UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ________________

 

Commission file number: 000-51847

 

HIMAX TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s name into English)

 

CAYMAN ISLANDS

(Jurisdiction of incorporation or organization)

 

NO. 26, ZIH LIAN ROAD

SINSHIH DISTRICT, TAINAN CITY 74148

TAIWAN, REPUBLIC OF CHINA

(Address of principal executive offices)

 

Jackie Chang

Chief Financial Officer

Telephone: +886-2-2370-3999

E-mail: jackie_chang@himax.com.tw

Facsimile: +886-2-2314-0877

10F, No. 1, Xiangyang Road
Taipei 10046

Taiwan, Republic of China

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class Name of each exchange on which registered
Ordinary Shares, par value $0.3 per ordinary share The NASDAQ Global Select Market Inc.*
   
*Not for trading, but only in connection with the listing on the NASDAQ Global Select Market, Inc. of American Depositary Shares representing such Ordinary Shares

 

 
 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 339,149,508 Ordinary Shares.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨  Yes      x  No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨  Yes      x  No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x  Yes      ¨  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨                                 Accelerated filer x                                 Non-accelerated filer ¨

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ Other ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨  Item 17      ¨  Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨  Yes      x  No 

 

 

 

 
 

 

TABLE OF CONTENTS

 

  Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
CERTAIN CONVENTIONS 1
PART I 3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 3
ITEM 3. KEY INFORMATION 3
3.A. Selected Financial Data 3
3.B. Capitalization and Indebtedness 5
3.C. Reason for the Offer and Use of Proceeds 5
3.D. Risk Factors 6
ITEM 4. INFORMATION ON THE COMPANY 27
4.A. History and Development of the Company 27
4.B. Business Overview 29
4.C. Organizational Structure 49
4.D. Property, Plant and Equipment 51
ITEM 4A. UNRESOLVED STAFF COMMENTS 51
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 51
5.A. Operating Results 51
5.B. Liquidity and Capital Resources 68
5.C. Research and Development 69
5.D. Trend Information 69
5.E. Off-Balance-Sheet Arrangements 69
5.F. Tabular Disclosure of Contractual Obligations 70
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 70
6.A. Directors and Senior Management 70
6.B. Compensation of Directors and Executive Officers 72
6.C. Board Practices 73
6.D. Employees 75
6.E. Share Ownership 77
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 78
7.A. Major Shareholders 78
7.B. Related Party Transactions 79
7.C. Interests of Experts and Counsel 80
ITEM 8. FINANCIAL INFORMATION 80
8.A. Consolidated Statements and Other Financial Information 81
8.B. Significant Changes 81
ITEM 9. THE OFFER AND LISTING 81
9.A. Offer and Listing Details 81
9.B. Plan of Distribution 82
9.C. Markets 82
9.D. Selling Shareholders 82
9.E. Dilution 82
9.F. Expenses of the Issue 82
ITEM 10. ADDITIONAL INFORMATION 82
10.A. Share Capital 82
10.B. Memorandum and Articles of Association 82
10.C. Material Contracts 83
10.D. Exchange Controls 83
10.E. Taxation 83
10.F. Dividends and Paying Agents 86
10.G. Statement by Experts 86
10.H. Documents on Display 86
10.I. Subsidiary Information 86

 

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 86
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 87
12.A. Debt Securities 87
12.B. Warrants and Rights 87
12.C. Other Securities 87
12.D. American Depositary Shares 88
PART II 88
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 88
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 88
ITEM 15. CONTROLS AND PROCEDURES 88
ITEM 16. [RESERVED] 90
16.A. Audit Committee Financial Expert 90
16.B. Code of Ethics 90
16.C. Principal Accountant Fees and Services 90
16.D. Exemptions from the Listing Standards for Audit Committees 91
16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 92
16.F. Chang in Registrant’s Certified Accountant 92
16.G. Corporate Governance 92
16.H. Mine Safety Disclosure 92
PART III 92
ITEM 17. FINANCIAL STATEMENTS 92
ITEM 18. FINANCIAL STATEMENTS 92
ITEM 19. EXHIBITS 94

 

ii
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Although these forward-looking statements, which may include statements regarding our future results of operations, financial condition, or business prospects, are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report. The words “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements. Our actual results of operations, financial condition or business prospects may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons, including, among other things and not limited to, our anticipated growth strategies, our and our customers’ future business developments, results of operations and financial condition, our ability to develop new products, the future growth and pricing trend of the display driver markets, the future growth of end-use applications that use flat panel displays, particularly TFT-LCD panels, development of alternative flat panel display technologies, market acceptance and competitiveness of the driver and non-driver products developed by us, our ability to protect intellectual property, changes in customer relations and preference, shortage in supply of key components, our ability to collect accounts receivable and manage inventory, changes in economic and financial market conditions, and other factors. For a discussion of these risks and other factors, please see “Item 3.D. Key Information—Risk Factors.”

 

CERTAIN CONVENTIONS

 

Unless otherwise indicated, all translations from U.S. dollars to NT dollars in this annual report were made at a rate of $1.00 to NT$29.05, the exchange rates set forth in the H.10 weekly statistical release of the Federal Reserve System of the United States (the “Federal Reserve Board”) on December 31, 2012. No representation is made that the NT dollar amounts referred to herein could have been or could be converted into U.S. dollars at any particular rate or at all. On April 19, 2013, the noon buying rate was $1.00 to NT$29.77. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

 

Unless otherwise indicated, in this annual report,

 

the terms “we,” “us,” “our company,” “our,” and “Himax” refer to Himax Technologies, Inc., its predecessor entities and subsidiaries;

 

the term “Himax Taiwan” refers to Himax Technologies Limited, our wholly owned subsidiary in Taiwan and our predecessor;

 

“shares” or “ordinary shares” refers to our ordinary shares, par value $0.3 per share;

 

“RSUs” refers to restricted share units;

 

“ADSs” refers to our American depositary shares, each of which represents two ordinary shares;

 

“ADRs” refers to the American depositary receipts that evidence our ADSs;

 

“ROC” or “Taiwan” refers to the island of Taiwan and other areas under the effective control of the Republic of China;

 

“PRC” or “China” for purposes of this annual report refers to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau;

 

“AMOLED” refers to active matrix organic light-emitting diode;

 

“ASIC” refers to application specific integrated circuit;

 

“CMOS” refers to complementary metal oxide semiconductor;

 

“head-mounted-display” refers to a display device, worn on the head or as part of a helmet, that has a small display optic in front of one or each;

 

1
 

 

“IC” refers to integrated circuit;

 

“IGZO” refers to indium gallium zinc oxide;

 

“Innolux” refers to Innolux Corporation, its predecessor and consolidated subsidiaries, unless the context otherwise requires;

 

“LCOS” refers to liquid crystal on silicon;

 

“LED” refers to light-emitting diode;

 

“LTPS” refers to low temperature poly silicon;

 

“MEMS” refers to micro-electro mechanical systems;

 

“OLED” refers to organic light-emitting diode;

 

“TFT-LCD” refers to amorphous silicon thin film transistor liquid crystal display, or “a-Si TFT-LCD”;

 

“VGA” refers to Video Graphics Array;

 

“wafer level optics” are optical products manufactured using semiconductor process on wafers;

 

“processed tape” refers to polyimide tape plated with copper foil that has a circuit formed within it, which is used in tape-automated bonding packaging;

 

“semiconductor manufacturing service providers” refers to third-party wafer fabrication foundries, gold bumping houses, and assembly and testing houses;

 

“large-sized panels” refers to panels that are typically above ten inches in diagonal measurement;

 

“small and medium-sized panels” refers to panels that are typically around ten inches or less in diagonal measurement;

 

all references to “New Taiwan dollars,” “NT dollars” and “NT$” are to the legal currency of the ROC; and

 

all references to “dollars,” “U.S. dollars” and “$” are to the legal currency of the United States.

 

On August 10, 2009, we effected:(i) a stock split in the form of a stock dividend of 5,999 ordinary shares for each ordinary share held by shareholders of record, followed by a consolidation of every 3,000 ordinary shares into one ordinary share;(ii) a change of the par value of our ordinary shares from $0.0001 each to $0.3 each; and (iii) a change in our ADS ratio from one ADS representing one ordinary share to one ADS representing two ordinary shares. See “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders” for more information. Unless otherwise indicated, all shares, per share and share equity data in this annual report have been retroactively adjusted to reflect the effect of the stock split and the change in par value for all periods presented.

 

 

2
 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

3.A. Selected Financial Data

 

The selected consolidated statement of income data and selected consolidated cash flow data for the years ended December 31, 2010, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited consolidated financial statements included herein, which were prepared in accordance with U.S. GAAP. The selected consolidated statement of income data and selected consolidated cash flow data for the years ended December 31, 2008 and 2009 and the selected consolidated balance sheet data as of December 31, 2008, 2009 and 2010 are derived from our audited consolidated financial statements that have not been included herein and were prepared in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and the notes to those statements included herein.

 

   Year Ended December 31, 
   2008   2009   2010   2011   2012 
   (in thousands, except per share data) 
Consolidated Statement of Income Data:                    
Revenues from third parties, net   $312,336   $245,075   $304,068   $374,788   $485,281 
Revenues from related parties, net    520,463    447,306    338,624    258,233    251,974 
Costs and expenses(1):                         
Cost of revenues    628,693    550,556    507,647    507,449    566,700 
Research and development    87,574    71,364    76,426    79,042    70,913 
General and administrative    19,353    16,346    18,770    17,095    17,139 
(Recovery of) bad debt expense    25,305    218    (8,788)   (1,541)   - 
Sales and marketing    11,692    10,360    13,279    14,368    15,443 
                          
Operating income   $60,182   $43,537   $35,358   $16,608   $67,060 
                          
Net income(2)   $72,724   $35,810   $29,066   $9,507   $50,138 
Net income attributable to
Himax stockholders
  $76,381   $39,650   $33,206   $10,706   $51,596 
                          
                          
Earnings per ordinary share attributable to Himax stockholders(2):                         
Basic   $0.20   $0.11   $0.09   $0.03   $0.15 
Diluted   $0.20   $0.11   $0.09   $0.03   $0.15 
Earnings per ADS attributable to
Himax stockholders:
                         
Basic   $0.40   $0.21   $0.19   $0.06   $0.30 
Diluted   $0.40   $0.21   $0.19   $0.06   $0.30 
Weighted-average number of ordinary shares used in earnings per share computation:                         
Basic    383,229    369,652    355,037    353,771    341,056 
Diluted    383,753    370,229    355,690    353,827    341,524 
Weighted-average number of ADS equivalent used in earnings per share computation:                         
Basic    191,615    184,826    177,518    176,886    170,528 
Diluted    191,877    185,115    177,845    176,914    170,762 
                          
Cash dividends declared per ordinary share(3)   $0.175   $0.150   $0.125   $0.060   $0.032 
Cash dividends declared per ADS   $0.350   $0.300   $0.250   $0.120   $0.063 

 

 

Note: (1) The amount of share-based compensation included in applicable costs and expenses categories is summarized as follows:

 

3
 

 

   Year Ended December 31, 
   2008   2009   2010   2011   2012 
   (in thousands) 
Cost of revenues   $435   $264   $240   $124   $176 
Research and development    15,861    10,936    8,803    5,062    5,625 
General and administrative    2,813    1,959    1,525    872    1,191 
Sales and marketing    2,691    1,902    1,613    1,005    1,230 
Total   $21,800   $15,061   $12,181   $7,063   $8,222 

 

Of the $21.8 million, $15.1 million, $12.2 million, $7.1 million and $8.2 million in share-based compensation in 2008, 2009, 2010, 2011 and 2012, $12.7 million, $6.5 million, $5.9 million, $2.9 million and $6.3 million were settled in cash, respectively.

 

(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. The effect of such tax exemption on our historical results was an increase on net income and basic and diluted earnings per share attributable to our stockholders of $25.2 million, $0.07 and $0.07, respectively, for the year ended December 31, 2008, $9.4 million, $0.03 and $0.03, respectively, for the year ended December 31, 2009, $3.6 million, $0.01 and $0.01, respectively, for the year ended December 31, 2010, $0.8 million, $0.002 and $0.002, respectively, for the year ended December 31, 2011 and $2.9 million, $0.01 and $0.01, respectively, for the year ended December 31, 2012. A portion of these tax exemptions expired or will expire on March 31, 2009, December 31, 2010, December 31, 2012, December 31, 2013 and December 31, 2017.

 

(3)The above cash dividends should not be considered representative of the dividends that would be paid in any future periods or our dividend policy. See “Item 8.A.8. Financial Information—Dividends and Dividend Policy” for more information on our dividends and our dividend policy.

 

   As of December 31, 
   2008   2009   2010   2011   2012 
Consolidated Balance Sheet Data:  (in thousands) 
Cash and cash equivalents  $ 135,200   $ 110,924   $ 96,842   $ 106,164   $ 138,737 
Accounts receivable, net   51,029    64,496    80,212    101,280    135,747 
Accounts receivable from related parties, net   104,477    138,172    95,964    79,833    73,258 
Inventories   96,921    67,768    117,988    112,985    116,671 
Total current assets   434,650    423,797    485,924    515,709    567,088 
Total assets   565,548    550,448    619,620    644,978    674,598 
Accounts payable   53,720    88,079    115,922    134,353    135,546 
Total current liabilities   90,143    120,651    205,748    245,360    242,117 
Total liabilities   95,542    126,376    212,644    249,920    246,440 
Ordinary shares   114,072    107,404    106,153    107,010    107,010 
Total equity   470,006    424,072    406,976    395,058    428,158 

  

4
 

 

  Year Ended December 31, 
   2008   2009   2010   2011   2012 
Consolidated Cash Flow Data:  (in thousands) 
Net cash provided by operating activities  $136,500   $73,630   $57,631   $43,448   $52,167 
Net cash used in investing activities   (21,810)   (7,541)   (17,599)   (10,197)   (695)
Net cash used in financing activities   (74,304)   (90,779)   (54,195)   (24,015)   (18,931)

 

Exchange Rate Information

 

The following table sets forth the average, high, low and period-end noon buying rates between NT dollars and U.S. dollars for the periods indicated. For periods prior to January 1, 2009, the exchange rates reflected the noon buying rate for cable transfers in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York. For periods after January 1, 2009, the exchange rates reflect the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board.

 

    Noon Buying Rate  
   

Average(1)

    High     Low     Period-end  
    (NT dollars per U.S. dollar)  
Period                        
2008     31.51       33.58       29.99       32.76  
2009     32.96       35.21       31.95       31.95  
2010     31.39       32.43       29.14       29.14  
2011     29.42       30.67       28.50       30.27  
2012     29.47       30.28       28.96       29.05  
October     29.24       29.31       29.15       29.20  
November     29.11       29.26       28.96       29.07  
December     29.04       29.10       29.00       29.05  
2013                                
January     29.10       29.54       28.93       29.54  
February     29.63       29.73       29.52       29.67  
March     29.74       29.88       29.63       29.81  
April (through April 19)     29.91       30.06       29.77       29.77  

 

 

Note:(1)Annual averages are calculated by averaging month-end rates for the relevant year. Monthly averages are calculated by averaging daily rates for the relevant period.

 

3.B. Capitalization and Indebtedness

 

Not applicable.

 

3.C. Reason for the Offer and Use of Proceeds

 

Not applicable.

 

5
 

 

3.D. Risk Factors

 

Risks Relating to Our Financial Condition and Business

 

We generate a substantial majority of our revenues from Innolux, which is the surviving entity following the merger of three of our customers. Any loss of or a significant reduction in Innolux’s sales could materially and adversely affect our operating results.

 

Innolux, formally known as Chimei Innolux Corporation, is one of our key customers. Chimei Innolux Corporation (then Innolux Display Corporation), underwent a merger with Chi Mei Optoelectronics Corp., or CMO, and TPO Displays Corporation, or TPO, in March 2010. All three of these entities have been our customers. In 2012, Innolux, together with its affiliates, accounted for approximately 34.2% of our revenues. As a significant portion of our revenues are generated from Innolux, we expect our results of operations and financial condition to continue to be significantly linked to the success and purchase policy of Innolux. Innolux has been adversely affected by the impact of the global economic downturn in recent years. Any loss of or a sharp reduction in Innolux’s sales could have a significant negative impact on our business and results of operations. In 2011 and 2012, our sales of large-sized panels, for which Innolux is our major customer, declined by approximately 26.2% and increased by approximately 12.9%, respectively. The decline in 2011 was primarily due to Innolux’s change of purchase policy to diversify its display driver supply base. The increase in 2012 was attributed to the growth from the Chinese panel makers in the China market where most of the new buildings of panel capacity took place. We cannot assure you that the purchase policy of Innolux will not change further and result in a reduction of our future sales. In addition, if Innolux seeks lower prices from us, our business and financial results could be materially and adversely affected. We expect our reliance on sales to Innolux to continue in the foreseeable future. Therefore, our operating results will likely continue to depend on sales to Innolux, as well as on the ability of Innolux to sell products that incorporate our products.

 

Our suppliers may have increasing bargaining power as a result of industry consolidation, which could result in an increase in our average unit cost and a decrease in our profit margin.

 

There has been an increased level of industry consolidation among our suppliers in recent years. In January, 2010, Chartered Semiconductor Manufacturing Ltd., one of our foundry service providers, merged with GlobalFoundries, one of the world’s largest semiconductor foundries. In April 2010, Chipbond Technology Corporation, or Chipbond, merged with International Semiconductor Technology Ltd., or IST, which have both been among our principal providers of gold bumping, assembly and testing, and chip probe testing services. Such merger and acquisition activities will likely increase the size and market power of the relevant suppliers and reduce the number of suppliers we could use. In addition, Siliconware Precision Industries Co., Ltd. closed its gold bumping manufacturing service in July 2010. Samsung Techwin Co., Ltd and Mitsui Micro Circuits Taiwan Co., Ltd will close chip-on flex, or packages business after June 2012. Such industry change could further reduce the number of suppliers for gold bumping, COF packages services and Tape that we could use. Therefore, suppliers could be in a better position to bargain for higher prices for their services and products, which could result in an increase in our average unit cost. Moreover, as gold is a crucial raw material in the gold bumping process, any increases in the price of gold could result in an increase in our average unit cost and a decrease in our profit margin. If we are unable to transfer any increase in average unit cost to our customers by selling at higher prices, our gross margin would decrease and our results of operations could be adversely affected.

 

The global economic downturn and financial crisis could negatively affect our business, results of operations and financial condition.

 

The global economic downturn and financial crisis that have been affecting global business, banking and financial sectors in recent years have also been affecting the semiconductor market. Our customers have reduced or delayed purchases of our products and may continue to alter their purchasing activities in response to economic uncertainty, weak consumer spending, concern about the stability of markets and lack of credit, among other factors. In addition, there could be a number of knock-on effects from such turmoil on our business, including insolvency of key suppliers resulting in product delays, inability of customers to obtain credit to finance purchases of our products or customer insolvencies, and other counterparty failures. Current uncertainty in global economic conditions also poses a risk to the overall economy that could impact our ability to manage commercial relationships with our customers and suppliers. Our revenues are susceptible to unexpected changes in global market conditions. If the severe global economic conditions continue or worsen, our results of operations and financial condition may be materially and adversely affected.

 

6
 

 

We derive over 80% of our net revenues from sales to the TFT-LCD panel industry, which is highly cyclical and subject to price fluctuations. Such cyclicality and price fluctuations could negatively impact our business or results of operations.

 

In 2011 and 2012, 87.3% and 86.0% of our revenues, respectively, were attributable to display drivers that were incorporated into TFT-LCD panels. We expect to continue to substantially depend on sales to the TFT-LCD panel industry for the foreseeable future. The TFT-LCD panel industry is intensely competitive and is vulnerable to cyclical market conditions. The average selling prices of TFT-LCD panels generally decline with time as a result of, among other factors, capacity ramp-up, technological advancements and cost reduction with the exception of the new high end and high resolution products. The average selling prices of TFT-LCD panels could further decline for numerous reasons, including but not limited to the following:

 

·lower-than-expected demand for end-use products that incorporate TFT-LCD panels;

 

·a surge in industrial manufacturing capacity due to the ramping up of new fabrication facilities and/or improvements in production yields; and

 

·manufacturers operating at high levels of capacity utilization in order to reduce fixed costs per panel.

 

The TFT-LCD panel industry is volatile and difficult to predict. Beginning in the second half of 2008, as a result of the severe economic downturn, the TFT-LCD panel industry suffered from an oversupply and a decrease in the average selling price of TFT-LCD panels. Such environment continued as we entered 2009, resulting in significant downward pricing pressure on our products. There was a rebound in demand for TFT-LCD panels in the second quarter of 2009, but the growth in output of TFT-LCD panels has been limited by the shortage of certain components for TFT-LCD panels. In the first half of 2010, due to rush orders from customers, supply chain for display drivers became very tight, especially for wafer foundry and processed tape. TFT-LCD panel manufacturers began to significantly increase their orders for certain components for TFT-LCD panels because of concerns about component shortage. As a result, the TFT-LCD panel industry suffered again from an oversupply in the second half of 2010 as the end demand did not pick up as expected, which negatively affected our sales to the TFT-LCD panel industry. Moreover, the 9.0 magnitude earthquake and tsunami in Japan in March 2011 materially and adversely impacted the supply chain for the TFT-LCD industry. Japan has played and is expected to continue to play an important role in supplying chemicals, raw materials, semiconductors and other products to both the TFT-LCD panel industry and the semiconductor industry and any future adverse impacts to the Japanese TFT-LCD panel industry may negatively impact our sales in Japan which could have a material adverse effect on our business or results of operations. In 2012, there were no events such as those described above that negatively impacted the TFT-LCD panel industry; however, we cannot assure you that such similar events will not occur in the future or there will not be any future shortages of materials or components for our products or our customers’ products or a decrease in demand for our products.

 

In addition, the merger of certain of our major customers, including CMO, Innolux and TPO in 2010, could result in an increase in their bargaining power and therefore subject us to additional downward pricing pressure. We cannot assure you that in such periods in which we experience significant downward pricing pressure, we could sufficiently reduce costs to completely offset the loss of revenues. In addition, a severe and prolonged industry downturn could also result in higher risks in relation to the collectability of our accounts receivable, the marketability and valuation of our inventories, the impairment of our tangible and intangible assets, and the stability of our supply chain. As a result, the cyclicality of the TFT-LCD panel industry could adversely affect our revenues, cost of revenues and results of operations.

 

Our strategy of expanding our product offerings to non-driver products may not be successful.

 

We have devoted, and intend to continue to devote, financial and management resources to the development, manufacturing and marketing of non-driver products as we diversify our product portfolio and because our non-driver products have higher gross margin than our driver products. Our non-driver products include, among others, timing controllers, touch panel controllers, TFT-LCD television and monitor semiconductor solutions, LCOS and MEMS microdisplays, power management ICs, CMOS image sensors, and wafer level optics products.

 

We believe end products utilizing our LCOS technology could potentially be a large market. Although we have made major progress toward commercialization of LCOS microdisplays for head-mounted-display, it is at a relatively early stage as compared to other products and has a relatively immature supply chain. Therefore it is difficult to project the success of the applications that use LCOS microdisplay products. We also believe there are potential market opportunities for our CMOS image sensors. However, the demand fluctuates and is very hard to predict. As we rely primarily on third-party foundries to supply wafers with at least a 3-month lead time and we currently do not have any long-term supply arrangements with any third-party foundries, we cannot assure you that we can acquire sufficient wafer capacity to fulfill customers’ orders.

 

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Developing and commercializing each of our non-driver products requires a significant amount of management, engineering and monetary resources. For example, we have established certain in-house facilities for key manufacturing process of our non-driver products including LCOS projector solutions and wafer level optics products. We also plan to increase capital expenditure for the development and manufacturing of non-driver products in the future. Moreover, we will be subject to ramp-up expenses in the early stage of mass production of our non-driver products. Numerous uncertainties exist in developing new products and we cannot assure you that we will be able to develop our non-driver products successfully. We may underestimate the amount of capital, personnel and other resources required to develop and commercialize our non-driver products, which may affect the success of our growth strategy. We may also overestimate the market potential of the end products that are utilizing or will utilize our non-driver products, which may negatively impact our strategy for the development of non-driver products. In addition, if we are unsuccessful in expanding our product offerings to non-driver products, it may negatively affect our reputation and the status of our brand in our other markets. The failure or delay in the development, production or commercialization of any of our non-driver products, the occurrence of any product defects or design flaws, or the low market acceptance of or demand for either our products or the end devices using our products may adversely affect our results of operations and growth prospects.

 

The concentration of our accounts receivable and the extension of payment terms for certain of our customers exposes us to increased credit risk and could harm our operating results and cash flows.

 

As of December 31, 2012, our accounts receivable less allowance for sales returns and discounts from Innolux and its affiliates were $73.3 million, which represented approximately 35.1% of our total accounts receivable less allowance for doubtful accounts, sales returns and discounts. The concentration of our accounts receivable exposes us to increased credit risk. For example, in 2008, partly due to the severe economic downturn, we incurred significant bad debt expense in relation to one of our largest customers Shanghai SVA-NEC Liquid Crystal Display Co. Ltd., or SVA-NEC, which represented 18% of our total accounts receivable outstanding as of December 31, 2008. During the second half of 2011, we agreed to extend payment terms for one of our largest customers because at that time this customer experienced certain financial difficulties. The receivables from this customer have since been paid and have stayed current during 2012 and we incurred no bad debt expenses. In addition, we have at times agreed to extend the payment terms for certain of our third-party and related party customers. Other customers have also requested extension of payment terms. We may also agree to grant such requests for the extension of payment terms in the future. As a result, a default by any such customer, a prolonged delay in the payment of accounts receivable or the extension of payment terms for our customers could adversely affect our cash flow, liquidity and our operating results.

 

Our customers may experience a decline in profitability or may not be profitable at all, which could adversely affect our results of operations and financial condition.

 

The TFT-LCD panel industry is highly competitive. TFT-LCD panel manufacturers, including our customers, experience significant pressure on prices and profit margins, due largely to growing industry capacity and fluctuations in demand for TFT-LCD panels. Some TFT-LCD panel manufacturers have greater access to capital or greater production, research and development, intellectual property, marketing or other resources than our customers, who may not be able to compete successfully and sustain their market positions. In addition, our customers’ business performance may fluctuate significantly due to a number of factors, many of which are beyond their control, including:

 

·consumer demand and the general economic conditions;

 

·the cyclical nature of both the TFT-LCD industry, including fluctuations in average selling prices, and its downstream industries;

 

·the speed at which TFT-LCD panel manufacturers expand production capacity;

 

·brand companies’ continued need for original equipment manufacturing services provided by TFT-LCD panel manufacturers;

 

·access to raw materials, components, equipment and utilities on a timely and economical basis;

 

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·technological changes;

 

·the rescheduling and cancellation of large orders;

 

·access to funding on satisfactory terms; and

 

·fluctuations in the currencies of TFT-LCD panels exporting countries against the U.S. dollar.

 

Our customers continued to operate in a challenging business environment and may experience a decline in profitability or may not be profitable at all. In addition, the aggressive expansion plans for next generation fabs in China proposed by several TFT-LCD panel manufacturers might significantly increase the output of TFT-LCD panels if all of the plans are implemented in the next few years, which could result in a decline in the average selling prices of TFT-LCD panels. In addition, the antitrust lawsuits in the U.S. and the European Union against several TFT-LCD panel manufacturers have materially and adversely affected the profitability of certain of our customers, which could, in turn, adversely affect our profit margin, significantly reduce our profits and materially affect our results of operations and financial condition.

 

We depend on sales of display drivers used in TFT-LCD panels, and the limited potential for further growth in both the market size of display drivers and the market share of our display drivers or the absence of continued market acceptance of our display drivers could limit our growth in revenues or harm our business.

 

In 2011 and 2012, we derived 87.3% and 86.0% of our revenues from the sale of display drivers used for large-sized applications, mobile handset applications and consumer electronics applications, and we expect to continue to derive a substantial portion of our revenues from these or related products. As the display drivers industry and our display drivers business are relatively mature, there may be limited potential for the overall display drivers market to grow and for us to further grow our market share, which could limit our future growth in revenues. Failure to grow our unit shipments for display drivers, coupled with a general decline in the average selling prices, could adversely and materially affect our results of operations. See also “—Risks Relating to Our Industry—The average selling prices of our products could decrease rapidly, which may negatively impact our revenues and operating results.” We expect to continue to derive a substantial portion of our revenues from the sale of display drivers. Therefore, the continued market acceptance of our display drivers is critical to our future success. Failure to grow or maintain our revenues generated from the sales of display drivers could adversely and materially affect our results of operations and financial condition.

 

Technological innovation may reduce the number of display drivers typically required for each panel, thereby reducing the number of display drivers we are able to sell per panel. If such a reduction in demand is not offset by the general growth of the industry, growth in our market share or an increase in our average selling prices, our revenues may decline.

 

Except for certain small-sized panels, multiple display drivers are typically required for each panel to function. In order to reduce costs, TFT-LCD panel manufacturers generally seek to have display drivers with higher channel counts and new panel designs to reduce the number of display drivers required for each panel. We have been developing such innovative and cost-effective display driver solutions in order to grow our market share, attract additional customers, increase our average selling prices and capture new design wins. However, we cannot assure you that we will successfully achieve these goals. If we fail to do so and the number of display drivers typically required per panel decreases thereby reducing our unit shipments, our revenues may decline. Recently, TFT-LCD panel manufacturers have developed several panel designs to reduce the usage of display drivers, including gate in panel, or GIP, amorphous silicon gate, or ASG, or simply gateless designs, which integrate the gate driver function onto the glass and eliminate the need for gate drivers, as well as dual gate and triple gate panel designs, which would largely reduce the usage of source drivers. If such designs or technologies become widely adopted, demand for our display drivers may decrease significantly, which would adversely and materially affect our results of operations.

 

We face numerous challenges relating to our growth.

 

The scope and complexity of our business has grown significantly since our inception. Our growth has placed, and will continue to place, a strain on our management, personnel, systems and resources. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business plan or respond to competitive pressures. To successfully manage our growth, we believe we must effectively:

 

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·hire, train, integrate, retain and manage additional qualified engineers, senior managers, sales and marketing personnel, and information technology personnel;

 

·implement additional, and improve existing, administrative and operations systems, procedures and controls;

 

·expand our accounting and internal audit team, including hiring additional personnel with U.S. GAAP and internal control expertise;

 

·continue to expand and upgrade our design and product development capabilities;

 

·manage multiple relationships with semiconductor manufacturing service providers, customers, suppliers and certain other third parties; and

 

·continue to develop and commercialize non-driver products, including, among others, timing controllers, touch controller ICs, TFT-LCD television and monitor semiconductor solutions, LCOS and MEMS microdisplays, power ICs, CMOS image sensors and wafer level optics products.

