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 SHAREHOLDRS
FOR THE YEAR 2006
Contents
Special Note Regarding Forward-Looking Statements ................................................................
Selected Financial Data .................................................................................................................
Information on the Company ........................................................................................................
Business Overview .........................................................................................................................
3
4
6
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 ..........................
General and administrative ............................
Sales and marketing ......................................
Operating income ..........................................
7,800
1,489
884
992
21,077
24,021
41,278
60,655
4,614
2,669
3,381
4,654
2,742
6,784
4,762
9,762
6,970
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)
Diluted ............................................................ $
0.00
$ (0.00)
$
$
0.21
0.21
$
$
0.35
0.34
$
$
0.39
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 .............................................
Sales and marketing .......................................................
353
348
2,124
1,349
721
537
848
1,241
1,444
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 ................................................
Accounts receivable from related parties, net ..............
1,637
4,786
Inventories .......................................................................
12,056
12,543
22,893
21,088
27,016
39,129
80,259
112,767
69,587
116,850
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
Total current liabilities .....................................................
11,750
Total liabilities ..................................................................
11,975
Ordinary Shares ..............................................................
11
22,901
43,613
43,870
17
38,649
105,801
120,407
52,157
160,784
153,279
52,246
160,784
153,471
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
Net cash provided by (used in) investing activities ......
(7,130)
(28,915)
11,001
(25,363)
Net cash provided by financing activities ......................
11,644
30,341
735
14,404
29,696
(8,927)
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
TFT-LCD Gate Drivers
• 192 to 400 output channels
interface technologies
• 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:
Analog Video
Signals
Digital Video/
Audio Signals
Analog TV
Signal
Digital TV
Signal
Analog Audio
Signals
Analog Interfaces
Video processor
Panel
Digital Interfaces
Analog Tuner
– –
–
–
–
–
–
–
––––
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– – – – – – – – – – – – – –
–
–
– – – – – – – – – – – – – – – –
–
– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –
Channel Receiver
Digital Tuner
Video Signal Path
Audio Signal Path
– – – – – – – – – – – – – –
DTV Decoder
Audiooo Processor/
Amplifier
Speakers
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,
• 640 x 360 pixels (Q720P), VGA and SVGA resolutions
Mini- and and Mobile-projector
• 8-bit (16 million colors)
Applications
• high reflectivity and greater than 100:1 contrast ratio
LCOS Modules for Projection
• WXGA and Full HD resolutions
Applications
• 8-bit (16 million colors)
• low power consumption
• 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.
TAB
COG
Wafer Fabrication
Wafer Fabrication
Processed Tape
Tape Carrier
Chip on
Packaging
(TCP)
Film
(COF)
Gold Bumping
Chip Probe Testing
Inner-lead Bonding
Gold Bumping
Chip Probe Testing
Final Testing
COG Assembly Testing
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 Chartered, Lite-on, Macronix, Powerchip,
and UMC. 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.
Macronix International Co., Ltd.
Powerchip Semiconductor Corp.
Taiwan Semiconductor Manufacturing Company
United Microelectronics Corporation
Vanguard International Semiconductor Corporation
ChipMOS Technologies Inc.
International Semiconductor Technology Ltd.
Processed Tape for TAB Packaging
Assembly and Testing
CASIO Micronics Co., Ltd.
Hitachi Cable, Ltd.
Chipbond Technology Corporation
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.
Himax
Technologies, Inc.
Himax
Imaging, Inc.
100%
Himax
Technologies Limited
100%
Himax Technologies
Anyang Limited
100%
Wisepal
Technologies, Inc.
100%
Himax Imaging
Corp. (USA)
100%
Himax
Imaging Ltd.
100%
Himax Technologies
(Samoa), Inc.
100%
Himax
Display, Inc.
87.5%
Himax
Analogic, Inc.
86.3%
Himax Technologies
Himax Technologies
Integrated
(Shenzhen) Co., Ltd.
(Suzhou) Co., Ltd.
Microdisplays Limited
100%
100%
100%
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 judgments and estimates
used in the preparation of our consolidated financial statements.
Share-Based Compensation
As of December 31, 2006, we have not issued any stock options to employees or others. Share-based
compensation primarily consists of grants of nonvested or restricted shares of common stock and RSUs
issued to employees. We have applied SFAS No. 123R for our share-based compensation plans for all
periods since the incorporation of Himax Taiwan in 2001. The cost of employee services received in
exchange for share-based compensation is measured based on the grant-date fair value of the share-
based instruments issued. The cost of employee services is equal to the grant-date fair value of shares
issued to employees and is recognized in earnings over the service period. Share-based compensation
expense estimates also take into account the number of shares awarded that management believes will
eventually vest. We adjust our estimate each period to reflect the current estimate of forfeitures. As of
December 31, 2006, we based our share-based compensation cost on an assumed forfeiture rate of
5.3% per annum. If actual forfeitures occur at a lower rate, share-based compensation costs will increase
in future periods.
