AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2005
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2004
COMMISSION FILE NUMBER 5-59311
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DIALOG SEMICONDUCTOR PLC
(Exact name of Registrant as specified in its charter)
NOT APPLICABLE ENGLAND AND WALES
(Translation of Registrant's Name Into (Jurisdiction of Incorporation
English) of Organization)
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Neue Strasse 95
D-73230 Kirchheim/Teck-Nabern, Germany
(Address of Principal Executive Offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS OF WHICH REGISTERED
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ORDINARY SHARES OF GBP 0.10 PER SHARE REPRESENTED NASDAQ NATIONAL MARKET
BY AMERICAN DEPOSITARY SHARES ORDINARY SHARES FRANKFURT STOCK EXCHANGE
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.
ORDINARY SHARES 46,068,930
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 proceeding 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 [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosure about Market Risk
Item 12. Description of Securities other than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders
and use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
FORWARD-LOOKING STATEMENTS
This annual report contains "forward-looking statements". All statements
regarding our future financial condition, results of operations and businesses,
strategy, plans and objectives are forward-looking. Statements containing the
words "believes", "intends", "expects" and words of similar meaning are also
forward-looking. Such statements involve unknown risks, uncertainties and other
factors that may cause our results, performance or achievements or conditions in
the markets in which we operate to differ from those expressed or implied in
such statements. These factors include, among others, product demand, the effect
of general economic conditions and conditions in the semiconductor and
telecommunications markets, exchange rate and interest rate movements, capital
and credit market developments, the timing of customer orders and manufacturing
lead times, the changes in customer order and payment patterns, the financial
condition and strategic plans of our major customers, insufficient, excess or
obsolete inventory, and the impact of competing products and their pricing,
product development, commercialization and technological difficulties, political
risks in the countries in which we operate or sale and supply constraints. It is
not possible to predict or identify all such factors. Consequently, any such
list should not be considered to be a complete statement of all potential risks
or uncertainties. We do not assume the obligations to update forward-looking
statements.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
NOT APPLICABLE.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
NOT APPLICABLE.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
We derived the following selected historical financial data from our
consolidated financial statements. You should read the following selected
financial data in conjunction with our consolidated financial statements and
"Item 5. Operating and Financial Review and Prospects". We derived the selected
historical consolidated financial information of Dialog Semiconductor Plc as of
December 31, 2004, 2003, 2002, 2001 and 2000 and for the years ended December
31, 2004, 2003, 2002, 2001 and 2000 from our audited consolidated financial
statements, which have been audited by KPMG Deutsche Treuhand Gesellschaft
Aktiengesellschaft Wirtschaftsprufungsgesellschaft ("KPMG"). The audited
consolidated financial statements for the years ended December 31, 2004, 2003,
and 2002 are included elsewhere in this annual report.
Our audited consolidated financial statements were prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP").
YEAR ENDED DECEMBER 31,
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(IN THOUSANDS OF EURO, EXCEPT SHARE AMOUNTS) 2004 2003 2002 2001 2000
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STATEMENT OF INCOME (LOSS) DATA:
Revenues 116,044 92,893 77,104 100,519 214,459
Cost of sales (1) (79,783) (62,374) (57,409) (80,574) (138,879)
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GROSS MARGIN 36,261 30,519 19,695 19,945 75,580
Selling and marketing expenses (6,237) (4,197) (4,149) (4,054) (5,672)
General and administrative expenses (5,462) (5,044) (6,447) (5,569) (5,972)
Research and development expenses (29,071) (30,590) (34,530) (31,256) (22,898)
Amortization of goodwill and (1,520) (2,073) (1,975) (3,202) (2,651)
intangible assets
Restructuring and related impairment (59) (1,839) -- -- --
charges
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OPERATING PROFIT (LOSS) (6,088) (13,224) (27,406) (24,136) 38,387
Interest income, net 1,081 757 1,121 898 1,940
Foreign currency exchange gains and (726) (454) (1,918) 1,713 2,789
losses, net
Recovery (write-down) of investment 54 315 11,969 (42,405) --
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RESULT BEFORE INCOME TAXES (5,679) (12,606) (16,234) (63,930) 43,116
Income tax benefit (expense) (64) (7,814) 6,026 22,544 (16,466)
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NET INCOME (LOSS) (5,743) (20,420) (10,208) (41,386) 26,650
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Basic earnings (loss) per share (0.13) (0.46) (0.23) (0.94) 0.62
Diluted earnings (loss) per share (0.13) (0.46) (0.23) (0.94) 0.60
BALANCE SHEET DATA:
Cash and cash equivalents 13,977 8,109 31,005 32,626 29,879
Working capital (2) 67,144 71,857 56,082 50,438 70,605
Total assets 141,959 140,471 166,073 179,062 247,572
Shareholders' equity 121,135 126,843 147,495 158,092 199,287
OTHER DATA:
Weighted average number of
shares outstanding (in thousands):
Basic 44,025 43,951 43,888 43,788 42,669
Diluted 44,025 43,951 43,888 43,788 44,300
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(1) Includes provision for excess inventory of EUR 1,930 and EUR 10,689 for the years ended December 31, 2002 and
2001, respectively.
(2) Current assets less current liabilities.
EXCHANGE RATE INFORMATION
The following table shows, for the dates indicated, certain information
concerning the noon buying rate in New York City in Pounds Sterling as certified
for customs purposes by the Federal Reserve Bank of New York, expressed in US
Dollars per GBP 1.00.
PERIOD PERIOD END AVERAGE(1) HIGH LOW
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YEAR
2000............................. 1.50 1.52 1.65 1.40
2001............................. 1.45 1.44 1.51 1.37
2002............................. 1.61 1.50 1.61 1.41
2003............................. 1.78 1.64 1.78 1.55
2004............................. 1.92 1.83 1.95 1.75
MONTH
October 2004..................... 1.83 1.81 1.84 1.78
November 2004.................... 1.91 1.86 1.91 1.83
December 2004.................... 1.92 1.93 1.95 1.91
January 2005..................... 1.89 1.88 1.91 1.86
February 2005.................... 1.92 1.89 1.92 1.86
March 2005....................... 1.89 1.90 1.93 1.87
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(1) The average of the noon buying rates on the last day of each period in question.
On April 7, 2005, the noon buying rate was $1.88 per GBP 1.00.
The following table shows, for the dates indicated, certain information
concerning the noon buying rate in New York City in Euro as certified for
customs purposes by the Federal Reserve Bank of New York expressed in US Dollars
per EUR 1.00.
PERIOD PERIOD END AVERAGE(1) HIGH LOW
----------------------------------------- --------------- --------------- --------------- ---------------
YEAR
2000............................. 0.94 0.92 1.03 0.83
2001............................. 0.89 0.90 0.93 0.85
2002............................. 1.05 0.95 1.05 0.86
2003............................. 1.26 1.13 1.26 1.04
2004............................. 1.35 1.24 1.36 1.18
MONTH
October 2004..................... 1.27 1.25 1.28 1.23
November 2004.................... 1.33 1.30 1.33 1.27
December 2004.................... 1.35 1.34 1.36 1.32
January 2005..................... 1.30 1.31 1.35 1.30
February 2005.................... 1.33 1.30 1.33 1.28
March 2005....................... 1.30 1.32 1.35 1.29
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(1) The average of the noon buying rates on the last day of each period in question.
On April 7, 2005, the noon buying rate was $1.29 per EUR 1.00.
B. CAPITALIZATION AND INDEBTEDNESS
NOT APPLICABLE
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
NOT APPLICABLE
D. RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT, YOU SHOULD CAREFULLY
CONSIDER THE RISKS DESCRIBED BELOW BEFORE DECIDING TO INVEST IN OUR ORDINARY
SHARES OR ADSS. ANY OF THESE RISK FACTORS COULD MATERIALLY AND ADVERSELY AFFECT
OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS. IN THAT CASE, THE
TRADING PRICE OF OUR ORDINARY SHARES AND ADSS COULD DECLINE, AND YOU COULD LOSE
ALL OR PART OF YOUR INVESTMENT. IT IS NOT POSSIBLE TO PREDICT OR IDENTIFY ALL
RELEVANT RISK FACTORS AND, THEREFORE, THE FOLLOWING LIST SHOULD NOT BE
CONSIDERED TO BE A COMPLETE STATEMENT OF ALL POTENTIAL RISKS OR UNCERTAINTIES.
WE HAVE NOT BEEN PROFITABLE FOR THE LAST FOUR FISCAL YEARS, AND THERE IS NO
GUARANTEE THAT WE WILL RETURN TO PROFITABILITY
While we reported an operating profit and net income for the 2000 fiscal year,
we incurred net losses of EUR 5,743,000, EUR 20,420,000, EUR 10,208,000
and EUR 41,386,000 for fiscal years 2004, 2003, 2002 and 2001, respectively.
We cannot assure you that our net losses will not continue or increase in the
future or that we will return to being profitable. Please see "Item 3. Key
Information" and "Item 5. Operating and Financial Review and Prospects" for
information regarding our financial condition.
OUR REVENUES, PROFITABILITY AND GROWTH COULD DECLINE
IF THE GROWTH OF THE WIRELESS COMMUNICATIONS MARKET SLOWS
We derive a substantial portion of our revenue from the wireless communications
market, which experienced difficult conditions in 2001, 2002 and the first half
of 2003. Our revenues from wireless communications applications accounted for
78%, 75% and 71% in the years ended December 31, 2004, 2003 and 2002. Our
revenues increased 25% from EUR 92.9 million for the year ended December 31,
2003 to EUR 116.0 million for the year ended December 31, 2004 and 20% from
EUR 77.1 million for the year ended December 31, 2002 to EUR 92.9 million
for the year ended December 31, 2003, primarily due to new products introduced
to volume production with more functionality and accordingly, higher selling
prices. Worldwide sales of cellular handsets increased in the second half of
2003 and 2004 (particularly in Asia), but we can give no assurance that this
trend will continue. In future periods, conditions in the wireless
communications market may fluctuate, which could result in either growth or
decline. Conditions in the wireless communications market may be influenced by
numerous factors, including:
o national and regional regulatory environments;
o general economic conditions;
o advances in competing telecommunication and information technologies;
o manufacturing capacity; and
o perceived health risks to cellular phone users.
Any significant constraints on the growth of, or downturns in, the wireless
communications market could have a negative effect on our future revenues and
profit growth.
WE MAY BECOME A PASSIVE FOREIGN INVESTMENT COMPANY
We may become a passive foreign investment company. Whether we become a passive
foreign investment company will depend, among other things, upon the amount of
our passive income and the value of our passive assets, the growth in our
business revenues and our market value in the future. Since goodwill represents
a substantial part of our non-passive assets, changes in the market value of our
shares, which have been significant and could continue to be significant, can
cause us to become a passive foreign investment company. If we become a passive
foreign investment company, US holders would be subject to additional US taxes
under special US federal income tax rules. See "Item 10. Additional
Information-US Federal Income Taxation-Passive Foreign Investment Company".
IF WE ARE UNABLE TO ADAPT RAPIDLY TO CHANGING MARKETS AND TECHNOLOGY, WE MAY
LOSE CUSTOMERS AND BE UNABLE TO DEVELOP NEW BUSINESS
The market in which we compete is characterized by continuous development and
technological improvement. As a result, our success depends on our ability to
develop new designs and products on a cost-effective, timely basis. Our future
success also depends on our ability to anticipate and respond to new market
trends, to rapidly implement new designs that satisfy customers' desires, and to
keep abreast of technological changes within the semiconductor industry
generally. If we fail to successfully design and develop new products and
product enhancements that respond to technological changes and customer
requirements in a timely and cost-effective manner, we may be unable to respond
to competitive challenges. We could also lose customers and experience a lower
demand for our products.
THE SEMICONDUCTOR INDUSTRY IS HIGHLY CYCLICAL IN NATURE, AND
THIS RESULTS IN PERIODIC OVERCAPACITY
The semiconductor industry has historically been highly cyclical and, at various
times, has experienced significant economic downturns characterized by
production over-capacity, reduced product demand and erosion of average sale
prices. We and many of our competitors have historically expanded during periods
of increased demand, resulting in overcapacity. See "Item 4. Business
Overview-Industry Background."
WE FACE INTENSE COMPETITION, AND IF WE ARE UNABLE TO COMPETE
EFFECTIVELY, WE COULD LOSE CUSTOMERS
Many of our direct and indirect competitors are major international
semiconductor companies with substantially greater technical, financial and
marketing resources and name recognition. In addition, in the future we may face
increased competition from smaller, niche semiconductor design companies.
Further, some of our customers could decide to satisfy their applications
specific integrated circuit ("ASIC") and application specific standard product
("ASSP") demands through in-house design and production. We compete with these
competitors primarily on the basis of the following attributes:
o price;
o design cycle time;
o reliability;
o performance;
o customer and logistical support; and
o reputation.
Our inability to compete effectively on any of these bases or others could
affect the pricing of and demand for our products. See "Item 4. Information on
the Company-Competition".
THE LOSS OF ONE OF OUR PRINCIPAL FOUNDRY RELATIONSHIPS OR ASSEMBLY SERVICES OR A
DELAY IN FOUNDRY OR ASSEMBLY PRODUCTION MAY RESULT IN A MATERIAL LOSS OF
PRODUCTION AND REVENUES
A material production delay, limitation or other detrimental effect on
production at one of our principal foundries could result in a material loss of
revenue until such production is restored or until the affected product lines
are transferred to another foundry. A foundry's production can be delayed,
limited or detrimentally affected by, among other things:
o difficulties in the manufacturing process;
o the complexity of individual designs;
o failure of suppliers to meet delivery dates;
o shortages in raw materials or silicon impurities; and
o other factors or circumstances outside our control.
We also outsource our wafer assembly services, including bonding and packaging,
to selected assemblers in Europe and Asia. If we lose one or more of our
assemblers or if any assembler fails to meet its delivery dates, fails to meet
quality standards set by us, limits production volumes or increases prices due
to capacity constraints, we could experience significant delays and loss of
production, which could result in a material loss of revenues. For more
information on outsourcing of production and assembly of our products, see "Item
4. Information on the Company-Our Product Cycle-Manufacture of Wafers".
OBTAINING ACCESS TO MANUFACTURING CAPACITY AT SEMICONDUCTOR MANUFACTURING PLANTS
MAY BECOME INCREASINGLY DIFFICULT AND COULD RESULT IN HIGHER COSTS AND A
MATERIAL LOSS OF REVENUES
We outsource our silicon wafer fabrication and, therefore, access to
semiconductor manufacturing plants, or "fabs", is necessary to our business.
Access to fabs, however, may become increasingly difficult in future years as
the semiconductor industry continues to grow. If we are unable to obtain access
to sufficient manufacturing capacity at fabs, we could experience significant
delays or a loss of production, which could result in a material loss of
revenues. Additionally, if there is a shortage of available manufacturing
capacity at fabs, we may have to pay more for the manufacture of silicon wafers.
WE CURRENTLY DEPEND ON A FEW CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS MAY RESULT IN A
MATERIAL DECLINE IN OUR REVENUES
We derive a substantial portion of our revenues from a relatively small number
of wireless communications manufacturers that require high performance, low cost
semiconductor products. Sales to two customers individually accounted for 65%
and 61% of total revenues in 2004 and 2002, respectively. Sales to one customer
individually accounted for 65% of total revenues in 2003. Our revenues declined
for the years ended December 31, 2002 and 2001, primarily as a result of
significantly reduced revenue from one major customer. Although revenues
increased in 2004 and 2003, respectively, the further loss of revenue from one
or more major customers would result in a material decrease in our revenues in
future periods. In addition, because we depend on a relatively small, focused
customer base, we are exposed to downward pricing pressures from those
customers.
PERCEIVED HEALTH RISKS RELATING TO CELLULAR HANDSETS COULD LEAD TO DECREASED
DEMAND FOR ASICS
Some members of the medical community have expressed concern that the
electromagnetic signals from cellular handsets may cause brain tumors, memory
loss or DNA and genetic damage. The perceived or actual health risks and related
publicity or litigation could reduce the demand for cellular handsets and ASICs
and, thus, reduce our sales and revenues.
OUR BUSINESS, FINANCIAL CONDITION AND REPUTATION MAY BE MATERIALLY ADVERSELY
AFFECTED IF OUR ASICS, OR THE ELECTRONIC SYSTEMS OF WHICH THEY ARE A PART,
CONTAIN DEFECTS THAT CAUSE DAMAGE OR INJURY
Our ASICs form part of larger complex products such as cellular phones and
airbag sensors. Defects in our ASICs, or in the electronic systems of which they
are part, may directly or indirectly result in damage to third parties'
property, physical injury or even death. If such defects occur, they may result
in:
o product liability claims;
o expensive and time-consuming modifications;
o damaged customer relationships;
o damage to our reputation; and
o loss of market share.
Although we carry insurance, our insurance coverage may not cover potential
claims to which we are exposed or may not be adequate to indemnify us for all
potential liability. In addition, we may not have sufficient cash reserves to
cover such liabilities. If we do not have sufficient insurance or cash reserves,
we may be forced to sell assets or divert cash that may have otherwise been used
for capital expenditures or operating costs.
OUR PRODUCTS ARE DIFFICULT TO MANUFACTURE AND MANUFACTURING DEFECTS CAN
ADVERSELY AFFECT OUR RESULTS
The manufacture of our products is a precise and complex process. The production
cycle for new products is characterized by the need to achieve increasingly high
yields from batches of ASICs. If we are unable to achieve increasingly high
yields, or if one of our products is defective, this could result in a delay in
the time it takes for our products to reach the market in quantity, a loss of
customers or damage to our business reputation, which could materially affect
our results of operations.
WE MAY NOT BE ABLE TO REMAIN COMPETITIVE IF WE LOSE ANY OF OUR KEY EXECUTIVES
Our success depends to a significant extent upon the continued service of our
key senior executives, particularly of our management members. We rely heavily
on senior management's special knowledge and its ability to maintain
relationships with our key customers. If we lose any of our key senior
executives, we may not be able to retain our current customers or develop
business with new customers.
WE MAY NOT BE ABLE TO REMAIN COMPETITIVE IF WE CANNOT HIRE AND RETAIN QUALIFIED
ENGINEERS AND SALES AND MARKETING PERSONNEL
Our future success depends on our ability to continue enhancing and introducing
new generations of technology. We are therefore particularly dependent on our
ability to identify, attract, motivate and retain qualified design, process and
testing engineers with the requisite educational background and industry
experience. Competition in the market for qualified engineers, particularly
those with significant industry experience, is intense. Our ability to
successfully grow will also depend on our ability to attract and retain sales
and marketing personnel. The loss of the services of any of our senior engineers
or our inability to attract and retain sales and marketing personnel could hurt
our product development efforts or business relationships.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND KNOW-HOW FROM BEING
COPIED OR USED BY OTHERS, OUR COMPETITORS MAY GAIN ACCESS TO ITS CONTENT AND
TECHNOLOGY
We attempt to protect our trade secrets and other proprietary information
through confidentiality agreements with customers, suppliers, employees and
consultants and through other security measures. We also rely on copyright,
trade secret and patent laws to protect our intellectual property and know-how.
If we are unable to protect our intellectual property, it may be possible for
someone to copy aspects of our designs and products or to obtain and use
information that we regard as proprietary.
The semiconductor industry is characterized by frequent litigation regarding
intellectual property rights. Questions of infringement in the semiconductor
field involve highly technical and subjective analysis. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights
of others, or to defend against claims of infringement or invalidity. Any
litigation, whether or not determined in our favor, would probably be costly and
would divert the efforts and attention of our management and technical personnel
from normal business operations. Adverse determinations in litigation could
result in the loss of our proprietary rights, subject us to significant
liabilities or require us to seek licenses from third parties. Moreover, there
may not be effective trade mark, copyright and trade secret protection in every
country in which our technology is or may be used in the future. This would
increase the possibility of infringement of our intellectual property.
THE PROFITABILITY OF OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CURRENCY
FLUCTUATIONS AND BY THE ECONOMIC AND LEGAL DEVELOPMENTS IN THE COUNTRIES WHERE
WE CONDUCT OUR BUSINESS
We sell our products primarily in Europe, Asia and the United States. Our
operations are subject to risks inherent in international business activities,
including:
o general economic conditions in each country;
o costs of complying with a variety of regulatory environments;
o currency conversion risks and the effect of fluctuations in
currency exchange rates;
o taxation by multiple government entities;
o tariffs and other trade barriers; and
o staffing and managing foreign operations.
We conduct our business primarily in Euro, which is financial statement
reporting currency, and US Dollars. We may be unable to match US dollar inflows
and outflows adequately, which increases our exposure to changing exchange
rates. Please see "Foreign Currencies" under "Item 5. Operating and Financial
Review and Prospects" for further information on the impact of exchange rates.
US-RESIDENT SHAREHOLDERS MAY FIND IT MORE DIFFICULT TO PROTECT THEIR INTERESTS
THAN THEY WOULD AS SHAREHOLDERS OF A US-BASED CORPORATION
Dialog Semiconductor Plc is incorporated under the laws of England and Wales.
The rights of our shareholders and the responsibilities of the members of the
board of directors of a corporation under English law are different from those
under US law. Furthermore, a majority of the members of our board of directors
and the majority of our assets are located outside the United States. Therefore,
US-resident shareholders may find it more difficult to protect their interests
and enforce a judgment of a US court as compared to shareholders of a US-based
corporation. In addition, it may be difficult to bring an action seeking a
remedy under US securities laws in a non-US court.
OUR FUTURE OPERATING RESULTS COULD BE MATERIALLY AFFECTED IF JUDGMENTS
UNDERLYING ANY OF OUR ACCOUNTING POLICIES WERE TO SIGNIFICANTLY CHANGE
A number of our accounting policies involve judgments about various factors,
including our financial and operating condition, the wireless communications
industry and general economic conditions. There is a reasonable likelihood that
our future operating results could be materially affected if the conditions or
assumptions on which our judgments are based were to significantly change. See
"Item 5. Operating and Financial Review and Prospects-Critical Accounting
Policies and Related Uncertainties".
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Dialog Semiconductor Plc ("Dialog" or the "Company") is a public limited company
constituted under the laws of England and Wales. Our business originated from
the European activities of International Microelectric Products, Inc., a US
company active in the semiconductor industry. On May 20, 1985, International
Microelectric Products, Inc. incorporated IMP (Europe) Limited as a private
limited company registered in England and Wales. At the end of 1989 and the
beginning of 1990, Daimler-Benz AG, now DaimlerChrysler AG, acquired IMP
(Europe) Limited, which became part of a Daimler-Benz AG subsidiary, Temic
Telefunken microelectronic GmbH, now Conti Temic microelectronic GmbH ("Conti
Temic"). In March 1998, three of our major shareholders, Apax Partners & Co.
Ventures Ltd. and Apax Partners & Co, Germany II L.P. (together "Apax
Partners"), Adtran, Inc. ("Adtran") and Ericsson provided funding to finance our
buyout of the business from Daimler-Benz AG (now DaimlerChrysler AG). These
shareholders contributed approximately EUR 28.0 million in cash in exchange
for ordinary shares in the amount of EUR 5.3 million, additional paid-in
capital in the amount of EUR 5.3 million and cumulative redeemable preference
shares in the amount of EUR 17.5 million. We then acquired our predecessor
business for EUR 28.0 million. In connection with this acquisition, Apax
Partners transferred some of its shares to members of management and the board
of directors of our company and transferred additional shares then owned by it
into the Dialog Seminonductor Plc Employee Benefit Trust (the "Trust") (a Jersey
trust established to purchase our shares from and sell our shares to our
employees and directors).
Our head office is located near Stuttgart, Germany and we have additional
offices in Swindon, UK; Clinton, New Jersey, USA; San Diego, California, USA;
Graz, Austria; Tokyo, Japan; Taipei, Taiwan; and Heidelberg and Munich, Germany.
