticipate,” “believe,” “expect,”
“intend,” “plan,” “estimate” and similar expressions, as they relate to us, are
intended to identify a number of these forward-looking statements. Our actual
results of operations, financial condition or business prospects may differ
materially from those expressed or implied in these forward-looking statements
for a variety of reasons, including, among other things and not limited to,
our
anticipated growth strategies, our future business developments, results
of
operations and financial condition, our ability to develop new products,
the
expected growth of the display driver markets, the expected growth of end-use
applications that use flat panel displays, particularly TFT-LCD panels,
development of alternative flat panel display technologies, other
factors.
All
references to “New Taiwan dollars,” “NT dollars” and “NT$” are to the legal
currency of the ROC; and all references to
“dollars,”
“U.S.
dollars,” and "$" are to the legal currency of the United States.
3
SELECTED
FINANCIAL DATA
The
selected consolidated statement of income data and consolidated cash flow
data
for the years ended December 31, 2004, 2005 and 2006 and the selected
consolidated balance sheet data as of December 31, 2005 and 2006 are derived
from our consolidated financial statements included herein, which have been
audited by KPMG Certified Public Accountants, or KPMG, and were prepared
in
accordance with U.S. GAAP. The selected consolidated balance sheet data as
of
December 31, 2002, 2003 and 2004 and the selected consolidated statement
of
operations data and consolidated cash flow data for the years ended December
31,
2002 and 2003 have been derived from our consolidated financial statements
that
have not been included herein but have been audited by KPMG and were prepared
in
accordance with U.S. GAAP. Our consolidated financial statements include
the
accounts of Himax Technologies, Inc. and its subsidiaries as if we had been
in
existence for all years presented. As a result of our reorganization, 100%
of
our outstanding ordinary shares immediately prior to our initial public offering
were owned by former shareholders of Himax Taiwan. 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 the consolidated financial statements and the notes
to
those statements included herein.
|
Year
Ended
December 31,
|
||||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||||
|
(in
thousands,
except per share data)
|
||||||||||||||||||||
|
Consolidated
Statements of Income Data:
|
||||||||||||||||||||
|
Revenues,
net
|
$ |
56,478
|
$ |
131,843
|
$ | 300,273 | $ |
540,204
|
$ |
744,518
|
||||||||||
|
Costs
and
expenses(1):
|
||||||||||||||||||||
|
Cost
of
revenues
|
45,313
|
100,102
|
235,973
|
419,380
|
601,565
|
|||||||||||||||
|
Research
and
development
|
7,800
|
21,077
|
24,021
|
41,278
|
60,655
|
|||||||||||||||
|
General
and
administrative
|
1,489
|
4,614
|
4,654
|
6,784
|
9,762
|
|||||||||||||||
|
Sales
and
marketing
|
884
|
2,669
|
2,742
|
4,762
|
6,970
|
|||||||||||||||
|
Operating
income
|
992
|
3,381
|
32,883
|
68,000
|
65,566
|
|||||||||||||||
|
Net
income
(loss)(2)
|
$ |
513
|
$ | (581 | ) | $ |
36,000
|
$ |
61,558
|
$ |
75,190
|
|||||||||
|
Earnings
(loss) per ordinary share(2) and per
|
||||||||||||||||||||
|
ADS(3):
|
||||||||||||||||||||
|
Basic
|
$ |
0.00
|
$ | (0.00 | ) | $ |
0.21
|
$ |
0.35
|
$ |
0.39
|
|||||||||
|
Diluted
|
$ |
0.00
|
$ | (0.00 | ) | $ |
0.21
|
$ |
0.34
|
$ |
0.39
|
|||||||||
|
Weighted-average
number of shares used in
|
||||||||||||||||||||
|
earnings
per
share computation:
|
||||||||||||||||||||
|
Basic
|
103,276
|
116,617
|
169,320
|
176,105
|
192,475
|
|||||||||||||||
|
Diluted
|
104,739
|
116,617
|
173,298
|
180,659
|
195,090
|
|||||||||||||||
|
Cash
dividends
declared per ordinary
|
||||||||||||||||||||
|
share(4)
|
$ |
0.00
|
$ |
0.00
|
$ |
0.00
|
$ |
0.08
|
$ |
0.00
|
||||||||||
Note:
(1) The amount of share-based compensation included in applicable costs and
expenses categories is summarized as follows:
4
|
Year
Ended
December 31,
|
||||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Cost
of
revenues
|
$ |
172
|
$ |
827
|
$ |
291
|
$ |
188
|
$ |
275
|
||||||||||
|
Research
and
development
|
3,057
|
11,666
|
4,288
|
6,336
|
11,806
|
|||||||||||||||
|
General
and
administrative
|
353
|
2,124
|
721
|
848
|
1,444
|
|||||||||||||||
|
Sales
and
marketing
|
348
|
1,349
|
537
|
1,241
|
1,625
|
|||||||||||||||
|
Total
|
$ |
3,930
|
$ |
15,966
|
$ |
5,837
|
$ |
8,613
|
$ |
15,150
|
||||||||||
|
(2)
|
Under
the ROC
Statute for Upgrading Industries, we are exempt from income taxes
for
income attributable to expanded production capacity or newly developed
technologies. If we had not been exempt from paying this income
tax, net
income and basic and diluted earnings per share would have been
$29.7
million, $0.18 and $0.17, respectively, for the year ended December
31,
2004, $52.4 million, $0.30 and $0.29, respectively, for the year
ended
December 31, 2005 and $59.2 million, $0.31 and $0.30, respectively,
for
the year ended December 31, 2006. A portion of this tax exemption
expires
on March 31, 2009 and the remainder on December 31,
2010.
|
|
(3)
|
Each
ADS
represents one ordinary share.
|
|
(4)
|
In
November 2005, we distributed a special cash dividend of approximately
$0.08 per share in respect of our performance prior to our initial
public
offering. This special cash dividend should not be considered
representative of the dividends that would be paid in any future
periods
or our dividend policy.
|
The
following table presents our selected consolidated balance sheet data as
of
December 31, 2002, 2003, 2004, 2005 and 2006 and selected consolidated cash
flow
data for the years ended December 31, 2002, 2003, 2004, 2005 and
2006:
|
As
of December
31,
|
||||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash
equivalents(1)
|
$ |
2,697
|
$ |
2,529
|
$ |
5,577
|
$ |
7,086
|
$ |
109,753
|
||||||||||
|
Accounts
receivable, net
|
1,637
|
12,543
|
27,016
|
80,259
|
112,767
|
|||||||||||||||
|
Accounts
receivable from related parties, net
|
4,786
|
22,893
|
39,129
|
69,587
|
116,850
|
|||||||||||||||
|
Inventories
|
12,056
|
21,088
|
54,092
|
105,004
|
101,341
|
|||||||||||||||
|
Total
current
assets
|
26,885
|
88,245
|
144,414
|
300,056
|
466,715
|
|||||||||||||||
|
Total
assets
|
29,423
|
96,159
|
157,770
|
327,239
|
518,794
|
|||||||||||||||
|
Accounts
payable
|
5,803
|
22,901
|
38,649
|
105,801
|
120,407
|
|||||||||||||||
|
Total
current
liabilities
|
11,750
|
43,613
|
52,157
|
160,784
|
153,279
|
|||||||||||||||
|
Total
liabilities
|
11,975
|
43,870
|
52,246
|
160,784
|
153,471
|
|||||||||||||||
|
Ordinary
Shares
|
11
|
17
|
18
|
18
|
19
|
|||||||||||||||
|
Total
stockholders’ equity (5)
|
17,448
|
52,289
|
104,860
|
165,831
|
363,927
|
|||||||||||||||
|
Consolidated
Cash Flow Data:
|
||||||||||||||||||||
|
Net
cash
provided by (used in) operating activities
|
(3,884 | ) | (1,593 | ) | (8,688 | ) |
12,464
|
29,696
|
||||||||||||
|
Net
cash
provided by (used in) investing activities
|
(7,130 | ) | (28,915 | ) |
11,001
|
(25,363 | ) | (8,927 | ) | |||||||||||
|
Net
cash
provided by financing activities
|
11,644
|
30,341
|
735
|
14,404
|
81,886
|
|||||||||||||||
|
Effect
of
exchange rate changes on cash and
|
||||||||||||||||||||
|
cash
equivalents
|
–
|
–
|
–
|
4
|
12
|
|||||||||||||||
|
Net
increase
(decrease) in cash and
|
||||||||||||||||||||
|
cash
equivalents
|
630
|
(167 | ) |
3,048
|
1,509
|
102,667
|
||||||||||||||
Note:
(1) Cash and cash equivalents at December 31, 2006 increased significantly
as
compared to December 31, 2005. This increase was primarily due to net proceeds
of $147.4 million received from our initial public offering in April 2006
which
also caused the increase in our stockholders equity by the same
amount.
5
INFORMATION
ON THE COMPANY
History
and
Development of the Company
Himax
Taiwan, our
predecessor, was incorporated on June 12, 2001 as a limited liability company
under the laws of the ROC. On April 26, 2005, we established Himax Technologies
Limited, an exempted company with limited liability under the Companies Law
Cap.
22 of the Cayman Islands, or the Companies Law, as a holding company to hold
the
shares of Himax Taiwan in connection with our reorganization and share exchange.
On October 14, 2005, Himax Taiwan became our wholly owned subsidiary through
a
share exchange consummated pursuant to the ROC Business Mergers and Acquisitions
Law through which we acquired all of the issued and outstanding shares of
Himax
Taiwan, and we issued ordinary shares to the shareholders of Himax Taiwan.
Shareholders of Himax Taiwan received one of our ordinary shares in exchange
for
one Himax Taiwan common share. The share exchange was unanimously approved
by
shareholders of Himax Taiwan on June 10, 2005 with no dissenting shareholders
and by the ROC Investment Commission on August 30, 2005 for our inbound
investment in Taiwan, and on September 7, 2005 for our outbound investment
outside of Taiwan. Acquisition of our ordinary shares by non-ROC shareholders
of
Himax Taiwan is not subject to the approval of the ROC Investment Commission.
We
effected this reorganization and share exchange to comply with ROC laws,
which
prohibit a Taiwan incorporated company not otherwise publicly listed in Taiwan
from listing its shares on an overseas stock exchange. Our reorganization
enables us to maintain our operations through our Taiwan subsidiary, Himax
Taiwan, while allowing us to list our shares overseas through our holding
company structure.
Pursuant
to the
approval letters from the ROC Investment Commission, we and Himax Taiwan
have to
comply with certain documentation requirements in order to evidence the
satisfaction of our undertakings. On November 24, 2005, Himax Taiwan submitted
to the ROC Investment Commission (1) the status report confirming the completion
of the share exchange, (2) the shareholders' notice setting the record date
of
the share exchange and (3) the shareholders register maintained by our
registrar. In addition, on December 5, 2005, Himax Taiwan submitted to the
ROC
Investment Commission its latest corporate registration card issued by the
ROC
Ministry of Economic Affairs. We have also submitted Himax Taiwan’s
2005 and 2006 audited financials as support for our satisfaction of the various
undertakings and expect to submit Himax Taiwan’s 2007 audited financials in
2008. We do not anticipate any difficulties in providing the required
documentation to the ROC Investment Commission and expect that any further
required documents (if any) will be submitted on a timely basis in satisfaction
of our obligations under the relevant approval letter.
The
common shares of Himax Taiwan were traded on the Emerging Stock Board from
December 26, 2003 to August 10, 2005, under the stock code “3222.” Himax
Taiwan’s common shares were delisted from the Emerging Stock Board on August 11,
2005. As a result of our reorganization, Himax Taiwan is no longer a Taiwan
public company, and its common shares are no longer listed or traded on any
trading markets.
On
September 26, 2005, we changed our name to “Himax Technologies, Inc.,” and on
October 17, 2005 Himax Taiwan changed its name to “Himax Technologies Limited”
upon the approval of shareholders of both companies and amendments to the
respective constitutive documents. We effected the name exchange in order
to
maintain continuity of operations and marketing under the trade name “Himax
Technologies, Inc.,” which had been previously used by Himax
Taiwan.
6
On
Feb 1, 2007, we acquired Wisepal Technologies, Inc. (“Wisepal”) and we believe
this acquisition will strengethen our small- and medium-sized product
offerings.
Our
principal executive offices are located at No. 26, Zih Lian Road, Fonghua
Village, Sinshih Township, Tainan County 74445, Taiwan, Republic of China.
Our
telephone number at this address is +886 (6) 505-0880. Our registered office
in
the Cayman Islands is located at Century Yard, Cricket Square, Hutchins Drive,
P.O. Box 2681 GT, Georgetown, Grand Cayman, Cayman Islands. Our telephone
number
at this address is +(1-345) 949-1040. In addition, we have regional offices
in
Hsinchu and Taipei, Taiwan; Suzhou and Shenzhen, China; Yokohama, Japan;
Anyangsi Kyungkido, South Korea; and Irvine, California, USA.
Investor
inquiries
should be directed to us at the address and telephone number of our principal
executive offices set forth above. Our website is www.himax.com.tw. The
information contained on our website is not part of this annual report. Our
agent for service of process in the United States is Puglisi & Associates
located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
We
closed our initial public offering on April 4, 2006 and our ADSs have been
listed on the Nasdaq Global Market since March
31, 2006. Our
ordinary shares are not listed or publicly traded on any trading
markets.
7
BUSINESS
OVERVIEW
We
design, develop and market semiconductors that are critical components of
flat
panel displays. Our principal products are display drivers for large-sized
TFT-LCD panels, which are used in desktop monitors, notebook computers and
televisions, and display drivers for small- and medium-sized TFT-LCD panels,
which are used in mobile handsets and consumer electronics products such
as
digital cameras, mobile gaming devices and car navigation displays. We also
offer display drivers for panels using OLED technology and LTPS technology.
In
addition, we are expanding our product offering to include television
semiconductor solutions, as well as LCOS products. Our customers are panel
and
television makers. We believe that our leading design and engineering expertise,
combined with our focus on customer service and close relationships with
semiconductor manufacturing service providers, has contributed to our
success.
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:
|
•
|
Display
Driver. The display driver receives image data from the timing
controller and delivers precise analog voltages or currents to
create
images on the display. The two main types of display drivers for
a TFT-LCD
panel are gate drivers and source drivers. Gate drivers turn on
the
transistor within each pixel cell on the horizontal line on the
panel for
data input at each row. Source drivers receive image data from
the timing
controller and generate voltage that is applied to the liquid crystal
within each pixel cell on the vertical line on the panel for data
input at
each column. The combination determines the colors generated by
each
pixel. Typically multiple gate drivers and source drivers are installed
separately on the panel. However, for certain small- and medium-sized
applications, gate drivers and source drivers are integrated into
a single
chip due to space and cost considerations. Large-sized
panels typically have higher resolution and require more display
drivers
than small- and medium-sized
panels.
|
|
•
|
Timing
Controller. The timing controller receives image data and converts
the format for the source drivers’ input. The timing controller also
generates controlling signals for gate and source drivers. Typically
the
timing controller is a discrete semiconductor in large-sized TFT-LCD
panels. For certain small- and medium-sized applications, however,
the
timing controller may be integrated with display
drivers.
|
|
|
|
•
|
Scaler.
For certain displays, a scaler is installed to magnify or
shrink
image data in order for the image to fill the
panel.
|
|
•
|
Operational
Amplifier. An operational amplifier supplies the reference voltage to
source drivers in order to make their output voltage
uniform.
|
|
•
|
Television
Chipset. Television flat panel displays require chipsets that
typically contain all or some of the following components: an audio
processor, analog interfaces, digital interfaces, a video processor,
a
channel receiver and a digital television decoder. See
“-Products-Television
|
8
|
Semiconductor
Solutions-Television Chipsets” for a description of these
components.
|
|
•
|
Others.
Flat panel displays also require multiple general purpose
semiconductors such as memory, power converters and
inverters.
|
Characteristics
of the Display Driver Market
Although
we operate
in several distinct segments of the flat panel display semiconductor industry,
our principal products are display drivers. Display drivers are critical
components of flat panel displays. As a result, we believe that the projected
growth in the demand for flat panel displays will result in the growth in
demand
for display drivers. The display driver market has specific characteristics,
including those discussed below.
Concentration
of
Panel Manufacturers
The
global TFT-LCD panel industry consists of a small number of manufacturers,
substantially all of which are based in Asia. In recent years, TFT-LCD panel
manufacturers, in particular Taiwan- and Korea-based manufacturers, have
invested heavily to establish, construct and ramp up additional fab capacity.
The capital intensive nature of the industry often results in TFT-LCD panel
manufacturers operating at a high level of capacity utilization in order
to
reduce unit costs. This tends to create a temporary oversupply of panels,
which
reduces the average selling price of panels and puts pricing pressure on
display
driver companies. Moreover, the concentration of panel manufacturers permits
major panel manufacturers to exert pricing pressure on display driver companies
such as us. The small number of panel manufacturers intensifies this as display
driver companies, in addition to seeking to expand their customer base, must
also focus on winning a larger percentage of such customers’ display driver
requirements.
Customization
Requirements
Each
panel display
has a unique pixel design to meet its particular requirements. To optimize
the
panel's performance, display drivers have to be customized for each panel
design. The most common customization requirement is for the display driver
company to optimize the gamma curve of each display driver for each panel
design. Display driver companies must work closely with their customers to
develop semiconductors that meet their customers’ specific needs in order to
optimize the performance of their products.
Mixed-Signal
Design and High-Voltage CMOS Process Technology
Display
drivers have
specific design and manufacturing requirements that are not standard in the
semiconductor industry. Some display drivers require mixed-signal design
since
they combine both analog and digital devices on a single semiconductor to
process both analog signals and digital data. Manufacturing display drivers
typically requires high-voltage complementary metal oxide semiconductor,
or
CMOS, process technology operating at 10 to 18 volts for source drivers and
10
to 45 volts for gate drivers, levels of voltage which are not standard in
the
semiconductor industry. For display drivers, the driving voltage must be
maintained under a very high degree of uniformity, which can be difficult
to
achieve using standard CMOS process technology. However, manufacturing display
drivers does not require very small-geometry semiconductor processes. Typically,
the manufacturing process for large panel display drivers requires geometries
between 0.13 micron and 1 micron because the physical dimensions of a
high-voltage device do not allow for the economical reduction in geometries
below this range. We believe that there are a limited number of fabs with
high-voltage CMOS process technology that are capable of high-volume
manufacturing of display drivers.
Special
Assembly
and Testing Requirements
Manufacturing
display drivers requires certain assembly and testing technologies and equipment
that are not standard for other semiconductors and are offered by a limited
number of providers. The assembly of display drivers typically uses either
tape
automated bonding, also known as TAB, or chip-on-glass, also known as COG,
technologies. Display drivers also require gold bumping, which is a process
in
which gold bumps are plated onto each wafer to connect the die and the processed
tape, in the case of TAB packages, and the glass, in the case of COG packages.
TAB may utilize
9
tape
carrier
package, also known as TCP, or chip on film, also known as COF. The type
of
assembly used depends on the panel manufacturer's design which is influenced
by
panel size and application and is typically determined by the panel
manufacturers. Display drivers for large-sized applications typically require
TAB package types and, to a lesser extent COG package types, whereas display
drivers for mobile handsets and consumer electronics products typically require
COG packages. The testing of display drivers also requires special testers
that
can support high-channel and high-voltage output semiconductors. Such testers
are not standard in the semiconductor industry.
Supply
Chain
Management
The
manufacturing of display drivers is a complex process and requires several
manufacturing stages such as wafer fabrication, gold bumping and assembly
and
testing, and the availability of materials such as the processed tape used
in
TAB packaging. We refer to these manufacturing stages and material requirements
collectively as the “supply chain.” Panel manufacturers typically operate at
high levels of capacity utilization and require a reliable supply of display
drivers. A shortage of display drivers, or a disruption to this supply, may
disrupt panel manufacturers’ operations since replacement supplies may not be
available on a timely basis or at all, given the customization of display
drivers. As a result, a display driver company’s ability to deliver its products
on a timely basis at the quality and quantity required is critical to satisfying
its existing customers and winning new ones. Such supply chain management
is
particularly crucial to fabless display driver companies that do not have
their
own in-house manufacturing capacity. In the case of display drivers, supply
chain management is further complicated by the high-voltage CMOS process
technology and the special assembly and testing requirements that are not
standard in the semiconductor industry. Access to this capacity also depends
in
part on display driver companies having received assurances of demand for
their
products since semiconductor manufacturing service providers require credible
demand forecasts before allocating capacity among customers and investing
to
expand their capacity to support growth.
Need
for Higher
Level of Integration
The
small form factor of mobile handsets and certain consumer electronics products
restricts the space for components. Small- and medium-sized panel applications
typically require one or more source drivers, one or more gate drivers and
one
timing controller, which can be installed as separate semiconductors or as
an
integrated single-chip driver. Customers are increasingly demanding higher
levels of integration in order to manufacture more compact panels, simplify
the
module assembly process and reduce unit costs. Display driver companies must
be
able to offer highly integrated chips that combine the source driver, gate
driver and timing controller, as well as semiconductors such as memory, power
circuit and image processors, into a single chip. Due to the size restrictions
and stringent power consumption constraints of such display drivers, single-chip
drivers are complex to design. For large-sized panel applications, integration
is both more difficult to achieve and less important since size and weight
are
less of a priority.
Products
We
have three principal product lines:
|
•
|
display
drivers and timing controllers;
|
|
•
|
television
semiconductor solutions; and
|
|
•
|
LCOS
products.
|
We
commenced volume shipments of our first source and gate driver for large-sized
panels in July 2001 and have developed a broad product portfolio of display
drivers and timing controllers for use in large-sized TFT-LCD panels. We
commenced volume shipments of our first display drivers for use in
consumer
10
electronics
applications in April 2002, volume shipments of two-chip display drivers
for
mobile handsets in August 2003 and volume shipments of single-chip display
drivers for mobile handsets in August 2004. In September 2004, we commenced
volume shipments of our first television semiconductor solutions. We commenced
shipping engineering samples of LCOS products in December 2003 and started
volume shipment in June 2006.
Display
Drivers
and Timing Controllers
Display
Driver
Characteristics
Display
drivers
deliver precise analog voltages and currents that activate the pixels on
panels.
The following is a
summary
of certain
display driver characteristics and their relationship to panel
performance.
|
•
|
Resolution
and Number of Channels. Resolution refers to the number of pixels per
line multiplied by the number of lines, which determines the level
of fine
detail within an image displayed on a panel. For example, a color
display
screen with 1,024 x 768 pixels has 1,024 red columns, 1,024 green
columns
and 1,024 blue columns for a total of 3,072 columns and 768 rows.
The red,
green and blue columns are commonly referred to as “RGB.” Therefore, the
display drivers need to drive 3,072 column outputs and 768 row
outputs.
The number of display drivers required for each panel depends on
the
resolution. For example, an XGA (1,024 x 768 pixels) panel requires
eight
384 channel source drivers (1,024 x 3 = 384 x 8) and three 256
channel
gate drivers (768 = 256 x 3), while a SXGA (1,280 x 1,024 pixels)
panel
requires ten 384 channel source drivers and four 256 channel gate
drivers.
The
number of display drivers required can be reduced by using drivers
with a
higher number of channels. For example, a SXGA panel can have eight
480
channel source drivers or four 960 channel source drivers instead
of ten
384 channel source drivers. Thus, using display drivers with a
higher
number of channels can reduce the number of display drivers required
for
each panel, although display drivers with a higher number of channels
typically have higher unit
costs.
|
|
•
|
Color
Depth. Color depth is the number of colors that can be displayed
on a
screen, which is determined by the number of shades of a color,
also known
as grayscale, that can be shown by the panel. For example, a 6-bit
source
driver is capable of generating 26 x
26 x
26 =
218,
or 262K
colors, and similarly, an 8-bit source driver is capable of generating
16
million colors. Typically, for TFT-LCD panels currently in commercial
production, 262K and 16 million colors are supported by 6-bit and
8-bit
source drivers, respectively.
|
|
•
|
Operational
Voltage. A display driver operates with two voltages: the input
voltage (which enables it to receive signals from the timing controller)
and the output voltage (which, in the case of source drivers, is
applied
to liquid crystals and, in the case of gate drivers, is used to
switch on
the TFT device). Source drivers typically operate at input voltages
from
3.3 to 1.5 volts and output voltages between 10 to 18 volts. Gate
drivers
typically operate at input voltages from 3.3 to 1.5 volts and output
voltages from 10 to 45 volts. Lower input voltage saves power and
lowers
electromagnetic interference, or EMI. Output voltage may be higher
or
lower depending on the characteristics of the liquid crystal (or
diode),
in the case of source drivers, or TFT device, in the case of gate
drivers.
|
|
•
|
Gamma
Curve. The relationship between the light passing through a pixel
and
the voltage applied to it by the source driver is nonlinear and
is
referred to as the “gamma curve” of the source driver. Different panel
designs and manufacturing processes require source drivers with
different
gamma curves. Display drivers need to adjust the gamma curve to
fit the
pixel design. Due to the materials and processes used in manufacturing,
panels may contain certain imperfections which can be corrected
by the
gamma curve of the source driver, a process which is generally
known as
“gamma correction.” For certain types of liquid crystal, the gamma curves
for RGB cells are significantly different and thus need to be
independently corrected. Some advanced display drivers feature
three
independent gamma curves for RGB
cells.
|
|
•
|
Driver
Interface. Driver interface refers to the connection between the
timing controller and display drivers. Display drivers increasingly
require higher bandwidth interface technology to address the larger
data
volume necessary for video images. Panels used for higher data
transmission applications such as televisions require more advanced
interface technology. The principal types of interface technologies
are
transistor-to-transistor logic, or TTL,
reduced
|
11
|
swing
differential signaling, or RSDS, and mini low voltage differential
signaling, or mini-LVDS. Among these, RSDS and mini-LVDS were developed
as
low power, low noise and low amplitude method for high-speed data
transmission using fewer copper wires and resulting in lower EMI.
In 2005,
we introduced two new display driver interfaces: dual edge TTL,
or DETTL,
and turbo RSDS. DETTL enables the interface to function with lower
power
(below 1.8V), thus reducing power consumption. Turbo RSDS is an
upgraded
version of RSDS which increases the interface frequency from 85MHz
to
135MHz, thus reducing the bus width and panel
costs.
|
|
•
|
Package
Type. The assembly of display drivers typically uses TAB and COG
package types. COF and TCP are two types of TAB packages. Customers
typically determine the package type required according to their
specific
mechanical and electrical considerations. In general, display drivers
for
small-sized panels use COG package type whereas display drivers
for
large-sized panels primarily use TAB package types and to a lesser
extent
COG package types.
|
Large-Sized
Applications
We
provide source drivers, gate drivers and timing controllers for large-sized
panels principally used in desktop monitors, notebook computers and televisions.
Display drivers used in large-sized applications feature different key
characteristics, depending on the end-use application. For display drivers
for
use in notebook computers, low power consumption is a key feature due to
the
portability of notebook computers and the need for long battery life. For
display drivers used in desktop monitors, low cost is more desirable than
low
power consumption. For advanced televisions, display drivers must meet the
requirements of larger panels, such as higher data transmission rates, wider
viewing angles, faster response time, higher color depth and better image
performance.
