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Au Optronics Corp (AUO) SEC Filing 20-F Annual report for the fiscal year ending Sunday, December 31, 2017

Au Optronics Corp

CIK: 1172494 Ticker: AUO

 

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

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2017

 

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)

 

Benjamin Tseng
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

 

E-mail: IR@auo.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 
 

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

 

Title of each class Name of each exchange on which registered
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. 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 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. Yes No

 

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

 

Large Accelerated Filer Accelerated Filer 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 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 No

 

 
 

table of contents

 

 

Page

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
CERTAIN CONVENTIONS 3
REFERENCES 4
PART I 5
ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 5
ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE 5
ITEM 3.    KEY INFORMATION 6
3.A.    Selected Financial Data 6
3.B.    Capitalization and Indebtedness 8
3.C.    Reason for the Offer and Use of Proceeds 8
3.D.    Risk Factors 8
ITEM 4.    INFORMATION ON THE COMPANY 31
4.A.    History and Development of the Company 31
4.B.    Business Overview 31
4.C.    Organizational Structure 39
4.D.    Property, Plants and Equipment 43
ITEM 4A.    UNRESOLVED STAFF COMMENTS 46
ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS 46
5.A.    Operating Results 46
5.B.    Liquidity and Capital Resources 57
5.C.    Research and Development 60
5.D.    Trend Information 62
5.E.    Off-Balance Sheet Arrangements 62
5.F.    Tabular Disclosure of Contractual Obligations 63
ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 63
6.A.    Directors and Senior Management 63
6.B.    Compensation 67
6.C.    Board Practices 68
6.D.    Employees 68
6.E.    Share Ownership 69
ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 70
7.A.    Major Shareholders 70
7.B.    Related Party Transactions 71
7.C.    Interests of Experts and Counsel 72
ITEM 8.    FINANCIAL INFORMATION 72
8.A.    Consolidated Statements and Other Financial Information 72
8.B.    Significant Changes 75
ITEM 9.    THE OFFER AND LISTING 75
9.A.    Offering and Listing Details 75
9.B.    Plan of Distribution 76
9.C.    Markets 76
9.D.    Selling Shareholders 76
9.E.    Dilution 76
9.F.    Expenses of the Issue 76
ITEM 10.    ADDITIONAL INFORMATION 76
10.A.    Share Capital 76
10.B.    Memorandum and Articles of Association 76
10.C.    Material Contracts 81
10.D.    Exchange Controls 82
10.E.    Taxation 82
10.F.    Dividends and Paying Agents 87
10.G.    Statement by Experts 87
10.H.    Documents on Display 87

 

i 

 

 

10.I.    Subsidiary Information 87
ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 87
ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 92
12.A.    Debt Securities 92
12.B.    Warrants and Rights 92
12.C.    Other Securities 92
12.D.    American Depositary Shares 92
PART II 94
ITEM 13.    ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 94
ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 94
ITEM 15.    CONTROLS AND PROCEDURES 94
ITEM 16.    [RESERVED] 96
16.A.    Audit Committee Financial Expert 96
16.B.    Code of Ethics 96
16.C.    Principal Accountant Fees and Services 96
16.D.    Exemptions from the Listing Standards for Audit Committees 97
16.E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers 97
16.F.    Change in Registrant’s Certifying Accountant 97
16.G.    Corporate Governance 97
16.H.    Mine Safety Disclosure 98
PART III 99
ITEM 17.    FINANCIAL STATEMENTS 99
ITEM 18.    FINANCIAL STATEMENTS 99
ITEM 19.    EXHIBITS 99
SIGNATURES 101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 102

 

ii 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 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;

 

 1

 

·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.”

 

 2

CERTAIN CONVENTIONS

 

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” or “CNY”) amounts, Japanese Yen (“JPY”) 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$29.64 to US$1.00, RMB6.5063 to US$1.00, JPY112.69 to US$1.00 and EUR0.8318 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 29, 2017. 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 12, 2018, the exchange rates set forth in the H.10 weekly statistical release of the Federal Reserve Board were NT$29.25 to US$1.00, RMB6.3270 to US$1.00, JPY106.52 to US$1.00 and EUR0.8118 to US$1.00, respectively. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

 

 3

REFERENCES

 

Unless otherwise indicated, in this annual report, the following terms shall have the meaning set out below:

 

“Acer Display” Acer Display Technology, Inc.
“AD” Anti-Dumping Duty
“ADSs” American Depositary Shares
“AFPD” AFPD Pte., Ltd.
“AHVA” Advanced hyper-viewing angle technology
“ALCD” Advanced LCD
“AMOLED” Active-matrix organic light emitting diode, is an organic light emitting diode display technology
“AUKS” AU Optronics (Kunshan) Co., Ltd.
“AUSP” AUO SunPower Sdn. Bhd.
“AUSZ” AU Optronics (Suzhou) Corp., Ltd.
“AUUS” AU Optronics Corporation America
“BenQ” BenQ Corporation
“BMC” BenQ Materials Corp.
“BTA” The basic tax amount
“CADE” Conselho Administrativa de Defesa Economica
“CGU” Cash-generating unit, the smallest identifiable group of assets that generates cash inflows which are largely independent of the cash inflows from other assets or group of assets
“China” or “PRC” 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
“COSO” Committee of Sponsoring Organizations of the Treadway Commission
“CSOT” Shenzhen China Star Optoelectronics Technology Co., Ltd.
“CVD” Countervailing Duty
“Deposit Agreement” Deposit agreement and its amendment
“DG COMP” The Commission of the European Communities Directorate-General for Competition
“DTC” The Depository Trust Company
“EPA” Environmental Protection Administration
“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
“FTA” China-South Korea Free Trade Agreement
“HD” High Definition
“HDR” High dynamic range technology
“Hydis” Hydis Technologies Co., Ltd.
“IBT Act” Income Basic Tax Act
“IFRS” The International Financial Reporting Standards as issued by the International Accounting Standards Board
“Investment Regulations” The ROC Regulations Governing Securities Investment by Overseas Chinese and Foreign Nationals
“Israeli Court” District Court of the Central District in Israel
“large-size panels” Panels ten inches and above in diagonal length
“LTPS” Low temperature poly-silicon method

 

 4

 

“LG Display” or “LGD” LG Display Co., Ltd.
“M.Setek” M.Setek Co., Ltd.
“mm” Millimeters
“MOEAIC” Investment Commission of Ministry of Economic Affairs
“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
“OLED” Organic light emitting diode, a light emitting display technology
“our company”, “us” or “we” AU Optronics Corp. and/or its consolidated subsidiaries, unless the context suggests otherwise
“PCAOB” Public Company Accounting Oversight Board
“PID” Public Information Display
“PFIC” A passive foreign investment company
“Pre-release” American depositary shares are released before delivery of shares to the depositary
“QCSZ” Qisda (Suzhou) Co., Ltd.
“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 government” The government of the ROC
“Samsung” Samsung Electronics Co., Ltd.
“Samsung Display” Samsung Display Co., Ltd.
“Samsung Group” Samsung Electronics Co., Ltd. and its subsidiaries
“SEC” The United States Securities and Exchange Commission
“Seiko Epson” Seiko Epson Corporation
“SID” Society for Information Display
“Sharp” Sharp Corporation
“SREC” Star River Energy Corp.
“subsidiary” A company 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
“UHD” Ultra High Definition
“U.S. DOJ” The United States Department of Justice
“Unipac” Unipac Optoelectronics Corp.
“VR” Virtual Reality

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

 5

 

ITEM 3.KEY INFORMATION

 

3.A.       Selected Financial Data

 

The selected consolidated financial data set forth below as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 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, 2013, 2014 and 2015 and selected consolidated statement of comprehensive income data for the years ended December 31, 2013 and 2014 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 are not required to separately present operating profit or loss in our consolidated statements of comprehensive income 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,
   2013  2014  2015  2016  2017
   NT$  NT$  NT$  NT$  NT$       US$
   (in millions, except percentages and earnings per share and per ADS data)
Consolidated Statement of Comprehensive Income Data:                  
Net revenue    416,363.0    408,178.7    360,346.5    329,089.0    341,028.3    11,505.7 
Gross profit    33,984.1    48,510.6    39,837.1    34,491.0    61,041.7    2,059.4 
Selling and distribution expenses    (7,470.0)   (7,799.0)   (4,206.1)   (3,895.1)   (3,889.0)   (131.2)
General and administrative expenses    (9,691.1)   (9,389.6)   (9,206.0)   (9,176.7)   (8,158.9)   (275.2)
Research and development expenses    (8,530.5)   (9,156.6)   (8,903.8)   (9,080.8)   (9,854.7)   (332.5)
Profit before income tax    5,236.0    19,980.4    7,598.9    11,185.9    39,363.6    1,328.0 
Income tax expense (benefit)    1,359.1    3,243.2    384.9    2,432.5    (1,125.2)   (38.0)
Profit for the year    3,876.9    16,737.2    7,214.0    8,753.4    40,488.8    1,366.0 
Total comprehensive income for the year    6,875.4    18,914.9    6,482.3    1,423.5    39,669.9    1,338.4 
Profit (loss) for the year attributable to:                              
Shareholders of AU Optronics Corp.    3,804.2    16,366.6    7,242.2    9,965.1    42,609.5    1,437.6 
Non-controlling interests    72.7    370.6    (28.2)   (1,211.7)   (2,120.7)   (71.6)
Total comprehensive income (loss) for the year attributable to:                              
Shareholders of AU Optronics Corp.    6,367.5    18,125.7    7,185.7    4,502.5    42,146.1    1,421.9 
Non-controlling interests    507.9    789.2    (703.4)   (3,079.0)   (2,476.2)   (83.5)
Earnings per share—Basic    0.41    1.70    0.75    1.04    4.43    0.15 
Earnings per share—Diluted(1)    0.40    1.69    0.70    1.02    4.27    0.14 
Earnings per ADS equivalent—Basic    4.07    17.01    7.52    10.35    44.27    1.49 
Earnings per ADS equivalent—Diluted(1)    4.04    16.88    6.98    10.24    42.73    1.44 
                               

 

 6

 

   Year Ended and As of December 31,
   2013  2014  2015  2016  2017
   NT$  NT$  NT$  NT$  NT$       US$  
   (in millions, except percentages and earnings per share and per ADS data)
Consolidated Statement of Financial Position Data:                              
Total current assets    169,604.1    185,614.5    161,992.1    163,346.2    180,175.5    6,078.8 
Property, plant and equipment    270,269.0    231,814.7    208,785.6    222,741.8    224,933.1    7,588.8 
Total assets    464,835.9    442,344.3    399,237.1    405,860.8    430,170.7    14,513.2 
Total current liabilities    181,338.6    174,143.1    141,867.7    118,031.6    110,264.7    3,720.1 
Total noncurrent liabilities    130,507.1    94,214.3    76,708.3    110,992.9    107,088.1    3,613.0 
Total liabilities    311,845.7    268,357.4    218,576.0    229,024.5    217,352.8    7,333.1 
Common stock    96,242.5    96,242.5    96,242.5    96,242.5    96,242.5    3,247.0 
Non-controlling interests in subsidiaries    14,036.5    19,329.2    22,648.6    18,388.2    17,068.5    575.9 
Total equity attributable to shareholders of AU Optronics Corp.    138,953.7    154,657.7    158,012.5    158,448.1    195,749.4    6,604.2 
                               
Other Financial Data:                              
Gross margin(2)    8.2%   11.9%   11.1%    10.5%    17.9%   17.9% 
Net margin(3)    0.9%   4.1%    2.0%    2.7%    11.9%   11.9% 
Capital expenditures    25,457.8    16,971.0    33,440.2    46,220.1    43,881.7    1,480.5 
Depreciation and amortization    63,637.7    56,902.7    47,745.8    39,693.2    36,429.8    1,229.1 
Net cash flows provided by operating activities    49,642.4    63,392.7    62,003.4    36,695.8    84,363.3    2,846.3 
Net cash flows used in investing activities    (23,223.8)   (13,106.8)   (31,734.7)   (42,267.3)   (43,667.5)   (1,473.3)
Net cash flows provided by (used in) financing activities    (26,785.4)   (45,041.5)   (34,277.0)   10,721.2    (13,410.4)   (452.4)
                               
Segment Data:                              
Net revenue                              
Display business    398,836.2    384,335.2    333,392.3    304,826.7    322,335.4    10,875.0 
Solar business    17,526.8    23,843.5    26,954.2    24,262.3    18,692.9    630.7 
Segment profit (loss)(4)                               
Display business    12,017.9    24,422.5    19,226.0    12,703.5    39,971.4    1,348.6 
Solar business    (3,725.4)   (2,257.1)   (1,704.8)   (365.1)   (832.3)   (28.1)

 

 

 

(1)The convertible bonds were not included for the calculation of diluted earnings per share in 2013 and 2014 due to the anti-dilutive effect but were included for the calculation of diluted earnings per share in 2015. The convertible bonds matured in October 2015. Therefore, no need to consider convertible bonds afterwards when calculating diluted earnings per share.

 

(2)Gross margin is calculated by dividing gross profit by net revenue.

 

(3)Net margin is calculated by dividing profit 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.

 

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.

 

 7

 

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)
         
2013    29.68    30.20    28.93    29.83 
2014    30.30    31.80    29.85    31.60 
2015    31.74    33.17    30.37    32.79 
2016    32.23    33.74    31.05    32.40 
2017    30.40    32.37    29.64    29.64 
September    30.13    30.37    29.93    30.33 
October    30.25    30.44    30.12    30.12 
November    30.08    30.21    29.97    29.98 
December    29.95    30.05    29.64    29.64 
2018                    
January    29.40    29.61    29.05    29.16 
February    29.25    29.42    29.03    29.32 
March (through March 12, 2018)    29.28    29.35    29.21    29.25 

 

3.B.       Capitalization and Indebtedness

 

Not applicable.

 

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

 

Not applicable.

 

3.D.       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 selling prices. For example, in 2017, the average selling price of our large-size panels decreased in the second half of the year by 11.1% from the first half of the 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 selling prices of our panels, which would affect our results of operations. We cannot assure you that any continuing or further decrease in 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 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.

 

 8

 

We may experience declines in the selling prices of our products irrespective of cyclical fluctuations in the industry.

 

The selling prices of our products 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, the 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 selling prices of our products 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 2018 or beyond, the value of the ADSs and our shares may be adversely affected.

 

Our business is significantly affected by cyclical market conditions for the TFT-LCD panel industry. From time to time, the industry has experienced imbalances between excess supply and slowdowns in demand, and in certain periods, resulting in declines in 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 challenging business conditions in the past years, including downward pricing pressure for solar modules, solar cells, solar wafers and ingots 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 increased by approximately 3.6% to NT$341.0 billion (US$11.5 billion) in 2017 compared to net revenue of NT$329.1 billion in 2016, while our net profit for the year increased from NT$8.8 billion in 2016 to NT$40.5 billion (US$1.4 billion) in 2017. We cannot assure you that we will be profitable in 2018 or beyond. In addition, we expect that selling prices for many of our existing products will continue to decline over the long term. If we are unable to reduce our production cost to offset the declines in 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 2018 or beyond, the value of the ADSs and our shares may be adversely affected.

 

Our future net revenue, gross profit, net 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 reduce production cost, such as raw materials and components;

 

·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;

 

·fines and penalties payable relating to the alleged violation of antitrust, competition laws and other regulations; and

 

·Unforeseen circumstances that resulting from the above factors which might lead to de-recognition of deferred tax assets.

 

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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, leverage ratio, interest coverage ratios, tangible net worth and other technical 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.

 

If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt. We have on occasion failed to comply with certain financial covenants in some of our loan agreements. Although in the past we have either obtained waivers for such noncompliance from the relevant banks or fully repaid the facility, we cannot assure you that we will always be able to do that in the future.

 

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 antitrust 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 markets. 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.

 

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.

 

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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 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.

 

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.

 

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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 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 approximately 44.3%, 42.7% and 44.7% of our net revenue in 2015, 2016 and 2017, respectively. We will continue to be dependent on the growth of the televisions, 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 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 products 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 2018 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 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.

 

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/or material adverse effect on our results of operation.

 

We depend on a small number of customers for a substantial portion of our business. In 2015, 2016 and 2017, our five largest customers accounted for approximately 36.5%, 36.3% and 39.0%, respectively, of our net revenue. In addition, our major customer, Samsung Group, individually accounted for more than 10% of our net revenue in the last three years, which were 11.7%, 11.3% and 12.8% of our net revenue in 2015, 2016 and 2017, respectively.

 

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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 deteriorates, 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.

 

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If capital resources required for our planned growth or development are not available, we may be unable to successfully implement 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 and solar power plants;

 

·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 grasp the market opportunities before us by introducing new products using such capacity. 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;

 

 14

·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;

 

·time-to-market; and

 

·access to capital and financing ability.

 

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.

 

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. 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 suitable 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.

 

 15

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 Company—4.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 realizing anticipated synergies;

 

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

 

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

 

·potential loss of key employees of the acquired company; and

 

·potential write-offs of acquired assets.

 

Our failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition or investment 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 annual consolidated financial statements for ROC reporting purposes and the basis for our earnings distribution may differ from those included in the annual report on Form 20-F.

 

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 and earnings distribution 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.

 

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 the basis for our earnings distribution may differ from those included in the annual report on Form 20-F.

  

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Any disagreement between applicable tax authorities and us with respect to our tax estimates, adverse changes in tax law, and any incompliance with changes in tax laws or their application could adversely affect our results of operations.

 

We are subject to income taxes in Taiwan and many foreign jurisdictions and might be under tax audit by local tax authorities within certain assessment periods. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our recorded income tax accruals. For example, our taxable income in any jurisdiction depends on the acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s length basis. In addition, each country’s tax authority has its own regulations on transfer pricing and its own interpretations of those regulations, such as China State Administration of Taxation Public Notice [2017] No. 6, which regulates the special tax investigation and adjustment. Due to inconsistencies in the application of the arm’s length standard among taxing authorities, as well as a lack of adequate treaty-based protection, challenges to transfer pricing by tax authorities could, if successful, substantially increase our income tax liability and interest expense.

 

We are subject to tax rules and regulations in various jurisdictions that may change adversely over time, which could have a material impact on our business. Any increase in tax liability could materially and adversely affect our financial position and operation results. In addition, many countries where we are conducting business may amend their tax laws in accordance with the Base Erosion and Profit Shifting project of the Organization for Economic Co-operation and Development due to economic and political pressures. We cannot assure you that we will always stay on top of the latest changes in the tax laws and we may fail to meet our compliance obligations and thus be subject to penalties.

 

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, such as property, plant and equipment and long-term purchase agreements, 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.

 

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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 the shareholding in AUSP held by one of our subsidiaries to SPTL in September 2016 for total selling price of US$170.1 million and recorded a loss from the disposal of approximately US$12.0 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 resources 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. If any 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, 2018 and is also one of our large customers. Qisda and its subsidiaries accounted for approximately 3.4%, 3.9% and 3.5% of our net revenue in 2015, 2016 and 2017, 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, 2018, one of our nine directors is a representative of Qisda. Mr. Peter Chen is the Chairman and President of Qisda. Mr. Kuen-Yao (K.Y.) Lee, our former Chairman, is also the Honorary Chairman of Qisda and Chairman of 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.

 

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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 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 unless the company is exempt from such requirement. 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 a 6-generation LTPS LCD fab in Kunshan, PRC in November 2016 to produce LTPS panels for high-end applications to provide services to our customers in China and other regions. 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 a 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. 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 require 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. 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 substrates, 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 certain jurisdictions, such as Taiwan, Japan and Korea. We cannot assure you that we will be able to obtain sufficient quantities of raw materials, 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.

 

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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;

 

·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.

 

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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.

 

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 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 (3840 x 2160 pixel), curved display, OLED, quantum dot wide color gamut, High Dynamic Range (“HDR”), bezel-less, touch, 8K4K (7680 x 4320 pixel), Mini LED, Micro LED 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 Prospects—5.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.

 

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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 Company—4.B. Business Overview—Intellectual Property—License Agreements.” If we are unable to renew our technology licensing arrangements with some or all of these companies on mutually beneficial economic terms, 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 are involved in intellectual property disputes with third parties. 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.