 

Moreover, if our allocation of resources does not correspond with future demand for particular products, we could miss market opportunities, and our business and financial results could be materially and adversely affected. Therefore, we cannot assure you that we will be able to manage our growth effectively in the future.

 

Our quarterly revenues and operating results are difficult to predict, and if we do not meet quarterly financial expectations, our ADS price will likely decline.

 

Our quarterly revenues and operating results are difficult to predict. They have fluctuated in the past from quarter to quarter and may continue to do so in the future. Our operating results may in some quarters fall below market expectations, likely causing our ADS price to decline. Our quarterly revenues and operating results may fluctuate because of many factors, including:

 

·our ability to accurately forecast shipments, average selling prices, cost of revenues, operating expenses, non-operating income/loss, foreign currency exchange rates, and tax rates;

 

·our ability to transfer any increase in unit costs to our customers;

 

·our ability to accurately perform various tests, estimations and projections, including with respect to the write-down on slow or obsolete inventories, the impairment of long-lived assets, the collectibility of accounts receivable, and the realization of deferred tax assets;

 

·our ability to successfully design, develop and introduce in a timely manner new or enhanced products acceptable to our customers;

 

·changes in the relative mix in the unit shipments of our products, which may have significantly different average selling prices and cost of revenues as a percentage of revenues;

 

·changes in share-based compensation;

 

·the loss of one or more of our key customers;

 

·decreases in the average selling prices of our products;

 

·our accumulation and write-down of inventory;

 

·the relative unpredictability in the volume and timing of customer orders;

 

·shortages of other components used in the manufacture of TFT-LCD panels;

 

·the risk of cancellation or deferral of customer orders in anticipation of our new products or product enhancements, or due to a reduction in demand of our customers’ end product;

 

·changes in our payment terms with our customers and our suppliers;

 

·our ability to negotiate favorable prices with customers and suppliers;

 

·our ability to hedge foreign exchange risks;

 

·changes in the available capacity of semiconductor manufacturing service providers;

 

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·the rate at which new markets emerge for new products under development;

 

·the evolution of industry standards and technologies;

 

·product obsolescence and our ability to manage product transitions;

 

·increase in cost of revenues due to inflation;

 

·our involvement in litigation or other types of disputes;

 

·changes in general economic conditions, especially the impact of the global financial crisis on economic growth and consumer spending, and the unease in the Middle East;

 

·changes in our tax exemptions, transfer pricing policy and applicable income tax regulations; and

 

·natural disasters, particularly earthquakes and typhoons, or outbreaks of disease affecting countries where we conduct our business or where our products are manufactured, assembled or tested.

  

The factors listed above are difficult to foresee, and along with other factors, could seriously harm our business. We anticipate the rate of new orders may vary significantly from quarter to quarter. Our operating expenses and inventory levels are based on our expectations of future revenues, and our operating expenses are relatively fixed in the short term. Consequently, if anticipated sales and shipments in any quarter do not occur as expected, operating expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters may be negatively impacted. Any shortfall in our revenues would directly impact our business. Our operating results are volatile and difficult to predict; therefore, you should not rely on the operating results of any one quarter as indicative of our future performance. Our operating results in future quarters may fall below the expectations of securities analysts and investors. In this event, our ADS price may decline significantly.

 

Our close relationship with Innolux could limit our potential to do business with Innolux’s competitors, which may cause us to lose opportunities to grow our business and expand our customer base.

 

Innolux, the successor of CMO after its merger with Innolux and TPO, is one of our largest shareholders. Innolux or, prior to the merger, CMO has been our largest customer since our inception. We expect to continue to maintain various contractual and other relationships with Innolux and its affiliates. Our close relationship with Innolux could limit our potential to do business with Innolux’s competitors or other TFT-LCD panel manufacturers, who may perceive that granting business to us could benefit Innolux. Our close relationship with Innolux may result in losing business opportunities or may prevent us from taking advantage of opportunities to grow our business and expand our customer base.

 

If there were an adverse change to our relationship with Innolux or if Innolux were to reduce its shareholding in us or cease to be our shareholder, our business could be materially and adversely affected.

 

Innolux is one of our largest shareholders, beneficially owning approximately 15.0% of our outstanding shares as of March 31, 2013, and also our largest customer, which, together with its affiliates, accounted for approximately 34.2% of our revenues in 2012. Our engineers work closely with Innolux’s engineers to design display drivers and other semiconductors used by Innolux and its affiliates or their customers. We have entered into various transactions with Innolux or CMO and its affiliates in the past, and we expect to continue to do so in the future. See “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transactions.” Dr. Biing-Seng Wu, chairman of our board of directors, used to serve as the vice chairman of the board of directors of CMO prior to its merger with the predecessor of Innolux and TPO. However, Dr. Wu no longer serves on the board of director of Innolux and presently none of our executive officers holds a director or officer position at Innolux. In addition, if Innolux reduces its shareholding of us or ceases to hold our shares, our close relationship with it may also be impacted. If our relationship with Innolux deteriorates for any reason, our business could be materially and adversely affected.

 

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The strategic relationships between certain of our competitors and their customers and the development of in-house capabilities by TFT-LCD panel manufacturers may limit our ability to expand our customer base and our growth prospects.

 

Certain of our competitors have established or may establish strategic or strong relationships with TFT-LCD panel manufacturers that are also our existing or potential customers. Marketing our display drivers to such TFT-LCD panel manufacturers that have established relationships with our competitors may be difficult. Moreover, several TFT-LCD panel manufacturers have in-house design capabilities and therefore may not need to source semiconductor products from us. If our customers successfully develop in-house capabilities to design and develop semiconductors that can substitute for our products, they would likely reduce or stop purchasing our products. In addition, we also face challenges in attracting new customers for our new products. To sell new products, we will likely need to target new market segments and new customers with whom we do not have current relationships, which may require different strategies and may present difficulties that we have not encountered before. Therefore, failure to broaden our customer base and attract new customers may limit our growth prospects.

 

We depend primarily on nine foundries to manufacture our wafers, and any failure to obtain sufficient foundry capacity or loss of any of the foundries we use could significantly delay our ability to ship our products, causing us to lose revenues and damage our customer relationships.

 

Access to foundry capacity is crucial to our business because we do not manufacture our own wafers, instead relying primarily on nine third-party foundries. The ability of a foundry to manufacture our semiconductor products is limited by its available capacity. Access to capacity is especially important due to the limited availability of the high-voltage CMOS process technology required for the manufacture of wafers used in display drivers. Moreover, Japanese integrated device manufacturer companies may outsource their semiconductor manufacturing to foundries outside Japan. This could result in tightness in the foundry supply available to us and affect our ability to acquire sufficient capacity. As we currently do not have any long-term supply arrangements with any third-party foundries to guarantee us access to a certain level of foundry capacity, if the primary third-party foundries that we rely upon are not able to meet our required capacity, or if our business relationships with these foundries are adversely affected, we would not be able to obtain the required capacity from these foundries to meet any increasing demand for our products and would have to seek alternative foundries, which may not be available on commercially reasonable terms, or at all, or which may expose us to risks associated with qualifying new foundries, as further discussed below. Our results of operations and business prospects could be adversely affected as a result of the foregoing.

 

We place wafer orders on the basis of our customers’ purchase orders and sales forecasts; however, any of the foundries we use can allocate capacity to other foundry customers and reduce deliveries to us on short notice. It could be that other foundry customers are larger and better financed than we are, or have supply agreements or better relationships with the foundries we use, and could induce these foundries to reallocate our capacity to them. The loss of any of the foundries we use or any shortfall in available foundry capacity could impair our ability to secure processed wafers, which could significantly delay our ability to ship our products, causing a loss of revenues and damages to our customer relationships.

 

Although we use several foundries for different semiconductor products, certain of our products are manufactured at only one of these foundries. If any one of the foundries that we use for a specific product is unable to provide us with our required capacity, does not deliver in a timely manner, or the quality or pricing terms are not acceptable to us, we could experience significant delays in receiving the product being manufactured for us by that foundry or incur additional costs to obtain substitutes. Also, if any of the foundries that we use experience financial difficulties or insolvency risks due to the impact of the global economic turmoil or any company-specific reasons or otherwise, if their operations are damaged or if there is any other disruption of their foundry operations, we may not be able to qualify an alternative foundry in a timely manner. If we choose to use a new foundry or process technology for a particular semiconductor product, we believe that it will take us several quarters to qualify the new foundry or process before we can begin shipping such products. If we cannot qualify a new foundry in a timely manner, we may experience a significant interruption in our supply of the affected products, which could reduce our revenues, increase our costs and expenses, and damage our customer relationships.

 

The recent fluctuations in the prices of certain metals, chemicals and gasoline and the recent volatility of foreign exchange rates may have increased costs for foundries and semiconductor service providers. This increase in costs could limit their ability to continue to make the research and development investments needed to keep up with technological advances. Any increase in costs for foundries and semiconductor service providers we use could lead to an increase in our unit costs or could limit our ability to lower our unit costs. We cannot assure you that we will be able to continue to reduce our costs and maintain our profit margins.

 

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Taiwan Semiconductor Manufacturing Company Limited, or TSMC, and Vanguard International Semiconductor Corporation, or Vanguard, historically manufactured substantially all of our wafers in the early years since our inception. In order to diversify our foundry sources, we have also used Macronix International Co., Ltd., or Macronix, Powerchip Technology Corporation, or PSC, Globalfoundries Singapore Pte., Ltd. (formerly Chartered Semiconductor Manufacturing Ltd.), or Globalfoundries Singapore, United Microelectronics Corporation, or UMC, Maxchip Electronics Corp., or Maxchip, Semiconductor Manufacturing International Corporation, or SMIC, and Shanghai Hua Hong NEC Electronics Company, Ltd., or HHNEC, to manufacture a portion of our products. As a result of outsourcing the manufacturing of our wafers, we face several significant risks, including:

 

·failure to secure necessary manufacturing capacity, or being able to obtain required capacity only at higher costs;

 

·risks of our proprietary information leaking to our competitors through the foundries we use;

 

·limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs;

 

·the unavailability of, or potential delays in obtaining access to, key process technologies; and

 

·financial risks of certain of our foundry suppliers, including those that are owned by ailing dynamic random access memory, or DRAM, companies.

 

In addition, in order to manufacture our display drivers used in TFT-LCD panels, we require foundries with high-voltage manufacturing process capacity. Of the limited number of foundries that offer this capability, some are owned by integrated device manufacturers which are also our competitors. As a result, our dependence on high-voltage foundries presents the following additional risks:

 

·potential capacity constraints faced by the limited number of high-voltage foundries and the lack of investment in new and existing high-voltage foundries;

 

·difficulty in attaining consistently high manufacturing yields from high-voltage foundries;

 

·delay and time required (approximately one year) to qualify and ramp up production at new high-voltage foundries; and

 

·price increases.

 

As a result of these risks, we may be required to use foundries with which we have no established relationships, which could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. Moreover, the scarcity and importance of high-voltage foundry capacity may necessitate us making investments in foundries in order to secure capacity, which would require us to substantially increase our capital outlays and possibly raise additional capital, which may not be available to us on satisfactory terms, if at all.

 

Shortages of processed tape used in the manufacturing of our products, increased costs of manufacturing such tape, or the loss of one of our suppliers of such tape may increase our costs or limit our revenues and impair our ability to ship our products on time.

 

There are a limited number of companies which supply the processed tape used to manufacture our semiconductor products, and we do not have binding long-term supply arrangements with processed tape suppliers that would guarantee us access to processed tape. Therefore, from time to time, shortages of such processed tape may occur. In the first half of 2010, the supply of processed tape has been tight and it is likely that the shortage of processed tape may continue in 2011, as certain of our processed tape suppliers have plans to either close or reduce the production of processed tape. Moreover, Japan, which has been leading in the production and supply of processed tape, was negatively affected by the earthquake and tsunami in March 2011, which led to a decrease in the production of processed tape. If any of the processed tape suppliers we rely upon experience difficulties in delivering processed tape or are unable to meet the prices, quality or services that we require, or if our business relationships with these suppliers weaken or deteriorate, we may not be able to locate alternative sources in a timely manner. Therefore, if shortages of processed tape were to occur, or if the costs of manufacturing such tape increases, we would incur additional costs or be unable to ship our products to our customers in a timely fashion, all of which could harm our business and our customer relationships and negatively impact our earnings. As a result of these risks, we may also be required to use processed tape suppliers with which we have no established relationships, which could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. Moreover, the scarcity and importance of processed tape may necessitate us making investments in processed tape suppliers in order to secure adequate supply, which would require us to substantially increase our capital outlays and possibly raise additional capital, which may not be available to us on satisfactory terms, if at all.

 

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The loss of, or our inability to secure sufficient capacity from, any of our third-party assembly and testing houses at reasonable and competitive prices could disrupt our shipments, harm our customer relationships and reduce our sales.

 

Access to third-party assembly and testing capacity is critical to our business because we do not have in-house assembly and testing capabilities for commercial production and instead rely on third-party service providers. Access to these services is especially important to our business because display drivers require specialized assembly and testing services. A limited number of third-party assembly and testing houses assemble and test substantially all of our current products. There has been an increased level of industry consolidation among our suppliers in recent years. Therefore, suppliers could be in a better position to bargain for higher prices for their services and products, which could result in an increase in our average unit cost. See also “—Our suppliers may have increasing bargaining power as a result of industry consolidation, which could result in an increase in our average unit cost and a decrease in our profit margin. “We do not have binding long-term supply arrangements with assembly and testing service providers that guarantee us access to our required capacity. If the primary assembly and testing service providers that we rely upon are not able to meet our requirements in price, quality, and service, or if our business relationships with these service providers were adversely affected, we would not be able to obtain the required capacity from such providers and would have to seek alternative providers, which may not be available on commercially reasonable terms, or at all. As a result, we do not directly control our product delivery schedules, assembly and testing costs, and quality assurance and control. If any of these third-party assembly and testing houses experiences capacity constraints, financial difficulties, suffers any damage to its facilities or if there is any disruption of its assembly and testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner. Because of the amount of time we usually take to qualify assembly and testing houses, we may experience significant delays in product shipments if we are required to find alternative sources. Any problems that we may encounter with the delivery, quality or cost of our products could damage our reputation and result in a loss of customers and orders.

 

As a result of these risks, we may be required to use assembly and testing service providers with which we have no established relationships, which could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. Moreover, the scarcity and importance of assembly and testing services may necessitate us making investments in assembly and testing service providers in order to secure capacity, which would require us to substantially increase our capital outlays and possibly raise additional capital, which may not be available to us on satisfactory terms, if at all.

 

Shortages of key components for our customers’ products could decrease demand for our products.

 

Shortages of components and other materials that are critical to the design and manufacture of our customers’ products may limit our sales. These components and other materials include, but are not limited to, color filters, backlight modules, polarizers, printed circuit boards and glass substrates. In the past, companies that use our products in their production have experienced delays in the availability of key components from other suppliers. In addition, component manufacturers may not be able to increase or maintain their component supply because of labor shortage in China or otherwise, and may shut down certain of their capacity from time to time because of weak demand, which may increase the instability of timely delivery and the risk of shortage of components. Such shortages of components and other materials critical to the design and manufacture of our customers’ products may cause a slowdown in demand for our products, resulting in a decrease in our sales and adversely affecting our results of operations. In addition, as a result of uncertain demand conditions, our customers may hesitate to build inventory on hand and tend to release orders on short notice.

 

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We rely on the services of our key personnel, and if we are unable to retain our current key personnel and hire additional personnel, our ability to design, develop and successfully market our products could be harmed.

 

We rely upon the continued service and performance of a relatively small number of key personnel, including certain engineering, technical and senior management personnel. In particular, our engineers and other key technical personnel are critical to our future technological and product innovations. Competition for highly skilled engineers and other key technical personnel is intense in the semiconductor industry in general and in Taiwan’s flat panel semiconductor industry in particular. Moreover, our future success depends on the expansion of our senior management team and the retention of key employees such as Jordan Wu, our president and chief executive officer; Dr. Biing-Seng Wu, our chairman; and Chih-Chung Tsai, our chief technology officer. We rely on these individuals to manage our company, develop and execute our business strategies, and manage our relationships with key suppliers and customers. Any of our key employees could leave our company with little or no prior notice. They could also leave our company to work with a competitor. In addition, we do not have “key person” life insurance policies covering any of our employees. The loss of any of our key personnel or our inability to attract or retain qualified personnel, whether engineers and others, could delay the development and introduction of new products and would have an adverse effect on our ability to sell our products as well as on our overall business and growth prospects. We may also incur increased operating expenses and be required to divert the attention of other senior executives away from their original duties to recruiting replacements for key personnel.

 

If we fail to forecast customer demand accurately, we may have excess or insufficient inventory, which may increase our operating costs and harm our business.

 

The lead time required by the semiconductor manufacturing service providers that we use to manufacture our products is typically longer than the lead time that our customers provide for delivery of our products to them. Therefore, to ensure availability of our products for our customers, we will typically ask our semiconductor manufacturing service providers to start manufacturing our products based on forecasts provided by our customers in advance of receiving their purchase orders. However, these forecasts are not binding purchase commitments, and we do not recognize revenues from these products until they are shipped to customers. Moreover, for the convenience of our customers, we may agree to ship our inventory to warehouses located near our customers, so that our products can be delivered to these customers more quickly. We may from time to time agree that title and risk of loss do not pass to our customer until the customer requests delivery of our products from such warehouses. In such cases, we will not recognize revenues from these products until the title and risk of loss have passed to our customers based on the shipping terms, which is generally when they are delivered to our customers from these warehouses. As a result, we incur inventory and manufacturing costs in advance of anticipated revenues.

 

The anticipated demand for our products may not materialize; therefore, manufacturing based on customer forecasts exposes us to risks of high inventory carrying costs, increased product obsolescence, and erosion of the products’ market value. For example, some of our customers might overstate their forecasts because of concerns that their semiconductor suppliers cannot deliver on their rush orders. If we overestimate demand for our display drivers or if purchase orders are cancelled or shipments delayed, we may incur excess inventory that we cannot sell, or may have to sell at low profit margins or even at a loss, which would harm our financial results. Conversely, if we underestimate demand, we may not have sufficient inventory and may lose market share and damage customer relationships, which also could harm our business. Obtaining additional supply in the face of product shortages may be costly or impossible, particularly in the short term, which could prevent us from fulfilling orders. These inventory risks are exacerbated by the high level of customization of our products, which limits our ability to sell excess inventory to other customers, which could eventually lead to write-down of these excess inventory.

 

If we do not achieve additional design wins in the future, our ability to grow will be limited.

 

Our future success depends on our current and prospective customers designing our products into their products. To achieve design wins, we must design and deliver cost-effective, innovative, reliable and integrated products that are customized for our customers’ needs. Once a supplier’s products have been designed into a system, the panel manufacturer may be reluctant to change its source of components due to the significant costs and time associated with qualifying a new supplier. Accordingly, our failure to obtain additional design wins with panel manufacturers and to successfully design, develop and introduce new products and product enhancements could harm our business, financial condition and results of operations.

 

A design win is not a binding commitment by a customer to purchase our products and may not result in large volume orders of our products. Rather, it is a decision by a customer to use our products in the design process of that customer’s products. Customers can choose at any time to stop using our products in their designs or product development efforts. Moreover, even if our products were chosen to be incorporated into a customer’s products, our ability to generate significant revenues from that customer would depend on the commercial success of those products. Thus, a design win may not necessarily generate significant revenues if our customers’ products are not commercially successful.

 

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Our products are complex and may require modifications to resolve undetected errors or failures in order for them to function with panels at the desired specifications, which could lead to higher costs, a loss of customers or a delay in market acceptance of our products.

 

Our products are highly complex and may contain undetected errors or failures when first introduced or as new versions are released. If our products are delivered with errors or defects, we could incur additional development, repair or replacement costs, and our credibility and the market acceptance of our products could be harmed. Defects could also lead to liability for defective products and lawsuits against us or our customers. We have agreed to indemnify some of our customers under some circumstances against liability from defects in our products. A successful product liability claim could require us to make significant damage payments.

 

Our display drivers comprise part of a complex panel manufactured by our customers. Our display drivers must operate according to specifications with the other components used by our customers in the panel manufacturing process. For example, during the panel manufacturing process, our display drivers are attached to the panel glass and must interoperate with the glass efficiently. If other components fail to operate efficiently with our display drivers, we may be required to incur additional development time and costs to improve the interoperability of our display drivers with the other components.

 

Our highly integrated products are difficult to manufacture without defects. The existence of defects in our products could increase our costs, decrease our sales and damage our customer relationships and our reputation.

 

The manufacture of our products is a complex process, and it is often difficult for semiconductor foundries to manufacture our products completely without defects. Minor deviations in the manufacturing process can cause substantial decreases in yield and quality. In particular, some of our products are highly integrated and incorporate mixed analog and digital signal processing and embedded memory technology, and this complexity makes it even more difficult to manufacture without defects.

 

The ability to manufacture products of acceptable quality depends on both product design and manufacturing process technology. Defective products can be caused by design, defective materials or component parts, or manufacturing difficulties. Thus, quality problems can be identified only by analyzing and testing our display drivers in a system after they have been manufactured. The difficulty in identifying defects is compounded by the uniqueness of the process technology used in each of the semiconductor foundries with which we have subcontracted to manufacture our products. Difficulties in achieving defect-free products due to the increasing complexity of display drivers and the panel system surrounding them may result in an increase in our costs and expenses, and delays in the availability of our products. In addition, if the foundries that we use fail to deliver products of satisfactory quality in the volume and at the price required, we will be unable to meet our customers’ demand for our products or to sell those products at an acceptable profit margin, which could adversely affect our sales and margins, and damage our customer relationships and our reputation.

 

We do not have long-term purchase commitments from our customers, which may result in significant uncertainty and volatility with respect to our revenues and could materially and adversely affect our results of operations and financial condition.

 

We do not have long-term purchase commitments from our customers, including Innolux, our largest customer; our sales are made on the basis of individual purchase orders. Our customers may also cancel or defer purchase orders. Our customers’ purchase orders may vary significantly from period to period, and it is difficult to forecast future order quantities. In the event of a cancellation, postponement, or reduction of an order, we would likely not be able to reduce operating expenses sufficiently so as to minimize the impact of the lost revenues. Alternatively, we may have excess inventory that we cannot sell, which would harm our operating results. In addition, changes in our customers’ business may adversely affect the quantity of purchase orders that we receive. For example, Innolux, our key customer, changed its purchase policy to diversify its display driver supply base, resulting in a decline in purchase from us. See also “—Risks Relating to Our Financial Condition and Business—We generate a substantial majority of our revenues from Innolux, which is the surviving entity following the merger of three of our customers. Any loss of or a significant reduction in Innolux’s sales could materially and adversely affect our operating results.” The reorganization of Innolux could result in the discontinuation of a large number of our design-win projects or the discontinuation of those design-win projects with large sales quantities. We could be required to write off a substantial amount of inventory prepared based on forecasts provided by any of these customers. In the past, some of our customers have also significantly lowered their capacity utilization rates, reduced or canceled their orders of our products, and requested higher-than-usual price concessions from us. We cannot assure you that any of our customers will continue to place orders with us in the future at the same level as in prior periods. We also cannot assure you that the volume of our customers’ orders will be consistent with our expectations when we plan our expenditures. Our results of operations and financial condition may thus be materially and adversely affected.

 

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Potential conflicts of interest with Innolux may affect our sales decisions and allocations.

 

We have a close relationship with Innolux, the successor of CMO after its merger with Innolux and TPO in March 2010. Innolux is currently one of our largest shareholders. Innolux or, prior to the merger, CMO has also been our largest customer since our inception. In addition, Mr. Tien-Jen Lin, our director, is the Special Assistant to the General Manager in Innolux. We cannot assure you that our close relationship with Innolux and the resulting potential conflicts of interest will not affect our sales decisions or allocations or that potential conflicts of interest with respect to Innolux will be resolved in our favor.

 

Our corporate actions are substantially controlled by officers, directors, principal shareholders and affiliated entities who may take actions that are not in, or may conflict with, our or our public shareholders’ interests.

 

As of March 31, 2013, Jordan Wu and Dr. Biing-Seng Wu (who are brothers) beneficially owned approximately 8.3% and 20.9% of our ordinary shares, respectively, and Innolux beneficially owned approximately 15.0% of our ordinary shares. For information relating to the beneficial ownership of our ordinary shares, see “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders.” These shareholders, acting together, could exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. Actions may be taken even if they were opposed by our other shareholders.

 

Assertions against us by third parties for infringement of their intellectual property rights could result in significant costs and cause our operating results to suffer.

 

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which results in protracted and expensive litigation for many companies. We have received, and expect to continue to receive, notices of infringement of third-party intellectual property rights. We may receive claims from various industry participants alleging infringement of their patents, trade secrets or other intellectual property rights in the future. Any lawsuit resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:

 

·stop selling products or using technology or manufacturing processes that contain the allegedly infringing intellectual property;

 

·pay damages to the party claiming infringement;

 

·attempt to obtain a license for the relevant intellectual property, which may not be available on commercially reasonable terms or at all; and

 

·attempt to redesign those products that contain the allegedly infringing intellectual property with non-infringing intellectual property, which may not be possible.

 

The outcome of a dispute may result in our need to develop non-infringing technology or enter into royalty or licensing agreements. We have agreed to indemnify certain customers for certain claims of infringement arising out of the sale of our products. Any intellectual property litigation could have a material adverse effect on our business, operating results or financial condition.

 

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Our ability to compete will be harmed if we are unable to protect our intellectual property rights adequately.

 

We believe that the protection of our intellectual property rights is, and will continue to be, important to the success of our business. We rely primarily on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain, copy or use information that we regard as proprietary, such as product design and manufacturing process expertise. As of March 31, 2013, we and our subsidiaries had 297 U.S. patent applications pending, 735 Taiwan patent applications pending and 275 patent applications pending in other jurisdictions, including the PRC, Japan, Korea and Europe. Our pending patent applications and any future applications may not result in issued patents or may not be sufficiently broad to protect our proprietary technologies. Moreover, policing any unauthorized use of our products is difficult and costly, and we cannot be certain that the measures which we have implemented will prevent misappropriation or unauthorized use of our technologies, particularly in foreign jurisdictions where the laws may not protect our proprietary rights as fully as the laws of the United States. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to protect our intellectual property effectively could harm our business.

 

We may undertake acquisitions or investments to expand our business that may pose risks to our business and dilute the ownership of our existing shareholders, and we may not realize the anticipated benefits of these acquisitions or investments.

 

As part of our growth and product diversification strategy, we will continue to evaluate opportunities to acquire or invest in other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of markets we can address or enhance our technical capabilities. For example, on July 3, 2012, our subsidiary, Himax Display, Inc., or Himax Display, acquired all of the outstanding shares of capital stock of Spatial Photonics, Inc., or Spatial Photonics, a Delaware corporation engaged in the business of manufacturing and production of high definition, high brightness, and high contrast projection displays for business and consumer applications. We cannot assure you that we will be able to realize the benefits we anticipate from acquiring Spatial Photonics. Acquisitions or investments that we have completed or potentially may make in the future, including our acquisition of Spatial Photonics, entail a number of risks that could materially and adversely affect our business, operating and financial results, including:

 

·problems integrating the acquired operations, technologies or products into our existing business and products;

 

·diversion of management’s time and attention from our core business;

 

·adverse effects of losses of the acquired target upon our financial condition and results of operations;

 

·adverse effects on existing business relationships with customers;

 

·the need for financial resources above our planned investment levels;

 

·dilution of share ownership of current shareholders under share swap transactions;

 

·failures in realizing anticipated synergies;

 

·difficulties in retaining business relationships with suppliers and customers of the acquired company;

 

·risks associated with entering markets in which we lack experience;

 

·potential loss of key employees of the acquired company;

 

·potential write-offs of acquired assets;

 

·potential expenses related to the depreciation of tangible assets and amortization of intangible assets; and

 

·potential impairment charges related to the goodwill acquired.

 

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Our failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition or investment may require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, the value of our ADSs and the underlying ordinary shares may be diluted. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that can, among other things, restrict us from distributing dividends.

 

Risks Relating to Our Industry

 

The average selling prices of our products could decrease rapidly, which may negatively impact our revenues and operating results.

 

The price of each semiconductor product typically declines over its product life cycle, reflecting product obsolescence, decreased demand as customers shift to more advanced products, decreased unit costs due to advanced designs or improved manufacturing yields, and increased competition as more semiconductor suppliers are able to offer similar products. We may experience substantial period-to-period fluctuations in future operating results if our average selling prices decline. We may reduce the average unit price of our products in response to competitive pricing pressures, new product introductions by us or our competitors, and other factors. The TFT-LCD panel market is highly cost sensitive, which may result in declining average selling prices of the components comprising TFT-LCD panels. We expect that these factors will create downward pressure on our average selling prices and operating results. To maintain acceptable operating results, we will need to develop and introduce new products and product enhancements on a timely basis and continue to reduce our costs. If we are unable to offset any reductions in our average selling prices by increasing our sales volumes and corresponding production cost reductions, or if we fail to develop and introduce new products and enhancements on a timely basis, our revenues and operating results will suffer.

 

The semiconductor industry, in particular semiconductors used in flat panel displays, is highly competitive, and we cannot assure that we will be able to compete successfully against our competitors.

 

The semiconductor industry, in particular semiconductors used in flat panel displays, is highly competitive. Increased competition may result in pricing pressure, reduced profitability and loss of market share, any of which could seriously harm our revenues and results of operations. Competition principally occurs at the design stage, where a customer evaluates alternative design solutions that require display drivers. We continually face intense competition from fabless display driver companies as well as from integrated device manufacturers. Some of our competitors have substantially greater financial and other resources than we do with which to pursue engineering, manufacturing, marketing and distribution of their products. As a result, they may be able to respond more quickly to changing customer demands or devote greater resources to the development, promotion and sales of their products than we can. Some of our competitors have manufacturing capabilities as well as in-house design operations that may give them significant advantages such as more research and development resources and the ability to attract highly skilled engineers. Furthermore, some of our competitors are affiliated with, or are subsidiaries of, our panel manufacturer customers. These relationships may also give our competitors significant advantages such as early access to product roadmaps and design-in priorities, which would allow them to respond more quickly to changing customer demands and achieve more design-wins than we can. In addition, even competitors with no such strategic associations with panel manufacturers may resort to price competition to maintain their market share, which may impose pricing pressures on us, reduce our profitability or decrease our market share. We cannot assure you that we will be able to increase or maintain our revenues and market share, or compete successfully against our current or future competitors in the semiconductor industry.