When estimating the fair value of our ordinary shares prior to our initial public offering, we reviewed both
internal and external sources of information. The sources we used to determine the fair value of the
underlying shares at the date of measurement have been subjective in nature and based on, among other
factors:
• our financial condition as of the date of grant;
• our financial and operating prospects at that time;
• for certain issuances in 2001 and early 2002, the price of new shares issued to unrelated third
parties;
• for certain issuances in 2002, 2003 and 2004, an independent third-party retrospective analysis of
the historical value of our common shares, which utilized both a net asset based methodology and
market and peer group comparables (including average price/earnings, enterprise value/sales,
enterprise value/earnings before interest and tax, and enterprise value/earnings before interest, tax,
depreciation and amortization); and
• for our issuance of RSUs in 2005, an independent third-party analysis of the current and future
value of our ordinary shares, which utilized both discounted cashflow and market value approaches,
using multiples such as price/earnings, forward price/earnings, enterprise value/earnings before
interest and tax, and forward enterprise value/earnings before interest and tax.
Changes in any of these factors or assumptions could have resulted in different estimates of the fair value
of our common shares and the related amounts of share-based compensation.
Based on these factors, we estimated the fair value per share of nonvested shares issued to certain
employees in June 2001, November 2001, and January 2002 at NT$4.02 ($0.116) per share and the fair
value of 596,897 shares (adjusted for stock splits) granted to two consultants in 2002 at $68,000.
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:
Balance at
Beginning
Amounts
Balance at
Year
of Year
Addition
Utilized
End of Year
(in thousands)
December 31, 2004 ............................................
December 31, 2005 ............................................
December 31, 2006 ............................................
$
$
$
28
240
181
$
$
$
1,022
398
2,843
$
$
$
(810)
(457)
(2,156)
$
$
$
240
181
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:
Balance at
Beginning
Amount
Balance at
Year
of Year
Addition
Utilized
End of Year
(in thousands)
December 31, 2004 ...............................
December 31, 2005 ...............................
December 31, 2006 ...............................
$
$
$
–
507
545
$
$
$
960
1,415
2,101
$
$
$
453
(1,377)
(2,016)
$
$
$
507
545
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
Research and development .............................................
General and administrative ...............................................
Sales and marketing .........................................................
Total costs and expenses ................................................
Operating income .............................................................
Other non operating income ............................................
Income tax expenses (benefit) .........................................
8.0
1.5
0.9
89.0
11.0
0.4
(0.6)
Net income .......................................................................
12.0
77.6
7.6
1.3
0.9
87.4
12.6
0.5
1.7
11.4
80.8
8.1
1.3
0.9
91.1
8.9
0.5
(0.7)
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
Net cash provided by financing activities ...............................................
Effect of exchange rate changes on cash and cash equivalents .........
Net increase in cash ...............................................................................
Cash and cash equivalents at beginning of period ...............................
Cash and cash equivalents at end of period ........................................
735
–
3,048
2,529
5,577
(25,363)
14,404
4
1,509
5,577
7,086
(8,927)
81,886
12
102,667
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
Less than
More than
Total
1 year
1-3 years
3-5 years
5 years
Operating lease obligations ...................
1,476
Purchase obligations(1) ..........................
143,164
Other obligations(2) ................................
31,217
Total ........................................................
175,857
864
143,164
31,217
175,245
(in thousands)
612
–
–
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. 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
On Aug 30, 2006, we announced that our board of directors had approved a letter of intent to acquire
Wisepal Technologies, Inc. (“Wisepal”). The deal was closed 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.
(c) Total Number of
(d) Approximate
Shares Purchased
Dollar Value of
as Shares Purchased
Shares that May
as Part of Publicly
Yet Be Purchased
Period
(a) Total Number of
(b) Average Price
Announced Plans or
Under the Plans or
Shares Purchased
Paid per Share
Programs
Programs
November 9, 2006 to November 30, 2006 ........
2,944,840
December 1, 2006 to December 31, 2006 ........
4,940,995
January 1, 2007 to January 23, 2007 ................
2,161,636
$
$
$
5.07
4.96
4.87
2,944,840
$ 35,056,654
7,885,835
$ 10,540,210
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 ...........................
Jordan Wu ........................................
Jung-Chun Lin ..................................
Dr. Chun-Yen Chang ........................
Yuan-Chuan Horng ...........................
Chih-Chung Tsai ...............................
Max Chan .........................................
Baker Bai ..........................................
John Chou ........................................
