Dialog Semiconductor
Annual Report 2005

Plain-text annual report

Annual Report 2005 Dialog Semiconductor Plc — Five-Year Financial Summary Selected Financial Data (in thousands of €, except per share, equity ratio and employee data) Operations data Revenues 1) Research and development expenses 1) Operating profit (loss) 1) Net loss Cash flow from operations Balance Sheet data Cash and cash equivalents Marketable securities Liquid assets Shareholders’ equity Equity ratio in % Total assets Purchases of property, plant and equipment Share data Basic loss per share Weighted average number of shares (in thousands) - basic Other data Employees (period end; December 31, 2005 excluding employees of Imaging Division) 1) In 2005 and 2004 amounts from continuing operations. IFRS US-GAAP 2005 2004 2003 2002 2001 129,406 (20,624) 2,699 (23,345) 10,299 16,920 14,890 31,810 85,898 83.3 103,138 4,036 115,786 (22,369) 2,295 (6,222) (8,601) 13,977 17,542 31,519 108,227 85.1 127,144 12,321 92,893 (30,590) (13,224) (20,420) 7,588 8,109 44,900 53,009 126,843 90.3 140,471 5,901 77,104 (34,530) (27,406) (10,208) (7,596) 31,005 - 31,005 147,495 88.8 166,073 3,872 100,519 (31,256) (24,136) (41,386) 15,139 32,626 - 32,626 158,092 88.3 179,062 3,157 (0.53) (0.14) (0.46) (0.23) (0.94) 44,173 44,025 43,951 43,888 43,788 238 296 273 284 287 2005 Financial Highlights (cid:132) Revenues increased by 12% to €129.4m (2004: €115.8m) (cid:132) Operating profit increased by 18% to €2.7m (2004: €2.3m) (cid:132) Net loss for the full year €23.3m (2004: €6.2m) (cid:132) 2005 result includes a write-down of deferred tax assets of €15.3 million and a €12.5 million loss from discontinued operations related to the Imaging division (2004: €8.9m) (cid:132) The company remains debt free and has significant liquid assets of €31.8m (2004: €31.5m) 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 The Dialog Semiconductor Share in 2005 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 Independent Auditors’ Report Consolidated Financial Statements Consolidated Statements of Operations Consolidated Balance Sheet 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 Corporate Governance Principles Executive Management Glossary Technical Glossary Financial Glossary 2 2 4 8 8 9 10 10 13 13 15 15 16 17 18 21 23 25 26 27 28 28 29 30 31 32 52 52 52 54 58 58 59 Annual Report 2005 | 1 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance Shareholder Information Letter to our Shareholders cant growth if we manage ourselves effec- tively and take full advantage of the oppor- tunities available to us in our markets. We are extremely well positioned to leverage growth in the market for mobile devices, as well as the longer term opportunities open to us in the consumer electronics and automotive systems. In short, I believe that we will be able to establish an excellent platform for future growth and that we have what it takes to succeed in this exciting marketplace. However, it is also clear to me that we face some major challenges in the coming years and there are three key issues with the current business that I believe we must turn our attention to. These are: (cid:132) Customer concentration (cid:132) European operational focus (cid:132) Management development. Going forward, I am reviewing the com- pany’s strategy and making a number of changes to ensure that the company is well positioned to deliver sustainable growth in profits for our shareholders and tackle the issues highlighted above. For the rest of 2006 our focus will be on developing and implementing the following strategies: (cid:132) Create further Application Specific Standard Products to enable access to a wider customer base in Wireless and Mobile sectors (cid:132) Focus R&D investment to maintain and extend our lead in power management, audio, and high voltage mixed signal Systems on Chip (SOC) (cid:132) Extend our sales, marketing and techni- cal support to clients outside Europe with a focus on US and Asia Pacific re- gions Dear Shareholders As Dialog Semiconductor’s newly ap- pointed Chief Executive Officer, I am de- lighted to greet you, the owners of Dialog Semiconductor, and to introduce myself. During my first few months in the job I have been pleased with what I have wit- nessed and particularly impressed by the application and skill of my new colleagues based all over the globe. I have been encouraged to note that Dialog is a company that has managed its recent transition responsibly and has achieved a strong turnaround in its financial perform- ance. Indeed, in the last two financial quarters of 2005 Dialog showed its strong- est quarterly performance for over five years in terms of revenues. It was immediately clear to me that Dialog is a company which has a world-class product line and an increasingly broad base of products from which to generate returns for its shareholders. What’s more, it boasts some of the best names in the industry as its partners and customers. I have also been left with the impression that this is a company capable of signifi- 2 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance (cid:132) Pay close attention to cost structure to maintain competitiveness in worldwide markets (cid:132) Continue to recruit industry leading experts to our management team, in order to expand the expertise and net- work of relationships within our com- pany. In addressing the company’s issues and focus we have also recently decided to create a number of product business units and have embarked upon recruiting further world class talent into the company to provide marketing and business leadership and extend our worldwide customer sup- port. Creating shareholder value lies at the heart of our strategy and to this end we view sustainable profitable growth as a key objective for Dialog going forward. This objective was at the heart of our deci- sion to spin out the imaging and camera module business, which was successfully achieved on February 14, 2006 with a syndicate of quality investors. As a result, Dialog maintains a minority holding in the new spin-out and participates in any po- tential upside in this growth business with- out carrying the burden of significant ongoing R&D investment on its own. This allows Dialog to focus on its fabless semi- conductor business model and its core competency of power and energy manage- ment. It is an exciting time to be joining this company and as outlined above, much remains to be done if we are to capitalise on these prospects. In 2006 we face a challenging competitive environment but we remain confident about building the platform for significant growth thereafter. Sincerely yours, Dr. Jalal Bagherli CEO Annual Report 2005 | 3 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 Dialog Semiconductor Share in 2005 Investment case In developing and supplying state-of-the- art power management, audio and display driver technology Dialog Semiconductor has built a global reputation in superior products for the wireless and automotive industries of this world. Our core compe- tence is focused on innovative mixed signal standard products as well as application specific IC solutions manufactured entirely in CMOS technology. By enhancing the performance and features of wireless, hand-held and portable elec- The Dialog Semiconductor Share Price Development Dialog Semiconductor shares have outper- formed all relevant indexes during the last financial year as well as for the last three years. In Euro terms the share price rose by more than 51 percent from €1.78 at the beginning of the year to €2.69 at year end. At the same time the German benchmark index TecDax increased by 25 percent and the Philadelphia Semiconductor Index (SOX) rose by 14 percent currency adjusted. tronic devices Dialog Semiconductor is poised to play a major role in the ever growing world of mobile living. We also provide technology used in intelligent control circuits in automotive and indus- trial applications thus participating in two additional global growth markets. In concentrating on development, quality control, and supply Dialog Semiconductor runs a fabless business model enabling the company to utilize its resources entirely in its core competences. In contrast the NASDAQ index declined by almost three percent in Euro terms. Over a three year time span the Dialog Semiconductor share almost tripled from €0.92 at the beginning of 2003 whereas the German TecDax rose by 83 percent and the US SOX and NASDAQ indexes in Euro terms gained 54 and 46 percent during the same time. 12 Month share price development relative to relevant benchmark indexes (in Euro terms) 3 ,0 0 2 ,5 0 2 ,0 0 1 ,5 0 1 ,0 0 0 ,5 0 0 ,0 0 3 0 0 0 0 0 0 2 5 0 0 0 0 0 2 0 0 0 0 0 0 1 5 0 0 0 0 0 1 0 0 0 0 0 0 5 0 0 0 0 0 0 Jan . 0 5 M rz. 0 5 M a i . 0 5 Ju l . 0 5 S ep . 0 5 N o v . 0 5 J an . 0 6 D a i l y N u m b er o f S h a re s T ra d e d (G erm an E x c h an g es ) D L G T e c D a x P rei s i n d e x N A S D A Q C o m p P h i l a d e l p h i a S em i c o n d u c t o r I n d e x 4 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance 3 Year share price development relative to relevant benchmark indexes (in Euro terms) 5,0 0 4,5 0 4,0 0 3,5 0 3,0 0 2,5 0 2,0 0 1,5 0 1,0 0 0,5 0 0,0 0 J an . 0 3 A pr. 0 3 J u l . 0 3 O k t . 03 J an . 0 4 A p r. 04 Ju l . 0 4 O k t . 04 J an . 0 5 A p r. 0 5 Ju l . 05 O k t . 05 J an . 0 6 D L G T ec D ax Pri c e I n d ex N A S D A Q C o m p P h i l ad el p h i a S em i c o n d u c t o r I n d ex Share Fundamentals for the Financial Year 2005 Total number of shares outstanding and registered as of December 31, 2005 46,068,930 Weighted average number of shares during 2005 (basic): Weighted average number of shares during 2005 (diluted): Type: Par Value (in £): Bloomberg Symbol: Reuters Symbol: ISIN: 44,172,908 45,183,202 Bearer Shares 0.10 DLG DLGS GB0059822006 Key figures for the fiscal year 2005 based on weighted average number of shares (basic) Sales per share (from continuing operations in €): 2.93 Operating profit per share (from continuing operations in €): 0.06 Net loss per share (in €): Book value per share as of December 31, 2005 Accounting standards: Market data 2005 Exchange segment Germany: 1.94 (0.53) IAS/IFRS Designated sponsor: Market capitalization as of December 31, 2005 (in millions of €): Turnover of shares during 2005: Prime All Share, Prime Technology, Technology All Share West LB 124 256,464 shares / day Annual Report 2005 | 5 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 share is traded in Germany on the XETRA and Frankfurt regulated and official markets and on all other German regional exchanges on the open market. American Depositary Shares of Dialog Semiconductor Plc (ADS) are traded on the NASDAQ Na- tional Market in the USA. Dividend policy Dialog Semiconductor participates in in- dustries that are considered to be global growth engines and provides its services and products to the major players in these industries. Thus, as a typical growth com- pany we are committed to re-investing our surpluses entirely into our business. Dia- log’s Board and of Directors is convinced that re-investing all profits into future growth is in the best interests of the share- holders of the company. Investor Relations: The company is positioning itself as a growth company within the global semi- conductor industry. We target our investor relations activities at all investors, private and institutional, who focus on growth falling to the bottom line and resulting in above average capital gains in their in- vestments. The Dialog Semiconductor share is covered by a growing number of analysts represent- ing major German banks and research institutions. During the Financial Year 2005 we held our regular annual analysts’ con- ference in February and had in addition regular meetings and telephone conferences with analysts. All information provided including presentations, press releases and reports of the company as well as the rec- ommendations of analysts covering the company can be downloaded from the corporate website www.dialog- semiconductor.com. 6 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance Shareholder Structure Information regarding the main sharehold- ers of the company is shown in the follow- ing graph. 