 

We may be adversely affected by the cyclicality of the semiconductor industry.

 

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The semiconductor industry has, from time to time, experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturn may reduce our revenues and result in our having excess inventory. Furthermore, any upturn in the semiconductor industry could result in increased competition for access to limited third-party foundry, assembly and testing capacity. Failure to gain access to foundry, assembly and testing capacity could impair our ability to secure the supply of products that we need, which could significantly delay our ability to ship our products, cause a loss of revenues and damage our customer relationships.

 

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We have a lengthy and expensive design-to-mass production cycle.

 

The cycle time from the design stage to mass production for display drivers is long and requires the investment of significant resources with each potential customer without any guarantee of sales. Our design-to-mass production cycle typically begins with a three to twelve-month semiconductor development stage and test period followed by a three to twelve-month end product development period by customers. This fairly lengthy cycle creates the risk that we may incur significant expenses but will be unable to realize meaningful sales. Moreover, prior to mass production, customers may decide to cancel the projects or change production specifications, resulting in sudden changes in our product specifications, further causing increased production time and costs. Failure to meet such specifications may delay the launch of our products.

 

Our business could be materially and adversely affected if we fail to anticipate changes in evolving industry standards, fail to achieve and maintain technological leadership in our industry or fail to develop and introduce new and enhanced products.

 

Our products are generally based on industry standards, which are continually evolving. The emergence of new industry standards could render our products or those of our customers unmarketable or obsolete and may require us to incur substantial unanticipated costs to comply with any such new standards. Likewise, the components used in the TFT-LCD panel industry are constantly changing with increased demand for improved features. Moreover, our past sales and profitability have resulted, to a significant extent, from our ability to anticipate changes in technology and industry standards, and to develop and introduce new and enhanced products in a timely fashion. If we do not anticipate these changes in technologies and rapidly develop and introduce new and innovative technologies, we may not be able to provide advanced display semiconductors on competitive terms, and some of our customers may buy products from our competitors instead of from us. Our continued ability to adapt to such changes and anticipate future standards will be a significant factor in maintaining or improving our competitive position and our growth prospects. We cannot assure you that we will be able to anticipate evolving industry standards, successfully complete the design of our new products, have these products manufactured at acceptable manufacturing yields, or obtain significant purchase orders for these products to meet new standards or technologies. If we fail to anticipate changes in technology and to introduce new products that achieve market acceptance, our business and results of operations could be materially and adversely affected.

 

Risks Relating to Our Holding Company Structure

 

Our ability to receive dividends and other payments or funds from our subsidiaries may be restricted by commercial, statutory and legal restrictions, and thereby materially and adversely affect our ability to grow, fund investments, make acquisitions, pay dividends and otherwise fund and conduct our business.

 

We are a holding company and our assets consist mainly of our 100% ownership interest in Himax Taiwan. We receive cash from Himax Taiwan through intercompany borrowings. Himax Taiwan has not paid us cash dividends in the past. Nonetheless, dividends and interest on shareholder loans that we receive from our subsidiaries in Taiwan, if any, will be subject to withholding tax under ROC law. The ability of our subsidiaries to provide us with loans, pay dividends, repay any shareholder loans from us or make other distributions to us is restricted by, among other things, the availability of funds, the terms of various credit arrangements entered into by our subsidiaries, as well as statutory and other legal restrictions. A Taiwan company is generally not permitted to distribute dividends or to make any other distributions to shareholders for any year in which it did not have either earnings or retained earnings (excluding reserves). In addition, before distributing a dividend to shareholders following the end of a fiscal year, the 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. Any limitation on dividend payments by our subsidiaries could materially and adversely affect our ability to grow, finance capital expenditures, make acquisitions, pay dividends, and otherwise fund and conduct our business. In addition, since Himax Taiwan is not a listed company, it will depend on us to meet its equity financing requirements in the future. Any capital contribution by us to Himax Taiwan may require the approval of the relevant ROC authorities. We may not be able to obtain any such approval in the future in a timely manner, or at all. If Himax Taiwan is unable to receive the equity financing it requires, its ability to grow and fund its operations may be materially and adversely affected.

 

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Political, Geographical and Economic Risks

 

Due to the location of our operations in Taiwan, we and many of our semiconductor manufacturing service providers, suppliers and customers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.

 

Most of our operations, and the operations of many of our semiconductor manufacturing service providers, suppliers and customers are located in Taiwan, which is vulnerable to natural disasters, in particular, earthquakes and typhoons. Our principal foundries and assembly and testing houses upon which we have relied to manufacture substantially all of our display drivers are located in Taiwan. In 2012, 48.4% of our revenues were derived from customers headquartered in Taiwan. As a result of this geographic concentration, disruption of operations at our facilities or the facilities of our semiconductor manufacturing service providers, suppliers and customers for any reason, including work stoppages, power outages, water supply shortages, fire, typhoons, earthquakes, contagious diseases or other natural disasters, could cause delays in production and shipments of our products. Any delays or disruptions could result in our customers seeking to source products from our competitors. Shortages or suspension of power supplies have occasionally occurred and have disrupted our operations. The occurrence of a power outage in the future could seriously hurt our business.

 

The manufacturing processes of TFT-LCD panels require a substantial amount of water and, as a result, the production operations of TFT-LCD panels may be seriously disrupted by water shortages. Our customers may encounter droughts in areas where most of their current or future manufacturing sites are located. If a drought were to occur and our customers or the authorities were unable to source water from alternative sources in sufficient quantities, our customers may be required to shut down temporarily or to substantially reduce the operations of their fabs, which would seriously affect demand for our products. The occurrence of any of these events in the future could adversely affect our business.

 

Disruptions in Taiwan’s political environment could negatively affect our business and the market price of our ADSs.

 

Our principal executive offices and a substantial amount of our assets are located in Taiwan, and a substantial portion of our revenues is derived from our operations in Taiwan. Accordingly, our business, financial condition and results of operations and the market price of our ADSs may be affected by changes in ROC governmental policies, taxation, inflation or interest rates, and by social instability and diplomatic and social developments in or affecting Taiwan that are outside of our control.

 

Taiwan has a unique international political status. Since 1949, Taiwan and the PRC have been separately governed. The government of the PRC claims that it is the sole government in China and that Taiwan is part of China. Although significant economic and cultural relations have been established during recent years between Taiwan and the PRC, the PRC government has refused to renounce the possibility that it may at some point use force to gain control over Taiwan. Furthermore, the PRC government adopted an anti-secession law relating to Taiwan. Relations between the ROC and the PRC governments have been strained in recent years for a variety of reasons, including the PRC government’s position on the “One China” policy and tensions concerning arms sales to Taiwan by the United States government. Any tension between the ROC and the PRC, or between the United States and the PRC, could materially and adversely affect the market prices of our ADSs.

 

Our business is sensitive to global economic conditions. A severe or prolonged downturn in the global or Taiwan economy could materially and adversely affect our business and our financial condition.

 

The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. Since then, recovery has been uneven and the global economy is facing new challenges, such as the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy in 2012. It is unclear whether the European sovereign debt crisis will be contained. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world's leading economies. There have also been concerns over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets, and over the possibility of a conflict involving Iran. There have also been concerns about the tensions in the relationship between China and Japan and about North Korea's nuclear program. Economic conditions in Taiwan are sensitive to global economic conditions. Any prolonged slowdown in the global or Taiwanese economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

 

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A substantial portion of our sales are made to customers in the PRC, which may expose us to additional political, regulatory, and economic risks.

 

We have been increasingly selling our products to customers in the PRC. In 2010, 2011 and 2012, approximately 17.6%, 33.1% and 45.4% of our revenues, respectively, were from customers headquartered in the PRC. We expect to continue to increase our sales to customers in the PRC in the near future. As a result of this regional customer concentration, we expect to be particularly subject to economic and political events and other developments that affect our customers in the PRC.

 

The PRC economy differs from the economies of most developed countries in many respects, including the structure, level of government involvement, level of development, foreign exchange control and allocation of resources. The PRC economy has been transitioning from a planned economy to a more market-oriented economy and is growing rapidly. For the past two decades, the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the PRC economy and also adjusted its macroeconomic control policies from time to time. These policies have led and may continue to lead to changes in market conditions. Although we believe these reforms have had a positive effect on the business of our customers in the PRC and consequently have benefited us, we cannot predict whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future customers in the PRC. In addition, the interpretation of PRC laws and regulations involves uncertainties. We cannot assure you that changes in such laws and regulations, or in their interpretation and enforcement, will not have a material adverse effect on the businesses and operations of our customers in the PRC and consequently have a material adverse effect on our own business and operations.

 

Fluctuations in exchange rates could result in foreign exchange losses and affect our results of operations.

 

Our functional and reporting currency is U.S. dollars. In 2012, more than 99.0% of our revenues and cost of revenues were denominated in U.S. dollars. However, we have foreign currency exposure and are primarily affected by fluctuations in exchange rates between the U.S. dollar and the NT dollar. This is because a significant portion of our operating expenses (including for research and development, general and administrative, and sales and marketing expenses) are denominated in NT dollars and we maintain a portion of our cash in NT dollars for local working capital purposes. For example, in December 2012, approximately 64% of our operating expenses were denominated in NT dollars, with a small percentage denominated in Japanese Yen, Korean Won and Chinese Renminbi, and the majority of the remainder in U.S. dollars. Moreover, there are tax-related assets and liabilities on our balance sheet which are denominated in NT dollars. The current global economic crisis may cause increased volatility in exchange rates. From time to time, we enter into forward contracts to hedge our foreign currency exposure, but we cannot assure you that this will adequately protect us against the risk of exchange rate fluctuations and reduce the impact of potential foreign exchange losses. Any significant fluctuation to our disadvantage in exchange rates would have an adverse effect on our results of operations and financial condition.

 

Changes in ROC tax laws would likely increase our tax expenditures and decrease our net income.

 

Pursuant to the ROC Statute for Upgrading Industries, which expired at the end of 2009, companies were entitled to tax credits for expenses relating to qualifying research and development, personnel training and purchases of qualifying machinery. The tax credits could be applied within a five-year period. The amount of tax credit that could be applied in any year was limited to 50% of the income tax payable for that year (with the exception of the final year when the remainder of the tax credit could be applied without limitation to the total amount of the income tax). Himax Taiwan, after a three year holding period, was entitled to tax credits of twenty percent of the price paid for the acquisition of shares originally issued by ROC domestic companies invested in by Himax Taiwan that are newly emerging, important and strategic industries; provided that the shareholders’ meeting of such ROC companies did not resolve to forfeit the shareholders’ tax credit benefit in exchange for such ROC companies’ five-year tax holiday. The credit also could be applied to the income tax payable over a period of five years. Under the ROC Statute for Upgrading Industries, Himax Taiwan was granted tax credits at rates set at a certain percentage of the amount utilized in qualifying research and development and personnel training expenses. The balance of unused investment tax credits totaled $55.0 million, $39.4 million and $22.8 million as of December 31, 2010, 2011 and 2012, respectively. On May 12, 2010, the Statute for Industrial Innovation was promulgated in the ROC, which became effective on the same date except for the provision relating to tax incentives which went into effect retroactively on January 1, 2010. Compared to the ROC Statute for Upgrading Industries, the Statute for Industrial Innovation provides for less tax credits. The Statute for Industrial Innovation entitles companies to tax credits for qualifying research and development expenses related to innovation activities but limits the amount of tax credit to only up to 15% of the total research and development expenditure for the current year, subject to a cap of 30% of the income tax payable for the current year. Moreover, any unused tax credits provided under the Statute for Industrial Innovation may not be carried forward. As a result, the tax credits that we received decreased significantly to $3.5 million in 2011 and $1.2 million in 2012 compared to $13.8 million in 2009.

 

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In addition, unlike the ROC Statute for Upgrading Industries, the Statute for Industrial Innovation no longer provides to companies deemed to be operating in important or strategic industries any tax exemption for income attributable to expanded production capacity or newly developed technologies. Pursuant to the ROC Statute for Upgrading Industries, beginning April 1, 2004, January 1, 2006, January 1, 2008 and January 1, 2013, Himax Taiwan became entitled to four preferential tax treatments, each for a period of five years, which expired or will expire on March 31, 2009, December 31, 2010, December 31, 2012 and December 31, 2017, respectively, and beginning January 1, 2009, Himax Semiconductor also became entitled to one preferential tax treatment for a period of five years, which will expire on December 31, 2013. As a result of these preferential tax treatments, income attributable to certain of our expanded production capacity or newly developed technologies has been tax exempt for the relevant periods. The effect of such tax exemption under the ROC Statute for Upgrading Industries was an increase on net income and basic and diluted earnings per share attributable to our stockholders of $3.6 million, $0.01 and $0.01, respectively, for the year ended December 31, 2010, $0.8 million, $0.002 and $0.002, respectively, for the year ended December 31, 2011 and $2.9 million, $0.01 and $0.01, respectively, for the year ended December 31, 2012. While the ROC Statute for Upgrading Industries expired at the end of 2009, under a grandfather clause we have continued to enjoy the five-year tax holiday since the relevant investment plans were approved by the ROC tax authority before the expiration of the Statute. However, as the tax exemptions that expired on March 31, 2009 and December 31, 2010 accounted for a substantial portion of our total tax-exempted income under the ROC Statute for Upgrading Industries, our income tax expenses increased significantly in 2009 and 2010 and may increase further in the future.

 

On January 1, 2006, an income basic tax (also known as alternative minimum tax, or (“AMT”) in accordance with the ROC Income Basic Tax Act (“IBTA”) became effective. The AMT is a supplemental tax which is payable if the income tax payable pursuant to the ROC Income Tax Act is below the minimum amount prescribed under the IBTA. In August 2012, the AMT rate for business entities was amended from 10% to 12% effective from 2013. However, the AMT amendment is not expected to have a significant impact on our financial statements.

 

On April 1, 2013, the ROC Finance Committee of the Legislative Yuan passed preliminary examination on the draft amendment for anti-avoidance to establish Article 43-3 Controlled Foreign Corporation (“CFC”) rules and Article 43-4 profit-seeking enterprises of resident status (“Resident Companies”) rules of the Income Tax Act (“ITA”). Key aspects of the ITA draft amendment are described as follows:

 

(i)Effective starting January 1, 2015, a profit-seeking enterprise (“PSE”) that directly or indirectly owns affiliated enterprises in low-tax jurisdictions outside the territory of the ROC shall recognize and include its pro rata share of affiliated enterprises’ annual profits as investment income in its income tax return for the year. Subsequent actual dividends and distributions from such affiliated enterprises that were previously recognized as investment income will then not be subject to income taxation; any surplus to previously recognized investment income shall be included as taxable income in the allocated year. Low-tax jurisdictions are defined as countries where the PSE income tax rate is lower than 30% of the income tax rate of the PSE in the ROC (the current rate is 17%) . (Article 43-3 CFC rules); and

 

(ii)Effective starting January 1, 2015, if a PSE, such as our company, is incorporated based on foreign legislation but its place of effective management (“PEM”) is maintained within the territory of the ROC, the head office of such PSE will be determined to be within the territory of the ROC and profit-seeking enterprise income tax shall be levied in accordance with the ITA and relevant tax regulations. The aforementioned PEM refers to a place where substantive key management and commercial decisions of an entity’s business and its operations are made. The relevant definition and provisions shall be determined by the MOF. (Article 43-4 Resident Companies rule).

 

The ITA draft amendment is still in a preliminary form. At this time, it is unclear what the finalized form of the ITA draft amendment would be, and accordingly, it is unclear what actual effect, if any, the ITA draft amendment would have on our tax cost and net income. However, if the ITA draft amendment were finalized in its current form, it would increase our tax cost and consequently decrease our net income from 2015 onwards.

  

We face risks related to health epidemics and outbreaks of contagious diseases, including H1N1 influenza, H5N1 influenza, H7N9 influenza and Severe Acute Respiratory Syndrome, or SARS.

 

In recent years, there have been reports of outbreaks of a highly pathogenic influenza caused by the H1N1 virus, H5N1 virus and H7N9 virus, in certain regions of Asia and other parts of the world. An outbreak of such contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, a recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected the PRC, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. Since all of our operations and substantially all of our customers and suppliers are based in Asia (mainly Taiwan), an outbreak of H1N1 influenza, H5N1 influenza, H7N9 influenza, SARS or other contagious diseases in Asia or elsewhere, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including the ROC and the PRC, could adversely affect our business, financial condition or results of operations.

 

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Risks Relating to Our ADSs and Our Trading Market

 

The market price for our ADSs is volatile.

 

The market price for our ADSs is volatile and has ranged from a low of $0.99 to a high of $2.46 on the NASDAQ Global Select Market in 2012.

 

The market price is subject to wide fluctuations in response to various factors, including the following:

 

·actual or anticipated fluctuations in our quarterly operating results;

 

·changes in financial estimates by securities research analysts;

 

·conditions in the TFT-LCD panel market;

 

·changes in the economic performance or market valuations of other display semiconductor companies;

 

·announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

·the addition or departure of key personnel;

 

·fluctuations in exchange rates between the U.S. dollar and the NT dollar;

 

·litigation related to our intellectual property; and

 

·the release of lock-up or other transfer restrictions on our outstanding ADSs or sales of additional ADSs.

 

In addition, as a result of the worldwide financial crisis, global stock markets have experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons which may not be directly related to their operating performance, including but not limited to events such as tax-loss selling, mutual fund redemptions, hedge fund redemptions and margin calls. These market fluctuations may also materially and adversely affect the market price of our ADSs.

 

Future sales or perceived sales of securities by us, our executive officers, directors or major shareholders may hurt the price of our ADSs.

 

The market price of our ADSs could decline as a result of sales of ADSs or shares or the perception that these sales could occur. As of March 31, 2013, we had 339,149,508 outstanding shares and a significant number of our shares were beneficially owned by certain major shareholders such as Innolux, as well as our directors and executive officers. See “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders. “If we, our executive officers, directors or our shareholders sell ADSs or shares, the market price for our shares or ADSs could decline. Future sales, or the perception of future sales, of ADSs or shares by us, our executive officers, directors or existing shareholders could cause the market price of our ADSs to decline.

 

The level of investor interest and trading in our ADSs could be affected by the lack of coverage by securities research analysts and the lack of investor relations activities.

 

We are currently only listed in the U.S. Investor interest in us may not be as strong as in U.S. companies or Taiwan companies that are listed in Taiwan both because we may not be adequately covered by securities research analyst reports and because of the lack of investor relations activities. The lack of coverage could negatively impact investor interest and the level of trading in our ADSs.

 

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Although publicly traded, the trading market in our ADSs has been substantially less liquid than the average stock quoted on the NASDAQ Global Select Market, and this low trading volume may adversely affect the price of our ADSs.

 

Although our ADSs are traded on the NASDAQ Global Select Market, the trading volume of our ADSs has generally been very low. Reported average daily trading volume in our ADSs was approximately 1,921,092 ADSs for the three months ended March 31, 2013 compared to approximately 337,283 ADSs for the year ended December 31, 2012. In addition, during the periods between November 8, 2007 and July 31, 2008, between November 17, 2008 and September 7, 2010, and between June 22, 2011 and April 19, 2013, we repurchased a total of approximately $33.1 million of our ADSs (approximately 7.7 million ADSs), a total of approximately $50.0 million of our ADSs (approximately 19.3 million ADSs) and a total of approximately $13.4 million of our ADSs (approximately 9.5 million ADSs), respectively, from the open market pursuant to three authorized share buyback programs. The repurchased ADSs and their underlying ordinary shares with respect to these three periods reduced the number of our ordinary shares otherwise outstanding by approximately 7.9%, 9.9% and 5.3%, respectively. Such share buyback programs or future share repurchases could negatively impact the average trading volume of our ADSs. Limited trading volume will subject our ADSs to greater price volatility and may make it difficult for you to buy or sell your ADSs at a price that is attractive to you.

 

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials sufficiently in advance to be able to exercise your right to vote.

 

Except as described in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. In certain circumstances, however, the depositary shall refrain from voting and any voting instructions received from ADS holders shall lapse. Furthermore, in certain other circumstances, the depositary will give us a discretionary proxy to vote shares evidenced by ADSs. You may not receive voting materials sufficiently in advance to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

 

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

 

You may be subject to limitations on transfer of your ADSs.

 

Your ADSs represented by the ADRs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time whenever it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it necessary or advisable to do so because of any requirement of law, any government, governmental body, commission, or any securities exchange on which our ADSs or our ordinary shares are listed, or under any provision of the deposit agreement or provisions of, or governing, the deposited securities or any meeting of our shareholders, or for any other reason.

 

We currently follow home country practice in lieu of complying with certain requirements of the NASDAQ Stock Market LLC. This may afford less protection to holders of our ordinary shares and ADSs.

 

Rule 5605 of the Marketplace Rules of the NASDAQ Stock Market LLC, or the Nasdaq Rules, requires listed companies to have, among others, a board of directors comprised of a majority of independent directors, the holding of regularly scheduled meetings at which only independent directors are present, a compensation committee, if any, comprised solely of independent directors, and a nominations committee, if any, comprised solely of independent directors. As a foreign private issuer, however, we are permitted to, and we do, follow home country practice in lieu of the above requirements. See “Item 6.C. Directors, Senior Management and Employees—Board Practices” and “Item 16G. Corporate Governance” for more information on the significant differences between our corporate governance practices and those followed by U.S. companies under the Nasdaq Rules. As a result, we have fewer board members exercising independent judgment, and there may be a decreased level of board oversight on the management of our company. Holders of our ordinary shares and ADSs may therefore be afforded less protection.

 

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Your ability to protect your rights through the United States federal courts may be limited, because we are incorporated under Cayman Islands law, conduct a substantial portion of our operations in Taiwan, and all of our directors and officers reside outside the United States.

 

We are incorporated in the Cayman Islands. A substantial portion of our operations is conducted in Taiwan through Himax Taiwan, our wholly owned subsidiary, and substantially all of our assets are located in Taiwan. All of our directors and officers reside outside the United States, and a substantial portion of the assets of those persons is located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of Taiwan may render you unable to enforce a United States judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of multiple damages, taxes, or other charges of a like nature or in respect of a fine or other penalty, may be subject to enforcement proceedings as debt in the courts of the Cayman Islands under the common law doctrine of obligation, provided that (a) such federal or state courts of the United States had proper jurisdiction over the parties subject to such judgment; (b) such federal or state courts of the United States did not contravene the rules of natural justice of the Cayman Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands.

 

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than shareholders of a corporation incorporated in a jurisdiction in the United States.

 

You may face difficulties in protecting your interests as a shareholder because judicial precedents regarding shareholders’ rights are more limited under Cayman Islands law than under U.S. law, and because Cayman Islands law generally provides less protection to shareholders than U.S. law.

 

Our corporate affairs are governed by our memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands, or the Cayman Islands Companies Law, and the common law of the Cayman Islands. The rights of shareholders to take action against directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities law than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

 

For example, the Cayman Islands Companies Law differs from laws applicable to United States corporations and their shareholders in certain material respects which may affect shareholders’ rights and shareholders’ access to information. These differences under the Cayman Islands Companies Law(as compared to Delaware law) include, though are not limited to, the following:

 

·directors who are interested in a transaction do not have a statutory duty to disclose such interest and there are no provisions under the Cayman Islands Companies Law which render such director liable to the company for any profit realized pursuant to such transaction. Our articles of association, however, contain provisions that require our directors to disclose their interest in a transaction;

 

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·dissenting shareholders do not have comparable appraisal rights if a scheme of arrangement is approved by the Grand Court of the Cayman Islands;

 

·shareholders may not be able to bring class action or derivative action suits before a Cayman Islands court except in certain exceptional circumstances; and

 

·unless otherwise provided under the memorandum and articles of association of the company, shareholders do not have the right to bring business before a meeting or call a meeting.

 

Moreover, certain of these differences in corporate law, including, for example, the fact that shareholders do not have the right to call a meeting or bring business to a meeting, may have anti-takeover effects, which could discourage, delay, or prevent the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise, which a shareholder may have considered in its best interest, and prevent the removal of incumbent officers and directors.

 

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would have as public shareholders of a U.S. company.

 

Investor confidence and the market price of our ADSs may be adversely impacted if we or our independent registered public accountants conclude that our internal controls over financial reporting are not effective.

 

The Securities and Exchange Commission, or the SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include in their Annual Report on Form 10-K or Form 20-F, as the case may be, a report of management on the company’s internal controls over financial reporting that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the company’s independent registered public accounting firm must report on the company’s internal control over financial reporting. Our management may conclude that our internal controls over financial reporting are not effective. Moreover, even if our management does conclude that our internal controls over financial reporting are effective, if our independent registered public accounting firm is not satisfied with our internal controls, the level at which our controls are documented, designed, operated or reviewed, or if our independent registered public accounting firm interprets the requirements, rules or regulations differently from us, then it may conclude that our internal controls over financial reporting are not effective. Furthermore, during the course of the evaluation, documentation and attestation, we may identify deficiencies that we may not be able to remedy in a timely manner. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls, on an ongoing basis, over financial reporting in accordance with the Sarbanes-Oxley Act. Furthermore, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs. In addition, we have incurred considerable costs and used significant management time and other resources in our effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

 

ITEM 4. INFORMATION ON THE COMPANY

 

4.A. History and Development of the Company

 

Himax Taiwan, our predecessor, was incorporated on June 12, 2001 as a limited liability company under the laws of the ROC. On April 26, 2005, we established Himax Technologies Limited, an exempted company with limited liability under the Cayman Islands Companies Law, as a holding company to hold the shares of Himax Taiwan in connection with our reorganization and share exchange. On October 14, 2005, Himax Taiwan became our wholly owned subsidiary through a share exchange consummated pursuant to the ROC Business Mergers and Acquisitions Law through which we acquired all of the issued and outstanding shares of Himax Taiwan, and we issued ordinary shares to the shareholders of Himax Taiwan. Shareholders of Himax Taiwan received one of our ordinary shares in exchange for one Himax Taiwan common share. The share exchange was unanimously approved by shareholders of Himax Taiwan on June 10, 2005 with no dissenting shareholders and by the ROC Investment Commission on August 30, 2005 for our inbound investment in Taiwan, and on September 7, 2005 for our outbound investment outside of Taiwan. We effected this reorganization and share exchange to comply with ROC laws, which prohibit a Taiwan incorporated company not otherwise publicly listed in Taiwan from listing its shares on an overseas stock exchange. Our reorganization enables us to maintain our operations through our Taiwan subsidiary, Himax Taiwan, while allowing us to list our shares overseas through our holding company structure.

 

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The common shares of Himax Taiwan were traded on the Emerging Stock Board from December 26, 2003 to August 10, 2005, under the stock code “3222.” Himax Taiwan’s common shares were delisted from the Emerging Stock Board on August 11, 2005. As a result of our reorganization, Himax Taiwan is no longer a Taiwan public company, and its common shares are no longer listed or traded on any trading markets.

 

On September 26, 2005, we changed our name to “Himax Technologies, Inc.,” and on October 17, 2005, Himax Taiwan changed its name to “Himax Technologies Limited” upon the approval of shareholders of both companies and amendments to the respective constitutive documents. We effected the name exchange in order to maintain continuity of operations and marketing under the trade name “Himax Technologies, Inc.,” which had been previously used by Himax Taiwan.

 

Our ADSs have been listed on the NASDAQ Global Select Market since March 31, 2006. Our ordinary shares are not listed or publicly traded on any trading markets.

 

In February 2007, we completed the acquisition of Wisepal, currently known as Himax Semiconductor, Inc., a fabless semiconductor company focusing on the development of LTPS TFT-LCD drivers for small and medium-sized applications. This transaction strengthened our competitive position in the small and medium-sized product areas and further diversified our technology and product offerings. From time to time, we have also made minority investments in various companies for strategic purposes in the ordinary course of business.

 

In March 2007, we established Himax Imaging, Inc., or Himax Imaging, which develops and markets CMOS image sensors with an initial focus on camera applications used in cell phones and notebook computers.

 

In October 2007, we formed Himax Media Solutions, Inc., or Himax Media Solutions, which oversees our TFT-LCD television and monitor chipset business with a focus on expanding market share in the global TFT-LCD television and monitor chipset market. In January 2008, Himax Media Solutions issued shares representing an interest of 19.9% in total to CMO, TPV Technology Limited, the world’s largest LCD monitor manufacturer and LCD TV ODM, and individuals including certain employees of CMO, TPV Technology Limited, Himax Media Solutions and Himax Taiwan.

 

On August 10, 2009, we effected:(i) a stock split in the form of a stock dividend of 5,999 ordinary shares for each ordinary share held by shareholders of record, followed by a consolidation of every 3,000 ordinary shares into one ordinary share;(ii) a change of the par value of our ordinary shares from $0.0001 each to $0.3 each; and (iii) a change in our ADS ratio from one ADS representing one ordinary share to one ADS representing two ordinary shares.

 

In July 2012, our subsidiary, Himax Display, completed the acquisition of Spatial Photonics, a Delaware corporation engaged in the business of manufacturing and production of MEMS products.

 

Our principal executive offices are located at No. 26, Zih Lian Road, Sinshih District, Tainan City 74148, 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 Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our telephone number at this address is +1-345-945-3901. In addition, we have offices in Hsinchu and Taipei, Taiwan; Foshan, Fuqing, Ningbo, Beijing, Shanghai, Shenzhen, Suzhou and Hefei, China; Yokohama and Matsusaka, Japan; Cheonan and Suwon, South Korea; and Irvine, California, and Sunnyvale, Delaware, USA.