Our principal executive office is located at Neue Strasse 95, D-73230
Kirchheim/Teck-Nabern, Germany, Tel: 0049 7021 805-0. Our agent for US federal
securities law purposes is Dialog Semiconductor, Inc., Corporation Trust Center,
1209 Orange Street, Wilmington, Delaware 19801.
B. BUSINESS OVERVIEW
Dialog is a fabless semiconductor company that develops and supplies power
management, audio and imaging technology, delivering innovative mixed signal
standard products as well as application specific IC solutions for wireless,
automotive and industrial applications. A "fabless" company is one that
outsources the production of silicon wafers. Our expertise in mixed signal
design, with products manufactured entirely in Complimentary Metal Oxide
Semiconductor ("CMOS") technology, enhances the performance and features of
wireless, hand-held and portable electronic products. Our technology is also
used in intelligent control circuits in automotive and industrial applications.
Production of these designs is then outsourced, and the final products are
returned to us for approval and testing before delivery to the customers. Our
strong track record in delivering qualified and tested products directly to the
world's leading wireless handset manufacturers is a result of shipping over 500
million successful audio-CODEC (a coding/decoding device) and power management
chips for cellular phones. The technology that optimizes power usage, processes
audio signals, and converts analog or digital data in wireless handsets is also
providing competitive solutions in automotive and industrial applications. With
this experience of delivering mixed signal circuits in CMOS semiconductor
technology, Dialog is enabling advanced applications and features in consumer
electronics products and other systems. In 2002 and 2003, we extended the reach
of our technology by introducing components and systems for embedding advanced
digital camera and video capability in portable electronic products. In 2003, we
developed a family of devices which drive color displays in wireless handsets.
These color STN (super-twisted nematic) liquid crystal display (LCD) drivers
were introduced to the market and shipped in volume production during 2004. In
power management, we launched the DA9030 in May 2004, the first integrated power
management IC (PMIC) to support the Wireless Intel SpeedStep(R) technology. In
2004 we also announced a long-term collaboration with Carl Zeiss, a world leader
in the optical and optoelectronics industry, to develop and market modules for
high quality camera phones.
INDUSTRY BACKGROUND
SEMICONDUCTORS AND MIXED SIGNAL ASICS
Semiconductors are essential building blocks in today's electronic products,
including cellular telephones. Integrated circuits are complex semiconductor
devices that consist of a single piece of silicon and are commonly referred to
as a "chip". In the past, standard integrated circuits were placed close
together to create a system that met the requirements of an application. This
standardization in turn has created a foundry industry which produces "wafers",
consisting of multiple identical silicon chips. In order to reduce size and
costs and increase performance ASICs were developed. ASICs integrate these
circuits together on one custom designed chip. A mixed signal ASIC processes
both analog and digital data.
Analog circuits provide the interface between electronic systems and a variety
of real world phenomena such as sound, light, and temperature. Digital devices
use a series of on/off states to perform arithmetic functions that are used to
process data. Due to the risk of interference, it is technically difficult to
combine analog and digital circuits on a single chip. System manufacturers
historically addressed mixed signal requirements using printed circuit boards
that incorporated individual analog and digital components. However, in response
to increasing demand for greater functionality at lower cost, system
manufacturers are actively seeking solutions that contain both analog and
digital functions integrated on a single chip.
OUR SOLUTION
We develop and supply mixed signal components and system level solutions for
wireless communications, automotive and industrial applications. Our technology
expertise addresses power management, audio-CODECs and imaging. We have
developed a considerable reputation among our customers in creating innovative,
customer-specific solutions in 100% CMOS technology-fully tested and delivered
quickly to achieve competitive time-to-market objectives.
The customer preference for smaller and more sophisticated hand-held and
portable devices with advanced capabilities such as wireless communications,
digital camera, video and audio all in the same device places huge demands on
the battery. Our highly integrated, single chip power management and audio
devices ensure the components within a mobile phone handset or PDA make optimum
use of the battery to prolong usage time, and also to provide high performance
audio playback.
DESIGN EXPERTISE AND PRODUCT INNOVATION
We concentrate on designing increasingly complex mixed signal ASIC solutions and
have accumulated substantial know-how in this area. We employ our know-how to
respond to our customers' demands and to identify new product solutions that
increase performance while lowering overall system costs.
Examples of the success of this approach can be seen in our leading market
positions in audio-CODEC and power management applications.
ALTERNATIVES TO ASICS AND CMOS TECHNOLOGY
We focus our business on the design of ASICs rather than general purpose,
mass-produced integrated circuits on standard chipsets. Our larger cellular
phone manufacturing customers rely primarily on ASIC-based semiconductor designs
to maintain their customized strategic position in the cellular phone industry,
giving them more control over the design of their products than they would have
if they used mass produced standard chips. Other customers tend to rely more
heavily on standard baseband chipsets. We supply these customers with standard
designed chips, although this is not a significant part of our business.
We supply ASICs using mainstream CMOS technology, the most widely used
semiconductor manufacturing technology. Although specialist analog (bipolar,
analog CMOS) as well as mixed manufacturing technologies (BiCMOS) exist for
analog circuits, most chip designers use CMOS manufacturing technology because
unit production costs can be up to 20-25% lower than can be achieved with
alternative manufacturing technologies for the same or similar functionality. In
addition, most foundries are designed to use CMOS production processes. As a
semiconductor company that relies on outsourced manufacture of our chips, access
to foundry capacity with comparable technology is critical to our ability to
compete in the cellular communications industry. Accordingly, we do not view
BiCMOS technology as a realistic alternative for our business.
COMMITMENT TO SELECTED CUSTOMERS
We have built a core of strong and growing relationships with selected high
profile, high volume customers. We are a flexible partner for these customers,
who increasingly demand that we, as a preferred supplier, serve as an integral
part of their overall supply chain. We work with our customers to rapidly
develop the appropriate technical response to changing market trends, and these
collaborative relationships have become increasingly important to us.
OUR STRATEGY
We believe that increased demand for new applications and technical improvements
in the wireless communications market will require handset manufacturers to rely
more on the type of ASICs that we supply to achieve the cost and performance
demands of the market.
Our objective is to be the leading global supplier of lowest power, highest
quality, mixed signal components and system level solutions to the wireless and
automotive markets. To meet these objectives, we have developed a clearly
focused strategy.
REMAIN FOCUSED ON EXISTING BUSINESS MODEL
We intend to remain focused on our existing business model, which includes
outsourcing silicon wafer production to foundry manufacturing plants and
supplying ASICs using mainstream CMOS technology. We maintain control over our
entire production process and ensure product quality through pre-shipping
testing of all final products. We believe that selectively outsourcing
production to foundries and assemblers minimizes the substantial cost of
purchasing semiconductor production equipment and allows us to concentrate
management efforts on our core competencies.
MARKET STANDARD PRODUCT SOLUTIONS
Aside from our primary focus on ASICs, we believe that we can adapt some of our
solutions to more than one customer and offer ASSPs. By engaging in basic
corporate identity and brand development activities in the engineering and
design community worldwide, in prior years we laid the foundations for marketing
ASSPs to a broader customer base than we have previously had.
EXPAND ENGINEERING EXPERTISE
We recognize that one of our key strengths lies in the engineering expertise of
our employees in design, product development and testing. Due to the increasing
complexity of mixed signal design and production, it is essential to our ongoing
success that we attract, develop and retain key engineering personnel. We intend
to continue to meet this challenge by offering our technical staff a variety of
ongoing educational and career opportunities, combined with performance
incentives and by actively recruiting additional highly skilled individuals. See
"-Sales and Marketing" below. One example is the announcement of the
availability of a brand new range of color liquid crystal display (LCD) drivers
providing real innovation for the mobile phone display market in 2004. Delivered
as standard parts ready for production, the DA89xx family delivers superior
color performance and low power consumption, while providing mobile phone
handset makers the flexibility to customize display parameters for creating
differentiation.
EXPAND RELATIONSHIPS WITH KEY INDUSTRY LEADERS
We have close relationships with a number of high volume customers, many of
which are key industry leaders. We intend to continue to focus our sales and
marketing efforts on a small number of high quality target customers. By
strengthening these relationships and developing new ones, including with
potential purchases of ASSPs, we intend to secure our involvement in developing
market segments.
PROACTIVELY REFINE CUSTOMERS' SYSTEM ARCHITECTURE
We work proactively with our customers to refine their system architectures. One
example of this approach is the integration of audio and power management
functions onto one chip in order to increase power efficiencies and reduce
product weight and size. We see particular opportunities in the expected
migration to 3G wireless communications technology, which will demand more
efficient use of system architectures.
SELECTIVELY EXPAND GLOBAL CAPABILITIES
We have successfully developed a strong, focused customer base in Europe and
Asia. In order to support and service our growing customers, we will consider
expansion through organic growth and selected acquisitions. To this end, we have
established design centers in Graz, Austria and Tokyo, Japan. Also, to support
our growing customer base in greater China we recently, in the first quarter of
2005, opened a new office based in Taipei, Taiwan. This means we can support our
customers close to where they need us. Such direct local support is highly
valued by our customers and complements their development activities. In
addition to global presence, effective development work in small teams is one of
the most important benefits of our business model. The individual design centers
frequently exchange know-how enabling them to focus on innovative design work
and, using uniform design software and IT infrastructure, drive product
developments forward at multiple locations simultaneously. See "Item 5.
Operating and Financial Review and Prospects-Liquidity and Capital Resources".
OUR PRINCIPAL PRODUCTS
We focus on the production and supply of mixed signal ASICs and ASSPs for the
cellular communications market and, to a lesser but increasing extent, for the
automotive electronics market. We also supply ASICs for other consumer and
industrial applications in the lighting systems and data communications markets.
Revenues from our wireless communications applications accounted for 78% of our
total revenues for the year ended December 31, 2004, 75% of our total revenues
for the year ended December 31, 2003 and 71% of our total revenues for the year
ended December 31, 2002. Revenues from our industrial applications sector were
12% of total revenues for the year ended December 31, 2004, 16% of total
revenues for the year ended December 31, 2003 and 21% of our total revenues for
the year ended December 31, 2002. Revenues from our automotive applications
sector were 10% of our total revenues for the year ended December 31, 2004, 9%
of total revenues for the year ended December 31, 2003 and 8% of our total
revenues for the year ended December 31, 2002.
Our products are categorized as follows: power management and audio ICs, camera
modules, liquid crystal display drivers and ASICs.
For the year ended December 31, 2004, approximately 56% of our revenues
originated from Europe (of which approximately 26% originated outside Germany),
36% originated from Asia and 8% originated from North and South America. For the
year ended December 31, 2003, approximately 65% of our revenues originated from
Europe (of which approximately 25% originated outside Germany), 27% originated
from Asia and 8% originated from North America. For the year ended December 31,
2002, approximately 68% of our revenues originated from Europe (of which
approximately 40% originated outside Germany), 24% originated from Asia and 7%
originated from North America.
POWER MANAGEMENT AND AUDIO ICS
The power management subsystem within the phone controls the power supply to all
of the functions in the phone ensuring power is used most efficiently and that
all the functions have the optimum operating environment.
Our power management functions include Smart Mirror(TM) LDO (low dropout
voltage) regulators, high efficiency buck and boost converters, programmable
multiple chemistry battery chargers for all common battery technologies like
NiMH, L ion and polymer. Our patented Smart Mirror(TM) technique, which we
introduced in 2003, allows product designers to minimize current consumption and
simplify their designs by eliminating `power-down' modes. This was first
introduced in our DA9010 integrated GSM/GPRS audio and power controller.
Developed in collaboration with Intel Corporation, the DA9010 provides all the
necessary power management and high performance audio functions for the phone
handset chip design, offering a level of integration not previously available in
this class of device.
The audio part of our ICs is an important part of systems such as mobile phones,
since it determines voice quality. Based on an audio CODEC (coding /decoding
device), it provides the interface between analog signals (such as the human
voice) and the digital data processing circuits inside the system. Our advanced
audio CODEC functions have up to 24-bit capability for digital audio player
algorithms like MP3 and beyond, and are based on Dialog's own digital signal
processing (DSP) designs optimized for minimum power consumption and silicon
area. A range of high performance analog interfaces for microphones,
loudspeakers and line drivers supports these audio codecs.
In addition to standard products, our power management and audio functions are
also available to customers as application specific ICs (ASICs) as we have been
able to continue these two functions on a single circuit. The power management
functions are also used in ASICs for automotive electronics and industrial
lighting systems.
We continue to develop new power management products such as the DA9030 and
DA9011 introduced during 2004.
CAMERA MODULES
The use of camera phones and PDAs with cameras is already widespread and market
analysts predict further growth in this area. Cameras are also becoming part of
automotive guidance and collision avoidance systems. We have developed a range
of CMOS image sensors and standalone modules for image sensing and processing,
allowing manufacturers to embed high performance, high-resolution camera
functionality into next generation consumer products and automotive systems.
The unique XDR(R) (extended dynamic range, one of our registered trademarks)
technology in our image sensors ensures clear images are captured under widely
contrasting ambient light, offering the best class of performance in low light
conditions. Key features of our image sensor technology include:
o Superior video in outdoor uncontrolled lighting
o High confidence image capture
o Fast response
o Very low power and low voltage requirements
o High resolution still and streaming video modes
Our advanced embedded camera-on-a-chip products range from stand-alone CMOS
image sensors to the complete module consisting of sensor, image DSP, lens,
housing and connector. The high sensitivity and processing capability down to
each pixel make our image sensor technology the ideal choice for automotive
systems, for which near real-time response is required.
In 2004 we announced our collaboration with Carl Zeiss Corporation to initiate a
program of camera module development utilizing the best of our image sensor and
processing technology, and combining it with a high quality lens in an extremely
small package using optics from Carl Zeiss.
LIQUID CRYSTAL DISPLAY DRIVERS
In 2004 we announced availability of a new range of color liquid crystal display
(LCD) drivers providing real innovation for the mobile phone display market.
Delivered as standard parts ready for production, the DA89xx family delivers
superior color performance and low power consumption, while providing mobile
phone handset makers the flexibility to customize display parameters for
creating differentiation.
Our family of color display drivers is specially developed for the growing
number of wireless handsets with high-resolution color displays and also with
dual displays. The color STN (super-twisted nematic) liquid crystal display
(LCD) drivers provide resolution of up to 65,000 colors, and address a demand
for higher performance full color, high speed moving images using MLA
(multi-line addressing) LCD technology. This ensures faster response time
compared to conventional passive matrix displays, and high-speed moving images
are supported while maintaining very low power consumption.
Products include the new DA8912A and DA8913A, which incorporate fully integrated
graphic display memory with high speed interfaces and various power management
functions to enable a single, low power chip for managing the display in next
generation mobile phone handsets and portable electronic products. The devices
offer fast display graphic transfer rates, supporting moving images
APPLICATION SPECIFIC ICS
Our background in developing ASIC (application specific integrated circuit)
solutions for wireless, automotive and industrial products allows us to rapidly
develop leading-edge application specific solutions for our customers based on
proven in-house technology and the latest CAD (computer-aided design) tools.
In CELLULAR PHONES for example, we have developed over 50 different power
management designs for the world's leading cellphone manufacturers. Our ASICs
are becoming ever more integrated with many power management functions on the
chip - such as high performance LDOs (low drop out voltage regulators), high
efficiency AC-DC converters, complete battery charging circuits, programmable
LED drivers and USB interfaces. For sophisticated audio capability, we have also
successfully integrated audio functions on to the same chip - exploiting the
complementary nature of power and audio sub-systems.
In AUTOMOTIVE ELECTRONICS, our ASICs control safety, engine management, and
comfort electronics for the top automobile manufacturers. This exploits Dialog's
competence in power management systems and mixed signal design, together with
knowledge of integrating high performance analog circuits and high-density
digital logic and high voltage circuits on a single chip in a standard CMOS
process. Our partnership with leading automotive equipment suppliers has also
resulted in developing chips able to connect directly to high voltage circuits
of up to 40V.
In INDUSTRIAL SYSTEMS, our single chip solutions integrate high voltage low
power circuits for electronic ballasts used to control fluorescent lamps. Our
customers are using ASICs that integrate, for example, the functionality of
power factor correction circuits, lamp management circuits, and half bridge
driver. Our expertise in the integration of these circuits forms the basis of
highly integrated control chips for smart power electronic systems in other
applications such as computer and mobile communications systems. Dialog's
solution is ideal for instances where the chip must be highly integrated yet
have the ability to control high voltages intelligently using digital circuits
on the same chip.
Our ASIC solutions are manufactured by leading foundry partners, with which we
work in true partnership to ensure our customers can access both the latest CMOS
processes, as well as foundry capacity. This enables our customers to meet both
costs and time-to-market objectives for their products. We also have our own
process engineers in-house to ensure our customers benefit from extracting the
optimum capability from a process.
PRINCIPAL CUSTOMERS
Our principal customers are recognized wireless communications manufacturers and
automotive equipment manufacturers. In light of the rapid pace of technological
development and customer demand for increasingly complex functionality, our
partnerships with our customers has allowed them to draw on us as an outside
source of expertise. For us, the close working relationship with our customers
provides an opportunity to continually develop and fine-tune market leading
technological expertise with a recognized industry leader.
We have developed long-term relationships with our customers, including
Ericsson, Motorola and Siemens for wireless communications, Adtran for wireline
communications applications, Bosch and Conti Temic for automotive applications
and Tridonic for industrial applications.
OUR PRODUCT CYCLE
We design, develop and supply mixed signal ASICs and ASSPs. We outsource the
actual manufacture of wafers and assembly to selected foundries and assemblers.
Once the manufacture and assembly have been completed, all of our products are
tested, the large majority in-house, before final delivery to our customers. A
description of our process from design to delivery can be summarized as follows:
o design and development;
o manufacture of wafers;
o assembly;
o testing; and
o delivery.
Due to the fact that we use a fabless model, 80 to 90% of the value chain is
subcontracted. Prices of raw materials have fallen over the past two years, but
are expected to increase in the near future; and on average the price of raw
materials related to silicon wafers and assembly vary by approximately 10% per
year. However, the price of silicon wafers of already quoted products is not
expected to increase. In general, wafer pricing is fairly dependent on overall
capacity utilization in the foundry industry.
DESIGN AND DEVELOPMENT
Our engineering group consists of 157 professionals (as of December 31, 2004)
with mixed signal ASIC experience. We use design tools from Cadence Design
Systems, Inc. to increase design automation and top level simulation to identify
system design incompatibilities at an early stage. Furthermore, we base our
production around a standard CMOS semiconductor technology process in order to
focus the design efforts more effectively. See "Manufacture of wafers" below.
Aside from our primary focus on ASICs, we believe that we can adapt some of our
solutions to more than one customer and offer ASSPs. By engaging in basic
corporate identity and brand development activities in the engineering and
design community worldwide, in prior years we laid the foundations for marketing
ASSPs to a broader customer base than we have previously had.
We believe we offer our clients a significant advantage through our ability to
rapidly develop mixed signal ASIC and ASSP designs. This ability has been
fostered through many years of design experience and a highly skilled
engineering staff. We keep track of evolving design elements through our design
library database. We achieve rapid design cycles through our strategy of
modifying and reusing previously designed building blocks. We use the CR16B, a
16 bit microprocessor core which we acquired under a license of indefinite
duration in 2000. This core, which utilizes the CompactRISC(TM) architecture
developed by National Semiconductor for embedded applications that are
integrated with other functions on a single integrated circuit, provides a high
performance, general purpose, flexible and power efficient platform that can be
used in a wide variety of designs. This technology enables us to develop
system-on-chip ("SOC") designs combining analog, digital and microcontroller
functions. We have successfully integrated circuits combining complex digital
functions including eFlash, which can simultaneously handle 40V in a 0.35-u
technology.
We assign dedicated design teams to each customer. These teams work closely with
the customer in order to identify and develop customized system solutions. This
approach builds close customer relationships and insures that each design team
develops a detailed knowledge of the customer's product enabling it to rapidly
develop innovative applications.
At the start of the design process, a customer typically generates a description
of its requirements. We will then propose a variety of possible solutions and
will also prepare a preliminary quotation outlining pricing details, time to
market factors and production considerations. This preliminary quotation is
usually prepared within one week of the initial request which we believe
provides us with a competitive advantage.
The unit price for each IC product is fixed in the development and supply
agreement and is usually dependent on the anticipated number of ICs to be
delivered. Unit price is subject to negotiation between us and the customer.
Generally, initial deliveries of product are sold at the highest per unit price
and subsequent volume deliveries are sold at reduced unit prices.
MANUFACTURE OF WAFERS
Semiconductors can be manufactured using different process technologies. The two
dominant processes in use today are bipolar and CMOS. Bipolar devices typically
operate at faster speeds than CMOS devices, but CMOS devices consume less power
and permit more transistors to be integrated on a single ASIC. While bipolar
semiconductors were once used extensively, CMOS technology has become the more
dominant of the two technologies. As a result, most CMOS processes have become
standardized and the design rules necessary for manufacture are well understood
in the semiconductor industry. This standardization has created an active
foundry industry.
We have adopted a strategy of outsourcing our wafer production to selected
foundries with a demonstrated ability to provide high quality products on tight
deadlines. The principal foundries we currently use are Chartered Semiconductor
Manufacturing Pte., Ltd. in Singapore ("Chartered"), X-FAB UK Ltd. ("X-FAB"),
Taiwan Semiconductors Manufacturing Co., Ltd. ("TSMC") and CSMC Manufacturing
Co. Ltd in China ("CSMC"). In 2004, we outsourced our wafer production as
follows: approximately 39% with Chartered, 49% with TSMC, 8% with CSMC, 3% with
X-FAB and 1% with other.
We aim to ensure that all steps in the manufacturing process can be provided by
at least two suppliers. Before we appoint one foundry as a supplier for a
specific wafer, we provide at least two foundries with technical specifications.
Upon confirmation by both foundries as to the ability to manufacture such wafer,
we appoint one of them; we then can use the other one as a back-up source of
production in the event that the first foundry is unable to provide its
services. The goal is to prevent shortage or loss of chip production due to
market conditions or disasters such as foundry fires.
Since the successful manufacture of silicon wafers is critical to our reputation
and profitability, we work carefully to identify suitable foundries in order to
maintain continuity and security of supply for our customers. There are many
factors which contribute to our selection of wafer suppliers. The principal
concern is whether the foundry's process technology can be effectively used for
our designs. Additionally, we will consider such factors as capacity, history,
financial stability, mixed signal experience, pricing, location, customer
support and reputation. Once a foundry has been selected, we then seek to secure
its supply in a variety of ways, including entering into supply contracts to fix
price and reserve production capacity and, when deemed appropriate, paying a
deposit to a foundry to guarantee future production capacity. We also place,
when practicable, our own process engineers directly at the fab premises to
resolve any potential engineering problems and to ensure both the quality and
timely delivery of the finished product.
We may, from time to time, reserve capacity in a foundry. We have entered into
supply agreements with Chartered and X-FAB. Under the terms of the Chartered
agreement, we maintained deposits totalling $20 million with Chartered which
guaranteed access to certain quantities of sub-micron wafers through fiscal
2003. These deposits were refunded to the Company in October 2003. For more
information on our agreement with Chartered, see "Item 5. Operating and
Financial Review and Prospects-Liquidity and Capital Resources - Off Balance
sheet Arrangements and other commitments" and Note 11 to the consolidated
financial statements. In 2002 we have made an advance payment of $2.5 million to
guarantee access to foundry capacity with X-FAB.
ASSEMBLY
We also outsource final assembly. During the standard assembly process, a wafer
is sawed, the individual chips are mounted on lead-frames and substrates and
then connected via bond wires. Finally there will be an encapsulation process
which protects the chip against environmental stress. There is a large group of
subcontractors who service this market. We have qualified the following eight
assemblers: Orient Semiconductor Electronics, Ltd (Taiwan), Carsem Semiconductor
Sdn. Bhd. (Malaysia), Circuit Electronic Industries Public Co., Ltd. (Thailand),
AIT Pte Limited (Singapore), ASE Inc. (Taiwan and Korea), King Yuan Electronics
Co. Limited (Taiwan), Siliconware Precision Industrie Co., Ltd (Taiwan) and Hana
Microelectronics Public Co.,Ltd. (Thailand). Completely assembled ASICs are
returned to us for final testing before delivery to the customer. We view our
quality assurance role as critical in order to ensure the success of a business
model that incorporates strategic outsourcing.
