20-F 1 dp54343_20f.htm FORM 20-F


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)
 
     ¨
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
     x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2014
 
OR
 
     ¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from         to
 
OR
 
     ¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report
 
Commission file number: 001-31335
 
(Exact name of Registrant as specified in its charter)
 

AU OPTRONICS CORP.
TAIWAN, REPUBLIC OF CHINA
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
 
1 LI-HSIN ROAD 2
HSINCHU SCIENCE PARK
HSINCHU, TAIWAN
REPUBLIC OF CHINA
(Address of principal executive offices)

Andy Yang
Chief Financial Officer
1 Li-Hsin Road 2
Hsinchu Science Park
Hsinchu, Taiwan
Republic of China
Telephone No.: +886-3-500-8800
Facsimile No.: +886-3-564-3370
Email: IR@auo.com
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
 
 

 
 
Title of each class
Name of each exchange on which registered
Common Shares of par value NT$10.00 each
The New York Stock Exchange, Inc.*
 
*
Not for trading, but only in connection with the listing on the New York Stock Exchange, Inc. of American Depositary Shares representing such Common Shares
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report 9,624,245,115 Common Shares.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes  ¨ No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes  x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes  ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one):
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP  ¨    International Financial Reporting Standards as issued by the International Accounting Standards Board  x    Other  ¨
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨  Item 17  ¨  Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes  x No



 
 

 
 

 
Page
 
 
 
i

 
 

 
 
This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. These forward-looking statements are based on our beliefs and assumptions and the information available to us from other sources we believe to be reliable as of the date these disclosures were prepared and we undertake no obligation to update these forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report. The words “anticipate,” “believe,” “expect,” “intend,” “seek,” “plan,” “estimate” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements. Our actual results of operations, financial condition or business prospects may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons, including, among other things and not limited to:
 
 
·
the cyclical nature of our industry;
 
 
·
further declines in average selling prices;
 
 
·
our ability to comply with the applicable covenants under the terms of our debt instruments;
 
 
·
litigation and regulatory investigations against us;
 
 
·
our dependence on introducing new products on a timely basis;
 
 
·
our dependence on growth in the demand for our products;
 
 
·
our continued ability to achieve high capacity utilization rates;
 
 
·
our ability to effectively manage inventories;
 
 
·
our dependence on a small number of customers for a substantial portion of our net revenue;
 
 
·
our ability to allocate capacity efficiently and in a timely manner;
 
 
·
implementation of our expansion plans and our ability to obtain capital resources for our planned growth;
 
 
·
our ability to compete effectively;
 
 
·
our dependence on the outsourcing of manufacturing by brand companies to original equipment manufacturing service providers;
 
 
·
our ability to expand into new businesses, industries or internationally and to undertake mergers, acquisitions, investments or divestments;
 
 
·
changes in the accounting standard as required by the ROC government;
 
 
·
our dependence on key personnel;
 
 
·
our relationship with our affiliates;
 
 
·
our ability to acquire sufficient raw materials and key components and obtain equipment and services from our suppliers in suitable quantity and quality;
 
 
·
changes in technology and competing products;
 
 
·
possible disruptions in commercial activities caused by natural and human-induced disasters, including terrorist activity and armed conflict;
 
 
·
general political, economic, financial and regulatory conditions;
 
 
·
fluctuations in foreign currency exchange rates; and  
 
 
·
other factors in the “Risk Factors” section in this annual report. Please see “Item 3. Key Information—3.D. Risk Factors.”
 
 
 
We publish our financial statements in New Taiwan dollars (“NT dollars”), the lawful currency of the Republic of China (“ROC”). This annual report contains translations of NT dollar amounts, Renminbi (“RMB”) amounts, Japanese Yen (“JPY” or “YEN”) amounts and Euro (“EUR”) amounts, into United States dollars (“U.S. dollars”), at specific rates solely for the convenience of the reader. For convenience only and unless otherwise noted, all translations between NT dollars and U.S. dollars, between RMB and U.S. dollars, between JPY and U.S. dollars and between EUR and U.S. dollars in this annual report were made at a rate of NT$31.60 to US$1.00, RMB6.2046 to US$1.00, JPY119.85 to US$1.00, and EUR0.8264 to US$1.00, respectively, the exchange rates set forth in the H.10 weekly statistical release of the Federal Reserve System of the United States (the “Federal Reserve Board”) on December 31, 2014. No representation is made that the NT dollar, RMB, JPY, EUR or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars, RMB, JPY, EUR or NT dollars, as the case may be, at any particular rate or at all. On March 13, 2015, the exchange rates set forth in the H.10 weekly statistical release of the Federal Reserve Board were NT$31.71 to US$1.00, RMB6.2585 to US$1.00, JPY121.17 to US$1.00 and EUR0.9502 to US$1.00, respectively. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
 
 
 
Unless otherwise indicated, in this annual report, the following terms shall have the meaning set out below:
 
“Acer Display”
Acer Display Technology, Inc.
“AC” or “Alternative Current”
A high-efficiency AC module with integrated microinverter
“ADSs”
American Depositary Shares
“AFPD”
AFPD Pte., Ltd.
“AHVA”
Advanced hyper-viewing angle technology
“AMOLED”
Active-matrix organic light emitting diode
“AMVA”
AUO Advanced Multi-domain Vertical Alignment
“AT&T”
AT&T Corporation and its affiliates
“AUSP”
AUO SunPower Sdn. Bhd.
“BenQ”
BenQ Corporation
“BMC”
BenQ Materials Corp.
“BTA”
The basic tax amount
“China”
The People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau
“Code”
The Internal Revenue Code of 1986, as amended
“Convertible Securities”
Bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants
“CTSP”
The Central Taiwan Science Park Development Office
“Delaware Court”
The United States District Court for the District of Delaware
“DG COMP”
The Commission of the European Communities Directorate-General for Competition
“DTC”
The Depository Trust Company
“Eidos”
Eidos Display, LLC and Eidos III, LLC
“EPA”
The Environmental Protection Administration of the Executive Yuan of the Taiwan
“eTP”
The embedded touch panel technology
“fabs”
Fabrication plants
“FDTC”
Fujitsu Display Technologies Corporation (which was merged into Fujitsu Limited)
“Federal Reserve Board”
The Federal Reserve System of the United States
“Forhouse”
Forhouse Corporation
“FSC”
The ROC Financial Supervisory Commission
“GOA”
Our Gate On Array technology
 
 
4

 
“IBTA Statute”
The Statute of Income Basic Tax Amount
“IFRS”
The International Financial Reporting Standards as issued by the International Accounting Standards Board
“ITC”
The United States International Trade Commission
“Investment Regulations”
The ROC Regulations Governing Securities Investment by Overseas Chinese and Foreign Nationals
“KFTC”
The Korea Fair Trade Commission
“large-size panels”
Panels ten inches and above in diagonal length
“LED”
Light emitting diodes
“Lextar”
Lextar Electronics Corp.
“LTPS”
Low temperature poly-silicon method
“LG Display” or “LGD”
LG Display Co., Ltd.
“M.Setek”
M.Setek Co., Ltd.
“mm”
Millimeters
“MOEAIC”
Investment Commission of Ministry of Economic Affairs
“mobile PC”
Primarily includes notebooks, tablets, etc.
“Motorola”
Motorola Inc.
“Nokia”
Nokia Corporation
“NYSE”
The New York Stock Exchange
“non-ROC resident”
A person who is not a resident of the ROC
“Northern California Court”
The United States District Court for the Northern District of California
“NSC”
National Science Counsel of the ROC Executive Yuan
“ODM”
Original Design Manufacturing
“OEM”
Original Equipment Manufacturing
“OGS”
One glass solution
“OLED”
An organic light emitting diode
“our company”, “us” or “we”
AU Optronics Corp. and its consolidated subsidiaries, unless the context suggests otherwise
“Oxide TFT”
Oxide Thin Film Transistor Technology
“PFIC”
A passive foreign investment company
“PRC” or “China”
The People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau
“QDI”
Quanta Display Inc.
“QDIIs”
Qualified domestic institutional investors
“Qisda”
Qisda Corporation
“Raydium”
Raydium Semiconductor Corporation
“ROC” or “Taiwan”
The island of Taiwan and the areas under the effective control of the Republic of China
“ROC GAAP”
The generally accepted accounting principles in the ROC
“ROC government”
The government of the ROC
“Samsung”
Samsung Electronics Co., Ltd.
“Samsung Group”
Samsung Electronics Co., Ltd. and its subsidiaries
“SEC”
The United States Securities and Exchange Commission
“Sharp”
Sharp Corporation
“Small to medium-size panels”
Panels which are under ten inches in diagonal length
“subsidiary”
Companies owned directly or indirectly by AU Optronics Corp., unless the context suggests otherwise
“SPTL”
SunPower Technology, Ltd., a subsidiary of SunPower Corporation
“Taiwan IFRS”
The International Financial Reporting Standards as issued by the International Accounting Standards Board and endorsed by the FSC, which are required to be adopted by applicable companies in the ROC pursuant to the Framework for Adoption of International Financial Reporting Standards by Companies in the ROC promulgated by the FSC on May 14, 2009
“Toppan CFI”
Toppan CFI (Taiwan) Co., Ltd.
“U.S. DOJ”
The United States Department of Justice
“Unipac”
Unipac Optoelectronics Corp.
“WCG”
The wide color gamut technology
 
 
 
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
KEY INFORMATION
 
Selected Financial Data
 
The selected consolidated financial data set forth below as of December 31, 2013 and 2014 and for the years ended December 31, 2012, 2013 and 2014 have been derived from our audited consolidated financial statements and the related notes, which have been prepared in accordance with IFRS, included elsewhere in this annual report. The selected consolidated statement of financial position data as of December 31, 2012 have been derived from our audited consolidated financial statements prepared in accordance with IFRS that are not included herein. The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the accompanying notes included elsewhere in this annual report.
 
We prepare our consolidated financial statements in accordance with IFRS. Until and including our consolidated financial statements included in our annual reports on Form 20-F for the year ended December 31, 2012, we prepared our consolidated financial statements in accordance with generally accepted accounting principles in the ROC (“ROC GAAP”), with reconciliations to U.S. GAAP.
 
Beginning on January 1, 2013, we have adopted Taiwan IFRS for reporting our annual and interim consolidated financial statements in the ROC in accordance with the requirements of the FSC. Meanwhile, we have adopted and will continue to adopt IFRS, which differs from Taiwan IFRS, for certain filings with the SEC, including this annual report and future annual reports on Form 20-F. Following our adoption of IFRS for SEC filing purposes since 2013, pursuant to the rule amendments adopted by the SEC which became effective on March 4, 2008, we are no longer required to reconcile our consolidated financial statements with U.S. GAAP. Furthermore, pursuant to the transitional relief granted by the SEC in respect of first-time application of IFRS, historical selected financial data for the years ended December 31, 2010 and 2011 has been omitted. Historical financial results as of and for the year ended December 31, 2012 have also been adjusted based on IFRS, which differs from the results included in our annual reports on Form 20-F for the year ended December 31, 2012.
 
We are not required to separately present operating profit or loss in our consolidated statements of comprehensive income (loss) prepared in accordance with IFRS. Therefore, the consolidated financial statements included in this annual report, which are prepared in accordance with IFRS, do not present a measure of operating profit or loss.
 
 
   
Year Ended and As of December 31,
 
   
2012
   
2013
   
2014
 
   
NT$
   
NT$
   
NT$
   
US$
 
   
(in millions, except percentages and earnings per share and per ADS data)
 
Consolidated Statements of Comprehensive Income (Loss) Data:
                       
Net revenue
    378,470.9       416,363.0       408,178.7       12,917.0  
Gross profit (loss)
    (13,122.9 )     33,984.1       48,510.6       1,535.1  
Selling and distribution expenses
    (6,377.2 )     (7,470.0 )     (7,799.0 )     (246.8 )
General and administrative expenses
    (9,203.9 )     (9,691.1 )     (9,389.6 )     (297.1 )
Research and development expenses
    (9,904.3 )     (8,530.5 )     (9,156.6 )     (289.8 )
Profit (loss) before income tax
    (51,494.1 )     5,236.0       19,980.4       632.3  
Income tax expense
    1,124.0       1,359.1       3,243.2       102.6  
Profit (loss) for the year
    (52,618.1 )     3,876.9       16,737.2       529.7  
Total comprehensive income (loss) for the year
    (54,201.9 )     6,875.4       18,914.9       598.6  
Profit (loss) for the year attributable to:
                               
   Stockholders of AU Optronics Corp.
    (51,327.1 )     3,804.2       16,366.6       517.9  
   Non-controlling interests
    (1,291.0 )     72.7       370.6       11.8  
Total comprehensive income (loss) for the year attributable to:
                               
   Stockholders of AU Optronics Corp.
    (52,751.7 )     6,367.5       18,125.7       573.6  
   Non-controlling interests
    (1,450.2 )     507.9       789.2       25.0  
Earnings (loss) per share—Basic
    (5.81 )     0.41       1.70       0.05  
Earnings (loss) per share—Diluted(1)
    -       0.40       1.69       0.05  
Earnings (loss) per ADS equivalent—Basic
    (58.15 )     4.07       17.01       0.54  
Earnings (loss) per ADS equivalent—Diluted(1)
    -       4.04       16.88       0.53  
                                 
Consolidated Statements of Financial Position Data:
                               
Total current assets
    174,072.2       169,604.1       185,614.5       5,873.9  
Property, plant and equipment, net
    315,518.2       270,269.0       231,814.7       7,335.9  
Total assets
    515,008.5       464,835.9       442,344.3       13,998.2  
Total current liabilities
    192,221.7       181,338.6       174,143.1       5,510.9  
Total noncurrent liabilities
    186,638.0       130,507.1       94,214.3       2,981.4  
Total liabilities
    378,859.7       311,845.7       268,357.4       8,492.3  
Common stock
    88,270.5       96,242.5       96,242.5       3,045.6  
Non-controlling interests in subsidiaries
    14,062.6       14,036.5       19,329.2       611.7  
Total equity attributable to stockholders of AU Optronics Corp.
    122,086.2       138,953.7       154,657.7       4,894.2  
                                 
Other Financial Data:
                               
Gross margin(2) 
    (3.5 %)     8.2 %     11.9 %     11.9 %
Net margin(3) 
    (13.9 %)     0.9 %     4.1 %     4.1 %
Capital expenditures
    43,332.6       25,457.8       16,971.0       537.1  
Depreciation and amortization
    75,276.4       63,637.7       56,902.7       1,800.7  
Net cash flows provided by operating activities
    35,747.9       49,642.4       63,392.7       2,006.1  
Net cash flows used in investing activities
    (43,181.7 )     (23,223.8 )     (13,106.8 )     (414.8 )
Net cash flows used in financing activities
    (5,940.4 )     (26,785.4 )     (45,041.5 )     (1,425.4 )
                                 
Segment Data:
                               
Net revenue
                               
Display business
    367,120.3       398,836.2       384,335.2       12,162.5  
Solar business
    11,350.6       17,526.8       23,843.5       754.5  
Segment profit (loss) (4)
                               
Display business
    (30,330.8 )     12,017.9       24,422.5       772.8  
Solar business
    (8,277.5 )     (3,725.4 )     (2,257.1 )     (71.4 )

(1)
Diluted earnings per share in 2012 was not applicable due to the anti-dilutive effect on the basic net loss per share. The convertible bonds (“ECB”) were not included for the calculation of diluted earnings per share in 2013 and 2014 due to its anti-dilutive effect.
(2)
Gross margin is calculated by dividing gross profit (loss) by net revenue.
(3)
Net margin is calculated by dividing profit (loss) for the year by net revenue.
(4)
Segment profit (loss) represents gross profit (loss) minus selling and distribution expenses, general and administrative expenses and research and development expenses.
 
 
7

 
Exchange Rate
 
Fluctuations in the exchange rate between NT dollars and U.S. dollars will affect the U.S. dollar equivalent of the NT dollar price of our shares on the Taiwan Stock Exchange and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the U.S. dollar conversion by the depositary of cash dividends paid in NT dollars on, and the NT dollar proceeds received by the depositary from any sale of, our shares represented by ADSs.
 
The following table sets forth, for the periods indicated, information concerning the number of NT dollars for which one U.S. dollar could be exchanged. The exchange rates reflect the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board.
 
   
Exchange Rate
 
   
Average
   
High
   
Low
   
Period-End
 
   
(or month-end
rates for years)
                   
2010
    31.49       32.43       29.14       29.14  
2011
    29.38       30.67       28.50       30.27  
2012
    29.56       30.28       28.96       29.05  
2013
    29.68       30.20       28.93       29.83  
2014
    30.30       31.80       29.85       31.60  
September
    30.13       30.47       29.89       30.44  
October
    30.40       30.49       30.31       30.45  
November
    30.73       30.99       30.48       30.99  
December
    31.35       31.80       31.03       31.60  
2015
 
 
   
 
   
 
         
January
    31.64       32.00       31.06       31.75  
February
    31.55       31.76       31.31       31.44  
March (through March 13, 2015)
    31.54       31.71       31.35       31.71  
     
Capitalization and Indebtedness
 
Not applicable.
 