 

Investor inquiries should be directed to our Investor Relations department, at +886-2-2370-3999 ext. 22320 or by email to penny_lin@himax.com.tw.Our website is www.himax.com.tw. The information contained on our website is not part of this annual report. Our agent for service of process in the United States is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

 

 

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4.B. Business Overview

 

We design, develop and market semiconductors that are critical components of flat panel displays. Our principal products are display drivers for large-sized TFT-LCD panels, which are primarily used in desktop monitors, notebook computers and televisions, and display drivers for small and medium-sized TFT-LCD panels, which are primarily used in mobile handsets and consumer electronics products such as tablet PCs, netbook computers (typically ten inches or below in diagonal measurement), digital cameras, mobile gaming devices, portable DVD players, digital photo frames, head-mounted-displays and car navigation displays. We also offer display drivers for panels using OLED technology and LTPS technology. In addition, we are expanding our product offerings to include non-driver products such as timing controllers, touch controller ICs, TFT-LCD television and monitor semiconductor solutions, LCOS microdisplays solutions, power ICs, CMOS image sensors and wafer level optics products. For display drivers and display-related products, our customers are panel manufacturers, agents or distributors, module manufacturers and assembly houses. We also work with camera module manufacturers, optical engine manufacturers, and television system manufacturers for various non-driver products. We believe that our recognized 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 mainly operate in the flat panel display semiconductor industry. As the majority of our revenues derive from products that are critical components of flat panel displays, such as display drivers, timing controllers, scalers, power ICs and other semiconductor products, 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 applications. 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—TFT-LCD Television and Monitor Semiconductor Solutions—TFT-LCD Television and Monitor Chipsets” for a description of these components.

 

·Power IC. Power ICs include certain drivers, amplifiers, DC to DC converters and other semiconductors designed to enhance power management, such as voltage regulation, voltage boosting and battery management.

 

·Others. Flat panel displays also require multiple general purpose semiconductors such as memory, power converters and inverters.

 

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Characteristics of the Display Driver Market

 

Although we operate in several distinct segments of the flat panel display semiconductor industry, our principal products are display drivers. Display drivers are critical components of flat panel displays. 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- , Korea- and China-based manufacturers, have invested or are planning to invest 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 component companies including 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 exacerbates this situation 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 require high-voltage CMOS process technology operating typically at 4.5 to 24 volts for source drivers and 10 to 50 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 require geometries between 0.11 micron and 1 micron because the physical dimensions of a high-voltage device do not allow for the economical reduction in geometries below this range. We believe that there are a limited number of fabs with high-voltage CMOS process technology that are capable of high-volume manufacturing of display drivers.

 

Special Assembly and Testing Requirements

 

Manufacturing display drivers requires certain assembly and testing technologies and equipment that are not standard for other semiconductors and are offered by a limited number of providers. The assembly of display drivers typically uses either tape-automated bonding, also known as TAB, or chip-on-glass, also known as COG, technologies. Display drivers also require gold bumping, which is a process in which gold bumps are plated onto each wafer to connect the die and the processed tape, in the case of TAB packages, and the glass, in the case of COG packages. TAB may utilize tape carrier packages, 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.

 

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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 several principal product lines:

 

·display drivers and timing controllers;

 

·touch controller ICs;

 

·TFT-LCD television and monitor semiconductor solutions;

 

·IP and ASIC service;

 

·LCOS and MEMS products;

 

·power ICs;

 

·CMOS image sensor product; and

 

·wafer level optics products.

 

We commenced volume shipments of our first source and gate drivers for large-sized panels in July 2001 and have developed a broad product portfolio of display drivers and timing controllers for use in large-sized TFT-LCD panels. We commenced volume shipments of our first display drivers for use in consumer electronics applications in April 2002, volume shipments of two-chip display drivers for mobile handsets in August 2003 and volume shipments of single-chip display drivers for mobile handsets in August 2004. In September 2004, we commenced volume shipments of our first television semiconductor solutions. We commenced shipping engineering samples of LCOS products in December 2003 and started volume shipments in June 2006. We commenced shipping engineering samples of power ICs in October 2006 and started volume shipments in January 2007. We commenced small quantity commercial shipments of our CMOS image sensor products in April 2009 and started volume shipments in August 2010. We commenced small quantity commercial shipments of our wafer level optics products in December 2009 and started volume shipments in the third quarter of 2011. We commenced our IP and ASIC services in the fourth quarter of 2011. We commenced small quantity commercial shipments of our touch controller products in December 2010 and started volume shipments in the fourth quarter of 2011.

 

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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 of the panel and the number of channels per display driver. 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 full HD (1,920 x 1,080 pixels) panel requires eight 720-channel source drivers and four 270-channel gate drivers. The number of display drivers required can be reduced by using drivers with a higher number of channels. For example, a full HD panel can have six 960-channel source drivers instead of eight 720-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, 16 million and 1 billion colors are supported by 6-bit, 8-bit and 10-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 1.8 volts and output voltages ranging from 7 up to 24 volts. Gate drivers typically operate at input voltages from 3.3 to 1.8 volts and output voltages ranging from 10 to 50 volts. Lower input voltage saves power and lowers electromagnetic interference, or EMI. Output voltage may be higher or lower depending on the characteristics of the liquid crystal (or diode), in the case of source drivers, or TFT device, in the case of gate drivers.

 

·Gamma Curve. The relationship between the light passing through a pixel and the voltage applied to it by the source driver is nonlinear and is referred to as the “gamma curve” of the source driver. Different panel designs and manufacturing processes require source drivers with different gamma curves. Display drivers need to adjust the gamma curve to fit the pixel design. Due to the materials and processes used in manufacturing, panels may contain certain imperfections which can be corrected by the gamma curve of the source driver, a process which is generally known as “gamma correction.” For certain types of liquid crystal, the gamma curves for RGB cells are significantly different and thus need to be independently corrected. Some advanced display drivers feature three independent gamma curves for RGB cells.

 

·Driver Interface. Driver interface refers to the connection between the timing controller and display drivers. Display drivers increasingly require higher bandwidth interface technology to address the larger data volume necessary for video images. Panels used for higher data transmission applications, such as televisions, require more advanced interface technology. The principal types of interface technologies are transistor-to-transistor logic, or TTL, reduced swing differential signaling, or RSDS, mini-low voltage differential signaling, or mini-LVDS, and point-to-point high speed interface. Among these, RSDS, mini-LVDS and point-to-point interface were developed as low power, low noise and low amplitude methods for high-speed data transmission using fewer copper wires and resulting in lower EMI. Moreover, there are some panel manufacturers developing their proprietary point-to-point interfaces, such as embedded panel interface, or EPI, and advanced intra-panel interface, or AIPI,

 

·Package Type. The assembly of display drivers typically uses TAB and COG package types. COF and TCP are two types of TAB packages, of which COF packages have become predominantly used in recent years. 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 types, whereas display drivers for large-sized panels primarily use TAB package types and, to a lesser extent, COG package types.

  

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Large-Sized Applications

 

We provide source drivers, gate drivers and timing controllers for large-sized panels principally used in desktop monitors, notebook computers and televisions. Display drivers used in large-sized applications feature different key characteristics, depending on the end-use application. For example, the industry trend for large-sized applications is generally toward super high channel, low power consumption, low cost, thin and light form factor, touch function, higher data transmission rate and higher driving capabilities. Higher speed interface technologies are also key for 4Kx2K high-resolution TV. Greater color depth, enhanced color through RGB independent gamma and 3D display, are particularly important for advanced televisions and certain monitors.

 

In December 2007, we introduced the cascade modulated driver interface, or CDMI, technology, a patented technology for LED notebook panels, benefits of which include a thin and light form factor, lower power consumption and support of a resolution of up to 1,920 x 1,200 pixels.

 

In February 2009, we introduced timing controllers with the content adaptive brightness control, or CABC, technology. CABC technology controls backlight brightness intelligently by analyzing the content displayed to save power and enhance the contrast level while maintaining vivid display quality. Our algorithm enables a smooth adjustment in backlight brightness even when the content changes swiftly.

 

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The table below sets forth the features of our products for large-sized applications:

 

Product   Features
TFT-LCD Source Drivers      
    6-bit (262K colors), 8-bit (16 million colors) or 10-bit (1 billion colors)
    one gamma-type driver
    two gamma-type driver to improve display quality
    three gamma-type drivers (RGB independent gamma curve to enhance color image)
    output driving voltage ranging from 7 up to 24V
    input logic voltage ranging from standard 3.3V to low power 1.8V and support half VDDA
    low power consumption and low EMI
    support COF and COG package types
    support TTL, RSDS, mini-LVDS (up to 480MHz), cascade modulated driver interface, or CMDI, point-to-point high speed interface and customized interface technologies
    support dual gate and triple gate panel designs
       
TFT-LCD Gate Drivers   192 to 1600 output channels
    output driving voltage ranging from 10 up to 50v
    input logic voltage ranging from standard 3.3V to low power 1.8V
    low power consumption
    support COF and COG package types
    support dual gate and triple gate panel designs
     
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, 1,920 x 1,200 pixels and 3840 x 2160)
    support TTL, RSDS, mini-LVDS, DETTL, turbo RSDS, CMDI, point-to-point high speed interface and customized output interface technologies
    input logic voltage ranging from standard 3.3V to low power 1.2V
    embedded overdrive function to improve response time
    support CABC to save power and color engine to enhance color and sharpness
  support TTL, LVDS, eDP and V-by-one input interface technologies
  support dual-gate and triple-gate panel designs

 

Mobile Handset Applications

 

We offer display drivers for mobile handset displays that combine source driver, gate driver, timing controller, frame buffer and DC to DC circuits into a single chip in various display technologies, such as TFT-LCD, LTPS and AMOLED. As mobile handset prices remain competitive, mobile display module manufacturers continue to reduce cost and seek to source cost-effective display drivers. By designing a finer channel pitch that features cost efficient processes, we have offered a smaller chip size and endeavor to provide handset display driver products with fewer external components to reduce the cost of materials for our customers.

 

The industry trend for mobile handset display drivers is generally toward display drivers that can support high-speed interfaces, have greater color depth and enhanced image quality as multimedia functions are increasingly incorporated into mobile handsets. In addition, the ability for mobile handsets to operate for long durations without recharging the battery is of high value. Thus, display drivers with lower power consumption are desired. We integrated our proprietary low power driving circuits and content adaptive brightness control, or technology into display drivers in order to extend the battery life.

 

With new software platforms providing better access to the Internet, smartphones have gained greater popularity among consumers and enjoyed higher growth in recent years. This has also contributed to higher demand for mobile handset displays that have a larger size and higher resolution. In the past 2 years, we offered innovative handset display driver products by providing advanced WVGA (480 x 864 pixels), qHD (540 x 960 pixels), and HD720 (720 x 1280)/ WXGA (800 x 1280) display driver ICs. We have recently continued to update new products for this mainstream smartphone segment with new features, such as color enhancement and sun-light readability enhancement functions. Meanwhile, we believe we developed the first HD720/WXGA display driver with compressed RAM technology, which we believe has led the industry migration to smartphones with higher resolution displays and lower power consumption. We keep moving forward to develop and provide next generation display driver ICs, such as FHD (1080 x 1920 pixel), with higher resolution.

 

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The following table summarizes the features of our products for mobile handsets:

 

Product   Features
Mobile Handset Display Drivers   highly integrated single chip embedded with the source driver, gate driver, power circuit, timing controller and memory
    suitable for a wide range of resolutions from QQVGA (128 x 160 pixels) to FHD (1080 x 1920 pixels)
    support 65K, 262K colors and up to 16 million colors
    support RGB separated gamma adjustment
    support CABC
    support color enhancement features including saturation, brightness, and sharpness enhancement
    support MDDI and MIPI interfaces
    low power consumption and low EMI
    fewer external components to reduce costs
    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, GIP drivers without gate driver, LTPS drivers, or AMOLED drivers)

 

Consumer Electronics Products

 

We offer source drivers, gate drivers, timing controllers and integrated drivers for consumer electronics products such as tablet PCs, netbook computers, digital cameras, digital video recorders, personal digital assistants, mobile gaming devices, portable DVD players, electronic book readers, or E-readers, digital photo frames 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 the source driver, gate driver and timing controller, as well as more functional semiconductors such as power circuit and touch controller, combined into a single chip.

 

The industry trend for display drivers used in medium-sized consumer electronics products is towards higher channels and the integration of timing controllers with display drivers. The trend of display drivers used in small-sized consumer electronics products is toward single-chip solutions combining the source driver, gate driver, timing controller and power circuit into a single chip.

 

In 2009, we introduced our new electro-phoretic display solutions, including HX8701 (gate driver) and HX8702 (source driver), for use in E-reader devices.

 

In 2011, we introduced our new point-to-point display solution including HX8288 (source driver) and HX8896 (timing controller), for use in tablet PCs, and this solution is also suitable for other slim display applications such as Ultrabook .

 

In 2012, we developed our highly integrated display driver for low power, high resolution IGZO displays used in tablet PCs.

 

The following table summarizes the features of our products used in consumer electronics products:

 

Product   Features
TFT-LCD Source Drivers   240 to 1,536 output channels
    products for analog and digital interfaces
    support 262K colors to 16.7 million colors
    input logic voltage ranging from standard 3.3V to low power 1.8V
    low power consumption and low EMI
       
TFT-LCD Gate Drivers   96 to 1,600 output channels
    input logic voltage ranging from standard 3.3V to low power 1.8V
    output driving voltage ranging from 10 to 40V
       
TFT-LCD Integrated Drivers   highly integrated single chip embedded with source driver, gate driver, timing controller and power circuit
    resolutions include WVGA (846 x 480 pixels), SVGA (800 x 600 pixels), WSVGA (1,024 x 600 pixels) and WXGA (1,280 x 800 pixels)
    products for analog or digital interfaces
    low power consumption
    CABC function integrated for backlight power saving
       
Timing Controllers   products for digital interfaces/high speed interface
    products for Tablet/Netbook/Ultrabook
    support various resolutions from 1024x600 pixels to 1920 x1200 pixels

 

Touch Controller ICs

 

We offer touch controller solutions for capacitive touch panels. Our touch controller solutions are suitable for electronic devices employing touch panel screens of up to 11”, such as smartphones, mobile internet devices and tablet PCs. In the third quarter of 2011, we commenced shipping capacitive touch controller ICs to a worldwide brand smartphone and tablet customer.

 

Our capacitive touch controller possesses certain innovations and merits. It could support sensing and tracking of up to ten points. Its embedded micro-controller, single chip solution and no external components contribute to reducing cost for flexible product design. Its auto calibration mechanism can meet strict validation requirements of leading smart phone brands. Our touch controller’s proprietary sensing circuits and algorithms could also enhance noise immunity capability and enable touch panels to work without shielding layer or to work on a single glass structure, which contributes to simplifying the manufacturing process and reducing costs for touch panels.

 

The following table summarizes the features of our touch controller products:

 

Product   Features
Capacitive Touch Controller   complete single chip touch controller solutions for handheld devices, supporting smartphones (up to 5), MIDs (up to 8), or tablet PCs (up to 11)
    real multi-point capability support of up to 10 points
    mass production with GG, GFF and one glass without shielding layer
    approved LCD and AC noise immunity
    minimum components: simple, neat, and flexible mechanical design

 

TFT-LCD Television and Monitor Semiconductor Solutions

 

Himax Media Solutions, our subsidiary, provides TFT-LCD television and monitor semiconductor solutions.

 

TFT-LCD Monitor Chipsets

 

The following table summarizes the features of our monitor scaler solutions:

 

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Product   Features
Monitor Scaler Integrated Solutions   ideal for monitor applications
    integrated with high performance ADC and scaler
    built-in HDMI 1.4a and DVI receiver
    built-in audio digital-to-analog converter
    built-in high performance color engine
    integrated high speed MCU
    integrated with timing control for additional cost-down
    input/output resolutions range from 640 x 480 pixels up to 1,920 x 1,080 pixel.
    integrated 2D to 3D conversion
    integrated 3D format conversion

 

In addition to scaler solutions, we expanded the product offering of monitor chipset solutions in 2012 to unveil the innovative 2D to 3D conversion solution called RV2H and RVP3 for new 3D applications which can convert 2D images into the 3D format in real time. This compact solution can be implemented in a number of hardware platforms, such as 3D portable applications including tablet and mobile phone, 3D notebook personal computers, 3D digital photo frame, 3D projector and 3D converter box. This compact solution has already been designed into products of a number of famous companies. Our algorithm utilizes human visual perception characteristics, which not only reveals more 3D details but may also offer a more comfortable and enjoyable viewing experience.

 

The following table summarizes the features of our 2D to 3D RVP3 and RV2H conversion solutions:

 

Product   Features
RVP3 2D to 3D Conversion Solutions   3D Android: any 2D content can be in real time convert to 3D video sequence cover in UI, icons, video, photo and gaming
    low power, small package, without CPU computing power and cost effective
    real 3D adjustable
    multi-views in 3D
    support HDMI-1.4 3D formats and 2D content converting to 2~9 views
    auto scene mode detection
    switchable between Portrait and Landscape modes in 3D
    switchable barrier 2D/3D control
    resolution up to WUXGA - 1920 x 1200
    3D conversion with elimination of jagged edge effectively
    inter-bridge between MIPI, LVDS and TTL
    I2C programming interface
    easily integrated into existing project
       
RV2H 2D to 3D Conversion Solutions      
    support HDMI 1.4 3D format input including 3D format
    support 2D mode, 2D to 3D mode, 3D to 2D mode and 3D bypass/converter mode
    support resolution up to full HD with 10 bits deep color
    built-in de-interlace and scaler
    built-in 2D to 3D engine
    built-in Frame rate conversion which can output 120 Hz frame rate
    built-in 64 mega bits SDR chip
    TTL interface supports up to 1920 x 1080 RGB 888 resolution
    TTL interface supports up to 12 bits RGB/YUV
    built-in 3D glass sync and L/R sync signal

 

IP and ASIC Service

 

Video IP

 

In the fourth quarter of 2011, we developed a new business segment on IP and ASIC service. It is a brand new model based on our core technology of video display and High Speed Transmission. There are 3D Video and Image Compression/Decompression IP, 2D convert to 3D IP and Technology Licensing, High Speed Transmission and High Performance Video ADC Silicon IP (SIP) Licensing.

 

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As an expert player in 3D image and display core technologies solutions, we develop and own unique IPs of image and video applications. The high quality IPs, which are used in various popular multi-media commercial products, can provide our licensees with differentiated products and advantage in time-to-market. The features of IPs are summarized in the following table.

 

Product   Features
Real 3D Depth Controllable (R3D) IP   state-of-the-art real 3D depth controllable technology for healthy and comfortable 3D
    safe disparity angel is configurable and can meet each country’s 3D regulation in real 3D mode
    precise disparity control for view synthesis and parameters are configurable
    support 3D fatigue warning
    support various 3D Visual Protection modes
    3D content accommodation error detection and correction
    easily integrated into existing Projector, TV, Monitor, Box, DVD, and DPF system SoC with 3D features
       
2D to 3D Conversion IP   state-of-the-art 2D-to-3D conversion algorithms for transforming any 2D video content to 3D video sequence and supporting different 3D display
    support auto-scene detection and various scene modes
    precise disparity control for view synthesis and parameters are configurable
    Support configurable stereoscopic density for both modes including in front of screen call pulled and behind the screen call push
    easily integrated into existing Projector, TV, monitor, box, DVD, and DPF system SoC with 3D features
       
Multi-view: 3D Glasses-free IP   state-of-the-art real 2D/3D depth generator for multi-view controller
    support multi-view (2~9 views) parallax barrier and lenticular lens glasses-free 3D displays based on perfect viewing angle adjustment
    both 2D content (one view) and real 3D content (two views) can be synthesized for multi-view display
    precise disparity control for view synthesis and parameters are configurable
    support configurable stereoscopic density for both modes including in front of screen call pulled and behind the screen call push
    easily integrated into existing portable DVD, DPF, Pad like, mobile system SoC with 3D features
       
SunLight Readable IP   improve sunlight readability under bright sunlight environment
    smart contrast enhancement processing for shadow, mid-tone and highlight grey level respectively
    pixel based contrast adjustment
    adapt video content dynamically
    support automatic adjustment based on ambient light sensor input
    support manual adjustment based on manual enhancement level setting
    no frame buffer is required
    low power and compact architecture
       
Super High Resolution IP   high quality resolution up-conversion without image blur or side-effect such as zigzag artifact and ringing artifact
    synthesize rich details with texture extraction capability by database-free architecture
    support various levels of reality enhance effect
    any resolution up-conversion without arbitrary ratio limitation
    real-time single-frame conversion, no extra external memory requirement
    easily integrated into existing Projector, TV, Monitor, Box, DVD, and Surveillance system SoC with scaler functionality
     
Embedded Visual Lossless Compression IP   proprietary technologies near lossless compression for embedded frame buffer can reduce bandwidth and power consumption for SOC application
    compression Ratio: 2x~3x
    reduce image storage capacity and transmission time
    offer two color domain compression: YUV / RGB
    support real-time compress/decompress with low latency delay for video processor application
    block-based / frame-based data access encode/decode

 

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Silicon IP

 

We also develop and own unique IPs of high speed transmission. These silicon IPs are not only silicon proven but also “product proven” and are used in various popular media commercial products. We provide our licensees with unique, high quality and cost competitive silicon IPs to reduce risk and accelerate time-to-market. The features of silicon IPs are summarized in the below table:

 

Product   Features
HDMI Transmitter and Receiver IP   provide configurable HDMI digital controllers and high-speed mixed signal Physical Layer IP (“PHY”)
    fully compliant with HDMI 1.4a specifications and received the ATC certification
       
Mobile Industry Processor Interface (“MIPI”) and Display Serial Interface (“DSI”) IP   fully compliant with the DSI version 1.01
    support the physical adapter layer of the D-PHY specification version 1.00
    support both command and video modes providing the greatest range of flexibility
     
VBO IP   fully compliant with the V-by-One® HS Standard Version 1.3
    provide configurable VBO digital controllers and high-speed mixed signal PHY
    designed for supporting high-speed video data transmission between the host device and display device, especially UltraHD TV application

 

ASIC Service

 

In 2012, we completed the ASIC project for Japan top TV makers with customized video processing chip. The chip has LVDS TX/RX interfaces and specialized video processing technology.

 

The following table summarizes the features of our ASIC service:

 

Product   Features
ASIC Service   based on our video processor platform solutions including video processor and timing controller platform
    support video input/output interfaces like LVDS, HDMI, DVI, VBO, Display port, MIPI, MHL, etc.
    built-in 8/32- bit microprocessor
    built-in video processing algorithm like super-high resolution, sun-light readable, MEMC, FRC, etc
    built-in 3D feature technologies like 2D-to-3D, Glasses-free 3D, 3D multi-view, 3D visual protection, etc.
    support 4K x 2K display
    support advanced timing controller technologies like smart contrast enhance, local dimming, EVLC, and energy saving

 

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LCOS and MEMS Products

 

Himax Display, our subsidiary, has contributed to our microdisplay products lines: Color-filter LCOS, Color-sequential LCOS and MEMS.

 

Himax Display is the market leader of the LCOS industry based on market share in 2012. We believe Himax Display is the only non-captive LCOS company that owned a mass production ready liquid crystal assembly line. We have produced and shipped over 1.5 million units from this ISO certified line. Our customers use our products in various applications such as pico-projector, embedded projector in different applications (cell phone and camcorder), communication, toy projector, and head-mounted-display.

 

We believe Himax is among the few players, including Texas Instruments, in the market offering MEMS microdisplay solutions.

 

Both technologies have their own merits for different applications in resolution, power consumption, size, cost, optical engine design, and image quality. We provide a rich products family for customers to choose for different applications, since each product has its own most important parameters to select. Himax Display provides choices to customers. The following table shows certain details of our products:

 

LCOS Microdisplays   Size and Resolution
Color-Filter LCOS Microdisplays   0.28” (320x240 pixels) QVGA
    0.38” (640x360 pixels) nHD
    0.44” (640x480 pixels) VGA
    0.59” (800x600 pixels) SVGA
    Customized design
       
Color-Sequential LCOS Microdisplays   0.22” (640 x 360 pixels) nHD
    0.28” (852 x 480 pixels) WVGA
    0.38” (640 x 480 pixels) VGA
    0.37” (800 x 600 pixels) SVGA
    0.37” (1366 x 768 pixels) WXGA
    0.45” (1024 x 768 pixels) XGA
    Customized design
       
MEMS   0.55” (1280 x 800 pixels) WXGA

 

Power ICs

 

Himax Analogic, Inc., or Himax Analogic, our subsidiary, has two major product lines: power management ICs and LED drivers.

 

Power Management ICs

 

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A power management IC integrates several power components to fulfill system power requirements. It may include step-up or step-down pulse width modulation, or PWM, DC-to-DC converters, low-dropout regulators, or LDO regulators, voltage detectors, operational amplifiers, level shifters, or other components. For panel module applications, a power management IC provides a reliable and precise voltage for source drivers, gate drivers, timing controllers, and panel cells. Moreover, its built-in over-temperature and over-current protections help prevent components from being damaged under certain abnormal conditions. As integrating an increasing number of components into a power management IC is likely to be a continuing trend, we believe power management ICs will continue to be critical components of a TFT-LCD panel module. The following table summarizes certain features of our power management IC products:

 

Product   Features
Integrated Multi-Channel Power Solutions for Notebooks   built-in power MOSFET
    step-up PWM converter
    charge pump regulator
    LDO regulator
    voltage detector
    gate pulse modulator
    Vcom operational amplifier
    with/without LED drivers
    smart PWM control
       
Integrated Multi-Channel Power Solutions for Monitors   built-in power MOSFET
    step-up PWM converter
    HV LDO regulator
    voltage detector
    gate pulse modulator
    programmable Vcom voltage / Vcom operational amplifier
    level shifter
       
Integrated Multi-Channel Power Solutions for TVs   built-in power MOSFET
    step-up PWM converter
    step-down PWM converter
    charge pump regulator
    HV LDO regulator
    voltage detector
    gate pulse modulator
    Vcom operational amplifier
    I2C programmable
    level shifter

 

LED Drivers

 

The LED driver provides sufficient voltage and current to light up LED diodes. Moreover, in addition to turning LEDs on, the driver has to keep the brightness of LEDs uniform and stable. Therefore, voltage boosting and current sensing are the core functional blocks of a white LED driver. The following table summarizes certain features of our LED drivers products:

 

Product   Features
WLED Drivers for NB   4.5V to 24V input voltage range
    built-in 1.3MHz step-up PWM converter (max. boost voltage: 40V)
    8 constant current source channels
    capable of driving up to 10 LEDs in serial for each channel
       
WLED Drivers for LED MNT   5V to 33V input voltage range
    built-in 2MHz step-up PWM controller
    2/4/8 constant current source channels
    up to 200mA per channel
    60V sustainable voltage for LED pins
    capable of driving up to 16 LEDs in serial for each channel
       
WLED Drivers for LED TV   8V to 33V input voltage range
    8-channel current sinks
    up to 90mA per channel
    60V sustainable voltage for LED pins

 

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CMOS Image Sensor Products

 

Our CMOS image sensor products are designed primarily for camera-equipped mobile devices, such as mobile phones, tablets and notebook computers, with a focus on low light image and video quality. The CMOS image sensor product line is developed by our subsidiary, Himax Imaging. With the product launch of 3 mega pixel, 2 mega pixel and VGA system-on-chip sensor products in 2009, we have secured customer designs in both mobile phones and notebook applications and moved these products into production phase. We continue to expand our product portfolio with the successful introduction of a 1/6” 1.3 mega pixel, a 1/6” HD, and a 1/5” format 2.0 mega pixel system-on-chip sensor. Based on new pixel architecture, a 1/4” 5 mega pixel, a 1/3.2” 8 mega pixel and a smaller 1/9” HD sensor were designed and started phasing into production. Thanks to backside illumination, or BSI technology, a high performance 1/6” Full HD sensor and a new 8 mega pixel sensor will be designed in 2013. Besides products in mobile devices, we also develop specialized sensors for automobile and surveillance. Almost all of our CMOS image sensors feature the BrightSenseTM technology to achieve a better signal-to-noise ratio in the lowlight or video mode without a decreasing frame rate or increasing power consumption. Embedded in our new 2.0 mega pixel sensor, ClearViewTM technology provides the optical restoration engine to enhance the optical performance. In the automobile and surveillance product line, ClearSenseTM technology extends the dynamic range by special pixel and readout. We are committed to being a key player in CMOS image sensor business with investments in experienced human resources, an efficient supply chain, and strategic technology developments and partnerships to further increase the performance and features of small and specially designed pixel sensors.

 

The following table sets forth the features of our CMOS image sensor products:

 

Product   Features
8MP Color Image Sensor   1/3.2” format color type
    8MP at 15 frames per second, support 1080p and 720p at 30 frames per second
    advanced ADC architecture to keep outstanding SNR
    state-of-the-art ultra bright pixel
    10 bit parallel video data port and 2-lane MIPI CSI2 outputs RAW8/10, YUV422, RGB565/555/444
       
5MP Color Image Sensor System on Chip   1/4” format color type
    5MP resolution at 15 frames per second (with MJEG), support 720p HD at 30 frames per second and 1080 FHD at 15 frames per second
    VCM driver and MJEG engine embedded
    color processing pipeline including lens shading correction, defect correction, edge enhancement, exposure control with backlight compensation, color de-mosaic, color correction, gamma control, and saturation/hue adjustment
    10 bit parallel video data port and 2-lane MIPI CSI2 outputs RAW8/10, YUV422, RGB565/555/444
     
3.4MP BrightSenseTM Color Image Sensor   1/4” format color type
    QXGA resolution at 15 frames per second, support for 720p HD and D1 resolution at 30 frames per second
    ClearVisionTM 80dB enhanced dynamic range mode compatible with standard color processing
    on-chip 4-channel lens correction, defect removal
       
2.0MP ClearViewTM Color Image Sensor   1/5” format color type
    ClearViewTM boosts optical performance by lens compensation
    UXGA YUV output at 15 frames per second, 720p HD resolution at 30 frames per second
    color processing pipeline including lens correction, defect correction, color de-mosaic, color correction, gamma control, saturation/hue adjustment, and edge enhancement
    multiple video formats including YUV422, RGB565, and ITU656
       

 

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Product   Features

2.0MP BrightSenseTM System on Chip

 

  1/5” format color type
    UXGA resolution at 18 frames per second, 720p HD resolution at 30 frames per second
    on-chip 4-channel lens correction, defect removal
    low noise and low power consumption
       
HD 720p ClearViewTM System on Chip   1/6” format with high sensitivity
    ClearViewTM boosts optical performance by lens compensation
    720p HD resolution at 30 frames per second
    color processing pipeline including lens shading correction, defect correction, edge enhancement, exposure control with backlight compensation, color de-mosaic, color correction, gamma control, and saturation/hue adjustment.
    10 bit parallel video data port and 1-lane MIPI CSI2 outputs RAW8/10, YUV422, RGB565/555/444
       
1.3MP ClearSenseTM EDR Color Image Sensor   1/4” format with ultra high sensitivity
    ClearSenseTM achieves higher dynamic range in color up to 84dB with on-chip tone mapping
    800p and 720p resolution at 30 frames per second
    FlexiTM engine automatically controls dynamic range, exposure, gain, and white balance to balance color fidelity and contrast
    color processing pipeline including lens shading correction, defect correction, edge enhancement, color interpolation and correction, gamma control, and saturation/hue adjustment.
    anti-blooming and dark sun cancellation
    built-in low dropout regulator and power on reset
    10 bit parallel video data port supports RAW, YUV422, and RGB565/555/444
       
1.3MP BrightSenseTM System on Chip   1/6” format color type
    SXGA resolution at 20 frames per second, 720p HD resolution at 30 frames per second
    color processing pipeline with dynamic adjustments based on luminance and light color temperature
    low noise and low power consumption
     
VGA BrightSenseTM System on Chip   1/13” format color type
    VGA YUV output at 30 frames per second
    color processing pipeline including lens correction, defect correction, color de-mosaic, color correction, gamma control, saturation/hue adjustment, and edge enhancement
    automatic low light and frame rate control
    1-lane MIPI CSI2 outputs RAW, YUV422, RGB565/555/444

 

Wafer Level Optics Products

 

Wafer level optics are optical products manufactured using semiconductor process on wafers. This innovative approach enables wafer level optics to feature small-form factor and high temperature resistance, making the Surface-Mount Technology or SMT reflow process possible. We offer entire optical solutions for customers who need compact and easy-to-handle optical products on their electronic devices.