 

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If our products or manufacturing processes are found to infringe third-party rights, we may be subject to significant liabilities and/or be required to change our manufacturing processes or products. Disputes over intellectual property rights 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. For detailed information regarding legal disputes we are involved in, please refer to “Item 8.A.7. Litigation.”

 

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 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 adversely affect 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 industry.

 

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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. 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, Singapore and Korea. 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 or voltage sags 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, Taichung, Tainan or Kaohsiung 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 and economic risks with respect to our investments and business operations in the PRC.

 

We have established subsidiaries in the PRC. 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 extensive environmental regulations, rising wages and a growing shortage of blue-collar workers. Environmental regulations, 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.

 

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 investments and 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 investments, businesses and operations in the PRC.

 

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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. Under the current Taiwan regulations, subject to meeting certain requirements, including but not limited to making investment and research in next generation of display panel, TFT-LCD manufacturers in the ROC may apply to the Investment Commission of Ministry of Economic Affairs (“MOEAIC”) for investing in 6-generation or more advanced TFT-LCD manufacturing fabs in the PRC (up to three fabs) with the technology which is the same generation or one generation behind the technology then used in the ROC. Moreover, the MOEAIC also allowed ROC TFT-LCD manufacturers to make equity investments 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 2002. During the past few years, our investment and presence in the PRC gradually and significantly increased. As of December 31, 2017, we had 18 subsidiaries incorporated in the PRC. 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 the ROC government that 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.

 

If we fail to overcome the duty barrier, our revenue will be materially affected.

 

The trade tensions in the international solar market have been increasing, especially in the United States and the European Union, where we are undertaking efforts to avoid or alleviate the impacts from the present and foreseeable anti-dumping duty (“AD”), and countervailing duty (“CVD”) proceedings. However, we cannot guarantee that these efforts will be successful due to potential policy changes or other changes in the activities and practices of the various national trade authorities responsible for AD and CVD enforcement. Any material adverse change in trade policies and/or our failure to overcome any duty barrier could have a material adverse impact on our business and results of operation.

 

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.

  

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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 Information—Item 8.A.7. Litigation.”

 

If economic conditions in Taiwan change drastically or there are disruptions in Taiwan’s political environment, our current business, future growth and market price of our shares could be affected materially and adversely.

 

Most of our assets and operations are located in Taiwan and approximately 31.8% of our net revenue was derived from customers in Taiwan in 2017. Therefore, 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, in recent years, the currencies of many East Asian countries, including Taiwan, have experienced considerable volatility.

 

Our business and financial condition may also be affected by changes in local governmental policies and political and social instability. 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.

 

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, 2017 to December 31, 2017, the Taiwan Stock Exchange Index peaked at 10,854.57 on November 23, 2017, and reached a low of 9,272.88 on January 3, 2017. Over the same period, daily closing values of our shares ranged from NT$11.45 per share to NT$13.95 per share. On March 12, 2018, the Taiwan Stock Exchange Index closed at 11,002.10, and the closing value of our shares was NT$13.45 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.

 

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If the NT dollar or other currencies in which our sales, raw materials and components, capital expenditures and certain assets are denominated fluctuate significantly against the U.S. dollar, the Japanese yen or the Renminbi, our financial condition and results of operation 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, the Renminbi and other currencies. Our sales, raw materials and components, capital expenditures and certain assets are denominated mainly in U.S. dollars, Japanese yen, NT dollars and Renminbi in varying amounts. For example, in 2017, approximately 90.5% of our net revenue was denominated in U.S. dollars. During the same period, approximately 69.5%, 15.3% and 13.1% of our raw materials and component costs were denominated in U.S. dollars, Japanese yen and NT dollars, respectively. In addition, in 2017, approximately 38.2%, 31.1%, 21.1% and 9.1% of our total capital expenditures (principally for the purchase of equipment) were denominated in Japanese yen, NT dollars, U.S. dollars and Renminbi, respectively. Also, results of operation of our foreign subsidiaries are accounted for in foreign currencies before their consolidation into our financial result. During periods of weakening foreign currencies, the value of certain assets of our foreign subsidiaries could be substantially reduced in NT dollars. Although from time to time, we enter into forward foreign currency contracts to hedge our foreign currency exposure, we may not be able to hedge all of the exposure, including foreign exchange exposure relating to the value of our foreign currency-denominated assets. We cannot assure you that we will fully minimize the risk against exchange rate fluctuations and the impact on our financial condition and 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 2015, 2016 and 2017, sales to our overseas customers accounted for approximately 66.8%, 68.4% and 68.2%, respectively, of our net revenue. In addition, a significant portion of our sales to customers in Taiwan and PRC is made to major brand customers or their procurement entities located in Taiwan and the PRC. 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. For example, the display panel industry in Taiwan may be negatively impacted by the China-South Korea Free Trade Agreement (the “FTA”) effective in December 2015, under which tariff reduction covers several areas of trade including display panels and polarizer products. However, the FTA is likely not to have an immediate significant effect on us as the tariff reduction for panel products commences from the ninth year after the FTA took effect.

 

We face risks related to health epidemics and outbreaks of contagious disease.

 

In the recent years, there have been reports of outbreaks of highly pathogenic diseases in Asia and other parts of the 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 and PRC), an outbreak of contagious diseases in Asia or elsewhere, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including the ROC and the PRC, could adversely affect our business, financial condition or results of operations.

 

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Risks 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.

 

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 can be submitted on behalf of all ADS holders.

 

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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 remunerations in the form of stock 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 remunerations 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 2015, 2016 or 2017. In addition, we did not grant any stock options to our employees in 2015, 2016 or 2017. If we issue remunerations in the form of stock 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. As of the date of this report, we have no outstanding equity-linked securities. However, any 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.

 

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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’ investments 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 Act 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 remuneration 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.

 

For a detailed discussion of the differences between our corporate governance practices and the NYSE listing standards, see “Item 16—16.G. Corporate Governance” for more information.

 

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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.

 

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, 2018, we had an aggregate of 9,624.2 million shares, including our shares and entitlement certificates, issued and outstanding, 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. 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 Act. Most of our directors and executives, 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.

 

ITEM 4.INFORMATION ON THE COMPANY

 

4.A.       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, ingot and solar wafer manufacturer in Japan, through equity investments in 2009. Furthermore, in May 2010, we formed a joint venture named AUO SunPower Sdn. Bhd. (“AUSP”) with SunPower Technology, Ltd. (“SPTL”). Since 2011 we have also operated ingot and solar wafer related business through our subsidiary AUO Crystal Corp. In September 2016, we sold all of our interest in AUSP to SPTL for a consideration of US$170.1 million. Furthermore, we have built solar systems and invested in solar power plant in Taiwan since 2011.

 

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.”

 

4.B.       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.

 

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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, pachinko machines, and medical equipment, etc.)

 

Solar business. We entered into the solar business at the end of 2008. We are capable of manufacturing products such as ingots, solar wafers and solar modules. We are also able to build solar systems, invest in solar power plant and provide various value-added services for solar systems projects.

 

For the year ended December 31, 2017, net revenue generated from our display business and solar business was NT$322,335.4 million (US$10,875.0 million) and NT$18,692.9 million (US$630.7 million), respectively, representing approximately 94.5% and 5.5% 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 41 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, 2018, all the fabs listed under “—4.D. Property, Plants and Equipment” 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 utilize display panels ranging mainly from 19.5 inches to 85 inches, including panels for televisions, TV sets and other related products.

 

·Monitors, which utilize display panels ranging mainly from 17 inches to 35 inches, including products such as desktop monitors.

 

·Mobile PCs, which utilize display panels ranging mainly from 6 inches to 17.3 inches, including products such as notebooks and tablets.

 

·Mobile devices, which utilize display panels ranging mainly from 1.2 inches to 6.38 inches, including products such as mobile phones.

 

·Commercial and other applications, which utilize display panels ranging mainly from 1.2 inches to 21.5 inches or above for use in products such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines, medical equipment and others.

 

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The following table sets forth the shipment of our products by category for the periods indicated:

 

   Year Ended December 31,
   2015  2016  2017
   (Panels in thousands)
Products for Televisions   30,076.3    31,815.3    31,374.5 
Products for Monitors   26,483.7    26,951.0    26,060.8 
Products for Mobile PCs   54,130.0    64,835.7    63,076.4 
Products for Mobile Devices   114,843.5    89,622.6    103,213.8 
Products for Commercial and Other Applications   52,929.6    51,224.9    56,930.0 
Total   278,463.1    264,449.5    280,655.5 

 

The following table sets forth our net revenue by product category for the periods indicated:

 

   Year Ended December 31,
   2015  2016  2017
   NT$  %  NT$  %  NT$  US$  %
   (in millions, except for percentages)
Products for Televisions   159,534.8    44.3    140,519.9    42.7    152,442.2    5,143.1    44.7 
Products for Monitors   48,234.5    13.4    44,668.0    13.6    45,696.2    1,541.7    13.4 
Products for Mobile PCs   52,488.1    14.6    52,721.5    16.0    56,209.5    1,896.4    16.5 
Products for Mobile Devices   23,622.5    6.5    14,170.6    4.3    14,858.8    501.3    4.4 
Products for Commercial and Others(1)   49,512.4    13.7    52,746.6    16.0    53,128.7    1,792.5    15.5 
Solar Products   26,954.2    7.5    24,262.4    7.4    18,692.9    630.7    5.5 
Total   360,346.5    100.0    329,089.0    100.0    341,028.3    11,505.7    100.0 

 

 

 

(1)Others include sales from products for other applications and sales of raw materials, components and from service charges.

 

Products for Televisions

 

Our current portfolio of products for televisions consists of 19.5-inch to 85-inch panels. In 2017, approximately 61.3% of the sales of products for televisions we produced were 50 inches and above. In 2015, 2016 and 2017, sales of products for televisions accounted for 44.3%, 42.7% and 44.7%, respectively, of our net revenue.

 

Products for Monitors

 

In recent years, demand for monitors has continued to migrate to larger sizes. In 2017, 21.5-, 24- and 27-inch panels were the major sizes produced by us for monitors. In 2015, 2016 and 2017, sales of products for monitors accounted for 13.4%, 13.6% and 13.4%, respectively, of our net revenue.

 

Products for Mobile PCs

 

In 2015, 2016 and 2017, sales of products for mobile PCs accounted for 14.6%, 16.0% and 16.5%, respectively, of our net revenue. In 2017, 14.0-inch and 15.6-inch panels with an aspect ratio of 16:9 were the major sizes produced by us for notebooks, while 8-inch and 10.1-inch panels were the major sizes produced by us for tablets.

 

Products for Mobile Devices

 

Our products for mobile devices are used in products such as mobile phones. In 2015, 2016 and 2017, sales of products for mobile devices accounted for 6.5%, 4.3% and 4.4%, respectively, of our net revenue.

 

Products for Commercial and Others

 

Our products for commercial and others are used in products such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines, medical equipment and others. In 2015, 2016 and 2017, sales of products for commercial and others accounted for 13.7%, 16.0% and 15.5%, respectively, of our net revenue.

 

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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,
   2015  2016  2017
   NT$  %  NT$  %  NT$  US$  %
   (in millions, except for percentages)
Taiwan    119,626.4    33.2    104,059.3    31.6    108,288.4    3,653.5    31.8 
PRC    123,476.5    34.3    115,110.1    35.0    125,341.6    4,228.8    36.8 
Japan    37,903.9    10.5    33,346.0    10.1    32,739.3    1,104.6    9.6 
Singapore    30,210.6    8.4    31,776.3    9.7    35,939.3    1,212.5    10.5 
Others(1)    49,129.1    13.6    44,797.3    13.6    38,719.7    1,306.3    11.3 
Total    360,346.5    100.0    329,089.0    100.0    341,028.3    11,505.7    100.0 

 

 

 

(1)Include the United 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, due to the fact that our major brand customers or their procurement entities are located in Taiwan and the PRC.

 

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 2015, 2016 and 2017, our five largest customers accounted for approximately 36.5%, 36.3% and 39.0%, respectively, of our net revenue. In addition, our major customer, Samsung Group, individually accounted for more than 10% of our net revenue in the last three years, which were 11.7%, 11.3% and 12.8% of our net revenue in 2015, 2016 and 2017, 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, 2017, our reserve for warranties totaled NT$1,547.0 million (US$52.2 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, 2015, 2016 and 2017 was 48 days, 46 days and 48 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 consumer demand 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 various factors, including economic downturn, our inventory management and certain special events such as government subsidies and sports events.

 

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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. The prices of these raw materials and components are subject to volatility. 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. 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(2)
Nippon Electric Glass     Nitto Denko  
      Sumika Technology  

 

 

 

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

 

(2)Raydium is our investee. See “Item 7. Major Shareholders and Related Party Transactions—7.B. Related Party Transactions.”

 

 35

 

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 backup 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 2017, we reduced our equipment purchases as compared to 2016 primarily due to the substantial completion of the installation of our 6-generation LTPS fab in China in the fourth quarter of 2016. 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 Prospects—5.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, the PRC and Japan. We believe our principal competitors include LG Display and Samsung Display in Korea; Innolux, Chunghwa Picture Tubes and Hannstar Display in Taiwan; BOE, China Star Optoelectronics Technology, CEC-Panda LCD Technology, Xianyang CaiHong Optoelectronics Technology, HKC, Tianma, EverDisplay Optronics, Century, Truly Semiconductors Ltd and Visionox in the PRC and Sharp, Panasonic LCD and Japan Display in Japan.

 

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.

 

Solar Business

 

Through our subsidiaries AUO Crystal Corp. and M.Setek, we mainly focus on research, production and sales of solar materials, such as ingots and solar wafers. Our principal manufacturing sites for ingots and solar wafers are located in Taiwan, Japan and Malaysia. In addition, we are among the few companies in Taiwan and worldwide which are capable of producing both mono-crystalline solar wafers and multi-crystalline solar wafers.

 

 36

 

We also design, develop and manufacture solar modules, build solar systems and provide various value-added services for solar systems projects. A solar module is an assembly of solar cells that are electrically interconnected, laminated and framed in a durable and weatherproof package. Currently, our solar modules are manufactured with multi-crystalline solar cells and mono-crystalline solar cells. A solar system consists of one or more solar 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 ingot and solar wafer products primarily to solar cell manufacturers. We are also dedicated to reach out new clients in emerging markets to enlarge our current customer base. We sell our solar modules to Taiwan, Japan, Europe and customers in other regions, including installers, solar system integrators, property developers and other value-added resellers. We have commenced mass production of back-contact mono-crystalline modules with conversion efficiencies over 20% since 2011.

 

In 2017, revenues generated from our solar business amounted to NT$18,692.9 million (US$630.7 million), representing 5.5% of our total net revenue for 2017.

 

Quality Management

 

Our quality management system includes design quality assurance, manufacturing quality assurance, vendor quality assurance and service quality assurance. By structuring quality management system, building up product design and development procedures for our different business applications as well as conducting market analysis, feasibility study, risk assessment, product verification and validation in our product development process, we endeavor to achieve a “first time right” approach. We are also dedicated to production quality control and process technology enhancement upon failure modes and effect analysis, process control plan, statistical process control and measurement system analysis.

 

For vendor quality assurance, we cooperate with our primary suppliers through our extensive experience and effective management. We encourage suppliers to demonstrate quality control and reliability, and also perform an annual customer satisfaction survey to ensure that their needs are well understood and addressed. Customer feedbacks are critical to our continual improvement plans. In addition, we use quality audit program, nonconformity management and the hazardous chemical management to secure long-term agreements and develop strategic relationships.

 

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 IATF 16949 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.

 

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, 2017, our insurance also included protection from covered losses, including property damage up to maximum coverage of NT$30.5 billion (US$1.0 billion) for all of our inventories and NT$732.2 billion (US$24.7 billion) for our equipment and facilities. In addition, as of December 31, 2017, we had insurance coverage for business interruptions in the aggregate amount of NT$41.8 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.

 

 37

  

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 and the PRC 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 identified certain factors associated with climate change that would have an impact on our operation, including the uncertainty surrounding new regulation, cap and trade schemes, change in precipitation patterns, change in weather conditions and fuel/energy taxes and regulations. 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.

 

On December 29, 2015, we announced the launch of the process water full-recycling system to be operated at our Lungtan site. Through various recycling phases, process water could be condensed and reduced to zero liquid discharge by high-efficient evaporation equipment. We will continue to create values and opportunities for sustainable development.

 

Intellectual Property

 

Overview

 

As of February 28, 2018, we had filed more than 24,000 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 and OLED manufacturing processes and products, and more than 17,900 patents were issued as of February 28, 2018. Most of these patents have a term of 20 years. In addition, we have registered “AU Optronics” as a trademark in some countries and jurisdictions where we operate, including the ROC, United States, European Union and Korea and registered our corporate logo, “AUO” as a trademark in the ROC, PRC, United States, European Union, Japan, Korea, Malaysia and Singapore.

 

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 Information—8.A.7. Litigation.”

 

 38

 

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 license agreements with each of FDTC (subsequently assumed by Fujitsu Limited) and Toppan Printing Co., Ltd., which provides for the non-transferable and non-exclusive license under certain patents to manufacture certain LCD and OLED panels at our facilities, (ii) we entered into 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 and (v) 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.

 

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.

 

4.C.       Organizational Structure

 

The following chart sets forth our corporate structure and ownership interest in each of our principal operating subsidiaries as of December 31, 2017.

 

 

 39

 

 

 

 

 

 

(1)28.56% held directly by us, 6.40% held indirectly through Konly Venture Corp. and 6.09% held indirectly through Ronly Venture Corp., respectively.

 

(2)81.97% held directly by us, 13.25% held indirectly through Konly Venture Corp. and 0.81% held indirectly through Ronly Venture Corp., respectively.

 

(3)70.29% held indirectly through AU Optronics (L) Corp. and 29.71% held indirectly through Darwin Precisions Corporation, respectively.

 

(4)99.99% held directly by us, 0.0005% held indirectly through Konly Venture Corp. and 0.0004% held indirectly through Ronly Venture Corp., respectively. On March 23, 2018, our Board approved the disposal of our 99.99% ownership, Konly Venture Corp.’s 0.0005% ownership and Ronly Venture Corp.’s 0.0004% ownership in Sanda Materials corporation to AUO Crystal Corp. The transaction is expected to close, subject to certain conditions, by June 30, 2018.

 

(5)In the process of liquidation.

 

 40

The following table sets forth summary information for our subsidiaries as of December 31, 2017.