Reason for the Offer and Use of Proceeds
 
Not applicable.
 
Risk Factors
 
Risks Relating to Our Financial Condition, Business and Industry
 
Our industry is cyclical, with recurring periods of capacity increases. As a result, price fluctuations in response to supply and demand imbalances could harm our results of operations.
 
The display panel industry in general is characterized by cyclical market conditions. From time to time, the industry has been subject to imbalances between excess supply and a slowdown in demand, and in certain periods, resulting in declines in average selling prices. For example, in 2014, average selling price of our large-size panels decreased by 6.2% in the first quarter from the fourth quarter in the previous year. In addition, capacity expansion anticipated in the display panel industry may lead to excess capacity. It is anticipated that capacity expansion in the display panel industry is due to scheduled ramp-up of new fabs, and any large increases in capacity as a result of such expansion could further drive down the average selling prices of our panels, which would affect our results of operations. We cannot assure you that any continuing or further decrease in average selling prices or future downturns resulting from excess capacity or other factors affecting the industry will not be severe or that any such continuation, decrease or downturn would not seriously harm our business, financial condition and results of operations.
 
 
Our ability to maintain or increase our revenues will primarily depend upon our ability to maintain market share, increase unit sales of existing products, and introduce and sell new products that offset the anticipated fluctuation and long-term declines in the average selling prices of our existing products. We cannot assure you that we will be able to maintain or expand market share, increase unit sales, and introduce and sell new products, to the extent necessary to compensate for market oversupply.  
 
We may experience declines in the average selling prices of our display panels irrespective of cyclical fluctuations in the industry.
 
The average selling prices of our display panels have declined in general and are expected to continually decline with time irrespective of industry-wide cyclical fluctuations as a result of, among other factors, technology advancements and cost reductions. Although we may be able to take advantage of the higher selling prices typically associated with new products and technologies when they are first introduced into the market, such prices decline over time and in certain cases, very rapidly, as a result of market competition. If we are unable to anticipate effectively and counter the price erosion that accompanies our products, or if the average selling prices of our display panels decrease faster than the rate at which we are able to reduce our manufacturing costs, our profit margins will be affected adversely and our results of operations and financial condition may be affected materially and adversely.
 
Our results of operations have fluctuated in the past. If we are unable to achieve profitability in 2015 or beyond, the value of the ADSs and our shares may be adversely affected.
 
Our business is significantly affected by cyclical market conditions. From time to time, the industry has experienced imbalances between excess supply and slowdowns in demand, and in certain periods, resulting in declines in average selling prices. In addition, other factors such as technology advancement and cost reductions have driven down and may continue to drive down our average selling prices irrespective of cyclical market conditions for the TFT-LCD panel industry.
 
The solar industry has undergone a challenging business conditions in the past years, including downward pricing pressure for solar modules, solar cells, solar wafers and polysilicon mainly as a result of oversupply and reductions in applicable governmental subsidies. Although the solar industry might continue to grow in the long run, there is no assurance that the solar industry will not suffer significant downturns or significant reductions in the scope or discontinuation of government incentive programs in the future, especially in markets where we operate or we target, which will adversely affect demands for our solar products as well as our results of operations.
 
Our results of operations have fluctuated in the past. Our net revenue decreased by approximately 2.0% to NT$408.2 billion (US$12.9 billion) in 2014 compared to net revenue of NT$416.4 billion in 2013, while our net profit for the year significantly increased from NT$3.9 billion in 2013 to NT$16.7 billion (US$0.5 billion) in 2014. We cannot assure you that we will be profitable in 2015 or beyond. In addition, we expect that average selling prices for many of our existing products will continue to decline over the long term. If we are unable to reduce our costs of manufacturing of our products to offset expected declines in average selling prices and maintain a high capacity utilization rate, our gross margin will decline, which could seriously harm our business and reduce the value of our equity securities. If we are unable to achieve profitability in 2015 or beyond, the value of the ADSs and our shares may be adversely affected.
 
Our future net revenue, gross profit, operating income and financing capabilities may vary significantly due to a combination of factors, including, but not limited to:
 
 
·
our ability to develop and introduce new products to meet customers’ needs in a timely manner;
 
 
·
our ability to develop or acquire and implement new manufacturing processes and product technologies;
 
 
·
our ability to control our fixed and variable costs and operating expenses;
 
 
·
our ability to manage our product mix;
 
 
·
our ability to obtain raw materials and components at acceptable prices and in a timely manner;
 
 
·
lower than expected growth in demand resulting in oversupply in the market;
 
 
·
our ability to obtain adequate external financing on satisfactory terms; and
 
 
·
fines and penalties payable relating to the alleged violation of antitrust ,competition laws and other regulations.
 
 
9

 
We need to comply with certain financial and other covenants under the terms of our debt instruments, the failure to comply with which may put us in default under those instruments.
 
We are a party to numerous loans and other agreements relating to the incurrence of debt, many of which include financial covenants and broad default provisions. The financial covenants primarily include current ratios, indebtedness ratios, interest coverage ratios and minimum equity requirements, which, in general, govern our existing long-term debt and debt we may incur in the future. These covenants could limit our ability to plan for or react to market conditions or to meet our capital needs in a timely manner and we may have to curtail some of our operations and growth plans to maintain compliance. In addition, any global or regional economic deterioration may cause us to incur significant net losses or force us to assume considerable liabilities, which would adversely impact our ability to comply with the financial covenants of our outstanding loans. If the relevant creditors decline to grant waivers for any non-compliance with the covenants, such non-compliance will constitute an event of default which may trigger a requirement for acceleration of the amounts due under the applicable loan agreements. Some of our loan agreements also contain cross-default clauses, which could enable creditors under our other debt instruments to declare an event of default when there is a default in other loan agreements. We cannot assure you that we will be able to remain in compliance with our financial covenants. In the event of default, we may not be able to cure the default or obtain a waiver on a timely basis. An event of default under any agreement governing our existing or future debts, if not cured by us or waived by our creditors, could have a material adverse effect on our liquidity, financial condition and results of operations.
 
We have on occasion failed to comply with certain financial covenants in some of our loan agreements. For example, in 2012 we failed to comply with the financial covenants with respect to leverage ratio and/or tangible net worth in the agreements for certain syndicated and bilateral credit facilities and we have obtained waivers from such noncompliance from the relevant banks for each of these credit facilities. In 2013 our subsidiaries, AUO Crystal Corp. and M.Setek, failed to comply with the financial covenants with respect to current ratio and/or, leverage ratio and/or tangible net worth in the agreements for syndicated credit facilities, for which we have obtained waivers from such noncompliance from the relevant banks for each of these credit facilities.
 
In 2014, our subsidiary AUO Crystal Corp. failed to comply with the financial covenants with respect to interest coverage ratio for its NT$8.0 billion five-year syndicated credit facility, for which First Commercial Bank acted as the agent bank. As of the date of this annual report, the aggregated outstanding amount of the syndicated credit facility is NT$4.2 billion (US$0.1 billion). AUO Crystal Corp. is in the process of preparing the waiver application to the syndicate banks for such breach of financial covenants and will submit the waiver application when its audited financial statements are available. Pursuant to the terms of the agreement, a breach of financial covenants is not deemed to constitute an event of default so long as such syndicate banks representing the majority of the outstanding loan amount (the “majority syndicate banks”) have not yet made a decision on the waiver application. See “Item 5. Operating and Financial Review and Prospects—5.B. Liquidity and Capital Resources” for further details. Although we believe that AUO Crystal Corp. is likely to be able to obtain the waiver, we cannot assure you of the outcome of the waiver application. Moreover, we cannot assure you that no lender would seek to further accelerate the payment in respect of the existing debt if AUO Crystal Corp. does not obtain the required consent from the majority syndicate banks on the waiver application. If AUO Crystal Corp. is unable to timely remedy the non-compliance under such loan agreement, such as obtaining the applicable waiver, such non-compliance will constitute an event of default which would adversely and materially affect its results of operations and financial condition.
 
We are involved in a number of legal proceedings concerning matters arising from our business and operations, and as a result we may face significant liabilities. If we or our employees are found to have violated any applicable law, including antitrust and competition laws in pending actions or new claims, or if our appeals regarding such violations are not successful, we may be subject to severe fines or penalties that would have a material adverse effect on our business and operations.
 
We are involved in a number of legal proceedings concerning matters arising from our business and operations, primarily related to the development and the sale of our products, including patent infringements, investigations by the government authorities such as anti-trust investigations and proceedings, and other legal matters. In addition, we may have compliance issues with regulatory bodies in the course of our operations, which may subject us to administrative proceedings and unfavorable decrees that result in liabilities and cause delays to our production. Our products may also be subject to anti-dumping or countervailing duty proceedings as a result of protectionist measures adopted by governments in any of our export market. We may be involved in other proceedings or disputes in the future that may have a material adverse effect on our business, financial condition, results of operations or cash flows.
 
 
In particular, there have been numerous antitrust proceedings and investigations, criminal, civil, and/or administrative, concerning the alleged price fixing by manufacturers of TFT-LCD panels, including us. Since December 2006, we and certain of our overseas subsidiaries have become involved in antitrust investigations, including but not limited to, investigations by the United States Department of Justice (“U.S. DOJ”), the European Commission Directorate-General for Competition and certain regulatory authorities in other countries concerning the allegations of price fixing by manufacturers of TFT-LCD panels. For example, the U.S. DOJ has brought charges against us, our U.S. subsidiary and certain of our executives. In September 2012, the United States District Court for Northern District of California (“Northern California Court”) rendered judgment and imposed a fine of US$500 million against us to be payable over three years and sentenced two of our former executives to imprisonment and imposed a fine on them. We paid the first three installments each in the amount of US$125 million in January 2013, September 2013 and September 2014. We expect to pay the last installment in the amount of US$125 million in September 2015. We were also involved in other U.S. Federal class action lawsuits brought by direct and indirect panel purchasers and were required to, among other things, pay an aggregate amount of approximately US$208 million in settling these lawsuits and such amount was fully paid by the first quarter of 2013.
 
See “Item 8. Financial Information—8.A.7. Litigation” for a discussion of certain legal proceedings in which we are involved.
 
We may be subject to other new claims, charges or investigations. Defending against any of these pending or future actions will likely be costly and time-consuming and could significantly divert management’s efforts and resources. The ultimate outcome of the pending investigations cannot be predicted with certainty. Any penalties, fines, damages or settlements made in connection with these criminal, civil, and/or administrative investigations and/or lawsuits may have a material adverse effect on our business, results of operations and future prospects.
 
Our results of operations fluctuate from quarter to quarter, which makes it difficult to predict our future performance.
 
Our results of operations have varied significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a number of factors, many of which are beyond our control. Our business and operations may be adversely affected by the following factors, among others:
 
 
·
rapid changes from month to month, including shipment volume and product mix change;
 
 
·
the cyclical nature of the industry, including fluctuations in average selling prices, and imbalances between excess supply and slowdowns in demand;  
 
 
·
the speed at which we and our competitors expand production capacity;
 
 
·
access to raw materials and components, equipment, electricity, water and other required utilities on a timely and economical basis;
 
 
·
technological changes;
 
 
·
the loss of a key customer or the postponement, rescheduling or cancellation of large orders from customers;
 
 
·
the outcome of ongoing and future litigation and government investigations;
 
 
·
changes in end-users’ spending patterns;
 
 
·
changes to our management team;
 
 
·
access to funding on satisfactory terms;
 
 
·
our customers’ adjustments in their inventory;
 
 
·
changes in general political, economic, financial and legal conditions; and
 
 
·
natural disasters, such as typhoons and earthquakes, and industrial accidents, such as fires and power failures, as well as geo-political instability as a result of terrorism or political or military conflicts.
 
Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter comparisons to predict our future performance. Unfavorable changes in any of the above factors may seriously harm our business, financial condition and results of operations. In addition, our results of operations may be below the expectations of public market analysts and investors in some future periods, which may result in a decline in the price of the ADSs or shares.
 
 
11

 
Our results of operations may be affected adversely if we cannot timely introduce new products or if our new products do not gain market acceptance.
 
Early product development by itself does not guarantee the success of a new product. Success also depends on other factors such as product acceptance by the market. New products are developed in anticipation of future demand. Our delay in the development of commercially successful products with anticipated technological advancement may adversely affect our business. We cannot assure you that the launch of any new product will be successful, or that we will be able to produce sufficient quantities of these products to meet market demand.
 
We plan to continue to expand our operations to meet the needs of applications in televisions, monitors, mobile PCs, mobile devices and commercial and other applications as demand increases. Because these products are expected to be marketed to a diversified group of end-users with demands for different specifications, functions and prices, we have developed different marketing strategies to promote our panels for these products. We cannot assure you that our strategies to expand our market share for these panels will be successful. If we fail to successfully market panels for these products, our results of operations will be adversely affected.  
 
Our net revenue and results of operations depend on continuing demand for televisions, monitors, mobile PCs, mobile devices and commercial and other applications with display panels. Our sales may not grow at the rate we expect if there is a downturn in the demand for, or a further decrease in the average selling prices of, panels for these products.
 
Currently, our total sales are derived principally from customers using our products in televisions, monitors, mobile PCs, mobile devices and commercial and other applications with display devices. For example, a substantial percentage of our sales are derived from our panels and other related products for televisions, which accounted for 44.6%, 45.3% and 42.0% of our net revenue in 2012, 2013 and 2014, respectively. We will continue to be dependent on the growth of the television, monitors, mobile PCs, mobile devices and commercial and other applications for a substantial portion of our net revenue, and any downturn in these industries would result in reduced demand for our products, reduced net revenue, lower average selling prices and/or reduced margins and our business prospects and results of operations may be materially and adversely affected.
 
If we are unable to achieve high capacity utilization rates, our results of operations will be affected adversely.
 
High capacity utilization rates allow us to allocate fixed costs over a greater number of panels produced. Increases or decreases in capacity utilization rates can impact significantly our gross margins. Accordingly, our ability to maintain or improve our gross margins will continue to depend, in part, on achieving high capacity utilization rates. In turn, our ability to achieve high capacity utilization rates will depend on the ramp-up progress of our advanced production facilities and our ability to efficiently and effectively allocate production capacity among our product lines, as well as the demand for our products and our ability to offer products that meet our customers’ requirements at competitive prices.
 
From time to time, our results of operations in the past have been adversely affected by low capacity utilization rates. We cannot assure you that we will be able to achieve high capacity utilization rates in 2015 or beyond. If we are unable to efficiently ramp-up our production facilities for advanced technology or demand for our products does not meet our expectations, our capacity utilization rates will decrease, our gross margins will suffer and our results of operations will be materially and adversely affected.
 
We may experience losses on inventories.
 
Frequent new product introductions in the technology industry can result in a decline in the average selling prices of our products and the obsolescence of our existing inventory. This can result in a decrease in the stated value of our inventory, which we value at the lower of cost or net realizable value.
 
We manage our inventory based on our customers’ and our own forecasts. Although we regularly make adjustments based on market conditions, we typically deliver our goods to our customers several weeks after a firm order is placed. While we maintain open channels of communication with our major customers to avoid unexpected decreases in firm orders or subsequent changes to placed orders, and try to minimize our inventory levels, such actions by our customers may have a material adverse effect on our inventory management and our results of operations.
 
 
12

 
We depend on a small number of customers for a substantial portion of our net revenue, and a loss of any one of these customers, a significant decrease in orders from any of these customers or difficulty in collection of accounts receivables would result in the loss of a significant portion of our net revenue and material adverse effect on our results of operation.
 
We depend on a small number of customers for a substantial portion of our business. In 2012, 2013 and 2014, our five largest customers accounted for 37.6%, 39.7% and 33.4%, respectively, of our net revenue. In addition, certain customers individually accounted for more than 10% of our net revenue in the last three years. For example, Samsung Group accounted for 15.3%, 13.8% and 10.2% of our net revenue in 2012, 2013 and 2014, respectively.
 
In recent years, our largest customers have varied due to changes in our product mix. We expect that we will continue to depend on a relatively small number of customers for a significant portion of our net revenue and may continue to experience fluctuations in the distribution of our sales among our largest customers as we periodically adjust our product mix. Our ability to maintain close and satisfactory relationships with our customers is important to the ongoing success and profitability of our business. In addition, our ability to attract potential customers is also critical to the success of our business. If any of our significant customers reduces, delays or cancels its orders for any reason, or the financial condition of our key customers deteriorate, our business could be seriously harmed. Similarly, a failure to manufacture sufficient quantities of products to meet the demands of these customers may cause us to lose customers, which may affect adversely the profitability of our business as a result. Furthermore, if we experience difficulties in the collection of our accounts receivables from our major customers, our results of operation may be materially and adversely affected.
 
