F-1/A 1 df1a.htm FORM F-1 AMENDMENT NO. 1 Form F-1 Amendment No. 1
Table of Contents

 

As filed with the Securities and Exchange Commission on March 20, 2006

 

Registration No. 333-132372


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

AMENDMENT NO. 1

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

HIMAX TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s name into English)


 

 

Cayman Islands   3674   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

10th Floor, No. 605, Chungshan Road

Hsinhua, Tainan County 712

Taiwan, Republic of China

+886 (6) 505-0880

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Puglisi & Associates

850 Library Avenue, Suite 204

Newark, Delaware 19711

(302) 738-6680

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 


 

Copies to:

 

Show-Mao Chen, Esq.

John G. Crowley, Esq.

Davis Polk & Wardwell

18th Floor, The Hong Kong Club Building

3A Chater Road

Central, Hong Kong S.A.R., China

(852) 2533-3300

 

Matthew Bersani, Esq.

Shearman & Sterling LLP

12/F, Gloucester Tower

The Landmark

11 Pedder Street

Central, Hong Kong S.A.R., China

(852) 2978-8000


 

 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                  

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                  

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                  

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

 


 

CALCULATION OF REGISTRATION FEE


Title of each class of securities to be registered    Amount to be registered(1)(2)    Proposed maximum
offering price per
ordinary share(1)
   Proposed maximum
aggregate
offering price(1)(2)
   Amount of
registration fee

Ordinary shares, par value $0.0001 per ordinary share(3)

   59,800,000 ordinary shares    $9.00    $538,200,000    $57,587.40

(1)   Estimated solely for the purpose of computing the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(2)   Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside the United States.
(3)   American depositary shares issuable upon deposit of the ordinary shares registered hereby are registered under a separate registration statement on Form F-6 filed with the Commission. Each American depositary share represents one ordinary share.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.



Table of Contents

The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued March 20, 2006

 

52,000,000 American Depositary Shares

LOGO

Himax Technologies, Inc.

REPRESENTING 52,000,000 ORDINARY SHARES

 


 

Himax Technologies, Inc. is offering 12,561,753 American depositary shares, or ADSs, and the selling shareholders are offering 39,438,247 ADSs. Each ADS represents one of our ordinary shares. This is our initial public offering, and no public market currently exists for our ADSs. We anticipate that the initial public offering price will be between $7 1/2 and $9 per ADS.

 


 

We have applied to have the ADSs quoted on the Nasdaq National Market under the symbol “HIMX.”

 


 

Investing in the ADSs involves risks. See “ Risk Factors” beginning on page 7.

 


 

PRICE $                 AN ADS

 


 

       Price to
Public


    

Underwriting

Discounts and

Commissions


    

Proceeds to

Himax

Technologies, Inc.


    

Proceeds to
the Selling

Shareholders


Per ADS

     $      $      $      $

Total

     $                  $                  $                  $            

 

Himax Technologies, Inc. has granted the underwriters the right to purchase up to an additional 7,800,000 ADSs to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the ADSs to purchasers on                 , 2006.

 


 

MORGAN STANLEY

 

CREDIT SUISSE

 

BANC OF AMERICA SECURITIES LLC

 

PIPER JAFFRAY

 

ABN AMRO ROTHSCHILD

 

HSBC

 

March         , 2006


Table of Contents

 

 

 

[Page intentionally left blank]

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   7

Special Note Regarding Forward-Looking Statements

   30

Use of Proceeds

   31

Exchange Rate Information

   32

Dividend Policy

   33

Price Range of Common Shares

   35

Capitalization

   36

Dilution

   37

Selected Consolidated Financial Data

   39

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   41

Business

   63

Management

   84
     Page

Principal and Selling Shareholders

   92

Corporate History and Related Party Transactions

   94

Description of Share Capital

   97

Description of American Depositary Shares

   110

Shares Eligible for Future Sale

   118

Taxation

   120

Underwriters

   123

Enforceability of Civil Liabilities

   130

Expenses Relating to This Offering

   132

Legal Matters

   133

Experts

   133

Where You Can Find Additional Information

   133

Conventions That Apply to This Prospectus

   134

Index to Consolidated Financial Statements

   F-1

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell ADSs and seeking offers to buy ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs.

 

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus outside of the United States.

 

Until                 , all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i


Table of Contents

PROSPECTUS SUMMARY

 

You should read the following summary together with the more detailed information regarding our company and the ADSs being sold in this offering and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

HIMAX TECHNOLOGIES, INC.

 

Overview

 

We design, develop and market semiconductors that are critical components of flat panel displays. We believe we are among the world’s leading suppliers of display drivers for large-sized thin film transistor liquid crystal display, or TFT-LCD, panel displays, with a market share of approximately 15.8% in terms of revenues in 2005, according to iSuppli Corporation, or iSuppli, a research firm focused on the electronics industry. Our principal products are display drivers for large-sized TFT-LCD panels, which are used in desktop monitors, notebook computers and televisions, and display drivers for small- and medium-sized TFT-LCD panels, which are used in mobile handsets and consumer electronics products such as digital cameras, mobile gaming devices and car navigation displays. We also offer display drivers for panels using organic light-emitting diode, or OLED, technology and low temperature poly silicon, or LTPS, technology. In addition, we are expanding our product offering to include television semiconductor solutions, as well as liquid crystal on silicon, or LCOS, products.

 

We have a close relationship with Chi Mei Optoelectronics Corp., or CMO, a leading TFT-LCD panel manufacturer based in Taiwan. CMO is one of our largest shareholders and has been our largest customer since our inception. Certain of our directors also hold key management positions at CMO. A substantial portion of our sales are to CMO and Chunghwa Picture Tubes, or CPT, which together with their respective affiliates accounted for approximately 58.9% and 16.2%, respectively, of our revenues in 2005. Our other customers are principally panel makers such as HannStar Display Corporation, Innolux Display Corporation, Samsung Electronics Taiwan Co., Ltd. and Shanghai SVA-NEC Liquid Crystal Display. We believe that our leading design and engineering expertise, combined with our focus on customer service and close relationships with semiconductor manufacturing service providers, has contributed to our success.

 

Our aim is to become one of the world’s leading providers of semiconductors for flat panel display applications through:

 

    expanding and diversifying our customer base;

 

    capturing a larger percentage of our customers’ large-sized panel display driver requirements;

 

    establishing a leadership position in the mobile handset display driver market;

 

    leveraging our design and engineering expertise to capture other growth opportunities; and

 

    strengthening our semiconductor manufacturing supply chain.

 

Our Industry

 

We operate in the flat panel display semiconductor industry. As our semiconductors are critical components of flat panel displays, our industry is closely linked to the trends and developments of the flat panel display industry. According to iSuppli, global unit shipments of large-sized flat panel displays are expected to grow from approximately 203.7 million units in 2005 to approximately 352.7 million units in 2009. iSuppli also forecasts global unit shipments of small- and medium-sized flat panel displays to grow from approximately 1.5 billion units in 2005 to approximately 1.8 billion units in 2009. This projected growth is expected to drive the demand

 

1


Table of Contents

for semiconductors used in these panels. Panel manufacturers are primarily located in Taiwan, South Korea, Japan and China. We believe that Taiwan-based semiconductor companies, such as us, are well positioned to take advantage of the geographic proximity to work closely with panel manufacturers to design semiconductors to be integrated into such customers’ products.

 

Corporate Information

 

We were incorporated in the Cayman Islands on April 26, 2005. We chose the Cayman Islands as our place of incorporation because we believe investors are increasingly familiar with Asia-based technology companies reorganizing as Cayman Islands companies for purposes of listing their shares in the form of ADSs in the United States and therefore are likely to be more familiar with the laws, regulations and articles of association governing Cayman Islands companies. Since we are a holding company, our only asset (prior to the completion of this offering) is our shares of Himax Technologies Limited, or Himax Taiwan, our wholly owned subsidiary in Taiwan, through which we conduct substantially all of our business. As a result of our reorganization and share exchange undertaken prior to this offering, 100% of our outstanding shares (immediately after the share exchange) are owned by former shareholders of Himax 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.

 

Our principal executive offices are located at 10th Floor, No. 605, Chungshan Road, Hsinhua, Tainan County 712, Taiwan, Republic of China. Our telephone number at this address is +886 (6) 505-0880. Our registered office in the Cayman Islands is located at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681 GT, Georgetown, Grand Cayman, Cayman Islands. Our telephone number at this address is +(1-345) 949-1040. In addition, we have regional offices in Hsinchu and Taipei, Taiwan; Suzhou and Shenzhen, China; Yokohama, Japan; and Anyangsi Kyungkido, South Korea.

 

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.himax.com.tw. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

 

2


Table of Contents

THE OFFERING

 

American depositary shares offered

 

by us

12,561,753 ADSs

 

by the selling shareholders

39,438,247 ADSs

 

Total

52,000,000 ADSs

 

Price per ADS

We currently estimate that the initial public offering price will be between $7.50 and $9.00 per ADS.

 

The ADSs

Each ADS represents one ordinary share, par value $0.0001 per ordinary share. The ADSs will be evidenced by American depositary receipts, or ADRs. You will have the rights of an ADR holder as provided in a deposit agreement entered into among us, the depositary and holders and beneficial owners of ADSs from time to time, dated                 , 2006. To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Over-allotment option

We have granted a 30-day option (commencing from the date of this prospectus) to the underwriters to purchase up to an additional 7,800,000 ADSs to cover over-allotments of ADSs.

 

ADSs outstanding immediately after this offering

52,000,000 ADSs (or 59,800,000 ADSs if the underwriters exercise their over-allotment option in full).

 

Ordinary shares outstanding immediately after this offering

194,650,633 ordinary shares (or 202,450,633 ordinary shares if the underwriters exercise their over-allotment option in full). The number of ordinary shares outstanding immediately after this offering excludes (i) the 988,169 ordinary shares representing the unvested portion of the RSUs granted (as described in “—Restricted share units”) and (ii) the 15,769,143 ordinary shares remaining reserved for future issuance under our 2005 long-term incentive plan.

 

Use of proceeds

We intend to use a portion of the net proceeds (1) to fund our capital expenditures of approximately $26.1 million, including the purchase of equipment, software, and costs of construction for our new headquarters in Tainan, Taiwan; (2) to repay various short-term loans in the total principal amount of approximately $38.4 million; and (3) for general corporate purposes.

 

 

We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ADSs.

 

3


Table of Contents

Listing

We have applied for approval to have our ADSs included for quotation on the Nasdaq National Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

Proposed Nasdaq National Market symbol

“HIMX”

 

Depositary

Deutsche Bank Trust Company Americas

 

Lock-up

We have agreed, subject to certain exceptions, not to transfer or dispose of, directly or indirectly, any of our ordinary shares or securities convertible into or exchangeable or exercisable for our ordinary shares, in the form of ADSs or otherwise, for a period of 180 days after the date of this prospectus. Each of CMO, Jordan Wu, Dr. Biing-Seng Wu, Jung-Chun Lin, Chun-Yen Chang, Yuan-Chuan Horng, Chih-Chung Tsai, Max Chan, Baker Bai and John Chou has agreed to similar restrictions, for a period of 360 days after the date of this prospectus.

 

 

In addition, we have agreed not to facilitate, and Deutsche Bank Trust Company Americas has agreed not to effect, any deposit of our ordinary shares against the issuance of ADSs for 180 days after the date of this prospectus. For more detailed information, see “Shares Eligible for Future Sale” and “Underwriters.”

 

Restricted share units

We adopted a long-term incentive plan in October 2005 which permits the grant of options or restricted share units, or RSUs, to our employees, directors and service providers. RSUs are subject to certain conditions as described in the award document. We committed to pay a bonus to our employees to settle the accrued bonus payable in respect of their service provided in 2004 and the ten months ended October 31, 2005, which was satisfied through a grant of 990,220 RSUs on December 30, 2005. All RSUs granted to employees as a bonus vested immediately on the grant date.

 

 

We made an additional grant of 1,297,564 RSUs to our employees on December 30, 2005. The vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on each of September 30, 2006, 2007 and 2008, subject to certain forfeiture events.

 

 

We also made a grant of 20,000 RSUs to our independent directors on December 30, 2005. The vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on each of June 30, 2006, 2007 and 2008, subject to certain forfeiture events.

 

4


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following summary consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The summary consolidated statement of operations data for the years ended December 31, 2003, 2004 and 2005 and the summary consolidated balance sheet data as of December 31, 2004 and 2005 are derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by KPMG Certified Public Accountants and were prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our consolidated financial statements include the accounts of Himax Technologies, Inc. and its subsidiaries as if we had been in existence for all years presented. As a result of our recent reorganization, 100% of our outstanding ordinary shares are owned by former shareholders of Himax Taiwan. See “Corporate History and Related Party Transactions.” This reorganization is a change in legal organization for which no change in accounting basis is appropriate. Therefore, in presenting our consolidated financial statements, the assets and liabilities, revenues and expenses of Himax Taiwan and its subsidiaries are included in our consolidated financial statements at their historical amounts for all periods presented. Our historical results do not necessarily indicate results expected for any future periods.

 

     Year Ended December 31,

               2003          

              2004          

             2005          

     (in thousands, except per share data)

Consolidated Statements of Operations Data:

                     

Revenues

   $ 131,843     $ 300,273    $ 540,204

Costs and expenses(1):

                     

Cost of revenues

     100,102       235,973      419,380

Research and development

     21,077       24,021      41,278

General and administrative

     4,614       4,654      6,784

Sales and marketing

     2,669       2,742      4,762
    


 

  

Total costs and expenses

     128,462       267,390      472,204
    


 

  

Operating income

     3,381       32,883      68,000
    


 

  

Net income (loss)(2)

   $ (581 )   $ 36,000    $ 61,558
    


 

  

Earnings (loss) per ordinary share(2) and per ADS(3):

                     

Basic

   $ (0.00 )   $ 0.21    $ 0.35

Diluted

   $ (0.00 )   $ 0.21    $ 0.34

Weighted-average number of shares used in earnings per share computation:

                     

Basic

     116,617       169,320      176,105

Diluted

     116,617       173,298      180,659

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

 

     Year Ended December 31,

     2003

   2004

   2005

     (in thousands)

Cost of revenues

   $ 827    $ 291    $ 188

Research and development

     11,666      4,288      6,336

General and administrative

     2,124      721      848

Sales and marketing

     1,349      537      1,241
    

  

  

Total

   $ 15,966    $ 5,837    $ 8,613
    

  

  

 

(2)   Under the ROC Statute for Upgrading Industries, we are exempt from income taxes for income attributable to expanded production capacity or newly developed technologies. If we had not been exempt from paying this income tax, net income and basic and diluted earnings per share would have been $52.4 million, $0.30 and $0.29 for the year ended December 31, 2005, respectively. This tax exemption expires on March 31, 2009.
(3)   Each ADS represents one ordinary share. Earnings (loss) per ADS are unaudited.

 

5


Table of Contents

The following table presents a summary of our consolidated balance sheet data as of December 31, 2004 and 2005:

 

     As of December 31,

     2004

   2005

     (in thousands)

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

   $ 5,577    $ 7,086

Accounts receivable, net

     26,860      80,158

Accounts receivable from related parties

     39,285      69,688

Inventories

     54,092      105,004

Total current assets

     144,414      300,056

Total assets

     157,770      327,239

Short-term debt

          27,274

Accounts payable

     38,649      105,801

Total current liabilities

     52,157      160,784

Total liabilities

     52,246      160,784

Total stockholders’ equity

     104,860      165,831

 

6


Table of Contents

RISK FACTORS

 

You should carefully consider the risks described below in conjunction with the other information and our consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. Our business, financial condition or results of operations could be materially and adversely affected by any of these risks. The trading price of our ADSs could decline due to any of these risks, and you may lose all or part of your investment.

 

This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements due to the material risks that we face described below.

 

Risks Related to Our Business

 

Our limited operating history makes it difficult for us to forecast our revenues and plan our expenses accurately, or to evaluate our business and prospects appropriately.

 

We commenced operations in June 2001 and have only a limited operating history, which may not provide a meaningful basis on which to evaluate our business. Our limited operating history, combined with the rapidly evolving nature of the flat panel display semiconductor industry and other factors that are beyond our control, makes it difficult to accurately forecast our future revenues and budget our operating expenses. We have limited historical financial data from which to predict our future revenues and expenses. Most of our expenses are fixed in the short term or incurred in advance of anticipated revenues; therefore, we may not be able to reduce our expenses in a timely manner to offset any shortfall in revenues.

 

We may not have sufficient experience to address the risks frequently encountered by companies with limited operating history, including our potential failure to:

 

    maintain our profitability;

 

    preserve our position in the large-sized panel display driver market;

 

    acquire and retain customers;

 

    secure satisfactory performance from our semiconductor manufacturing service providers;

 

    diversify our revenue sources by successfully developing, designing and selling products other than large-sized panel display drivers;

 

    develop display drivers with more advanced features and for use in different applications;

 

    attract, train, motivate and retain qualified personnel;

 

    keep up with evolving industry standards and market developments;

 

    manage our expanding operations and product offerings, including the integration of any future acquisitions;

 

    raise our brand recognition, maintain and enhance our reputation and develop customer loyalty;

 

    anticipate and adapt to any changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics;

 

    maintain adequate control of our expenses; or

 

    manage risks relating to intellectual property rights, including the protection of our proprietary technologies.

 

If we were unsuccessful in addressing any of these risks, our business would be materially and adversely affected.

 

7


Table of Contents

We do not expect to sustain our recent growth rate in revenues or net income, so you should not rely on the results of recent periods as an indication of future revenues or net income growth.

 

Our revenues and net income have grown significantly since our inception in 2001. Our annual revenues increased by 127.8% to $300.3 million in 2004 and further increased by 79.9% to $540.2 million in 2005. Our net income increased from a net loss of $0.6 million in 2003 to a net income of $36.0 million in 2004 and then further increased to a net income of $61.6 million in 2005. We do not expect similar growth rates in our revenues and net income in future periods. Accordingly, you should not rely on the results of any prior quarterly or annual periods as indicative of our future revenues or net income growth or financial results.

 

We face numerous challenges relating to our growth.

 

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

 

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

 

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

 

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

 

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

 

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

 

    manage our financial condition.

 

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

 

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

 

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

 

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

 

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

 

    the loss of one or more of our key customers;

 

    decreases in the average selling prices of our products;

 

    our accumulation of inventory;

 

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

 

8


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

 

    changes in the availability of capacity of semiconductor manufacturing service providers;

 

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

 

    the evolution of industry standards and technologies;

 

    product obsolescence and our ability to manage product transitions;

 

    our involvement in litigation or other types of disputes;

 

    general economic conditions; and

 

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

 

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

 

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

 

In 2004 and 2005, approximately 97.3% and 96.3% of our revenues, respectively, was attributable to display drivers that were incorporated into TFT-LCD panels. We expect to be substantially dependent on sales to the TFT-LCD panel industry for the foreseeable future. The TFT-LCD panel industry is intensely competitive and is vulnerable to cyclical market conditions. The average selling prices of TFT-LCD panels could decline for numerous reasons, including the following:

 

    a surge in manufacturing capacity due to the ramping up of new fabrication facilities;

 

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

 

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

 

There have been industry reports of a possible oversupply of large-sized TFT-LCD panels in 2006, which could result in downward pricing pressure on TFT-LCD panel manufacturers. The downward pricing pressure faced by TFT-LCD panel manufacturers could result in similar downward pricing pressure on us as our customers seek price reductions or cheaper alternatives. We cannot assure you that we will be able to reduce costs to offset such downward pricing pressure. Moreover, during periods of declining average selling prices for TFT-LCD panels, TFT-LCD panel manufacturers may decrease capacity utilization and sell fewer panels, which could depress demand for our display drivers. As a result, the cyclicality of the TFT-LCD panel industry could adversely affect our revenues, cost of revenues and results of operations.

 

9


Table of Contents

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

 

Access to foundry capacity is critical to our business because we do not manufacture our own wafers and instead rely primarily on two third-party foundries. The ability of a foundry to manufacture our semiconductor products is limited by its available capacity. Access to capacity is especially important due to the limited availability of high-voltage CMOS process technology required for the manufacture of wafers used in display drivers. We do not have binding long-term supply arrangements with third-party foundries that guarantee us access to foundry capacity. As a result, if the primary third-party foundries that we rely upon were not able to meet our required capacity, or if our business relationships with these foundries were adversely affected, we would not be able to obtain the required capacity from these foundries and would have to seek alternative foundries, which may not be available on commercially reasonable terms, or at all, or which may expose us to risks associated with qualifying new foundries, as further discussed below. Our results of operations and business prospects could be adversely affected as a result of the foregoing.

 

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

 

Taiwan Semiconductor Manufacturing Company, or TSMC, and Vanguard International Semiconductor Corporation, or Vanguard, have historically manufactured substantially all of our wafers. In order to diversify our foundry sources, we have begun to use Macronix International Co., Ltd., or Macronix, and Lite-on Semiconductor Corp., or Lite-on, 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 cost;

 

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

 

    the unavailability of, or potential delays in obtaining access to, key process technologies.

 

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

 

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

 

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

 

    delay and time required (approximately one year) to qualify and ramp up production at a new high voltage foundry; and

 

    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, a scarcity in foundry capacity could necessitate making investments in foundries

 

10


Table of Contents

in order to secure additional capacity, which would require us to substantially increase our capital outlays and possibly raise additional capital, which may not be available to us on satisfactory terms, if at all.

 

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

 

There is a limited number of companies which supply processed tape used to manufacture our semiconductor products, and therefore, from time to time, shortages of such processed tape may occur. If any of our suppliers experience difficulties in delivering processed tape used in our products, we may not be able to locate alternative sources in a timely manner. Moreover, if shortages of processed tape were to occur, we would incur additional costs or be unable to ship our products to our customers in a timely fashion, all of which could harm our business and our customer relationships and negatively impact our earnings.

 

The loss of, or our inability to secure sufficient capacity at, any of the third-party assembly and testing houses that assemble and test our products could disrupt our shipments, harm our customer relationships and reduce our sales.

 

Access to third-party assembly and testing capacity is critical to our business because we do not have in-house assembly and testing capabilities and instead rely on third-party service providers. Access to capacity is especially important to our business because display drivers require specialized assembly and testing services. A limited number of third-party assembly and testing houses assemble and test substantially all of our current products. We do not have binding long-term supply arrangements with assembly and testing service providers that guarantee us access to capacity. If the primary assembly and testing service providers that we rely upon were not able to meet our requirements, or if our business relationships with these service providers were adversely affected, we would not be able to obtain the required capacity from such providers and would have to seek alternative providers, which may not be available on commercially reasonable terms, or at all. As a result, we do not directly control our product delivery schedules, assembly and testing costs and quality assurance and control. If any of these third-party assembly and testing houses experiences capacity constraints or financial difficulties or suffers any damage to its facilities, or if there is any other disruption of its assembly and testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner. We typically procure services from assembly and testing houses on a per-order basis. Because of the amount of time we usually take to qualify assembly and testing houses, we may experience significant delays in product shipments if we are required to find alternative source. Any problems that we may encounter with the delivery, quality or cost of our products could damage our reputation and result in a loss of customers and orders.

 

Shortages of other key components for our customers’ products could delay our ability to sell our products.

 

Shortages of components and other materials that are critical to the design and manufacture of our customers’ products may limit our sales. These components include color filters, backlights and glass substrates. In the past, companies that use our products have experienced delays in the availability of key components from other suppliers. For example, some TFT-LCD panel manufacturers experienced a shortage of glass substrates in 2001, 2003 and 2004, as well as color filters in 2003 and 2004. While shortages of components and other materials critical to the design and manufacture of our customers’ products have yet to limit our sales, such delays could cause a slowdown in demand and a decrease in sales for our products.

 

We depend on two customers for a substantial majority of our revenues and the loss of, or a significant reduction in orders from, either of them would significantly reduce our revenues and adversely impact our operating results.

 

Our top two customers, CMO and CPT, together with their respective affiliates, accounted for approximately 63.2% and 19.5%, respectively, of our revenues in 2004 and for approximately 58.9% and 16.2%,

 

11


Table of Contents

respectively, of our revenues in 2005. The loss of either CMO or CPT as our customer or a sharp reduction in sales to either customer would have a significant negative impact on our business. As further discussed below, our sales to these customers are made pursuant to standard purchase orders rather than contracts. These customers may cancel or reduce orders more readily than if we had long-term purchase commitments from them. In the event of a cancellation or reduction of an order, we would likely not be able to reduce operating expenses sufficiently so as to minimize the impact of the lost revenues. In the alternative, we may have excess inventory that we cannot sell, which would harm our operating results. We expect our reliance on sales to CMO and CPT and their respective affiliates to continue in the foreseeable future. Therefore, our operating results will likely continue to depend on sales to a relatively small number of customers, as well as on the ability of such customers to sell products that incorporate our products.

 

Failure to attract new customers may limit our growth prospects.

 

We face challenges in attracting new customers for our existing products as well as new products. Marketing our display drivers to other TFT-LCD panel manufacturers that have established relationships with our competitors may be difficult. Moreover, several TFT-LCD panel manufacturers have in-house design capabilities and therefore may not need to source semiconductor products from us. To sell new products, we will likely need to target new market segments and new customers with whom we do not have current relationships, which may require different strategies and may present difficulties that we may not have encountered before. Therefore, failure to broaden our customer base and attract new customers may limit our growth prospects.

 

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

 

Multiple display drivers are required for each large-sized panel to function. We are designing higher-channel display drivers to reduce the number of display drivers required for each large-sized panel while achieving the same resolution. By developing such innovative and cost-effective display driver solutions, we hope to grow our market share, attract additional customers, increase our average selling prices and capture new design wins. We cannot assure you that developing such display drivers with a higher number of channels will successfully achieve the foregoing goals. If we fail to attain the foregoing goals, and the decrease in revenues as a result of the reduction in the number of display drivers we sell per panel is not offset by the increase in average selling prices or our sales, our revenues may decline.

 

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

 

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

 

12


Table of Contents

business and growth prospects. We may also incur increased operating expenses and be required to divert the attention of other senior executives to recruit replacements for key personnel.

 

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

 

The lead time required by the semiconductor manufacturing service providers we use to manufacture our products is typically longer than the lead time that our customers provide to us for delivery of our products to them. Therefore, to ensure availability of our products for our customers, we will typically ask our semiconductor manufacturing service providers to start manufacturing our products based on forecasts provided by these customers in advance of receiving purchase orders. However, these forecasts are not binding purchase commitments, and we do not recognize revenues from these products until they are shipped to customers. Moreover, for the convenience of our customers, we may agree to ship our inventory to warehouses located near our customers, so that our products can be delivered to our customers more quickly. We may from time to time agree that title and risk of loss do not pass to our customer until the customer requests delivery of our products from such warehouses. In such case, we will not recognize revenues from these products until the title and risk of loss has passed to our customers based on the shipping terms, which is generally when they are delivered to our customers from these warehouses. As a result, we incur inventory and manufacturing costs in advance of anticipated revenues. Anticipated demand for our products may not materialize; therefore, manufacturing based on customer forecasts exposes us to risks of high inventory carrying costs and increased product obsolescence and may increase our costs. If we overestimate demand for our display drivers or if purchase orders are cancelled or shipments delayed, we may incur excess inventory that we cannot sell, which would harm our financial results. Conversely, if we underestimate demand, we may not have sufficient inventory and may lose market share and damage customer relationships, which also could harm our business. Obtaining additional supply in the face of product shortages may be costly or impossible, particularly in the short term, which could prevent us from fulfilling orders. These inventory risks are exacerbated by the high level of customization of our products, which limits our ability to sell excess inventory to other customers.

 

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

 

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

 

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

 

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

 

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

 

13


Table of Contents

success of those products. Thus, a design win may not necessarily generate significant revenues if our customers’ products are not commercially successful.

 

Some of our semiconductor products are manufactured at only one foundry. If any foundry is unable to provide the capacity we need, we may experience delays in shipping our products, which could damage our customer relationships and result in reduced revenues and higher expenses.

 

Although we use several foundries for different semiconductor products, certain of our products are manufactured at only one of these foundries. If any one of the sole foundries we use for a specific product is unable to provide us with our required capacity, we could experience significant delays in delivering the product being manufactured for us by that foundry. Also, if any of the foundries we use experience financial difficulties, if their foundry operations are damaged or if there is any other disruption of their foundry operations, we may not be able to qualify an alternative foundry in a timely manner. If we choose to use a new foundry or process technology for a particular semiconductor product, we believe that it will take us several months to qualify the new foundry or process before we can begin shipping such products. If we cannot qualify a new foundry in a timely manner, we may experience a significant interruption in our supply of the affected products, which could reduce our revenues, increase our expenses and damage our customer relationships.

 

An adverse change to our relationship with CMO could have a material adverse effect on our business.