18,37% APAX Partners 5,47% Adtran, Inc. 76,16% Freefloat Freefloat Freefloat includes 5,043,095 shares (10.9%) held by the Capital Group Companies Inc. as notified on May 5, 2006 on behalf of discretionary clients, 1,780,000 shares (3.9%) held by Standard Capital Partners Disclosure of Interests The provisions of the UK Companies Act 1985 require that any person acquiring 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 com- N.V. (Rhine Alpha and its associated funds) as notified on October 14, 2005 and 1,691,155 shares (3.7%) held by the Dialog Semiconductor Plc Benefit Trust. pany's general meetings must inform the company of its interest within two working days. If the 3 percent interest is exceeded, the shareholder must inform the company of any increase or decrease of one percent- age point in its interest. Annual Report 2005 | 7 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 Profile Innovative IC solutions for wireless, automotive and industrial electronics 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 designing low power mixed signal circuits for sensing, processing and conversion, high quality audio as well as expert han- dling of high voltages on CMOS technol- ogy. Our business model is a ‘fabless’ one whereby we design ICs, outsource produc- tion 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 multimedia display drivers and intelligent motion control sys- tem-on-chip products. 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. 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. Global Presence Our corporate headquarters office is located near Stuttgart, Germany. We have product development facilities at Kirchheim, Hei- delberg and Munich in Germany, Graz in Austria, Swindon, UK and Tokyo, Japan. To support our growing customer base we have additional sales offices in Japan, Taiwan, and the USA. 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, process audio sig- nals and convert analog or digital data for wireless handsets also provides us with the ability to deliver competitive solutions in automotive and industrial applications. Our Employees In the year ended December 31, 2005 we had a global workforce of 238 employees in eight locations worldwide, the majority of whom are employed in R&D functions. This reduced headcount reflects the transfer of 41 employees to the Imaging and camera module business spinout company. 8 | Annual Report 2005 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 Mission and Strategy business model (cid:132) Remaining focused on our existing Dialog Semiconductor’s mission is: “To be the leading global supplier of lowest power, highest quality mixed signal com- ponents 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 in- dustry leaders (cid:132) Building on a common technology platform (cid:132) Marketing Application Specific Stan- dard Parts solutions (cid:132) Proactively refining customers’ system architecture (cid:132) Expanding engineering expertise (cid:132) Selectively expanding global capabili- ties (cid:132) Delivering the highest quality products (cid:132) Becoming partner of choice for power management ICs for key 3G platform chipset providers The success of this strategy is demonstrated by the strong and growing relationships we have developed with some of our high profile, high volume customers. They see Dialog Semiconductor as a flexible partner and an integral part of their overall supply chain. We work with our customers to rapidly develop appropriate responses, both techni- cally and commercially, to changing mar- ket trends and requirements. Through our relationships with partners and manufac- turers, we then ensure rapid delivery of quality-approved products to the customer. Annual Report 2005 | 9 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 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, 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, the key factor driving the pace of development of our product solutions is the rapid evolution of smaller and more sophisticated devices packed with advanced capabilities such as wireless communications, video and audio. This places huge demands on power man- agement and requires excellent imaging 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 display drivers enhance the user experience with the graphical user inter- face. In the automotive and industrial market, our products address the safety, manage- ment and control of electronics systems in the car and highly integrated smart power electronics management systems such as electronic ballasts for lighting. In all our product areas, our customers acknowledge our leadership in creating innovative silicon solutions in 100% CMOS technology - fully tested and delivered quickly to achieve competitive time-to- market objectives. 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. Our main product categories are: (cid:132) Power management and audio ICs (cid:132) Liquid crystal display drivers (cid:132) Application Specific ICs (ASICs) Power Management and audio ICs The drive towards smaller and more sophis- ticated portable consumer electronics prod- ucts challenges designers and manufactur- ers to achieve maximum battery life. Effec- tive power management is therefore an increasingly vital part of the system – an area in which Dialog Semiconductor has considerable experience as a result of de- signing chips for hundreds of millions of cellular handsets. We continue to develop new power management products such as the DA9025, DA9027 and DA9035 as well as the lightshow processor DA9026 during 2005. 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 mobile phones take advan- tage of the benefits of integrating high performance audio CODEC functions with power management circuits. The two are complementary functions that can be de- signed onto a single chip, enabling one chip to both improve battery life and pro- We address two major markets: Wireless Automotive / Industrial New power management ICs: DA9025, DA9027, DA9035 10 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance Color LCD driver: DA8914A, DA8984A, DA8987 vide digital audio playback or hi-fi quality voice. This results in unique power management and audio chips which are highly inte- grated and contain over 30 different func- tions, all in a single chip. Typical functions include: (cid:132) Smart mirror™ LDO (low dropout volt- age) regulators – minimizing current consumption and simplifying circuit design (cid:132) High efficiency buck and boost con- 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, Li-Ion 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 Liquid Crystal Display Drivers In 2005 we launched a further range of color liquid crystal display (LCD) drivers providing real innovation for the mobile phone display market. Delivered as stan- dard parts ready for production, the DA89xx family delivers superior color performance and low power consumption, while providing mobile phone handset makers the flexibility to customize display parameters for creating differentiation. Products include the new DA8914A, DA8984A and DA8987, which incorporate fully integrated graphic display memory with high speed interfaces and various power management functions to enable a single, low power chip to manage the dis- play in next generation mobile phone handsets and portable electronic products. The devices offer fast display graphic trans- fer rates, supporting moving images. Going forward, Dialog is shifting its strate- gic emphasis from lower margin commod- ity end of the display driver chip market towards more value-added, differentiated display driver chips. 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. Our family of color display drivers is spe- cially developed for the growing number of wireless handsets with high-resolution color displays or with dual displays. The color STN (super-twisted nematic) liquid crystal display (LCD) drivers provide excel- lent resolution of up to 65,000 colors, and address a demand for higher performance full color, high speed moving images using MLA (multi-line addressing) LCD techno- logy. This ensures faster response time compared to conventional passive matrix displays, and high-speed moving images are supported while maintaining very low power consumption. 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 DC- 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. Annual Report 2005 | 11 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance In automotive electronics, our ASICs con- trol safety, engine management and com- fort electronics for the top automobile manufacturers. This takes advantage of Dialog’s competence in power management systems and mixed signal design and its knowledge of integrating high performance analog circuits and high-density digital logic and high voltage circuits on a single chip in a standard CMOS process. Our partnership with leading automotive equipment suppliers has also resulted in the development of chips able to connect di- rectly to high voltage circuits of up to 40V. In industrial systems, our single chip solu- tions integrate high voltage low power 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 integra- tion 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 and foundry capacity. This en- ables our customers to meet both costs and time-to-market objectives for their prod- ucts. We also have our own process engi- neers in-house to ensure our customers benefit from the optimum capability from a process. 12 | Annual Report 2005 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 Principal Customers Our principal customers are recognized wireless communications, consumer elec- tronics, and automotive equipment manu- facturers. These include customers for both our standard products introduced over the last years and for 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 for standard products or for custom solutions. Hence our customers look to Dialog as an outside source of expertise, 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, then test the products in-house, before final delivery to customers. The product cycle is as fol- lows: (cid:132) Design and development (cid:132) Manufacture of wafers (cid:132) Assembly and testing (cid:132) Quality and environment control 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 100 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- while the close working relationship pro- vides us with an opportunity to continually develop and fine-tune market leading tech- nological expertise with recognized indus- try leaders. We have long-term relationships with customers such as Ericsson, Motorola, BenQSiemens and Sharp for cellular phones; Adtran for wireline communica- tions applications; Bosch and Conti Temic for automotive applications; and Tridonic for industrial applications. level simulation to identify system design incompatibilities at an early stage. Our focus is on furthering our technology expertise in power management, audio- CODECs 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 expenditure on research and development in 2005 was €21 million. This expenditure was focused on enhancing our leading edge analog design, DSP tech- niques, high voltage process R&D and CAD tools as well as test and verification sys- tems. 