49
46
58
69
55
51
40
49
48
Chairman of the Board
President, Chief Executive Officer and Director
Director
Director
Director
Chief Technology Officer, Senior Vice President
Chief Financial Officer
Vice President, Incubator System Design Center
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
Granted
Vested Portion of RSUs
Unvested Portion of RSUs
Total RSUs
Ordinary Shares Underlying
Ordinary Shares Underlying
Dr. Biing-Seng Wu ......................
Jordan Wu ...................................
30,188
71,581
Jung-Chun Lin .............................
Dr. Chun-Yen Chang ...................
Yuan-Chuan Horng ......................
Chi-Chung Tsai ............................
Max Chan ....................................
Baker Bai .....................................
John Chou ...................................
Norman Hung ..............................
0
0
0
71,581
23,872
43,441
38,747
37,672
7,547
17,895
0
0
0
17,895
5,968
10,860
22,500
11,667
22,641
53,686
0
0
0
53,686
17,904
32,581
16,247
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
Research and development(1) ........................................................................................................................
Engineering and manufacturing(2) ...................................................................................................................
Sales and marketing(3) ....................................................................................................................................
General and administrative ..............................................................................................................................
Total ..................................................................................................................................................................
Number
615
125
120
64
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 .............................................
Jordan Wu ..........................................................
Jung-Chun Lin ....................................................
Dr. Chun-Yen Chang ..........................................
Yuan-Chuan Horng .............................................
Chih-Chung Tsai .................................................
Max Chan ...........................................................
Baker Bai ............................................................
John Chou ..........................................................
Norman Hung .....................................................
31,578,765
10,906,363
–
794,807
453,052
2,922,012
61,247
2,281,364
39,863
23,997
15.98%
5.52%
–
*
*
1.48%
*
1.15%
*
*
* 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 ........................................................................
$
Marketable securities available-for-sale .......................................................
Restricted cash equivalents and marketable securities ..............................
7,086
3,989
14,053
109,753
8,828
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. .............................
Inventories ...................................................................................................
Deferred income taxes ................................................................................
Prepaid expenses and other current assets ...............................................
69,587
105,004
8,965
11,113
116,850
101,341
6,744
10,324
Total current assets .........................................................................
300,056
466,715
Property, plant, and equipment, net ............................................................
Deferred income taxes ...................................................................................
Intangible assets, net .....................................................................................
Investments in non-marketable securities ....................................................
Refundable deposits and prepaid pension costs .......................................
24,426
151
81
1,813
712
27,183
Total assets ......................................................................................
$
327,239
38,895
11,405
393
817
569
52,079
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 .....................................................................................
Other accrued expenses and other current liabilities .................................
13,625
13,995
11,666
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 ...............................................................
Total stockholders equity ................................................................
67,327
165,831
142,517
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
Revenues from related parties, net ................................
Costs and expenses:
Cost of revenues ...........................................................
Research and development ...........................................
General and administrative .............................................
Sales and marketing ......................................................
Total costs and expenses ..................................
Operating income ..............................................................
Non operating income (loss):
Interest income ..............................................................
Gain on sale of marketable securities, net ....................
Other than temporary impairment loss on investments
in non-marketable securities .......................................
Foreign exchange gains (losses), net ............................
Interest expense .............................................................
Other income, net ..........................................................
Income before income taxes and minority interest .......
Income tax expense (benefit) ................................
Income before minority interest .......................................
Minority interest, net of tax ...................................
Net income .........................................................................
Basic earnings per ordinary share .......................................
Diluted earnings per ordinary share ....................................
$
$
$
190,759
300,273
235,973
24,021
4,654
2,742
267,390
32,883
72
401
–
847
(6)
5
1,319
34,202
(1,771)
35,973
27
36,000
0.21
0.21
217,420
322,784
540,204
419,380
41,278
6,784
4,762
472,204
68,000
580
105
(129)
1,808
(125)
19
2,258
70,258
8,923
61,335
223
61,558
0.35
0.34
329,886
414,632
744,518
601,565
60,655
9,762
6,970
678,952
65,566
5,860
60
(1,500)
(341)
(311)
173
3,941
69,507
(5,446)
74,953
237
75,190
0.39
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
Reclassification adjustment for realized gains included
in net income .............................................................
(401)
(105)
Foreign currency translation adjustments, net of tax
of $3 and $6 in 2005 and 2006, respectively. .........
–
5
Comprehensive income .....................................................
$
35,933
61,587
56
(60)
24
75,210
See accompanying notes to consolidated financial statements.
47
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48
HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2005 and 2006
(in thousands of US dollars)
Year Ended December 31,
2004
2005
2006
Cash flows from operating activities:
Net income ......................................................................................
$ 36,000
61,558
75,190
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................................
Share-based compensation expenses ...................................
Minority interest, net of tax .....................................................
Loss on disposal of property, plant, and equipment .............
Gain on sales of subsidiary shares and investment in
non-marketable securities, net ...........................................
Gain on sale of marketable securities, net .............................