 

CMO is one of our largest shareholders, beneficially owning approximately 13.6% of our outstanding shares as of December 31, 2005, and is also our largest customer, accounting (together with its affiliates) for approximately 58.9% of our revenues in 2005. Our engineers work closely with CMO’s engineers to design display drivers used in TFT-LCD panels manufactured by CMO. We have entered into various transactions with CMO in the past, and we expect to continue to do so in the future. See “Corporate History and Related Party Transactions.” If our relationship with CMO deteriorates for any reason, our business could be materially and adversely affected.

 

Our products are complex and may require modifications to resolve undetected errors or failures, which could lead to higher costs, a loss of customers or a delay in market acceptance of our products.

 

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

 

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

 

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

 

The manufacture of our products is a complex process, and it is often difficult for semiconductor foundries to manufacture our products free of defects. Minor deviations in the manufacturing process can cause substantial decreases in yield and quality. In particular, some of our products are highly integrated and incorporate mixed

 

14


Table of Contents

analog and digital signal processing and embedded memory technology and thus are even more difficult to manufacture without defects.

 

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

 

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

 

We do not have long-term purchase commitments from our customers; our sales are made on the basis of individual purchase orders. Our customers may also cancel or defer purchase orders. Our customers’ purchase orders may vary significantly from period to period, and it is difficult to forecast future order quantities. In addition, changes in our customers’ business may adversely affect the quantity of purchase orders we receive. For example, one of our customers substantially reduced the utilization rate of its production facilities in late 2005 in connection with its renovation plans and, as a result, the quantity of purchase orders we received from this customer decreased substantially. We cannot assure you that any of our customers will continue to place orders with us in the future at the same level as in prior periods. We also cannot assure you that the volume of our customers’ orders will be consistent with our expectations when we plan our expenditures. Our results of operations and financial condition may thus be affected materially and adversely.

 

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

 

As of December 31, 2005, we had two customers that each represented more than 10% of our accounts receivable balance. CMO and CPT, together with their respective affiliates, represented approximately 45.5% and 27.6%, respectively, of our total accounts receivable as of December 31, 2005. Moreover, we have at times agreed to extend the payment terms for certain of our customers. Other customers have also requested extension of payments terms, and we may grant such requests for extension in the future. As a result, a default by any such customer, a prolonged delay in the payment of accounts receivable or the extension of payment terms for our customers would adversely affect our cash flow, liquidity and our operating results.

 

We depend on sales of display drivers used in TFT-LCD panels, and the absence of continued market acceptance of our display drivers could harm our business.

 

In 2004 and 2005, we derived nearly all of our revenues from the sale of display drivers used in TFT-LCD panels, and we expect to continue to derive a substantial portion of our revenues from these or related products. In particular, display drivers used in large-sized panels represented approximately 85.9% and 87.1% of our revenues in 2004 and 2005, respectively. Continued market acceptance of our display drivers is therefore critical to our future success.

 

15


Table of Contents

Our strategy of expanding our product offerings to liquid crystal on silicon products may not be successful.

 

We have devoted, and intend to continue to devote, financial and management resources to the development, manufacturing and marketing of LCOS products. LCOS products utilize a form of LCD reflective technology to produce high-resolution images. We believe that end-use products utilizing LCOS products (such as near-to-eye applications, rear projection televisions and mini-projectors) could potentially be a large market. LCOS technology, however, is at a relatively early stage of commercialization and the production of products using LCOS technology at acceptable yields has proven difficult. We cannot assure you that we will be able to develop, design and manufacture such products at costs and with performance specifications acceptable to customers. Moreover, the market acceptance of LCOS technology is still unproven. Wide acceptance of LCOS technology would require brand name electronics companies devoting substantial resources to promote products based on this technology. Furthermore, for near-to-eye devices utilizing LCOS technology (such as wearable display devices embedded in goggles or eyewear) to become widely accepted, consumers must first become accustomed to wearing such devices. By devoting resources to the development of LCOS products we may negatively affect the development of our other products. If the LCOS market does not develop as we expect, our LCOS strategy may result in operating losses in this aspect of our business and may adversely affect our results of operations and growth prospects.

 

Potential conflicts of interest with CMO may affect our sales decisions and allocations. Our chairman also holds key management positions at CMO and may not be able to allocate sufficient time and resources to both companies.

 

We have a close relationship with CMO. CMO is one of our largest shareholders and has been our largest customer since our inception, and certain of our directors also hold key management positions at CMO. Jung-Chun Lin, our director, serves on our board in his capacity as a representative of CMO and also holds the positions of director, vice president, chief financial officer and chief accounting officer at CMO. Dr. Biing-Seng Wu, our chairman, is also a director, senior vice president and chief technology officer of CMO. We cannot assure you that our close relationship with CMO and potential conflicts of interest will not affect our sales decisions or allocations or that potential conflicts of interest with respect to representatives of CMO will be resolved in our favor. Moreover, Dr. Biing-Seng Wu, who holds key positions with both CMO and us, may not be able to allocate sufficient time and resources to both companies.

 

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

 

After this offering, our directors, executive officers and affiliated entities will beneficially own approximately 37.9% of our outstanding ordinary shares. As of December 31, 2005, Jordan Wu and Dr. Biing- Seng Wu (who are brothers) beneficially owned approximately 6.1% and 17.7% of our ordinary shares, respectively, and CMO beneficially owned approximately 13.6% of our ordinary shares. For information relating to the beneficial ownership of our ordinary shares, see “Principal and Selling Shareholders.” These shareholders, if they acted together, could exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. Actions may be taken even if they were opposed by our other shareholders, including those who purchase ADSs in this offering.

 

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

 

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We have

 

16


Table of Contents

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

 

    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.

 

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

 

We believe that the protection of our intellectual property rights is, and will continue to be, important to the success of our business. We rely primarily on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain, copy or use information that we regard as proprietary, such as product design and manufacturing process expertise. As of December 31, 2005, we had 105 U.S. patent applications pending and 135 Taiwan patent applications pending. Our pending patent applications and any future applications may not result in issued patents or may not be sufficiently broad to protect our proprietary technologies. Moreover, policing any unauthorized use of our products is difficult and costly, and we cannot be certain that the measures we have implemented will prevent misappropriation or unauthorized use of our technologies, particularly in foreign jurisdictions where the laws may not protect our proprietary rights as fully as the laws of the United States. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to protect our intellectual property effectively could harm our business.

 

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

 

As part of our growth and product diversification strategy, we will continue to evaluate opportunities to acquire or invest in other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of markets we can address or enhance our technical capabilities. Acquisitions or investments that we may potentially make in the future 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 on existing business relationships with customers;

 

17


Table of Contents
    need for financial resources above our planned investment levels;

 

    failures in recognizing 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; and

 

    potential expenses related to the amortization of intangible assets.

 

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

 

Risks Related to Our Industry

 

The semiconductor industry, in particular the display driver and television semiconductor solutions segments, is highly competitive, and we cannot assure you that we will be able to compete successfully against our competitors.

 

The semiconductor industry, in particular the display driver and television semiconductor solutions segments, is highly competitive. Increased competition may result in price pressure, reduced profitability and loss of market share, any of which could seriously harm our revenues and results of operations. Competition principally occurs at the design stage, where a customer evaluates alternative design solutions that require display drivers. We continually face intense competition from fabless display driver companies as well as from integrated device manufacturers. Some of our competitors have substantially greater financial and other resources than us with which to pursue engineering, manufacturing, marketing and distribution of their products. As a result, they may be able to respond more quickly to changing customer demands or devote greater resources to the development, promotion and sales of their products than we can. Some of our competitors have manufacturing capabilities as well as in-house design operations that may give them significant advantages such as higher research and development budgets and the ability to attract highly skilled engineers. We cannot assure you that we will be able to increase or maintain our revenues and market share, or compete successfully against our current or future competitors in the semiconductor industry.

 

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

 

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

 

18


Table of Contents

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

 

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

 

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

 

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

 

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

 

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

 

19


Table of Contents

Risks Relating to Our Holding Company Structure

 

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

 

We are a holding company, and prior to this offering, our only asset is our 100% ownership interest in Himax Taiwan. Dividends and interest on intercompany loans we receive from our subsidiaries in Taiwan, if any, will be subject to withholding tax under ROC law. The ability of our subsidiaries to pay dividends, repay intercompany loans from us or make other distributions to us is restricted by, among other things, the availability of funds, the terms of various credit arrangements entered into by our subsidiaries, as well as statutory and other legal restrictions, including the ROC government’s right to revoke repatriation of profits. See “— Political, Geographical and Economic Risks — If we failed to satisfy the undertakings we made to the ROC Investment Commission in connection with our application seeking approval of the share exchange, the ROC Investment Commission could take actions against us that would materially and adversely affect our business, financial condition and results of operations and decrease the value of our ADSs.” In addition, although there are currently no foreign exchange control regulations which restrict the ability of our subsidiaries located in Taiwan to distribute dividends to us, we cannot assure you that the relevant regulations will not be changed and that the ability of our subsidiaries to distribute dividends to us will not be restricted in the future. A Taiwan company is generally not permitted to distribute dividends or to make any other distributions to shareholders for any year in which it did not have either earnings or retained earnings (excluding reserves). In addition, before distributing a dividend to shareholders following the end of a fiscal year, the company must recover any past losses, pay all outstanding taxes and set aside 10% of its annual net income (less prior years’ losses and outstanding taxes) as a legal reserve until the accumulated legal reserve equals its paid-in capital, and may set aside a special reserve.

 

Any limitation on dividend payments by our subsidiaries could materially and adversely affect our ability to grow, finance capital expenditures, make acquisitions, pay dividends, and otherwise fund and conduct our business.

 

Our ability to make further investments in Himax Taiwan may be dependent on regulatory approvals. If Himax Taiwan is unable to receive the equity financing it requires, its ability to grow and fund its operations may be materially and adversely affected.

 

Since Himax Taiwan is not a listed company, it generally depends on us to meet its equity financing requirements. Any capital contribution by us to Himax Taiwan may require the approval of the relevant ROC authorities such as the Investment Commission of the Ministry of Economic Affairs of the ROC, or the ROC Investment Commission. We may not be able to obtain any such approval in the future in a timely manner, or at all. If Himax Taiwan is unable to receive the equity financing it requires, its ability to grow and fund its operations may be materially and adversely affected.

 

Political, Geographical and Economic Risks

 

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

 

Most of our operations, and the operations of many of our semiconductor manufacturing service providers, suppliers and customers are located in Taiwan, which is vulnerable to natural disasters, in particular, earthquakes and typhoons. Our principal foundries and assembly and testing houses upon which we have relied to manufacture substantially all of our display drivers are located in Taiwan. In 2005, approximately 89.4% of our revenues was derived from customers headquartered in Taiwan. As a result of this geographic concentration, disruption of operations at our facilities or the facilities of our semiconductor manufacturing service providers, suppliers and customers for any reason, including work stoppages, power outages, water supply shortages, fire, typhoons, earthquakes, contagious diseases or other natural disasters, could cause delays in production and

 

20


Table of Contents

shipments of our products. Any delays or disruptions could result in our customers seeking to source products from our competitors. Shortages or suspension of power supplies have occasionally occurred and have disrupted our operations. The occurrence of a power outage in the future could seriously hurt our business.

 

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

 

Strained relations between the PRC and the ROC could negatively affect our business and the market price of our ADSs.

 

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

 

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

 

If the U.S. dollar or other currencies in which our sales, processed tape and component purchases and capital expenditures are denominated fluctuate significantly against the NT dollar or the Japanese yen, our profitability may be seriously affected.

 

We have significant foreign currency exposure, and are primarily affected by fluctuations in exchange rates among the U.S. dollar, the Japanese yen, the NT dollar and other currencies. Our revenues, processed tape and component purchases and capital expenditures are denominated in U.S. dollars, Japanese yen and NT dollars in varying amounts. For example, in 2005, approximately 98.5% of our revenues was denominated in U.S. dollars. During the same period, approximately 67.3%, 9.8% and 22.9% of our cost of revenues (principally wafers, processed tape and component purchases) were denominated in U.S. dollars, Japanese yen and NT dollars, respectively. From time to time, we enter into forward contracts to hedge our foreign currency exposure, but we cannot assure you that this will adequately protect against us the risk of exchange rate fluctuations and reduce the impact on our results of operations.

 

A decrease in the support of the ROC government may increase our tax expenditures and decrease our net income.

 

The ROC government has been very supportive of Taiwan-incorporated technology companies such as Himax Taiwan. In particular, Himax Taiwan, like many Taiwan technology companies, has benefited from substantial tax incentives provided by the ROC government. The ROC Statute for Upgrading Industries entitles companies to tax credits for expenses relating to qualifying research and development, personnel training and

 

21


Table of Contents

purchases of qualifying machinery. This tax credit may be applied within a five-year period. The amount from the tax credit that may be applied in any year is limited to 50% of the income tax payable for that year (with the exception of the final year when the remainder of the tax credit may be applied without limitation to the total amount of the income tax). Under the ROC Statute for Upgrading Industries, Himax Taiwan was granted tax credits by the ROC Ministry of Finance at rates set at a certain percentage of the amount utilized in qualifying research and development and personnel training expenses. The balance of unused investment tax credits totaled $0.5 million, $4.7 million and $9.4 million as of December 31, 2003, 2004 and 2005, respectively. In addition, the ROC Statute for Upgrading Industries provides to companies deemed to be operating in important or strategic industries a five-year tax exemption for income attributable to expanded production capacity or newly developed technologies. Such expanded production capacity or newly developed technologies must be funded in whole or in part from either initial capital investment made by a company’s shareholders, a subsequent capital increase or a capitalizing of a company’s retained earnings. Since April 1, 2004, Himax Taiwan has been entitled to such preferential tax treatment for a period of five years, which expires on March 31, 2009. As a result of this preferential tax treatment, income attributable to certain of our expanded production capacity or newly developed technologies is tax exempt for the duration of this five-year period. If the ROC government changed the laws to terminate, decrease or otherwise adversely change such tax incentives, our tax expenditures could increase, resulting in a decrease in our net income. For instance, if we did not have this tax exemption, net income and basic and diluted earnings per ordinary share would have been $52.4 million, $0.30 and $0.29 for the year ended December 31, 2005, respectively.

 

If we failed to satisfy the undertakings we made to the ROC Investment Commission in connection with our application seeking approval of the share exchange, the ROC Investment Commission could take actions against us that would materially and adversely affect our business, financial condition and results of operations and decrease the value of our ADSs.

 

Our current corporate structure was established through a share exchange, which became effective on October 14, 2005, between us and the former shareholders of Himax Taiwan. The share exchange was subject to the review and approval of the ROC Investment Commission, an agency under the administration of the ROC Ministry of Economic Affairs established for the purposes of promoting Taiwan’s economic development and attracting foreign investments. It has supervisory and regulatory authority for matters relating to, among other things, inbound investments in Taiwanese companies by non-ROC persons and overseas ROC nationals, and outbound investments by Taiwanese companies or individuals.

 

In connection with our application seeking approval of the share exchange, we and Himax Taiwan made the following undertakings to the ROC Investment Commission:

 

    to purchase three hectares of land in connection with the construction of our new headquarters in Tainan, Taiwan;

 

    to increase the number of employees in Taiwan to 430 employees, 475 employees and 520 employees by the end of 2005, 2006 and 2007, respectively; and

 

    to invest no less than NT$800.0 million ($24.4 million), NT$900.0 million ($27.4 million) and NT$1.0 billion ($30.5 million) for research and development in Taiwan in 2005, 2006 and 2007, respectively, which may be satisfied through cash-based compensation paid to research and development personnel but not through non-cash share-based compensation.

 

The undertakings do not specify, and the ROC Investment Commission has not required, that the required personnel and research and development expenditures be directed for any particular purpose. Instead, these undertakings allow management discretion on the utilization of such resources. We made the undertakings as assurances of our commitment to invest in Taiwan based on our business plan, the expected growth in 2005, 2006 and 2007 and our anticipated requirements with respect to our headquarter expansion plans, employee headcount projections and research and development requirements.

 

22


Table of Contents

The ROC Investment Commission approved the share exchange subject to our satisfying the above-mentioned undertakings. The failure to satisfy these undertakings could have the following material adverse consequences:

 

Revocation of the Right of Repatriation of Profits. The ROC Investment Commission can (at its discretion) revoke Himax Taiwan’s right to repatriate profits to us. Since we rely on dividend payments from Himax Taiwan, such a restriction would adversely affect our ability to pay dividends to our shareholders.

 

Revocation of the Approval of the Share Exchange. The ROC Investment Commission has the right (at its discretion) to revoke its approval of the share exchange. Prior to exercising this right, in practice we and Himax Taiwan would be notified and given an opportunity to be heard. There are no promulgated rules or regulations setting forth the factors that the ROC Investment Commission would consider in exercising its discretion. Each case is determined individually.

 

Such a revocation could have any of the following material adverse consequences:

 

    We may face difficulties obtaining subsequent ROC Investment Commission approvals for additional investments in Himax Taiwan, including further equity investments such as cash or asset contributions and inter-company loans from us.

 

    We may face difficulties obtaining approval from the ROC Central Bank of China to transfer the net proceeds of this offering (and any future offerings) to Himax Taiwan. Any restriction on our ability to transfer the net proceeds of our capital raising to Himax Taiwan would effectively limit Himax Taiwan’s ability to access the capital markets through us since we are a holding company with no operations and the use of proceeds for any capital raised by us would be for the operations of Himax Taiwan through which substantially all of our operations are conducted.

 

    Himax Taiwan may also lose its status as a foreign-invested company under the ROC Statute for Investment by Foreign Nationals, resulting in the loss of certain protections, including the protection from possible expropriation of the company’s assets.

 

Although we intend to discharge our undertakings to the ROC Investment Commission, we cannot assure you that we would be able to do so under all circumstances. To the extent that we experience no or negative revenue growth as a result of significant company-specific or industry-wide events, we would be limited in our ability to adjust our headcount and research and development expenditures in response to those events. In this case, these undertakings would restrict our operational flexibility and adversely affect our operating margins and results of operations. Nor can we assure you that we would be successful in amending the undertakings if necessary or in appealing to reverse a decision to revoke Himax Taiwan’s right to repatriate profits or the share exchange approval. The occurrence of either revocation would have a material and adverse effect on our business prospects, financial condition and results of operations and decrease the value of our ADSs.

 

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

 

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

 

23


Table of Contents

Risks Related to this Offering

 

There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

 

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. From December 2003 to August 2005, prior to a capital re-organization under which all existing common shares of Himax Taiwan were acquired by us in exchange for our ordinary shares, the common shares of Himax Taiwan were quoted and traded on the Emerging Stock Board of the GreTai Securities Market, or the Emerging Stock Board. During that period, the common shares of Himax Taiwan were generally thinly traded. We have applied to list our ADSs on the Nasdaq National Market. Our ordinary shares will not be listed on any exchange. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

 

The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

 

The market price for our ADSs may be volatile.

 

The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:

 

    actual or anticipated fluctuations in our quarterly operating results;

 

    changes in financial estimates by securities research analysts;

 

    conditions in 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;

 

    addition or departure of key personnel;

 

    fluctuations of exchange rates between U.S. dollar, NT dollar and Japanese yen;

 

    litigation related to our intellectual property; and

 

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

 

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

 

You will experience immediate and substantial dilution in the net tangible book value of ADSs purchased.

 

The initial public offering price per ADS will be substantially higher than the net tangible book value per ADS prior to the offering. Consequently, when you purchase ADSs in the offering, you will incur an immediate dilution of $6.91 per ADS (assuming no exercise by the underwriters of options to acquire additional ADSs), representing the difference between our net tangible book value per ADS as of December 31, 2005, after giving effect to this offering and the mid-point of the initial public offering price of $8.25 per ADS. See “Dilution.”

 

24


Table of Contents

Of our total outstanding shares after this offering, 142,650,633 ordinary shares or 73.3%, will be restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our ADSs to drop significantly, even if our business is doing well.

 

After this offering, we will have outstanding 194,650,633 ordinary shares, based on the number of shares outstanding as of December 31, 2005. This includes the 12,561,753 shares we are selling, and the 39,438,247 shares the selling shareholders are selling, in this offering, all of which shares may be resold in the public market immediately. We have agreed not to facilitate, and Deutsche Bank Trust Company Americas, as depositary, has agreed not to effect, any deposit of our ordinary shares against the issuance of ADSs for 180 days after the date of this prospectus. See “Underwriters” for more detailed information. Therefore, 68,911,436 ordinary shares outstanding immediately after this offering, representing 35.4% of the total outstanding shares immediately after the offering, held by existing shareholders who are not our “affiliates” as that term is defined in Rule 144 under the Securities Act, may be freely tradeable without restriction under the Securities Act, 181 days after the date of this prospectus. The remaining 73,739,197 ordinary shares outstanding immediately after this offering will become available for resale in the public market 361 days after the date of this prospectus upon the expiration of the lock-up agreements between CMO, Jordan Wu, Dr. Biing-Seng Wu, Jung-Chun Lin, Chun-Yen Chang, Yuan-Chuan Horng, Chih-Chung Tsai, Max Chan, Baker Bai, John Chou and the underwriters, subject to restrictions under Rule 144 under the Securities Act or by means of registered public offerings.

 

The underwriters can waive the restrictions of the lock-up agreements at an earlier time without prior notice or announcement and allow shareholders to sell their shares. As restrictions on resale end, the market price of our ADSs could drop significantly if the holders of restricted shares sell such restricted shares or are perceived by the market as intending to sell such restricted shares. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional ADSs. For more detailed information, see “Shares Eligible for Future Sale.”

 

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

 

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

 

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.

 

25


Table of Contents

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

 

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

 

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

 

We are incorporated in the Cayman Islands. A substantial portion of our operations is conducted in Taiwan through Himax Taiwan, our wholly owned subsidiary, and substantially all of our assets are located in Taiwan. All of our directors and officers reside outside the United States, and a substantial portion of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of Taiwan may render you unable to enforce a United States judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and the ROC, see “Enforceability of Civil Liabilities.”

 

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

 

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

 

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

 

26


Table of Contents

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

 

    directors who are interested in a transaction are not required to disclose such interest and there are no provisions under Cayman Islands law which render such director liable to the company for any profit realized pursuant to such transaction;

 

    dissenting shareholders do not have 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; and

 

    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, that a shareholder may consider in its best interest, and the removal of incumbent officers and directors. For more information regarding differences in corporate law between the Cayman Islands and Delaware, see “Description of Share Capital—Differences in Corporate Law.”

 

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.

 

Our management will have considerable discretion as to the use of the net proceeds from this offering.

 

We have not allocated a substantial portion of the net proceeds of this offering to any particular purpose. Rather, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and Nasdaq, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are currently evaluating developments with respect to these new rules, and we cannot predict or estimate with any certainty the amount of additional costs we may incur or the timing of such costs.

 

27


Table of Contents

Investor confidence and the market price of our ADSs may be adversely impacted if we or our independent registered public accountants conclude we have one or more material weaknesses in our internal control over financial reporting as of December 31, 2007, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

 

We will be subject to the SEC’s reporting obligations upon the completion of this offering. The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include in their Annual Report on Form 10-K or Form 20-F, as the case may be, a report of management on the company’s internal controls over financial reporting that contains an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the company’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. These requirements will first apply to our Annual Report on Form 20-F for the fiscal year ending December 31, 2007. Our management may conclude that our internal controls over financial reporting are not effective. Moreover, even if our management does conclude that our internal controls over financial reporting are effective, if our independent registered public accounting firm is not satisfied with our internal controls, the level at which our controls are documented, designed, operated or reviewed, or if our independent registered public accounting firm interprets the requirements, rules or regulations differently from us, then it may decline to attest to our management’s assessment or may issue an adverse or qualified report. Furthermore, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs.

 

We have had control deficiencies in our internal controls over financial reporting in the past and cannot assure you that additional deficiencies or material weaknesses will not be identified in the future.

 

Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we were a newly established private company with limited accounting personnel and other resources with which to address our internal controls and procedures. As a result, in connection with the audit of our consolidated financial statements for the years ended December 31, 2003 and 2004, our independent registered public accounting firm identified two control deficiencies that were significant deficiencies in our internal control procedures which, in their judgment, could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of our management in the financial statements. A significant deficiency is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a more than inconsequential misstatement of the company’s annual or interim financial statements will not be prevented or detected. Specifically, the control deficiencies identified consisted of (1) a lack of personnel with significant U.S. GAAP reporting experience necessary to identify and resolve certain complex U.S. GAAP matters in a timely manner, and (2) the use of manual accounting systems that carry a risk of inconsistent operation, are subject to human error and do not enable timely recording of transactions. In connection with the audit of our consolidated financial statements for the year ended December 31, 2005, our independent registered accounting firm did not identify any significant deficiencies but continued to identify our use of manual accounting systems as a control deficiency and identified two additional control deficiencies related to the lack of a systematic approach for monitoring contracts with accounting implications and the lack of an automated credit control system.

 

We plan to remediate the above-mentioned control deficiency in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. However, we cannot assure you that we will be able to remedy this control deficiency or that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. If the significant deficiencies reported by our independent registered public accounting firm are to recur, or if we identify additional weaknesses or fail to implement new or improved controls successfully in a timely manner, our ability

 

28


Table of Contents

to assure timely and accurate financial reporting may be adversely affected, we may be required to restate our financial statements, and investors could lose confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs, result in lawsuits being filed against us by our shareholders, or otherwise harm our reputation.

 

Significant resources from our management team and additional expenses have been, and may continue to be, required to implement and maintain effective controls and procedures in order to remedy the above-mentioned control deficiency and any additional weaknesses we and our independent registered public accounting firm may identify in our internal control over financial reporting in the future. We have hired, and may need to continue to hire, additional employees and outside consultants with accounting and financial reporting experience (particularly those with U.S. GAAP reporting experience) and further train our existing employees. If additional personnel are needed, we cannot assure you that we will be able to recruit qualified personnel in a timely and cost-efficient manner to meet our requirements.

 

We may become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.

 

Based on the nature of our business, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year. However, whether or not we are a PFIC for any taxable year will be based in part on the character of our income and assets and the value of our assets from time to time, which will be based in part on the trading price of our ADSs, which may be volatile. Accordingly, it is possible that we may be a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which a U.S. investor held an ordinary share or ADS, certain adverse U.S. federal income tax consequences could apply to the U.S. investor. See “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Rules.”

 

29


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things:

 

    our anticipated growth strategies;

 

    our future business developments, results of operations and financial condition;

 

    our ability to develop new products;

 

    the expected growth of the display driver markets;

 

    the expected growth of end-use applications that use flat panel displays, particularly TFT-LCD panels;

 

    development of alternative flat panel display technologies; and

 

    other matters described in this prospectus that are not historical facts.

 

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

30


Table of Contents

USE OF PROCEEDS

 

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option, will be approximately $94.4 million, assuming an initial public offering price of $8.25 per ADS, the midpoint of the estimated range of the initial public offering price. If the underwriters exercise their over-allotment option in full, we will receive approximately $155.5 million. Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $8.25 per ADS would increase (decrease) the net proceeds to us by $11.9 million ($19.3 million if the underwriters exercise their over-allotment option in full). We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

 

We intend to use a portion of the net proceeds:

 

    to fund our capital expenditures of approximately $26.1 million, including the purchase of equipment, software, and costs of construction for our new headquarters in Tainan, Taiwan;

 

    to repay the following loans, in the total principal amount of approximately $38.4 million:
Principal Amount

  Interest Rate

 

Maturity

(may be extended)


(in millions)        
$13.6   One-month SIBOR + 25bps   May 2, 2006
7.6   1.72%   March 26, 2006
6.1   1.60%   April 20, 2006
5.0   Six-month SIBOR + 50bps   July 24, 2006
4.9   1.70%   March 27, 2006
1.2   1.72%   March 26, 2006

 

and

 

    for general corporate purposes.

 

The $13.6 million loan was incurred to finance the payment of a special cash dividend we distributed to shareholders of record as of November 2, 2005. The remaining short-term loans were used for general corporate purposes.

 

We have not yet determined all of our anticipated expenditures and therefore cannot estimate the amounts to be used for each of the purposes discussed above. The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering.

 

31


Table of Contents

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:

 

     Noon Buying Rate

     Average(1)

   High

   Low

   Period-end

     (NT dollars per U.S. dollar)

Period

                   

2000

   31.26    33.25    30.35    33.17

2001

   33.82    35.13    32.23    35.00

2002

   34.54    35.16    32.85    34.70

2003

   34.40    34.98    33.72    33.99

2004

   33.37    34.16    31.74    31.74

2005

                   

First quarter

   31.46    32.22    30.65    31.46

Second quarter

   31.36    31.70    30.98    31.64

Third quarter

   32.29    32.27    31.61    33.18

September

   32.92    33.27    32.52    33.18

October

   33.47    33.77    33.19    33.55

November

   33.58    33.71    33.39    33.51

December

   33.29    33.56    32.80    32.80

2006

                   

January

   32.04    32.59    31.83    31.97

February

   32.32    32.65    31.97    32.40

March (through March 17)

   32.41    32.52    32.28    32.38

Source: Federal Reserve Bank of New York.