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, which is essential for the target markets we address. Annual Report 2005 | 13 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance 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. 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. 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 foundry premises to resolve any potential engineering issues and to ensure both the quality and timely delivery of the finished product. 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 impact 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- 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 who are also qualified to the same international quality standards. 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. Our quality management system has been established and is maintained to provide customers with the assurance that our products and services fulfill both their contractual re- quirements 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, 14 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance 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 Interna- tional Financial Reporting Standards (IFRS). Executive Summary We are a global supplier of power man- agement, audio and display driver technol- ogy, delivering innovative mixed signal standard products as well as application specific integrated circuits for wireless, automotive and industrial applications. To date, we have shipped over 600 million integrated circuits for mobile 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 cus- tomers 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 for specified periods and/or volumes. Po- tential price reductions in subsequent peri- ods are typically offset with lower produc- tion 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, customer acceptance and implementation of our designs in large-scale production and con- tinued demand from our key customers for the development of new products. Partner- ships with companies at all levels of busi- ness 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 on our research and development activities, which are essential for us to respond to our customers’ cutting edge silicon solutions requirements and also to maintain our competitiveness in our mar- ket. Consequently, it is critical for us to make significant and ongoing cash expen- ditures to fund our research and develop- ment activities. We have also made signifi- cant investments in long-lived assets, pri- marily 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, from cash generated from operations in previous years and from recoveries of certain of our investments and deposits. Substantially all of our near term future cash inflows are expected to come from the sale of our products. We generally collect cash from our customers within 69 days after product delivery. However, we derive a substantial portion of our revenues from a relatively small number of wireless communications manufacturers. Sales to three customers accounted for 64% of total revenues in 2005. Therefore, the main action we are taking to minimize the risk of this depend- ency is developing new products for new customers; such new products include a range of color liquid crystal display drivers and new intelligent motion control ICs in the automotive market. We anticipate ma- terial opportunities in the future to include growth in our main market, cellular hand- sets, based on the expected transition to 3G, and further worldwide growth in semi- conductor sales, especially in Asia. How- ever, our revenues, profitability and growth could decline if the growth in these markets slows. We believe that our key performance indicators driving our operating profit or loss are revenues, gross margin and re- search and development costs. Accordingly, our Board of Directors and management use operating profit as a measure of per- formance. More than 600 million ICs shipped New products reduce dependency on few customers Operating profit is a key performance indicator Annual Report 2005 | 15 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance 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. State- ments 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 condi- tions in the semiconductor and telecommu- nications markets, exchange rate and inter- est rate movements, capital and credit market developments, the timing of cus- tomer orders and manufacturing lead times, the changes in customer order and payment patterns, the financial condition and strate- gic plans of our major customers, insuffi- cient, excess or obsolete inventory, the impact of competing products and their pricing, product development, commerciali- zation and technological difficulties, politi- cal risks in the countries in which we oper- ate and 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 state- ment of all potential risks or uncertainties. We do not assume any obligation to update forward-looking statements. The following table sets forth historical consolidated statements of operations of Dialog for the fiscal years ended December 31, 2005 and 2004 in thousands of Euros and as a percentage of revenues: 2005 % 2004 % Change (in thousands of €) Revenues Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Operating profit Interest income, net Foreign currency exchange gains and losses, net Other income Result before income taxes Income tax expense 129,406 (92,529) 36,877 (7,205) (6,349) (20,624) 2,699 723 1,018 28 4,468 (15,296) Net income from continuing operations (10,828) 100.0 115,786 (71.5) 28.5 (5.6) (4.9) (79,293) 36,493 (6,272) (5,557) (15.9) (22,369) 2.1 0.6 0.8 0.0 3.5 (11.8) (8.3) 2,295 1,081 (726) 54 2,704 (64) 2,640 % 11.8 16.7 1.1 14.9 14.3 (7.8) 17.6 (33.1) 240.2 (48.1) 65.2 23,800.0 (510.2) 100.0 (68.5) 31.5 (5.4) (4.8) (19.3) 2.0 0.9 (0.6) 0.0 2.3 (0.1) 2.2 Loss from discontinued operations (12,517) (9.7) (8,862) (7.7) 41.2 Net loss (23,345) (18.0) (6,222) (5.5) 275.2 16 | Annual Report 2005 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 Segment Reporting Revenues in the wireless communications sector were €103.4 million for the year ended December 31, 2005 compared with €90.4 million for the year ended December 31, 2004, comprising 79.9% and 78.0% of our total revenues from continuing opera- tions for those periods. The increase in this sector resulted from higher sales volumes of new products introduced in 2005, pri- marily color display driver ICs. Operating profit in this sector decreased from €5.2 million for the year ended December 31, 2004 to €4.5 million for the year ended December 31, 2005. Revenues from our automotive / industrial applications sector were €26.0 million and €25.4 million for the years ended December 31, 2005 and 2004, respectively, represent- ing 20.1% and 22.0% of our total revenues from continuing operations for those peri- ods. Operating profit in the sector was €1.0 million in 2005, compared to an operating loss of €1.2 million in the previous year. Revenues Revenues were €129.4 million for the year ended December 31, 2005 compared with €115.8 million for the year ended Decem- ber 31, 2004. The increase of 11.8% in revenues primarily resulted from higher sales volumes in the wireless communica- tions sector as described above. Regional growth was particularly strong in Asia where revenues increased from €42.1 million (€19.7 million in China, €4.8 mil- lion in Japan and €17.5 million in other Asian countries) to €74.0 million (€21.6 million in China, €18.9 million in Japan and €33.5 million in other Asian countries) for the years ended December 31, 2004 and 2005, respectively. 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 16.7% from €79.3 million (68.5% of our total revenues) for the year ended December 31, 2004 to €92.5 million (71.5% of our total revenues) for the year ended December 31, 2005, in line with increased production volumes. Also, cost of sales in 2005 in- cludes a provision for excess inventory of €6.6 million compared to a provision for excess inventory of €0.7 for the year end- ing December 31, 2004. 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 €6.3 million or 5.4% of total revenues for the year ended December 31, 2004, to €7.2 million or 5.6% of total revenues for the year ended December 31, 2005, in line with increased production volume and in connection with a higher proportion of sales volumes primarily in Asia of prod- ucts subject to commission payments. 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 €5.6 million for the year ended December 31, 2004 to €6.3 million for the year ended December 31, 2005, primarily due to settlement ar- rangements with senior executives. As a result general and administrative expenses increased from 4.8% of total revenues for the year ended December 31, 2004 to 4.9% of total revenues for the year ended De- cember 31, 2005. Research and Development Expenses Research and development expenses consist principally of design and engineering re- lated costs associated with the development of new application specific integrated cir- cuits (“ASICs”) and application specific standard products (“ASSPs”). Research and development expenses decreased from €22.4 million for the year ended December 31, 2004 to €20.6 million for the year ended December 31, 2005 as a result of certain cost saving measures. As a percent- Revenues (in millions of €) 120 100 2004 2005 Cost of Sales (in millions of €) -50 -75 -100 2004 2005 Research and Development Expenses (in millions of €) -15 -20 -25 2004 2005 Annual Report 2005 | 17 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance 31, 2005 and 2004, respectively. The change in income taxes mainly reflects an additional valuation allowance on deferred tax assets of €15.3 million primarily related to the uncertainty about the future realiza- bility of our German tax-loss carryfor- wards. We have evaluated our deferred tax asset position and the need for a valuation allowance as a result of further losses in- curred in 2005 and a lack of visibility of profitability in 2006. Our assessment con- sidered the weight given to cumulative tax losses incurred in Germany over the five- year period ended December 31, 2005, as well as detailed forecasts of taxable income in the foreseeable future. Although we forecast generating future taxable income beginning 2007, pursuant to IAS 12 and the inherent uncertainties in projecting future taxable income, we concluded that our tax losses may not ultimately be real- ized. Consequently, we recognized an addi- tional valuation allowance as of Decem- ber 31, 2005. Loss from discontinued operations The losses from discontinued operations were €12.5 million and €8.9 million in the years ended December 31, 2005 and 2004, respectively. The losses in both years con- sist of the operating losses of our Imaging division. The loss in 2005 also includes a write-down of certain assets attributable to the Imaging business. For further informa- tion please see note 4 to the consolidated financial statements. Net Loss For the reasons described above, we re- ported a net loss of €23.3 million and €6.2 million for the years ended December 31, 2005 and 2004 respectively. Loss per share (basic) was €0.53 in 2005 and €0.14 in 2004. age of total