 

Subsidiary 

Main Activities 

Jurisdiction of Incorporation 

Percentage of Ownership Interest 

a. u. Vista Inc. Research and development and IP related business United States 100.00%(1)
AFPD Pte., Ltd. Manufacturing TFT-LCD panels based on low temperature polysilicon technology Singapore 100.00%(1)
AU Optronics (Czech) s.r.o. Assembly of solar modules Czech Republic 100.00%(1)
AU Optronics (Kunshan) Co., Ltd. Manufacturing and sale of TFT-LCD panels PRC 51.00%(1)
AU Optronics (L) Corp. Holding and trading company Malaysia 100.00%
AU Optronics (Shanghai) Co., Ltd. Sales support of TFT-LCD panels PRC 100.00%(1)
AU Optronics (Slovakia) s.r.o. Repairing of TFT-LCD modules Slovakia Republic 100.00%(1)
AU Optronics (Suzhou) Corp., Ltd. Manufacturing and assembly of TFT-LCD modules PRC 100.00%(1)
AU Optronics (Xiamen) Corp. Manufacturing and assembly of TFT-LCD modules PRC 100.00%(1)
AU Optronics Corporation America Sales support of TFT-LCD panels United States 100.00%(1)
AU Optronics Corporation Japan Sales support of TFT-LCD panels Japan 100.00%(1)
AU Optronics Europe B.V. Sales support of TFT-LCD panels Netherlands 100.00%(1)
AU Optronics Korea Ltd. Sales support of TFT-LCD panels South Korea 100.00%(1)
AU Optronics Manufacturing (Shanghai) Corp. Manufacturing and assembly of TFT-LCD modules PRC 100.00%(1)
AU Optronics Singapore Pte. Ltd. Holding company and sales support of TFT-LCD panels Singapore 100.00%(1)
AUO Care Management (Suzhou) Co., Ltd. Design, development and sales of software and hardware for health care industry PRC 100.00%(13)
AUO Crystal (Malaysia) Sdn. Bhd. Manufacturing and sale of solar wafers Malaysia 100.00%(8)
AUO Crystal Corp. Manufacturing and sale of ingots and solar wafers ROC 96.03%(10)
AUO Energy (Tianjin) Corp. Manufacturing and sale of solar modules PRC 100.00%(12)
AUO Green Energy America Corp. Sales and sales support of solar-related products United States 100.00%(12)
AUO Green Energy Europe B.V. Sales support of solar-related products Netherlands 100.00%(12)
BriView (Hefei) Co., Ltd. Manufacturing and sale of liquid crystal products and related parts PRC 100.00%(5)
BriView (L) Corp. Holding company Malaysia 100.00%(11)
BriView (Xiamen) Corp. Manufacturing and sale of liquid crystal products and related parts PRC 100.00%(9)
ChampionGen Power Corporation Renewable energy power generation ROC 100.00%(7)
Darwin Precisions (Chengdu) Corp. Manufacturing and sale of backlight modules and related parts PRC 100.00%(4)(23)
Darwin Precisions (Hong Kong) Limited Holding company Hong Kong 100.00%(3)
Darwin Precisions (L) Corp. Holding company Malaysia 100.00%(2)
Darwin Precisions (Slovakia) s.r.o. Manufacturing, assembly and sale of automotive parts Slovakia Republic 100.00%(3)
Darwin Precisions (Suzhou) Corp. Manufacturing and sale of backlight modules and related parts PRC 100.00%(4)
Darwin Precisions (Xiamen) Corp. Manufacturing and sale of backlight modules and related parts PRC 100.00%(4)

 

 41

Subsidiary 

Main Activities 

Jurisdiction of Incorporation 

Percentage of Ownership Interest 

Darwin Precisions Corporation Manufacturing, design and sale of TFT-LCD modules, TV set, backlight modules and related parts ROC 41.05%(6)
Force International Holding Ltd. Holding company BVI 100.00%(2)
Forefront Corporation Holding company Mauritius 100.00%(20)
Forhouse Electronics (Suzhou) Co., Ltd. Manufacturing of motorized treadmills PRC 100.00%(21)
Forhouse International Holding Ltd. Holding company BVI 100.00%(2)
Fortech Electronics (Kunshan) Co., Ltd. Manufacturing and sale of backlight modules and related parts PRC 100.00%(18)
Fortech Electronics (Suzhou) Co., Ltd. Manufacturing and sale of backlight modules and related parts PRC 100.00%(17)
Fortech International Corp. Holding company Mauritius 100.00%(16)
Fortech Optronics (Xiamen) Co., Ltd. Manufacturing and sale of backlight modules and related parts PRC 100.00%(17)(23)
Forward Optronics International Corp. Holding company Samoa 100.00%(16)
Full Luck (Wujiang) Precisions Co., Ltd. Manufacturing and sale of precision metal parts PRC 100.00%(19)(23)
Full Luck Precisions Co., Ltd. Holding company Mauritius 100.00%(16)
Konly Venture Corp. Venture capital investment ROC 100.00%
LiGen Power Corporation Renewable energy power generation ROC 100.00%(7)
M.Setek Co., Ltd. Manufacturing and sale of ingots Japan 99.9991%(14)
Prime Forward International Ltd. Holding company Samoa 100.00%(16)
Ronly Venture Corp. Venture capital investment ROC 100.00%
Sanda Materials Corporation Holding company ROC 99.99%(15)
Space Money Inc. Sale of TFT-LCD panels; leasing ROC 100.00%
Suzhou Forplax Optronics Co., Ltd. Manufacturing and sale of precision plastic parts PRC 100.00%(22)
U-Fresh Technology Inc. Planning, design and development of construction for environmental protection and related project management ROC 100.00%

 

 

(1)Indirectly, through our 100% ownership of AU Optronics (L) Corp.

 

(2)Indirectly, through our 41.05% 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)28.56% held directly by us, 6.40% held indirectly by Konly Venture Corp. and 6.09% held indirectly by Ronly Venture Corp., respectively.

 

(7)Indirectly, through our 100% ownership of Konly Venture Corp.

 

(8)Indirectly, through our 96.03% ownership of AUO Crystal Corp.

 

(9)Indirectly, through our 100% ownership of AU Optronics (Xiamen) Corp.

 

(10)81.97% held directly by us, 13.25% held indirectly through Konly Venture Corp. and 0.81% held indirectly through Ronly Venture Corp., respectively.

 

(11)70.29% held indirectly through AU Optronics (L) Corp. and 29.71% held indirectly through Darwin Precisions Corporation, respectively.

 

(12)Indirectly, through our 100% ownership of AU Optronics Singapore Pte. Ltd.

 

(13)Indirectly, through our 100% ownership of AU Optronics (Shanghai) Co., Ltd.

 

(14)Indirectly, through our 99.99% ownership of Sanda Materials Corporation.

 

(15)99.99% held directly by us, 0.0005% held indirectly through Konly Venture Corp., and 0.0004% 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.

 

 42

 

(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)65.52% held indirectly through Forward Optronics International Corp. and 34.48% held indirectly through Fortech International Corp., respectively.

 

(23)Darwin Precisions (Chengdu) Corp., Full Luck (Wujiang) Precisions Co., Ltd. and Fortech Optronics (Xiamen) Co., Ltd. are in the process of liquidation as of December 31, 2017.

 

The following is a summary of our major organizational activities in the first quarter of 2018:

 

ŸU-Fresh Technology (Suzhou) Co., Ltd. , founded in February 2018, is a 100%-owned subsidiary of AU Optronics (Shanghai) Co., Ltd. with RMB4 million of capital invested. The company focuses on the planning, design and development of construction for environmental protection and related project management.

 

ŸFull Luck Precisions Co., Ltd. is in the process of liquidation in the first quarter of 2018.

 

ŸComQi Ltd. was 100% acquired by us in March 2018. The company provides content management services.

 

4.D.       Property, Plants and Equipment

 

Principal Facilities

 

Display Business

 

As of December 31, 2017, we had a monthly capacity to produce approximately 2.3 to 2.7 million square meters of glass area of TFT-LCD panels. The capacity may be subject to change due to factors such as product mix, technological changes and production efficiency improvement.

 

As of February 28, 2018, 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, 2018. 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, Kunshan Economic and Technical Development Zone and Suzhou Industrial Park, on which our facilities are located, is leased from the PRC government.

 

Fab 

Location 

Building Size 

Generation 

Input Substrate Size 

Commencement of Commercial
Production 

Primary Use 

Owned or Leased 

   

(in square

meters)

  (in millimeters)      
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 2037) 

               

L3D

L5D

 

No. 189, Hwaya Rd. 2, Kueishan Hwaya
Science Park,
Kueishan Dist., Taoyuan 33383,
Taiwan, 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 Dist.,
Taoyuan 32543, 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

 

               

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Fab 

Location 

Building Size 

Generation 

Input Substrate Size 

Commencement of Commercial
Production 

Primary Use 

Owned or Leased 

   

(in square

meters)

  (in millimeters)      
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)

               

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)

               
L6B No. 228, Lungke St., Lungke
Science Park,
Lungtan Dist., Taoyuan 32542, 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)

               
L6K

No. 6, LongTeng Road, Kunshan Economic and Technical Development Zone, Kunshan, the PRC

598,299 6 1,500x1,850 November 2016 Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters

·  Building is owned

·  Land is leased (expires in 2060)

 

               
L8B No. 1, Machang Rd.,
Central Taiwan
Science Park,
Houli Dist.,
Taichung
42147, Taiwan,
ROC
587,746 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)

 

               
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)

               

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Fab 

Location 

Building Size 

Generation 

Input Substrate Size 

Commencement of Commercial
Production 

Primary Use 

Owned or Leased 

   

(in square

meters)

  (in millimeters)      
Module S11, S16, S17 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 TFT-LCD module and component assembly

·  Building is owned

·  Land is leased (expires in 2056)

               

Solar Business

 

As of December 31, 2017, our solar business had the capacity of producing 500 megawatt of solar modules per year, 44 million pieces of wafer per month, and 750 tons of ingot per month. The actual shipment may be subject to market conditions, customer demand and capacity outsourcing.

 

As of February 28, 2018, our principal manufacturing sites for solar business were located in Taiwan, Japan, Europe and Malaysia. The following table sets forth certain information relating to our principal facilities for solar business as of February 28, 2018.

 

Location 

Building Size 

Commencement of
Commercial
Production 

Primary Use 

Owned or Leased 

  (in square
meters)
     

No. 1, JhongKe Rd.,
Central Taiwan
Science Park,

Taichung 40763,
Taiwan, ROC

1,430,750(1)

April 2010

November 2011

 

Manufacturing of solar cells and modules

·      Building is owned

·      Land is leased (expires in December 2022)

 

         

No. 3, Keya Rd.,
Xitun Dist.,

Taichung 40763,
Taiwan, ROC

9,559 June 2011 Production of wafers

·      Building is owned

·      Land is leased (expires in December 2020)

 

         

No. 2, Jian 7th Rd.,
Wuqi Dist.,

Taichung 43541,
Taiwan, ROC

19,888 October 2011 Production of ingots

·      Building is owned

·      Land is leased (expires in July 2027)

 

         
No. 335, sec. 2,
Houke Rd., Houli Dist.,
Taichung 42152,
Taiwan, ROC
44,225 June 2012 Production of ingots and wafers

·      Building is owned

·      Land is leased (expires in December 2030)

         

Kochi Site 1:
378, Myoken-machi,
Susaki-shi, Kochi-ken, Japan

Kochi Site 2:
1117-1, Otani,

Susaki-shi, Kochi-ken, Japan

36,729
(including
Kochi Site 1 and Kochi Site 2)

Kochi Site 1:
April 2004

Kochi Site 2:
January 2009

 

Production of ingots

 

·      Building is owned

·      Land is owned

 

 

Turanka 859/98d,
Slatina, 627 00 Brno,
Czech Republic
17,765 July 2010 Manufacturing of solar modules

·      Building is leased (expires in December 2021)

·      Land is leased (expires in December 2021)

         
Melaka World Solar Valley, 78000 Alor Gajah, Melaka, Malaysia 7,719 March 2011 Production of wafers

·      Building is leased

·      Land is leased

  

 

 

(1)Shared the same facility with L6A, L5C, L7A, L7B and L8A fabs.

 

 45

 

Expansion Projects

 

To capture the market of mobile devices, we established a 6-generation LTPS fab in Kunshan, PRC. We commenced commercial production at this fab in the fourth quarter of 2016. This fab has monthly capacity of 25 thousands glass substrates and focuses on producing LTPS panels for high-end applications. We have fully ramped up the 25 thousands glass substrates per month of capacity in the fourth quarter of 2017.

 

Furthermore, in order to sustain our long-term profit model, we plan to invest in capacity expansion, new facilities and technology upgrades for the purpose of manufacturing competitive products to differentiate ourselves against our competitors.

 

Set forth below is the description of our principal expansion projects:

 

8.5-Generation Capacity Expansion. To cater to the expected strong demand in large-size panels, we added 27 thousand substrates per month of capacity at our 8.5-generation facilities in Houli District, Taichung City. The expanded capacity has already been fully ramped up in the second quarter of 2016. Subject to market conditions, we expect to ramp up additional capacity of 25 to 30 thousands substrates per month in the second half of 2018.

 

We estimate our capital expenditures in 2018 to be around NT$45.0 billion for purposes including the technology upgrades and payments in the above-mentioned two capacity expansions at our 8.5-generation fab in Taiwan. Our principal sources of funds include cash on hand, cash flow from operations and financing activities, for instance the issuance of equity securities, long-term borrowings, and the issuance of convertible and other debt securities. For further descriptions with regard to our capital expenditures and source of funding, see “Item 5. Operating and Financial Review and Prospects—5.B.—Liquidity and Capital Resources—Capital Expenditures.”

 

ITEM 4A.UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion should be read in conjunction with our audited consolidated financial statements and their accompanying notes included elsewhere herein which are prepared in accordance with IFRS.

 

5.A.       Operating Results

 

Our operating results are affected by a number of factors, principally by general market conditions, operating efficiency and product mix.

 

General Market Conditions

 

The display panel industry in general has been characterized 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 selling prices. Our revenues primarily depend on the average selling prices and shipment volume of our panels and are affected by fluctuations in those prices and volumes.

 

 46

  

The prices and shipment volume of our panels are affected by numerous factors, such as raw material costs, yield rates, supply and demand, competition, our pricing strategies and transportation costs. It is expected that the demand for panels is likely to continue to grow mainly driven by a shift towards larger screen and higher resolution products and the replacement cycle of TVs, including the flat screen replacement cycle in developed markets and CRT TV replacement cycle in emerging markets. However, there is still a lack of visibility into future demand and the outlook of display industry remains highly uncertain. We expect selling prices of panels will fluctuate from time to time due to the changes of general market conditions and the global economy.

 

To meet a potential future increase in demand, many display panel manufacturers, including our company, may expand capacity. If such expansion in capacity is not matched by a comparable increase in demand, it could lead to overcapacity and declines in the selling prices of panels in the future. In addition, we expect that, as is typical in the display panel industry, the selling prices for our existing product lines will gradually decrease as the cost of manufacturing display panels declines. However, the impact of such decreases may be offset through the introduction of new products and cost control.

 

The demand for our solar products also highly depends on the general economic conditions in our target markets. The solar industry has undergone challenging business conditions in the recent years, including downward pricing pressure for solar modules, solar cells, solar wafers and ingots mainly as a result of oversupply, and the fluctuations in demand mainly due to reductions in applicable governmental subsidies.

 

In the past year, the United States, Europe, China, Japan and India remain the primary markets of solar products. In the meantime, other emerging markets have gradually become the growth engine of the industry.

 

Despite the higher tariffs imposed on our solar products in certain countries, the demand for alternative energy resources might keep the continuous growth of the solar industry.

 

Operating Efficiency

 

Our results of operations have been affected by our operating efficiency. Our operating efficiency is impacted by production yield, cycle time, capacity utilization, production capacity and other factors.

 

Our manufacturing processes are highly complex and require advanced and costly equipment. In order to maintain our competitiveness and to meet customer demand, we must routinely upgrade or expand our equipment. Upgrades and implementing new equipment to improve production yields and production efficiency takes time and training and may require adjustments to the manufacturing process. In addition, certain of our customers have different specification requirements than other customers. Specification requests may also require adjustments to or the use of different manufacturing processes which may accelerate or delay production. The turnaround time for production and our capacity utilization is also impacted by the availability of raw materials and components as well as the level of demand for our products.

 

We measure the capacity of a fab in terms of the number of substrates and the glass area of substrates that can be produced. As of December 31, 2017, we had a monthly capacity to produce approximately 2.3 to 2.7 million square meters of glass area of TFT-LCD panels. Our production capacity has been affected by the process of construction and the schedule of commencement of operation of our fabs. Once the design of a new fab is completed, it typically takes six to eight quarters before the fab commences commercial production, during which time we construct the building, install the machinery and equipment and conduct trial production at the fab. An additional two to four quarters are required for the fab to be in a position to produce at the installed capacity and with high production yield, where production yield is the number of good panels produced expressed as a percentage of the total number of panels produced. This process is commonly referred to as “ramp-up.” At the beginning of the ramp-up process, fixed costs, such as depreciation and amortization, other overhead expenses, labor, general and administrative and other expenses, are relatively high on a per panel basis, primarily due to the low output. Variable costs, particularly raw materials and component costs, are also relatively high on a per panel basis since production yield is typically low in the early stages of the ramp-up of a fab, resulting in greater waste of raw materials and components. In general, upon the completion of the ramp-up process, a fab is capable of producing at its installed capacity, leading to lower fixed costs per panel as a result of higher output, as well as lower raw material and component costs per panel as a result of higher production yield. We typically construct our new fabs in phases in order to allocate our aggregate capital expenditure across a greater period of time. As a result, the installed capacity in the early phases of production at a new fab is typically lower than the maximum capacity that can be installed at a fab.

 

 47

 

Product Mix

 

Our product mix affects our sales and profitability, as the prices and costs of different size panels may vary significantly. Our product mix also affects the overall average selling prices of our products. In general, higher valued products, such as higher resolution panels, typically command higher average selling prices. If the percentage of sales in higher valued products as a percentage of our net revenue increases, the overall average selling prices for all of our display products may likely improve. Moreover, higher selling prices are typically associated with new products and technologies when they are first introduced into the market, thus our ability to introduce and sell new products that offset the anticipated fluctuation and long-term declines in the selling prices of our existing products is also one of the most important factors to maintain or increase our revenues. We periodically review and adjust our product mix based on the demand for and profitability of the different panel that we manufacture.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations contained elsewhere in this annual report are based on our audited consolidated financial statements which have been prepared in accordance with IFRS. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an ongoing basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

 

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 4 to our consolidated financial statements included elsewhere herein. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition

 

Revenue is recognized when title to the products and risk of ownership are transferred to the customers. We continuously evaluate whether our products meet our inspection standards and can reliably estimate sales returns expected to result from customer inspections. Allowance and related provisions for sales returns and discounts are estimated on the basis of historical experience, our management’s judgment and any known factors that would significantly affect such allowance. Such provisions are deducted from sales in the same period during which the related revenue is recognized. There have been no changes in this policy for the last three years.

 

The movements of the allowance for sales returns and discounts are as follows:

 

   2015  2016  2017
   NT$  NT$  NT$  US$
   (in thousands)
Balance beginning of year   825,355    1,524,144    853,614    28,799.4 
Provision charged to revenue   2,485,510    472,397    1,926,017    64,980.3 
Utilized   (1,786,721)   (1,142,927)   (1,442,555)   (48,669.2)
Balance at end of year   1,524,144    853,614    1,337,076    45,110.5 

 

Allowance for Doubtful Accounts Receivables

 

We periodically evaluate our outstanding accounts receivables for collectability purposes on an individual and a collective basis. We first assess whether objective evidence of impairment exists for outstanding accounts receivables that are individually significant. If there is objective evidence indicating that an impairment loss has occurred, the amount of impairment loss is assessed individually. For accounts receivables other than those aforementioned, we group those assets and assess their impairment collectively. Our evaluation on a collective basis includes an analysis of the number of days outstanding for each outstanding accounts receivable account. When appropriate, we provide a provision that is based on the number of days for which the account has been outstanding. The provision provided on each aged account is primarily based on our average historical collection experience and current trends in the credit quality of our customers. We also carry accounts receivable insurance for potential defaults. There have been no changes in this policy for the last three years.

 

 48

  

Provisions of Warranty Obligations

 

We make a provision for warranty obligations based on the estimated costs that we expect to incur. These liabilities are accrued when product revenue are recognized. We make the provisions based on the quantities within the warranty period, the historical and anticipated warranty claims rate associated with similar products and services, and the projected unit cost of maintenance. We regularly review the basis of the accrual and, if necessary, amend it as appropriate at the end of reporting period. There could be a significant impact on provisions for warranty obligations for any changes of the basis of the accrual. We recognized provisions for warranty obligations amounting to NT$1,528.9 million and NT$1,547.0 million (US$52.2 million) as of December 31, 2016 and 2017, respectively.

 

Realization of Inventory

 

Provisions for inventory obsolescence and devaluation are recorded when we determine that the amounts expected to be realized are less than their cost basis or when we determine that inventories cannot be liquidated without price concessions, which may be affected by the number of months in which inventory items remain unsold and their prevailing market prices. Additionally, our analyses of the amount we expect to ultimately realize are based partially upon forecasts of demand for our products and any change to these forecasts. There have been no changes in this policy for the last three years.

 

Inventories write-downs to net realizable value, which are amounts charged to cost of sales, were NT$5,661.3 million, NT$3,673.2 million and NT$3,756.7 million (US$126.7 million) for the years ended December 31, 2015, 2016 and 2017, respectively. The provision made in 2017 slightly increased mainly due to inventory write-downs on certain products after considering their prevailing market prices. The provision made in 2016 decreased mainly due to a rise in the market price of most products resulting from a favorable demand/supply condition in the second half of 2016.