Note:  (1)   Determined by averaging the rates on each business day.

 

Except as discussed in the next two sentences, all translations from NT dollars to U.S. dollars and from U.S. dollars to NT dollars in this prospectus were made at a rate of NT$32.80 to $1.00, the noon buying rate in The City of New York for cable transfers in NT dollars per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on December 30, 2005. NT dollar amounts relating to the estimated fair value per share of all share-based compensation issued to employees and consultants have been calculated based on historical exchange rates used for our accounting purposes. No representation is made that the NT dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or NT dollars, as the case may be, at any particular rate or at all. On March 17, 2006, the noon buying rate was NT$32.38 to $1.00.

 

32


Table of Contents

DIVIDEND POLICY

 

Our dividend policy is to retain most, if not all, of our available funds and any future earnings for use in the operation and growth of our business.

 

We distributed a special cash dividend to our shareholders in the amount of approximately $13.6 million, or the equivalent of approximately $0.075 per share based on our total shares outstanding prior to this offering. This dividend was paid to our shareholders in respect of our performance prior to our initial public offering. We decided to pay the dividend in cash instead of shares because our ordinary shares at the time of the dividend payment was not listed on any stock exchange and therefore had limited liquidity. This dividend was approved by our board of directors and was financed through a loan. Because the record date for the payment of the special dividend was November 2, 2005, which was prior to the closing of this offering, purchasers of ADSs sold in connection with this offering, and any subsequent transferees, will not have the right to receive this dividend. This special dividend should not be considered representative of the dividends that would be paid in any future periods or our dividend policy.

 

Our board of directors has full discretion as to whether we will distribute dividends in the future. Even if our board of directors decides to distribute dividends, the form, frequency and amount of such dividends will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as the board of directors may deem relevant.

 

Our ability to pay cash or stock dividends will depend upon the amount of distributions, if any, received by us from our direct and indirect subsidiaries, which must comply with the laws and regulations of their respective countries and respective articles of association. Since its inception in June 2001, Himax Taiwan has paid stock dividends in an amount of 13,517,773 shares on September 1, 2003 and 42,976,372 shares on September 20, 2004 with respect to the fiscal years 2002 and 2003, respectively. However, Himax Taiwan has not paid cash dividends in the past. In accordance with ROC laws and regulations and Himax Taiwan’s articles of incorporation, Himax Taiwan is permitted to distribute dividends after allowances have been made for:

 

    payment of taxes;

 

    recovery of prior years’ deficits, if any;

 

    legal reserve (in an amount equal to 10% of annual net income after having deducted the above items until such time as its legal reserve equals the amount of its total paid-in capital);

 

    special reserve based on relevant laws or regulations, or retained earnings, if necessary;

 

    dividends for preferred shares, if any; and

 

    cash or stock bonus to employees (in an amount less than 10% of annual net income) and remuneration for directors and supervisor(s) (in an amount less than 2% of the annual net income); after having deducted the above items, based on a resolution of the board of directors; if stock bonuses are paid to employees, the bonus may also be appropriated to employees of subsidiaries under the board of directors’ approval.

 

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

 

If we are not able to satisfy our undertakings to the ROC Investment Commission, Himax Taiwan may not be able to pay dividends to us, which may adversely affect your ability to receive dividends because we rely on Himax Taiwan and our other subsidiaries for dividend payments, if any, to our shareholders. See “Risk Factors—Political, Geographical and Economic Risks—If we failed to satisfy the undertakings we made to the ROC Investment Commission in connection with our application seeking approval of the share exchange, the ROC Investment Commission could take actions against us that would materially and adversely affect our business, financial condition and results of operations and decrease the value of our ADSs.”

 

33


Table of Contents

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

 

34


Table of Contents

PRICE RANGE OF COMMON SHARES

 

Prior to the share exchange through which Himax Taiwan became our wholly owned subsidiary on October 14, 2005, the common shares of Himax Taiwan were traded on the Emerging Stock Board from December 26, 2003 to August 10, 2005, under the stock code “3222.” The common shares of Himax Taiwan were delisted from the Emerging Stock Board on August 11, 2005.

 

The Emerging Stock Board was established in January 2002 to facilitate the trading of securities of companies that do not qualify for listing on the Taiwan Stock Exchange or the GreTai Securities Market. We believe that the qualifications for such companies with an emerging stock available for transactions in this trading system are substantially different from those of a public company in a formal exchange or quotation system such as Nasdaq National Market. Moreover, we believe that the trading characteristics of this system differ significantly from those typically associated with formal stock exchanges or quotation systems such as the Nasdaq National Market. For instance, shares are traded in this system through negotiation and not through computerized matching. Additionally, those selling their shares through this trading system are typically required to deposit their share certificates with their securities brokers, who then physically deliver the certificates at settlement. As a result, securities traded in this system are relatively illiquid and the trading volume is generally limited.

 

The table below sets out, for the periods indicated, the reported high and low closing market prices for the common shares of Himax Taiwan on the Emerging Stock Board. Given the different characteristics (such as the base of investors, non-centralized trading nature of the system, disclosure requirements, corporate governance standards, the relative lower trading volumes, the scope of research coverage and others) of the trading system in which Himax Taiwan’s common shares were historically traded, as compared to the Nasdaq National Market, we believe that the historical stock prices for the common shares of Himax Taiwan are not indicative of the initial public offering price or any subsequent trading prices of the ADSs representing our ordinary shares.

 

     High

   Low

2003: (from December 26)

   NT$ 74.18    NT$ 68.14

2004:

             

First quarter

     154.67      104.18

Second quarter

     183.70      114.21

Third quarter

     127.38      74.11

Fourth quarter

     74.81      61.61

2005: (through August 10)

             

January

     75.00      63.63

February

     82.08      74.98

March

     84.42      80.04

April

     94.64      82.24

May

     84.11      74.29

June

     84.37      80.08

July

     96.32      81.64

August (through August 10)

     112.69      90.47
 
  Source:   GreTai Securities Market

 

The average daily trading volume of the common shares of Himax Taiwan for the period from December 26, 2003 to December 31, 2003, the year 2004 and the period from January 1, 2005 to August 10, 2005, was 11,500, 60,385 and 309,183 common shares, respectively, which represented approximately 0.0%, 0.0% and 0.2% of the outstanding common shares of Himax Taiwan as of December 31, 2003, December 31, 2004 and August 10, 2005, respectively.

 

35


Table of Contents

CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2005 (unaudited):

 

    on an actual basis; and

 

    on a pro forma as adjusted basis to give effect to (i) the sale of ADSs by us in this offering at the assumed initial public offering price of $8.25 per ADS, the midpoint of the estimated range of the initial public offering price, and (ii) the estimated net proceeds of $94.4 million we expect to receive after deduction of underwriting discounts and commissions and the estimated offering expenses.

 

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of December 31, 2005

     Actual

  

Pro Forma

As Adjusted


     (in thousands)

Long-term debt, less current portion

   $    $

Minority interest

     624      624

Stockholders’ equity:

             

Ordinary shares, $0.0001 par value per share; 500,000,000 shares authorized; 182,088,880 shares issued and outstanding, as actual; 194,650,633 shares, issued and outstanding, pro forma as adjusted

     18      19

Additional paid-in capital(2)

     98,450      192,901

Accumulated other comprehensive income, net

     36      36

Retained earnings:

             

Legal reserve

     2,180      2,180

Unappropriated earnings

     65,147      65,147
    

  

Total stockholders’ equity(2)

     165,831      260,284
    

  

Total capitalization(1)(2)

   $ 166,455    $ 260,908
    

  


Note:          

(1)    Total capitalization includes long-term debt (less current portion), minority interest and total stockholders’ equity. Total capitalization excludes short-term debt and current portion of long-term debt because the above capitalization table is intended to show the amounts and types of long-term financing used by us. As of December 31, 2005, on an actual basis and on a pro forma as adjusted basis, our short-term debt was $27.2 million and the current portion of long-term debt was $89,000.

  (2)   Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $8.25 per ADS would increase (decrease) each of additional paid-in capital, total stockholders’ equity and total capitalization by $11.9 million. The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total stockholders’ equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

 

36


Table of Contents

DILUTION

 

Our net tangible book value as of December 31, 2005 was approximately $0.91 per ordinary share and per ADS. Net tangible book value per ordinary share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share.

 

Without taking into account any other changes in such net tangible book value after December 31, 2005, other than to give effect to (i) our sale of the 12,561,753 ADSs offered in this offering at the assumed initial public offering price of $8.25 per ADS, the mid-point of the estimated public offering price range and (ii) the estimated net proceeds of $94.4 million after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, our net tangible book value at December 31, 2005 would have been $1.34 per ordinary share and per ADS. This represents an immediate increase in net tangible book value of $0.43 per ordinary share and per ADS, to existing shareholders and an immediate dilution in net tangible book value of $6.91 per ordinary share and per ADS, to purchasers of ADSs in this offering.

 

The following table illustrates this dilution on a per ordinary share and per ADS basis:

 

    Per
Ordinary
Share and
Per ADS


Assumed initial public offering price

  $8.25

Net tangible book value as of December 31, 2005

  $0.91

Increase in net tangible book value attributable to this offering

  $0.43

Net tangible book value after this offering

  $1.34

Dilution in net tangible book value to new investors in this offering

  $6.91

 

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $8.25 per ADS would increase (decrease) our net tangible book value after giving effect to this offering by $11.9 million. Consequently, the net tangible book value per ordinary share and per ADS after giving effect to this offering would increase (decrease) by $0.06 per ordinary share and per ADS, and the dilution in net tangible book value per ordinary share and per ADS to new investors in this offering would increase (decrease) by $0.94 per ordinary share and per ADS. The information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

 

37


Table of Contents

The following table summarizes, on a pro forma basis as of December 31, 2005, the differences between the shareholders as of December 31, 2005 and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid before deducting estimated underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include 7,800,000 ADSs issuable pursuant to the exercise of the over-allotment option granted to the underwriters. The information in the following table is illustrative only. The total consideration paid and the average price per ordinary share/ADS are subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

     Ordinary Shares
Purchased


    Total Consideration

    Average
Price Per
Ordinary
Share


   Average
Price Per
ADS


       Number  

     Percent  

      Amount  

     Percent  

      

Existing shareholders

   182,088,880    93.5 %   $ 98,468,000    48.7 %   $ 0.54    $ 0.54

New investors

   12,561,753    6.5       103,634,462    51.3       8.25      8.25
    
  

 

  

 

  

Total

   194,650,633    100.0 %   $ 202,102,462    100.0 %             
    
  

 

  

            

 

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and before deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $8.25 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ordinary share/ADS paid by all shareholders by $12.6 million, $12.6 million and $0.06, respectively.

 

The discussion and tables above do not take into account the 988,169 ordinary shares representing the unvested portion of the RSUs granted on December 30, 2005 and the 15,769,143 ordinary shares remaining reserved for future issuance under our long-term incentive plan. See “Management—Share-Based Compensation Plans—Restricted Share Units.” If all of the unvested portion of the RSUs granted had been issued on December 31, 2005, after giving effect to this offering, our net tangible book value would have been approximately $260.2 million, or $1.33 per ordinary share and per ADS, and the dilution in net tangible book value to new investors would have been $6.92 per ordinary share and per ADS. If the underwriters exercise their option to purchase additional ADSs in full, our net tangible book value would have been approximately $1.58 per ordinary share and per ADS, and the dilution in net tangible book value to new investors would have been $6.67 per ordinary share and per ADS.

 

The table below takes into account the 988,169 ordinary shares representing the unvested portion of the RSUs granted on December 30, 2005:

 

     Ordinary Shares
Purchased


    Total Consideration

    Average
Price Per
Ordinary
Share


   Average
Price Per
ADS


       Number  

     Percent  

      Amount  

     Percent  

      

Existing shareholders

   183,077,049    93.6 %   $ 106,986,017    50.8 %   $ 0.58    $ 0.58

New investors

   12,561,753    6.4       103,634,462    49.2       8.25      8.25
    
  

 

  

 

  

Total

   195,638,802    100.0 %   $ 202,102,462    100.0 %             
    
  

 

  

            

 

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and before deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $8.25 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ordinary share/ADS paid by all shareholders by $12.6 million, $12.6 million and $0.06, respectively.

 

38


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2003, 2004 and 2005 and the selected consolidated balance sheet data as of December 31, 2004 and 2005 are derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by KPMG Certified Public Accountants and were prepared in accordance with U.S. GAAP. The selected consolidated balance sheet data as of December 31, 2001, 2002 and 2003 and the selected consolidated statement of operations data for the period from our inception on June 12, 2001 to December 31, 2001 and the year ended December 31, 2002 have been derived from our consolidated financial statements not included in this prospectus which have been audited by KPMG Certified Public Accountants and were prepared in accordance with U.S. GAAP. Our consolidated financial statements include the accounts of Himax Technologies, Inc. and its subsidiaries as if we had been in existence for all years presented. As a result of our recent reorganization, 100% of our outstanding ordinary shares are owned by former shareholders of Himax Taiwan. See “Corporate History and Related Party Transactions.” This reorganization is a change in legal organization for which no change in accounting basis is appropriate. Therefore, in presenting our consolidated financial statements, the assets and liabilities, revenues and expenses of Himax Taiwan and its subsidiaries are included in our consolidated financial statements at their historical amounts for all periods presented. Our historical results do not necessarily indicate results expected for any future periods.

 

    For the Period
from
June 12, 2001
(Inception) to
December 31, 2001


    Year Ended December 31,

                2002          

             2003          

              2004          

             2005          

          (in thousands, except per share data)     

Consolidated Statements of Operations Data:

                                   

Revenues

  $     8,980     $ 56,478    $ 131,843     $ 300,273    $ 540,204

Costs and expenses(1):

                                   

Cost of revenues

    7,176       45,313      100,102       235,973      419,380

Research and development

    1,509       7,800      21,077       24,021      41,278

General and administrative

    317       1,489      4,614       4,654      6,784

Sales and marketing

    162       884      2,669       2,742      4,762
   


 

  


 

  

Total costs and expenses

    9,164       55,486      128,462       267,390      472,204
   


 

  


 

  

Operating income (loss)

    (184 )     992      3,381       32,883      68,000
   


 

  


 

  

Net income (loss)(2)

  $ 20     $ 513    $ (581 )   $ 36,000    $ 61,558
   


 

  


 

  

Earnings (loss) per ordinary share(2) and per ADS(3):

                                   

Basic

  $ 0.00     $ 0.00    $ (0.00 )   $ 0.21    $ 0.35

Diluted

  $ 0.00     $ 0.00    $ (0.00 )   $ 0.21    $ 0.34

Weighted-average number of shares used in earnings per share computation:

                                   

Basic

    25,732       103,276      116,617       169,320      176,105

Diluted

    26,057       104,739      116,617       173,298      180,659

 

39


Table of Contents

 

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

 

    For the Period
from
June 12, 2001
(Inception) to
December 31, 2001


   Year Ended December 31,

       2002

   2003

   2004

   2005

         (in thousands)     

Cost of revenues

  $          17    $ 172    $ 827    $ 291    $ 188

Research and development

    344      3,057      11,666      4,288      6,336

General and administrative

    34      353      2,124      721      848

Sales and marketing

    35      348      1,349      537      1,241
   

  

  

  

  

Total

  $ 430    $ 3,930    $ 15,966    $ 5,837    $ 8,613
   

  

  

  

  

 

(2)   Under the ROC Statute for Upgrading Industries, we are exempt from income taxes for income attributable to expanded production capacity or newly developed technologies. If we had not been exempt from paying this income tax, net income and basic and diluted earnings per share would have been $52.4 million, $0.30 and $0.29 for the year ended December 31, 2005, respectively. This tax exemption expires on March 31, 2009.
(3)   Each ADS represents one ordinary share. Earnings (loss) per ADS are unaudited.

 

 

The following table presents our selected consolidated balance sheet data as of December 31, 2001, 2002, 2003, 2004 and 2005:

 

     As of December 31,

     2001

   2002

   2003

   2004

   2005

     (in thousands)

Consolidated Balance Sheet Data:

                                  

Cash and cash equivalents

   $ 2,067    $ 2,697    $ 2,529    $ 5,577    $ 7,086

Accounts receivable, net

     80      1,637      12,543      26,860      80,158

Accounts receivable from related parties

     3,901      4,786      22,893      39,285      69,688

Inventories

     1,222      12,056      21,088      54,092      105,004

Total current assets

     7,621      26,885      88,245      144,414      300,056

Total assets

     9,079      29,423      96,159      157,770      327,239

Short-term debt

                         27,274

Accounts payable

     2,249      5,803      22,901      38,649      105,801

Total current liabilities

     3,922      11,750      43,613      52,157      160,784

Total liabilities

     3,922      11,975      43,870      52,246      160,784

Total stockholders’ equity

     5,157      17,448      52,289      104,860      165,831

 

40


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of the material risks that we face set forth under “Risk Factors.”

 

Our consolidated financial statements include the accounts of Himax Technologies, Inc. and its subsidiaries as if we had been in existence for all years presented. As a result of our recent reorganization, 100% of our outstanding ordinary shares are owned by former shareholders of Himax Taiwan. See “Corporate History and Related Party Transactions.” This reorganization is a change in legal organization for which no change in accounting basis is appropriate. Therefore, in presenting our consolidated financial statements, the assets and liabilities, revenues and expenses of Himax Taiwan and its subsidiaries are included in our consolidated financial statements at their historical amounts for all periods presented.

 

Overview

 

We design, develop and market semiconductors that are critical components of flat panel displays. Our principal products are display drivers for use in desktop monitors, notebook computers, televisions, mobile handsets and consumer electronics products such as digital cameras, mobile gaming devices and car navigation displays. We also offer display drivers for panels utilizing OLED technology and LTPS technology. We are also expanding our product offering to include television semiconductor solutions such as television chipsets and television tuner modules, as well as LCOS products. We primarily sell our display drivers to TFT-LCD panel manufacturers and mobile device module manufacturers, and we sell our television semiconductor solutions to television makers.

 

We commenced operations through our predecessor, Himax Taiwan, in June 2001. We have achieved significant revenue growth since our inception. Our revenues were $131.8 million, $300.3 million and $540.2 million in 2003, 2004 and 2005, respectively. We do not expect similar growth rates in our revenues in future periods. Our net income (loss) was $(0.6) million, $36.0 million and $61.6 million in 2003, 2004 and 2005, respectively. Although we were profitable in 2002, 2004 and 2005, we recorded a net loss in 2003 primarily due to a significant increase in our share-based compensation expenses. We may not be profitable in the future. We must, among other things, continue to expand and diversify our customer base, broaden our product portfolio, achieve additional design wins and manage our costs to partially mitigate declining average selling prices in order to maintain our profitability. Moreover, we must continue to address the challenges of being a rapidly growing technology company, including hiring and retaining managerial, engineering, operational and financial personnel and implementing and improving our existing administrative, financial and operations systems.

 

We are a fabless semiconductor company. We leverage our experience and engineering expertise to design high-performance semiconductors and rely on third-party semiconductor manufacturing service providers for wafer fabrication, gold bumping, assembly and testing. We are able to take advantage of the economies of scale and the specialization of such semiconductor manufacturing service providers. Our fabless model enables us to capture certain financial and operational benefits, including reduced manufacturing personnel, capital expenditures, fixed assets and fixed costs. It also gives us the flexibility to use the technology and service providers that are most suitable for any given product.

 

As our semiconductors are critical components of flat panel displays, our industry is closely linked to the trends and developments of the flat panel display industry, in particular, the TFT-LCD panel segment. In 2003, 2004 and 2005, substantially all of our revenues were derived from sales of display drivers that were eventually incorporated into TFT-LCD panels. We expect display drivers for TFT-LCD panels to continue to be our primary products. The TFT-LCD panel industry is intensely competitive and is vulnerable to cyclical market conditions.

 

41


Table of Contents

The average selling prices of TFT-LCD panels could decline for numerous reasons, including the following: a surge in manufacturing capacity due to the ramping up of new fabrication facilities; manufacturers operating at high levels of capacity utilization in order to reduce fixed costs per panel; and lower-than-expected demand for end-use products that incorporate TFT-LCD panels. There have been industry reports of a possible oversupply of large-sized TFT-LCD panels in 2006, which could result in downward pricing pressure on TFT-LCD panel manufacturers. The downward pricing pressure faced by TFT-LCD panel manufacturers could result in similar downward pricing pressure on us as our customers seek price reductions or lower cost alternatives. We cannot assure you that we will be able to reduce costs to offset such downward pricing pressure. Moreover, during periods of declining average selling prices for TFT-LCD panels, TFT-LCD panel manufacturers may decrease capacity utilization and sell fewer panels, which could depress demand for our display drivers. As a result, the cyclicality of the TFT-LCD panel industry could adversely affect our revenues, cost of revenues and results of operations.

 

Factors Affecting Our Performance

 

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

 

    average selling prices;

 

    unit shipments;

 

    product mix;

 

    design wins;

 

    cost of revenues and cost reductions;

 

    supply chain management; and

 

    share-based compensation expenses.

 

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 packaging type our customers choose as well as the level of product integration. However, the impact of declining average selling prices on our profitability can be offset or mitigated to a certain extent by increased volume, as lower prices may stimulate demand and thereby drive sales.

 

Unit Shipments

 

Our performance is also affected by the number of semiconductors we ship, or unit shipments. As our display drivers are critical components of flat panel displays, our unit shipments depend on our customers’ panel shipments. Our unit shipments have grown significantly since our inception primarily as a result of our increased market share with certain major customers and their increased number of large-sized panels shipped. We have continued to expand our customer base. Our growth in unit shipments also reflected the significant growth in the

 

42


Table of Contents

display driver market, as the demand for display drivers grew significantly in recent years reflecting the strong demand for TFT-LCD panels.

 

Product Mix

 

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

 

Design Wins

 

Achieving design wins is important to our business, and it affects our unit shipments. Design wins occur when a customer incorporates our products into their product designs. There are numerous opportunities for design wins, including when panel manufacturers:

 

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

 

    establish new fabs and seek to qualify existing or new components suppliers; and

 

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

 

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

 

Cost of Revenues and Cost Reductions

 

We strive to control our cost of revenues. Our cost of revenues as a percentage of total revenues for 2003, 2004 and 2005 were 75.9%, 78.6% and 77.6%, respectively. For the year ended December 31, 2005, the costs of wafer fabrication were 47.5% and the cost of processed tape was 27.1% of our manufacturing cost. As a result, our ability to manage our wafer fabrication costs and costs for processed tape is critical to our performance. In addition, to partially mitigate declining average selling prices, we aim to reduce unit costs by, among other things:

 

    improving semiconductor 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

 

43


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

 

Supply Chain Management

 

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

 

Share-Based Compensation Expenses

 

Our results of operations have been affected by, and we expect our results of operations to continue to be affected by, our share-based compensation expenses. We have historically granted bonus shares to our employees from our inception to December 2003. Employee bonuses are accrued and recognized as share-based compensation expenses in the period services are provided. We determined the amount of employee bonuses based on ROC GAAP financial results, subject to shareholder approval. The difference between the estimated bonuses and actual amounts paid, either in cash or through the issuance of shares, was charged to earnings upon shareholder approval of the amount and form (shares or cash) of employee bonuses. Amounts charged for share issuances are based upon the estimated fair value of such bonus shares at the date of shareholder approval. Our share-based compensation expenses also include charges taken relating to grants of (i) nonvested shares to employees, (ii) treasury shares to employees and (iii) shares to non-employees. We have since discontinued our practice of the above-mentioned share-based compensation.

 

We adopted a long-term incentive plan in October 2005 which permits the grant of options or RSUs to our employees and non-employees where each unit represents one ordinary share. The actual awards will be determined by our compensation committee. We recorded share-based compensation expenses totaling $16.0 million, $5.8 million and $8.6 million in 2003, 2004 and 2005, respectively. See “—Critical Accounting Policies—Share-Based Compensation Expenses.” We have applied SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123R, to account for our share-based compensation plans. SFAS No. 123R requires companies to measure and recognize compensation expense for all share-based payments at fair value.

 

Set forth below is a summary of our historical and proposed share-based compensation plans as reflected in our consolidated financial statements.

 

Employee Stock Bonuses.    From our inception in June 2001 to December 31, 2003, employees of Himax Taiwan were entitled to receive bonuses in cash, shares, or a combination of both, based on annual distributable earnings in accordance to Himax Taiwan’s articles of incorporation, subject to certain annual limits. Subsequent sales of these bonus shares by the employees were subject to restrictions. Employees were permitted to sell their bonus shares according to the following schedule: 50% immediately on the date of grant; 25% after one year from date of grant; and 25% after two years from date of grant. An employee leaving Himax Taiwan within one year after the date of grant would not be permitted to sell the remaining 50% of their bonus shares until two years after the date of grant. Unvested bonus shares of employees who are found to have violated certain provisions of their employment contracts will be forfeited.

 

Nonvested Shares Issued to Employees.    In June 2001, November 2001 and January 2002, Himax Taiwan granted nonvested shares of common shares to certain employees for their future service. The shares vest five years after the grant date. Employees leaving Himax Taiwan before completing the five-year service period

 

44


Table of Contents

would be required to sell these shares back to Himax Taiwan at NT$1.00 ($0.03) per share. The forfeiture of such nonvested shares is limited to the original number of shares granted and does not apply to the shares received for stock splits and dividends. Since none of these shares has vested, we did not record a capital increase at the time the shares were issued. Share-based compensation expenses in relation to these nonvested shares are recognized on a straight-line basis over the five-year service period with a corresponding increase to stockholders’ equity.

 

As of December 31, 2005, the total share-based compensation expenses related to nonvested shares not yet recognized was $68,000, which is expected to be recognized in 2006.

 

Treasury Shares Issued to Employees.    In 2002 and 2003, treasury shares were issued to employees with a three-year vesting period. The forfeiture of treasury shares issued to employees is based on the original number of shares granted and does not include the shares received for stock splits and dividends. We recognized the difference between the fair value of these shares and the amount that an employee paid for treasury shares as share-based compensation expenses on a straight-line basis over the three-year service period with a corresponding increase to stockholders’ equity.

 

As of December 31, 2005, the total share-based compensation expenses related to treasury stock not yet recognized was $548,000, which is expected to be recognized in 2006.

 

Shares Issued to Non-Employees.    In 2002, Himax Taiwan granted 596,897 common shares to two consultants in exchange for their assistance in the development of LCOS technology during the period from July 2001 through June 2002.  Himax Taiwan recognized share-based compensation expenses of $34,000 in both 2001 and 2002.

 

Restricted Share Units (RSUs).    We adopted a long-term incentive plan in October 2005. We committed to pay a bonus to our employees to settle the accrued bonus payable in respect of their service provided in 2004 and the ten months ended October 31, 2005, which was satisfied through a grant of 990,220 RSUs on December 30, 2005. We accrued share-based compensation expenses of approximately $4.1 million and $3.6 million in 2004 and the ten months ended October 31, 2005, respectively, in connection with this commitment. All RSUs granted to employees as a bonus vested immediately on the grant date. The share-based compensation expenses accrued represents the portion of compensation to employees for their service in 2004 and the ten months ended October 31, 2005 and has been recorded as a liability and compensation expense reflected in our results of operations for 2004 and the ten months ended October 31, 2005, respectively.

 

We made an additional grant of 1,297,564 RSUs to our employees on December 30, 2005. The vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on each of September 30, 2006, 2007 and 2008, subject to certain forfeiture events.

 

We also made a grant of 20,000 RSUs to our independent directors on December 30, 2005. The vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on each of June 30, 2006, 2007 and 2008, subject to certain forfeiture events.

 

The amount of share-based compensation expense with regard to the RSUs granted to our directors and employees was determined based on an estimated fair value of $8.62 per ordinary share of the ordinary shares underlying the RSUs granted December 30, 2005. The fair value of our ordinary shares was determined based on a third-party valuation conducted by an independent third-party appraiser.

 

Determining the fair value of our ordinary shares requires making complex and subjective judgments regarding projected financial and operating results, our business risks, the liquidity of our shares and our operating history and prospects. We used the discounted cash flow approach in conjunction with the market value approach by assigning a different weight to each of the approaches to estimate the value of the Company when the RSUs were granted. The discounted cash flow approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. The market value approach incorporates certain

 

45


Table of Contents

assumptions including the market performance of comparable companies as well as our financial results and growth trends to derive our total equity value. The assumptions used in deriving the fair value are consistent with our business plan. These assumptions include: no material changes in the existing political, legal, fiscal and economic conditions in Taiwan; our ability to retain competent management, key personnel and technical staff to support our ongoing operation; and no material deviation in industry trends and market conditions from economic forecasts. These assumptions are inherently uncertain. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rate. If a different discount rate were used, the valuation and the amount of share-based compensation would have been different because the fair value of the underlying ordinary shares for the RSUs granted would be different.