revenues research and devel- opment expenses decreased from 19.3% to 15.9% in those periods, resulting from the absolute decrease and a higher revenue base in the latter period. Operating Profit We reported an operating profit of €2.7 million for the year ended December 31, 2005 and €2.3 million for the year ended December 31, 2004, an increase of 17.6%. This increase in operating profit was pri- marily due to the increase in revenues, offset by higher inventory write-downs. Interest Income, net Interest and similar income, net from the Company’s investments (primarily short- term deposits and securities) was €0.7 million for the year ended December 31, 2005 and €1.1 million for the year ended December 31, 2004, reflecting mainly higher cash equivalents and marketable securities balances during 2004. Foreign Currency Exchange Gains and Losses, net Foreign currency transaction gains and losses result from amounts ultimately real- ized upon settlement of foreign currency transactions and from the period end re- measurement of foreign currency denomi- nated receivables and payables into Euro. Foreign currency exchange gains, net were €1.0 million for the year ended December 31, 2005 compared with foreign currency exchange losses, net of €0.7 million for the year ended December 31, 2004. The loss in 2004 was primarily due to the reduction in value of the US Dollar against the Euro over the period. The gain in 2005 was primarily due to the increase in value of the US Dollar against the Euro over the period. Income Tax Expense Income tax expense was €15.3 million and €64 thousand for the years ended December 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. Operating Profit (in millions of €) 3 0 2004 2005 18 | Annual Report 2005 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 from our wireless communica- tions applications accounted for 80% of our total revenues for the year ended December 31, 2005, 78% of our total revenues for the year ended December 31, 2004, 75% of our total revenues for the year ended December 31, 2003 and 71% of our total revenues for the year ended December 31, 2002. Market Trends The year has been one of fast-paced change in the consumer and in-car electronics industry. In 2004, we had expected conver- gence and 3G to play a key part in the growth outlook for 2005 – and indeed it has proved to be fairly accurate. The key headline trends that are particularly rele- vant to Dialog Semiconductor’s business are indicated in the following section. Cellular handsets Total cellular handset shipments exceeded 816 million in 2005, representing a signifi- cant 14% growth over 2004 (iSuppli, Feb 1, 2006). A significant trend in this growth during 2005 has been the consolidation of market position among the top five handset manufacturers, which through economies of scale and global reach have squeezed out second tier players – manufacturers outside the top five lost 18% of their previous market share. This trend is likely to con- tinue as the leading players will be best positioned to capture the ultra low cost and the high performance 3G market spaces. While new cellular subscriber additions are relatively static in most developed markets, subscribers trading up to more advanced phones, or replacement phones, are con- tinuing to increase and account for up to 30 percent of the market. In 2005, 3G cellular systems became firmly established, taking a substantial share of the replacement market in Europe, with one of the key drivers for growth being the introduction by manufacturers of new 3G phone models in form factors comparable to their 2.5G counterparts. Dialog Semi- conductor’s solutions address the WCDMA sector of 3G, and worldwide WCDMA shipments grew over 140% in 2005 to 46.4 million (Gartner, Feb 2006). As network operators increase promotional activity to boost the market and new applications such as mobile TV spur further demand, this rapid growth trend is expected to continue for the next two years. Convergence devices Personal media players and personal navi- gation devices are just two examples of products that have seen significant growth in 2005. Music players started off as devices playing MP3 and other encoded audio formats but quickly transformed into personal media players handling pictures and video. This market has grown spectacularly in the past two years and is forecast to continue with CAGR of 30.2% for the next five years (InStat, June 05). These applications re- quire both audio and power management and LCD driver solutions with both cost and performance being key metrics. Personal navigation devices are effectively single application PDAs (personal digital assistants). Whilst the traditional PDA market has stagnated at around 15 million units per year, new applications such as the navigation device are expected to double in growth in coming years. Built around a powerful applications processor, these devices require audio and power manage- ment functionality similar to that seen in high-end smart phones. Automotive The demand for in-car electronics contin- ued to be strong during 2005, especially as more and more vehicles provide as part of the standard accessories or options package many of the features once found in only top-of-the-range cars. In particular, Dialog Semiconductor’s motion control ICs enable intelligent motor controllers found all over the car – such as in windscreen wipers, seat controls and window controls. 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 to add new Asian customers, Sales of mobile devices in 2005 exceeded all expectations and closed at 816.6 million units Annual Report 2005 | 19 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance regional growth was particularly strong in Asia in 2005, where revenue increased by 76% from €42.1 million for the year ended December 31, 2004 to €74.0 million for the year ended December 31, 2005. In Ger- many, we experienced decline in demand for our ASIC products where revenue de- creased by 47% from €47.7 million for the year ended December 31, 2004 to €25.4 million for the year ended December 31, 2005, due primarily to the fact that one customer based in Germany relocated parts of the production to Asia. In 2004, regional growth was particularly strong in Asia where revenue increased 69% from €24.9 million for the year ended December 31, 2003 to €42.1 million for the year ended December 31, 2004. Revenue Trends Due to the cell phone customers phase out of Dialog 2G chips and partial adoption of competing intermediate solutions prior to adoption of Dialog's 3G ICs, and increased competitive pressures for display driver chips we expect revenues for the year ending December 31, 2006 to be lower than those for the year ended December 31, 2005. Our forward visibility with respect to customer demand is limited and a success- ful introduction of new products depends on the completion of new designs on a timely basis. Our revenues for 2006 will also be highly dependent on continued growth in the worldwide market for cellular handsets. Gross Margin Trends Our gross margin decreased from 31.5% of revenues for the year ended December 31, 2004 to 28.5% of revenues for the year ended December 31, 2005, primarily result- ing from a higher provision for excess inventory. We expect the near term future gross margin percentage to fall below the gross margin percentage achieved in 2005 as a result of lower utilization of our inter- nal test operations and lower margins of certain display driver products. Research and Development Expenditure Trends Research and development expenditure amounted to €20.6 million in 2005 and €22.4 million in 2004. We expect research and development costs to increase in 2006 as we are planning to add to our headcount in order to strengthen our core competence. Our ability to generate revenues in the long term depends on achieving technical feasi- bility from our research and development programs, and on customers accepting our designs and implementing them in large- scale production. Foreign Currency Exchange Rate Trends The reporting currency for our consolidated financial statements is the Euro. The 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 the results of our operations. Our sales are primarily denominated in US Dollars and Euro, whereas our purchases of raw materials and manufacturing services are primarily de- nominated in US Dollars. In order to hedge our foreign currency exposure, primarily to the US Dollar, we attempt to match cash inflows and outflows in the same currency. Since its introduction on January 1, 1999, the Euro has fluctuated in value against the US Dollar. From the date of its introduction through to December 31, 2001, the Euro declined approximately 25% against the US Dollar. By March 14, 2006 the Euro had recovered to 102% 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- 20 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance tions to hedge against exchange rate fluc- tuations. For the year ended December 31, 2005, 69% of our revenues were denominated in US Dollars, 19% were denominated in Euro and 12% were denominated in Japanese Yen, and 84% of our material costs were denominated in US Dollars and 16% were denominated in Euro. 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 material costs were denominated in Euro and 82% were denominated in US Dollars. We also have foreign currency risks 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 provided by operating activities was €10.3 million for the year ended December 31, 2005 compared with cash used for operating activities of €8.6 million for the year ended December 31, 2004. The cash inflow in 2005 primarily resulted from lower inventory balances. During the year ended December 31, 2004 we used cash to finance our growing working capital re- quirements, and inventory and accounts receivable were up as our business volume increased. In addition, in 2004 we increased inventory to meet previously projected forecasts of our customers. Cash used for investing activities was €7.5 million for the year ended December 31, 2005 compared with cash provided by investing activities of €14.5 million for the year ended December 31, 2004. Cash used for investing activities for the year ended December 31, 2005 consisted mostly of the purchase of test equipment, tooling (masks), laboratory equipment, probecards and loadboards of €4.0 million and the pur- chase of software and licenses of €5.5 million. Cash provided by investing activi- ties 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 soft- ware, licenses and patents of €0.7 million. Liquidity At December 31, 2005 we had €16.9 mil- lion in cash and cash equivalents and €14.9 million in marketable securities. The work- ing capital was €64.8 million. As of December 31, 2005 we had no long- term debt other than deferred payments for acquired software licenses. A decrease in customer demand for our products caused by unfavorable industry conditions or an inability to develop new products in re- sponse to technological changes could materially reduce the amount of cash gen- erated from operations. If necessary, we have available for use short-term credit facilities of €12.5 million that bear interest at a rate of EURIBOR + 0.75% per annum. At December 31, 2005 we had no amounts outstanding under these facilities. Accordingly, we believe the funding available from these and other sources will be sufficient to satisfy our working capital requirements in the near to medium term. Capital Expenditures and Investments Purchases of property, plant and equipment were €4.0 million for the year