American Patents LLC v. Mediatek, Inc. et al

Western District of Texas, txwd-6:2018-cv-00339

Exhibit F - MediaTek's 2017 Annual Report

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0 EXHIBIT F 0 0 Contact Information Spokesman: Name: David Ku Title: Chief Financial Officer Tel: +886 (0)3-567-0766 Fax: +886 (0)3-578-7610 Email: ir@mediatek.com Acting spokesperson: Name: Jessie Wang Title: Senior Manager, Finance Department Tel: +886 (0)3-567-0766 Fax: +886 (0)3-578-7610 Email: ir@mediatek.com MediaTek Inc. Headquarters: Address: No. 1, Dusing 1st Rd., Hsinchu Science Park, Hsinchu, 30078, Taiwan Tel: +886 (0)3-567-0766 MediaTek Inc. Taipei Office: Address: No. 15, Lane 91, Section 1, Neihu Road, Neihu District, Taipei, 11442, Taiwan Tel: +886 (0)2-2659-8088 Transfer Agent: Company: ChinaTrust Commercial Bank, Transfer Agency Department Address: 5F, No. 83, Sec. 1, Chungqing S. Rd., Taipei City, Taiwan, R.O.C. 100 Website: https://ecorp.chinatrust.com.tw/cts/en/index.jsp Tel: +886 (0)2-6636-5566 Independent Auditor: Company: Ernst & Young Auditors: Shou-Pin Kuo and Wen-Fun Fuh Address: 9F, No.333, Sec. 1, Keelung Rd., Taipei, Taiwan, R.O.C. Tel: +886 (0)2-2757-8888 Website: http://www.ey.com MediaTek Inc. Website: Website: http://www.mediatek.com MediaTek Inc. | 2017 Annual Report 1 0 2017 MediaTek Annual Report Table of Contents I. Letter to Shareholders ................................................................................................................................... 4 II. Company Profile ........................................................................................................................................... 6 1. MediaTek Company Profile ................................................................................................................. 6 2. Milestones ............................................................................................................................................ 6 III. Corporate Governance ............................................................................................................................. 11 1. Organization ....................................................................................................................................... 11 2. Directors............................................................................................................................................. 13 3. Management Team ............................................................................................................................. 18 4. Corporate Governance Report............................................................................................................ 21 5. Information Regarding the Company's Independent Auditors ........................................................... 37 6. Net Changes in Shareholding ............................................................................................................. 40 7. Top 10 Shareholders Who are Related Parties to Each Other ............................................................ 41 8. Long-Term Investment Ownership .................................................................................................... 41 IV. Capital and Shares ..................................................................................................................................... 42 1. Capital and Shares .............................................................................................................................. 42 2. Status of Corporate Bonds ................................................................................................................. 45 3. Status of Preferred Stocks .................................................................................................................. 45 4. Status of GDR/ADR........................................................................................................................... 46 5. Status of Employee Stock Option Plan .............................................................................................. 46 6. Status of New Employees Restricted Stock Issuance......................................................................... 47 7. Status of New Shares Issuance in Connection with Mergers and Acquisitions.................................. 49 8. Financing Plans and Implementation ................................................................................................ 50 V. Business Activities ....................................................................................................................................... 51 1. Business Scope................................................................................................................................... 51 2. Market, Production, and Sales Outlook ............................................................................................. 56 3. Employees .......................................................................................................................................... 61 4. Material Contracts .............................................................................................................................. 62 VI. Corporate Social Responsibility ............................................................................................................... 63 MediaTek Inc. | 2017 Annual Report 2 0 1. Corporate Promise.............................................................................................................................. 63 2. Social Participation ............................................................................................................................ 66 3. Environmental Efforts ........................................................................................................................ 69 VII. Financial Status, Operating Results and Status of Risk Management................................................ 73 1. Financial Status .................................................................................................................................. 73 2. Operating Results ............................................................................................................................... 