Dialog Semiconductor
Annual Report 2004
Dialog Semiconductor Plc — Five-Year Financial Summary Selected Financial Data
(in thousands of €, except per share, equity ratio and em-
ployee data)
2004
2003
2002
2001
2000
Earnings data
Revenues
Research and development expenses
Operating profit (loss)
Net income (loss)
Cash flow from operations 1)
Balance Sheet data
Cash and cash equivalents
Marketable securities
Liquid assets
Shareholders’ equity
Equity ratio in %
Total assets
Capital expenditures
Share data
Basic earnings (loss) per share
Weighted average number of shares (in thousands) - basic
Other data
Employees (at December 31)
116,044
(29,071)
(6,088)
(5,743)
(8,601)
13,977
17,542
31,519
121,135
85.3
141,959
12,321
(0.13)
44,025
92,893
(30,590)
(13,224)
(20,420)
7,588
8,109
44,900
53,009
126,843
90.3
140,471
5,901
(0.46)
43,951
77,104
(34,530)
(27,406)
(10,208)
(7,596)
31,005
–
31,005
147,495
88.8
166,073
3,872
(0.23)
43,888
100,519
(31,256)
(24,136)
(41,386)
15,139
32,626
–
32,626
158,092
88.3
179,062
3,157
(0.94)
43,788
214,459
(22,898)
38,387
26,650
18,072
29,879
–
29,879
199,287
80.5
247,572
39,024
0.62
42,669
296
273
284
287
268
1) In 2000 excluding advance payments to secure silicon capacity of € 23,201.
Overview of the legal group structure
Overview of the legal group structure
Dialog Semiconductor Plc , UK
Dialog Semiconductor GmbH,
Germany, Headquarters
Sales, Marketing, Design & Test
Dialog Semiconductor Inc.,
USA
Sales, Marketing & Design
North America
Dialog Semiconductor UK Ltd.,
Dialog Seminconductor UK Ltd.,
United Kingdom
United Kingdom
Sales, Marketing & Design
Sales, Marketing & Design
Northern Europe
Northern Europe
Dialog Semiconductor KK
Dialog Semiconductor KK
Japan
Japan
Sales, Marketing & Design
Sales, Marketing & Design
Japan
Japan
Unaudited Quarterly Financial Information
2004
Revenues
Gross margin
Selling, general and administrative expenses
Research and development
Amortization of intangible assets
Restructuring and related impairment charges
Operating profit (loss)
Financial income (expense), net
Recovery of investment
Result before income taxes
Income taxes
Net income (loss)
Basic earnings (loss) per share
2003
Revenues
Gross margin
Selling, general and administrative expenses
Research and development
Amortization of intangible assets
Restructuring and related impairment charges
Operating profit (loss)
Financial income (expense), net
Recovery of investment
Result before income taxes
Income taxes
Net income (loss)
Basic earnings (loss) per share
2002
Revenues
Gross margin
Selling, general and administrative expenses
Research and development
Amortization of intangible assets
Operating profit (loss)
Financial income (expense), net
Recovery of investment
Result before income taxes
Income taxes
Net income (loss)
Basic earnings (loss) per share
Q1
23,000
7,974
(2,668)
(7,387)
(486)
(59)
(2,626)
248
54
(2,324)
836
(1,488)
(0.03)
Q1
21,015
6,221
(2,335)
(8,767)
(551)
(1,465)
(6,897)
2
166
(6,729)
1,864
(4,865)
(0.11)
Q1
19,063
5,516
(2,297)
(7,996)
(447)
(5,224)
362
6,457
1,595
(588)
1,007
0.02
Q2
30,402
10,229
(2,799)
(6,923)
(474)
-
33
161
-
194
(69)
125
0.00
Q2
21,086
6,472
(2,344)
(7,455)
(553)
(315)
(4,195)
205
-
(3,990)
1,352
(2,638)
(0.06)
Q2
17,051
4,648
(2,603)
(8,617)
(444)
(7,016)
(1,422)
755
(7,683)
2,773
(4,910)
(0.11)
Q3
31,584
10,373
(2,794)
(7,166)
(289)
-
124
210
-
334
(120)
214
0.00
Q3
23,247
8,008
(2,347)
(7,296)
(485)
(59)
(2,179)
71
149
(1,959)
457
(1,502)
(0.03)
Q3
17,903
4,993
(2,696)
(8,574)
(540)
(6,817)
491
2,675
(3,651)
1,299
(2,352)
(0.05)
Q4
31,058
7,685
(3,438)
(7,595)
(271)
-
(3,619)
(264)
-
(3,883)
(711)
(4,594)
(0.10)
Q4
27,545
9,818
(2,215)
(7,072)
(484)
-
47
25
-
72
(11,487)
(11,415)
(0.26)
Q4
23,087
4,538
(3,000)
(9,343)
(544)
(8,349)
(228)
2,082
(6,495)
2,542
(3,953)
(0.09)
Total
116,044
36,261
(11,699)
(29,071)
(1,520)
(59)
(6,088)
355
54
(5,679)
(64)
(5,743)
(0.13)
Total
92,893
30,519
(9,241)
(30,590)
(2,073)
(1,839)
(13,224)
303
315
(12,606)
(7,814)
(20,420)
(0.46)
Total
77,104
19,695
(10,596)
(34,530)
(1,975)
(27,406)
(797)
11,969
(16,234)
6,026
(10,208)
(0.23)
Meeting the silicon needs of a new digital age
For the first time in the history of electron-
ics, the world is experiencing very fast
moving demand for everything digital.
There seems to be a rapidly growing global
appetite for always-connected lifestyles,
with the ability to talk, take photos, listen
to music, watch movies, play games and
connect to the internet at any time.
Many products and services enabling this
lifestyle have only come to reality within
the last 12 months or so – such as mobile
phones with multiple megapixel resolution
cameras and advanced color displays ena-
bling an all-in-one device with additional
video download capability; and digital
music players capable of playing back
hours of downloaded music.
electronics equipment manufacturers are
having to keep up the pace of new product
development to meet consumer demand for
the latest must-have gadgets. At Dialog
Semiconductor, we work closely with in-
dustry leaders in wireless, optics and imag-
ing to deliver mixed signal semiconductor
solutions that enable these sophisticated
electronics products.
With over 20 years experience in research,
development and manufacture of power
management, audio and imaging technol-
ogy behind several generations of mobile
handsets, our technical knowledge and
expertise is also enabling solutions for
automotive and industrial electronics mar-
kets.
As operators and service providers drive
market acceptance of this new digital age,
Our chip and system-level solutions address
two key market areas:
Wireless
We provide the industry’s most highly
integrated power management and audio
ICs that improve standby times and there-
fore extend battery life in wireless and
other hand-held consumer electronics
products. On top of this, our CMOS tech-
nology image sensors, camera modules, and
liquid crystal display drivers add sophisti-
cated high-resolution imaging capabilities
to these mobile and consumer gadgets.
Automotive / Industrial
Our application specific ICs are providing
the leading automotive manufacturers with
engine management and comfort electron-
ics systems, based on our expertise in
power management and analog and digital
circuit system integration. Extending this
technology to high voltages, we also pro-
vide industrial lighting control system ICs
for fluorescent lamps.
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Table of Contents
Shareholder Information
Letter to our Shareholders
Management
The Dialog Semiconductor Share in 2004
Corporate Profile
Business Overview
Our Mission and Strategy
Our Solution
Our Principal Products
Our Principal Customers
Our Product Cycle
Management Report
Executive Summary
Operating and Financial Review
Results of Operations
Trend Information
Liquidity and Capital Resources
Critical Accounting Policies and Related Uncertainties
Risk Factors
Outlook
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to the Consolidated Financial Statements
Corporate Governance
Report of the Board of Directors
Accounting under International Financial Reporting Standards (IFRSs)
Corporate Governance Principles
Members of the Board of Directors
2
2
4
5
10
10
12
13
14
16
16
19
19
20
21
23
25
27
29
30
31
33
34
35
36
37
38
52
52
52
53
56
Annual Report 2004 | 1
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Letter to our Shareholders
Dear Shareholders,
nine months of 2003. However, in the
fourth quarter, like others in the industry
we were affected by the weak US dollar
exchange rate against the Euro. Combined
with lower than expected uptake from key
customers, this impacted our business,
slowing down revenue growth for the full
year to 25 percent.
Overall, shipments of our ICs for wireless
and automotive applications were up in
value terms compared to 2003. This is a
result of two developments for the Com-
pany: one is the addition of new products
such as our liquid crystal display (LCD)
drivers for wireless handsets, and the sec-
ond is continued success in winning design
slots within the growing number of hand-
sets and other consumer electronic products
being designed and manufactured in Asia.
Products & partnerships
We announced new products and partner-
ships in two key areas during 2004 – in
display drivers and imaging, and in inte-
grated power management ICs. Both are
extremely important as we enter an age in
which multimedia and communications are
reaching unprecedented levels of conver-
gence.
In displays and imaging, our entry into
color LCD driver ICs, announced in Febru-
ary 2004, has proved to be a success. We
introduced the first products in this family,
the DA8912A and DA8913A, in June and
started shipping in volume to customers
during the second half of the year.
We also announced a long-term collabora-
tion with Carl Zeiss, a world leader in the
optical and optoelectronics industry, to
develop and market modules for high qual-
ity camera phones. The combination of Carl
I am able to report revenue growth of 25
percent in 2004 compared to 2003. Our
2004 revenue grew to €116 million, and we
reduced operating losses for the full year by
more than 50 percent. With the increased
opportunities created by our new products
and implementation of an operational
review to manage costs appropriate to our
revenue levels, we remain positive for
steady growth through 2005.
Key developments during the year
Dialog Semiconductor had significant
developments during 2004 on many fronts
– new products, partnerships, and further
penetration of key markets and customers.
We are especially encouraged by the sig-
nificant progress represented by the inclu-
sion of our audio and power management
products in 3G handsets. In 2004 20 mil-
lion 3G handsets were shipped worldwide.
This market is expected to grow to almost
50 million in 2005.
During the first three quarters of 2004,
revenue increased 30 percent over the first
2 | Annual Report 2004
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Corporate
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Zeiss’ optical expertise and our high quality
image sensor capability promises to be
exciting as we look to jointly shape the
market for next generation camera phones.
In power management, we launched the
DA9030 in May, the first integrated power
management IC (PMIC) to support the
Wireless Intel SpeedStep® technology. The
IC, targeted at entry-level, mid-range and
premium smartphones, personal digital
assistants (PDAs) and communicators with
highly sophisticated multimedia and inter-
net capabilities, provides significant power
consumption and system cost savings com-
pared to equivalent discrete solutions.
Outlook
During 2004, we established a very good
platform from which to exploit many more
opportunities in both the wireless handset
market and the automotive electronic in-
dustry. The ability to build on our strengths
in mixed signal IC design, applications
knowledge and experience in the wireless
market have resulted in Dialog Semicon-
ductor being able to develop and deliver a
range of products and solutions to meet our
customers’ needs.
The Company is therefore continuing to
evolve as we establish ourselves as a sup-
plier of both application specific standard
products (ASSPs) and solutions for wireless
and automotive electronic markets, as well
as application specific integrated circuits
(ASICs).
We expect to build further market share in
imaging through partnerships with other
blue-chip names in opto-mechanical and
imaging. In addition, we are working with
the leading mobile phone manufacturers to
position ourselves as a key supplier of
mixed signal devices in a number of differ-
ent design sockets within the handset – not
just power management or audio. Our
product portfolio includes embedded cam-
eras and display drivers.
With these multiple component design-in
prospects, we are positive about the Com-
pany’s growth potential in 2005. This
would not be possible without the contin-
ued commitment of all our stakeholders, so
I would like to once again thank all our
employees, customers, partners and all
others who have helped Dialog Semicon-
ductor maintain a growth path in 2004.
Kirchheim/Nabern, February 2005
Roland Pudelko
CEO & President
Annual Report 2004 | 3
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Management
Roland Pudelko
Chief Executive Officer and President (52)
With Dialog Semiconductor since 1989 and served as Executive Director, CEO and Presi-
dent from 1998. He has over 20 years experience in management, design and engineering
in electronics, including with the Daimler-Benz Group, and TEMIC.
Gary Duncan
Vice-President, Engineering – Imaging (49)
With the company since 1987 and is responsible for the design and development of imag-
ing products. Prior experience includes various senior engineering and management posi-
tions at Plessey and ES2.
Peter Hall
Vice-President, Quality and Technical Support (53)
Joined in 1987 and is responsible for technical support, IT and quality. Previous manage-
ment and engineering positions were at STC Semiconductors and MEM in Switzerland.
Erwin Hopf
Vice-President, Operations (50)
Joined in 2002, after over 20 years experience in various process engineering as well as
research and development and production management positions at Siemens Components
and Infineon Technologies.
Yoshihiko Kido
Vice-President, Japan (52)
Joined in 2001, after various management positions at General Electric, Act Japan and
Seagate. He was also a founding employee of Nippon Ericsson, as procurement director for
mobile phones and base station components.
Martin Klöble
Vice-President, Finance and Controlling (45)
With the company since 1999 and previously a partner with KPMG. An MBA graduate and
qualified tax consultant and certified public accountant in Germany (Wirtschaftsprüfer)
and in the United States (CPA).
Martin Sallenhag
Director of Product Marketing (36)
Joined Dialog Semiconductor in 2001, after roles in management and engineering at Erics-
son Mobile Communications and Axis Communications. He is responsible for the technical
marketing of Dialog’s product groups.
Richard Schmitz
Vice-President, Engineering - Mixed Signal ICs (48)
Joined in 1989 and is responsible for mixed signal semiconductors for power management
& audio, RF, and automotive & industrial products. Previously at Hewlett Packard's instru-
ments division and the Institute for Microelectronics, Stuttgart.
4 | Annual Report 2004
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Corporate
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The Dialog Semiconductor Share in 2004
The International Stock Markets in 2004
Following three years ending in losses from
2000 to 2002, and the bull market of 2003,
the momentum of the international stock
markets slowed a little in 2004. While the
most important leading stock exchanges in
Europe, the US and Japan were up at the
end of the trading year, growth was signifi-
cantly slower than in the previous year. In
addition to factors such as the development
of the dollar-euro exchange rate and the
interest rate increase implemented by the
Federal Reserve Bank in the summer, the
high price of oil was a key negative impact
on the continuation of the bull market.