TESTING
Following return of the assembled products from its assemblers, we test our
products before delivery to a customer. No product is delivered to a customer
unless it has been tested. This rigorous testing approach allows us to ensure
overall quality control of our manufactured products. The test programs
developed by our test engineers are based upon specifications determined by the
individual customers and are developed in parallel with the design.
Once a testing program has been developed and the chips have been delivered from
the assembly, individual batches of chips are tested in our machines. Twenty-six
of our testing machines are made by Credence Systems Corporation two are made by
Teradyne, Inc, and we use a display test system made by Advantest America
Corporation. The machines are regularly calibrated to ensure the accuracy of the
test parameters.
All our chips are tested in-house. Any chip that does not satisfy our testing
criteria is discarded. We send approved chips to a tape and reel manufacturer
who will then return the loaded reels to us for final packaging and delivery to
the customer.
SALES AND MARKETING
At December 31, 2004, we had a direct sales staff of 22, of which eleven are
based in Germany, five in the United Kingdom, two in the United States three in
Japan and one in Taiwan.
We occasionally use a limited number of independent sales representatives in our
coverage efforts. In 2004, we generated more than 90% of our revenues from sales
directly to customers through our regional sales offices and less than 10% of
our revenues from sales through representatives. Our marketing department is
responsible for new market research and development, competition analysis and
identifying new target applications. This ensures that we retain an application
focus on the wireless communications and automotive sectors in addition to the
customer focus of our sales team.
Our marketing department provides input to senior management in their
development of strategic planning and business guidelines. This ensures that our
strategy is focused on defined goals.
INTELLECTUAL PROPERTY
We attempt to protect our intellectual property and know-how through a
combination of patents, copyrights, trade secret laws, trademarks and
confidentiality agreements with our customers, suppliers, employees and
consultants. In the past and to some extent at present, we have created
specialized designs of mixed signal ASIC device products, which are designed
according to customer specifications. As our designs are customer-specific, they
remain the intellectual property of our customers, thereby limiting our ability
to patent such inventions. However, where such limitations do not exist, we have
begun and will continue to obtain more patents covering some basic concepts in
our production fields. During the year ended December 31, 2002, we acquired a
CMOS imaging patent portfolio from Sarnoff Corporation and were granted another
6 patents. In 2003 and 2004 we have been granted 29 patents. In addition, we
currently have more than 150 patents and patent applications pending for various
ASIC applications. We intend to apply for patents, including those for ASSPs,
whenever practicable in the future. Operating in an industry in which
competitive position is determined by the ability to maintain a leading edge in
technology, we depend substantially on patents and new manufacturing processes.
To develop a family of color STN (super-twisted nematic) liquid crystal display
(LCD) drivers, we have licensed multi-line addressing (MLA) LCD technology from
both Optrex Corporation and Motif Corporation.
In addition, we license standard software from a number of vendors on standard
terms. We have also licensed the CR16B 16 bit microprocessor core, a software
product, from National Semiconductor. This license is of indefinite duration.
While these licenses enhance our ability to design and develop IC solutions, our
business does not depend on such licenses. See "Our Product Cycle-Design and
Development" above.
COMPETITION
Competition in the semiconductor market is intense. There are many competitors
in this market, offering products that are similar to ours and are based on
similar technologies. We compete in the wireless communications market with
major international semiconductor manufacturers, such as ST Microelectronics,
Texas Instruments and NEC. We also compete in the automotive electronics market
with major international semiconductor manufacturers, such as Motorola, ST
Microelectronics, Infineon and National Semiconductor. For industrial
applications, the market is very fragmented and we compete with competitors
across the spectrum from small design companies to very large companies.
In general, we compete primarily on the basis of price, design cycle time,
reliability, performance, customer and logistical support and reputation. Our
ability to compete successfully depends on factors both within and beyond our
control, including successful and timely development of new products,
availability of future-oriented manufacturing process technologies, product
performance and quality, manufacturing yields and product availability, customer
service, pricing, industry trends and general economic trends. Many of our
direct and indirect competitors are major international semiconductor companies
with substantially greater technical, financial and marketing resources and name
recognition. In addition, in the future we may face increased competition from
smaller, niche semiconductor design companies. Further, some of our customers
could decide to satisfy their ASIC demands through in-house design and
production. See "Item 3. Key Information-Risk Factors-We face intense
competition, and if we are unable to compete effectively, we could lose
customers".
REGULATORY MATTERS
We are subject to a comprehensive body of environmental laws, rules and
regulations in each jurisdiction in which we operate. Since we have no
manufacturing facilities, our management believes that we are in material
compliance with all applicable environmental laws, rules and regulations. In
addition, we have implemented an Environmental Management System compliant with
the internationally recognized International Organization for Standardization
standard, ISO 14001, requirements.
C. ORGANIZATIONAL STRUCTURE
PROPORTION OF
COUNTRY OF OWNERSHIP INTEREST
NAME AND REGISTERED OFFICE AREAS OF BUSINESS INCORPORATION (IN %)
------------------------------- ---------------------------------- ---------------- --------------------
Dialog Semiconductor GmbH Acquisition, sale and marketing Germany 100
of microelectronic products,
especially of ASICs
Dialog Semiconductor (UK) Design, development and sale of England and 100
Limited semiconductor components Wales
Dialog Semiconductor, Inc. Design, development and sale of United States 100
semiconductor components
Dialog Semiconductor K.K. Design, development and sale of Japan 100
semiconductor components
D. PROPERTY, PLANTS AND EQUIPMENT
Dialog and its wholly-owned subsidiaries currently use the following properties:
APPROXIMATE
LOCATION TENURE TERM AREA (M2) PRINCIPAL USE
--------------------------- ----------- ---------------------- ----------------- ------------------------
Building 15 and 5C, Leasehold Fixed until December 5,821 Company
Neue Strasse 95, 31, 2005 headquarters, office
Kirchheim/Teck-Nabern, operation for
Germany design, marketing
and testing
Industriestrasse 1, Leasehold Five years, fixed until 530 Office operation for
Munich/Germering, September 30, 2005 design
Germany with option for a
further five year
period
Mannheimer Strasse 1, Leasehold Fixed until June 481 Office operation for
Heidelberg, 30, 2006 with option design
Germany for a further five year
period
Kaerntner Strasse 518, Leasehold Lease with unlimited 596 Office operation for
Graz-Seiersberg, duration, terminable design
Austria by either party on
three months' notice to
the end of a quarter
Unit 1 Omega, Leasehold 24 years from 780 Office operation for sales,
Windmill Hill Business September 29, 1986 marketing and design
Centre,
Swindon,
Wiltshire,
United Kingdom
54 Old Highway 22, Leasehold Fixed until November 30, 661 Office operation for sales,
Clinton, 2006, with option for a marketing and design
New Jersey, further two year period
USA
16870 West Bernardo Drive Leasehold Fixed until February 1, 21 Office operation for sales
San Diego 2006, with option for a
California further one year
USA period
Kishimoto Bldg 10F Leasehold Fixed until June 391 Office operation for sales,
2-2-1, Marunouchi, 30, 2009 marketing and design
Chiyodaku,
Tokyo, 100-0005
Japan
809 Room, No 689 Leasehold Fixed until December Office operation for sales
Sec 5, Zhongxiao Rd 31, 2005 and marketing
Xinyi District
Taipei City 110
Taiwan ROC
We do not currently own any properties. Our management believes that our leased
properties and our existing design and administrative facilities are sufficient
for our current requirements and provide us with flexibility to expand our
facilities in accordance with our current objectives.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with the audited consolidated financial
statements included in this annual report. Our audited consolidated financial
statements have been prepared in accordance with US GAAP.
EXECUTIVE SUMMARY
We are a global supplier of power management, audio and imaging technology,
delivering innovative mixed signal standard products as well as application
specific integrated circuits for wireless, automotive and industrial
applications. To date, we have shipped over 500 million integrated circuits for
cellular phones. We operate in intense competitive markets and our customers
select us based upon numerous factors including price, design cycle time,
reliability and performance. Our customers purchase our products through
periodic orders made throughout the year. The prices paid for each type of
product or design are generally agreed with customers on an annual basis for
specified volumes of each design ordered by the customer during the year.
Potential price reductions in subsequent years are typically offset by lower
production costs as a result of improved yields, lower wafer costs or smaller
chip sizes.
Critical success factors for us include the continued growth in the worldwide
market for cellular handsets, the completion of our new designs on a timely
basis, customers acceptance and implementation of our designs in large-scale
production, and continued demand from our key customers for the development of
new products. Partnerships with companies at all levels of business are
important for our success in a market dominated by major international
semiconductor companies. We rely on our fabless business model that enables us
to focus our research and development activities, which are essential for us to
respond to our customers' cutting edge silicon solutions requirements and also
maintain our competitiveness in our market. Consequently, it is critical for us
to make significant and ongoing cash expenditures to fund our research and
development activities. We have also made significant investments in long-lived
assets, primarily for our in-house test equipment.
We have a significant amount of liquid assets on hand, primarily from the
remaining sales proceeds from the issuance of our ordinary shares in 1999 and
2000, cash generated from operations in previous years and recoveries of certain
of our investments and deposits. Substantially all of our near term future cash
inflows are expected to come from the sale of our products. We generally collect
cash from our customers within 58 days after product delivery. However, we
derive a substantial portion of our revenues from a relatively small number of
wireless communications manufacturers. Sales to two customers individually
accounted for 65% of total revenues in 2004. Therefore, the main action we are
taking to minimize the risk of this dependency is developing new products for
new customers; such new products include a range of color liquid crystal display
drivers, image sensors and camera modules. Material opportunities we envision
include growth in our main market, cellular handsets, based on the expected
transition to 3G, and a further worldwide growth in semiconductor sales,
especially in Asia. However, our revenues, profitability and growth could
decline if the growth in these markets slows.
We believe that our key performance indicators are revenues, gross margin and
research and development costs, thereby being the main driver of our operating
profit or loss. Accordingly, our Board of Directors and management use operating
profit as a measure of performance.
RESULTS OF OPERATIONS
The following table sets forth historical consolidated statements of operations
of Dialog for the fiscal years ended December 31, 2004, 2003 and 2002 in
thousands of Euro and as a percentage of revenues.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2004 2003 2002
--------------------------------------------------------
% % %
Revenues 116,044 100.0 92,893 100.0 77,104 100.0
Cost of sales (79,783) (68.8) (62,374) (67.2) (57,409) (74.4)
--------------------------------------------------------
GROSS MARGIN 36,261 31.2 30,519 32.8 19,695 25.6
Selling and marketing expenses (6,237) (5.3) (4,197) (4.5) (4,149) (5.4)
General and administrative expenses (5,462) (4.7) (5,044) (5.4) (6,447) (8.4)
Research and development expenses (29,071) (25.0) (30,590) (32.9) (34,530) (44.8)
Amortization of intangible assets (1,520) (1.3) (2,073) (2.2) (1,975) (2.5)
Restructuring and related impairment charges (59) (0.1) (1,839) (2.0) -- --
--------------------------------------------------------
OPERATING LOSS (6,088) (5.2) (13,224) (14.2) (27,406) (35.5)
Interest income, net 1,081 0.9 757 0.8 1,121 1.5
Foreign currency exchange gains and losses, net (726) (0.6) (454) (0.5) (1,918) (2.5)
Recovery (write-down) of investment 54 - 315 0.3 11,969 15.5
--------------------------------------------------------
RESULT BEFORE INCOME TAXES (5,679) (4.9) (12,606) (13.6) (16,234) (21.0)
Income tax benefit (expense) (64) (0.1) (7,814) (8.4) 6,026 7.8
--------------------------------------------------------
NET LOSS (5,743) (5.0) (20,420) (22.0) (10,208) (13.2)
========================================================
YEAR ENDED DECEMBER 31, 2004 COMPARED TO
THE YEAR ENDED DECEMBER 31, 2003
REVENUES
Revenues were EUR 116.0 million for the year ended December 31, 2004 compared
with EUR 92.9 million for year ended December 31, 2003. The increase of 25% in
revenues primarily results from higher sales volumes in our wireless
communication and automotive markets which more than offset a decline in
revenues in our industrial applications sector during the period. Revenues in
the wireless communications sector were EUR 90.6 million for the year ended
December 31, 2004 compared with EUR 69.9 in 2003, comprising 78% and 75% of
our total revenues in the years ended December 31, 2004 and 2003, respectively.
Revenues from our automotive applications sector were EUR 11.9 million and
EUR 7.9 million, representing 10% and 9% of our total revenues in 2004 and
2003, respectively. Revenues from our industrial applications sector were
EUR 13.5 million or 12% of total revenues in 2004 and EUR 15.1 million or
16% of total revenues in 2003.
Regional growth was particularly strong in Asia where revenue increased from EUR
24.9 million (China EUR 18.2 million, other Asian countries EUR 6.7 million) to
EUR 42.1 million (China EUR 19.7 million, other Asian countries EUR 22.4
million) for year ended December 31, 2003 and 2004, respectively.
Due to the shipments of new products in volume production to the market we
expect revenues for the year ended December 31, 2005 to be higher than those for
the year ended December 31, 2004. However, our forward visibility with respect
to customer demand is limited and a successful introduction of new products
depends on the completion of new designs on a timely basis. Our revenues for
2005 will also be highly dependent on continued growth in the worldwide market
for cellular handsets. We cannot give any assurance that this growth trend will
continue throughout 2005.
COST OF SALES
Cost of sales consists of the costs of outsourcing production and assembly,
related personnel costs and applicable overhead and depreciation of test and
other equipment. Cost of sales increased by 28% from EUR 62.4 million (67.2% of
our total revenues) for the year ended December 31, 2003 to EUR 79.8 million
(68.8% of our total revenues) for year ended December 31, 2004, in line with
increased production volumes. In addition, as a result of introducing new
products to volume production in 2004, per unit production costs increased
during their ramp-up phase and also increased cost of sales as a percentage of
total revenues.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist primarily of salaries, travel expenses,
sales commissions and costs associated with advertising and other marketing
activities. Selling and marketing expenses increased from EUR 4.2 million for
year ended December 31, 2003 to EUR 6.2 million for year ended December 31, 2004
due primarily to an increase in sales commissions incurred in connection with
higher sales volumes. As a percentage of total revenues, selling and marketing
expenses increased from 4.5% to 5.3%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel and support
costs for our finance, human resources, information systems and other management
departments. General and administrative expenses increased from EUR 5.0 million
for the year ended December 31, 2003 to EUR 5.5 million for the year ended
December 31, 2004, due primarily to legal fees and other costs incurred in
connection with the filing of patent applications. General and administrative
expenses decreased from 5.4% of total revenues to 4.7% of total revenues
resulting from the proportionally higher revenue base.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses principally consist of design and engineering
related costs associated with the development of new application specific
integrated circuits ("ASICs") and application specific standard products
("ASSPs"). Research and development expenses decreased 5% from EUR 30.6 million
for the year ended December 31, 2003 to EUR 29.1 million for the year ended
December 31, 2004. The decrease in research and development expenses primarily
results from continued cost savings following the closure of our Swedish
subsidiary. Research and development expenses decreased from 32.9% to 25.0% as a
percentage of total revenues resulting both from the absolute decrease and the
proportionately higher revenue base.
AMORTIZATION OF INTANGIBLE ASSETS
Intangible assets subject to amortization include ASIC design software, a 16-bit
microcontroller, licenses and certain imaging patents. Amortization expense for
the year ended December 31, 2004 was EUR 1.5 million as compared to EUR 2.1
million for the year ended December 31, 2003, a decrease of 27%. Amortization
expense decreased as certain intangible assets reached the end of their useful
lives.
RESTRUCTURING AND RELATED IMPAIRMENT CHARGES
In the second quarter of 2003 we closed our Swedish subsidiary. In connection
with the closure of the facility, we recorded restructuring charges of EUR 1.5
million and impairment charges of EUR 0.3 million, totaling EUR 1.8 million for
the year ended December 31, 2003. In 2004 we settled a lease obligation in
connection with the closure and incurred additional costs of EUR 0.1 million.
See Note 3 to the consolidated financial statements for further information.
OPERATING LOSS
We reported an operating loss of EUR 6.1 million for the year ended December 31,
2004 and EUR 13.2 million for the year ended December 31, 2003, a decrease of
54%. This decrease in operating loss was primarily due to a higher gross margin
and lower restructuring and impairment charges in the year ended December 31,
2004.
INTEREST INCOME, NET
Interest income, net from the Company's investments (primarily short-term
deposits and exchange-traded funds) increased from EUR 0.8 million for the year
ended December 31, 2003 to EUR 1.1 million for the year ended December 31, 2004
reflecting higher cash equivalents and marketable securities balances during
2004.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES, NET
Foreign currency transaction gains and losses result from amounts ultimately
realized upon settlement of foreign currency transactions and from the period
end remeasurement of foreign currency denominated receivables, prepaid expenses
and payables into Euro. Foreign currency exchange losses, net were EUR 0.7
million for the year ended December 31, 2004 and EUR 0.5 million for the year
ended December 31, 2003.
RECOVERY OF INVESTMENT
In the fourth quarter of 2001, we determined that our ability to recover the
full amount of our investments in silicon supplier ESM Holding Limited ("ESM")
was impaired. Accordingly we wrote off our investments in ESM. In March 2002,
International Rectifier acquired ESM. As a result we were able to recover EUR
0.1 million and EUR 0.3 million for the years ended December 31, 2004 and 2003,
respectively.
INCOME TAXES
Our business is subject to taxation in Germany, Japan, the United Kingdom and
the United States. Our effective tax rate and tax liability are affected by a
number of factors, such as the amount of taxable income or loss in these
particular jurisdictions, the tax rates in these jurisdictions, tax treaties
between jurisdictions, the extent to which we transfer funds between
jurisdictions and income is repatriated, and future changes in law. Generally,
because the tax liability for each legal entity is determined on a
non-consolidated basis we may pay income taxes in these jurisdictions even
though on a consolidated basis we have incurred a net loss for the period.
Income tax expense was EUR 0.1 million for the year ended December 31, 2004
compared with EUR 7.8 million income tax expense for the year ended December 31,
2003. The change in income taxes mainly reflects a valuation allowance on
deferred tax assets recognized in 2003 of EUR 11.8 million primarily related to
the uncertainty about the future realizability of our German tax-loss
carryforwards. See Note 6 to the consolidated financial statements for further
information.
NET LOSS
For the reasons described above, we reported net loss of EUR 5.7 million for the
year ended December 31, 2004 compared with net loss of EUR 20.4 million for the
year ended December 31, 2003.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO
THE YEAR ENDED DECEMBER 31, 2002
REVENUES
Revenues were EUR 92.9 million for the year ended December 31, 2003 compared
with EUR 77.1 million for the year ended December 31, 2002. The increase of 20%
in revenues is primarily due to new products introduced to volume production in
the second half of 2002 with more functionality and accordingly, higher average
selling prices. Our revenues for 2003 reflected the inclusion of sales of those
new products. Our increased revenues in 2003 also reflect the general increase
in cellular handset sales in the second half of 2003 (particularly in Asian
markets). Revenues in the wireless communications business sector were EUR 69.8
million for the year ended December 31, 2003 compared with EUR 54.7 million in
2002, comprising 75% and 71% of our total revenues in the years ended December
31, 2003 and 2002, respectively. Revenues from our industrial applications
business sector were EUR 12.8 million or 14% of total revenues in 2003 and EUR
13.7 million or 18% of total revenues in 2002. Revenues from our automotive
applications business sector were EUR 7.9 million and EUR 6.1 million,
representing 9% and 8% of our total revenues in 2003 and 2002, respectively.
Other revenues were EUR 2.4 million, or 2% of total revenues, a decline of EUR
0.2 million when compared to the EUR 2.6 million, or 3% of total revenues, in
2002.
COST OF SALES
Cost of sales consists of the costs of outsourcing production and assembly,
related personnel costs and applicable overhead and depreciation of test and
other equipment. Cost of sales increased by 9% from EUR 57.4 million for the
year December 31, 2002 to EUR 62.4 million for the year ended December 31, 2003
in line with increased production volumes. In addition, as a result of higher
production volume, our internal testing operation has been running at an
increased utilization level, which in turn has decreased per unit production
costs and decreased costs of sales as a percentage of total revenues. Because we
have a number of products that we expect to introduce to volume production in
2004, we expect per unit costs to increase in the near term.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist primarily of salaries, travel expenses
and costs associated with advertising and other marketing activities. Selling
and marketing expenses were approximately EUR 4.2 million and EUR 4.1 million
for the year ended December 31, 2003 and 2002, respectively. As a percentage of
total revenues, selling and marketing expenses decreased from 5.4% to 4.5%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel and support
costs for our finance, human resources, information systems and other management
departments. General and administrative expenses decreased 15.8% from EUR 6.4
million for the year ended December 31, 2002 to EUR 5.0 million for the year
ended December 31, 2003, primarily as a result of the closure of our Swedish
subsidiary. As a percentage of total revenues, general and administrative
expenses decreased from 8.4% to 5.4%.
RESEARCH AND DEVELOPMENT
Research and development expenses consist principally of unreimbursed design and
engineering related costs associated with the development of new ASICs and
application specific products ("ASSPs"). Research and development expenses
decreased 11% from EUR 34.5 million for the year ended December 31, 2002 to EUR
30.6 million for the year ended December 31, 2003. The decrease in research and
development expenses results from cost savings following the closure of our
Swedish subsidiary. Research and development expenses decreased from 44.8% to
32.9% as a percentage of revenues, resulting from the absolute decrease and the
proportionately higher revenue base.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
Amortization expenses for the year ended December 31, 2003 was EUR 2.1 million
as compared to EUR 2.0 million for the year ended December 31, 2002, an increase
of 5%. Amortization expense for intangible assets includes ASIC design software,
a 16 bit microprocessor core, other intangible assets and certain imaging
patents.
RESTRUCTURING AND RELATED IMPAIRMENT CHARGES
In the second quarter of 2003 we closed our Swedish subsidiary. In connection
with the closure of the facility, we recorded a restructuring charge of EUR 1.5
million and impairment charges of EUR 0.3million, totaling EUR 1.8 million for
the year ended December 31, 2003. Restructuring charges include termination
benefits of EUR 1.0 million that were paid to all employees affected by the
closing and a provision of EUR 0.5 million for estimated costs that will
continue to be incurred under an executory contract for its remaining term
without economic benefit to the Company. See Note 3 to the consolidated
financial statements for further information.
OPERATING LOSS
We reported an operating loss of EUR 13.2 million for the year ended December
31, 2003 and EUR 27.4 million for the year ended December 31, 2002, a decrease
of 52%. The decrease in operating loss was primarily due to a higher gross
margin, including the absence of a provision for excess inventory (EUR 1.9
million in 2002), the impact of which was partially offset by restructuring and
related impairment charges in the year ended December 31, 2003.
INTEREST INCOME, NET
Interest income, net from the Company's investments (primarily short-term
deposits) was EUR 0.8 million for the year ended December 31, 2003 and EUR 1.1
million for 2002.
FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES, NET
Foreign currency exchange losses, net were EUR 0.5 million for the year ended
December 31, 2003 and EUR 1.9 for the year ended December 31, 2002. This
decrease was primarily due to the re-measurement of our outstanding US Dollar
advance payment for two wafer suppliers, of which the most significant is
Chartered Semiconductor Manufacturing Pte., Ltd. ("Chartered"). Such advance
payments are classified in the balance sheet line item "Prepaid expenses". In
the second quarter of 2003 we concluded that it was appropriate to account for
our advance payments as "monetary assets" for the purpose re-measuring the
outstanding balance into Euro, with the resulting exchange gains or losses
recorded in the statement of operations. Accordingly, certain prior period
amounts presented have been revised to reflect this re-measurement process. We
believe that the impact of this re-measurement, using the then current exchange
rates applicable for those periods impacted (rather than the historical exchange
rate at the time we entered into the relevant contracts) does not have a
material effect on any financial statements previously issued or on our 2003
financial statements.