The
table below sets forth the features of our products for large-sized
applications:
|
Product
|
Features
|
|
TFT-LCD
Source
Drivers
|
• 384
to 960
output channels
• 6-bit
(262K
colors), 8-bit (16 million colors) or 10-bit (1 billion
colors)
• one
gamma-type
driver
• three
gamma-type drivers (RGB independent gamma curve to enhance color
image)
• output
driver
voltage ranging from 4.5V to 18V
• input
logic
voltage ranging from standard 3.3V to low power 1.5V
• low
power
consumption and low EMI
• supports
TCP,
COF and COG package types
• supports
TTL,
RSDS, mini-LVDS, DETTL, turbo RSDS and customized interface
technologies
|
|
TFT-LCD
Gate
Drivers
|
• 192
to 400
output channels
• output
driving
voltage ranging from 10 to 45V
• input
logic
voltage ranging from standard 3.3V to low power 1.5V
• low
power
consumption
• supports
TCP,
COF and COG package types
|
|
Timing
Controllers
|
• product
portfolio supports a wide range of resolutions, from VGA (640 x
480
pixels) to Full HD (1,920 x 1,080 pixels)
• supports
TTL,
RSDS, mini-LVDS, DETTL, turbo RSDS and customized output interface
technologies
• input
logic
voltage ranging from standard 3.3V to low power 1.5V
• embedded
overdrive function for television applications to improve response
time
• supports
TTL,
LVDS and mini-LVDS input interface technologies
|
12
The
industry trend for large-sized applications is towards low power consumption
notebook computer display drivers, low cost desktop monitor display drivers
and
display drivers that can support higher speed interface technologies, have
greater color depth and enhanced color through RGB independent gamma for
use in
advanced televisions.
Mobile
Handset
Applications
We
offer display drivers for mobile handset displays that combine source driver,
gate driver and other functions into a single chip. As mobile handsets become
smaller and more compact, customers are increasingly demanding smaller die
sizes
and higher levels of integration with source driver, gate driver, timing
controller, as well as more functional semiconductors such as memory, power
circuit and image processors, integrated into a single chip. Moreover, mobile
handsets must operate for long durations without recharging the battery.
Thus,
display drivers with lower power consumption are desired in order to extend
the
battery life. Low cost is also an important feature as mobile handset
manufacturers continue to reduce cost and customers increasingly seek out
cost-effective display drivers.
The
following table summarizes the features of our products for mobile
handsets:
|
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) and a range of panel sizes
from
1.5 to 3.2 inches in diagonal measurement
• supports
262K
colors to 16 million colors
• input
logic
voltage ranging from standard 3.3V to low power 1.65V
• low
power
consumption and low EMI
• utilizes
die
shrink technology to reduce die size and cost
• slimmer
die
for compact module to fit smaller mobile handset designs
• application
specific integrated circuits, or ASIC, can be designed to meet
customized
requirements (e.g. drivers without memory or drivers without gate
driver
embedded on the chip)
|
|
LTPS
Drivers
|
• highly
integrated single chip embedded with the source driver, power circuit,
timing controller and memory
• supports
262K
colors to 16 million colors
• input
logic
voltage ranging from standard 3.3V to low power 1.65V
• utilizes
die
shrink technology to reduce die size and cost
• slimmer
die
for compact module
• ASIC
can be
designed to meet customized requirements (e.g. gate-less or multi-bank
output driver)
|
The
industry trend for mobile handset display drivers is towards display drivers
that can support high-speed interfaces, have
greater color
depth and enhanced image quality as mobile handsets increasingly incorporate
multimedia functions.
Consumer
Electronics Products
We
offer source drivers, gate drivers, timing controllers and integrated drivers
for consumer electronics products like digital cameras, digital video recorders,
personal digital assistants, mobile gaming devices, portable DVD players
and car
navigation displays. We offer an extensive line of display drivers covering
different applications, interfaces and channel output and levels of integration.
Similar to mobile handsets, consumer electronics products are typically compact,
battery-operated devices. Customers are increasingly demanding display drivers
with smaller and more compact die sizes and higher levels of integration
with
source driver, gate driver, timing controller, as well as more
13
functional
semiconductors such as memory, power circuit and image processors, integrated
into a single chip. Moreover, display drivers with lower power consumption
are
desired in order to extend the battery life.
The
following table summarizes the features of our products used in consumer
electronics products:
|
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
• products
for
analog or digital interfaces
|
|
Timing
Controllers
|
• products
for
analog or digital interfaces
• supports
various resolutions from 280 x 220 pixels to 800 x 600 pixels
|
The
industry trend for display drivers used in medium-sized consumer electronics
products is towards higher channels and for the timing controller to be
integrated into the video processor. The trend of display drivers used in
small-sized consumer electronics products is towards single-chip solutions
combining source driver, gate driver, timing controller and power circuit
into a
single chip.
Television
Semiconductor Solutions
We
provide television semiconductor solutions specifically designed to meet
the
requirements of advanced television
systems.
Set
forth below are the various semiconductor components that may be utilized
in
advanced televisions:
14
Television
Chipsets
Television
chipsets
contain numerous components that process video and audio signals and thus
enhance the image
and
audio qualities of televisions. Advanced televisions typically require some
or
all of these components:
|
•
|
Audio
Processor/Amplifier. Demodulates, processes and amplifies sound from
television signals.
|
|
•
|
Analog
Interfaces. Convert analog video signals into digital video signals.
Video decoder and analog-to-digital converter (ADC) are
included.
|
|
•
|
Digital
Interfaces. Receive digital signals via digital receivers. Digital
visual interfaces (DVI) and high-definition multimedia interfaces
(HDMI)
are included.
|
|
•
|
Channel
Receiver. Demodulates input signals so that the output becomes
compressed bit stream data.
|
|
•
|
DTV
Decoder. Converts video and audio signals from compressed bit stream
data into regular video and audio
signals.
|
|
•
|
Video
Processor. Performs the scaling function that magnifies or shrinks
the image data in order to fit the panel's resolution; provides
real-time
processing for improved color and image quality; converts output
video
from an interlaced format to a progressive format in order to eliminate
jaggedness; and supports on-screen display and real-time video
format
transformation.
|
We
are developing all of the above components and have shipped our analog TV
single-chip solutions in volume. Our analog TV single-chip solutions are
designed for use in advanced televisions as well as LCOS applications and
our
product portfolio includes high-performance chips which target high-end segments
as well as cost-effective chips which target entry-level segments.
The
following table summarizes the features of our analog TV single-chip
solutions:
|
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
|
Television
Tuner
Modules
We
offer a variety of digital and analog television tuner modules. We are highly
skilled in designing compact, high-performance tuner modules that integrate
semiconductors and other components on the system board. The semiconductors
and
components are purchased from third-party suppliers and are assembled by
third-party electronics manufacturing service providers. We design our
television tuner modules in an advanced, coil-free architecture to provide
slim
and small tuners.
Our
tuners are suitable for most of the world’s signal transmission standards,
including: Digital Video Broadcast-Terrestrial, also known as DVB-T, the
digital
television standard (depending on the bandwidth) in Taiwan, Australia and
Europe; Advanced Television System Committee, or ATSC, the digital television
standard in the United States and Canada; National Television System Committee,
or NTSC, the analog television standard in the United States, Canada, Japan,
the
Philippines, Taiwan and South Korea; Phase Alternating Line, or PAL, the
analog
television standard in Western Europe, Australia, Hong Kong and China; and
Systeme Electronique Couleur Avec Memoire, or SECAM, the analog television
standard in France, Russia and Eastern Europe.
15
The
following table sets forth the features of our television tuner
modules:
|
Product
|
Features
|
|
|
Digital
Television Tuner Modules
|
· DVB-T
tuners
for 6MHz bandwidth (for use in Taiwan), 7MHz bandwidth (for use
in
Australia) and 8MHz bandwidth (for use in Europe)
|
|
|
· ATSC
RF tuners
with NTSC function
|
||
|
· lower
power RF
tuners
|
||
|
Analog
Television Tuner Modules
|
· global
tuner
combining NTSC, PAL and SECAM television standards and FM radio
tuner
|
|
|
· low
power
off-air tuner combining NTSC and PAL television standards and
FM radio
tuner
|
||
|
· mobile
analog
tuner combining NTSC television standards and FM radio
tuner
|
||
|
· slim
design to
save space
|
LCOS
Products
LCOS
technology is
beginning to migrate into the mass-production stage for some commercial
applications and is expected to be utilized in near-to-eye applications,
rear
projection televisions and mini-projectors. We design our LCOS products at
our
subsidiary, Himax Display, which owns and operates a fab for the manufacture
of
such products.
The
following table sets forth the features of our LCOS products:
|
Product
|
Features
|
|
|
LCOS
Modules
for Near-to-eye, Mini- and and Mobile-projector
Applications
|
· 640
x 360
pixels (Q720P), VGA and SVGA resolutions
|
|
|
· 8-bit
(16
million colors)
|
||
|
· high
reflectivity and greater than 100:1 contrast ratio
|
||
|
· low
power
consumption
|
||
|
LCOS
Modules
for Projection Applications
|
· WXGA
and Full
HD resolutions
|
|
|
· 8-bit
(16
million colors)
|
||
|
· high
reflectivity and greater than 1,000:1 contrast
ratio
|
Other
Products and Services
We
established Himax
Analogic Inc., or Himax Analogic, (formerly Amazion Electronics Inc.) in
July
2004 to design, develop and market semiconductors for power management
applications. To date, Himax Analogic has generated $2,475 in revenues from
such
products. We also offer liquid crystal injection services through our subsidiary
Himax Display. In 2006, Himax Display generated $4.2 million in revenues
from
such services.
Core
Technologies and Know-How
Driving
System Technology. Through our collaboration with panel
manufacturers, we have developed extensive knowledge of circuit design, TFT-LCD
driving systems, high-voltage processes and display systems, all of which
are
important to the design of high-performance TFT-LCD display drivers. Our
engineers have in-depth knowledge of the driving system technology, which
is the
architecture for the interaction between the source driver, gate driver,
timing
controller and power systems as well as other passive components. We believe
that our understanding of the entire driving system has strengthened our
design
capabilities. Our engineers are highly skilled in designing power efficient
and
compact display drivers that enhance the performance of TFT-LCD. We are
leveraging our know-how of display drivers and driving system technology
to
develop display drivers for panels utilizing other technologies such as
OLED.
16
High-Voltage
CMOS Circuit Design. Unlike most other semiconductors, TFT-LCD
display drivers typically 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
direct customers for display drivers are primarily panel manufacturers and
mobile device module manufacturers, who in turn design and market their products
to manufacturers of end-use products such as notebook computers, desktop
monitors, televisions, mobile handsets and consumer electronics products.
As of
December 31, 2006, we sold our products to more than 50 customers. In 2004,
2005
and 2006, CMO and its affiliates accounted for 63.2%, 58.9%, and 55.0% of
our
revenues, respectively, while CPT and its affiliates accounted for 19.5%,
16.2%,
and 12.4% of our revenues, respectively, in the same periods. We expect that
sales to CMO and CPT and their affiliates will continue to account for a
substantial majority of our revenues in the near term.
Set
forth below (in alphabetical order) are our ten largest customers (and their
affiliates) based on revenues for the year ended December 31, 2006:
|
·
|
Chi
Mei Optoelectronics Corp.
|
|
·
|
Chunghwa
Picture
Tubes
|
|
·
|
Funai
Electric
Co., Ltd.
|
|
·
|
HannStar
Display
Corporation
|
|
·
|
InnoLux
Display
Corporation
|
|
·
|
Optrex
Corporation
|
|
·
|
Perfect
Display
Limited
|
|
·
|
Samsung
Electronics Taiwan Co.,
Ltd.
|
|
·
|
Shanghai
SVA-NEC Liquid Crystal
Display
|
|
·
|
TPO
Displays
Corporation
|
Our
customers typically provide us with a long-term (12 month) forecast plus
three-month rolling non-binding forecasts and confirm orders with us one
month
ahead of scheduled delivery. In general, purchase orders are not cancellable
by
either party, although from time to time we and our customers have agreed
to
amend the terms of such orders.
Sales
and
Marketing
We
focus our sales and marketing strategy on establishing business and technology
relationships principally with TFT-LCD panel manufacturers and increasingly
also
with panel manufacturers using LTPS or OLED technologies and also with mobile
display module and mobile handset manufacturers in order to work closely
with
them on future semiconductor
17
solutions
that align
with their product roadmaps. Our engineers collaborate with our customers’
engineers to create products that comply with their specifications and provide
a
high level of performance at competitive prices. Our end market for large-sized
panels is concentrated around a limited number of major panel manufacturers.
We
have also commenced marketing our products directly to mobile device
manufacturers so that our products can be qualified for their specifications
and
designed into their products.
We
primarily sell our products through our direct sales team located in Taiwan,
China, South Korea and Japan. We also have dedicated sales teams for certain
of
our most important current or prospective customers. We have sales and technical
support offices in Tainan, Taipei and Hsinchu in Taiwan, in Suzhou and Shenzhen,
China, in Anyangsi Kyungkido, South Korea and in Yokohama, Japan, all in
close
proximity to our customers. For certain products or regions we may from time
to
time sell our products through agents or distributors.
Our
sales and marketing team possesses a high level of technical expertise and
industry knowledge used to support a lengthy and complex sales process. This
includes a highly trained team of field applications engineers that provides
technical support and assistance to potential and existing customers in
designing, testing and qualifying display modules that incorporate our products.
We believe that the depth and quality of this design support are key to
improving customers’ time-to-market and maintaining a high level of customer
satisfaction.
Manufacturing
We
are a fabless semiconductor company. We leverage our experience and engineering
expertise to design high-performance semiconductors and rely on semiconductor
manufacturing service providers for wafer fabrication, gold bumping, assembly
and testing. We also rely on third-party suppliers of processed tape used
in TAB
packaging. We engage foundries with high-voltage CMOS process technology
for our
display drivers and with assembly and testing houses that specialize in TAB
and
COG packages, thereby taking advantage of the economies of scale and the
specialization of such semiconductor manufacturing service providers. Our
fabless model enables us to capture certain financial and operational benefits,
including reduced manufacturing personnel, capital expenditures, fixed assets
and fixed costs. It also gives us the flexibility to use the technology and
service provider most suitable for any given product.
18
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.
|
19
|
·
|
Final
Testing: The assembled display drivers are
tested to ensure that they meet performance specifications. Testing
takes
place on specialized equipment using software customized for each
product.
|
COG
Assembly
COG
assembly connects display drivers directly to LCD panels without the need
for
processed tape. COG assembly involves grinding the tested wafers into their
required thickness and cutting the wafers into individual dies, or chips.
Each
individual die is picked and placed into a chip tray and is then visually
or
auto-inspected for defects. The dies are packed within a tray in an aluminum
bag
after completion of the inspection process.
Quality
Assurance
We
maintain a comprehensive quality assurance system. Using a variety of methods
from conducting rigorous simulations during the circuit design process to
evaluating supplier performance at various stages of our products’ manufacturing
process, we seek to bring about improvements and achieve customer satisfaction.
In addition to monitoring customer satisfaction through regular reviews,
we
implement extensive supplier quality controls so that the products we outsource
achieve our high standards. Prior to engaging a third-party as our supplier,
we
perform a series of audits on their operations, and upon engagement, we hold
frequent quality assurance meetings with suppliers, evaluating such factors
as
product quality, production costs, technological sophistication and timely
delivery.
In
November 2002, we received ISO 9001:2000 certification which was renewed
in
February 2005 and will expire in January 2008. In addition, in March 2007,
we
received IECQ QC 080000 certification which will expire in 2010.
Semiconductor
Manufacturing Service Providers and Suppliers
Through
our
relationships with leading foundries, assembly, gold bumping and testing
houses
and processed tape suppliers, we believe we have established a supply chain
that
enables us to timely deliver high-quality products to our
customers.
Access
to
semiconductor manufacturing service providers is critical as display drivers
typically require high-voltage CMOS process technology and specialized assembly
and testing services, all of which are different from industry standards.
We
have historically obtained our foundry services from TSMC and Vanguard and
have
also recently established relationships with Macronix, Lite-on, Chartered,
UMC,
and Powerchip. These are among a select number of
semiconductor manufacturers that provide high-voltage CMOS process technology
required for manufacturing display drivers. We engage assembly and testing
houses that specialize in TAB and COG packages such as Chipbond Technology
Corporation, ChipMOS Technologies Inc., International Semiconductor Technology
Ltd., and Siliconware Precision Industries Co., Ltd.
We
plan to strengthen our relationships with our existing semiconductor
manufacturing service providers and diversify our network of such service
providers in order to ensure access to sufficient cost-competitive and
high-quality manufacturing capacity. We are selective in our choice of
semiconductor manufacturing service providers. It takes a substantial amount
of
time to qualify alternative foundries, gold bumping, assembly and testing
houses
for production. As a result, we expect that we will continue to rely on limited
number of semiconductor manufacturing service providers for a substantial
portion of our manufacturing requirements in the near future.
20
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.
|
|
|
Powerchip
Semiconductor Corp.
|
||
|
Taiwan
Semiconductor Manufacturing Company
|
||
|
United
Microelectronics Corporation
|
||
|
Vanguard
International Semiconductor Corporation
|
|
Processed
Tape for TAB Packaging
|
Assembly
and Testing
|
|
|
CASIO
Micronics Co., Ltd.
|
Chipbond
Technology Corporation
|
|
|
Hitachi
Cable,
Ltd.
|
ChipMOS
Technologies Inc.
|
|
|
Mitsui
Mining
& Smelting Co., Ltd.
|
International
Semiconductor Technology Ltd.
|
|
|
Samsung
Techwin Co. Ltd.
|
Siliconware
Precision Industries Co., Ltd.
|
|
|
Stemco.,
Ltd
|
||
|
Sumitomo
Metal
Mining Package Material Co., Ltd.
|
|
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, 2006, we held a total of 148 patents, including 100 in Taiwan,
32 in the United States, 9 in China, 6 in Korea and 1 in Japan. The expiration
dates of our patents range from 2019 to 2026. We also have a total of 217
pending patent applications in Taiwan, 177 in the United States and 134 in
other
jurisdictions, including the PRC, Japan, Korea and Europe. In addition, we
have
registered “Himax” and our logo as a trademark and service mark in Taiwan, China
and Japan and the United States.
Competition
The
markets for our products are, in general, intensely competitive, characterized
by continuous technological change, evolving industry standards, and declining
average selling prices. We believe key factors that differentiate among the
competition in our industry include:
|
·
|
customer
relations;
|
|
·
|
product
performance;
|
|
·
|
design
customization;
|
|
·
|
development
time;
|
|
·
|
product
integration;
|
|
·
|
technical
services;
|
|
·
|
manufacturing
costs;
|
|
·
|
supply
chain
management;
|
|
·
|
economies
of
scale; and
|
|
·
|
broad
product
portfolio.
|
21
We
continually face intense competition from other fabless display driver
companies, including Cheertek Incorporation, DenMOS Technology Inc., Fitipower
Integrated Technology, Inc., Ili Technology Corp., Leadis Technology, Inc.,
Novatek Microelectronics Corp., Ltd., Orise Technology Co., Ltd., Raydium
Semiconductor Corporation, Sitronix Technology Co., Ltd., SmartASIC Technology,
Inc. and Solomon Systech Limited. We also face competition from integrated
device manufacturers, such as MagnaChip Semiconductor Ltd., Matsushita Electric
Works, Ltd., NEC Electronics Corporation, Oki Electric Industry Co. Ltd.,
Renesas Technology Corp., Seiko Epson Corporation and Toshiba Corporation,
and
panel manufacturers with in-house semiconductor design capabilities, such
as
Samsung Electronics Co., Ltd. and Sharp Corporation. The latter are both
our
competitors and customers.
Many
of our
competitors, some of which are affiliated or have established relationships
with
other panel manufacturers, have longer operating histories, greater brand
recognition and significantly greater financial, manufacturing, technological,
sales and marketing, human and other resources than us. Additionally, we
expect
that as the flat panel semiconductor industry expands, more companies may
enter
and compete in our markets.
Our
television semiconductor solutions compete against solutions offered by a
significant number of semiconductor companies including Advanced Micro Devices,
Inc., Broadcom Corporation, Genesis Microchip, Inc., Mediatek Corp., Micronas
Semiconductor Holding AG, MStar Semiconductor, Inc., NXP Semiconductor,
Pixelworks Inc., STMicroelectronics, Trident Microsystems, Inc. and Zoran
Corporation, among others, some of which focus solely on video processors
or
digital TV solutions and others that offer a more diversified
portfolio.
For
LCOS products, we face competition
primarily
from Sony Corporation,
Victor Company of Japan,
Limited, also known as JVC, Displaytech
Inc., Texas Instruments Incorporated’s
digital
light processing
technology-based
products and
Microvision,
Inc.’s laser-based
products in mini-projectors
and mobile-projectors.
Insurance
We
maintain insurance policies on our buildings, equipment and inventories covering
property damage and damage due to, among other events, fires, typhoons,
earthquakes and floods. We maintain these insurance policies on our facilities
and on inland transit of inventories. Additionally, we also maintain director
and officer liability insurance. We do not have insurance for business
interruptions, nor do we have key person insurance.
Environmental
Matters
The
business of semiconductor design does not cause any significant pollution.
Himax
Display maintains a facility for our LCOS products where we have taken the
necessary steps to obtain the appropriate permits and believe that we are
in
compliance with the existing environmental laws and regulations in the ROC.
We
have entered into various agreements with certain customers whereby we have
agreed to indemnify them, and in certain cases, their customers, for any
claims
made against them for hazardous material violations that are found in our
products.
22
Organizational
Structure
The
following chart sets forth our corporate structure and ownership interest
in
each of our principal operating subsidiaries and affiliates as of June 1,
2007.
Property,
Plants and Equipment
In
October 2006, we completed construction on and relocated our corporate
headquarters to a 22,172 square meter facility within the Tree Valley Industrial
Park in Tainan, Taiwan. The facility houses our research and development,
engineering, sales and marketing, operations and general administrative staff.
Construction for our new headquarters commenced in the fourth quarter of
2005
and was completed in the fourth quarter of 2006. The total costs amounted
to
approximately $25.7 million, of which approximately $10.2 million was for
the
land and approximately $15.5 million was for the construction of the building
and related facilities (which included architect fees, general contractor
fees,
building materials, the purchase and installation of network, clean room,
and
office equipment and other fixtures). We also lease office space in Taipei
and
Hsinchu, Taiwan; Suzhou and Shenzhen, China; Yokohama, Japan; Anyangsi
Kyungkido, South Korea; and Irvine, California, USA. The lease contracts
may be
renewed upon expiration. Himax Display, our subsidiary, owns and operates
a fab
with 3,040 square meters of floor space in a building leased from
CMO.
Litigation
We
are not involved in any litigation or other legal matters which could reasonably
be expected to, if decided adversely to us, have a material adverse impact
on
our business or operations.
23
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
We
believe the following critical accounting policies
affect our more significant judgements and estimates used in the preparation
of
our consolidated financial statements.
Share-Based
Compensation
As
of December 31, 2006, we have not issued any stock options to employees or
others. Share-based compensation primarily consists of grants of nonvested
or
restricted shares of common stock and RSUs issued to employees. We have applied
SFAS No. 123R for our share-based compensation plans for all periods since
the
incorporation of Himax Taiwan in 2001. The cost of employee services received
in
exchange for share-based compensation is measured based on the grant-date
fair
value of the share-based instruments issued. The cost of employee services
is
equal to the grant-date fair value of shares issued to employees and is
recognized in earnings over the service period. Share-based compensation
expense
estimates also take into account the number of shares awarded that management
believes will eventually vest. We adjust our estimate each period to reflect
the
current estimate of forfeitures.
As of December 31,
2006, we based our share-based compensation cost on an
assumed forfeiture rate of 5.3% per annum. If actual forfeitures occur at
a
lower rate, share-based compensation costs will increase in future
periods.
When
estimating the
fair value of our ordinary shares prior to our initial public offering, we
reviewed both internal and external sources of information. The sources we
used
to determine the fair value of the underlying shares at the date of measurement
have been subjective in nature and based on, among other factors:
|
·
|
our
financial
condition as of the date of grant;
|
|
·
|
our
financial
and operating prospects at that
time;
|
|
·
|
for
certain
issuances in 2001 and early 2002, the price of new shares issued
to
unrelated third parties;
|
|
·
|
for
certain
issuances in 2002, 2003 and 2004, an independent third-party retrospective
analysis of the historical value of our common shares, which utilized
both
a net asset based methodology and market and peer group comparables
(including average price/earnings, enterprise value/sales, enterprise
value/earnings before interest and tax, and enterprise value/earnings
before interest, tax, depreciation and amortization);
and
|
|
·
|
for
our
issuance of RSUs in 2005, an independent third-party analysis of
the
current and future value of our ordinary shares, which utilized
both
discounted cashflow and market value approaches, using multiples
such as
price/earnings, forward price/earnings, enterprise value/earnings
before
interest and tax, and forward enterprise value/earnings before
interest
and tax.
|
Changes
in any of
these factors or assumptions could have resulted in different estimates of
the
fair value of our common shares and the related amounts of share-based
compensation.
Based
on these
factors, we estimated the fair value per share of nonvested shares issued
to
certain employees in June 2001, November 2001, and January 2002 at NT$4.02
($0.116) per share and the fair value of 596,897 shares (adjusted for stock
splits) granted to two consultants in 2002 at $68,000.
24
Similarly,
we
estimated the fair value per share of employee bonus shares on the date of
shareholder approval to be NT$39.44 ($1.15) per share and NT$67.13 ($1.96)
per
share in 2003 and 2004, respectively. These employee bonus shares were issued
in
relation to employee services provided in 2001, 2002 and 2003, respectively.
We
estimated the fair value of treasury shares issued to employees at prices
ranging from NT$15.32 ($0.46) per share to NT$19.93 ($0.58) per share in
2002
and NT$20.17 ($0.58) per share to NT$52.10 ($1.54) per share in 2003. We
estimated the fair value of the ordinary shares underlying the RSUs granted
to
our directors and employees at $8.62 per share in 2005. For our issuance
of RSUs
in 2006, the fair value of the ordinary shares underlying the RSUs granted
to
our employees, was $5.71 per share, which was the closing price of our ADSs
on
September 29, 2006.
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, 2004, 2005 and 2006
is as
follows:
|
Year
|
Balance
at
Beginning
of
Year
|
Addition
|
Amounts
Utilized
|
Balance
at
End
of
Year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31,
2004
|
$ |
28
|
$ |
1,022
|
$ | (810 | ) | $ |
240
|
|||||||
|
December
31,
2005
|
$ |
240
|
$ |
398
|
$ | (457 | ) | $ |
181
|
|||||||
|
December
31,
2006
|
$ |
181
|
$ |
2,843
|
$ | (2,156 | ) | $ |
868
|
|||||||
Inventory
Inventories
are
stated at the lower of cost or market value. Cost is determined using the
weighted-average method. For work-in-process and manufactured inventories,
cost
consists of the cost of raw materials (primarily fabricated wafers and processed
tape), direct labor and an appropriate proportion of production overheads.
We
also write down excess and obsolete inventory to its estimated market value
based upon estimations about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional future inventory write-down may be required that could adversely
affect our operating results. Once written down, inventories are carried
at this
lower amount until sold or scrapped. If actual market conditions are more
favorable, we may have higher operating income when such products are sold.
Sales to date of such products have not had a significant impact on our
operating income. The inventory write-down for the years ended December 31,
2004, 2005 and 2006 was approximately $847,000, $927,000 and, $5.2 million,
respectively, and are included in cost of revenues in our consolidated
statements of income. The inventory write-down was particularly high
in 2006 primarily due to a higher volume base, broader product offerings
and
more severe market fluctuations.
Impairment
of
Long-Lived Assets
We
routinely review our long-lived assets, other than goodwill and indefinite
life
intangibles that are held and used for impairment whenever events or changes
in
circumstances indicate that their carrying amounts may not be recoverable.
The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of the asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance, average selling
prices,
utilization rates and other factors. If the sum of the undiscounted cash
flows
(excluding interest) is less than the carrying value, an impairment charge
is
25
recognized
for the
amount that the carrying value of the asset exceeds its fair value, based
on the
best information available, including discounted cash flow analysis. However,
due to the cyclical nature of our industry and changes in our business strategy,
market requirements, or the needs of our customers, we may not always be
in a
position to accurately anticipate declines in the utility of our equipment
or
acquired technology until they occur. We have not had any impairment charges
on
long-lived assets other than goodwill and indefinite life intangibles during
the
period from December 31, 2002 to December 31, 2006.