75 3. Cash Flow Analysis ............................................................................................................................ 77 4. Major Capital Expenditure ................................................................................................................. 78 5. Investment Policies ............................................................................................................................ 78 6. Risk Management .............................................................................................................................. 78 7. Other Material Events ........................................................................................................................ 81 VIII. Special Disclosure ................................................................................................................................... 82 1. Summary of Affiliated Companies ..................................................................................................... 82 2. Private Placement Securities .............................................................................................................. 96 3. Holding or Disposition of the Company Stocks by Subsidiaries ....................................................... 96 4. Any Events that Had Significant Impacts on Shareholders' Rights or Security Prices as Stated in Item 2 Paragraph 2 of Article 36 of Securities and Exchange Law of Taiwan ........................................... 97 5. Other Necessary Supplement ............................................................................................................. 97 IX. Financial Information ............................................................................................................................... 98 1. Condensed Balance Sheets ................................................................................................................. 98 2. Condensed Statements of Comprehensive Income .......................................................................... 100 3. Auditors' Opinions from 2013 to 2017 ............................................................................................ 101 4. Five-Year Financial Analysis ........................................................................................................... 101 5. Audit Committee's Review Report .................................................................................................. 104 6. Financial Statements and Independent Auditors' Report –the Company & Subsidiaries (Page F1 – Page F117) ................................................................................................................................................ 105 7. Financial Statements and Independent Auditors' Report – Parent Company (Page F118 – Page F204) ........................................................................................................................................................ 105 8. The Impact on the Company's Financial Status in Cases where the Company or its Affiliates have Financial Difficulties ................................................................................................................................ 105 MediaTek Inc. | 2017 Annual Report 3 0 V. Business Activities 1. Business Scope 1.1. Business Scope 1.1.1 The Main Business Activities of the Company A. Design, develop, produce, manufacture and market the following products: a. Multimedia Integrated Circuits (IC); b. Computer peripheral ICs; c. High-end digital consumer ICs; d. Other application specific ICs; e. Patent and circuit-layout licensing and services of the above-mentioned products B. Provide the above-mentioned products with software and hardware application design, test, maintenance, and technological consultation services C. Import and export of the above-mentioned products 1.1.2 Revenue Mix (2017) Product Category Multimedia Chipsets Others (Note) Revenue Mix 99.17% 0.83% Note: Others include revenue from technical services and licensing fees. 1.1.3 Products Currently Offered by the Company A. Mobile communication chipsets; B. Tablet chipsets; C. Bluetooth chips; D. Wireless LAN (WLAN) chips; E. Global Positioning Satellite (GPS) chips; F. Near Field Communication (NFC) SoCs; G. Connectivity combo SoCs that integrated Bluetooth, FM, WLAN, GPS, etc.; H. Multimode wireless charging chips; I. Wearable device SoCs; J. Smart home connectivity chips; K. Bio-sensing analog front-end chips; L. Optical storage chipsets; M. DVD player SoCs; N. Blu-ray DVD player chipsets; O. Highly-integrated digital TV controller chips; P. ATSC and DVB-T TV decoder and demodulator chipsets; Q. xDSL chipsets; R. Automotive chipsets; S. Power management and controller chips for various electronics; and T. USB PD Type-C controller chips 1.1.4 New Products Planned for Development A. Next generation highly-integrated mobile communication chipsets; B. Next generation tablet chipsets; C. Next generation highly-integrated multi-functional wireless communication SoCs; D. Next generation wearable device SoCs; E. Next generation low-power smart home connectivity chips; F. Next generation highly integrated Ultra HD, 4K120Hz smart TV chips; G. Next generation passive optical network (xPON) chipsets; H. Next generation gigabit digital subscriber line (VDSL 35B) chipsets; I. Next generation ten megabyte NBASE-T Ethernet physical chipsets; and MediaTek Inc. | 2017 Annual Report 51 0 J. Next generation power management and controller chipsets for various electronics 1.2. Industry Outlook 1.2.1 The semiconductor manufacturing supply chain: The semiconductor industry can be categorized as: upstream – IC design companies, midstream – wafer foundries, and downstream – IC packaging and testing service providers. The horizontal specialization is the main difference that sets Taiwan's IC industry apart from its overseas peers. Major international semiconductor companies usually operate vertically across the value chain, from IC design and manufacturing, to packaging, testing, to systems integration. However, as the rapidly-evolving industry environment requires high capital