 

Combining traditional optical lens design, precise mold control and semiconductor manufacturing expertise, our VGA wafer level optics products have been adopted by tier-1 camera module makers and mobile phone brands. The double-side manufacture process makes the lens structure more reductive and achieves better performance. With the innovative process and specific structure, our wafer level optics products enhance the performance of camera modules.

 

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Besides imaging lens, our technology is also adapted to form microstructure such as lens array and lenticular for advanced application in digital optics field.

 

The following table sets forth the features of our wafer level optics products:

 

Product   Features
VGA 1 element wafer level lens   for 1/11” VGA CIS (2.0μm pixel pitch)
    one-element and two-surface design for cost-competitive market
    double-side manufacture process
    already in mass production
       
VGA 1 element wafer level lens   for 1/13” VGA CIS (1.75μm pixel pitch)
    one-element and two-surface design for cost-competitive market
    double-side manufacture process
    already in mass production
     
HD/1.3M 2 element wafer level lens   for 1/9” 1.3M/HD CIS (1.4μm pixel pitch)
    two-element and four-surface design for cost-competitive market
    double-side manufacture process
     
Lens array   customized lens array for various kinds of applications
    precise surface form
    dimension of lens let could achieve as small as 10μm

 

Core Technologies and Know-How

 

Driving System Technology. Through our collaboration with panel manufacturers, we have developed extensive knowledge of circuit design, TFT-LCD driving systems, high-voltage processes and display systems, all of which are important to the design of high-performance TFT-LCD display drivers. Our engineers have in-depth knowledge of the driving system technology, which is the architecture for the interaction between the source driver, gate driver, timing controller and power systems as well as other passive components. We believe that our understanding of the entire driving system has strengthened our design capabilities. Our engineers are highly skilled in designing power efficient and compact display drivers that enhance the performance of TFT-LCD. We are leveraging our know-how of display drivers and driving system technology to develop display drivers for panels utilizing other technologies such as OLED.

 

High-Voltage CMOS Circuit Design. Unlike most other semiconductors, TFT-LCD display drivers require a high output voltage of 3.3 to 50 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 transistor-transistor logic (“TTL”), Reduced Swing Differential Signaling (“RSDS”), mini low-voltage differential signaling (“LVDS”), dual-edge TTL (“DETTL”), turbo Reduced Swing Differential Signaling (“RSDS”), Mobile Industry Processor Interface (“MIPI”)and other 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.

 

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Customers

 

Our customers for display drivers are primarily panel manufacturers and mobile device module manufacturers, who in turn design and market their products to manufacturers of end-use products such as notebook computers, desktop monitors, televisions, mobile handsets and consumer electronics products. We may sell our products through agents or distributors for certain products or in certain regions. As of December 31, 2012, we sold our products to more than 200 customers. In 2010, 2011 and 2012, Innolux, including CMO, the predecessor of Innolux and TPO, and its affiliates, combined with the predecessor of Innolux and TPO before the merger, accounted for 52.8%, 40.8% and 34.2% of our revenues, respectively; customer A and its affiliates, accounted for 0.2%, 5.7% and 11.7% of our revenues, respectively.

 

Set forth below (in alphabetical order) are our ten largest customers (and their affiliates) based on revenues for the year ended December 31, 2012:

 

BOE Technology Group Co., Ltd.

Chunghwa Picture Tubes, Ltd.

HannStar Display Corporation

Happiness Commercial Co., Limited

Innolux

Mitsudi (HK) Company

Perfect Display Limited

Shanghai Tianma Microelectronics

Truly Semiconductors Ltd.

Welltek Electronics (Hong Kong) Limited

 

Certain of our customers provide us with a long-term (twelve-month) forecast plus three-month rolling non-binding forecasts and confirm orders about 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 also with panel manufacturers using LTPS or OLED technologies and also with mobile display module and mobile handset manufacturers in order to work closely with them on future semiconductor solutions that align with their product road maps. Our engineers collaborate with our customers’ engineers to create products that comply with their specifications and provide a high level of performance at competitive prices. Our end market for large-sized panels is concentrated among a limited number of major panel manufacturers. We also market our products directly to monitor, notebook and mobile device manufacturers so that our products can be qualified for their specifications and designed into their products.

 

We primarily sell our products through our direct sales teams located in Taiwan, China, South Korea and Japan. We also have dedicated sales teams for certain of our most important current or prospective customers. We have sales and technical support offices in Tainan, Taiwan; and Foshan, Fuging, and Ningbo, China. We have offices in Hsinchu and Taipei, Taiwan; Hefei, Beijing, Shanghai, Shenzhen and Suzhou, China; Yokohama and Matsusaka, Japan; Cheonan and Suwon, South Korea; and Irvine and Sunnyvale, California, and Delaware, USA, all in close proximity to our customers. For certain products or regions, we may 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 product managers and field applications engineers. Our team is equipped with extensive strategic marketing experience and a strong capability to identify market trends. We also provide 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 operate primarily in a fabless business model that utilizes substantially third-party foundry and assembly and testing capabilities. 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 largely on third-party suppliers of processed tape used in TAB packaging. We engage foundries with high-voltage CMOS process technology for our display drivers and engage assembly and testing houses that specialize in TAB and COG packages, thereby taking advantage of the economies of scale and the specialization of such semiconductor manufacturing service providers. Our primarily fabless model enables us to capture certain financial and operational benefits, including reduced manufacturing personnel, capital expenditures, fixed assets and fixed costs. It also gives us the flexibility to use the technology and service providers that are the most suitable for any given product.

 

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We operate a small fab under Himax Display primarily for performing certain manufacturing processes for our LCOS microdisplays. Moreover, in order to further meet customers’ demand for higher quality, lower cost, and faster time-to-market, we have established an in-house color filter facility under Himax Taiwan, which commenced small-scale shipments in 2010. The color filter line is a critical and unique process for our proprietary single-panel color LCOS microdisplays. An in-house color filter facility enhances the competitiveness of our LCOS products and creates value for our customers. In addition, we have established an in-house wafer level optics facility under Himax Taiwan for the key process of our wafer level optics products, which commenced small-scale shipments in December 2009.

 

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 primarily on the application and design of the panel and is determined by our customers.

 

 

 

Wafer Fabrication: Based on our design, the foundry provides us with fabricated wafers. Each fabricated wafer contains many chips, each known as a die.

 

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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 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. By contrast, with COF packages, the lead is mounted directly on the processed tape and there is no flying lead. In recent years, COF packages have become predominantly used in TAB technology.

 

·Inner-Lead Bonding: The TCP and COF assembly process involves grinding the bumped wafers into their required thickness and cutting the wafers into individual dies, or chips. An inner lead bonder machine connects the chip to the printed circuit processed tape and the package is sealed with resin at high temperatures.

 

·Final Testing: The assembled display drivers are tested to ensure that they meet performance specifications. Testing takes place on specialized equipment using software customized for each product.

 

COG Assembly

 

COG assembly connects display drivers directly to LCD panels without the need for processed tape. COG assembly involves grinding the tested wafers into their required thickness and cutting the wafers into individual dies, or chips. Each individual die is picked and placed into a chip tray and is then visually or auto-inspected for defects. The dies are packed within a tray in an aluminum bag after completion of the inspection process.

 

Quality Assurance

 

We maintain a comprehensive quality assurance system. Using a variety of methods, from conducting rigorous simulations during the circuit design process to evaluating supplier performance at various stages of our products’ manufacturing process, we seek to bring about improvements and achieve customer satisfaction. In addition to monitoring customer satisfaction through regular reviews, we implement extensive supplier quality controls so that the products we outsource achieve our high standards. Prior to engaging a third party as our supplier, we perform a series of audits on their operations, and upon engagement, we hold frequent quality assurance meetings with our suppliers to evaluate such factors as product quality, production costs, technological sophistication and timely delivery.

 

In November 2002, we received ISO 9001 certification, which was renewed in February 2011 and will expire in February 2014. In February 2006, we received ISO 14001 certification, which was renewed in January 2012 and will expire in January 2015. In addition, in March 2007, we received IECQ QC 080000 certification, which was renewed in March 2013 and will expire in March 2016, and OHSAS 18001 certification, which was renewed in January 2012 and will expire in January 2015.

 

Semiconductor Manufacturing Service Providers and Suppliers

 

Through our relationships with leading foundries, assembly, gold bumping and testing houses and processed tape suppliers, we believe we have established a supply chain that enables us to deliver high-quality products to our customers in a timely manner.

 

Access to semiconductor manufacturing service providers is critical as display drivers require high-voltage CMOS process technology and specialized assembly and testing services, all of which are different from industry standards. We have obtained our foundry services from TSMC, Vanguard, Macronix, Globalfoundries Singapore, SMIC and Maxchip in the past few years and have also established relationships with UMC, HHNEC and PSC.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, ChipMOS Technologies Inc., Chipmore International trading company Ltd. and Nepes Corporation.

 

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 a limited number of semiconductor manufacturing service providers for a substantial portion of our manufacturing requirements in the near future.

 

The table below sets forth (in alphabetical order) our principal semiconductor manufacturing service providers and suppliers:

 

Wafer Fabrication 

 

Gold Bumping 

Globalfoundries Singapore Pte., Ltd.   Chipbond Technology Corporation
Macronix International Co., Ltd.   Chipmore International Trading Company Ltd.
Maxchip Electronics Corp.   ChipMOS Technologies Inc.
Shanghai Hua Hong NEC Electronics Company, Ltd.   LB Semicon Co., Ltd.
Semiconductor Manufacturing International Corporation   Nepes Corporation
Taiwan Semiconductor Manufacturing Company Limited    
United Microelectronics Corporation    
Vanguard International Semiconductor Corporation    

Powerchip Technology Corporation

   

 

Processed Tape for TAB Packaging 

 

Assembly and Testing 

Mitsui Micro Circuits Taiwan Co., Ltd.   Ardentec Corporation
Samsung Techwin Co., Ltd.   Advanced Semiconductor Engineering Inc.
Simpal Electronics Co., Ltd.   Chipbond Technology Corporation
Sumitomo Metal Mining Package Material Co., Ltd.   Chipmore International Trading Company Ltd.
LG Innotek Co., Ltd.   ChipMOS Technologies Inc.
Stemco., Ltd.   Nepes Corporation
    Global Testing Corporation
    Greatek Electronics Inc.
    Jiangsu Changjiang Electronics Technology Co., Ltd.
    King Yuan Electronics Co., Ltd.
    Orient Semiconductor Electronics Ltd.
    Siliconware Precision Industries Co., Ltd.
    Taiwan IC Packaging Corporation
    Micro Silicon Electronics Corp.

 

Chip Probe Testing 

   
Ardentec Corporation    
Chipbond Technology Corporation    
Chipmore International Trading Company Ltd.    
ChipMOS Technologies Inc.    

Nepes Corporation

Global Testing Corporation

   
Greatek Electronics Inc.    
King Yuan Electronics Co., Ltd.    
Micro Silicon Electronics Corp.    

 

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Intellectual Property

 

As of March 31, 2013, we held a total of 1,869 patents, including 660 in Taiwan, 708 in the United States, 446 in China, and 55 in other countries. The expiration dates of our patents range from 2019 to 2032. We also have a total of 735 pending patent applications in Taiwan, 297 in the United States and 275 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, Europe, Singapore, Korea 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 the competition in our industry include:

 

·customer relations;

 

·product performance;

 

·design customization;

 

·development time;

 

·product integration;

 

·technical services;

 

·manufacturing costs;

 

·supply chain management;

 

·timely delivery;

 

·economies of scale; and

 

·broad product portfolio.

 

We continually face intense competition from fabless display driver companies, including Fitipower Integrated Technology, Inc., Ili Technology Corp., Lusem Co., Ltd, Novatek Microelectronics Corp., Orise Technology Co., Ltd., Raydium Semiconductor Corporation, Sitronix Technology Co., Ltd., Silicon Works Co. Ltd. and Solomon Systech Limited. We also face competition from integrated device manufacturers, such as MagnaChip Semiconductor Ltd., Panasonic Corporation, NEC Electronics Corporation, Renesas Technology Corp., Seiko Epson Corporation, Toshiba Corporation, Sanyo Electric Co., Ltd. and Rohm Co., Ltd., 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 whom are affiliated or have established relationships with other panel manufacturers, have longer operating histories, greater brand recognition and significantly greater financial, manufacturing, technological, sales and marketing, human and other resources than we do. Additionally, we expect that as the flat panel semiconductor industry expands, more companies may enter and compete in our markets.

 

For touch controller ICs, we compete with worldwide suppliers, such as Atmel Corp., Cypress Semiconductor Corp. and Synaptics Inc.

 

Our monitor semiconductor solutions compete against solutions offered by a significant number of semiconductor companies including MStar Semiconductor, Inc., Novatek Microelectronics Corp., and Realtek Semiconductor Corp. For 2D to 3D conversion solutions, we face competition from Mediatek Corp. and MStar Semiconductor, Inc.

 

For LCOS products, we face competition primarily from digital lighting processing, or DLP, projectors incorporating Texas Instruments Incorporated’s digital light processing technology. We also face competition from a few other mobile projector technologies, including OmniVision, which acquired Aurora Systems in 2010, Syndiant Inc. and Microvision, Inc., a company providing laser-scanning projector solutions. For MEMS products, we face competition primarily from TI’s DLP and Epson 3LCD technology.

 

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For power ICs, we face competition from Taiwan companies including Richtek Technology Corporation, Global Mixed-mode Technology Inc. and Advanced Analog Technology, Inc. We also compete with worldwide suppliers such as Maxim Integrated Products, Inc., Texas Instruments Incorporated and Rohm Co., Ltd.

 

For CMOS image sensor products, we face competition primarily from Aptina Imaging Corporation, Omnivision Technologies Inc., Samsung Electronics Co. Ltd., Sony Corporation and SK Hynix Inc.

 

For wafer level optics products, we face competition primarily from OmniVision, Heptagon, Anteryon, NemotekTechnologies and Q-Technology Ltd.

 

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 transit of inventories. Additionally, we maintain director and officer liability insurance. We do not have insurance for business interruptions, nor do we have key person insurance.

 

Environmental Matters

 

The business of semiconductor design does not cause any significant pollution. Himax Taiwan maintains a color filter facility and a wafer level optics facility and 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.

 

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4.C. Organizational Structure

 

The following chart sets forth our corporate structure and ownership interest in each of our principal operating subsidiaries and affiliates as of March 31, 2013.

 

 

 

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The following table sets forth summary information for our subsidiaries as of March 31, 2013.

 

Subsidiary  Main Activities  Jurisdiction of
Incorporation
  Percentage of
Our Ownership
Interest
 
           
Himax Technologies Limited  IC design and sales  ROC   100.0%
Himax Technologies Korea Ltd.  Sales  South Korea   100.0%
Himax Semiconductor, Inc.  IC design and sales  ROC   100.0%
Himax Technologies (Samoa), Inc.  Investments  Samoa   100.0%(1)
Himax Technologies (Suzhou) Co., Ltd.  Sales  PRC   100.0%(2)
Himax Technologies (Shenzhen) Co., Ltd.  Sales  PRC   100.0%(2)
Himax Display, Inc.  LCOS and MEMS design, manufacturing and sales  ROC   81.5%(1)
Integrated Microdisplays Limited  LCOS sales  Hong Kong   81.5%(3)
Himax Display (USA) Inc.  MEMS design  Delaware, USA   81.5%(3)
Himax Analogic, Inc.  IC design and sales  ROC   74.6%(1)
Himax Imaging, Inc.  Investments  Cayman Islands   100.0%
Himax Imaging, Ltd.  IC design and sales  ROC   87.6%(4)
Himax Imaging Corp.  IC design  California, USA   100.0%(5)
Argo Limited  Investments  Cayman Islands   100.0%
Tellus Limited  Investments  Cayman Islands   100.0%(6)
Himax Media Solutions, Inc.  TFT-LCD television and monitor chipset operations, ASIC service and IP Licensing  ROC   86.7%(7)
Himax Media Solutions (Hong Kong)Limited  Investments  Hong Kong   86.7%(8)
Harvest Investment Limited  Investments  ROC   100.0%(1)
Iris Optronics Co., Ltd.  E-paper manufacturing and sales  ROC   21.7%(1)
Himax Technologies Japan Ltd.  Sales  Japan   100.0%

 

 

(1)Indirectly, through our 100.0% ownership of Himax Technologies Limited.

 

(2)Indirectly, through our 100.0% ownership of Himax Technologies (Samoa), Inc.

 

(3)Indirectly, through our 81.5% ownership of Himax Display, Inc.

 

(4)Indirectly, as to 79.7% through our 100.0% ownership of Himax Imaging, Inc. and as to 7.9% through our 100.0% ownership of Himax Technologies Limited.

 

(5)Indirectly, through our 100.0% ownership of Himax Imaging, Inc.

 

(6)Indirectly, through our 100.0% ownership of Argo Limited.

 

(7)Directly, as to 22.0%, and indirectly, as to 64.7% through our 100.0% ownership of Himax Technologies Limited.

 

(8)Indirectly, through our 86.7% ownership of Himax Media Solutions, Inc.

 

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4.D. Property, Plant and Equipment

 

Our corporate headquarters are located at 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 of the facility was completed in October 2006, and the total land and construction costs amounted to approximately $25.8 million.

 

We also lease office space in Taipei and Hsinchu, Taiwan; Suzhou, Shenzhen, Foshan, Fuqing, Beijing, Shanghai and Ningbo, China; Yokohama and Matsusaka, Japan; Cheonan and Suwon, South Korea; and Irvine and Sunnyvale, California and Delaware, USA. In June 2008, we completed the relocation of the Taipei offices of our company, Himax Media Solutions and Himax Analogic. The lease contracts may be renewed upon expiration.

 

We have established under Himax Taiwan an in-house wafer level optics facility for the key process of our products, with 1,171 square meters of floor space in a building leased from Innolux, which commenced small-scale shipments in December 2009. We have also expanded certain facilities for LCOS and wafer level optics products to accommodate new customers and new applications located at our headquarters in Tainan, Taiwan. In addition, Himax Taiwan owns and operates a fab with 1,431 square meters of floor space in a building leased from Innolux in Tainan, where it established an in-house color filter facility. The color filter line is a critical and unique process for our proprietary single-panel color LCOS microdisplays. An in-house color filter facility enhances the competitiveness of our LCOS products and creates value for our customers.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

5.A. Operating Results

 

Overview

 

We design, develop and market semiconductors that are critical components of flat panel displays. Our principal products are display drivers for large-sized TFT-LCD panels, which are primarily used in desktop monitors, notebook computers and televisions, and display drivers for small and medium-sized TFT-LCD panels, which are primarily used in mobile handsets and consumer electronics products such as tablet PCs, netbook computers (typically ten inches or below in diagonal measurement), digital cameras, mobile gaming devices, portable DVD players, digital photo frames, head-mounted-displays and car navigation displays. We also offer display drivers for panels using OLED technology and LTPS technology. In addition, we are expanding our product offerings to include non-driver products such as timing controllers, touch controller ICs, TFT-LCD television and monitor semiconductor solutions, LCOS microdisplays solutions, power ICs, CMOS image sensors and wafer level optics products. For display drivers and display-related products, our customers are panel manufacturers, agents or distributors, module manufacturers and assembly houses. We also work with camera module manufacturers, optical engine manufacturers, and television system manufacturers for various non-driver products.

 

We commenced operations through our predecessor, Himax Taiwan, in June 2001. We must, among other things, continue to expand and diversify our customer base, broaden our product portfolio, maintain our leading technology position, achieve additional design wins and manage our costs to partially mitigate declining average selling prices and any other market risks in order to maintain our profitability. Moreover, we must continue to address the challenges of being a growing technology company, including hiring and retaining managerial, engineering, operational and financial personnel and implementing and improving our existing administrative, financial and operations systems.

 

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We operate primarily in a fabless business model that utilizes substantially third-party foundry and assembly and testing capabilities. We leverage our experience and engineering expertise to design high-performance semiconductors and rely largely on third-party semiconductor manufacturing service providers for wafer fabrication, gold bumping, assembly and testing with the exception of manufacturing of LCOS microdisplay and wafer level optics products, which we manufacture through our own factories. We are able to take advantage of the economies of scale and the specialization of our third-party semiconductor manufacturing service providers. Our primarily fabless model enables us to capture certain financial and operational benefits, including reduced manufacturing personnel, capital expenditures, fixed assets and fixed costs. It also gives us the flexibility to use the technology and service providers that are the most suitable for any given product. For LCOS microdisplay and wafer level optics products, our in-house factories enable us to protect our proprietary technologies and manufacturing expertise in the effort to further expand these businesses.

 

As our semiconductors are critical components of flat panel displays, our industry is closely linked to the trends and developments of the flat panel display industry, in particular, the TFT-LCD panel segment. The majority of our revenues in 2012 were derived from sales of display drivers that were eventually incorporated into TFT-LCD panels. We expect display drivers for TFT-LCD panels to continue to be our primary products. The TFT-LCD panel industry is intensely competitive and is vulnerable to cyclical market conditions. The average selling prices of TFT-LCD panels could decline for numerous reasons, which could in turn result in downward pricing pressure on our products. See “Item 3.D. Key Information—Risk Factors—Risks Relating to Our Financial Condition and Business—We derive over 80% of our net revenues from sales to the TFT-LCD panel industry, which is highly cyclical and subject to price fluctuations. Such cyclicality and price fluctuations could negatively impact our business or results of operations.” The revenue expansion of our non-driver products as well as TFT-LCD product trending toward high resolution and any other new product introduction help to mitigate these risks.

 

Factors Affecting Our Performance

 

Our business, financial position and results of operations, as well as the period-to-period comparability of our financial results, are significantly affected by a number of factors, some of which are beyond our control, including:

 

·average selling prices;

 

·unit shipments;

 

·product mix;

 

·design wins;

 

·cost of revenues and cost reductions;

 

·supply chain management;

 

·share-based compensation expenses; and

 

·tax credits and exemptions.

 

Average Selling Prices

 

Our performance is affected by the selling prices of each of our products. We price our products based on several factors, including manufacturing costs, life cycle stage of the product, competition, technical complexity of the product, size of the purchase order and our relationship with the customer. We typically are able to charge the highest price for a product when it is first introduced. Although from time to time we are able to raise our selling prices during times of supply constraints, our average selling prices typically decline over a product’s life cycle, which may be offset by changes in conditions in the semiconductor industry such as constraints in foundry capacity. The general trend in the semiconductor industry is for the average selling prices of semiconductors to decline over a product’s life cycle due to competition, production efficiencies, emergence of substitutes and technological obsolescence. Our cost reduction efforts also contribute to this decline in average selling prices. See “—Cost of Revenues and Cost Reductions.”

 

Our average selling prices are also affected by the cyclicality of the TFT-LCD panel industry. Any downward pricing pressure on TFT-LCD panel manufacturers could result in similar downward pricing pressure on us. During periods of declining average selling prices for TFT-LCD panels, TFT-LCD panel manufacturers may also decrease capacity utilization and sell fewer panels, which could depress demand for our display drivers. For example, in the second half of 2008, as a result of the severe economic downturn and the weakening of consumer spending, there was an over-supply of large-sized TFT-LCD panels. Many TFT-LCD panel manufacturers experienced a decrease in prices of large-sized TFT-LCD panels and reduced capacity utilization significantly, which in turn resulted in strong downward pricing pressure on and a decrease in demand for our products, particularly in late 2008 and early 2009. While there was a rebound in demand for TFT-LCD panels in the second quarter of 2009, the growth in output of TFT-LCD panels has been limited by the shortage of certain components for TFT-LCD panels. Our product pricing remained weak in 2009. In the second half of 2010, the TFT-LCD panel industry suffered again from an over-supply due to a high inventory level built up previously, which significantly decreased our sales to the TFT-LCD panel industry. In the second half of 2011, the demand of TFT-LCD panels was affected by the uncertain global economic conditions by lowering capacity utilization for large panel products. Because the demand was lower than originally anticipated, ASP pressure arose for large-sized applications during the traditional peak season. In addition, our average selling prices are affected by the size and bargaining power of our customers. The merger of CMO, the predecessor of Innolux and TPO could negatively affect our ability to maintain, if not raise, our selling prices. In addition, as new China panel makers emerge in the marketplace and continue to expand their capacity, China panel makers’ bargaining power will increase accordingly, negatively impacting our average selling price. Our average selling prices are also affected by the packaging type our customers choose as well as the level of product integration. See “—Product Mix” below. Lastly, competition level affects our average selling prices as well. For example, as competitors have started to enter into the smartphone driver IC space and compete aggressively to get market share since the second quarter of 2012, average selling prices of smartphone driver IC for mid to low-end resolution have been under pressure since then. However, the impact of declining average selling prices on our profitability might be offset or mitigated to a certain extent by increased volume as lower prices may stimulate demand and thereby drive sales and TFT-LCD panel products trending toward higher resolution which creates a higher barrier of entry, less competition and higher profit margins.

 

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Unit Shipments

 

Our performance is also affected by the number of semiconductors we ship, or unit shipments. As our display drivers are critical components of flat panel displays, our unit shipments depend primarily on our customers’ panel shipments among other factors. Our unit shipments have grown since our inception primarily as a result of our increased market share with certain major customers and their increased shipments of panels. Our growth in unit shipments also reflected the demand for higher resolution panels which typically require more display drivers. However, the development of higher channel display drivers or new technologies, if successful, could potentially reduce the number of display drivers required for each panel while achieving the same resolution. If such technologies become commercially available, the market for our display drivers will be reduced and we could experience a decline in revenue and profit.

 

Product Mix

 

The proportion of our revenues that is generated from the sale of different product types, also referred to as product mix, also affects our average selling prices, revenues and profitability. Our display driver products vary depending on, among other things, the number of output channels, the level of integration and the package type. Variations in each of these specifications could affect the average selling prices of such products. For example, the trend for display drivers for use in large-sized panels is toward products with a higher number of channels, which typically command higher average selling prices than traditional products with a lower number of channels. However, panels that use higher-channel display drivers typically require fewer display drivers per panel. As a result, our profitability will be adversely affected to the extent that the decrease in the number of display drivers required for each panel is not offset by increased total unit shipments and/or higher average selling prices for display drivers with a higher number of channels. The level of integration of our display drivers also affects average selling prices, as more highly integrated chips typically have higher selling prices. Additionally, average selling prices are affected by changes in the package types used by our customers. For example, the chip-on-glass package type typically has lower material costs because no processed tape is required. Moreover, our different non-driver products vary in average selling prices and costs.

 

The proportion of non-driver business would also affect our financial position and results of operations. For the past three years, we have experienced operating losses from our non-driver business. This was partly due to low sales volume during these periods that led to insufficient revenue to fully cover expenses such as research and development and operating expenses. We expect; however, to ramp up the volume production and sales of our non-driver products in the future and generate positive operation income from such non-driver products. In addition, given that our non-driver products have higher gross margins and higher growth potential than our driver products, we expect the overall profit margin across our product platform to improve.

 

 

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Design Wins

 

Achieving design wins is important to our business, and it affects our unit shipments. Design wins occur when a customer incorporates our products into their product designs. There are numerous opportunities for design wins, including, but not limited to, when panel manufacturers:

 

·introduce new models to improve the cost and/or performance of their existing products or to expand their product portfolio;

 

·establish new fabs and seek to qualify existing or new component suppliers; and

 

·replace existing display driver companies due to cost or performance reasons.

 

Design wins are not binding commitments by customers to purchase our products. However, we believe that achieving design wins is an important performance indicator. Our customers typically devote substantial time and resources to designing their products as well as qualifying their component suppliers and their products. Once our products have been designed into a system, the customer may be reluctant to change its component suppliers due to the significant costs and time associated with qualifying a new supplier or a replacement component. Therefore, we strive to work closely with current and prospective customers in order to anticipate their requirements and product roadmaps and achieve additional design wins.

 

Cost of Revenues and Cost Reductions

 

We strive to control our cost of revenues. Our cost of revenues as a percentage of total revenues in 2010, 2011 and 2012 was 79.0%,80.2% and 76.9%, respectively. In 2012, as a percentage of Himax Taiwan’s total manufacturing costs, the cost of wafer fabrication was 55.7%, the cost of processed tape was 8.0%, the cost of assembly and testing was 35.8% and overhead was 0.5%. Our cost of revenues may increase as a result of an increase in raw material prices, any failure to obtain sufficient foundry, assembly or testing capacity or any shortage of processed tape or failure to improve our manufacturing utilization rate or production yield. As a result, our ability to manage our wafer fabrication costs, costs for processed tape, and assembly and testing costs is critical to our performance. In addition, to mitigate declining average selling prices, we aim to reduce unit costs by, among other things:

 

·improving product design (e.g., having smaller die size allows for a larger number of dies on each wafer, thereby reducing the cost of each die);

 

·improving manufacturing yields through our close collaboration with our semiconductor manufacturing service providers and in our in-house manufacturing facilities; and

 

·achieving better pricing from a diversified pool of semiconductor manufacturing service providers and suppliers, reflecting our ability to leverage our scale, volume requirements and close relationships as well as our strategy of sourcing from multiple service providers and suppliers.