Our customers generally do not place purchase orders far in advance, which makes it difficult for us to predict our future revenues and allocate capacity efficiently and in a timely manner.
 
Our customers generally provide rolling forecasts several months in advance of, and do not place firm purchase orders until several weeks before, the expected shipment date. There is no assurance that there will not be unexpected decreases in firm orders or subsequent changes to placed orders from our customers. In addition, due to the cyclical nature of the display panel industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant backlog. The lack of significant backlog makes it difficult for us to forecast our revenues in future periods. Moreover, we incur expenses and adjust inventory levels of raw materials and components based on customers’ forecast, and we may be unable to allocate production capacity in a timely manner to compensate for shortfalls in sales. We expect that, in the future, our sales in any quarter will continue to be dependent substantially upon purchase orders received in that quarter. The inability to adjust production costs, to obtain necessary raw materials and components or to allocate production capacity quickly to respond to the demand for our products may affect our ability to maximize results of operations, which may result in a negative impact on the value of your investment in the ADSs or our shares.
 
Our future competitiveness and growth prospects could be affected adversely if we are unable to successfully expand or improve our fabs to meet market demand.
 
As part of our business growth strategy, we have been undertaking and may undertake in the future a number of significant capital expenditures for our fabs.
 
The successful expansion of our fabs and commencement of commercial production is dependent upon a number of factors, including timely delivery of equipment and machinery and the hiring and training of new skilled personnel. Although we believe that we have the internal capabilities and know-how to expand our fabs and commence commercial production, no assurances can be given that we will be successful. We cannot assure you that we will be able to obtain from third parties, if necessary, the technology, intellectual property or know-how that may be required for the expansion or improvement of our fabs on acceptable terms. In addition, delays in the delivery of equipment and machinery as a result of increased demand for such equipment and machinery or the delivery of equipment and machinery that do not meet our specifications could delay the establishment, expansion or improvement of these fabs. Moreover, the expansion of our fabs may also be disrupted by governmental planning activities. If we face unforeseen disruptions in the installation, expansion and/or manufacturing processes with respect to our fabs, we may not be able to realize the potential gains and may face disruptions in capturing the growth opportunities.
 
If capital resources required for our planned growth or development are not available, we may be unable to implement successfully our business strategy.
 
Historically, we have been able to finance our capital expenditures through cash flow from our operating activities and financing activities, including long-term borrowings, the issuance of convertible and other debt securities and the issuance of equity securities. Our ability to expand our production facilities and establish advanced technology fabs will continue to largely depend on our ability to obtain sufficient cash flow from operations as well as external funding. We expect to make capital expenditures in connection with the development of our business, including investments in connection with new capacity, technological upgrade and the enhancement of capacity value.
 
 
These capital expenditures will be made well in advance of any additional sales to be generated from these expenditures. Our results of operations may be affected adversely if we do not have the capital resources to complete our planned growth, or if our actual expenditures exceed planned expenditures for any number of reasons, including changes in:
 
 
·
our growth plan and strategy;
 
 
·
manufacturing process and product technologies;
 
 
·
market conditions;
 
 
·
prices of equipment;
 
 
·
costs of construction and installation;
 
 
·
market conditions for financing activities of display panel manufacturers;
 
 
·
interest rates and foreign exchange rates; and
 
 
·
social, economic, financial, political and other conditions in Taiwan and elsewhere.
 
If adequate funds are not available on satisfactory terms at appropriate times, we may have to curtail our planned growth, which could result in a loss of customers, adversely affect our ability to implement successfully our business strategy and limit the growth of our business.
 
We operate in a highly competitive environment and we may not be able to sustain our current market position if we fail to compete successfully.
 
The markets for our products are highly competitive. We experience pressure on our prices and profit margins, due largely to additional and growing industry capacity from competitors in Taiwan, Korea, Japan and the PRC. The ability to manufacture on a large scale with greater cost efficiencies is a competitive advantage in our industry. Some of our competitors have expanded through mergers and acquisitions. Some of our competitors have greater access to capital and substantially greater production, research and development, intellectual property, marketing and other resources than we do. Some of our competitors have announced their plans to develop, and have already invested substantial resources in new capacity. Our competitors may be able to introduce products manufactured using such capacity in advance of our schedule. In addition, some of our larger competitors have more extensive intellectual property portfolios than ours, which they may use to their advantage when negotiating cross-licensing agreements for technologies. As a result, these companies may be able to compete more aggressively over a longer period of time than we can.  
 
The principal elements of competition in the display industry include:
 
 
·
price;
 
 
·
product performance features and quality;
 
 
·
customer service, including product design support;
 
 
·
ability to reduce production cost;
 
 
·
ability to provide sufficient quantity of products to fulfill customers’ needs;
 
 
·
research and development, including the ability to develop new technologies such as AMOLED, LTPS or Oxide TFT;
 
 
·
time-to-market; and
 
 
·
access to capital.
 
Our ability to compete successfully in the display industry also depends on factors beyond our control, including industry and general political and economic conditions as well as currency fluctuations.
 
 
14

 
If brand companies do not continue to outsource the manufacturing of their products to original equipment manufacturing service providers with production operations in Taiwan, the PRC and elsewhere, our sales and results of operations could be affected adversely.
 
In recent years, brand companies have outsourced the manufacturing of their products to original equipment manufacturing service providers with part or all of their production operations in Taiwan, the PRC and elsewhere. We believe that we have benefited from this outsourcing trend in large part due to our production locations in Taiwan and the PRC, which has allowed us to better coordinate our production and services with our customers’ requirements, especially in the areas of delivery time and product design support. We cannot assure you that this outsourcing trend will continue. If brand companies do not continue to outsource the manufacturing of their products to original equipment manufacturing service providers with their production operations in Taiwan, the PRC, and elsewhere, our sales and results of operations could be adversely affected.
 
If we are unable to manage our growth effectively, our business could be affected adversely.
 
We have experienced, and expect to continue to experience, growth in the scope and complexity of our operations and in the number of our employees. For example, we may make capital expenditures in connection with new capacity, technological upgrade and the enhancement of capacity value. This growth may strain our existing managerial, financial and other resources. In order to manage our growth, we must continue to implement additional operating and financial controls and may hire and train additional personnel for these functions. We cannot assure you that we will be able to do so in the future, and our failure to do so could jeopardize our planned growth and seriously harm our operations.
 
We may encounter difficulties expanding into new businesses or industries, which may affect adversely our results of operations and financial condition.
 
We may encounter difficulties and face risks in connection with our expansion into new businesses or industries. We cannot assure you that our expansion into new businesses will be successful as we may have limited experience in such industries. We cannot assure you that we will be able to generate sufficient profits to justify the costs of expanding into new businesses or industries. Any new business in which we invest or which we intend to develop may require our additional capital investment, research and development efforts, as well as our management’s attention. If such new business does not progress as planned, our results of operations and financial condition may be affected adversely.
 
We may undertake mergers, acquisitions or investments to diversify or expand our business, which may pose risks to our business and dilute the ownership of our existing shareholders, and we may not realize the anticipated benefits of these mergers, acquisition or investments.
 
As part of our growth and product diversification strategy, we may continue to evaluate opportunities to acquire or invest in other businesses or existing businesses, intellectual property or technologies and expand the breadth of markets we can address or enhance our technical capabilities. See “Item 4. Information on the Company4.C. Organizational Structure” for further information.
 
Mergers, acquisitions or investments that we have entered into and may enter into in the future entail a number of risks that could materially and adversely affect our business, operating and financial results, including, among others:
 
 
·
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;
 
 
·
conflicts with joint venture partners;
 
 
·
adverse effect on our existing business relationships with customers;
 
 
·
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; and  
 
 
·
potential write-offs of acquired assets.
 
 
15

 
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 will likely 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.
 
Our adoption of Taiwan IFRS and IFRS may materially and adversely affect our reported results of operations and financial condition.
 
We have historically presented our consolidated financial statements, including our consolidated financial statements for the year ended December 31, 2012, in accordance with ROC GAAP for purposes of our filings with the Taiwan Stock Exchange, with reconciliation to US GAAP for certain filings with the SEC. Effective January 1, 2013, companies listed on the Taiwan Stock Exchange, including us, must report their financial statements under Taiwan IFRS pursuant to the requirements of the Framework for Adoption of International Financial Reporting Standards by Companies in the ROC promulgated by the FSC on May 14, 2009. Accordingly, we have adopted Taiwan IFRS for reporting in the ROC our annual consolidated financial statements beginning in 2013 and our interim quarterly earnings releases beginning in the first quarter of 2013. While we have adopted Taiwan IFRS for ROC reporting purposes, we have also adopted and will continue to adopt IFRS, which differs from Taiwan IFRS, for certain filings with the SEC, including this annual report and future reports on Form 20-F. Following our adoption of IFRS for SEC filing purposes, we are no longer required to reconcile our consolidated financial statements with US GAAP.
 
Taiwan IFRS differs from IFRS in certain significant respects, including, but not limited to the extent that any new or amended standards or interpretations applicable under IFRS may not be timely endorsed by the FSC. Consequently, our annual consolidated financial statements for ROC reporting purposes and earnings distribution purposes may differ from those included in the annual report on Form 20-F.
 
In addition, Taiwan IFRS and IFRS differ in certain significant respects from ROC GAAP. Because of the differences in accounting treatments, the adoption of Taiwan IFRS and IFRS may result in material and adverse impact to our results of operations and financial condition in our reported financial statements and financial statements going forward. Additionally, upon our first adoption of Taiwan IFRS and IFRS, we are required to apply Taiwan IFRS and IFRS retrospectively unless otherwise exempted from certain applications and to present the opening balance sheet on the transition date of January 1, 2012 with adjusted opening balances prepared under Taiwan IFRS and IFRS. Any transactions after the transition date are accounted for in accordance with Taiwan IFRS and IFRS. Consequently, our consolidated financial information for the year ended December 31, 2012 included in this annual report may differ materially from those included in the annual report for the year ended December 31, 2012, even though they relate to the same fiscal year.
 
Any impairment charge may have a material adverse effect on our operating results.
 
Under IFRS, we are required to evaluate our investments and long-term non-financial assets for impairment whenever triggering events or changes in circumstances indicate that the asset may be impaired and carrying value may not be recoverable. If certain criteria are met, we are required to recognize an impairment charge. In addition, under IFRS, we are required to determine the realizability of our deferred tax assets. Any impairment charge on our investments and long-term non-financial assets, or the inability to recognize or the subsequent derecognization of previously recognized deferred tax assets may have a material adverse effect on our operating results.
 
The determination of an impairment charge at any given time is based significantly on our expected results of operations over a number of years subsequent to that time. As a result, an impairment charge is more likely to occur during a period when our operating results are otherwise already depressed. The valuation of long-term non-financial assets is subjective and requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in business operations, changes in competition or potential changes in our stock price and market capitalization. Changes in these estimates and assumptions, or changes in actual performance compared with estimates of our future performance, may affect the fair value of long-term non-financial assets, which may result in an impairment charge. See “Item 5. Operating and Financial Review and Prospects — Critical Accounting Policies and Estimates” for a discussion of how we assess if an impairment charge is required and, if so, how the amount is determined.
 
 
16

 
Our divestiture strategies and divestment activities may affect our financial performance and the market price of our shares and ADSs.
 
From time to time, we evaluate possible divestments and may, if a suitable opportunity or condition arises, make divestments or decisions to dispose of certain businesses or assets. We may reduce our holdings of equity securities or dispose of certain of our businesses or assets in order to reduce financial or operational risks. As part of our ongoing strategic plan, we have selectively divested, and may in the future continue to pursue divestitures of certain of our businesses or assets as part of our portfolio optimization strategy. We make divestments based on, among other considerations, management’s evaluation of or changes in business strategies and performance and valuation of divested businesses or assets. For example, we sold all of our shareholding in BMC in the open market in 2014. We received total net proceeds of approximately NT$433.8 million (US$13.7 million) and recorded a gain from disposal of NT$301.6 million (US$9.5 million). These divestment activities may result in either gains or losses and we cannot assure you that we can always make divestment with a gain. We may be subject to continuing financial obligations for a period of time following the divestments, and any claims such as warranty or indemnification claims, if determined against us, would negatively affect our financial performance. Moreover, divestures may require us to separate integrated assets and personnel from our retained businesses and devote our resource to transitioning assets and services to purchasers, resulting in disruptions to our ongoing business and distraction of management. Any losses due to our divestments of businesses or disposal of assets could adversely affect our financial performance and may affect the market price of our shares and ADSs.
 
The loss of any key management personnel or the undue distraction of any such personnel may disrupt our business.
 
Our success depends on the continued services of key senior management, including our Chairman and President. In March 2013, criminal charges for alleged ROC Securities and Exchange Act violations were brought by the Taiwan Taoyuan district attorney’s office against Mr. Kuen Yao (K.Y.) Lee, our Chairman. Mr. Lee was alleged to be involved in inaccurate disclosure of Qisda’s shareholdings in his capacity as Chairman of Qisda. These charges do not involve Mr. Lee acting in the capacity as our Chairman, nor are we a party to these charges. Mr. Lee was acquitted by the Taiwan Taoyuan district court in October 2013. The Taiwan Taoyuan district attorney’s office lodged an appeal to the Taiwan High Court, which was dismissed by the Taiwan High Court in March 2014. No further appeals have been filed and this case is closed. If any other legal proceedings are brought against our senior management in the future, these proceedings may divert such senior management’s attention from our business operations. Our reputation may also be harmed as a result of any negative publicity associated with these charges or otherwise.
 
We do not carry “key person” life insurance on any of our senior management personnel. If we lose the services of key senior management personnel, we may not be able to find suitable replacements or integrate replacement personnel in a timely manner or at all, which would seriously harm our business. In addition, our continuing growth will, to a large extent, depend on the attention of key management personnel to our daily affairs. If any of them is unable to devote enough time to our company, our operations may be affected adversely.
 
If we are not able to attract and retain skilled technical personnel, including research and development and other personnel, our operations and planned growth would be affected adversely.
 
Our success depends on our ability to attract and retain skilled employees, particularly engineering and technical personnel in the research and development and manufacturing processing areas. We also have established a professional on-the-job training program for employees. Without a sufficient number of skilled employees, our operations and production quality could suffer. Competition for qualified technical personnel and operators in Taiwan and many other places where we operate is intense and the replacement of skilled employees is difficult. We may encounter this problem in the future, as we require an increased number of skilled employees for any expansion we may choose to undertake if market demand arises. If we are unable to attract and retain our technical personnel and other employees, this may adversely affect our business and our operating efficiency may deteriorate.
 
Potential conflicts of interest with our affiliates may cause us to lose opportunities to expand and improve our operations.
 
We face potential conflicts of interest with our affiliates, such as Qisda Corporation (“Qisda”) and its subsidiaries, including BenQ Corporation. Qisda is our largest shareholder, owning directly 6.9% of our outstanding shares as of February 28, 2015 and is also one of our large customers. Qisda and its subsidiaries accounted for 3.1%, 2.4% and 2.9% of our net revenue in 2012, 2013 and 2014, respectively. Qisda and its subsidiaries’ substantial interest in our company may lead to conflicts of interest affecting our sales decisions or allocations. In addition, as of February 28, 2015, one of our nine directors is a representative of Qisda. Mr. Kuen-Yao (K.Y.) Lee, our Chairman, is also the Chairman of Qisda and BenQ Corporation. See “Item 6. Directors, Senior Management and Employees—6.A. Directors and Senior Management.” As a result, conflicts of interest between their duties to Qisda and/or its subsidiaries and us may arise. We cannot assure you that when conflicts of interest arise with respect to representatives of Qisda and/or its subsidiaries, the conflicts of interest will be resolved in our favor. These conflicts may result in lost corporate opportunities, including opportunities that are never brought to our attention, or actions that may prevent us from taking advantage of opportunities to expand and improve our operations.
 
 
If we fail to maintain an effective system of internal controls, we may not be able to report accurately our financial results or prevent fraud.
 
The United States Securities and Exchange Commission (the “SEC”), as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must report on the effectiveness of the company’s internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may conclude that our internal controls over financial reporting are not effective. Furthermore, during the course of the evaluation, documentation and attestation, we may identify deficiencies that we may not be able to remedy in a timely manner. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls, on an ongoing basis, over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs.
 
Our planned international expansion poses additional risks and could fail, which could cost us valuable resources and adversely affect our results of operations.
 