Goodwill
We
review goodwill for impairment at least annually, and test for impairment
between annual tests if an event occurs or circumstances change that would
indicate that the carrying amount may be impaired. Impairment testing
for goodwill is done at a reporting unit level. The goodwill
impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its
carrying value, an indication of goodwill impairment exists for the reporting
unit and we perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit
in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141,
Business Combination. The residual fair value after this
allocation is the implied fair value of the reporting unit
goodwill. We consider the enterprise as a whole to be the reporting
unit for purposes of evaluating goodwill impairment. Consequently, we
determine the fair value of the reporting unit using the quoted market price
of
our ordinary shares.
Product
Warranty
Under
our standard
terms and conditions of sale, products sold are subject to a limited product
quality warranty. The stated limited warranty period is 60 days. We may receive
warranty claims outside the scope of the standard terms and conditions. We
provide for the estimated cost of product warranties at the time revenue
is
recognized based primarily on historical experience and any specifically
identified quality issues. The movement in accrued warranty costs for the
years
ended December 31, 2004, 2005 and 2006 is as follows:
|
Year
|
Balance
at
Beginning
of
Year
|
Addition
|
Amount
Utilized
|
Balance
at
End
of
Year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
December
31,
2004
|
$ |
—
|
$ |
960
|
$ |
453
|
$ |
507
|
||||||||
|
December
31,
2005
|
$ |
507
|
$ |
1,415
|
$ | (1,377 | ) | $ |
545
|
|||||||
|
December
31,
2006
|
$ |
545
|
$ |
2,101
|
$ | (2,016 | ) | $ |
630
|
|||||||
Income
Taxes
As
part of the process of preparing our consolidated financial statements,
management is required to estimate income taxes and tax bases of assets and
liabilities for us and our subsidiaries. This process involves estimating
current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes and the
amount
of tax credits and tax loss carryforwards. These differences result in deferred
tax assets and liabilities, which are included in the consolidated balance
sheets. Management must then assess the likelihood that the deferred tax
assets
will be recovered from future taxable income, and, to the extent it believes
that recovery is not more likely than not, a valuation allowance is
provided.
26
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets and
therefore the determination of the valuation allowance is dependent upon
the
generation of future taxable income by the taxable entity during the periods
in
which those temporary differences become deductible. Management considers
the
scheduled reversal of different liabilities, projected future taxable income,
and tax planning strategies in determining the valuation allowance.
Except
for Himax
Taiwan, all of our other subsidiaries have generated tax losses since inception
and are not included in the consolidated tax filing with Himax Taiwan, a
valuation allowance of $893,000, $3.3 million and $6.3 million as of December
31, 2004, 2005 and 2006, respectively, was provided to reduce their deferred
tax
assets (consisting primarily of operating loss carryforwards and unused
investment tax credits) to zero because management believes it is unlikely
that
these tax benefits will be realized. The net change in valuation allowance
for
the years ended December 31, 2004, 2005 and 2006 was an increase of $882,000,
$2.4 million, and $3.0 million, respectively, as a result of increases in
deferred tax assets which we do not expect to realize.
27
OPERATING
RESULTS
Results
of
Operations
Our
business has evolved rapidly and significantly since we commenced operations
in
2001. Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of
operating results should not be relied upon as indicative of future performance.
The following table sets forth a summary of our consolidated statements of
income as a percentage of revenues:
|
Year
Ended
December
31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Costs
and
expenses:
|
||||||||||||
|
Cost
of
revenues
|
78.6
|
77.6
|
80.8
|
|||||||||
|
Research
and
development
|
8.0
|
7.6
|
8.1
|
|||||||||
|
General
and
administrative
|
1.5
|
1.3
|
1.3
|
|||||||||
|
Sales
and
marketing
|
0.9
|
0.9
|
0.9
|
|||||||||
|
Total
costs
and expenses
|
89.0
|
87.4
|
91.1
|
|||||||||
|
Operating
income
|
11.0
|
12.6
|
8.9
|
|||||||||
|
Other
non
operating income
|
0.4
|
0.5
|
0.5
|
|||||||||
|
Income
tax
expenses (benefit)
|
(0.6 | ) |
1.7
|
(0.7 | ) | |||||||
|
Net
income
|
12.0
|
11.4
|
10.1
|
|||||||||
Year
Ended
December 31, 2006 Compared to Year Ended December 31,
2005.
Revenues.
Our revenues increased 37.8% to $744.5 million in 2006 from $540.2 million
in
2005. This increase was primarily due to a 59.4% increase in unit shipments
of
display drivers for large-sized applications, partially offset by a 14.3
%
decrease in average selling prices of such products. This increase was also
attributable to an increase of unit shipments for display drivers for mobile
handsets, which more than doubled, but was partially offset by a 24.0% decrease
in average selling prices of such products. The increase in unit
shipments was primarily due to the increased number of panels shipped by
our
customers as well as our increased market share with certain major
customers. The decrease in the average selling prices of
our display drivers was primarily due to a combination of the pricing pressure
we faced from our customers, the general industry trend of declining average
selling prices of semiconductors over a product’s life cycle, the introduction
of newer, lower-cost display drivers, as well as our ability to reduce per
unit
cost of revenues in order to meet such pressure. Revenues from related parties
increased 28.4% to $414.6 million in 2006 from $322.8 million in 2005 as
a
result of increased unit shipments to CMO (and its affiliates) and other
related
parties. However, revenues from related parties as a percentage of
our revenues decreased from 59.8% in 2005 to 55.7% in 2006 as our sales to
other
customers continued to grow, reflecting our effort in diversifying our customer
base and reducing our reliance on any one customer.
Costs
and
Expenses. Costs and expenses increased 43.8% to $679.0 million in 2006 from
$472.2 million in 2005. As a percentage of revenues, costs and expenses
increased to 91.1% in 2006 compared to 87.4% in 2005.
28
|
·
|
Cost
of
Revenues. Cost of revenues increased 43.4% to $601.6 million in 2006
from $419.4 million in 2005. The increase in cost of revenues was
primarily due to an increase in unit shipments. As a percentage
of revenues, cost of revenues increased to 80.8% in 2006 compared
to 77.6%
in 2005, primarily as a result of a decrease in average selling
prices of
our display drivers. We were able to partially offset such declines
by
decreasing per unit costs associated with the manufacturing, assembly,
testing and delivery of our products. This is a result of our cost
reduction efforts achieved by improving designs and processes,
increasing
manufacturing yields and leveraging our scale, volume requirements
and
close relationships with semiconductor manufacturing service providers
and
suppliers, as well as our strategy of sourcing from multiple service
providers and suppliers in order to obtain better
pricing.
|
|
·
|
Research
and Development. Research and development expenses increased 47.0% to
$60.7 million in the 2006 from $41.3 million in the 2005, primarily
due to
the increase in share-based compensation expenses and salary expenses.
The
increase in salary expenses was due to a 27.6% increase in headcount
and
higher average salaries. The increase was also partially a result
of
increased mask costs and prototype wafer and processed tape costs
associated with an increased number of new products
introduced. The increase in share-based compensation expenses
resulted from our increase in headcount and our grant of RSUs to
certain
employees in 2006.
|
|
·
|
General
and Administrative. General and administrative expenses increased
44.1% to $9.8 million in 2006 from $6.8 million in 2005, primarily
due to
an increase in share-based compensation expenses and salary expenses.
The
increase in share-based compensation expenses resulted from our
grant of
RSUs to certain employees in 2006. The increase in salary
expenses was due to higher average salaries. This increase was
also partially the result of increased depreciation expense and
fees
relating to patent filings.
|
|
·
|
Sales
and
Marketing. Sales and marketing expenses increased 45.8% to $7.0
million in 2006 from $4.8 million in 2005, primarily due to an
increase in
salary expenses and share-based compensation expenses. The increase
in
salary expenses was due to a 44.6% increase in headcount. The increase
in
share-based compensation expenses also resulted from our increase
in
headcount and our grant of RSUs to certain employees in 2006. The
increase
in sales and marketing expenses was also partially attributable
to
increased travel expenses resulting from increased sales
activity.
|
Non-Operating
Income (Loss). We had non-operating income of $3.9 million in 2006 compared
to $2.3 million in 2005, primarily as a result of a significant increase
in
interest income due to higher cash balance on hand from the proceeds of our
initial public offering. This was partially offset by an impairment loss
of $1.5
million recognized from our write off of our equity investment in LightMaster
Systems Inc., which filed for bankruptcy in 2006.
Income
Tax
Expense (Benefit). We recognized an income tax benefit of $5.4 million in
2006 compared to an income tax expense of $8.9 million in 2005. Our effective
income tax rate decreased from 12.7% in 2005 to (7.8) % in 2006, primarily
due
to an increase in tax-exempted income, non-deductible share-based compensation
expenses, a tax benefit from the distribution of the prior year’s income and an
increase in investment tax credits compared to 2005, partially offset by
the
effect of an enacted change in Taiwan’s tax laws in 2006 and the increase of
valuation allowance provided to reduce certain subsidiaries’ deferred tax assets
to zero.
Net
Income.
As a result of the foregoing, our net income increased to $75.2 million
in
2006 from a net income of $61.6 million in 2005.
Year
Ended
December 31, 2005 Compared to Year Ended December 31, 2004
Revenues.
Our revenues increased 79.9% to $540.2 million in 2005 from $300.3 million
in
2004. This increase was primarily due to a 118.4% increase in unit shipments
of
display drivers for large-sized applications, partially offset by a 16.2%
decrease in average selling prices of such products. The increase in unit
shipments was primarily due to the increased number of panels shipped by
our
customers as well as our increased market share with certain major customers.
The decrease in the average selling prices of our display drivers was primarily
due to a combination of the
29
pricing
pressure we
faced from our customers, the general industry trend of declining average
selling prices of semiconductors over a product’s life cycle, the introduction
of newer, lower-cost display drivers for large-sized applications, as well
as
our ability to reduce per unit cost of revenues in order to meet such pressure.
Revenues from related parties increased 69.2% to $322.8 million in 2005 from
$190.8 million in 2004 as a result of increased unit shipments to CMO (and
its
affiliates) and other related parties. However, revenues from related parties
as
a percentage of our revenues decreased from 63.5% in 2004 to 59.8% in 2005
as
our sales to other customers continued to grow, reflecting our effort in
diversifying our customer base and reducing our reliance on any one
customer.
Costs
and
Expenses. Costs and expenses increased 76.6% to $472.2 million in 2005 from
$267.4 million in 2004. As a percentage of revenues, costs and expenses
decreased to 87.4% in 2005 compared to 89.0% in 2004.
|
·
|
Cost
of
Revenues. Cost of revenues increased 77.7% to $419.4 million in 2005
from $236.0 million in 2004. The increase in cost of revenues was
primarily due to an increase in unit shipments, partially offset
by a
slight decrease in per units costs associated with the manufacturing,
assembly, testing and delivery of our products. This is a result
of our
cost reduction efforts achieved by improving designs and processes,
increasing manufacturing yields and leveraging our scale, volume
requirements and close relationships with semiconductor manufacturing
service providers and suppliers, as well as our strategy of sourcing
from
multiple service providers and suppliers in order to obtain better
pricing.\
|
|
·
|
Research
and Development. Research and development expenses increased 72.0% to
$41.3 million in the 2005 from $24.0 million in 2004, primarily
due to the
increase in salary expenses and share-based compensation expenses.
The
increase in salary expenses was due to increased headcount and
higher
average salaries. The increase was also partially as a result of
increased
mask costs and prototype wafer and processed tape costs associated
with an
increased number of new products introduced. The increase in share-based
compensation expenses also resulted from our increase in headcount
and our
grant of RSUs to certain employees on December 30,
2005.
|
|
·
|
General
and Administrative. General and administrative expenses increased
45.8% to $6.8 million in 2005 from $4.7 million in 2004, primarily
due to
an increase in salary expenses. The increase in salary expenses
was due to
increased headcount and higher average salaries. The increase in
general
and administrative expenses also partially resulted from increased
costs
associated with increased management and other fees paid to our
security
company and increased fees relating to patent filings.
|
|
·
|
Sales
and
Marketing. Sales and marketing expenses increased 73.7% to $4.8
million in 2005 from $2.7 million in 2004, primarily due to an
increase in
salary expenses and share-based compensation expenses. The increase
in
salary expenses was due to a 76.6% increase in headcount and higher
average salaries. The increase in share-based compensation expenses
also
resulted from our increase in headcount and our grant of RSUs to
certain
employees on December 30, 2005. The increase in sales and marketing
expenses was also partially as a result of increased travel expenses
reflecting increased sales
activity.
|
Non-Operating
Income (Loss). We had a non-operating income of $2.3 million in 2005
compared to $1.3 million in 2004, primarily as a result of increases in both
foreign exchange gain and interest income as compared to 2004. Foreign exchange
gain increased due to the weakening of the NT dollar and Japanese yen relative
to the U.S. dollar. The significant increase in interest income was due to
the
higher cash balance on hand, which was primarily placed in higher yield U.S.
dollar denominated time deposits beginning in August 2005.
30
Income
Tax
Expense (Benefit). Income tax expenses increased to $8.9 million in 2005
compared to an income tax benefit of $1.8 million in 2004. Our effective
income
tax rate increased from (5.2%) in 2004 to 12.7% in 2005, primarily due to:
(a)
the increase of valuation allowance provided to reduce certain subsidiaries’
deferred tax assets to zero, (b) the increase of non-deductible share-based
compensation expenses and (c) the absence in 2005 of a tax benefit from the
distribution of the prior year’s income compared to 2004, which was partially
offset by more investment tax credits and tax exempted income as compared
to
2004.
Net
Income.
As a result of the foregoing, our net income increased to $61.6 million
in
2005 from a net income of $36.0 million in 2004.
Liquidity
and Capital Resources
The
following table sets forth a summary of our cash flows for the periods
indicated:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Net
cash
provided by (used in) operating activities
|
$ | (8,688 | ) | $ |
12,464
|
$ |
29,696
|
|||||
|
Net
cash
provided by (used in) investing activities
|
11,001
|
(25,363 | ) | (8,927 | ) | |||||||
|
Net
cash
provided by financing activities
|
735
|
14,404
|
81,886
|
|||||||||
|
Effect
of
exchange rate changes on cash and cash equivalents
|
¾
|
4
|
12
|
|||||||||
|
Net
increase
in cash
|
3,048
|
1,509
|
102,667
|
|||||||||
|
Cash
and cash
equivalents at beginning of period
|
2,529
|
5,577
|
7,086
|
|||||||||
|
Cash
and cash
equivalents at end of period
|
5,577
|
7,086
|
109,753
|
|||||||||
Prior
to being a
public company, we financed our operations primarily through the issuance
of
shares in Himax Taiwan. As of December 31, 2006, we had $109.8 million in
cash
and cash equivalents.
Operating
Activities. Net cash provided by operating activities for the year ended
December 31, 2006 was $29.7 million compared to net cash provided by operating
activities of $12.5 million for the year ended December 31, 2005. Net cash
provided by operating activities increased in 2006 primarily as a result
of an
increase in operating profit and accounts payable due to an increase in cost
of
revenues and other expenses, which was partially offset by an increase in
accounts receivables. The increase in accounts receivable was primarily a
result
of the increase in sales in 2006 and the extension of payment terms for certain
of our customers. Net cash provided by operating activities for the year
ended
December 31, 2005 was $12.5 million compared to net cash used in operating
activities of $8.7 million for the year ended December 31, 2004. Net cash
provided by operating activities increased in 2005 primarily as a result
of an
increase in operating profit and accounts payable due to the extension of
payment terms received from certain vendors, which was partially offset by
an
increase in accounts receivable. We negotiated an extension of payment terms
with two of our main third-party semiconductor manufacturing service providers
in order to better balance our cash flows with payment terms that we offer
our
customers. The increase in accounts receivable was primarily as a result
of the
significant increase in sales in the second half of 2005 and the extension
of
payment terms for certain of our customers in the fourth quarter of
2005.
Investing
Activities. Net cash used in investing activities in the year ended
December 31, 2006 was $8.9 million compared to net cash used in investing
activities of $25.4 million in the year ended December 31, 2005. This change
was
primarily due to a decrease in net proceeds generated from the purchase and
sale
of available-for-sale marketable securities of $8.8 million, when compared
to
the year ended December 31, 2005 and an increase in the purchase of property
and
equipment as a result of the payment of construction costs in connection
with
our new headquarters in the Tree Valley Industrial Park. This
decrease was offset by the release of restricted cash equivalents and marketable
securities of $27.7 million. Net cash used in investing activities in
the year ended December 31, 2005 was $25.4 million
31
compared
to net cash
provided by investing activities of $11.0 million in the year ended December
31,
2004. This change was primarily due to a decrease in net proceeds generated
from
the purchase and sale of available-for-sale marketable securities of $15.2
million, when compared to the year ended December 31, 2004, an increase in
the
purchase of property and equipment and a pledge of restricted cash equivalents
and marketable securities of $13.7 million.
Financing
Activities. Net cash provided by financing activities in the year ended
December 31, 2006 was $81.9 million compared to net cash provided by financing
activities of $14.4 million in the year ended December 31, 2005, primarily
due
to proceeds received in our initial public offering which was offset by the
repayment of short-term debt and our repurchase of ordinary
shares. Net cash provided by financing activities
in the year ended December 31, 2005 was $14.4 million compared to net cash
provided by financing activities of $0.7 million in the year ended December
31,
2004, primarily due to proceeds received from borrowings of short-term debt
and
the issuance of Himax Analogic’s shares, which was offset by a distribution of
special cash dividends and the repayment of long-term debt.
Our
liquidity could be adversely affected by our obligation to meet certain
conditions set by the ROC Investment Commission (including a requirement
to make
substantial investments in research and development) in connection with its
approval for the share exchange as further described below under “—Contractual
Obligations.”
Moreover,
our
liquidity could be negatively impacted by a decrease in demand for our products.
Our products are subject to rapid technological change, among other factors,
which could result in revenue variability in future periods. Further, we
expect
to continue increasing our headcount, especially for engineering and sales,
to
pursue growth opportunities and keep pace with changes in technology. Should
demand for our products slow down or fail to grow as expected, our increased
headcount would result in sustained losses and reductions in our cash balance.
We have at times agreed to extend the payment terms for certain of our
customers. Other customers have also requested extension of payment terms
and we
may grant such requests for extension in the future. The extension of payment
terms for our customers could adversely affect our cash flow, liquidity and
our
operating results.
Research
and Development
Our
research and development efforts focus on improving and enhancing our core
technologies and know-how relating to semiconductor solutions for flat panel
displays and advanced televisions with particular emphasis on our three major
product lines. Although a significant portion of the resources at our integrated
circuit design center are invested in advanced research for future products,
we
continue to invest in improving the performance and reducing the cost of
our
existing products. Our application engineers, who provide on-system verification
of semiconductors and product specifications, and field application engineers,
who provide on-site engineering support at our customers’ offices, work closely
with panel manufacturers to co-develop display solutions for their electronic
devices. In 2004, 2005 and 2006, we incurred research and development expenses
of $24.0 million, $41.3 million, and $60.7 million, respectively, representing
8.0%, 7.6%, and 8.1% of
our
revenues, respectively.
Off-Balance
Sheet Arrangements
As
of December 31, 2006, we did not have any off-balance sheet guarantees, interest
rate swap transactions or foreign currency forward contracts. We do not engage
in trading activities involving non-exchange traded contracts. Furthermore,
as
of December 31, 2006, we did not have any interests in variable interest
entities.
32
Tabular
Disclosure of Contractual Obligations
The
following table sets forth our contractual obligations as of December 31,
2006:
|
Payment
Due by
Period
|
||||||||||||||||||||
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Operating
lease obligations
|
1,476
|
864
|
612
|
—
|
—
|
|||||||||||||||
|
Purchase
obligations(1)
|
143,164
|
143,164
|
—
|
—
|
—
|
|||||||||||||||
|
Other
obligations(2)
|
31,217
|
31,217
|
—
|
—
|
—
|
|||||||||||||||
|
Total
|
175,857
|
175,245
|
612
|
—
|
—
|
|||||||||||||||
|
Notes:
|
(1)
|
Includes
obligations for wafer fabrication, raw materials and
supplies.
|
|
(2)
|
Includes
obligations under license agreements and investment obligations
required
by the ROC Investment Commission.
|
In
August 2004, we entered into a license agreement for the use of certain central
processing unit cores for product development. In accordance with the agreement,
we are required to pay a license fee based on the progress of the project
development and a royalty based on shipments. The initial license fee of
$100,000 was charged to research and development expense in 2004; no fees
or
royalties were paid in 2005. We also paid a license fee of $200,000
in 2006 and expect to pay $100,000 in 2007 under the agreement.
In
addition, we completed construction of our new headquarters located in the
Tree
Valley Industrial Park. The facility occupies 22,172 square meters and houses
our research and development, engineering, sales and marketing, operations
and
general administrative staff. The land (31,800 square meters) is owned by
us.
The total costs were approximately $25.7 million, of which approximately
$10.2
million was for the land and approximately $15.5 million was for the
construction of the building and related facilities (which included architect
fees, general contractor fees, building materials, the purchase and installation
of network, clean room, and office equipment and other fixtures). We have
already paid for the land and approximately $0.8 million and $9.7 million
of the
construction costs were paid in 2005 and 2006, respectively. We expect to
pay
the remaining $5.0 million of the construction costs in 2007 using cash on
hand
and cash flows generated from our operations.
Our
current corporate structure was established as a result of a share exchange
between us and the former shareholders of Himax Taiwan. The ROC Investment
Commission has approved the share exchange, subject to our satisfying the
following undertakings we gave in connection with our application seeking
approval of the share exchange: Himax Taiwan is required to (1) purchase
three
hectares of land in connection with the construction of its new headquarters
in
Tainan, Taiwan; (2) increase the number of Taiwanese employees to 430 employees,
475 employees and 520 employees by the end of 2005, 2006 and 2007, respectively;
and (3) invest no less than $24.4 million, $27.6 million and $30.7 million
for
research and development in Taiwan in 2005, 2006 and 2007, respectively.
The
required research and development expenditure may be satisfied through
cash-based compensation but cannot be satisfied through non-cash share-based
compensation. Himax Taiwan is required to submit to the ROC Investment
Commission its annual financial statements audited by a certified public
accountant and other relevant supporting documents in connection with the
implementation of the above-mentioned conditions within four months after
the
end of each of 2005, 2006 and 2007.
We
believe that the undertakings under the ROC Investment Commission approval
are
in line with our business plan. In August 2005, we purchased 3.18 hectares
of
land for an aggregate purchase price of approximately $10.2 million in
satisfaction of the first condition. As of December 31, 2005 and 2006, we
had
satisfied the conditions with respect to the Taiwan employees’ requirements with
549 and 664 Taiwan employees for 2005 and 2006, respectively, and Himax Taiwan
had spent approximately $30.9 million and $42.8 million in research and
development expenditures in
33
2005
and 2006,
respectively. With respect to 2007, we expect that we will spend an amount
at or
above the research and development expenditure requirements. We
intend to commit the necessary resources in both headcount and research and
development to support our plans for further growth and to ensure future
competitiveness. Our business plan for 2007 contemplates an increase
in headcount (mostly research and development personnel) and research and
development expenditure to improve and enhance our core technologies and
know-how. Based on our historical trend with respect to increases in
headcount and research and development expenditure, and our projected headcount
and research and development expenditure, we expect that the above-mentioned
requirements for 2007 will be satisfied.
Although
we intend
to discharge our undertakings to the ROC Investment Commission, we cannot
assure
you that we will be able to do so under all circumstances. To the extent
that we
experience no or negative revenue growth as a result of significant
company-specific or industry-wide events, we would be limited in our ability
to
adjust our headcount and research and development expenditures in response
to
those events. In this case, these undertakings would restrict our operational
flexibility and adversely affect our operating margins and results of
operations. See “Item 3.D. Risk Factors—Political, Geographical and Economic
Risks — If we failed to satisfy the undertakings we made to the ROC Investment
Commission in connection with our application seeking approval of the share
exchange, the ROC Investment Commission could take actions against us that
would
materially and adversely affect our business, financial condition and results
of
operations and decrease the value of our ADSs.”
Under
the ROC Labor
Standard Law, we established a defined benefit plan and were required to
make
monthly contributions to a pension fund in an amount equal to 2% of wages
and
salaries of our employees. Under the newly effective ROC Labor Pension Act,
beginning on July 1, 2005, we are required to make a monthly contribution
for
employees that elect to participate in the new defined contribution plan
of no
less than 6% of the employee’s monthly wages, to the employee’s individual
pension fund account. Substantially all participants in the defined benefit
plan
have elected to participate in the new defined contribution plan. Participants’
accumulated benefits under the defined benefit plan are not impacted by their
election to change plans. We are required to make contributions to the defined
benefit plan until it is fully funded. As a result, our monthly contribution
to
the pension fund increased to $68,211 in July 2005 compared to $15,646 in
June
2005, and we expect to contribute at this increased rate in the future. Total
contributions to the new defined contribution plan in 2006 were $855,000
compared to $217,000 in 2005. Total contributions to the defined benefit
plan
and the new defined contribution plan in 2006 were $1.1 million compared
to
$412,000 in 2005. This increase has not, and is not expected to have,
a material effect on our cash flows or results of operations.
We
believe that our current cash and cash equivalents and cash flow from operations
will be sufficient to meet our anticipated cash needs, including our cash
needs
for working capital and capital expenditures for the foreseeable future.
We may,
however, require additional cash resources due to higher than expected growth
in
our business or other changing business conditions or other future developments,
including any investments or acquisitions we may decide to pursue.
Wisepal
Acquisition
We
announced that our board of directors had approved a letter of intent to
acquire
Wisepal Technologies, Inc. (“Wisepal”) on Aug 30, 2006 and closed the
deal on Feb 1, 2007. We acquired 100 percent of the outstanding
common stock of Wisepal at a value of approximately $45 million by a share
exchange. Please see footnotes of financial statements for
details.
Wisepal
is a display
driver IC company focused on small- and medium-sized
applications. Wisepal primarily supplies to TPO Displays Corp., whose
customers supply to global tier-one handset
manufacturers.
34
We
expect this
acquisition can allow us to
secure and
benefit from a closer partnership with a world-leading panel supplier and
with
handset suppliers.
Share
Buyback
On
November 2, 2006, our board of directors authorized a share buyback program
allowing us to repurchase up to $50.0 million of our ADSs in the open market
or
through privately negotiated transactions. We completed this share
buyback program in the first quarter of 2007 and repurchased a total of
approximately $50.0 million of our ADSs (equivalent to approximately 10 million
ADSs) from the open market. The repurchased ADSs and their underlying
ordinary shares have been cancelled, thereby reducing approximately 5% of
our
issued and outstanding shares.
The
following table sets forth information regarding transactions completed under
the share buyback program for each of the specified periods.
|
Period
|
(a)
Total
Number
of
Shares
Purchased
|
(b)
Average
Price
Paid
per
Share
|
(c)
Total
Number of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
|
(d)
Approximate
Dollar
Value
of
Shares
that
May
Yet
Be
Purchased
Under
the Plans
or
Programs
|
||||||||||||
|
November
9,
2006 to November 30, 2006
|
2,944,840
|
$ |
5.07
|
2,944,840
|
$ |
35,056,654
|
||||||||||
|
December
1,
2006 to December 31, 2006
|
4,940,995
|
$ |
4.96
|
7,885,835
|
$ |
10,540,210
|
||||||||||
|
January
1,
2007 to January 23, 2007
|
2,161,636
|
$ |
4.87
|
10,047,471
|
$ |
443
|
||||||||||
Inflation
Inflation
in Taiwan
has not had a material impact on our results of operations in recent years.
The
rate of inflation in Taiwan was 1.6%, 2.3%, and 0.6% in 2004, 2005 and 2006,
respectively.
35
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
Directors
and Senior Management
Members
of our board
of directors may be elected by our directors or our shareholders. Our board
of
directors consists of five directors, two of whom will be independent directors
within the meaning of Rule 4200(a)(15) of the Nasdaq Stock Market, Inc.