Impairment loss on investments in non-marketable securities
2,761
5,837
(27)
69
–
(401)
–
3,613
8,613
(223)
–
(19)
(105)
129
Deferred income taxes ............................................................
(4,986)
(3,371)
Inventory write downs .............................................................
847
927
5,221
15,150
(237)
36
(137)
(60)
1,500
(8,938)
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 ..........................
Accounts payable ...................................................................
Income tax payable .................................................................
Other accrued expenses and other current liabilities .............
Net cash provided by (used in) operating activities .
(3,296)
15,748
(761)
4,081
(8,688)
(6,413)
67,152
10,852
5,290
749
14,606
(1,959)
4,412
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 ...........................................................
Proceeds from sale of subsidiary shares and investment in
non-marketable securities by Himax Technologies Limited ..........
Purchase of investment in non-marketable securities .....................
Purchase of subsidiary shares from minority interest ......................
–
–
–
–
Refund from (increase in) refundable deposits ................................
(137)
Release (pledge) of restricted cash equivalents and marketable
–
51
–
(523)
(414)
17
1,142
(817)
(773)
171
securities .......................................................................................
35
Net cash provided by (used in) investing activities ..........
11,001
(13,724)
(25,363)
13,945
(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 .............................................
$
Proceeds from initial public offering, net of issuance costs ............
Proceeds from issuance of new shares by subsidiaries .................
Acquisition of ordinary shares for retirement ...................................
Proceeds from borrowing of short-term debt ..................................
Repayment of short-term debt .........................................................
Repayment of long-term debt ..........................................................
Net cash provided by financing activities ..........................
Effect of exchange rate changes on cash and cash equivalents ..
Net increase in cash and cash equivalents ......................................
Cash and cash equivalents at beginning of year ............................
–
–
803
–
–
–
(68)
735
–
3,048
2,529
Cash and cash equivalents at end of year ......................................
$
5,577
Supplemental disclosures of cash flow information:
Cash paid during the year for:
(13,558)
–
–
147,408
866
–
676
(38,835)
27,274
11,303
–
(38,577)
(178)
(89)
14,404
81,886
4
1,509
5,577
7,086
12
102,667
7,086
109,753
Interest ....................................................................................
Income taxes ..........................................................................
Supplemental disclosures of non-cash investing activities:
Payable for purchase of equipment and construction in progress .
Fair value of ordinary shares issued by Himax Display, Inc.
in the acquisition of Integrated Microdisplays Limited ..................
$
$
$
$
6
3,867
125
1,130
311
5,695
(71)
(2,285)
(1,846)
–
–
538
See accompanying notes to consolidated financial statements.
50
HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2005 and 2006
Note 1. Background, Principal Activities and Basis of Presentation
Background
Himax Technologies Limited (“Himax Taiwan”) was incorporated on June 12, 2001. On April 26, 2005, Himax Technologies,
Inc. was established as a new holding company in the Cayman Islands to hold the shares of Himax Taiwan in connection with
the reorganization and share exchange described below.
On June 10, 2005, Himax Taiwan’s shareholders resolved the exchange of shares between Himax Taiwan and Himax Technologies,
Inc. (the “Company”) pursuant to Republic of China (ROC) Business Mergers and Acquisitions Law. Upon obtaining all
necessary approvals from ROC authorities, the share exchange became effective on October 14, 2005, whereby all issued and
outstanding common shares of Himax Taiwan were exchanged with Himax Technologies, Inc.'s new shares at a 1:1 ratio. The
approval of the ROC Investment Commission is conditioned upon the satisfaction of certain undertakings the Company made
to the ROC Investment Commission, including undertakings relating to the Company’s plans to expand its investment in the
ROC as well as undertakings to submit certain documentation after the effectiveness of the share exchange. Many of these
undertakings are prospective, on-going obligations and have yet to be satisfied to date. Refer to Note 21 (i) for further details.
Upon completion of the share exchange, Himax Taiwan became Himax Technologies, Inc.’s directly and wholly-owned subsidiary.
On April 4 and 13, 2006, the Company completed its initial public offering and sold 17,290,588 American Depositary Shares
(“ADSs”), representing 17,290,588 new ordinary shares, at an initial public offering price of US$8.55 per ADS. 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”).
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.
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
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
SFAS No. 158
After application
of SFAS No. 158
Adjustments
of SFAS No. 158
Refundable deposits and prepaid pension costs .......................
$
811
Deferred income taxes-noncurrent ..............................................
Total assets ..........................................................................
Accrued pension liabilities ...........................................................
Minority interest ............................................................................
Accumulated other comprehensive income (loss), net of tax ...
Total stockholders’ equity ....................................................
Total stockholders’ equity and liabilities ..............................