To meet our clients’ requirements, we have expanded our operations internationally, which has led to operations across many countries. For example, we have established LCD module-assembly operations in China in order to provide more immediate services to our Chinese customers. If a suitable opportunity or condition arises, we may continue to expand into new geographic areas. We intend to run our operations in compliance with local regulations, such as tax, civil, environmental and other laws in conjunction with our business activities in each country where we may have presence or operations. However, there are inherent legal, financial and operational risks involved in having international operations. We may encounter different challenges due to differences in local market conditions, culture, government policies, regulations and taxation. For example, many countries where we are conducting business may revise their tax laws in accordance with Base Erosion and Profit Shifting (“BEPS”) project of the Organization for Economic Co-operation and Development (“OECD”) published in 2014 or increase tax rate due to economic and political pressures. In addition, we may also face established competitors with stronger local experience, more familiar with the local regulations, practices and better relationship with local suppliers, contractors and purchasers. We cannot assure you that we will be able to develop successfully and expand our international operations or we will be able to overcome the significant obstacles and risks of international operations. If our international expansion plans are unsuccessful or do not deliver an appropriate return on our investments, our results of operations, financial condition and future prospects could be materially and adversely affected.
 
Regulations related to conflict minerals could adversely affect our business, financial condition and results of operations.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, which are defined as cassiterite, columbite-tantalite, gold, wolframite or their derivatives and other minerals determined by the U.S. government to be financing conflict in the Democratic Republic of Congo and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals in their products. These requirements has required companies that manufacture or contract to manufacture products for which conflict minerals are necessary to the functionality or production to begin scrutinizing the origin of conflict minerals in their products starting from January 1, 2013, and file Form SD, containing the conflict minerals disclosure for the prior calendar year, beginning May 31, 2014. Currently, such conflict is not determinable in our case and we cannot assure you that conflict minerals identified under the conflict minerals rules issued by the SEC are not used in our products. We may be subject to the new disclosure requirements related to the conflict minerals. There will be costs associated with complying with these disclosure requirements, including costs for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” minerals, we cannot be sure that we will be able to obtain necessary “conflict free” minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face adverse effects to our reputation if we determine that certain of our products contain minerals to be not conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.
 
 
Risks Relating to Manufacturing
 
Our manufacturing processes are highly complex, costly and potentially vulnerable to disruptions that can significantly increase our production costs and delay product shipments to our customers.
 
Our manufacturing processes are highly complex, require advanced and costly equipment and are modified periodically to improve manufacturing yields and production efficiency. We face the risk of production difficulties from time to time that could cause delivery delays and reduced production yields. These production difficulties include capacity constraints, construction delays, difficulties in upgrading or expanding existing facilities, difficulties in changing our manufacturing technology and delays in the delivery or relocation of specialized equipment. We may encounter these difficulties in connection with the adoption of new manufacturing process technologies. We cannot assure you that we will be able to develop and expand our fabs without equipment delays or difficulties, or that we will not encounter manufacturing difficulties in the future.
 
If we are unable to obtain raw materials and components in suitable quantity and quality from our suppliers, our production schedules would be delayed and we may lose substantial customers.
 
Raw materials and component costs represent a substantial portion of our cost of goods sold. We must obtain sufficient quantities of raw materials and components of the right quality at acceptable prices and in a timely manner. We source most of our raw materials and components, including critical materials like glass substractes, liquid crystals, color filters, polarizers and driver ICs from a limited group of suppliers, both foreign and domestic. Our operations would be affected adversely if we could not obtain raw materials and components in sufficient quantity and quality at acceptable prices. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by display panel manufacturers, including our company, without a corresponding increase in the supply of raw materials and components. Further, our suppliers may also face shortage in supply of their key raw materials. The impact of any shortage in raw materials and components will be magnified as we establish new fabs and/or continue to increase our production capacity.  
 
We depend on supplies of certain principal raw materials and components mainly from suppliers with production in Taiwan, Japan and Korea. We cannot assure you that we will be able to obtain sufficient quantities of raw materials and components and other supplies of an acceptable quality in the future. Our inability to obtain raw materials and components of the right quality in a timely and cost-effective manner or our suppliers’ failure in obtaining their raw materials may cause us to delay our production and delivery schedules, which may result in the loss of our customers and revenues.
 
If we are unable to obtain equipment and services from our suppliers, we may be forced to delay our planned growth.
 
We have purchased, and expect to purchase, a substantial portion of our equipment from foreign suppliers for our new capacity and advanced technology fabs. These foreign suppliers also provide assembly, testing and/or maintenance services for our purchased equipment. From time to time, increased demand for new equipment may cause lead time to extend beyond those normally required by equipment vendors. For example, in the past, increased demand for equipment caused some equipment suppliers to satisfy only partially our equipment orders in the normal time frame. The unavailability of equipment, delays in the delivery of equipment or the delivery of equipment that does not meet our specifications could delay implementation of our planned growth and impair our ability to meet customer orders. Furthermore, if our equipment vendors are unable to provide assembly, testing and/or maintenance services in a timely manner for any reasons, our planned growth may be adversely affected. In addition, the availability or the timely supply of equipment and services from our suppliers and vendors also could be affected by factors such as natural disasters. We may have to use assembly, testing and/or maintenance service providers with which we have no established relationship, which could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. As a result of these risks, we may be unable to implement our planned growth on schedule or in line with customer expectations and our business may be materially and adversely affected.
 
If we are unable to manufacture successfully our products within the acceptable range of quality, our results of operations could be affected adversely.
 
Display panel manufacturing processes are complex and involve a number of precise steps. Defective production can result from a number of factors, including but not limited to:
 
 
·
the level of contaminants in the manufacturing environment;
 
 
19

 
 
·
human error;
 
 
·
equipment malfunction;
 
 
·
use of substandard raw materials and components; and
 
 
·
inadequate sample testing.
 
From time to time, we have experienced, and may in the future experience, lower than anticipated production yields as a result of the above factors, particularly in connection with the expansion of our capacity or change in our manufacturing processes. We remediate our customers mainly through repairing or replacing the defective products or refunding the purchase price relating to defective products if they are within the warranty period. We recognize a provision for warranty obligations based on the estimated costs that we expect to incur under our basic limited warranty for our products, which includes the provision of replacement parts and after-sale service for our products. The warranty provision is largely based on historical and anticipated rates of warranty claims, and therefore we cannot provide assurance that the provision would be sufficient to cover any surge in future warranty expenses that significantly exceed historical and anticipated rates of warranty claims. In addition, our production yield on new products will be lower than average as we develop the necessary expertise and experience to produce those products. If we fail to maintain high production yields and high-quality production standards, our reputation may suffer and our customers may cancel their orders or return our panels for rework, which could affect adversely our results of operations.
 
Climate change, other environmental concerns and green initiatives also present other commercial challenges, economic risks and physical risks that could harm our results of operations or affect the manner in which we conduct our business.
 
Increasing climate change and environmental concerns would affect the results of our operations if any of our customers would request us to exceed any standards set for environmentally compliant products and services. If we are unable to offer such products or offer products that are compliant but are not as reliable due to the lack of reasonably available alternative technologies, it may harm our results of operations.  
 
Furthermore, energy costs in general could increase significantly due to climate change regulations. Therefore, our energy costs may increase substantially if utility or power companies pass on their costs, fully or partially, such as those associated with carbon taxes, emission cap and carbon credit trading programs.
 
If we violate environmental regulations, we may be subject to fines or restrictions that could cause our operations to be delayed or interrupted and our business to suffer.
 
Our operations can expose us to the risk of environmental claims which could result in damages awarded or fines imposed against us. We must comply with regulations relating to storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes resulting from our manufacturing processes. See “Item 4. Information on the Company—4.B. Business Overview—Environmental Matters.” In the past, we incurred small fines for failure to meet certain effluent standards and air pollution control regulations. Future changes to existing environmental regulations or unknown contamination of our sites, including contamination by prior owners and operators of our sites, may give rise to additional compliance costs or potential exposure to liability for environmental claims that may seriously affect our business, financial condition and results of operations. In addition, we may face possible disruptions in our manufacturing and production facilities caused by environmental activists, which may affect adversely our business operations.
 
If we violate labor regulations, we may be subject to fines or restrictions that could have an adverse effect on our business, financial condition and results of operations.
 
We must comply with the various labor regulations in the jurisdictions in which we operate. The cost of compliance with such regulations may increase as regulations change or new regulations are adopted. For instance, China has been experiencing rapid changes in its labor policies and it is uncertain how any such changes in China as well as other jurisdictions will impact our current employment policies and practices. Our employment policies and practices may violate current or future laws and we may be subject to related penalties, fines or legal fees. In addition, compliance with any new labor regulations may increase our operating expenses as we may incur substantial administrative and staffing cost.
 
 
20

 
Risks Relating to Our Technologies and Intellectual Property
 
If we cannot successfully introduce, develop or acquire advanced technologies, our profitability may suffer.
 
Technology and industry standards in the display panel industry evolve quickly, resulting in steep price declines in the advanced stages of a product’s life cycle. To remain competitive, we continually must develop or acquire advanced manufacturing process technologies and build advanced technology fabs to lower production costs and enable the timely release of new products. In addition, we expect to utilize more advanced display technologies, such as UHD 4K (3,840x2,160 pixel), curved display, Wide Color Gamut (“WCG”),  High Dynamic Range (“HDR”) and other technologies, to develop new products. Our ability to manufacture products by utilizing more advanced manufacturing process technologies to increase production efficiency will be critical to our sustained competitiveness. We may undertake in the future a number of significant capital expenditures for advanced technology fabs and new capacity subject to market demand and our overall business strategy. See “Item 5. Operating and Financial Review and Prospects5.B. Liquidity and Capital Resources.” However, we cannot assure you that we will be successful in completing our planned growth or in the development of other future technologies for our fabs, or that we will be able to complete them without material delays or at the expected costs. If we fail to do so, our results of operations and financial condition may be materially and adversely affected. We also cannot assure you that there will be no material delays in connection with our efforts to develop new technology and manufacture more technologically advanced products. If we fail to develop or make advancements in product technologies or manufacturing process technologies on a timely basis, we may become less competitive.  
 
Other flat panel display technologies or alternative display technologies could render our products uncompetitive.
 
We currently manufacture products primarily using TFT-LCD technology, which is currently one of the most commonly used flat panel display technologies. We may face competition from flat panel display manufacturers utilizing alternative flat panel technologies, such as OLED. OLED technology is currently at various stages of development and production by us and other display panel makers. OLED technologies may, in the future, gain wider market acceptance than TFT-LCD technology for application in certain consumer products, such as televisions, mobile phones, tablets and wearable devices. Failure to further refine our OLED technology or any other alternative display technology could render our products uncompetitive or obsolete, which in turn could cause our sales and revenues to decline. Moreover, if the various alternative flat panel technologies currently commercially available or in the research and development stage are developed to have better performance-to-price ratios and begin mass production, such technologies may pose a great challenge to TFT-LCD technology. Even though we seek to remain competitive through research and development of flat panel technologies, we may invest in research and development in certain technologies that do not come to fruition.
 
If we lose the support of our technology partners or the legal rights to use our licensed manufacturing process or product technologies, our business may suffer.
 
Enhancing our manufacturing process and product technologies is critical to our ability to provide high-quality products to our customers at competitive prices. We intend to continue to advance our manufacturing process and product technologies through internal research and development and licensing from other companies. We currently have certain licensing arrangements with certain companies for product and manufacturing process technologies related to the production of certain products including certain display panels. See “Item 4. Information on The Company4.B. Business OverviewIntellectual PropertyLicense Agreements.” If we are unable to renew our technology licensing arrangements with some or all of these companies on mutually beneficial economic terms, if at all, we may lose the legal right to use certain of the processes and designs which we may have employed to manufacture our products. Similarly, if we cannot license or otherwise acquire or develop new manufacturing process and product technologies that are critical to the development of our business or products, we may lose important customers because we are unable to continue providing our customers with products based on advanced manufacturing process and product technologies.
 
We have entered into patent and intellectual property license or cross-license agreements, some of which require periodic royalty payments. In the future, we may need to obtain additional patent licenses or renew existing license agreements. We cannot assure you that these license agreements can be obtained or renewed on acceptable terms, if at all. If these license agreements are not obtained or renewed on acceptable terms if at all, our business and future results of operations may be affected materially and adversely.
 
Disputes over intellectual property rights could be costly and deprive us of the technology to stay competitive.
 
As technology is an integral part of our manufacturing process and product, we have, in the past, received communications alleging that our products or processes infringe product or manufacturing process technology rights held by others, and expect to continue to receive such communications. We currently are involved in intellectual property disputes with several companies. See “Item 8. Financial Information8.A.7. Litigation.” There is no means of knowing all of the patent applications that have been filed in the United States or elsewhere and whether, if the applications are granted, such patents would have a material adverse effect on our business.
 
 
If any third party were to make valid intellectual property infringement claims against our customers or us, we may be required to:
 
 
·
discontinue using disputed manufacturing process technologies;
 
 
·
pay substantial monetary damages;
 
 
·
seek to develop non-infringing technologies, which may not be feasible;
 
 
·
stop shipment to certain areas; and/or
 
 
·
seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all.
 
If our products or manufacturing processes are found to infringe third-party rights, we may be subject to significant liabilities and be required to change our manufacturing processes or products. This could restrict us from making, using, selling or exporting some of our products, which in turn could affect materially and adversely our business and financial condition. In addition, any litigation, whether to enforce our patents or other intellectual property rights or to defend ourselves against claims that we have infringed the intellectual property rights of others, could affect materially and adversely our results of operations because of the management attention required and legal costs incurred.
 
Our ability to compete will be harmed if we are unable to protect adequately our intellectual property.
 
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 law 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. Although we have 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 independently may develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to protect effectively our intellectual property could harm our business.
 
Our rapid introduction of new technologies and products may increase the likelihood that third parties will assert claims that our products infringe upon their proprietary rights.
 
Although we take and will continue to take steps to endeavor that our new products do not infringe upon valid third-party rights, the rapid technological changes that characterize our industry require that we quickly implement new processes and components with respect to our products. Often with respect to recently developed processes and components, a degree of uncertainty exists as to who may rightfully claim ownership rights in such processes and components. Uncertainty of this type increases the risk that claims alleging that such components or processes infringe upon third-party rights may be brought against us. If our products or manufacturing processes are found to infringe upon third-party rights, we may be subject to significant liabilities and be required to change our manufacturing processes or be prohibited from manufacturing certain products, which could have a material adverse effect on our operations and financial condition.
 
We rely upon trade secrets and other unpatented proprietary know-how to maintain our competitive position in the display panel industry and any loss of our rights to, or unauthorized disclosure of, our trade secrets or other unpatented proprietary know-how could affect adversely our business.
 
We rely upon trade secrets, unpatented proprietary know-how and information, as well as continuing technological innovation in our business. The information we rely upon includes price forecasts, core technology and key customer information. Our current standard employment agreement with our employees contains a confidentiality provision which generally provides that all inventions, ideas, discoveries, improvements and copyrightable material made or conceived by the individual arising out of the employment relationship and all confidential information developed or made known to the individual during the term of the relationship is our exclusive property. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach.
 
 
The disclosure of our trade secrets or other know-how as a result of such a breach could affect adversely our business. Also, our competitors may come to know about or determine our trade secrets and other proprietary information through a variety of methods. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of the relevant agreements and there can be no assurance that any such disputes would be resolved in our favor. Furthermore, others may acquire or independently develop similar technology, or if patents are not issued with respect to products arising from research, we may not be able to maintain information pertinent to such research as proprietary technology or trade secrets and that could have an adverse effect on our competitive position within the display panel industry.
 
Political, Geographical and Economic Risks
 
A slowdown in the global economy could affect materially and adversely our business, results of operations and financial condition.
 
A slowdown in the global economy could adversely affect the market demand and result in a negative impact on electronic products sales from which we generate our income. The recent global economic downturn has adversely affected demand for electronic products manufactured by our customers. A global economic downturn could also lead to a slowdown in our business, with side effects including significant decreases in orders from our customers, insolvency of key suppliers resulting in raw material constraints and product delays, inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies and counterparty failures negatively impacting our operations. Because of such factors, we believe the level of demand for our products and projections of future revenue and operating results will be difficult to predict. If any economic downturn occurs in the future, our business, results of operations and financial condition may be affected materially and adversely.
 
We and many of our customers and suppliers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.
 