The Dow Jones Index of the most important
US industrials rose by 3.6 percent over the
trading year as a whole. The Nasdaq Com-
posite ended 2004 up by8.7 percent. How-
ever, both figures disguise the fact that the
price level in the US fell considerably at
times in late summer. It was not until the
last quarter of 2004 that price develop-
ments were again increasingly positive,
being driven primarily by sustained in-
creases in corporate profits and sound
economic data.
The DAX also shared this development.
Following a relatively highly volatile per-
formance in the first half-year, prices ral-
lied strongly from August, allowing the
DAX to rise by7.3 percent at year-end. At
the very end of the year, the DAX reached
its annual high of 4256 points. In contrast,
the TecDAX turned in a negative perform-
ance, falling3.9 percent over the year.
The Dialog Semiconductor
Share Performance
The very strong performance of the 2003
trading year continued at the beginning of
2004. Dialog Semiconductor’s share began
2004 with a Xetra closing price of €3.55.
Buoyed by, among other things, its inclu-
sion in the TecDAX effective from March
22, 2004, Dialog Semiconductor's share
developed positively in the opening weeks
of the year, reaching its annual high of
€4.49 (NASDAQ $5.66) on February 18.
While maintaining stable trading volumes,
the share remained at around this level
until the end of the first quarter.
At the start of the second quarter, the per-
formance of Dialog Semiconductor's share
was initially weaker, though this was in
line with the performance of the TecDAX as
a whole, which was also down. The share
started the second quarter at €4.01 with a
quarterly high of €4.09 (NASDAQ $5.00)
and a quarterly low of €2.69 (NASDAQ
$3.06). As at June 30 – following a tempo-
rary recovery from around mid-May to
mid-June – the Xetra closing price was
€3.08.
Largely parallel to the somewhat weaker
performance of the TecDAX and interna-
tional stock markets as a whole, the price
of Dialog Semiconductor's share tracked
largely sideways in the third quarter and
subsequently also in the fourth quarter,
while displaying relatively low volatility
and below-average trading volumes. The
quarterly high for the third quarter was
€3.09 (NASDAQ $3.75) and €2.94 for the
fourth quarter (NASDAQ $3.57).
The share's development in the final quar-
ter of 2004 was largely defined by the
announcement of a negative business out-
look for the fourth quarter on December 15.
With the weakness of the dollar and reve-
nue falling short of forecasts in the Mobile
Communications sector, Dialog Semicon-
ductor was forced to adjust its revenue and
earnings targets for the fourth quarter and
fiscal 2004 downwards. Following this
announcement, the share price dropped
significantly by 28 percent to its annual
low of €1.63 (NASDAQ $2.29).
Leading German indices mixed
Annual Report 2004 | 5
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Report
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Notes to the Consolidated
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Corporate
Governance
Finally, as a result of this drastic price slide
in the final days of trading in 2004, Dialog
Semiconductor's share fell 49.7 percent in
total as against its closing price on Decem-
ber 31, 2003.
Looking back over the year, one highlight
was the inclusion of Dialog Semiconductor
in the TecDAX. Thus, since March 22, 2004,
Dialog Semiconductor's share has been
listed in the blue chip index for the 30
largest technology stocks in the Prime
Standard. The share's listing in this index
came as a result of the improved perform-
ance of Dialog Semiconductor's share in
2003 and market and investor confidence
in the progressive change in the company's
business orientation and its impact on the
trend towards profitability. As at December
31, 2004, in the TecDAX league table,
Dialog Semiconductor was placed at 21 for
the criterion of trading volume and at 40
for market capitalization. In the preceding
Share price movement compared to TecDAX
January 2, 2004 - December 30, 2004
months, the share was rated significantly
below 35, the threshold used in semi-
annual reviews. Against this backdrop, the
possibility that Deutsche Börse will remove
the share from the TecDAX in its forthcom-
ing review cannot be ruled out. However, it
has been made clear in the past that consis-
tency is often weighted more heavily as a
review factor than short-term shortfalls.
Taken over the year as a whole, Dialog
Semiconductor has good results in this
context, which would support its remaining
in the TecDAX.
Capital Increase
On September 24, 2004, the company is-
sued 2,000,000 new ordinary shares from
authorized capital at a price of £0.10 per
share for the employee stock option plan,
so as to have shares to serve option rights
granted to employees.
Dialog Semiconductor Plc
TecDAX
in
%
150
125
100
75
50
25
First Quarter Second Quarter Third Quarter Fourth Quarter
Inclusion in the TecDAX
6 | Annual Report 2004
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Market prices
The following table shows, for the periods
indicated, the highest and lowest closing
Frankfurt (DLG)
NASDAQ (DLGS)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
market prices for our shares on the TecDAX
(Xetra) and the NASDAQ:
2004
2003
High
€ 4.49
€ 4.09
€ 3.09
€ 2.94
$ 5.66
$ 5.00
$ 3.75
$ 3.57
Low
€ 3.48
€ 2.69
€ 2.46
€ 1.63
$ 4.40
$ 3.06
$ 3.01
$ 2.29
High
€ 1.31
€ 1.64
€ 3.28
€ 4.39
$ 1.68
$ 1.93
$ 3.80
$ 5.52
Low
€ 0.82
€ 0.85
€ 1.56
€ 2.90
$ 0.95
$ 0.95
$ 1.80
$ 3.45
Average trading volume per day
237,200
253,640
Investor Relations:
Successful Continuation of Dialog with
the Financial Community
Creating and maintaining transparency for
capital market participants – this principle
that all TecDAX companies are required to
follow was again the maxim of Dialog
Semiconductor's financial communication
in fiscal 2004.
On roadshows in London, Frankfurt, Co-
logne and Vienna and at numerous tech-
nology conferences, the Dialog Semicon-
ductor management team addressed and
answered questions put by investors, ana-
lysts and journalists. As is traditional when
publishing annual results, we held a DVFA
analysts’ conference, as well as telephone
conferences on the publication of our quar-
terly results. Furthermore, some 30 individ-
ual meetings were held with investors,
analysts and the press worldwide in fiscal
2004.
We continued to intensively maintain and
extend our investor relations offering on
our home page www.dialog-
semiconductor.com. In addition to the
comprehensive offering of share price
overviews, financial reports and other
information, of particular note here are, for
example, disclosures on all Dialog Semi-
conductor Plc directors' dealings in line
with Section 15a of the Wertpapierhan-
delsgesetz (WpHG – German Securities
Trading Act) under the German Corporate
Governance Code and all disclosures pub-
lished as ad hoc publicity.
Intensive exchange of information
with investors, analysts and the
press
Annual Report 2004 | 7
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Management
Report
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Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Investor Relations Activities in 2004
Date
February 18
March 15 - 16
March 25 - 26
April 27
April 28
May 12
July 21
July 27
September 16
September 21
October 20
November 2
Location
Frankfurt
London
Event
Press and Analyst Conference of 2003 result
Roadshow Kepler Equities
Frankfurt/Cologne
Roadshow Kepler Equities
Frankfurt
DZ Bank Conference
Conference Call
Release of first quarter results
London
Annual shareholders’ meeting
Conference Call
Release of second quarter results
Frankfurt
Vienna
Frankfurt
Roadshow Berenberg Bank
Roadshow Dresdner Kleinwort Wasserstein
Roadshow WestLB
Conference Call
Release of third quarter results
London
Roadshow WestLB
Reporting by Financial Analysts
In the past fiscal year, we continued to
maintain the intensive and ongoing ex-
change of opinions and information with
financial analysts.
The following table shows a selection of
institutes and analysts that published re-
ports on Dialog Semiconductor or covered
our company as part of a peer group analy-
sis for the semiconductor industry in 2004.
Institution
Areté Research
Berenberg Bank
BW Bank
DZ Bank
ING BHF-Bank
Kepler Equities
LBBW
MM Warburg
SES Research
WestLB Panmure
Analyst
Brett Simpson
Dr. Oliver Wojahn
Helmut Bartsch
Harald Schnitzer
Manuel Deimel
Ingo Queiser
Stephan Wittwer
Michael Bahlmann
Oliver Drebing
Dr. Karsten Iltgen
Share Data (share prices refer to Xetra, Frankfurt Stock Exchange)
Stock Exchanges and Symbols
Frankfurt Stock Exchange (Prime Standard) : DLG
Security Identification Number (SIN)
Number of shares as of Dec. 31, 2004
Share price as of Dec. 31, 2004 (in €)
2004 High (in €)
2004 Low (in €)
Performance since offering
Trading volume per day (average 2004)
Market capitalization (in millions of €)
Basic loss per share 2004 (in €)
NASDAQ, USA : DLGS
927 200
46,068,930
1.71
4.49
1.63
(82%)
237,200
79
(0.13)
8 | Annual Report 2004
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Information
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Principal Shareholders
Information regarding entities known by
the company to be beneficial owners of
more than 3 percent of outstanding
shares in the company is shown in the
table below:
Name
Apax Partners
Adtran, Inc.
Ericsson Radio Systems AB
Free float (1)
Total
Number
8,460,793
2,520,960
2,101,554
32,985,623
46,068,930
Percent
18.4
5.5
4.5
71.6
100.0
(1) Of which 4,688,171 shares (10.2%) are held by the Capital Group Companies Inc as notified on January 13, 2005
on behalf of discretionary clients. 2,001,559shares (4.3%) are held by the Dialog Semiconductor Plc Benefit Trust.
Disclosure of Interests
The provisions of the UK Companies Act
of 1985 require that any person acquir-
ing a direct or indirect interest of
3 percent or more of a class of shares
issued by the company (including shares
held in the form of ADSs) with voting
rights at the company's general meetings
.
must inform the company of its interest
within two working days. If the 3 per-
cent interest is exceeded, the shareholder
must inform the company of any in-
crease or decrease of one percentage
point in its interest.
Annual Report 2004 | 9
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Corporate Profile
Innovative IC solutions for wireless,
automotive and industrial electron-
ics
Business Overview
Dialog Semiconductor develops and sup-
plies a range of innovative integrated cir-
cuit (IC) product solutions for wireless,
automotive and industrial electronics sys-
tems. Our background and strengths are in
specific design skills such as mixed signal
circuits, image sensing and processing. Our
business model is a ‘fabless’ one whereby
we design ICs, outsource production of
silicon wafers, and then deliver final chips
to our customers.
Dialog’s customers are designers and
manufacturers of mobile handsets and
portable electronics products, as well as
automotive suppliers. Our chip solutions for
their products range from comprehensive
and highly integrated power management
and audio functions, to image sensors,
image processing and multimedia display
drivers.
History and Development of the Company
Our roots are firmly established in the
design of complex analog and digital cir-
cuits. Dialog Semiconductor originated
from the European activities of a US semi-
conductor company, International Micro-
electronic Products, Inc. ("IMP"), founded
in 1981 in Silicon Valley, specializing in
mixed signal CMOS semiconductor tech-
nology. After being acquired by Daimler-
Benz AG and becoming a part of its sub-
sidiary Temic Telefunken Microelectronic,
Dialog Semiconductor Plc was created as a
result of a subsequent management buy-
out financed by Apax Partners, Adtran and
Ericsson. Then in 1999 we made an initial
public offering on the Frankfurt Stock
Exchange and in 2000 listed on NASDAQ.
In 2002 we acquired the CMOS imaging
business and associated Active Pixel Sensor
(APS) patent portfolio from Sarnoff Corpo-
ration.
Throughout our history we have delivered
several technology firsts. For example, in
1996 we introduced the first system level
CMOS power management device, and four
years later the first combined power man-
agement and audio device for 3G. In imag-
ing, we developed the first digital camera
accessory module in 2001 for a leading
mobile phone manufacturer, and in 2002
we launched a full VGA resolution camera
module as a standard product for high
quality photo imaging and video in mobile
phones and personal digital assistants
(PDAs).
10 | Annual Report 2004
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Global Presence
Our corporate headquarters office is located
near Stuttgart, Germany. To support our
growing customer base in greater China we
recently, in the first quarter of 2005,
opened a new office based in Taipei, Tai-
wan. We have additional offices in Ger-
many as well as Austria, Japan, United
Kingdom and the USA.
New office opened in Taipei
Our Expertise
Dialog Semiconductor’s competitive advan-
tage comes from a strong track record in
designing, manufacturing, testing and
delivering mixed signal circuits produced
entirely in complimentary metal oxide
semiconductor (“CMOS”) technology. Our
core technology expertise is applied across
different target markets, enabling maxi-
mum return on investment from our re-
search and development while delivering
the latest technology products for each of
these chosen markets.
For example, the technology that helps us
optimize power usage, processes audio
signals, and convert analog or digital data
for wireless handsets also provides us with
the ability to deliver competitive solutions
in automotive, industrial and imaging
applications.
Our Employees
In the year ended December 31, 2004 our
global workforce grew to 296 employees in
eight locations worldwide, the majority of
whom are employed in R&D functions. This
represents an 8% headcount increase com-
pared with 273 employees at the end of the
preceding year.
Annual Report 2004 | 11
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Our Mission and Strategy
Dialog Semiconductor’s mission 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”
Achieving this mission requires a clearly
focused strategy that we have developed
based on:
(cid:132) Expanding relationships with key
industry leaders
(cid:132) Building on a common technology
platform
(cid:132) Marketing standard product solu-
tions
(cid:132) Proactively refining customers’ sys-
tem architecture
(cid:132) Expanding engineering expertise
(cid:132) Selectively expanding global capa-
bilities
(cid:132) Remaining focused on our existing
business model
(cid:132) Delivering the highest quality prod-
ucts
The success of this strategy is demon-
strated by the strong and growing rela-
tionships developed with some of our
high profile, high volume customers.
They see Dialog Semiconductor as a
flexible partner and integral part of their
overall supply chain.
We work with our customers to rapidly
develop appropriate responses, both
technically and commercially, to chang-
ing market trends and requirements.
Through our relationships with partners
and manufacturers, we then ensure rapid
delivery of quality-approved products to
the customer.
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Our Solution
Dialog Semiconductor’s products address
the needs of original equipment manufac-
turers (OEMs) requiring either standard
products or customer-specific silicon. We
design, develop and deliver mixed signal
components and system level solutions
based on our technology expertise in key
areas such as power management, audio-
CODECS, imaging and system-on-a-chip
integration.