RECOVERY (WRITE-DOWN) OF INVESTMENTS
In the fourth quarter of 2001, we determined that our ability to recover the
full amount of our investments in silicon supplier ESM Holding Limited ("ESM")
was impaired. Accordingly we wrote off our investments in ESM. In March 2002,
International Rectifier acquired ESM. As a result, we were able to recover EUR
0.3 million and EUR 12.0 million for the years ended December 31, 2003 and 2002,
respectively.
INCOME TAXES
The income tax expense was EUR 7.8 million for the year ended December 31, 2003
compared with EUR 6.0 million income tax benefit for the year ended December 31,
2002. The adverse change in income tax expense despite the reduction in the
pretax loss in 2003 is primarily due to the EUR 11.8 million provision to
recognize a valuation allowance on certain deferred tax assets.
NET LOSS
For the reasons described above, we reported net loss of EUR 20.4 million for
the year ended December 31, 2003 compared with net loss of EUR 10.2 million for
the year ended December 31, 2002.
TREND INFORMATION
GENERAL
The semiconductor industry in general is highly cyclical and has been subject to
significant economic downturns which, at various times, have resulted in
production overcapacity, reduced product demand and an accelerated erosion of
average selling prices.
Revenues from our wireless communications applications accounted for 78% of our
total revenues for the year ended December 31, 2004, 75% of our total revenues
for the year ended December 31, 2003 and 71% of our total revenues for the year
ended December 31, 2002.
According to the Semiconductor Industry Association (SIA), strong growth in
sales of personal computers and wireless handsets were among the major drivers
of record chip sales in 2004, evidenced by a 28% growth rate in 2004 for the
total market for semiconductors (source: SIA press release, 31 January 2005,
"Global semiconductor sales hit record $213 billion in 2004"). The wireless
handset market saw its first real growth in 3G/WCDMA (Wideband code-division
multiple access) phones, with 20 million shipped worldwide in 2004, representing
3% of total handset sales in 2004 (source: Strategy Analytics press release, 14
February 2005,"20 Million 3G Phones Sold Worldwide in 2004"). This growth was
driven by aggressive mobile operator marketing in Japan and Western Europe to
encourage millions of early adopters to upgrade from their existing 2.5G
devices. The top handset manufacturers in this space expect the market to more
than double in size in 2005 as usability and styling is improved.
Overall wireless handset shipment growth was up last year, as a result of
technological advanced features such as color screens, cameras and clamshell
designs. The markets saw more clamshell handsets with dual displays, larger main
displays to display content, more sophisticated and higher resolution cameras,
and high quality audio. These developments were accompanied by manufacturers
increasingly using additional applications and graphics processors, and
continually demanding even lower power consumption in the same form factor
despite incorporating more sophisticated features.
MARKET TRENDS
The biggest market trend in the industry that Dialog Semiconductor addresses is
the convergence of multimedia and mobile communications. This means we will see
not just camera phones or smart phones, but devices such as PDAs with integrated
phone and multimedia capability. We believe there will most likely be an
explosion in other mobile gaming and entertainment possibilities in the next
three years, resulting from the rapid evolution of the mobile handset as we
currently know it.
Camera phones alone will build on the growth of 200% in 2004 (source:
In-Stat/MDR press release, 14 December 2004, "Camera Phone Market Continues to
Boom - 200% Growth in Annual Shipments"). Mobile gaming services are expected to
generate significant additional revenue in future years, accounting for over 4%
of total wireless data revenue in the USA by 2009 (source: In-Stat/MDR press
release, 7 September 2004, "Gaming to be Key Contributor to Wireless Data Usage
and Revenues").
Traditional mobile phone handsets will also continue to grow, although not at as
great a rate as in the boom years leading up to 2001. Gartner predicts 763
million handsets to be shipped in 2008, compared to 629 million in 2004 (source:
Gartner Market Focus Report: "Semiconductors in Mobile Phones, Worldwide,
2004-2008", 24 December 2004).
In the broader consumer electronics sector, there has also been a burst of
consumer interest in devices for playing back downloaded digital music. This
trend is likely to fuel interest and also significant growth in portable digital
music players, even with the different music download standards such as MP3, AC3
or WMA.
In automotive, complex electronics systems were in the past a feature of only
the most prestigious cars. However, the growing trend among the manufacturers of
lower cost cars is to add more value to their cars, making the electronics
systems almost as complex as those of the top end cars. The result will be a
mass market rather than niche market for complex electronics systems built in to
the car.
We believe one other key trend will be the growing use of imaging electronics
for driver safety features such as geographic positioning, navigation systems,
blind spot detection and white lane departure systems.
GEOGRAPHIC MARKET TRENDS
We allocate our revenues to countries based on the location of the shipment
destination. Changes in revenues from period to period have differed among
geographical regions. As our customers have continued to increase their
production in the greater China region and by adding new Asian customers,
regional growth was particularly strong in Asia in 2004, where revenue increased
by 69% from EUR 24.9 million for the year ended December 31, 2003 to EUR 42.1
million for the year ended December 31, 2004. Particularly in France, we
experienced decline in demand for our ASIC products where revenue decreased by
58% from EUR 4.5 million for the year ended December 31, 2003 to EUR 1.9 million
for the year ended December 31, 2004, due primarily to the fact that our
contract with one customer based in France was not renewed upon expiration. In
2003, regional growth was particularly strong in Germany and China where revenue
increased from EUR 31.5 million for the year ended December 31, 2002 to EUR 45.4
million for the year ended December 31, 2003 and from EUR 13.0 million for the
year ended December 31, 2002 to EUR 18.2 million for the year ended December 31,
2003. In 2003, particularly in France, we experienced decline in demand for our
ASIC products where revenue decreased from EUR 9.3 million for the year ended
December 31, 2002 to EUR 4.5 million for the year ended December 31, 2003.
GROSS MARGIN TRENDS
Our gross margin decreased from 32.8% of revenues for the year ended December
31, 2003 to 31.2% of revenues for the year ended December 31, 2004. The
weakening of the US dollar against the Euro and the reduction in price of
wireless communication ICs were the primary factors contributing to this
decrease in our gross margin.
RESEARCH AND DEVELOPMENT EXPENDITURE TRENDS
Research and development costs amounted to EUR 29.1 million in 2004, EUR 30.6
million in 2003 and EUR 34.5 million in 2002. We expect to incur research and
development costs below the current level based on certain cost savings
measures. Our ability to generate revenues in the long term depends on achieving
technical feasibility from our research and development programs, and on
customers accepting our designs and implementing them in large-scale production.
FOREIGN CURRENCY EXCHANGE RATE TRENDS
The reporting currency for our consolidated financial statements is the Euro.
The functional currency for our operations is generally the applicable local
currency. Accordingly, the assets and liabilities, the equity accounts and the
statements of income and cash flow of companies whose functional currency is not
the Euro must be translated into the reporting currency (the Euro). See Note 2
to the consolidated financial statements for further information. Changes in
exchange rates also influence our results of operations. Our sales are primarily
denominated in US Dollars and Euro, whereas our purchases of raw materials and
manufacturing services are primarily denominated in US Dollars.
In order to hedge our foreign currency exposure, primarily the US Dollar, we
attempt to match cash inflows and outflows in the same currency.
Since its introduction on January 1, 1999, the Euro has fluctuated in value
against the US Dollar. From the date of its introduction through December 31,
2001, the Euro declined approximately 25% against the US Dollar. Through
February 04, 2005 the Euro had recovered to 110% of its original value. Changes
in the exchange rate between the Euro and other non-Euro currencies, principally
the US Dollar, will affect the translation of our consolidated financial results
into Euro, and will also affect the value of any amounts that our subsidiaries
distribute to us. Exchange rate changes may also affect our balance sheet.
Changes in the Euro values of our assets and liabilities resulting from
exchange-rate movements may cause us to record foreign currency gains and
losses. We do not currently enter into forward or other derivative transactions
to hedge against exchange rate fluctuations.
For the year ended December 31, 2004, 55% of our revenues were denominated in
Euro and 45% were denominated in US Dollars, and 18% of our cost of sales was
denominated in Euro and 82% was denominated in US Dollars. Due to the weakening
of the US Dollar in the fourth quarter and a higher proportion of US
Dollar-denominated revenue compared with previous quarters combined with lower
than expected uptake from key customers, our revenue growth was lower in the
fourth quarter compared with the first three quarters of the year.
For the year ended December 31, 2003 78% of our revenues were denominated in
Euro and 22% were denominated in US Dollars, and 25% of our cost of sales was
denominated in Euro and 75% was denominated in US Dollars. For the year ended
December 31, 2002, 76% of our revenues were denominated in Euro, 23% were
denominated in US Dollars and 1% were denominated in Pounds Sterling, and 25% of
our cost of sales was denominated in Euro and 75% was denominated in US Dollars.
We also have foreign currency risk with respect to our net investments in
foreign subsidiaries in Japan, the United Kingdom and the United States. Foreign
currency translation gains and losses with respect to these subsidiaries are
included in other comprehensive income.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash used for operating activities was EUR 8.6 million for year ended December
31, 2004 compared with cash provided by operating activities of EUR 7.6 million
for the year ended December 31, 2003. In the year ended December 31, 2004 we
used cash mainly to increase our inventory to meet previously projected
forecasts of our customers. We expect this level to be reduced in the first half
2005. In the year ended December 31, 2003, our working capital (excluding cash
and cash equivalents and marketable securities) had decreased primarily due to
contractually required refunds of advance payments from a silicon supplier which
resulted in a related operating cash inflow.
Cash provided by investing activities was EUR 14.5 for year ended December 31,
2004 compared with cash used for investing activities of EUR 30.3 million for
year ended December 31, 2003. Cash provided by investing activities for the year
ended December 31, 2004 consisted mostly of a net sale of marketable securities
of EUR 27.4 million offset in part by the purchase of test equipment, tooling
(masks), laboratory and EDP equipment of EUR 12.3 million, and the purchase of
software, licenses and patents of EUR 0.7 million. Cash used for investing
activities for the year ended December 31, 2003 consisted mostly of the purchase
of marketable securities of EUR 45.0 million, the purchase of test equipment,
tooling (masks), laboratory and EDP equipment of EUR 5.9 million, and the
purchase of software, licenses and patents of EUR 1.4 million. In October 2003,
we also received an early repayment of our deposit of EUR 21.7 million (USD 20
million) from Chartered.
LIQUIDITY
At December 31, 2004 we had EUR 14.0 million in cash and cash equivalents and
EUR 17.5 million in marketable securities. The working capital was EUR 67.1
million.
Our primary sources of liquidity have historically been cash from operations,
cash from the issuance of ordinary shares in 1999 and 2000, short-term
borrowings, the recovery of the investment in ESM Limited and in 2003 the early
repayment of a deposit from Chartered. As of December 31, 2004 we had no
long-term debt. We expect to reduce our working capital in 2005, thereby
increasing our cash and cash equivalents and marketable securities in 2005. A
decrease in customer demand for our products caused by unfavorable industry
conditions or an inability to develop new products in response to technological
changes could materially reduce the amount of cash generated from operations.
If necessary, we have available for use a short-term credit facility of EUR 12.5
million that bears interest at a rate of EURIBOR + 0.75% per annum. At December
31, 2004 we had no amounts outstanding under this facility. Accordingly, we
believe the funding available from these and other sources will be sufficient to
satisfy our working capital requirements in the near to medium term.
CAPITAL EXPENDITURES AND INVESTMENTS
Purchases of property, plant and equipment were EUR 12.3 million for the year
ended December 31, 2004 compared to EUR 5.9 million for the year ended December
31, 2003 and EUR 3.9 million for the year ended December 31, 2002. Our capital
expenditures in 2004, 2003 and 2002 consisted primarily of purchasing new or
replacement test systems, tooling equipment, handling systems and other
equipment in the ordinary course of our business. Capital expenditures in 2004
increased over that of prior years as we upgraded eight test systems enabling us
to test four ICs in a single test step, and added certain test equipment to test
color display and image sensor ICs. In 2004, 2003 and 2002 we paid installments
of EUR 0.3, EUR 0.8 and EUR 1.5 million, respectively, for the CMOS imaging
technology and associated CMOS Active Pixel Sensor (APS) patents which we
acquired in 2002. We expect capital expenditures in 2005 to be below the 2004
level.
In future periods, we may make strategic investments or acquisitions in
connection with our plans to expand our business internationally.
OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS
We have no off-balance sheet arrangements involving variable interest entities.
We lease design software, all of our office facilities, office and test
equipment, and vehicles under operating leases. Future minimum lease payments
under rental and lease agreements, which have initial or remaining terms in
excess of one year at December 31, 2004 are as follows (EUR thousands):
2005 2006 2007 2008 2009 Thereafter
--------------------------------------------------------------------------------
Operating leases 8,148 6,629 6,399 6,429 3,297 316
We have no long-term debt, capital lease obligations, unconditional purchase
obligations or any other long-term obligations that would have a material impact
on our liquidity or financial condition. We have supply agreements with various
suppliers and maintain an outstanding balance of advance payment of EUR 1.2
million with one supplier, which will be refunded in proportion to our purchases
of wafers. See Note 11 to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND RELATED UNCERTAINTIES
We have identified the following accounting policies and related uncertainties
with the accounting measures used in preparing our consolidated financial
statements that we believe are essential to understanding the financial
reporting risks present in the current economic environment.
RECOVERABILITY OF LONG-LIVED ASSETS
GOODWILL
At December 31, 2004, the carrying value of our goodwill is EUR 11.8 million.
Since 2002, goodwill is no longer amortized, but we have, and will continue to
evaluate the recoverability of our goodwill at least annually or when
significant events occur or circumstances arise which indicate that the fair
value of the Company may be less than its net shareholders' equity. The fair
value of the Company is determined by estimating the present value of future
cash flows, which we believe is a more appropriate measure to determine fair
value than the Company's current market capitalization (which is based on the
quoted market price of the Company's ordinary shares). For purposes of
performing step 1 of the impairments test, the fair value of the entire company
is determined based on expected cash flows which are derived from the Company's
strategic plan and forecasts. The discount rate applied considered marketplace
participant assumptions including a risk-free rate, market risk premium and a
beta factor that is consistent with the Company's market peers. If it becomes
necessary to change assumptions used to determine the fair value of the company,
we may conclude that our ability to recover the carrying value of our goodwill
is impaired. Such an impairment charge could have a material adverse impact on
our future result of operations.
OTHER LONG-LIVED ASSETS
Our business is capital intensive and has required, and will continue to
require, significant investments in long-lived assets, including property,
plant, equipment and intangible assets (other than goodwill). At December 31,
2004, the carrying amount of our property, plant and equipment was EUR 21.2
million. As discussed in Note 2 to the consolidated financial statements,
recoverability of these long-lived assets that will continue to be held and used
is evaluated whenever an indication of impairment exists. Then we will compare
the carrying amount of the asset or group of assets to the net undiscounted cash
flows expected to be generated by the asset or group of assets. If the asset or
group of assets is considered impaired, the impairment recognized is measured as
the amount by which the carrying amount of the impaired asset or group of assets
exceeds its fair value.
We do not believe that our ability to recover the carrying value of our other
long-lived assets has been impaired and no significant impairment charges have
been recognized in any of the past three years. However, a general economic
downturn and, specifically, a continued downturn in the semiconductor industry
would intensify competitive pricing pressure because of overcapacity in the
industry, and we could be forced to decrease production and reduce capacity.
Such events could adversely affect our estimates of future net cash flows
expected to be generated by our long-lived assets. It is reasonably possible
that our future operating results could be materially and adversely affected by
an impairment charge related to the recoverability of our long-lived assets.
USEFUL LIFE OF EQUIPMENT
In the fourth quarter of 2004, we determined that the useful life of our test
equipment should be changed to eight years. Previously, we had determined its
useful life to be five years. The effect of this change in our accounting
estimates resulted in a lower depreciation charge of EUR 1,349 (EUR 842, net of
tax, or EUR 0.02 per share).
In determining the proper amount of annual depreciation with respect to
equipment assets, management needs to make an estimate of the expected useful
economic life of such assets. Ideally, the end of the useful life of an asset
coincides with the close of the depreciation period.
As a result of changes in our business, we may need to determine the prospective
expected useful life of assets in a period subsequent to the period in which
those assets were initially put into service.
Specifically, a decision to revise our capital spending plan and invest in
upgrades which extend the prospective useful lives of assets on hand, rather
than replace those assets with new equipment, would result in a change in the
expected remaining useful life of such upgraded assets. This change would be
considered on a going-forward basis for depreciation assets. Similarly, we may
gain more experience in estimating the useful lives of equipment and determine
that we may be able to continue to use certain assets for a longer period of
time than originally estimated when we put them into service.
REALIZABLE VALUE OF INVENTORIES
We value inventory at the lower of cost or market. We review the recoverability
of inventory based on regular monitoring of the size and composition of the
inventory positions, market conditions, current economic events, the pricing
environment and projected future demand. This evaluation is inherently
judgmental and requires material estimates, including both forecasted product
demand and pricing environment, both of which may be susceptible to significant
change.
Changes in estimates regarding the realizability of the carrying value of our
inventory has resulted in excess inventory provision of EUR 1.9 million being
charged to costs of sales in 2002. No excess inventory provision was required in
2004 and 2003. At December 31, 2004, our total inventory was EUR 29.8 million.
We believe that the carrying value of our inventory will be recovered through
customer consumption of goods based on their forecasts and related contractual
agreements. However, the demand for our products can fluctuate significantly in
response to rapid technological changes in the semiconductor and wireless
communications industries. It is reasonably possible that future operating
results could be materially and adversely affected if any excess inventory
charges are needed.
REALIZATION OF DEFERRED TAX ASSETS
Total deferred tax assets, before the recognition of valuation allowances, were
EUR 31.2 million at December 31, 2004, which include deferred tax assets of EUR
25.2 million on tax loss carryforwards. While the majority of these losses may
be carried forward indefinitely, their realization is dependent on generating
sufficient taxable income to utilize the losses. In December 2003, the German
government enacted new tax legislation, which among other things, limits the use
of German tax-loss carryforwards to 60% of the taxable income for fiscal years
starting from 2004 and thereafter. We have evaluated our deferred tax asset
position and the need for a valuation allowance as a result of this change in
tax law. The assessment requires the exercise of judgment on the part of our
management, with respect to, among other things, benefits that could be realized
from available tax strategies and future taxable income, as well as other
positive and negative factors. Our assessment considered the weight given to
cumulative tax losses incurred in Germany, as well as detailed forecasts of
taxable income in the foreseeable future. Although we forecasted generating
future taxable income, the change in tax law increased the forecasted number of
additional years we had to generate such future taxable income in order to fully
realize these loss carryforward benefits. Pursuant to SFAS 109 and the inherent
uncertainties in projecting future taxable income, we concluded that it is more
likely than not that a portion of our tax losses could not ultimately be
realized. Consequently, we recognized an additional valuation allowance of EUR
1.9 million and EUR 11.8 million as of December 31, 2004 and 2003, respectively,
to reduce the carrying value of our net deferred tax assets to an amount that we
believed was more likely than not expected to be ultimately realized.
DIVIDENDS
We did not pay dividends in the years ended December 31, 2004, 2003 and 2002. We
do not currently plan to pay dividends in the foreseeable future. See "Item 8.
Dividend Policy".
INFLATION
We do not believe that inflation has had a significant effect on our operations
to date.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2004, EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investment, was issued which includes new guidance
for evaluating and recording other than temporary impairment losses on debt and
equity securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities and cost method investments, as well
as new disclosure requirements for investments that are deemed to be temporarily
impaired. While the disclosure requirements for specified debt and equity
securities and cost method investments are effective for annual periods ending
after December 15, 2003, the FASB Board has directed the FASB staff to delay the
effective date for the measurement and recognition guidance contained in EITF
No. 03-1. This delay does not suspend the requirement to recognize
other-than-temporary impairments as required by existing authoritative
literature. We do not expect the adoption of EITF No. 03-1 to have a material
impact on our consolidated financial statements.
In November 2004, the FASB issued Statement No. 151, Inventory Costs, to amend
the guidance in Chapter 4, "Inventory Pricing," of FASB Accounting Research
Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins.
Statement 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. We do not believe the adoption of SFAS No. 151 will have a material
impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award based upon an
option-pricing model and an estimate of the number of awards expected to vest.
Compensation cost will be recognized as they vest, including related tax
effects. SFAS No. 123(R) will be effective for interim or annual reporting
periods beginning on or after June 15, 2005. The statement provides for three
alternate transition methods, each having a different reporting implication. We
previously accounted for our stock based compensation plan using the
intrinsic-value-based method based on APB Opinion No 25. Under this method, no
stock-based compensation is reflected in net income (loss) (see also "Stock
based compensation" in Note 2 to the consolidated financial statements). We are
in the process of determining the transition method we are going to adopt and
the potential impact on our financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
OVERVIEW
We rely on our board of directors to manage our business. The board, which
consists of executive and non-executive directors, supervises our general
management and decides upon and oversees the implementation of our central
strategic and operational guidelines.
Each director is required under English law to carry out his or her functions as
a director with the degree of skill and care that may reasonably be expected of
a person of his or her skill and experience. Each director is obliged to act in
the interests of our shareholders as a whole and should avoid allowing any
conflicting interests, whether his or hers or those of the persons that
appointed him or her, to influence his or her judgment in acting as a director.
The board is ultimately required to manage our affairs in accordance with our
memorandum and articles of association and with the requirements of local laws
and regulations.
We have seven non-executive independent directors as part of our board. While
these non-executive directors do not play an active role in our day to day
operations, they provide the board with an independent element which brings a
greater depth of skill, experience and objectivity to the making of key
decisions.
We also have six vice-presidents who, together with the executive director, are
responsible for our day to day business. All directors and senior management can
receive service of process at the business address of the company.
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth, as of February 27, 2004, the name of each member
of our board of directors and each of our senior management, their ages, the
dates of their first appointments and their positions:
DATE OF
NAME AGE APPOINTMENT POSITION
----------------------------------- --------- --------------------- ----------------------------------
Roland Pudelko 52 March 1998 Executive Director, CEO and
President
Timothy Richard Black Anderson 44 February 1998 Non-executive Director
Michael John Glover 66 March 1998 Non-executive Director
Aidan Hughes 44 October 2004 Non-executive Director
John McMonigall 61 March 1998 Non-executive Director
Michael Risman 36 August 1999 Non-executive Director
Jan Olof Ingemar Tufvesson 66 March 1998 Non-executive Chairman
Gregorio Reyes 63 December 2003 Non-executive Director
Gary Duncan 49 October 1987 Vice-President of
Engineering-Imaging
Peter Hall 53 July 1987 Vice-President of IT and
Technical Support
Erwin Hopf 50 July 2002 Vice-President of Operations
Yoshihiko Kido 52 November 2001 Vice President of Japan
Martin Kloeble 45 July 1999 Vice-President of Finance and
Controlling
Martin Sallenhag 36 November 2001 Director of Product Marketing
Richard Schmitz 48 January 1994 Vice-President of
Engineering-Mixed Signal ICs
The following is a brief biography of each director, executive officer and
senior manager named here.
ROLAND PUDELKO joined us in 1989 as managing director and has served as
Executive Director, CEO and President since March 1998. Mr. Pudelko has over 20
years experience in electronics and microelectronics, primarily in management
positions within the Daimler-Benz Group. During that time, he was a board member
of a joint venture with the Taiwanese company, ACER, and for the TEMIC Group he
was responsible for the coordination of worldwide design and engineering. Mr.
Pudelko has a diploma in communication technologies. He is also the managing
director of Dialog Semiconductor GmbH and our other consolidated subsidiaries.
TIMOTHY RICHARD BLACK ANDERSON joined the board of our then-holding company in
1990 and has served as a director since February 1998. Mr. Anderson has been a
partner with the London law firm Reynolds Porter Chamberlain since 1989, where
he specializes in business law for media and technology companies. He holds a
law degree from Southampton University and is qualified as a solicitor in
England and Wales.