 

Recoverability of Long-Lived Assets

 

Our long-lived assets include property, plant and equipment and intangible assets. We assess the impairment of long-lived assets at the reporting date or whenever triggering events or changes in circumstances indicate that the asset may be impaired and carrying value may not be recoverable. If any such indication of impairment exists, then the recoverable amount of the relevant asset or cash-generating unit (“CGU”) is estimated. Recoverable amount is defined as the higher of (a) the fair value of an asset or a CGU less costs of disposal (if determinable) or (b) its “value in use,” which is defined as the present value of the expected future cash flows generated by the asset or CGU. An impairment loss is recognized in the consolidated statement of comprehensive income if the carrying amount of an asset or its related CGU exceeds its estimated recoverable amount.

 

The process of evaluating the potential impairment of long-lived assets requires significant judgment. Our future expected cash flow assumptions are based on forecasted revenue, operating costs and other relevant factors. Due to the cyclical nature of our industry and changes in our business strategy, market requirements or the needs of our customers, if our estimates of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of long-lived assets could change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our consolidated financial statements.

 

In 2015 and 2017, the Company wrote down certain machineries and equipment with low utilization resulting from the decline in the application for certain products associated with its display segment and recognized impairment losses of NT$172.5 million and NT$896.0 million (US$30.2 million), respectively.

 

In 2015, 2016 and 2017, the Company wrote down certain long-term assets with lower capacity utilization associated with its solar segment and recognized impairment losses of NT$101.8 million, NT$34.0 million and NT$120.7 million (US$4.1 million), respectively.

 

 49

 

In addition, polysilicon in the solar industry has experienced significant downturns including a sharp decline in pricing due to oversupply capacity worldwide. Therefore, we decided to cease the production of polysilicon in January 2016. We performed the impairment assessment on the polysilicon CGU’s long-lived assets in the fourth quarter of 2015. The recoverable amount was determined based on the relevant asset’s estimated fair value less cost of disposal. The fair value of long-lived assets was determined by management with reference to the sales prices of recent transactions of similar assets in the same geographical area.

 

The following table shows the valuation technique used in the determination of fair value of the polysilicon CGU’s long-lived assets as well as the significant inputs used in the valuation model.

 

Description of
Valuation Technique

Significant inputs

Inter-relationship between significant inputs and fair value measurement 

Sales comparison approach: Sales price of comparable property in close proximity are adjusted for differences in key attributes such as property size. The expected sales price is adjusted with sales discount based on land size. The significant inputs into this valuation approach are price per square meter of comparable properties and sales discount.

·      Price per square meter (JPY8,000).

·      Sales discount (15%).

 

The estimated fair value would increase (decrease) if:

·      the price per square meter is higher (lower); or

·      the sales discount rates are lower (higher).

 

Based on management assessment, the carrying amount of the polysilicon CGU was determined to be higher than its estimated recoverable amount; consequently, we recognized an impairment loss of NT$6,755.2 million in 2015.

 

Investments in equity-accounted Investees

 

When we have the ability to exercise significant influence over the operating and financial policies of investees, or when we have contractual arrangements with other parties sharing equal control over the arrangements, and have rights to the net assets of the arrangements, those investments are accounted for using the equity method. Significant judgment is required to assess whether we have significant influence. Factors that we consider in making such judgment include, among other matters, participation in policymaking processes, material intercompany transactions, interchange of managerial personnel or technological dependency.

 

The difference between the acquisition cost and the carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of non-current assets. Any unallocated difference is treated as goodwill. Under IFRS, such difference is not amortized, but the carrying value of the total investment is assessed for impairment. The allocation of excess basis in equity-accounted investments requires the use of judgments regarding, among other matters, the fair value and estimated useful lives of long-lived assets. Changes in those judgments would affect the amount and timing of amounts charged to our consolidated statements of comprehensive income.

 

An investment in an equity-accounted investee is considered to be impaired if there is objective evidence of impairment as a result of one or more events that had occurred as of the reporting date indicating that the recoverable amount is below the carrying amount of the investment. Impairment is assessed at the individual security level. The recoverable amount is determined based on one of the two following approaches: (1) the discounted expected future net cash flows from the investee company; or (2) the combination of expected cash dividends from the investee company and the discounted cash flows from the ultimate disposal of the investment. The impairment loss is recorded in the consolidated statement of comprehensive income. If the recoverable amount increases in the future period, the amount previously recognized as impairment loss could be reversed and recognized as a gain.

 

In 2015, 2016 and 2017, we did not recognize any impairment loss on our investments in equity-accounted investees.

 

 50

Income Taxes Uncertainties and Recognition of Deferred Taxes

 

We are subject to the continuous examination of our income tax returns by the tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. A change in the outcome of the assessment could materially affect our consolidated financial statements.

 

We have recognized deferred tax assets for the carryforward of unused tax losses and unused tax investment credits to the extent that it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilized. At each reporting date, the deferred tax assets are reviewed for recoverability and reduced to the extent that it is no longer probable that the related tax benefit will be realized, by considering nature of industry cycles, projected future taxable income and expiration years of unused tax losses carryforwards and tax investment credits. As of December 31, 2016 and 2017, our unrecognized deferred tax assets were NT$39,992.3 million and NT$29,346.1 million (US$990.1 million), respectively. Besides, we also have unrecognized deferred tax liabilities associated with investments in subsidiaries amounting to NT$448.5 million as of December 31, 2016.

 

The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforwards or reversal periods are reduced.

 

Legal Contingencies

 

From time to time, we are involved in disputes that arise in the ordinary course of business, and we do not expect this to change in the future. We are currently involved in certain legal proceedings as discussed in “Item 8. Financial Information—Item 8.A.7. Litigation.”

 

When we determine it is more likely than not our defense in a legal claim will be unsuccessful and therefore it is also more likely than not it will result in an outflow of our resources and our management can reasonably estimate the amount or range of such outflow, we make appropriate provisions in our consolidated financial statements. In making this assessment we consider factors such as the nature of the litigation or claims, the materiality of the amount of possible loss, the progress of the case and the opinions or views of legal counsel and other advisors. In determining the appropriate amount of the provision to be recognized, we develop an estimated amount or range of such loss. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, we use the midpoint of the range to measure and recognize the provision. Such estimates are based on our assessment of the facts and circumstances at each reporting date and are subject to change based upon new information and intervening events. We had provisions for litigation and claims amounting to NT$1,027.3 million and NT$89.5 million (US$3.0 million) in the consolidated statements of financial position as of December 31, 2016 and 2017, respectively. See Note 22 and 40 to our consolidated financial statements included elsewhere in this annual report. However, our actual liability may be materially different from the estimates as of December 31, 2017 and may have a material adverse effect on our operating results, cash flows or financial condition.

 

Measurement of Defined Benefit Obligations

 

We use the Projected Unit Credit Cost Method for accrued pension liabilities and the resulting pension expenses under defined benefit pension plans. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase, etc. The discount rate is determined by reference to the yield rate on Taiwan government bonds at the reporting date. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability. As of December 31, 2016 and 2017, the accrued pension liabilities for our defined benefit obligations were NT$921.5 million and NT$915.9 million (US$30.9 million), respectively.

 

Consolidated Results of Operations

 

The following table sets forth certain information of our results of operations, in both monetary amounts and as a percentage of our net revenue for the periods indicated:

 51

 

   Year Ended December 31,
   2015  2016  2017
   NT$  %  NT$  %  NT$  US$  %
   (in millions, except for percentages)
Net revenue   360,346.5    100.0    329,089.0    100.0    341,028.3    11,505.7    100.0 
Cost of sales   (320,509.4)   (88.9)   (294,598.0)   (89.5)   (279,986.6)   (9,446.3)   (82.1)
Gross profit   39,837.1    11.1    34,491.0    10.5    61,041.7    2,059.4    17.9 
Selling and distribution expenses   (4,206.1)   (1.2)   (3,895.1)   (1.2)   (3,889.0)   (131.2)   (1.1)
General and administrative expenses   (9,206.0)   (2.6)   (9,176.7)   (2.8)   (8,158.9)   (275.2)   (2.4)
Research and development expenses   (8,903.8)   (2.5)   (9,080.8)   (2.7)   (9,854.7)   (332.5)   (2.9)
Other income   2,197.6    0.6    2,380.2    0.7    3,829.9    129.2    1.1 
Other gains and losses   (9,978.3)   (2.7)   (925.6)   (0.3)   (976.5)   (33.0)   (0.3)
Finance costs   (2,591.0)   (0.7)   (2,707.9)   (0.8)   (2,867.9)   (96.8)   (0.8)
Share of profit of equity-accounted investees   449.4    0.1    100.8    0.0    239.0    8.1    0.1 
Profit before income tax   7,598.9    2.1    11,185.9    3.4    39,363.6    1,328.0    11.6 
Income tax expense (benefit)   384.9    0.1    2,432.5    0.7    (1,125.2)   (38.0)   (0.3)
Profit for the year   7,214.0    2.0    8,753.4    2.7    40,488.8    1,366.0    11.9 
Other comprehensive loss for the year, net of taxes   (731.7)   (0.2)   (7,329.9)   (2.3)   (818.9)   (27.6)   (0.3)
Total comprehensive income for the year   6,482.3    1.8    1,423.5    0.4    39,669.9    1,338.4    11.6 

 

In 2017, we improved our product mix by seeking enhancement of our high-end products as well as focusing on product differentiation. Moreover, the higher average selling price of large-size panels strengthened our profitability. As a result, our gross margin and net margin increased by 7.4% and 9.2% compared to 2016, respectively.

 

In 2016, our gross margin slightly decreased by 0.6% compared to 2015, primarily due to a decrease in the average selling price resulting from a decline in panel prices, offset by our effective cost control. Despite panel prices rebounding in the second half of 2016 due to favorable demand/supply condition, the average selling price of our products still declined on a year-over-year basis owing to a sharp decline of panel prices in the second half of 2015 continuing through the first half of 2016. However, we had higher net margin in 2016 compared to 2015 primarily due to an asset impairment associated with the cessation of polysilicon production occurred in 2015.

 

For the Years Ended December 31, 2017 and 2016

 

Net Revenue

 

Net revenue increased 3.6% to NT$341,028.3 million (US$11,505.7 million) in 2017 from NT$329,089.0 million in 2016.

 

Net revenue of large-size panels increased 6.5% to NT$264,203.5 million (US$8,913.7 million) in 2017 from NT$248,193.6 million in 2016 primarily due to increased average selling price and sales volume. The average selling price per panel increased by 5.2% from NT$2,246.6 in 2016 to NT$2,363.1 (US$79.7) in 2017 mainly due to a change in our product mix and favorable market demand/supply condition.

 

Net revenue of small- to medium-size panels increased 1.7% to NT$48,277.9 million (US$1,628.8 million) in 2017 from NT$47,448.4 million in 2016. The increase was primarily due to an increase in sales volume by 9.7% from 154.0 million in 2016 to 168.9 million in 2017. On the other hand, the average selling price per panel decreased by 7.2% from NT$308.2 in 2016 to NT$285.9 (US$9.6) in 2017, primarily due to the appreciation of NT dollar and a change in product mix.

 

Cost of sales

 

Cost of sales consisted primarily of raw material and component costs, direct labor costs and overhead expenses which include depreciation expenses, maintenance expenses of production equipment, indirect labor costs, indirect material costs, utilities and supplies.

 

 52

Cost of sales decreased 5.0% from NT$294,598.0 million in 2016 to NT$279,986.6 million (US$9,446.3 million) in 2017. This decrease in cost of sales was primarily due to our continuing improvement on cost control as well as reduction on purchases resulting from favorable exchange rate. As a percentage of net revenue, cost of sales decreased from 89.5% in 2016 to 82.1% in 2017.

 

Gross Profit

 

Gross profit was NT$61,041.7 million (US$2,059.4 million) in 2017 compared to gross profit of NT$34,491.0 million in 2016. Gross margin mainly fluctuates, among other factors, with our capacity utilization rate, the yield rate of our products, market price change of our products and our product mix. The gross margin in 2017 and 2016 was 17.9% and 10.5%, respectively. The increase was primarily due to higher average selling price of large-size panels. Moreover, our focus on high-end products and the implementation of cost control also contributed to our growing profit.

 

Selling and Distribution Expenses

 

Selling and distribution expenses decreased 0.2% to NT$3,889.0 million (US$131.2 million) in 2017 from NT$3,895.1 million in 2016. As a percentage of net revenue, selling and distribution expenses decreased to 1.1% in 2017 from 1.2% in 2016. Our selling and distribution expenses remained approximately the same from previous year.

 

General and Administrative Expenses

 

General and administrative expenses decreased 11.1% to NT$8,158.9 million (US$275.2 million) in 2017 from NT$9,176.7 million in 2016 mainly due to the ramp-up expenses related to our 6-generation LTPS fab in China recognized in 2016. Apart from the aforementioned, the general and administrative expenses in 2017 slightly decreased compared with 2016, primarily due to a decrease in professional expenses, which was partially offset by an increase in our personnel expenses. As a percentage of net revenues, general and administrative expenses decreased to 2.4% in 2017 from 2.8% in 2016.

 

Research and Development Expenses

 

Research and development expenses increased 8.5% to NT$9,854.7 million (US$332.5 million) in 2017 from NT$9,080.8 million in 2016. The increase in 2017 was primarily due to an increase in our personnel expenses as well as an increase in purchase of tools and materials used for our increased research and development activities. As a percentage of net revenue, research and development expenses increased to 2.9% in 2017 from 2.7% in 2016.

 

Other Income

 

Other income primarily included interest income on bank deposits, rental income, interest income on government bonds with reverse repurchase agreements, dividend income and grants, etc. Other income significantly increased to NT$3,829.9 million (US$129.2 million) in 2017 from NT$2,380.2 million in 2016, primarily due to an increase in grants which our subsidiaries received from government.

 

Finance Costs

 

Finance costs consist of interest expenses, which have been primarily attributable to our bank loans. Finance costs increased 5.9% to NT$2,867.9 million (US$96.8 million) in 2017 from NT$2,707.9 million in 2016, primarily due to having more borrowings from countries with higher interest rates.

 

Income Tax Expense (Benefit)

 

We had income tax benefit of NT$1,125.2 million (US$38.0 million) in 2017 and income tax expense of NT$2,432.5 million in 2016, respectively. The income tax benefit in 2017 was primarily due to the recognition of deferred tax assets from prior years’ unutilized tax losses carryforwards. As a result, our effective tax rate was negative 2.85% in 2017 compared to 21.7% in 2016.

 

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Net Profit for the Year

 

As a result of the foregoing, we had a net profit of NT$40,488.8 million (US$1,366.0 million) in 2017 or basic earnings per share of NT$4.43 (US$0.15) and diluted earnings per share of NT$4.27 (US$0.14) in 2017 compared to a net profit of NT$8,753.4 million or basic and diluted earnings per share of NT$1.04 and NT$1.02, respectively, in 2016.

 

For the Years Ended December 31, 2016 and 2015

 

Net Revenue

 

Net revenue decreased 8.7% to NT$329,089.0 million in 2016 from NT$360,346.5 million in 2015.

 

Net revenue of large-size panels decreased 8.1% to NT$248,193.6 million in 2016 from NT$270,008.2 million in 2015 primarily due to a decrease in the average selling price. The average selling price per panel decreased by 12.1% from NT$2,555.6 in 2015 to NT$2,246.6 in 2016 mainly due to a soft market condition starting from the second half of 2015 continuing through the first half of 2016. Although panel prices rebounded in the second half of 2016, the average selling prices of our large-size panels in 2016 stayed lower compared to 2015.

 

Net revenue of small- to medium-size panels decreased 13.1% to NT$47,448.4 million in 2016 from NT$54,624.2 million in 2015. The average selling price per panel decreased by 2.5% from NT$316.1 in 2015 to NT$308.2 in 2016. The decrease was primarily due to a decline in market prices in the first half of 2016 for certain products and a change of product mix to shift to products with higher margins.

 

Cost of sales

 

Cost of sales consisted primarily of raw material and component costs, direct labor costs and overhead expenses which include depreciation expenses, maintenance expenses of production equipment, indirect labor costs, indirect material costs, utilities and supplies.

 

Cost of sales decreased 8.1% from NT$320,509.4 million in 2015 to NT$294,598.0 million in 2016. This decrease in cost of sales was primarily due to our effective cost control and a significant reduction in depreciation. However, the decrease in average selling price outpaced the decrease in cost of sales per panel, as a percentage of net revenue, cost of sales increased from 88.9% in 2015 to 89.5% in 2016.

 

Gross Profit

 

Gross profit was NT$34,491.0 million in 2016 compared to gross profit of NT$39,837.1 million in 2015. Gross margin mainly fluctuates, among other factors, with our capacity utilization rate, the yield rate of our products, market price change of our products and our product mix. The gross margin in 2016 and 2015 was 10.5% and 11.1%, respectively. The slight decrease was primarily due to a decrease in the average selling price resulting from a decline in panel prices, offset by our effective cost control. Despite panel prices rebounding in the second half of 2016 due to favorable demand/supply condition, the average selling prices of our products still declined on a year-over-year basis owing to a sharp decline of panel prices in the second half of 2015 continuing through the first half of 2016.

 

Selling and Distribution Expenses

 

Selling and distribution expenses decreased 7.4% to NT$3,895.1 million in 2016 from NT$4,206.1 million in 2015. The lower expenses in 2016 were primarily due to a decline in freight expenses in 2016 resulting from the decrease of international oil price. As a percentage of net revenue, selling and distribution expenses remained flat at 1.2% in both 2016 and 2015.

 

General and Administrative Expenses

 

General and administrative expenses decreased 0.3% to NT$9,176.7 million in 2016 from NT$9,206.0 million in 2015. The lower expenses in 2016 were primarily due to a decrease in professional service expenses, which were partially offset by ramp-up expenses incurred in our 6-generation LTPS fab in China before it was ready for commercial production. However, due to a decrease in net revenue, as a percentage of net revenues, general and administrative expenses increased to 2.8% in 2016 from 2.6% in 2015.

 

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Research and Development Expenses

 

Research and development expenses increased 2.0% to NT$9,080.8 million in 2016 from NT$8,903.8 million in 2015. The increase in 2016 was primarily due to an increase in purchase of tools in response to our increased research and development activities in 2016. As a percentage of net revenue, research and development expenses increased to 2.7% in 2016 from 2.5% in 2015.

 

Other Gains and Losses

 

Other gains and losses primarily include gains or losses on disposal of assets, impairment loss on assets, foreign exchange gains or losses, gains or losses on valuation of financial assets and liabilities measured at fair value through profit or loss, gain on bargain purchase and provisions related to legal proceedings or claims and others. Total net other losses significantly decreased to NT$925.6 million in 2016 from NT$9,978.3 million in 2015, primarily due to an asset impairment associated with the cessation of polysilicon production in our subsidiary M.Setek in 2015.

 

Finance Costs

 

Finance costs consist of interest expenses, which have been primarily attributable to our bank loans. Finance costs increased 4.5% to NT$2,707.9 million in 2016 from NT$2,591.0 million in 2015, primarily due to an increase in our long-term bank borrowings.

 

Income Tax Expense

 

Income tax expense significantly increased to NT$2,432.5 million in 2016 from NT$384.9 million in 2015, primarily due to increased profits, a higher surtax on undistributed retained earnings in 2016 and an adjustment of prior-year tax returns. As a result, our effective tax rate was 21.7% in 2016 compared to 5.1% in 2015.

 

Net Profit for the Year

 

As a result of the foregoing, we had a net profit of NT$8,753.4 million in 2016 or basic earnings per share of NT$1.04 and diluted earnings per share of NT$1.02 in 2016 compared to a net profit of NT$7,214.0 million or basic and diluted earnings per share of NT$0.75 and NT$0.70, respectively, in 2015.

 

Segment Information

 

General

 

We have two operating segments: display business and solar business. Our management monitors and evaluates the performance of both operating segments based on the information of their revenue and segment profit (loss). Segment profit (loss) represents gross profit (loss) minus selling and distribution expenses, general and administrative expenses and research and development expenses. Segment profit (loss) excludes long-lived asset impairments, gains and losses on disposal of assets, gain on bargain purchase, litigation provisions for display business, foreign currency exchange gains or losses, finance costs, income taxes, share of profit and losses of equity-accounted investees and other miscellaneous income and expenses. The following table sets forth our segments results for the years indicated.