ended De- cember 31, 2005 compared to €12.3 million for the year ended December 31, 2004. Our capital expenditures in 2005 and 2004 consisted primarily of purchasing new or replacement test systems, tooling equip- ment, handling systems and other equip- ment in the ordinary course of our busi- ness. Capital expenditures in 2004 were higher than in 2005 as in 2004 we up- graded eight test systems enabling us to test four ICs in a single test step, and added certain test equipment to test color display Annual Report 2005 | 21 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance and image sensor ICs. Purchases of intangi- ble assets were €8.8 million in 2005 and €0.3 million in 2004. In 2005 acquisitions primarily related to three year licensing contracts for the use of electronic design automated tools. See note 12 to the con- solidated financial statements. In future periods, we may make strategic investments or acquisitions in connection with our plans to expand our business internationally. Balance Sheet Balance sheet total as of December 31, 2005 and as of December 31, 2004 amounted to €103.1million and €127.1 million, respectively. Current assets de- creased from €86.2 million as of December 31, 2004 to €79.1 million as of December 31, 2005. In line with growing sales vol- umes in the course of the year inventories were sold off and certain write-downs were recorded, leading to a decline of €12.6 million as against the end of last year and accounts receivable increased by €4.3 million. Long-term assets decreased from €40.9 million, or 32.2% of the balance sheet total, as of December 31, 2004 to €24.0 million, or 23.3% of the balance sheet total, as of December 31, 2005, mainly caused by the increase of the de- ferred tax asset valuation allowance of €15.3 million, the depreciation and amorti- zation of property, plant and equipment and intangible assets of €10.0 million and a write-down of the carrying value of assets to be contributed to Dialog Imaging Sys- tems in 2006 of €3.9 million. See note 4 to the consolidated financial statements. This was partially offset by capital expenditures and investments in 2005 of €12.8 million. Current liabilities in 2005 were €4.6 million below the previous year’s level. Non- current liabilities amounting to €2.9 million consisted exclusively of the financing equivalent related to software and licences purchased during the year. See note 12 to the consolidated financial statements. Shareholders’ equity decreased from €108.2 million at December 31, 2004 to €85.9 million at December 31, 2005 due to the net loss in 2005. The very solid equity ratio decreased slightly to 83.3% from 85.1%. Off-Balance Sheet Arrangements and Other Commitments We have no off-balance sheet arrange- ments involving variable interest entities. We lease all of our office facilities, office and test equipment, and vehicles under operating leases. In addition we have con- tracted consulting services related to CAD (computer aided designs) until June 30, 2009. Future minimum payments under these agreements, which have initial or remaining terms in excess of one year at December 31, 2005, are as follows. (in thousands of €) 2006 2007 2008 2009 2010 Thereafter Total Operating leases 3,817 2,573 1,980 1,068 197 154 9,789 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 €1.1 million with one supplier, which will be refunded in propor- tion to our purchases of wafers. Dividends We did not pay dividends in the years ended December 31, 2005 and 2004. We do not currently plan to pay dividends in the foreseeable future. 22 | Annual Report 2005 Shareholder Information 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 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 At December 31, 2005, the carrying value of our property, plant and equipment was €15.7 million. As discussed in note 2 to the consolidated financial statements, recov- erability of these long-lived assets that will continue to be held and used is evaluated whenever an indication of impairment exists. Then we will compare the carrying value of the asset or group of assets to the net undiscounted cash flows expected to be generated by the asset or group of assets. If the asset or group of assets is considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the impaired asset or group of assets exceeds its fair value. We do not believe that our ability to recover the carrying value of our long- lived assets has been impaired. As of December 31, 2005 we recorded a write- down of the carrying value of assets to be contributed to the spin out of our Imaging Division in 2006 of €3.9 mil- lion. See note 4 to the consolidated financial statements. A general eco- nomic downturn and, specifically, a continued downturn in the semiconduc- tor industry would intensify competitive pricing pressure because of overcapacity in the industry, and we could be forced to decrease production and reduce ca- pacity. Such events could adversely affect our estimates of future net cash flows expected to be generated by our long-lived assets. It is reasonably possi- ble that our future operating results could be materially and adversely af- fected by an impairment charge related to the recoverability 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- mates, including both forecasted product demand and pricing environment, both of which may be susceptible to signifi- cant change. At December 31, 2005, our total inven- tory was €17.2 million. In 2005 and 2004, we recorded provisions for excess inventory of €6.6 million and €0.7 mil- lion, respectively. We believe that the carrying value of our inventory will be recovered through customer consump- tion of goods based on their forecasts and related contractual agreements. However, the demand for our products can fluctuate significantly in response to rapid technological changes in the semi- conductor and wireless communications industries. It is reasonably possible that future operating results could be materi- ally and adversely affected if any excess inventory charges are needed. Realization of Deferred Tax Assets Total deferred tax assets (including those that were not recognized) were €34.2 million at December 31, 2005, which include deferred tax assets of €28.3 million on tax loss carryforwards. While the majority of these losses may be carried forward indefinitely, their reali- zation is dependent on generating suffi- cient taxable income to utilize the losses. We have evaluated our deferred tax asset position and considered whether it is probable that some portion or all of the deferred tax assets will not be real- Annual Report 2005 | 23 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance ized. The assessment requires the exer- cise 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 the group, as well as detailed forecasts of taxable income in the foreseeable future. Although we forecasted future taxable income, pursuant to the inherent uncer- tainties in projecting future taxable income, we concluded that our tax losses may not ultimately be realized. Conse- quently, we recognized an additional valuation allowance as of December 31, 2005. 24 | Annual Report 2005 Shareholder 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' desire and to keep abreast of technologi- cal changes within the semiconductor industry generally. It is not possible to predict or identify all relevant risk fac- tors 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 five 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 2005 | 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 Outlook Wireless In 2006 and beyond, one of the most excit- ing drivers for the cellular industry is ex- pected to be the rapid transition to 3G and HSDPA (high speed downlink packet ac- cess) technologies – which will enable new multimedia capabilities such as DVB-H TV, MP3, video and games download and pos- sibly much more. In 3G alone, Gartner predicts WCDMA will be the dominant technology in 2006, with 105.4 million handset shipments predicted – more than double that of 2005 for WCDMA. The com- mercial roll out of HSDPA in 2006 will add further momentum to 3G in 2007. In the overall mobile handset market, most forward projections show slower growth in handset sales with forecasts of about 4.9% growth in 2006 and similar trends in future years. However, Strategy Analytics offers a more bullish picture, forecasting a 14 per- cent growth in 2006 to 930 million units. Whichever end of the range of the forecasts is taken, one fact is clear – it will not be too long before mobile phone shipments surpass one billion units. As Gartner had said last year, “The world's appetite for mobile phones has exceeded even the most optimistic expectations. Mobile phones could go on to be the most common con- sumer electronics devices on the planet.” While the transition to 3G handsets drives the high-end and developed markets, ultra low cost phones are expected to drive subscriber growth in emerging markets, providing an ideal opportunity for Dialog Semiconductor’s family of LCD display drivers. Personal media players with many func- tions and single application portable de- vices or PDAs will also continue to gener- ate demand for greater portability and longer battery life. Automotive In the automotive sector, Mercer Manage- ment Consulting says ‘dramatically high growth’ is expected in the area of elec- tric/electronic modules. Such applications are estimated to represent more than 50 percent of the entire additional value added of €280 billion to be obtained by the global automotive equipment industry in the period until 2015, says Mercer. Dialog Semiconductor entered 2006 with a business now entirely focused on develop- ing best in breed power management IC solutions and a wide variety of advanced LCD display driver products for the rapidly growing consumer cellular and automotive markets, and is therefore well positioned to take advantage of the opportunities offered by these trends. 26 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance Independent Auditors’ Report To the Board of Directors of Dialog Semi- conductor Plc: We have audited the accompanying con- solidated balance sheet of Dialog Semicon- ductor Plc and subsidiaries (“the Company”) as of December 31, 2005 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the year then ended. These con- solidated financial statements are the re- sponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. 