MICHAEL JOHN GLOVER joined the board of our then-holding company in 1990 and has
served as one of our directors since March 1998. Mr. Glover was a senior
executive with technology based companies in the United Kingdom, Europe, the Far
East and North America prior to becoming involved in private equity fund
management in 1985. He has a degree in economics from the University of
Birmingham. Mr. Glover currently is Managing Director of Aylestone Strategic
Management Limited and serves as a director of other companies.
AIDAN HUGHES joined us as a director in October 2004. He qualified as a
chartered accountant with Price Waterhouse in the 1980s before taking senior
accountant roles at Lex Service Plc and Carlton Communications Plc. He served
the Sage Group Plc as finance director from 1993 until 2000. Between December
2001 and August 2004 Hughes was a director of Communisis Plc.
JOHN MCMONIGALL has served as one of our directors since March 1998. He joined
Apax Partners as a director in 1990 and is currently the director responsible
for investments in telecommunications, software and related fields. Between 1986
and 1990, Mr. McMonigall held a variety of senior positions at British Telecom,
including managing director of the customer service division. He was also a
member of the management board of British Telecom. He is currently on the board
of five other public and private companies, including Crane Telecommunications
Ltd, Autonomy Corporation plc and Amphion Ltd.
GREGORIO REYES joined us as a director in December 2003, and has been a private
investor and management consultant since 1994 with current board positions at
companies including LSI Logic Corp., Appshop, Amphion Semiconductor, Astute
Networks, Future Trade Technologies, and Nuera Communications. He has held
various executive positions with National Semiconductor (1962-1967), Motorola
(1967-1968) and Fairchild Semiconductor (1968-1978). He was also president and
CEO of National Micronetics (1981-1984), and chairman and CEO of American
Semiconductor Equipment Technologies (1986-1990), and of Sunward Technologies
(1990-1994).
MICHAEL RISMAN joined us as a director in August 1999, having been closely
involved with our company since March 1998. He is a director at Apax Partners
where he is responsible for their European IT investment activities and is a
member of their International Approval Committee. Before joining Apax Partners
in 1995, Mr. Risman worked for Cap Gemini as a consultant and for Jaguar Cars as
a research and development engineer. He earned an MBA from Harvard Business
School and an MA (Honors) degree in Electrical Engineering and Management from
Cambridge University. He is also a director of Frontier Silicon (Holdings) Ltd,
Red-M (Communications) Limited and Streamserve Inc.
JAN OLOF INGEMAR TUFVESSON joined the board of our then-holding company in 1990
and has served as chairman of the board since March 1998. Between 1972 and 1980
he held senior positions on the Royal Swedish Air Force Board. In 1980 he joined
Ericsson where he had a number of executive roles, the last being a vice
president at LM Ericsson corporate, responsible for all procurement in Ericsson
and for developing relations with key suppliers. Mr. Tufvesson graduated from
the Royal University of Technology in Stockholm with a masters degree in
electronic engineering in 1962. Mr. Tufvesson retired from Ericsson in 1998 and
is now based in Stockholm.
GARY DUNCAN joined us in October 1987 and is currently the Vice-President of
Engineering-Imaging. He obtained a Higher National Certificate in electronics
and mathematics in 1978 from Plymouth Polytechnic and is a chartered engineer.
Before joining Dialog, Mr. Duncan held various senior engineering and management
positions at Plessey and ES2 in quality and production, device engineering,
design software and marketing.
PETER HALL joined us in July 1987 and is currently our Vice-President of Quality
and Technical Support and is responsible for all computer systems and quality
issues. Before joining Dialog he held various management and engineering
positions at STC Semiconductors and MEM in Switzerland. Mr. Hall obtained his
BSc (Honors) in electrical and electronic engineering in 1974 from the
University of Newcastle upon Tyne, his MSc in digital techniques in 1977 from
the University of Edinburgh and his MBA in technology management in 2003 from
the Open University.
ERWIN HOPF joined us in July 2002 and is currently our Vice-President of
Operations. He received his Diploma in physics in 1980 from the Technical
University of Darmstadt. From 1980 until 2002, he held various engineering as
well as research and development and production managing positions at Siemens
Components and Infineon Technologies.
YOSHIHIKO KIDO joined us in March 2001 and is responsible for our Japanese
operation. He was previously a consultant at Overseas Affiliates Pty. Ltd., and
held management positions at General Electric, Act Japan, Seagate and Nippon
Ericsson. He obtained his BA in English Language from Kanagawa University in
1976.
MARTIN KLOEBLE joined us in July 1999 as Vice-President of Finance and
Controlling. He holds an MBA from the University of Stuttgart-Hohenheim and is
qualified as a tax consultant (STEUERBERATER) as well as a certified public
accountant in Germany (WIRTSCHAFTSPRUEFER) and in the United States (CPA).
Before joining Dialog, Mr. Kloeble worked with KPMG, and was appointed a partner
at the beginning of 1999.
RICHARD SCHMITZ joined us in 1994 and is currently our Vice-President of
Engineering-Mixed Signal ICs. Prior to joining us, he held various
design-related positions at Hewlett Packard's instruments division in Boeblingen
and the Institute for Microelectronics, Stuttgart. Mr. Schmitz received a
diploma in engineering for communications electronics in 1983 from the
vocational college (FACHHOCHSCHULE) in Trier.
B. COMPENSATION
We pay non-executive directors who are not associated with any of our principal
shareholders GBP 5,000 to GBP 35,000.
We reimburse all of our directors for their reasonable travel expenses incurred
in connection with attending meetings of the board or committees thereof. Under
certain circumstances, directors are also eligible to receive stock options.
The following table sets out the amount of remuneration paid by us and our
subsidiaries to each of our directors for services rendered during the year
ended December 31, 2004.
COMPENSATION (IN EUR)
LONG-TERM
NAME POSITION BASE SALARY BONUS INCENTIVES
-------------- -- ----------- --------------
Roland Pudelko Executive Director, CEO and
President 279,105 33,334 -
Tim Anderson(1) Non-executive Director 7,366 - -
Michael Glover Non-executive Chairman of the
Audit Committee 51,565 - -
Aidan Hughes Non-executive Director (since
October 1, 2004) 11,050
John McMonigall Non-executive Director 29,466 - -
Gregorio Reyes Non-executive Director 44,198 - -
Michael Risman Non-executive Director 29,466 - -
Jan Tufvesson Non-executive Chairman 51,565 - -
-------------- -- ----------- - --------------
503,781 33,334 0
============== == =========== = ==============
---------------
(1) Tim Anderson is also a partner in the law firm Reynolds Porter
Chamberlain, which frequently acts as our legal adviser. Fees to
Reynolds Porter Chamberlain for legal services rendered during the 2004
fiscal year amounted to EUR 211,683.
The aggregate compensation for our CEO and senior management for 2004 was
EUR 1,409,404.
All of our employees participate in a quarterly profit-based bonus scheme, which
pays out if we achieve our agreed financial goals.
A further bonus is available to our sales employees and senior management via
our Management By Objectives "MBO" program.
Under this program, each sales person is annually assigned a number of
objectives which specifically target achieving design-wins from selected
customers within a set period of time. These objectives are established by
senior management with input from the marketing department. We assess the
performance of each sales person against these objectives half-yearly and
annually.
For senior management, key business objectives for their respective departments
are set and agreed by the board of directors. Performance is measured formally
on an annual basis and also via quarterly progress reviews.
STOCK OPTIONS
As of March 22, 2005, our directors and senior management held 1,116,400 options
for our ordinary shares which entitle the holders to acquire 1,116,400 shares.
The following table gives stock option information for the Company's directors
and senior management.
DIRECTORS AND SENIOR OPTIONS EXPIRATION EXERCISE
MANAGEMENT HELD DATE PRICE
----------- ------------------------ -----------
Roland Pudelko 150,000 February 21, 2009 GBP 0.20
34,530 May 6, 2009 GBP 0.40
132,920 July 28, 2009 GBP 0.60
200,000 November 20, 2013 EUR 3.45
Gary Duncan 50,000 February 21, 2009 GBP 0.20
17,210 May 6, 2009 GBP 0.40
26,440 July 28, 2009 GBP 0.60
50,000 November 20, 2013 EUR 3.45
Peter Hall 60,000 February 21, 2009 GBP 0.20
17,210 May 6, 2009 GBP 0.40
26,440 July 28, 2009 GBP 0.60
50,000 November 20, 2013 EUR 3.45
Erwin Hopf 40,000 June 30, 2012 EUR 1.48
20,000 November 20, 2013 EUR 3.45
Yoshihiko Kido 50,000 November 20, 2013 EUR 3.45
Martin Kloeble 45,000 July 28, 2009 GBP 0.80
50,000 November 20, 2013 EUR 3.45
Martin Sallenhag 30,000 November 20, 2013 EUR 3.45
Richard Schmitz 210 May 6, 2009 GBP 0.40
16,440 July 28, 2009 GBP 0.60
50,000 November 20, 2013 EUR 3.45
-----------------
1,116,400
=================
C. BOARD PRACTICES
TERM OF OFFICE AND RETIREMENT BY ROTATION
Our articles of association currently provide that one-third (or a number
nearest to one-third) of the directors shall retire at every annual general
meeting; but if any director has at the start of the annual general meeting been
in office for more than three years since his or her last appointment or
re-appointment, he or she shall retire. A director who retires at an annual
general meeting may, if willing to act, be re-appointed.
SERVICE AGREEMENTS
Our CEO and President, Roland Pudelko, has entered into a service agreement with
us that is of unlimited duration. The agreement is terminable by either party on
12 months' notice. In addition, our shareholders are entitled to dismiss Mr.
Pudelko by virtue of an ordinary resolution at any time, without prejudice to
his right to remuneration. Such dismissal is considered termination of the
contract at the next possible deadline.
Each of our vice-presidents has entered into a service agreement with us and our
subsidiaries. The service agreements are all of unlimited duration. In the cases
of Gary Duncan, Peter Hall and Erwin Hopf, their agreements are terminable by
either party to the agreement on six months' written notice to the other.
Richard Schmitz's agreement is terminable by either party on three months'
notice to the end of a calendar quarter. Yoshihiko Kido's agreement has no time
limit and can be terminated by either party on three months' notice in writing.
Martin Kloeble's agreement is terminable subject to German statutory provisions
for termination. Martin Sallenhag's agreement is terminable subject to Swedish
statutory provisions for termination. None of the service agreements contain
provisions subjecting us to onerous obligations in the case of early
termination.
BOARD COMMITTEES
We have established an Audit Committee of the board of directors which reviews,
acts on and reports to the board of directors with respect to various auditing
and accounting matters, including the selection of our auditors, the scope of
the annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. Our Audit Committee consists
of Messrs. Glover, Hughes and Tufvesson.
The Company's Compensation Committee of the board of directors determines the
salaries and incentive compensation of our CEO and senior management and
provides recommendations for the salaries and incentive compensation of other
employees and consultants. The Compensation Committee also administers our
various compensation, stock and benefit plans. Our Compensation Committee
consists of Messrs. Glover, Reyes and Tufvesson. None of the members of this
Committee was our employee at any time during 2004.
The Nomination Committee of the Board of Directors reviews the board structure,
size and composition and makes recommendations to the Board. The Nomination
Committee is responsible, amongst other things, for identifying and nominating
board candidates for approval by the Board. The Nomination Committee comprises
Messrs. Glover, Tufvesson and Reyes.
EXEMPTIONS FROM LISTING STANDARDS
We rely on an exemption from the quorum requirement as set forth under Nasdaq
Marketplace Rule 4350(f). This exemption was granted to Dialog on 1 August 2000.
In lieu of following this quorum requirement, Dialog's articles of association
provides for quorum for any general meeting that is no less than two persons
present in person or by proxy entitled to vote on the business to be transacted,
which is in accordance with law, rule, regulation, and generally accepted
business practices in Dialog's home country of England and Wales.
D. EMPLOYEES
At December 31, 2004, we employed 296 full-time employees not including
trainees/apprentices, of which 204 were based in Germany, 55 in the United
Kingdom, 22 in the United States, 8 in Austria, 6 in Japan and 1 in Taiwan. Of
the total number, 156 were engaged in engineering (including design and product
engineering) and 85 were engaged in production (including logistics, quality and
testing). The average number of employees in 2004 was 282 compared to 273 in
2003 and 285 in 2002.
E. SHARE OWNERSHIP
As of March 22, 2005, our directors and senior management held 1,398,535 shares.
DIRECTORS AND SENIOR MANAGEMENT NUMBER PERCENT OF SHARES
BENEFICIALLY OWNED
Roland Pudelko 320,405 *
Timothy Richard Black Anderson 75,166 *
Michael John Glover(1) 195,000 *
Gregorio Reyes 35,000 *
Jan Olof Ingemar Tufvesson(2) 175,062 *
Michael Risman 1,172 *
Gary Duncan 162,105 *
Peter Hall 162,415 *
Martin Kloeble 180,000 *
Richard Schmitz 92,210 *
---------------
1,398,535
===============
---------------
* Less than 1%
(1) Includes (i) 40,000 shares owned directly by Mr. Michael John Glover, (ii)
90,000 shares owned by Linda Diane Glover, (iii) 5,000 shares owned by
Matthew James Glover and (iv) 60,000 shares held by Timothy Thornton Jones
as trustee for Linda Diane Glover and the sons of Michael John Glover.
(2) Includes (i) 157,062 shares owned by Mr. Tufvesson and (ii) 18,000 shares
held by members of his family.
EMPLOYEE SHARE PURCHASE PLAN
On March 26, 1998, in connection with the acquisition of the Company, we and our
then majority owner, Apax Partners, adopted a Subscription and Shareholders
Agreement under which employees and directors were invited at the discretion of
the Board, to purchase up to 3,456,890 ordinary shares of the Company from Apax
Partners or an established Dialog Semiconductor Plc Employee Benefit Trust (the
"Trust"). The purchase price of the shares was equal to their estimated fair
value on the date the employee or director subscribed for those shares. During
the first quarter of 1999, the Trust acquired the remaining 668,800 ordinary
shares from Apax Partners, which were not sold to employees or directors for
purposes of distributing them to employees under the Employee Stock Purchase
Plan or for distribution in connection with the exercise of employee stock
options.
On September 24, 2004, the Company completed an offering of 2,000,000 previously
unissued ordinary shares at (pound)0.10 per share to its employee benefit trust,
to make such shares available for the exercise of stock option rights that had
previously been granted to employees.
At December 31, 2004, the Trust continued to hold 2,001,559 shares, equaling the
remaining balance of the acquired 668,800 shares and the 2,000,000 shares
acquired in 2004 .
SHARE OPTION SCHEME
All of our employees and full time executive directors and employees of any of
our consolidated subsidiaries who are required to devote substantially the whole
of their working time to us and/or any of our subsidiaries are eligible to be
granted options under our share option scheme, at the discretion of the board.
The scheme was established on August 7, 1998. As at December 31, 2004, a total
of 8,129,811 shares may be issued under the scheme. See Note 17 to the
consolidated financial statements. As of December 31, 2004 we had granted
options to purchase 3,299,406 shares. These options are exercisable at prices
ranging from (pound)0.20 to EUR 8.00 per share depending on the date of grant
and what type of option they are (see below). The options generally expire 10
years after the date of grant.
Eligible employees and directors may be invited by the board to apply for
options. Employees and directors who wish to take up the invitation will have a
period of 14 days (or such longer period as the board determines) to then apply
for an option. No payment will be required in applying for an option. Options
may be offered by the board within 42 days of the day on which we announce the
annual or semi-annual results or in exceptional circumstances when approved by
the board.
The scheme provides for the grant of three categories of options:
o short options, which may be exercised, if at all, within two years of the
date of grant;
o long options, which may be exercised within five years of the date of
grant; and
o incentive stock options which are options granted to a US employee which
complies with the relevant terms of the United States Internal Revenue Code
of 1986.
Options granted have not been subject to date to a performance condition (such
as the achievement of pre-determined financial targets), although the rules
allow the board to make the exercise of an option subject to the satisfaction of
objective performance conditions.
Options entitle the option holder to acquire shares at a price per share
determined by the board. Such price may not be less than the greater of:
o the nominal value of a share;
o the market value of a share at the date of grant; or
o for US participants, who own 10% or more of the total combined voting power
of any company of the group, 110% of the market value of a share on the
date of grant.
Fifty percent of the shares comprised in a short option may be exercised on the
first anniversary of the date of grant. Twenty percent of the shares comprised
in a long option may be exercised on each anniversary of the date of grant
together with any unexercised portion from previous years.
An incentive stock option held by a US participant owning 10% or more of the
total voting power of our company or our consolidated subsidiaries may not be
exercised later than five years after the date of grant. For all other option
holders, options may be exercised before the tenth anniversary of the date of
grant, at the end of which period they will lapse.
Unless the option holder is dismissed for cause or has filed for bankruptcy he
or she has one calendar month or such longer period as the board determines from
the date of termination of employment in which to exercise options. Otherwise,
any options held will lapse immediately upon termination of employment.
In the event of the death of an option holder, his or her personal
representatives may exercise any subsisting option in the period of 12 months
from the date of death.
In the event that an option holder, other than an option holder holding an
incentive stock option, retires in accordance with the contractual retirement
age or otherwise at 65, any subsisting options may be exercised within the
period of six months following the date of retirement. Holders of incentive
stock options must exercise any subsisting options within the period of one
month following the date of retirement.
Where the option holder leaves our employment in circumstances of injury,
disability, redundancy within the meaning of the UK Employment Rights Act 1996,
the company for which the option holder works ceases to be a member of the
Dialog Semiconductor group or the business for which the option holder works is
transferred out of the Dialog Semiconductor group, options will be exercisable
in the period of six months (three months in respect of incentive stock options)
following termination of employment, whether or not any performance conditions
which apply to them have been satisfied. In the event of a takeover,
reconstruction or amalgamation of our company, options may be exercised in the
period of six months following such event. Alternatively, options may be
exchanged for options over shares in an acquiring company provided that the new
option confers a right to acquire a number of new shares that have the same
total market value as the subsisting option, the total amount payable by a
participant is the same under the new option as under the subsisting option, and
the new option is exercisable in the same manner as the corresponding subsisting
option. In practice the six month period can be shortened by the compulsory
acquisition procedure under Section 429 of the Companies Act 1985 on a takeover.
In the event of a voluntary winding up of the company the options may be
exercised within three months of the passing of a winding up resolution.
In the event of any rights or capitalization issue, sub-division, consolidation,
or reduction of our share capital, the board may (subject to auditors'
confirmation) adjust the number of shares subject to options and the price
payable on their exercise provided that (1) the option price for a share is not
less than its nominal value; and (2) the total price for the option has not been
materially altered.
Other than options granted to German participants (which are fully
transferable), options are not transferable and may only be exercised by the
option holder or his or her personal representatives. Shares allotted or
transferred under the share option scheme will rank pari passu with shares of
the same class then in issue (except in respect of entitlements arising prior to
the date of allotment).
No options may be granted over shares under the share option scheme which would,
when combined with options granted over shares under any other scheme operated
by us or any of our consolidated subsidiaries, exceed 15%, after issue, of the
Company's issued share capital.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
Apax Partners own 8,460,793 of our ordinary shares or 18.4%. Apax Partners act
as Manager of Apax Funds Nominees Limited and Managing General Partner of Apax
Germany II L.P., respectively. Apax Funds Nominees Limited holds shares as a
nominee for certain other Apax Venture Capital Limited Partnerships. Prior to
the secondary offering in June 2000, Apax Partners owned 18,091,170 of our
ordinary shares or 41.2%. Apax Partners' voting rights do not differ from the
rights of other shareholders.
Adtran, through its wholly-owned subsidiary ADFI, Inc., owns 2,520,960 ordinary
shares or 5.5%. Prior to the secondary offering in June 2000, Adtran owned
5,305,810 ordinary shares or 12.6%. Adtran's voting rights do not differ from
the rights of other shareholders.
UNITED STATES SHAREHOLDERS
Clearstream Banking AG ("Clearstream") and a nominee of Clearstream holding two
shares are the current holders of record of the company's shares. Clearstream
issues bearer rights to these shares to financial institutions who are
participants in Clearstream and through whom beneficial owners (including US
beneficial owners) hold our shares. Due to the secrecy laws of some of the
jurisdictions (including Germany) in which the participants of Clearstream are
located, these participants may not be obligated to disclose information
regarding beneficial ownership of our shares pursuant to Section 198 of the
Companies Act 1985 or the Nasdaq Europe regulations. Consequently, we are unable
to identify the US beneficial owners of these shares.
B. RELATED PARTY TRANSACTIONS
Timothy Anderson, a member of the Board, is also a partner in the law firm
Reynolds Porter Chamberlain, which frequently acts as our legal adviser. Fees to
Reynolds Porter Chamberlain for legal services rendered during the three year
period ended December 31, 2004, December 31, 2003 and December 31, 2002 amounted
to EUR 211,684, EUR 162,241 and EUR 267,884, respectively.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 18: Financial Statements" and the Notes thereto.
LEGAL PROCEEDINGS
Neither we nor any of our consolidated subsidiaries are involved in litigation
or arbitration proceedings that could have a substantial impact on our financial
position or the financial position of any of our consolidated subsidiaries. We
have not been involved in such litigation or arbitration proceedings in the past
two years, nor, to the best of our knowledge, are such proceedings pending or
threatened against us or any of our consolidated subsidiaries. However, as is
the case with many companies in the semiconductor industry, we may from time to
time receive communications alleging possible infringement of intellectual
property rights of others. Irrespective of the validity of such claims, we could
incur significant costs with respect to the defense of such claims which could
have a material adverse effect on our business, results of operations or
financial condition. See "Item 3: Risk Factors--If we are unable to protect our
intellectual property and know-how from copy or use by others, our competitors
may gain access to our content and technology".
DIVIDEND POLICY
We have never declared or paid any dividends. We currently intend to retain all
available earnings generated by our operations for the development and growth of
our business. As a result, we do not anticipate paying any dividends in the
foreseeable future. You should also refer to "Item 5: Operating and Financial
Review and Prospects-Liquidity".
B. SIGNIFICANT CHANGES
NOT APPLICABLE
ITEM 9. THE OFFER AND LISTING
The German stock exchange (XETRA/Frankfurter Wertpapierborse) and Nasdaq are the
principal trading markets for our ordinary shares and ADSs.
Dialog is listed in the Prime Standard segment of the Frankfurt Stock Exchange
and therefore has to comply with the requirements of the Prime Standard:
o quarterly reporting;
o application of international accounting standards (IFRS, international
financial reporting standard, or US GAAP);
o publication of a financial calendar listing the most important corporate
events;
o at least one analysts' conference per year; and
o use of the English language for current reporting and for ad-hoc
disclosures required under the German Securities Trading Act.
MARKET PRICES
The following table sets forth, for the periods indicated, the highest and
lowest closing market quotations for the shares from the Frankfurter
Wertpapierborse (XETRA) and Nasdaq.
DEUTSCHE BORSE (FRANKFURT STOCK EXCHANGE) ORDINARY SHARES
----------------------------------
HIGH EURO LOW EURO
----------------- ----------------
ANNUAL HIGHS AND LOWS
2000 72.50 6.86
2001 10.85 2.75
2002 8.82 0.70
2003 4.39 0.82
2004 4.49 1.63
QUARTERLY HIGHS AND LOWS
2003
First quarter 1.31 0.82
Second quarter 1.64 0.85
Third quarter 3.28 1.56
Fourth quarter 4.39 2.90
2004
First quarter 4.49 3.48
Second quarter 4.09 2.69
Third quarter 3.09 2.46
Fourth quarter 2.94 1.63
MONTHLY HIGHS AND LOWS
2004
October 2.94 2.57
November 2.67 2.50
December 2.57 1.63
2005
January 1.81 1.58
February 1.98 1.44
March 2.28 1.78
---------------
On April 7, 2005 the closing market quotation for our shares on the Frankfurt
Stock Exchange (XETRA) was EUR 1.94.