expenditures, horizontal model is able to focus resources on specific field more efficiently to meet industry trends and proves to be an outperformer compared to the integrated model. The major business of an IC design company is to design and sell semiconductor devices, or to design products based on customers' requirements. IC design is the upstream of the industry value chain, while other players in the backend of supply chain, including photo mask providers, wafer foundries, packaging and testing companies, etc. In general, IC companies outsource almost 100% of photo mask, wafer fabrication, and IC packaging to specialized manufacturing partners. Most companies also outsource their IC testing work to specialized testing houses, while some IC design companies keeps a certain portion of in-house testing. In the semiconductor supply chain, the IC design industry is a knowledge-intensive industry with a relatively high return on investment. Coupled with complete semiconductor industry ecosystem and ample talents, IC design is a thriving industry in Taiwan. 1.2.2 Industry Outlook, Trends and Competition A. Wireless Communications Products The wireless communication industry is booming and relevant applications are growing with handsets carrying the largest volume. According to Strategy Analytics, worldwide handset shipment has reached 1.9 billion units in 2017 and the number is expected to grow steadily to 2.2 billion units in 2022, thanks to the growth of smartphone shipments. Strategy Analytics estimated that global smartphone shipments was about 1.5 billion units in 2017 and the number is expected to grow to 1.9 billion units in 2022. In addition to mobile phones and tablets, the emerging Internet of Things and automotive electronics are important applications for wireless communications, concurrently driving the growth of wireless communication industry. (In million units) Worldwide Handset Shipment Forecast 2,500 2,000 1,500 1,000 500 - 2017 2018 2019 2020 2021 2022 Source: Strategy Analytics, December 2017 MediaTek Inc. | 2017 Annual Report 52 0 (In million units) Worldwide Smartphone Shipment Forecast 2,500 2,000 1,500 1,000 500 - 2017 2018 2019 2020 2021 2022 Source: Strategy Analytics, December 2017 Global communication technologies continue to evolve and upgrade. 4G networks become mature in developed markets as well as Mainland China. In emerging markets, 4G networks has also become more popular. Coupled with the falling prices of end devices, local users are more willing to convert their feature phones to smartphones, the trend that further increases the penetration rate of smartphones. The functionality of wireless communication also enhances. Apart from voice communication and camera function, consumers look forward to rich multimedia applications such as dual camera shooting, video streaming, social networking, online gaming, augmented/virtual reality, etc. and expect these functions can be supported by mainstream phones. In order to meet consumers' need and support more applications, the specifications and features of smartphones and tablets continue to be upgraded such as AI function integration to enhance user experience, CPUs with higher performance and lower power consumption and more comprehensive connectivity technologies. For example, the emergence of dual 4G LTE SIM with dual VoLTE/ViLTE support can provide a consistent user experience to dual SIM users. These more comprehensive and optimized functions bring up the emergence of many end devices. Manufacturers launch a variety of products to stimulate end market demand. Other than smartphones and tablets, with the rise of Internet of Things (IoT) concept, new applications with Wi- Fi, GPS and Bluetooth are also boosting the market demand for wireless communications, including AI voice assistant devices, smart home appliances, car fleet management, sharing bikes, smart meters, etc. These new devices further drive market demand for wireless communication. Looking forward, the emergence of low power wide area (LPWA) technologies such as NB-IoT will bring up broader IoT applications, and the technologies are also one of the Company's key focuses. The rapidly-growing wireless communication market comes with intense competition, primarily from semiconductor companies in the US, Europe, Mainland China and Taiwan. Not only will semiconductor companies have to keep up with new technology standards and launch more advanced products to compete but also need to compete on cost optimization and technical support to offer the best total solutions to customers. For smartphone products, the Company establishes partnerships with worldwide operators and distribution channels to aggressively expand global market, upgrade 4G technologies and develop the next generation mobile communication technologies such as 5G and NB-IoT to make our product portfolio more comprehensive. For feature phones, the Company continues our efforts in integrating more features into products to achieve a higher level of customization and differentiation for customers. On the tablet front, the Company further optimizes multimedia functions and enhances performance to expand market size. As for Bluetooth, WLAN, GPS, NFC, fast charging, wireless charging, and other peripheral chips, the Company will strengthen product competitiveness by high-speed transmission enhancement and integration with high-performance processors. Also, the Company MediaTek Inc. | 2017 Annual Report 53 0 will continue to expand to other consumer electronic platforms such as AI voice assistant devices, smart wearables, smart home appliances, sharing bikes, game consoles, TVs, etc. B. Digital TV Products Global digital TV shipment growth is slowing down. However, with Ultra High Definition (UHD) becoming a mature technology, the penetration rate of UHD TV is increasing. Coupled with the price of panels remaining high and that of memory growing sequentially, TV manufacturers have more tendency to ship large-size TVs. After the introduction of coding and decoding specifications for UHD TVs, content providers, TV operators, and video streaming services providers are aggressively preparing for UHD videos, which strengthen UHD TV sales momentum. OLED panel's increasing yield rate and decreasing