Marketplace Rules, or the Nasdaq Rules, as amended from time to time. Other
than
Jordan Wu and Dr. Biing-Seng Wu, who are brothers, there are no family
relationships between any of our directors and executive officers. The following
table sets forth information regarding our directors and executive officers
as
of June 1, 2007. Our directors and executive officers all assumed their
respective positions at our company, Himax Technologies, Inc., after our
shareholders’ meeting and board meeting, which were both held on October 25,
2005. Unless otherwise indicated, the positions or titles indicated in the
table
below refer to Himax Technologies, Inc.
|
Directors
and
Executive Officers
|
Age
|
Position/Title
|
||
|
Dr.
Biing-Seng
Wu
|
49
|
Chairman
of
the Board
|
||
|
Jordan
Wu
|
46
|
President,
Chief Executive Officer and Director
|
||
|
Jung-Chun
Lin
|
58
|
Director
|
||
|
Dr.
Chun-Yen
Chang
|
69
|
Director
|
||
|
Yuan-Chuan
Horng
|
55
|
Director
|
||
|
Chih-Chung
Tsai
|
51
|
Chief
Technology Officer, Senior Vice President
|
||
|
Max
Chan
|
40
|
Chief
Financial Officer
|
||
|
Baker
Bai
|
49
|
Vice
President, Incubator System Design Center
|
||
|
John
Chou
|
48
|
Vice
President, Quality & Reliability Assurance & Support Design
Center
|
||
|
Norman
Hung
|
49
|
Vice
President, Sales and Marketing
|
Directors
Dr.
Biing-Seng
Wu is the chairman of our board of directors. Dr. Wu is also the chairman
of the board of directors of Himax Taiwan, Himax Display, Himax Analogic
and
Himax Imaging Inc. Prior to our reorganization in October 2005, Dr. Wu served
as
president, chief executive officer and a director of Himax Taiwan and chairman,
president and chief executive officer of Himax Display. Dr. Wu is also a
director of Himax Anyang and serves as a director, executive vice president
and
chief technology officer of CMO, a TFT-LCD panel manufacturer, and a director
of
Chi Lin Technology Co., Ltd., an electronics manufacturing service provider,
Chi
Mei El Corp., an OLED company, and Nexgen Mediatech Inc., a TFT-LCD television
manufacturer. Dr. Wu has been active in the TFT-LCD panel industry for over
20
years and is a member of the boards of the Taiwan TFT-LCD Association and
the
Society for Information Display. Prior to joining CMO in 1998, Dr. Wu was
senior
director and plant director of Prime View International Co., Ltd. a TFT-LCD
panel manufacturer, from 1993 to 1997, and a manager of Thin Film Technology
Development at the Electronics Research & Service Organization/Industry
Technology Research Institute, or ERSO/ITRI, of Taiwan. Dr. Wu holds a B.S.
degree, an M.S. degree and a Ph.D. degree in electrical engineering from
National Cheng Kung University. Dr. Wu is the brother of Mr. Jordan Wu, our
president and chief executive officer.
Jordan
Wu
is our president and chief executive officer. Prior to our reorganization
in
October 2005, Mr.
36
Wu
served as the chairman of the board of directors of Himax Taiwan, a position
that he held since April 2003. Mr. Wu is also the chairman of the board of
directors of Wisepal and Integrated Microdisplays and a director of Himax
Taiwan, Himax Display, Himax Analogic, Himax Samoa, Himax Anyang, Himax
Shenzhen, Himax Suzhou and Himax Imaging Ltd. Prior to joining Himax Taiwan,
Mr.
Wu served as chief executive officer of TV Plus Technologies, Inc. and chief
financial officer and executive director of DVN Holdings Ltd. in Hong Kong.
Prior to that, he was an investment banker at Merrill Lynch (Asia Pacific)
Limited, Barclays de Zoete Wedd (Asia) Limited and Baring Securities, based
in
Hong Kong and Taipei. Mr. Wu holds a B.S. degree in mechanical engineering
from
National Taiwan University and an M.B.A. degree from the University of
Rochester. Mr. Wu is the brother of Dr. Biing-Seng Wu, our
chairman.
Jung-Chun
Lin is our director. He has also been a director of Himax Taiwan since
June
2001, a director of Himax Display and a supervisor of Himax Analogic since
July
2004. Mr. Lin also serves as a director, senior vice president, chief financial
officer and chief accounting officer of CMO and a senior vice president of
Chi
Mei Corporation. Prior to joining CMO in 2000, Mr. Lin was vice president
of Chi
Mei Corporation and had been with Chi Mei Corporation since 1971. Mr. Lin
holds
a B.S. degree in accounting from National ChengChi University.
Dr.
Chun-Yen
Chang is our director. Prior to our reorganization in October 2005, he
served as a supervisor of Himax Taiwan since December 2003. He was president
of
the National Chiao Tung University, or NCTU, of Taiwan from 1998 to 2006.
Prior
to that, he served as the director of the Microelectronics and Information
Systems Research Center of NCTU from 1996 to 1998 and as the dean of both
the
College of Electrical Engineering and Computer Science of NCTU and the College
of Engineering of NCTU from 1990 to 1994. Dr. Chang has been active in the
semiconductor industry for over 40 years. He is a fellow of the Institute
of
Electrical and Electronics Engineers, Inc., or IEEE, a foreign associate
of the
National Academy of Engineering of the United States and a fellow of Academia
Sinica of Taiwan. Dr. Chang holds a B.S. degree in electrical engineering
from
National Cheng Kung University and an M.S. degree and a Ph.D. degree in
electrical engineering from National Chiao Tung University.
Yuan-Chuan
Horng
is our director. Prior to our reorganization in October 2005, Mr. Horng
served as a director of Himax Taiwan from August 2004 to October 2005. Mr.
Horng
is the general manager of the Finance Department of China Steel Corporation,
a
position he has held since April 2000. He has held various accounting and
finance positions at China Steel Corporation for over 30 years. Mr. Horng
holds
a B.A. degree in economics from Soochow University.
Other
Executive Officers
Chih-Chung
Tsai is our chief technology officer and senior vice president. Mr. Tsai
is
also a director and chief technology officer of Himax Taiwan, a director
of
Himax Display, Himax Anyang, Wisepal and Integrated Microdisplays, and a
supervisor of Himax Analogic. Prior to joining Himax Taiwan, Mr. Tsai served
as
vice president of IC Design of Utron Technology from 1998 to 2001, director
of
the IC Division of Sunplus Technology from 1994 to 1998, director of the
IC
Design Division of Silicon Integrated Systems Corp. from 1987 to 1993 and
project leader at ERSO/ITRI from 1981 to 1987. Mr. Tsai holds a B.S. degree
and
an M.S. degree in electrical engineering from National Chiao Tung
University.
Max
Chan is
our chief financial officer. Mr. Chan is also the chief financial officer
of
Himax Taiwan. Mr. Chan is also a supervisor of Wisepal. Prior to our
reorganization in October 2005, Mr. Chan served as director of the planning
division of Himax Taiwan from June 2004 to October 2005. Prior to joining
Himax
Taiwan, he was treasury manager of Intel Capital, the strategic investment
division of Intel Corporation in Taiwan from 2000 to 2004, senior associate
of
Credit Suisse First Boston Asia International (Cayman) Limited, Taiwan Branch
in
2000 and a manager of the Overseas Direct Investment Department of China
Development Industrial Bank from 1992 to 2000. Mr. Chan holds a B.S. degree
in
civil engineering and an M.B.A. degree in finance from National Taiwan
University and an M.S. degree in business administration from the University
of
Illinois at Urbana-Champaign.
Baker
Bai
is our vice president in charge of the Incubator System Design Center, a
director of Himax Taiwan and Himax Analogic, and a supervisor of Himax Display
and Himax Anyang. Prior to joining Himax Taiwan in 2001, Mr. Bai served
37
as
the director of the TFT Liquid Crystal Module Fab of CMO from 1998 to 2001,
research and development manager of the Research Center of Vate Technology
Inc.,
a semiconductor testing house, from 1994 to 1998, and research and development
engineer at Chun Shan Technology Institute from 1983 to 1994. Mr. Bai holds
a
B.S. degree in electrical engineering from National Cheng Kung University,
an
M.S. degree in electrical engineering from the University of Southern California
and an M.S. degree in electrical engineering from National Chiao Tung
University.
John
Chou
is our vice president in charge of the Quality & Reliability Assurance &
Support Design Center and also serves as a director of Himax Analogic. Prior
to
joining Himax in 2005, Mr. Chou served as the director of the Application
and
Marketing Department at Pyramis Corp., a subsidiary and the semiconductor
arm of
Delta Electronics Inc., from August 2002 to April 2005. Mr. Chou was application
manager at O2Micro, Inc., an integrated circuit design house, from 1997 to
2002
and design engineer and project manager at Philips Lighting Electronics from
1992 to 1996. Mr. Chou holds a B.S. degree in electrical engineering from
National Cheng Kung University and an M.S. degree in electrical engineering
from
California State University, Los Angeles.
Norman
Hung
is our vice president in charge of Sales and Marketing and also serves as
a
director of Himax Analogic and Wisepal. From 2000 to 2006, Mr. Hung served
as
president of ZyDAS Technology Corp., a fabless integrated circuit design
house. From 1999 to 2000, he served as vice president of Sales and
Marketing for HiMARK Technology Inc., another fabless integrated circuit
design
house. Prior to that, from 1996 to 1998, Mr. Hung served as Director
of Sales and Marketing for Integrated Silicon Solution, Inc. He has
also served in various Marketing positions for Hewlett-Packard and
Logitech. Mr. Hung holds a B.S. degree in electrical engineering from
National Cheng Kung University and an executive M.B.A. degree from National
Chiao Tung University.
Compensation
of Directors and Executive Officers
In
the year ended December 31, 2006, the aggregate cash compensation that we
paid
to our executive officers was approximately $0.52 million. The aggregate
share-based compensation that we paid to our executive officers was
approximately $0.76 million. No executive officer is entitled to any severance
benefits upon termination of his or her employment with us.
In
the year ended December 31, 2006, the aggregate cash compensation that we
paid
to our directors was approximately $20,000. The aggregate share-based
compensation that we paid to our directors was $43,100.
The
following table summarizes the RSUs that we granted in 2006 to our directors
and
executive officers under our 2005 long-term incentive plan.
|
Name
|
Total
RSUs
Granted
|
Ordinary
Shares
Underlying
Vested
Portion
of
RSUs
|
Ordinary
Shares
Underlying
Unvested
Portion
of
RSUs
|
|||||||||
|
Dr.
Biing-Seng
Wu
|
30,188
|
7,547
|
22,641
|
|||||||||
|
Jordan
Wu
|
71,581
|
17,895
|
53,686
|
|||||||||
|
Jung-Chun
Lin
|
0
|
0
|
0
|
|||||||||
|
Dr.
Chun-Yen
Chang
|
0
|
0
|
0
|
|||||||||
|
Yuan-Chuan
Horng
|
0
|
0
|
0
|
|||||||||
|
Chi-Chung
Tsai
|
71,581
|
17,895
|
53,686
|
|||||||||
|
Max
Chan
|
23,872
|
5,968
|
17,904
|
|||||||||
|
Baker
Bai
|
43,441
|
10,860
|
32,581
|
|||||||||
|
John
Chou
|
38,747
|
22,500
|
16,247
|
|||||||||
|
Norman
Hung
|
37,672
|
11,667
|
26,005
|
|||||||||
38
Board
Practices
General
Our
board of directors consists of five directors, two of whom are independent
directors within the meaning of Rule 4200(a)(15) of the Nasdaq Stock Market,
Inc. Marketplace Rules, or the Nasdaq Rules, as amended from time to
time. We intend to follow home country practice
that permits our board of directors to have less than a majority of independent
directors in lieu of complying with Rule 4350(c)(1) of the Nasdaq Rules that
require boards of U.S. companies to have a board of directors comprised of
a
majority of independent directors. Moreover, we intend to follow home country
practice that permits our independent directors not to hold regularly scheduled
meetings at which only independent directors are present in lieu of complying
with Rule 4350(c)(2).
Committees
of the Board of Directors
To
enhance our corporate governance, we have established three committees under
the
board of directors prior to the closing of this offer: the audit committee,
the
compensation committee and the nominating and corporate governance committee.
We
have adopted a charter for each of the three committees. Each committee’s
members and functions are described below.
Audit
Committee. Our audit committee currently consists of Yuan-Chuan
Horng and Dr. Chun-Yen Chang. Our board of directors has determined that
all of
our audit committee members are “independent directors” within the meaning of
Rule 4200(a)(15) of the Nasdaq Rules and meet the criteria for independence
set
forth in Section 10A(m)(3)(B)(i) of the Exchange Act. We intend to follow
home
country practice that permits an audit committee to contain two independent
directors in lieu of complying with Rule 4350(d) of the Nasdaq Rules that
requires the audit committees of U.S. companies to have a minimum of three
independent directors. Our audit committee will oversee our accounting and
financial reporting processes and the audits of our financial statements.
The
audit committee will be responsible for, among other things:
|
·
|
selecting
the
independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent
auditors;
|
|
·
|
reviewing
with
the independent auditors any audit problems or difficulties and
management’s response;
|
|
·
|
reviewing
and
approving all proposed related party transactions, as defined in
Item 404
of Regulation SK under the Securities Act;
|
|
·
|
discussing
the
annual audited financial statements with management and the independent
auditors;
|
|
·
|
reviewing
major issues as to the adequacy of our internal controls and any
special
audit steps adopted in light of material internal control
deficiencies;
|
|
·
|
annually
reviewing and reassessing the adequacy of our audit committee
charter;
|
|
·
|
meeting
separately and periodically with management and the independent
auditors;
|
|
·
|
reporting
regularly to the board of directors; and
|
|
·
|
such
other
matters that are specifically delegated to our audit committee
by our
board of directors from time to
time.
|
Compensation
Committee. Our current compensation committee consists of
Yuan-Chuan Horng, Dr. Chun-Yen Chang and Jung-Chun Lin. Our compensation
committee assists our board of directors in reviewing and approving the
compensation structure, including all forms of compensation, relating to
our
directors and executive officers. Our chief executive officer may not be
present
at any committee meeting while his compensation is deliberated. We intend
to
follow home country practice that permits a compensation committee to contain
a
director that does not meet the definition of “independence” within the meaning
of Rule 4200(a) (15) of the Nasdaq Rules. We intend to follow home country
practice in lieu of complying with Rule 4350(c)(3)(A)(ii) and (B)(ii) of
the
Nasdaq Rules that requires the compensation committees of U.S. companies
to be
comprised solely of independent directors. The compensation committee will
be
responsible for, among other things:
39
|
·
|
reviewing
and
making recommendations to our board of directors regarding our
compensation policies and forms of compensation provided to our
directors
and officers;
|
|
·
|
reviewing
and
determining bonuses for our officers and other
employees;
|
|
·
|
reviewing
and
determining share-based compensation for our directors, officers,
employees and consultants;
|
|
·
|
administering
our equity incentive plans in accordance with the terms thereof;
and
|
|
·
|
such
other
matters that are specifically delegated to the compensation committee
by
our board of directors from time to
time.
|
Nominating
and Corporate Governance Committee. Our nominating and corporate
governance committee assists the board of directors in identifying individuals
qualified to be members of our board of directors and in determining the
composition of the board and its committees. Our current nominating and
corporate governance committee consists of Yuan-Chuan Horng, Dr. Chun-Yen
Chang
and Jung-Chun Lin. We intend to follow home country practice that permits
a
nominating committee to contain a director that does not meet the definition
of
“independence” within the meaning of Rule 4200(a) (15) of the Nasdaq Rules. We
intend to follow home country practice in lieu of complying with Rule 4350(c)
(4) (A) (ii) and (B) (ii) of the Nasdaq Rules that requires the nominating
committees of U.S. companies be comprised solely of independent directors.
Our
nominating and corporate governance committee will be responsible for, among
other things:
|
·
|
identifying
and recommending to our board of directors nominees for election
or
re-election, or for appointment to fill any vacancy;
|
|
·
|
reviewing
annually with our board of directors the current composition of
our board
of directors in light of the characteristics of independence, age,
skills,
experience and availability of service to us;
|
|
·
|
reviewing
the
continued board membership of a director upon a significant change
in such
director’s principal occupation;
|
|
·
|
identifying
and recommending to our board of directors the names of directors
to serve
as members of the audit committee and the compensation committee,
as well
as the nominating and corporate governance committee
itself;
|
|
·
|
advising
the
board periodically with respect to significant developments in
the law and
practice of corporate governance as well as our compliance with
applicable
laws and regulations, and making recommendations to our board of
directors
on all matters of corporate governance and on any corrective action
to be
taken; and
|
|
·
|
monitoring
compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to ensure
proper compliance.
|
Terms
of
Directors and Officers
Under
Cayman Islands
law and our articles of association, our directors hold office until a successor
has been duly elected and qualified unless the director was appointed by
the
board of directors, in which case such director holds office until the next
annual meeting of shareholders at which time such director is eligible for
re-election. Our directors are subject to periodic retirement and re-election
by
shareholders in accordance with our articles of association, resulting in
their
retirement and re-election at staggered intervals. At each annual general
meeting, one-third of our directors who are subject to retirement by rotation,
or if their number is not a multiple of three, the nearest to one-third but
not
exceeding one-third, retire from office. Any retiring director is eligible
for
reappointment. The Chairman of our board of directors will not be subject
to
retirement by rotation or be taken into account in determining the number
of
directors to retire in each year. Under this formula, assuming five directors
continue to serve on the board of directors, one director will retire and
be
subject to re-election in each year beginning 2006, and until 2009, the term
that each director serves before he is subject to retirement by rotation
will
vary from one
40
year
to four years.
Under our articles of association, which director will retire at each annual
general meeting will be determined as follows: (i) any director who wishes
to
retire and not offer himself for re-election, (ii) if no director wishes
to
retire, the director who has been longest in office since his last re-election
or appointment, (iii) if two or more directors have served on the board the
longest, then as agreed among the directors themselves or as determined by
lot.
Beginning in 2010, assuming that our board of directors consists of five
directors, each director will serve a term of four years. All of our executive
officers are appointed by and serve at the discretion of our board of
directors.
Employees
As
of December 31, 2004, 2005 and 2006, we had 469, 716 and 924 employees,
respectively. The following is a breakdown of our employees by
function as of December 31, 2006:
|
Function
|
Number
|
|||
|
Research
and
development(1)
|
615
|
|||
|
Engineering
and manufacturing(2)
|
125
|
|||
|
Sales
and
marketing(3)
|
120
|
|||
|
General
and
administrative
|
64
|
|||
|
Total
|
924
|
|||
|
Notes:
|
(1)
|
Includes
semiconductor design engineers, application engineers, assembly
and
testing engineers and quality control engineers.
|
|
(2)
|
Includes
manufacturing personnel of Himax Display, our subsidiary focused
on design
and manufacturing of LCOS products and liquid crystal injection
services.
|
|
|
(3)
|
Includes
field
application engineers.
|
Share
Ownership
The
following table sets forth the beneficial ownership of our ordinary shares,
as
of June 1, 2007, by each of our directors and executive officers.
|
Name
|
Number of
Shares
Owned
|
Percentage
of Shares Owned
|
||||||
|
Dr.
Biing-Seng
Wu
|
31,578,765
|
15.98 | % | |||||
|
Jordan
Wu
|
10,906,363
|
5.52 | % | |||||
|
Jung-Chun
Lin
|
|
|
|
|
||||
|
Dr.
Chun-Yen
Chang
|
794,807
|
*
|
||||||
|
Yuan-Chuan
Horng
|
453,052
|
*
|
||||||
|
Chih-Chung
Tsai
|
2,922,012
|
1.48 | % | |||||
|
Max
Chan
|
61,247
|
*
|
||||||
|
Baker
Bai
|
2,281,364
|
1.15 | % | |||||
|
John
Chou
|
39,863
|
*
|
||||||
|
Norman
Hung
|
23,997
|
*
|
||||||
|
|
*
Less than
1%
|
|
|
None
of our
directors or executive officers has different voting rights from
other
shareholders.
|
Dividends
and Dividend Policy
Our
dividend policy is to retain most, if not all, of our available funds and
any
future earnings for use in the operation and growth of our
business.
In
November 2005, we distributed a special cash dividend to our shareholders
in the
amount of approximately $13.6 million, or the equivalent of approximately
$0.075
per share based on our total shares outstanding as of a certain record date.
This dividend was paid to our shareholders in respect of our performance
prior
to our initial public offering. We decided to pay the dividend in cash instead
of shares because our ordinary shares at the time of the dividend
payment
41
was
not listed on any stock exchange and therefore had limited liquidity. This
dividend was approved by our board of directors and was financed through
a loan.
This special dividend should not be considered representative of the dividends
that would be paid in any future periods or our dividend policy. In 2006,
we did
not distribute any dividends.
Our
board of directors has full discretion as to whether we will distribute
dividends in the future. Even if our board of directors decides to distribute
dividends, the form, frequency and amount of such dividends will depend upon
our
future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and other factors as the board
of
directors may deem relevant.
Our
ability to pay cash or stock dividends will depend upon the amount of
distributions, if any, received by us from our direct and indirect subsidiaries,
which must comply with the laws and regulations of their respective countries
and respective articles of association. Since its inception in June 2001,
Himax
Taiwan has paid stock dividends in an amount of 13,517,773 shares on September
1, 2003 and 42,976,372 shares on September 20, 2004 with respect to the fiscal
years 2002 and 2003, respectively. However, Himax Taiwan has not paid cash
dividends in the past. In accordance with ROC laws and regulations and Himax
Taiwan’s articles of incorporation, Himax Taiwan is permitted to distribute
dividends after allowances have been made for:
|
·
|
payment
of
taxes;
|
|
·
|
recovery
of
prior years’ deficits, if any;
|
|
·
|
legal
reserve
(in an amount equal to 10% of annual net income after having deducted
the
above items until such time as its legal reserve equals the amount
of its
total paid-in capital);
|
|
·
|
special
reserve based on relevant laws or regulations, or retained earnings,
if
necessary;
|
|
·
|
dividends
for
preferred shares, if any; and
|
|
·
|
cash
or stock
bonus to employees (in an amount less than 10% of annual net income)
and
remuneration for directors and supervisor(s) (in an amount less
than 2% of
the annual net income); after having deducted the above items,
based on a
resolution of the board of directors; if stock bonuses are paid
to
employees, the bonus may also be appropriated to employees of subsidiaries
under the board of directors’
approval.
|
Furthermore,
if
Himax Taiwan does not record any net income for any year as determined in
accordance with generally accepted accounting principles in Taiwan, it generally
may not distribute dividends for that year.
If
we are not able to satisfy our undertakings to the ROC Investment Commission,
Himax Taiwan may not be able to pay dividends to us, which may adversely
affect
your ability to receive dividends because we rely on Himax Taiwan and our
other
subsidiaries for dividend payments, if any, to our shareholders. If we failed
to
satisfy the undertakings we made to the ROC Investment Commission in connection
with our application seeking approval of the share exchange, the ROC Investment
Commission could take actions against us that would materially and adversely
affect our business, financial condition and results of operations and decrease
the value of our ADSs.
Any
dividend we declare will be paid to the holders of ADSs, subject to the terms
of
the deposit agreement, to the same extent as holders of our ordinary shares,
to
the extent permitted by applicable law and regulations, less the fees and
expenses payable under the deposit agreement. Any dividend we declare will
be
distributed by the depositary bank to the holders of our ADSs. Cash dividends
on
our ordinary shares, if any, will be paid in U.S. dollars.
42
●Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Himax
Technologies,
Inc.:
We
have audited the accompanying consolidated balance sheets of Himax Technologies,
Inc. (a Cayman Island Company) and subsidiaries as of December 31, 2005
and
2006, and the related consolidated statements of income, comprehensive
income,
stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financials
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatements. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Himax Technologies,
Inc. and subsidiaries as of December 31, 2005 and 2006, and the results
of their
operations and their cash flows for each of the years in the three-year
period
ended December 31, 2006, in conformity with U. S. generally accepted accounting
principles.
As
described in the Notes 2 and 13 to the consolidated financial statements,
the
Company adopted the recognition and disclosure provisions of Statements
of
Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, as of December 31,
2006.
/s/
KPMG Certified Public Accountants
Taipei,
Taiwan (the
Republic of China)
May
28, 2007
43
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Consolidated
Balance Sheets
December
31, 2005
and 2006
|
(in
thousands
of US dollars)
|
||||||||
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash
equivalents
|
$ |
7,086
|
109,753
|
|||||
|
Marketable
securities available-for-sale
|
3,989
|
8,828
|
||||||
|
Restricted
cash equivalents and marketable securities
|
14,053
|
108
|
||||||
|
Accounts
receivable, less allowance for doubtful accounts,
|
||||||||
|
sales
returns
and discounts of $80 and $464 at
|
||||||||
|
December
31,
2005 and 2006, respectively
|
80,259
|
112,767
|
||||||
|
Accounts
receivable from related parties, less allowance for
|
||||||||
|
sales
returns
and discounts of $101 and $404 at
|
||||||||
|
December
31,
2005 and 2006, respectively
|
69,587
|
116,850
|
||||||
|
Inventories
|
105,004
|
101,341
|
||||||
|
Deferred
income taxes
|
8,965
|
6,744
|
||||||
|
Prepaid
expenses and other current assets
|
11,113
|
10,324
|
||||||
|
Total
current assets
|
300,056
|
466,715
|
||||||
|
Property,
plant, and equipment, net
|
24,426
|
38,895
|
||||||
|
Deferred
income taxes
|
151
|
11,405
|
||||||
|
Intangible
assets, net
|
81
|
393
|
||||||
|
Investments
in non-marketable securities
|
1,813
|
817
|
||||||
|
Refundable
deposits and prepaid pension costs
|
712
|
569
|
||||||
|
27,183
|
52,079
|
|||||||
|
Total
assets
|
$ |
327,239
|
518,794
|
|||||
See
accompanying notes to consolidated financial
statements.