Our solutions address two major market
requirements in:
(cid:132) Wireless communication electronics
(cid:132) Automotive and industrial electronics
In wireless applications, key factors driving
the pace of development of our product
solutions are the rapid evolution of smaller
and more sophisticated devices packed with
advanced capabilities such as wireless
communications, digital camera, video and
audio.
This places huge demands on the power
management and requires excellent imag-
ing and displays. Dialog Semiconductor’s
strength in developing highly integrated
power management and audio chips enable
optimum use of the battery to prolong
usage time, and provide high performance
audio playback at the same time. In addi-
tion, our excellent image sensors, image
processing and display drivers enhance the
user experience with the camera and
graphical user interface.
In automotive and industrial, our products
address the safety, management and con-
trol of electronics systems in the car; and
highly integrated smart power electronics
management systems such as electronic
ballasts for lighting.
With all our products, our customers ac-
knowledge our leadership in creating inno-
vative silicon solutions in 100% CMOS
technology - fully tested and delivered
quickly to achieve competitive time-to-
market objectives.
We address two major markets:
Wireless
Automotive /
Industrial
Annual Report 2004 | 13
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Our Principal Products
Dialog Semiconductor’s products utilize
common technology platforms to deliver
unique, highly integrated and high per-
formance capabilities for selected target
applications.
(cid:132) Smart mirror™ LDO (low dropout volt-
age) regulators – minimizing current
consumption and simplifying circuit
design
Our main product categories are:
(cid:132) High efficiency buck and boost con-
(cid:132) Power management and audio ICs
(cid:132) Camera modules
(cid:132) Liquid crystal display drivers
(cid:132) Application specific ICs
Power Management and audio ICs
The drive towards smaller and more sophis-
ticated portable consumer electronics prod-
ucts puts the challenge to designers and
manufacturers to achieve maximum battery
life. Effective power management is there-
fore an increasingly vital part of the system
– an area in which Dialog Semiconductor
has considerable experience as a result of
designing chips for hundreds of millions of
cellular handsets. We continue to develop
new power management products such as
the DA9030 and DA9011 introduced during
2004.
Combined with our expertise in integrating
both low voltage and high voltage circuits
for car electronics and lighting control
systems, we also deliver custom and intelli-
gent power management solutions for
automotive and industrial electronics sys-
tems.
Our chips for cellphones take advantage of
the benefits of integrating high perform-
ance audio CODEC functions with power
management circuits. The two are comple-
mentary functions that can be designed
onto a single chip, enabling one chip to
both improve battery life and provide digi-
tal audio playback or hi-fi quality voice.
This results in unique power management
and audio chips which are highly inte-
grated and can contain over 30 different
functions, all in a single chip. Typical func-
tions include:
verters – designed for efficiencies over
90% with currents up to 500mA
(cid:132) Programmable multiple chemistry bat-
tery chargers – handling all common
battery technologies, NiMH, LiJon and
polymer
(cid:132) Audio CODECs with up to 24-bit capa-
bility for digital audio player algo-
rithms and based on Dialog’s own digi-
tal signal processing (DSP) designs op-
timized for minimum power consump-
tion and silicon area
Camera modules
Since developing the first digital camera
accessory module for a leading mobile
handset manufacturer in 2001, and acquir-
ing the CMOS imaging business and associ-
ated patent portfolio from Sarnoff Corpora-
tion in 2002, Dialog Semiconductor has
developed a range of standalone CMOS
image sensors and complete modules con-
sisting of sensor, image DSP, lens, housing
and connector.
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.
The relationship between our companies is
a powerful one that we expect to shape a
growing market for high quality camera
phones.
Our high-resolution, high performance
sensors and modules are ideal for embed-
ding into wireless handsets and hand-held
electronics. In addition the high sensitivity
of the pixels and processing capability
down to each pixel makes our image sensor
technology the ideal choice for automotive
systems, where near real-time response is
required.
New power management IC:
DA9030
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Key features of our CMOS image sensors
include:
(cid:132) Superior video in outdoor uncontrolled
lighting
(cid:132) High confidence image capture
(cid:132) Fast response
(cid:132) Very low power and low voltage re-
quirements
(cid:132) High resolution still and streaming
video modes
Liquid Crystal Display Drivers
In 2004 we announced availability of a
brand new range of color liquid crystal
display (LCD) drivers providing real inno-
vation for the mobile phone display market.
Delivered as standard parts ready for pro-
duction, the DA89xx family delivers supe-
rior 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 spe-
cially 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
excellent resolution of up to 65,000 colors,
and address a demand for higher perform-
ance 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 inte-
grated graphic display memory with high
speed interfaces and various power man-
agement 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 (ASICs)
Although we are increasingly seeing stan-
dard product solutions addressing a vast
majority of customer requirements in our
target markets, there is still a demand from
some customers for custom solutions.
These ASIC solutions are based on our in-
house expertise in mixed signal design, and
in integrating complex analog high voltage
(up to 40V) and other low voltage circuits,
all produced in mainstream CMOS technol-
ogy.
Our expertise is based on many years of
experience, proven in-house technology,
and the latest CAD tools to rapidly develop
leading-edge application specific ICs. This
experience is gained from delivering cus-
tom solutions for cellular phone handsets,
in automotive electronics systems, and in
industrial systems.
In cellular phones for example, we have
developed over 50 different power man-
agement 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 inte-
grated audio functions on to the same chip
– exploiting the complementary nature of
power and audio sub-systems.
In automotive electronics, our ASICs con-
trol safety, engine management, and com-
fort electronics for the top automobile
manufacturers. This exploits Dialog’s com-
petence in power management systems and
mixed signal design, together with knowl-
edge of integrating high performance ana-
log circuits and high-density digital logic
and high voltage circuits on a single chip
in a standard CMOS process. Our partner-
ship with leading automotive equipment
suppliers has also resulted in developing
chips able to connect directly to high volt-
age circuits of up to 40V.
In industrial systems, our single chip solu-
tions integrate high voltage low power
Color LCD driver: DA8912A
Annual Report 2004 | 15
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circuits for electronic ballasts used to con-
trol 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 applica-
tions such as computer and mobile com-
munications 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 capa-
bility from a process.
Our Principal Customers
Our principal customers are recognized
wireless communications, consumer elec-
tronics, and automotive equipment manu-
facturers. These customers are for both our
standard products introduced over the last
two years, as well as application specific
(ASIC) products.
The rapidly evolving technology in all our
target market sectors means that a partner-
ship approach with our customers is essen-
tial – whether it is for standard products or
for custom solutions. Hence our customers
look to Dialog as an outside source of
Our Product Cycle
As a fabless semiconductor manufacturer,
our focus is on developing the products and
technology, and then delivering quality-
approved products to our customers. Hence
we design, develop and supply mixed sig-
nal ASICs and ASSPs, outsource the actual
manufacture of wafers and assembly to
selected foundries and assemblers, and then
test the products in-house, before final
delivery to customers. The product cycle is
as follows:
(cid:132) Design and development
(cid:132) Manufacture of wafers
(cid:132) Assembly and testing
(cid:132) Quality and environment control
expertise, while the close working relation-
ship provides us with an opportunity to
continually develop and fine-tune market
leading technological expertise with recog-
nized industry leaders.
Long-term relationships with our customers
include those with Ericsson, Motorola and
Siemens for wireless communications;
Adtran for wireline communications appli-
cations; Bosch and Conti Temic for auto-
motive applications; and Tridonic for in-
dustrial applications.
Design and development
Our customers gain significant advantage
from our ability to rapidly develop mixed
signal ASIC and ASSP designs, fostered
through many years of design experience
and a highly skilled engineering staff of
over 150 professionals. Evolving designs
are constantly monitored through our
design library database, and we achieve
rapid design cycles through our strategy of
modifying and reusing previously designed
building blocks.
We use industry standard design tools from
suppliers such as Cadence Design Systems,
Inc. to increase design automation and top-
level simulation to identify system design
incompatibilities at an early stage.
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Our focus is on furthering our technology
expertise in power management, audio-
CODECs, image sensors and systems, and
display driver technology. We also ensure
that our process teams are up to date with
the latest commercially available CMOS
manufacturing technologies.
Our total spend on research and develop-
ment in 2004 was €29 million. This re-
source was focused on enhancing our soft-
ware development, state-of-the-art digital
system design, leading edge analog design,
as well as test systems.
Manufacture of wafers
We outsource our wafer production to
selected foundries with a demonstrated
ability to provide high quality products on
tight deadlines. Foundries we use include
Chartered Semiconductor Manufacturing
Pte., Ltd. in Singapore and Taiwan Semi-
conductors Manufacturing Co., Ltd.
(“TSMC”).
Our choice of technology is CMOS rather
than bipolar, primarily because CMOS
devices consume less power and permit
more transistors to be integrated on a sin-
gle chip, essential for the target markets we
address.
We always aim to ensure that all steps in
the manufacturing process can be provided
by at least two suppliers, in order to pre-
vent 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. We also place, where possible,
our own process engineers directly at the
fab premises to resolve any potential engi-
neering issues and to ensure both the qual-
ity and timely delivery of the finished
product.
Assembly and testing
We outsource final assembly of the chips
from the wafers to various sub-contractors
in the Far East and Europe. Completely
assembled chips are then returned to Dialog
Semiconductor for final testing before
delivery to the customer. All our chips are
tested in-house, and no product is delivered
to a customer unless it has been tested and
approved.
Our rigorous testing approach allows us to
ensure overall quality control of our manu-
factured products. The test programs devel-
oped by our test engineers are based upon
specifications determined by individual
customers as well as our own standard
product specifications, and are developed in
parallel with the design. Our test equipment
is regularly calibrated to ensure the accu-
racy of test parameters.
Quality and environment control
Dialog Semiconductor’s policy is to supply
products and services in full compliance
with relevant specifications to ensure cus-
tomer requirements are met. Hence our
quality management system has been es-
tablished and is maintained to provide
customers with the assurance that our
products and services fulfil both their con-
tractual requirements as well as future
needs. Our main target is to achieve ‘Zero
Fails’.
An uncompromising approach to quality
assurance in every area of our operations,
through active participation from every
employee within the company, produces a
highly structured quality environment that
has resulted in Dialog Semiconductor being
approved by all our major blue-chip cus-
tomers.
In addition to ensuring the highest levels of
product quality and operational efficiency,
we also believe in a commitment to envi-
ronmentally friendly products. Responsibil-
ity for nature and the environment have
been an important part of our company
philosophy and activities since 1999. Our
aim is to minimize adverse environmental
impacts by advancing environmentally
compatible product design and environ-
mentally friendly activities.
As part of this commitment, we maintain a
certified environmental management sys-
tem in accordance with international stan-
Annual Report 2004 | 17
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dards (ISO14001). Awareness and knowl-
edge of environmental issues is promoted
throughout the organization so that it
becomes a natural part of the decision
making process.
As a fabless semiconductor company, Dia-
log Semiconductor’s business model is
based on strategic outsourcing. In order to
achieve the highest quality we must de-
mand world-class quality standards from
both our fabrication and assembly partners
as well as our own internal processes to
increase our customers’ confidence in our
products. Dialog Semiconductor is accred-
ited to QS9000/ISO9001:2000/ISO14001
and as an extension of this practice it is
our policy to build partnerships with sup-
pliers that are also qualified to the same
international quality standards.
.
18 | Annual Report 2004
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Management Report
The following discussion of our financial
condition and results of operations
should be read in conjunction with the
audited financial statements included in
this annual report, which have been
prepared in accordance with US GAAP.
Executive Summary
We are a global supplier of power man-
agement, audio and imaging technology,
delivering innovative mixed signal stan-
dard products as well as application spe-
cific integrated circuits for wireless, auto-
motive and industrial applications. To date,
we have shipped over 500 million inte-
grated circuits for cellular phones. We
operate in intense competitive markets and
our customers select us based upon numer-
ous 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 sub-
sequent 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. Part-
nerships 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 activi-
ties, which are essential for us to respond
to our customers’ cutting edge silicon solu-
tions requirements and also maintain our
competitiveness in our market. Conse-
quently, it is critical for us to make signifi-
cant and ongoing cash expenditures to
fund our research and development activi-
ties. We have also made significant invest-
ments in long-lived assets, primarily for
our in-house test equipment.
We have a significant amount of liquid
assets on hand, primarily from the remain-
ing 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 in-
vestments and deposits. Substantially all of
our near term future cash inflows are ex-
pected to come from the sale of our prod-
ucts. 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 prod-
ucts for new customers; such new products
include a range of color liquid crystal dis-
play drivers, image sensors and camera
modules. Material opportunities we envi-
sion 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, profitabil-
ity and growth could decline if the growth
in these markets slows.
We believe that our key performance indi-
cators 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.
More than 500 million ICs shipped
New products reduce dependency
on few customers
Operating profit is a key perform-
ance indicator
Annual Report 2004 | 19
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Operating and Financial Review
Forward-looking statements.
This annual report contains “forward-
looking statements”. All statements regard-
ing 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, uncer-
tainties 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 economic conditions and
conditions in the semiconductor and tele-
communications 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, com-
mercialization and technological difficul-
ties, 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 uncer-
tainties. We do not assume the obligations
to update forward-looking statements.
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
Euros and as a percentage of revenues:
(in thousands of €)
Revenues
Cost of sales
Gross margin
Selling and marketing expenses
General and administrative expenses
2004 % of
2003
revenues
% of
revenues
2002
% of
revenues
116,044
100.0
92,893
100.0
77,104
(79,783)
(68.8)
(62,374)
(67.2)
(57,409)
36,261
(6,237)
(5,462)
31.2
30,519
32.8
19,695
(5.3)
(4.7)
(4,197)
(5,044)
(4.5)
(5.4)
(4,149)
(6,447)
Research and development expenses
(29,071)
(25.0)
(30,590)
(32.9)
(34,530)
Amortization of intangible assets
(1,520)
(1.3)
(2,073)
(2.2)
(1,975)
100.0
(74.4)
25.6
(5.4)
(8.4)
(44.8)
(2.5)
Restructuring and related impairment
charges
Operating loss
Interest income, net
Foreign currency exchange gains and
losses, net
Recovery of investment
(59)
(0.1)
(1,839)
(2.0)
-
-
(6,088)
(5.2) (13,224)
(14.2) (27,406)
(35.5)
1,081
0.9
757
0.8
1,121
1.5
(726)
54
(0.6)
-
(454)
315
(0.5)
(1,918)
0.3
11,969
(2.5)
15.5
Result before income taxes
(5,679)
(4.9) (12,606)
(13.6) (16,234)
(21.0)
Income tax (expense) benefit
(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)
20 | Annual Report 2004
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Results of Operations
Revenues
Revenues were €116.0 million for the year
ended December 31, 2004 compared with
€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 auto-
motive markets which more than offset a
decline in revenues in our industrial appli-
cations sector during the period. Revenues
in the wireless communications sector were
€90.6 million for the year ended December
31, 2004 compared with €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 €11.9 million and €7.9 million, repre-
senting 10% and 9% of our total revenues
in 2004 and 2003, respectively. Revenues
from our industrial applications sector were
€13.5 million or 12% of total revenues in
2004 and €15.1 million or 16% of total
revenues in 2003.