 

Description of Certain Statements of Income Line Items

 

Revenues

 

We generate revenues primarily from sales of our display drivers. We have achieved significant revenue growth since our inception, primarily due to a significant increase in unit shipments, partially offset by the general trend of declining average selling prices of our products. Historically, we have generated revenues from sales of display drivers for large-sized applications, display drivers for mobile handsets and display drivers for consumer electronics products. In addition, our product portfolio includes operational amplifiers, timing controllers, video processors and television tuner modules.

 

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,

 
    2003

    2004

    2005

 
    Amount

  % of
Revenues


    Amount

  % of
Revenues


    Amount

  % of
Revenues


 
    (in thousands, except percentages)  

Display drivers for large-sized applications

  $ 108,784   82.5 %   $ 258,006   85.9 %   $ 470,631   87.1 %

Display drivers for mobile handsets applications

    5,695   4.3       12,607   4.2       31,123   5.8  

Display drivers for consumer electronics applications

    11,795   8.9       21,754   7.2       18,571   3.4  

Others(1)

    5,569   4.2       7,906   2.6       19,879   3.7  
   

 

 

 

 

 

Total

  $ 131,843   100 %   $ 300,273   100 %   $ 540,204   100 %
   

 

 

 

 

 


Note:  (1)   Includes, among other things, operational amplifiers, timing controllers, television semiconductor solutions, television tuner modules and liquid crystal injection.

 

46


Table of Contents

A limited number of customers account for substantially all our revenues. We are seeking to diversify our customer base and to reduce our reliance on any one customer. We began recognizing revenues from the sale of display drivers to CPT and its affiliates in 2002 and began volume shipments to CPT and its affiliates in 2003. Accordingly, the percentage of our revenues generated by sales to CMO and its affiliates has decreased gradually since 2002. The table below sets forth, for the periods indicated, our revenues generated from significant customers (including their respective affiliates) and others and such revenues as a percentage of our revenues:

 

    Year Ended December 31,

 
    2003

    2004

    2005

 
    Amount

  % of
Revenues


    Amount

  % of
Revenues


    Amount

  % of
Revenues


 
    (in thousands, except percentages)  

CMO and its affiliates

  $ 102,793   78.0 %   $ 189,870   63.2 %   $ 318,008   58.9 %

CPT and its affiliates

    7,566   5.7       58,430   19.5       87,534   16.2 %

Others

    21,484   16.3       51,973   17.3       134,662   24.9 %
   

 

 

 

 

 

Total

  $ 131,843   100.0 %   $ 300,273   100.0 %   $ 540,204   100.0 %
   

 

 

 

 

 

 

The global TFT-LCD panel market is highly concentrated, with only a limited number of TFT-LCD panel manufacturers producing large-sized TFT-LCD panels in high volumes. We sell large-sized panel display drivers to many of these TFT-LCD panel manufacturers. Our revenues, therefore, will depend on our ability to capture an increasingly larger percentage of each panel manufacturer’s display driver requirements.

 

We derive substantially all of our revenues from sales to Asia-based customers whose end-use products are sold worldwide. In 2003, 2004 and 2005, approximately 92.8%, 94.8% and 89.4% of our revenues, respectively, were from customers headquartered in Taiwan. We believe that substantially all of our revenues will continue to be from customers located in Asia, where almost all of the TFT-LCD panel manufacturers and mobile device module manufacturers are located. As a result of the regional customer concentration, we expect to continue to be particularly subject to economic and political events and other developments that affect our customers in Asia. A substantial majority of our sales invoices is denominated in U.S. dollars.

 

Costs and Expenses

 

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

 

Cost of Revenues

 

The principal items of our cost of revenues are:

 

    cost of wafer fabrication;

 

    cost of processed tape used in TAB packaging;

 

    cost of gold bumping, assembly and testing; and

 

    other costs and expenses (primarily overhead and direct labor).

 

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

 

47


Table of Contents

Research and Development Expenses

 

Research and development expenses consist primarily of research and development employee salaries and related employee welfare costs, costs associated with prototype wafers and processed tape, mask and tooling sets and depreciation on research and development equipment. We believe that we will need to continue to spend a significant amount on research and development in order to remain competitive. We expect to continue to increase our spending on research and development in absolute dollar amounts in the future as we continue to increase our research and development headcount and associated costs to pursue additional product development opportunities.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries of general and administrative employees and related employee welfare costs, Southern Taiwan Science Park management fees, rent and professional fees. We moved Himax Taiwan’s operations out of Southern Taiwan Science Park in July 2004, and therefore our management fees are substantially lower in 2005. We anticipate that our general and administrative expenses will increase in absolute dollar amounts as we expand our operations, hire additional administrative personnel, incur depreciation and amortization expenses in connection with our new headquarters located at the Tainan LCD-TV Industry Park, which is adjacent to Southern Taiwan Science Park, and incur additional compliance costs required of a publicly listed company in the United States.

 

Sales and Marketing Expenses

 

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

 

Share-Based Compensation Expenses

 

Our share-based compensation expenses consist of various forms of share-based compensation we have historically issued to our employees and consultants, as well as share-based compensation issued to employees, directors and service providers under our 2005 long-term incentive plan. We allocate such share-based compensation expenses to applicable cost of revenues and expense categories as related services are performed. See note 13 to our consolidated financial statements. Historically our share-based compensation practice comprised grants of (i) bonus shares to employees, (ii) nonvested shares to employees, (iii) treasury shares to employees and (iv) shares to non-employees. We committed to pay a bonus to our employees in respect of their service provided in 2004 and the ten months ended October 31, 2005, which was satisfied through a grant of RSUs on December 30, 2005. We accrued share-based compensation expenses of approximately $4.1 million and $3.6 million in 2004 and the ten months ended October 31, 2005, respectively, in connection with this commitment. We have also adopted a long-term incentive plan in October 2005 which permits the grant of options or RSUs to our employees, directors and service providers. We granted additional RSUs on December 30, 2005 to our employees and directors. See “—Critical Accounting Policies—Share-Based Compensation Expenses” for further discussion of the accounting of such expenses.

 

Income Taxes

 

Since we and our direct and indirect subsidiaries, including Himax Taiwan and Himax Display Inc., or Himax Display, our subsidiary, 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

 

48


Table of Contents

as adjusted for certain items including accumulated losses carried forward, non-deductible expenses, research and development tax credits, certain tax holidays, as well as changes in our deferred tax assets and liabilities.

 

ROC tax regulations require our ROC subsidiaries to pay an additional 10% tax on unappropriated earnings. ROC law offers preferential tax treatments to industries that are encouraged by the ROC government. The ROC Statute for Upgrading Industries entitles companies to tax credits for expenses relating to qualifying research and development and personnel training expenses and purchases of qualifying machinery. This tax credit may be applied within a five-year period. The amount from the tax credit that may be applied in any year (with the exception of the final year when the remainder of the tax credit may be applied without limitation to the total amount of the income tax payable) is limited to 50% of the income tax payable for that year. Under the ROC Statute for Upgrading Industries, Himax Taiwan was granted tax credits by the ROC Ministry of Finance at rates set at a certain percentage of the amount utilized in qualifying research and development and personnel training expenses. The balance of unused investment tax credits totaled $0.5 million, $4.7 million and $9.4 million as of December 31, 2003, 2004 and 2005, respectively. In addition, the ROC Statute for Upgrading Industries provides to companies deemed to be operating in important or strategic industries a five-year tax exemption for income attributable to expanded production capacity or newly developed technologies. Such expanded production capacity or newly developed technologies must be funded in whole or in part from either the initial capital investment made by a company’s shareholders, a subsequent capital increase or a capitalization of a company’s retained earnings. As a result of this statute, income attributable to certain of our expanded production capacity or newly developed technologies is tax exempt for a period of five years, effective on April 1, 2004 and expiring on March 31, 2009. If we did not have this tax exemption, net income and basic and diluted earnings per ordinary share would have been $52.4 million, $0.30 and $0.29 for the year ended December 31, 2005, respectively.

 

Control Deficiencies

 

Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we were a newly established private company with limited accounting personnel and other resources with which to address our internal controls and procedures. As a result, in connection with the audit of our consolidated financial statements for the years ended December 31, 2003 and 2004, our independent registered public accounting firm identified two control deficiencies that were significant deficiencies in our internal control procedures which, in their judgment, could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of our management in the financial statements. A significant deficiency is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a more than inconsequential misstatement of the company’s annual or interim financial statements will not be prevented or detected. Specifically, the control deficiencies identified consisted of (1) a lack of personnel with significant U.S. GAAP reporting experience necessary to identify and resolve certain complex U.S. GAAP matters in a timely manner, and (2) the use of manual accounting systems that carry a risk of inconsistent operation, are subject to human error and do not enable timely recording of transactions. In connection with the audit of our consolidated financial statements for the year ended December 31, 2005, our independent registered accounting firm did not identify any significant deficiencies but continued to identify our use of manual accounting systems as a control deficiency and identified two additional control deficiencies related to the lack of a systematic approach for monitoring contracts with accounting implications and the lack of an automated credit control system.

 

Critical Accounting Policies and Estimates

 

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

 

Share-Based Compensation

 

As of December 31, 2005, we have not issued any stock options to employees or others. Share-based compensation primarily consists of grants of nonvested or restricted shares of common stock and RSUs issued to

 

49


Table of Contents

employees. We have applied SFAS No. 123R for our share-based compensation plans for all periods since the incorporation of Himax Taiwan in 2001. The cost of employee services received in exchange for share-based compensation is measured based on the grant-date fair value of the share-based instruments issued. The cost of employee services is equal to the grant-date fair value of shares issued to employees and is recognized in earnings over the service period. Share-based compensation expense estimates also take into account the number of shares awarded that management believes will eventually vest. We adjust our estimate each period to reflect the current estimate of forfeitures. As of December 31, 2005, we based our share-based compensation cost on an assumed forfeiture rate of 12.2% and 27.0% for Himax Taiwan and Amazion Electronics Inc., or Amazion, our subsidiary, respectively. If actual forfeitures occur at a lower rate, share-based compensation costs will increase in future periods.

 

When estimating the fair value of our ordinary shares on the grant date, we review both internal and external sources of information. During periods in which we were a private company, the sources we used to determine the fair value of the underlying shares at the date of measurement have been subjective in nature and based on, among other factors:

 

    our financial condition as of the date of grant;

 

    our financial and operating prospects at that time;

 

    for certain issuances in 2001 and early 2002, the price of new shares issued to unrelated third parties;

 

    for certain issuances in 2002, 2003 and 2004, an independent third-party retrospective analysis of the historical value of our common shares, which utilized both a net asset based methodology and market and peer group comparables (including average price / earnings, enterprise value / sales, enterprise value / earnings before interest and tax, and enterprise value / earnings before interest, tax, depreciation and amortization); and

 

    for our issuance of RSUs in 2005, an independent third-party analysis of the current and future value of our ordinary shares, which utilized both discounted cashflow and market value approaches, using multiples such as price / earnings, forward price / earnings, enterprise value / earnings before interest and tax, and forward enterprise value / earnings before interest and tax.

 

Changes in any of these factors or assumptions could have resulted in different estimates of the fair value of our common shares and the related amounts of share-based compensation.

 

Based on these factors, we estimated the fair value per share of nonvested shares issued to certain employees in June 2001, November 2001, and January 2002 at NT$4.02 ($0.116) per share and the fair value of 596,897 shares (adjusted for stock splits) granted to two consultants in 2002 at $68,000. Similarly, we estimated the fair value per share of employee bonus shares on the date of shareholder approval to be NT$39.44 ($1.15) per share and NT$67.13 ($1.96) per share in 2003 and 2004, respectively. These employee bonus shares were issued in relation to employee services provided in 2001, 2002 and 2003, respectively. We estimated the fair value of treasury shares issued to employees at prices ranging from NT$15.32 ($0.46) per share to NT$19.93 ($0.58) per share in 2002 and NT$20.17 ($0.58) per share to NT$52.10 ($1.54) per share in 2003. We estimated the fair value of the ordinary shares underlying the RSUs granted to our directors and employees at $8.62 per share in 2005.

 

50


Table of Contents

Allowance for 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. The movement in the allowance for sales returns and discounts for the years ended December 31, 2003, 2004 and 2005 is as follows:

 

Year


   Balance
at
Beginning
of Year


   Addition

   Amounts
Utilized


   

Balance at

End of Year


     (in thousands)

December 31, 2003

   $    $ 117    $ (89 )   $ 28

December 31, 2004

   $ 28    $ 1,022    $ (810 )   $ 240

December 31, 2005

   $ 240    $ 398    $ (457 )   $ 181

 

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 wafer fabrication and processed tape), direct labor and an appropriate proportion of production overheads. We write down inventory to its estimated market value, which is based upon estimations about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional future inventory write-down may be required and could adversely affect our operating results. Once written down, inventories are carried at this lower amount until sold or scrapped. If actual market conditions are more favorable, we may have higher operating income when such products are sold. Sales to date of such products have not had a significant impact on our operating income. The inventory write-down for the years ended December 31, 2003, 2004 and 2005 was approximately $116,000, $847,000 and $927,000, respectively, and are included in cost of revenues in our consolidated statements of operations.

 

Impairment of Long-Lived Assets

 

We routinely review our long-lived assets that are held and used for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, average selling prices, utilization rates and other factors. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, an impairment charge is recognized for the amount that the carrying value of the asset exceeds its fair value, based on the best information available, including discounted cash flow analysis. However, due to the cyclical nature of our industry and changes in our business strategy, market requirements, or the needs of our customers, we may not always be in a position to accurately anticipate declines in the utility of our equipment or acquired technology until they occur. We have not had any impairment charges on long-lived assets during the period from December 31, 2002 to December 31, 2005.

 

Product Warranty

 

Under our standard terms and conditions of sale, products sold are subject to a limited product quality warranty. The stated limited warranty period is 60 days. We may receive warranty claims outside the scope of the standard terms and conditions. We provide for the estimated cost of product warranties at the time revenue is recognized based primarily on historical experience and any specifically identified quality issues. As of

 

51


Table of Contents

December 31, 2005 and 2004, the accrued warranty cost was $545,000 and $507,000, respectively; in 2003 there was no accrued warranty costs. The movement in accrued warranty costs for the years ended December 31, 2003, 2004 and 2005 is as follows:

 

Year


   Balance
at
Beginning
of Year


   Addition

   Amount
Utilized


    Balance at
End of Year


     (in thousands)

December 31, 2003

   $    $ 2    $ 2     $

December 31, 2004

   $    $ 960    $ 453     $ 507

December 31, 2005

   $ 507    $ 1,415    $ (1,377 )   $ 545

 

Income Taxes

 

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

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets and therefore the determination of the valuation allowance is dependent upon the generation of future taxable income by the taxable entity during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of different liabilities, projected future taxable income, and tax planning strategies in determining the valuation allowance.

 

Since Himax Taiwan’s subsidiaries have generated tax losses since inception and are not included in the consolidated tax filing with Himax Taiwan, a valuation allowance of $11,000, $893,000 and $3.3 million as of December 31, 2003, 2004 and 2005, respectively, was provided to reduce their deferred tax assets (consisting primarily of operating loss carryforwards and unused investment tax credits) to zero because management believes it is unlikely that these tax benefits will be realized. There was no change in the valuation allowance for the year ended December 31, 2002 and the net change in valuation allowance for the years ended December 31, 2003, 2004 and 2005 was an increase of $11,000, $882,000 and $2.4 million, respectively, as a result of increases in deferred tax assets which we do not expect to realize.

 

52


Table of Contents

Results of Operations

 

Our business has evolved rapidly and significantly since we commenced operations in 2001. Our limited operating history makes the prediction of future operating results very difficult. We believe that period-to-period comparisons of operating results should not be relied upon as indicative of future performance. The following table sets forth a summary of our consolidated statements of operations as a percentage of revenues:

 

     Year Ended
December 31,


 
     2003

    2004

    2005

 
                    

Revenues

   100.0 %   100.0 %   100.0 %

Costs and expenses:

                  

Cost of revenues

   75.9     78.6     77.6  

Research and development

   16.0     8.0     7.6  

General and administrative

   3.5     1.5     1.3  

Sales and marketing

   2.0     0.9     0.9  

Total costs and expenses

   97.4     89.0     87.4  

Operating income

   2.6     11.0     12.6  

Other non operating income (loss)

   (0.5 )   0.4     0.4  

Income tax (benefit) expenses

   2.5     (0.6 )   1.7  

Net income (loss)

   (0.4 )   12.0     11.4  

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Revenues. Our revenues increased 79.9% to $540.2 million in 2005 from $300.3 million in 2004. This increase was primarily due to an 118.4% increase in unit shipments of display drivers for large-sized applications, partially offset by a 16.2% decrease in average selling prices of such products. The increase in unit shipments was primarily due to the increased number of panels shipped by our customers as well as our increased market share with certain major customers. The decrease in the average selling prices of our display drivers was primarily due to a combination of the pricing pressure we faced from our customers, the general industry trend of declining average selling prices of semiconductors over a product’s life cycle, the introduction of newer, lower-cost display drivers for large-sized applications, as well as our ability to reduce per unit cost of revenues in order to meet such pressure. Revenues from related parties increased 69.2% to $322.8 million in 2005 from $190.8 million in 2004 as a result of increased unit shipments to CMO (and its affiliates) and other related parties. However, revenues from related parties as a percentage of our revenues decreased from 63.5% in 2004 to 59.8% in 2005 as our sales to other customers continued to grow, reflecting our effort in diversifying our customer base and reducing our reliance on any one customer.

 

Costs and Expenses.    Costs and expenses increased 76.6% to $472.2 million in 2005 from $267.4 million in 2004. As a percentage of revenues, costs and expenses decreased to 87.4% in 2005 compared to 89.0% in 2004.

 

    Cost of Revenues.    Cost of revenues increased 77.7% to $419.4 million in 2005 from $236.0 million in 2004. The increase in cost of revenues was primarily due to an increase in unit shipments, partially offset by a slight decrease in per units costs associated with the manufacturing, assembly, testing and delivery of our products. This is a result of our cost reduction efforts achieved by improving designs and processes, increasing manufacturing yields and leveraging our scale, volume requirements and close relationships with semiconductor manufacturing service providers and suppliers, as well as our strategy of sourcing from multiple service providers and suppliers in order to obtain better pricing.

 

   

Research and Development.    Research and development expenses increased 72.0% to $41.3 million in the 2005 from $24.0 million in 2004, primarily due to the increase in salary expenses and share-based compensation expenses. The increase in salary expenses was due to increased headcount and higher

 

53


Table of Contents
 

average salaries. The increase was also partially as a result of increased mask costs and prototype wafer and processed tape costs associated with an increased number of new products introduced. The increase in share-based compensation expenses also resulted from our increase in headcount and our grant of RSUs to certain employees on December 30, 2005.

 

    General and Administrative.    General and administrative expenses increased 45.8% to $6.8 million in 2005 from $4.7 million in 2004, primarily due to an increase in salary expenses. The increase in salary expenses was due to increased headcount and higher average salaries. The increase in general and administrative expenses also partially resulted from increased costs associated with increased management and other fees paid to our security company and increased fees relating to patent filings.

 

    Sales and Marketing.    Sales and marketing expenses increased 73.7% to $4.8 million in 2005 from $2.7 million in 2004, primarily due to an increase in salary expenses and share-based compensation expenses. The increase in salary expenses was due to a 76.6% increase in headcount and higher average salaries. The increase in share-based compensation expenses also resulted from our increase in headcount and our grant of RSUs to certain employees on December 30, 2005. The increase in sales and marketing expenses was also partially as a result of increased travel expenses reflecting increased sales activity.

 

Non-Operating Income (Loss).    We had a non-operating income of $2.3 million in 2005 compared to $1.3 million in 2004, primarily as a result of increases in both foreign exchange gain and interest income as compared to 2004. Foreign exchange gain increased due to the weakening of the NT dollar and Japanese yen relative to the U.S. dollar. The significant increase in interest income was due to the higher cash balance on hand, which was primarily placed in higher yield U.S. dollar denominated time deposits beginning in August 2005.

 

Income Tax (Benefit) Expense.    Income tax expenses increased to $8.9 million in 2005 compared to an income tax benefit of $1.8 million in 2004. Our effective income tax rate increased from (5.2%) in 2004 to 12.7% in 2005, primarily due to: (a) the increase of valuation allowance provided to reduce certain subsidiaries’ deferred tax assets to zero, (b) the increase of non-deductible share-based compensation expenses and (c) the absence in 2005 of a tax benefit from the distribution of the prior year’s income compared to 2004, which was partially offset by more investment tax credits and tax exempted income as compared to 2004.

 

Net Income.    As a result of the foregoing, our net income increased to $61.6 million in 2005 from a net income of $36.0 million in 2004.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Revenues.    Our revenues increased 127.8% to $300.3 million in 2004 from $131.8 million in 2003. This increase was primarily due to a 151.3% increase in unit shipments of display drivers for large-sized applications, partially offset by a 6.0% decrease in average selling prices of such products. The increase in unit shipments was primarily due to the increased number of panels shipped by our customers, our increased market share with certain major customers and our success in winning new customers. The decrease in the average selling prices of our display drivers was primarily due to a combination of the pricing pressure we faced from our customers, the general industry trend of declining average selling prices of semiconductors over a product’s life cycle, the introduction of newer, lower-cost display drivers for large-sized applications, as well as our ability to reduce per unit cost of revenues in order to meet such pressure. Revenues from related parties increased 85.6% to $190.8 million in 2004 from $102.8 million in 2003 as a result of increased unit shipments to CMO (and its affiliates) and other related parties. However, revenues from related parties as a percentage of our revenues decreased from 78.0% in 2003 to 63.5% in 2004 as our sales to CPT (and its affiliates) and other customers continued to grow, reflecting our effort in diversifying our customer base and reducing our reliance on any one customer.

 

54


Table of Contents

Costs and Expenses.    Costs and expenses increased 108.2% to $267.4 million in 2004 from $128.5 million in 2003. As a percentage of revenues, costs and expenses decreased to 89.0% in 2004 from 97.4% in 2003.

 

    Cost of Revenues.    Cost of revenues increased 135.8% to $236.0 million in 2004 from $100.1 million in 2003. The increase in cost of revenues was primarily due to an increase in unit shipments and the associated costs to manufacture, assemble, test and deliver these products. This increase was partially offset by a decrease in the per unit cost of revenues as a result of our cost reduction efforts achieved by improving designs and processes, increasing manufacturing yields and leveraging our scale, volume requirements and close relationships with semiconductor manufacturing service providers and suppliers as well as our strategy of sourcing from multiple service providers and suppliers in order to obtain better pricing. Our cost of revenues as a percentage of total revenues increased 2.7% to 78.6% in 2004 from 75.9% in 2003 primarily as a result of a decrease in 2004 of average selling prices in order to attract new customers and revenues received in 2003 from ChipMOS for LCOS technology advisory services and sales of panel molds to CMO, both of which have relatively low cost of revenues. These transactions are not part of our core business, and we do not expect to generate meaningful revenues from these sources in the future.

 

    Research and Development.    Research and development expenses increased 14.0% to $24.0 million in 2004 from $21.1 million in 2003, primarily as a result of increased mask costs and prototype wafer and processed tape costs associated with an increase in the number of new products introduced, increased salary expenses and employee welfare related costs reflecting higher headcount and increased depreciation expense as we installed additional research and development equipment as part of our expanded research and development efforts. The increase in research and development expenses was partially offset by a decrease in share-based compensation expenses, which decreased 63.2% to $4.3 million in 2004 from $11.7 million in 2003. The decrease in share-based compensation expenses was primarily as a result of our decision to grant less share-based compensation in 2004 with the expectation that we would be granting more share-based compensation to our employees under our long-term incentive plan after our initial public offering.

 

    General and Administrative.    General and administrative expenses increased 0.9% to $4.7 million in 2004 from $4.6 million in 2003, primarily as a result of increases in staffing expenses and expenses relating to patent filings. This increase was partially offset by a decrease in share-based compensation expenses, which decreased 66.1% to $0.7 million in 2004 from $2.1 million in 2003, primarily as a result of our decision to grant less share-based compensation in 2004 with the expectation that we would be granting more share-based compensation to our employees under our long-term incentive plan after our initial public offering.

 

    Sales and Marketing.    Sales and marketing expenses increased 2.7% to $2.7 million in 2004, primarily as a result of an increase in product sample costs, increased salary expense due to higher headcount and increased travel expenses, all as a result of the increase in our unit sales and our expanded sales and marketing efforts. The increase in sales and marketing expenses was partially offset by a decrease in share-based compensation expenses, which decreased 60.2% to $0.5 million in 2004 from $1.4 million in 2003, primarily as a result of our decision to grant less share-based compensation in 2004 with the expectation that we would be granting more share-based compensation to our employees under our long-term incentive plan after our initial public offering.

 

Non-Operating Income (Loss).    We had a non-operating income of $1.3 million in 2004 compared to a non-operating loss of $0.6 million in 2003, primarily as a result of a foreign exchange gain of $0.8 million in 2004 compared to a foreign exchange loss of $0.8 million in 2003 and a gain on sale of marketable securities of $0.4 million in 2004 compared to a gain on sale of marketable securities of $0.1 million in 2003.

 

Income Tax (Benefit) Expenses.    We recorded an income tax benefit of $1.8 million in 2004 compared to an income tax expense of $3.3 million in 2003. Our effective tax rate decreased in 2004 due primarily to the fact that we generated more investment tax credits related to research and development expenditures and less

 

55


Table of Contents

non-deductible share-based compensation expenses in 2004 as compared to 2003, as well as a result of our qualifying for an income tax exemption on the incremental income generated from sales of newly designed display drivers starting in April 2004.

 

Net Income.    As a result of the foregoing, our net income increased significantly to $36.0 million in 2004 from a net loss of $0.6 million in 2003.

 

56


Table of Contents

Selected Unaudited Quarterly Results of Operations

 

The following table presents our unaudited quarterly results of operations for the six quarters for the period beginning July 1, 2004 and ending December 31, 2005. You should read the following table in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. This information reflects all adjustments, consisting only of normal recurring adjustments, which are in the opinion of our management necessary for fair presentation of our results of operations for the quarters presented.

 

     Three Months Ended

     September 30,
2004


   December 31,
2004


   March 31,
2005


   June 30,
2005


   September 30,
2005


   December 31,
2005


     (unaudited)
     (in thousands, except per share data)

Revenues

   $ 75,496    $ 89,004    $ 96,417    $ 111,633    $ 154,820    $ 177,334

Costs and expenses(1):

                                         

Cost of revenues

     60,032      70,754      75,027      86,214      118,475      139,664

Research and development

     6,130      7,519      8,191      8,896      10,234      13,957

General administrative

     1,119      1,496      1,187      1,392      1,649      2,556

Sales and marketing

     737      764      818      873      1,053      2,018
    

  

  

  

  

  

Total costs and expenses

     68,018      80,533      85,223      97,375      131,411      158,195
    

  

  

  

  

  

Operating income

     7,478      8,471      11,194      14,258      23,409      19,139
    

  

  

  

  

  

Net income(2)

   $ 8,344    $ 9,554    $ 10,133    $ 13,069    $ 21,376    $ 16,980
    

  

  

  

  

  

Basic earnings per ordinary share and per ADS(2)

   $ 0.05    $ 0.05    $ 0.06    $ 0.07    $ 0.12    $ 0.10

Diluted earnings per ordinary share and per ADS(2)

   $ 0.05    $ 0.05    $ 0.06    $ 0.07    $ 0.12    $ 0.09

Weighted-average number of shares used in basic and diluted earnings per share computation (in thousand):

                                         

Basic

     168,087      174,764      175,660      175,660      176,231      176,854

Diluted

     172,757      178,574      180,124      180,464      180,606      180,707

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

 

    Three Months Ended

    September 30,
2004


  December 31,
2004


  March 31,
2005


  June 30,
2005


  September 30,
2005


  December 31,
2005


    (unaudited)
    (in thousands, except per share data)
Cost of revenues   $ 72   $ 74   $ 37   $ 33   $ 29   $ 89

Research and development

    1,060     1,084     1,117     1,126     1,060     3,033

General and administrative

    178     182     164     166     138     380

Sales and marketing

    133     135     205     203     205     628
   

 

 

 

 

 

Total   $ 1,443   $ 1,475   $ 1,523   $ 1,528   $ 1,432   $ 4,130
   

 

 

 

 

 

Note:  (2)   Under the ROC Statute for Upgrading Industries, we are exempt from income taxes for income attributable to expanded production capacity or newly developed technologies. If we had not been exempt from paying this income tax, net income and (basic and diluted) earnings per share would have been as follows:

 

    Three Months Ended

    September 30,
2004


  December 31,
2004


  March 31,
2005


  June 30,
2005


  September 30,
2005


  December 31,
2005


    (unaudited)
    (in thousands, except per share data)

Net income

  $ 6,071   $ 7,083   $ 8,629   $ 11,236   $ 18,224   $ 14,280

Basic earnings per ordinary share and per ADS

  $ 0.04   $ 0.04   $ 0.05   $ 0.06   $ 0.10   $ 0.08

Diluted earnings per ordinary share and per ADS(2)

  $ 0.04   $ 0.04   $ 0.05   $ 0.06   $ 0.10   $ 0.08

 

57


Table of Contents

Liquidity and Capital Resources

 

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

 

     Year Ended December 31,

 
     2003

    2004

    2005

 
     (in thousands)  

Net cash provided by (used in) operating activities

   $ (1,593 )   $ (8,688 )   $ 12,464  

Net cash provided by (used in) investing activities

     (28,915 )     11,001       (25,363 )

Net cash provided by financing activities

     30,341       735       14,404  

Net increase (decrease) in cash

     (167 )     3,048       1,509  

Cash at beginning of period

     2,696       2,529       5,577  

Cash at end of period

     2,529       5,577       7,086  

 

From our inception, we financed our operations primarily through the issuance of shares in Himax Taiwan. As of December 31, 2005, we had $7.1 million in cash.