11,307
518,938
–
1,401
56
364,258
518,938
(242)
98
(144)
192
(5)
(331)
(331)
(144)
569
11,405
518,794
192
1,396
(275)
363,927
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)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the
financial statements and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for
deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
(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
Basic earnings per share ............................................................
$
0.21
176,105
0.35
192,475
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) .............................................
Nonvested ordinary shares and RSUs (in thousands) .......
169,320
3,978
173,298
Diluted earnings per share .........................................................
$
0.21
176,105
4,554
180,659
0.34
192,475
2,615
195,090
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:
Time deposit with original maturities
more than three months ............................
Open-ended bond fund .....................................
Total ....................................................................
Time deposit with original maturities
more than three months ............................
Open-ended bond fund .....................................
Total ....................................................................
December 31, 2005
Amortized
Gross Unrealized Gross Unrealized
Cost
Gains
Losses
Market
Value
(in thousands)
152
3,804
3,956
–
33
33
–
–
–
152
3,837
3,989
December 31, 2005
Amortized
Gross Unrealized Gross Unrealized
Cost
Gains
Losses
Market
Value
(in thousands)
522
8,277
8,799
–
29
29
–
–
–
522
8,306
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
Gross
Gross
from sales
realized gains
realized losses
Year ended December 31, 2004 .....................................................
Year ended December 31, 2005 .....................................................
Year ended December 31, 2006 .....................................................
$
$
$
66,312
42,028
27,128
(in thousands)
401
105
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
beginning of year
Addition
Balance at
Amounts
utilized
Balance at
end of year
For the year ended December 31, 2004 .........
For the year ended December 31, 2005 .........
For the year ended December 31, 2006 .........
$
$
$
28
240
181
(in thousands)
1,022
398
2,843
(810)
(457)
(2,156)
240
181
868
59
Note 5. Inventories
As of December 31, 2005 and 2006, inventories consisted of the following:
Merchandise ......................................................................................................................
$
Finished goods .................................................................................................................
Work in process ...............................................................................................................
Raw materials ...................................................................................................................
Supplies ............................................................................................................................
December 31,
2005
2006
(in thousands)
38
32,192
51,769
20,877
128
6
44,194
40,039
17,048
54
Note 6. Prepaid Expenses and Other Current Assets
$
105,004
101,341
December 31,
2005
2006
(in thousands)
Refundable business tax ..................................................................................................
$
Prepaid rental, software maintenance fee and others ....................................................
Fair value of foreign currency forward contract ..............................................................
7,953
2,910
250
$
11,113
5,994
4,330
–
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
Building .............................................................................................................................
Machinery ..........................................................................................................................
Research and development equipment ...........................................................................
Software ............................................................................................................................
Office furniture and equipment ........................................................................................
Others ...............................................................................................................................
Accumulated depreciation and amortization ...................................................................
Prepayment for purchases of equipment and software .................................................
Construction of buildings in progress ..............................................................................
–
6,184
5,464
3,590
1,534
3,474
30,406
(7,566)
798
788
$
24,426
10,154
12,967
6,744
8,611
5,149
2,478
4,150
50,253
(12,742)
1,384
–
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:
TopSun Optronics, Inc. .....................................................................................................
$
Jemitek Electronic Corp. ..................................................................................................
LightMaster Systems, Inc. ................................................................................................
$
December 31,
2005
2006
(in thousands)
–
313
1,500
1,813
817
–
–
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 ............................................................................
$
Accrued commission ........................................................................................................
Accrued warranty costs ...................................................................................................
Accrued mask and mold fees .........................................................................................
Payable for purchases of equipment ...............................................................................
Accrued insurance, welfare expenses, etc. .....................................................................
2,855
2,534
545
3,039
2,471
2,551
3,441
1,836
630
3,282
4,317
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
beginning of year
Addition
Balance at
Amounts
utilized
Balance at
end of year
Year ended December 31, 2004 ......................
Year ended December 31, 2005 ......................
Year ended December 31, 2006 ......................
$
$
$
–
507
545
Note 11. Short-term Debt
(in thousands)
960
1,415
2,101
(453)
(1,377)
(2,016)
507
545
630
Short-term debt borrowed in 2005 are bank loans used to finance the payment of a special cash dividend that the Company
distributed to its shareholders of record as of November 2, 2005 and to support the working capital requirements for general
corporate purposes.
As of December 31, 2005, short-term debt consisted of a $13,600 thousand loan, denominated in US dollars, and which has
a maturity date that had been extended to May 2, 2006. The remaining balance of short-term debt of approximately $13,674
thousand, is comprised of three separate loans in the amounts of NT$250,000 thousand ($7,596 thousand), NT$40,000
thousand ($1,216 thousand) and NT$160,000 thousand ($4,862 thousand), all of which are denominated in New Taiwan dollars
and which have maturity dates that have been extended to March 26, 2006, March 26, 2006 and March 27, 2006, respectively.
All short term debts had been fully paid off during 2006.