Most of our existing manufacturing operations, and the operations of many of our customers and suppliers, are located in areas including Taiwan, the PRC, Japan and Singapore. Some locations are vulnerable to natural disasters, such as earthquakes and typhoons. We cannot assure you that the natural disasters will not happen and will not have adverse impact on our operations in the future. Any disruption of operations at our fabs or the facilities of our customers and suppliers for any reason, including earthquakes, typhoons or other natural disasters, work stoppages, power outages, water supply shortages and fire etc. could cause delays or disrupt in production and shipments of our products and raw materials. Any delays or disruptions could result in our customers seeking to source our products from other manufacturers. In addition, shortages or suspension of power supplies have occurred occasionally, and have disrupted our operations. The occurrence of a power outage in the future could seriously hurt our business. Besides, our manufacturing processes require a substantial amount of water. Although currently a significant portion of the water used in our production process is recycled in Taiwan, our production operations may be seriously disrupted by water shortages. We may encounter droughts in the Hsinchu, Taoyuan or Taichung areas in the future, where most of our current or future manufacturing sites are located. If another drought were to occur and we or the authorities were unable to source water from alternative sources in sufficient quantity, we may be required to shut down temporarily or substantially reduce the operations of these fabs, which would affect seriously our operations. In addition, even if we were able to source water from alternative sources, our reliance on supplemental water supplies would increase our operating costs. Furthermore, the disruption of operations at our customers’ facilities could lead to reduced demand for our products. The occurrence of any of these events in the future could affect adversely our business.
 
We have made investments in, and are exploring the possibility of expanding our businesses and operations to, or making additional investments in, the PRC, which may expose us to additional social, political, regulatory, economic and foreign investment risks.
 
We have established subsidiaries in the PRC, primarily focusing on module-assembly operations and related supporting services. We are also in the process of establishing a 6-generation LTPS fab in Kunshan, PRC to produce small to medium-size panels if the market demand allows. Depending on our business needs, we may further expand or adjust our business operations in the PRC in the future.
 
However, in recent years, China has experienced rapid social, political and economic changes which have led to rising wages and a growing shortage of blue-collar workers. Rising wages as well as a shortage of labor in China may increase our overall cost of production, cause delays in production and could have a material adverse effect on our results of operations. In addition, the interpretation of PRC laws and regulations involves uncertainties.
 
 
23

 
Therefore, we cannot predict whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future operations in the PRC. In addition, we cannot assure you that changes in such laws and regulations, or in their interpretation and enforcement, will not have a material adverse effect on our businesses and operations in the PRC.
 
The current restrictions imposed by the ROC government on investments in certain related businesses may limit our ability to compete with other display panel manufacturers that are permitted to establish display panel production operations in the PRC.
 
There are current restrictions imposed by the ROC government on investments by Taiwan companies in the PRC, including but not limited to the generation of manufacturing technology of TFT-LCD in the PRC. As a result, our ability to invest in the PRC has been restricted compared to those display panel manufacturers that have been less regulated by their domestic regulators and are permitted to establish display panel production operations in the PRC. During recent years, ROC government has loosened some restrictions. In February 2010, the Investment Commission of Ministry of Economic Affairs (“MOEAIC”) loosened certain restrictions, which has provided the possibility for TFT-LCD manufacturers in the ROC to invest in 6-generation or more advanced TFT-LCD manufacturing fabs in the PRC with the technology which is one generation behind the technology then used in the ROC (the “N-Minus-One-Generation Ban”). In March 2011, the MOEAIC lifted the N-Minus-One-Generation Ban. As a result, TFT-LCD manufacturers may be granted approval to establish fabs in the PRC with the same generation of manufacturing technology as the fabs they establish in Taiwan. Moreover, the MOEAIC also allowed ROC TFT-LCD manufacturers to make equity investment or merge with companies in the PRC.
 
Many of our customers and competitors have expanded their businesses and operations to the PRC. In order to take advantage of the fast growth of China’s market, the lower production costs in China and to establish a presence in this market, we began our investment in China with the establishment of a module-assembly facility in Suzhou, Jiangsu Province of the PRC, which began operations in July 2002. During the past few years, our investment and presence in the PRC gradually and significantly increased. We obtained approval from MOEAIC to make an equity investment to establish an 8.5-generation fab in Kunshan, PRC in June 2011. We have completed the construction of buildings of this fab in 2012. However, in January 2014, we revised our original investment plan from establishing an 8.5-generation fab to a 6-generation LTPS fab to meet market demands and had been approved by MOEAIC in March 2014. The equipment move in and ramp up schedule will be subject to market conditions. As of December 31, 2014, we had 19 subsidiaries incorporated in the PRC, primarily focusing on module-assembly operations and related supporting services. For further information of our PRC investments, see “Item 4. Information on the Company—4.C. Organizational Structure.”
 
However, due to certain restrictions imposed by ROC government are still effective, we cannot assure you that any future applications to the MOEAIC to make further investments in the PRC will be successful and timely approved. We also do not know when and whether the remaining restrictions under ROC laws and regulations governing investment in the PRC will be amended or repealed and we cannot assure you that any such amendments to those regulations will permit us to invest in operations in the PRC. Restrictions under ROC laws on our ability to make investments in the PRC may materially and adversely affect our business prospects.
 
We may not be able to obtain or renew all licenses, approvals or permits necessary for our current and future operations.
 
Our current and future operations in Taiwan and other regions require a number of regulatory licenses, approvals and permits. We cannot assure you that we will be able to obtain licenses, approvals or permits necessary for our operations in these regions, or that upon the expiration of our existing licenses, approvals or permits, we will be able to successfully renew them.
 
In addition, if the relevant authorities enact new regulations, we cannot assure you that we will be able to meet successfully such requirements. If we fail to obtain or renew the necessary regulatory licenses, approvals or permits, we may have to cease construction or operation of the relevant projects, be subject to fines, or face other penalties, which could have a material adverse effect on our business, financial condition and results of operations. Even if we already obtained the licenses, approvals and permits, there could be parties or interest groups with different views who may take actions against the renewal of such licenses, approvals and permits, which may have an adverse effect on our business operations. For example, there have been environmental proceedings relating to the development project of the Central Taiwan Science Park in Houli, Taichung, where our second 8.5-generation fab is located. See  “Item 8. Financial InformationItem 8.A.7. Litigation.”
 
Disruptions in Taiwan’s political environment could seriously harm our business and the market price of our shares and ADSs.
 
Most of our assets and operations are located in Taiwan and approximately 33.2% of our net revenue were derived from customers in Taiwan in 2014. Accordingly, our business and financial condition may be affected by changes in local governmental policies and political and social instability.  
 
 
24

 
Taiwan has a unique international political status. The PRC government asserts sovereignty over mainland China and Taiwan and does not recognize the legitimacy of the government of the ROC. The PRC government has indicated that it may use military force to gain control over Taiwan if Taiwan declares independence or if Taiwan refuses to accept the PRC’s stated “One China” policy. In addition, on March 14, 2005, the National Peoples’ Congress of the PRC passed what is widely referred to as the “anti-secession” law, a law authorizing the PRC military to respond to efforts by Taiwan to seek formal independence. An increase in tensions between the ROC and the PRC and the possibility of instability and uncertainty could adversely affect the prices of our ADSs and our shares. It is unclear what effects any of the events described above may have on relations with the PRC. Relations between Taiwan and the PRC and other factors affecting Taiwan’s political environment could affect our business.
 
If economic conditions in Taiwan changes drastically, our current business and future growth could be affected materially and adversely.
 
In recent years, the currencies of many East Asian countries, including Taiwan, have experienced considerable volatility. Our business, financial condition and results of operations may be affected by changes in ROC government policies, taxation, inflation, interest rates and general economic conditions in Taiwan, as well as the global economies. For example, the banking and financial sectors in Taiwan have been harmed by the general economic downturn in recent years. As a result, financial institutions are more cautious in providing credit to certain businesses in Taiwan. We cannot assure you that we will continue to have access to credit at commercially reasonable rates of interest or at all.
 
The market value of our ADSs may fluctuate due to the volatility of the ROC securities market.
 
The trading price of our ADSs may be affected by the trading price of our shares on the Taiwan Stock Exchange. The Taiwan Stock Exchange is smaller and more volatile than the securities markets in the United States and a number of stock exchanges in Europe. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of trading of securities, and there are currently limits on the range of daily price fluctuations on the Taiwan Stock Exchange. During the period from January 1, 2014 to December 31, 2014, the Taiwan Stock Exchange Index peaked at 9,569.17 on July 15, 2014, and reached a low of 8,264.48 on February 5, 2014. Over the same period, daily closing values of our shares ranged from NT$8.80 per share to NT$16.55 per share. On March 13, 2015, the Taiwan Stock Exchange Index closed at 9,579.35, and the closing value of our shares was NT$15.8 per share.
 
The Taiwan Stock Exchange is particularly volatile during times of political instability, including when relations between Taiwan and the PRC are strained. Several investment funds affiliated with the ROC government have also from time to time purchased securities from the Taiwan Stock Exchange to support the trading level of the Taiwan Stock Exchange. Moreover, the Taiwan Stock Exchange has experienced problems, including market manipulation, insider trading and settlement defaults. The recurrence of these or similar problems could have an adverse effect on the market price and liquidity of our shares and ADSs.
 
If the NT dollar or other currencies in which our sales, raw materials and components and capital expenditures are denominated fluctuate significantly against the U.S. dollar or the Japanese yen, our profitability may be affected seriously.
 
We have significant foreign currency exposure and are affected by fluctuations in exchange rates among the U.S. dollar, the Japanese yen, the NT dollar and other currencies. Our sales, raw materials and components and capital expenditures are denominated mainly in U.S. dollars, Japanese yen and NT dollars in varying amounts. For example, in 2014, approximately 93.8% of our net revenue were denominated in U.S. dollars. During the same period, approximately 71.8%, 17.7% and 9.0% of our raw materials and component costs were denominated in U.S. dollars, Japanese yen and NT dollars, respectively. In addition, in 2014, approximately 47.7%, 30.3%, 13.2% and 7.3% of our total capital expenditures (principally for the purchase of equipment) was denominated in NT dollars, Japanese yen, U.S. dollars and Renminbi, respectively. From time to time, we enter into forward foreign currency contracts to hedge our foreign currency exposure, but we cannot assure you that we will fully minimize the risk against exchange rate fluctuations and the impact on our results of operations.
 
Disruptions in the international trading environment and changing international trade regulation may seriously decrease our international sales.
 
A majority of our net revenue is derived from sales to customers located outside of Taiwan. In 2012, 2013 and 2014, sales to our overseas customers accounted for 60.2%, 65.5% and 66.8%, respectively, of our net revenue. In addition, a significant portion of our sales to customers in Taiwan is made to original equipment manufacturing service provider customers that use our display panels in the products that they manufacture on a contract basis for brand companies worldwide. We expect sales to customers outside of Taiwan to continue to represent a significant portion of our net revenue. As a result, our business will continue to be vulnerable to disruptions in the international trading environment, including those caused by adverse changes in foreign government regulations, political unrest, international economic downturns, terrorist attacks and military unrest. These disruptions in the international trading environment may affect the demand for our products and change the terms upon which we sell our products overseas, which could seriously decrease our international sales.
 
 
In addition, our ability to compete effectively could be materially and adversely affected by a number of factors relating to international trade regulation. Higher tariffs, duties, or our failure to comply with trade regulations could restrict our ability to export products or compete effectively with our competitors, resulting in a decrease in our international sales. Also, panel industry in Taiwan may be negatively impacted by the proposed China-South Korea Free Trade Agreement, which proposes tariff reduction covering several areas of trade including the panel and polarizer products.

We face risks related to health epidemics and outbreaks of contagious disease.
 
In 2009 and 2011, there have been reports of outbreaks of a highly pathogenic influenza caused by the H1N1 virus, as well as an influenza caused by the H5N1 virus, in certain regions of Asia and other parts of the world. Starting from March 2013, H7N9 bird flu, a new strain of animal influenza, has been spreading in China and has infected more than a hundred people. In 2014, a deadly disease called Ebola virus diseases (“EVD”) caused thousands of death in West Africa and also spread to other parts of world. The outbreak of such contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries. Since most of our operations and customers and suppliers are based in Asia (mainly Taiwan), an outbreak of H1N1 influenza, H5N1 influenza, H7N9 influenza, EVD or other contagious diseases in Asia or elsewhere, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including the ROC and the PRC, could adversely affect our business, financial condition or results of operations.
 
Risks Related to Our ADSs and Our Trading Market
 
The market value of our ADSs may fluctuate due to the volatility of the securities markets.
 
The securities markets in the United States and other countries have experienced significant price and volume fluctuations. Volatility in the price of our ADSs may be caused by factors beyond our control and may be unrelated to, or disproportionate to changes in, our results of operations. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has been instituted against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.
 
Restrictions on the ability to deposit shares into our ADS facility may adversely affect the liquidity and price of our ADSs.
 
The ability to deposit shares into our ADS facility is restricted by ROC law. A significant number of withdrawals of shares underlying our ADSs would reduce the liquidity of our ADSs by reducing the number of ADSs outstanding. As a result, the prevailing market price of our ADSs may differ from the prevailing market price of our shares on the Taiwan Stock Exchange. Under current ROC law, no person or entity, including you and us, may deposit its shares in our ADS facility without specific approval of the ROC Financial Supervisory Commission (the “FSC”), unless:
 
 
(1)
we pay stock dividends on our shares;
 
 
(2)
we make a free distribution of shares;
 
 
(3)
ADS holders exercise preemptive rights in the event of capital increases for cash; or
 
 
(4)
investors purchase our shares, directly or through the depositary, on the Taiwan Stock Exchange, and deliver our shares to the custodian for deposit into our ADS facility, or our existing shareholders deliver our shares to the custodian for deposit into our ADS facility.
 
With respect to (4) above, the depositary may issue ADSs against the deposit of those shares only if the total number of ADSs outstanding following the deposit will not exceed the number of ADSs previously approved by the FSC, plus any ADSs issued pursuant to the events described in the subparagraph (1), (2) and (3) above. Issuance of additional ADSs under item (4) above will be permitted to the extent that previously issued ADSs have been cancelled. In addition, in the case of a deposit of our shares requested under item (4) above, the depositary will refuse to accept deposit of our shares if such deposit is not permitted under any legal, regulatory or other restrictions notified by us to the depositary from time to time, which restrictions may specify blackout periods during which deposits may not be made, minimum and maximum amounts and frequencies of deposits.
 
 
26

 
ADS holders will not have the same rights as our shareholders, which may affect the value of the ADSs.
 
ADS holders’ rights as to the shares represented by such holders’ ADSs are governed by the deposit agreement. ADS holders will not be able to exercise voting rights on an individual basis. If holders representing at least 51% of our ADSs outstanding at the relevant record date instruct the depositary to vote in the same manner regarding a resolution, including the election of directors, the depositary will cause all shares represented by the ADSs to be voted in that manner. If, at the relevant record date, the depositary does not receive instructions representing at least 51% of ADSs outstanding to vote in the same manner for any resolution, including the election of directors, ADS holders will be deemed to have instructed the depositary or its nominee to authorize all the shares represented by the ADS holders’ ADSs to be voted at the discretion of our Chairman or his designee, which may not be in the ADS holders’ interest. Moreover, while shareholders who own 1% or more of our outstanding shares are entitled to submit one proposal to be considered at our annual general meetings and submit a roster of candidates to be considered for nomination to our board of directors at our shareholders’ meeting for the election of directors, only holders representing at least 51% or more of our ADSs outstanding at the relevant record date are entitled to submit one proposal to be considered at our annual general meetings or one nomination to our board of directors, in accordance with the deposit agreement. Hence, only one proposal or one nomination may be submitted on behalf of all ADS holders.
 
ADS holders’ rights to participate in our rights offerings are limited, which could cause dilution to the holdings of ADS holders.
 
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer ADS holders those rights unless both the distribution of the rights and the underlying securities to all our ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. Although we may be eligible to take advantage of certain exemptions under the Securities Act available to certain foreign issuers for rights offerings, we can give no assurances that we will be able to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement for any of these rights. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution with respect to their holdings.  
 
Our equity holders may experience dilution if we issue stock bonuses and stock options to employees or sell additional equity or equity-linked securities.
 
Similar to other technology companies in Taiwan, from time to time we may issue bonuses to our employees in the form of shares. The issuance of these shares may have a dilutive effect on our ADSs. We did not issue shares to our employees in 2012, 2013 or 2014. In addition, we did not grant any stock options to our employees in 2012, 2013 or 2014. If we issue stock bonuses or stock options to employees in the future, our equity holders may experience dilution.
 