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   For the Year Ended December 31
   2015  2016  2017
   NT$  NT$  NT$  US$
   (in millions)
Net revenue            
Display business   333,392.3    304,826.7    322,335.4    10,875.0 
Solar business   26,954.2    24,262.3    18,692.9    630.7 
Total   360,346.5    329,089.0    341,028.3    11,505.7 
Segment profit (loss)                    
Display business   19,226.0    12,703.5    39,971.4    1,348.6 
Solar business   (1,704.8)   (365.1)   (832.3)   (28.1)
Total   17,521.2    12,338.4    39,139.1    1,320.5 

 

Display business

 

For the Years Ended December 31, 2017 and 2016

 

Net revenue from our display business segment increased 5.7% to NT$322,335.4 million (US$10,875.0 million) in 2017 from NT$304,826.7 million in 2016, primarily due to an increase in the average selling price of large-size panels and continuous enhancement of our product mix toward high-value oriented products.

 

The aggregate selling, administrative and research and development expenses in our display business segment slightly decreased to NT$20,716.6 million (US$698.9 million) in 2017 from NT$20,717.2 million in 2016. Our ramp-up expenses relating to 6-generation LTPS fab in China were fully recognized in 2016, but none in 2017. Apart from the aforementioned, our professional expenses decreased in 2017, partially offset by an increase in our purchase of tools and materials for our continuing research and development activities as well as an increase in our overall personnel expenses.

 

Our segment profit was NT$39,971.4 million (US$1,348.6 million) in 2017 compared to segment profit of NT$12,703.5 million in 2016. The increase in segment profit in 2017 was primarily due to the increasing average selling price of large-size panels, our endeavors to work on product differentiation as well as our continued efforts to provide higher valued products.

 

For the Years Ended December 31, 2016 and 2015

 

Net revenue from our display business segment decreased 8.6% to NT$304,826.7 million in 2016 from NT$333,392.3 million in 2015, primarily due to a decrease in the average selling price resulting from a decline in panel prices. Despite panel prices rebounding in the second half of 2016 due to favorable demand/supply condition, the average selling prices of our products still declined on a year-over-year basis owing to a sharp decline of panel prices in the second half of 2015 continuing through the first half of 2016.

 

The aggregate selling, administrative and research and development expenses in our display business segment increased 1.1% to NT$20,717.2 million in 2016 from NT$20,498.1 million in 2015, primarily due to ramp-up expenses incurred in our 6-generation LTPS fab in China before it was ready for commercial production and an increase in purchase of tools in response to our increased research and development activities in 2016, partially offset by a decrease in professional service expenses.

 

Our segment profit was NT$12,703.5 million in 2016 compared to segment profit of NT$19,226.0 million in 2015. The decrease in segment profit in 2016 was primarily due to a decrease in the average selling price as a result of a soft market condition starting from the second half of 2015 continuing through the first half of 2016.

 

Solar business

 

For the Years Ended December 31, 2017 and 2016

 

Net revenue from our solar business segment decreased 23.0% to NT$18,692.9 million (US$630.7 million) in 2017 from NT$24,262.3 million in 2016. The decrease in solar segment revenue was primarily due to a decrease in the average selling price. Although the sales volume of module increased, the benefit was offset by the decrease in the average selling price.

 

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Segment loss increased to NT$832.3 million (US$28.1 million) in 2017 from NT$365.1 million in 2016, primarily due to a decline in the average selling price.

 

For the Years Ended December 31, 2016 and 2015

 

Net revenue from our solar business segment decreased 10.0% to NT$24,262.3 million in 2016 from NT$26,954.2 million in 2015. The decrease in solar segment revenue was primarily due to a decline in the selling prices of ingots, wafers and modules as a result of unfavorable market conditions for the solar industry in the second half of 2016.

 

Segment loss decreased to NT$365.1 million in 2016 from NT$1,704.8 million in 2015, primarily due to a change of our product mix and the cessation of unprofitable polysilicon production starting from 2016.

 

Inflation

 

We do not believe that inflation in any of our key markets has had a material impact on our results of operations in 2017. However, we cannot provide assurance that in the event of significant variations in the nature, extent or scope of inflation within any of our key markets in the future would not have a material impact on our results of operations.

 

Taxation

 

The corporate income tax rate in ROC is 17% in 2015, 2016 and 2017 and will be increased to 20% from the year 2018 due to the recent amendments to the ROC Income Tax Law, and our subsidiaries outside ROC are subject to their country’s juridical tax rate.

 

In the past, we had been granted exemptions from taxable income in Taiwan for construction and capacity expansions of production facilities according to the ROC Statute for Upgrading Industries. The exemption period may begin at any time within four to five years following the completion of a construction or expansion. However, given that the ROC Statute for Upgrading Industries expired at the end of 2009, such taxable income exemption, after specified period, may be subject to additional ROC Income Basic Tax Act (the “IBT Act”) taxes. Therefore, the Company may not use the granted exemptions.

 

Under regulations promulgated under the ROC Statute for Industrial Innovation, we are eligible to apply either (1) a one-time tax credit up to 15% of our research and development expenditures for that year or (2) a tax credit of 10% of our research and development expenditures for three consecutive years. Either of the aforesaid tax credits shall not exceed 30% of our corporate income tax payable for that year.

 

Pursuant to the IBT Act, when a taxpayer’s income tax amount is less than the basic tax amount (“BTA”), a taxpayer is required to pay the regular income tax and the difference between the BTA and the regular income tax amount. For enterprises, BTA is determined using regular taxable income plus specific add-back items such as certain exempt income tax under a tax incentives scheme and exempt capital gain or loss from securities and futures trading.

 

5.B.       Liquidity and Capital Resources

 

We need cash primarily for technology advancement, capacity expansion and working capital. Although we have historically been able to meet our working capital requirements through cash flow from operations, our ability to upgrade our technology and expand our capacity has largely depended upon, and to a certain extent will continue to depend upon, our financing capability through long-term borrowings, the issuance of convertible and other debt securities and the issuance of equity securities. If adequate funds are not available, whether on satisfactory terms or at all, we may be forced to curtail our growth plans including technology advancements, new capacity and advanced technology fabs. Our ability to meet our working capital needs from cash flow from operations will be affected by our business conditions which in turn may be affected by several factors. Many of these factors are outside of our control, such as economic downturns and declines in the selling prices of our products caused by oversupply in the market. The selling prices of our existing product lines are reasonably likely to be subject to further downward pressure in the future if oversupply occurs. To the extent that we do not generate sufficient cash flow from our operations to meet our cash requirements, including technology advancement, capacity expansion, working capital, matured debt repayment and any accelerated debt obligations arising from defaults that are not waived by the relevant creditors, we may need to rely on a combination of additional borrowings, equity or debt securities offerings or other forms of capital financing. Other than as described below in “Item 5. Operating and Financial Review and Prospects—Item 5.E—Off-Balance Sheet Arrangements,” we have not historically relied, and we do not plan to rely in the foreseeable future, on off-balance sheet financing arrangements to finance our operations or expansion.

 

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As of December 31, 2017, we had net current assets of NT$69,910.8 million (US$2,358.7 million) as our current assets of NT$180,175.5 million (US$6,078.8 million) exceeded our current liabilities of NT$110,264.7 million (US$3,720.1 million). We expect to meet our present working capital requirements through cash flow from operations, bank loans and borrowings and by financing activities from capital markets from time to time.

 

As of December 31, 2017, we had cash and cash equivalents of NT$105,020.6 million (US$3,543.2 million). As of December 31, 2017, we had total short-term credit lines of NT$39,291.3 million (US$1,325.6 million), of which we had borrowed NT$3,424.4 million (US$115.5 million). All of our short-term facilities are revolving with a term of one year, which may be extended for terms of one year each with lender consent. Our repayment obligations under our short-term loans are unsecured. We believe that our existing credit lines under our short-term loans, together with cash generated from our operations, are sufficient to liquidity needs.

 

We also entered into reverse repurchase agreements with securities firms or banks in Taiwan covering government bonds for short-term yield enhancement purposes. The terms of these reverse repurchase agreements are typically less than one month. As of December 31, 2015, 2016 and 2017, we held government bonds with reverse repurchase agreements in amounts of NT$1,295.1 million, NT$125.0 million and NT$6,710.3 million (US$226.4 million), respectively; and these bonds yielded interest at rates ranging from 0.26% to 0.38%, at 0.22%, and from 0.24% to 0.65%, respectively.

 

As of December 31, 2017, we had outstanding long-term borrowings of approximately NT$111.0 billion (US$3.7 billion). The interest rates in respect of these long-term borrowings are variable, and as of December 31, 2017 ranged between 1.25% and 5.16% per year.

 

Below is a summary of our major outstanding borrowings and loans. Please also see Note 21 to our consolidated financial statements for further information.

 

·In January 2013, we entered into a NT$17.3 billion four-and-a-half-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of repaying existing debts. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this facility are secured by certain of our building, equipment and machinery. We fully repaid this credit facility in March, 2017.

 

·In October 2013, we entered into a NT$26.9 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of repaying existing debts. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this facility are secured by certain of our land, building, equipment and machinery. We fully repaid this credit facility in December, 2017.

 

·In August 2014, our subsidiary AFPD entered into a US$110 million four-and-a-half-year syndicated credit facility, for which Standard Chartered Bank (Hong Kong) Limited, acted as agent bank, for the purpose of repaying AFPD’s existing loan and financing AFPD’s general corporate purposes. The agreement for this syndicated facility is guaranteed by us. Under the agreement, AFPD and we are required to maintain certain financial ratios. Following a request by us in January 2015 to reduce the amount of this credit facility, the syndicated banks cancelled US$9 million under this syndicated credit facility effective February 13, 2015. We fully repaid this credit facility in June, 2017.

 

·In September 2014, we entered into a NT$25.8 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of repaying existing debts. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this facility are secured by certain of our building, equipment and machinery. As of December 31, 2017, NT$22.7 billion (US$766.0 million) was outstanding under this credit facility.

 

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·In May 2015, our subsidiary AU Optronics (Kunshan) Co., Ltd. (“AUKS”) entered into an RMB3,985 million and US$326 million eight-year syndicated credit facility, for which the Bank of China (Suzhou) acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment for our 6-generation LTPS fab in Kunshan, PRC. The agreement for this syndicated facility is guaranteed by AUKS’s shareholders, Kunshan Economic & Technical Development Zone Assets Operation Co., Ltd. and us, in accordance with the shareholding percentages, respectively. Under the guarantee, we are required to maintain certain financial ratios. As of December 31, 2017, RMB6.1 billion (US$935.0 million) was outstanding under this credit facility.

 

·In September 2015, we entered into a NT$37.5 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding medium-term working capital and repaying existing debts. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this facility are secured by certain of our building, equipment and machinery. As of December 31, 2017, NT$37.5 billion (US$1,265.2 million) was outstanding under this credit facility.

 

·In February 2016, our subsidiary AUO Crystal Corp. entered into a NT$3.0 billion three-year syndicated credit facility, for which First Commercial Bank acted as the agent bank, for the purpose of repaying AUO Crystal Corp.’s existing loan. The agreement for this syndicated facility contains covenants that require AUO Crystal Corp. to maintain certain financial ratios. As of December 31, 2017, NT$2.4 billion (US$80.8 million) was outstanding under this credit facility.

 

·In November 2016, we entered into a NT$10.0 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding purchase of machinery and equipment for 8.5-generation fab expansion. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2017, NT$10.0 billion (US$337.4 million) was outstanding under this credit facility.

 

·In July 2017, we entered into a NT$23.0 billion five-year syndicated credit facility with a right to extend two-years of loan repayment period based on each bank’s consent, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding purchase of machinery and equipment for 8.5-generation fab expansion. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2017, no amount has been drawn down under this credit facility.

 

The carrying amount of our assets pledged as collateral to secure our obligations under our long-term borrowings, including land, building, machinery and equipment was NT$59.2 billion (US$1,996.4 million) as of December 31, 2017.

 

Our long-term loans and facilities contain various financial and other covenants that could trigger a requirement for early payment. Among other things, these covenants require the maintenance of certain financial ratios, such as current ratio, leverage ratio, interest coverage ratio, tangible net worth and other technical requirements. In general, covenants in the agreements governing our existing debt, and debt we may incur in the future, may materially restrict our operations, including our ability to incur debt, pay dividends, make certain investments and payments and encumber or dispose of assets. A default under one debt instrument may also trigger cross-defaults under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on our liquidity, as well as our financial condition and operations. See “Item 3. Key Information—3.D. Risk Factors-Risks Relating to Our Business—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.”

 

Our principal sources of funds have been historically from long-term borrowings, the issuance of convertible and other debt securities as well as the issuance of equity securities. We believe that our existing cash, cash equivalents, short-term investments, expected cash flow from operations and borrowings under our existing and future credit facilities should be sufficient to meet our present capital expenditure, working capital, cash obligations under our existing debt and lease arrangements and other requirements. From time to time, we frequently need to raise additional capital for the needs of our business growth, including but not limited to, our investment in new capacity and new technologies to improve our economies of scale, reduce our production costs and enrich our product portfolio. However, we cannot assure you that we will be able to raise additional capital should it become necessary on terms acceptable to us or at all. See “Item 3. Key Information—3.D. Risk Factors—Risks Relating to Our Financial Condition, Business and Industry— If capital resources required for our planned growth or development are not available, we may be unable to successfully implement our business strategy.”

 

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Cash Flows

 

Net cash provided by operating activities was NT$62,003.4 million in 2015, NT$36,695.8 million in 2016 and NT$84,363.3 million (US$2,846.3 million) in 2017. The increase in net cash provided by operating activities in 2017 compared to 2016 was primarily due to increased cash collection from our revenue growth as well as our higher profit before income tax contributed more cash inflow. The decrease in net cash provided by operating activities in 2016 compared to 2015 was primarily due to decreased cash collections from our ordinary business as a result of a decline in net revenue in 2016.

 

Net cash used in investing activities were NT$31,734.7 million in 2015, NT$42,267.3 million in 2016 and NT$43,667.5 million (US$1,473.3 million) in 2017. Net cash used in investing activities primarily reflected capital expenditures for property, plant and equipment of NT$33,440.2 million in 2015, NT$46,220.1 million in 2016 and NT$43,881.7 million (US$1,480.5 million) in 2017. These capital expenditures were primarily funded with net cash provided by operating activities and proceeds from long-term bank borrowings.

 

Net cash used in financing activities was NT$34,277.0 million in 2015, reflecting primarily in the repayment of long-term borrowings for NT$50,849.7 million and the purchase of convertible bonds payable for NT$14,799.7 million, partially offset by the proceeds from long-term borrowings for NT$30,634.0 million. Net cash provided by financing activities was NT$10,721.2 million in 2016, reflecting primarily in the proceeds from long-term borrowings for NT$61,799.6 million, partially offset by the repayment of long-term borrowings for NT$45,651.0 million. Net cash used in financing activities was NT$13,410.4 million (US$452.4 million) in 2017, reflecting primarily in the repayment of long-term borrowings for NT$47,443.8 million (US$1,600.7 million), partially offset by proceeds from long-term borrowings for NT$34,872.6 million (US$1,176.5 million).

 

Capital Expenditures

 

We have made, and expect to continue to make, capital expenditures in connection with technology advancement and the expansion of our production capacity. For the past three years, substantially all of capital expenditures were invested in facilities located in Taiwan and the PRC.

 

We are sometimes required to prepay our purchases of equipment. Prepayments for purchases of equipment result from contractual agreements involving down payments to suppliers when the equipment is ordered by us. As of December 31, 2015, 2016 and 2017, prepayments for purchases of equipment were NT$16,332.9 million, NT$13,535.5 million and NT$27,646.0 million (US$932.7 million), respectively.

 

Our capital expenditures paid in 2017 were approximately NT$43,881.7 million (US$1,480.5 million), primarily for the expansion at our 8.5-generation fab in Taiwan and 6-generation fab in Kunshan, PRC. Our capital expenditures in 2018 are expected to be approximately NT$45.0 billion, which, depending on cash flow generated from our operations, the progress of our planned growth, and market conditions, may be adjusted later. Our capital expenditures in 2018 are planned to be used primarily for the technology upgrades and payments in the two capacity expansions at our 8.5-generation fab in Houli District, Taichung City.

 

5.C.       Research and Development

 

We incurred research and development costs of NT$8,903.8 million, NT$9,080.8 million and NT$9,854.7 million (US$332.5 million) in 2015, 2016 and 2017, respectively, which represented approximately 2.5%, 2.7% and 2.9%, respectively, of our net revenue.

 

Our research and development activities are principally directed toward advancing our technologies in key components, manufacturing processes and product development, with the objective of improving the features of our products and services to bring added value to our customers in addition to design products that meet their specific requirements. We have a product development team dedicated to each of our primary product categories. Each of these teams focuses on the development of our existing and potential new products. In addition, we have several research and development teams to develop new and advanced display technologies, such as, UHD 4K , curved display, OLED, quantum dot wide color gamut, HDR, bezel-less, touch, 8K4K and other technologies. Monetary incentives are provided to our employees if research projects result in successful patents. As of December 31, 2017, we employed approximately 1,738 research and development engineers.

 

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We established a dedicated flat panel research and development center, the AUO Technology Center, in 2002, which we believe is one of Taiwan’s largest optronics research and development centers. The research activities at the AUO Technology Center initially have been divided into several general areas, including advanced technology development in new liquid crystal materials, new system electronics, new backlight unit technologies, image and color processing, LTPS and new TFT devices. In addition to new product development and module processing, the AUO Technology Center also focuses on improving our current TFT-LCD panel product and manufacturing process technologies. In 2005, we expanded the AUO Technology Center to the Central Taiwan Science Park. In 2008, we established the Advance Research Center under the AUO Technology Research Center to focus on the development of new technologies and mid to long-term technologies.

 

In 2015, we announced and exhibited a series of new developments of advanced display technologies. For example, we introduced the ALCD (Advanced LCD) TV panels incorporating numerous pioneering display technologies, including UHD 4K ultra high resolution, curved design, quantum dot wide color gamut and HDR technologies; this new product can provide true colors and images in exquisite details, and also create dazzling and breathtaking scenes. We showcased light and power-saving displays for wearable devices, including 1.3/2.6-inch transflective LCD, 1.5/1.6-inch square AMOLED displays employing a glass thinning method to trim panel thickness down to 0.45 mm and 4.3-inch Full HD ultra-thin LTPS display. The 1.4-inch full circle AMOLED display was honored as 2015 Society for Information Display (“SID”) Best in Show Award. In addition, we debuted slim UHD 4K ultra high resolution displays for smartphone, notebooks, oTP-Lite (on-cell) touch panel with wide color gamut and high contrast ratio to present colors in more precision which can meet the demand for professional graphic stylus. We also presented a complete series of ultra-high resolution car displays, including 12.3-inch LCD (2880 x 1080 pixel) with high resolution display for instrument cluster and 8/10.1-inch HD resolution LCD panels for center information display. In addition, the 8-inch WVGA LCD combines oTP and full lamination technologies to obtain low reflection and excellent touch performance. Furthermore, we developed a 55-inch Full HD super-narrow border panel for public information display TV wall application.

 

In 2016, we announced and exhibited a series of new developments of advanced display technologies. For example, we showcased 4 side bezel-less ALCD TV panels, which not only demonstrates the advanced technologies (4K/Curved/quantum dot wide color gamut/HDR) but also reflects a stylish and fashionable design where consumers can barely see the bezels. We also showcased the world’s first bezel-less 65-inch 8K4K (7680 x 4320 pixel) ultra-high resolution TV panel with curved display feature; this product adopts high transmittance and quantum dot materials to achieve low power consumption and true color presentation. We debuted a series of high-end products to capture the gaming market, including a 25-inch FHD (1920 x 1080 pixel) panel with 240Hz refresh rate, and a 27-inch UHD 4K panel with 144Hz refresh rate. We also debuted the 24.9-inch UHD 4K free-form curved car display in Consumer Electronics Show. The touch function for this product is imbedded, and the free-form panel is more suitable for car application. In addition, we presented the 13.3-inch UHD 4K LTPS notebook panel at Touch Taiwan. LTPS panels have the advantages of the low power consumption, high resolution and slim border. The 331 ppi UHD4K panel can fit into high-end customer product line. The panel left/right/up side border can be 2.0mm, and the power consumption is close to a current a-Si FHD panel. We also exhibited high resolution AMOLED display technologies being applied to smartwatches and virtual reality (“VR”) devices. In terms of smartwatch applications, 1.5- and 1.6-inch high resolution square AMOLED displays and 1.2- and 1.4-inch full circle AMOLED displays were showcased. The ultra-narrow border, high resolution and power-saving full circle AMOLED displays apply a special cut and driver IC design to create a full circular display area. In terms of VR headset displays, we presented a 3.8-inch AMOLED display with high pixel density of 423 ppi. A set of two displays are designed together to offer a resolution as high as 2K (2160 x 1200 pixel) for both eyes. High color saturation, high contrast with ultimate black state performance, and fast response time altogether offer even smoother and more vivid images, which is expected to offer the most life-like immersive VR experience possible.