 

Supply Chain Management

 

Due to the competitive nature of the flat panel display industry and our customers’ need to maintain high capacity utilization in order to reduce unit costs per panel, any delays in the delivery of our products could significantly disrupt our customers’ operations. To deliver our products on a timely basis and meet the quality standards and technical specifications our customers require, we must have assurances of high-quality capacity from our semiconductor manufacturing service providers. We therefore strive to manage our supply chain by maintaining close relationships with our key semiconductor manufacturing service providers and strive to provide credible forecasts of capacity demand and seek for new manufacturing service providers in case of any manufacturer’s capacity shortage. Any disruption to our supply chain could adversely affect our performance and could result in a loss of customers as well as potentially damage our reputation.

 

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Share-Based Compensation Expenses

 

Our results of operations have been affected by, and we expect our results of operations to continue to be affected by, our share-based compensation expenses, which consist of charges taken relating to grants of mainly RSUs as well as non-vested shares to employees.

 

We adopted two long-term incentive plans in October 2005 and September 2011, respectively, which permit the grant of options or RSUs to our employees and non-employees where each unit represents two ordinary shares. The actual awards will be determined by our compensation committee. We recorded share-based compensation expenses under the long-term incentive plan totaling $11.5 million, $6.8 million and $8.2 million in 2010, 2011 and 2012, respectively. See “—Critical Accounting Policies and Estimates—Share-Based Compensation Expenses.” Of the total share-based compensation expenses recognized, $5.9 million, $2.9 million and $6.3 million in 2010, 2011 and 2012, respectively, were settled in cash. We have applied Accounting Standards Codification, or ASC, ASC 718, Compensation—Stock Compensation, to account for our share-based compensation plans. ASC 718 requires companies to measure and recognize compensation expense for all share-based payments at fair value.

 

Set forth below is a summary of our historical share-based compensation plans for the years ended December 31, 2010, 2011 and 2012 as reflected in our consolidated financial statements.

 

Restricted Share Units (RSUs). We adopted two long-term incentive plans in October 2005 and September 2011, respectively.

 

We made grants of 7,108,675 RSUs to our employees on September 29, 2008. The vesting schedule for such RSU grants is as follows: 60.64% of the RSU grants vested immediately and were settled by cash in the amount of $12.7 million on the grant date, with the remainder vesting equally on each of September 30, 2009, 2010 and 2011, which has been or will be settled by our ordinary shares, subject to certain forfeiture events.

 

We made grants of 3,577,686 RSUs to our employees on September 28, 2009. The vesting schedule for such RSU grants is as follows: 55.96% of the RSU grants vested immediately and were settled by cash in the amount of $6.5 million on the grant date, with the remainder vesting equally on each of September 30, 2010, 2011 and 2012, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

We made grants of 3,488,952 RSUs to our employees on September 28, 2010. The vesting schedule for such RSU grants is as follows: 68.11% of the RSU grants vested immediately and were settled by cash in the amount of $5.9 million on the grant date, with the remainder vesting equally on each of September 30, 2011, 2012 and 2013, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

We made grants of 2,727,278 RSUs to our employees on September 28, 2011. The vesting schedule for such RSU grants is as follows: 97.36% of the RSU grants vested immediately and were settled by cash in the amount of $2.9 million on the grant date, with the remainder vesting equally on each of September 30, 2012, 2013 and 2014, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

We made grants of 5,522,279 RSUs to our employees on September 26, 2012. The vesting schedule for such RSU grants is as follows: 58.36% of the RSU grants vested immediately and were settled by cash in the amount of $6.3 million on the grant date, with the remainder vesting equally on each of September 30, 2013, 2014 and 2015, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

The amount of share-based compensation expense with regard to the RSUs granted to our employees on September 28, 2010, September 28, 2011 and September 26, 2012 was $2.47, $1.10 and $1.95 per ADS, respectively, which was based on the trading price of our ADSs on that day.

 

Tax Credits and Exemptions

 

Our results of operations have been affected by, and we expect our results of operations to continue to be affected by, tax credits and income tax exemptions available to us.

 

The ROC Statute for Upgrading Industries, which expired at the end of 2009, entitled companies to tax credits for expenses relating to qualifying research and development, personnel training and purchases of qualifying machinery. The tax credits could be applied within a five-year period. The amount of tax credit that could be applied in any year was limited to 50% of the income tax payable for that year (with the exception of the final year when the remainder of the tax credit could be applied without limitation to the total amount of the income tax). Under the ROC Statute for Upgrading Industries, Himax Taiwan was granted tax credits at rates set at a certain percentage of the amount utilized in qualifying research and development, personnel training expenses, purchases of qualifying machinery and investments in the newly emerging, important and strategic industries; provided that the shareholders’ meeting of such ROC companies invested in by Himax Taiwan did not resolve to forfeit the shareholders’ tax credit benefit in exchange for such ROC companies’ five-years tax holiday. The balance of unused investment tax credits totaled $55.0 million, $39.4 million and $22.8 million as of December 31, 2010, 2011 and 2012, respectively.

 

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On May 12, 2010, the Statute for Industrial Innovation was promulgated in the ROC, which became effective on the same date except for the provision relating to tax incentives which went into effect retroactively on January 1, 2010. Compared to the ROC Statute for Upgrading Industries, the Statute for Industrial Innovation provides for less tax credits. The Statute for Industrial Innovation entitles companies to tax credits for qualifying research and development expenses related to innovation activities but limits the amount of tax credit to only up to 15% of the total research and development expenditure for the current year, subject to a cap of 30% of the income tax payable for the current year. Moreover, any unused tax credits provided under the Statute for Industrial Innovation may not be carried forward. As a result, the tax credits that we received decreased significantly to $3.5 million in 2011 and $1.2 million in 2012 compared to $13.8 million in 2009.

 

The ROC Statute for Upgrading Industries provided to companies deemed to be operating in important or strategic industries a five-year tax exemption for income attributable to expanded production capacity or newly developed technologies. Such expanded production capacity or newly developed technologies was required to be funded in whole or in part from either the initial capital investment made by a company’s shareholders, a subsequent capital increase or a capitalization of a company’s retained earnings. As a result of this statute, income attributable to certain of Himax Taiwan’s expanded production capacity is tax exempt for a period of five years, effective on April 1, 2004, January 1, 2006, January 1, 2008 and January 1, 2013 and expiring on March 31, 2009, December 31, 2010, December 31, 2012 and December 31, 2017, respectively. In addition, beginning January 1, 2009, Himax Semiconductor became entitled to a five-year tax exemption expiring on December 31, 2013. While the ROC Statute for Upgrading Industries expired at the end of 2009, under a grandfather clause we have continued to enjoy the five-year tax holiday since the relevant investment plans were approved by the ROC tax authority before the expiration of the Statute. The effect of such tax exemption was an increase on net income and basic and diluted earnings per share attributable to our stockholders of $3.6 million, $0.01 and $0.01, respectively, for the year ended December 31, 2010, $0.8 million, $0.002 and $0.002 for the year ended December 31, 2011 and $2.9 million, $0.01 and $0.01 for the year ended December 31, 2012. As the tax exemptions that expired on March 31, 2009 and December 31, 2010 accounted for a substantial portion of our total tax-exempted income under the ROC Statute for Upgrading Industries, our income tax expenses increased significantly in 2009 and 2010 as compared to 2008. It may continue to increase in the future. No such tax exemption is provided for under the newly adopted Statute for Industrial Innovation.

 

Description of Certain Statements of Income Line Items

 

Revenues

 

Historically, we have generated revenues from sales of display drivers for large-sized applications, display drivers for mobile handsets and display drivers for consumer electronics products. In addition, our product portfolio includes operational amplifiers, timing controllers, touch controller ICs, TFT-LCD television and monitor semiconductor solutions, LCOS microdisplay solutions, power ICs, CMOS image sensors and wafer level optics products, 2D to 3D conversion solutions, ASIC service and IP licensing.

 

Display drivers for large-sized applications have been the largest source of revenues for us, but we expect display drivers for mobile handsets applications, display drivers for consumer electronics applications and other non-driver products to increase in revenue contribution in the future. Our revenues generated from sales of display drivers for large-sized applications decreased in 2010 and 2011 both in absolute amount and as a percentage of our total revenues, primarily due to the significant decrease in sales to Innolux, or prior to the merger, CMO as a result of the impact of the global economic downturn in 2009 and the change of purchase policy by Innolux to diversify its display driver supply base in 2010. However, our revenues generated from sales of display drivers for large-sized applications increased in 2012 due to the increased sales to customers in China. Our revenues generated from sales of each of display drivers for mobile handsets applications, display drivers for consumer electronics applications and other non-driver products increased in 2010, 2011 and 2012, primarily due to our increased market share for certain products, the larger market size for certain applications and a wider market adoption for some non-driver products.

 

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The following table sets forth, for the periods indicated, our revenues by amount and our revenues as a percentage of revenues by each product line:

 

   Year Ended December 31, 
   2010   2011   2012 
   Amount   Percentage of
Revenues
   Amount   Percentage of
Revenues
   Amount   Percentage of
Revenues
 
   (in thousands, except percentages) 
Display drivers for large-sized applications   $366,492    57.0%  $270,372    42.7%  $305,247    41.4%
Display drivers for mobile handsets applications    119,623    18.6    169,248    26.8    177,175    24.0 
Display drivers for consumer electronics applications    103,942    16.2    112,836    17.8    151,689    20.6 
Others(1)    52,635    8.2    80,565    12.7    103,144    14.0 
Total   $642,692    100.0%  $633,021    100.0%  $737,255    100.0%
                               

 

 

Note:(1)Includes, among other things, timing controllers, touch controller ICs, TFT-LCD television and monitor chipsets, LCOS projector solutions, power ICs, CMOS image sensors, wafer level optics products, 2D to 3D conversion solutions, ASIC service and IP licensing.

 

A limited number of customers account for substantially all our revenues. Innolux and its affiliates, which take into account the effect of the merger of CMO, Innolux and TPO in March 2010, accounted for 52.8%, 40.8% and 34.2% of our revenues in 2010, 2011 and 2012, respectively. Sales to Innolux and its affiliates further decreased both in absolute amount and as a percentage of our total revenues, primarily due to the change of purchase policy by Innolux to diversify its display driver supply base and our increased sales to China customers.

 

   Year Ended December 31, 
   2010   2011   2012 
   Amount   Percentage of
Revenues
   Amount   Percentage of
Revenues
   Amount   Percentage of
Revenues
 
   (in thousands, except percentages) 
Innolux and its affiliates   $339,220    52.8%  $258,156    40.8%  $251,974    34.2%
Customer A and its affiliates    1,516    0.2    35,908    5.7    86,069    11.7 
Others    301,956    47.0    338,957    53.5    399,212    54.1 
Total   $642,692    100.0%  $633,021    100.0%  $737,255    100.0%

  

The global TFT-LCD panel market is highly concentrated, with only a limited number of TFT-LCD panel manufacturers producing large-sized TFT-LCD panels in high volumes. We sell large-sized panel display drivers to many of these TFT-LCD panel manufacturers. Our revenues, therefore, will depend on our ability to capture an increasingly larger percentage of each panel manufacturer’s display driver requirements. Our sales to panel makers in China grew significantly in 2011 and 2012 due to the Chinese panel maker business expansion which started in 2011. These sales have become a significant portion of our revenue.

 

We derive substantially all of our revenues from sales to Asia-based customers whose end products are sold worldwide. In 2010, 2011 and 2012, approximately 76.7%, 62.4% and 48.4% of our revenues, respectively, were from customers headquartered in Taiwan and approximately 17.6%, 33.1% and 45.4% of our revenues, respectively, were from customers headquartered in China. We believe that substantially all of our revenues will continue to be from customers located in Asia, where almost all of the TFT-LCD panel manufacturers and mobile device module manufacturers are located. As a result of the regional customer concentration, we expect to continue to be subject to economic and political events and other developments that affect our customers in Asia. A substantial majority of our sales invoices are denominated in U.S. dollars.

 

Costs and Expenses

 

Our costs and expenses consist of cost of revenues, research and development expenses, general and administrative expenses, bad debt expense, sales and marketing expenses and share-based compensation expenses.

 

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Cost of Revenues

 

The principal items of our cost of revenues are:

 

·cost of wafer fabrication;

 

·cost of processed tape used in TAB packaging;

 

·cost of gold bumping, assembly and testing; and

 

·other costs and expenses.

 

We outsource the manufacturing of our semiconductors and semiconductor solutions to semiconductor manufacturing service providers. The costs of wafer fabrication, gold bumping, assembly and testing depend on the availability of capacity and demand for such services. The wafer fabrication industry, in particular, is highly cyclical, resulting in fluctuations in the price of processed wafers depending on the available foundry capacity and the demand for foundry services.

 

Research and Development Expenses

 

Research and development expenses consist primarily of research and development employee salaries, including related employee welfare costs, costs associated with prototype wafers, processed tape, masks, molding and tooling sets, depreciation on research and development equipment, and acquisition-related charges. We believe that we will need to continue to spend a significant amount on research and development in order to remain competitive. We expect to continue increasing our spending on research and development in absolute dollar amounts in the future as we continue to increase our research and development headcount and associated costs to pursue additional product development opportunities. As a percentage of revenues, our research and development expenses in 2010, 2011 and 2012 were 11.9%, 12.4% and 9.6%, respectively.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries of general and administrative employees, including related employee welfare costs, depreciation on buildings, office furniture and equipment, rent and professional fees. We anticipate that our general and administrative expenses will increase in absolute dollar amounts as we expand our operations, hire additional administrative personnel, incur depreciation expenses in connection with our headquarters at the Tree Valley Industrial Park, incur professional fees for filing patent applications and incur additional compliance costs required of a publicly listed company in the United States.

 

Bad Debt Expense

 

We evaluate our outstanding accounts receivable on a monthly basis for collectability 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. In 2010 and 2011, we recognized net recoveries of previously considered doubtful accounts from SVA-NEC of $8.8 million and $1.5 million, respectively.

 

Sales and Marketing Expenses

 

Our sales and marketing expenses consist primarily of salaries of sales and marketing employees, including related employee welfare costs, amortization expenses for the acquired intangible assets related to the acquisition of Wisepal in 2007, travel expenses and product sample costs. We expect that our sales and marketing expenses will increase in absolute dollar amounts over the next several years. However, we believe that as we continue to achieve greater economies of scale and operating efficiencies, our sales and marketing expenses may decline over time as a percentage of our revenues.

 

Share-Based Compensation Expenses

 

Our share-based compensation expenses consist of various forms of share-based compensation that we have historically issued to our employees and consultants, as well as share-based compensation issued to employees, directors and service providers under our 2005 and 2011 long-term incentive plans. We allocate such share-based compensation expenses to the applicable cost of revenues and expense categories as related services are performed. See note 15 to our consolidated financial statements. Under the long-term incentive plan, we granted RSUs on December 30, 2005 to our employees and directors and again on September 29, 2006, September 26, 2007, September 29, 2008, September 28, 2009, September 28, 2010, September 28, 2011 and September 26, 2012 to our employees. Share-based compensation expenses recorded under the long-term incentive plan totaled $11.5 million, $6.8 million and $8.2 million in 2010, 2011 and 2012, respectively. See“—Critical Accounting Policies and Estimates—Share-Based Compensation” for further discussion of the accounting of such expenses.

 

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Income Taxes

 

Since we and our direct and indirect subsidiaries are incorporated in different jurisdictions, we file separate income tax returns. Under the current laws of the Cayman Islands, we are not subject to income or capital gains tax. Additionally, dividend payments made by us are not subject to withholding tax in the Cayman Islands. We recognize income taxes at the applicable statutory rates in accordance with the jurisdictions where our subsidiaries are located and as adjusted for certain items including accumulated losses carried forward, non-deductible expenses, research and development tax credits, certain tax holidays, as well as changes in our deferred tax assets and liabilities.

 

Our effective income tax rate was 17.6% in 2010, 43.4% in 2011 and 23.9% in 2012, respectively.

 

ROC law offers preferential tax treatments to industries that are encouraged by the ROC government. The ROC Statute for Upgrading Industries, which expired at the end of 2009, entitled companies to tax credits for expenses relating to qualifying research and development, personnel training expenses, purchases of qualifying machinery and investments in the newly emerging, important and strategic industries; provided that the shareholders’ meeting of such ROC companies did not resolve to forfeit the shareholders’ tax credit benefit in exchange for such ROC companies’ five-year tax holiday. The tax credits could be applied within a five-year period. The amount from the tax credit that could be applied in any year (with the exception of the final year when the remainder of the tax credit could be applied without limitation to the total amount of the income tax payable) was limited to 50% of the income tax payable for that year. Under the ROC Statute for Upgrading Industries, Himax Taiwan, Himax Semiconductor, Himax Display, Himax Analogic, Himax Media Solutions and Himax Imaging, Ltd. were granted tax credits at rates set at a certain percentage of the amount utilized in qualifying research and development, and personnel training expenses. The balance of unused investment tax credits totaled $55.0 million, $39.4 million and $22.8 million as of December 31, 2010, 2011 and 2012, respectively. On May 12, 2010, the Statute for Industrial Innovation was promulgated in the ROC, which became effective on the same date except for the provision relating to tax incentives which went into effect retroactively on January 1, 2010. Compared to the ROC Statute for Upgrading Industries, the Statute for Industrial Innovation provides for less tax credits. The Statute for Industrial Innovation entitles companies to tax credits for qualifying research and development expenses related to innovation activities but limits the amount of tax credit to only up to 15% of the total research and development expenditure for the current year, subject to a cap of 30% of the income tax payable for the current year. Moreover, any unused tax credits provided under the Statute for Industrial Innovation may not be carried forward. As a result, the tax credits that we received decreased significantly to $3.5 million in 2011 and $1.2 million in 2012 compared to $13.8 million in 2009.

 

Under the ROC Statute for Upgrading Industries and the applicable grandfather clause, income attributable to certain of Himax Taiwan’s expanded production capacity is tax exempt for a period of five years, effective on April 1, 2004, January 1, 2006, January 1, 2008 and January 1, 2013 and expiring on March 31, 2009, December 31, 2010, December 31, 2012 and December 31, 2017, respectively. In addition, beginning January 1, 2009, Himax Semiconductor is also entitled to a five-year tax exemption expiring on December 31, 2013. Based on the ROC statutory income tax rate of 17%, the effect of these tax exemptions on net income and basic and diluted earnings per ordinary share attributable to our stockholders had been an increase of $3.6 million, $0.01 and $0.01 for the year ended December 31, 2010, respectively, $0.8 million, $0.002 and $0.002 for the year ended December 31, 2011, respectively, and $2.9 million, $0.01 and $0.01 for the year ended December 31, 2012, respectively. The tax exemptions that expired on March 31, 2009 and December 31, 2010 accounted for a substantial proportion of our total tax-exempted income under the ROC Statute for Upgrading Industries. No such tax exemption is provided for under the newly adopted Statute for Industrial Innovation.

 

Our higher effective tax rate in 2011 was due to two reasons. One, our Taiwan subsidiaries, other than Himax Taiwan, incurred net operating losses and provided full valuation allowance for deferred tax assets. Another factor was the NT dollar’s depreciation against the U.S. dollar during 2011. While our reporting currency is the U.S. dollar, a substantial majority of our taxes are incurred in Taiwan on the tax basis of the NT dollar. More deferred tax liabilities were recognized by Himax Taiwan in 2011 because if we were to settle the monetary assets or liabilities in U.S. dollars, it would have resulted in taxable income.

 

 

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Critical Accounting Policies and Estimates

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Share-Based Compensation

 

Share-based compensation primarily consists of grants of non-vested or restricted shares of common stock, stock options and RSUs issued to employees. We have applied ASC 718 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 for each period to reflect the current estimate of forfeitures. As of December 31, 2012, we based our share-based compensation cost on an assumed forfeiture rate of 12.19% per annum for RSUs issued in 2009, and 14.13% per annum for RSUs issued in 2010 and 2012 under our long-term incentive plan. If actual forfeitures occur at a lower rate, share-based compensation costs will increase in future periods.

 

For our issuance of RSUs in 2010, 2011 and 2012, the fair value of the ordinary shares underlying the RSUs granted to our employees was $2.47, $1.10 and $1.95 per share, respectively, which was the closing price of our ADSs on September 28, 2010 and 2011 and September 26, 2012, respectively.

 

Allowance for Doubtful Accounts, Sales Returns and Discounts

 

We record a reduction to revenues and accounts receivable by establishing a sales discount and return allowance for estimated sales discounts and product returns at the time revenues are recognized based primarily on historical discount and return rates. However, if sales discount and product returns for a particular fiscal period exceed historical rates, we may determine that additional sales discount and return allowances are required to properly reflect our estimated remaining exposure for sales discounts and product returns.

 

We evaluate our outstanding accounts receivable on a monthly basis for collectability 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. In 2008, we recognized a valuation allowance of $25.3 million for the probable credit loss relating to SVA-NEC. Since around September 2008, SVA-NEC has delayed paying a large portion of our accounts receivable outstanding from them. Subsequently, in late February 2009, it was reported that SVA Group, the ultimate parent company of SVA-NEC, was in financial distress, and in late March 2009, the Shanghai municipal government set up a conservatorship committee to assist in SVA Group’s restructuring. While we recovered $8.8 million and $1.5 million from SVA-NEC in 2010 and 2011, respectively, we believe it is probable that we would not be able to collect any of our remaining accounts receivable outstanding from SVA-NEC.

 

The movement in the allowance for doubtful accounts, sales returns and discounts for the years ended December 31, 2010, 2011 and 2012 are as follows:

 

Allowance for doubtful accounts

 

Year  Balance at
Beginning
of Year
   Charges (credits) to earnings   Amounts
Utilized
   Balance at
End of Year
 
   (in thousands) 
2010   $25,515   $(8,788)  $-   $16,727 
2011   $16,727   $(1,541)  $-   $15,186 
2012   $15,186   $-   $-   $15,186 

 

Allowance for sales returns and discounts

 

Year  Balance at
Beginning
of Year
   Additions Charged to Expense   Amounts
Utilized
   Balance at
End of Year
 
   (in thousands) 
2010   $970   $4,551   $(4,930)  $591 
2011   $591   $3,385   $(3,191)  $785 
2012   $785   $7,386   $(7,093)  $1,078 

 

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Inventory

 

Inventories are stated at the lower of cost or market value. Cost is determined using the weighted-average method. For work-in-process and manufactured inventories, cost consists of the cost of raw materials (primarily fabricated wafers and processed tape), direct labor and an appropriate proportion of production overheads. We also write down excess and obsolete inventory to its estimated market value based upon estimations about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional future inventory write-downs may be required which could adversely affect our operating results. Once written down, inventories are carried at this lower amount until sold or scrapped. If actual market conditions are more favorable, we may have higher gross margin when such products are sold. Sales to date of such products have not had a significant impact on our gross margin. The inventory write-downs in 2010, 2011 and 2012 were approximately $10.6 million, $9.1 million and $12.4 million, respectively, and were included in cost of revenues in our consolidated statements of income.

 

Impairment of Long-Lived Assets, Excluding Goodwill

 

We routinely review our long-lived assets that are held and used for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, average selling prices, utilization rates and other factors. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, an impairment charge is recognized for the amount that the carrying value of the asset exceeds its fair value, based on the best information available, including discounted cash flow analysis. However, due to the cyclical nature of our industry and changes in our business strategy, market requirements, or the needs of our customers, we may not always be in a position to accurately anticipate declines in the utility of our equipment or acquired technology until they occur. Prior to evaluating goodwill for impairment, we evaluated the Company’s long-lived assets for impairment. For each significant asset group, we determined that the undiscounted cash flows expected to result from the use of the asset group significantly exceeded their respective carrying amounts. Consequently, we have not recognized any impairment charges on long-lived assets during the period from December 31, 2010 to December 31, 2012.

 

Goodwill

 

We evaluate 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 ASC 805 Business Combination. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

 

In 2010, we considered the enterprise as a whole to be a single reporting unit for purposes of testing goodwill for impairment. The adjusted market value of the Company, based on the quoted market price of the Company’s shares and including a reasonable control premium, was in excess of the Company’s equity book value on the date of first step of the assessment in 2010. Therefore, we concluded that the Company’s goodwill was not impaired in 2010.

 

Since January 2011, we changed our internal reporting such that we now have two operating segments, which are also reportable, segments. We have determined that we have five reporting units. However, all of the goodwill has been assigned to the Driver IC reporting unit, which is also an operating segment. Therefore, only the Driver IC reporting unit needs to be tested for goodwill impairment.

 

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For the Driver IC reporting unit in 2011 and 2012, we compared the carrying value of the Driver IC reporting unit, inclusive of assigned goodwill, to its respective fair value—step 1 of the two-step impairment test.

 

We use the discounted cash flow (DCF) method to determine the fair value of each reporting unit. We engaged an independent external service provider to assist us in estimating the fair value of each reporting unit. In conducting the DCF valuation, we incorporate the use of projected financial information and a discount rate that are developed using market-participant-based assumptions. The cash-flow projections are based on five-year financial forecasts that include revenue projections, which are based on our business plan and considered industry trends, capital spending trends, and investment in working capital to support anticipated revenue growth. The selected discount rate considers the risk and nature of the respective reporting unit’s cash flows and the rates of return market participants would require to invest their capital in our reporting units. We used a discount rate based on our weighted average cost of capital, which was 23.0% for the Driver IC reporting unit and 30.1% and 35.1% for other reporting units as of October 31, 2011 and 21.3% for the Driver IC reporting unit and 30.2% for other reporting units as of October 31, 2012.

 

In order to determine the reasonableness of the fair values of the reporting units, we performed a reconciliation of the aggregate fair values of the reporting units to our market capitalization based on the quoted market price of our ordinary shares, adjusted for an appropriate control premium. In determining an appropriate control premium, we referenced the FactSet MergerStat database and Standard Industrial Classification (SIC) Code 367X to identify comparable merger and acquisition transactions effected in 2011 and 2012 prior to October 31, 2011. Within the four compared and observed semiconductor industry transactions, the control premiums ranged from 57.9% to 175.3%. The average observed control premium was approximately 94.3%.

 

Based on our assessment, the estimated fair value of the Driver IC reporting unit exceeded its carrying amount by 7.6% and 54.3% at October 31, 2011 and 2012, respectively and therefore we concluded that goodwill was not impaired in 2011 and 2012. However, our conclusion could change in the future if our quoted market price falls further below our net book value per share or if market conditions change with respect to control premiums paid for companies of our size and business nature.

 

Goodwill also exists in our Non-Driver Products reportable segment as of December 31, 2012 as a result of our acquisition of Spatial Photonics, Inc. during that year. The amount of such goodwill is immaterial.

 

Product Warranty

 

Under our standard terms and conditions of sale, products sold are subject to a limited product quality warranty. We may receive warranty claims outside the scope of the standard terms and conditions. We provide for the estimated cost of product warranties at the time revenue is recognized based primarily on historical experience and any specifically identified quality issues. The movement in accrued warranty costs for the years ended December 31, 2010, 2011 and 2012 is as follows:

 

Year  Balance at Beginning
of Year
   Additions (Reversal) Charged to Expense   Amount
Utilized
   Balance at
End of Year
 
   (in thousands) 
2010   $679   $3,772   $(3,772)  $679 
2011   $679   $(321)  $(280)  $78 
2012   $78   $856   $(737)  $197 

 

Income Taxes

 

According to the ROC Income Tax Act, dividends distributed by a Taiwan company to its foreign shareholders are subject to ROC withholding tax, currently at the rate of 20%, on the amount of the distribution in the case of cash dividends or on the par value of the ordinary shares in the case of stock dividends. However, a 10% ROC retained earnings tax paid by a Taiwan company on its undistributed after-tax earnings, if any, would provide a credit of up to 10% of the gross amount of any dividends declared out of those earnings that would reduce the 20% ROC tax imposed on those distributions.

 

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As of December 31, 2011 and 2012, we have not provided for retained earnings tax on the undistributed earnings of approximately $467.7 million and $536.5 million, respectively, of our Taiwanese subsidiaries since we have specific plans to reinvest these earnings indefinitely. The undistributed earnings in our foreign subsidiaries are mainly from Himax Taiwan totaling approximately $467.3 million and $514.9 million as of December 31, 2011 and 2012, respectively. We intend to use accumulated and future earnings of Himax Taiwan to expand operations in Taiwan.

 

However, a deferred tax liability will be recognized when the Taiwanese company can no longer demonstrate that it plans to reinvest indefinitely these undistributed earnings. It is not practicable to estimate the amount of additional taxes that might be payable on such undistributed earnings.

 

We are a holding company located in the Cayman Islands and have paid dividends and repurchased outstanding shares. To fund such dividends and repurchases, in the past four years, we have received cash from bank loans and from Himax Taiwan through intercompany borrowings instead of dividends distributed by Himax Taiwan. At December 31, 2011 and 2012, the amount of cash and cash equivalents and investments in marketable securities available-for-sale held by Himax Taiwan were $85.6 million and $119.3 million, respectively, which are not available to fund our ultimate parent company’s activities unless the cash is distributed.

 

As part of the process of preparing our consolidated financial statements, our management is required to estimate income taxes and tax bases of assets and liabilities for us and our subsidiaries. This process involves estimating current tax exposure together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes and the amount of tax credits and tax loss carry-forward. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and, to the extent it believes that recovery is not more likely than not, a valuation allowance is provided.

 

In assessing the ability to realize deferred tax assets, our management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets and therefore the determination of the valuation allowance are 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.

 

We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. We have to recognize income tax expenses when the possibility of tax adjustments made by the tax authority is greater than 50% in the future period. Changes in income tax recognition or measurement of previous periods are reflected in the period in which the change in judgment occurs.

 

A reconciliation of the beginning and ending amounts of uncertain tax positions is as follows:

 

   Year ended December 31, 
   2010   2011   2012 
   (in thousands) 
Balance at beginning of year   $8,450   $6,892   $128 
Increase related to prior year tax positions    -    -   $658 
Decrease related to prior year tax positions   $(2,295)  $(6,759)   - 
Increase related to current year tax positions   $133    -    - 
Effect of exchange rate change   $604   $(5)  $5 
Balance at end of year   $6,892   $128   $791 

 

With the exception of Himax Taiwan, Himax Technologies Korea Ltd. (based in South Korea), or Himax Korea, Himax Technologies (Suzhou) Co., Ltd., Himax Technologies (Shenzhen) Co., Ltd., and Himax Imaging Corp., most of our subsidiaries have generated tax losses since their inception and are not included in the consolidated tax filing with Himax Taiwan or other subsidiaries with taxable income. Valuation allowances of $31.6 million, $31.9 million and $30.5 million as of December 31, 2010, 2011 and 2012, respectively, were provided to reduce their deferred tax assets (consisting primarily of operating loss carry-forwards and unused investment tax credits) to zero because management believes it is unlikely that these tax benefits will be realized. Additional valuation allowances of $3.3 million and $5.8 million as of December 31, 2011 and 2012, respectively, were provided to reduce Himax Taiwan’s deferred tax assets related to unused investment tax credits.