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, evi- dence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluat- ing the overall financial statement presen- tation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Com- pany as of December 31, 2005, and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Stan- dards. Without qualifying our opinion, we draw attention to Note 3 to the consolidated financial statements which discusses that the Company has restated its financial statements. Stuttgart, Germany May 18, 2006 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Annual Report 2005 | 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 Consolidated Financial Statements Consolidated Statements of Operations (in thousands, except per share data) Revenues Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Operating profit Interest income Interest expense Foreign currency exchange gains and losses, net Other income Result before income taxes Income tax expense Net income from continuing operations Loss from discontinued operations Net loss Net loss per share Basic and diluted Net loss per share from continuing operations Basic Diluted Weighted average number of shares (in thousands) Basic Diluted Notes 18 2005 2005 2004 $153,243 €129,406 €115,786 (109,573) 43,670 (8,532) (7,518) (24,423) 3,197 1,009 (153) 1,206 33 5,292 (92,529) 36,877 (7,205) (6,349) (20,624) 2,699 852 (129) 1,018 28 4,468 (18,114) (12,822) (15,296) (10,828) (79,293) 36,493 (6,272) (5,557) (22,369) 2,295 1,086 (5) (726) 54 2,704 (64) 2,640 (14,823) (12,517) (8,862) (27,645) (23,345) (6,222) (0.63) (0.53) (0.14) (0.29) - 44,173 45,183 (0.25) - 44,173 45,183 0.06 0.06 44,025 45,074 18 6 4 2 2 The accompanying notes are an integral part of these Consolidated Financial Statements 28 | Annual Report 2005 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 Sheet (in thousands) ASSETS Cash and cash equivalents Marketable securities Trade accounts receivable, net Inventories Prepaid expenses Other current assets Total current assets Property, plant and equipment, net Intangible assets Deposits Deferred taxes Prepaid expenses TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Trade accounts payable Accrued expenses Income taxes payable Other current liabilities Total current liabilities Non-current liabilities Ordinary Shares Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Employee stock purchase plan shares Net Shareholders’ equity Notes At December 31, 2005 At December 31, 2005 At December 31, 2004 7 7 8 9 10 11 12 6 10 18 13 $20,037 €16,920 €13,977 17,633 33,589 20,315 598 1,489 93,661 18,603 8,497 243 - 1,133 14,890 28,364 17,155 505 1,257 79,091 15,710 7,175 205 - 957 17,542 24,036 29,794 616 281 86,246 21,238 3,144 194 15,245 1,077 122,137 103,138 127,144 10,643 4,230 28 2,043 16,944 8,987 3,572 24 1,725 14,308 15,429 2,204 9 1,275 18,917 3,472 2,932 - 8,323 199,931 (104,945) (1,291) (297) 14 101,721 7,028 168,832 (88,621) (1,090) (251) 85,898 7,028 168,782 (66,328) (958) (297) 108,227 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 122,137 103,138 127,144 The accompanying notes are an integral part of these Consolidated Financial Statements Annual Report 2005 | 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 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 Restructuring and related impairment charges Stock compensation Depreciation of property, plant and equipment Write-down of imaging assets Amortization of intangible assets Increase in deferred tax asset valuation allowance Losses on disposals of fixed assets Interest income, net Income tax expense Changes in working capital: Trade accounts receivable Inventories Prepaid expenses Trade accounts payable Accrued expenses Other assets and liabilities Cash generated from operations Interest paid Interest received Income taxes paid Income taxes received 2005 2005 2004 $ (27,645) € (23,345) € (6,222) (33) - 1,246 9,022 4,639 3,324 18,097 50 (856) 17 (5,100) 14,967 278 (7,586) 1,602 (360) 11,662 (1) 570 (33) - (28) - 1,052 7,619 3,917 2,807 15,282 42 (723) 14 (4,307) 12,639 235 (6,406) 1,353 (304) 9,847 (1) 481 (28) - Cash provided by (used for) operating activities 12,198 10,299 Cash flows from investing activities: Recovery of investment Purchases of property, plant and equipment Purchases of intangible assets Investments and deposits received (made) Purchase 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 Cash provided by financing activities Cash provided by operating, investing and financing activities Effect of foreign exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 33 (4,779) (6,546) (8) - 2,378 (8,922) - 114 114 3,390 96 3,486 16,551 20,037 28 (4,036) (5,528) (7) - 2,009 (7,534) - 96 96 2,861 82 2,943 13,977 16,920 The accompanying notes are an integral part of these Consolidated Financial Statements 30 | Annual Report 2005 (54) (387) 675 11,501 - 1,383 - 147 (1,081) 64 (9,697) (16,552) 1,362 8,276 (77) 942 (9,720) (5) 1,086 (49) 87 (8,601) 54 (12,321) (675) (20) (49,670) 77,087 14,455 (21) 30 9 5,863 5 5,868 8,109 13,977 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 comprehensive loss Ordinary Shares Additional paid-in capital Accumu- lated deficit Currency translation adjust- ment Available for sale securities Employee stock purchase plan shares Total Balance at December 31, 2003 6,737 168,795 (60,781) (924) Net loss Other comprehensive income (loss) Total comprehensive loss New issuance of shares Sale of employee stock purchase plan shares Equity settled transactions, net of tax Balance at December 31, 2004 Net loss Other comprehensive income (loss) Total comprehensive loss Sale of employee stock purchase plan shares Equity settled transactions, net of tax Balance at December 31, 2005 - - 291 - - - - (22) 9 - (6,222) - - - 675 7,028 168,782 (66,328) - - - - - - 50 - (23,345) - - 1,052 - (6) - - - (930) - 139 - - (69) - 41 - - - (28) - (271) - - (26) 113,732 - - (291) 20 - (6,222) 35 (6,187) (22) 29 675 (297) 108,227 - - 46 - (23,345) (132) (23,477) 96 1,052 7,028 168,832 (88,621) (791) (299) (251) 85,898 The accompanying notes are an integral part of these Consolidated Financial Statements Annual Report 2005 | 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 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 display driver technology, delivering innovative mixed signal stan- dard products as well as application specific IC solutions for wireless, automotive and industrial applications. The Com- pany’s expertise in mixed signal design, with products manu- factured entirely in CMOS technology, enhances the perform- ance and features of wireless, hand-held and portable elec- tronic products. Its technology is also used in intelligent control circuits in automotive and industrial applications. Production of these designs is then outsourced, and the final products are returned to Dialog for approval and testing before delivery to the customers. 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 2005 three customers indi- vidually accounted for more than 10% of the Company's revenues. Total revenues from these three customers were €82,996 or 64%. Net receivables from these three customers were €23,908 at December 31, 2005. During 2004 two cus- tomers individually accounted for more than 10% of the Company's revenues. Total revenues from these two custom- ers were €75,651 or 65% of the revenues. Net receivables from these two customers were €15,724 at December 31, 2004. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its 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 80% and 78% of the Company’s total revenue for the years ended December 31, 2005 and 2004, 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 US dollars and Euros whereas purchases of raw materials and manufacturing services are primarily denominated in US dollars. The Company also has foreign currency exchange risks with respect to its net investments in foreign subsidiar- ies in Japan, the United Kingdom and the United States. Fluctuations in these currencies could significantly impact the Company’s reported results from operations. c) Basis of Presentation In compliance with the European Parliament and Council Regulation on the application of International Financial Reporting Standards (IFRS) adopted in July 2002, all listed European Union companies are required to prepare their consolidated financial statements in accordance with IFRS for fiscal years commencing on or after January 1, 2005. Therefore, for the first time, the accompanying consolidated financial statements have been prepared on the basis of the recognition and measurement requirements of IFRS and its interpretation adopted by the International Accounting Stan- dards Board (IASB) as of December 31, 2005. Based on these standards, management has applied the accounting policies as set out below. Although Dialog Semiconductor Plc is a UK company, its principal operations are located in Germany and all of its operating subsidiaries are held by the German subsidiary. Accordingly, the financial statements are presented in thou- sands of Euro (“€”) and for the year 2005 are also presented in U.S. Dollars (“$”), the latter being unaudited and presented solely for convenience of the reader at the rate of €1 = $1.1842, the Noon Buying Rate of the Federal Reserve Bank of New York on December 30, 2005. The financial statements are prepared on the historical cost basis except that financial instruments classified as avail- able-for-sale are stated at their fair value. 32 | Annual Report 2005 (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 IFRS 1, First-Time Adoption of International Financial Re- porting Standards, requires disclosures that explain how the transition from previous GAAP to IFRS 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 IFRS. Accordingly the Company’s date of transition to IFRS is the beginning of business on January 1, 2004 (open- ing IFRS balance sheet date). As a UK company, Dialog has to use its financial statements prepared in accordance with accounting principles generally accepted in the United King- dom ("UK GAAP"), which are filed at Companies House for purposes of conversion from previous GAAP to IFRS. An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the group is provided in note 20. A summary of significant ac- counting policies is provided in note 2. The Board of Directors authorized these consolidated finan- cial statements for issue on May 18, 2006. (In thousands of € unless otherwise stated) Annual Report 2005 | 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 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 Dialog Imaging Systems GmbH Dialog Imaging Systems Inc Wilmington, Delaware, USA Tokyo, Japan Kirchheim/Teck - Nabern, Germany Wilmington, Delaware, USA 100% 100% 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, 2005 and 2004, re- spectively consist of exchange traded funds that are classi- fied as available-for-sale and are accounted for on the basis of the settlement date and recorded at fair value as deter- mined by the most recently quoted market price of each security at the balance sheet date. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a component of other comprehensive income (loss) until real- ized. Realized gains and losses from the sale of available-for- sale securities are determined on a specific-identification basis. Any impairment losses on available-for-sale security are charged to earnings. Interest income is recognized when earned. All securities are measured at fair values that are determined based on observable market prices or rates. Inventories Inventories include assets held for sale in the ordinary course of business (finished goods), in the process of production (work in process) or in the form of materials to be consumed in the production process (raw materials). Inventories are valued at the lower of cost or market value. Cost, which includes direct materials, labor and overhead plus indirect overhead, is determined using the first-in, first-out (FIFO) or weighted average cost methods. Trade Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and do not bear interest. All trade accounts receiv- able are from customers. 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 considers the collectibility of a trade account receivable to be impaired when it is probable that the Company will be unable to collect all amounts due ac- cording to the sales terms based on current information and events regarding the customers’ ability to repay their obliga- tions. When a trade receivable is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows. Any credit losses are included in the allowance for doubtful accounts through a charge to bad debt expense. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. In the profit and loss account, impairment losses are included in sales and marketing expenses. Recoveries of trade receivables previously written-off are recorded when re- ceived. 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. 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: 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 Intangible Assets Purchased intangible assets with estimable useful lives pri- marily consist of licenses, software and patents and are re- corded at acquisition cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets ranging from 3 to 10 years. Amortization expenses are allocated to the cost of goods sold, selling expenses, research and development ex- penses or general administration expenses. 34 | Annual Report 2005 (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 Liabilities Trade accounts payable and other current liabilities are rec- ognized at payment or redemption amounts. Impairment of Long-Lived Assets In accordance with IAS 36, long-lived assets, such as prop- erty, plant and equipment, and purchased intangibles subject to amortization, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or group of assets to future undiscounted net cash flows expected to be generated by the asset or group of assets. If the carrying amount of an asset or group of asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. In accordance with IFRS 5, non-current 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, 2005 Dec 31, 2004 € 1 = 0.69 139.13 1.18 € 1 = 0.71 139.83 1.36 2005 € 1 = 0.68 136.88 1.24 2004 € 1 = 0.68 134.46 1.24 Revenue Recognition Substantially all of the Company’s revenue is derived from the sale of its products, applications specific integrated cir- cuit (“ASIC”) and application specific standard product (“ASSP”) to end customers. These products are manufactured in accordance with the customer’s technical specification and the Company performs a final test of the products prior to shipment in accordance with the specification. Revenue is recognized when title passes, the risks and rewards of owner- ship have been transferred to the customer, the fee is fixed or determinable, and collection of the related receivable is prob- able. Revenues are recorded net of sales taxes and customer discounts, if any. The Company has insurance for product claims and also records a provision for warranty costs as a charge in cost of sales, based on historical trends of warranty costs incurred as a percentage of sales, which management has determined to be a reasonable estimate of the probable costs to be incurred for warranty claims in a period. Returns are permitted only for quality-related reasons within the applicable warranty period and any potential warranty claims are subject to the Company’s determination that it is at fault for damages, and usually such claims must be submitted within a short period following the date of sale. Product-Related Expenses Cost of sales consists 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. Selling and Marketing Expenses Selling and marketing expenses consist primarily of salaries, travel expenses, sales commissions, bad debt expenses and costs associated with advertising and other marketing activi- ties. General and Administrative Expenses General and administrative expenses consist primarily of personnel and support costs for finance, human resources, information systems and other management departments (In thousands of € unless otherwise stated) Annual Report 2005 | 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 which are not attributable to development, production or sales functions. Research and development costs Costs identified as research costs are expensed as incurred, whereas development costs are capitalized as an intangible asset and amortized if the Company can demonstrate all of the following: (cid:132) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (cid:132) its intention to complete the intangible asset and use or sell it; (cid:132) its ability to use or sell the intangible asset; (cid:132) how the intangible asset will generate probable future economic benefits. Among other things, the Company can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the service period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the options were granted. Expectations of early exercise are accounted for within the average life of the options. The Company applies IFRS 2 to all options granted after Novem- ber 7, 2002 that had not yet vested as of January 1, 2005. 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 two periods presented, only basic per share amounts have been presented for those periods. Had the Company reported net income in 2005 and 2004, the weighted average number of shares outstanding would have potentially been as follows: (in thousands) Basic number of shares Effect of dilutive options outstanding 2005 2004 44,173 44,025 1,010 1,049 45,183 45,074 (cid:132) the availability of adequate technical, financial and other Dilutive number of shares resources to complete the development and use or sell the intangible asset; and (cid:132) its ability to measure reliably the expenditure attributable to the intangible asset during its development. As not all of these conditions were satisfied, development costs have not been capitalized as an intangible asset. 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 tax rates that have been enacted or substantially enacted by the balance sheet date expected to apply to taxable income in the years, in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A deferred tax asset is recognized to the extent that it is probable that tax- able profit will be available against which the deductible temporary differences can be utilized. Stock-Based Compensation The Company has established a share option scheme under which employees and executive directors may be granted stock options to acquire shares of the company. The fair value of options granted is recognized as a compensation 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- penses during the reporting period. Significant items subject to such estimates and judgments include the recoverability of the long-lived assets, the realizability of deferred income tax assets and inventories, and the measurement of stock-based employee compensation awards. Actual results may differ from those estimates. In the fourth quarter of 2004, the company determined that the useful life of its test equipment is eight years. Previously the useful life had been determined to be five years. Man- agement determined that the estimated useful life of the equipment after investing in certain upgrades which enable the systems to test new and more complex power manage- ment integrated circuits and postponing replacement invest- ments exceeded the initial estimate of five years and there- fore extended the useful life of the systems. The effect of this change in accounting estimates resulted in a lower deprecia- tion of €1,349 and in a lower net loss of €842 or €0.02 per share during the year ended December 31, 2004. 36 | Annual Report 2005 (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 Recently Issued Accounting Standards In August 2005, the IASB issued a complementary amend- ment to IAS 1 “Presentation of Financial Statements - Capital Disclosures”. The amendment to IAS 1 adds requirements for all entities to disclose the entity’s objectives, policies and processes for managing capital and is effective for annual periods beginning on or after January 1, 2007. Earlier appli- cation is encouraged. As a result of the first time adoption of this amendment to IAS 1 the Company expects additional disclosure requirements within the notes to its consolidated financial statements. improve the information on financial instruments that is given in entities’ financial statements and changes or amends certain disclosure requirements. It replaces IAS 30 “Disclo- sures in the Financial Statements of Banks and Similar Fi- nancial Institutions” and some of the requirements in IAS 32 “Financial Instruments: Disclosure and Presentation”. IFRS 7 is effective for annual periods beginning on or after January 1, 2007. Earlier application is encouraged. As a result of the first time adoption of IFRS 7 the Company expects additional disclosure requirements within the notes to its consolidated financial statements. In August 2005, the IASB issued IFRS 7 “Financial Instru- ments: Disclosures”. IFRS 7 introduces new requirements to 3. Restatement of Consolidated Financial Statements In April 2006, Dialog decided to focus on more value-added, differentiated display driver chips and not to compete further within the lower margin commodity end of the display driver chip market. Following this decision, management and the audit committee of the board of directors of Dialog learned about certain facts and circumstances that existed at year end and determined that inventories of €3,142, trade ac- counts receivable of € 443 and tooling included in property, plant and equipment of €448 were impaired as of December 31, 2005. As a consequence of these write downs and im- pairment charges and the impact of the facts and circum- stances surrounding those charges on expected future taxable income, Dialog increased the valuation allowance of deferred tax assets recorded in the balance sheet amounting to €15,282. The Company then identified additional facts that existed at the balance sheet date related to the settlement arrangements with senior executives and adjusted accrued expenses by €650. The following table reconciles the con- solidated financial statements after giving effect to the re- statements to the previously issued consolidated financial statements: a) Consolidated Balance Sheet at December 31, 2005 (in thousands of €) As previously issued Restatement As restated Trade accounts receivable, net Inventories Property, plant and equipment, net Deferred taxes Accrued expenses Accumulated deficit Net Shareholders’ equity 28,807 20,297 16,158 15,282 2,922 (68,656) 105,863 (443) (3,142) (448) (15,282) (650) (19,965) (19,965) 28,364 17,155 15,710 - 3,572 (88,621) 85,898 b) Consolidated Income Statement for the year 2005 (in thousands of €) As previously issued Restatement As restated Revenues Cost of sales Gross profit General and administrative expenses Operating profit Income tax expense Net income from continuing operations Loss from discontinued operations Net loss 129,406 (88,496) 40,910 (5,699) 7,382 (14) 9,137 (12,517) (3,380) - (4,033) (4,033) (650) (4,683) (15,282) (19,965) - (19,965) 129,406 (92,529) 36,877 (6,349) 2,699 (15,296) (10,828) (12,517) (23,345) (In thousands of € unless otherwise stated) Annual Report 2005 | 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 4. Discontinued Operations On February 14, 2006 the Company concluded a disposi- tion of its Imaging Division, Dialog Imaging Systems (“DIS”). The business of this division includes the devel- opment, design, manufacture, assembly, marketing and delivering of image sensor semiconductors and camera modules. Dialog transferred the assets of its Imaging Divi- sion to a newly created entity which will issue additional equity interests in exchange for consideration from inves- tors. A total of €22.25 million will be invested in DIS by private equity investors, the management team and Dialog of which Dialog will invest €2 million due in two tranches of €1.2 million and €0.8 million. As of December 31, 2005 Dialog recorded a write-down of the carrying value of assets to be contributed to DIS in 2006 of €3.9 