Regional growth was particularly strong in
Asia where revenue increased from €24.9
million (China €18.2 million, other Asian
countries €6.7 million) to €42.1 million
(China €19.7 million, other Asian countries
€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 intro-
duction 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 out-
sourcing production and assembly, related
personnel costs and applicable overhead
and depreciation of test and other equip-
ment. Cost of sales increased by 28% from
€62.4 million (67.2% of our total revenues)
for the year ended December 31, 2003 to
€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 €4.2 million for year ended December
31, 2003 to €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 con-
sist primarily of personnel and support
costs for our finance, human resources,
information systems and other manage-
ment departments. General and administra-
tive expenses increased from €5.0 million
for the year ended December 31, 2003 to
€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.
Revenues (in millions of €)
100
50
0
2002
2003
2004
Cost of Sales (in millions of €)
0
-50
-100
2002
2003
2004
Annual Report 2004 | 21
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Corporate
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Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Research and Development Expenses
Research and development expenses princi-
pally consist of design and engineering
related costs associated with the develop-
ment of new application specific integrated
circuits (“ASICs”) and application specific
standard products (“ASSPs”). Research and
development expenses decreased 5% from
€30.6 million for the year ended December
31, 2003 to €29.1 million for the year
ended December 31, 2004. The decrease in
research and development expenses primar-
ily results from continued cost savings
following the closure of our Swedish sub-
sidiary. Research and development ex-
penses decreased from 32.9% to 25.0% as a
percentage of total revenues resulting both
from the absolute decrease and the propor-
tionately higher revenue base.
Amortization of Intangible Assets
Intangible assets subject to amortization
include ASIC design software, a 16-bit
microcontroller, licenses and certain imag-
ing patents. Amortization expense for the
year ended December 31, 2004 was €1.5
million as compared to €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 €1.5 million and
impairment charges of €0.3 million, total-
ing €1.8 million for the year ended Decem-
ber 31, 2003. In 2004 we settled a lease
obligation in connection with the closure
and incurred additional costs of
€0.1 million. See Note 3 to the consolidated
financial statements for further informa-
tion.
Operating Loss
We reported an operating loss of €6.1
million for the year ended December 31,
2004 and €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
€0.8 million for the year ended December
31, 2003 to €1.1 million for the year ended
December 31, 2004 reflecting higher cash
equivalents and marketable securities bal-
ances during 2004.
Foreign Currency Exchange Gains and
Losses, net
Foreign currency transaction gains and
losses result from amounts ultimately real-
ized upon settlement of foreign currency
transactions and from the period end re-
measurement of foreign currency denomi-
nated receivables, prepaid expenses and
payables into Euro. Foreign currency ex-
change losses, net were €0.7 million for the
year ended December 31, 2004 and €0.5
million for the year ended December 31,
2003.
Recovery of Investment
In the fourth quarter of 2001, we deter-
mined that our ability to recover the full
amount of our investments in silicon sup-
plier ESM Holding Limited (“ESM”) was
impaired. Accordingly we wrote off our
investments in ESM. In March 2002, Inter-
national Rectifier acquired ESM. As a result
we were able to recover €0.1 million and
€0.3 million for the years ended December
31, 2004 and 2003, respectively.
Income Taxes
Income tax expense was €0.1 million for
the year ended December 31, 2004 com-
pared with €7.8 million income tax ex-
pense 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 €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 fur-
ther information.
Research and Development Expenses
(in millions of €)
0
-25
-50
2002
2003
2004
Operating Loss (in millions of €)
0
-25
-50
2002
2003
2004
22 | Annual Report 2004
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Management
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Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
manufacturers increasingly using addi-
tional 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. There
will most likely be an explosion in other
mobile gaming and entertainment possibili-
ties 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 Con-
tributor to Wireless Data Usage and Reve-
nues").
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 De-
cember 2004).
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 communica-
tions 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 De-
cember 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, repre-
senting 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 mar-
keting 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 dou-
ble in size in 2005 as usability and styling
is improved.
Overall wireless handset shipment growth
was up last year, as a result of technologi-
cal 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
More than 20 million 3G phones
shipped in 2004
WCDMA technology ready for
commercial launch as networks
improve and handsets become
generally available
Annual Report 2004 | 23
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Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 sys-
tems built in to the car.
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 in-
crease 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 €24.9 million for the year ended
December 31, 2003 to €42.1 million for the
year ended December 31, 2003, respec-
tively. Particularly in France, we experi-
enced decline in demand for our ASIC
products where revenue decreased by 58%
from €4.5 million for the year ended De-
cember 31, 2003 to €1.9 million for the
year ended December 31, 2004, due primar-
ily 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 €31.5
million for the year ended December 31,
2002 to €45.4 million for the year ended
December 31, 2003 and from €13.0 million
for the year ended December 31, 2002 to
€18.2 million for the year ended December
31, 2003, respectively. In 2003, particularly
in France, we experienced decline in de-
mand for our ASIC products where revenue
decreased from €9.3 million for the year
ended December 31, 2002 to €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 communica-
tion ICs were the primary factors contribut-
ing to this decrease in our gross margin.
Research and Development Expenditure
Trends
Research and development costs amounted
to €29.1 million in 2004, €30.6 million in
2003 and €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 gener-
ate 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 produc-
tion.
Foreign Currency Exchange Rate Trends
The reporting currency for our consolidated
financial statements is the Euro. The func-
tional currency for our operations is gener-
ally the applicable local currency. Accord-
ingly, 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 state-
ments for further information. Changes in
exchange rates also influence our results of
operations. Our sales are primarily denomi-
nated in US Dollars and Euro, whereas our
purchases of raw materials and manufac-
turing services are primarily denominated
in US Dollars.
In order to hedge our foreign currency
exposure, primarily the US Dollar, we at-
tempt to match cash inflows and outflows
in the same currency.
Gross Margin (in millions of €)
50
25
0
2002
2003
2004
24 | Annual Report 2004
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 de-
clined 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, prin-
cipally the US Dollar, will affect the trans-
lation 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 transac-
tions to hedge against exchange rate fluc-
tuations.
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 de-
nominated in US Dollars. Due to the weak-
ening of the US Dollar in the fourth quarter
and a higher proportion of US Dollar-
denominated revenue compared with previ-
ous quarters combined with lower than
expected uptake from key customers, our
revenue growth was lower in the fourth
quarter compared with the first three quar-
ters 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 denomi-
nated in Euro and 75% was denominated in
US Dollars. For the year ended December
31, 2002, 76% of our revenues were de-
nominated in Euro, 23% were denominated
in US Dollars and 1% were denominated in
Pound 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 €8.6
million for year ended December 31, 2004
compared with cash provided by operating
activities of €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 secu-
rities) had decreased primarily due to con-
tractually required refunds of advance
payments from a silicon supplier which
resulted in a related operating cash inflow.
Cash provided by investing activities was
€14.5 for year ended December 31, 2004
compared with cash used for investing
activities of €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 €27.4
million offset in part by the purchase of
test equipment, tooling (masks), laboratory
and EDP equipment of €12.3 million, and
the purchase of software, licenses and
patents of €0.7 million. Cash used for in-
vesting activities for the year ended De-
cember 31, 2003 consisted mostly of the
purchase of marketable securities of €45.0
million, the purchase of test equipment,
tooling (masks), laboratory and EDP
equipment of €5.9 million, and the pur-
chase of software, licenses and patents of
€1.4 million. In October 2003, we also
received an early repayment of our deposit
of €21.7 million (USD 20 million) from
Chartered.
Annual Report 2004 | 25
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Liquidity
At December 31, 2004 we had €14.0 mil-
lion in cash and cash equivalents and €17.5
million in marketable securities. The work-
ing capital was €67.1 million.
Our primary sources of liquidity have his-
torically 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 de-
posit 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 indus-
try 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 €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 fund-
ing 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 €12.3 million for the year ended
December 31, 2004 compared to
€5.9 million for the year ended December
31, 2003 and €3.9 million for the year
ended December 31, 2002. Our capital
expenditures in 2004, 2003 and 2002 con-
sisted primarily of purchasing new or re-
placement 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 sys-
tems 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 install-
ments of €0.3, €0.8 and €1.5 million, re-
spectively, for the CMOS imaging technol-
ogy 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 arrange-
ments 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 (€ thou-
sands)
(in thousands of €)
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 obliga-
tions 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 €1.2 million with one
supplier, which will be refunded in propor-
tion to our purchases of wafers. See
Note 11 to the consolidated financial
statements.
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.
26 | Annual Report 2004
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Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Critical Accounting Policies and Related Uncertainties
We have identified the following ac-
counting policies and related uncertain-
ties 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 €11.8 million.
Since 2002, goodwill is no longer amor-
tized, but we have, and will continue to
evaluate the recoverability of our good-
will 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 share-
holders’ 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 as-
sumptions 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 im-
paired. 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, equip-
ment and intangible assets (other than
goodwill). At December 31, 2004, the
carrying amount of our property, plant
and equipment was €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 when-
ever 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 ex-
pected to be generated by the asset or
group of assets. If the asset or group of
assets is considered impaired, the im-
pairment 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 ex-
pected to be generated by our long-lived
assets. It is reasonably possible that our
future operating results could be materi-
ally and adversely affected by an im-
pairment charge related to the recover-
ability of our long-lived assets.
Realizable Value of Inventories
We value inventory at the lower of cost
or market. We review the recoverability
of inventory based on regular monitor-
ing of the size and composition of the
inventory positions, market conditions,
current economic events, the pricing
environment and projected future de-
mand. This evaluation is inherently
judgmental and requires material esti-
Annual Report 2004 | 27
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 addi-
tional valuation allowance of €1.9 mil-
lion and €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 ex-
pected to be ultimately realized.
mates, including both forecasted product
demand and pricing environment, both
of which may be susceptible to signifi-
cant change.
Changes in estimates regarding the
realizability of the carrying value of our
inventory has resulted in excess inven-
tory provision of €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 €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 tech-
nological 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 inven-
tory charges are needed.
Realization of Deferred Tax Assets
Total deferred tax assets, before the
recognition of valuation allowances,
were €31.2 million at December 31,
2004, which include deferred tax assets
of €25.2 million on tax loss carryfor-
wards. While the majority of these losses
may be carried forward indefinitely,
their realization is dependent on gener-
ating sufficient taxable income to utilize
the losses. In December 2003, the Ger-
man government enacted new tax legis-
lation, which among other things, limits
the use of German tax-loss carryfor-
wards to 60% of the taxable income for
fiscal years starting from 2004 and
thereafter. We have evaluated our de-
ferred 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
28 | Annual Report 2004
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Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Risk Factors
The market in which we compete is
characterized by continuous develop-
ment 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 which satisfy customers'
desires, and to keep abreast of techno-
logical changes within the semiconduc-
tor industry generally. It is not possible
to predict or identify all relevant risk
factors and, therefore, the following list
should not be considered to be a com-
plete statement of all potential risks or
uncertainties.
(cid:132) We have not been profitable for the
last four fiscal years, and there is no
guarantee that we will return to
profitability
(cid:132) We currently depend on a few cus-
tomers 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
(cid:132) Our revenues, profitability and
(cid:132)
growth could decline if the growth of
the wireless communications market
slows
If we are unable to adapt rapidly to
changing markets and technology,
we may lose customers and be un-
able to develop new business
(cid:132) The semiconductor industry is highly
cyclical in nature and this results in
periodic overcapacity
(cid:132) We face intense competition, and if
we are unable to compete effectively
or if we are unable to adapt rapidly
to changing markets and technology,
we could lose customers and be un-
able to develop new business
(cid:132) The loss of one of our principal
foundry relationships or assembly
services or a delay in foundry or as-
sembly production may result in a
material loss of production and
revenues
(cid:132) Obtaining access to manufacturing
capacity at semiconductor manufac-
turing plants may become increas-
ingly difficult and could result in
higher costs and a material loss of
revenues
(cid:132) Perceived health risks relating to
cellular handsets could lead to de-
creased demand for ASICs
(cid:132) Our business, financial condition and
reputation may be materially ad-
versely affected if our ASICs, or the
electronic systems of which they are
a part, contain defects that cause
damage or injury
(cid:132) Our products are difficult to manu-
facture and manufacturing defects
can adversely affect our results
(cid:132) We may not be able to remain com-
petitive if we lose any of our key ex-
ecutives or if we cannot hire and re-
tain qualified engineers and sales
and marketing personnel
If we are unable to protect our intel-
lectual property and knowhow from
being copied or used by others, our
competitors may gain access to its
content and technology
(cid:132)
(cid:132) The profitability of our business may
be adversely affected by currency
fluctuations and by the economic
and legal developments in the coun-
tries where we conduct our business
(cid:132) We may become a passive foreign
investment company
(cid:132) US-resident shareholders may find it
more difficult to protect their inter-
ests than they would as shareholders
of a US-based corporation
(cid:132) Our future operating results could be
materially affected if judgments un-
derlying any of our accounting poli-
cies were to significantly change
Annual Report 2004 | 29
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Outlook
In recent years, convergence of mobile
communications and multimedia has been
talked about as a key driver for growth in
the electronics industry. Dialog Semicon-
ductor expects 2005 to be the first year
when this is expected to have a major
impact on our business.