 

Operating Activities.    Net cash provided by operating activities for the year ended December 31, 2005 was $12.5 million compared to net cash used in operating activities of $8.7 million for the year ended December 31, 2004. Net cash provided by operating activities increased in 2005 primarily as a result of an increase in operating profit and accounts payable due to the extension of payment terms received from certain vendors, which was partially offset by an increase in accounts receivable. We negotiated an extension of payment terms with two of our main third-party semiconductor manufacturing service providers in order to better balance our cash flows with payment terms that we offer our customers. The increase in accounts receivable was primarily as a result of the significant increase in sales in the second half of 2005 and the extension of payment terms for certain of our customers in the fourth quarter of 2005. Net cash used in operating activities was $8.7 million for the year ended December 31, 2004, an increase of $7.1 million over net cash used in operating activities of $1.6 million for the year ended December 31, 2003. Our net cash used in operating activities increased in 2004 primarily as a result of an increase in inventory of $33.0 million and accounts receivable (including from related parties) of $30.7 million due to increased sales which were offset by increases in accounts payable of $15.7 million. Additionally, in 2003 and 2004 we operated with negative cash flow from operating activities primarily due to high working capital needs characteristic of our industry, which result from a combination of factors, including our rapid growth, the long lead-time required of work-in-process typical in our industry, our need to maintain high levels of inventory to meet our customers’ requirements and the difference between accounts receivable and accounts payable. If we continue to experience these factors, we expect that we will operate with negative cash flow from operating activities.

 

Investing Activities.    Net cash used in investing activities in the year ended December 31, 2005 was $25.4 million compared to net cash provided by investing activities of $11.0 million in the year ended December 31, 2004. This change was primarily due to a decrease in net proceeds generated from the purchase and sale of available-for-sale marketable securities of $15.2 million, when compared to the year ended December 31, 2004, an increase in the purchase of property and equipment and a pledge of restricted cash equivalents and marketable securities of $13.7 million. Net cash provided by investing activities for the year ended December 31, 2004 was $11.0 million, an increase of $39.9 million compared to net cash used in investing activities of $28.9 million for the year ended December 31, 2003. This increase was primarily as a result of a $41.0 million increase in the net proceeds generated from the purchase and sale of marketable securities when compared to that of 2003, which was partially offset by an increase in the purchase of property and equipment. Additionally, we currently expect remaining fixed asset purchases to be approximately $27.7 million in 2006, which is significantly higher than in previous years, as a result of the payment of construction costs in connection with our new headquarters in the Tainan LCD-TV Industry Park.

 

Financing Activities.    Net cash provided by financing activities in the year ended December 31, 2005 was $14.4 million compared to net cash provided by financing activities of $0.7 million in the year ended

 

58


Table of Contents

December 31, 2004, primarily due to proceeds received from borrowings of short-term debt and the issuance of Amazion’s shares, which was offset by a distribution of special cash dividends and the repayment of long-term debt. Net cash provided by financing activities for the year ended December 31, 2004 was $0.7 million compared to net cash provided by financing activities of $30.3 million for the year ended December 31, 2003. The substantial decrease in net cash provided by financing activities in 2004 was attributable to the fact that there was no issuance and sale of common shares in 2004 compared with 2003. In 2003, the increases in net cash provided by financing activities were primarily due to proceeds from the sales of our common shares.

 

Our liquidity could be adversely affected by our obligation to meet certain conditions set by the ROC Investment Commission (including a requirement to make substantial investments in research and development) in connection with its approval for the share exchange as further described below under “—Contractual Obligations.”

 

Moreover, our liquidity could be negatively impacted by a decrease in demand for our products. Our products are subject to rapid technological change, among other factors, which could result in revenue variability in future periods. Further, we expect to continue increasing our headcount, especially for engineering and sales, to pursue growth opportunities and keep pace with changes in technology. Should demand for our products slow down or fail to grow as expected, our increased headcount would result in sustained losses and reductions in our cash balance. We have at times agreed to extend the payment terms for certain of our customers. Other customers have also requested extension of payment terms and we may grant such requests for extension in the future. The extension of payment terms for our customers could adversely affect our cash flow, liquidity and our operating results.

 

Contractual Obligations

 

The following table sets forth our contractual obligations as of December 31, 2005:

 

     Payment Due by Period

     Total

   Less than
1 year


   1-3 years

   3-5
years


   More than
5 years


     (in thousands)

Long and short term debt

   $ 27,363    $ 27,363    $ —      —      —  

Operating lease obligations

     1,529      1,148      381    —      —  

Purchase obligations(1)

     94,118      94,118      0    —      —  

Other obligations(2)

     59,127      27,959      31,168    —      —  
    

  

  

  
  

Total

   $ 182,137    $ 150,588    $ 31,549    —      —  
    

  

  

  
  

Notes:  (1)   Includes obligations for wafer fabrication, raw materials and supplies.
     (2)   Includes obligations under a license agreement for the use of certain central processing unit cores and the investment obligations required by the ROC Investment Commission.

 

In August 2004, we entered into a license agreement for the use of certain central processing unit cores for product development. In accordance with the agreement, we are required to pay a license fee based on the progress of the project development and a royalty based on shipments. The initial license fee of $100,000 is charged to research and development expense in 2004; no fees or royalties were paid in 2005.

 

In addition, we have begun construction of our new headquarters located in the Tainan LCD-TV Industry Park. The headquarters will house our research and development, engineering, sales and marketing, operations and general administrative staff. Upon completion, the new headquarters is expected to have 21,200 square meters of usable space and occupy 31,800 square meters of land. The land is owned by us. Construction has commenced in the fourth quarter of 2005 and is expected to be completed in the third quarter of 2006. The total costs are estimated to be approximately NT$905.8 million ($27.6 million), of which approximately NT$325.8 million ($9.9 million) is for the land and approximately NT$580 million ($17.7 million) is for the construction

 

59


Table of Contents

costs (which includes architect fees, general contractor fees, building materials, purchases and installation of office equipment and other fixtures). We have already paid for the land purchased and approximately NT$26.1 million ($0.8 million) of the construction costs in 2005. We expect to pay the remainder of the construction costs in 2006. We intend to finance the remaining cost of our new headquarters with a portion of the net proceeds from this offering.

 

Our current corporate structure was established as a result of a share exchange between us and the former shareholders of Himax Taiwan. The ROC Investment Commission has approved the share exchange, subject to our satisfying the following undertakings we gave in connection with our application seeking approval of the share exchange: Himax Taiwan is required to (1) purchase three hectares of land in connection with the construction of its new headquarters in Tainan, Taiwan; (2) increase the number of Taiwanese employees to 430 employees, 475 employees and 520 employees by the end of 2005, 2006 and 2007, respectively; and (3) invest no less than NT$800 million ($24.4 million), NT$900 million ($27.4 million) and NT$1.0 billion ($30.5 million) for research and development in Taiwan in 2005, 2006 and 2007, respectively. The required research and development expenditure may be satisfied through cash-based compensation but cannot be satisfied through non-cash share-based compensation. Himax Taiwan is required to submit to the ROC Investment Commission its annual financial statements audited by a certified public accountant and other relevant supporting documents in connection with the implementation of the above-mentioned conditions within four months after the end of each of 2005, 2006 and 2007.

 

We plan to finance the commitments required under our undertakings to the ROC Investment Commission through a portion of the proceeds from this offering and working capital. We believe that the undertakings under the ROC Investment Commission approval are in line with our business plan. In August 2005, we purchased 3.18 hectares of land for an aggregate purchase price of approximately NT$325.8 million ($9.9 million) in satisfaction of the first condition. As of December 31, 2005, we had satisfied the conditions with respect to the Taiwan employees requirements for 2005 (with 549 Taiwan employees) and had spent approximately NT$1,012 million ($30.9 million) in research and development expenditures.

 

Although we intend to discharge our undertakings to the ROC Investment Commission, we cannot assure you that we will be able to do so under all circumstances. To the extent that we experience no or negative revenue growth as a result of significant company-specific or industry-wide events, we would be limited in our ability to adjust our headcount and research and development expenditures in response to those events. In this case, these undertakings would restrict our operational flexibility and adversely affect our operating margins and results of operations. See “Risk Factors—Political, Geographical and Economic Risks — If we failed to satisfy the undertakings we made to the ROC Investment Commission in connection with our application seeking approval of the share exchange, the ROC Investment Commission could take actions against us that would materially and adversely affect our business, financial condition and results of operations and decrease the value of our ADSs.”

 

Under the ROC Labor Standard Law, we established a defined benefit plan and were required to make monthly contributions to a pension fund in an amount equal to 2% of wages and salaries of our employees. Under the newly effective ROC Labor Pension Act, beginning on July 1, 2005, we are required to make a monthly contribution for employees that elect to participate in the new defined contribution plan of no less than 6% of the employee’s monthly wages, to the employee’s individual pension fund account. Substantially all participants in the defined benefit plan have elected to participate in the new defined contribution plan. Participants’ accumulated benefits under the defined benefit plan are not impacted by their election to change plans. We are required to make contributions to the defined benefit plan until it is fully funded. As a result, our monthly contribution to the pension fund increased to $68,211 in July 2005 compared to $15,646 in June 2005, and we expect to contribute at this increased rate in the future. This increase has not, and is not expected to have, a material effect on our cash flows or results of operations.

 

We believe that our current cash and cash equivalents, cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and

 

60


Table of Contents

capital expenditures for the foreseeable future. We may, however, require additional cash resources due to higher than expected growth in our business or other changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2005, we did not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts. Furthermore, as of December 31, 2005, we did not have any interests in variable interest entities.

 

Inflation

 

Inflation in Taiwan has not had a material impact on our results of operations in recent years. The rate of inflation (deflation) in Taiwan was -0.1%, 1.6% and 2.3% in 2003, 2004 and 2005, respectively.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk.    Our exposure to interest rate risk for changes in interest rates is limited to the interest income generated by our cash deposited with banks and interest rate expense on our floating rate short-term borrowings.

 

Foreign Exchange Risk.    The U.S. dollar is our functional and reporting currency. A substantial portion of our expenses is denominated in currencies other than the U.S. dollar. As of December 31, 2005, more than 40.6% of our accounts payable was denominated in currencies other than the U.S. dollar, primarily in NT dollars and Japanese yen. Approximately 0.6% of our accounts receivable were denominated in currencies other than the U.S. dollar, mainly in NT dollars. In the year ended December 31, 2005, 98.5% of our sales were quoted in U.S. dollars. In 2005, approximately 67.3% of our cost of revenues was denominated in U.S. dollars. We anticipate that we will continue to quote substantially all of our sales in U.S. dollars. We do not believe that we have a material currency risk with regard to the NT dollar, Japanese yen, Euros or Renminbi. We believe any potential adverse foreign exchange impacts on our operating assets may be offset by a potential favorable foreign exchange impact on our operating liabilities. From time to time we have engaged in, and may continue to engage in, forward contracts to hedge against our foreign currency exposure.

 

Recent Accounting Pronouncements

 

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 03-1, or EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for identifying impaired investments and new disclosure requirements for investments that are deemed to be temporarily impaired. On September 30, 2004, the FASB issued a final staff position EITF Issue 03-1-1 that delays indefinitely the effective date for the measurement and recognition guidance included in paragraphs 10 through 20 of EITF 03-1. The guidance in paragraph 10 through 20 of EITF 03-1 has been replaced by guidance in FASB Staff Position, or FSP, FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments issued by the FASB in November 2005. Quantitative and qualitative disclosures required by EITF 03-1 remain effective for fiscal 2005. We have adopted the disclosure requirements of EITF 03-01.

 

FSP FAS 115-1 and FAS 124-1 amend EITF 03-1 and address when an investment is considered impaired and whether that impairment is other-than-temporary and also measure an impairment loss. The FSP also addresses the accounting after an entity recognizes an other-than-temporary impairment and requires certain disclosures about unrealized losses that the entity did not recognize as other-than-temporary impairments. The FSP is effective for reporting periods beginning after December 15, 2005. We do not expect the adoption of this FSP to have a material impact on our consolidated financial position, results of operations or cash flows.

 

61


Table of Contents

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, or SFAS No. 151. SFAS No. 151 amends ARB No. 43, Chapter 4, in order to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The provision of SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transaction, or SFAS No. 153. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS No. 153 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, or FIN 47. FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by this interpretation are those for which an entity has a legal obligation to perform; however, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to estimate reasonably the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal year ending after December 15, 2005. The initial adoption of FIN 47 did not have an impact on our financial condition and consolidated statement of operations.

 

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, or SFAS No. 154. SFAS No. 154 replaces APB No. 20 and SFAS No. 3 and requires retrospective application to a prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. We do not currently plan to undertake any voluntary changes in accounting principle and therefore do not expect the adoption of SFAS No. 154 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In September, 2005, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 04-13, or EITF 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF 04-13 provides guidance for circumstances under which two or more transactions involving inventory with the same counterparty should be viewed as a single nonmonetary transaction within the scope of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and whether there are circumstances under which nonmonetary exchanges of inventory within the same line of business should be recognized at fair value. EITF 04-13 is effective for new arrangements entered into in reporting periods beginning after March 15, 2006. We do not expect the adoption of EITF 04-13 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

62


Table of Contents

BUSINESS

 

Overview

 

We design, develop and market semiconductors that are critical components of flat panel displays. We believe we are among the world’s leading suppliers of large-sized TFT-LCD panel display drivers, with a market share of approximately 15.8% in terms of revenues in 2005, according to iSuppli. Our principal products are display drivers for large-sized TFT-LCD panels, which are used in desktop monitors, notebook computers and televisions, and display drivers for small- and medium-sized TFT-LCD panels, which are used in mobile handsets and consumer electronics products such as digital cameras, mobile gaming devices and car navigation displays. We also offer display drivers for panels using OLED technology and LTPS technology. In addition, we are expanding our product offering to include television semiconductor solutions, as well as LCOS products. Our customers are panel and television makers. We believe that our leading design and engineering expertise, combined with our focus on customer service and close relationships with semiconductor manufacturing service providers, has contributed to our success.

 

Industry Background

 

We operate in the flat panel display semiconductor industry. As our semiconductors are critical components of flat panel displays, our industry is closely linked to the trends and developments of the flat panel display industry. According to iSuppli, global unit shipments of large-sized (ten inches and above in diagonal measurement) flat panel displays are expected to grow from approximately 203.7 million units in 2005 to approximately 352.7 million units in 2009. iSuppli also forecasts global unit shipments of small- and medium-sized (less than ten inches in diagonal measurement) flat panel displays to grow from approximately 1.5 billion units in 2005 to approximately 1.8 billion units in 2009. This projected growth is expected to drive the demand for semiconductors used in large-sized panels and small- and medium-sized panels. Panel manufacturers are primarily located in Taiwan, South Korea, Japan and China. We believe that Taiwan-based semiconductor companies are well positioned to take advantage of the geographic proximity to work closely with panel manufacturers to design semiconductors to be integrated into such customers’ products.

 

Flat Panel Displays

 

Flat panel displays are thin displays that are widely used in a broad range of applications, including notebook computers, desktop monitors, televisions, mobile handsets and consumer electronics products. Flat panel displays have a number of attractive characteristics, including flat and thin screens, light weight, high resolution, stable picture quality with no flickering, low power consumption and low radiation. Technological innovation and production efficiency have resulted in the reduction in the price of flat panel displays and have narrowed the price difference between flat panel displays and traditional cathode ray tube, or CRT, displays. For certain large-sized applications such as desktop monitors and televisions, CRT displays are increasingly being replaced by flat panel displays. This trend is expected to drive the demand for large-sized flat panel displays. Further, the demand for low-cost, high-quality color displays for small-sized applications and consumer preferences for multimedia color panels are expected to drive the demand for mobile handsets and other mobile devices.

 

There are several alternative flat panel display technologies at various stages of development and commercial production, including the following:

 

   

Amorphous silicon thin film transistor liquid crystal display technology, or a-Si TFT-LCD, is an advanced active matrix technology that uses a matrix of transistors embedded on a thin film of silicon to change the transparency of the LCD when voltage is applied. An a-Si TFT-LCD panel consists of two thin glass substrates between which a layer of liquid crystals is deposited and behind which a light source is mounted. The front glass substrate is fitted with a color filter, while the back glass substrate, also called a TFT array, has a thin film of transistors, or TFT, formed on its surface. The liquid crystals

 

63


Table of Contents
 

are normally aligned to allow the polarized light from the backlight unit to pass through the two glass panels to form a picture element, or pixel. When voltage is applied to the transistors on the TFT array, the liquid crystals change their alignment and alter the amount of light that passes through them. Meanwhile, the color filter on the front glass substrate gives each pixel its own color. The combination of these pixels in different colors and levels of brightness forms the image on the panel. A-Si TFT-LCD panels are used in devices of different sizes ranging from one inch to greater than 50 inches for various applications. Unless otherwise indicated, the term “TFT-LCD” is used generally in this prospectus to refer to a-Si TFT-LCD.

 

    LTPS is an alternative form of TFT-LCD technology and uses poly silicon instead of the amorphous silicon used in standard TFT-LCD panels. LTPS is currently primarily used in small-sized panels.

 

    OLED technology uses electro-luminescent materials under active or passive matrix schemes. OLED is currently primarily used in small-sized panels.

 

    Super twisted nematic, or STN, is a passive matrix LCD technology. STN is a low-power, low-cost solution that has been widely used in small displays. There are two types of STN displays, monochrome and color. Color STN displays have largely replaced monochrome STNs, with monochrome STNs primarily used in low-end mobile handsets. However, color STN is gradually being replaced by TFT-LCD and other technologies that offer superior image quality compared with color STN technology.

 

    Liquid crystal on silicon technology, or LCOS, is a microdisplay technology that creates high-resolution images with liquid crystals and silicon chips. LCOS displays are constructed with a silicon chip, a layer of liquid crystals and a glass cover plate in contrast to the more common TFT-LCD construction of liquid crystals sandwiched between two glass plates. LCOS is at a relatively early stage of commercialization and is currently used in large-sized projection televisions and certain small-sized applications.

 

    Digital light processing technology, or DLP, is another microdisplay technology. Instead of using liquid crystals, the DLP chip is a reflective surface containing tiny mirrors. Each mirror represents a single pixel. DLP technology is primarily used in large-sized projection televisions.

 

Of these technologies, TFT-LCD technology was the most widely used flat panel display technology in 2005 in terms of revenues, with global sales of TFT-LCD driver products representing approximately 68.3% of the total flat panel driver market, according to iSuppli. TFT-LCD is currently the dominant technology used in desktop monitors and notebook computers and is becoming more widely adopted in televisions. The attractiveness of the TFT-LCD market opportunity has spurred substantial investments in capital expenditures on new generation fabs leading to expanded and improved manufacturing capacity and increased focus and spending on research and development by panel manufacturers. Additionally, the TFT-LCD market opportunity has contributed to the growth of a highly developed and specialized supply chain. The combination of these factors is expected to continue to improve performance and reduce the unit cost of TFT-LCD panels and thereby further drive demand for such products and their components.

 

Flat Panel Display Semiconductors

 

Flat panel displays require different semiconductors depending upon the display technologies and the application. Some of the most important ones include the following:

 

   

Display Driver.    The display driver receives image data from the timing controller and delivers precise analog voltages or currents to create images on the display. The two main types of display drivers for a TFT-LCD panel are gate drivers and source drivers. Gate drivers turn on the transistor within each pixel cell on the horizontal line on the panel for data input at each row. Source drivers receive image data from the timing controller and generate voltage that is applied to the liquid crystal within each pixel cell on the vertical line on the panel for data input at each column. The combination

 

64


Table of Contents
 

determines the colors generated by each pixel. Typically multiple gate drivers and source drivers are installed separately on the panel. However, for certain small-sized applications, gate drivers and source drivers are integrated into a single chip due to space and cost considerations. The number of display drivers required for each panel depends on the resolution. Large-sized panels typically have higher resolution and require more display drivers than smaller-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 small-sized applications, however, the timing controller may be integrated with display drivers.

 

    Scaler.    For certain displays, a scaler is installed to magnify or shrink image data in order for the image to fill the panel.

 

    Operational Amplifier.    An operational amplifier supplies the reference voltage to source drivers in order to make their output voltage uniform.

 

    Television Chipset.    Television flat panel displays require chipsets that typically contain all or some of the following components: an audio processor, analog interfaces, digital interfaces, a video processor, a channel receiver and a digital television decoder. See “—Products—Television Semiconductor Solutions—Television Chipsets” for a description of these components.

 

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

 

Characteristics of the Display Driver Market

 

Although we operate in several distinct segments of the flat panel display semiconductor industry, our principal products are display drivers. Display drivers are critical components of flat panel displays. As a result, we believe that the projected growth in the demand for flat panel displays will result in the growth in demand for display drivers. According to iSuppli, shipments of display drivers are expected to grow from 4.2 billion units in 2005 to 6.3 billion units in 2009, with global sales revenues increasing from $7.8 billion in 2005 to $9.3 billion in 2009. 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. According to iSuppli, the top ten TFT-LCD panel manufacturers of large-sized panels in terms of unit sales accounted for 95.7% of global sales in the first three quarters of 2005. All of these manufacturers are based in Asia. In recent years, TFT-LCD panel manufacturers, in particular Taiwan- and Korea-based manufacturers, have invested heavily to establish, construct and ramp up additional fab capacity. The capital intensive nature of the industry often results in TFT-LCD panel manufacturers operating at a high level of capacity utilization in order to reduce unit costs. This tends to create a temporary oversupply of panels, which reduces the average selling price of panels and puts pricing pressure on display driver companies. Moreover, the concentration of panel manufacturers permits major panel manufacturers to exert pricing pressure on display driver companies such as us. The small number of panel manufacturers intensifies this as display driver companies, in addition to seeking to expand their customer base, must also focus on winning a larger percentage of such customers’ display driver requirements.

 

Customization Requirements

 

Each panel display has a unique pixel design to meet its particular requirements. To optimize the panel’s performance, display drivers have to be customized for each panel design. The most common customization requirement is for the display driver company to optimize the gamma curve of each display driver for each panel design. Display driver companies must work closely with their customers to develop semiconductors that meet their customers’ specific needs in order to optimize the performance of their products.

 

65


Table of Contents

Mixed-Signal Design and High-Voltage CMOS Process Technology

 

Display drivers have specific design and manufacturing requirements that are not standard in the semiconductor industry. Some display drivers require mixed-signal design since they combine both analog and digital devices on a single semiconductor to process both analog signals and digital data. Manufacturing display drivers requires high-voltage complementary metal oxide semiconductor, or CMOS, process technology typically operating at eight to 16 volts for source drivers and 10 to 40 volts for gate drivers, levels of voltage which are not standard in the semiconductor industry. For display drivers, the driving voltage must be maintained under a very high degree of uniformity, which can be difficult to achieve using standard CMOS process technology. However, manufacturing display drivers does not require very small-geometry semiconductor processes. Typically, the manufacturing process for large panel display drivers requires geometries between 0.18 micron and 1 micron because the physical dimensions of a high-voltage device do not allow for the economical reduction in geometries below this range. We believe that there are a limited number of fabs with high-voltage CMOS process technology that are capable of high-volume manufacturing of display drivers.

 

Special Assembly and Testing Requirements

 

Manufacturing display drivers requires certain assembly and testing technologies and equipment that are not standard for other semiconductors and are offered by a limited number of providers. The assembly of display drivers typically uses either tape automated bonding, also known as TAB, or chip-on-glass, also known as COG, technologies. Display drivers also require gold bumping, which is a process in which gold bumps are plated onto each wafer to connect the die and the processed tape, in the case of TAB packages, and the glass, in the case of COG packages. TAB may utilize tape carrier package, also known as TCP, or chip on film, also known as COF. The type of assembly used depends on the panel manufacturer’s design which is influenced by panel size and application and is typically determined by the panel manufacturers. Display drivers for large-sized applications typically require TAB package types and, to a lesser extent COG package types, whereas display drivers for mobile handsets and consumer electronics products typically require COG packages. The testing of display drivers also requires special testers that can support high-channel and high-voltage output semiconductors. Such testers are not standard in the semiconductor industry.

 

Supply Chain Management

 

The manufacturing of display drivers is a complex process and requires several manufacturing stages such as wafer fabrication, gold bumping and assembly and testing, and the availability of materials such as the processed tape used in TAB packaging. We refer to these manufacturing stages and material requirements collectively as the “supply chain.” Panel manufacturers typically operate at high levels of capacity utilization and require a reliable supply of display drivers. A shortage of display drivers, or a disruption to this supply, may disrupt panel manufacturers’ operations since replacement supplies may not be available on a timely basis or at all, given the customization of display drivers. As a result, a display driver company’s ability to deliver its products on a timely basis at the quality and quantity required is critical to satisfying its existing customers and winning new ones. Such supply chain management is particularly crucial to fabless display driver companies that do not have their own in-house manufacturing capacity. In the case of display drivers, supply chain management is further complicated by the high-voltage CMOS process technology and the special assembly and testing requirements that are not standard in the semiconductor industry. Access to this capacity also depends in part on display driver companies having received assurances of demand for their products since semiconductor manufacturing service providers require credible demand forecasts before allocating capacity among customers and investing to expand their capacity to support growth.

 

Need for Higher Level of Integration

 

The small form factor of mobile handsets and certain consumer electronics products restricts the space for components. Small-sized panel applications require one source driver, one gate driver and one timing controller,

 

66


Table of Contents

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.

 

The Taiwan Advantage in the Flat Panel Display Driver Industry

 

The highly developed Taiwan semiconductor supply chain and the close proximity to panel manufacturers have contributed to the growth of Taiwan’s display driver industry. Taiwan is one of the world’s leading locations for outsourced semiconductor manufacturing and back-end services, with leading semiconductor manufacturing service providers offering outsourced, high-volume and advanced manufacturing for each of the various stages of the semiconductor manufacturing process, including wafer fabrication, gold bumping, assembly and testing. This cluster effect gives Taiwan-based display driver companies access to significant capacity, economies of scale, specialized expertise and manufacturing flexibility. Moreover, Taiwan-based semiconductor manufacturing service providers can leverage Taiwan’s large pool of highly skilled engineers and other personnel suitable for sophisticated manufacturing industries. The ready availability of semiconductor manufacturing in Taiwan helps Taiwan-based display driver companies such as us to mass-produce their products at competitive prices. Taiwan is also a key location for panel manufacturers. The close proximity to customers facilitates efficient joint development and improved manufacturing processes and engineering support.

 

The Himax Solution

 

Our semiconductors and solutions provide our customers with the following benefits:

 

    Comprehensive Display Driver Solutions.    We offer comprehensive display driver solutions and have devoted substantial resources to satisfy our customers’ short- and long-term needs. We are highly skilled in the design of customized, high-performance and cost-effective display drivers. We believe that we design and offer display drivers that meet the various and fast-changing requirements of panel manufacturers. We have in-depth knowledge of display technologies and liquid crystal characteristics and are committed to working closely with our customers and using this know-how to solve their display-related problems and to optimize the performance of their products.