 

In 2017, we announced and exhibited a series of new developments of advanced display technologies, including but not limited to:

 

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·Enhanced ALCD technology: the display can achieve as high as 2000-nit brightness with significantly higher contrast. Its low reflective quality helps to deliver high HDR image quality even in daylight, perfectly capturing both bright and dark image details. By adopting environmentally-friendly cadmium-free quantum dots with high color saturation, the display can reveal rich and detailed color depth, with a wide color gamut exceeding NTSC 110% in all environments.

 

·The world’s largest 85-inch 8K4K bezel-less ALCD TV display with 120Hz high refresh rate to deliver smooth motion flow with impressive image quality.

 

·We partnered with NVIDIA, an industry leader in visual computing, to jointly develop NVIDIA G-Sync HDR technology, which improves the contrast and enriches the details of game display through advanced HDR technology. We also presented the world’s first 27-inch gaming monitor panel combining 144Hz refresh rate and UHD 4K ultra high resolution, applying advanced HDR technology and Adobe RGB 99% high color saturation.

 

·UHD 4K Ultra Narrow Border LTPS notebook panels that integrates on-cell touch function. This display combines ultra-high resolution, power-saving function and higher touch sensitivity features to provide a richer user experience with more flexibility.

 

·A series of Public Information Display (“PID”) Total Solutions, including ultra large 85-inch UHD 4K signage for the outdoors, equipped with 2500-nit ultra-brightness and capability to operate for long periods of time with stability. This also includes stretched type PID from 28.6- to 42-inch that could be installed in semi-outdoor areas; these displays typically function as traffic information displays to provide real time information and advertisement for passengers.

 

·18:9 full screen LTPS in-cell touch panel, including 6-inch full HD LTPS in-cell touch panel that integrates the display driver IC and touch IC to simplify the overall module structure. This product uses a new circuit and display design that enables the bottom module border to decrease by 40% in width, and the left and right module borders to be 0.6 mm wide. The in-cell touch technology enhances touch precision and the 18:9 full screen aspect ratio produces more space to accommodate a virtual HOME button, which together offers a boundless, audio-visual experience.

 

·Free-form and curved car displays, including the 12.3-inch full HD LTPS display for cluster application with 1.5mm ultra slim border to streamline the product appearance. The display also integrates high resolution, high color saturation, high contrast and wide viewing angle technologies to high-end car displays.

 

·AMOLED Smartwatch displays, including the AUO 1.2-inch and 1.4-inch true circle AMOLED displays which both have resolution as high as 326 ppi and consume 30% less power when compared with other products in the market. The displays are equipped with a brightness increase mode, so that information and color on the watches are still clearly visible when users are out under strong sunlight. The 1.3-inch AMOLED touch panel, possessing touch function and power-saving strength, offers intuitive touch experience and is light to carry, making it especially suitable for children’s smartwatch. We also exhibited two flexible AMOLED display applications, applying plastic substrate and special structural layer design to make the panels foldable and rollable.

 

5.D.     Trend Information

 

For trend information, see “Item 4. Information on the Company—4.B. Business Overview” and “Item 5. Operating and Financial Review and Prospects—5.A. Operating Results.”

 

5.E.      Off-Balance Sheet Arrangements

 

We have, from time to time, entered into non-derivative financial instruments, including letters of credit, to finance or secure our purchase payment obligations. As of December 31, 2017, we had off-balance sheet outstanding letters of credit of US$15.0 million and JPY2,761.8 million.

 

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5.F.      Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations with definitive payment terms as of December 31, 2017, which will require significant cash outlays in the future.

 

   Payments Due by Period
   Total  Less than 1 year  1-3 years  3-5 years  More than 5 years
Contractual Obligations  NT$  NT$  NT$  NT$  NT$
   (in millions)
Long-term borrowings(1)   119,344.9    10,941.7    68,455.5    33,892.5    6,055.2 
Operating lease obligations(2)   7,420.6    858.2    1,576.6    1,494.1    3,491.7 
Purchase obligations(3)   25,561.3    25,561.3    -      -      -   
Other obligations(4)   895.2    268.5    417.8    208.9    -   
Total   153,222.0    37,629.7    70,449.9    35,595.5    9,546.9 

 

 

 

(1)Includes estimated relevant interest payments in any given period in the future. See Note 21 to our consolidated financial statements for further information regarding interest rates.

 

(2)Represents our obligations to make lease payments to use the land on which our fabs and module-assembly facilities are located.

 

(3)Represents our significant outstanding purchase commitments for the machinery and equipment at our fabs.

 

(4)Includes certain settlement agreements regarding certain alleged patent infringements with definitive payment terms as of December 31, 2017. See “Item 8. Financial Information—8.A.7. Litigation” for further information relating to certain antitrust civil actions.

 

In addition to the contractual obligations set forth above, we also have continuing obligations to make cash royalty payments under our technology license agreements, the amounts of which are determined based on our use of certain technology and/or patents. Furthermore, pursuant to relevant regulatory requirements, we estimate that we will contribute approximately NT$102.9 million (US$3.5 million) to our pension fund maintained with the Bank of Taiwan in 2018.

 

We have not entered into any financial guarantees or similar commitments to guarantee the payment obligations of non-affiliated third parties. Our long-term loan and lease agreements include provisions that require early payment under certain conditions. The terms of our credit facilities for long-term borrowings also contain financial covenants, including current ratio, leverage ratio, interest coverage ratio, tangible net worth and other technical requirements. Our debt under these facilities may be accelerated if there is a default, including defaults triggered by failure to comply with these financial covenants and other technical requirements. Please refer to “Item 5. Operating and Financial Review and Prospects—5.B. Liquidity and Capital Resources” for further information about our major outstanding borrowings and loans.

 

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

6.A.       Directors and Senior Management

 

Members of our board of directors are elected by our shareholders. Our board of directors is composed of nine directors. The chairman of the board of directors is elected by the directors. The chairman of the board of directors presides at all meetings of the board of directors and also has the authority to act as our representative. The term of office for directors is three years.

 

Pursuant to the ROC Company Act, a person may serve as our director in his or her personal capacity or as the representative of another legal entity. A director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Of our nine current directors, one is the representative of Qisda and one is the representative of BenQ Foundation.

 

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In addition, pursuant to the ROC Securities Exchange Act, a public company is required to either establish an audit committee or retain supervisors, provided that the FSC may, after considering the scale and business nature of a public company and other essential conditions, require the company to establish an audit committee in place of its supervisors. We replaced our supervisors by establishing an audit committee on June 13, 2007. The audit committee’s duties and powers include, but are not limited to, inspection of corporate records, verification of statements prepared by the board of directors, and giving reports at shareholders’ meetings. Each individual member of our audit committee is authorized to investigate our financial condition, represent us when a director is engaged in a sale, loan or other juristic acts with us for his own account or on behalf of another, call the shareholders meeting if the board of directors fails to do so, and give notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our Articles of Incorporation or our shareholder resolutions. Our audit committee is required to be composed of all of our independent directors, who are currently Vivien Huey-Juan Hsieh, Mei-Yueh Ho, Ding-Yuan Yang, Chin-Bing (Philip) Peng and Yen-Shiang Shih.

 

Directors

 

Nine directors, including five independent directors, were elected at the 2016 Annual General Shareholders Meeting. The following table sets forth information regarding all of our directors as of February 28, 2018. The business address of all of our directors is the company’s principal executive office.

 

Name    Age    Position    Term
Expires 
  Years on
Our
Board 
  Principal Business Activities Performed
Outside Our Company 
Shuang-Lang (Paul) Peng   60   Chairman and Chief Executive Officer   2019   8  

·      Director, Qisda Corporation

·      Director, Darwin PrecisionsCorporation

Kuen-Yao (K.Y.) Lee   66   Director   2019   22  

·      Honorary Chairman, Qisda Corporation

·      Director, Darfon Corporation

·      Director, BenQ Materials Corp.

Kuo-Hsin (Michael) Tsai

(representing BenQ

Foundation)

  54   Director, President and Chief Operating Officer   2019   2  

·      Director, Lextar Electronics Corp.

·      Director, Daxin Materials Corporation

 

Peter Chen

(representing Qisda) (1)

 

  57   Director   2019   2  

·      Chairman and President, Qisda Corp.

·      Director, Darfon Electronics Corp.

·      Director, BenQ Materials Corp.

·      Director, DFI Inc.

·      Chairman, BenQ Medical Technology Corporation

·      Chairman, Partner Tech Corp.

Vivien Huey-Juan Hsieh   65   Independent Director   2019   14   ·      Independent Director and member of Remuneration Committee and Audit Committee, Darwin Precisions Corporation
Mei-Yueh Ho   67   Independent Director   2019   8  

·      Independent Director and member of Remuneration Committee and Audit Committee, Bank of Kaohsiung, Ltd.

·      Independent Director and member of Remuneration Committee and Audit Committee, KINPO Electronics Inc.

·      Independent Director and member of Audit Committee, Advanced Semiconductor Engineering, Inc.

·      Independent Director and member of Remuneration Committee and Audit
Committee, Ausnutria Dairy Corporation Ltd.

Ding-Yuan Yang   70   Independent Director   2019   8   ·      Chairman, UniSVR Global Information Technology Corp.
Chin-Bing (Philip) Peng   65   Independent Director   2019   5  

·      Director and President, iD SoftCapital

·      Director, ACER Incorporated

·      Director, Wistron NeWeb Corporation

·      Director, AOPEN Inc.

·      Director, Wistron Information Technology & Services Corp.

 

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Name 

 

Age 

 

Position 

 

Term
Expires 

 

Years on
Our
Board 

  Principal Business Activities Performed
Outside Our Company 

Yen-Shiang Shih   68   Independent Director   2019   2  

·      Independent Director and member of Remuneration Committee and Audit Committee, CTCI Corporation

·      Director, USI Corporation

·      Director, Taiwan Research Institute

·      Director, Taiwan Institute of Economic Research

·      Chair Professor, Chung Yuan Christian University

·      Council Minister and the Convener of the Group of Energy, Petroleum & Chemical, and Accouterments, Cross-Strait CEO Summit

·      Policy Advisor, Taiwan Electrical and Electronic Manufacturer’s Association

·      Chairman, Sustainable Circulation Economy Development Association

 

 

 

(1)For information regarding the transactions with Qisda, please review our related party transactions described in “Item 7. Major Shareholders and Related Party Transactions—7.B. Related Party Transactions.”

 

Shuang-Lang (Paul) Peng. Mr. Peng has been our Chairman since May 11, 2015, and our Chief Executive Officer since November 1, 2015. He has been a director with us since 2010. Prior to his current position, Mr. Peng was our President from January 1, 2012 to October 31, 2015, Executive Vice President from 2008 to 2011, Senior Vice President from 2007 to 2008 and Vice President from 1998 to 2007. Prior to joining AUO, Mr. Peng worked as the Manager of the material and production department at BenQ’s Malaysia branch. Mr. Peng received his Master’s degree in Business Administration from Heriot-Watt University in the United Kingdom in 1995.

 

Kuen-Yao (K.Y.) Lee. Mr. Lee has been a director of our company since 1996. He was our Chairman from 1996 to May 10, 2015. Mr. Lee received his Bachelor’s degree in Electrical Engineering from the National Taiwan University in Taiwan in 1974 and his Master of Business Administration degree from the International Institute for Management Development in Switzerland in 1990.

 

Kuo-Hsin (Michael) Tsai. Mr. Tsai has been our director since 2016 and has been our President and Chief Operation Officer since November 1, 2015. Prior to his current position, Mr. Tsai was our Senior Vice President and the General Manager of our Video Solutions Business Group from 2013 to October 2015, the Vice President and the General Manager of Video Solutions Business Group from 2011 to 2012, the head of our Information Technology Business Group from 2008 to 2011, Senior Associate Vice President of our IT Display Manufacturing team from 2007 to 2008, and Associate Vice President of our Procurement Division during 2005 to 2006. Mr. Tsai also worked in various divisions including Material Management and Procurement, and was also the Director of the Suzhou module plant from 2002 to 2005. Mr. Tsai holds a Bachelor’s degree in Business Management from National Cheng Kung University and an Executive MBA degree from National Chiao Tung University in Taiwan in 2010.

 

Peter Chen. Mr. Chen has been a director of our company since June 2016 and has been the Chairman and President of Qisda Corp. since June 22, 2017 and January 1, 2014, respectively. Prior to his current position, Mr. Chen was Executive Vice President of Technology Product Center of BenQ Corp. from September 2007 to December 2013. Mr. Chen received his Bachelor’s degree in Electrical Engineering from the National Cheng Kung University in Taiwan in 1985 and his EMBA from the Thunderbird American Graduate School in the United States in 2001.

 

Vivien Huey-Juan Hsieh. Dr. Hsieh has been our director since 2004. Dr. Hsieh received a Ph.D. in Finance from the Graduate School of Business Administration, University of Houston, University Park, Texas in the United States.

 

Mei-Yueh Ho. Ms. Ho has been our director since 2010. Ms. Ho served as Minister of the Ministry of Economic Affairs, ROC from 2004 to 2006. She was also Council Minister of the Council for Economic Planning and Development, ROC from 2007 to 2008. Ms. Ho received her Bachelor’s degree in Agricultural Chemistry from the National Taiwan University in Taiwan in 1973.

 

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Ding-Yuan Yang. Dr. Yang has been a director of our company since 2010. Dr. Yang is also Chairman of UniSVR Global Information Technology Corp. Dr. Yang served as President of Windbond Electronics Corp. from 1987 to 1999 and as Vice Chairman of Windbond Electronics Corp. from 1999 to 2002. Dr. Yang received his bachelor’s degree in Electrical Engineering from the National Taiwan University in Taiwan in 1969 and his Ph.D. degree in Electrical Engineering from Princeton University in the United States in 1975.

 

Chin-Bing (Philip) Peng. Mr. Peng has been a director of our company since 2013. Mr. Peng is also Director and President of iD SoftCapital Inc. Mr. Peng served as Senior Vice President and Chief Financial Officer of ACER Incorporated from 2001 to 2004. Mr. Peng received his Master’s degree in Business Administration from National ChengChi University in 1980.

 

Yen-Shiang Shih. Dr. Shih has been a director of our company since 2016. Dr. Shih is a Chair Professor of Business Management at Chung Yuan Christian University. Dr. Shih was Chairman of Sinotech Engineering Consultants Inc. from 2014 to 2016 and served as Minister of Economic Affairs, Chairman of CPC Corporation, Director General of the Taiwan Tobacco & Wine Bureau, Director General of the Industrial Development Bureau, Director General of the Small and Medium Enterprise Administration and in other posts from 1986 to 2013. Dr. Shih was a professor at National Taiwan University of Science and Technology from 1979 to 1986. Dr. Shih received his bachelor’s degree from National Taiwan University and his Ph.D. degree from the Massachusetts Institute of Technology in the United States.

 

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Senior Management

 

The following table sets forth information regarding key executives as of February 28, 2018.

 

Name

Age

Position

Years with Us

Shuang-Lang (Paul) Peng 60 Chairman and Chief Executive Officer 22
Kuo-Hsin (Michael) Tsai 54 President and Chief Operation Officer 20
Wei-Lung Liau 47 General Manager of the Video Solutions Business Group 19
Hong-Shiung (Sean) Chen 49 General Manager of the Mobile Solutions Business Group 19
Benjamin Tseng 50 Chief Financial Officer 9

 

Shuang-Lang (Paul) Peng. See “—Directors.”

 

Kuo-Hsin (Michael) Tsai. See “—Directors.”

 

Wei-Lung Liau. Mr. Liau has been the General Manager of our Video Solutions Business Group since November 1, 2015. Prior to his current position, Mr. Liau was Vice President of our Video Solutions Technology Unit from 2013 to October 2015, Associate Vice President of our Video Solution Technology Development Center from 2012 to 2013, Associate Vice President of our Advanced Technology Research Center from 2010 to 2012 and the head of the LCD Technology Division from 2005 to 2010. Mr. Liau also worked in various divisions including Engineering and Manufacturing. Mr. Liau received his Bachelor’s and Master’s degrees in Applied Chemistry from National Chiao Tung University in Taiwan in 1994 and 1996, respectively and received his Ph.D. in Applied Chemistry at National Chiao Tung University in Taiwan in 2017.

 

Hong-Shiung (Sean) Chen. Mr. Chen has been the General Manager of our Mobile Solutions Business Group since November 1, 2015. Prior to his current position, Mr. Chen was the Senior Associate Vice President of our Mobile Solutions Business Group from 2014 to October 2015, Associate Vice President of our Video Solutions Product Business Unit from 2011 to 2014, Associate Vice President of our IT Display Product Business Unit from 2010 to 2011, Director of our IT display product marketing unit from 2008 to 2010 and Director of the Suzhou module plant from 2003 to 2008. Mr. Chen received his Bachelor’s degree in Mechanical and Electro-Mechanical Engineering from Tamkang University in Taiwan in 1991. He also received a dual Master’s degree in Operation Research and Industrial Engineering and in Mechanical Engineering from Cornell University in the United States in 1997.

 

Benjamin Tseng. Mr. Tseng has been our Chief Financial Officer since November 1, 2015. Prior to his current position, Mr. Tseng was the Financial Associate Vice President of our Finance Center in China from 2011 to October 2015 and Director of our Finance Management Division from 2008 to 2011. Prior to joining AUO in 2008, Mr. Tseng served as the Director of Corporate Development at Coretronic Corporation from 2006 to 2008, and as Vice President in the Corporate Clients Department of ABN AMRO Bank from 1995 to 2006. Mr. Tseng received his Bachelor’s degree in Business Administration from Huntington College in the United States in 1993, and obtained his Master’s degree in Business Administration from the University of Rochester in the United States in 1995.

 

6.B.       Compensation

 

The aggregate compensation paid or payable to the directors and executives for their services rendered in 2017 was approximately NT$566.2 million (US$19.1 million). According to our Articles of Incorporation approved by our annual shareholders’ meeting in June 2016, which are applicable to the distribution of compensation to our directors for the year 2015, where we have a profit before tax for each fiscal year, we shall first reserve a certain amount of the profit to recover the loss for preceding years, and then distribute no more than 1% of the remaining profit to our directors as remuneration. In the event that a director serves as a representative of a legal entity, such compensation is paid to the legal entity. See “Item 10. Additional Information—10.B. Memorandum and Articles of Association—Dividends and Distributions.”

 

We have a defined benefit pension plan covering our regular employees in the ROC. Retirement benefits are based on years of service and average salaries or wages in the last six months before retirement. We make monthly contributions, at a certain percentage of salaries and wages, to a pension fund that is deposited in the name of, and administered by, the employees’ pension plan committee. Beginning on July 1, 2005, pursuant to the ROC Labor Pension Act, we are required to make a monthly contribution for employees in the ROC that elected to participate in a defined contribution plan at a rate of no less than 6% of the employees’ monthly salaries or wages to the employees’ individual pension fund accounts at the ROC Bureau of Labor Insurance. The total pension cost for our executives for the year ended December 31, 2017 was NT$2.3 million (US$0.08 million). Our directors did not receive any pension as part of their remuneration.

 

Our company, AU Optronics Corp., currently does not have any stock option plans.