As of December 31, 2005 and 2006, unused credit lines amounted to $26,727 thousand and $42,557 thousand, respectively.
Interest rates per annum on short-term debt outstanding as of December 31, 2005 ranged from 1.70% to 4.61%. Cash
equivalents in the form of time deposits of $13,600 thousand are held as collateral for certain short-term debt at December
31, 2005.
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
Mobile phone TFT driver IC
February 2005
SBIP
DOIT of MOEA
3,800 (US$112)
October 2004 to July 2005
Application of LCOS
19,500 (US$610)
December 2004 to
Multimedia high definition
DOIT of MOEA
7,000 (US$214)
September 2005 to
Mobile phone TFT
December 2006
single chip SOC
November 2005
TV 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 .....................................................................
$
Service cost ................................................................................................................
Interest cost ................................................................................................................
Actuarial loss ..............................................................................................................
Benefit obligation at end of year ...............................................................................
Change in plan assets:
Fair value at beginning of year ..................................................................................
Actual return on plan assets .....................................................................................
Employer contribution ................................................................................................
Fair value at end of year ...........................................................................................
Funded status ......................................................................................................
Unrecognized net actuarial loss .......................................................................................
Amounts recognized in the balance sheet consist of:
Prepaid pension costs ...............................................................................................
Accrued pension liabilities ..........................................................................................
Net amount recognized .......................................................................................
$
$
$
$
414
150
13
45
622
215
4
195
414
(208)
206
12
(14)
(2)
622
9
22
232
885
414
12
286
712
(173)
–
19
(192)
(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
Interest cost ......................................................................................
Expected return on plan assets ......................................................
Net amortization and deferral ..........................................................
5
(3)
6
Net periodic pension cost ................................................................
$
178
150
13
(6)
6
163
9
22
(18)
6
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 Display &
Himax Taiwan
Himax Analogic
Himax Analogic
Discount rate ....................................................................................
Rate of increase in compensation levels .........................................
3.50%
4.00%
3.50%
3.00%
2.75%
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
Taiwan
Himax
Display &
Himax Analogic
Himax
Taiwan
Himax
Himax
Display &
Display &
Himax Analogic 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 ..............................................................................
$
Research and development .............................................................
General and administrative ...............................................................
Sales and marketing .........................................................................
291
4,288
721
537
$
5,837
188
6,336
848
1,241
8,613
275
11,806
1,444
1,625
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 ........................................................................
$
Research and development ........................................................
General and administrative .........................................................
Sales and marketing ...................................................................
220
3,045
540
336
$
4,141
98
3,215
454
628
4,395
–
–
–
–
–
(b) Long-term Incentive Plan
On October 25, 2005, the Company’s shareholders approved a long-term incentive plan. The plan permits the grants of
options or RSUs to the Company’s employees, directors and service providers where each unit of RSU represents one
ordinary share of the Company.
On December 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
Weighted
Underlying
Average Grant
Shares for RSUs
Date Fair Value
Balance at January 1, 2005 ......................................................................................
–
$
Granted .................................................................................................................
1,317,564
Vested ...................................................................................................................
Balance at December 31, 2005 ................................................................................
(329,395)
988,169
Granted .................................................................................................................
3,798,808
Vested ...................................................................................................................
(2,106,669)
Forfeited ................................................................................................................
(172,165)
Balance at December 31, 2006 ................................................................................
2,508,143
–
8.62
8.62
8.62
5.71
6.14
7.19
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 ........................................................................
$
Research and development ........................................................
General and administrative .........................................................
Sales and marketing ...................................................................
$
–
–
–
–
–
62
2,080
262
436
2,840
264
11,263
1,392
1,554
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:
Weighted
Number of
Average Grant
Shares
Date Fair Value
Balance at January 1, 2004 ......................................................................................
3,680,864
$
Forfeited ................................................................................................................
(484,979)
Balance at December 31, 2004 ................................................................................
3,195,885
Forfeited ................................................................................................................
(2,487)
Balance at December 31, 2005 ................................................................................
3,193,398
Vested ...................................................................................................................
(3,193,398)
Balance at December 31, 2006 ................................................................................
–
0.116
0.116
0.116
0.116
0.116
0.116
–
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:
Weighted
Number of
Average Grant
Shares
Date Fair Value
Balance at January 1, 2005 ......................................................................................
–
$
Granted .................................................................................................................
1,250,000
Forfeited ................................................................................................................
Balance at December 31, 2005 ................................................................................
Forfeited ................................................................................................................
Balance at December 31, 2006 ................................................................................
(445,000)
805,000
(36,000)
769,000
–
0.319
0.319
0.319
0.319
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:
Weighted Average of
Excess of Grant Date
Number of
Fair Value over
Shares
Employee Payment
Balance at January 1, 2004 ......................................................................