In addition, the sale of additional equity or equity-linked securities may result in additional dilution to our shareholders. In October 2010, we issued US$800 million unsecured zero coupon convertible bonds due 2015 to purchase machinery and equipment overseas in line with the growth of our business. As of February 28, 2015, we have purchased from the market an aggregate principal amount of US$424.9 million of the outstanding bonds at a cost of US$426.9 million. The bonds are convertible by holders at any time until 10 days before maturity. The current conversion price is NT$39.46 per common share. As of February 28, 2015, none of the bonds has been converted into our common shares, and the principal amount of the outstanding bonds was US$375.1 million. Upon full conversion, the outstanding bonds would be converted to 292,570,395 common shares if based on the current conversion price, representing approximately 3.0% of our outstanding shares at the end of February 28, 2015. Any conversion of the bonds, in full or in part, would dilute the ownership interest of our existing shareholders and our earnings per share and could adversely affect the market price of our ADSs. Moreover, in May 2013, we issued 797,199,580 common shares for cash to sponsor the issuance of US$350.8 million American Depositary Shares. Any prior or future issuance of additional equity or equity-linked securities could each cause dilution to ADS holders.
 
Non-ROC holders of ADSs who withdraw our shares will be required to obtain a foreign investor investment identification and appoint a local custodian and agent and a tax guarantor in the ROC.
 
Under current ROC law, if you are a non-ROC person (other than a PRC person) and wish to withdraw and hold our shares from a depositary receipt facility, you will be required to obtain a foreign investor investment identification, or the Foreign Investor Investment I.D., issued in accordance with the ROC Regulations Governing Securities Investment by Overseas Chinese and Foreign Nationals (the “Investment Regulations”). You also will be required to appoint an eligible agent in the ROC to open a securities trading account and a Taiwan Depository & Clearing Corporation book-entry account and a bank account, to pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other functions as you may designate upon such withdrawal. In addition, you will be required to appoint a custodian bank to hold the securities in safekeeping, make confirmation and settle trades and report all relevant information. Without obtaining such Foreign Investor Investment I.D. under the Investment Regulations and opening such
accounts, the non-ROC withdrawing holder would be unable to hold or subsequently sell our shares withdrawn from the depositary receipt facility on the Taiwan Stock Exchange or otherwise. There can be no assurance that such withdrawing holder would be able to obtain the Foreign Investor Investment I.D. and open such accounts in a timely manner.
 
 
With the exception of a foreign institutional investor with a fixed place of business or business agent within the ROC, non-ROC holders of ADSs (other than a PRC person) withdrawing our shares represented by ADSs also are required under current ROC law and regulations to appoint an agent in the ROC for filing tax returns and making tax payments. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of such withdrawing holder’s ROC tax obligations (“Tax Guarantor”). Generally, the evidence of the appointment of such agent and the approval of such appointment by the ROC tax authorities may be required as conditions to such withdrawing holder’s repatriation of the profits. There can be no assurance that such withdrawing holder would be able to appoint and obtain approval for such agent in a timely manner.
 
Also, if any non-ROC person (other than a PRC person) receives 10% or more of our total issued and outstanding shares upon a single withdrawal, such non-ROC person must obtain prior approval from the MOEAIC. There can be no assurance that such withdrawing holder would be able to obtain such approval in a timely manner.  
 
Pursuant to the Regulations Governing Securities Investment and Futures Trading in Taiwan by Mainland Area Investors (the “Mainland Investors Regulations”), only qualified domestic institutional investors (“QDIIs”) approved by the China Securities Regulatory Commission and registered with the Taiwan Stock Exchange or Taiwan Futures Exchange are permitted to withdraw and hold our shares from a depositary receipt facility. In order to hold our shares, such QDIIs are required to appoint an agent, custodian and Tax Guarantor as required by the Mainland Investors Regulations. If the aggregate amount of our shares held by any QDII or shares received by any QDII upon a single withdrawal reaches 10% or more of our total issued and outstanding shares, such QDII must obtain the prior approval from the MOEAIC. We cannot assure you that such approval would be granted.
 
In addition, PRC investors’ investment in our shares are subject to various restrictions, specifically, there are restrictions on the amount remitted to the ROC for investments by QDIIs, either individually or jointly. Accordingly, the qualification criteria for a PRC person to make investment and the investment threshold imposed by the ROC government might cause a ADS holder who is a PRC person to be unable to withdraw and hold our shares.
 
The protection of the interests of our public shareholders available under our Articles of Incorporation and the laws governing ROC corporations is different from that which applies to a U.S. corporation.
 
Our corporate affairs are governed by our Articles of Incorporation and by the laws governing ROC corporations. The rights and responsibilities of our shareholders and members of our board of directors under ROC law are different from those that apply to a U.S. corporation. Directors of ROC corporations are required to conduct business faithfully and act with the care of good administrators. However, the duty of care required of an ROC corporation’s directors may not be the same as the fiduciary duty of a director of a U.S. corporation. In addition, controlling shareholders of U.S. corporations owe fiduciary duties to minority shareholders, while controlling shareholders in ROC corporations do not. The ROC Company Law also requires that a shareholder continuously hold at least 3% of our issued and outstanding shares for at least a year in order to request that our audit committee institute an action against a director on the company’s behalf. Therefore, our public shareholders may have more difficulty protecting their interests against actions of our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation.
 
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of applicable SEC and NYSE requirements, which may result in less protection than is accorded to investors under rules applicable to domestic issuers.
 
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the NYSE rules for domestic issuers, including, but not limited to:
 
 
·
the evaluation standards for director’s independence;
 
 
·
the requirements for non-management directors to meet regularly without management;
 
 
·
the requirement to have nominating/corporate governance committee;
 
 
·
the requirement to have a compensation committee set up pursuant to NYSE rules;
 
 
·
the requirement for shareholders’ approval on all equity based compensation and material revisions thereto; and
 
 
·
the requirement to adopt NYSE corporate governance guidelines.
 
 
28

 
For a detailed discussion of the differences between our corporate governance practices and the NYSE listing standards, see “Item 1616.G. Corporate Governance” for more information.
 
Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the NYSE may provide less protection than is accorded to investors under the NYSE rules applicable to domestic issuers. In addition, as a foreign private issuer, we are exempt from certain rules and regulations under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act , to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act, as amended.
 
Future sales or perceived sales of securities by us, our senior management, directors or major shareholders may hurt the price of our ADSs.
 
The market price of our ADSs could decline as a result of sales of ADSs or shares or the perception that these sales could occur. As of February 28, 2015, we had an aggregate of 9,624.2 million shares issued and outstanding, most of which were freely tradable. If we, our senior management, directors or our shareholders, sell ADSs or shares, the market price for our shares or ADSs could decline. For example, in May 2013, we issued 797,199,580 common shares for cash to sponsor the issuance of US$350.8 million ADSs. Future sales, or the perception of future sales, of ADSs or shares by us, our senior management, directors or major shareholders could cause the market price of our ADSs to decline. Moreover, if the offering price of any of the sales of shares by us is substantially lower than the then existing marketing price or net tangible value per share, our existing shareholders may experience substantial dilution.
 
You may not be able to enforce a judgment of a foreign court in the ROC.
 
We are a company limited by shares and incorporated under the ROC Company Law. Most of our directors and executive officers, and some of the experts named herein, are residents of the ROC. As a result, it may be difficult for holders of our shares or ADSs to enforce against us or them judgments obtained outside the ROC, including those predicated upon the civil liability provisions of the federal securities laws of the United States. It is also not entirely certain that an action for civil liability predicated solely on the United States federal securities laws could be brought directly in the ROC courts.
 
INFORMATION ON THE COMPANY
 
History and Development of the Company
 
We were incorporated as Acer Display Technology, Inc. (“Acer Display”) under the laws of the ROC as a company limited by shares in 1996. The shares of Acer Display were listed on the Taiwan Stock Exchange on September 8, 2000.
 
On September 1, 2001, we completed a merger with Unipac Optoelectronics Corp. (“Unipac”) pursuant to a merger agreement dated April 9, 2001, as amended by a supplemental agreement dated May 15, 2001. We changed our name to AU Optronics Corp. on May 22, 2001. Prior to the merger, Acer Display was primarily involved in the design, development, production and marketing of large-size TFT-LCD panels, and Unipac was primarily involved in the design, production and marketing of both small-size and large-size TFT-LCD panels.  
 
On October 1, 2006, we completed our merger with Quanta Display Inc. (“QDI”), a company incorporated in Taiwan that manufactured and assembled TFT-LCD panels. As of the effective date of the merger, we became the surviving entity and assumed substantially all of the assets, liabilities and personnel of QDI. The purpose of the merger was to increase our competitiveness and expand our market share.
 
On October 1, 2014, our subsidiary BriView Corp. completed a merger with Forhouse Corporation (“Forhouse”), one of our investees. Both companies were primarily engaged in the manufacturing and selling of TFT-LCD modules and backlight modules. The purpose of the merger was to integrate resources and increase competitiveness. After the merger, Forhouse, as the surviving company, was renamed to Darwin Precisions Corporation and became our subsidiary.
 
 
At the end of 2008, we entered the solar business and formed our Solar Photovoltaic Business Unit in October 2009. In connection with this expansion, we obtained a controlling interest in M.Setek, a major polysilicon and solar wafer manufacturer in Japan, through equity investments in 2009. Also, in May 2010, we formed a joint venture with SunPower Technology, Ltd. (“SPTL”), a subsidiary of SunPower Corporation, a leading manufacturer of residential and commercial solar systems in the United States, to construct and operate a solar cell manufacturing facility in Malaysia, AUO SunPower Sdn. Bhd. (“AUSP”). We aim to provide reliable total solar solutions with high-efficiency to cater to the needs of residential, commercial and utility customers globally. With our efforts, we reached accumulated shipment of 1 gigawatt of solar PV modules as of October 2014.
 
Our principal executive offices are located at No. 1, Li-Hsin Road 2, Hsinchu Science Park, Hsinchu, Taiwan, ROC, and our telephone number is +886-3-500-8800. Our agent for service of process in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711, and our agent’s telephone number is 302-738-6680.
 
Our ADSs have been listed on the New York Stock Exchange under the symbol “AUO” since May 2002.
 
For a description of our capital expenditures in the past three fiscal years and source of funding, see “Item 5. Operating and Financial Review and Prospects—5.B.— Liquidity and Capital Resources— Capital Expenditures.”
 
Business Overview
 
Introduction
 
We are one of the world’s leading TFT-LCD panel providers. We operate in two business segments: display business and solar business.
 
Display business. We design, develop, manufacture, assemble and market flat panel displays and most of our products are TFT-LCD panels. TFT-LCD is currently the most widely used flat panel display technology. Our panels are primarily used in televisions, monitors,  mobile PCs, mobile devices and commercial and other applications (such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals and pachinko machines), etc.
 
Solar business. We entered into the solar business at the end of 2008, and have established a vertically integrated solar value chain, including manufacturing and branding capabilities for our solar products. We manufacture upstream and midstream products such as polysilicon, ingots, wafers and solar cells. We design, develop, and manufacture solar photovoltaic (“PV”) modules as well as produce solar PV systems and provide various value-added services for solar PV systems projects.
 
For the year ended December 31, 2014, net revenue generated from our display business and solar business were NT$384.3 billion (US$12.2 billion) and NT$23.8 billion (US$0.8 billion), respectively, representing approximately 94.2% and 5.8% of our total net revenue, respectively. For more information on the financial performance of our two operating segments, see “Item 5. Operating and Financial Review and Prospects” and Note 38 to our consolidated financial statements.
 
Display Business
 
We sell our panels primarily to companies that design and assemble products based on their customers’ specifications, commonly known as original equipment manufacturing service providers, and to brand customers. Our original equipment manufacturing service provider customers, most of whose production operations are located in Taiwan or the PRC, use our panels in the products that they manufacture on a contract basis for brand companies worldwide. Our operations in Taiwan and the PRC allow us to better coordinate our production and services with our customers’ requirements, especially in respect of delivery time and design support. We also sell our products to some brand companies on a direct shipment basis.
 
We currently manufacture TFT-LCD panels at fabrication facilities commonly known as “fabs. With production facilities utilizing 3.5-, fourth-, 4.5-, fifth-, sixth-, 7.5- and 8.5-generation technologies, we have the flexibility to produce a large number of panels of various sizes. As of February 28, 2015, all fabs have commenced commercial production. See “Item 4. Information on the Company—4.D. Property, Plants and Equipment” for information on our principal manufacturing and module assembly sites for the display business.
 
Principal Products
 
We design, develop, manufacture, assemble and market a wide range of display products for the following principal product categories:
 
 
·
Televisions, which typically utilize display panels ranging from 17 inches to 75 inches, including panels for televisions, TV sets and other related products for televisions.
 
 
30

 
 
·
Monitors, which typically utilize display panels ranging from 17 inches to 32 inches, including products such as desktop monitors.
 
 
·
Mobile PCs, which typically utilize display panels ranging from 6 inches to 17.3 inches, including products such as notebooks and tablets.
 
 
·
Mobile devices, which typically utilize display panels ranging from 1.6 inches to 7 inches, including products such as mobile phones.
 
 
·
Commercial and other applications, which typically utilize display panels ranging from 2.5 inches to 22 inches or above for use in products such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines and others.
 
The following table sets forth the shipment of our products by category for the periods indicated:
 
   
Year Ended December 31,
 
   
2012
   
2013
   
2014
 
   
(Panels in thousands)
 
Products for Televisions
    32,575.1       33,521.0       31,793.3  
Products for Monitors
    28,599.7       30,983.9       28,561.7  
Products for Mobile PCs
    56,759.0       59,325.0       66,148.5  
Products for Mobile Devices
    107,038.4       89,045.0       102,642.1  
Products for Commercial and Other Applications
    52,769.7       56,619.4       58,478.5  
Total
    277,741.9       269,494.3       287,624.1  
 
The following table sets forth our net revenue by product category for the periods indicated:
 
   
Year Ended December 31,
 
   
2012
   
2013
   
2014
 
   
NT$
   
%
   
NT$
   
%
   
NT$
   
US$
   
%
 
   
(in millions, except for percentages)
 
Products for Televisions
    168,892.2       44.6       188,428.2       45.3       171,399.6       5,424.0       42.0  
Products for Monitors
    59,576.0       15.7       59,564.2       14.3       57,549.0       1,821.2       14.1  
Products for Mobile PCs
    72,373.6       19.1       78,376.8       18.8       75,353.6       2,384.6       18.5  
Products for Mobile Devices
    23,592.0       6.3       26,670.0       6.4       34,412.5       1,089.0       8.4  
Products for Commercial and Other Applications
    34,154.5       9.0       36,601.8       8.8       39,117.1       1,237.9       9.6  
Solar Products
    11,350.6       3.0       17,526.8       4.2       23,843.5       754.5       5.8  
Others(1)
    8,532.0       2.3       9,195.2       2.2       6,503.4       205.8       1.6  
Total
    378,470.9       100.0       416,363.0       100.0       408,178.7       12,917.0       100.0  

(1)
Includes sales of raw materials, components and service charges.

Products for Televisions
 
Our current portfolio of products for televisions consists of 17-inch to 75-inch panels. In 2014, approximately 85.6% of the sales of products for televisions we produced were 39 inches and above. In 2012, 2013 and 2014, sales of products for televisions accounted for 44.6%, 45.3% and 42.0%, respectively, of our net revenue.
 
Products for Monitors
 
In 2012, 2013 and 2014, sales of products for monitors accounted for 15.7%, 14.3% and 14.1%, respectively, of our net revenue. The most commonly produced size of monitors changes as the generation of TFT-LCD manufacturing technology evolves, with manufacturers moving production to panel sizes that make the most efficient use of glass substrates processed by their fabs. In 2014, 19.5-, 22-and 24-inch panels were most commonly produced for monitors.
 
 
31

 
Products  for Mobile PCs
 
In 2012, 2013 and 2014, sales of products for mobile PCs accounted for 19.1%, 18.8% and 18.5%, respectively, of our net revenue. In 2014, 14.0-inch and 15.6-inch panels with an aspect ratio of 16:9 are the most commonly produced sizes for notebooks, while 7- to 10.1-inch panels are the most commonly produced sizes for tablets.
 
Products for Mobile Devices
 
Our products for mobile devices are used in products such as mobile phones. In 2012, 2013 and 2014, sales of products for mobile devices accounted for 6.3%, 6.4% and 8.4%, respectively, of our net revenue.
 
Products for Commercial and Other Applications
 
Our products for commercial and other applications are used in products such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines and others. In 2012, 2013 and 2014, sales of products for commercial and other applications accounted for 9.0%, 8.8% and 9.6%, respectively, of our net revenue.
 