 

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Segment Reporting

 

We use the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker (CODM) for making operating decisions, allocating resources and assessing performance as the source for determining the Company’s reportable segments.

 

Our CODM has been identified as the Chief Executive Officer, who regularly reviews operating results to make decisions about allocating resources and assessing performance for us.

 

Management of the Company has determined that we have two operating segments, Driver IC and Non-driver products, which are also reportable segments.

 

The CODM assesses the performance of the operating segments based on segment sales and segment profit and loss. There are no intersegment sales in the segment revenues reported to the CODM. Segment profit and loss is determined on a basis that is consistent with how we report operating income (loss) in our consolidated statements of operations. Segment profit (loss) excludes income taxes, interest income and expense, foreign currency exchange gains and losses, equity in the earnings (losses) of affiliates, gains and losses on valuations of financial instruments and sales of investment securities, and other income and expenses.

 

Consolidated Results of Operations

 

The following table sets forth a summary of our consolidated statements of income as a percentage of revenues:

 

   Year Ended December 31, 
   2010   2011   2012 
Revenues    100.0%   100.0%   100.0%
Costs and expenses:               
Cost of revenues    79.0    80.2    76.9 
Research and development    11.9    12.4    9.6 
General and administrative    2.9    2.7    2.3 
(Recovery of) bad debt expense    (1.4)   (0.2)   - 
Sales and marketing    2.1    2.3    2.1 
Total costs and expenses    94.5    97.4    90.9 
Operating income    5.5    2.6    9.1 
Non-operating income (loss)    -    -    (0.2)
Income tax expense    1.0    1.1    2.1 
Net income    4.5    1.5    6.8 
Net loss attributable to noncontrolling interests    0.6    0.2    0.2 
Net income attributable to Himax stockholders    5.2    1.7    7.0 

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Revenues. Our revenues increased by 16.5% to $737.3 million in 2012 from $633.0 million in 2011. The growth was a result of increasing sales in all categories of products. This increase was attributable mainly to a 16.6% increase in revenues from sales of display drivers for, mobile handsets and consumer electronics applications to $328.9 million in 2012 from $282.1 million in 2011, primarily as a result of our expanding reach to end customers in China, Korea and the U.S. The increase was also attributable to a 12.9% increase in revenues from display drivers for large-sized applications to $305.2 million in 2012 from $270.4 million in 2011, mainly driven by sales to Chinese customers, which led to a gain in market share and a 28.0% increase in revenues from non-driver products to $103.2 million in 2012 from $80.5 million in 2011. In 2012, our average selling prices increased by 4.6%, primarily as a result of changes in our product mix, and our unit shipments increased by 11.4% as a result of our increased market share for certain products, the larger market size for certain applications and a wider market adoption for some non-driver products.

 

Costs and Expenses. Costs and expenses increased by 8.7% to $670.2 million in 2012 from $616.4 million in 2011. As a percentage of revenues, costs and expenses decreased to 90.9% in 2012 compared to 97.4% in 2011.

 

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·Cost of Revenues. Cost of revenues increased to $566.7 million in 2012 from $507.4 million in 2011. The increase in cost of revenues was due primarily to an 11.4% increase in unit shipments in 2012, as compared to 2011. Inventory write-downs, which are included in cost of revenues, increased to $12.4 million in 2012 from $9.1 million in 2011 primarily due to larger inventory write-downs as a result of unused inventory produced to meet projected customer demand. As a percentage of revenues, cost of revenues decreased to 76.9% in 2012 from 80.2% in 2011. The significant margin improvement is primarily a result of product diversification.

 

·Research and Development. Research and development expenses decreased by 10.3% to $70.9 million in 2012 from $79.0 million in 2011. This decrease was primarily attributable to decreases in research and development material expenses and mask and mold expenses. The decrease was partially offset by an increase in salary expenses (including share-based compensation). The increase in salary expenses was due primarily to higher average salaries.

 

·General and Administrative. General and administrative expenses increased slightly by 0.3% to $17.1 million in 2012 from $17.1 million in 2011, primarily as a result of increases in salary expenses and welfare expense. The increase was partially offset by a decrease in depreciation expenses. The decrease in depreciation expenses was due primarily to the useful life of prior capitalized items gradually being expired in 2012.

 

·Recovery of Bad Debt Expense. We recognized net recoveries of previously considered doubtful accounts from SVA-NEC of nil in 2012 and $1.5 million in 2011.

 

·Sales and Marketing. Sales and marketing expenses increased by 7.5% to $15.4 million in 2012 from $14.4 million in 2011, primarily as a result of increases in salary expenses, sample expenses and travelling expenses. The increase in salary expenses was due primarily to higher average salaries.

 

Non-Operating Income (Loss), net. We had a net non-operating loss of $1.2 million in 2012 compared to net non-operating income of $0.2 million in 2011. We recognized a one-time impairment loss on investment of $1.3 million in 2012. Our foreign currency exchange losses increased to $0.5 million in 2012 from an exchange gain of $0.5 million in 2011, primarily due to the net liability denominated in NT dollars as a result of the stronger NT dollar against the U.S. dollar in 2012. Our other income increased to $0.1 million in 2012 from other losses of $0.4 million in 2011, primarily as a result of a decrease in unrealized losses on conversion options in 2012.

 

Income Tax Expense. Our income tax expense increased by $8.4 million to $15.7 million in 2012 from $7.3 million in 2011. Our effective income tax rate decreased to 23.9% from 43.4% in 2011. This change in our effective income tax rate was primarily attributable to tax benefits for realized tax losses on investments in subsidiaries due to capital reclassification to offset the accumulated deficit and tax benefits resulting from changes in foreign currency exchange rates.

 

Net Income. As a result of the foregoing, our net income increased to $50.1 million in 2012 from $9.5 million in 2011 and net income attributable to Himax stockholders increased to $51.6 million in 2012 from $10.7 million in 2011.

 

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

 

Revenues. Our revenues decreased 1.5% to $633.0 million in 2011 from $642.7 million in 2010. This decrease was attributable mainly to a 26.2% decrease in revenues from display drivers for large-sized applications to $270.4 million in 2011 from $366.5 million in 2010 primarily as a result of a significant decrease in sales to Innolux due to the change of purchase policy by Innolux to diversify its display driver supply base in 2011. The decrease was partially offset by a 26.2% increase in revenues from display drivers for mobile handset and consumer electronics applications to $282.1 million in 2011 from $223.6 million in 2010, and a 53.1% increase in revenues from non-driver products to $80.6 million in 2011 from $52.6 million in 2010. Our average selling prices decreased 2.3% in 2011 primarily as a result of the downward pricing pressure from TFT-LCD panel manufacturers in 2011 and changes in our product mix. Such impact on our revenues was partially offset by a 28.1% increase in unit shipments of our display drivers for mobile handset applications, display drivers for consumer electronics applications and other non-driver products, as a result of our increased market share for certain products, the larger market size for certain applications and a wider market adoption for some non-driver products.

 

Costs and Expenses. Costs and expenses increased 1.5% to $616.4 million in 2011 from $607.3 million in 2010. As a percentage of revenues, costs and expenses increased to 97.4% in 2011 compared to 94.5% in 2010.

 

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·Cost of Revenues. Cost of revenues decreased to $507.4 million in 2011 from $507.6 million in 2010. The minor decrease in cost of revenues was due primarily to a 0.80% decrease in average unit cost, partially offset by a 0.77% increase in unit shipments, as compared to 2010. Inventory write-downs, which are included in cost of revenues, decreased slightly to $9.1 million in 2011 from $10.6 million in 2010. As a percentage of revenues, cost of revenues decreased to 80.2% in 2011 from 79.0% in 2010.

 

·Research and Development. Research and development expenses increased 3.4% to $79.0 million in 2011 from $76.4 million in 2010. This increase was primarily attributable to increases in salary expenses and outsourcing process expenses. The increase was partially offset by a decrease in research and development material expenses. The increase in salary expenses was due primarily to a larger headcount of research and development staff and higher average salaries.

 

·General and Administrative. General and administrative expenses decreased 8.9% to $17.1 million in 2011 from $18.8 million in 2010, primarily as a result of a decrease in depreciation expenses and professional fees. The decrease in depreciation expenses was due primarily to the change of allocation base for the depreciation of our headquarters. The decrease in professional fees was due primarily to decreasing certain expenses relating to our Taiwan listing application with the Taiwan Stock Exchange on its main board and the lawyers’ fees for investment assessment in 2010.

 

·Recovery of Bad Debt Expense. We recognized net recoveries of previously considered doubtful accounts from SVA-NEC of $1.5 million in 2011 and $8.8 million in 2010.

 

·Sales and Marketing. Sales and marketing expenses increased 8.2% to $14.4 million in 2011 from $13.3 million in 2010, primarily as a result of an increase in salary expenses. The increase in salary expenses was due primarily to a larger headcount of sales and marketing staff and higher average salaries.

 

Non-Operating Income (Loss), net. We had a net non-operating income of $0.2 million in 2011 compared to net non-operating loss of $64,000 in 2010. Our foreign currency exchange gains increased to $0.5 million in 2011 from an exchange loss of $0.9 million in 2010, primarily for the net liability denominated in NT dollars due to the weaker NT dollar against the U.S. dollar in 2011. Our interest expense increased to $0.5 million from $0.2 million in 2010 because we obtained bank loans in 2011 to fund our investment in subsidiary and dividend distribution. Our other losses increased to $0.4 million in 2011 from other income of $0.5 million in 2010, primarily as a result of unrealized losses on conversion options in 2011.

 

Income Tax Expense. Our income tax expense increased 17.2% to $7.3 million in 2011 from $6.2 million in 2010. Our effective income tax rate increased from 17.6% in 2010 to 43.4% in 2011. This change in our effective income tax rate was mainly attributable to the increase in taxable income due to the weaker NT dollar against the U.S. dollar in 2011, the additional valuation allowance provided in 2011 to reduce Himax Taiwan’s deferred tax assets related to unused investment tax credits, and net operating loss carry-forwards at certain loss-making subsidiaries.

 

Net Income. As a result of the foregoing, our net income decreased to $9.5 million in 2011 from $29.1 million in 2010 and net income attributable to Himax stockholders decreased to $10.7 million in 2011 from $33.2 million in 2010.

  

Segment Results

 

The following table sets forth the revenues and operating results for our reportable segments for the periods indicated:

 

   Year Ended December 31, 
   2010   2011   2012 
   (in thousands) 
Segment Revenues                
Driver IC   $590,057   $552,456   $634,111 
Non-Driver Products   $52,635   $80,565   $103,144 
Total   $642,692   $633,021   $737,255 
                
Segment Operating Income (loss)               
Driver IC   $54,815   $38,401   $83,883 
Non-Driver Products   $(19,457)  $(21,793)  $(16,823)
Total   $35,358   $16,608   $67,060 

  

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Driver IC Segment

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Segment revenues. Our revenues from the Driver IC segment increased by 14.8% to $634.1 million in 2012 from $552.5 million in 2011. This increase was attributable to a 9.8% increase in our average selling price and a 4.6% increase in unit shipments of our driver IC products.

 

Segment operating income. Operating income from the Driver IC segment increased to $83.9 million in 2012 from $38.4 million in 2011. This increase was primarily attributable to an increase in revenues and gross profit in 2012 as compared to 2011. As a percentage of segment revenues, segment operating income increased to 13.2% in 2012 from 7.0% in 2011. The increase is a result of the product diversification and more profit contribution generated from certain new products.

 

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

 

Segment revenues. Our revenues from the Driver IC segment decreased by 6.4% to $552.5 million in 2011 from $590.1 million in 2010. This decrease was attributable to a 3.1% decrease in our average selling price and a 3.2% decrease in unit shipments of our driver IC products.

 

Segment operating income. Operating income from the Driver IC segment decreased to $38.4 million in 2011 from $54.8 million in 2010. This decrease was primarily attributable to a decrease in revenues, partially offset by a 0.9% decrease in average unit cost and a 2.7% decrease in operating expenses, as compared to 2010. As a percentage of segment revenues, segment operating income decreased to 7.0% in 2011 from 9.3% in 2010. This decrease was primarily due to smaller contribution from shipments of large-sized applications.

 

Non-Driver Products Segment

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Segment revenues. Our revenues from the Non-Driver Products segment increased by 28.0% to $103.2 million in 2012 from $80.6 million in 2011. This increase was attributable mainly to a 67.5% increase in unit shipments of our non-driver products.

 

Segment operating loss. Operating loss from the Non-Driver Products segment decreased to $16.8 million in 2012 from $21.8 million in 2011. Segment operating loss from Non-Driver Products as a percentage of its segment revenues decreased to 16.3% in 2012 from 27.1% in 2011, primarily due to an increase in shipments of WLO and controllers products and a decrease in research and development material expenses and mask and mold expenses.

 

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

 

Segment revenues. Our revenues from the Non-Driver Products segment increased by 53.1% to $80.6 million in 2011 from $52.6 million in 2010. This increase was attributable mainly to a 54.4% increase in unit shipments of our non-driver products.

 

Segment operating loss. Operating loss from the Non-Driver Products segment increased to $21.8 million in 2011 from $19.5 million in 2010. Segment operating loss from Non-Driver Products as a percentage of its segment revenue decreased to 27.1% in 2011 from 37.0% in 2010, primarily due to an increase in shipments of CMOS products. This increase was attributable to a 31.8% increase in operating expenses, partially offset by an increase in revenues and a 2.1% decrease in average unit cost, as compared to 2010. This increase in operating expenses was primarily attributable to increases in salary expenses and outsourcing process expenses for research and development.

 

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5.B. Liquidity and Capital Resources

 

We need cash primarily for technology advancement, capacity expansion and working capital. We have historically been able to meet our cash requirements through cash flow from operations.

 

As of December 31, 2012, we had total current assets of $567.1 million, total current liabilities of $242.1 million and cash and cash equivalents of $138.7 million. As of December 31, 2012, we had total short-term debt of $73.0 million with equal amount of cash and time deposits as collateral and did not have any outstanding long-term borrowings as of December 31, 2012. We believe that our working capital is sufficient for our present requirements.

 

The following table sets forth a summary of our cash flows for the periods indicated:

 

   Year Ended December 31, 
   2010   2011   2012 
   (in thousands) 
Net cash provided by operating activities   $57,631   $43,448   $52,167 
Net cash used in investing activities    (17,599)   (10,197)   (695)
Net cash used in financing activities    (54,195)   (24,015)   (18,931)
Net increase (decrease) in cash and cash equivalents    (14,082)   9,322    32,573 
Cash and cash equivalents at beginning of period    110,924    96,842    106,164 
Cash and cash equivalents at end of period    96,842    106,164    138,737 

 

Operating Activities. Net cash provided by operating activities in 2012 was $52.2 million compared to $43.4 million in 2011. This increase in net cash provided by operating activities in 2012 was due primarily to an increase in cash collected from customers in 2012 compared to 2011 and a decrease in cash paid for income tax in 2012 compared to 2011, partially offset by an increase in cash used for raw materials, assembly and testing process fees in 2012 compared to 2011.Net cash provided by operating activities in 2011 was $43.4 million compared to $57.6 million in 2010. This decrease in net cash provided by operating activities in 2011 was due primarily to a decrease in cash collected from customers in 2011 compared to 2010, an increase in cash used in 2011 to pay for operating expense and a decrease in recovery of accounts receivable previously written off in 2011, partially offset by a decrease in cash used for raw materials, assembly and testing process fees in 2011 compared to 2010.

 

Investing Activities.Net cash used in investing activities in 2012 was $0.7 million compared to $10.2 million in 2011. This decrease in net cash used in investing activities in 2012 was due primarily to a decrease in cash used for property and equipment in 2012 compared to 2011.Net cash used in investing activities in 2011 was $10.2 million compared to $17.6 million in 2010. This decrease in net cash used in investing activities in 2011 was due primarily to a decrease in purchasing of investment securities and available-for-sale marketable securities and partially offset by an increase in cash used for property and equipment in 2011 compared to 2010.

 

Financing Activities. Net cash used in financing activities in 2012 was $18.9 million compared to $24.0 million in 2011. This decrease was due primarily to a decrease in distribution of cash dividends and partially offset by an increase in payments to repurchase ordinary shares.Net cash used in financing activities in 2011 was $24.0 million compared to $54.2 million in 2010. This change was due primarily to a decrease in payments to acquire ordinary shares and a decrease in distribution of cash dividends.

 

Our liquidity could be negatively impacted by a decrease in demand for our products that are subject to rapid technological change, among other factors, which could result in revenue variability in future periods. In addition, we have at times agreed to extend the payment terms for certain of our customers. Other customers have also requested extension of payment terms and we may grant such requests for extensions in the future. The extension of payment terms for our customers could adversely affect our cash flow, liquidity and our operating results. Our subsidiaries’ ability to distribute dividends and other payments to us may be limited by ROC regulations. See “Risk Factors — Risks Related to Our Holding Company Structure — Our ability to receive dividends and other payments or funds from our subsidiaries may be restricted by commercial, statutory and legal restrictions, and thereby materially and adversely affect our ability to grow, fund investments, make acquisitions, pay dividends and otherwise fund and conduct our business.”

 

Our capital expenditures were incurred primarily in connection with the purchase of property and equipment. Our capital expenditures totaled $7.2 million, $18.9 million and $6.6 million in 2010, 2011 and 2012, respectively. We will continue to make capital expenditures to meet the expected growth of our operations. We believe that our working capital is sufficient for our present requirements.

 

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5.C. Research and Development

 

Our research and development efforts focus on improving and enhancing our core technologies and know-how relating to the semiconductor solutions we offer to the flat panel display industry. In particular, we have committed a significant portion of our resources to the research and development of non-driver products because we believe in the long-term business prospects of such products and are committed to continuing to diversify our product portfolio. Although a significant portion of the resources at our integrated circuit design center are invested in advanced research for future products, we continue to invest in improving the performance and reducing the costs of our existing products. Our application engineers, who provide on-system verification of semiconductors and product specifications, and field application engineers, who provide on-site engineering support at our customers’ offices or factories, work closely with panel manufacturers to co-develop display solutions for their electronic devices. In 2010, 2011 and 2012, we incurred research and development expenses of $76.4 million, $79.0 million and $70.9 million, respectively, representing 11.9%, 12.4% and 9.6% of our revenues, respectively.

 

5.D. Trend Information

 

LED TVs, 3D TVs, smartphones and tablet PCs are the major themes for large, small and medium-sized panels. There will be more and more similar products on the market. In 2011, we lost share in large panel drivers because one of our major customers continued to diversify their driver IC supply base. However, benefiting from the growth in the market in China, where most of the new buildings of panel capacity took place, we gained share in the large panel sector and grew our large panel driver IC sales in 2012. In addition, we also benefited from our gains in small and medium-sized panels, especially in smartphone and tablet applications. Excluding feature phone sales, our small and medium-sized drivers grew over 50% year over year. We were able to achieve such strong performance in this area in 2012 because we were able to expand our reach to end customers across China, Korea and the U.S. However, continued growth momentum in the smart phone market has attracted more competitors to this segment. Increased competition in the smart phone segment may result in pricing pressure and loss of market share.

 

We also see the demand from our customers for high-resolution displays of all sizes of TFT-LCD panels to provide better user experiences. As a leading player with a track record with top global brands in display driver ICs, we are well-positioned to benefit from this trend in resolution upgrades. We have worked closely with panel partners and also tier-one brand customers to develop next-generation high-resolution mobile devices.

 

We are devoted to the development, manufacturing and marketing of non-driver products to diversify our customer base and product portfolio. Our non-driver products delivered the strongest growth last year owing to many new product launches and project wins. We expect that our non-driver businesses will continue to account for an increasing percentage of our sales.

 

The potential expansion plans for next generation fabs in China proposed by several TFT-LCD panel manufacturers might significantly increase the output of TFT-LCD panels if all of the plans are implemented in the following years. Although these capacity expansions offer attractive new driver business opportunities, they might also cause over-supply for TFT-LCD panels at the same time. In addition, as new China panel makers have continued to expand their capacity, their bargaining power will increase due to their larger size and result in more ASP pressure.

 

For more trend information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results.”

 

5.E. Off-Balance-Sheet Arrangements

 

As of December 31, 2012, we did not have any off-balance-sheet guarantees, interest rate swap transactions or foreign currency forwards. We do not engage in trading activities involving non-exchange traded contracts. Furthermore, as of December 31, 2012, we did not have any interests in variable interest entities.

 

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5.F. Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations as of December 31, 2012:

 

   Payment Due by Period 
   Total   Less than
1 year
   1-3 years   3-5
years
   More than
5 years
 
   (in thousands) 
Operating lease obligations    5,009    1,898    1,380    552    1,179 
Purchase obligations(1)    157,626    157,626    -    -    - 
Other obligations(2)    1,817    755    804    258    - 
Total    164,452    160,279    2,184    810    1,179 

 

 

Notes:(1) Includes obligations for purchase of equipment, computer software and machinery and wafer fabrication, raw material, supplies, assembly and testing services.
   
 (2) Includes obligations under license agreements and donations for laboratory commitments.

 

We lease office and building space pursuant to operating lease arrangements with unrelated third parties. In 2010, 2011 and 2012, rental expenses for operating leases amounted to $1.2 million, $1.2 million and $1.8 million, respectively. The lease arrangements will expire gradually from 2014 to 2017. As of December 31, 2012, we agreed to make future minimum lease payments of $1.7 million, $0.8 million, $0.2 million, $0.1 million and $65,000 in 2013, 2014, 2015, 2016 and 2017, respectively, under non-cancelable operating leases.

 

We have, from time to time, entered into contracts for the acquisition of equipment and computer software. As of December 31, 2012, the remaining commitments under such contracts were $13.9 million. These outstanding contracts had a total contract value of $15.1 million.

 

Pursuant to several wafer fabrication or assembly and testing service arrangements we entered into with service providers, we may be obligated to make payments for purchase orders made under such arrangements. As of December 31, 2012, our contractual obligations pursuant to such arrangements amounted to approximately $121.0 million.

 

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 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. Total contributions to the new defined contribution plan in 2012 were $1.8 million compared to $1.8 million and $1.5 million in 2011 and 2010, respectively. Total contributions to the defined benefit plan and the new defined contribution plan in 2012 were $2.0 million compared to $1.9 million and $1.7 million in 2011 and 2010, respectively. Such changes in contributions have not, and are not expected to have, a material effect on our cash flows or results of operations.

 

Inflation

 

Inflation in Taiwan has not had a material impact on our results of operations in recent years. However, an increase in inflation can lead to increases in our costs and lower our profit margins. According to the Directorate General of Budget, Accounting and Statistics, Executive Yuan, ROC, the change of the consumer price index in Taiwan was 1.0%,1.4% and 1.9% in 2010, 2011 and 2012, respectively.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

6.A. Directors and Senior Management

 

Members of our board of directors may be elected by our directors or our shareholders. Our board of directors consists of seven directors, three of whom are independent directors within the meaning of Rule 5605(a)(2) of the Nasdaq Rules. 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 March 31, 2013. Unless otherwise indicated, the positions or titles indicated in the table below refer to Himax Technologies, Inc.

 

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Directors and Executive Officers  Age  Position/Title
Dr. Biing-Seng Wu   55  Chairman of the Board
Jordan Wu   52  President, Chief Executive Officer and Director
Tien-Jen Lin   50  Director
Chih-Chung Tsai   57  Director, Chief Technology Officer, Senior Vice President
Dr. Yan-Kuin Su   64  Director
Yuan-Chuan Horng   61  Director
Hsiung-Ku Chen   61  Director
Jackie Chang   53  Chief Financial Officer
Norman Hung   55  Vice President, Sales and Marketing

 

Directors

 

Dr. Biing-Seng Wu is the chairman of our board of directors. Prior to our reorganization in October 2005, Dr. Wu served as president, chief executive officer and a director of Himax Taiwan. Dr. Wu also served as the vice chairman of the board of directors of CMO prior to its merger with the predecessor of Innolux and TPO. 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, chief executive officer and director. Prior to our reorganization in October 2005, Mr. Wu served as the chairman of the board of directors of Himax Taiwan, a position which he held since April 2003. 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.

 

Tien-Jen Lin is our director. Mr. Lin is the Special Assistant to the General Manager of Innolux. Mr. Lin has extensive experience and broad knowledge in the TFT-LCD industry. Prior to his current position, he has held various positions in the field of TFT-LCD panel product design and market development. Mr. Lin holds a B.S. degree and an M.S. degree in electrical engineering from National Taiwan University.

 

Chih-Chung Tsai is our director, chief technology officer and senior vice president. Prior to joining Himax Taiwan, Mr. Tsai served as vice president of IC Design of Utron Technology from 1998 to 2001, manager and director of the IC Division of Sunplus Technology from 1994 to 1998, director of the IC Design Division of Silicon Integrated Systems Corp. from 1987 to 1993 and project leader at ERSO/ITRI from 1981 to 1987. Mr. Tsai holds a B.S. degree and an M.S. degree in electrical engineering from National Chiao Tung University.

 

Dr. Yan-Kuin Su is our director. He is currently the president of Kun Shan University and also a professor in the Department of Electrical Engineering, National Cheng Kung University since 1983. He is a fellow of the Institute of Electrical and Electronics Engineers, Inc. Dr. Su holds a B.S. degree and an M.S. degree and a Ph.D. degree in Electrical Engineering from National Cheng Kung University.

 

Yuan-Chuan Horng is our director. He has been the assistant vice president of the Finance Division of China Steel Corporation since October 2011. Prior to our reorganization in October 2005, Mr. Horng served as a director of Himax Taiwan from August 2004 to October 2005. Mr. Horng was the general manager of the Finance Department of China Steel Corporation, a position which he 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.

 

Hsiung-Ku Chen is our director. He has a B.S. degree in Physics from Fu-Jen University, an M.A. degree in Physics from Temple University and a Ph.D. degree in Applied Physics from Oregon Graduate Center. Dr. Chen specializes in areas including Thin Film Transistor Technology, Liquid Crystal Display Technology, IC Process Technology and Patent Laws and Regulations, etc. He has dedicated himself to the researching and performing practice of the TFT-LCD industry. From 1980 to 2002, Dr. Chen held various positions including manager, director and special assistant of the director’s office in the Electronics Research & Service Organization of the Industrial Technology Research Institute for over 20 years and was the leader of many research projects during his tenure. Additionally, Dr. Chen was elected as Society of Information Display, Taipei Chapter Director and Treasurer from 1992 to 1997 and as Taiwan TFT LCD Association Secretary General from 2000 to 2002. Furthermore, Dr. Chen contributed his professional knowledge to serve as a supervisor of Himax Technologies Limited from April 2003 to December 2003 and as a director from December 2003 to October 2005. Dr. Chen was also the Special Assistant of the CEO Office at Etron Technology, Inc. from 2005 to 2007. Currently, Dr. Chen serves as consultants in various organizations, including Color Display Industry Promotion Office and the Intellectual Property Innovation Corporation.

 

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Other Executive Officers

 

Jackie Chang is our chief financial officer. Before joining Himax, Ms. Chang served as the CFO of Castlink Corporation and Tongxing International, as well as the VP of Finance and Operations for PlayHut, Inc. Prior to joining PlayHut, Ms. Chang was General Manager -Treasury Control for Nissan North America. She held several positions in Nissan North America from 1994 to 2006 including finance, treasury planning, operations and accounting. She worked at Nissan JV in China from 2003 to 2006, where she implemented IFRS and SAP successfully. She holds a BBA in accounting from the National Chung-Hsing University in Taiwan and an MBA in Finance from Memphis State University.

 

Norman Hung is our vice president in charge of Sales and Marketing and also serves as a supervisor of Himax Analogic and Himax Media Solutions. From 2000 to 2006, Mr. Hung served as president of ZyDAS Technology Corp., a fabless integrated circuit design house. From 1999 to 2000, he served as vice president of Sales and Marketing for HiMARK Technology Inc., another fabless integrated circuit design house. Prior to that, from 1996 to 1998, Mr. Hung served as Director of Sales and Marketing for Integrated Silicon Solution, Inc. He has also served in various Marketing positions for Hewlett-Packard and Logitech. Mr. Hung holds a B.S. degree in electrical engineering from National Cheng Kung University and an executive M.B.A. degree from National Chiao Tung University.

 

6.B. Compensation of Directors and Executive Officers

 

For the year ended December 31, 2012, the aggregate cash compensation that we paid to our executive officers was approximately $0.7 million. The aggregate share-based compensation that we paid to our executive officers was approximately $0.4 million. No executive officer is entitled to any severance benefits upon termination of his or her employment with us.

 

For the year ended December 31, 2012, the aggregate cash compensation that we paid to our independent directors was approximately $120,000. The aggregate share-based compensation that we paid to our independent directors was nil.

 

The following table summarizes the RSUs that we granted in 2012 to our directors and executive officers under our 2011 long-term incentive plan. Each unit of RSU represents two ordinary shares as of August 10, 2009. See “Item 6.D. Directors, Senior Management and Employees—Employees––Share-Based Compensation Plans” for more details regarding our RSU grants.

 

Name  Total RSUs
Granted
   Ordinary Shares
Underlying Vested
Portion of RSUs
   Ordinary Shares
Underlying
Unvested Portion
of RSUs
 
Dr. Biing-Seng Wu    140,717    70,358    211,076 
Jordan Wu    140,717    70,358    211,076 
Tien-Jen Lin    -    -    - 
Chih-Chung Tsai    140,717    70,358    211,076 
Hsiung-Ku Chen    -    -    - 
Dr. Yan-Kuin Su    -    -    - 
Yuan-Chuan Horng    -    -    - 
Jackie Chang    48,757    24,378    73,136 
Norman Hung    75,469    37,734    113,204 

 

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6.C. Board Practices

 

General

 

Our board of directors consists of seven directors, three of whom are independent directors within the meaning of Rule 5605(a)(2) of the Nasdaq Rules. 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 5605(b)(1) of the Nasdaq Rules that require boards of U.S. companies to have a board of directors which is comprised of a majority of independent directors. Moreover, we intend to follow home country practice that permits our independent directors not to hold regularly scheduled meetings at which only independent directors are present in lieu of complying with Rule 5605(b)(2).