Convergence will drive growth in ship-
ments of our integrated circuits (ICs) for
power management and color LCD displays
as well as camera modules featuring ad-
vanced optics for wireless and consumer
electronics products. In addition, we ex-
pect to see further advances in the use of
image sensors in automotive and industrial
electronics on top of our established market
in safety and comfort electronics in cars.
While mobile phone handset growth is
expected to rise progressively to 763 mil-
lion handsets in 2008 (from 629 million in
2004, source: Gartner Market Focus Report:
“Semiconductors in Mobile Phones, World-
wide, 2004-2008”, 24 December 2004), we
are now supplying more than just the
power management and audio IC that
represented the traditional slot for Dialog
Semiconductor in the handset. Expansion
of our product range over the last three
years not only addresses more elements of
the handset and smartphone, but also ex-
tends to other portable consumer electron-
ics devices like PDAs (personal digital
assistants) and personal audio players (such
as MP3).
Asia plays a strong part in this growth of
wireless and consumer electronics, which is
why we have also strengthened our opera-
tions in the region with our new southeast
Asia office for local sales, marketing and
technical support to a growing customer
base.
In the wireless sector, some of the market
indicators illustrate where greater demand
is likely to emerge for our diversified range
of ICs and modules for the mobile phone.
Worldwide annual shipments of camera
phones was up more than 200% in 2004
(source: In-Stat/MDR press release, 14
December 2004, "Camera Phone Market
Continues to Boom - 200% Growth in
Annual Shipments"), and CMOS image
sensor shipments will grow at roughly
seven times the rate of CCDs (charge cou-
pled devices) through 2008 (source: In-
Stat/MDR press release, 18 October 2004,
"Camera Phones and Digital Still Cameras
Driving Market for CMOS and CCDs").
CMOS sensors offer lower prices, lower
power consumption, and the ability to
integrate other functions on chips, making
them ideal for camera phones. We have
introduced camera modules that improve
picture quality due to world-class optics
from Carl Zeiss, and provide excellent
image sensor performance.
As operators look to increase ARPU (aver-
age revenue per user), mobile gaming ser-
vices are expected to generate 4.4% of total
wireless data revenues of US$1.8 billion in
the USA by 2009; gaming downloads will
also increase 10-fold from 2003 levels
(source: In-Stat/MDR press release, 7 Sep-
tember 2004, "Gaming to be Key Contribu-
tor to Wireless Data Usage and Revenues").
The implication in the US and worldwide is
that handsets will need both advanced
color graphic display capability and ex-
tremely efficient power management sys-
tems.
In the automotive sector, we are expecting
more interest in our imaging systems ad-
dressing applications such as lane departure
warning and blind spot detection.
Overall, Dialog Semiconductor believes the
prospects for growth during 2005 are posi-
tive as a result of our transition to both
developing more application specific stan-
dard products (ASSPs) for emerging ‘con-
vergence’ applications in wireless and
consumer electronics, as well as addressing
the needs of our application specific IC
(ASIC) customers in the more traditional
but advancing automotive and industrial
electronics markets.
30 | Annual Report 2004
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Report of Independent Registered
Public Accounting Firm
In our opinion, the consolidated financial
statements referred to above present fairly,
in all material respects, the financial posi-
tion of Dialog Semiconductor Plc and sub-
sidiaries 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
Wirtschaftsprüfungsgesellschaft
To the Board of Directors of Dialog Semi-
conductor Plc:
We have audited the accompanying con-
solidated balance sheets of Dialog Semi-
conductor Plc and subsidiaries (the “Com-
pany”) 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 state-
ments are the responsibility of the Com-
pany'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 signifi-
cant 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.
Annual Report 2004 | 31
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Consolidated Financial Statements
Consolidated Financial Statements
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to the Consolidated Financial Statements
Other Disclosures to the Statements of Operation
Summary of Significant Accounting Policies
Restructuring and Related Impairment Charges
Recovery of Investment
1. General
2.
3.
4.
5.
6.
7. Additional Cash Flow Information
8.
Trade Accounts Receivable, net
9.
10. Marketable Securities
11. Deposits and Prepaid Expenses
Income Taxes
Inventories
12. Property, Plant and Equipment, net
13.
Intangible Assets and Goodwill
14. Accrued Expenses
15. Shareholders' Equity and Comprehensive Income
16. Pension Scheme
17. Stock-based Compensation
18. Commitments
19. Financial Instruments and Hedging Activities
20. Segment Reporting
21. Transactions with Related Parties
Corporate Governance
Report of the Board of Directors
Accounting under International Financial Reporting Standards (IFRSs)
Corporate Governance Principles
Members of the Board of Directors
33
34
35
36
37
38
38
39
42
42
43
43
45
45
45
45
46
46
46
47
47
47
48
49
49
50
51
52
52
52
53
56
Annual Report 2004 | 33
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Consolidated Statements of Operations
(in thousands, except per share data)
Revenues
Cost of sales
Gross margin
Selling and marketing expenses
General and administrative expense
Research and development expenses
Amortization and intangible assets
Restructuring and related impairment charges
Operating loss
Interest income, net
Foreign currency exchange gains and losses, net
Recovery of investment
Result before income taxes
Income tax (expense) benefit
Net loss
Loss per share:
Basic and diluted
Weighted average number of shares (in thousands):
Basic and diluted
Notes
2004
2004
2003
2002
20
$ 157,100
€ 116,044
€ 92,893
€ 77,104
5
(108,010)
(79,783)
(62,374)
(57,409)
49,090
36,261
30,519
19,695
(8,444)
(7,394)
(6,237)
(5,462)
(4,197)
(5,044)
(4,149)
(6,447)
(39,356)
(29,071)
(30,590)
(34,530)
(2,058)
(1,520)
3
(80)
(59)
(2,073)
(1,839)
(1,975)
–
(8,242)
(6,088)
(13,224)
(27,406)
1,463
(983)
73
1,081
(726)
54
757
(454)
315
1,121
(1,918)
11,969
(7,689)
(5,679)
(12,606)
(16,234)
(86)
(64)
(7,814)
6,026
(7,775)
(5,743)
(20,420)
(10,208)
4
6
(0.18)
(0.13)
(0.46)
(0.23)
44,025
44,025
43,951
43,888
The accompanying notes are an integral part of these Consolidated Financial Statements
34 | Annual Report 2004
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Consolidated Balance Sheets
(in thousands)
ASSETS
Cash and cash equivalents
Trade accounts receivable, net
Inventories
Marketable securities
Deferred taxes
Prepaid expenses
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets
Goodwill
Deposits
Deferred taxes
Prepaid expenses
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Trade accounts payable
Accrued expenses
Income taxes payable
Deferred taxes
Other current liabilities
Total current liabilities
Deferred taxes
Total liabilities
Ordinary Shares
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Employee stock purchase plan shares
Shareholders’ equity
Notes Dec 31, 2004 Dec 31, 2004 Dec 31, 2003
8
9
10
6
11
12
13
13
11
6
11
14
6
6
15
$ 18,922
€ 13,977
32,540
40,335
23,749
950
834
380
24,036
29,794
17,542
702
616
281
€ 8,109
14,338
13,242
44,900
103
2,131
993
117,710
86,948
83,816
28,752
5,775
15,956
263
22,270
1,458
21,238
4,266
11,786
194
16,450
1,077
20,590
5,440
11,786
183
17,729
927
192,184
141,959
140,471
20,888
4,175
12
9
1,726
26,810
1,381
28,191
9,515
228,497
(72,323)
(1,294)
(402)
15,429
3,084
9
7
1,275
19,804
1,020
20,824
7,028
168,782
(53,422)
(956)
(297)
7,157
3,165
18
4
1,615
11,959
1,669
13,628
6,737
168,795
(47,679)
(984)
(26)
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
Annual Report 2004 | 35
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Recovery of investment
Provision for excess inventory
Restructuring and related impairment charges
Depreciation of property, plant and equipment
Amortization intangible assets
Losses on disposals of fixed assets
Increase in deferred tax asset valuation allowance
Other changes in deferred taxes
Changes in current assets and liabilities:
Trade accounts receivable
Inventories
Prepaid expenses
Trade accounts payable
Accrued expenses
Income taxes payable
Other assets and liabilities
Cash provided by (used for) operating activities
Cash flows from investing activities:
Recovery of investment
Purchases of property, plant and equipment
Purchases of intangible assets
Investments and deposits received (made)
Purchases of marketable securities
Sale of marketable securities
Cash provided by (used for) investing activities
Cash flows from financing activities:
Costs for issuance of shares
Sale of employee stock purchase plan shares
Other
Cash provided by financing activities
2004
2004
2003
2002
$ (7,775)
€ (5,743)
€ (20,420)
€ (10,208)
(73)
-
(444)
15,570
2,058
199
-
24
(13,128)
(22,408)
1,844
11,204
(104)
(12)
1,401
(11,644)
(54)
-
(328)
11,501
1,520
147
-
18
(9,697)
(16,552)
1,362
8,276
(77)
(9)
1,035
(8,601)
73
54
(16,680)
(12,321)
(914)
(27)
(67,243)
104,360
19,569
(28)
40
-
12
(675)
(20)
(49,670)
77,087
14,455
(21)
30
-
9
(315)
–
613
12,545
2,073
253
10,237
(1,984)
1,691
1,265
5,382
(2,846)
(258)
(107)
(541)
7,588
315
(5,901)
(1,410)
21,670
(44,998)
–
(11,969)
1,930
–
12,834
1,975
–
–
(4,167)
450
715
1,663
1,760
(1,381)
(1,224)
26
(7,596)
11,969
(3,872)
(2,101)
94
–
–
(30,324)
6,090
–
37
–
37
–
58
(44)
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
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
7
7,944
10,978
18,922
5
(197)
5,868
(22,896)
8,109
13,977
31,005
8,109
(129)
(1,621)
32,626
31,005
The accompanying notes are an integral part of these Consolidated Financial Statements
36 | Annual Report 2004
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands of €)
Accumulated other comprehen-
sive loss
Addi-
tional
paid-in
capital
Accumu-
lated
deficit
Currency
transla-
tion
adjust-
ment
Available
for sale
securities
Derivative
financial
instru-
ments
Employee
stock
purchase
plan
shares
Ordinary
Shares
Total
Balance at December 31, 2001
6,737
168,788
(17,051)
(270)
Net loss
Other comprehensive loss
Total comprehensive loss
Cost of issuance of shares in 2000
Sale of employee stock purchase plan shares
–
–
–
–
–
–
(44)
37
(10,208)
–
–
–
–
(287)
–
–
Balance at December 31, 2002
6,737
168,781
(27,259)
(557)
Net loss
Other comprehensive income (loss)
Total comprehensive loss
Sale of employee stock purchase plan shares
–
–
–
–
–
14
(20,420)
–
–
–
(366)
–
Balance at December 31, 2003
6,737
168,795
(47,679)
(923)
Net loss
Other comprehensive income (loss)
Total comprehensive loss
New issuance of shares
Sale of employee stock purchase plan shares
–
–
291
–
–
–
(22)
9
(5,743)
–
–
–
–
(5)
–
–
–
–
–
–
–
–
–
(61)
–
(61)
–
33
–
–
Balance at December 31, 2004
7,028
168,782
(53,422)
(928)
(28)
(42)
–
(116)
–
–
(70)
158,092
–
–
–
21
(10,208)
(403)
(10,611)
(44)
58
(158)
(49)
147,495
–
158
–
–
–
–
–
–
–
–
–
(20,420)
(269)
(20,689)
23
37
(26)
126,843
–
–
(291)
20
(5,743)
28
(5,715)
(22)
29
(297)
121,135
The accompanying notes are an integral part of these Consolidated Financial Statements.
Annual Report 2004 | 37
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Notes to the Consolidated Financial Statements
1. General
a) Description of Business
Dialog Semiconductor Plc and subsidiaries ("Dialog" or the
"Company") is a fabless semiconductor company that devel-
ops and supplies power management, audio and imaging
technology, delivering innovative mixed signal standard
products as well as application specific IC solutions for wire-
less, 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 prod-
ucts. 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 Com-
pany’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 semiconduc-
tor 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 wire-
less 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 cur-
rency 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 hedg-
ing activities). The Company also has foreign currency ex-
change 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 cus-
tomers 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 cus-
tomers individually accounted for more than 10% of the
Company's revenues. Total revenues from these two custom-
ers were €75,651 and €46,746 or 65% and 61% in 2004 and
2002, respectively. Net receivables from these two customers
were €15,724 at December 31, 2004. During 2003, one cus-
tomer individually accounted for more than 10% of the
Company’s revenue. Total revenue from this customer was
€60,192 or 65%. Net receivables from this customer were
€9,414 at December 31, 2003. The Company performs ongo-
ing 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
(“€”) 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 €1 = $1.3538, the
Noon Buying Rate of the Federal Reserve Bank of New York
on December 31, 2004.
38 | Annual Report 2004
(in thousands of € unless otherwise stated)
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Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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
Dialog Semiconductor (UK) Limited
Swindon, UK
Dialog Semiconductor Inc
Dialog Semiconductor KK
Clinton, New Jersey, USA
Tokyo, Japan
100%
100%
100%
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 re-
corded 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 ef-
fect, on available-for-sale securities are excluded from earn-
ings and are reported as a component of other comprehen-
sive 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 impair-
ment, which is charged to earnings. Interest income is recog-
nized when earned.
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 ac-
count, 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 Decem-
ber 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 accumu-
lated depreciation. Depreciation is charged on a straight-line
basis over the estimated useful lives of the assets as follows:
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.
Equipment
Test equipment
Useful life
3 to 8 years
Leasehold improvements
Shorter of useful life or lease term
Office and other equipment
3 to 13 years
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 infor-
mation and events regarding the customers’ ability to repay
their obligations, considers the collectibility of a trade ac-
count 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.
Goodwill and other Intangible Assets
Goodwill represents the excess of purchase price over fair
value of net assets of businesses acquired. Purchased intan-
gible assets with estimable useful lives primarily consist of
licenses, software, customer lists and patents and are re-
corded 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 as-
sets ranging from 3 to 17 years.
Goodwill is tested annually for impairment and more fre-
quently 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.
(In thousands of € unless otherwise stated) Annual Report 2004 | 39
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Consolidated Financial
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Notes to the Consolidated
Financial Statements
Corporate
Governance
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 when-
ever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recov-
erability of assets to be held and used is measured by a com-
parison of the carrying amount of an asset or group of assets
to future undiscounted net cash flows expected to be gener-
ated 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 cur-
rency (the Euro) at the exchange rates applicable at the end
of the reporting year. Equity accounts are measured at his-
torical 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 transac-
tion 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 func-
tional currency of the respective entity.