44
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Consolidated
Balance Sheets–continued
December
31, 2005
and 2006
|
(in
thousands
of US dollars,
except
share
and per share data)
|
||||||||
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
Liabilities,
Minority Interest and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Short-term
debt
|
$ |
27,274
|
–
|
|||||
|
Current
portion of long-term debt
|
89
|
–
|
||||||
|
Accounts
payable
|
105,801
|
120,407
|
||||||
|
Income
tax
payable
|
13,625
|
11,666
|
||||||
|
Other
accrued
expenses and other current liabilities
|
13,995
|
21,206
|
||||||
|
Total
current liabilities
|
160,784
|
153,279
|
||||||
|
Accrued
pension liabilities
|
–
|
192
|
||||||
|
Total
liabilities
|
160,784
|
153,471
|
||||||
|
Minority
interest
|
624
|
1,396
|
||||||
|
Stockholders’
equity:
|
||||||||
|
Ordinary
share, US$0.0001 par value, 500,000,000 shares authorized;
|
||||||||
|
182,088,880
and 193,600,302 shares issued and outstanding at
|
||||||||
|
December
31,
2005 and 2006, respectively
|
18
|
19
|
||||||
|
Additional
paid-in capital
|
98,450
|
221,666
|
||||||
|
Accumulated
other comprehensive income (loss)
|
36
|
(275 | ) | |||||
|
Unappropriated
retained earnings
|
67,327
|
142,517
|
||||||
|
Total
stockholders equity
|
165,831
|
363,927
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Total
liabilities, minority interest and stockholders
equity
|
$ |
327,239
|
518,794
|
|||||
See
accompanying notes to consolidated financial
statements. 45
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Consolidated
Statements of Income
Years
ended December
31, 2004, 2005 and 2006
|
(in
thousands
of US dollars, except per share data)
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Revenues
|
||||||||||||
|
Revenues
from
third parties, net
|
$ |
109,514
|
217,420
|
329,886
|
||||||||
|
Revenues
from
related parties, net
|
190,759
|
322,784
|
414,632
|
|||||||||
|
300,273
|
540,204
|
744,518
|
||||||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of
revenues
|
235,973
|
419,380
|
601,565
|
|||||||||
|
Research
and
development
|
24,021
|
41,278
|
60,655
|
|||||||||
|
General
and
administrative
|
4,654
|
6,784
|
9,762
|
|||||||||
|
Sales
and
marketing
|
2,742
|
4,762
|
6,970
|
|||||||||
|
Total
costs and expenses
|
267,390
|
472,204
|
678,952
|
|||||||||
|
Operating
income
|
32,883
|
68,000
|
65,566
|
|||||||||
|
Non
operating income (loss):
|
||||||||||||
|
Interest
income
|
72
|
580
|
5,860
|
|
||||||||
|
Gain
on sale
of marketable securities, net
|
401
|
105
|
60
|
|||||||||
|
Other
than
temporary impairment loss on investments
|
||||||||||||
|
in
non-marketable securities
|
–
|
(129 | ) | (1,500 | ) | |||||||
|
Foreign
exchange gains (losses), net
|
847
|
1,808
|
(341 | ) | ||||||||
|
Interest
expense
|
(6 | ) | (125 | ) | (311 | ) | ||||||
|
Other
income,
net
|
5
|
19
|
173
|
|||||||||
|
1,319
|
2,258
|
3,941
|
||||||||||
|
Income
before income taxes and minority interest
|
34,202
|
70,258
|
69,507
|
|||||||||
|
Income
tax
expense (benefit)
|
(1,771 | ) |
8,923
|
(5,446 | ) | |||||||
|
Income
before minority interest
|
35,973
|
61,335
|
74,953
|
|||||||||
|
Minority
interest, net of tax
|
27
|
223
|
237
|
|||||||||
|
Net
income
|
$ |
36,000
|
61,558
|
75,190
|
||||||||
|
Basic
earnings
per ordinary share
|
$ |
0.21
|
0.35
|
0.39
|
||||||||
|
Diluted
earnings per ordinary share
|
$ |
0.21
|
0.34
|
0.39
|
||||||||
See
accompanying notes to consolidated financial
statements. 46
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Consolidated
Statements of Comprehensive
Income
Years
ended December
31, 2004, 2005 and 2006
|
(in
thousands
of US dollars, except per share data)
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Net
income
|
$ |
36,000
|
61,558
|
75,190
|
||||||||
|
Other
comprehensive income:
|
||||||||||||
|
Unrealized
gains on securities, not subject to tax:
|
||||||||||||
|
Unrealized
holding gains on available-for-sale
|
||||||||||||
|
marketable
securities arising during the period
|
334
|
129
|
56
|
|||||||||
|
Reclassification
adjustment for realized gains included
|
||||||||||||
|
in
net
income
|
(401 | ) | (105 | ) | (60 | ) | ||||||
|
Foreign
currency translation adjustments, net of tax
|
||||||||||||
|
of
$3 and $6
in 2005 and 2006, respectively
|
–
|
5
|
24
|
|||||||||
|
Comprehensive
income
|
$ |
35,933
|
61,587
|
75,210
|
||||||||
See
accompanying notes to consolidated financial
statements. 47
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Consolidated
Statements of Stockholders' Equity
Years
ended December
31, 2004, 2005 and 2006
(in
thousands
of US dollars and shares)
|
Ordinary
share
|
||||||||||||||||||||||||||||
|
Shares
|
|
Amount
|
Additional
paid-in
capital
|
Treasury
shares
|
Accumulated
other
comprehensive
Income
(loss)
|
Unappropriated
Retained
earnings
(accumulated
deficit)
|
Total
|
|||||||||||||||||||||
|
Balance
at January 1, 2004
|
173,185
|
$ |
17
|
56,220
|
-
|
74
|
(4,022 | ) |
52,289
|
|||||||||||||||||||
|
Stock
split
effected in the form of a stock dividend
|
-
|
12,651
|
-
|
-
|
(12,651 | ) |
-
|
|||||||||||||||||||||
|
Issuance
of
ordinary shares as employee bonus
|
7,584
|
1
|
14,829
|
-
|
-
|
-
|
14,830
|
|||||||||||||||||||||
|
Share-based
compensation expenses
|
-
|
-
|
1,696
|
-
|
-
|
-
|
1,696
|
|||||||||||||||||||||
|
Dilution
gain
from issuance of new subsidiary shares
|
-
|
-
|
112
|
-
|
-
|
-
|
112
|
|||||||||||||||||||||
|
Unrealized
holding loss on available-for-sale marketable securities
|
-
|
-
|
-
|
-
|
(67 | ) |
-
|
(67 | ) | |||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
36,000
|
36,000
|
|||||||||||||||||||||
|
Balance
at December 31, 2004
|
180,769
|
18
|
85,508
|
-
|
7
|
19,327
|
104,860
|
|||||||||||||||||||||
|
Declaration
of
special cash dividends
|
-
|
-
|
-
|
-
|
-
|
(13,558 | ) | (13,558 | ) | |||||||||||||||||||
|
Issuance
of
ordinary shares as employee bonus
|
990
|
-
|
8,536
|
-
|
-
|
-
|
8,536
|
|||||||||||||||||||||
|
Share-based
compensation expenses
|
330
|
-
|
4,184
|
-
|
-
|
-
|
4,184
|
|||||||||||||||||||||
|
Dilution
gain
from issuance of new subsidiary shares
|
-
|
-
|
222
|
-
|
-
|
-
|
222
|
|||||||||||||||||||||
|
Unrealized
holding gain on available-for-sale marketable securities
|
-
|
-
|
-
|
-
|
24
|
-
|
24
|
|||||||||||||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
5
|
-
|
5
|
|||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
61,558
|
61,558
|
|||||||||||||||||||||
|
Balance
at December 31, 2005
|
182,089
|
$ |
18
|
98,450
|
-
|
36
|
67,327
|
165,831
|
||||||||||||||||||||
|
Issuance
of
ordinary shares upon initial public offering, net of issuance
costs of
$8,207
|
17,290
|
2
|
147,406
|
-
|
-
|
-
|
147,408
|
|||||||||||||||||||||
|
Shares
acquisition
|
(7,886 | ) |
-
|
-
|
(39,460 | ) |
-
|
-
|
(39,460 | ) | ||||||||||||||||||
|
Shares
retirement
|
-
|
(1 | ) | (39,459 | ) |
39,460
|
-
|
-
|
-
|
|||||||||||||||||||
|
Share-based
compensation expenses
|
2,107
|
-
|
15,091
|
-
|
-
|
-
|
15,091
|
|||||||||||||||||||||
|
Dilution
gain
from issuance of new subsidiary shares
|
-
|
-
|
178
|
-
|
-
|
-
|
178
|
|||||||||||||||||||||
|
Adjustment
upon adoption of SFAS No. 158, net of tax of $98
|
-
|
-
|
-
|
-
|
(331 | ) |
-
|
(331 | ) | |||||||||||||||||||
|
Unrealized
holding loss on available-for-sale marketable securities
|
-
|
-
|
-
|
-
|
(4 | ) |
-
|
(4 | ) | |||||||||||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
24
|
-
|
24
|
|||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
75,190
|
75,190
|
|||||||||||||||||||||
|
Balance
at December 31, 2006
|
193,600
|
$ |
19
|
221,666
|
-
|
(275 | ) |
142,517
|
363,927
|
|||||||||||||||||||
See
accompanying notes to consolidated financial statements.
48
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Consolidated
Statement of Cash Flows
Years
ended December
31, 2004, 2005 and 2006
(in
thousands of US
dollars)
|
Year
Ended December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ |
36,000
|
61,558
|
75,190
|
||||||||
|
Adjustments
to
reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
2,761
|
3,613
|
5,221
|
|||||||||
|
Share-based
compensation expenses
|
5,837
|
8,613
|
15,150
|
|||||||||
|
Minority
interest, net of tax
|
(27 | ) | (223 | ) | (237 | ) | ||||||
|
Loss
on
disposal of property, plant, and equipment
|
69
|
-
|
36
|
|||||||||
|
Gain
on sales
of subsidiary shares and investment in non-marketable securities,
net
|
-
|
(19 | ) | (137 | ) | |||||||
|
Gain
on sale
of marketable securities, net
|
(401 | ) | (105 | ) | (60 | ) | ||||||
|
Impairment loss on investments in non-marketable
securities
|
-
|
129
|
1,500
|
|||||||||
|
Deferred
income taxes
|
(4,986 | ) | (3,371 | ) | (8,938 | ) | ||||||
|
Inventory
write downs
|
847
|
927
|
5,165
|
|||||||||
|
Changes
in
operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(14,473 | ) | (53,242 | ) | (32,237 | ) | ||||||
|
Accounts
receivable from related parties
|
(16,236 | ) | (30,458 | ) | (47,263 | ) | ||||||
|
Inventories
|
(33,851 | ) | (51,839 | ) | (1,502 | ) | ||||||
|
Prepaid
expenses and other current assets
|
(3,296 | ) | (6,413 | ) |
749
|
|||||||
|
Accounts
payable
|
15,748
|
67,152
|
14,606
|
|||||||||
|
Income
tax
payable
|
(761 | ) |
10,852
|
(1,959 | ) | |||||||
|
Other
accrued
expenses and other current liabilities
|
4,081
|
5,290
|
4,412
|
|||||||||
|
Net
cash provided by (used in) operating activities
|
(8,688 | ) |
12,464
|
29,696
|
||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of
land, property and equipment
|
(8,046 | ) | (14,733 | ) | (17,829 | ) | ||||||
|
Purchase
of
available-for-sale marketable securities
|
(47,163 | ) | (38,048 | ) | (31,911 | ) | ||||||
|
Sales
and
maturities of available-for-sale marketable securities
|
66,312
|
42,028
|
27,128
|
|||||||||
|
Cash
acquired
in acquisition
|
-
|
-
|
17
|
|||||||||
|
Proceeds
from
sale of subsidiary shares and investment in non-marketable securities
by
Himax Technologies Limited
|
-
|
51
|
1,142
|
|||||||||
|
Purchase
of
investment in non-marketable securities
|
-
|
-
|
(817 | ) | ||||||||
|
Purchase
of
subsidiary shares from minority interest
|
-
|
(523 | ) | (773 | ) | |||||||
|
Refund
from
(increase in) refundable deposits
|
(137 | ) | (414 | ) |
171
|
|||||||
|
Release
(pledge) of restricted cash equivalents and marketable
securities
|
35
|
(13,724 | ) |
13,945
|
||||||||
|
Net
cash provided by (used in) investing activities
|
11,001
|
(25,363 | ) | (8,927 | ) | |||||||
See
accompanying notes to consolidated financial
statements. 49
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Consolidated
Statements of Cash Flows - continued
Years
ended December
31, 2004, 2005 and 2006
(in
thousands of US
dollars)
|
Year
Ended December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Distribution
of special cash dividends
|
$ |
-
|
(13,558 | ) |
-
|
|||||||
|
Proceeds
from
initial public offering,
net
of issuance costs
|
-
|
-
|
147,408
|
|||||||||
|
Proceeds
from
issuance of new shares by subsidiaries
|
803
|
866
|
676
|
|||||||||
|
Acquisition
of
ordinary shares for retirement
|
-
|
-
|
(38,835 | ) | ||||||||
|
Proceeds
from
borrowing of short-term debt
|
-
|
27,274
|
11,303
|
|||||||||
|
Repayment
of
short-term debt
|
-
|
-
|
(38,577 | ) | ||||||||
|
Repayment
of
long-term debt
|
(68 | ) | (178 | ) | (89 | ) | ||||||
|
Net
cash provided by financing activities
|
735
|
14,404
|
81,886
|
|||||||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
-
|
4
|
12
|
|||||||||
|
Net
increase in cash and cash equivalents
|
3,048
|
1,509
|
102,667
|
|||||||||
|
Cash
and cash equivalents at beginning of year
|
2,529
|
5,577
|
7,086
|
|||||||||
|
Cash
and cash equivalents at end of year
|
$ |
5,577
|
7,086
|
109,753
|
||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid
during the year for:
|
||||||||||||
|
Interest
|
$ |
6
|
125
|
311
|
||||||||
|
Income
taxes
|
$ |
3,867
|
1,130
|
5,695
|
||||||||
|
Supplemental
disclosures of non-cash investing activities:
|
||||||||||||
|
Payable
for
purchase of equipment and construction in progress
|
$ | (71 | ) | (2,285 | ) | (1,846 | ) | |||||
|
Fair
value of
ordinary shares issued by Himax Display, Inc. in the acquisition
of
Integrated Microdisplays Limited
|
$ |
-
|
-
|
538
|
||||||||
See
accompanying notes to consolidated financial
statements. 50
HIMAX
TECHNOLOGINES,
INC. AND SUBSIDIARIES
●Notes
to Consolidated Financial Statements
Years
ended December
31, 2004, 2005 and 2006
Background
Himax
Technologies
Limited (“Himax Taiwan”) was incorporated on June 12, 2001. On April
26, 2005, Himax Technologies, Inc. was established as a new holding company
in
the Cayman Islands to hold the shares of Himax Taiwan in connection with
the
reorganization and share exchange described below.
On
June 10, 2005, Himax Taiwan’s shareholders resolved the exchange of shares
between Himax Taiwan and Himax Technologies, Inc. (the “Company”) pursuant to
Republic of China (ROC) Business Mergers and Acquisitions Law. Upon
obtaining all necessary approvals from ROC authorities, the share exchange
became effective on October 14, 2005, whereby all issued and outstanding
common
shares of Himax Taiwan were exchanged with Himax Technologies, Inc.’s new shares
at a 1:1 ratio. The approval of the ROC Investment Commission is
conditioned upon the satisfaction of certain undertakings the Company made
to
the ROC Investment Commission, including undertakings relating to the Company’s
plans to expand its investment in the ROC as well as undertakings to submit
certain documentation after the effectiveness of the share
exchange. Many of these undertakings are prospective, on-going
obligations and have yet to be satisfied to date. Refer to Note 21
(i) for further details. Upon completion of the share exchange, Himax Taiwan
became Himax Technologies, Inc.’s directly and wholly-owned
subsidiary.
On
April 4 and 13,
2006, the Company completed its initial public offering and sold 17,290,588
American Depositary Shares (“ADSs”), representing 17,290,588 new ordinary
shares, at an initial public offering price of US$8.55 per ADS. The
Company received net proceeds, after deduction of the related offering costs,
in
the amount of $147,408,000.
Since
March 2006,
the Company’s ordinary shares have been quoted on the NASDAQ Global Market under
the symbol “HIMX.” in the form of ADSs.
Principal
Activities
Himax
Technologies,
Inc. and subsidiaries (collectively, the Company) designs, develops and markets
semiconductors that are critical components of flat panel
displays. The Company’s principal products are display drivers for
large-sized thin film transistor liquid crystal displays (TFT-LCD) panels,
which
are used in desktop monitors, notebook computers and consumer
electronics
products such as display drivers for small- and medium-sized TFT-LCD panels
which are used in mobile handset, digital cameras, mobile gaming devices
and car
navigation displays. The Company has expanded its product offering to
include television semiconductor solutions such as television chipsets and
tuners, modules, as well as liquid crystal on silicon (LCOS)
products. The Company’s customers are TFT-LCD panel manufacturers,
LCD and mobile device module manufacturers and television makers.
Basis
of
Presentation
The
accompanying consolidated financial statements include the accounts of Himax
Technologies, Inc. and its subsidiaries as if the Company had been in existence
for all periods presented. As a result of the above-mentioned share
exchange, all of the outstanding ordinary shares of Himax Technologies, Inc.
were owned by former shareholders of Himax Taiwan until the Company’s initial
public offering. This transaction is a change in legal organization
for which no change in accounting basis is appropriate. Therefore, in
presenting the consolidated financial statements of the Company, the assets
and
liabilities, revenues and expenses of Himax Taiwan and its subsidiaries are
included at their historical amounts for all periods presented.
The
accompanying
consolidated financial statements of the Company have been prepared in
conformity with US generally accepted accounting principles (“US
GAAP”).
See
accompanying notes to consolidated financial
statements. 51
Note
2. Summary
of
Significant Accounting Policies
(a)
Principles
of
Consolidation
The
consolidated
financial statements include the accounts and operations of the Himax
Technologies, Inc., and all its majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b)
Use
of
Estimates
The
preparation of
consolidated financial statements in conformity with US GAAP requires
management
to make estimates and assumptions relating to the reported amounts of
assets and
liabilities and disclosures of contingent assets and liabilities at the
date of
the consolidated financial statements and the reported amounts of revenue
and
expenses during the reporting period. Significant items subject to
such estimates and assumptions include the carrying value of property,
equipment
and intangible assets, valuation allowances for receivables and deferred
income
tax assets, inventory realizable values, potential impairment of marketable
securities and other equity investments, valuation of derivative financial
instruments and share-based compensation, and valuation of assets and
obligations related to employee retirement benefits. Actual results
could differ from those estimates.
(c)
Stock
Split
and Stock Dividends
On
September 30,
2004, Himax Taiwan’s stockholders approved stock dividends at par value per
share of NT$3.63 and a stock split, pursuant to which it issued 42,976,372
shares and 11,837,166 shares of common stock to the then holders of its
outstanding shares of common stock.
This
transaction
resulted in an increase of 46.31% of the then outstanding common shares
for 2004
which is accounted for as a stock split effected in the form of a
dividend. However, retained earnings were charged for the stock
splits effected in the form of a dividend to comply with Taiwanese legal
requirements. All references in the consolidated financial statements
and notes to the number of shares outstanding, per share amounts and
stock
option data of the Company’s common stock have been retroactively adjusted to
reflect the effect of this stock split in 2004.
(d)
Cash
and Cash
Equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less at the time of purchase to be cash
equivalents. As of December 31, 2005, the Company had $13,600
thousand of cash equivalents, consisting of US dollar denominated time
deposits
with an original maturity of two months, which had been pledged as collateral
for short-term debt, and are recorded as restricted cash equivalents
in the
accompanying consolidated balance sheets. As of December 31, 2006,
the Company had $89,500 thousand of cash equivalents, consisting of US
dollar
denominated time deposits with an original maturity of less than three
months.
(e)
Marketable
Securities
As
of
December 31, 2005 and 2006, all of the Company’s investments in debt and
marketable equity securities are classified as available-for-sale securities
and
are reported at fair value with changes in fair value, net of related
taxes,
excluded from earnings and reported in other comprehensive income.
Available-for-sale securities, which mature or are expected to be sold
in one
year, are classified as current assets.
Declines
in market
value are charged against earnings at the time that a decline has been
determined to be other than temporary, which is based primarily on the
financial
condition of the issuer and the extent and length of time of the
decline.
The
cost of the
securities sold is computed based on the moving average cost of each
security
held at the time of sale.
See
accompanying notes to consolidated financial
statements. 52
(f)
Inventories
Inventories
primarily consist of raw materials, work-in-process and finished goods
awaiting
final assembly and test, and are stated at the lower of cost or market
value.
Cost is determined using the weighted-average method. For
work-in-process and manufactured inventories, cost consists of the cost
of raw
materials (primarily fabricated wafer and processed tape), direct labor
and an
appropriate proportion of production overheads. The Company also
writes down excess and obsolete inventory to its estimated market value
based
upon estimations about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional future inventory write-down may be required that could adversely
affect the Company’s operating results. Once written down, inventories are
carried at this lower amount until sold or scrapped. If actual market
conditions are more favorable, the Company may have higher operating
income when
such products are sold. Sales to date of such products have not had a
significant impact on the Company’s operating income.
(g)
Investments
in
Non-Marketable Securities
Non-marketable
equity securities in which the Company does not have the ability to exercise
significant influence over the operating and financial policies of the
investee
are stated at cost. Dividends, if any, are recognized into earnings
when received.
An
impairment of an investment in non-marketable securities that is deemed
to be
other-than-temporary results in a reduction in its carrying amount to
its
estimated fair value. The resulting impairment loss is charged to
earnings at that time. To determine whether an impairment is
other-than-temporary, the Company primarily considers the financial condition
of
the investee, reasons for the impairment, the severity and duration of
the
impairment, changes in value subsequent to period end and forecasted
performance
of the investee.
(h)
Property,
Plant, and Equipment
Property,
plant, and
equipment consists primarily of land purchased in August 2005 as the
construction site of the Company’s new headquarters which was completed in
November 2006, and machinery and equipment used in the design and development
of
products, and is stated at cost. Depreciation on building and
machinery and equipment commences when the asset is ready for its intended
use
and is calculated on the straight-line method over the estimated useful
lives of
the assets which range as follows: building, 25 years, machinery and
equipment,
generally three to six years. Leasehold improvements are amortized on
a straight line basis over the shorter of the lease term or the estimated
useful
life of the asset. Software is amortized on a straight line basis
over estimated useful lives ranging from two to four years.
(i)
Intangible
Assets
The
Company’s
acquired technology is recorded at acquisition cost and amortized over
its
estimated useful life of five years on a straight-line basis.
(j)
Derivative
Financial Instruments
All
derivative financial instruments are recognized as either assets or liabilities
and are reported at fair value at each balance sheet date. As none of
the derivative financial instruments qualify for hedge accounting, changes
in
the fair value of derivative financial instruments are recognized in
earnings
and are included in other income (expense) in the accompanying consolidated
statements of income.
(k)
Impairment
of
Long-Lived Assets
The
Company’s long-lived assets, which consist of property, plant, and
equipment and intangible assets are reviewed for
See
accompanying notes to consolidated financial
statements. 53
impairment
whenever
events or changes in circumstances indicate that the carrying amount
of an asset
may not be recoverable. Recoverability of assets to be held and used
is assessed by a comparison of the carrying amount of an asset to its
estimated
undiscounted future cash flows expected to be generated. If the
carrying amount of an asset exceeds such estimated cash flows, an impairment
charge is recognized for the amount by which the carrying amount of the
asset
exceeds its estimated fair value. The Company generally determines fair
value
based on the estimated discounted future cash flows expected to be generated
by
the asset.
(l)
Revenue
Recognition
The
Company recognizes revenue from product sales when persuasive evidence
of an
arrangement exists, the product has been delivered, the price is fixed
and
determinable and collection is reasonably assured. The Company uses a
binding purchase order as evidence of an arrangement. The Company
considers delivery to occur upon shipment provided title and risk of
loss has
passed to the customer based on the shipping terms, which is generally
when the
product is shipped to the customer from the Company’s facilities or the
outsourced assembly and testing house. In some cases, title and risk
of loss does not pass to the customer when the product is received by
them. In these cases, the Company recognizes revenue at the time when
title and risk of loss is transferred, assuming all other revenue recognition
criteria have been satisfied. These cases include several inventory
locations where the Company manages inventory for its customers, some
of which
inventory is at customer facilities. In such cases, revenue is not
recognized when products are received at these locations; rather, revenue
is
recognized when customers take the inventory from the location for their
use.
The
Company records a reduction to revenue and accounts receivable by establishing
a
sales discount and return allowance for estimated sales discounts and
product
returns at the time revenue is recognized based primarily on historical
discount
and return rates. However, if sales discount and product returns for
a particular fiscal period exceed historical rates, the Company may determine
that additional sales discount and return allowances are required to
properly
reflect the Company’s estimated remaining exposure for sales discounts and
product returns.
Sales
taxes
collected from customers and remitted to governmental authorities are
accounted
for on a net basis and therefore are excluded from revenues in the consolidated
statements of income.
(m)
Product
Warranty
Under
the Company’s
standard terms and conditions of sale, products sold are subject to a
limited
product quality warranty. The standard limited warranty period is 60
days. The Company may receive warranty claims outside the scope of
the standard terms and conditions. The Company provides for the
estimated cost of product warranties at the time revenue is recognized
based
primarily on historical experience and any specifically identified quality
issues.
(n)
Research
and
Development and Advertising Costs
The
Company’s research and development and advertising expenditures are charged to
expense as incurred. Advertising expenses for the years ended
December 31, 2004, 2005 and 2006, were $78 thousand, $29 thousand and
$27
thousand, respectively.
The
Company recognizes government grants to fund research and development
expenditures as a reduction of research and development expense in the
accompanying consolidated statements of income based on the percentage
of actual
qualifying expenditures incurred to date to the most recent estimate
of total
expenditures which they are intended to compensate.
54
(o)
Employee
Retirement Plan
The
Company has established an employee noncontributory defined benefit
retirement
plan (the “Defined Benefit Plan”) covering full-time employees in the
ROC.
The
Company records annual amounts relating to its pension and postretirement
plans
based on calculations that incorporate various actuarial and other assumptions
including, discount rates, mortality, assumed rates of return, compensation
increases, and turnover rates. The Company reviews its assumptions on
an annual basis and makes modifications to the assumptions based on current
rates when it is appropriate to do so. The effect of modifications to
those assumptions is recorded in accumulated other comprehensive income
beginning from the end of 2006 and amortized to net periodic cost over future
periods using the corridor method. The Company believes that the
assumptions utilized in recording its obligations under its plans are reasonable
based on its experience and market conditions.
On
December 31, 2006, the Company adopted the recognition and disclosure provisions
of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans, or SFAS No. 158. SFAS No. 158
requires companies to recognize the funded status of defined benefit pension
and
other postretirement plans as a net asset or liability and to recognize changes
in that funded status in the year in which the changes occur through other
comprehensive income to the extent those changes are not included in the
net
periodic cost. SFAS No. 158 also eliminates the requirement for Additional
Minimum Pension Liability required under SFAS No. 87. This statement
does not change the existing criteria for measurement of periodic benefit
costs,
plan assets or benefit obligations.
The
funded status reported on the balance sheet as of December 31, 2006 under
SFAS
No. 158 was measured as the difference between the fair value of plan
assets and the benefit obligation on a plan-by-plan basis. The
incremental effect of the initial adoption of SFAS No. 158 at December 31,
2006
was a reduction of accumulated other comprehensive income of $331 thousand,
which was applied as follows:
|
Before
application of
SFAS No. 158
|
SFAS
No. 158
Adjustments
|
After
application
of
SFAS No. 158
|
||||||||||
|
Refundable
deposits and prepaid pension costs
|
$ |
811
|
(242 | ) |
569
|
|||||||
|
Deferred
income taxes-noncurrent
|
11,307
|
98
|
11,405
|
|||||||||
|
Total
assets
|
518,938
|
(144 | ) |
518,794
|
||||||||
|
Accrued
pension liabilities
|
-
|
192
|
192
|
|||||||||
|
Minority
interest
|
1,401
|
(5 | ) |
1,396
|
||||||||
|
Accumulated
other comprehensive income (loss), net of tax
|
56
|
(331 | ) | (275 | ) | |||||||
|
Total
stockholders’ equity
|
364,258
|
(331 | ) |
363,927
|
||||||||
|
Total
stockholders’ equity and liabilities
|
518,938
|
(144 | ) |
518,794
|
||||||||
The
recognition provisions of SFAS No. 158 had no effect on the statements of
income
for the periods presented. The adoption of SFAS No. 158 did not
impact the Company’s compliance with debt covenants or its cash
position.
The
Company has adopted a defined contribution plan covering full-time employees
in
the ROC (the “Defined Contribution Plan”) beginning July 1, 2005 pursuant to ROC
Labor Pension Act. Pension cost for a period is determined based on
the contribution called for in that period. Substantially all
participants in the Defined Benefit Plan have been provided the option of
continuing to participate in the Defined Benefit Plan, or to participate
in the
Defined Contribution Plan on a prospective basis from July 1,
2005. Accumulated benefits attributed to participants that elect to
change plans are not impacted by their election.
55
(p)
IIncome
Taxes
Income
taxes are
accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the carrying amounts of existing assets
and
liabilities in the financial statements and their respective tax bases, and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to
be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that
includes the enactment date. A valuation allowance is recorded for
deferred tax assets when it is more likely than not that some portion or
all of
the deferred tax assets will not be realized.