Customers, Sales and Marketing
 
We sell our panels mostly to brand companies and original equipment manufacturing service providers with operations in Taiwan, the PRC, Japan and other areas. The following table sets forth the geographic breakdown of our net revenue by the location of our customers placing orders for the periods indicated:
 
   
Year Ended December 31,
 
   
2012
   
2013
   
2014
 
Region
 
NT$
   
%
   
NT$
   
%
   
NT$
   
US$
   
%
 
   
(in millions, except percentages)
 
Taiwan 
    150,790.4       39.8       143,549.4       34.5       135,420.4       4,285.4       33.2  
PRC
    114,469.5       30.2       141,951.3       34.1       135,102.4       4,275.4       33.1  
Japan
    14,864.2       3.9       42,562.6       10.2       37,410.4       1,183.9       9.1  
Singapore
    31,397.4       8.3       23,280.8       5.6       34,237.7       1,083.4       8.4  
Malaysia
    4,675.5       1.2       12,986.3       3.1       12,952.0       409.9       3.2  
Others(1)
    62,273.9       16.6       52,032.6       12.5       53,055.8       1,679.0       13.0  
      Total  
    378,470.9       100.0       416,363.0       100.0       408,178.7       12,917.0       100.0  

(1)
Include Untied States, Europe and other regions.

Our sales in Taiwan and the PRC, as set forth in the table above, represent a significant portion of our net revenue for the past three years. A significant portion of these sales were made to original equipment manufacturing service providers who use our panels in the products they manufacture on a contract basis for brand companies worldwide.
 
We market our panels to, and negotiate prices with, both our original equipment manufacturing service provider customers and brand customers, as display panels often constitute a significant part of the end product. A significant portion of our net revenue is attributable to a small number of our customers. In 2012, 2013 and 2014, our five largest customers accounted for 37.6%, 39.7% and 33.4%, respectively, of our net revenue. In addition, some customers individually accounted for more than 10% of our net revenue for each of the last three years. For example, Samsung Group accounted for 15.3%, 13.8% and 10.2% of our net revenue in 2012, 2013 and 2014, respectively.
 
We focus our sales activities on a number of large customers with whom we seek to build close relationships. We appoint a sales manager to serve as the main contact person with each of our major customers. Each product category has its own sales and marketing division, and is further subdivided into smaller teams dedicated to each of our major customers. Each dedicated customer team is headed by an account manager who is primarily responsible for our relationship with that specific customer.
 
Our customers typically provide monthly non-binding rolling forecasts of their requirements for the coming several months, and typically place purchase orders several weeks before the expected shipment date. We generally provide a limited warranty to our customers, including the provision of replacement parts and after-sale service for our products. In connection with these warranty policies, based on our historical experience, we set aside an amount as a reserve to cover these warranty obligations. As of December 31, 2014, our reserve for warranties totaled NT$2,668.5 million (US$84.4 million). In addition, we are required under several of our sales contracts to provide replacement parts for our products, at agreed prices, for a specified period of time.
 
 
We price our products in accordance with prevailing market conditions, giving consideration to factors such as the complexity of the product, the order size, the strength and history of our relationship with the customer and our capacity utilization. Selling prices and payment terms for sales to related parties are not significantly different from those for other customers. Our credit policy for sales to related parties and other customers typically requires payment within 30 to 60 days. From time to time, we may extend longer credit terms to our large customers as compared to our smaller customers. The average number of collection days extended for sales to our customers for the years ended December 31, 2012, 2013 and 2014 was 45 days, 38 days and 46 days, respectively. We believe the terms for customers and products are comparable to the terms offered by our industry peers.
 
Our business is subject to seasonal fluctuations common in the display panel industry, which in turn is affected by the seasonality of demand for consumer and other end-products produced by our customers. Our low seasons typically start in the fourth quarter and may go lower in the first quarter; while our high seasons generally start in the second quarter and may go higher in the third quarter. The seasonality of our sales also may be affected by factors including economic downturn, our inventory management and certain special events such as government subsidies and sports events.

The TFT-LCD Manufacturing Process
 
The basic structure of a TFT-LCD panel may be thought of as two glass substrates sandwiching a layer of liquid crystal. The front glass substrate is fitted with a color filter, while the back glass substrate has transistors fabricated on it. A light source called a backlight unit is located at the back of the panel.
 
The manufacturing process consists of hundreds of steps, but may be divided into three primary steps. The first step is the array process, which involves fabricating transistors on the back substrate using film deposition, lithography and etching. The array process is similar to the semiconductor manufacturing process, except that transistors are fabricated on a glass substrate instead of a silicon wafer. The second step is the cell process, which joins the back array substrate and the front color filter substrate. The space between the two substrates is filled with liquid crystal. The third step is the module-assembly process, which involves connecting additional components, such as driver ICs and backlight units, to the TFT-LCD panel.
 
The array and cell processes are capital-intensive and require highly automated production equipment. TFT-LCD manufacturers typically design their own fabs and purchase production equipment from various suppliers. Each TFT-LCD manufacturer combines various equipment according to its manufacturing process technologies to form a TFT-LCD fab. In addition to developing our own manufacturing process technologies, we also license such technologies from other companies, such as Fujitsu Display Technologies Corporation (which was merged into Fujitsu Limited) (“FDTC”). We have automated our array and cell processes, with the exception of some steps in the cell process, such as panel inspection. In contrast to the array and cell processes, the module-assembly process is labor-intensive, as it involves manual labor to assemble the pieces. A substantial portion of our module-assembly process is conducted in the PRC.
 
Raw Materials and Components and Suppliers
 
Our manufacturing operations require adequate supplies of raw materials and components of the right quality on a timely basis. We purchase our raw materials and components based on forecasts from our customers, as well as our own assessments of our customers’ needs. We generally prepare forecasts one to four months in advance, depending on the raw materials and components, and update this forecast weekly or monthly. We source most of our raw materials and components, including critical materials such as glass substrates, liquid crystals, color filters, polarizer and driver ICs, from a limited group of suppliers. In order to reduce our raw materials and component costs and our dependence on any one supplier, we generally purchase our raw materials and components from multiple sources. We typically do not enter into contracts with our suppliers. However, during periods of supply shortages, we may enter into supply contracts with suppliers to ensure a stable supply of necessary raw materials and components.
 
From time to time, we experienced shortages of certain raw materials in the past. Our operations would be adversely affected if we could not obtain raw materials and components in sufficient quantity and quality. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by display panel manufacturers, including our company, without a corresponding increase in the supply of raw materials and components.
 
Raw materials and components constitute a substantial portion of our cost of goods sold. An increase in the cost of our raw materials may adversely affect our gross margins.
 
 
33

 
Set forth below are our major suppliers of key raw materials and components in alphabetical order by category:
 
Glass Substrates
 
Liquid Crystals
 
Color Filters
 
Polarizer
 
Driver ICs
Asahi Glass
 
JNC Corporation
 
Dai Nippon Printing
 
BMC(1)
 
Novatek
Corning Taiwan
 
Merck
 
Toray Industries
 
LG Chem
 
Raydium Semiconductor(2)
Nippon Electric Glass
         
Nitto Denko
   
           
Sumika Technology
   

(1)
BMC is a subsidiary of one of our major shareholders, Qisda. See “Item 7. Major Shareholder and Related Party Transactions7.B. Related Party Transactions.”

(2)
Raydium Semiconductor is our investee. See “Item 7. Major Shareholder and Related Party Transactions7.B. Related Party Transactions.”
 
We use a large amount of water and electricity in our manufacturing process. We mostly obtain water from government-owned entities and are in compliance with relevant local laws and regulations of water recovery rate. We use electricity supplied by the external power grids. We maintain back-up generators that provide electricity in case of power interruptions, which we have experienced from time to time. Except for power outages, power interruptions in general have not materially affected our production processes.
 
Equipment and Suppliers
 
We depend on a number of equipment manufacturers that make and sell the equipment that we use in our manufacturing processes. Our manufacturing processes depend on the quality and technological capacity of our equipment. We purchase equipment that is customized to our specific requirements for our manufacturing processes. The principal types of equipment we use to manufacture display panels include chemical vapor deposition equipment, sputters, steppers, developers and coaters.
 
In 2014, we reduced our equipment purchases from 2013 primarily due to our focus on investing in technology improvements and enhancement of capacity value rather than investing in new capacity. Going forward, we expect to maintain investments in advanced technology and new capacity based on market conditions. See “Item 5. Operating and Financial Review and Prospects5.B. Liquidity and Capital Resources.” We purchase equipment from a small number of qualified vendors to assure consistent quality and performance. We typically order equipment four to six months or longer in advance of our planned installation.
 
Competition
 
The display business is highly competitive. Most of our competitors operate fabs in Korea, Taiwan, Japan and the PRC. We believe our principal competitors include LG Display and Samsung Display in Korea; Innolux, Chunghwa Picture Tubes and Hannstar Display in Taiwan; Sharp, Panasonic LCD, and Japan Display in Japan; and BOE, Century, Tianma, China Star Optoelectronics Technology and CEC-PANDA LCD Technology in the PRC.
 
In addition, we believe the principal elements of competition for customers in the display market include:
 
 
·
price, based in large part on the ability to ramp-up lower cost, advanced technology production facilities before competitors;
 
 
·
product features and quality;
 
 
·
customer service, including product design support;
 
 
·
ability to keep production costs low by maintaining high yield and operating at full capacity;
 
 
·
ability to provide sufficient quantity of products to meet customer demand;
 
 
·
quality of the research and development team;
 
 
·
time-to-market;  
 
 
·
superior logistics; and
 
 
·
access to capital.
 
 
34

 
Solar Business
 
We manufacture upstream and midstream solar products such as polysilicon, ingots, wafers and solar cells. Through our subsidiaries AUO Crystal Corp. and M.Setek, we manufacture polysilicon, ingots and wafers. Through AUSP, a joint venture we formed with SunPower Corporation in the United States, we produce high-efficiency solar cells in Malaysia.

We also design, develop, and manufacture solar PV modules, as well as produce solar PV systems and provide various value-added services for solar PV systems projects. A solar PV module is an assembly of PV cells that are electrically interconnected, laminated and framed in a durable and weatherproof package. Currently, our solar PV modules are manufactured with multi-crystalline PV cells and mono-crystalline PV cells. Our PV modules are made with a highly strengthened frame design that enhances their abilities to withstand vibrations. A solar PV system consists of one or more solar PV modules that are physically mounted and electrically interconnected with system components such as inverters, mounting structures, wiring systems and other devices to produce and store electricity. See “Item 4. Information on the Company—4.D. Property, Plants and Equipment.” for information on our principal manufacturing sites for the solar business.
 
We sell our solar PV modules primarily to overseas customers, including installers, solar PV system integrators, property developers and other value-added resellers, which incorporate our PV modules into large on-grid integrated PV systems with inverters, mounting structures and wiring systems. We have commenced mass production of back-contact mono-crystalline modules with conversion efficiencies over 20% since 2011. In 2012, we launched the alternative current (“AC”) module, a high-efficient module with integrated microinverter in the United States. Also, we market our solar PV products and services, which are sold in Europe, the United States Asia and elsewhere. With our efforts, we reached accumulated shipment of 1 gigawatt of solar PV modules as of October 2014. In addition, with our efforts to provide value-added services for solar PV systems projects, we have successfully completed and secured solar projects with our global partners in Europe, the United States, Asia and elsewhere.
 
In 2014, revenues generated from our solar business amounted to NT$23,843.5 million (US$754.5 million), representing 5.8% of our total net revenue for 2014.
 
Quality Control
 
We have implemented quality inspection and testing procedures at all of our fabs and module-assembly facilities. Our quality management system includes statistical process controls, which involve sampling measurements to monitor and control the production processes. We perform outgoing quality control based on sampling plans, ongoing reliability tests covering a wide range of application conditions, in-process quality control to prevent potential quality deviations, and other programs designed for process measurement and improvement, reduction of manufacturing costs, maintenance of on-time delivery, increasing in-process production yields and improving field reliability of our products. If a problem is detected, we take steps to contain the problem, conduct defect analyses to identify the cause of the problem and take appropriate corrective and preventive actions.
 
We visually inspect and test all completed products to ensure that production standards are met. To ensure the effective and consistent application of our quality control procedures, we provide quality control training to all of our production line employees according to a certification system depending on the particular levels of skills and knowledge required.  
 
We also perform quality control procedures for the raw materials and components used in our products. These procedures include testing samples for large batches, obtaining vendor testing reports and testing to ensure compatibility with other raw materials and components, as well as vendor qualification and vendor ratings. We also implement procedures that manage the flow of any changes in the design, parts, or processes during mass production, in order to avoid problems in product quality and reliability caused by engineering changes, and thus to maintain product and system integrity.
 
Our quality management system has received accredited International Standard of ISO 9001 and QC080000 certifications, as well as qualifications from our customers. We also received the ISO/TS16949 for most of our factories that design and manufacture the flat panel displays. In addition, all of our facilities have been certified as meeting the International Organization for Standardization ISO 14001 environmental protection standards and OHSAS 18001 occupational health and safety standard and certain of our facilities have completed ISO 50001 certification for energy management. The International Standard assessment process involves subjecting our manufacturing processes and quality management systems to periodic reviews and observations. We believe that certification also provides independent verification to our customers regarding the quality control employed in our manufacturing and assembly processes.
 
 
35

 
Insurance
 
We mostly maintain insurance policies on our production facilities, buildings, machinery and inventories covering property damage and damage due to fire, earthquakes, floods, and other natural and accidental perils. Our insurance policies cover factory maintenance and replacement costs for our sixth generation fabs and above, while for our fifth generation fabs and below, most of our insurance policies cover the amount equal to the book value of assets. As of December 31, 2014, our insurance also included protection from covered losses, including property damage up to maximum coverage of NT$44.0 billion (US$1.4 billion) for all of our inventories and NT$707.7 billion (US$22.4 billion) for our equipment and facilities. In addition, as of December 31, 2014, we had insurance coverage for business interruptions in the aggregate amount of NT$44.8 billion (US$1.4 billion).
 
In general, we also maintain insurance policies, including director and officer liability insurance, employee group health insurance, travel and life insurance, employer liability insurance, general liability insurance, and policies that provide coverage for risks during the shipment of goods and equipment, as well as during equipment installation at our fabs.
 
Environmental Matters
 
Our manufacturing processes involve the use of hazardous materials and generate a significant amount of pollution, including wastewater, solid/liquid waste and air pollution, which are strictly monitored by local environmental protection bureaus. We must comply with regulations relating to storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes resulting from our manufacturing processes. To meet ROC environmental standards, we employ various types of pollution control equipment for the treatment of exhaust gases, liquid waste, solid waste and the treatment of wastewater and chemicals in our fabs. We control exhaust gas and wastewater on-site. The treatment of solid and liquid wastes is subcontracted to third parties off-site in accordance with pollution control requirements.
 
Our operations can expose us to the risk of environmental claims which could result in damages awarded or fines imposed against us. We have taken the necessary steps to ensure the proper operation of our facilities to meet the necessary standards and strengthened the monitoring mechanisms against further violations, as well as obtained the appropriate permits, and believe that we are in compliance with the existing environmental laws and regulations in all material aspects in the ROC.
 
Intellectual Property
 
Overview
 
As of February 28, 2015, we had filed more than 21,300 patent applications in various jurisdictions, including Taiwan, the United States, the PRC, Japan, United Kingdom, European Union, Korea and others. These patent applications include patents for TFT-LCD manufacturing processes and products, and more than 14,200 patent were issued as of February 28, 2015. Most of these patents have a term of 20 years. In addition, we have registered “AU Optronics” as trademarks in some countries and jurisdictions where we operate, including ROC, United States, European Union and Korea and registered our corporate logo, “AUO” as trademarks in the ROC, PRC, United States, European Union, Japan and Korea.
 
We require all of our employees to sign an employment agreement which prohibits the unauthorized disclosure of any of our trade secrets, confidential information and proprietary technologies subject to the terms and conditions of the employment agreement, and we also require our technical personnel to assign to us any inventions related to our business that they develop during the course of their employment.
 
We have licenses to use certain technology and processes from certain companies. Our royalty expenses relating to intellectual property licenses may increase in the future due to increases in unit sales as well as the potential need to enter into additional license agreements or to renew existing license agreements on different terms.
 
We intend to continue to file patent applications, where appropriate, to protect our proprietary technologies. We may find it necessary to enforce our patents or other intellectual property rights or defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources. We may suffer legal liabilities and financial and reputational damages if we are found to infringe product or process technology rights held by others. We are currently involved in litigation regarding alleged patent infringement. See “Item 8. Financial Information8.A.7. Litigation.”
 