The exchange rates of the more important currencies against the Euro used in preparation of the consolidated financial state-
ments were as follows:
Currency
Great Britain
Japan
United States
Exchange rate at
Annual average exchange rate
Dec 31, 2004
Dec 31, 2003
€ 1 =
0.71
139.83
1.36
€ 1 =
0.70
133.68
1.25
2004
€ 1 =
0.68
134.46
1.24
2003
€ 1 =
0.69
130.93
1.13
2002
€ 1 =
0.63
118.05
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 as-
sured.
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 ad-
vertising and sales promotion and for other sales-related
expenses are charged to marketing expenses as incurred.
Shipping and handling costs amounting to €313 (2003:
€251; 2002: €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 be-
tween 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 real-
ized.
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
40 | Annual Report 2004
(in thousands of € unless otherwise stated)
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Management
Report
Report of Independent
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Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
exercise price equal to market value of the underlying com-
mon 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 re-
quirements of SFAS 123, as amended by SFAS 148, Account-
ing 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.
penses 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 invento-
ries, and the fair value of stock-based employee compensa-
tion 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 €1,349 (€842, net of tax, or €0.02 per
share).
Net loss, as reported:
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects
Pro forma net loss
Earnings (loss) per share
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
2004
2003
2002
(5,743)
(20,420)
(10,208)
(847)
(601)
(1,166)
(6,590)
(21,021)
(11,374)
(0.13)
(0.15)
(0.13)
(0.15)
(0.46)
(0.48)
(0.46)
(0.48)
(0.23)
(0.26)
(0.23)
(0.26)
Derivative Instruments and Hedging Activities
The Company operates internationally, giving rise to expo-
sure 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 guid-
ance on accounting for all derivative instruments, and for
hedging activities. Derivative financial instruments are re-
corded 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 out-
standing 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 ex-
Recently Issued Accounting Standards
In June 2004, EITF No. 03-1, The Meaning of Other-Than-
Temporary Impairment and its Application to Certain Invest-
ment, 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 Secu-
rities and cost method investments, as well as new disclosure
requirements for investments that are deemed to be tempo-
rarily impaired. While the disclosure requirements for speci-
fied 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 guid-
ance contained in EITF No. 03-1. This delay does not suspend
the requirement to recognize other-than-temporary impair-
ments 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 state-
ments.
In November 2004, the FASB issued Statement No. 151,
Inventory Costs, to amend the guidance in Chapter 4, “Inven-
tory 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
(In thousands of € unless otherwise stated) Annual Report 2004 | 41
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Management
Report
Report of Independent
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Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 impli-
cation. 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 consoli-
dated 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 com-
prised of €59 restructuring charges for the year ended De-
cember 31, 2004 and of €1,554 restructuring charges and
€285 impairment charges totaling €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 €1,076 and a provision for esti-
mated costs that will continue to be incurred under an oper-
ating lease for the building for its remaining term without
economic benefit to the Company of €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 €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 com-
prised of the following:
(in thousands of €)
Liability balance at Janu-
ary 1, 2003
Initial charges
Additional charges
Payments made
Liability balance at
December 31, 2003
Additional charges
Payments made
Liability balance at
December 31, 2004
Employee
termination
costs
Contract
termination
costs
-
834
242
-
346
132
Total
-
1,180
374
(1,076)
(150)
(1,226)
-
-
-
-
328
59
(387)
328
59
(387)
-
-
Asset Impairment Charges
As a result of the closure of the Swedish facility, certain
long-lived assets with a net carrying value of €158 have
been abandoned and certain prepaid expenses of €127 no
longer provided any future benefit to the Company. Accord-
ingly, impairment charges totaling €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 €12.0 million, €0.3 million
and €0.1 million of its total investment in ESM in 2002, 2003
and 2004.
42 | Annual Report 2004
(in thousands of € unless otherwise stated)
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
5. Other Disclosures to the Statements of Operation
Result before income taxes is stated after charging:
(in thousands of €)
Depreciation of property, plant and equipment
Amortization of intangible assets
Personnel costs
Cost of sales: provision for excess inventory
6. Income Taxes
2004
11,501
1,520
21,622
-
2003
12,545
2,073
21,197
-
2002
12,834
1,975
20,193
1,930
Loss before income taxes consists of the following:
Benefit (provision) for income taxes are as follows:
2002
(in thousands of €)
2004
2003
2002
(in thousands of €)
Germany
Foreign
2004
(3,079)
(2,600)
2003
(6,323)
(6,283)
(11,376)
(4,858)
(5,679)
(12,606)
(16,234)
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 follow-
ing 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%.
Expected benefit for income taxes
Foreign tax rate differential
Amortization of non-deductible intangible assets
Valuation allowance on deferred tax assets
Others
Actual benefit (expense) for income taxes
Current taxes:
Germany
Foreign
Deferred taxes:
Germany
Foreign
-
(38)
250
(91)
43
1,685
-
(8,287)
(26)
(64)
314
(7,814)
3,941
357
6,026
A reconciliation of income taxes determined using the Ger-
man corporate tax rate of 26,375% plus the after federal tax
benefit rate for trade taxes of 11,225%, for a combined statu-
tory rate of 37.6%, is as follows:
2004
2,135
(200)
(41)
2003
4,740
(505)
(41)
(1,947)
(11,804)
(204)
(11)
(64)
2002
6,104
(387)
(41)
(118)
468
(7,814)
6,026
(In thousands of € unless otherwise stated) Annual Report 2004 | 43
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Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Deferred income tax assets and liabilities are summarized as follows:
Property, plant and equipment
Net operating loss and tax credit
carryforwards
Liabilities
Other
Valuation allowance
Deferred tax assets
Property, plant and equipment
Receivables
Deferred tax liabilities
Net deferred tax assets
Dec 31, 2004 Dec 31, 2003
374
196
25,158
5,654
12
31,198
(14,046)
17,152
(1,020)
(7)
(1,027)
16,125
24,284
5,640
41
30,161
(12,329)
17,832
(1,669)
(4)
(1,673)
16,159
Tax loss carryforwards and established valuation allowances are summarized as follows:
December 31, 2004
Tax loss carryfor-
wards subject to
valution allowance
Tax loss
carryforward
Valuation allo-
wance
Tax loss
carryforward
December 31, 2003
Tax loss carryfor-
wards subject to
valution allowance
Valuation allo-
wance
63,124
6,384
1,571
1,442
-
28,648
6,286
1,571
1,442
-
11,392
2,026
498
131
-
14,046
61,696
4,391
1,520
1,514
543
27,220
4,293
1,520
1,514
543
10,235
1,288
493
131
182
12,329
Germany
UK
US
Federal
State
Sweden
Total
In assessing the realizability of deferred tax assets, manage-
ment 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 de-
ductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. In De-
cember 2003, the German government enacted new tax legis-
lation, 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 fac-
tors. 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 €10,235, to reduce the
carrying value of its net deferred tax assets on tax loss carry-
forwards 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 com-
pany established valuation allowances of €1,288, €624 and
€182 on tax losses in the UK, the US and Sweden, respec-
tively, 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 recog-
nized any additional deferred tax assets and established an
additional valuation allowance of €1,947 on the tax-loss
44 | Annual Report 2004
(in thousands of € unless otherwise stated)
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Management
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Consolidated Financial
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Notes to the Consolidated
Financial Statements
Corporate
Governance
carryforwards generated mainly in Germany in 2004. How-
ever, 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.
7. Additional Cash Flow Information
The tax loss carryforwards in the US are expiring in 2005
through 2017, the other tax loss carryforwards have no expi-
ration date.
The following represents supplemental information with
respect to cash flows:
(in thousands of €)
Interest paid, net
Income taxes paid, net
2004
5
49
2003
14
372
2002
9
911
8. Trade Accounts Receivable, net
The recorded trade accounts receivable for which an impair-
ment has been recognized and the related allowance for
doubtful accounts at December 31, 2004 and 2003 were €34
and €17, and €270 and €197, respectively.
The allowance for doubtful accounts developed as follows:
9. Inventories
Inventories are comprised of the following:
(in thousands of €)
2004
2003
2002
Allowance for doubtful ac-
counts at beginning of year
Additions charged to bad debt
expense
Write-offs charged against the
allowance
Reductions charged to bad
debt expense
Allowance for doubtful
accounts at end of year
197
16
397
230
439
222
(186)
(210)
(139)
(10)
(220)
(125)
17
197
397
(in thousands of €)
Raw materials
Work-in-process
Finished goods
2004
9,893
13,906
5,995
2003
2,738
5,026
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:
(in thousands of €)
Corporate debt securities
Debt based funds
Dec 31, 2004
Dec 31, 2003
Cost
–
17,581
17,581
Fair value Unrealized loss
Cost
Fair value Unrealized loss
–
17,542
17,542
–
(39)
(39)
43,029
1,969
44,998
42,947
1,953
44,900
(82)
(16)
(98)
(In thousands of € unless otherwise stated) Annual Report 2004 | 45
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Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 pay-
ment 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
12. Property, Plant and Equipment, net
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 amount of advance payments expected to be refunded in
the next twelve months.
A summary of activity for property, plant and equipment for the year ended December 31, 2004 is as follows:
Cost
Jan 1,
2004
Currency
change
Addi-
tions
Reclassi-
fications Disposals
Dec 31,
2004
Accumu-
lated
depre-
ciation
Net book
value as
of Dec
31,
2004
Accumu-
lated
depre-
ciation
2003
Net book
value as
of Dec
31,
2003
Depre-
ciation
2004
(in thousands of €)
Test equipment
Leasehold improvements
53.050
903
(2)
(19)
8.028
158
Office and other equipment
14.303
(112)
2.412
300
-
(33)
(863)
(145)
(860)
60.513
(45.227)
15.286
(36.956)
16.094
(9.076)
897
(596)
301
(550)
353
(121)
15.710
(11.782)
3.928
(10.427)
3.876
(2.304)
Advance payment relating
to test equipment
Property, plant and
equipment
267
-
1.723
(267)
-
1.723
-
1.723
-
267
-
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:
Cost
Jan 1,
2004
Currency
change
Addi-
tions
Reclassi-
fications Disposals
Dec 31,
2004
Accumu-
lated
depre-
ciation
Net book
value as
of Dec
31,
2004
Accumu-
lated
depre-
ciation
2003
Net book
value as
of Dec
31,
2003
Depre-
ciation
2004
10.930
3.008
13.938
15.736
(26)
-
(26)
-
348
-
348
-
-
-
-
-
(199)
11.053
(8.952)
-
3.008
(843)
2.101
2.165
(7.992)
(506)
2.938
2.502
(1.183)
(337)
(199)
14.061
(9.795)
4.266
(8.498)
5.440
(1.520)
-
15.736
(3.950)
11.786
(3.950)
11.786
-
(in thousands of €)
Software, licenses and
other
Patents
Intangible assets
Goodwill
During the year ended December 31, 2004 and 2003, the
Company acquired software and licenses for a total purchase
price of €348 and €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 port-
folio from Sarnoff Corporation, a research and development
institute, for a total purchase price of €3,008. The expected
weighted average useful life of these patents is 9 years. In
addition, Sarnoff may be paid additional contingent consid-
eration 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
46 | Annual Report 2004
(in thousands of € unless otherwise stated)
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 €1,520, €2,073 and
€1,975, respectively. Amortization expense of the gross car-
rying amount of intangible assets at December 31, 2004 is
estimated to be €1,015 in 2005, €631 in 2006, €542 in 2007,
€518 in 2008 and €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 €)
Balance at beginning of year
Utilizations
Additions
Balance at end of year
2004
135
(8)
28
155
2003
115
(115)
135
135
15. Shareholders' Equity and Comprehensive Income
At December 31, 2003, Dialog had authorized 104,311,860
ordinary shares with a par value of £0.10 per share, of which
44,068,930 were issued and outstanding. All shares are fully
paid.
previously been granted to employees. These shares are le-
gally 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.
On September 24, 2004, the Company completed an offering
of 2,000,000 previously unissued ordinary shares at £0.10 per
share to its employee benefit trust, to make such shares
available for the exercise of stock option rights that had
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:
(in thousands of €)
Pretax
Tax effect
Net
Pretax
Tax effect
Net
Pretax
Tax effect
Net
2004
2003
2002
Unrealized (losses) gains on
available for sale securities
Unrealized (losses) gains on
derivative financial instru-
ments
Currency translation adjust-
ment
Other Comprensive Income
(loss)
59
(26)
33
(98)
37
(61)
-
-
-
-
12
71
-
(17)
(43)
-
(5)
28
253
(95)
158
(185)
69
(116)
(508)
142
(366)
(437)
150
(287)
(353)
84
(269)
(622)
219
(403)
In 2003, realized losses of €44 (net of €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 €484
(2003: €565; 2002: €640). At December 31, 2004, contribu-
tions amounting to €59 (2003: €5) were payable to the funds
and are included in creditors.
(In thousands of € unless otherwise stated) Annual Report 2004 | 47
Shareholder
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Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 Com-
pany'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 Com-
pany'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.
Expected dividend yield
Expected volatility
Risk free interest rate
Expected life (in years)
Weighted average share price
Weighted average exercise
price
Weighted-average fair value of
options granted (in €)
2004
0%
80%
3.4%
5.0
3.70
2003
0%
74%
3.4%
3.8
3.37
2002
0%
106%
3.7%
5.0
2.33
3.70
3.37
2.33
2.44
2.21
1.83
Stock option plan activity for the years ended December 31, 2004, 2003 and 2002 was as follows:
(prices in €)
Outstanding at beginning of year
Granted
Exercised
Forfeited
Cancelled
Outstanding at end of year
Options exercisable at year end
2004
2003
2002
Weighted
average exercise
price
2.32
3.70
0.44
3.48
-
2.34
1.53
Options
3,412,270
108,960
(64,648)
(157,176)
-
3,299,406
1,827,076
Weighted
average exercise
price
3.62
3.37
0.52
6.21
7.29
2.32
0.70
Options
2,634,382
2,050,180
(76,828)
(204,004)
(991,460)
3,412,270
1,013,356
Options
2,672,506
124,060
(79,174)
(83,010)
-
2,634,382
1,217,402
Weighted
average exercise
price
3.78
2.33
0.79
9.78
-
3.62
3.07
The weighted average share price at the date of exercise of
options was €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 €7.29. In November 2003, approximately 2.0 million op-
tions were granted at an exercise price equal to fair value (at
that date) of €3.45 per share.