(q)
Foreign
Currency Translation
The
reporting currency of the Company is the United States dollar. The functional
currency for the Company’s majority operations is the United States
dollar. Accordingly, the assets and liabilities of subsidiaries whose
functional currency is other than the United States dollar are included in
the
consolidation by translating the assets and liabilities into the reporting
currency (the United States dollar) at the exchange rates applicable at the
end
of the reporting period. Equity accounts are translated at historical
rates. The statements of income and cash flows are translated at the
average exchange rates during the year. Translation gains or losses
are accumulated as a separate component of stockholders’ equity in accumulated
other comprehensive income (loss). Foreign currency denominated
monetary assets and liabilities are remeasured into functional currency at
end-of-period exchange rates. Non-monetary assets and liabilities, including
inventories, prepaid expenses and other current assets, property and equipment,
other assets and equity, are remeasured at historical exchange rates. Revenue
and expenses are remeasured at average exchange rates in effect during each
period. Gains or losses from foreign currency remeasurement are included
in
other income (loss) in the accompanying consolidated statements of
income.
(r)
Earnings
Per
Share
Basic
earnings per
share is computed using the weighted average number of ordinary shares
outstanding during the period. Diluted earnings per share is computed using
the
weighted average number of ordinary and diluted ordinary equivalent shares
outstanding during the period. Ordinary equivalent shares consist of
nonvested shares and unvested treasury stock issued to employees that are
contingently returnable until lapse of the requisite service period and ordinary
shares that are contingently issuable upon the vesting of unvested restricted
share units (RSUs) granted to employees and independent directors.
Basic
and diluted
earnings per ordinary share have been calculated as follows:
|
Year
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Net
income (in
thousands)
|
$ |
36,000
|
61,558
|
75,190
|
||||||||
|
Denominator
for basic earnings per share:
|
||||||||||||
|
Weighted
average number of ordinary shares outstanding (in
thousands)
|
169,320
|
176,105
|
192,475
|
|||||||||
|
Basic
earnings
per share
|
$ |
0.21
|
0.35
|
0.39
|
||||||||
Contingently
returnable nonvested shares and unvested treasury stock issued to employees
and
contingently issuable ordinary shares underlying the unvested RSUs granted
to
employees and independent directors are included in the calculation of diluted
earnings per share based on treasury stock method. In 2006,
the
unvested 590,401 RSUs which will vest during 2007 and 2008 were excluded
from the diluted earnings per share computation as their effect would be
anti-dilutive.
56
|
Year
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Net
income (in thousands)
|
$ |
36,000
|
61,558
|
75,190
|
||||||||
|
Denominator
for diluted earnings per share:
|
||||||||||||
|
Weighted
average number of ordinary shares outstanding (in
thousands)
|
169,320
|
176,105
|
192,475
|
|||||||||
|
Nonvested
ordinary shares and RSUs (in thousands)
|
3,978
|
4,554
|
2,615
|
|||||||||
|
173,298
|
180,659
|
195,090
|
||||||||||
|
Diluted
earnings per share
|
$ |
0.21
|
0.34
|
0.39
|
||||||||
(s)
Share-Based
Compensation
The
Company has
applied SFAS No.123 (revised 2004), Share-Based Payment, from its
incorporation in June 2001 for its share-based compensation plan. The
cost of
employee services received in exchange for share-based compensation is
measured
based on the grant-date fair value of the share-based instruments issued.
The
cost of employee services is equal to the grant-date fair value of shares
issued
to employees and is recognized in earnings over the service period. Compensation
cost also considers the number of awards management believes will eventually
vest. As a result, compensation cost is reduced by the estimated forfeitures.
The estimate is adjusted each period to reflect the current estimate
of
forfeitures, and finally, the actual number of awards that vest.
(t)
Sale
of Newly Issued
Subsidiary Shares
A
gain resulting from the issuance of shares by a subsidiary to a third-party
that
reduces the Company’s percentage ownership (“dilution gain”) is recognized as
additional paid in capital in the Company’s consolidated statements of
stockholders' equity. For the year ended December 31, 2004, the Company
recognized a dilution gain of $112 thousand resulting from the issuance
to third
parties of new shares (representing a 5.39 % interest) by Himax Display,
Inc.
(“Himax Display”, a consolidated subsidiary) for cash proceeds of $803
thousand. For the year ended December 31, 2005, the Company
recognized a dilution gain of $170 thousand and $52 thousand, respectively,
resulting from the issuance to third parties of new shares (representing
a 20.73
% interest) and the issuance to employees of nonvested shares (representing
a
6.60% interest) by Himax Analogic Inc. (a consolidated subsidiary, formerly
known as Amazion Electronics, Inc,) for cash proceeds of $866 thousand
and for
employees’ future service with a fair value of $392 thousand, respectively. For
the year ended December 31, 2006, the Company recognized a dilution gain
of $178
thousand, resulting from the issuance to third parties of new shares
(representing a 2.34 % interest) by Himax Display for cash proceeds of
$676
thousand.
(u)
Recently
Issued Accounting Pronouncements
In
September 2005,
the Emerging Issues Task Force (EITF) issued EITF Issue No. 04-13 Accounting
for Purchases and Sales of Inventory with the Same Counterparty (EITF
04-13). EITF 04-13 provides guidance as to when purchases and sales of
inventory
with the same counterparty should be accounted for as a single exchange
transaction. EITF 04-13 also provides guidance as to when a nonmonetary
exchange
of inventory should be accounted for at fair value. EITF 04-13 will be
applied
to new arrangements entered into, and modifications or renewals of existing
arrangements occurring after January 1, 2007. The application of EITF 04-13
is
not expected to have a significant impact on the Company's financial
statements.
In
September 2006,
the FASB issued FASB Statement No. 157, Fair Value Measurement, or SFAS
No. 157.
SFAS No. 157 defines fair value, establishes a framework for the measurement
of
fair value, and enhances disclosures about fair value measurements. The
Statement does not require any new fair value measures. The Statement is
effective for fair value measures already required or permitted by other
standards for fiscal years beginning after November 15, 2007 (January
1,
57
2008
for the
Company) and is to be applied prospectively. Management is currently
evaluating
the impact and disclosures of this standard, but does not expect SFAS
No. 157
will have a material impact on the Company’s consolidated results of operations
or financial condition.
In
September 2006, the FASB issued FASB Staff Position No. AUG AIR-1,
Accounting for Planned Major Maintenance Activities. This
guidance prohibits the use of the accrue-in-advance method of accounting
for
planned major activities because an obligation has not occurred and therefore
a
liability should not be recognized. The provisions of this guidance will
be
effective for reporting periods beginning after December 15, 2006. The
provisions of the Staff Position are consistent with the Company’s current
policies and management does not anticipate that the adoption of the
provisions
of this guidance will have a material impact on its results of operations
and
financial position.
In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement 109, or
FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a threshold
of
more-likely-than-not for recognition of tax benefits of uncertain tax
positions
taken or expected to be taken in a tax return. FIN 48 also provides
related guidance on measurement, derecognition, classification, interest
and
penalties, and disclosure. The provisions of FIN 48 will be effective
for the Company on January 1, 2007, with any cumulative effect of the
change in
accounting principle recorded as an adjustment to opening retained earnings.
The
initial adoption of the provisions of FIN 48 will not have any impact
(unaudited) on the Company's results of operations and financial
position.
In
September 2006, the FASB issued SFAS Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans-an
Amendment of FASB Statements No. 87, 88, 106, and 132 (R), or SFAS No.
158. As described in Note 2 (o), effective December 31, 2006, the
Company adopted the recognition and disclosure provisions of SFAS No.
158. SFAS
No. 158 also requires plan assets and benefit obligations be measured
as of the
date of its fiscal year-end statement of financial position with limited
exceptions. The measurement provisions of SFAS No. 158 are effective
for fiscal
years ending after December 15, 2008, and will not be applied retrospectively.
The measurement provisions of SFAS No.158 are consistent with the Company's
currency policies and management does not anticipate that the adoption
of the
measurement provisions of SFAS No. 158 will have an impact on its consolidated
financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No.
108”), Consideration the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, or SAB No.
108. SAB No. 108 The intent of SAB No. 108 is to reduce diversity in
practice
for the method companies use to quantify financial statement misstatements,
including the effect of prior year uncorrected errors. SAB No. 108 established
an approach that requires quantification of financial statement errors
using
both an income statement and a cumulative balance sheet approach. SAB
No. 108 is
effective for fiscal years ending after November 15, 2006. The adoption
of SAB
No. 108 for the year ended December 31, 2006, did not have any impact
on the
Company’s consolidated financial statements.
58
Note
3.
Marketable
Securities
Following
is a
summary of marketable securities as of December 31, 2005 and 2006:
|
December
31, 2005
|
||||||||||||||||
|
Amortized
|
Gross
Unrealized
|
Gross
Unrealized
|
Market
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Time
deposit
with original maturities more than three months
|
$ |
152
|
-
|
-
|
152
|
|||||||||||
|
Open-ended
bond fund
|
3,804
|
33
|
-
|
3,837
|
||||||||||||
|
Total
|
$ |
3,956
|
33
|
-
|
3,989
|
|||||||||||
|
December
31, 2006
|
||||||||||||||||
|
Amortized
|
Gross
Unrealized
|
Gross
Unrealized
|
Market
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Time
deposit
with original maturities more than three months
|
$ |
522
|
-
|
-
|
522
|
|||||||||||
|
Open-ended
bond fund
|
8,277
|
29
|
-
|
8,306
|
||||||||||||
|
Total
|
$ |
8,799
|
29
|
-
|
8,828
|
|||||||||||
The
Company’s
portfolio of available for sale marketable securities by contractual maturity
as
of December 31, 2005 and 2006 is due in one year or less.
Information
on sales
of available for sale marketable securities for the years ended December
31,
2004, 2005 and 2006 is summarized below.
|
Period
|
Proceeds
from
sales
|
Gross
realized
gains
|
Gross
realized
losses
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Year
ended
December 31, 2004
|
$ |
66,312
|
401
|
-
|
||||||||
|
Year
ended
December 31, 2005
|
$ |
42,028
|
105
|
-
|
||||||||
|
Year
ended
December 31, 2006
|
$ |
27,128
|
60
|
-
|
||||||||
At
December 31, 2005
and 2006, the Company had $453 thousand and $108 thousand, respectively,
of
restricted marketable securities, consisting of time deposits with an original
maturity of more than three months, which had been pledged as collateral
for
long-term debt or custom duty.
Note
4.
Allowance
for Doubtful Accounts, Sales Returns and Discounts
The
activity in the
allowance for doubtful accounts, sales returns and discounts for the years
ended
December 31, 2004, 2005 and 2006 follows:
|
Period
|
Balance
at beginning
of
year
|
Addition
|
Amounts
utilized
|
Balance
at
end
of year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
For
the year
ended December 31, 2004
|
$ |
28
|
1,022
|
(810 | ) |
240
|
||||||||||
|
For
the year
ended December 31, 2005
|
$ |
240
|
398
|
(457 | ) |
181
|
||||||||||
|
For
the year
ended December 31, 2006
|
$ |
181
|
2,843
|
(2,156 | ) |
868
|
||||||||||
59
Note
5.
Inventories
As
of December 31,
2005 and 2006, inventories consisted of the following:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Merchandise
|
$ |
38
|
6
|
|||||
|
Finished
goods
|
32,192
|
44,194
|
||||||
|
Work
in
process
|
51,769
|
40,039
|
||||||
|
Raw
materials
|
20,877
|
17,048
|
||||||
|
Supplies
|
128
|
54
|
||||||
| $ |
105,004
|
101,341
|
||||||
Note
6.
Prepaid
Expenses and Other Current Assets
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Refundable
business tax
|
$ |
7,953
|
5,994
|
|||||
|
Prepaid
rental, software maintenance fee and others
|
2,910
|
4,330
|
||||||
|
Fair
value of
foreign currency forward contract
|
250
|
-
|
||||||
| $ |
11,113
|
10,324
|
||||||
Note
7.
Intangible
Assets
The
amount assigned
to intangible assets acquired in the acquisition of Integrated Microdisplays
Limited on October 3, 2006 was $358 thousand which includes two registered
patents and were amortized over a 5-year useful life.
The
gross carrying
amount of the Company’s acquired technologies was $140 thousand and $497
thousand at December 31, 2005 and 2006, respectively. The related
accumulated amortization was $59 thousand and $104 thousand at December 31,
2005
and 2006, respectively.
Amortization
expense
for the years ended December 31, 2004, 2005 and 2006, was $28 thousand, $28
thousand and $45 thousand, respectively. Future amortization expense for
the net
carrying amount of these intangible assets at December 31, 2006 is estimated
also to be $99 thousand in 2007, $97 thousand in 2008, $72 thousand in 2009
and
2010, and $53 thousand in 2011.
60
Note
8.
Property,
Plant, and Equipment
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Land
|
$ |
10,160
|
10,154
|
|||||
|
Building
|
-
|
12,967
|
||||||
|
Machinery
|
6,184
|
6,744
|
||||||
|
Research
and
development equipment
|
5,464
|
8,611
|
||||||
|
Software
|
3,590
|
5,149
|
||||||
|
Office
furniture and equipment
|
1,534
|
2,478
|
||||||
|
Others
|
3,474
|
4,150
|
||||||
|
30,406
|
50,253
|
|||||||
|
Accumulated
depreciation and amortization
|
(7,566 | ) | (12,742 | ) | ||||
|
Prepayment
for
purchases of equipment and software
|
798
|
1,384
|
||||||
|
Construction
of buildings in progress
|
788
|
-
|
||||||
| $ |
24,426
|
38,895
|
||||||
Depreciation
and
amortization of these assets for 2004, 2005 and 2006, was $2,733 thousand,
$3,585 thousand and $5,176 thousand, respectively.
Note
9.
Investments
in Non-marketable Securities
Following
is a
summary of such investments as of December 31, 2005 and 2006:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
TopSun
Optronics, Inc.
|
$ |
-
|
817
|
|||||
|
Jemitek
Electronic Corp.
|
313
|
-
|
||||||
|
LightMaster
Systems, Inc.
|
1,500
|
-
|
||||||
| $ |
1,813
|
817
|
||||||
In
2005, the Company
considered its investment in equity of Integrated Microdisplays Limited to
be
other than temporarily impaired due to a significant operating
deficit. The carrying amount of $129 thousand was fully written off
with an impairment loss recognized in other non-operating loss in the
accompanying consolidated statements of income.
In
2006, the Company
considered its investment in equity of LightMaster Systems, Inc. to be other
than temporarily impaired due to the bankruptcy case concerning LightMaster
Systems, Inc. filed in July 2006. The carrying amount of $1,500
thousand was fully written off with an impairment loss recognized in other
non-operating loss in the accompanying consolidated statements of
income.
As
of December 31,
2006, it was not practicable for the Company to estimate the fair value of
its
investment in equity of TopSun Optronics, Inc. However, there are no identified
events or changes in circumstance that may have significant adverse effects
on
the recoverability of the carrying value of the investment.
61
Note
10.
Other Accrued Expenses and Other Current Liabilities
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Accrued
payroll and related expenses
|
$ |
2,855
|
3,441
|
|||||
|
Accrued
commission
|
2,534
|
1,836
|
||||||
|
Accrued
warranty costs
|
545
|
630
|
||||||
|
Accrued
mask
and mold fees
|
3,039
|
3,282
|
||||||
|
Payable
for
purchases of equipment
|
2,471
|
4,317
|
||||||
|
Accrued
insurance, welfare expenses, etc.
|
2,551
|
7,700
|
||||||
| $ |
13,995
|
21,206
|
||||||
The
movement in
accrued warranty costs for the years ended December 31, 2004, 2005 and 2006,
is
as follows:
|
Period
|
Balance
at
beginning
of
year
|
Addition
|
Amounts
utilized
|
Balance
at
end
of year
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Year
ended
December 31, 2004
|
$ |
-
|
960
|
(453 | ) |
507
|
||||||||||
|
Year
ended
December 31, 2005
|
$ |
507
|
1,415
|
(1,377 | ) |
545
|
||||||||||
|
Year
ended
December 31, 2006
|
$ |
545
|
2,101
|
(2,016 | ) |
630
|
||||||||||
Note
11.
Short-term
Debt
Short-term
debt
borrowed in 2005 are bank loans used to finance the payment of a special
cash
dividend that the Company distributed to its shareholders of record as of
November 2, 2005 and to support the working capital requirements for general
corporate purposes.
As
of December 31, 2005, short-term debt consisted of a $13,600 thousand loan,
denominated in US dollars, and which has a maturity date that had been extended
to May 2, 2006. The remaining balance of short-term debt of
approximately $13,674 thousand, is comprised of three separate loans in the
amounts of NT$250,000 thousand ($7,596 thousand), NT$40,000 thousand ($1,216
thousand) and NT$160,000 thousand ($4,862 thousand), all of which are
denominated in New Taiwan dollars and which have maturity dates that have
been
extended to March 26, 2006, March 26, 2006 and March 27, 2006,
respectively. All short term debts had been fully paid off during
2006.
As
of December 31,
2005 and 2006, unused credit lines amounted to $26,727 thousand and $42,557
thousand, respectively.
Interest
rates per
annum on short-term debt outstanding as of December 31, 2005 ranged from
1.70%
to 4.61%. Cash equivalents in the form of time deposits of $13,600
thousand are held as collateral for certain short-term debt at December 31,
2005.
Note
12.
Government Grant and Long-term Debt
The
Company entered
into several contracts with Industrial Development Bureau of Ministry of
Economic Affairs (IDB of MOEA), Department of Industrial Technology of Ministry
of Economic Affairs (DOIT of MOEA) and the Administrative Bureau of
Science-Based Industrial Park (SBIP) during 2003, 2004 and 2005 for the
development of certain new leading products or technologies. Details of these
contracts are summarized below:
62
|
Authority
|
Total Grant
|
Execution
Period
|
Product
Description
|
|||
|
(in
thousands)
|
||||||
|
IDB
of
MOEA
|
|
NT$22,700
(US$654)
|
September
2003
to February 2005
|
Mobile
phone
TFT driver IC
|
||
|
SBIP
|
3,800
(US$112)
|
|
October
2004
to July
2005
|
Application
of
LCOS
|
||
|
DOIT
of
MOEA
|
19,500
(US$610)
|
December
2004
to November 2005
|
Multimedia
high definition TV SOC
|
|||
|
DOIT
of
MOEA
|
7,000
(US$214)
|
September
2005
to December 2006
|
Mobile
phone
TFT single chip SOC
|
|||
Government
grants
recognized by the Company as a reduction of research and development expense
in
the accompanying consolidated statements of income in 2004, 2005 and 2006
were
$556 thousand, $381 thousand and $466 thousand, respectively.
In
2002, IDB of MOEA
provided an interest free loan of $355 thousand to the Company. The
loan is repaid in eight equal installments starting from July1, 2004 and
had
been fully paid off during 2006. The Company is required to pay a
return fee equal to 2% of the sales of certain developed products with a
ceiling
of 30% of the interest free loan within three years commencing from the sales
of
the project product. In 2004, a return fee of $0.45 thousand was
accrued and recognized as a reduction of sales in the accompanying consolidated
statements of income. No return fee occurred in 2005 and 2006.
As
of December 31,
2005, time deposits pledged to bank for repayment guarantee of the
above-mentioned interest free loan amounted to $361 thousand. The
restricted time deposits have been released during 2006.
Note
13.
Retirement Plan
The
Company has
established the Defined Benefit Plan covering full-time employees in the
ROC. In accordance with the Defined Benefit Plan, employees are
eligible for retirement or are required to retire after meeting certain age
or
service requirements. Retirement benefits are based on years of
service and the average salary for the six-month period before the employee’s
retirement. Each employee earns two months of salary for each of the
first fifteen years of service, and one month of salary for each year of
service
thereafter. The maximum retirement benefit is 45 months of
salary. Retirement benefits are paid to eligible participants on a
lump-sum basis upon retirement.
Defined
Benefit Plan
assets consist entirely of a Pension Fund (the “Fund”) denominated solely in
cash, as mandated by ROC Labor Standard Law. The Company contributes
an amount equal to 2% of wages and salaries paid every month to the Fund
(required by law). The Fund is administered by a pension fund
monitoring committee (the “Committee”) and is deposited in the Committee’s name
in the Central Trust of China.
As
discussed in note
2(o), effective December 31, 2006, the Company adopted the recognition and
disclosure provisions of SFAS No. 158. SFAS No. 158 requires
companies to recognize the funded status of defined benefit pension and other
postretirement plans as a net asset or liability on its balance
sheet. Actuarial gains and losses are generally amortized subject to
the corridor, over the average remaining service life of the Company’s active
employee.
Beginning
July 1,
2005, pursuant to the newly effective ROC Labor Pension Act, the Company
is
required to make a monthly contribution for full-time employees in the ROC
that
elected to participate in the Defined Contribution Plan at a rate no less
than
6% of the employee’s monthly wages to the employees’ individual pension fund
accounts at the ROC Bureau of Labor
63
Insurance.
Expense
recognized in 2005 and 2006, based on the contribution called for was $356
thousand and $883 thousand, respectively.
Substantially
all
participants in the Defined Benefits Plan had elected to participate in the
Defined Contribution Plan. The transfer of participants to the
Defined Contribution Plan did not have a material effect on the Company’s
financial position or results of operations. Participants’
accumulated benefits under the Defined Benefit Plan are not impacted by their
election to change the plans and their seniority remains regulated by ROC
Labor
Standard Law, such as the retirement criteria and the amount
payable. The Company is required to make contribution for the Defined
Benefit Plan until it is fully funded. Pursuant to relevant
regulatory requirements, the Company expects to make a cash contribution
of $310
thousand to its pension fund maintained with the Central Trust of China and
$1,048 thousand to the employees’ individual pension fund accounts at the ROC
Bureau of Labor Insurance in 2007.
The
Company uses a
measurement date of December 31, for the Defined Benefit Plan. The
changes in projected benefit obligation, plan assets and details of the funded
status of the Plan are as follows:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Change
in
projected benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ |
414
|
622
|
|||||
|
Service
cost
|
150
|
9
|
||||||
|
Interest
cost
|
13
|
22
|
||||||
|
Actuarial
loss
|
45
|
232
|
||||||
|
Benefit
obligation at end of year
|
622
|
885
|
||||||
|
Change
in plan
assets:
|
||||||||
|
Fair
value at
beginning of year
|
215
|
414
|
||||||
|
Actual
return
on plan assets
|
4
|
12
|
||||||
|
Employer
contribution
|
195
|
286
|
||||||
|
Fair
value at
end of year
|
414
|
712
|
||||||
|
Funded
status
|
$ | (208 | ) | (173 | ) | |||
|
Unrecognized
net actuarial loss
|
$ |
206
|
-
|
|||||
|
Amounts
recognized in the balance sheet consist of:
|
||||||||
|
Prepaid
pension costs
|
$ |
12
|
19
|
|||||
|
Accrued
pension liabilities
|
(14 | ) | (192 | ) | ||||
|
Net
amount recognized
|
$ | (2 | ) | (173 | ) | |||
Amounts
recognized
in accumulated other comprehensive income was net actuarial loss of $331
thousand as of December 31, 2006.
The
accumulated
benefit obligation for the Defined Benefit Plan was $288 thousand and $379
thousand at December 31, 2005 and 2006, respectively. As of December
31, 2005 and 2006, no employee was eligible for retirement or was required
to
retire.
64
For
the years ended
December 31, 2004, 2005 and 2006, the net periodic pension cost consisted
of the
following:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
|
2005
|
2006
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Service
cost
|
$ |
170
|
150
|
9
|
||||||||
|
Interest
cost
|
5
|
13
|
22
|
|||||||||
|
Expected
return on plan assets
|
(3 | ) | (6 | ) | (18 | ) | ||||||
|
Net
amortization and deferral
|
6
|
6
|
6
|
|||||||||
|
Net
periodic
pension cost
|
$ |
178
|
163
|
19
|
||||||||
The
net actuarial
loss for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost in
2007 is
$34 thousand.
At
December 31, 2005
and 2006, the weighted-average assumptions used in computing the benefit
obligation are as follows:
|
December
31,
|
||||||||||||
|
2005
|
2006
|
|||||||||||
|
Himax
Taiwan
|
Himax
Display
& Himax Analogic
|
Himax
Taiwan,
Himax
Display
& Himax Analogic
|
||||||||||
|
Discount
rate
|
3.50 | % | 3.50 | % | 2.75 | % | ||||||
|
Rate
of
increase in compensation levels
|
4.00 | % | 3.00 | % | 4.00 | % | ||||||
For
the years ended
December 31, 2004, 2005 and 2006, the weighted average assumptions used in
computing net periodic benefit cost are as follows:
|
Year
Ended December
31,
|
||||||||||||||||||||
|
2004
|
2005
|
2006
|
||||||||||||||||||
|
Himax
Taiwan
|
Himax
Display
& Himax Analogic
|
Himax
Taiwan
|
Himax
Display
& Himax Analogic
|
Himax
Taiwan,
Himax
Display
& Himax Analogic
|
||||||||||||||||
|
Discount
rate
|
2.50 | % | 3.00 | % | 3.50 | % | 3.50 | % | 2.75 | % | ||||||||||
|
Rate
of
increase in compensation levels
|
4.00 | % | 1.00 | % | 4.00 | % | 3.00 | % | 4.00 | % | ||||||||||
|
Expected
long-term rate of return on pension assets
|
2.50 | % | 3.00 | % | 3.50 | % | 3.50 | % | 2.75 | % | ||||||||||
The
Company
determines the expected long-term rate of return on plan assets based on
the
yields of twenty year ROC central government bonds and the historical long-term
rate of return on the above mentioned Fund mandated by the ROC Labor Standard
Law.
65
Benefits
payments to
be paid during the next ten years are estimated as follows:
|
Amount
|
||
|
(in
thousands)
|
||
|
2007
|
$
|
-
|
|
2008
|
-
|
|
|
2009
|
-
|
|
|
2010
|
-
|
|
|
2011
|
-
|
|
|
2012
~
2016
|
114
|
Note
14.
Share-Based Compensation
The
amount of
share-based compensation expenses included in applicable costs of sales and
expense categories is summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of
revenues
|
$ |
291
|
188
|
275
|
||||||||
|
Research
and
development
|
4,288
|
6,336
|
11,806
|
|||||||||
|
General
and
administrative
|
721
|
848
|
1,444
|
|||||||||
|
Sales
and
marketing
|
537
|
1,241
|
1,625
|
|||||||||
| $ |
5,837
|
8,613
|
15,150
|
|||||||||
|
(a)
|
Employee
Annual Bonus Plan
|
In
June 2005, Himax
Taiwan discontinued the employee stock bonus program with effect from December
31, 2004. Due to a history of paying bonus based on annual operating results,
the Company’s employees have developed an expectation of receiving a bonus of
some form. In order to meet such expectation and to retain and
motivate employees, management communicated to all employees that they would
receive a competitive bonus for services rendered beginning in 2004 and up
to
the effectiveness of a long-term incentive plan which was expected to be
adopted
after the completion of the share exchange referred to in Note 1 and approval
of
the Company’s shareholders.
Based
on a
compensation package analysis with the Company’s primary domestic competitors,
an annual bonus on top of the cash compensation was accrued. The
revised bonus plan allows the bonus to be paid in cash or shares. If
a cash payment is not made, the shares given will have the same value as
the
cash award. Employee compensation expense of $4,141 thousand was accrued
in 2004
relating to such bonus plan.
In
order to settle
the above mentioned accrued bonus payable, on December 27, 2005, pursuant
to the
authorization of the Company’s shareholders and the delegation of the Company’s
board of directors, the Company’s compensation committee approved a grant of
990,220 RSUs to employees for their service provided in 2004 and the ten
months
ended October 31, 2005. All RSUs granted to employees as a bonus
vested immediately on the grant date.
The
amount of
compensation expense from the annual bonus plan was determined based on the
estimated fair value of the ordinary shares underlying the RSUs granted on
the
date of grant, which was $8.62 per share.
66
The
allocation of
compensation expenses from the annual bonus plan is summarized as
follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of
revenues
|
$ |
220
|
98
|
-
|
||||||||
|
Research
and
development
|
3,045
|
3,215
|
-
|
|||||||||
|
General
and
administrative
|
540
|
454
|
-
|
|||||||||
|
Sales
and
marketing
|
336
|
628
|
-
|
|||||||||
| $ |
4,141
|
4,395
|
-
|
|||||||||
|
(b)
|
Long-term
Incentive Plan
|
On
October 25, 2005,
the Company’s shareholders approved a long-term incentive plan. The
plan permits the grants of options or RSUs to the Company’s employees, directors
and service providers where each unit of RSU represents one ordinary share
of
the Company.