NASDAQ(1) ADSs
-----------------------------------------
HIGH DOLLAR LOW DOLLAR
------------------- ---------------------
ANNUAL HIGHS AND LOWS
2000 (from June 29) 54.88 6.25
2001 9.69 2.49
2002 7.55 0.64
2003 5.52 0.95
2004 5.66 2.29
QUARTERLY HIGHS AND LOWS
2003
First quarter 1.68 0.95
Second quarter 1.93 0.95
Third quarter 3.80 1.80
Fourth quarter 5.52 3.45
2004
First quarter 5.66 4.40
Second quarter 5.00 2.29
Third quarter 3.75 3.01
Fourth quarter 3.57 2.29
MONTHLY HIGHS AND LOWS
2004
October 3.57 3.08
November 3.54 3.19
December 3.42 2.29
2005
January 2.45 2.10
February 2.59 1.93
March 3.03 2.33
---------------
(1) Our shares were first listed on Nasdaq on June 29, 2000.
On April 7, 2005 the closing market quotation for our shares on Nasdaq was
$2.41.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
NOT APPLICABLE.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Incorporated by reference to our Registration Statement on Form F-1, which was
filed with the Securities and Exchange Commission on June 27, 2000.
C. MATERIAL CONTRACTS
SUPPLY AGREEMENT WITH CHARTERED SEMICONDUCTOR MANUFACTURING PTE., LTD.
Until October 2003, we maintained a deposit of $20 million with Chartered which
was classified in the balance sheet line item "Deposits". Under the terms of our
supply agreement dated June 30, 2000, the deposit guaranteed access to certain
quantities of sub-micron wafers through fiscal 2003 and several generations of
process technologies ranging from current products at 0.60u and 0.35u and will
extend down to, and beyond 0.18u technologies. In October 2003, we received the
repayment of the deposit from Chartered. In addition, we had paid $20 million as
advance payments for future wafer deliveries, of which we received a $10 million
refund from Chartered in 2001. At December 31, 2003 the outstanding balance of
the advance payments was classified in the balance sheet under "Prepaid
expenses". In 2004 all remaining advance payments were refunded to the company
in proportion to our purchases of wafers from Chartered. On October 25, 2001,
the Securities and Exchange Commission granted our request for confidential
treatment with respect to wafer prices, lot quantities and related proprietary
data contained in the supply agreement. We entered into a temporary modification
of this agreement on December 18, 2001 pursuant to which we received the $10
million refund. Concurrently with the filing of this Form 20-F in 2001, we
requested confidential treatment of aspects of this amendment agreement
analogous to those for which the Securities and Exchange Commission granted a
request for confidential treatment on October 25, 2001.
D. EXCHANGE CONTROLS
There are currently no UK laws, decrees or regulations that restrict the export
or import of capital, including, but not limited to, foreign exchange controls,
or that affect the remittance of dividends or other payments to non-UK residents
or to US holders of our securities except as otherwise set forth below in
"Taxation". There are no limitations under our articles of association
restricting voting or shareholding.
E. TAXATION
The following is a discussion of the material tax consequences to holders of our
shares or ADSs under the present laws of the United Kingdom and the United
States. The discussion addresses only persons who hold shares or ADSs as capital
assets. It does not address the tax treatment of persons subject to special
rules. Among those are banks, securities dealers, insurance companies,
tax-exempt entities, partnerships, holders of 10 percent or more of our voting
shares, persons holding shares as part of a hedge, straddle, conversion or
constructive sale transaction, US holders using a functional currency other than
the US Dollar, persons resident or ordinarily resident in the United Kingdom for
UK tax purposes and persons holding shares or ADSs in connection with a trade or
business conducted in the United Kingdom or some other place outside their
country of residence. The summary also does not discuss the tax laws of
particular states or localities in the United States and other countries.
This summary does not consider your particular tax circumstances. It is not a
substitute for tax advice. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS ABOUT
THE TAX CONSEQUENCES TO YOU OF HOLDING OUR SHARES OR ADSs IN LIGHT OF YOUR
PARTICULAR CIRCUMSTANCES.
As used in this summary, "US holder" means a beneficial owner of shares or ADSs
that is (1) an individual who is a US citizen or resident, (2) a corporation,
partnership or other business entity organized under the laws of the United
States or its political subdivisions, (3) a trust subject to the control of a US
person and the primary supervision of a US court and (4) an estate the income of
which is subject to US federal income tax regardless of its source.
UK TAXATION
DIVIDENDS
Under current UK taxation legislation, no tax is required to be withheld at
source from cash dividend payments by Dialog. See "US Federal Income
Taxation--Distributions" below for a discussion of the treatment of dividend
payments by Dialog under the UK-US Income Tax Treaty.
CAPITAL GAINS
If you are not resident or ordinarily resident in the UK then, subject to the
comments below, you will not be liable for UK tax on capital gains realized on
the disposal of a share or ADS unless, at the time of the disposal, you carry on
a trade, including a profession or vocation, in the UK through a branch or
agency and the share or ADS you dispose of is, or has been, held or acquired for
the purposes of that trade or branch or agency carried on by you in the UK.
A US holder who is an individual and who has on or after March 17, 1998 ceased
to be resident or ordinarily resident for tax purposes in the UK for a period of
less than five years of assessment and who disposes of shares or ADSs during
that period may be liable on his or her return to the UK to UK tax on chargeable
gains, subject to any available exemption or relief, notwithstanding that he or
she is not resident or ordinarily resident in the UK at the time of the
disposal.
UK INHERITANCE TAX
Shares or ADSs are assets situated in the UK for the purposes of UK inheritance
tax. Subject to the discussion of the UK-US estate tax treaty in the next
paragraph, shares or ADSs beneficially owned by an individual US holder will be
subject to UK inheritance tax on the death of the individual or, if the shares
or ADSs are the subject of a lifetime gift that constitutes a chargeable
transfer, including a transfer at less than full market value, by such
individual. UK inheritance tax is not chargeable on gifts to individuals or to
accumulation and maintenance or disabled trusts made more than seven years
before the death of the donor. Special rules apply to shares or ADSs held in a
settlement.
A share or ADS held by an individual US holder whose domicile is determined to
be the US for purposes of the UK-US Estate Tax Treaty, and who is not a national
of the UK, will not be subject to UK inheritance tax on the individual's death
or on a lifetime transfer of the share or ADS except where the share or ADS:
o is part of the business property of a UK permanent establishment of an
enterprise; or
o pertains to a UK fixed base of an individual used for the performance of
independent personal services.
The estate tax treaty provides a credit against US federal tax liability for the
amount of any tax paid in the UK in a case where the share or ADS is subject
both to UK inheritance tax and to US federal estate or gift tax.
On 23 February 2000, the Inland Revenue indicated that the US and UK Governments
had scheduled negotiations for revisions to their estate and gift tax treaty.
However, as of the date of this annual report no such negotiations have taken
place.
UK STAMP DUTY AND STAMP DUTY RESERVE TAX
No stamp duty or stamp duty reserve tax ("SDRT") will be payable on the transfer
of existing shares which are held, and which continue to be held, in
Clearstream.
No UK stamp duty will be payable on the transfer of an ADS provided that any
instrument of transfer remains at all times outside the UK and is not executed
in or brought into the UK. An agreement to transfer an ADS will not give rise to
SDRT.
No stamp duty or SDRT will be payable on a cancellation of an ADS provided that
the underlying shares continue to be held within Clearstream Banking AG.
US FEDERAL INCOME TAXATION
If the obligations contemplated by the deposit agreement are performed in
accordance with their terms, US holders of ADSs will be treated as the owners of
the shares represented by those ADSs for US federal income tax purposes.
DISTRIBUTIONS
Subject to the "Passive Foreign Investment Company" discussion below, dividends
paid with respect to shares or ADSs will be included in the gross income of a US
holder as ordinary dividend income from foreign sources to the extent paid from
Dialog's earnings and profits as determined under US federal income tax
principles. Distributions in excess of earnings and profits will be treated
first as a return of capital to the extent of the US holder's tax basis in the
shares or ADSs and then as a capital gain. Dividends will not be eligible for
the dividends-received deduction available to corporations. Dividends received
by noncorporate US holders, however, will be taxed at the same preferential rate
allowed for long-term capital gains if (i) Dialog qualifies for benefits under
the new UK-US income tax treaty and (ii) the US holder satisfies certain holding
period and other requirements. Dialog will qualify for benefits under the new
UK-US income tax treaty as long as its shares are regularly and sufficiently
traded on NASDAQ.
Dividends paid in Euro will be includable in income in a US Dollar amount based
on the exchange rate in effect on the day received by the shareholder or the
depositary whether or not the payment is converted into Dollars at that time.
Gain or loss recognized on a subsequent conversion of Euro for a different
amount will be US source ordinary income or loss.
During a twelve-month transition period under the new UK-US income tax treaty
(which ends on 30 April 2004), an eligible US shareholder that elects the
benefits of the old UK-US treaty may be entitled to a foreign tax credit for UK
withholding tax in an amount equal to the tax credit payment that the US
shareholder is entitled to receive from the UK Inland Revenue under the old
treaty. At current rates, a dividend of (pound)90 entitles an eligible US
shareholder claiming benefits under the old treaty to a payment of (pound)10
offset by a UK withholding tax of (pound)10. Because the tax credit payment and
the withholding tax offset each other, the Inland Revenue neither makes the
payment nor collects the tax. The offsetting payments nevertheless have tax
significance because an electing US shareholder must include the tax credit
payment in its income and may claim a foreign tax credit for the UK withholding
tax (subject to otherwise applicable limitations on foreign tax credits). To
make the election, a US shareholder (or where the US shareholder is a
partnership, each eligible US partner) must file a completed US Internal Revenue
Service Form 8833 with its US federal income tax return for the relevant year.
US shareholders cannot claim UK tax credit payments under the new UK-US treaty
after the transition period. You should consult your own tax advisors about the
consequences of the new treaty in light of your particular circumstances.
DISPOSITIONS
Subject to the "Passive Foreign Investment Company" discussion below, US holders
will recognize capital gain or loss on the sale or other disposition of the
shares or ADSs in an amount equal to the difference between the amount realized
on the sale or other disposition and the US holder's basis in the shares or
ADSs. Such gain or loss will be long term capital gain or loss if the US holder
has held the shares or ADSs for more than one year at the time of the sale or
other disposition. Long term capital gain recognized by an individual is subject
to taxation at a maximum rate of 20 per cent. Deductions for capital losses are
subject to limitations. Any gain or loss will be treated as arising from US
sources.
A US holder that receives Euro upon sale or other disposition of the shares will
realize an amount equal to the US Dollar value of the Euro on the date of sale
(or in the case of cash basis and electing accrual basis taxpayers, the
settlement date). A US holder will have a tax basis in the Euro received equal
to the US Dollar amount received. Any gain or loss realized by a US holder on a
subsequent conversion of Euro into US Dollars will be US source ordinary income
or loss.
PASSIVE FOREIGN INVESTMENT COMPANY
Dialog may become a passive foreign investment company ("PFIC") for US federal
income tax purposes. A non-US company is a PFIC in any taxable year in which,
after taking into account the income and assets of certain subsidiaries, either
(1) at least 75% of its gross income is passive income or (2) at least 50% of
the average value of its assets is attributable to assets that produce or are
held to produce passive income. Whether Dialog becomes a PFIC will depend, among
other things, upon the amount of its passive income and the value of its passive
assets, the growth in its business revenues and its market value in the future.
Since goodwill represents a substantial part of its non-passive assets, changes
in the market value of Dialog's shares, which have been significant and could
continue to be significant, could cause Dialog to become a PFIC.
If Dialog were a PFIC in any year during which a US holder owned the shares or
ADSs, the US holder would be subject to additional taxes on any excess
distributions received from Dialog and any gain realized from the sale or other
disposition of the shares or ADSs, regardless of whether Dialog continued to be
a PFIC. A US holder has an excess distribution to the extent that distributions
on the shares or ADSs during a taxable year exceed 125% of the average amount
received during the three preceding tax years or, if shorter, the US holder's
holding period. A US holder may realize gain on the shares or ADSs not only
through a sale or other disposition, but also by pledging the shares or ADSs as
security for a loan or entering into certain constructive disposition
transactions. To compute the tax on excess distributions or any gain (1) the
excess distribution or the gain is allocated ratably over the US holder's
holding period, (2) the amount allocated to the current year and any year before
Dialog became a PFIC is taxed as ordinary income in the current year, and (3)
the amount allocated to other taxable years is taxed at the highest applicable
marginal rate in effect for each year and an interest charge is imposed to
recover the deemed benefit from the deferred payment of the tax attributable to
each year.
If Dialog were a PFIC and then ceased to be a PFIC, a US holder may avoid the
continued application of the tax treatment described above by electing to be
treated as if it sold its shares on the last day of the last taxable year in
which Dialog were a PFIC. Any gain is recognized and subject to tax under the
rules described above. Loss is not recognized. The US holder's basis in its
shares is increased by the amount of gain recognized on the sale.
If Dialog becomes a PFIC in any tax year, a US holder of the shares or ADSs
could avoid some of the tax consequences just described by electing to mark the
shares or ADSs to market annually. Any gain from marking the shares or ADSs to
market or from disposing them will be ordinary income. A US holder will
recognize loss from marking the shares or ADSs to market, but only to the extent
of its unreversed gains from marking them to market. Loss from marking shares or
ADSs to market will be ordinary, but loss on disposing of them will be capital
loss except to the extent of unreversed gains.
A US holder of shares or ADSs will not be able to avoid the tax consequences
described above by electing to treat Dialog Semiconductor Plc as a qualified
electing fund ("QEF") because Dialog does not intend to prepare the information
that US holders would need to make a QEF election.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Distributions on the shares or ADSs and proceeds from sale of the shares or ADSs
paid in the United States (or by certain persons outside the United States) will
be reported to the US Internal Revenue Service unless the shareholder (1) is a
corporation, (2) provides a properly executed US Internal Revenue Service Form
W-8 BEN or (3) otherwise establishes a basis for exemption. Backup withholding
tax may apply to amounts subject to reporting if the holder fails to provide an
accurate taxpayer identification number. The amount of any backup withholding
tax will be allowed as a credit against the shareholder's United States federal
income tax liability and the shareholder may claim a refund of any excess
amounts..
F. DIVIDENDS AND PAYING AGENTS
NOT APPLICABLE.
G. STATEMENT BY EXPERTS
NOT APPLICABLE
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended. In accordance with these requirements, we file reports and
other information with the Securities and Exchange Commission. These materials,
including this annual report and the exhibits thereto, may be inspected and
copied at the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the material may
be obtained from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain
information on the operation of the Commission's Public Reference Room by
calling the Commission in the United States at 1-800-SEC-0330. The Commission
also maintains a web site at HTTP://WWW.SEC.GOV that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission. Our annual reports and some other information submitted by
us to the Commission may be accessed through this web site.
I. SUBSIDIARY INFORMATION
NOT APPLICABLE
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a matter of policy, we do not engage in derivatives trading, derivatives
market-making or other speculative activities. See "Item 5: Operating and
Financial Review and Prospects-Foreign Currencies" and Note 19 to the
consolidated financial statements.
During 2000 to hedge the foreign currency exposure with respect to the $20
million of deposits with Chartered, we purchased foreign currency forward
contracts to effectively change the US Dollar deposits into Euro (EUR 21.7
million) upon the expected return of the deposit as of December 31, 2003. These
deposits were refunded to us in October 2003. Upon receipt of the deposit, we
settled our currency hedging position related to this deposit and recognized a
loss of EUR 71,000 in the consolidated statement of operations. See Note 19 to
the consolidated financial statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
NOT APPLICABLE.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
NOT APPLICABLE.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
NOT APPLICABLE.
ITEM 15. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report, we carried out an
evaluation, under the supervision and with the participation of our senior
management, including Executive Director, CEO and President Roland Pudelko and
Vice-President of Finance and Controlling Martin Kloeble, of the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15 of the U.S.
Securities Exchange Act of 1934. Disclosure controls and procedures are designed
to ensure that the material financial and non-financial information required to
be disclosed in this Form 20-F is recorded, processed, summarized and reported
in a timely manner. In designing and evaluating the disclosure controls and
procedures, management has considered the needs of the Company in light of its
size and industry, and has recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable, rather than
absolute, assurance of achieving the desired control objectives. Based upon that
evaluation, our management, including Mr. Pudelko and Mr. Kloeble, concluded
that our disclosure controls and procedures are effective in the accumulation
and timely communication of material information relating to the Company as
required to be included in periodic SEC filings.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board has determined that we have at least two audit committee financial
experts, as defined in Form 20-F of the U.S. Securities Exchange Act, 1934,
serving on our audit committee. These experts are Messrs. Glover and Hughes, who
are independent as such term is defined in the listing standards applicable to
us.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics ("Code of Business Conduct and Ethics")
applicable to our officers, directors and employees, pursuant to the
requirements of the Sarbanes-Oxley Act of 2002. The text of our Code of Business
Conduct and Ethics is provided on our Internet website
(www.dialog-semiconductor.com).
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by the principal
accountant, KPMG, for the audit of our financial statements or services normally
provided by the auditor in connection with statutory and regulatory filings were
EUR 174,000 for the year ended December 31, 2004, and EUR 169,000 for the year
ended December 31, 2003.
AUDIT-RELATED FEES
There were no assurance or related services performed by KPMG which were
reasonably related to the performance of the audit or review of our financial
statements and not reported under "--Audit Fees" above, for the year ended
December 31, 2004 or for the year ended December 31, 2003. As such, aggregate
fees billed for such services in these years were nil.
TAX FEES
The aggregate fees billed for professional services rendered by KPMG for tax
compliance, tax advice, and tax planning were EUR 110,000 for the year ended
December 31, 2004, and EUR 65,000 for the year ended December 31, 2003. Tax fees
are fees for professional services rendered by KPMG for tax compliance, tax
advice on actual or contemplated transactions, tax consulting associated with
international transfer prices, and expatriate employee tax services.
ALL OTHER FEES
There were no products or services provided by KPMG, other than those reported
above under "--Audit Fees" and "--Tax Fees," for the year ended December 31,
2003, or for the year ended December 31, 2004. As such, aggregate fees billed
for such services in these years were nil.
AUDIT COMMITTEE APPROVAL
Our Audit Committee nominates and engages our independent auditors to audit our
financial statements. In 2003 our Audit Committee also adopted a policy
requiring management to obtain the Committee's approval before engaging our
independent auditors to provide any other audit or permitted non-audit services
to us or our subsidiaries. Pursuant to this policy, which is designed to assure
that such engagements do not impair the independence of our auditors, the Audit
Committee pre-approves annually a catalog of specific Tax Consulting Services
that may be performed by our auditors. 100% and 79% of the tax services referred
to under "Tax Fees" above were pre-approved by the Audit Committee in 2004 and
2003, respectively.
All other services that are not included in the catalog require pre-approval by
the Audit Committee's chairman on a case-by-case basis. The chairman of our
Audit Committee is not permitted to approve any engagement of our auditors if
the services to be performed either fall into a category of services that are
not permitted by applicable law or the services would be inconsistent with
maintaining the auditors' independence.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
We rely on an exemption from the listing standard for audit committees as set
forth under Nasdaq Marketplace Rule 4350(d)(2). This exemption was granted to
Dialog on 1 August 2000. We do not believe that our reliance on this exemption
would materially adversely affect the ability of our audit committee to act
independently and to satisfy other requirements of Rule 10A-3 of the U.S.
Securities Exchange Act of 1934. In lieu of following this requirement on audit
committee composition, Dialog's audit committee consists of two independent
members in accordance with law, rule, regulation, and generally accepted
business practices in Dialog's home country of England and Wales.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
See the Consolidated Financial Statements and the Notes thereto.
ITEM 19. EXHIBITS
1.1 Memorandum and Articles of Association of Dialog Semiconductor Plc. (1)
2.1 Form of Deposit Agreement among Dialog Semiconductor Plc, The Bank of
New York as depositary, and holders and beneficial owners from time to
time of ADRs issued thereunder.(1)
3.1 Not applicable.
4.1 Supply Agreement with Chartered Semiconductor Manufacturing Pte.,
Ltd. dated June 30, 2000.(2)(3)
4.2 Amendment Agreement with Chartered Semiconductor Manufacturing
Pte., Ltd. dated December 18, 2001. (4) (5)
5.1 Not applicable.
6.1 Not applicable.
7.1 Not applicable.
8.1 See "Item 4: Information on the Company- C. Organizational Structure".
9.1 Not applicable.
10.1 Not applicable.
11.1 Not Applicable.
12.1 Rule 13a-14(a) Certification of the Chief Executive Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act of
2002.
12.2 Rule 13a-14(a) Certification of the Vice-President of Finance and
Controlling of the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002.
13.1 Section 1350 Certification of Chief Executive Officer of the Company in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002.(6)
13.2 Section 1350 Certification of Vice-President of Finance and Controlling
of the Company in accordance with Section 906 of the Sarbanes-Oxley Act
of 2002.(6)
14.1 Not applicable.
----------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form F-1, filed with the Securities and Exchange Commission on June
27, 2000 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form
20-F for 2000, filed with the US Securities and Exchange Commission on
June 4, 2001 and incorporated herein by reference.
(3) On October 25, 2001, the US Securities and Exchange Commission granted
our request for confidential treatment of the commercially sensitive
material in this contract.
(4) Previously filed as an exhibit to the Company's Annual Report on Form
20-F for 2002, filed with the US Securities and Exchange Commission on
February 27, 2003 and incorporated herein by reference.
(5) The US Securities and Exchange Commission granted our request for
confidential treatment of the commercially sensitive material in this
contract.