 

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6.C.        Board Practices

 

General

 

For a discussion of the term of office of the board of directors, see “—6.A. Directors and Senior Management.” No benefits are payable to members of the board upon termination of their relationship with us.

 

Audit Committee

 

Our board of directors established an audit committee in August 2002. On June 13, 2007, we replaced our supervisors with an audit committee pursuant to the amended ROC Securities Exchange Act. The audit committee’s duties and powers include, but are not limited to, investigation of our financial condition, inspection of corporate records, verification of statements by the board of directors, giving reports at shareholders’ meetings, and giving notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our Articles of Incorporation or the resolutions of our shareholders’ meeting. Our audit committee is required to be composed of all our independent directors, who are currently Vivien Huey-Juan Hsieh, Mei-Yueh Ho, Ding-Yuan Yang, Chin-Bing (Philip) Peng and Yen-Shiang Shih. Vivien Huey-Juan Hsieh and Chin-Bing (Philip) Peng are financially literate and have accounting or related financial management expertise. The audit committee meets as often as it deems necessary to carry out its responsibilities. Our board of directors has adopted an Audit Committee Charter for the audit committee.

 

Remuneration Committee

 

Our board of directors established a remuneration committee in August 2011. The remuneration committee’s duties and powers include, but are not limited to, matters relating to the compensation of the members of our board of directors and senior management. The members of the remuneration committee are appointed by the board of directors. They currently are Chin-Bing (Philip) Peng, Ding-Yuan Yang and Vivien Huey-Juan Hsieh. The remuneration committee must meet at least twice each year and may meet as often as it deems necessary to carry out its responsibilities. Our board of directors has adopted a Remuneration Committee Charter for the remuneration committee.

 

6.D.        Employees

 

Employees

 

The following table provides a breakdown of our employees by function as of December 31, 2015, 2016 and 2017.

 

   As of December 31,
Function  2015  2016  2017
Production   45,846    43,831    43,420 
Technical(1)   9,331    8,992    9,055 
Sales and marketing   938    898    969 
Management and administration   3,968    3,858    3,761 
Total   60,083    57,579    57,205 

 

 

 

(1)Includes research and development personnel.

 

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The following table provides a breakdown of our employees by geographic location as of December 31, 2015, 2016 and 2017. Please refer to “Item 4. Information on the Company—Item 4.C. Organizational Structure” for information about our subsidiaries incorporated in different geographic locations.

 

   As of December 31,
Location  2015  2016  2017
Taiwan   24,996    25,227    26,176 
PRC   32,753    30,125    28,954 
Others   2,334    2,227    2,075 
Total   60,083    57,579    57,205 

 

Employee salaries are reviewed and adjusted annually. Salaries are reviewed primarily based upon market survey, inflation, individual performance, company profit and its affordable capability. In order to motivate and encourage employees, incentives consisting of a performance bonus and profit sharing are created and granted to employees according to the company’s performance.

 

According to our Articles of Incorporation approved by our annual shareholders’ meeting in June 2016, provided that where we have a profit before tax for each fiscal year, we shall first recover the loss for preceding years, if any, and then distribute no less than 5% of the remaining profit to employees as remuneration. Employees are entitled to receive remuneration in the form of stock, cash or a combination of stock and cash to be determined by our board of directors. Prior to January 1, 2008, the amount allocated in shares is subject to the resolution of the shareholders’ meeting and determined by valuing the shares at their par value, or NT$10.00 per share. Effective on January 1, 2008, the amount allocated in shares is determined by valuing the shares at the closing price on the last trading day before the date of the shareholders’ meeting. Effective on January 30, 2016, the amount allocated in shares to employees is determined by valuing the shares at the closing price on the last trading day before the date of the board meeting. In addition, ROC law generally requires that our employees be given a preemptive right to subscribe for between 10% and 15% of any of our share offerings.

 

The distribution rule of profit sharing to our employees is based upon his/her position, individual performance, job grade and service seniority for that year.

 

The Hsinchu Science Park Administration offers a variety of employee-related services, including medical examinations, health insurance, career planning advice and other services for our employees in Taiwan. In addition to the services provided by the Hsinchu Science Park Administration, we have established a welfare committee, a pension fund committee, and other employee committees and a variety of employee benefit programs.

 

We do not have any collective bargaining arrangement with our employees. We consider our relations with our employees to be good. We do not employ a significant number of temporary employees.

 

Some senior executive officers are entitled to certain benefits upon termination under certain conditions, including a severance payment equal to a certain specified number of months of his or her then salary.

 

6.E.       Share Ownership

 

The table below sets forth the information with respect to the beneficial ownership of our common shares for each of our directors and key executives as of February 28, 2018. Share ownership information will include the common shares held by the legal entities represented by our directors and key executives.

 

Name  Number of Shares Beneficially Owned  Percentage of Shares Beneficially Owned
Shuang-Lang (Paul) Peng, Chairman and Chief Executive Officer   4,188,114(1)    * 
Kuen-Yao (K.Y.) Lee, Director   11,727,466(2)    * 
Kuo-Hsin (Michael) Tsai, Director** and President & Chief Operation Officer   2,697,804(3)    * 
Peter Chen, Director***   663,697,887(4)    6.9%
Vivien Huey-Juan Hsieh, Independent Director        
Mei-Yueh Ho, Independent Director        
Ding-Yuan Yang, Independent Director        

 

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Name  Number of Shares Beneficially Owned  Percentage of Shares Beneficially Owned
Chin-Bing (Philip) Peng, Independent Director   96,670    * 
Yen-Shiang Shih, Independent Director        
Wei-Lung Liau, General Manager of the Video Solutions Business Group   597,217    * 
Hong-Shiung (Sean) Chen, General Manager of the Mobile Solutions Business Group   1,106,920    * 
Benjamin Tseng, Chief Financial Officer   560,218    * 

 

 

 

*The number of common shares beneficially held is less than 1% of our total outstanding common shares.

 

**Representative of BenQ Foundation.

 

***Representative of Qisda.

 

(1)Including 2,976,335 shares directly held and 1,211,779 shares beneficially owned by spouse and minor children.

 

(2)Including 10,512,153 shares directly held and 1,215,313 shares beneficially owned through spouse and minor children.

 

(3)Including 1,677,205 shares directly held and 920,599 shares beneficially owned through spouse and minor children. 100,000 shares beneficially owned as a representative of BenQ Foundation.

 

(4)Including 0 shares directly held and 99,267 shares beneficially owned through spouse and minor children. 663,598,620 shares beneficially owned as a representative of Qisda. 491,115,000 shares beneficially owned were pledged and 159,315,690 pledged shares have no voting rights under the ROC Company Act.

 

As of February 28, 2018, none of our directors or key executives held any employee stock options from our company, AU Optronics Corp. None of our directors or key executives has voting rights different from those of other shareholders.

 

ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

7.A.        Major Shareholders

 

Qisda is one of our major shareholders. As of February 28, 2018, Qisda beneficially owned 6.9% of our outstanding shares. As of February 28, 2018, one of our nine directors is a representative of Qisda.

 

The following table sets forth information known to us with respect to the beneficial ownership of our shares as of February 28, 2018 or the most recent practicable date, unless otherwise noted, by (1) each shareholder known by us to beneficially own more than 5% of our shares and (2) all directors as a group.

 

Name of Beneficial Owner  Number of Shares Beneficially Owned  Percentage of Shares Beneficially Owned  Percentage of Shares Beneficially Owned
(Fully Diluted)
Qisda
157, Shan-Ying Road, Gueishan, Taoyuan 333, Taiwan, ROC
   663,598,620(1)   6.9%   6.9%
All directors as a group(2)   682,407,941    7.1%   7.1%

 

 

 

(1)As of February 28, 2018, Qisda directly owned 663,598,620 of our common shares, representing approximately 6.9% of the outstanding shares. Of the 663,598,620 common shares directly owned by Qisda, 504,282,930 shares have sole voting power and 159,315,690 shares have no voting rights pursuant to the ROC Company Act. All 663,598,620 common shares directly owned by Qisda have sole dispositive power.

 

(2)Calculated as the sum of (a) with respect to directors who are serving in their personal capacity, the number of shares beneficially held by such director and (b) with respect to directors who are serving in the capacity as legal representatives, the number of shares owned by such institutional or corporate shareholder for which such director is a legal representative and the number of shares beneficially held by such director in his or her personal capacity. This information is as of February 28, 2018.

 

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None of our major shareholders has voting rights different from those of our other shareholders. To the best of our knowledge, we are not directly or indirectly owned or controlled by another corporation, any foreign government, or any other natural or legal person, severally or jointly.

 

We are not currently aware of any arrangement that may at a subsequent date result in a change of control of our company.

 

As of February 28, 2018, approximately 9,624.2 million of our shares were issued and outstanding. Citibank, N.A. has advised us that, as of February 28, 2018, approximately 43.7 million ADSs representing 437.0 million common shares were held of record by Cede & Co. and 21 other registered shareholders domiciled in and outside of the United States.

 

7.B.         Related Party Transactions

 

We have not extended any loans or credit to any of our directors or executives, and we have not provided guarantees for borrowings by any of these persons. We have not entered into any fee-paying contract with any of these persons for such person to provide services not within such person’s capacity as a director or executive of the company.

 

We have, from time to time, purchased raw materials and components and sold our products to our affiliated companies. We believe that these transactions with related parties have been conducted on arms’-length terms.

 

The following table sets forth a summary of our material transactions with related parties in 2017. Please also see Note 38 to our consolidated financial statements for further information.

 

   Net Revenue  Accounts Receivables
   For the Year Ended December 31,  As of December 31,
   2015  2016  2017  2016  2017
   NT$  NT$  NT$  US$  NT$  NT$  US$
   (in millions)  (in millions)
Associates   8,745.7    554.9    1,216.9    41.1    58.7    184.9    6.2 
Joint Ventures   5,453.1    4,105.4    -      -      -      -      -   
Others(1)   6,005.2    12,767.1    11,959.7    403.5    2,474.5    1,668.1    56.3 
    20,204.0    17,427.4    13,176.6    444.6    2,533.2    1,853.0    62.5 

 

   Net Purchases  Accounts Payables
   For the Year Ended December 31,  As of December 31,
   2015  2016  2017  2016  2017
   NT$  NT$  NT$  US$  NT$  NT$  US$
   (in millions)  (in millions)
Associates   19,563.6    9,886.5    8,667.6    292.4    3,734.9    3,233.0    109.1 
Joint Ventures   4,786.3    3,754.4    1,057.1    35.7    -      -      -   
Others(1)   10,587.1    18,317.4    17,549.2    592.1    5,088.2    4,431.7    149.5 
    34,937.0    31,958.3    27,273.9    920.2    8,823.1    7,664.7    258.6 

 

 

 

(1)Qisda ceased to be an associate of us in May 2015. However, Qisda and its subsidiaries are still related parties of us, and amounts for the related transactions between Qisda and its subsidiaries and us starting from June 2015 are set forth in the “Others” category above.

 

Our major related party transactions were conducted with the following companies in 2017:

 

·BenQ Corporation (“BenQ”)

 

BenQ is a subsidiary of Qisda as of December 31, 2017. We sold panels for monitors to BenQ.

 

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·Evergen Power Corporation (“EGPC”)

 

EGPC is a subsidiary of SREC, which is one of our associates, as of December 31, 2017. We sold solar modules to EGPC and undertook construction of power plants for EGPC.

 

·Qisda (Suzhou) Co., Ltd. (“QCSZ”)

 

QCSZ is a subsidiary of Qisda as of December 31, 2017. We sold panels for monitors to QCSZ.

 

·BenQ Materials Corp. (“BMC”)

 

BMC is a subsidiary of Qisda as of December 31, 2017. We purchased polarizers from BMC.

 

·Qisda Corporation (“Qisda”)

 

We directly and indirectly owned 9.99% of Qisda as of December 31, 2017. Qisda provides module-assembly services to us.

 

·Raydium Semiconductor Corporation (“Raydium”)

 

We indirectly owned 17.91% of Raydium as of December 31, 2017. We purchased driver ICs from Raydium.

 

7.C.Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8.FINANCIAL INFORMATION

 

8.A.Consolidated Statements and Other Financial Information

 

8.A.1.See Item 18 for our audited consolidated financial statements and pages F-1 through F-97.

 

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

 

8.A.3.See page F-1 for the audit report of our independent auditors, entitled “Report of Independent Registered Public Accounting Firm.”

 

8.A.4.Not applicable.

 

8.A.5.Not applicable.

 

8.A.6.See “Item 4. Information on the Company—4.B. Business Overview—Customers, Sales and Marketing” for the amount of our export sales.

 

8.A.7.Litigation

 

Investigation for Alleged Violation of Antitrust and Competition Laws

 

We and certain of our subsidiaries, along with various competitors in the TFT-LCD industry, were under investigation for alleged violation of antitrust and competition laws of certain jurisdictions in the past. Since December 2006, we and certain of our overseas subsidiaries had become involved in antitrust investigations, including but not limited to by the U.S. DOJ, the European Commission Directorate-General for Competition (the “DG COMP”), and the Secretariat of Economic Law of Brazil concerning the allegations of price fixing by manufacturers of TFT-LCD panels. Set forth below is a non-exclusive list of the material antitrust proceedings against us.

 

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United States

 

In June 2010, we, AUUS and certain of our current and former officers and employees were indicted in the Northern California Court for alleged violations of Section 1 of the Sherman Act. In March 2012, the jury delivered a guilty verdict against us and AUUS. On September 21, 2012, the Northern California Court 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. The US$500 million fine was fully paid by us in September 2015. The Northern California Court also placed us and AUUS on probation for three years, ordered us and AUUS to publish the conviction and fine in three major trade publications in the U.S., as well as assigned a monitor and required us to adopt an effective antitrust compliance program. The probationary period and monitorship ended in December 2016.

 

Brazil

 

We received requests from the Secretariat of Economic Law of Brazil for information regarding their investigations, and have cooperated with Conselho Administrativa de Defesa Economica (“CADE”), Brazil’s competition agency, in connection therewith. In December 2015, the tribunal of CADE approved a settlement reached by CADE and us. We paid CADE 16.7 million Brazilian Reals in February 2016 pursuant to the settlement agreement. We are awaiting final administrative approval.

 

Antitrust Civil Actions Lawsuits in the United States and other Jurisdictions

 

There were also over 100 civil lawsuits filed against us and/or AUUS in the United States and Canada alleging, among other things, antitrust violations. We and AUUS have reached settlement agreements with the relevant plaintiffs, including a settlement with the state of Illinois in April 2016 and a settlement with the Costco Wholesale Corporation in September 2016.

 

In addition to the above cases in the United States and Canada, a lawsuit was filed by certain consumers in Israel against certain LCD manufacturers, including us, in the District Court of the Central District in Israel (“Israeli Court”). The defendants contested various issues, including whether the lawsuit was properly served. In March 2016, the Israeli Court issued an order stating that the case may proceed in Israel. We and other defendants appealed the Israeli Court’s decision. The Israeli Court ordered that except the appellate proceedings, all the other court proceedings be stayed. The first-level appellate court heard the appeal in December 2016. In December 2016, the Israeli Court overturned the original decision and revoked the permission for this case to be served outside of Israeli jurisdiction. The plaintiffs lodged an appeal to the Israeli Supreme Court, but the Israeli Supreme Court overruled the appeal in August 2017. In January 2018, the parties reached a settlement agreement and agreed to commence the required proceedings for withdrawing the lawsuit.

 

We will make certain provisions with respect to some, but not all, civil lawsuits as the management deems appropriate. See Note 40 of our consolidated financial statements for further details. The provisions may ultimately be proven to be under- or over-estimated. We will reassess the adequacy and reasonableness of the said provisions and make adjustments as we deem necessary. Any penalties, fines, damages or settlements made in connection with these legal proceedings and/or lawsuits may have a material adverse effect on our business, results of operations and future prospects.

 

Other Litigation

 

In July and August of 2014, we, AU Optronic Singapore Ptd. Ltd. and SunPower Technology, Ltd. (“SPTL”) submitted certain disputes for arbitration to the International Court of Arbitration of the International Chamber of Commerce in San Francisco, U.S. in connection with the joint venture agreement among the parties. The arbitration was amicably settled by the parties in September 2016.

 

On February 22, 2017, one of AUO’s subsidiaries in the PRC, AU Optronics (Suzhou) Corp., Ltd. (“AUSZ”) received an administrative complaint filed by Shenzhen China Star Optoelectronics Technology Co., Ltd. (“CSOT”) alleging that AUSZ infringes two PRC patents, and the complaint requests that AUSZ cease the alleged infringing act. Based on the Company’s preliminary assessment, AUO believes that its subsidiary does not infringe the two PRC patents as alleged, and further that the two PRC patents appear to be invalid. In response to such administrative complaint, AUSZ has filed a request to invalidate the two PRC patents accordingly. In April 2017, CSOT filed civil lawsuits in the Intermediate People’s Court of Shenzhen Municipality against the subsidiary claiming infringement of the same two PRC patents. In June 2017, CSOT filed civil lawsuits in the No. 1 Intermediate People’s Court of Chongqing Municipality against the subsidiary claiming infringement of three PRC patents (including one of the above mentioned PRC patents). CSOT requested that AUSZ cease the alleged infringing act and claimed approximate RMB49.91 million for economic loss for each of the said respective four PRC patents and compensation for reasonable fees and litigation expenses such as notarization fees and attorney fees incurred by CSOT. On September 24, 2017, the relevant parties reached a settlement agreement and agreed to withdraw relevant legal proceedings.

 

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In addition to the matters described above, we and/or our subsidiaries are also a party to other litigations or proceedings that arise during our or their ordinary course of business. Except as mentioned above, we and/or our subsidiaries are not involved in any material litigation or proceeding which could be expected to have a material adverse effect on our business or results of operations.

 

Proceedings Related to Our Directors and Senior Management

 

None.

 

Environmental Proceedings

 

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 and which has been established since 2010. The proceedings were initiated by six residents in Houli District, Taichung City (the “Plaintiffs”) to object the administrative dispositions of the environmental assessment and development approval issued in 2010 by the Environmental Protection Administration (“EPA”) of the Executive Yuan of Taiwan to the third-phase development area in the Central Taiwan Science Park (the “Project”). On August 8, 2014, the Plaintiffs reached a settlement with the defendants (i.e. the governmental authorities, including the EPA of the Executive Yuan of Taiwan, the Ministry of Science and Technology (former National Science Council of the ROC Executive Yuan) and the Central Taiwan Science Park Development Office) in the Taipei High Administrative Court. The second-phase environmental impact assessment for the Project continues to proceed. On December 14, 2017, the EPA of the Executive Yuan of Taiwan held the third review meeting of the investigation group. The review meeting reached the conclusion of suggesting approval for the Project. The Central Taiwan Science Park Bureau is now reviewing the comments and conclusion of the review meeting and will reply to the Environmental Impact Assessment Committee of the EPA for further discussion. After approval, the Project will be submitted to the Environmental Impact Assessment General Meeting for review. We will continue to monitor if there will be any material adverse effect on our operations as the event develops.

 

8.A.8.       Dividends and Dividend Policy

 

On June 16, 2016, our annual shareholders’ meeting approved the board of directors’ proposal to distribute a cash dividend of NT$0.35 per share for the year ended December 31, 2015. On June 15, 2017, our annual shareholders’ meeting approved the board of directors’ proposal to distribute a cash dividend of NT$0.56 per share for the year ended December 31, 2016. On March 23, 2018, our board of directors passed a resolution to distribute a cash dividend of NT$1.5 per share for the year ended December 31, 2017, which is subject to the resolution of our annual shareholders’ meeting to be held on June 15, 2018 for the year ended December 31, 2017.

 

Our Articles of Incorporation provide that when the retained earnings available for distribution of the current year reaches 2% of our paid in capital, no less than 20% of the retained earnings available for distribution of the current year shall be distributed as dividends and when the retained earnings available for distribution of the current year does not reach 2% of our paid in capital, we may distribute no dividends and the cash portion of any dividend shall not be less than 10% of the annual dividend. The form, frequency and amount of future dividends will depend upon our earnings, cash flow, financial condition, reinvestment opportunities and other factors.