 
36

 
License Agreements
 
We have entered into patent and intellectual property license and cross-license agreements, some of which require periodic royalty payments. For example: (i) we have a license agreement with FDTC (subsequently assumed by Fujitsu Limited), effective as of March 31, 2003, which provides for the non-transferable and non-exclusive license under certain patents to manufacture certain TFT-LCD panels at our facilities, (ii) we entered into a cross-license agreements with each of Sharp, LG Display Co., Ltd., (“LGD”), Samsung Electronics Co., Ltd. (“Samsung”) and Hydis Technologies Co., Ltd. (“Hydis”, E Ink’s Korean subsidiary), respectively. Under each of these agreements, each party granted to the other non-transferable and non-exclusive licenses in relation to certain patents involving LCD related technologies, (iii) we have a cross-license agreement with Japan Display Inc. (formerly known as Japan Display East Inc./Hitachi Displays Ltd.) and Panasonic Liquid Crystal Display Co., Ltd. (formerly known as IPS Alpha Technology Ltd.) , under which each party granted to the other non-transferrable and non-exclusive licenses under certain patents to manufacture certain TFT-LCD and OLED panels and modules, (iv) we have a license agreement with Semiconductor Energy Laboratory Co., Ltd., which provides for the non-transferable and non-exclusive license under certain patents to manufacture certain LCD and certain OLED products, (v) we have a cross-license agreement with Toshiba Mobile Display Co., Ltd., under which each party granted to the other non-transferrable and non-exclusive licenses under certain patents to manufacture certain TFT-LCD and OLED panels and modules, (vi) we have a cross-license agreement with E Ink Holding Inc. (“E Ink”), under which AUO granted to E Ink non-transferrable and non-exclusive licenses under certain patents involving LCD-related and certain other technologies, and E Ink granted to AUO a non-transferrable and non-exclusive licenses under certain patents involving LCD-related technologies, (vii) we have a cross-license agreement with Seiko Epson Corporation (“Seiko Epson”), under which AUO granted to Seiko Epson non-transferrable and non-exclusive licenses under certain patents involving certain technologies, and Seiko Epson granted to AUO a non-transferrable and non-exclusive license under certain patents involving LCD related technologies, and (viii) we have a trademark licensing agreement with BenQ Corporation, under which BenQ Corporation granted AUO a non-exclusive trademark license for the development, marketing and sale of our solar products and services.
 
In addition to the above, we have also entered into license or cross-license agreements with other third parties in the course of our business operations in connection with certain patents which such third parties own or control. In the future, we may need to obtain additional patent licenses or renew existing license agreements.
 
 
37

 
Organizational Structure
 
The following chart sets forth our corporate structure and ownership interest in each of our principal operating subsidiaries as of December 31, 2014.
 
 
 
 
The following table sets forth summary information for our subsidiaries as of December 31, 2014.  
 
Subsidiary
Main Activities
Jurisdiction of
Incorporation
Percentage of
Ownership
Interest
AU Optronics (L) Corp.
Holding and trading company
Malaysia
100.00%
AU Optronics Corporation America
Sales and sales support of TFT-LCD modules
United States
100.00%(1)
AU Optronics Corporation Japan
Sales and sales support of TFT-LCD modules
Japan
100.00%(1)
AU Optronics Europe B.V.
Sales support of TFT-LCD modules
Netherlands
100.00%(1)
AU Optronics Korea Ltd.
Sales support of TFT-LCD modules
South Korea
100.00%(1)
AU Optronics Singapore Pte. Ltd.
Holding company and sales support of TFT-LCD modules
Singapore
100.00%(1)
AU Optronics (Shanghai) Co., Ltd.
Sales support of TFT-LCD modules
PRC
100.00%(1)
AU Optronics (Xiamen) Corp.
Assembly of TFT-LCD modules
PRC
100.00%(1)
AU Optronics (Suzhou) Corp., Ltd.
Assembly of TFT-LCD modules
PRC
100.00%(1)
AU Optronics (Czech) s.r.o.
Assembly of solar PV modules
Czech Republic
100.00%(1)
AU Optronics Manufacturing (Shanghai) Corp.
Assembly of TFT-LCD modules
PRC
100.00%(1)
AU Optronics (Slovakia) s.r.o.
Repair of TFT-LCD modules; injecting and stamping parts; manufacturing and sale of molds
Slovakia Republic
100.00%(1)
AUO Energy (Tianjin) Corp.
Manufacturing and sale of solar modules
PRC
100.00%(13)
AUO Green Energy America Corp.
Holding company, sale and sales support of solar modules
United States
100.00%(13)
AUO Green Energy Europe B.V.
Holding company and sales support of solar modules
Netherlands
100.00%(13)
BriView (Xiamen) Corp.
Manufacturing and sale of liquid crystal products, TV set and related parts
PRC
100.00%(5)
Darwin Precisions (L) Corp.
Holding and trading company
Malaysia
100.00%(2)
Darwin Precisions (Hong Kong) Limited
Holding company
Hong Kong
100.00%(3)
Darwin Precisions (Suzhou) Corp.
Manufacturing, assembly and sale of TFT-LCD modules, backlight modules and related parts
PRC
100.00%(4)
Darwin Precisions (Xiamen) Corp.
Manufacturing, assembly and sale of TFT-LCD modules, backlight modules and related parts
PRC
100.00%(4)
Darwin Precisions (Chengdu) Corp.
Manufacturing, assembly and sale of TFT-LCD modules, backlight modules and related parts
PRC
100.00%(4)(23)
Huizhou Bri-King Optronics Co., Ltd.
Manufacturing and sale of liquid crystal products and related parts
PRC
51.00%(1)(23)
 
 
Subsidiary
Main Activities
Jurisdiction of
Incorporation
Percentage of
Ownership
Interest
BriView (Kunshan) Co., Ltd.
Manufacturing and sale of liquid crystal products, TV sets and related parts
PRC
100.00%(5) (23)
BriView (Hefei) Co., Ltd.
Manufacturing and sale of liquid crystal products, TV sets and related parts
PRC
100.00%(5)
Forhouse International Holding Ltd.
Holding and trading company
BVI
100.00%(2)
Force International Holding Ltd.
Holding company
BVI
100.00%(2)
Fullhouse Corporation Sdn. Bhd.
Manufacturing and sale of electronics dartboard
Malaysia
100.00%(16) (23)
Forefront Corporation
Holding company
Mauritius
100.00%(20)
Fortech International Corp.
Holding and trading company
Mauritius
100.00%(16)
Forward Optronics International Corp.
Holding company
Samoa
100.00%(16)
Prime Forward International Ltd.
Holding company
Samoa
100.00%(16)
Full Luck Precisions Co., Ltd.
Holding and trading company
Mauritius
100.00%(16)
Forhouse Electronics (Suzhou) Co., Ltd.
Manufacturing and sale of motorized treadmills
PRC
100.00%(21)
Fortech Electronics (Suzhou) Co., Ltd.
Manufacturing, assembly, and sale of TFT-LCD modules, backlight modules and related parts
PRC
100.00%(17)
Fortech Optronics (Xiamen) Co., Ltd.
Manufacturing, assembly, and sale of TFT-LCD modules, backlight modules and related parts
PRC
100.00%(17)
Suzhou Forplax Optronics Co., Ltd.
Manufacturing and sale of light guide plates
PRC
100.00%(22)
Fortech Electronics (Kunshan) Co., Ltd.
Manufacturing, assembly, and sale of TFT-LCD modules, backlight modules and related parts
PRC
100.00%(18)
Full Luck (Wujiang) Precisions, Co., Ltd.
Manufacturing and sale of precision metal parts
PRC
100.00%(19)
Konly Venture Corp.
Venture capital investment
ROC
100.00%
Ronly Venture Corp.
Venture capital investment
ROC
100.00%
Darwin Precisions Corporation
Manufacturing, design and sale of TFT-LCD modules, TV set, backlight modules and related parts
ROC
43.48%(6) (7)
Toppan CFI (Taiwan) Co., Ltd.
Manufacturing and sale of color filters
ROC
49.00%(7)
BriView (L) Corp.
Holding and trading company
Malaysia
100.00%(12)
AUO Crystal Corp.
Design, manufacture and sale of solar modules
ROC
96.56%(11)
AUO Crystal (Malaysia) Sdn. Bhd.
Manufacturing and sale of single crystal silicon wafers
Malaysia
100.00%(9)
 
 
40

 
 
Subsidiary
Main Activities
Jurisdiction of
Incorporation
Percentage of
Ownership
Interest
M.Setek Co., Ltd.
Manufacturing and sale of polysilicon and other solar-related products
Japan
99.98%(14)
AFPD Pte., Ltd.
Manufacturing LCD panels based on low temperature polysilicon technology
Singapore
100.00%(1)
AU Optronics (Kunshan) Co., Ltd.
Manufacturing, assembly and sale of TFT-LCD panels
PRC
49.00%(1)(7)
AUO Green Energy Germany GmbH
Sales support of solar modules
Germany
100.00%(10) (23)
Fargen Power Corporation
Solar power generation
ROC
100.00%(8)
Evergen Power Corporation
Solar power generation
ROC
100.00%(8)
Sanda Materials Corporation
Venture capital investment
ROC
99.90%(15)
a. u. Vista Inc.
Research and development and IP related business
United States
100.00%(1)
 

(1)
Indirectly, through our 100% ownership of AU Optronics (L) Corp.
(2)
Indirectly, through our 43.48% ownership of Darwin Precisions Corporation.
(3)
Indirectly, through our 100% ownership of Darwin Precisions (L) Corp.
(4)
Indirectly, through our 100% ownership of Darwin Precisions (Hong Kong) Limited.
(5)
Indirectly, through our 100% ownership of BriView (L) Corp.
(6)
30.29% held directly by us, 8.01% held indirectly by Konly Venture Corp. and 5.18% held indirectly by Ronly Venture Corp., respectively.
(7)
We exercise de facto control over the relevant operating activities of Toppan CFI,  AU Optronics (Kunshan) Co., Ltd. and Darwin Precisions Corporation, respectively. As a result, we consolidated Toppan CFI, AU Optronics (Kunshan) Co., Ltd. and Darwin Precisions Corporation.
(8)
Indirectly, through our 100% ownership of Konly Venture Corp.
(9)
Indirectly, through our 96.56% ownership of AUO Crystal Corp.
(10)
Indirectly, through our 100% ownership of AUO Green Energy Europe B.V.
(11)
82.42% held directly by us, 13.32% held indirectly through Konly Venture Corp. and 0.82% held indirectly through Ronly Venture Corp., respectively.
(12)
70.29% held indirectly through AU Optronics (L) Corp. and 29.71% held indirectly through  Darwin Precisions Corporation, respectively. We hold 43.48% ownership of Darwin Precisions Corporation.
(13)
Indirectly, through our 100% ownership of AU Optronics Singapore Pte. Ltd.
(14)
Indirectly, through our 99.90% ownership of Sanda Materials Corporation.
(15)
99.86% held directly by us, 0.03% held indirectly through Konly Venture Corp., and 0.01% held indirectly through Ronly Venture Corp., respectively.
(16)
Indirectly, through our 100% ownership of Forhouse International Holding Ltd.
(17)
Indirectly, through our 100% ownership of Fortech International Corp.
(18)
Indirectly, through our 100% ownership of Prime Forward International Ltd.
(19)
Indirectly, through our 100% ownership of Full Luck Precisions Co., Ltd.
(20)
Indirectly, through our 100% ownership of Force International Holding Ltd.
(21)
Indirectly, through our 100% ownership of Forefront Corporation.
(22)
34.48% held indirectly through Forward Optronics International Corp. and 65.52% held indirectly through Fortech International Corp., respectively.
(23) 
Darwin Precisions (Chengdu) Corp., BriView (Kunshan) Co., Ltd., AUO Green Energy Germany GmbH, Fullhouse Corporation Sdn. Bhd. and Huizhou Bri-King Optronics Co., Ltd. are in the process of liquidation as of December 31, 2014.

The following is a summary of our major organizational activities in the first quarter of 2015:
 
 
·
Toppan CFI In February 2015, our board of directors approved the acquisition of 51% shareholding in Toppan CFI in the amount of approximately NT$4.4 billion (US$140.1 million), in order to further secure the supply of color filters and to increase our competitiveness. Upon completion of the transaction, Toppan CFI will be 100% owned by us.

 
·
AU Optronics (Kunshan) Co., Ltd.  In January 2015, in furtherance of establishing our 6-generation LTPS fab in Kunshan, we increased our indirect shareholding in AU Optronics (Kunshan) Co., Ltd. from 49% to 51% in an amount of approximately US$17.2 million.

 
41

 
Property, Plants and Equipment
 
Principal Facilities
 
Display Business
 
As of February 28, 2015, our principal manufacturing sites were located in Taiwan, the PRC, Europe and Singapore. The following table sets forth certain information relating to our principal facilities as of February 28, 2015. The land in the Hsinchu Science Park, Lungke Science Park and Central Taiwan Science Park on which our facilities are located is leased from the ROC government. The land in the Songjiang Export Processing Zone, Xiamen Torch Hi-tech Industrial Development Zone and Suzhou Industrial Park, on which our facilities are located, is leased from the PRC government.
 
As of December 31, 2014, our capacity in area basis for the display business was 2.1 million to 2.5 million square meters per month. The capacity may be subject to change due to factors such as product mix and platform transition.
 
Fab
 
Location
 
Building Size
 
Generation
 
Input Substrate Size
 
Commencement of
Commercial
Production
 
Primary Use
 
Owned or Leased
       
(in square
meters)
     
(in millimeters)
           
L3A
 
No. 5, Li-Hsin Rd.
6, Hsinchu
Science Park,
Hsinchu 30078,
Taiwan, ROC
 
69,647
 
3.5
 
610x720
 
December 1999
 
Manufacturing of TFT-LCD panels
 
•   Building is owned
•   Land is leased (expires in December 2020)
                             
L3C
 
No. 23, Li-Hsin Rd.
Hsinchu
Science Park,
Hsinchu 30078,
Taiwan, ROC
 
105,127
 
3.5
 
600x720
 
July 1999
 
Manufacturing of TFT-LCD panels
 
•   Building is owned
•   Land is leased (expires in January 2017)
                             
L3D
L5D
 
No. 189, Hwaya Rd. 2, Kueishan Hwaya
Science Park,
Kueishan 33383,
Taoyuan, ROC
 
162,826
 
3.5
5
 
620x750
1,100x 1,300
 
December 2001
October 2003
 
 
Manufacturing of TFT-LCD panels
 
•   Building is owned
•   Land is owned
                             
L4A
L5A
L5B
 
No. 1, Xinhe Rd. Aspire Park
Lungtan 32543,
Taoyuan
Taiwan, ROC
 
535,528
 
4
5
5
 
680x880
1,100x1,250
1,100x1,300
 
November 2001
March 2003
February 2004
 
Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters
 
•   Building is owned
•   Land is owned
                             
L6B
 
No. 228, Lungke St., Lungke
Science Park,
Lungtan, 32542,
Taoyuan,
Taiwan, ROC
 
867,955
 
6
 
1,500x1,850
 
August 2005
 
Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters
 
•   Building is owned
•   Land is leased (expires in December 2027)
 
 
 
Fab
 
Location
 
Building Size
 
Generation
 
Input Substrate Size
 
Commencement of
Commercial
Production
 
Primary Use
 
Owned or Leased
       
(in square
meters)
     
(in millimeters)
           
L6A
L5C
L7A
L7B
L8A
 
No. 1 JhongKe Rd. Central Taiwan
Science Park
Taichung 40763, Taiwan, ROC
 
1,430,750
 
6
5
7.5
7.5
8.5
 
1,500x1,850
1,100x1,300
1,950x2,250
1,950x2,250
2,200x2,500
 
March 2005
August 2005
June 2006
March 2009
March 2009
 
Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters
 
•  Building is owned
•  Land is leased (expires in December 2022)
                             
L8B
 
No. 1, Machang Rd. Central Taiwan
Science Park
Houli Dist
Taichung City
42147, Taiwan,
ROC.
 
587,810
 
8.5
 
2,200x2,500
 
June 2011
 
Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters
 
•  Building is owned
•  Land is leased (expires in December 2025)
                             
L4B
 
10 Tampines
Industrial Avenue 3
Singapore 528798
 
183,341
 
4.5
 
730x920
 
August 2002
 
Manufacturing of TFT-LCD panels
 
•  Building is owned
•  Land is leased (expires in June 2059)
                             
Module S01, S02, S06
 
No. 398,
Suhong Zhong Road
Suzhou
Industrial Park,
Suzhou, the PRC
 
413,035
 
N/A
 
N/A
 
July 2002
 
TFT-LCD module and component assembly
 
•  Building is owned
•  Land is leased (expires in 2054)
                             
Module S03
 
No. 3, Lane 58, San-Zhuang Rd., Songjiang Export Processing Zone,
Shanghai, the PRC
 
83,508
 
N/A
 
N/A
 
October 2004
 
TFT-LCD module and component assembly
 
•  Building is owned
•  Land is leased (expires in 2052)
                             
Module S11, S16
 
No. 1689, North of XiangAn Rd.,
XiangAn Branch,
Torch Hi-tech Industrial Development Zone, Xiamen, the PRC
 
289,744
 
N/A
 
N/A
 
April 2007