48 | Annual Report 2004
(in thousands of € unless otherwise stated)
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
The following table summaries information about stock options outstanding at December 31, 2004:
Options Outstanding
Weighted-Average
Remaining Con-
tractual Life (in
years)
Options Exercisable
Weighted-Average
Exercise Price
Number Exercisable
at December 31,
2004
Weighted-Average
Exercise Price
5.0
8.7
7.2
0.70
3.47
2.34
1,254,622
572,454
1,827,076
0.64
3.48
1.53
Number Out-
standing at Decem-
ber 31, 2004
1,345,086
1,954,320
3,299,406
Range of Exercise Prices
€0.32 - 2.15
€3.00 - 8.00
€0.32 - 8.00
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 Agree-
ment 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 distribut-
ing 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 £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
(see note 15).
18. Commitments
The Company leases design software, all of its office facili-
ties, 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 €7,780,
€7,581 and €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 €)
Operating leases
2005
2006
2007
2008
2009
Thereafter
Total
8,148
6,629
6,399
6,429
3,297
316
31,218
At December 31, 2004, the Company had an unused short-
term credit line of €12,500. There are no amounts out-
standing 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, manufactur-
ing 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.
(In thousands of € unless otherwise stated) Annual Report 2004 | 49
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
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 (€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 €71
in the consolidated statement of operations.
In the fourth quarter of 2003, the Company entered into
derivative financial arrangements with a bank (the "counter-
party") 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 unre-
alized loss of €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:
(in thousands of €)
Carrying amount
Fair Value Carrying amount
Fair Value
Dec 31, 2004
Dec 31, 2003
Financial instruments (other than derivative instruments)
Cash and cash equivalents
Marketable securities
Deposits
Derivative instruments (currency contracts)
Current liabilities
20. Segment Reporting
13,977
17,542
194
13,977
17,542
194
8,109
44,900
183
8,109
44,900
183
-
-
78
78
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 substan-
tial 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:
Wireless communication
Automotive
Industrial
2004
90,617
11,898
13,529
116,044
2003
69,849
7,896
15,148
92,893
2002
54,715
6,074
16,315
77,104
50 | Annual Report 2004
(in thousands of € unless otherwise stated)
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Revenues are allocated to countries based on the location of
the shipment destination:
Following are the net carrying values of investments in prop-
erty, plant and equipment by geographic location:
Germany
France
Other European countries
China
Other Asian countries
Other countries
2004
47,719
1,936
14,931
19,738
22,351
9,369
2003
45,395
4,532
10,438
18,198
6,695
7,635
2002
31,478
9,348
11,698
13,006
5,154
6,420
116,044
92,893
77,104
Property, plant and equipment
Germany
Japan
United Kingdom
USA
Dec 31,
2004
Dec 31,
2003
20,675
19,634
92
189
282
176
358
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 ser-
vices rendered were €212, €162 and €268 in 2004, 2003 and
2002, respectively.
(In thousands of € unless otherwise stated) Annual Report 2004 | 51
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Corporate Governance
Report of the Board of Directors
As reported in this document, 2004 was a year of consolida-
tion and preparation for new opportunities from a broaden-
ing product and technology portfolio. Collaboration with
partners and customers ensured that we made progress in the
development of products for a more diverse customer base.
During the year the Board oversaw the functioning of execu-
tive management of the Company at the quarterly Board
Meetings of February 4, April 21, July 13, October 13, 2004
and assured itself of the proper conduct of executive man-
agement during that year. At such Board Meetings the Board
received and analyzed reports from the chief executive as to
the achievements of the Company as compared to budget and
progress made in achieving the commercial goals for the
year.
The Compensation Committee, comprising Jan Tufvesson,
Michael Glover and Greg Reyes met in October 2004 to dis-
cuss the achievements of the Management during that year
and to establish the individual objectives of the Management
for 2005. The Audit Committee, comprising of Jan Tufvesson,
Michael Glover and since October 1st 2004 Aidan Hughes,
met on a quarterly basis. These meetings concentrated on a
review of the financial information to be reported on for the
relevant prior financial period and on the internationally
accepted standards for fair and responsible financial report-
ing and corporate governance.
The Company’s audited financial statements, for the year
ended December 31, 2003, and the reports from the Directors
and Auditors thereon were presented to, and approved by,
the shareholders at the annual general meeting of the Com-
pany, held on May 12, 2004, at which KPMG, the Company’s
independent auditor was reappointed until the following
annual general meeting of the Company.
The Board extends its thanks and appreciation to the Execu-
tive Management and all employees for their hard work and
considerable achievements in 2004.
52 | Annual Report 2004
Accounting under International Financial
Reporting Standards (IFRSs)
In compliance with the European Parliament and Council
Regulation on the application of International Financial
Reporting Standards (IFRSs) adopted in July 2002, all listed
European Union companies, including banks and insurance
companies, are required to prepare their consolidated finan-
cial statements in accordance with IFRS for fiscal years
commencing on or after January 1, 2005.
IFRS 1, First-Time Adoption of International Financial Re-
porting Standards, requires disclosures that explain how the
transition from previous GAAP to IFRSs affected the entity’s
reported financial position, financial performance and cash
flows and to comply with each IFRS effective at the reporting
date for its first IFRS financial statements. An entity shall
prepare an opening IFRS balance sheet at the date of transi-
tion and present at least one year of comparative information
under IFRSs. Accordingly our date of transition to IFRSs is
the beginning of business on 1 January 2004 (opening IFRS
balance sheet date). As a UK company, Dialog has to use its
UK GAAP financial statements (previous GAAP) which are
filed at Companies House for purposes of conversion from
previous GAAP to IFRSs. We expect to prepare and publish
IFRS financial statements in the first quarter 2005.
Convergence of IFRSs and U.S. GAAP
Dialog strongly supports further alignments between IFRSs
and U.S. GAAP to increase international comparability and
transparency in financial reporting. In preparation for our
adoption of IFRSs, we closely track developments and activi-
ties at both standard setting bodies, the IASB and the
U.S. Financial Accounting Standards Board—FASB, and ex-
pressly welcome the joint initiatives that have already and
will further significantly increase the speed and extent of
convergence of IFRSs and U.S. GAAP. Following a formal
commitment to the common goal of convergence in Septem-
ber 2002, both Boards have added a joint short-term conver-
gence project to their agendas, which is aimed at removing a
number of individual differences in the short-term. That is in
consideration of the 2005 IFRSs adoption date in Europe,
usually by selecting current practice either under existing
IFRSs or U.S. GAAP. A long-term objective for the IASB and
the FASB is to work together to reduce or eliminate remain-
ing differences on an ongoing basis, through a series of joint
projects and through coordination of future work programs.
In addition, the Boards have agreed to work together through
Shareholder
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Corporate
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Management
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Report of Independent
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Consolidated Financial
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Notes to the Consolidated
Financial Statements
Corporate
Governance
their respective interpretive bodies in converging interpreta-
tion and application issues.
Dialog expects the adoption of IFRSs to have the following
impact on its Consolidated Financial Statements:
Research and development costs
U.S. GAAP generally requires R&D costs to be expensed as
incurred. Separate rules apply to software development costs,
which may qualify for capitalization under certain circum-
stances. Under IFRSs, a distinction is to be made between
research and development. All costs identified as research
costs are to be expensed as incurred, whereas development
costs are to be capitalized and amortized if specified criteria
are met.
Accounting for Goodwill
Goodwill represents the excess of purchase price over fair
value of net assets of businesses acquired. Under U.S. GAAP,
beginning January1, 2002, goodwill is no longer amortized,
but instead tested for impairment. In accordance with IFRS 1,
we expect not to apply IFRS 3, Business Combinations, retro-
spectively to past business combinations. Therefore the carry-
ing amount of goodwill in the opening IFRS balance sheet
shall be the carrying amount under previous GAAP at the
date of transition to IFRSs. We previously have amortized
goodwill over a five year period resulting in a zero balance
as of December 31, 2003 in our UK GAAP financial state-
ments. Accordingly, goodwill is no longer recorded as an
asset in our IFRS financial statements.
Corporate Governance Principles
High corporate governance standards
Dialog Semiconductor Plc is committed to comply with Ger-
man, US and internationally accepted standards for fair and
responsible corporate governance. Accordingly, Dialog Semi-
conductor (as a foreign Company listed on the German stock
exchange) has established and published its own Corporate
Governance Principles corresponding in substance to the
provision of the “German Declaration on Corporate Govern-
ance”. Also, in accordance with the Sarbanes-Oxley Act of
2002, Dialog has adopted a Code of Business Conduct and
Ethics and maintains an Audit Committee. Furthermore, as
Dialog is listed on NASDAQ, the Code of Business Conduct
and Ethics complies with NASDAQ`s corporate governance
rules. Dialog has adopted and will follow these principles and
codes in order to further enhance the confidence of share-
holders, customers, employees and the general public in the
Company.
Full details of the Corporate Governance Principles and the
Code of Business Conduct and Ethics are published on Dialog
Semiconductor’s internet site (www.dialog-
semiconductor.com). In summary the Corporate Governance
Principles cover the following key areas
Shareholders rights and the Annual General Meeting
(AGM)
Each share carries one vote, and there are no multiple voting
rights or preferential voting rights (golden shares). All finan-
cial and independent audit reports are presented to the AGM.
The AGM is where the directors will obtain authorization to
approve and pass resolutions related to Company business,
such as auditor’s remuneration, and issue of new shares. The
Company will also facilitate the personal exercising of share-
holders’ voting rights. The company shall publish key infor-
mation relating to the AGM on its web site on the day of the
annual meeting.
Board of Directors’ responsibilities, composition and com-
pensation
Dialog has seven non-executive directors and one executive
director on the Board, to supervise the general management
and develop the Company’s strategy. The non-executive
directors do not play an active role in day-to-day operations
providing an independence and objectivity in the making of
key decisions. During 2004, directors received the remunera-
tion listed below and their shareholdings in Dialog Semicon-
ductor are as follows.
Annual Report 2004 | 53
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Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Name
Roland Pudelko
Tim Anderson 1)
Michael Glover
Aidan Hughes
Position
Executive Director, CEO and President
Non-executive Director
Non-executive Chairman of the Audit Committee
Non-executive Director (since October 1, 2004)
John McMonigall
Non-executive Director
Gregorio Reyes
Non-executive Director
Michael Risman
Non-executive Director
Jan Tufvesson
Non-executive Chairman
Compensation (in €)
Directors Holdings
Bonus / Long-
term incen-
tives
33.334
Base salary
279.105
7.366
51.565
11.050
29.466
44.198
29.466
51.565
-
-
-
-
-
-
-
503.781
33.334
Shares
320.405
75.166
195.000
-
-
35.000
1.172
175.062
801.805
Options
517.450
-
-
-
-
-
-
-
517.450
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 €212.
Variable compensation of the Chief Executive Officer is measured based on the profitability of the Company as well as success
in reaching specific strategic goals.
Audit Committee and Compensation Committee
Dialog has established an Audit Committee of the Board of
Directors consisting of independent directors: Messrs. Glover
(chairman of the Audit Committee), Tufvesson and Hughes.
To maintain independence, members of the Committee are
not to receive payment from the Company for consulting,
advisory, or other services other than for board service and
are not to be affiliated with the Company. The Compensation
Committee determines the salaries and incentive compensa-
tion of Dialog’s officers and the officers of the Company’s
subsidiaries and provides recommendations for the salaries
and incentive compensation of other employees and consult-
ants. Our Compensation Committee consists of Messrs.
Tufvesson (chairman of the Compensation Committee),
Glover and Reyes. None of the members of this Committee
should serve as an employee of the Company.
Transparency, including director’s dealing, insider dealing
and loans
Dialog promptly discloses price sensitive information to the
stock exchanges and then publishes the information elec-
tronically. Significant shareholder interests should be re-
ported to the Company according to the UK Companies Act
1985. Transactions in securities of the Company’s own shares
carried out by members of the Board of Directors and of their
family members will be reported and published without delay
pursuant to section 15a of the German Securities Trading Act
(Wertpapierhandelsgesetz). With regard to insider dealing
Dialog has adopted a Code of Dealing, in which we comply
with stringent guidelines to ensure against suspicion of abus-
ing the possession of price sensitive information, by prohibit-
ing dealing in any of the company’s financial instruments
during defined periods. In addition, the Company will not
provide or guarantee any loans to directors or senior execu-
tives.
Business conduct and ethics
The Company shall comply with all governmental laws, rules
and regulations that are applicable to the Company's activi-
ties, and expects that all directors, officers and employees
acting on behalf of the Company will obey the law. Directors,
officers and employees should not be involved in any activ-
ity, which creates or gives the appearance of a conflict of
interest between their personal interests and the Company's
interests. The Company is committed to promoting the values
of honesty, integrity and fairness in the conduct of its busi-
ness and sustaining a work environment that fosters mutual
respect, openness and individual integrity. Directors, officers
and employees are expected to deal honestly and fairly with
the Company's customers, suppliers, competitors and other
third parties.
Auditor’s independence
The aggregate fees billed for each of the last two fiscal years
for professional services rendered by the principal accountant
for the audit of annual financial statements or services by the
principal accountant, KPMG, were as follows:
(in thousands of €)
2004
2003
Audit fees
Tax fees
174
110
284
169
65
234
Tax services rendered in 2004 were pre-approved by the
audit committee in accordance with § 401(i) of the Sarbanes
– Oxley Act of 2002.
Our Auditor, KPMG, confirmed their independence at each
quarterly audit committee meeting and declared the follow-
ing:
54 | Annual Report 2004
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Our internal organization complies with the requirements of
the “Gemeinsamen Stellungnahme der Wirtschaftsprüfer-
kammer und des Instituts der Wirtschaftsprüfer in Deutsch-
land: Zur Qualitätssicherung in der Wirtschaftsprüferpraxis“
(VO 1/1995). Our partners are prohibited to have any finan-
cial investment in a KPMG audit client. All other professional
staff is prohibited to have any financial investment in an
audit client he or she delivers services to. The affected per-
sons have to declare that they comply with these regulations
on a regular basis.”