On
December 27,
2005, the Company’s compensation committee made grants of 1,297,564 RSUs and
20,000 RSUs to its employees and independent directors,
respectively. The vesting schedule for the RSUs granted to employees
is as follows: 25% of the RSU grant vested immediately on the grant date,
and a
subsequent 25% will vest on each of September 30, 2006, 2007 and 2008, subject
to certain forfeiture events. The vesting schedule for the RSUs
granted to independent directors is as follows: 25% of the RSU grant vested
immediately on the grant date, and a subsequent 25% will vest on each of
June
30, 2006, 2007 and 2008, subject to certain forfeiture events.
On
September 29,
2006, the Company’s compensation committee made grants of 3,798,808 RSUs to its
employees. The vesting schedule for the RSUs is as follows: 47.29% of
the RSUs grant vested immediately on the grant date and a
subsequent 17.57% will vest on each of September 30, 2007, 2008 and
2009, subject to certain forfeiture events.
The
amount of
compensation expense from the long-term incentive plan was determined based
on
the estimated fair value and the market price of the ordinary shares underlying
the RSUs granted on the date of grant, which was $8.62 per share and $5.71
per
share on December 27, 2005 and September 29, 2006, respectively.
Management
is
primarily responsible for estimating the fair value of the Company’s ordinary
shares underlying the RSUs granted on December 30, 2005. When
estimating fair value for such share prior to the Company’s IPO, management
considers a number of factors, including contemporaneous valuations from
an
independent third-party appraiser. The share valuation methodologies
used include the discounted cash flow approach and the market value approach
where a different weight to each of the approaches is assigned to estimate
the
value of the Company when the RSUs were granted. The discounted cash
flow approach involves applying appropriate discount rates to estimated cash
flows that are based on earnings forecasts. The market value approach
incorporates certain assumptions including the market performance of comparable
companies as well as the Company’s financial results and business
plan. These assumptions include: no material changes in the existing
political, legal, fiscal and economic conditions in Taiwan; the Company’s
ability to retain competent management, key personnel and technical staff
to
support its ongoing operations; and no material deviation in industry trends
and
market conditions from economic forecasts.
67
RSUs
activity under
the long-term incentive plan during the periods indicated is as
follows:
|
Number
of
Underlying Shares for RSUs
|
Weighted
Average Grant Date Fair Value
|
|||||||
|
Balance
at
January 1, 2005
|
-
|
$ |
-
|
|||||
|
Granted
|
1,317,564
|
8.62
|
||||||
|
Vested
|
(329,395 | ) |
8.62
|
|||||
|
Balance
at
December 31, 2005
|
988,169
|
8.62
|
||||||
|
Granted
|
3,798,808
|
5.71
|
||||||
|
Vested
|
(2,106,669 | ) |
6.14
|
|||||
|
Forfeited
|
(172,165 | ) |
7.19
|
|||||
|
Balance
at
December 31, 2006
|
2,508,143
|
6.39
|
||||||
As
of December 31,
2006, the total compensation cost related to the unvested RSUs not yet
recognized was $13,745 thousand. The weighted-average period over
which it is expected to be recognized is 2.25 years.
The
allocation of
compensation expenses from the RSUs granted to employees and independent
directors under the long-term incentive plan is summarized as
follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of
revenues
|
$ |
-
|
62
|
264
|
||||||||
|
Research
and
development
|
-
|
2,080
|
11,263
|
|||||||||
|
General
and
administrative
|
-
|
262
|
1,392
|
|||||||||
|
Sales
and
marketing
|
-
|
436
|
1,554
|
|||||||||
| $ |
-
|
2,840
|
14,473
|
|||||||||
|
(c)
|
Nonvested
Shares Issued to Employees
|
In
June 2001,
November 2001 and January 2002, Himax Taiwan granted nonvested shares of
common
stock to certain employees for their future service. The shares will
vest five years after the grant date. If employees leave Himax Taiwan
before completing the five year service period, they must sell these shares
back
to Himax Taiwan at NT$1.00 (US$0.03) per share.
Because
the shares
had not vested, the capital increase recorded when the shares were issued
was
fully offset by an equal amount of deferred compensation expense. Compensation
expense is recognized on a straight-line basis over the five-year service
period
with a corresponding reduction of deferred compensation expense, resulting
in a
net increase in equity. The Company recognized compensation expenses
of $130 thousand, $92 thousand and $70 thousand in 2004, 2005 and 2006,
respectively. Such compensation expense was recorded as research and
development expenses in the accompanying consolidated statements of income
since
the employees who received such nonvested shares were assigned to the research
and development department. The fair value of shares on grant date
was estimated based on the then most recent price of new shares issued to
unrelated third parties, which was NT$4.02 (US$0.116) per share.
68
Nonvested
share
activity during the periods indicated is as follows:
|
Number
of
Shares
|
Weighted
Average Grant Date Fair Value
|
|||||||
|
Balance
at
January 1, 2004
|
3,680,864
|
$ |
0.116
|
|||||
|
Forfeited
|
(484,979 | ) |
0.116
|
|||||
|
Balance
at
December 31, 2004
|
3,195,885
|
0.116
|
||||||
|
Forfeited
|
(2,487 | ) |
0.116
|
|||||
|
Balance
at
December 31, 2005
|
3,193,398
|
0.116
|
||||||
|
Vested
|
(3,193,398 | ) |
0.116
|
|||||
|
Balance
at
December 31, 2006
|
-
|
-
|
||||||
The
forfeiture of
nonvested shares issued to employees is based on the original number of shares
granted, not including the shares issued pursuant to subsequent stock splits
or
dividends.
As
of December 31,
2006, the total compensation cost related to the actual number of nonvested
shares that vest has been fully recognized.
In
September 2005,
Himax Analogic Inc. (a consolidated subsidiary) granted nonvested shares
of its
common stock to certain employees for their future service. The
shares will vest four years after the grant date. If employees leave
Himax Analogic Inc. before completing the four year service period, they
must
sell these shares back to Himax Analogic Inc. at NT$1.00 (US$0.03) per share.
The Company recognized compensation expenses of $33 thousand and $59 thousand
in
2005 and 2006, respectively. Such compensation expense was recorded
as research and development expenses in the accompanying consolidated statements
of income with a corresponding increase to minority interest in the accompanying
consolidated balance sheets. The fair value of shares on grant date
was estimated based on the then most recent price of new shares issued to
unrelated third parties, which was NT$10 (US$0.319) per share.
Nonvested
share
activity of this award during the period indicated is as follows:
|
Number
of
Shares
|
Weighted
Average Grant Date Fair Value
|
|||||||
|
Balance
at
January 1, 2005
|
-
|
$ |
-
|
|||||
|
Granted
|
1,250,000
|
0.319
|
||||||
|
Forfeited
|
(445,000 | ) |
0.319
|
|||||
|
Balance
at
December 31, 2005
|
805,000
|
0.319
|
||||||
|
Forfeited
|
(36,000 | ) |
0.319
|
|||||
|
Balance
at
December 31, 2006
|
769,000
|
0.319
|
||||||
As
of December 31,
2006, the total compensation cost related to this award not yet recognized
was
$182 thousand. The weighted-average period over which it is expected
to be recognized is 2.54years.
|
(d)
|
Treasury
Stock
Issued to Employees
|
In
2002 and 2003,
treasury shares were issued to employees with a three year vesting
period. The excess of the fair value of these common shares over any
amount that an employee paid for treasury stock is recorded as deferred
compensation
69
expense
which is
reflected as an offset to equity upon issuance of the treasury
shares. Deferred compensation expense is amortized to compensation
expense on a straight-line basis over the three-year service period with
a
corresponding increase to equity.
Management
is
primarily responsible for estimating the fair value of its
share. When estimating fair value, management considered a number of
factors, including retrospective valuations from an independent third-party
valuer. The estimated grant date fair value per share in 2002 and
2003 range from NT$15.32 (US$0.459) to NT$19.93 (US$0.577) and NT$20.17
(US$0.583) to NT$52.10 (US$1.538), respectively.
Treasury
stock
activity during the periods indicated is as follows:
|
Number
of
Shares
|
Weighted Average
of Excess of Grant Date Fair Value over
Employee Payment
|
|||||||
|
Balance
at
January 1, 2004
|
8,474,948
|
$ |
0.607
|
|||||
|
Forfeited
|
(1,289,280 | ) |
0.662
|
|||||
|
Balance
at
December 31, 2004
|
7,185,668
|
0.597
|
||||||
|
Vested
|
(2,706,593 | ) |
0.356
|
|||||
|
Balance
at
December 31, 2005
|
4,479,075
|
0.743
|
||||||
|
Vested
|
(4,479,075 | ) |
0.743
|
|||||
|
Balance
at
December 31, 2006
|
-
|
-
|
||||||
The
forfeiture of
treasury stock issued to employees is based on the original number of shares
granted, not including the shares issued pursuant to subsequent stock splits
or
dividends.
As
of December 31,
2006, the total compensation cost related to the actual number of treasury
stocks that vest has been fully recognized.
The
allocation of
compensation expenses from the treasury stock issued to employees is summarized
as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of
revenues
|
$ |
71
|
28
|
11
|
||||||||
|
Research
and
development
|
1,113
|
916
|
414
|
|||||||||
|
General
and
administrative
|
181
|
132
|
52
|
|||||||||
|
Sales
and
marketing
|
201
|
177
|
71
|
|||||||||
| $ |
1,566
|
1,253
|
548
|
|||||||||
Note
15.
Stockholders'
Equity
|
(a)
|
Share
capital
|
On
October 14, 2005,
the shareholders of Himax Taiwan exchanged an aggregated of 180,769,264 common
shares of Himax Taiwan for an aggregate of 180,769,264 ordinary shares of
Himax
Technologies, Inc. Accordingly, as of October 14, 2005, Himax
Technologies, Inc. has an authorized share capital of 500,000,000 ordinary
shares with par value of US$0.0001 per share, and 180,769,265 ordinary shares
issued and outstanding. There was no change in the amount of total
stockholders’ equity as a result of this transaction.
70
In
accordance with a
board of director’s resolution on November 2, 2006, the Company authorized a
share buyback program. The program allows the Company to repurchase
up to $50 million of the Company’s ADSs for retirement. The Company repurchased
7,885,835 ADSs in 2006.
|
(b)
|
Earnings
distribution
|
As
a holding
company, and prior to the proposed overseas listing, the major asset of the
Company is the 100% ownership interest in Himax Taiwan. Dividends
received from the Company’s subsidiaries in Taiwan, if any, will be subjected to
withholding tax under ROC law. The ability of the Company’s
subsidiaries to pay dividends, repay intercompany loans from the Company
or make
other distributions to the Company may be restricted by the availability
of
funds, the terms of various credit arrangements entered into by the Company’s
subsidiaries, as well as statutory and other legal restrictions. The
Company’s subsidiaries in Taiwan are generally not permitted to distribute
dividends or to make any other distributions to shareholders for any year
in
which it did not have either earnings or retained earnings (excluding
reserve). In addition, before distributing a dividend to shareholders
following the end of a fiscal year, a Taiwan company must recover any past
losses, pay all outstanding taxes and set aside 10% of its annual net income
(less prior years’ losses and outstanding taxes) as a legal reserve until the
accumulated legal reserve equals its paid-in capital, and may set aside a
special reserve.
The
legal and
special reserve provided by Himax Taiwan as of December 31, 2005 and 2006
amounting to $6,680 thousand and $14,178 thousand, respectively.
Note
16.
Income
Taxes
Substantially
all of
the Company’s pre-tax income is derived from the operations in the ROC and
substantially all of the Company’s income tax expense (benefit) is incurred in
the ROC.
An
additional 10%
corporate income tax will be assessed on undistributed income for the
consolidated entities in the ROC, but only to the extent such income is not
distributed before the end of the following year. The 10% surtax is
recorded in the period the income is earned, and the reduction in the tax
liability is recognized in the period the distribution to shareholders is
finalized. Prior to 2006, the tax effects of temporary differences
were initially measured by using the undistributed tax rate of
32.5%. Commencing from 2006, due to the enacted changes in ROC Income
Tax Acts in May 2006 that revised the tax base of the undistributed income
surtax from “assessed taxable income, net of current tax” to “net income under
ROC generally accepted accounting principles (ROC GAAP) ”, the tax effects of
temporary differences between ROC GAAP and tax base are initially measured
at
the distributed tax rate of 25% and the tax effects of temporary differences
between US GAAP and ROC GAAP are initially measured at the revised undistributed
tax rate of 31.8%.
In
accordance with the ROC Statute for Upgrading Industries, the Company’s capital
increase in 2003 related to the manufacturing of newly designed TFT-LCD driver
was approved by the government authorities as a newly emerging, important
and
strategic industry. The incremental income derived from selling the
above new product is tax exempt for a period of five years. The tax
exemption period of the Company‘s effective tax incentive as of December 31,
2006 are as follows:
|
Date
of
capital increase
|
Tax
exemption
period
|
|||
|
September
1,
2003
|
April
1, 2004
~ March 31, 2009
|
|||
|
October
29,
2003
|
January
1,
2006 ~December 31, 2010
|
The
aggregate basic
and diluted earnings per share effect of such income tax exemption for the
years
ended December 31, 2004, 2005 and 2006, is a $0.04, $0.05 and $0.08 increase
to
earnings per share, respectively.
71
The
components of
income tax expense (benefit) are summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
income
tax expense
|
$ |
3,215
|
12,294
|
3,492
|
||||||||
|
Deferred
income tax benefit
|
(4,986 | ) | (3,371 | ) | (8,938 | ) | ||||||
| $ | (1,771 | ) |
8,923
|
(5,446 | ) | |||||||
The
differences
between expected income tax expense, computed based on the statutory
undistributed income tax rate of 32.5%, 32.5% and 31.8% for 2004, 2005 and
2006,
respectively, and the actual income tax expense (benefit) as reported in
the
accompanying consolidated statements of income for the years ended December
31,
2004, 2005 and 2006 are summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Expected
income tax expense
|
$ |
11,115
|
22,834
|
22,103
|
||||||||
|
Tax-exempted
income
|
(6,328 | ) | (9,189 | ) | (16,012 | ) | ||||||
|
Effect
of
difference between tax base of undistributed income surtax with
pre-tax
income
|
-
|
-
|
1,562
|
|||||||||
|
Adjustment
for
enacted change in tax laws
|
-
|
-
|
1,099
|
|||||||||
|
Impairment
loss on investment in non-marketable securities
|
-
|
-
|
477
|
|||||||||
|
Nontaxable
gains on sale of marketable securities
|
(130 | ) | (38 | ) | (67 | ) | ||||||
|
Increase
of
investment tax credits
|
(7,586 | ) | (10,647 | ) | (15,216 | ) | ||||||
|
Increase
in
valuation allowance
|
882
|
2,421
|
2,798
|
|||||||||
|
Non
deductible
share-based compensation expenses
|
1,897
|
2,799
|
1,002
|
|||||||||
|
Provision
for
uncertain tax position in connection with share-based compensation
expenses
|
-
|
124
|
526
|
|||||||||
|
Tax
benefit
resulting from distribution of prior year’s income
|
(1,650 | ) |
-
|
(789 | ) | |||||||
|
Foreign
tax
rate differential
|
41
|
83
|
(1,796 | ) | ||||||||
|
Others
|
(12 | ) |
536
|
(1,133 | ) | |||||||
|
Actual
income
tax expense (benefit)
|
$ | (1,771 | ) |
8,923
|
(5,446 | ) | ||||||
The
adjustment for
enacted change in tax laws includes adjustment to deferred tax assets and
liabilities and the undistributed income surtax of 2005 related to this change
amounting to $686 thousand and $413 thousand, respectively. The
enacted changes in ROC Income Tax Acts in May 2006 affects the determination
of
the undistributed income surtax commencing from 2005 and related deferred
income
tax assets and liabilities existed as of the enactment date. The
Company recognized the impact of the change in 2006, the year of enactment
of
the tax law.
72
The
amount of total
income tax expense (benefit) allocated to continuing operations and the amounts
separately allocated to other items are summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Continuing
operations
|
$ | (1,771 | ) |
8,923
|
(5,446 | ) | ||||||
|
Charged
directly to equity
|
-
|
-
|
(98 | ) | ||||||||
|
Other
comprehensive income
|
-
|
3
|
3
|
|||||||||
|
Total
income
tax expense (benefit)
|
$ | (1,771 | ) |
8,926
|
(5,541 | ) | ||||||
As
of December 31, 2005 and 2006, the components of deferred income tax assets
(liabilities) were as follows:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax
assets:
|
||||||||
|
Inventory
|
$ |
643
|
1,497
|
|||||
|
Unrealized
foreign exchange loss
|
30
|
-
|
||||||
|
Capitalized
expense for tax purposes
|
145
|
85
|
||||||
|
Accrued
compensated absences
|
37
|
88
|
||||||
|
Allowance
for
sales return, discounts and warranty
|
236
|
328
|
||||||
|
Unused
investment tax credits
|
9,407
|
19,420
|
||||||
|
Unused
loss
carry-forward
|
1,851
|
3,094
|
||||||
|
Defined
benefit pension plan
|
-
|
98
|
||||||
|
Investments
in
non-marketable securities
|
42
|
-
|
||||||
|
Other
|
51
|
13
|
||||||
|
Total
gross
deferred tax assets
|
12,442
|
24,623
|
||||||
|
Less:
valuation allowance
|
(3,314 | ) | (6,278 | ) | ||||
|
Net
deferred
tax assets
|
9,128
|
18,345
|
||||||
|
Deferred
tax
liabilities:
|
||||||||
|
Unrealized
foreign exchange gain
|
5
|
125
|
||||||
|
Foreign
currency translation adjustments
|
3
|
6
|
||||||
|
Prepaid
pension cost
|
4
|
65
|
||||||
|
Total
gross
deferred tax liabilities
|
12
|
196
|
||||||
|
Net
deferred
tax assets
|
$ |
9,116
|
18,149
|
|||||
The
valuation
allowance for deferred tax assets as of January 1, 2004, 2005 and 2006 was
$11
thousand, $893 thousand and $3,314 thousand, respectively. The net change
in the valuation allowance for the years ended December 31, 2004, 2005 and
2006, was an increase of $882 thousand, $2,421 thousand and $2,964
thousand, respectively. The change in 2006 includes an increase of valuation
allowance of $166 thousand which was provided for the deferred tax assets
attributable to the acquisition of Integrated Microdisplays Limited in October
2006.
In
assessing the
realizability of deferred tax assets, management considers whether it is
more
likely than not that some portion or all of the deferred tax assets will
not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in
which those temporary differences become deductible and tax loss
73
carryforwards
utilizable. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies
in
making this assessment.
Subsequent
recognized tax benefits relating to the valuation allowance for deferred
tax
assets as of December 31, 2006, will be allocated as follows:
|
Income
tax
benefit that would be reported in the consolidated statement of
income
|
$ |
6,112
|
||
|
Goodwill
and
other noncurrent intangible assets
|
166
|
|||
| $ |
6,278
|
Except
for Himax
Taiwan, all other subsidiaries of the Company have generated tax losses since
inception and are not included in the consolidated tax filing with Himax
Taiwan,
a valuation allowance of $3,314 thousand and $6,278 thousand as of December
31,
2005 and 2006, respectively, was provided to reduce their deferred tax assets
(consisting primarily of operating loss carryforwards and unused investment
tax
credits) to zero because management believes it is unlikely these tax benefits
will be realized. The total tax loss carryforwards for these subsidiaries
at
December 31, 2006 was $3,094 thousand, which will expire if unused by
2011. The remaining investment tax credit for these subsidiaries at
December 31, 2006 was $3,196 thousand, which will expire if unused by
2009.
According
to the
Statute for Upgrading Industries, the purchase of machinery for the automation
of production, expenditure for research and development and training of
professional personnel entitles the Company to tax credits. This
credit may be applied over a period of five years. The amount of the
credit that may be applied in any year except the final year is limited to
50%
of the income tax payable for that year. There is no limitation on
the amount of investment tax credit that may be applied up to the amount
of the
tax actually payable in the final year.
As
of December 31,
2006, all of the Company’s remaining investment tax credits of NT$634,268
thousand (US$19,420 thousand), which will expire if unused by 2010.
Himax
Taiwan’s
income tax returns have been examined and assessed by the ROC tax authorities
through 2003.
Pursuant
to the
Statute of Income Basic Tax Amount (the “IBTA Statute”) pronounced in late 2005,
an alternative minimum tax system will be effective commencing from January
1,
2006 in Taiwan. When a taxpayer’s income tax amount is less than the
basic tax amount (“BTA”), the taxpayer would be required to pay the regular
income tax and the difference between the BTA and the regular
tax. For enterprise, BTA is determined by regular taxable income plus
specific add-back items applied with a tax rate ranges from 10% to
12%. The add-back items include exempt gain from nonpublic traded
security transactions and exempt income under tax holidays,
etc. Currently, the tax rate set by the authority is
10%. As there are grandfathered treatments for the tax holidays
approved from the tax authorities before the IBTA Statute take effect, the
effectiveness of the IBTA Statute does not have significant impact to the
Company.
Note
17.
Derivative
Financial Instruments
The
Company operates
in Taiwan and internationally, giving rise to exposure to changes in foreign
currency exchanges rates. The Company enters into foreign currency
forward contracts to reduce such exposure. None of the Company’s
derivatives qualify for hedge accounting pursuant to SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.
Accordingly, the derivative instruments are recorded at fair value
on the
consolidated balance sheets with the change in fair value being reflected
immediately in earnings in the consolidated statements of income.
74
The
Company did not
hold any derivative financial instruments as of December 31,
2006. The table below shows the fair value and notional principal of
the Company’s derivative financial instruments as of December 31,
2005. The estimated fair value of the derivative instruments is
recorded in other current assets on the accompanying consolidated balance
sheet
as of December 31, 2005. The fair value of the derivative financial
instruments as of December 31, 2005 is estimated based on quoted market prices
from brokers or banks. Although the following table reflects the
notional principal and fair value of amounts of derivative financial
instruments, it does not reflect the gains or losses associated with the
exposures and transactions that these financial instruments are intended
to
hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying
exposures will depend on actual market conditions during the remaining life
of
the instruments.
As
of December 31,
2005, the details of foreign currency exchanges contracts outstanding are
summarized as follows:
|
December
31,
2005
|
||||||||||
|
BUY
|
SELL
|
Contract
amount
|
Fair
Value
|
Settlement
date
|
Maturity
amount
|
|||||
|
(in
thousands)
|
||||||||||
|
NTD
|
USD
|
$
12,000
|
$
213
|
January
25,
2006
|
NT$
400,348
|
|||||
|
JPY
|
USD
|
$
10,000
|
$
37
|
January
25,
2006 ~ February 22, 2006
|
JPY
1,177,925
|
|||||
As
of December 31,
2004 and 2005, unrealized gains included in earnings related to the above
foreign currency forward contracts were $448 thousand and $250 thousand,
respectively. The realized gains (losses) resulting from foreign
currency forward contracts were $677 thousand, $108 thousand and ($611) thousand
in 2004, 2005 and 2006, respectively.
Note
18. Fair Value of Financial Instruments
The
fair values of
cash, cash equivalents, accounts receivable, short-term debt, current-portion
of
long-term debt, accounts payable and accrued liabilities approximate their
carrying values due to their relatively short maturities. Marketable securities
consisting of open-ended bond funds are reported at fair value based on quoted
market prices at the reporting date. Marketable securities consisting of
time
deposits with original maturities more than three months is determined using
the
discounted present value of expected cash flows. Derivative financial
instruments are also reported at fair value based on quoted market prices
from
brokers or banks. The fair value of investments in non-marketable
securities has not been estimated as there are no identified events or changes
in circumstances that may have significant adverse effects on the carrying
value
of these investments, and it is not practicable to estimate their fair
values.
Note
19. Significant Concentrations
Financial
instruments that currently subject the Company to concentrations of credit
risk
consist primarily of cash, cash equivalents, marketable securities, accounts
receivable and derivative financial instruments. The Company places its cash
primarily in checking and saving accounts with reputable financial institutions.
The Company has not experienced any material losses on deposits of the Company’s
cash and cash equivalents. Marketable securities consist of time deposits
with
original maturities of greater than three months and investments in an
open-ended bond fund identified to fund current operations. All marketable
securities are classified as available-for-sale. The Company enters
into foreign currency forward contracts to reduce exposure to changes in
foreign
currency exchanges rates. The Company entered into such contracts
with major international foreign banks or reputable local banks. The
likelihood of default on the part of the banks is considered
remote.
The
Company derived
substantially all of its revenues from sales of display drivers that are
incorporated into TFT-LCD panels. The TFT-LCD panel industry is
intensely competitive and is vulnerable to cyclical market conditions and
subject to price fluctuations. The Company expects to be
substantially dependent on sales to the TFT-LCD panel industry for the
foreseeable future.
75
The
Company depends
on two customers for a substantial majority of its revenues and the loss
of, or
a significant reduction in orders from, either of them would significantly
reduce the Company’s revenues and adversely impact the Company’s operating
results. The largest customer (CMO and its affiliates), a related
party, accounted for approximately 63.2%, 58.9% and 55.0%, respectively,
of the
Company’s revenues in 2004, 2005 and 2006. The second largest
(Chunghwa Picture Tubes and its affiliates) accounted for 19.5%, 16.2% and
12.4%, respectively. Each of these two customers also represented
more than 10% of the Company’s accounts receivable balance at December 31, 2005
and 2006. CMO and its affiliates accounted for approximately 45.5%
and 50.3% of the Company’s accounts receivable balance at December 31, 2005 and
2006, respectively. Chunghwa Picture Tubes and its affiliates
accounted for 27.6% and 14.7%, respectively. Moreover, the Company
has at times agreed to extend the payment terms for certain of its customers.
Other customers have also requested extension of payment terms, and the Company
may grant such requests for extension in the future. As a result, a default
by
any such customer, a prolonged delay in the payment of accounts receivable,
or
the extension of payment terms for our customers would adversely affect the
Company’s cash flow, liquidity and operating results. The Company
performs ongoing credit evaluations of each customer and adjusts credit policy
based upon payment history and the customer’s credit worthiness, as determined
by the review of their current credit information. See Notes 20 and 22 for
additional information.
The
Company focuses
on design, development and marketing of its products and outsources all its
semiconductor fabrication, assembly and test. The Company primarily
depends on five foundries to manufacture its wafer, and any failure to obtain
sufficient foundry capacity or loss of any of the foundries it uses could
significantly delay the Company’s ability to ship its products, cause the
Company to lose revenues and damage the Company’s customer
relationships. The Company plans to begin using another two foundries
on a mass-production scale in 2007 in order to diversify the Company’s foundry
sources.
There
are a limited
number of companies which supply processed tape used to manufacture the
Company’s semiconductor products and therefore, from time to time, shortage of
such processed tape may occur. If any of the Company’s suppliers
experience difficulties in delivering processed tape used in its products,
the
Company may not be able to locate alternative sources in a timely
manner. Moreover, if shortages of processed tape were to occur, the
Company may incur additional costs or be unable to ship its products to
customers in a timely manner, which could harm the Company’s business customer
relationships and negatively impact its earnings.
A
limited number of
third-party assembly and testing houses assemble and test substantially all
of
the Company’s current products. As a result, the Company does not
directly control its product delivery schedule, assembly and testing costs
and
quality assurance and control. If any of these assembly and testing
houses experiences capacity constraints or financial difficulties, or suffers
any damage to its facilities, or if there is any other disruption of its
assembly and testing capacity, the Company may not be able to obtain alternative
assembly and testing services in a timely manner. Because the amount
of time the Company usually takes to qualify assembly and testing houses,
the
Company could experience significant delays in product shipments if it is
required to find alternative sources. Any problems that the Company
may encounter with the delivery, quality or cost of its products could damage
the Company’s reputation and result in a loss of customers and
orders.