 

Committees of the Board of Directors

 

To enhance our corporate governance, we have established three committees under the board of directors: 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, Hsiung-Ku Chen and Dr. Yan-Kuin Su. Our board of directors has determined that all of our audit committee members are “independent directors” within the meaning of Rule 5605(a)(2) of the Nasdaq Rules and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act. 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. Yan-Kuin Su, Hsiung-Ku Chen and Tien-Jen Lin. Our compensation committee assists our board of directors in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting where his or her compensation is deliberated. We intend to follow home country practice that permits a compensation committee to contain a director who does not meet the definition of “independence” within the meaning of Rule 5605(a)(2) of the Nasdaq Rules. We intend to follow home country practice in lieu of complying with Rule 5605(d)(1)(B) and (2)(B) of the Nasdaq Rules which requires the compensation committees of U.S. companies to be comprised solely of independent directors. The compensation committee will be responsible for, among other things:

 

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·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, Hsiung-Ku Chen, Dr. Yan-Kuin Su and Tien-Jen Lin. We intend to follow home country practice that permits a nominations committee to contain a director who does not meet the definition of “independence” within the meaning of Rule 5605(a)(2) of the Nasdaq Rules. We intend to follow home country practice in lieu of complying with Rule 5605(e)(1)(B) of the Nasdaq Rules which requires that nominations 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, each of our directors holds office until a successor has been duly elected or appointed, except where any director was appointed by the board of directors to fill a vacancy on the board of directors or as an addition to the existing board, such director shall hold office until the next annual general 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 are subject to retirement by rotation, or if their number is not a multiple of three, the number nearest to one-third but not exceeding one-third shall retire from office. Any retiring director is eligible for re-election. The chairman of our board of directors and/or the managing director 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 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, and (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.

 

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6.D. Employees

 

As of December 31, 2010, 2011 and 2012, we had 1,341, 1,423 and 1,431 employees, respectively. The following is a breakdown of our employees by function as of December 31, 2012:

 

Function  Number 
Research and development(1)    870 
Engineering and manufacturing(2)    206 
Sales and marketing(3)    247 
General and administrative    108 
Total    1,431 

 

 

Notes: (1) Includes semiconductor design engineers, application engineers, assembly and testing engineers and quality control engineers.
     
  (2) Includes manufacturing personnel of Himax Display, our subsidiary focused on design and manufacturing of LCOS products and liquid crystal injection services.
     
  (3) Includes field application engineers.

 

 

 

 

Share-Based Compensation Plans

 

Himax Technologies, Inc. 2005 and 2011 Long-Term Incentive Plan

 

We adopted two long-term incentive plans in October 2005 and September 2011. The following description of the plan is intended to be a summary and does not describe all provisions of the plan.

 

Purpose of the Plan. The purpose of the plan is to advance our interests and those of our shareholders by:

 

·providing the opportunity for our employees, directors and service providers to develop a sense of proprietorship and personal involvement in our development and financial success and to devote their best efforts to our business; and

 

·providing us with a means through which we may attract able individuals to become our employees or to serve as our directors or service providers and providing us a means whereby those individuals, upon whom the responsibilities of our successful administration and management are of importance, can acquire and maintain share ownership, thereby strengthening their concern for our welfare.

 

Type of Awards. The plan provides for the grant of stock options and restricted share units.

 

Duration. Generally, the plan will terminate five years from the effective date of the plan. After the plan is terminated, no awards may be granted, but any award previously granted will remain outstanding in accordance with the plan.

 

Administration. The plan is administered by the compensation committee of our board of directors or any other committee designated by our board to administer the plan. Committee members will be appointed from time to time by, and will serve at the discretion of, our board. The committee has full power and authority to interpret the terms and intent of the plan or any agreement or document in connection with the plan, determine eligibility for awards and adopt such rules, regulations, forms, instruments and guidelines for administering the plan. The committee may delegate its duties or powers.

 

Number of Authorized Shares. We have authorized a maximum issuance of 36,153,854 shares in the 2005 plan and 20,000,000 shares in the 2011 plan. As of the date of this annual report, there were no stock options or restricted share units outstanding under the plan except as described under “—Restricted Share Units.”

 

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Eligibility and Participation. All of our employees, directors and service providers are eligible to participate in the plan. The committee may select from all eligible individuals those individuals to whom awards will be granted and will determine the nature of any and all terms permissible by law and the amount of each award.

 

Stock Options. The committee may grant options to participants in such number, upon such terms and at any time as it determines. Each option grant will be evidenced by an award document that will specify the exercise price, the maximum duration of the option, the number of shares to which the option pertains, conditions upon which the option will become vested and exercisable and such other provisions which are not inconsistent with the plan.

 

The exercise price for each option will be:

 

·based on 100% of the fair market value of the shares on the date of grant;

 

·set at a premium to the fair market value of the shares on the date of grant; or

 

·indexed to the fair market value of the shares on the date of grant, with the committee determining the index.

 

The exercise price on the date of grant must be at least equal to 100% of the fair market value of the shares on the date of grant.

 

Each option will expire at such time as the committee determines at the time of its grant; however, no option will be exercisable later than the 10th anniversary of its grant date. Notwithstanding the foregoing, for options granted to participants outside the United States, the committee can set options that have terms greater than ten years.

 

Options will be exercisable at such times and be subject to such terms and conditions as the committee approves. A condition of the delivery of shares as to which an option will be exercised will be the payment of the exercise price. Subject to any governing rules or regulations, as soon as practicable after receipt of written notification of exercise and full payment, we will deliver to the participant evidence of book-entry shares or, upon his or her request, share certificates in an appropriate amount based on the number of shares purchased under the option(s). The committee may impose such restrictions on any shares acquired pursuant to the exercise of an option as it may deem advisable.

 

Each participant’s award document will set forth the extent to which he or she will have the right to exercise the options following termination of his or her employment or services.

 

We have not yet granted any stock options under the plan.

 

Restricted Share Units. The committee may grant restricted share units to participants. Each grant will be evidenced by an award document that will specify the period(s) of restriction, the number of restricted share units granted and such other provisions as the committee determines.

 

Generally, restricted share units will become freely transferable after all conditions and restrictions applicable to such shares have been satisfied or lapse and restricted share units will be paid in cash, shares or a combination of the two, as determined by the committee.

 

The committee may impose such other conditions or restrictions on any restricted share units as it may deem advisable, including a requirement that participants pay a stipulated purchase price for each restricted share unit, restrictions based upon the achievement of specific performance goals and time-based restrictions on vesting.

 

A participant will have no voting rights with respect to any restricted share units.

 

Each award document will set forth the extent to which the participant will have the right to retain restricted share units following termination of his or her employment or services.

 

We made grants of 7,108,675 RSUs to our employees on September 29, 2008. The vesting schedule for such RSU grants is as follows: 60.64% of the RSU grants vested immediately and was settled by cash in the amount of $12.7 million on the grant date, with the remainder vesting equally on each of September 30, 2009, 2010 and 2011, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

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We made grants of 3,577,686 RSUs to our employees on September 28, 2009. The vesting schedule for such RSU grants is as follows: 55.96% of the RSU grants vested immediately and was settled by cash in the amount of $6.5 million on the grant date, with the remainder vesting equally on each of September 30, 2010, 2011 and 2012, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

We made grants of 3,488,952 RSUs to our employees on September 28, 2010. The vesting schedule for such RSU grants is as follows: 68.11% of the RSU grants vested immediately and was settled by cash in the amount of $5.9 million on the grant date, with the remainder vesting equally on each of September 30, 2011, 2012 and 2013, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

We made grants of 2,727,278 RSUs to our employees on September 28, 2011. The vesting schedule for such RSU grants is as follows: 97.36% of the RSU grants vested immediately and was settled by cash in the amount of $2.9 million on the grant date, with the remainder vesting equally on each of September 30, 2012, 2013 and 2014, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

We made grants of 5,522,279 RSUs to our employees on September 26, 2012. The vesting schedule for such RSU grants is as follows: 58.36% of the RSU grants vested immediately and was settled by cash in the amount of $6.3 million on the grant date, with the remainder vesting equally on each of September 30, 2013, 2014 and 2015, which will be settled by our ordinary shares, subject to certain forfeiture events.

 

Dividend Equivalents. Any participant selected by the committee may be granted dividend equivalents based on the dividends declared on shares that are subject to any award, to be credited as of dividend payment dates, during the period between the date the award is granted and the date the award is exercised, vests or expires, as determined by the committee, provided that unvested RSUs are currently not entitled to dividend equivalents. Dividend equivalents will be converted to cash or additional shares by such formula and at such time and subject to such limitations as determined by the committee.

 

Transferability of Awards. Generally, awards cannot be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.

 

Adjustments in Authorized Shares. In the event of any of the corporate events or transactions described in the plan, to avoid any unintended enlargement or dilution of benefits, the committee has the sole discretion to substitute or adjust the number and kind of shares that can be issued or otherwise delivered.

 

Forfeiture Events. The committee may specify in an award document that the participant’s rights, payments and benefits with respect to an award will be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an award.

 

If we are required to prepare an accounting restatement owing to our material noncompliance, as a result of misconduct, with any financial reporting requirement under the securities laws, then if the participant is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, the participant will reimburse us the amount of any payment in settlement of an award earned or accrued during the twelve-month period following the first public issuance or filing with the SEC (whichever first occurred) of the financial document embodying such financial reporting requirement.

 

Amendment and Termination. Subject to, and except as, provided in the plan, the committee has the sole discretion to alter, amend, modify, suspend, or terminate the plan and any award document in whole or in part. Amendments to the plan are subject to shareholder approval, to the extent required by law, or by stock exchange rules or regulations.

 

6.E. Share Ownership

 

The following table sets forth the beneficial ownership of our ordinary shares, as of March 31, 2013, by each of our directors and executive officers.

 

Name  Number of Shares Owned   Percentage of Shares Owned 
Dr. Biing-Seng Wu    71,049,528    20.9%
Jordan Wu    28,110,756    8.3%
Tien-Jen Lin    -    - 
Chih-Chung Tsai    7,065,902    2.1%
Hsiung-Ku Chen    -    - 
Dr. Yan-Kuin Su    -    - 
Yuan-Chuan Horng    916,104    0.3%
Jackie Chang    -    - 
Norman Hung    397,122    0.1%

 

 

 None of our directors or executive officers has voting rights different from those of other shareholders.

 

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

7.A. Major Shareholders

 

On August 10, 2009, we effected certain changes in our capital stock structure in order to meet the Taiwan Stock Exchange’s primary listing requirement that the par value of shares be NT$10 or $0.3 per share and in order to increase the number of outstanding ordinary shares to be listed on the Taiwan Stock Exchange. In particular, we increased our authorized share capital from $50,000 (divided into 500,000,000 shares of par value $0.0001 each) to $300,000,000 (divided into 3,000,000,000,000 shares of par value $0.0001 each) and distributed 5,999 bonus shares for each share of par value $0.0001 held by shareholders of record as of August 7, 2009. These were followed by a consolidation of every 3,000 shares of par value $0.0001 each into one ordinary share of par value $0.3 each. As a result, the number of ordinary shares outstanding was doubled and each of our ordinary shares had a par value of $0.3.

 

In connection with the above changes, we also changed our ADS ratio effective August 10, 2009 from one ADS representing one ordinary share to one ADS representing two ordinary shares. Such change in ADS ratio was intended to adjust for the net dilutive effect due to the bonus shares distribution and the shares consolidation so that each ADS would represent the same percentage ownership in our share capital immediately before and after the above changes. The number of ADSs also remained the same immediately before and after the above changes.

 

As of March 31, 2013, 339,149,508 of our shares were outstanding. We believe that, of such shares, 147,463,282 shares in the form of ADSs were held by approximately 13,077 holders in the United States as of March 31, 2013.

 

The following table sets forth information known to us with respect to the beneficial ownership of our shares as of March 31, 2013, the most recent practicable date, by (i) each shareholder known by us to beneficially own more than 5% of our shares and (ii) all directors and executive officers as a group.

 

Name of Beneficial Owner  Number of Shares
Beneficially Owned
   Percentage of Shares
Beneficially Owned
 
Dr. Biing-Seng Wu(1)    71,049,528    20.9%
Innolux(2)    50,799,506    15.0%
Jordan Wu(3)    28,110,756    8.3%
Dalton Investment LLC(4)    20,618,718    6.1%
All directors and executive officers as a group    107,539,412    31.7%

 

 

Note:(1)Dr. Biing-Seng Wu beneficially owns 46,365,451 ordinary shares and 23,529,677 ordinary shares through Sanfair Asia Investments Ltd. and Chi-Duan Investment Co., Ltd, respectively, both of which are investment companies controlled by Dr. Biing-Seng Wu, and may be deemed to beneficially own 1,154,400 shares held by certain of his children. Accordingly, Dr. Biing-Seng Wu may be deemed to beneficially own an aggregate of 71,049,528 ordinary shares, representing approximately 20.9% of the outstanding ordinary shares.

 

(2)Innolux directly owns 1,154,448 ordinary shares and beneficially owns 49,645,058 ordinary shares through its wholly owned British Virgin Islands subsidiary, Leadtek Global Group Limited. As of March 31, 2013, Innolux also beneficially owns an equity interest of approximately 3.3% in our subsidiary Himax Media Solutions.

 

(3)Jordan Wu beneficially owns 22,662,426 ordinary shares and 4,780,730 ordinary shares through Arch Finance Ltd. and Shu Chuan Investment Co., Ltd, respectively, both of which are investment companies controlled by Jordan Wu, and may be deemed to beneficially own 667,600 shares held by certain of his children. Accordingly, Jordan Wu may be deemed to beneficially own an aggregate of 28,110,756 ordinary shares, representing approximately 8.3% of the outstanding ordinary shares.

 

(4)According to the amendment to the Schedule 13G filed with the SEC on February 14, 2013, Dalton Investment LLC, together with its affiliates, beneficially owned 20,618,718 of our shares, some or all of which may include shares represented by our ADS, as of December 31, 2012. We do not have further information with respect to any changes in Dalton Investment LLC’s beneficial ownership of our shares subsequent to December 31, 2012.

 

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We have a close relationship with Innolux, one of our major shareholders and a leading TFT-LCD panel manufacturer based in Taiwan and listed on the Taiwan Stock Exchange. Innolux’s primary focus is the manufacture of large-sized TFT-LCD panels for use in notebook computers, desktop monitors and LCD televisions. Innolux was formerly known as Innolux and is the surviving entity following the completion of the merger of CMO, Innolux, and TPO on March 18, 2010. Several of Himax Taiwan’s initial employees, including Dr. Biing-Seng Wu, our chairman, were former employees of CMO. CMO was Himax Taiwan’s largest shareholder at the time of its incorporation, and Innolux currently is one of our largest shareholders. Innolux or CMO has also been our largest customer since our inception. In 2012, sales to Innolux(together with its affiliates)accounted for 34.2% of our revenues. Certain of our directors also held or hold key management positions at Innolux or CMO or its affiliates prior to the merger. Mr. Tien-Jen Lin, our director, served as the Special Assistant to the General Manager at Innolux. Prior to the merger, Mr. Jung-Chun Lin, our former director, was the senior vice president of finance and administration of CMO and Dr. Biing-Seng Wu, our chairman, was the vice chairman of the board of directors of CMO. After the merger, Mr. Jung-Chun Lin and Dr. Biing-Seng Wu no longer hold positions in Innolux. We also have entered into various transactions with Innolux, or CMO prior to the merger, and its affiliates as further described below.

 

None of our major shareholders has voting rights different from those of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

7.B. Related Party Transactions

 

Innolux and Related Companies

 

Innolux

 

We sold display drivers to Innolux. We generated net sales to Innolux in the amount of $56.2 million in 2012. Our receivables from such sales were $17.3 million as of December 31, 2012.

 

We lease office space, facilities and inventory locations from Innolux and certain of its subsidiaries. Rent and utility expenses resulting from such leases in 2012 were $0.8 million. The related payables as of December 31, 2012 were $0.2 million. As of December 31, 2012, we agreed to make future minimum lease payments of $2.1 million in aggregate under non-cancelable operating leases with these related parties.

 

In 2012, we purchased consumable and miscellaneous items amounting to $31,000 from Innolux and other related parties. The related payables as of December 31, 2012 were nil.

 

CMO-NingBo

 

CMO-NingBo is a subsidiary of Innolux. We sell display drivers to CMO-NingBo. We generated net sales to CMO-NingBo in the amount of $93.7 million in 2012. Our receivables from such sales were $31.4 million as of December 31, 2012.

 

CMO-NanHai

 

CMO-NanHai is a subsidiary of Innolux. We sell display drivers to CMO-NanHai. We generated net sales to CMO-NanHai in the amount of $63.4 million in 2012. Our receivables from such sales were $13.4 million as of December 31, 2012.

 

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NingBo Chi Hsin Electronics Ltd.

 

NingBo Chi Hsin Electronics Ltd., or Chi Hsin-NingBo, is a subsidiary of Innolux. We sell display drivers for certain audio and visual and mobile applications to Chi Hsin-NingBo. We generated net sales to Chi Hsin-NingBo in the amount of $12.6 million in 2012. Our receivables from such sales were $3.2 million as of December 31, 2012.

 

NingBo Chi Mei Electronics Ltd.

 

NingBo Chi Mei Electronics Ltd., or CME-NingBo, is a subsidiary of Innolux. We sell display drivers for large-sized applications to CME-NingBo. We generated net sales to CME-NingBo in the amount of $21.7 million in 2012, and our receivables from these sales were approximately $5.9 million as of December 31, 2012.

 

7.C. Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

8.A. Consolidated Statements and Other Financial Information

 

8.A.1. See “Item 18. Financial Statements” for our audited consolidated financial statements.

 

8.A.2. See “Item 18. Financial Statements” for our audited consolidated financial statements, which cover the last three financial years.

 

8.A.3. See page F-1 for the report of our independent registered public accounting firm.

 

8.A.4. Not applicable.

 

8.A.5. Not applicable.

 

8.A.6. See Note 22 to our audited consolidated financial statements included in “Item 18. Financial Statements.”

 

8.A.7. Litigation

 

We may be subject to legal proceedings, investigations and claims relating to the conduct of our business from time to time. We may also initiate legal proceedings in order to protect our contractual and property rights. However, as of the date of this annual report, we are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or results of operations.

 

8.A.8. Dividends and Dividend Policy

 

Subject to the Cayman Islands Companies Law, we may declare dividends in any currency, but no dividend may be declared in excess of the amount recommended by our board of directors. Whether our board of directors recommends any dividends and the form, frequency and amount of dividends, if any, 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.

 

On June 27, 2008, we paid a cash dividend in the amount of $66.8 million, or the equivalent of $0.350 per ADS. In 2009, we paid a cash dividend on June 29, 2009 in the amount of $55.5 million, or the equivalent of $0.300 per ADS, and distributed a stock dividend on August 10, 2009 of 5,999 ordinary shares of par value $0.0001 for each ordinary share of par value $0.0001 held by shareholders of record as of August 7, 2009. On August 13, 2010, we paid a cash dividend in the amount of $44.1 million, or the equivalent of $0.250 per ADS. On July 20, 2011, we paid a cash dividend in the amount of $21.2 million, or the equivalent of $0.120 per ADS. On July 25, 2012, we paid a cash dividend in the amount of $10.7 million, or the equivalent of $0.063 per ADS. For more information on the stock dividend distribution, see “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders.” The dividends for any of these years should not be considered representative of the dividends that would be paid in any future periods or of our dividend policy.

 

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Our ability to pay cash or stock dividends will depend, at least partially, upon the amount of funds 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. We receive cash from Himax Taiwan through intercompany borrowings. Himax Taiwan has not paid us 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 no more than 10% of annual net income) and remuneration for directors and supervisor(s) (in an amount no more than 2% of the annual net income); after having deducted the above items, based on a resolution of the board of directors; if stock bonuses are paid to employees, the bonus may also be appropriated to employees of subsidiaries under the board of directors’ approval.

 

Furthermore, if Himax Taiwan does not record any net income for any year as determined in accordance with generally accepted accounting principles in Taiwan, it generally may not distribute dividends for that year.

 

Any dividend we declare will be paid to the holders of ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary shares, to the extent permitted by applicable laws and regulations, less the fees and expenses payable under the deposit agreement. Any dividend we declare will be distributed by the depositary bank to the holders of our ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

8.B. Significant Changes

 

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of the annual financial statements.

 

ITEM 9. THE OFFER AND LISTING

 

9.A. Offer and Listing Details

 

Our ADSs have been quoted on the NASDAQ Global Select Market under the symbol “HIMX” since March 31, 2006. The table below sets forth, for the periods indicated, the high and low market prices and the average daily volume of trading activity on the NASDAQ Global Select Market for the shares represented by ADSs.

 

   High   Low   Average Daily Trading Volume 
           (in thousands of ADSs) 
2008   6.29    1.00    590.1 
2009   3.97    1.32    529.6 
2010   3.28    2.00    297.0 
2011   2.69    0.97    293.1 
First quarter    2.69    2.17    240.7 
Second quarter    2.56    1.71    140.9 
Third quarter    2.20    1.10    241.7 
Fourth quarter    1.20    0.97    548.4 
2012   2.46    0.99    337.3 
First quarter    2.34    0.99    639.1 
Second quarter    2.45    1.75    298.4 
Third quarter    2.10    1.47    151.2 
Fourth quarter    2.46    1.77    265.1 
October    2.07    1.77    171.7 
November    2.45    1.82    368.6 
December    2.46    2.25    254.4 
2013               
First quarter    5.45    2.40    1,921.1 
January    3.25    2.40    869.5 
February    3.23    2.74    456.3 
March    5.45    3.15    4,416.8 
April (through April 26)    6.63    5.00    4,904.4 

 

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9.B. Plan of Distribution

 

Not applicable.

 

9.C. Markets

 

The principal trading market for our shares is the NASDAQ Global Select Market, on which our shares are traded in the form of ADSs.

 

9.D. Selling Shareholders

 

Not applicable.

 

9.E. Dilution

 

Not applicable.

 

9.F. Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

10.A. Share Capital

 

Not applicable.

 

10.B. Memorandum and Articles of Association

 

Our shareholders previously adopted the Amended and Restated Memorandum of Association on September 26, 2005 by a special resolution passed by the sole shareholder of our company and the Amended and Restated Articles of Association at an extraordinary shareholder meeting held on October 25, 2005, both of which were filed as an exhibit to our registration statement on Form F-1 (file no. 333-132372) with the SEC on March 13, 2006.

 

At our annual general meeting on August 6, 2009, our shareholders adopted the Second Amended and Restated Memorandum and Articles of Association, which became effective on August 10, 2009 and were filed as exhibits to our current report on Form 6-K with the SEC on July 13, 2009. These were adopted primarily in connection with our proposed Taiwan listing to meet the Taiwan Stock Exchange’s primary listing requirement concerning protection of material shareholders’ rights under the ROC’s Company Act and Securities Exchange Act. At the same time, our shareholders also adopted the Third Amended and Restated Memorandum and Articles of Association, which were filed as an exhibit to our annual report on Form 20-F for the fiscal year ended December 31, 2009 with the SEC on June 3, 2010 and are substantially the same as the Amended and Restated Memorandum and Articles of Association of our company except that our authorized share capital is stated to be $300,000,000 divided into 1,000,000,000 shares of nominal or par value of $0.3 each, on the condition that it shall become effective if the application made by our company to list its ordinary shares on the Taiwan Stock Exchange is rejected or aborted. On May 20, 2010, the Third Amended and Restated Memorandum and Articles of Association became effective as a result of the termination of our primary listing application to the Taiwan Stock Exchange.

 

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We incorporate by reference into this annual report the description of our Amended and Restated Memorandum and Articles of Association (except for provisions relating to our authorized share capital) contained in our F-1 registration statement (File No. 333-132372) filed with the SEC on March 13, 2006. Such description sets forth a summary of certain provisions of our memorandum and articles of association as currently in effect, which is qualified in its entirety by reference to the full text of the Third Amended and Restated Memorandum and Articles of Association. As of the date of this annual report, our authorized share capital is $300,000,000 divided into 1,000,000,000 shares of nominal or par value of $0.3 each.

 

10.C. Material Contracts

 

For a summary of any material contract entered into by us outside of the ordinary course of business during the last two years, see “Item 4A. History and Development of the Company” for more information on our subsidiary, Himax Display, which acquired all of the outstanding shares of capital stock of Spatial Photonics in exchange for a certain number of common stock of Himax Display.

 

10.D. Exchange Controls

 

We have extracted from publicly available documents the information presented in this section. The information below may be applicable because our wholly owned operating subsidiary, Himax Taiwan, is incorporated in the ROC. Please note that citizens of the PRC and entities organized in the PRC are subject to special ROC laws, rules and regulations, which are not discussed in this section.

 

The ROC’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle foreign exchange transactions by the Central Bank of the ROC. There is an annual limit on the amount of currency a Taiwanese entity may convert into, or out of, NT dollars other than for trade purposes. Current regulations favor trade-related foreign exchange transactions.

 

With regard to inward and outward remittances, approval by the Central Bank of the ROC is generally required for any conversion exceeding, in aggregate in each calendar year, $50 million (or its equivalent) for companies and $5 million (or its equivalent) for Taiwanese and resident foreign individuals. A requirement is also imposed on all private enterprises to report all medium- and long-term foreign debt with the Central Bank of the ROC.

 

In addition, a foreign person without an alien resident card or an unrecognized foreign entity may remit to and from Taiwan foreign currencies of up to $100,000 per remittance if required documentation is provided to the ROC authorities. This limit applies only to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies.

 

10.E. Taxation

 

Cayman Islands Taxation

 

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation, and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of, the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

 

We have, pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, obtained an undertaking from the Governor-in-Council that:

 

(a) no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income or gains or appreciations shall apply to us or our operations;

 

(b) the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our ordinary shares, debentures or other obligations.

 

The undertaking that we have obtained is for a period of 20 years from May 3, 2005.

 

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United States Federal Income Taxation

 

The following is a description of material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of ordinary shares or ADSs, but it does not purport to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to hold the securities. This discussion applies only to a U.S. Holder that holds ordinary shares or ADSs as capital assets for U.S. federal income tax purposes. This discussion does not address any aspect of the “Medicare contributions tax” on “net investment income.” In addition, it does not describe all of the tax consequences that may be relevant in light of the U.S. Holder’s particular circumstances, including alternative minimum tax consequences and tax consequences applicable to U.S. Holders subject to special rules, such as:

 

·certain financial institutions;

 

·dealers or traders in securities who use a mark-to-market method of tax accounting;

 

·persons holding ordinary shares or ADSs as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the ordinary shares or ADSs;

 

·persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

 

·entities classified as partnerships for U.S. federal income tax purposes;

 

·tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”;

 

·persons that own or are deemed to own ten percent or more of our voting stock; or

 

·persons holding ordinary shares or ADSs in connection with a trade or business conducted outside of the United States.

 

If an entity that is classified as a partnership for U.S. federal income tax purposes owns ordinary shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding ordinary shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the ordinary shares or ADSs.

 

This discussion is based on the Internal Revenue Code of 1986, as amended, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. You should consult your tax adviser concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of ordinary shares or ADSs in your particular circumstances.

 

As used herein, a “U.S. Holder” is a person that is, for U.S. federal tax purposes, a beneficial owner of ordinary shares or ADSs and is: (i) a citizen or resident of the United States; (ii) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or (iii) an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

 

In general, a U.S. Holder of ADSs will be treated for U.S. federal income tax purposes as the owner of the underlying ordinary shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying ordinary shares represented by those ADSs.

 

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary (“pre-release”) may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of American depositary shares. Such actions would also be inconsistent with the claiming of the preferred rates of tax, described below, applicable to dividends received by certain non-corporate U.S. holders. Accordingly, the availability of the preferential tax rates for dividends received by certain non-corporate U.S. Holders, described below, could be affected by actions taken by parties to whom ADSs are pre-released.

 

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This discussion assumes that we are not, and will not become, a passive foreign investment company (as discussed below).

 

Taxation of Distributions

 

Distributions received by U.S. Holders with respect to the ordinary shares or ADSs, other than certain pro rata distributions of ordinary shares, will constitute foreign-source dividend income for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits, as determined in accordance with U.S. federal income tax principles. We do not to maintain records of earnings and profits in accordance with U.S. federal income tax principles, and therefore it is expected that distributions will generally be reported to U.S. Holders as dividends. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADSs, the depository’s) receipt of the dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, certain dividends paid by qualified foreign corporations to certain non-corporate holders may be taxable at preferential tax rates applicable to long-term capital gains. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the NASDAQ Global Select Market, where our ADSs are traded. Our ordinary shares are not traded on a securities market in the United States. Non-corporate U.S. Holders of our ordinary shares or ADSs should consult their tax advisers regarding their eligibility for taxation at such preferential rates and whether they are subject to any special rules that limit their ability to be taxed at such preferential rates. Corporate U.S. Holders will not be entitled to claim the dividends-received deduction with respect to dividends paid by us.

 

Sale and Other Disposition of Ordinary Shares or ADSs

 

A U.S. Holder will generally recognize U.S.-source capital gain or loss for U.S. federal income tax purposes on the sale or other disposition of ordinary shares or ADSs, which will be long-term capital gain or loss if the ordinary shares or ADSs were held for more than one year. Long-term capital gains of certain non-corporate U.S. Holders may be taxable at preferential rates. The amount of gain or loss will be equal to the difference between the amount realized on the sale or other disposition and the U.S. Holder’s tax basis in the ordinary shares or ADSs. The deductibility of capital losses is subject to limitations.

 

Passive Foreign Investment Company Rules

 

We believe that we were not a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for our taxable year ended December 31, 2012.

 

In general, a non-U.S. company will be a PFIC for U.S. federal income tax purposes for any taxable year in which (i) 75% or more of its gross income consists of passive income (such as dividends, interest, rents and royalties) or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income (including cash). If a corporation owns at least 25% (by value) of the stock of another corporation, the corporation will be treated, for purposes of the PFIC tests, as owning its proportionate share of the 25%-owned subsidiary’s assets and receiving its proportionate share of the 25%-owned subsidiary’s income. As PFIC status depends upon the composition of our income and assets and the value of our assets from time to time (and the value of our assets may be determined, in part, based on the market price of our shares and ADSs, which may fluctuate considerably from time to time given that market prices of certain technology companies historically have been volatile), there can be no assurance that we will not be a PFIC fo