manufacturing costs bring up tier-one brands' OLED TV shipment sequentially. The Company leads the industry by launching multi-core smart TV SoCs and supporting coding and decoding specifications for UHD TVs. Meanwhile, the Company cooperates with Google on Android TVs, which have been adopted by various international brands. Thus, the Company can maintain our market-leading position. C. Digital Consumer Products Content-rich online video and audio streaming services gradually replace video services by traditional DVD players. Along with the popularity of OTT Boxes and smart TV, consumers are changing their ways of enjoying movies. The Company's Blu-ray chipsets can support Internet access and online streaming and our high-end products also can support 4K and HDR. As a result, we can maintain a certain amount of shipments in the declining DVD player market. D. Optical Storage Products The PC industry changes rapidly. The emergence of optical disc-free ultra-thin notebook and tablets and the popularity of cloud storage applications compress the optical disc market upside. DVD-Rewritable, the existing main optical storage product, is a mature product. The Company maintains a high market share by enhancing our core competitiveness and customer services. E. Broadband Networking Products Global broadband industry continues to grow, thanks to the increasing number of broadband users. According to research firms, at the end of fourth quarter 2017, there are more than 840 million global broadband users, which implies a steady growth rate of 5%. Among them, more than 300 million users are in Mainland China, whose mainstream technology is xPON, which accounts for 80% of total China broadband market. China is the largest xPON market, globally. With the trend of FTTH, many countries accelerate the deployment of xPON, including Central and South America, Southeast Asia and India. The rapid xPON development in China with tens of millions of installation has lowered the equipment cost of xPON. In recent years, the growth of PON in export markets has been heating up, becoming next market growth momentum. Furthermore, FTTH is the foundation for 5G mobile communication technologies to meet this future technologies' high throughput requirements. F. Analog Products Nowadays, with digital electronic system becoming market mainstream, market demand on analog ICs does not decrease but increase as all digital electronic systems require data and signals' input/output and transition. Analog ICs are in charge of information transmission between users and machines. As a result, the applications of analog ICs are very broad, including computers and their peripheral applications, communications, automotive electronics, consumer electronics and new applications such as smart home, IoT, etc. Almost all electronic systems are equipped with analog ICs. 1.3. Technology and R&D 1.3.1 R&D Spending The Company's R&D spending in 2017 was NT$57,170,776 thousand, and from January 1 st 2018 to the printing date of this annual report, the R&D spending was NT$17,422,826 thousand. MediaTek Inc. | 2017 Annual Report 54 0 1.3.2 Developed Technologies or Products in the Last Fiscal Year and Year-to-Date A. Highly integrated GSM/GPRS/WCDMA/TD-SCDMA SoCs for multimedia phones; B. Highly integrated LTE chipsets; C. Highly integrated tablet chipsets; D. Highly integrated wearable device chipsets; E. Highly integrated smart home connectivity chips; F. Highly integrated WLAN SoCs; G. High performance/cost NFC chips; H. High performance/cost multifunction wireless communication SoC; I. Multi-mode wireless charging chips; J. Highly integrated Ultra HD smart TV chipsets; K. Highly integrated UHG chipsets; L. Highly integrated passive optical network (xPON) chipsets; M. Highly integrated VDSL 35B chipsets; N. Power management and controller chipsets for various electronics and O. USB PD Type-C controller chipsets 1.4. Long- and Short-Term Business Development Plans 1.4.1 Short-Term Business Development Plans A. Keep our finger on the pulse of market trend and customer need, continue to develop highly competitive new products, and adopt more advanced process/more optimized circuit design architecture to introduce high price-performance ratio mainstream products to stimulate market demand. B. Combine newly-acquired companies' product offerings with existing platform advantages to provide customers with total solutions. Deeply understand and serve customers, and facilitate customers to time-to- market to seize market opportunities. C. Enhance existing long-term partnerships with customers as well as expand customer base and market share by implementing efficient marketing strategies. Meanwhile, work closely with relevant partners in every industry such as operators to expand business opportunities. D. Maintain close relationship with supply chain partners including foundries, packaging companies and testing houses. Ensure real-time communications with customers and manufacturing partners to respond to market changes quickly and effectively, secure sufficient capacity, and ensure smooth delivery as well as AR/inventory management. E. Sustain systematic and flexible financial systems to support all R&D and sales activities. 1.4.2 Long-Term Business Development Plans A. Participate actively in global standard committees and strengthen long-term relationship cooperation with world-class customers and partners to develop various business opportunities. B. Continue to develop innovative products and maintain a market-leading position in different markets. Continue to enhance product competitiveness and profitability through new product developments, product design optimization, cost control, etc. C. Continue to work closely with the supply chain and co-develop more cost-effective solutions. D. Recruit and retain global talents with different expertise for future products and market development. Establish comprehensive internal training systems to share knowledge and experiences. E. Establish comprehensive global management systems to ensure effective internal operation efficiency and external communications. Maintain good relationship with capital markets and seek investment targets for business expansion. MediaTek Inc. | 2017 Annual Report 55