(6) A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F, and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
DIALOG SEMICONDUCTOR PLC
By: /s/ Roland Pudelko
-----------------------------------------------
Roland Pudelko
Executive Director, Chief Executive
Officer and President
FINANCIAL INFORMATION
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2003
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Dialog Semiconductor Plc:
We have audited the accompanying consolidated balance sheets of Dialog
Semiconductor Plc and subsidiaries (the "Company") as of December 31, 2004 and
2003 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards established by the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dialog Semiconductor
Plc and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
Stuttgart, Germany
February 21, 2005
KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftspruefungsgesellschaft
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
--------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Notes 2004 2004 2003 2002
--------------------------------------------------------------------------------------------------------------------------------
Revenues 20 $157,100 EUR 116,044 EUR 92,893 EUR 77,104
--------------------------------------------------------------------------------------------------------------------------------
Cost of sales 5 (108,010) (79,783) (62,374) (57,409)
--------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 49,090 36,261 30,519 19,695
--------------------------------------------------------------------------------------------------------------------------------
Selling and marketing expenses (8,444) (6,237) (4,197) (4,149)
--------------------------------------------------------------------------------------------------------------------------------
General and administrative expense (7,394) (5,462) (5,044) (6,447)
--------------------------------------------------------------------------------------------------------------------------------
Research and development expenses (39,356) (29,071) (30,590) (34,530)
--------------------------------------------------------------------------------------------------------------------------------
Amortization and intangible assets (2,058) (1,520) (2,073) (1,975)
--------------------------------------------------------------------------------------------------------------------------------
Restructuring and related impairment charges 3 (80) (59) (1,839) -
--------------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (8,242) (6,088) (13,224) (27,406)
--------------------------------------------------------------------------------------------------------------------------------
Interest income, net 1,463 1,081 757 1,121
--------------------------------------------------------------------------------------------------------------------------------
Foreign currency exchange gains and losses, net (983) (726) (454) (1,918)
--------------------------------------------------------------------------------------------------------------------------------
Recovery of investment 4 73 54 315 11,969
--------------------------------------------------------------------------------------------------------------------------------
Result before income taxes (7,689) (5,679) (12,606) (16,234)
--------------------------------------------------------------------------------------------------------------------------------
Income tax (expense) benefit 6 (86) (64) (7,814) 6,026
--------------------------------------------------------------------------------------------------------------------------------
NET LOSS (7,775) (5,743) (20,420) (10,208)
--------------------------------------------------------------------------------------------------------------------------------
Loss per share:
Basic and diluted (0.18) (0.13) (0.46) (0.23)
--------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS):
Basic and diluted 44,025 44,025 43,951 43,888
--------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Balance Sheets
--------------------------------------------------------------------------------------------------------------------------
(in thousands) Notes Dec. 31, 2004 Dec. 31, 2004 Dec. 31, 2003
--------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $18,922 EUR 13,977 EUR 8,109
--------------------------------------------------------------------------------------------------------------------------
Trade accounts receivable, net 8 32,540 24,036 14,338
--------------------------------------------------------------------------------------------------------------------------
Inventories 9 40,335 29,794 13,242
--------------------------------------------------------------------------------------------------------------------------
Marketable securities 10 23,749 17,542 44,900
--------------------------------------------------------------------------------------------------------------------------
Deferred taxes 6 950 702 103
--------------------------------------------------------------------------------------------------------------------------
Prepaid expenses 11 834 616 2,131
--------------------------------------------------------------------------------------------------------------------------
Other current assets 380 281 993
--------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 117,710 86,948 83,816
--------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 12 28,752 21,238 20,590
--------------------------------------------------------------------------------------------------------------------------
Intangible assets 13 5,775 4,266 5,440
--------------------------------------------------------------------------------------------------------------------------
Goodwill 13 15,956 11,786 11,786
--------------------------------------------------------------------------------------------------------------------------
Deposits 11 263 194 183
--------------------------------------------------------------------------------------------------------------------------
Deferred taxes 6 22,270 16,450 17,729
--------------------------------------------------------------------------------------------------------------------------
Prepaid expenses 11 1,458 1,077 927
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 192,184 141,959 140,471
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable 20,888 15,429 7,157
--------------------------------------------------------------------------------------------------------------------------
Accrued expenses 14 4,175 3,084 3,165
--------------------------------------------------------------------------------------------------------------------------
Income taxes payable 12 9 18
--------------------------------------------------------------------------------------------------------------------------
Deferred taxes 6 9 7 4
--------------------------------------------------------------------------------------------------------------------------
Other current liabilities 1,726 1,275 1,615
--------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 26,810 19,804 11,959
--------------------------------------------------------------------------------------------------------------------------
Deferred taxes 6 1,381 1,020 1,669
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 28,191 20,824 13,628
--------------------------------------------------------------------------------------------------------------------------
Ordinary Shares 15 9,515 7,028 6,737
--------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 228,497 168,782 168,795
--------------------------------------------------------------------------------------------------------------------------
Accumulated deficit (72,323) (53,422) (47,679)
--------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss (1,294) (956) (984)
--------------------------------------------------------------------------------------------------------------------------
Employee stock purchase plan shares (402) (297) (26)
--------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 163,993 121,135 126,843
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 192,184 141,959 140,471
--------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------
(in thousands) 2004 2004 2003 2002
------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,775) EUR (5,743) EUR (20,420) EUR (10,208)
------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash
provided by (used for)
------------------------------------------------------------------------------------------------------------
operating activities:
------------------------------------------------------------------------------------------------------------
Recovery of investment (73) (54) (315) (11,969)
------------------------------------------------------------------------------------------------------------
Provision for excess inventory - - - 1,930
------------------------------------------------------------------------------------------------------------
Restructuring and related impairment charges (444) (328) 613 -
------------------------------------------------------------------------------------------------------------
Depreciation of property, plant and equipment 15,570 11,501 12,545 12,834
------------------------------------------------------------------------------------------------------------
Amortization intangible assets 2,058 1,520 2,073 1,975
------------------------------------------------------------------------------------------------------------
Losses on disposals of fixed assets 199 147 253 -
------------------------------------------------------------------------------------------------------------
Increase in deferred tax asset valuation allowance - - 10,237 -
------------------------------------------------------------------------------------------------------------
Other changes in deferred taxes 24 18 (1,984) (4,167)
------------------------------------------------------------------------------------------------------------
Changes in current assets and liabilities:
------------------------------------------------------------------------------------------------------------
Trade accounts receivable (13,128) (9,697) 1,691 450
------------------------------------------------------------------------------------------------------------
Inventories (22,408) (16,552) 1,265 715
------------------------------------------------------------------------------------------------------------
Prepaid expenses 1,844 1,362 5,382 1,663
------------------------------------------------------------------------------------------------------------
Trade accounts payable 11,204 8,276 (2,846) 1,760
------------------------------------------------------------------------------------------------------------
Accrued expenses (104) (77) (258) (1,381)
------------------------------------------------------------------------------------------------------------
Income taxes payable (12) (9) (107) (1,224)
------------------------------------------------------------------------------------------------------------
Other assets and liabilities 1,401 1,035 (541) 26
------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (11,644) (8,601) 7,588 (7,596)
------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Recovery of investment 73 54 315 11,969
------------------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (16,680) (12,321) (5,901) (3,872)
------------------------------------------------------------------------------------------------------------
Purchases of intangible assets (914) (675) (1,410) (2,101)
------------------------------------------------------------------------------------------------------------
Investments and deposits received (made) (27) (20) 21,670 94
------------------------------------------------------------------------------------------------------------
Purchases of marketable securities (67,243) (49,670) (44,998) -
------------------------------------------------------------------------------------------------------------
Sale of marketable securities 104,360 77,087 - -
------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 19,569 14,455 (30,324) 6,090
------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs for issuance of shares (28) (21) - -
------------------------------------------------------------------------------------------------------------
Sale of employee stock purchase plan shares 40 30 37 58
------------------------------------------------------------------------------------------------------------
Other - - - (44)
------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 12 9 37 14
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING, INVESTING AND
FINANCING ACTIVITIES 7,937 5,863 (22,699) (1,492)
------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and
cash equivalents 7 5 (197) (129)
------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,944 5,868 (22,896) (1,621)
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 10,978 8,109 31,005 32,626
------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 18,922 13,977 8,109 31,005
------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
EMPLOYEE
ADDITIONAL CURRENCY AVAILABLE DERIVATIVE STOCK
ORDINARY PAID-IN ACCUMULATED TRANSLATION FOR SALE FINANCIAL PURCHASE
(in thousands of EUR) SHARES CAPITAL DEFICIT ADJUSTMENT SECURITIES INSTRUMENTS PLAN SHARES TOTAL
-------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 6,737 168,788 (17,051) (270) -- (42) (70) 158,092
-------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- (10,208) -- -- -- -- (10,208)
Other comprehensive loss -- -- -- (287) -- (116) -- (403)
-------
TOTAL COMPREHENSIVE LOSS (10,611)
Cost of issuance of shares in 2000 -- (44) -- -- -- -- -- (44)
Sale of employee stock purchase
plan shares -- 37 -- -- -- -- 21 58
-------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 6,737 168,781 (27,259) (557) -- (158) (49) 147,495
-------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- (20,420) -- -- -- -- (20,420)
Other comprehensive income (loss) -- -- -- (366) (61) 158 -- (269)
--------
TOTAL COMPREHENSIVE LOSS (20,689)
Sale of employee stock purchase
plan shares -- 14 -- -- -- -- 23 37
-------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 6,737 168,795 (47,679) (923) (61) -- (26) 126,843
-------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- (5,743) -- -- -- -- (5,743)
Other comprehensive income (loss) -- -- -- (5) 33 -- -- 28
---------
TOTAL COMPREHENSIVE LOSS (5,715)
New issuance of shares 291 (22) -- -- -- -- (291) (22)
Sale of employee stock purchase
plan shares -- 9 -- -- -- -- 20 29
-------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004 7,028 168,782 (53,422) (928) (28) -- (297) 121,135
-------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of EUR, unless otherwise stated)
1. GENERAL
A) DESCRIPTION OF BUSINESS
Dialog Semiconductor Plc and subsidiaries ("Dialog" or the "Company") is a
fabless semiconductor company that develops and supplies power management, audio
and imaging technology, delivering innovative mixed signal standard products as
well as application specific IC solutions for wireless, automotive and
industrial applications. The company's expertise in mixed signal design, with
products manufactured entirely in CMOS technology, enhances the performance and
features of wireless, hand-held and portable electronic products. Its technology
is also used in intelligent control circuits in automotive and industrial
applications. Production of these designs is then outsourced, and the final
products are returned to Dialog for approval and testing before delivery to the
customers.
B) VULNERABILITY DUE TO CERTAIN SIGNIFICANT CONCENTRATIONS
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from historical results include, but
are not limited to, the highly cyclical nature of both the semiconductor and
wireless communications industries, dependence on certain customers and the
ability to obtain adequate supply of sub-micron wafers.
The Company's products are generally utilized in the cellular communications and
automotive industries. The Company generates a substantial portion of its
revenue from the wireless communications market, which accounted for 78%, 75%
and 71% of the Company's total revenue for the years ended December 31, 2004,
2003 and 2002, respectively.
The Company's revenue base is diversified by geographic region and by individual
customer. Changes in foreign currency exchange rates influence the Company's
results of operations. The Company's sales are primarily denominated in Euros
and US dollars whereas purchases of raw materials and manufacturing services are
primarily denominated in US dollars (see Note 19 for a description of the
Company's hedging activities). The Company also has foreign currency exchange
risks with respect to its net investments in foreign subsidiaries in Japan, the
United Kingdom and the United States. Fluctuations in these currencies could
significantly impact the Company's reported results from operations.
The Company depends on a relatively small number of customers for a substantial
portion of its revenues, and the loss of one or more of these customers may
result in a significant decline in future revenue. During 2004 and 2002, two
customers individually accounted for more than 10% of the Company's revenues.
Total revenues from these two customers were EUR 75,651 and EUR 46,746 or
65% and 61% in 2004 and 2002, respectively. Net receivables from these two
customers were EUR 15,724 at December 31, 2004. During 2003, one customer
individually accounted for more than 10% of the Company's revenue. Total revenue
from this customer was EUR 60,192 or 65%. Net receivables from this customer
were EUR 9,414 at December 31, 2003. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers.
C) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP"). All amounts herein are shown in thousands of Euro
("EUR") and for the year 2004 are also presented in U.S. Dollars ("$"), the
latter being unaudited and presented solely for convenience of the reader at the
rate of EUR 1 = $1.3538, the Noon Buying Rate of the Federal Reserve Bank of
New York on December 31, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Investments in Affiliated Companies
The consolidated financial statements include Dialog Semiconductor Plc and all
of its owned subsidiaries:
-------------------------------------------------------------------------------
NAME REGISTERED OFFICE PARTICIPATION
-------------------------------------------------------------------------------
Dialog Semiconductor GmbH Kirchheim/Teck - Nabern, Germany 100%
-------------------------------------------------------------------------------
Dialog Semiconductor (UK)
Limited Swindon, UK 100%
-------------------------------------------------------------------------------
Dialog Semiconductor Inc Clinton, New Jersey, USA 100%
-------------------------------------------------------------------------------
Dialog Semiconductor KK Tokyo, Japan 100%
-------------------------------------------------------------------------------
All intercompany accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturity dates of three months or less.
MARKETABLE SECURITIES
Marketable securities at December 31, 2004 and 2003 consist of exchange traded
funds and at December 31, 2003 also debt securities that are classified as
available-for-sale and are accounted for on the basis of the settlement date and
recorded at fair value as determined by the most recently quoted market price of
each security at the balance sheet date. Unrealized gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from earnings
and are reported as a component of other comprehensive income (loss) until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis. A decline in the
market value of any available-for-sale security below cost that is deemed to be
other than temporary will result in an impairment, which is charged to earnings.
Interest income is recognized when earned.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost, which includes
direct materials, labor and overhead plus indirect overhead, is determined using
the first-in, first-out (FIFO) or weighted average cost methods.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing accounts
receivable. The Company reviews its allowance for doubtful accounts quarterly.
Management, considering current information and events regarding the customers'
ability to repay their obligations, considers the collectibility of a trade
account receivable to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the sales terms. When a trade
receivable is considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows. Any credit
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. In the profit and loss account, impairment losses are
included in sales and marketing expenses. Recoveries of trade receivables
previously written-off are recorded when received. Reversals of impairment
losses, if any, would be included in other operating income. The Company does
not have any off-balance-sheet credit exposure related to its customers.
OTHER CURRENT ASSETS
Other current assets include tax refunds receivable at December 31, 2004 and
2003. It also included interest receivable at December 31, 2003.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is charged on a straight-line basis over the estimated useful lives
of the assets as follows:
----------------------------------------------
EQUIPMENT USEFUL LIFE
----------------------------------------------
Test equipment 3 to 8 years
----------------------------------------------
Shorter of useful life
Leasehold improvements or lease term
----------------------------------------------
Office and other
equipment 3 to 13 years
----------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of purchase price over fair value of net assets
of businesses acquired. Purchased intangible assets with estimable useful lives
primarily consist of licenses, software, customer lists and patents and are
recorded at acquisition cost less accumulated amortization. Intangible assets
other than goodwill are amortized on a straight-line basis over the estimated
useful lives of the assets ranging from 3 to 17 years.
Goodwill is tested annually for impairment and more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent the carrying amount exceeds the asset's fair value.
Prior to the adoption of SFAS 142 in 2002, goodwill and assembled workforce were
amortized over their estimated useful life.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 144, long-lived assets, such as property, plant and
equipment, and purchased intangibles subject to amortization, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
or group of assets to future undiscounted net cash flows expected to be
generated by the asset or group of assets. If the carrying amount of an asset or
group of asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated.
FOREIGN CURRENCIES
The functional currency for the Company's operations is generally the applicable
local currency. Accordingly, the assets and liabilities of companies whose
functional currency is other than the Euro are included in the consolidation by
translating the assets and liabilities into the reporting currency (the Euro) at
the exchange rates applicable at the end of the reporting year. Equity accounts
are measured at historical rates. The statements of income and cash flows are
translated at the average exchange rates during the year. Translation gains or
losses are accumulated as a separate component of shareholders' equity. Foreign
currency transaction gains and losses are included in financial income, net at
each reporting period. They result from amounts ultimately realized upon
settlement of foreign currency transactions and from the period end
re-measurement of foreign currency denominated monetary assets and liabilities
into the functional currency of the respective entity. The exchange rates of the
more important currencies against the Euro used in preparation of the
consolidated financial statements were as follows:
---------------------------------------------------------------------------------------------
CURRENCY DEC 31, 2004 DEC, 31, 2003 2004 2003 2002
---------------------------------------------------------------------------------------------
EUR 1 = EUR 1 = EUR 1 = EUR 1 = EUR 1 =
---------------------------------------------------------------------------------------------
Great Britain 0.71 0.70 0.68 0.69 0.63
---------------------------------------------------------------------------------------------
Japan 139.83 133.68 134.46 130.93 118.05
---------------------------------------------------------------------------------------------
United States 1.36 1.25 1.24 1.13 0.94
---------------------------------------------------------------------------------------------
REVENUE RECOGNITION
Substantially all of the Company's revenue is derived from the sale of its
products. Product revenue, net of discounts, is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the price of the
transaction is fixed and determinable, and collectibility is reasonably assured.
PRODUCT-RELATED EXPENSES
Cost of sales consist of the costs of outsourcing production and assembly,
personnel costs and applicable overhead and depreciation of test and other
equipment. Provisions for estimated product warranty are recorded in cost of
sales at the time the related sale is recognized. Expenditures for advertising
and sales promotion and for other sales-related expenses are charged to
marketing expenses as incurred. Shipping and handling costs amounting to EUR 313
(2003: EUR 251; 2002: EUR 221) are recorded within selling expenses.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years, in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. The Company records deferred tax valuation allowances, if any,
to reduce the deferred tax assets to amounts, which will more likely than not be
realized.
STOCK-BASED COMPENSATION
The Company has a stock-based employee compensation plan that is accounted for
using the intrinsic-value-based method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under
this method, no stock-based compensation cost is reflected in net income (loss),
as all options granted by the plan had an exercise price equal to market value
of the underlying common stock on the date of grant. SFAS 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation. As allowed by SFAS 123, the Company has elected to continue to
apply the intrinsic-value-based method of accounting described above, and has
adopted only the disclosure requirements of SFAS 123, as amended by SFAS 148,
Accounting for Stock-Based Compensation-Transition and Disclosure. The following
table illustrates the effect on net loss if the fair-value-based method had been
applied to all outstanding and unvested awards in each period.
2004 2003 2002
-----------------------------------------------
Net loss, as reported: (5,743)(20,420)(10,208)
-----------------------------------------------
Deduct: Total stock-
based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects (847) (601) (1,166)
-----------------------------------------------
Pro forma net loss (6,590)(21,021)(11,374)
-----------------------------------------------
Earnings (loss) per
share
-----------------------------------------------
Basic - as reported (0.13) (0.46) (0.23)
-----------------------------------------------
Basic - pro forma (0.15) (0.48) (0.26)
-----------------------------------------------
Diluted - as reported (0.13) (0.46) (0.23)
Diluted - pro forma (0.15) (0.48) (0.26)
-----------------------------------------------
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company operates internationally, giving rise to exposure to changes in
foreign currency exchange rates. The Company applies SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,
SFAS No. 138 and SFAS No. 149, which provides guidance on accounting for all
derivative instruments, and for hedging activities. Derivative financial
instruments are recorded at their fair value and included in other current
assets or other current liabilities.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share has been computed using the weighted average number of
outstanding ordinary shares for each year. Because the Company reported a net
loss in each of the years in the three-year period ended December 31, 2004, only
basic per share amounts have been presented for those years. Had the Company
reported net income in 2004, 2003 and 2002, the weighted average number of
shares outstanding would have potentially been diluted by 1,309,406 and 962,184
and 2,634,382 stock options, respectively (not assuming the effects of applying
the treasury stock method).
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, as
well as disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant items subject to such estimates and judgments
include the recoverability of the carrying value of goodwill and other
long-lived assets, the realizability of deferred income tax assets and
inventories, and the fair value of stock-based employee compensation awards.
Actual results may differ from those estimates. In the fourth quarter of 2004,
the company determined that the useful life of its test equipment is eight
years. Previously the useful life had been determined to be five years. The
effect of this change in accounting estimates resulted in a lower depreciation
of EUR 1,349 (EUR 842, net of tax, or EUR 0.02 per share).
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2004, EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investment, was issued which includes new guidance
for evaluating and recording other than temporary impairment losses on debt and
equity securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities and cost method investments, as well
as new disclosure requirements for investments that are deemed to be temporarily
impaired. While the disclosure requirements for specified debt and equity
securities and cost method investments are effective for annual periods ending
after December 15, 2003, the FASB Board has directed the FASB staff to delay the
effective date for the measurement and recognition guidance contained in EITF
No. 03-1. This delay does not suspend the requirement to recognize
other-than-temporary impairments as required by existing authoritative
literature. The Company does not expect the adoption of EITF No. 03-1 to have a
material impact on its consolidated financial statements.
In November 2004, the FASB issued Statement No. 151, Inventory Costs, to amend
the guidance in Chapter 4, "Inventory Pricing," of FASB Accounting Research
Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins.
Statement 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The company does not believe the adoption of SFAS No. 151 will have
a material impact on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award based upon an
option-pricing model and an estimate of the number of awards expected to vest.
Compensation cost will be recognized as they vest, including related tax
effects. SFAS No. 123(R) will be effective for interim or annual reporting
periods beginning on or after June 15, 2005. The statement provides for three
alternate transition methods, each having a different reporting implication. The
company previously accounted for its stock based compensation plan using the
intrinsic-value-based method based on APB Opinion No 25. Under this method, no
stock-based compensation is reflected in net income (loss) (see also "Stock
based compensation" in this note 2 to the consolidated financial statements).
The Company is in the process of determining the transition method it is going
to adopt and the potential impact on the financial statements.
3. RESTRUCTURING AND RELATED IMPAIRMENT CHARGES
Restructuring and related asset impairment charges are comprised of EUR 59
restructuring charges for the year ended December 31, 2004 and of EUR 1,554
restructuring charges and EUR 285 impairment charges totaling EUR 1,839 for the
year ended December 31, 2003.
RESTRUCTURING CHARGES
In the first quarter of 2003 the Company decided to close the Swedish
subsidiary. Restructuring charges incurred in 2003, include termination benefits
that were paid to all employees affected by the closing of EUR 1,076 and a
provision for estimated costs that will continue to be incurred under an
operating lease for the building for its remaining term without economic benefit
to the Company of EUR 478. In the first quarter of 2004 the Company settled its
building lease obligation in connection with the closure and recognized an
additional charge of EUR 59. The contractual termination benefits were accounted
for in accordance with SFAS 88. The provision for the operating lease was
recorded at its estimated fair value in accordance with SFAS 146.
The pretax amounts for the restructuring charges are comprised of the following:
TERMINATION TERMINATION
(in thousands of EUR) COSTS COSTS TOTAL
-----------------------------------------------------------------------------
Liability balance
at January 1,
2003 - - -
Initial charges 834 346 1,180
Additional
charges 242 132 374
Payments made (1,076) (150) (1,226)
----------------------------------------------------------------------------
Liability balance
at December 31,
2003 - 328 328
----------------------------------------------------------------------------
Additional
charges - 59 59
Payments made - (387) (387)
----------------------------------------------------------------------------
Liability balance
at December 31,
2004 - - -
----------------------------------------------------------------------------
ASSET IMPAIRMENT CHARGES
As a result of the closure of the Swedish facility, certain long-lived assets
with a net carrying value of EUR 158 have been abandoned and certain prepaid
expenses of EUR 127 no longer provided any future benefit to the Company.
Accordingly, impairment charges totaling EUR 285 were recognized for the year
ended December 31, 2003, to write-off these assets.
4. RECOVERY OF INVESTMENT
In the fourth quarter of 2001, the Company determined that its ability to
recover the full amount of its investments in silicon supplier ESM was impaired.
Accordingly the Company wrote off the investments in ESM. In March 2002, ESM was
acquired by International Rectifier. As a result, the Company was able to
subsequently recover EUR 12.0 million, EUR 0.3 million and EUR 0.1 million of
its total investment in ESM in 2002, 2003 and 2004.
5. OTHER DISCLOSURES TO THE STATEMENTS OF OPERATION
Result before income taxes is stated after charging:
---------------------------------------------------------------------------------------------
(in thousands of EUR) 2004 2003 2202
---------------------------------------------------------------------------------------------
Depreciation of property, plant and equipment 11,501 12,545 12,834
---------------------------------------------------------------------------------------------
Amortization of intangible assets 1,520 2,073 1,975
---------------------------------------------------------------------------------------------
Personnel costs 21,622 21,197 20,193
---------------------------------------------------------------------------------------------
Cost of sales: provision for excess inventory - - 1,930
---------------------------------------------------------------------------------------------
6. INCOME TAXES
Loss before income taxes consists of the following:
--------------------------------------------
(in thousands of EUR) 2004 2003 2002
--------------------------------------------
Germany (3,079) (6,323)(11,376)
--------------------------------------------
Foreign (2,600) (6,283) (4,858)
--------------------------------------------
(5,679)(12,606)(16,234)
--------------------------------------------
Benefit (provision) for income taxes are as follows:
--------------------------------------------
(in thousands of EUR) 2004 2003 2002
--------------------------------------------
Current taxes:
--------------------------------------------
Germany - 250 43
--------------------------------------------
Foreign (38) (91) 1,685
--------------------------------------------
Deferred taxes:
--------------------------------------------
Germany - (8,287) 3,941
--------------------------------------------
Foreign (26) 314 357
--------------------------------------------
(64) (7,814) 6,026
--------------------------------------------
Although Dialog is a UK company, its principal operations are located in Germany
and all of its operating subsidiaries are owned by its German subsidiary.
Accordingly, the following information is based on German corporate tax law. The
Company's statutory tax rate for its German subsidiary is 25%. Including the
impact of the solidarity surcharge of 5.5%, the federal corporate tax rate
amounts to 26,375%.