Declaration of conformity with regard to the German cor-
porate governance code
“Dialog Semiconductor Plc has established and published its
own corporate governance principles corresponding in sub-
stance to the provisions of the German “Declaration on Cor-
porate Governance” as published on November 13, 2002
thereby adopting in substance the recommendations of the
Government Commission on the German Corporate Govern-
ance Code”.
This declaration is available on the Internet at: www.dialog-
semiconductor.com/Investor Relations/Corporate Governance.
London, February 2005
Jan Tufvesson, Chairman
“We hereby confirm, that as of February 21, 2005, we are
independent accountants with respect to the Company within
in the meaning of the Securities Acts administered by the
Securities and Exchange Commission of the United States
and the requirements of the Independence Standards Board,
Auditing Standard No. 2 of the Public Company Accounting
Oversight Board (United States), German law, the German
Coporate Governance Code and professional standards in
Germany and the United States. In particular
(cid:132) We verified that no professional relationships to the
Company exist that may reasonably be thought to bear
on our independence. This relates especially to board
membership and employee relationships with the Com-
pany.
(cid:132) We verified that no financial relationships exist that may
reasonably be thought to bear on our independence. This
relates especially to direct investments such as stocks,
bonds and similar investments. We are also independent
in respect to the requirements of § 319 paragraph 2 no. 8
HGB (unamended version). For each of the last five years
our annual revenues generated from services to the Com-
pany and other entities for, which the Company holds
more than 20% ownership amounted to less than 30% in
fact, less than 1% of our total revenues. This is also ex-
pected to be the case for the current fiscal year (§ 319
paragraph 3 no. 5 HGB (amended version)).
(cid:132) We will also ensure that anything, which may reasonably
be thought to bear on our independence with regard to
the self review threat will be avoided. In particular, apart
from the audit we have not taken part in the maintenance
of any books or records or the preparation of financial
statements and will not do so in future.
(cid:132) We will comply with the requirements regarding internal
rotation (§ 319 paragraph 3 no. 6 HGB).
(cid:132) We are not aware of any other relationships or matters,
which may reasonably be thought to bear on our inde-
pendence such as close family or personal relationships
with the board members or management of the Company.
Annual Report 2004 | 55
Shareholder
Information
Corporate
Profile
Management
Report
Report of Independent
Registered Public Accounting Firm
Consolidated Financial
Statements
Notes to the Consolidated
Financial Statements
Corporate
Governance
Members of the Board of Directors
Jan Olof Ingemar Tufvesson, Chairman (66)
joined the board of our then-holding company in 1990 and
has served as chairman of the board since March 1998. Be-
tween 1972 and 1980 he held senior appointments 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 Uni-
versity 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.
Roland Pudelko, Chief Executive Officer and President (52)
joined us in 1989 as managing director and has served as
Executive Director, CEO and President since March 1998. He
has over 20 years experience in electronics and microelec-
tronics, primarily in management positions within the Daim-
ler-Benz Group. During that time, he was on the board of a
joint venture with ACER of Taiwan, and in the TEMIC Group
he was responsible for worldwide design and engineering.
Mr. Pudelko has a diploma in communication technologies.
He is also the managing director of Dialog Semiconductor
GmbH and other consolidated subsidiaries of Dialog Semi-
conductor Plc.
Timothy Richard Black Anderson (43)
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 (66)
joined the board of our then-holding company in 1990 and
has served as a director 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 manage-
ment in 1985. He has a degree in economics from the Uni-
versity of Birmingham. Mr. Glover is currently Managing
Director of Aylestone Strategic Management Limited and
serves as a director of other companies.
Aidan Hughes (44)
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 (61)
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 telecommunica-
tions, 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 Telecommuni-
cations Ltd, Autonomy plc and Amphion Ltd.
Gregorio Reyes (63)
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 Semicon-
ductor (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 (36)
joined us as a director in August 1999, having been closely
involved with our company since March 1998. He is a direc-
tor of Apax Partners where he has responsibility 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 an R&D engineer. He
earned an MBA from Harvard Business School and an MA
(Hons) 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.
56 | Annual Report 2004
Investor Information
(cid:132) Annual Meeting
(cid:132) Corporate Calendar
The annual meeting of Dialog
Semiconductor Plc will be held on May
11, 2005
9 a.m. local time
278/282 High Holborn
London WC1V 7HA
United Kingdom
April 20, 2005
Release of first quarter results
May 11, 2005
Annual shareholders’ meeting
July 20, 2005
Release of second quarter results
October 19, 2005
Release of third quarter results
(cid:132) Corporate Counsel
(cid:132) Certified Public Accountants
Reynolds Porter Chamberlain
London, United Kingdom
KPMG Deutsche Treuhand-Gesellschaft
Stuttgart, Germany
(cid:132) US Listing
(cid:132) ADS Administrator
Our Shares are listed on Nasdaq in the
form of American Depositary Shares
(ADS). Each ADS represents one ordinary
share.
Dialog Semiconductor is subject to the
regulations of the Securities and Exchange
Commission (SEC) in the USA as they
apply to foreign companies and files with
the SEC its Annual Report on Form 20-F
and other information as required.
ADS holders may instruct The Bank of
New York, which administers our ADS
program, as to the exercise of voting
rights pertaining thereto:
The Bank of New York
101 Barclay Street, 22W
New York, NY 10286
Telephone: +1 (888) 269-2377
Facsimile: +1 (212) 571-3050
(cid:132) Please direct inquiries to:
(cid:132) www.dialog-semiconductor.com
Dialog Semiconductor
Birgit Hummel
Neue Straße 95
D-73230 Kirchheim/Teck - Nabern
Telephone
Fax
E-mail: birgit.hummel@diasemi.com
+49-7021-805-412
+49-7021-805-200
All our recent press releases are accessible
together with the latest Annual and
Interim Reports.
Publications of interest to current and
potential investors (Form 20-F, Annual
and Interim Reports) are available without
charge upon request.
Please order within the investor relations
section of our homepage.
Technical Glossary
Analog A type of signal in an electronic circuit that
takes on a continuous range of values rather than
only a few discrete values.
APS Advanced Pixel Sensor technology used in
Dialog Semiconductor’s CMOS image sensors.
ASIC Application Specific Integrated Circuit; an
integrated chip custom designed for a specific
application.
ASSP Application Specific Standard Product; a
semiconductor device integrated circuit (IC)
dedicated to a specific application and sold to more
than one user.
is typically lower than the input voltage.
LED Light Emitting Diode. A semiconductor device
that emits light when charged with electricity, often
used for LCD display backlights.
Mixed signal Describes a combination of analog
and digital signals being generated, controlled or
modified on the same chip.
MLA Multi-Line Addressing is a technology used
in color LCDs to enable full color, high quality
display of moving images with fast response time,
high brightness, lower cost and low power
consumption.
Audio CODEC The interface between analog signals
(such as the human voice) and the digital data
processing inside a mobile phone, determining
voice quality.
MP3 (MPEG-1 Audio Layer-3) A standard
technology format for compression of sound
sequences into very small files, while preserving the
original level of sound quality.
CAD Computer Aided Design, usually refers to a
software tool used for designing electronics
hardware or software systems.
CDMA (Code Division Multiple Access) An
alternative to GSM technology for mobile wireless
networks.
Chips Electronic integrated circuits.
CMOS Complimentary Metal Oxide Semiconductor,
the most popular class of semiconductor
manufacturing technology.
DC-DC A DC-to-DC converter accepts a direct
current input voltage and produces a direct current
output voltage. The output is typically at a different
voltage level than the input, and often the
component provides power bus regulation.
Digital A type of signal used to transmit
information that has only discrete levels of some
parameter (usually voltage).
Fabless A term describing a company that designs
and delivers semiconductors by outsourcing the
fabrication (manufacturing) process.
Foundry A manufacturing plant where silicon
wafers are produced.
GPS Global Positioning System. A worldwide
satellite navigation system used in electronics
systems for positional information.
GPRS General Packet Radio Service, a step between
GSM and 3G (third generation) mobile networks,
offering fast data transmission via the GSM
network
GSM Global System for Mobile Communications,
the world’s most widely used mobile system.
IC Integrated Circuit; an electronic device with
numerous components on a single chip.
Imaging The capture and processing of images via
an image sensor for use by an electronic device to
send to a display for viewing by a user.
Liquid Crystal Display (LCD) A display technology
found in many portable electronics products,
including personal organizers, cellular handsets and
notebook computers.
Multimedia messaging services (MMS) A
standardized messaging service for the mobile
environment, delivering user-created content from
phone to phone, and containing any combination
of graphics, images and audio.
NiMH, L Ion and polymer Various battery
technologies.
Personal digital assistant (PDA) A hand-held
computer designed for use as a personal organizer
with communications capabilities.
Power management The management of the power
requirements of various subsystems, important in
hand-held and portable electronics equipment.
PMIC Power Management IC.
Semiconductor A base material halfway between a
conductor and an insulator, which can be
physically altered by mixing in certain atoms.
Semiconductors form the basis for present-day
electronics.
Silicon A semi-metallic element used to create a
wafer, and the most common semiconductor
material - in about 95% of all manufactured chips.
Smart Mirror™ A technology patented by Dialog
Semiconductor which simplifies circuit design and
provides very low current consumption in power
management circuits.
STN Super-Twisted Nematic, refers to the direction
of rotation of the liquid crystals in an LCD to
enable excellent brightness and a wide angle at
which the display can be viewed before losing
much contrast.
System on chip (SOC) Advanced semiconductor
device embedding custom circuits and intellectual
property (IP) elements into single chip solutions.
USB Universal Serial Bus. A universal interface
standard to connect different electronics devices
VGA Video Graphics Array. A standard
size/resolution of 640 pixels by 480 pixels for
digital cameras, images, and displays.
Wafer A slice of silicon from a 4, 5, 6 or 8 inch
diameter silicon bar and used as the foundation on
which to build semiconductor products.
LDO Low Dropout voltage regulators are used in
battery operated systems, where the output voltage
WCDMA Wideband CDMA, a 3G (third generation)
wireless standard, also referred to as UMTS.
Financial Glossary
Cash Flow The primary purpose of a statement
of cash flows is to provide relevant information
about the cash receipts and cash payments of an
enterprise during a period. It helps to assess the
enterprise's ability to generate positive future
net cash flows. A statement of cash flows shall
explain the change in cash and cash equivalents
during the period by classifying cash receipts
and payments according to whether they stem
from operating, investing, or financing
activities.
Cash flow from operating activities Cash flow
from operating activities includes all
transactions and other events that are not
defined as investing or financing activities in
paragraphs. Operating activities generally
involve producing and delivering goods and
providing services. Cash flows from operating
activities are generally the cash effects of
transactions and other events that enter into the
determination of net income.
Comprehensive Income The purpose of reporting
comprehensive income is to report a measure of
all changes in equity of an enterprise that result
from recognized transactions and other
economic events of the period other than
transactions with owners such as capital
increases or dividends. An example of items
effecting comprehensive income is foreign
currency translation adjustments resulting from
the process of translating an entity's financial
statements in a foreign currency into the
reporting currency.
Corporate Governance Corporate governance is
the system by which business corporations are
directed and controlled. The corporate
governance structure specifies the distribution of
rights and responsibilities among different
participants in the corporation, such as, the
board, managers, shareholders and other
stakeholders, and spells out the rules and
procedures for making decisions on corporate
affairs. By doing this, it also provides the
structure through which the company objectives
are set, and the means of attaining those
objectives and monitoring performance.
Deferred taxes Deferred tax assets or liabilities
are temporary differences between the tax basis
of an asset or liability and its reported amount
in the financial statements that will result in
taxable or deductible amounts in future years
when the reported amount of the asset or
liability is recovered or settled, respectively.
Derivative financial instruments A financial
instrument that derives its value from the price
or expected price of an underlying asset (e.g. a
security, currency or bond).
Goodwill Goodwill is to be recorded in a
purchase business combination for an excess of
the cost of the acquired enterprise over the total
amount assigned to the identifiable assets
acquired less liabilities assumed.
Gross Margin Gross Margin equals the difference
between revenues and cost of sales as presented
in the statement of operations.
Hedging A strategy used to minimize exposure
to changes in prices, interest rates or exchange
rates by means of derivative financial
instruments (options, swaps, forward contracts,
etc.).
Impairment Impairment is the condition that
exists when the carrying amount of a long-lived
asset exceeds its fair value (the sum of the
undiscounted cash flows expected to result from
the use and eventual disposition of the asset).
IFRS (International Financial Reporting
Standards) Accounting standards generally to be
used for fiscal years commencing on or after
January 1, 2005 by all publicly listed European
Union companies in compliance with the
European Parliament and Council Regulation
adopted in July 2002.
Prime Standard The new segmentation of the
equity market of the German Stock Exchange
comprises a Prime Standard segment in addition
to the General Standard segment that applies the
statutory minimum requirements. The Prime
Standard segment addresses companies that
wish to target international investors. These
companies are required to meet high
international transparency criteria, over and
above those set out by the General Standard.
Restructuring Charges Costs associated with an
exit or disposal activity, e.g. termination
benefits provided to employees that are
involuntarily terminated.
Securities Debt securities are instruments
representing a creditor relationship with an
enterprise and include government securities,
corporate bonds, commercial paper, and all
securitized debt instruments. Available-for-sale
securities are debt securities not classified as
held-to-maturity or trading securities.
Shareholders’ equity Shareholders’ equity reflects
the investment of shareholders in a company.
Shareholders’ equity is comprised of ordinary
shares, additional paid-in capital, retained
earnings and accumulated other comprehensive
income.
Stock option plans Stock option plans include all
agreements by an entity to issue shares of stock
or other equity instruments to employees. Stock
option plans provide employees the opportunity
to receive stock resulting in an additional
compensation based on the future share price
performance. The purpose of stock option plans
is to motivate employees to increase shareholder
value on a long-term basis.
Total Assets Total assets include all current and
non-current assets. Total assets equal total
liabilities and shareholders’ equity.
Working Capital Working capital is represented
by the excess of current assets over current
liabilities and identifies the relatively liquid
portion of total enterprise capital that
constitutes a margin or buffer for meeting
obligations within the ordinary operating cycle
of the business