 

    Broad Product Portfolio.    We offer a broad range of display drivers to meet the requirements of our customers. We provide display drivers to support a wide range of resolutions, panel sizes and various interface technologies, including customized interfaces, as well as COF, COG and TCP package types. To further broaden our product portfolio, we are developing source and gate drivers with a higher number of channels and higher-bit source drivers for large-sized TFT-LCD panels, expanding our portfolio of display drivers for LTPS and developing display drivers for panels utilizing OLED technology.

 

    Customized Products That Optimize Panel Performance.    We design many of our products based on our customers’ specifications, and we work closely with our direct customers, and in some cases our customers’ customers, to better understand their needs and to align our products with their product roadmaps. For example, our continuing close relationship and collaboration with CMO, a leading panel manufacturer, have improved our understanding of the requirements of panel manufacturers and enhanced our ability to optimize panel performance. Our customized product approach allows our engineers to focus on customer service and deliver engineering samples and offer engineering solutions. Finally, our ability to quickly change the driving gamma curve allows us to optimize the performance of various liquid crystal materials and customize our products.

 

67


Table of Contents
    Fabless Model for Manufacturing Efficiency and Flexibility.    We use semiconductor manufacturing service providers such as foundries and assembly and testing houses. We engage foundries with high- voltage CMOS process technology for our display drivers, and we work with assembly and testing houses that specialize in TAB and COG assembly, thereby allowing us to take advantage of the economies of scale and specialization of such semiconductor manufacturing service providers. In addition, we are able to capture the financial and operational benefits of the fabless model, including reduced manufacturing personnel, capital expenditures, fixed assets and fixed costs. Our fabless model also provides us with the flexibility to use the most suitable technology and service provider for a particular product.

 

    Cost-Effective Solutions for High-Volume Manufacturing.    We strive to design cost-effective semiconductors for high-volume manufacturing by reducing manufacturing and material costs while maintaining the desired level of performance. We believe that our relationships with our suppliers provide us with access to processed tape used in TAB package and equipment at competitive prices. Since panel manufacturers are price sensitive, we must leverage existing product design expertise to shrink the die size in order to develop cost-effective products with desired features and performances. Moreover, we strive to achieve cost savings by economies of scale, yield improvements, design improvements and manufacturing efficiency.

 

    Highly Integrated, Small and Power Efficient Display Drivers for Mobile Handsets and Consumer Electronics Products.    Our engineers are highly skilled at combining various multi-voltage, mixed signal functional building blocks into a single chip. For example, our display drivers for mobile device applications combine source drivers, gate drivers, power circuit, timing controllers and static random access memory, or SRAM, into a single chip. We have devoted significant time and engineering resources collaborating with our customers to simulate, characterize, and, as necessary, adapt these processes to design and develop our products for higher performances and smaller die sizes. As a result, we believe our display drivers for mobile handsets are currently among the smallest in the industry. Similarly, we work to reduce the power consumption and heat generation of our products, as improved power efficiency extends battery life, which is particularly important for mobile devices.

 

Strategy

 

We are a leading supplier of display drivers for large-sized TFT-LCD panels. Our aim is to become one of the world’s leading providers of semiconductors for flat panel display applications. We intend to pursue this goal through the following strategies:

 

Expand and Diversify Our Customer Base and Capture a Larger Percentage of Our Customers’ Large-sized Panel Display Driver Requirements.    We currently sell display drivers to many of the world’s leading panel manufacturers, including CMO, CPT, Innolux Display, Samsung and SVA-SEC. We believe we are among the world’s leading suppliers of display drivers for large-sized TFT-LCD panel display drivers, with a market share of approximately 15.8% in terms of revenues in 2005, according to iSuppli. This position, which we achieved in a relatively short period of time, reflects our customers’ confidence in our ability to scale up our production to meet their volume requirements and our ability to provide customized, high-performance and cost-effective products. We intend to leverage our market position to continue to enhance and strengthen our relationship with existing customers and expand and diversify our customer base. We seek to capture a larger percentage of their requirements by continuing to focus on customization and enhanced product performance. We are actively working with existing and prospective customers on new designs. Additionally, the trend towards display drivers with a higher number of channels with the advanced interface technologies required of higher-resolution panels should offer opportunities for us to achieve additional design wins. We aim to capture growth opportunities presented by these industry developments and to reduce our reliance on any one customer.

 

Target Leadership Position in Mobile Handset Display Driver Market.    We aim to establish a leadership position in the mobile handset display driver market. We offer display drivers for panels using TFT-LCD and LTPS technologies and are developing display drivers for panels using OLED technology to further expand our

 

68


Table of Contents

product offerings and market penetration. We commenced volume shipments of single-chip TFT-LCD display drivers for use in mobile handsets in August 2004 and of our small-sized display drivers using our die shrink know-how for mobile handsets in June 2005. We believe our display drivers for mobile handsets are currently among the smallest in the industry. We believe that mobile handset display drivers will provide us with significant growth opportunities as a result of the growing demand for low-cost, high-quality displays and as mobile handsets increasingly incorporate multimedia features. Moreover, we believe that achieving a leadership position in the mobile handset display driver market would enable us to diversify our sources of revenue.

 

Leverage Design and Engineering Expertise to Capture Other Growth Opportunities.    We plan to leverage our display-related semiconductor and engineering expertise to develop other products for which we believe there are significant growth opportunities. For example, we are focusing on television chipsets for use in flat panel and advanced CRT televisions. Our close collaboration with panel manufacturers that are focused on the LCD television market enables us to better understand the requirements of LCD television makers. Additionally, we have leveraged our design and process capabilities to develop and commercialize LCOS products, which are targeted at projection TV and microdisplay opportunities.

 

Strengthen Our Semiconductor Manufacturing Supply Chain.    We aim to strengthen our access to stable, larger, more reliable, diverse and cost-efficient manufacturing capacity and supply of processed tape. We believe this is important to our ability to meet our customers’ delivery requirements, since to do so our semiconductor manufacturing service providers and suppliers must meet the schedules and quality specifications that we set for them. Our customers expect us to have access to sufficient high-quality and diverse manufacturing capacity to meet their long-term growth targets. We plan to strengthen our relationships with our existing foundries and to begin sourcing from additional semiconductor manufacturing service providers.

 

Products

 

We have three principal product lines:

 

    display drivers and timing controllers;

 

    television semiconductor solutions; and

 

    LCOS products.

 

We commenced volume shipments of our first source and gate driver for large-sized panels in July 2001 and have developed a broad product portfolio of display drivers and timing controllers for use in large-sized TFT-LCD panels. We commenced volume shipments of our first display drivers for use in consumer 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.

 

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.

 

69


Table of Contents
 

For example, an XGA (1,024 x 768 pixels) panel requires eight 384 channel source drivers (1,024 x 3 = 384 x 8) and three 256 channel gate drivers (768 = 256 x 3), while a SXGA (1,280 x 1,024 pixels) panel requires ten 384 channel source drivers and four 256 channel gate drivers. The number of display drivers required can be reduced by using drivers with a higher number of channels. For example, a SXGA panel can have eight 480 channel source drivers or four 960 channel source drivers instead of ten 384 channel source drivers. Thus, using display drivers with a higher number of channels can reduce the number of display drivers required for each panel, although display drivers with a higher number of channels typically have higher unit costs.

 

    Color Depth.    Color depth is the number of colors that can be displayed on a screen, which is determined by the number of shades of a color, also known as grayscale, that can be shown by the panel. For example, a 6-bit source driver is capable of generating 26 x 26 x 26 = 218, or 262K colors, and similarly, an 8-bit source driver is capable of generating 16 million colors. Typically, for TFT-LCD panels currently in commercial production, 262K and 16 million colors are supported by 6-bit and 8-bit source drivers, respectively.

 

    Operational Voltage.    A display driver operates with two voltages: the input voltage (which enables it to receive signals from the timing controller) and the output voltage (which, in the case of source drivers, is applied to liquid crystals and, in the case of gate drivers, is used to switch on the TFT device). Source drivers typically operate at input voltages from 3.3 to 1.8 volts and output voltages between eight to 16 volts. Gate drivers typically operate at input voltages from 3.3 to 1.8 volts and output voltages from 10 to 40 volts. Lower input voltage saves power and lowers electromagnetic interference, or EMI. Output voltage may be higher or lower depending on the characteristics of the liquid crystal (or diode), in the case of source drivers, or TFT device, in the case of gate drivers.

 

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

 

    Driver Interface.    Driver interface refers to the connection between the timing controller and display drivers. Display drivers increasingly require higher bandwidth interface technology to address the larger data volume necessary for video images. Panels used for higher data transmission applications such as televisions require more advanced interface technology. The principal types of interface technologies are transistor-to-transistor logic, or TTL, reduced swing differential signaling, or RSDS, and mini low voltage differential signaling, or mini-LVDS. Among these, RSDS and mini-LVDS were developed as low power, low noise and low amplitude method for high-speed data transmission using fewer copper wires and resulting in lower EMI. In 2005, we introduced two new display driver interfaces: dual edge TTL, or DETTL, and turbo RSDS. DETTL enables the interface to function with lower power (below 1.8V), thus reducing power consumption. Turbo RSDS is an upgraded version of RSDS which increases the interface frequency from 85MHz to 135MHz, thus reducing the bus width and panel costs.

 

    Package Type.    The assembly of display drivers typically uses TAB and COG package types. COF and TCP are two types of TAB packages. Customers typically determine the package type required according to their specific mechanical and electrical considerations. In general, display drivers for small-sized panels use COG package type whereas display drivers for large-sized panels primarily use TAB package types and to a lesser extent COG package types.

 

70


Table of Contents

Large-Sized Applications

 

We provide source drivers, gate drivers and timing controllers for large-sized panels principally used in desktop monitors, notebook computers and televisions. Display drivers used in large-sized applications feature different key characteristics, depending on the end-use application. For display drivers for use in notebook computers, low power consumption is a key feature due to the portability of notebook computers and the need for long battery life. For display drivers used in desktop monitors, low cost is more desirable than low power consumption. For advanced televisions, display drivers must meet the requirements of larger panels, such as higher data transmission rates, wider viewing angles, faster response time, higher color depth and better image performance.

 

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

 

Product


  

Features


TFT-LCD Source Drivers

  

•        384 to 720 output channels

•        6-bit (262K colors) or 8-bit (16 million colors)

•        one gamma-type driver

•        three gamma-type drivers (RGB independent gamma curve to enhance color image)

•        output driver voltage ranging from eight to 16V

•        input logic voltage ranging from standard 3.3V to low power 1.8V

•        low power consumption and low EMI

•        supports TCP, COF and COG package types

•        supports TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized interface technologies

TFT-LCD Gate Drivers

  

•        192 to 400 output channels

•        output driving voltage ranging from 10 to 40V

•        input logic voltage ranging from standard 3.3V to low power 1.8V

•        low power consumption

•        supports TCP, COF and COG package types

Timing Controllers

  

•        product portfolio supports a wide range of resolutions, from VGA (640 x 480 pixels) to HDTV (1,920 x 1,080 pixels)

•        supports TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized output interface technologies

•        input logic voltage ranging from standard 3.3V to low power 1.8V

•        embedded overdrive function for television applications to improve response time

•        supports TTL and LVDS input interface technologies

 

The industry trend for large-sized applications is towards low power consumption notebook computer display drivers, low cost desktop monitor display drivers and display drivers that can support higher speed interface technologies, have greater color depth and enhanced color through RGB independent gamma for use in advanced televisions.

 

Mobile Handset Applications

 

We offer display drivers for mobile handset displays that combine source driver, gate driver and other functions into a single chip. As mobile handsets become smaller and more compact, customers are increasingly

 

71


Table of Contents

demanding smaller die sizes and higher levels of integration with source driver, gate driver, timing controller, as well as more functional semiconductors such as memory, power circuit and image processors, integrated into a single chip. Moreover, mobile handsets must operate for long durations without recharging the battery. Thus, display drivers with lower power consumption are desired in order to extend the battery life. Low cost is also an important feature as mobile handset manufacturers continue to reduce cost and customers increasingly seek out cost-effective display drivers.

 

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

 

Product


  

Features


TFT-LCD Drivers

  

•        highly integrated single chip embedded with the source driver, gate driver, power circuit, timing controller and memory

•        product portfolio suitable for a wide range of resolutions including QQVGA (128 x 160 pixels), QCIF (132 x 176 pixels), QCIF+ (176 x 220 pixels), QVGA (240 x 320 pixels) and a range of panel sizes from 1.5 to 2.4 inches in diagonal measurement

•        supports 262K colors to 16 million colors

•        input logic voltage ranging from standard 3.3V to low power 1.65V

•        low power consumption and low EMI

•        utilizes die shrink technology to reduce die size and cost

•        slimmer die for compact module to fit smaller mobile handset designs

•        application specific integrated circuits, or ASIC, can be designed to meet customized requirements (e.g. drivers without memory or drivers without gate driver embedded on the chip)

LTPS Drivers

  

•        highly integrated single chip embedded with the source driver, power circuit, timing controller and memory

•        supports 262K colors to 16 million colors

•        input logic voltage ranging from standard 3.3V to low power 1.65V

•        utilizes die shrink technology to reduce die size and cost

•        slimmer die for compact module

•        ASIC can be designed to meet customized requirements
(e.g. gate-less or multi-bank output driver)

 

The industry trend for mobile handset display drivers is towards display drivers that can support high-speed interfaces, have greater color depth and enhanced image quality as mobile handsets increasingly incorporate multimedia functions.

 

Consumer Electronics Products

 

We offer source drivers, gate drivers, timing controllers and integrated drivers for consumer electronics products like digital cameras, digital video recorders, personal digital assistants, mobile gaming devices, portable DVD players and car navigation displays. We offer an extensive line of display drivers covering different applications, interfaces and channel output and levels of integration. Similar to mobile handsets, consumer electronics products are typically compact, battery-operated devices. Customers are increasingly demanding display drivers with smaller and more compact die sizes and higher levels of integration with source driver, gate driver, timing controller, as well as more functional semiconductors such as memory, power circuit and image processors, integrated into a single chip. Moreover, display drivers with lower power consumption are desired in order to extend the battery life.

 

72


Table of Contents

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

 

Product


  

Features


TFT-LCD Source Drivers

  

•        240 to 960 output channels

•        products for analog and digital interfaces

•        supports 262K colors to 16 million colors

•        input logic voltage ranging from standard 3.3V to low power 2.5V

•        low power consumption and low EMI

TFT-LCD Gate Drivers

  

•        96 to 480 output channels

•        input logic voltage ranging from standard 3.3V to low power 2.5V

•        output driving voltage ranging from 10 to 40V

TFT-LCD Integrated Drivers

  

•        highly integrated single chip embedded with source driver, gate driver, timing controller and power circuit

•        products for analog or digital interfaces

Timing Controllers

  

•        products for analog or digital interfaces

•        supports various resolutions from 280 x 220 pixels to 800 x 600 pixels

 

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

 

73


Table of Contents

Television Semiconductor Solutions

 

We provide television semiconductor solutions specifically designed to meet the requirements of advanced television systems.

 

Set forth below are the various semiconductor components that may be utilized in advanced televisions:

 

LOGO

 

Television Chipsets

 

Television chipsets contain numerous components that process video and audio signals and thus enhance the image and audio qualities of televisions. Advanced televisions typically require some or all of these components:

 

    Audio Processor/Amplifier.    Demodulates, processes and amplifies sound from television signals.

 

    Analog Interfaces.    Convert analog video signals into digital video signals. Video decoder and analog-to-digital converter (ADC) are included.

 

    Digital Interfaces.    Receive digital signals via digital receivers. Digital visual interfaces (DVI) and high-definition multimedia interfaces (HDMI) are included.

 

    Channel Receiver.    Demodulates input signals so that the output becomes compressed bit stream data.

 

    DTV Decoder.    Converts video and audio signals from compressed bit stream data into regular video and audio signals.

 

    Video Processor.    Performs the scaling function that magnifies or shrinks the image data in order to fit the panel’s resolution; provides real-time processing for improved color and image quality; converts output video from an interlaced format to a progressive format in order to eliminate jaggedness; and supports on-screen display and real-time video format transformation.

 

74


Table of Contents

We are developing all of the above components, although we currently only offer and sell video processors in volume. Our video processors are designed for use in advanced televisions and our product portfolio includes high-performance video processors which target high-end segments as well as cost-effective video processors which target entry-level segments.

 

The following table summarizes the features of our video processors:

 

Product


  

Features


Video Processors

  

•        3D noise reduction reduces spatial or temporal noise on the video image

•        3D de-interlacer converts output video from interlaced format to progressive format to eliminate jaggedness

•        dynamic exposure adaptation maximizes black and white contrast quality

•        scaling function to convert the image resolution coming from video sources in order to fit the panel’s resolution

•        dynamic color adaptation adjusts video color to make it more saturated and accurate

 

Television Tuner Modules

 

We offer a variety of digital and analog television tuner modules. We are highly skilled in designing compact, high-performance tuner modules that integrate semiconductors and other components on the system board. The semiconductors and components are purchased from third-party suppliers and are assembled by third-party electronics manufacturing service providers. We design our television tuner modules in an advanced, coil-free architecture to provide slim and small tuners.

 

Our tuners are suitable for most of the world’s signal transmission standards, including: Digital Video Broadcast–Terrestrial, also known as DVB-T, the digital television standard (depending on the bandwidth) in Taiwan, Australia and Europe; Advanced Television System Committee, or ATSC, the digital television standard in the United States and Canada; National Television System Committee, or NTSC, the analog television standard in the United States, Canada, Japan, the Philippines, Taiwan and South Korea; Phase Alternating Line, or PAL, the analog television standard in Western Europe, Australia, Hong Kong and China; and Systeme Electronique Couleur Avec Memoire, or SECAM, the analog television standard in France, Russia and Eastern Europe.

 

The following table sets forth the features of our television tuner modules:

 

Product


  

Features


Digital Television Tuner Modules

  

•        DVB-T tuners for 6MHz bandwidth (for use in Taiwan), 7MHz bandwidth (for use in Australia) and 8MHz bandwidth (for use in Europe)

•        ATSC RF tuners with NTSC function

•        lower power RF tuners

Analog Television Tuner Modules

  

•        global tuner combining NTSC, PAL and SECAM television standards and FM radio tuner

•        low power off-air tuner combining NTSC and PAL television standards and FM radio tuner

•        mobile analog tuner combining NTSC television standards and FM radio tuner

•        slim design to save space

 

75


Table of Contents

LCOS Products

 

LCOS technology is still at a relatively early stage of commercial application but is expected to be utilized in near-to-eye applications, rear projection televisions and mini-projectors. We design our LCOS products at our subsidiary, Himax Display, which owns and operates a fab for the manufacture of such products.

 

The following table sets forth the features of our LCOS products:

 

Product


  

Features


LCOS Modules for Near-to-eye and Mini-projector Applications

  

•        640 x 360 pixels (Q720P), VGA and SVGA resolutions

•        8-bit (16 million colors)

•        high reflectivity and greater than 100:1 contrast ratio

•        low power consumption

LCOS Modules for Projection Applications

  

•        WXGA and HDTV resolutions

•        8-bit (16 million colors)

•        high reflectivity and greater than 1,000:1 contrast ratio

 

Other Products and Services

 

We established Amazion in July 2004 to design, develop and market semiconductors for power management applications. To date, Amazion has not generated any revenues from such products. We also offer liquid crystal injection services through our subsidiary Himax Display. In 2005, Himax Display generated NT$95.8 million ($2.9 million) in revenues from such services.

 

Core Technologies and Know-How

 

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

 

High-Voltage CMOS Circuit Design.    Unlike most other semiconductors, TFT-LCD display drivers require a high output voltage of eight to 40 volts. We have developed circuit design technologies using a high-voltage CMOS process that enables us to produce high-yield, reliable and compact drivers for high-volume applications. Moreover, our technologies enable us to keep the driving voltage at very high uniformity, which can be difficult to achieve when using standard CMOS process technology.

 

High-Bandwidth Interfaces.    In addition to high-voltage circuit design, TFT-LCD display drivers require high bandwidth transmission for video signals. We have applied several high-speed interfaces, including TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized interfaces, in our display drivers. Moreover, we are developing additional driver interfaces for special applications with optimized speed, lower EMI and higher system stability.

 

Die Shrink and Low-Power Technologies.    Our engineers are highly skilled in employing their knowledge of driving technology and high-voltage CMOS circuit design to shrink the die size of our display drivers while leveraging their understanding of driving technology and panel characteristics to design display drivers with low power consumption. Die size is an important consideration for applications with size constraints. Smaller die size also reduces the cost of the chip. Lower power consumption is important for many portable devices such as notebook computers, mobile handsets and consumer electronics products.

 

76


Table of Contents

Customers

 

Our direct customers for display drivers are primarily panel 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 sell our television semiconductors to manufacturers of advanced televisions. As of December 31, 2005, we sold our products to more than 50 customers. In 2003, 2004 and 2005, CMO and its affiliates accounted for 78.0%, 63.2% and 58.9% of our revenues, respectively, while CPT and its affiliates accounted for 5.7%, 19.5% and 16.2% of our revenues, respectively, in the same periods. We expect that sales to CMO and CPT and their affiliates will continue to account for a substantial majority of our revenues in the near term.

 

Set forth below (in alphabetical order) are our ten largest customers (and their affiliates) based on revenues for the year ended December 31, 2005:

 

Chi Mei Optoelectronics Corp.

Chunghwa Picture Tubes

HannStar Display Corporation

InnoLux Display Corporation

Lightsonic Optoelectronics Inc.

Optrex Corporation

Perfect Display Limited

Samsung Electronics Taiwan Co., Ltd.

Shanghai SVA-NEC Liquid Crystal Display

Transcend Optronics (Yangzhou) Co, Ltd.

 

Our customers typically provide us with a long-term (12 month) forecast plus three-month rolling non-binding forecasts and confirm orders with us one month ahead of scheduled delivery. In general, purchase orders are not cancellable by either party, although from time to time we and our customers have agreed to amend the terms of such orders.

 

Sales and Marketing

 

We focus our sales and marketing strategy on establishing business and technology relationships principally with TFT-LCD panel manufacturers and increasingly also with panel manufacturers using LTPS or OLED technologies and also with mobile display module and mobile handset manufacturers in order to work closely with them on future semiconductor solutions that align with their product roadmaps. Our engineers collaborate with our customers’ engineers to create products that comply with their specifications and provide a high level of performance at competitive prices. Our end market for large-sized panels is concentrated around a limited number of major panel manufacturers. We have also commenced marketing our products directly to mobile device manufacturers so that our products can be qualified for their specifications and designed into their products.

 

We primarily sell our products through our direct sales team located in Taiwan, South Korea, Japan and China. We also have dedicated sales teams for certain of our most important current or prospective customers. We have sales and technical support offices in Tainan, Taipei and Hsinchu in Taiwan, in Suzhou, China, in Anyangsi Kyungkido, South Korea and in Yokohama, Japan, all in close proximity to our customers. We have dedicated sales teams for our display driver and television semiconductor solutions businesses that cover each of the markets of Taiwan, South Korea, Japan and China. For certain products or regions we may from time to time sell our products through agents or distributors.

 

Our sales and marketing team possesses a high level of technical expertise and industry knowledge used to support a lengthy and complex sales process. This includes a highly trained team of field applications engineers that provides technical support and assistance to potential and existing customers in designing, testing and

 

77


Table of Contents

qualifying display modules that incorporate our products. We believe that the depth and quality of this design support are key to improving customers’ time-to-market and maintaining a high level of customer satisfaction.

 

Manufacturing

 

We are a fabless semiconductor company. We leverage our experience and engineering expertise to design high-performance semiconductors and rely on semiconductor manufacturing service providers for wafer fabrication, gold bumping, assembly and testing. We also rely on third-party suppliers of processed tape used in TAB packaging. We engage foundries with high-voltage CMOS process technology for our display drivers and with assembly and testing houses that specialize in TAB and COG packages, thereby taking advantage of the economies of scale and the specialization of such semiconductor manufacturing service providers. Our fabless model enables us to capture certain financial and operational benefits, including reduced manufacturing personnel, capital expenditures, fixed assets and fixed costs. It also gives us the flexibility to use the technology and service provider most suitable for any given product.

 

Manufacturing Stages

 

The diagram below sets forth the various stages in manufacturing display drivers according to the two different types of assembly utilized: TAB or COG. The assembly type depends on the application of the panel and is determined by our customers.

 

LOGO

 

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

 

Gold Bumping:    After the wafers are fabricated, they are delivered to gold bumping houses where gold bumps are plated on each wafer. The gold bumping process uses thin film metal deposition, photolithography and

 

78


Table of Contents

electrical plating technologies. The gold bumps are plated onto each wafer to connect the die to the processed tape, in the case of TAB package, or the glass, in the case of COG package.

 

Chip Probe Testing:    Each individual die is electrically tested, or probed, for defects. Dies that fail this test are discarded.

 

Assembly and Testing:    Our display drivers use two types of assembly technology: TAB or COG. Display drivers for large-sized applications typically require TAB package types and to a lesser extent COG package types, whereas display drivers for mobile handsets and consumer electronics products typically require COG package types.

 

TAB Assembly

 

We use two types of TAB technologies: TCP and COF. TCP and COF packages are both made of processed tape that is typically 35mm or 48mm wide, plated with copper foil and has a circuit formed within it. TCP and COF packages differ, however, in terms of their chip connections. With TCP packages, a hole is punched through the processed tape in the area of the chip, which is connected to a flying lead made of copper. In contrast, with COF packages, the lead is mounted directly on the processed tape and there is no flying lead.

 

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

 

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

 

COG Assembly

 

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

 

Quality Assurance

 

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

 

In November 2002, we received the ISO 9001:2000 certification which was renewed in February 2005.

 

Semiconductor Manufacturing Service Providers and Suppliers

 

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

 

79


Table of Contents

Access to semiconductor manufacturing service providers is critical as display drivers require high-voltage CMOS process technology and specialized assembly and testing services, all of which are different from industry standards. We have historically obtained our foundry services from TSMC and Vanguard and have also recently established a relationship with Macronix and Lite-on. These are among a select number of semiconductor manufacturers that provide high-voltage CMOS process technology required for manufacturing display drivers. We engage assembly and testing houses that specialize in TAB and COG packages such as Chipbond Technology Corporation, ChipMOS, and Siliconware Precision Industries Co., Ltd.

 

We plan to strengthen our relationships with our existing semiconductor manufacturing service providers and diversify our network of such service providers in order to ensure access to sufficient cost-competitive and high-quality manufacturing capacity. We are selective in our choice of semiconductor manufacturing service providers. It takes a substantial amount of time to qualify alternative foundries, gold bumping, assembly and testing houses for production. As a result, we expect that we will continue to rely on limited number of semiconductor manufacturing service providers for a substantial portion of our manufacturing requirements in the near future.

 

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

 

Wafer Fabrication


  

Gold Bumping


Lite-on Semiconductor Corp.

   Chipbond Technology Corporation

Macronix International Co., Ltd.

   FuPo Electronics Corporation

Taiwan Semiconductor Manufacturing Company

   International Semiconductor Technology Ltd.

Vanguard International Semiconductor Corporation

   Megic Corporation

Processed Tape for TAB Packaging


  

Assembly and Testing


CASIO Micronics Co., Ltd.

   Chipbond Technology Corporation

Hitachi Cable, Ltd.

   ChipMOS Technologies Inc.

Mitsui Mining & Smelting Co., Ltd.

   International Semiconductor Technology Ltd.

Samsung Techwin Co. Ltd.

   Megic Corporation

Stemco., Ltd

   Siliconware Precision Industries Co., Ltd.
Sumitomo Metal Mining Package Material Co., Ltd.     
WUS Microelectronics Co., Ltd.     

Chip Probe Testing


    

Ardentec Corporation

    

ChipMOS Technologies Inc.

    

International Semiconductor Technology Ltd.

    

King Yuan Electronics Co., Ltd

    

Siliconware Precision Industries Co., Ltd.

    

 

Research and Development

 

Our research and development efforts focus on improving and enhancing our core technologies and know-how relating to semiconductor solutions for flat panel displays and advanced televisions with particular emphasis on our three major product lines. Although a significant portion of the resources at our semiconductor design center are invested in advanced research for future products, we continue to invest in improving the performance and reducing the cost of our existing products. Our application engineers, who provide on-system verification of semiconductors and product specifications, and field application engineers, who provide on-site engineering support at our customers’ offices, work closely with panel manufacturers to co-develop display solutions for their electronic devices. In 2003, 2004 and 2005, we incurred research and development expenses of $21.0 million, $24.0 million and $41.3 million, respectively, representing 16.0%, 8.0% and 7.6% of our revenues, respectively.