8,474,948
$
0.607
Forfeited ................................................................................................
(1,289,280)
Balance at December 31, 2004 ................................................................
7,185,668
Vested ...................................................................................................
(2,706,593)
Balance at December 31, 2005 ................................................................
4,479,075
Vested ...................................................................................................
(4,479,075)
Balance at December 31, 2006 ................................................................
–
0.662
0.597
0.356
0.743
0.743
–
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 ..............................................................................
$
Research and development .............................................................
General and administrative ...............................................................
Sales and marketing .........................................................................
71
1,113
181
201
28
916
132
177
$
1,566
1,253
11
414
52
71
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
October 29, 2003
April 1, 2004 ~ March 31, 2009
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:
Current income tax expense ............................................................
Deferred income tax benefit .............................................................
Year Ended December 31,
2004
2005
2006
$
$
3,215
(4,986)
(1,771)
(in thousands)
12,294
(3,371)
8,923
3,492
(8,938)
(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
Expected income tax expense .........................................................
$
11,115
Tax-exempted income ......................................................................
(6,328)
(in thousands)
22,834
(9,189)
Effect of difference between tax base of undistributed
income surtax with pre-tax income ...........................................
Adjustment for enacted change in tax laws ...................................
Impairment loss on investment in non-marketable securities ........
Nontaxable gains on sale of marketable securities ........................
Increase of investment tax credits ...................................................
Increase in valuation allowance .......................................................
Non deductible share-based compensation expenses ...................
Provision for uncertain tax position in connection with
share-based compensation expenses ........................................
Tax benefit resulting from distribution of prior year’s income ........
Foreign tax rate differential ...............................................................
Others ...............................................................................................
–
–
–
(130)
(7,586)
882
1,897
–
(1,650)
41
(12)
Actual income tax expense (benefit) ...............................................
$
(1,771)
–
–
–
(38)
(10,647)
2,421
2,799
124
–
83
536
8,923
22,103
(16,012)
1,562
1,099
477
(67)
(15,216)
2,798
1,002
526
(789)
(1,796)
(1,133)
(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 ................................................................
Other comprehensive income ..........................................................
–
–
–
3
(98)
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 .....................................................................................................................
$
Unrealized foreign exchange loss ..............................................................................
Capitalized expense for tax purposes .......................................................................
Accrued compensated absences ..............................................................................
Allowance for sales return, discounts and warranty ................................................
Unused investment tax credits ..................................................................................
Unused loss carry-forward .........................................................................................
Defined benefit pension plan .....................................................................................
Investments in non-marketable securities .................................................................
Other ...........................................................................................................................
Total gross deferred tax assets ...........................................................................
Less: valuation allowance .................................................................................................
Net deferred tax assets .......................................................................................
Deferred tax liabilities:
Unrealized foreign exchange gain ..............................................................................
Foreign currency translation adjustments ..................................................................
Prepaid pension cost .................................................................................................
Total gross deferred tax liabilities ........................................................................
Net deferred tax assets .......................................................................................
$
643
30
145
37
236
9,407
1,851
–
42
51
12,442
(3,314)
9,128
5
3
4
12
9,116
1,497
–
85
88
328
19,420
3,094
98
–
13
24,623
(6,278)
18,345
125
6
65
196
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 ...........................................................................................
Goodwill and other noncurrent intangible assets .......................................................................................
$
$
6,112
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
NTD
JPY
USD
USD
$
$
12,000
10,000
$ 213
$
37
January 25, 2006
NT$
400,348
January 25, 2006 ~ February 22, 2006
JPY 1,177,925
(in thousands)
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
Chi Mei Communication System, Inc. (CMCS)
CMC nominated more than half of the seats on
NEXGEN’s Board of Directors
CMCS’s Board of Directors
Chi Lin Technology Co., Ltd.(Chi Lin Tech)
CMC nominated more than half of the seats on
NingBo Chi Mei Optoelectronics Ltd. (CMO-NingBo)
The subsidiary of CMO
Chi Lin Tech’s Board of Directors
Chi Mei EL Corporation(CMEL)
TopSun Optronics, Inc.(TopSun)
The subsidiary of CMO
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
CMO-NingBo ...............................................................................
Chi Lin Tech ................................................................................
TopSun ........................................................................................
NEXGEN ......................................................................................
JEC ..............................................................................................
CMEL ...........................................................................................
ID Tech ........................................................................................
–
290
–
–
599
–
775
721
2,841
–
370
1,565
–
275
335,797
73,898
2,985
1,136
805
9
2
–
$
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 ..........
Display driver for mobile handsets .......................................
Others ....................................................................................
41
–
528
$
189,095
6
–
1,165
317,012
482
6
1,130
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
CMO-NingBo .........................................................................................................
TopSun ...................................................................................................................
Chi Lin Tech ..........................................................................................................