 

We are generally not permitted under the ROC Company Act to distribute dividends or to make any other distributions to shareholders for any fiscal year in which we have no earnings. According to our Articles of Incorporation approved by our annual shareholders’ meeting in June 2016, which are applicable to distribution of dividends for the years after 2015, provided that where we have a profit before tax for each fiscal year, we shall first recover the loss for preceding years, if any, and then distribute no less than 5% and no more than 1% of the remaining profit to our employees and directors as remuneration, and then pay taxes, and then 10% of the remaining net earnings shall be allocated as our legal reserve unless and until the accumulated legal reserve reaches the paid-in capital; and a certain amount shall be further allocated as special reserve or the special reserve shall be reversed in accordance with applicable laws and regulations or as requested by the competent authority. The balance (if any) together with accumulated and unappropriated retained earnings can be distributed after the distribution plan proposed by the Board and approved by the shareholders’ meeting.

 

 

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In addition to permitting dividends to be paid out of accumulated earnings after deducting losses, we are permitted under the ROC Company Act to make distributions to our shareholders in the form of shares or in cash from the legal reserve and certain capital surplus. However, where legal reserve is distributed by issuing new shares or by cash, only the portion of legal reserve that exceeds 25% of our paid-in capital may be distributed. See “Item 10. Additional Information—10.B. Memorandum and Articles of Association—Dividends and Distribution.” For information about ROC taxes on dividends and distributions, see “Item 10. Additional Information—10.E. Taxation—ROC Tax Considerations—Dividends.”

 

The holders of ADSs will be entitled to receive dividends to the same extent as the holders of our shares, subject to the terms of the deposit agreement.

 

Any cash dividends will be paid to the depositary in NT dollars and, after deduction of any applicable ROC taxes and fees and expenses of the depositary and custodian, except as otherwise provided in the deposit agreement, will be converted by the depositary into U.S. dollars and paid to the holders of ADSs. Whenever the depositary receives any free distribution of shares, including stock dividends, on any ADSs that the holders of ADSs hold, the depositary may, and will if we so instruct, deliver to the holders of ADSs additional ADSs which represent the number of shares received in the free distribution, after deduction of applicable taxes and the fees and expenses of the depositary and the custodian. If additional ADSs are not so delivered, each ADS that the holders of ADSs hold shall represent its proportionate interest in the additional shares distributed.

 

8.B.Significant Changes

 

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

 

ITEM 9.THE OFFER AND LISTING

 

9.A.Offering and Listing Details

 

Our shares have been listed on the Taiwan Stock Exchange since September 8, 2000 under the number “2409.” Our ADSs have been listed on the New York Stock Exchange under the symbol “AUO” since May 2002. The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Taiwan Stock Exchange for the shares and the high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for the shares represented by ADSs.

 

    Taiwan Stock Exchange  

New York Stock Exchange(1) 

    Closing Price per
Common Share
  Average Daily
Trading
  Closing Price per
ADS
  Average Daily
Trading
    High   Low   Volume   High   Low   Volume
    (NT$)   (NT$)   (in thousands of
Common Shares)
  (US$)   (US$)   (in thousands
of ADSs)
2013     14.00       8.44       81,594.3       4.89       2.82       1,146.2  
2014     16.55       8.80       74,525.9       5.42       2.73       480.1  
2015     18.90       8.11       76,047.5       6.01       2.40       1,870.4  
2016     13.60       8.26       67,023.1       4.38       2.44       745.5  
First Quarter     10.05       8.26       70,336.6       3.06       2.44       713.8  
Second Quarter       10.95       8.41       51,948.5       3.49       2.49       548.5  
Third Quarter     13.60       10.90       90,285.4       4.38       3.37       1,061.9  
Fourth Quarter       13.10       11.35       55,904.9       4.18       3.46       654.9  
2017     13.95       11.45       82,251.6       4.81       3.63       1,580.7  
First Quarter     13.40       11.75       71,233.9       4.29       3.63       1,227.5  
Second Quarter       13.95       11.45       99,133.9       4.81       3.66       2,422.2  
Third Quarter     13.55       11.70       91,044.2       4.49       3.73       1,888.1  
Fourth Quarter       13.30       12.10       66,411.1       4.46       3.98       779.2  

 

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    Taiwan Stock Exchange  

New York Stock Exchange(1) 

    Closing Price per
Common Share
  Average Daily
Trading
  Closing Price per
ADS
  Average Daily
Trading
    High   Low   Volume   High   Low   Volume
    (NT$)   (NT$)   (in thousands of
Common Shares)
  (US$)   (US$)   (in thousands
of ADSs)
October     12.60       12.10       62,519.2       4.24       3.98       996.9  
November     13.30       12.20       88,154.8       4.46       4.10       869.6  
December     12.70       12.30       47,153.3       4.23       4.12       444.8  
2018 (through March 12, 2018)     14.30       12.35       114,604.1       4.99       4.20       1,142.2  
January       14.30       12.35       120,470.1       4.99       4.20       1,278.1  
February     13.80       12.80       129,072.8       4.93       4.40       1,191.8  
March (through March 12, 2018)     13.65       12.95       74,961.2       4.67       4.45       667.5  

 

 

(1)Each ADS represents 10 common shares.

 

9.B.Plan of Distribution

 

Not applicable.

 

9.C.Markets

 

The principal trading markets for our shares are the Taiwan Stock Exchange and the New York Stock Exchange, on which our shares trade in the form of ADSs.

 

9.D.Selling Shareholders

 

Not applicable.

 

9.E.Dilution

 

Not applicable.

 

9.F.Expenses of the Issue

 

Not applicable.

 

ITEM 10.ADDITIONAL INFORMATION

 

10.A.Share Capital

 

Not applicable.

 

10.B.Memorandum and Articles of Association

 

On June 15, 2017, our shareholders approved the twentieth amendment to our Articles of Incorporation, a copy of which is filed as Exhibit 1.1 hereto.

 

The following statements summarize the material elements of our capital structure and the more important rights and privileges of our shareholders conferred by ROC law and our Articles of Incorporation.

 

Objects and Purpose

 

The scope of our business as set forth in Article 2 of our Articles of Incorporation includes the research, development, production, manufacture and sale of the following products: plasma display and related systems, liquid crystal display and related systems, organic light emitting diodes and related systems, amorphous silicon photo sensor device parts and components, thin film photo diode sensor device parts and components, thin film transistor photo sensor device parts and components, touch imaging sensors, full color active matrix flat panel displays, field emission displays, single crystal liquid crystal displays, original equipment manufacturing for amorphous silicon thin film transistor process and flat panel display modules, original design manufacturing and original equipment manufacturing business for flat panel display modules, solar cell, modules, and related systems and services, new green energy related systems and services (for operations outside the Science Park only), color filters, the simultaneous operation of a trade business relating to our business and the simultaneous operation of metals, Refuse Derived Fuel and chemical products from our manufacturing recycle processes.

 

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Directors

 

Our board of directors is elected by our shareholders and is responsible for the management of our business. Our Articles of Incorporation provide that our board of directors is to have between seven to eleven members. Currently, our board of directors is composed of nine directors. The chairman of our board is elected by the directors. The chairman presides at all meetings of our board of directors and also has the authority to represent, sign for, and bind our company. The term of office for our directors is three years.

 

In addition, pursuant to the ROC Securities Exchange Act, a public company is required to either establish an audit committee or retain supervisors, provided that the FSC may, after considering the scale, business nature of a public company and other essential conditions, require the company to establish an audit committee in place of its supervisors. We replaced our supervisors by establishing an audit committee on June 13, 2007. The audit committee’s duties and powers include, but are not limited to, inspection of corporate records, verification of statements prepared by the board of directors, and giving reports at shareholders’ meetings. Each individual member of our audit committee is authorized to investigate our financial condition, represent us when a director is engaged in a sale, loan or other juristic acts with us for his own account or on behalf of another, call the shareholders meeting if the board of directors fails to do so, and give notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our Articles of Incorporation or the resolutions of our shareholders’ meeting. Our audit committee is required to be composed of all of our independent directors, who are currently Vivien Huey-Juan Hsieh, Mei-Yueh Ho, Ding-Yuan Yang, Chin-Bing (Philip) Peng and Yen-Shiang Shih.

 

Pursuant to the ROC Company Act, the election of our directors is conducted by means of cumulative voting. The most recent election for all of the directors was held on June 16, 2016. We have adopted a candidate nomination system for the election of directors.

 

Pursuant to the ROC Company Act, a person may serve as a director in his or her personal capacity or as the representative of another legal entity. A legal entity that owns our shares may be elected as a director, in which case a natural person must be designated to act as the legal entity’s representative. In the event several representatives are designated by the same legal entity, any or all of them may be elected. A natural person who serves as the representative of a legal entity as a director may be removed or replaced at any time at the discretion of such legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Currently, two of our directors are the representatives of the entities as shown in “Item 6. Directors, Senior Management and Employees—6.A. Directors and Senior Management—Directors.”

 

The present members of the board of directors took office on June 16, 2016.

 

Shares

 

As of February 28, 2018, our authorized share capital was NT$120 billion, divided into 12 billion common shares, of which 100 million shares are reserved for the issuance of shares for employee stock options, and 9,624,245,115 common shares were issued.

 

All shares presently issued, including those underlying our ADSs, are fully paid and in registered form, and existing shareholders are not obligated to contribute additional capital.

 

See “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our ADSs and Our Trading Market—Our equity holders may experience dilution if we issue remunerations in the form of stock and stock options to employees or sell additional equity or equity-linked securities.”

 

New Shares and Preemptive Rights

 

The issuance of new shares requires the prior approval of our board of directors. If our issuance of any new shares will result in any change in our authorized share capital, we are required under ROC law to amend our Articles of Incorporation, which requires approval of our shareholders in a shareholders’ meeting. We must also obtain the approval of, or submit a report to, the FSC and the Hsinchu Science Park Administration Bureau, as applicable. Generally, when a company issues capital stock for cash, 10% to 15% of the issue must be offered to its employees. In addition, if a public company intends to offer new shares for cash, at least 10% of the issue must also be offered to the public. This percentage can be increased by a resolution passed at a shareholders’ meeting, which will reduce the number of new shares in which existing shareholders may have preemptive rights. Unless the percentage of the shares offered to the public is increased by a resolution, existing shareholders of the company have a preemptive right to acquire the remaining 75% to 80% of the issue in proportion to their existing shareholdings. Nevertheless, the preemptive rights provisions will not apply to offerings of new shares through a private placements approved at a shareholders’ meeting.

 

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Register of Shareholders and Record Date

 

For our shareholders who have opened Taiwan Depository & Clearing Corporation book-entry accounts, our register of such shareholders is maintained by the database of Taiwan Depository & Clearing Corporation. For our shareholders who have not opened Taiwan Depository & Clearing Corporation book-entry accounts, our register of such shareholders is maintained by our share registrar, Taishin International Bank, Stock Affairs Department. The ROC Company Act permits us, by giving advance public notice, to set a record date and close the register of shareholders for a specified period in order to determine the shareholders or pledgees that are entitled to certain rights pertaining to our shares. Under the ROC Company Act, our register of shareholders should be closed for a period of sixty days before each general meeting of shareholders, thirty days before each extraordinary meeting of shareholders and five days before each record date.

 

Transfer of Shares

 

Under the ROC Company Act, shares are transferred by endorsement and delivery of the related share certificates. However, settlement of trading of shares of a listed company, such as our company, generally, is carried out on the book entry system maintained by the Taiwan Depository & Clearing Corporation. In addition, transferees must have their names and addresses registered on our register in order to assert shareholders’ rights against us. Notwithstanding the foregoing, shareholders are required to file their specimen seals with our share registrar.

 

Shareholders’ Meetings

 

We are required to hold an annual general shareholders’ meeting once every calendar year, generally within six months after the end of each fiscal year. Any shareholder who holds 1% or more of our issued and outstanding common shares may submit one written proposal for discussion at our annual general shareholders’ meeting. Our directors may convene an extraordinary shareholders’ meeting whenever they think fit, and they must do so if requested in writing by shareholders holding not less than 3% of our paid-in share capital who have held their shares for more than a year. In addition, any member of our audit committee may convene a shareholders’ meeting under certain circumstances. For a public company in Taiwan, such as our company, at least 15 days’ advance written notice must be given of every extraordinary shareholders’ meeting and at least 30 days’ advance written notice must be given of every annual general shareholders’ meeting. Unless otherwise required by law or by our articles of incorporation, voting for an ordinary resolution requires an affirmative vote of a simple majority of those present and voting. A distribution of cash dividends would be an example of an act requiring an ordinary resolution. A special resolution may be adopted in a meeting of shareholders convened with a quorum of holders of at least two thirds of our total outstanding shares at which the holders of at least a majority of our shares represented at the meeting vote in favor thereof. A special resolution is necessary for various matters under ROC law, including:

 

·any amendment to our articles of incorporation;

 

·our dissolution or amalgamation;

 

·a merger or spin-off;

 

·transfers of the whole or a substantial part of our business or properties;

 

·the acquisition of the entire business or properties of another company which would have a significant impact on our operations;

 

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·execution, modification or termination of any contracts regarding leasing of all business or joint operations or mandate of our business to other persons;

 

·the distribution of any stock dividend; or

 

·the removal of directors.

 

However, in the case of a public company such as our company, a special resolution may be adopted by holders of at least two thirds of the shares represented at a meeting of shareholders at which holders of at least a majority of the total outstanding shares are present.

 

Voting Rights

 

According to the ROC Company Act, a holder of our shares has one vote for each share held at shareholders’ meetings. However, (i) treasury shares or (ii) our common shares held by an entity in which our company owns more than 50% of the voting shares or paid-in capital, or a “Controlled Entity,” or by a third entity in which our company and a Controlled Entity jointly own, directly or indirectly, more than 50% of the voting shares or paid-in capital, cannot be voted. There is cumulative voting for the election of directors. In all other matters, shareholders must cast all their votes the same way on any resolution provided that shareholders holding shares on behalf of others are permitted to split votes when exercising voting rights. Voting rights attached to our common shares may be exercised by personal attendance or proxy through written or electronic ballot.

 

If any shareholder is represented at a general or extraordinary shareholders’ meeting by proxy, a valid proxy form must be delivered to us five days before the commencement of the general or extraordinary shareholders’ meeting. Voting rights attached to our shares that are exercised by our shareholders’ proxy are subject to ROC proxy regulations. Any shareholder who has a personal interest in a matter to be discussed at our shareholders’ meeting, the outcome of which may impair our interests, is not permitted to vote or exercise voting rights nor vote or exercise voting rights on behalf of another shareholder on such matter.

 

Except for trust enterprises or share transfer agents approved by the FSC, where one person is appointed as proxy by two or more shareholders who together hold more than 3% of our shares, the votes of those shareholders in excess of 3% of our total issued shares will not be counted.

 

You will not be able to exercise voting rights on the shares underlying your ADSs on an individual basis. For additional information, see “Item 3. Key Information—3.D. Risk Factors—Risk Related to our ADSs and Our Trading Market—ADS holders will not have the same rights as our shareholders, which may affect the value of the ADSs.”

 

Dividends and Distributions

 

We may distribute dividends in any year in which we have accumulated earnings. At the shareholders’ annual general meeting, our board of directors submits to the shareholders for approval proposals for the distribution of a dividend or the making of any other distribution to shareholders from our accumulated earnings or reserves for the preceding fiscal year. Dividends may be distributed either in cash, in the form of shares or as a combination of cash and shares. Our Articles of Incorporation provide that the cash portion of any dividend shall not be less than 10% of the annual dividend. Dividends are paid proportionately to shareholders as listed on the register of shareholders on the relevant record date.

 

According to our Articles of Incorporation approved by our annual shareholders’ meeting in June 2016, provided that where we have a profit before tax for each fiscal year, we shall first recover the loss for the preceding years, if any, and then distribute no less than 5% of the remaining profit for distribution to employees as remuneration and no more than 1% of the remaining profit for distribution to directors as remuneration, and then pay taxes, and then 10% of the remaining net earnings shall be allocated as our legal reserve unless and until the accumulated reserve reaches the paid-in capital; and a certain amount shall be further allocated as special reserve or the special reserve shall be reversed in accordance with applicable laws and regulations or as requested by the competent authority. The balance (if any) together with accumulated but unappropriated retained earnings can be distributed after the distribution plan proposed by the Board and approved by the shareholders’ meeting.

 

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In addition to permitting dividends to be paid out of accumulated earnings after deducting losses, we are permitted under the ROC Company Act to make distributions to our shareholders based on Taiwan IFRS financials for ROC reporting purposes in the form of shares or in cash from the legal reserve and certain capital surplus. However, where legal reserve is distributed by issuing new shares or by cash, only the portion of legal reserve which exceeds 25% of our paid-in capital may be distributed.

 

For information on the dividends paid by us in recent years, see “Item 8. Financial Information—8.A.8. Dividends and Dividend Policy.” For information as to ROC taxes on dividends and distributions, see “Item 10. Additional Information—10.E. Taxation—ROC Tax Considerations—Dividends.”

 

Acquisition of Shares by Our Company

 

With limited exceptions under the ROC Company Act, we are not permitted to acquire our shares.

 

In addition, pursuant to the Securities and Exchange Law, we may, by a board resolution adopted by majority consent at a meeting with two thirds of our directors present, purchase our shares on the Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the FSC, for the following purposes:

 

·to transfer shares to our employees;

 

·to facilitate conversion arising from bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants (collectively, the “Convertible Securities”) issued by our company into shares; and

 

·if necessary, to maintain our credit and our shareholders’ equity; provided that the shares so purchased shall be cancelled thereafter.

 

Our shares purchased pursuant to the first and the second items above shall be transferred to our employees or holders of Convertible Securities, as the case maybe, within three years after the date of such purchase. Our shares purchased pursuant to item 3 above shall be cancelled within six months after the date of such purchase.

 

We are not allowed to purchase more than 10% of our total issued and outstanding shares. In addition, we may not spend more than the aggregate amount of our retained earnings, the premium from issuing stock and the realized portion of the capital surplus to purchase our shares.

 

We may not pledge or hypothecate any purchased shares. In addition, we may not exercise any shareholders’ rights attaching to such shares. In the event that we purchase our shares on the Taiwan Stock Exchange, our affiliates, directors, officers and their respective spouses and minor children and/or nominees are prohibited from selling any of our shares during the period in which we purchase our shares.

 

According to the ROC Company Act, an entity in which our company directly or indirectly owns more than 50% of the voting shares or paid-in capital, which is referred to as a controlled entity, may not purchase our shares. Also, if our company and a controlled entity jointly own, directly or indirectly, more than 50% of the voting shares or paid-in capital of another entity, which is referred to as a third entity, the third entity may not purchase shares in either our company or a controlled entity.

 

Liquidation Rights

 

In the event of our liquidation, the assets remaining after payment of all debts, liquidation expenses, taxes and distributions to holders of preferred shares, if any, will be distributed pro rata to our shareholders in accordance with the ROC Company Act.

 

Rights to Bring Shareholder Suits

 

Under the ROC Company Act, a shareholder may bring suit against us in the following events:

 

·Within 30 days from the date on which a shareholders’ resolution is adopted, a shareholder may file a lawsuit to annul a shareholders’ resolution if the procedure for convening a shareholders’ meeting or the method of resolution violates any law or regulation or our articles of incorporation.

 

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·If the substance of a resolution adopted at a shareholders’ meeting contradicts any applicable law or regulation or our articles of incorporation, a shareholder may bring a suit to determine the validity of such resolution.

 

Shareholders may bring suit against our directors under the following circumstances:

 

·Shareholders who have continuously held 3% or more of the total number of issued and outstanding shares for a period of one year or longer may request in writing that an audit committee institute an action against a director on our behalf. In case the audit committee fails to institute an action within 30 days after receiving such request, the shareholders may institute an action on our behalf. In the event that shareholders institute an action, a court may, upon motion of the defendant, order such shareholders to furnish appropriate security.

 

·In the event that any director, officer or shareholder who holds more than 10% of our issued and outstanding shares and their respective spouse and minor children and/or nominees sells shares within six months after the acquisition of such shares, or repurchases the shares within six months after the sale, we may make a claim for recovery of any profits realized from the sale and purchase. If our board of directors or our audit committee fails to make a claim for recovery, any shareholder may request that our board of directors or our audit committee exercise the right of claim within 30 days. In the event our direc