76
Note
20.
Related-party
Transactions
|
(a)
|
Name
and
relationship
|
|
Name
of
related parties
|
Relationship
|
|
|
Chi
Mei
Optoelectronics Corp. (CMO)
|
Shareholder
represented on the Company’s Board of Directors; the Company’s Chairman
represented on CMO’s Board of Directors
|
|
|
International
Display Technology Ltd.
(ID
Tech)
|
Wholly
owned
subsidiary of CMO
|
|
|
Jemitek
Electronic Corp. (JEC)
|
The
Company’s
CEO represented on JEC’s Board of Directors
|
|
|
Chi
Mei
Corporation (CMC)
|
Major
shareholder of CMO
|
|
|
NEXGEN
Mediatech Inc. (NEXGEN)
|
CMC
nominated
more than half of the seats on NEXGEN’s Board of
Directors
|
|
|
Chi
Mei
Communication System, Inc. (CMCS)
|
CMC
nominated
more than half of the seats on CMCS’s Board of
Directors
|
|
|
Chi
Lin
Technology Co., Ltd.(Chi Lin Tech)
|
CMC
nominated
more than half of the seats on Chi Lin Tech’s Board of
Directors
|
|
|
NingBo
Chi Mei
Optoelectronics Ltd. (CMO-NingBo)
|
The
subsidiary
of CMO
|
|
|
Chi
Mei EL
Corporation(CMEL)
|
The
subsidiary
of CMO
|
|
|
TopSun
Optronics, Inc.(TopSun)
|
Chi
Lin Tech
nominated more than half of the seats on TopSun’s Board of Directors since
September 2006
|
|
(b)
|
Significant
transactions with related parties
|
|
(i)
|
Revenues
and
accounts receivable
|
Revenues
from
related parties are summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
CMO
|
$ |
189,095
|
317,012
|
335,797
|
||||||||
|
CMO-NingBo
|
-
|
721
|
73,898
|
|||||||||
|
Chi
Lin
Tech
|
290
|
2,841
|
2,985
|
|||||||||
|
TopSun
|
-
|
-
|
1,136
|
|||||||||
|
NEXGEN
|
-
|
370
|
805
|
|||||||||
|
JEC
|
599
|
1,565
|
9
|
|||||||||
|
CMEL
|
-
|
-
|
2
|
|||||||||
|
ID
Tech
|
775
|
275
|
-
|
|||||||||
| $ |
190,759
|
322,784
|
414,632
|
|||||||||
77
A
breakdown by
product type for sales to CMO is summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Display
driver
for large-size applications
|
$ |
188,526
|
315,841
|
334,179
|
||||||||
|
Display
driver
for consumer electronics applications
|
41
|
6
|
482
|
|||||||||
|
Display
driver
for mobile handsets
|
-
|
-
|
6
|
|||||||||
|
Others
|
528
|
1,165
|
1,130
|
|||||||||
| $ |
189,095
|
317,012
|
335,797
|
|||||||||
The
sales prices CMO
receives are comparable to those offered to unrelated third
parties.
The
related accounts
receivable resulting from the above sales as of December 31, 2005 and 2006,
were
as follows:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
CMO
|
$ |
67,392
|
81,610
|
|||||
|
CMO-NingBo
|
721
|
33,923
|
||||||
|
TopSun
|
-
|
1,158
|
||||||
|
Chi
Lin
Tech
|
1,234
|
444
|
||||||
|
NEXGEN
|
221
|
117
|
||||||
|
CMEL
|
-
|
2
|
||||||
|
JEC
|
120
|
-
|
||||||
|
69,688
|
117,254
|
|||||||
|
Allowance
for
sales returns and discounts
|
(101 | ) | (404 | ) | ||||
| $ |
69,587
|
116,850
|
||||||
The
credit terms
granted to CMO and its subsidiaries ranged form 60 days to 90 days, and the
credit terms granted to other related parties ranged from 30 days to 45
days,. The credit terms offered to unrelated third parties ranged
from 30 days to 120 days.
|
(ii)
|
Purchases
and
accounts payable
|
Purchases
from
related parties are summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
CMO
|
$ |
176
|
703
|
82
|
||||||||
|
Chi
Lin
Tech
|
-
|
31
|
7
|
|||||||||
|
CMC
|
-
|
9
|
-
|
|||||||||
| $ |
176
|
743
|
89
|
|||||||||
The
purchases had
been full paid as of December 31, 2005 and 2006.
78
The
terms of payment
to related parties were approximately 30~60 days after receiving, comparable
to
that from third parties.
|
(iii)
|
Property
transactions
|
In
2005, the Company
purchased equipment amounting to $2 thousand from Chi Lin Tech. The purchase
had
been full paid as of December 31, 2005.
|
(iv)
|
Lease
|
The
Company entered
into a lease contract with CMO for leasing office space and
equipment. For the years ended December 31, 2004, 2005 and 2006, the
related rent and utility expenses resulting from the aforementioned transactions
amounted to $633 thousand, $619 thousand and $759 thousand,
respectively, and were recorded as cost of revenue and operating expenses
in the
accompanying consolidated statements of income. As of December 31,
2005 and 2006, the related payables resulting from the aforementioned
transactions amounted to $55 thousand and $155 thousand, respectively, and
were
recorded as other accrued expenses in the accompanying consolidated balance
sheets.
|
(v)
|
Sales
agent
|
The
Company entered into sales agent contracts with CMO and CMCS. For the
years ended December 31, 2004 and 2005, the sales commission resulting from
such
contracts amounted to $48 thousand and $49 thousand,
respectively. The sales commission expenses were recorded as a
deduction from revenue in the accompanying consolidated statements of
income. No commission expense occurred under such contracts in
2006.
|
(vi)
|
Others
|
In
2004, 2005 and
2006, the Company purchased consumable and miscellaneous items amounting
to $121
thousand, $78 thousand and $159 thousand, respectively, from CMO, CMC, Chi
Lin
Tech and NEXGEN, which were charged to operating expense. As of
December 31, 2005 and 2006, the related payables resulting from the
aforementioned transactions were $19 thousand and $4 thousand,
respectively.
In
2004, 2005 and
2006, Chi Lin Tech provided IC bonding service on prototype panels for the
Company’s research activities for a fee of $12 thousand, $43 thousand and $128
thousand, respectively, which was charged to research and development
expense. As of December 31, 2006, the related process fee payable
resulting from the aforementioned transactions was $38 thousand.
Note
21.
Commitments
and Contingencies
|
(a)
|
As
of December
31, 2005 and 2006, amounts of outstanding letters of credit for
the
purchase machinery and equipment were $25 thousand and $146 thousand,
respectively.
|
|
(b)
|
As
of December
31, 2005, and 2006 the Company had entered into several contracts
for the
acquisition of equipment and computer software and the construction
of its
new headquarters. Total contract prices amounted to $8,861
thousand and $7,806 thousand, respectively. As of December 31,
2005 and 2006, the remaining commitments were $8,150 thousand and
$2,816
thousand, respectively.
|
|
(c)
|
The
Company
leases its office and buildings pursuant to operating lease arrangements
with unrelated third parties. The lease arrangement will expire
gradually from 2005 to 2009. As of December 31, 2005 and 2006,
deposits paid amounted
|
79
|
|
to
$371
thousand and $477 thousand, respectively, and were recorded as
refundable
deposit in the accompanying consolidated balance
sheets.
|
As
of December 31,
2006, future minimum lease payments under noncancelable operating leases
are as
follows:
|
Duration
|
Amount
|
|||
|
(in
thousands)
|
||||
|
January
1,
2007~December 31, 2007
|
$ |
864
|
||
|
January
1,
2008~December 31, 2008
|
509
|
|||
|
January
1,
2009~December 31, 2009
|
103
|
|||
| $ |
1,476
|
|||
Rental
expense for
operating leases amounted to $981 thousand, $1,305 thousand and $1,763 thousand
in 2004, 2005 and 2006, respectively.
|
(d)
|
The
Company
entered into several sales agent agreements commencing from
2003. Based on these agreements, the Company shall pay
commissions at the rates ranging from 0.5% to 5% of the sales to
customers
in the specific territory or referred by agents as stipulated in
these
agreements. Total commissions incurred amounting to $2,604
thousand, $4,478 thousand and $3,788 thousand, respectively, in
2004, 2005
and 2006, respectively. The sales commission expenses were
recorded as a deduction from revenue in the accompanying consolidated
statements of income.
|
|
(e)
|
In
August of
2004, the Company entered into a license agreement for the use
of certain
central processing unit cores for product development. In
accordance with the agreement, the Company is required to pay an
initial
license fee based on the progress of the project development and
a royalty
based on shipments. The license fee paid and charged to
research and development expense in 2004 and 2006 was $100 thousand
and
$200 thousand, respectively. No license fee or royalty occurred
in 2005.
|
In
March 2005, the
Company entered into a license agreement for the use of USB 2.0 relevant
technology for product development. In accordance with the agreement,
the Company is required to pay an initial license fee based on the progress
of
the project development and a royalty based on shipments. No license
fee or royalty occurred in 2005. The license fee paid and
charged to research and development expense in 2006 was $10
thousand.
|
(f)
|
The
Company
from time to time is subject to claims regarding the proprietary
use of
certain technologies. Currently, the Company is not aware of
any such claims that it believes could have a material adverse
effect on
its financial position or results of
operations.
|
|
(g)
|
Since
Himax
Taiwan is not a listed company, it will depend on Himax Technologies,
Inc.
to meet its equity financing requirements in the future. Any
capital contribution by Himax Technologies, Inc. to Himax Taiwan
may
require the approval of the relevant ROC authorities. The
Company may not be able to obtain any such approval in the future
in a
timely manner, or at all. If Himax Taiwan is unable to receive
the equity financing it requires, its ability to grow and fund
its
operations may be materially and adversely
affected.
|
|
(h)
|
The
Company
has entered into several wafer fabrication or assembly and testing
service
arrangements with service providers. The Company may be
obligated to make payments for purchase orders entered into pursuant
to
these arrangements.
|
80
|
(i)
|
The
current
corporate structure of the Company was established through a
share
exchange, which became effective on October 14, 2005, between
the Company
and the former shareholders of Himax Taiwan. The ROC Investment
Commission (an agency under the administration of the ROC Ministry
of
Economic Affairs) approved the share exchange on September 7,
2005. In
connection with the application seeking approval of the share
exchange,
the Company made the following undertakings to expand its investment
in
the ROC, the approval of which was conditional upon the satisfaction
of
such undertakings: (1) Himax Taiwan must purchase three hectares
of land
in connection with the construction of its new headquarters in
Tainan,
Taiwan, (2) Himax Taiwan must increase the number of employees
in the ROC to 430 employees, 475 employees and 520 employees
by the end of
2005, 2006 and 2007, respectively, (3) Himax Taiwan must invest
no less
than NT$800.0 million ($24.4 million), NT$900.0 million ($27.6
million)
and NT$1.0 billion ($30.7 million) for research and development
in Taiwan
in 2005, 2006 and 2007, respectively, which may be satisfied
through
cash-based compensation paid to research and development personnel
but not
through non-cash share-based compensation and (4) Himax Taiwan
must submit
to the ROC Investment Commission its annual financial statements
audited
by a certified public accountant and other relevant supporting
documents
in connection with the implementation of the above-mentioned
conditions
within four months after the end of each of 2005, 2006 and
2007.
|
If
the Company does not satisfy the undertakings set by the ROC Investment
Commission in approving the share exchange, the ROC Investment Commission
may
revoke Himax Taiwan’s right to repatriate profits to the Company and/or its
approval of the share exchange, the occurrence of either of which would
materially and adversely affect the Company’s business, financial condition and
results of operations and decrease the value of the Company’s American
depositary shares (ADSs). The material adverse consequences include: (1)
difficulty in obtaining approval for additional investments in Himax Taiwan,
(2)
restrictions on transfer of net proceeds of overseas offerings, (3) limitation
on ability to raise capital through the Company and (4) the loss of certain
protections under the status as a foreign-invested company under the ROC
Statute
for Investment by Foreign Nationals, including the protection from expropriation
of Himax Taiwan’s assets.
Before
distributing
a dividend to the Company, Himax Taiwan must recover any accumulated losses
in
prior years, pay all outstanding taxes and set aside 10% of its annual
net
income as a legal reserve until the accumulated legal reserve equals Himax
Taiwan’s paid-in capital. Refer to Note 15 (b) of the Company’s consolidated
financial statements for further details. However, if the Company does
not
satisfy the undertakings with the ROC Investment Commission, the ROC Investment
Commission may deny Himax Taiwan’s right to repatriate dividends to the Company.
Himax Taiwan’s ability to make advances or repay intercompany loans with terms
of less than one year to the Company will not be restricted as such activities
are not subject to the ROC Investment Commission’s approval.
The
ROC Investment Commission has the right (at its discretion) to revoke its
approval of the share exchange based on the undertakings described above.
Prior
to the ROC Investment Commission exercising its discretionary right to
revoke
its approval of the share exchange or Himax Taiwan’s right to repatriate profits
to the Company, in practice the Company and Himax Taiwan would be notified
and
given an opportunity to be heard. There are no promulgated rules or regulations
setting forth the factors that the ROC Investment Commission would consider
in
exercising its discretion. Each case is determined individually. Should
the
approval be revoked, the Company and Himax Taiwan would be entitled to
appeal
such decision to the Committee of Appeal of the ROC Ministry of Economic
Affairs
and/or initiate court proceedings to reverse such decision. A revocation
by the
ROC Investment Commission would not (1) invalidate the effectiveness of
the
share exchange pursuant to which the Company’s ownership structure was
established, (2) limit Himax Taiwan’s ability to issue equity or debt securities
or incur debt or (3) otherwise restrict Himax Taiwan’s operations (other than as
set out in the undertakings).
In
August 2005, the Company purchased 3.18 hectares of land for an aggregate
purchase price of approximately NT$325.8
81
million
($9.9
million) which satisfied the first condition. As of December 31, 2005
and 2006, the Company had satisfied the 2005 and 2006 undertakings the
Company
made with the ROC Investment Commission. Himax Taiwan had 549
employees and 664 employees as of December 31, 2005 and 2006, respectively,
and
had spent NT$1,012 million ($30.9 million) and NT$1,394 million ($42.8
million)
in research and development expenditures in 2005 and 2006,
respectively.
With
regard to 2007
conditions, the Company expects that it will spend at or above the research
and
development expenditures requirements in 2007, even if its business suffers
a
slowdown (unaudited). Based on the nature of the fabless semiconductor
design
industry, even if the Company experience no or negative revenue growth
as a
result of company-specific or industry-wide events, the Company believes
it
still must commit to the necessary resources in both headcount and research
and
development expenditures in order to support its plans for further growth
and
competitiveness (unaudited). The Company’s business plan contemplates an
increase in headcount (mostly research and development personnel) and research
and development expenditures to improve and enhance its core technologies
and
know-how (unaudited). Based on the historical trend of increasing headcount
and
research and development expenditures and the Company’s projected headcount and
research and development expenditures, the Company believes that the
above-mentioned headcount and research and development expenditures requirements
with respect to 2007 could be satisfied with a very high level of certainty
(unaudited). In the event that the Company’s operating performance is below its
current expectations, the Company believes it could still access unused
letters
of credit from several financial institutions to finance its working capital
requirements in order to meet the increased headcount and/or research and
development expenditures undertakings (unaudited). Moreover, the Company
believes that Himax Taiwan could access the capital markets through the
issuance
of equity or debt securities or through the incurrence of debt
(unaudited).
Therefore,
the
Company believes that the uncertainty that may arise from the restrictions
that
could potentially be imposed by the ROC Investment Commission mentioned
above is
not so severe that would cast significant doubt on the Company’s ability to
control Himax Taiwan. The Company has determined that the likelihood
of the Company failing to satisfy the undertakings given to the ROC Investment
Commission is remote and there is no significant impact to the Company’s
financial position or results of operations (unaudited).
Note
22.
Segment
Information
The
Company is
engaged in the design, development and marketing of semiconductors for
flat
panel displays. Based on the Company’s internal organization
structure and its internal reporting, management has determined that the
Company
does not have any operating segments as that term is defined in SFAS No.
131,
Disclosures about Segments of an Enterprise and Related
Information.
Revenues
from the
Company’s major product lines are summarized as follow:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Display
driver
ICs for large-size applications
|
$ |
258,006
|
470,631
|
645,513
|
||||||||
|
Display
driver
ICs for mobile handset applications
|
12,607
|
31,123
|
52,160
|
|||||||||
|
Display
drivers for consumer electronics applications
|
21,754
|
18,571
|
28,616
|
|||||||||
|
Others
|
7,906
|
19,879
|
18,229
|
|||||||||
| $ |
300,273
|
540,204
|
744,518
|
|||||||||
82
The following tables summarize information pertaining to the Company’s revenues from customers in different geographic region (based on customer’s headquarter location):
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Taiwan
|
$ |
284,569
|
482,991
|
605,924
|
||||||||
|
Other
Asia
Pacific (China, Korea and Japan)
|
15,704
|
57,213
|
138,287
|
|||||||||
|
Europe
(Netherlands and France)
|
-
|
-
|
307
|
|||||||||
| $ |
300,273
|
540,204
|
744,518
|
|||||||||
The
tangible
long-lived assets relating to above geographic areas were as
follows:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Taiwan
|
$ |
24,344
|
40,132
|
|||||
|
China
|
82
|
203
|
||||||
|
Korea
|
-
|
6
|
||||||
| $ |
24,426
|
40,341
|
||||||
Revenues
from
significant customers, those representing approximately 10% or more of
total
revenue for the respective periods, are summarized as follows:
|
Year
Ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
CMO
and its
affiliates, a related party
|
$ |
189,870
|
318,008
|
409,697
|
||||||||
|
Chunghwa
Picture Tubes and its affiliates
|
58,430
|
87,534
|
92,561
|
|||||||||
| $ |
248,300
|
405,542
|
502,258
|
|||||||||
Accounts
receivable
from significant customers, those representing approximately 10% or more
of
total accounts receivable for the respective periods, is summarized as
follows:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
CMO
and its
affiliates, a related party
|
$ |
68,113
|
115,535
|
|||||
|
Chunghwa
Picture Tubes and its affiliates
|
41,369
|
33,846
|
||||||
| $ |
109,482
|
149,381
|
||||||
Note
23.
Subsequent Events
|
(a)
|
Acquisition
|
On
February 1, 2007,
the Company acquired 100 percent of the outstanding common stock of Wisepal
Technologies, Inc. (“Wisepal”). The results of Wisepal’s operations
will be included in the Company’s consolidated financial statements beginning as
of that date. Wisepal is a display driver IC company primarily
focuses on small-and medium-sized applications. As a result of the
acquisition, the Company is expected to diversify its product portfolio
with
more exposure towards small-and medium-sized products. The
acquisition will further strengthen the Company’s competitiveness in the display
driver market with the addition of technology resources.
83
The
aggregate
purchase cost was $45,249 thousand, primarily consisting of 6,090,114 shares
of
the Company’s ordinary shares plus 418,440 units of the Company’s unvested RSUs.
The value of the Company’s ordinary shares issued and the unvested RSUs granted
was $43,020 thousand and $2,011 thousand, respectively, and was determined
based
on the average market price of the Company’s ordinary shares over the 2-day
period before and after the terms of the acquisition were agreed to and
announced. The purchase agreement requires the Company to grant an
option to the former parent company of Wisepal to purchase 626,285 additional
shares of the Company’s ordinary shares at US$0.001 per share upon the
achievement of specific milestones in 2007. When it is deemed beyond
a reasonable doubt that such conditions will be satisfied, the Company
will
record the additional consideration as additional goodwill related to the
acquisition. Based on the market price of the Company ordinary shares
as of December 31, 2006, which is US$4.78 per share, the maximum possible
price
of such contingent consideration is $2,994 thousand.
The
following table
summarizes the preliminary allocation of the purchase price to the estimated
fair values of the assets acquired and liabilities assumed at the date
of
acquisition. The Company is in the process of obtaining third-party
valuations of certain intangible assets; thus, the allocation of the purchase
price is subject to refinement.
|
At
February 1,
2007
(Unaudited)
|
||||
|
(in
thousands)
|
||||
|
Current
assets
|
$ |
8,937
|
||
|
Property
and
equipment
|
1,247
|
|||
|
Acquired
in-process R&D
|
700
|
|||
|
Intangible
assets
|
7,148
|
|||
|
Goodwill
|
28,566
|
|||
|
Total
assets
acquired
|
46,598
|
|||
|
Current
liabilities
|
(1,349 | ) | ||
|
Total
liabilities assumed
|
(1,349 | ) | ||
|
Net
assets
acquired
|
45,249
|
|||
Approximately
$700
thousand of the purchase price represents the estimated fair value of acquired
in-process R&D
projects that had not yet reached technological feasibility and had no
alternative future use. Accordingly, this amount will be expensed in
the Consolidated Statement of Income at the acquisition date. The
acquired intangible assets, all of which will be amortized, have a
weighted-average useful life of approximately 7 years. The intangible
assets that make up that amount include core and developed technology of
$3,000
thousand (7-year weighted-average useful life), customer relationship of
$4,100
thousand (7-year weighted-average useful life), and licence of $48 thousand
(3-year weighted-average useful life). Goodwill is not expected to be
deductible for tax purpose.
|
(b)
|
Treasury
share
buybacks
|
In
January 2007, the
Company repurchased 2,161,636 ADSs from open market amounting to $10,841
thousand. On February 1, 2007, the Company announced the completion of
its share
buyback program, which had been authorized by the Company’s Board of Directors
on November 2, 2006. In total, the Company has repurchased $50
million or 10,047,471 ADSs in the open market at an average prices of US$4.98
per ADS. The repurchased ADSs and their underling ordinary shares
were
then cancelled, thereby reducing approximately 10 million shares or 5%
of the
Company’s issued and outstanding ordinary shares in 2007.
84
Note
24.
Himax Technologies, Inc. (the Company only)
As
a holding
company, dividends received from the Company’s subsidiaries in Taiwan, if any,
will be subjected to withholding tax under ROC law as well as statutory
and
other legal restrictions. The current corporate structure of the
Company was established as a result of a share exchange between the Company
and
the former shareholders of Himax Taiwan. The ROC Investment
Commission has approved the share exchange, subject to the certain conditions
as
disclosed in the first paragraph of Note 21 (j). If the Company were
unable to satisfy any of the conditions imposed by ROC Investment Commission,
the ROC Investment Commission may revoke the Company’s right to repatriation of
profits to be distributed by Himax Taiwan or rescind its approval of the
share
exchange pursuant to which the Company’s ownership structure was
established.
As
of December 31,
2006, the amount of restricted net assets of Himax Taiwan, which may not
be
transferred to the Company in the forms of cash dividends by Himax Taiwan
if the
Company were unable to satisfy any of the conditions imposed by ROC Investment
Commission was $238,173 thousand.
The
Company believes
that the above-mentioned restrictions of the ROC Investment Commission
represent
a limitation on distribution of assets from its subsidiary to the Company,
therefore, the condensed separate financial information of the Company,
as if
the Company had been in existence for all periods, are presented as
follows:
Condensed
Balance Sheets
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Cash
and cash
equivalents
|
$ |
-
|
95,591
|
|||||
|
Other
current
assets
|
-
|
31,013
|
||||||
|
Investment
in
subsidiaries
|
179,564
|
238,648
|
||||||
|
Total
assets
|
$ |
179,564
|
365,252
|
|||||
|
Liabilities
|
$ |
13,733
|
1,325
|
|||||
|
Total
stockholders’ equity
|
165,831
|
363,927
|
||||||
|
Total
liabilities and stockholder’s equity
|
$ |
179,564
|
365,252
|
|||||
The
Company had no
long-term obligations or guarantees as of December 31, 2005 and
2006.
Condensed
Statements of Income
|
Year
ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Revenues
|
$ |
-
|
-
|
-
|
||||||||
|
Costs
and
expenses
|
-
|
(77 | ) |
-
|
||||||||
|
Operating
income (loss)
|
-
|
(77 | ) |
-
|
||||||||
|
Equity
in
earnings from subsidiaries
|
36,000
|
61,733
|
69,435
|
|||||||||
|
Other
non
operating income (loss)
|
-
|
(98 | ) |
5,755
|
||||||||
|
Income
before income taxes
|
36,000
|
61,558
|
75,190
|
|||||||||
|
Income
tax
|
-
|
-
|
-
|
|||||||||
|
Net
Income
|
$ |
36,000
|
61,558
|
75,190
|
||||||||
85
Condensed
Statements of Cash Flows
|
Year
ended
December 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
flows
from operating activities:
|
||||||||||||
|
Net
income
|
$ |
36,000
|
61,558
|
75,190
|
||||||||
|
Adjustments
to
reconcile net income to net cash provided by (used in)
operating activities:
|
||||||||||||
|
Equity
in
earning from subsidiaries
|
(36,000 | ) | (61,733 | ) | (69,435 | ) | ||||||
|
Changes
in
operating assets and liabilities:
|
||||||||||||
|
Increase
in other current
assets
|
-
|
-
|
(5,789 | ) | ||||||||
|
Increase
in other accrued expenses and
other currentliabilities
|
-
|
133
|
1,192
|
|||||||||
|
Net
cash provided by (used in) operating
activities
|
-
|
(42 | ) |
1,158
|
||||||||
|
Net
cash used in investing
activities
|
-
|
-
|
(540 | ) | ||||||||
|
Cash
flows
from financing activities:
|
||||||||||||
|
Distribution
of special cash
dividends
|
-
|
(13,558 | ) |
-
|
||||||||
|
Proceeds
from borrowing (repayment) of
short-termdebt
|
-
|
13,600
|
(13,600 | ) | ||||||||
|
Proceeds
from initial public offering,
net of issuance costs
|
-
|
-
|
147,408
|
|||||||||
|
Acquisition
of ordinary shares for
retirement
|
-
|
-
|
(38,835 | ) | ||||||||
|
Net
cash provided by financing
activities
|
-
|
42
|
94,973
|
|||||||||
|
Net
increase
in cash and cash equivalents
|
-
|
-
|
95,591
|
|||||||||
|
Cash
and cash
equivalents at beginning of year
|
-
|
-
|
-
|
|||||||||
|
Cash
and cash
equivalent at end of year
|
$ |
-
|
-
|
95,591
|
||||||||
86
|
Corporate
Information
|
|||
|
Board
of Directors
Chairman
Dr.
Biing-Seng
Wu
Directors
Jordan
Wu
Jung-Chun
Lin
Dr.
Chun-Yen
Chang
Yuan-Chuan
Horng
Senior
Management
Jordan
Wu
Chief
Executive Officer
Max
Chan
Chief
Financial Officer
Chih-Chung
Tsai
Chief
Technology Officer, Senior VP
Baker
Bai
Incubator
System Design Center, VP
John
Chou
Quality
&
Reliability Assurance and Support Design Center, VP
Norman
Hong
Sales
and
Marketing, VP
Corporate
Headquarters
Himax
Technologies, Inc.
No.
26, Zih
Lian Road, Fonghua Village,
Sinshih
Township, Tainan County 74445, Taiwan
Tel:
+886-6-505-0880
Fax:+886-6-507-0000
|
Investor
Information
Shareholder
Services for American Depositary Shares (ADSs)
Deutsche
Bank
Trust Company Americas
60
Wall
Street
New
York, NY
10005
Stock
Listings
The
company’s
common stock trades on the NASDAQ National Market under the
symbol
HIMX
Independent
Auditors
KPMG
Certified
Public Accountants
Investor
Contacts
Jackson
Ko
Jessie
Wang
Investor
Relations
Himax
Technologies, Inc.
8F,
No19,
Section 1, Hang-Chou South Road, Taipei 100, Taiwan
jackson_ko@himax.com.tw
Jessie_wang@himax.com.tw
David
Pasquale
Executive
Vice
President
The
Ruth
Group
757
Third
Avenue
New
York, NY
10017
+646-536-7006
dpasquale@theruthgroup.com
|
||
87
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