NEXGEN ................................................................................................................
CMEL .....................................................................................................................
JEC ........................................................................................................................
Allowance for sales returns and discounts ..........................................................
721
–
1,234
221
–
120
69,688
(101)
$
69,587
81,610
33,923
1,158
444
117
2
–
117,254
(404)
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.
( i i ) Purchases and accounts payable
Purchases from related parties are summarized as follows:
Year Ended December 31,
2004
2005
2006
(in thousands)
CMO ......................................................................................
$
176
Chi Lin Tech ..........................................................................
CMC ......................................................................................
–
–
$
176
The purchases had been full paid as of December 31, 2005 and 2006.
82
7
–
89
703
31
9
743
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 .......................................................................................................
$
January 1, 2008~December 31, 2008 .......................................................................................................
January 1, 2009~December 31, 2009 .......................................................................................................
864
509
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 .........................
Display drivers for consumer electronics applications ....................
Others ...............................................................................................
12,607
21,754
7,906
31,123
18,571
19,879
52,160
28,616
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
Taiwan ...............................................................................................
$
284,569
Other Asia Pacific (China, Korea and Japan) .................................
Europe (Netherlands and France) ....................................................
15,704
–
(in thousands)
482,991
57,213
–
$
300,273
540,204
605,924
138,287
307
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 .................................................................................................................................
Korea .................................................................................................................................
82
–
203
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:
CMO and its affiliates, a related party ............................................
Chunghwa Picture Tubes and its affiliates ......................................
Year Ended December 31,
2004
2005
2006
$
$
189,870
58,430
248,300
(in thousands)
318,008
87,534
405,542
409,697
92,561
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:
CMO and its affiliates, a related party ............................................................................
Chunghwa Picture Tubes and its affiliates ......................................................................
December 31,
2005
2006
(in thousands)
$
$
68,113
41,369
109,482
115,535
33,846
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 ...................................................................................................................................
$
Property and equipment ...................................................................................................................
Acquired in-process R&D .................................................................................................................
Intangible assets ...............................................................................................................................
Goodwill .............................................................................................................................................
Total assets acquired .................................................................................................................
Current liabilities ................................................................................................................................
Total liabilities assumed ..............................................................................................................
Net assets acquired ...................................................................................................................
8,937
1,247
700
7,148
28,566
46,598
(1,349)
(1,349)
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 ..............................................................................................
$
Other current assets .........................................................................................................
Investment in subsidiaries ................................................................................................
Total assets .......................................................................................................................
Liabilities ............................................................................................................................
Total stockholders’ equity ................................................................................................
Total liabilities and stockholder’s equity ...........................................................................
$
$
$
–
–
179,564
179,564
13,733
165,831
179,564
95,591
31,013
238,648
365,252
1,325
363,927
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 ........................................................................
Operating income (loss) .............................................................
Equity in earnings from subsidiaries ................................................
Other non operating income (loss) ..................................................
Income before income taxes .....................................................
Income tax ........................................................................................
–
–
–
36,000
–
36,000
–
Net Income ...................................................................................
$
36,000
–
(77)
(77)
61,733
(98)
61,558
–
61,558
–
–
–
69,435
5,755
75,190
–
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 ............................................
Increase in other accrued expenses and other current
liabilities ...............................................................................
Net cash provided by (used in) operating activities .................
Net cash used in investing activities .........................................
Cash flows from financing activities:
Distribution of special cash dividends .......................................
Proceeds from borrowing (repayment) of short-term debt ......
Proceeds from initial public offering, net of issuance costs ....
Acquisition of ordinary shares for retirement ............................
Net cash provided by financing activities .............................
Net increase in cash and cash equivalents ....................................
Cash and cash equivalents at beginning of year ...........................
Cash and cash equivalent at end of year ......................................
$
–
–
–
–
–
–
–
–
–
–
–
–
–
133
(42)
–
(13,558)
13,600
–
–
42
–
–
–
(5,789)
1,192
1,158
(540)
–
(13,600)
147,408
(38,835)
94,973
95,591
–
95,591
86
Corporate Information
Board of Directors
Investor Information
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
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.
Incubator System Design Center, VP
8F, No19, Section 1, Hang-Chou South Road,
John Chou
Taipei 100, Taiwan
jackson_ko@himax.com.tw
Quality & Reliability Assurance and Support
jessie_wang@himax.com.tw
Design Center, VP
Norman Hong
Sales and Marketing, VP
Corporate Headquarters
David Pasquale
Executive Vice President
The Ruth Group
757 Third Avenue
New York, NY 10017
+646-536-7006
Himax Technologies, Inc.
dpasquale@theruthgroup.com
No. 26, Zih Lian Road, Fonghua Village,
Sinshih Township, Tainan County 74445, Taiwan
Tel: +886-6-505-0880
Fax:+886-6-507-0000
87
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