A reconciliation of income taxes determined using the German corporate tax rate
of 26,375% plus the after federal tax benefit rate for trade taxes of 11,225%,
for a combined statutory rate of 37.6%, is as follows:
---------------------------------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------------------------------
Expected benefit for income taxes 2,135 4,740 6,104
---------------------------------------------------------------------------------------------
Foreign tax rate differential (200) (505) (387)
---------------------------------------------------------------------------------------------
Amortization of non-deductible intangible assets (41) (41) (41)
---------------------------------------------------------------------------------------------
Valuation allowance on deferred tax assets (1,947)(11,804) (118)
---------------------------------------------------------------------------------------------
Others (11) (204) 468
---------------------------------------------------------------------------------------------
Actual benefit (expense) for income taxes (64) (7,814) 6,026
---------------------------------------------------------------------------------------------
Deferred income tax assets and liabilities are summarized as follows:
---------------------------------------------
DEC 31, DEC 31,
2004 2003
---------------------------------------------
Property, plant and
equipment 374 196
---------------------------------------------
Net operating loss and
tax credit carryforwards 25,158 24,284
---------------------------------------------
Liabilities 5,654 5,640
---------------------------------------------
Other 12 41
---------------------------------------------
31,198 30,161
---------------------------------------------
Valuation allowance (14,046) (12,329)
---------------------------------------------
Deferred tax assets 17,152 17,832
---------------------------------------------
Property, plant and
equipment (1,020) (1,669)
---------------------------------------------
Receivables (7) (4)
---------------------------------------------
Deferred tax liabilities (1,027) (1,673)
---------------------------------------------
Net deferred tax assets 16,125 16,159
---------------------------------------------
Tax loss carryforwards and established valuation allowances are summarized as
follows:
---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
TAX LOSS TAX LOSS
CARRYFORWARDS CARRYFORWARDS
SUBJECT TO SUBJECT TO
TAX LOSS VALUATION VALUATION TAX LOSS VALUATION VALUATION
CARRYFORWARD ALLOWANCE ALLOWANCE CARRYFORWARD ALLOWANCE ALLOWANCE
---------------------------------------------------------------------------------------------
Germany 63,124 28,648 11,392 61,696 27,220 10,235
---------------------------------------------------------------------------------------------
UK 6,384 6,286 2,026 4,391 4,293 1,288
---------------------------------------------------------------------------------------------
US
Federal 1,571 1,571 498 1,520 1,520 493
---------------------------------------------------------------------------------------------
State 1,442 1,442 131 1,514 1,514 131
---------------------------------------------------------------------------------------------
Sweden - - - 543 543 182
---------------------------------------------------------------------------------------------
Total 14,046 12,329
---------------------------------------------------------------------------------------------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods, in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In December 2003, the
German government enacted new tax legislation, which among other things, limits
the use of German tax-loss carryforwards to 60% of the taxable income for fiscal
years starting from 2004 and thereafter. As a result of this change in tax law,
at December 31, 2003 the Company has re-evaluated its deferred tax asset
position and the need for a valuation allowance for the German tax losses. The
assessment requires the exercise of judgment on the part of management, with
respect to, among other things, benefits that could be realized from available
tax strategies and future taxable income, as well as other positive and negative
factors. The assessment in 2003 considered the weight given to cumulative losses
incurred in Germany over the three-year period ended December 31, 2003, as well
as detailed forecasts of taxable income in the foreseeable future. Although the
Company forecasted generating future taxable income to approximate available
tax-loss carryforwards, the change in tax law increased the forecasted number of
additional years that future taxable income must be generated in order to fully
realize these loss carryforward benefits. Pursuant to SFAS 109 and the inherent
uncertainties in projecting future taxable income, management had concluded that
it is more likely than not that a portion of our tax losses could not ultimately
be realized. Consequently, in 2003 the Company recognized a valuation allowance
of EUR 10,235, to reduce the carrying value of its net deferred tax assets on
tax loss carryforwards in Germany to an amount that was more likely than not
expected to be ultimately realized. Furthermore, based on management's
assessment, at December 31, 2003 the company established valuation allowances of
EUR 1,288, EUR 624 and EUR 182 on tax losses in the UK, the US and Sweden,
respectively, since it was more likely than not, that the deferred tax assets
will not be realized through future taxable earnings.
Due to losses incurred in 2004, the company has not recognized any additional
deferred tax assets and established an additional valuation allowance of EUR
1,947 on the tax-loss carryforwards generated in Germany in 2004. However,
management has evaluated whether it is more likely than not that the Company can
recover the carrying amount of deferred tax assets and determined that an
additional valuation allowance with respect to the deferred tax assets is not
required at December 31, 2004.
The tax loss carryforwards in the US are expiring in 2005 through 2017, the
other tax loss carryforwards have no expiration date.
7. ADDITIONAL CASH FLOW INFORMATION
The following represents supplemental information with respect to cash flows:
--------------------------------------------
(in thousands of EUR) 2004 2003 2002
--------------------------------------------
Interest paid, net 5 14 9
--------------------------------------------
Income taxes paid,
net 49 372 911
--------------------------------------------
8. TRADE ACCOUNTS RECEIVABLE, NET
The recorded trade accounts receivable for which an impairment has been
recognized and the related allowance for doubtful accounts at December 31, 2004
and 2003 were EUR 34 and EUR 17, and EUR 270 and EUR 197, respectively. The
allowance for doubtful accounts developed as follows:
--------------------------------------------
(in thousands of EUR) 2004 2003 2002
--------------------------------------------
Allowance for
doubtful accounts
at beginning of
year 197 397 439
--------------------------------------------
Additions charged to
bad debt expense 16 230 222
--------------------------------------------
Write-offs charged
against the
allowance (186) (210) (139)
--------------------------------------------
Reductions charged
to bad debt expense (10) (220) (125)
--------------------------------------------
Allowance for
doubtful accounts
at end of year 17 197 397
--------------------------------------------
9. INVENTORIES
Inventories are comprised of the following:
---------------------------------------------
(in thousands of EUR) 2004 2003
---------------------------------------------
Raw materials 9,893 2,738
---------------------------------------------
Work-in-process 13,906 5,026
---------------------------------------------
Finished goods 5,995 5,478
---------------------------------------------
29,794 13,242
---------------------------------------------
10. MARKETABLE SECURITIES
The Company has invested in "investment grade" rated debt securities with a
maturity up to six months, and exchange traded funds, which invest in
debt-securities. All marketable securities are classified as available for sale.
The aggregate costs, fair values and unrealized losses per security class are as
follows:
--------------------------------------------------------------------------------------------
DEC 31, 2004 DEC 31, 2003
UNREALIZED
(in thousands of EUR) COST FAIR VALUE LOSS COST FAIR VALUE LOSS
--------------------------------------------------------------------------------------------
Corporate debt securities - - - 43,029 42,947 (82)
--------------------------------------------------------------------------------------------
Debt based funds 17,581 17,542 (39) 1,969 1,953 (16)
--------------------------------------------------------------------------------------------
17,581 17,542 (39) 44,998 44,900 (98)
--------------------------------------------------------------------------------------------
11. DEPOSITS AND PREPAID EXPENSES
At December 31, 2002, the Company maintained deposits of $20 million with
Chartered Semiconductor Manufacturing Pte., Ltd. ("Chartered"). These deposits
were refunded to the Company in October 2003. In addition, the Company paid
Chartered a total of $10 million in 2000 as an advance payment for future wafer
deliveries and $2.5 million to another supplier. Such advance payments are
classified in the balance sheet line items "Prepaid expenses". In 2004 all
remaining advance payments paid to Chartered were refunded to the company. The
outstanding balance of the advance payments is refunded in proportion to the
Company's purchases of wafers from the other supplier, and at this time, the
Company expects to have the entire advance payments refunded. The amount of
advance payments classified in prepaid expenses on the consolidated balance
sheet as current assets represents that the amount of advance payments expected
to be refunded in the next twelve months.
12. PROPERTY, PLANT AND EQUIPMENT, NET
A summary of activity for property, plant and equipment for the year ended
December 31, 2004 is as follows:
----------------------------------------------------------------------------------------------------------------------------------
NET BOOK NET BOOK
VALUE VALUE
ACCUMULATED AS OF ACCUMULATED AS OF
(in thousands JAN 1, CURRENCY RECLASSIFIC- DEC 31, DEPRECIATI- DEC 31, DEPRECIATI- DEC 31, DEPRECIATI-
of EUR) 2004 CHANGE ADDITIONS ATIONS DISPOSALS 2004 ON 2004 ON 2003 2003 ON 2004
----------------------------------------------------------------------------------------------------------------------------------
Test equipment 53,050 (2) 8,028 300 (863) 60,513 (45,227) 15,286 (36,956) 16,094 (9,076)
----------------------------------------------------------------------------------------------------------------------------------
Leasehold
improvements 903 (19) 158 -- (145) 897 (596) 301 (550) 353 (121)
equipment 14,303 (112) 2,412 (33) (860) 15,710 (11,782) 3,928 (10,427) 3,876 (2,304)
----------------------------------------------------------------------------------------------------------------------------------
Advance payment
relating to test
equipment 267 -- 1,723 (267) -- 1,723 -- 1,723 -- 267 --
----------------------------------------------------------------------------------------------------------------------------------
Property, plant
and equipment 68,523 (133) 12,321 -- (1,868) 78,843 (57,605) 21,238 (47,933) 20,590 (11,501)
----------------------------------------------------------------------------------------------------------------------------------
13. INTANGIBLE ASSETS AND GOODWILL
A summary of activity for intangible assets and Goodwill for the year ended
December 31, 2004 is as follows:
----------------------------------------------------------------------------------------------------------------------------------
NET BOOK NET BOOK
VALUE VALUE
ACCUMULATED AS OF ACCUMULATED AS OF
(in thousands JAN 1, CURRENCY RECLASSIFIC- DEC 31, DEPRECIATI- DEC 31, DEPRECIATI- DEC 31, DEPRECIATI-
of EUR) 2004 CHANGE ADDITIONS ATIONS DISPOSALS 2004 ON 2004 ON 2003 2003 ON 2004
----------------------------------------------------------------------------------------------------------------------------------
Software, licenses
and other 10,930 (26) 348 -- (199) 11,053 (8,952) 2,101 (7,992) 2,938 (1,183)
----------------------------------------------------------------------------------------------------------------------------------
Patents 3,008 -- -- -- -- 3,008 (843) 2,165 (506) 2,502 (337)
----------------------------------------------------------------------------------------------------------------------------------
Intangible assets 13,938 (26) 348 -- (199) 14,061 (9,795) 4,266 (8,498) 5,440 (1,520)
----------------------------------------------------------------------------------------------------------------------------------
Goodwill 15,736 -- -- -- -- 15,736 (3,950) 11,786 (3,950) 11,786 --
----------------------------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2004 and 2003, the Company acquired software
and licenses for a total purchase price of EUR 348 and EUR 618 respectively. The
expected weighted average useful life of these assets is 3 years. During the
year 2002, the Company acquired the CMOS imaging technology and associated CMOS
Active Pixel Sensor (APS) patent portfolio from Sarnoff Corporation, a research
and development institute, for a total purchase price of EUR 3,008. The expected
weighted average useful life of these patents is 9 years. In addition, Sarnoff
may be paid additional contingent consideration which will be determined as a
percentage of the revenues received from sales of imagers used for camera
applications and as an agreed sum for each imager used for cellular phone
applications. Such contingent consideration is limited in absolute terms and has
a fixed expiration date as specified in the purchase agreement.
The aggregate amortization expense for the years ended December 31, 2004, 2003
and 2002 was EUR 1,520, EUR 2,073 and EUR 1,975, respectively. Amortization
expense of the gross carrying amount of intangible assets at December 31, 2004
is estimated to be EUR 1,015 in 2005, EUR 631 in 2006, EUR 542 in 2007, EUR 518
in 2008 and EUR 483 in 2009.
14. ACCRUED EXPENSES
The Company issues various types of contractual product warranties under which
it guarantees the performance of products delivered for a certain period or
term. The changes in the provision for those product warranties are summarized
as follows:
---------------------------------------------
(in thousands of EUR) 2004 2003
---------------------------------------------
Balance at beginning of year 135 115
---------------------------------------------
Utilizations (8) (115)
---------------------------------------------
Additions 28 135
---------------------------------------------
Balance at end of year 155 135
---------------------------------------------
15. SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
At December 31, 2003, Dialog had authorized 104,311,860 ordinary shares with a
par value of GBP 0.10 per share, of which 44,068,930 were issued and
outstanding. All shares are fully paid.
On September 24, 2004, the Company completed an offering of 2,000,000 previously
unissued ordinary shares at GBP 0.10 per share to its employee benefit trust, to
make such shares available for the exercise of stock option rights that had
previously been granted to employees. These shares are legally issued and
outstanding, but are not considered issued and outstanding for accounting
purposes and accordingly have been reported in the caption "employee stock
purchase plan shares" as a reduction of shareholders' equity.
The related tax effects allocated to each component of other comprehensive
income (loss) for the years ended December 31, 2004, 2003 and 2002 are as
follows:
----------------------------------------------------------------------------------------------
2004 2003 2002
(in thousands of EUR) PRETAX TAX EFFECT NET PRETAX TAX EFFECT NET PRETAX TAX EFFECT NET
----------------------------------------------------------------------------------------------
Unrealized (losses)
gains on available
for sale
securities 59 (26) 33 (98) 37 (61) - - -
----------------------------------------------------------------------------------------------
Unrealized (losses)
gains on
derivative
financial
instruments - - - 253 (95) 158 (185) 69 (116)
----------------------------------------------------------------------------------------------
Currency
translation
adjustment 12 (17) (5) (508) 142 (366) (437) 150 (287)
----------------------------------------------------------------------------------------------
Other Comprensive
Income (loss) 71 (43) 28 (353) 84 (269) (622) 219 (403)
----------------------------------------------------------------------------------------------
In 2003, realized losses of EUR 44 (net of EUR 27 tax benefits) on the
settlement of a derivative financial instrument were reclassified into net loss
(see Note 19).
16. PENSION SCHEME
The group operates defined contribution pension schemes. The pension cost charge
for the year represents contributions payable by the group to the funds and
amounted to EUR 484 (2003: EUR 565; 2002: EUR 640). At December 31, 2004,
contributions amounting to EUR 59 (2003: EUR 5) were payable to the funds and
are included in creditors.
17. STOCK-BASED COMPENSATION
A) STOCK OPTION PLAN
On August 7, 1998, the Company adopted a stock option plan ("Plan") under which
employees and directors may be granted from time-to-time, at the discretion of
the Board, stock options to acquire up to 3,840,990 shares of the Company's
authorized but unissued ordinary shares. On May 16, 2002 the shareholders of the
Company approved a resolution increasing the maximum amount of stock options
which may be granted by the company to 15%, after issue, of the Company's issued
share capital. At December 31, 2004, 15%, after issue, of the Company's issued
share capital amounted to 8,129,811 shares. Stock options are granted with an
exercise price not less than the quoted price at the date of grant. Stock
options have terms of ten years and vest over periods of one to five years from
the date of grant.
The fair value of all grants in the three-year period ended December 31, 2004 is
estimated using the Black-Scholes option pricing model. Expectations of early
exercise are accounted for within the average life of the options. The following
weighted-average assumptions were used for stock option grants for the years
ended December 31, 2004, 2003 and 2002.
2004 2003 2002
--------------------------------------------
Expected dividend
yield 0% 0% 0%
--------------------------------------------
Expected volatility 80% 74% 106%
--------------------------------------------
Risk free interest
rate 3.4% 3.4% 3.7%
--------------------------------------------
Expected life (in
years) 5.0 3.8 5.0
--------------------------------------------
Weighted average
share price 3.70 3.37 2.33
--------------------------------------------
Weighted average
exercise price 3.70 3.37 2.33
--------------------------------------------
Weighted-average
fair value of
options granted (in
EUR) 2.44 2.21 1.83
--------------------------------------------
Stock option plan activity for the years ended December 31, 2004, 2003 and 2002
was as follows:
------------------------------------------------------------------------------------------------------
2004 2003 2002
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
(prices in EUR) OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 3,412,270 2.32 2,634,382 3.62 2,672,506 3.78
----------------------------------------------------------------------------------------------------
Granted 108,960 3.70 2,050,180 3.37 124,060 2.33
----------------------------------------------------------------------------------------------------
Exercised (64,648) 0.44 (76,828) 0.52 (79,174) 0.79
----------------------------------------------------------------------------------------------------
Forfeited (157,176) 3.48 (204,004) 6.21 (83,010) 9.78
----------------------------------------------------------------------------------------------------
Cancelled - - (991,460) 7.29 - -
----------------------------------------------------------------------------------------------------
Outstanding at end of
year 3,299,406 2.34 3,412,270 2.32 2,634,382 3.62
----------------------------------------------------------------------------------------------------
Options exercisable at
year end 1,827,076 1.53 1,013,356 0.70 1,217,402 3.07
----------------------------------------------------------------------------------------------------
The weighted average share price at the date of exercise of options was EUR 3.23
in the year ended December 31, 2004.
In April 2003, the Company's board of directors approved a resolution giving
employees the right to cancel their options granted in 2000, 2001 and 2002.
Employees elected to cancel a total of 991,460 options with a weighted average
exercise of EUR 7.29. In November 2003, approximately 2.0 million options were
granted at an exercise price equal to fair value (at that date) of EUR 3.45 per
share.
The following table summaries information about stock options outstanding at
December 31, 2004:
--------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE NUMBER
NUMBER REMAINING WEIGHTED- EXERCISABLE
OUTSTANDING AT CONTRACTUAL AVERAGE AT
DECEMBER 31, LIFE EXERCISE DECEMBER 31, WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES 2004 (IN YEARS) PRICE 2004 EXERCISE PRICE
--------------------------------------------------------------------------------------------------
EUR 0.32 - 2.15 1,345,086 5.0 0.70 1,254,622 0.64
--------------------------------------------------------------------------------------------------
EUR 3.00 - 8.00 1,954,320 8.7 3.47 572,454 3.48
--------------------------------------------------------------------------------------------------
EUR 0.32 - 8.00 3,299,406 7.2 2.34 1,827,076 1.53
--------------------------------------------------------------------------------------------------
B) EMPLOYEE STOCK PURCHASE PLAN
On March 26, 1998, in connection with the acquisition of the Company, the
Company and its then majority owner, Apax Partners, adopted a Subscription and
Shareholders Agreement under which employees and directors were invited at the
discretion of the Board, to purchase up to 3,456,890 ordinary shares of the
Company from Apax Partners or an established Employee Benefit Trust. The
purchase price of the shares was equal to their estimated fair value on the date
the employee or director subscribes for those shares. During the first quarter
of 1999, the Trust acquired the remaining 668,800 ordinary shares from Apax
Partners, which had not been sold to employees or directors, for purposes of
distributing them to employees under the Employee Stock Purchase Plan or for
distribution in connection with the exercise of employee stock options.
On September 24, 2004, the Company completed an offering of 2,000,000 previously
unissued ordinary shares at EUR 0.10 per share to its employee benefit trust, to
make such shares available for the exercise of stock option rights that had
previously been granted to employees. These shares are legally issued and
outstanding, but are not considered issued and outstanding for accounting
purposes and accordingly have been reported in the caption "employee stock
purchase plan shares" as a reduction of shareholders' equity.
At December 31, 2004, the Trust continued to hold 2,001,559 shares, equaling the
remaining balance of the acquired 668,800 shares and the 2,000,000 shares
acquired in 2004 (see note 15).
18. COMMITMENTS
The Company leases design software, all of its office facilities, office and
test equipment, and vehicles under operating leases. Total rentals under
operating leases, charged as an expense in the statement of operations, amounted
to EUR 7,780, EUR 7,581 and EUR 7,229 for the years ended December 31, 2004,
2003 and 2002, respectively.
Future minimum lease payments under rental and lease agreements, which have
initial or remaining terms in excess of one year at December 31, 2004 are as
follows:
(in thousands of EUR) OPERATING LEASES
--------------------------------------------
2005 8,148
--------------------------------------------
2006 6,629
--------------------------------------------
2007 6,399
--------------------------------------------
2008 6,429
--------------------------------------------
2009 3,297
--------------------------------------------
Thereafter 316
--------------------------------------------
Total 31,218
--------------------------------------------
At December 31, 2004, the Company had an unused short-term credit line of EUR
12,782. There are no amounts outstanding under this credit line at December 31,
2004.
19. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
A) USE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company's sales are primarily denominated in Euros and US dollars whereas
purchases of raw materials, manufacturing services and the use of design
software are primarily denominated in US dollars, whereas other costs and
expenses such as salaries and other overhead costs are denominated in Euro, GBP
and US dollars. In order to manage these foreign currency exchange risks, the
Company attempts to match cash inflows and outflows (sales with supply costs) in
the same currency, primarily the US dollar. In situations where the Company is
not able to effectively match cash inflows and outflows in the same currency,
management considers the use of derivative financial instruments. As a matter of
policy, the Company does not engage in derivatives trading, derivatives
market-making or other speculative activities.
To hedge existing foreign currency exposure related to a $20 million deposit
(see Note 11), the Company purchased foreign currency forward contracts in 2000
to effectively change the US Dollar deposits into Euro ( EUR 21,680) upon the
expected return of the deposit as of December 31, 2003. These deposits were
refunded to the Company in October 2003. Upon receipt of the deposit, the
Company settled its currency hedging position related to this deposit and
recognized a loss of EUR 71 in the consolidated statement of operations.
In the fourth quarter of 2003, the Company entered into derivative financial
arrangements with a bank (the "counterparty") that obligates the Company, if
directed to do so by the counterparty, to purchase a total of $3,611 during the
first half of 2004 at euro-dollar exchange rates ranging from 1.22 to 1.24.
These arrangements do not qualify for hedge accounting treatment. Accordingly,
the fair value of these derivative financial instruments, which are based on a
Black-Scholes pricing model, are recognized on the balance sheet and the changes
in fair value are recognized in earnings. At December 31, 2003, these
transactions resulted in a net unrealized loss of EUR 78 recognized in earnings.
B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the price at which one party would
assume the rights and /or duties of another party.
The carrying amounts and fair values of the Group's financial instruments are as
follows:
---------------------------------------------------------------------------------------------
DEC 31, 2004 DEC 31, 2003
CARRYING CARRYING
(in thousands of EUR) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------------------------------------------------------------------------------
Financial instruments (other than derivative
instruments)
Cash and cash equivalents 13,977 13,977 8,109 8,109
---------------------------------------------------------------------------------------------
Marketable securities 17,542 17,542 44,900 44,900
---------------------------------------------------------------------------------------------
Deposits 194 194 183 183
---------------------------------------------------------------------------------------------
Derivative instruments (currency contracts)
Current liabilities - - 78 78
---------------------------------------------------------------------------------------------
20. SEGMENT REPORTING
The Company has one operating segment, which is the design and supply of
semiconductor chips. The Company delivers its products to various market sectors
and generates a substantial portion of its revenue from the wireless
communications market; 78%, 75% and 71% of total revenues in the years ended
December 31, 2004, 2003 and 2002, respectively.
Revenues by market sector consisted of the following:
--------------------------------------------
2004 2003 2002
--------------------------------------------
Wireless
communication 90,617 69,849 54,715
--------------------------------------------
Automotive 11,898 7,896 6,074
--------------------------------------------
Industrial 13,529 15,148 16,315
--------------------------------------------
116,044 92,893 77,104
--------------------------------------------
Revenues are allocated to countries based on the location of the shipment
destination:
--------------------------------------------
2004 2003 2002
--------------------------------------------
Germany 47,719 45,395 31,478
---------------------------------------------
France 1,936 4,532 9,348
---------------------------------------------
Other European
countries 14,931 10,438 11,698
---------------------------------------------
China 19,738 18,198 13,006
---------------------------------------------
Other Asian countries 22,351 6,695 5,154
---------------------------------------------
Other countries 9,369 7,635 6,420
---------------------------------------------
116,044 92,893 77,104
---------------------------------------------
Following are the net carrying values of investments in property, plant and
equipment by geographic location:
---------------------------------------------
DEC 31, DEC 31,
2004 2003
---------------------------------------------
Property, plant and equipment
Germany 20,675 19,634
---------------------------------------------
Japan 92 176
---------------------------------------------
United Kingdom 189 358
---------------------------------------------
USA 282 422
---------------------------------------------
21,238 20,590
---------------------------------------------
21. TRANSACTIONS WITH RELATED PARTIES
Timothy Anderson, a member of the Company's Board of Directors, is also a
partner in the law firm Reynolds Porter Chamberlain, which frequently acts as
the Company's legal adviser. Fees to Reynolds Porter Chamberlain for legal
services rendered were EUR 212, EUR 162 and EUR 268 in 2004, 2003 and 2002,
respectively.