 

80


Table of Contents

Intellectual Property

 

As of December 31, 2005, we held a total of 80 patents, including 53 in Taiwan, 19 in the United States, four in China, three in Korea and one in Japan. The expiration dates of our patents range from 2019 to 2024. We also have a total of 135 pending patent applications in Taiwan, 105 in the United States and 75 in other jurisdictions, including the PRC, Japan, Korea and Europe. In addition, we have registered “Himax” and our logo as a trademark and service mark in Taiwan, China and Japan and have applications pending in Europe, the United States and Korea.

 

Competition

 

The markets for our products are, in general, intensely competitive, characterized by continuous technological change, evolving industry standards, and declining average selling prices. We believe key factors that differentiate among the competition in our industry include:

 

    customer relations;

 

    product performance;

 

    design customization;

 

    development time;

 

    product integration;

 

    technical services;

 

    manufacturing costs;

 

    supply chain management;

 

    economies of scale; and

 

    broad product portfolio.

 

We continually face intense competition from other fabless display driver companies, including Cheertek Incorporation, DenMOS Technology Inc., Novatek Microelectronics Corp., Ltd., and Solomon Systech Limited. We also face competition from integrated device manufacturers, such as MagnaChip Semiconductor Ltd., Matsushita Electric Works, Ltd., NEC Electronics Corporation, Oki Electric Industry Co. Ltd., Renesas Technology Corp., Seiko Epson Corporation and Toshiba Corporation, and panel manufacturers with in-house semiconductor design capabilities, such as Samsung Electronics Co., Ltd. and Sharp Corporation. The latter are both our competitors and potential customers.

 

Many of our competitors, some of which are affiliated or have established relationships with other panel manufacturers, have longer operating histories, greater brand recognition and significantly greater financial, manufacturing, technological, sales and marketing, human and other resources than us. Additionally, we expect that as the flat panel semiconductor industry expands, more companies may enter and compete in our markets.

 

Our television semiconductor solutions compete against solutions offered by a significant number of semiconductor companies including ATI Technologies, Inc., Genesis Microchip, Inc., Koninklijke Philips Electronics N.V., Mediatek Corp., MStar Semiconductor, Inc., Pixelworks Inc., STMicroelectronics, Trident Microsystems, Inc. and Zoran Corporation, among others, some of which focus solely on video processors and others that offer a more diversified portfolio.

 

For LCOS products, we compete with diversified electronics companies such as Sony Corporation and Victor Company of Japan, Limited, also known as JVC, and companies specializing in LCOS technology such as eLCOS Microdisplay Technology Ltd, Brillian Corporation, Aurora Corporation and SpatiaLight, Inc.

 

81


Table of Contents

Employees

 

As of December 31, 2005, we had 716 employees serving in the following functions:

 

Function


   Number

Research and development(1)

   482

Engineering and manufacturing(2)

   90

Sales and marketing(3)

   83

General and administrative

   61
    

Total

   716

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.

 

As of December 31, 2005, we had a staff of 482 people in research and development, of which 20, 313, 114 and 35 hold a doctorate, master’s, bachelor’s and junior college degree, respectively.

 

Facilities

 

We lease our 4,082-square meter headquarters in Tainan, Taiwan under several leases; the principal lease expires in September 2006. We also lease office space in Taipei and Hsinchu, Taiwan; Suzhou and Shenzhen, China; Yokohoma, Japan; and Anyangsi Kyungkido, South Korea. The lease contracts may be renewed upon expiration. Himax Display, our subsidiary, owns and operates a fab with 3,885 square meters of floor space on land and in a building leased from CMO.

 

We have begun construction of our new headquarters located in the Tainan LCD-TV Industry Park. The headquarters will house our research and development, engineering, sales and marketing, operations and general administrative staff. Upon completion, the new headquarters is expected to have 21,200 square meters of usable space and occupy 31,800 square meters of land owned by us. Construction has commenced in the fourth quarter of 2005 and is expected to be completed in the third quarter of 2006. The total costs are estimated to be approximately NT$905.8 million ($27.6 million), of which approximately NT$325.8 million ($9.9 million) is for the land and approximately NT$580 million ($17.7 million) is for the construction costs (which includes the architect fees, general contractor fees, building materials, purchases and installation of office equipment and other fixtures). We have already paid for the land purchased and approximately NT$26.1 million ($0.8 million) of the construction costs in 2005. We expect to pay the remainder of the construction costs in 2006. We intend to finance the remaining cost of our new headquarters with a portion of the net proceeds of this offering.

 

Insurance

 

We maintain insurance policies on our buildings, equipment and inventories covering property damage and damage due to, among other events, fires, typhoons, earthquakes and floods. We maintain these insurance policies on our facilities and on inland transit of inventories. We do not have insurance for business interruptions. We do not have key person insurance.

 

Environmental Matters

 

The business of semiconductor design does not cause any significant pollution. Himax Display maintains a facility for our LCOS products where we have taken the necessary steps to obtain the appropriate permits and believe that we are in compliance with the existing environmental laws and regulations in the ROC. We have entered into various agreements with certain customers whereby we have agreed to indemnify them, and in certain cases, their customers, for any claims made against them for hazardous material violations that are found in our products.

 

82


Table of Contents

Legal Proceedings

 

We are not involved in any litigation or other legal matters which could reasonably be expected to, if decided adversely to us, have a material adverse impact on our business or operations.

 

83


Table of Contents

MANAGEMENT

 

Directors and Executive Officers

 

Members of our board of directors may be elected by our directors or our shareholders. Effective upon the closing of this offering, our board of directors will consist of five directors. The following table sets forth information regarding our directors and executive officers as of February 1, 2006. Our directors and executive officers all assumed their respective positions at our company, Himax Technologies, Inc., after our shareholders’ meeting and board meeting, which were both held on October 25, 2005. Unless otherwise indicated, the positions or titles indicated in the table below refer to Himax Technologies, Inc.

 

Directors and Executive Officers


   Age

  

Position/Title


Dr. Biing-Seng Wu

   48   

Chairman of the Board

Jordan Wu

   45   

President, Chief Executive Officer and Director

Jung-Chun Lin

   57   

Director

Dr. Chun-Yen Chang

   68   

Director

Yuan-Chuan Horng

   54   

Director

Chih-Chung Tsai

   50   

Chief Technology Officer, Senior Vice President

Max Chan

   39   

Chief Financial Officer

Baker Bai

   48   

Vice President, Engineering Center

John Chou

   47   

Vice President, Quality Assurance Center

 

Directors

 

Dr. Biing-Seng Wu is the chairman of our board of directors. Dr. Wu is also the chairman of the board of directors of Himax Taiwan and the chairman of the board of directors of Himax Display. Prior to our reorganization in October 2005, Dr. Wu served as president, chief executive officer and a director of Himax Taiwan and chairman, president and chief executive officer of Himax Display. Dr. Wu is also a director of Himax Display and Amazion and serves as a director, executive vice president and chief technology officer of CMO, a TFT-LCD panel manufacturer, and a director of Chi Lin Technology Co., Ltd., an electronics manufacturing service provider, Chi Mei El Corp., an OLED company, and Nexgen Mediatech Inc., a TFT-LCD television manufacturer. Dr. Wu has been active in the TFT-LCD panel industry for over 20 years and is a member of the boards of the Taiwan TFT-LCD Association and the Society for Information Display. Prior to joining CMO in 1998, Dr. Wu was senior director and plant director of Prime View International Co., Ltd. a TFT-LCD panel manufacturer, from 1993 to 1997, and a manager of Thin Film Technology Development at the Electronics Research & Service Organization/Industry Technology Research Institute, or ERSO/ITRI, of Taiwan. Dr. Wu holds a B.S. degree, an M.S. degree and a Ph.D. degree in electrical engineering from National Cheng Kung University. Dr. Wu is the brother of Mr. Jordan Wu, our president and chief executive officer.

 

Jordan Wu is our president and chief executive officer. Prior to our reorganization in October 2005, Mr. Wu served as the chairman of the board of directors of Himax Taiwan, a position that he held since April 2003. Mr. Wu is also a director of Himax Display and Amazion. He also serves as a director of Eastern Multimedia Co., Ltd. since January 2000 and Jemitek Electronics Corp. since June 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.

 

Jung-Chun Lin is our director. He has also been a director of Himax Taiwan since June 2001, a director of Himax Display and a supervisor of Amazion since July 2004. Mr. Lin also serves as a director, vice president, chief financial officer and chief accounting officer of CMO and a senior vice president of Chi Mei Corporation. Prior to joining CMO in 2000, Mr. Lin was vice president of Chi Mei Corporation and had been with Chi Mei Corporation since 1971. Mr. Lin holds a B.S. degree in accounting from National ChengChi University.

 

84


Table of Contents

Dr. Chun-Yen Chang is our director. Prior to our reorganization in October 2005, he served as a supervisor of Himax Taiwan since December 2003. He is the president of the National Chiao Tung University, or NCTU, of Taiwan, a post he has held since 1998. Prior to that, he served as the director of the Microelectronics and Information Systems Research Center of NCTU from 1996 to 1998 and as the dean of both the College of Electrical Engineering and Computer Science of NCTU and the College of Engineering of NCTU from 1990 to 1994. Dr. Chang has been active in the semiconductor industry for over 40 years. He is a fellow of the Institute of Electrical and Electronics Engineers, Inc., or IEEE, a foreign associate of the National Academy of Engineering of the United States and a fellow of Academia Sinica of Taiwan. Dr. Chang holds a B.S. degree in electrical engineering from National Cheng Kung University and an M.S. degree and a Ph.D. degree in electrical engineering from National Chiao Tung University.

 

Yuan-Chuan Horng is our director. Prior to our reorganization in October 2005, Mr. Horng served as a director of Himax Taiwan from August 2004 to October 2005. Mr. Horng is the general manager of the Finance Department of China Steel Corporation, a position he has held since April 2000. He has held various accounting and finance positions at China Steel Corporation for over 30 years. Mr. Horng holds a B.A. degree in economics from Soochow University.

 

Other Executive Officers

 

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

 

Max Chan is our chief financial officer. Mr. Chan is also the chief financial officer of Himax Taiwan. Prior to our reorganization in October 2005, Mr. Chan served as director of the planning division of Himax Taiwan from June 2004 to October 2005. Prior to joining Himax Taiwan, he was treasury manager of Intel Capital, the strategic investment division of Intel Corporation in Taiwan from 2000 to 2004, senior associate of Credit Suisse First Boston Asia International (Cayman) Limited, Taiwan Branch in 2000 and a manager of the Overseas Direct Investment Department of China Development Industrial Bank from 1992 to 2000. Mr. Chan holds a B.S. degree in civil engineering and an M.B.A. degree in finance from National Taiwan University and an M.S. degree in business administration from the University of Illinois at Urbana-Champaign.

 

Baker Bai is our vice president in charge of the Engineering Center, a director of Himax Taiwan, a supervisor of Himax Display and a director of Amazion. Prior to joining Himax Taiwan in 2001, Mr. Bai served as the director of the TFT Liquid Crystal Module Fab of CMO from 1998 to 2001, research and development manager of the Research Center of Vate Technology Inc., a semiconductor testing house, from 1994 to 1998, and research and development engineer at Chun Shan Technology Institute from 1983 to 1994. Mr. Bai holds a B.S. degree in electrical engineering from National Cheng Kung University, an M.S. degree in electrical engineering from the University of Southern California and an M.S. degree in electrical engineering from National Chiao Tung University.

 

John Chou is our vice president in charge of the Quality Assurance Center and also serves as a director of Amazion. Mr. Chou joined Himax in April 2005 as associate vice president of the Quality Assurance Center and was promoted to his current position in January 2006. Prior to joining Himax, Mr. Chou served as the director of the Application and Marketing Department at Pyramis Corp., a subsidiary and the semiconductor arm of Delta Electronics Inc., from August 2002 to April 2005. Mr. Chou was application manager at O2Micro, Inc., an integrated circuit design house, from 1997 to 2002 and design engineer and project manager at Philips Lighting Electronics from 1992 to 1996. Mr. Chou holds a B.S. degree in electrical engineering from National Cheng Kung University and an M.S. degree in electrical engineering from California State University, Los Angeles.

 

85


Table of Contents

Board Composition

 

Effective upon the closing of this offering, our board of directors will consist of five members, two of whom will be independent directors within the meaning of Rule 4200(a)(15) of the Nasdaq Stock Market, Inc. Marketplace Rules, or the Nasdaq Rules, as amended from time to time. Other than Jordan Wu and Dr. Biing-Seng Wu, who are brothers, there are no family relationships between any of our directors and executive officers. We intend to follow home country practice that permits our board of directors to have less than a majority of independent directors in lieu of complying with Rule 4350(c)(1) of the Nasdaq Rules that require boards of U.S. companies to have a board of directors comprised of a majority of independent directors. Moreover, we intend to follow home country practice that permits our independent directors not to hold regularly scheduled meetings at which only independent directors are present in lieu of complying with Rule 4350(c)(2).

 

Committees of the Board of Directors

 

To enhance our corporate governance, we have established three committees under the board of directors prior to the closing of this offer: the audit committee, the compensation committee and the nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.

 

Audit Committee.    Our audit committee currently consists of Yuan-Chuan Horng and Dr. Chun-Yen Chang. Our board of directors has determined that all of our audit committee members are “independent directors” within the meaning of Rule 4200(a)(15) of the Nasdaq Rules and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act. After the closing of this offering, we intend to follow home country practice that permits an audit committee to contain two independent directors in lieu of complying with Rule 4350(d) of the Nasdaq Rules that requires the audit committees of U.S. companies to have a minimum of three independent directors. Our audit committee will oversee our accounting and financial reporting processes and the audits of our financial statements. The audit committee will be responsible for, among other things:

 

    selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;

 

    reviewing with the independent auditors any audit problems or difficulties and management’s response;

 

    reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation SK under the Securities Act;

 

    discussing the annual audited financial statements with management and the independent auditors;

 

    reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material internal control deficiencies;

 

    annually reviewing and reassessing the adequacy of our audit committee charter;

 

    meeting separately and periodically with management and the independent auditors;

 

    reporting regularly to the board of directors; and

 

    such other matters that are specifically delegated to our audit committee by our board of directors from time to time.

 

Compensation Committee.    Our current compensation committee consists of Yuan-Chuan Horng, Dr. Chun-Yen Chang and Jung-Chun Lin. Our compensation committee assists our board of directors in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting while his compensation is deliberated. After the closing of this offering, we intend to follow home country practice that permits a compensation committee to contain a director that does not meet the definition of “independence”

 

86


Table of Contents

within the meaning of Rule 4200(a)(15) of the Nasdaq Rules. We intend to follow home country practice in lieu of complying with Rule 4350(c)(3)(A)(ii) and (B)(ii) of the Nasdaq Rules that requires the compensation committees of U.S. companies to be comprised solely of independent directors. The compensation committee will be responsible for, among other things:

 

    reviewing and making recommendations to our board of directors regarding our compensation policies and forms of compensation provided to our directors and officers;

 

    reviewing and determining bonuses for our officers and other employees;

 

    reviewing and determining share-based compensation for our directors, officers, employees and consultants;

 

    administering our equity incentive plans in accordance with the terms thereof; and

 

    such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.

 

Nominating and Corporate Governance Committee.    Our nominating and corporate governance committee assists the board of directors in identifying individuals qualified to be members of our board of directors and in determining the composition of the board and its committees. Our current nominating and corporate governance committee consists of Yuan-Chuan Horng, Dr. Chun-Yen Chang and Jung-Chun Lin. After the closing of this offering, we intend to follow home country practice that permits a nominating committee to contain a director that does not meet the definition of “independence” within the meaning of Rule 4200(a)(15) of the Nasdaq Rules. We intend to follow home country practice in lieu of complying with Rule 4350(c)(4)(A)(ii) and (B)(ii) of the Nasdaq Rules that requires the nominating committees of U.S. companies be comprised solely of independent directors. Our nominating and corporate governance committee will be responsible for, among other things:

 

    identifying and recommending to our board of directors nominees for election or re-election, or for appointment to fill any vacancy;

 

    reviewing annually with our board of directors the current composition of our board of directors in light of the characteristics of independence, age, skills, experience and availability of service to us;

 

    reviewing the continued board membership of a director upon a significant change in such director’s principal occupation;

 

    identifying and recommending to our board of directors the names of directors to serve as members of the audit committee and the compensation committee, as well as the nominating and corporate governance committee itself;

 

    advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any corrective action to be taken; and

 

    monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

Duties of Directors

 

Under Cayman Islands law, our directors have a fiduciary duty to the company to act in good faith in their dealings with or on behalf of our company and exercise their powers and fulfill the duties of their office honestly and loyally. This duty has four essential elements:

 

    a duty to act in good faith in the best interests of the company;

 

87


Table of Contents
    a duty not to personally profit from opportunities that arise from the office of director;

 

    a duty to avoid conflicts of interest; and

 

    a duty to exercise powers for the proper purpose for which such powers were intended.

 

In general, the Companies Law imposes various duties on officers of a company with respect to certain matters of management and administration of the company. The Companies Law imposes fines on persons who fail to satisfy those requirements. However, in many circumstances, an individual is only liable if he is knowingly guilty of the default or knowingly and willfully authorizes or permits the default. In comparison, under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. In addition, under Delaware law, a party challenging the propriety of a decision of the directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the “business judgment rule.” If the presumption is not rebutted, the business judgment rule protects the directors and their decisions, and their business judgments will not be second guessed. If the presumption is rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors’ conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction resulting in a sale of control of the corporation.

 

The Cayman Islands courts ordinarily would be expected to follow English case law precedents, which permit a minority shareholder to commence a representative action against or derivative actions in our name to challenge (a) an act which is illegal, (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (c) an irregularity in the passing of a resolution which requires a qualified (or special) majority.

 

Furthermore, a Cayman Islands court may, on the application of shareholders holding not less than one fifth of our shares, appoint an inspector to examine into our affairs and to report thereon in such manner as the Cayman Islands court shall direct.

 

Any of our shareholders may also petition the Cayman Islands court which may make a winding up order if the Cayman Islands court is of the opinion that it is just and equitable that we should be wound up.

 

Terms of Directors and Officers

 

Under Cayman Islands law and our articles of association, our directors hold office until a successor has been duly elected and qualified unless the director was appointed by the board of directors, in which case such director holds office until the next annual meeting of shareholders at which time such director is eligible for re-election. Our directors are subject to periodic retirement and re-election by shareholders in accordance with our articles of association, resulting in their retirement and re-election at staggered intervals. At each annual general meeting, one-third of our directors who are subject to retirement by rotation, or if their number is not a multiple of three, the nearest to one-third but not exceeding one-third, retire from office. Any retiring director is eligible for reappointment. The Chairman of our board of directors will not be subject to retirement by rotation or be taken into account in determining the number of directors to retire in each year. Under this formula, assuming five directors continue to serve on the board of directors, one director will retire and be subject to re-election in each year beginning 2006, and until 2009, the term that each director serves before he is subject to retirement by rotation will vary from one year to four years. Under our articles of association, which director will retire at each annual general meeting will be determined as follows: (i) any director who wishes to retire and not offer himself for re-election, (ii) if no director wishes to retire, the director who has been longest in office since his last re-election or appointment, (iii) if two or more directors have served on the board the longest, then as agreed among the directors themselves or as determined by lot. Beginning in 2010, assuming that our board of directors consists

 

88


Table of Contents

of five directors, each director will serve a term of four years. All of our executive officers are appointed by and serve at the discretion of our board of directors.

 

Compensation of Directors and Executive Officers

 

In the year ended December 31, 2005, the aggregate cash compensation that we paid to our executive officers was approximately $0.4 million. The aggregate share-based compensation that we paid to our executive officers was approximately $1.3 million. No executive officer is entitled to any severance benefits upon termination of his or her employment with us.

 

In the year ended December 31, 2005, the aggregate cash compensation that we paid to our directors was approximately $5,000. The aggregate share-based compensation that we paid to our directors was $43,100.

 

Share-Based Compensation Plans

 

Himax Technologies, Inc. 2005 Long-Term Incentive Plan

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Number of Authorized Shares.    We have authorized a maximum of 18,076,927 shares. As of the date of this prospectus, there were no stock options or restricted share units outstanding under the plan except as described under “—Restricted Share Units.”

 

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

 

Stock Options.    The committee may grant options to participants in such number, upon such terms and at any time as it determines. Each option grant will be evidenced by an award document that will specify the

 

89


Table of Contents

exercise price, the maximum duration of the option, the number of shares to which the option pertains, conditions upon which the option will become vested and exercisable and such other provisions which are not inconsistent with the plan.

 

The exercise price for each option will be:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We committed to pay a bonus to our employees to settle the accrued bonus payable in respect of their service provided in 2004 and the ten months ended October 31, 2005, which was satisfied through a grant of 990,220 RSUs on December 30, 2005. All RSUs granted to employees as a bonus vested immediately on the grant date.

 

90


Table of Contents

We made an additional grant of 1,297,564 RSUs to our employees on December 30, 2005. The vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on each of September 30, 2006, 2007 and 2008, subject to certain forfeiture events.

 

We also made a grant of 20,000 RSUs to our independent directors on December 30, 2005. The vesting schedule for this RSU grant is as follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on each of June 30, 2006, 2007 and 2008, subject to certain forfeiture events.

 

The following table summarizes, as of the date of this prospectus, the RSUs that we granted on December 30, 2005 to our directors and executive officers under our 2005 long-term incentive plan.

 

Name


   Total RSUs
Granted


   Ordinary Shares
Underlying Vested
Portion of RSUs


   Ordinary Shares
Underlying
Unvested Portion
of RSUs


Dr. Biing-Seng Wu

   56,057    33,634    22,423

Jordan Wu

   62,517    37,510    25,007

Jung-Chun Lin

   0    0    0

Dr. Chun-Yen Chang

   10,000    2,500    7,500

Yuan-Chuan Horng

   10,000    2,500    7,500

Chi-Chung Tsai

   62,517    37,510    25,007

Max Chan

   10,720    5,558    5,162

Baker Bai

   36,825    22,095    14,730

John Chou

   22,091    15,000    7,091

 

Dividend Equivalents.    Any participant selected by the committee may be granted dividend equivalents based on the dividends declared on shares that are subject to any award, to be credited as of dividend payment dates, during the period between the date the award is granted and the date the award is exercised, vests, or expires, as determined by the committee. Dividend equivalents will be converted to cash or additional shares by such formula and at such time and subject to such limitations as determined by the committee.

 

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

 

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

 

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

 

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

 

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

 

91


Table of Contents

PRINCIPAL AND SELLING SHAREHOLDERS

 

The following table sets forth information with respect to the beneficial ownership of our ordinary shares, as of December 31, 2005, by:

 

(1) each of our directors and executive officers;

 

(2) each person known to us to own beneficially more than 5.0% of our ordinary shares; and

 

(3) each other selling shareholder and selling shareholders as a group who each beneficially owns less than 1% of our outstanding shares.

 

     Ordinary Shares Beneficially
Owned Prior to This Offering(1)


    Ordinary Shares Being Sold in
This Offering


    Ordinary Shares
Beneficially Owned
After This Offering(1)(2)


 
         Number(3)    

       %    

        Number    

       %    

        Number    

       %    

 

Directors and Executive Officers:

                                 

Dr. Biing-Seng Wu(4)

   32,163,744    17.66 %   600,000    *     31,563,744    16.22 %

Jordan Wu(5)

   11,180,132    6.14 %   300,000    *     10,880,132    5.59 %

Jung-Chun Lin(6)

                     

Dr. Chun-Yen Chang(7)

   832,307    *     40,000    *     792,307    *  

Yuan-Chuan Horng(8)

   450,552    *            450,552    *  

Chih-Chung Tsai(9)

   3,025,781    1.66 %   130,000    *     2,895,781    1.49 %

Max Chan(10)

   53,558    *            53,558    *  

Baker Bai(11)

   2,490,078    1.37 %   224,484    *     2,265,594    1.16 %

John Chou(12)

   15,000    *            15,000    *  

All Directors and Executive Officers as a Group

   50,211,152    27.58 %   1,294,484    *     48,916,668    25.13 %

Principal Shareholders:

                                 

CMO(13)

   24,822,529    13.63 %          24,822,529    12.75 %

Other Selling Shareholders:

                                 

Yuen Foong Yu Paper MFG, Co., Ltd.(14)

   5,312,000    2.92 %   1,500,000    *     3,812,000    1.96 %

Yen-Chen Chen(15)

   3,128,895    1.72 %   140,000    *     2,988,895    1.54 %

Tiger International Management Inc.(16)

   2,412,384    1.32 %   1,800,000    *     612,384    *  

Yu-Hua Chen(17)

   2,143,176    1.18 %   2,143,176    1.18 %       

China Development Industrial Bank Inc.(18)

   2,048,284    1.12 %   1,000,000    *     1,048,284    *  

All other selling shareholders as a group who each beneficially owns less than 1% of our outstanding shares

   69,336,476    38.08 %   30,266,103    16.62 %   39,070,373    20.07 %

Notes:  *   less than 1%
  (1)   Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. For purposes of this table, we have included (i) the number of ordinary shares representing the RSUs granted on December 30, 2005 as a bonus to our employees to settle the accrued bonus payable in respect of their service provided in 2004 and the ten months ended October 31, 2005 and (ii) the number of ordinary shares representing the vested portion of the additional grant of RSUs made on December 30, 2005. The number of ordinary shares representing the RSU grants is based on a resolution by the compensation committee of our board of directors approving such issuance.
  (2)   Assumes that the underwriters do not exercise their over-allotment option.

 

92


Table of Contents
  (3)   Percentage of beneficial ownership is based on 182,088,880 ordinary shares outstanding as of December 31, 2005.
  (4)   Includes 14,806,048 ordinary shares held by Chi-Duan Investment Co. Ltd. and 17,324,062 ordinary shares held by Sanfair Asia Investments Ltd., both of which are investment companies controlled by Dr. Biing-Seng Wu. The business address of Dr. Biing-Seng Wu is Himax Technologies, Inc., No. 605 Chungshan Road, Hsinhua, Tainan County 712, Taiwan, Republic of China.
  (5)   Includes 8,122,257 ordinary shares held by Arch Finance Ltd. and 3,020,365 ordinary shares held by Shu Chuan Investment Co., Ltd., both of which are investment companies controlled by Jordan Wu. The business address of Jordan Wu is Himax Technologies, Inc., No. 605 Chungshan Road, Hsinhua, Tainan County 712, Taiwan, Republic of China.
  (6)   The business address of Jung-Chun Lin is Chi Mei Optroelectronics Corp., No. 1, Chi-Yeh Road, Tainan Science-Based Industrial Park, Taiwan, Republic of China.
  (7)   Includes 444,595 ordinary shares held by Dr. Chun-Yen Chang’s immediate family members. The business address of Dr. Chun-Yen Chang is 1001 University Avenue, Hsinchu, Taiwan, Republic of China.
  (8)   The business address of Yuan-Chuan Horng is 1 Chung Kang Road, Hsiao Kang, Kaohsiung 81233, Taiwan, Republic of China.
  (9)   Includes 318,066 ordinary shares held by Chih-Chung Tsai’s immediate family members. The business address of Chi-Chung Tsai is Himax Technologies, Inc., No. 605 Chungshan Road, Hsinhua, Tainan County 712, Taiwan, Republic of China.
  (10)   The business address of Max Chan is Himax Technologies, Inc., 8/F, No. 19, Section 1, Hang-Chou South Road, Taipei, Taiwan, Republic of China.
  (11)   Includes 271,625 ordinary shares held by Baker Bai’s immediate family members. The business address of Baker Bai is Himax Technologies, Inc., No. 605 Chungshan Road, Hsinhua, Tainan County 712, Taiwan, Republic of China.
  (12)   The business address of John Chou is Himax Technologies, Inc., No. 605 Chungshan Road, Hsinhua, Tainan County 712, Taiwan, Republic of China.
  (13)   The ordinary shares beneficially owned by CMO are held by Leadtek Global Group Limited, a wholly owned subsidiary of CMO; CMO’s board of directors has voting or investment control over these ordinary shares through its control of Leadtek Global Group Limited.
  (14)   Yuen Foong Yu Paper MFG, Co., Ltd. is a public company incorporated and listed in Taiwan. The address for Yuen Foong Yu Paper MFG, Co., Ltd. is No.14, Jioutang Road, Dashu Township, Kaohsiung County 840, Taiwan, Republic of China.
  (15)   Includes 1,234,073 ordinary shares held by Yen-Chen Chen’s immediate family members. The address for Yen-Chen Chen is No.6, Alley 20, Lane 182 Wenxian 1st Road, Tainan City 704, Taiwan, Republic of China.
  (16)   Tiger International Management Inc. is a company incorporated in the British Virgin Islands. The address for Tiger International Management Inc. is 12F-4, No.333, Mingyuan 2nd Road, Cianjhen District, Kaohsiung City 806, Taiwan, Republic of China.
  (17)   The address for Yu-Hua Chen is 7F-1, No.72-8, Lane 531, Sec. 1, Guangfu Road, Hsinchu City 300, Taiwan, Republic of China.
  (18)   China Development Industrial Bank Inc. is a public company incorporated and listed in Taiwan. The address for China Development Industrial Ltd. is No. 125, Sec. 5, Nanjing E. Road, Songshan District, Taipei City 105, Taiwan, Republic of China.

 

As of the date of this prospectus, none of our outstanding ordinary shares is held by record holders in the United States.

 

None of our existing shareholders has different voting rights from other shareholders after the closing of this offering. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

93


Table of Contents

CORPORATE HISTORY AND RELATED PARTY TRANSACTIONS

 

Corporate History

 

Himax Taiwan, our predecessor, was incorporated on June 12, 2001 as a limited liability company under the laws of the Republic of China. On April 26, 2005, we established Himax Technologies Limited, an exempted company with limited liability under the Companies Law Cap. 22 of the Cayman Islands, or the Companies Law, as a holding company to hold the shares of Himax Taiwan in connection with our reorganization and share exchange. On October 14, 2005, Himax Taiwan became our wholly owned subsidiary through a share exchange consummated pursuant to the ROC Business Mergers and Acquisitions Law through which we acquired all of the issued and outstanding shares of Himax Taiwan, and we issued ordinary shares to the shareholders of Himax Taiwan. Shareholders of Himax Taiwan received one of our ordinary shares in exchange for one Himax Taiwan common share. The share exchange was unanimously approved by shareholders of Himax Taiwan on June 10, 2005 with no dissenting shareholders and by the ROC Investment Commission on August 30, 2005 for our inbound investment in Taiwan, and on September 7, 2005 for our outbound investment outside of Taiwan. Acquisition of our ordinary shares by non-ROC shareholders of Himax Taiwan is not subject to the approval of the ROC Investment Commission.

 

Pursuant to the approval letters from the ROC Investment Commission, we and Himax Taiwan have to satisfy certain documentation requirements in order to evidence the completion of the share exchange, some of which have yet to be completed as of the date of this prospectus. On November 24, 2005, Himax Taiwan submitted to the ROC Investment Commission (1) the status report confirming the completion of the share exchange, (2) the shareholders’ notice setting the record date of the share exchange and (3) the shareholders register maintained by our registrar. In addition, on December 5, 2005, Himax Taiwan submitted to the ROC Investment Commission its latest corporate registration card issued by the ROC Ministry of Economic Affairs. The ROC Investment Commission is in the process of reviewing these documents and may request Himax Taiwan to provide further documents to satisfy the documentation requirement. We do not anticipate any difficulties in providing the required documentation to the ROC Investment Commission and expect that any further required documents (if any) will be submitted on a timely basis in satisfaction of our obligations under the relevant approval letter.

 

The common shares of Himax Taiwan were traded on the Emerging Stock Board from December 26, 2003 to August 10, 2005, under the stock code “3222.” Himax Taiwan’s common shares were delisted from the Emerging Stock Board on August 11, 2005. As a result of our recent reorganization, Himax Taiwan is no longer a 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.

 

Relationship with Chi Mei Optoelectronics Corp.

 

We have a close relationship with CMO, a leading TFT-LCD panel manufacturer based in Taiwan which is listed on the Taiwan Stock Exchange. CMO’s primary focus is the manufacturing of large-sized TFT-LCD panels for use in notebook computers, desktop monitors and LCD televisions. Several of Himax Taiwan’s initial employees, including Dr. Biing-Seng Wu, our chairman, were employees of CMO prior to the establishment of Himax Taiwan. CMO was Himax Taiwan’s largest shareholder at the time of its incorporation and remains one of our largest shareholders (with 13.6% of our outstanding shares as of December 31, 2005). CMO has also been our largest customer since our inception. As of December 31, 2005, sales to CMO (together with its affiliates) accounted for 58.9% of our revenues. Certain of our directors also hold key management positions at CMO. Jung-Chun Lin, our director, holds the positions of director, vice president, chief financial officer and chief

 

94


Table of Contents

accounting officer at CMO. Dr. Biing-Seng Wu, our chairman, is also a director, executive vice president and chief technology officer of CMO. We also have entered into various transactions with CMO as further described below.

 

CMO has acquired our shares through various transactions. In June 2001, CMO acquired (1) 4,375,000 shares in connection with its capital injection of NT$43,750,000, which is the equivalent of NT$10 per share, or the par value of Himax Taiwan’s common shares and (2) 247,000 shares, 986,000 shares and 1,267,000 shares in June 2001, November 2001 and January 2002, respectively, as consideration for 14 patents transferred to Himax Taiwan. In October 2003, CMO acquired 5,258,420 shares in connection with its capital injection of NT$131,460,500, which is the equivalent of NT$25 per share. In July 2002, September 2003 and September 2004, CMO acquired 2,750,000 shares, 2,082,753 shares and 7,856,356 shares, respectively, either as a result of stock splits or stock splits effected in the form of dividends.

 

Related Party Transactions

 

CMO and Related Companies

 

CMO

 

We sell display drivers to CMO. We generated net sales to CMO in the amount of $100.1 million in 2003, $189.1 million in 2004 and $317.0 million in 2005, and our receivables from these sales were $22.5 million as of December 31, 2003, $38.6 million as of December 31, 2004 and $67.4 million in 2005.

 

In 2003, we entered into a construction contract for an LCOS factory with CMO. The contract price amounted to $1.2 million. CMO also offered technology management services for setting out the layout of the LCOS factory and the related payment amounted to $0.3 million. As of December 31, 2003, these related payables were paid in full.

 

We lease office space and equipment from CMO. Rent and utility expenses paid to CMO amounted to $0.4 million in 2003, $0.6 million in 2004 and $0.6 million in 2005.

 

CMO and we entered into an LCOS development contract with the Industrial Development Bureau of the Ministry of Economic Affairs, or IDB, pursuant to which IDB provided a government grant of up to $0.3 million to be shared between CMO and us and a government loan of up to $0.3 million to be used by CMO and us. Under the contract, we are required to pay IDB an amount equal to 2% of sales of products manufactured from technology developed under the development contract up to a maximum amount of 30% of such government loan within three years commencing from the sales of such products.

 

Himax Display also provides liquid crystal injection services to CMO. Himax Display generated net sales of approximately $45,000 in 2005 from CMO in connection with these services. In 2003, 2004 and 2005, Himax Display purchased empty cells and liquid crystal from CMO which were used for Himax Display’s liquid crystal injection services, in an amount of $26,000, $176,000 and $703,000, respectively.

 

In February 2006, our board approved a donation of approximately $150,000 to Chi Mei Culture Foundation, a non-profit organization affiliated with CMO, which is dedicated to the promotion of the arts and culture in Taiwan.

 

International Display Technology Co., Ltd.

 

International Display Technology Co., Ltd., or IDTech, an affiliate of our company, is a privately held company 100% owned by CMO. Incorporated in Japan with its headquarters based in Yasu, Japan, IDTech historically has developed and manufactured large-sized, high-resolution TFT-LCD panels and currently markets TFT-LCD panels for CMO. We sell display drivers to IDTech. We generated net sales to IDTech in the amount

 

95


Table of Contents

of $2.7 million in 2003, $0.8 million in 2004 and $0.3 million in 2005, and our receivables from these sales were $0.4 million as of December 31, 2003. We had no receivables from these sales as of December 31, 2004 and 2005.

 

Chi Mei Corporation

 

Chi Mei Corporation, or CMC, is a privately held company incorporated in Taiwan and is the largest shareholder of CMO. CMC manufactures various products, including acrylonitrile butadiene styrene resins. We purchased desktop monitors from CMC in the amount of $65,000 and $48,000 in 2004 and 2005, respectively.

 

Chi Lin Technology Co., Ltd.

 

We sell display drivers to Chi Lin Technology Co., Ltd., or Chi Lin Tech, a company controlled by CMC. Chi Lin Tech, a publicly held Taiwanese company headquartered in Tainan, Taiwan, is engaged in the business of, among other things, the sale of LCD-related parts and the repair and maintenance of TFT-LCD panels. We generated net sales to Chi Lin Tech in the amount of $0.3 million and $2.8 million in 2004 and 2005, respectively, and our receivables from these sales was $0.2 million and $1.2 million as of December 31, 2004 and December 31, 2005, respectively. We did not generate net sales to Chi Lin Tech prior to 2004. We purchased miscellaneous items used for research and development from Chi Lin Tech in the amount of $47,000 and $3,060 in 2004 and 2005, respectively and packaging material from Chi Lin Tech in the amount of $31,000 in 2005.

 

Other Related Company

 

Jemitek Electronics Corp.

 

Our chief executive officer is on the board of directors of Jemitek Electronics Corp., or JEC, to whom we sell display drivers. JEC, a privately held Taiwanese company headquartered in Taipei, Taiwan, designs and assembles small-and medium-sized LCD panels for mobile phones and digital media players. We also own a 4.9% equity interest in JEC and CMO owns a 8.2% equity interest in JEC. We generated net sales to JEC in the amount of $0.6 million and $1.6 million in 2004 and 2005, respectively, and our receivables from these sales were $0.5 million and $0.1 million as of December 31, 2004 and 2005, respectively. We did not generate net sales from JEC prior to 2004.

 

96


Table of Contents

DESCRIPTION OF SHARE CAPITAL

 

As of the date hereof, our authorized share capital consists of 500,000,000 ordinary shares, par value $0.0001 per share, and there are 182,088,880 ordinary shares issued and outstanding, fully paid or credited as fully paid.

 

We were incorporated in the Cayman Islands on April 26, 2005 as an exempted company with limited liability under the Companies Law of the Cayman Islands and subsequently changed our name to Himax Technologies, Inc. on September 26, 2005. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares. A Cayman Islands exempted company:

 

    is a company that conducts its business outside of the Cayman Islands;

 

    is exempted from certain requirements of the Companies Law of the Cayman Islands, including filing of annual returns of its shareholders with the Registrar of Companies or the Immigration Board;

 

    does not have to make its register of shareholders open to inspection; and

 

    may obtain an undertaking against the imposition of any future taxation.

 

Our memorandum and articles of association authorize the issuance of up to 500,000,000 ordinary shares, par value $0.0001 per share. The following summarizes the terms and provisions of our share capital upon the completion of this offering, as well as the material applicable laws of the Cayman Islands. This summary is not complete, and you should read our memorandum and articles of association, which has been filed as an exhibit to the registration statement of which this prospectus is a part.

 

The following discussion primarily concerns ordinary shares and the rights of holders of ordinary shares. The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of the ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holders of such ADSs.

 

The holders of ADSs will be able to exercise their rights with respect to the ordinary shares underlying the ADSs only in accordance with the provisions of the deposit agreement. See “Description of American Depositary Shares” for more information.

 

Meetings

 

Subject to the company’s regulatory requirements, an annual general meeting and any extraordinary general meeting shall be called by not less than 10 clear days’ notice in writing. Notice of every general meeting will be given to all of our shareholders other than those that, under the provisions of our articles of association or the terms of issue of the ordinary shares they hold, are not entitled to receive such notices from us, and also to each director and our principal external auditors. Extraordinary general meetings may be called only by the chairman of our board of directors or a majority of our board of directors, and may not be called by any other person.

 

Notwithstanding that a meeting is called by shorter notice than that mentioned above, but, subject to applicable regulatory requirements, it will be deemed to have been duly called, if it is so agreed (1) in the case of a meeting called as an annual general meeting by all of our shareholders entitled to attend and vote at the meeting; (2) in the case of any other meeting, by a majority in number of our shareholders having a right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the ordinary shares giving that right.

 

Two shareholders present in person or by proxy that represent not less than one-third in nominal value of our issued and outstanding voting shares will constitute a quorum. No business other than the appointment of a chairman may be transacted at any general meeting unless a quorum is present at the commencement of business.

 

97


Table of Contents

However, the absence of a quorum will not preclude the appointment of a chairman. If present, the chairman of our board of directors shall be the chairman presiding at any shareholders meetings.

 

A corporation being a shareholder shall be deemed for the purpose of our articles of association to be present in person if represented by its duly authorized representative being the person appointed by resolution of the directors or other governing body of such corporation to act as its representative at the relevant general meeting or at any relevant general meeting of any class of our shareholders. Such duly authorized representative shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were our individual shareholder.

 

The quorum for a separate general meeting of the holders of a separate class of shares is described in “—Modification of Rights” below.

 

Voting Rights Attaching to the Shares

 

Subject to any special rights or restrictions as to voting for the time being attached to any shares, at any general meeting on a show of hands every shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one vote, and on a poll every shareholder present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly appointed representative) shall have one vote for each fully paid share which such shareholder is the holder.

 

No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as our shareholder at the applicable record date for that meeting and all calls or installments due by such shareholder to us have been paid.

 

If a clearing house or depositary (or its nominee(s)) is our shareholder, it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting or at any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision is entitled to exercise the same powers on behalf of the recognized clearing house or depositary (or its nominee(s)) as if such person was the registered holder of our shares held by that clearing house or depositary (or its nominee(s)) including the right to vote individually on a show of hands.

 

While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of directors of the company, unlike the requirement under Delaware law that cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation, it is not a concept that is accepted as a common practice in the Cayman Islands, and the company has made no provisions in its articles of association to allow cumulative voting for such elections.

 

See “Description of American Depositary Shares—Voting Rights” for a summary of voting rights and procedures applicable to holders of ADSs.

 

Protection of Minority Shareholders

 

The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one fifth of our shares in issue, appoint an inspector to examine our affairs and report thereon in a manner as the Grand Court shall direct.

 

Any shareholder may petition the Grand Court of the Cayman Islands which may make a winding up order, if the court is of the opinion that it is just and equitable that we should be wound up.

 

Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our articles of association.

 

98


Table of Contents

The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative actions in our name to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us and (3) an irregularity in the passing of a resolution which requires a qualified (or special) majority.

 

Pre-Emption Rights

 

There are no pre-emption rights applicable to the issue of new shares under either Cayman Islands law or our memorandum and articles of association.

 

Liquidation Rights

 

Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares (1) if we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst those shareholders in proportion to the amount paid up at the commencement of the winding up on the shares held by them, respectively, and (2) if we are wound up and the assets available for distribution among the shareholders as such are insufficient to repay the whole of the paid-up capital, those assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them, respectively.

 

If we are wound up (whether the liquidation is voluntary or ordered by the court), the liquidator may with the sanction of our special resolution and any other sanction required by the Companies Law of the Cayman Islands, divide among our shareholders in specie or kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders or different classes of shareholders. The liquidator may also vest any part of these assets in trustees upon such trusts for the benefit of the shareholders as the liquidator shall think fit, but so that no shareholder will be compelled to accept any assets, shares or other property upon which there is a liability.

 

Modification of Rights

 

Except with respect to share capital (as described below), alterations to our memorandum and articles of association may only be made by special resolution of no less than two-thirds of votes cast at a meeting of the shareholders.

 

Subject to the Companies Law of the Cayman Islands, all or any of the special rights attached to shares of any class (unless otherwise provided for by the terms of issue of the shares of that class) may be varied, modified or abrogated with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our articles of association relating to general meetings shall apply similarly to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting or at its adjourned meeting shall be a person or persons together holding (or represented by proxy) not less than one-third in nominal value of the issued shares of that class, every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll.

 

The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied, modified or abrogated by the creation or issue of further shares ranking pari passu therewith.

 

99


Table of Contents

Alteration of Capital

 

We may from time to time by ordinary resolution in accordance with the Companies Law of the Cayman Islands:

 

    increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;

 

    consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;

 

    cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled or, in the case of shares, without par value, diminish the number of shares into which its capital is divided;

 

    sub-divide our shares or any of them into shares of smaller amount than is fixed by our memorandum of association, subject nevertheless to the Companies Law of the Cayman Islands, and may by such resolution determine that, as between the holders of the share resulting from such subdivision, one or more of the shares may have any such preferred or other special rights, over, or may have such deferred rights or be subject to any such restrictions as compared with the others as we have power to attach to unissued or new shares; and

 

    divide shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares, attach to the shares respectively as preferential, deferred, qualified or special rights, privileges, conditions or such restrictions which in the absence of any such determination in general meeting may be determined by our directors.

 

We may, by special resolution, subject to any confirmation or consent required by the Companies Law of the Cayman Islands, reduce our share capital or any capital redemption reserve or other distributable reserve in any manner authorized by law.

 

Transfer of Shares

 

Subject to any applicable restrictions set forth in our memorandum and articles of association, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in a form prescribed by the Nasdaq National Market or in any other form which our directors may approve.

 

Our directors may decline to register any transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to register any transfer of any share unless:

 

    the instrument of transfer lodged with us is accompanied by the certificate for the shares to which it relates and such other evidence as our directors may reasonably require to show the right of the transferor to make the transfer;

 

    the instrument of transfer is in respect of only one class of share;

 

    the instrument of transfer is properly stamped (in circumstances where stamping is required);

 

    in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; and

 

    a fee of such maximum sum as the Nasdaq National Market may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof.

 

If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

 

100


Table of Contents

The registration of transfers may, on notice being given by advertisement in such one or more newspapers or by any other means in accordance with the requirements of the Nasdaq National Market, be suspended and the register closed at such times and for such periods as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our directors may determine.

 

Share Repurchase

 

We are empowered by the Companies Law of the Cayman Islands and our articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law of the Cayman Islands, our memorandum and articles of association and to any applicable requirements imposed from time to time by the SEC, the Nasdaq National Market, or by any recognized stock exchange on which our securities are listed.

 

Dividends

 

Subject to the Companies Law of the Cayman Islands, our board of directors may declare dividends in any currency to be paid to our shareholders but no dividend shall be declared in excess of the amount recommended by our board of directors. Dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is no longer needed. Our board of directors may also declare and pay dividends out of the share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law of the Cayman Islands.

 

Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provides (1) all dividends shall be declared and paid according to the amounts paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for this purpose as paid up on that share and (2) all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid.

 

Our directors may also pay any dividend that is payable on any shares semi-annually or on any other dates, whenever our financial position, in the opinion of our directors, justifies such payment.

 

Our directors may deduct from any dividend or other moneys payable to any shareholder all sums of money (if any) presently payable by such shareholder to us on account of calls, installments or otherwise.

 

No dividend or other money payable by us on or in respect of any share shall bear interest against us.

 

In respect of any dividend proposed to be paid or declared on our share capital, our directors may resolve and direct that (1) such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that our members entitled thereto will be entitled to elect to receive such dividend (or part thereof if our directors so determine) in cash in lieu of such allotment or (2) the shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as our directors may think fit. We may also, on the recommendation of our directors, resolve in respect of any particular dividend that, notwithstanding the foregoing, it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right of shareholders to elect to receive such dividend in cash in lieu of such allotment.

 

Any dividend interest or other sum payable in cash to the holder of shares may be paid by check or warrant sent by mail addressed to the holder at his registered address, or addressed to such person and at such addresses as the holder may direct. Every check or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register in respect of such shares, and shall be sent at his or their risk and payment of the check or warrant by the bank on which it is drawn shall constitute a good discharge to us.

 

101


Table of Contents

All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of our company until claimed. Any dividend unclaimed after a period of six years from the date of declaration of such dividend may be forfeited and, if so forfeited, shall revert to us.

 

Whenever our directors have resolved that a dividend be paid or declared, our directors may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe for our securities or securities of any other company. Where any difficulty arises with regard to such distribution, our directors may settle it as they think expedient. In particular, our directors may issue fractional certificates, ignore fractions altogether or round the same up or down, fix the value for distribution purposes of any such specific assets, determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of the parties, vest any such specific assets in trustees as may seem expedient to our directors, and may appoint any person to sign any requisite instruments of transfer and other documents on behalf of a person entitled to the dividend, which appointment shall be effective and binding on our shareholders.

 

Untraceable Shareholders

 

We are entitled to sell any shares of a shareholder who is untraceable, provided that:

 

  (1)   all checks or warrants in respect of dividends of such shares, not being less than three in number, for any sums payable in cash to the holder of such shares have remained uncashed for a period of 12 years prior to the publication of the advertisement and during the three months or such shorter period referred to in paragraph (3) below;

 

  (2)   we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled to such shares by death, bankruptcy or operation of law; and

 

  (3)   we have, if so required by the relevant listing rules of the Nasdaq National Market or of any recognized stock exchange, on which our securities are listed, caused an advertisement to be published in newspapers in the manner stipulated by our articles of association, giving notice of our intention to sell these shares, and a period of three months or such shorter period as may be allowed by the Nasdaq National Market or by any recognised stock exchange on which our securities are listed has elapsed since such advertisement and the Nasdaq National Market and/or any other recognized stock exchange on which our securities are listed has or have been notified of such intention.

 

The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.

 

102


Table of Contents

Differences in Corporate Law

 

The Companies Law of the Cayman Islands is modeled after similar laws in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the Companies Law of the Cayman Islands differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law of the Cayman Islands applicable to us and the laws applicable to companies incorporated in the United States (particularly Delaware).

 

Cayman Islands


  

Delaware


Duties of Directors

    

Under Cayman Islands law, at common law, members of a board of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements:

 

•        a duty to act in good faith in the best interests of the company;

 

•        a duty not to personally profit from opportunities that arise from the office of director;

 

•        a duty to avoid conflicts of interest; and

 

•        a duty to exercise powers for the purpose for which such powers were intended.

 

In general, the Companies Law of the Cayman Islands imposes various duties on officers of a company with respect to certain matters of management and administration of the company. The Companies Law of the Cayman Islands contains provisions which impose default fines on persons who fail to satisfy those requirements. However, in many circumstances, an individual is only liable if such individual knowingly commits the default or knowingly and wilfully authorizes or permits the default.

  

Under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. The duty of care requires that directors act in an informed and deliberative manner and inform themselves, prior to making a business decision, of all material information reasonably available to them. The duty of care also requires that directors exercise care in overseeing and investigating the conduct of the corporation’s employees. The duty of loyalty may be summarized as the duty to act in good faith, not out of self-interest, and in a manner which the director reasonably believes to be in the best interests of the shareholders.

 

Under Delaware law, a party challenging the propriety of a decision of a board of directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the “business judgment rule.” If the presumption is not rebutted, the business judgment rule protects the directors and their decisions, and their business judgments will not be second guessed. Where, however, the presumption is rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors’ conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction resulting in a sale of control of the corporation.

 

103


Table of Contents

Cayman Islands


  

Delaware


Interested Directors

    

There are no provisions under Cayman Islands law that require a director who is interested in a transaction entered into by a Cayman Islands company to disclose his interest nor will render such director liable to such company for any profit realized pursuant to such transaction. Our articles of association contain provisions that require our directors to disclose their interests in transactions.

  

Under Delaware law, a transaction in which a director who has an interest in such transaction would not be voidable if (a) the material facts as to such interested director’s relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum, (b) such material facts are disclosed or are known to the shareholders entitled to vote on such transaction and the transaction is specifically approved in good faith by vote of the shareholders, or (c) the transaction is fair as to the corporation as of the time it is authorized, approved or ratified. Under Delaware law, a director could be held liable for any transaction in which such director derived an improper personal benefit.

Voting Rights and Quorum Requirements

    

Under Cayman Islands law, the voting rights of shareholders are regulated by the company’s articles of association and, in certain circumstances, the Companies Law of the Cayman Islands. The articles of association will govern matters such as quorum for the transaction of business, rights of shares, and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Under Cayman Islands law, certain matters must be approved by a special resolution which is defined as two-thirds of the votes cast by shareholders present at a meeting and entitled to vote; otherwise, unless the articles of association otherwise provide, the majority is usually a simple majority of votes cast.

  

Under Delaware law, unless otherwise provided in the corporation’s certificate of incorporation, each shareholder is entitled to one vote for each share of stock held by the shareholder. Unless otherwise provided in the corporation’s certificate of incorporation or bylaws, a majority of the shares entitled to vote, present in person or represented by proxy, constitutes a quorum at a meeting of shareholders. In matters other than the election of directors, with the exception of special voting requirements related to extraordinary transactions, the affirmative vote of a majority of shares present in person or represented by proxy at the meeting and entitled to vote is required for shareholder action, and the affirmative vote of a plurality of shares is required for the election of directors.

 

104


Table of Contents

Cayman Islands


  

Delaware


Mergers and Similar Arrangements

    

Cayman Islands law does not provide for mergers as that expression is understood under U.S. corporate law. However, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that:

 

•        the company is not proposing to act illegally or beyond the scope of its authority and the statutory provisions as to majority vote have been complied with;

 

•        the shareholders have been fairly represented at the meeting in question;

 

•        the arrangement is such as a businessman would reasonably approve; and

 

•        the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law of the Cayman Islands or that would amount to a “fraud on the minority.”

 

When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offerer may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands but is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.

 

If the arrangement and reconstruction are thus approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

  

Under Delaware law, with certain exceptions, a merger, consolidation, exchange or sale of all or substantially all the assets of a corporation must be approved by the board of directors and a majority of the outstanding shares entitled to vote thereon. Under Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which such shareholder may receive cash in the amount of the fair value of the shares held by such shareholder (as determined by a court) in lieu of the consideration such shareholder would otherwise receive in the transaction.

 

Delaware law also provides that a parent corporation, by resolution of its board of directors, may merge with any subsidiary, of which it owns at least 90% of each class of capital stock without a vote by shareholders of such subsidiary. Upon any such merger, dissenting shareholders of the subsidiary would have appraisal rights.

 

105


Table of Contents

Cayman Islands


  

Delaware


Shareholder Suits     

We are not aware of any reported class action or derivative action having been brought in a Cayman Islands court. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:

 

•        a company is acting or proposing to act illegally or beyond the scope of its authority;

 

•        the act complained of, although not beyond the scope of its authority, could be effected duly if authorized by more than a simple majority vote which has not been obtained; and

 

•        those who control the company are perpetrating a “fraud on the minority.”

  

Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court generally has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.

Corporate Governance

    

Cayman Islands law does not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve. Under our memorandum and articles of association, subject to any separate requirement for audit committee approval under the applicable rules of the Nasdaq National Market or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in any contract or arrangement which he is interested in, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.

  

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.

Inspection of Corporate Records

    

Shareholders of a Cayman Islands company have no general right under Cayman Islands law to inspect or obtain copies of a list of shareholders or other corporate records of the company. However, these rights may be provided in the articles of association. Our amended and restated articles of association allow our shareholders and the public to inspect our register of shareholders. In addition, we will provide our shareholders with annual financial statements.

  

Under Delaware law, shareholders of a Delaware corporation have the right during normal business hours to inspect for any proper purpose, and to obtain copies of list(s) of shareholders and other books and records of the corporation and its subsidiaries, if any, to the extent the books and records of such subsidiaries are available to the corporation.

 

106


Table of Contents

Cayman Islands


  

Delaware


Shareholder Proposals

    

The Companies Law of the Cayman Islands does not provide shareholders any right to bring business before a meeting or requisition a general meeting. However, these rights may be provided in the articles of association but they are not provided in our articles of association.

  

Unless provided in the corporation’s certificate of incorporation or bylaws, Delaware law does not include a provision restricting the manner in which shareholders may bring business before a meeting.

Approval of Corporate Matters by Written Consent

The Companies Law of the Cayman Islands allows a special resolution to be passed in writing if signed by all the shareholders and authorized by the articles of association.

  

Delaware law permits shareholders to take action by written consent signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting of shareholders.

Calling of Special Shareholders Meetings

    

The Companies Law of the Cayman Islands does not have provisions governing the proceedings of shareholders meetings which are usually provided in the articles of association. See “Description of Share Capital—Meetings” for a summary of the proceedings of our shareholder meetings.

  

Delaware law permits the board of directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call a special meeting of shareholders.

Staggered Board of Directors

    

The Companies Law of the Cayman Islands does not contain statutory provisions that require staggered board arrangements for a Cayman Islands company. Such provisions, however, may validly be provided for in the articles of association.

  

Delaware law permits, but does not require, corporations to have a staggered board of directors.

Issuance of Preferred Shares

    

The Companies Law of the Cayman Islands allows shares to be issued with preferred, deferred or other special rights, whether in regard to dividend, voting, return of share capital or otherwise. The constitutional documents of a Cayman Islands company may contain provisions in respect of the authorization required for the creation and issue of different classes of preferred shares.

  

Delaware law allows shares to be issued with preferred, deferred or other special rights, whether in regard to dividend, voting, return of share capital or otherwise. The constitutional documents of a Delaware corporation may contain provisions in respect of the authorization required for the creation and issue of different classes of preferred shares.

Anti-Takeover Provisions

    

Cayman Islands law does not prevent companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred, removal of directors only for cause and provisions that restrict the rights of shareholders to call meetings, act by written consent and submit shareholder proposals.