million. The write-down was required be- cause the consideration received in exchange for the assets contributed is a preferential right to receive proceeds following a future sale of DIS. However, such a contingent gain will only be recorded when realized. The Company expects further losses from discontinued operations in 2006 of €1.8 million comprised of operating losses in- curred before control was legally transferred on February 14, 2006 inclusive of transaction and legal costs. Losses from the Imaging Division in 2005 and 2004 are comprised of: (in thousands of €, except per share data) Revenues Cost of sales Gross margin Selling and marketing expenses General and administrative expenses Research and development expenses Write-down of assets to net realizable value Intangible assets Property, plant and equipment, net Operating loss Income tax expense 2005 1,449 (1,661) (212) (593) (315) (7,480) (2,019) (1,898) (12,517) - 2004 258 (652) (394) (9) (11) (8,448) - - (8,862) - Net loss from discontinued operations (12,517) (8,862) Loss per share Basic and diluted The discontinued operation affected the Company’s cash flow statements as follows: (in thousands of €) Cash used for operating activities Cash used for investing activities Cash flows from financing activities Cash used for operating, investing and financing activities (0.28) (0.20) 2005 (7,383) (935) 11 (8,307) 2004 (7,266) (805) 1 (8,070) 38 | Annual Report 2005 (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 Included in cost of sales: Amount of inventory recognized as expense Write-downs of inventories recognized as an expense 2005 (7,619) (2,807) (23,439) (79,591) (6,576) 2004 (11,501) (1,383) (21,622) (67,437) (740) 6. Income Taxes Loss before income taxes consists of the following: (in thousands of €) Germany Foreign 2005 (9,660) 1,611 (8,049) 2004 (3,537) (2,621) (6,158) Benefit (provision) for income taxes are as follows: (in thousands of €) Current taxes: Germany Foreign Deferred taxes: Germany Foreign Income tax expense 2005 2004 - (43) (15,004) (249) (15,296) - (38) - (26) (64) 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%. A reconciliation of income taxes determined using the German corporate tax rate of 26.375% plus the after federal tax bene- fit rate for trade taxes of 11.225%, for a combined statutory rate of 37.6%, is as follows: (in thousands of €) Expected benefit for income taxes Foreign tax rate differential Non-deductible portion of stock-based compensation Unrecognized deferred tax assets Tax deduction related to the valuation of available for sale securities Adjustments recognized for current tax of prior periods Other 2005 3,026 190 (276) (18,390) 81 (10) 83 2004 2,315 (186) (253) (1,947) - 3 4 Actual expense for income taxes (15,296) (64) (In thousands of € unless otherwise stated) Annual Report 2005 | 39 Shareholder Information 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: (in thousands of €) Dec 31, 2005 Dec 31, 2004 Property, plant and equipment Net operating loss and tax credit carryforwards Liabilities Other Deferred tax assets Property, plant and equipment Other Deferred tax liabilities Net deferred tax assets Recognized net deferred tax assets Unrecognized deferred tax assets Net deferred tax assets 493 374 28,322 5,323 103 34,241 (706) (2) (708) 33,533 - 33,533 33,533 25,158 5,654 12 31,198 (1,020) (7) (1,027) 30,171 15,245 14,926 30,171 Tax loss carryforwards and unrecognized deferred tax assets are summarized as follows: December 31, 2005 December 31, 2004 Tax loss carryforwards Tax loss carryforwards Total 65,909 4,520 1,811 1,662 for which no deferred tax asset was recognized unrecognized deferred tax asset 65,909 4,520 1,811 1,662 30,729 1,785 807 212 33,533 Total 63,124 6,384 1,571 1,442 for which no deferred tax asset was recognized unrecognized deferred tax asset 28,648 6,286 1,571 1,442 12,272 2,026 497 131 14,926 Germany UK US Federal State 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, bene- fits that could be realized from available tax planning strate- gies and other positive and negative factors in making this assessment. Considering the weight given to cumulative losses incurred in Germany over the five-year period ended December 31, 2005, as well as the inherent uncertainties in projecting future taxable income, pursuant to IAS 12, man- agement concluded that tax losses may not ultimately be realized. Consequently, the Company recognized an addi- tional valuation allowance of €18,390 as of December 31, 2005. The tax loss carryforwards in the US will expire between 2006 and 2019; other tax loss carryforwards have no expira- tion date. 40 | Annual Report 2005 (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 7. Financial Instruments a) 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 aggregate costs, fair values, carrying amounts and unrealized losses of the Group’s financial instruments are as follows: (in thousands of €) Cash and cash equivalents Marketable securities (debt based funds) Liquid assets At December 31, 2005 At December 31, 2004 Fair value (carrying amount) 16,920 14,890 31,810 Unrealized gain (loss) - (311) (311) Cost 16,920 15,201 32,121 Fair value (carrying amount) 13,977 17,542 31,519 Unrealized gain (loss) - (39) (39) Cost 13,977 17,581 31,558 b) Marketable Securities The Company has invested in “investment grade” rated debt securities and exchange traded funds, which invest in debt c) Contracted maturities of financial instruments All financial instruments are contracted to mature within one year or less and/or incorporate a floating interest rate that is securities. All marketable securities are classified as available for sale. reset as market rates change. 8. Trade Accounts Receivable, net The recorded trade accounts receivable for which an impair- ment has been recognized was €15 and €34 at December 31, 2005 and 2004, respectively. The related allowance for doubtful accounts was €8 and €17 at December 31, 2005 and 2004, respectively. The allowance for doubtful accounts developed as follows: 9. Inventories Inventories are comprised of the following: (in thousands of €) 2005 2004 Allowance for doubtful accounts 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 17 133 (131) (11) 8 197 16 (186) (10) 17 (in thousands of €) Raw materials Work-in-process Finished goods At December 31, 2005 At December 31, 2004 5,797 7,193 4,165 17,155 9,893 13,906 5,995 29,794 (In thousands of € unless otherwise stated) Annual Report 2005 | 41 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance 10. Prepaid Expenses In 2000, the Company paid $2.5 million as an advance pay- ment to one of its suppliers. Those advance payments are classified in the balance sheet line items "Prepaid expenses". The outstanding balance is refunded in proportion to the Company’s purchases of wafers from this supplier and, at this time, the Company expects to have the entire advance pay- ments 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. 11. Property, Plant and Equipment, net A summary of activity for property, plant and equipment for the years ended December 31, 2005 and 2004 is as follows: (in thousands of €) Cost Balance at January 1, 2004 Effect of movements in foreign currency Acquisitions Reclassifications Disposals Balance at December 31, 2004 / January 1, 2005 Effect of movements in foreign currency Acquisitions Reclassifications Disposals Test equipment Leasehold improvements Office and other equip- ment Advance pay- ments 53,050 (2) 8,028 300 (863) 60,513 5 1,558 853 (179) 903 (19) 158 - (145) 897 37 11 - - 14,303 (112) 2,412 (33) (860) 15,710 203 1,703 - (228) 267 - 1,723 (267) - 1,723 - 764 (904) - Total 68,523 (133) 12,321 - (1,868) 78,843 245 4,036 (51) (407) Balance at December 31, 2005 62,750 945 17,388 1,583 82,666 Depreciation and impairment losses Balance at January 1, 2004 Effect of movements in foreign currency Depreciation charge for the year Reclassifications Disposals (36,956) 2 (9,076) (6) 809 (550) 13 (121) - 62 (10,427) 93 (2,304) 6 850 Balance at December 31, 2004 / January 1, 2005 (45,227) (596) (11,782) Effect of movements in foreign currency Depreciation charge for the year Write-down of imaging assets 1) Disposals (5) (5,035) (1,016) 138 (23) (53) (11) - (171) (2,531) (871) 227 Balance at December 31, 2005 (51,145) (683) (15,128) - - - - - - - - - - - Net book value At January 1, 2004 At December 31, 2004 / January 1, 2005 At December 31, 2005 16,094 15,286 11,605 353 301 262 3,876 3,928 2,260 267 1,723 1,583 1) Write-down of imaging assets: for further information see note 4 – Discontinued Operations (47,933) 108 (11,501) - 1,721 (57,605) (199) (7,619) (1,898) 365 (66,956) 20,590 21,238 15,710 42 | Annual Report 2005 (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 12. Intangible Assets A summary of activity for intangible assets for the years ended December 31, 2005 and 2004 is as follows: (in thousands of €) Cost Balance at January 1, 2004 Effect of movements in foreign currency Acquisitions Disposals Balance at December 31, 2004 / January 1, 2005 Effect of movements in foreign currency Acquisitions Reclassifications Disposals Purchased software, licenses and other Purchased patents Total 8,870 (26) 348 (199) 8,993 61 8,803 51 (610) 3,008 11,878 - - - (26) 348 (199) 3,008 12,001 - - - - 61 8,803 51 (610) Balance at December 31, 2005 17,298 3,008 20,306 Amortization and impairment losses Balance at January 1, 2004 Effect of movements in foreign currency Amortization charge for the year Disposals Balance at December 31, 2004 / January 1, 2005 Effect of movements in foreign currency Amortization charge for the year Write down of imaging assets 1) Disposals Balance at December 31, 2005 Net book value At January 1, 2004 At December 31, 2004 / January 1, 2005 At December 31, 2005 (7,191) 24 (1,046) 199 (8,014) (58) (2,487) (174) 610 (506) - (337) - (843) - (320) (1,845) - (7,697) 24 (1,383) 199 (8,857) (58) (2,807) (2,019) 610 (10,123) (3,008) (13,131) 1,679 979 7,175 2,502 2,165 - 4,181 3,144 7,175 1) Write-down of imaging assets: for further information see note 4 – Discontinued Operations During the years ended December 31, 2005 and 2004, the Company acquired software and licenses for a total purchase price of €8,803 and €348 respectively. The 2005 acquisitions primarily relate to three year licensing contracts for the use of electronic design automated tools. In connection with these contracts, the Company made payments of €4,450 and recorded the net present value of the unpaid portion of €3,275 (due in quarterly instalments) as a liability. The expected weighted average useful life of the acquired intangible assets is 3 years. The aggregate amortization ex- pense for the years ended December 31, 2005 and 2004 was €2,807 and €1,383 respectively. Amortization expense of the gross carrying amount of intangible assets at December 31, 2005 is estimated to be €2,983 in 2006, €2,894 in 2007, €992 in 2008, €120 in 2009 and €46 in 2010. 13. Accrued Expenses Provisions for obligations for personnel and social expenses comprise mainly vacation entitlements, settlement obliga- tions for senior executives and flexible workingtime credits. 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 provision is estimated based on historical warranty data. Other obliga- tions primarily include other of uncertain amounts. We ex- pect that all provisions will mature within the next twelve months. (In thousands of € unless otherwise stated) Annual Report 2005 | 43 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 changes in the provision are summarized as follows: Balance at January 1, 2005 Currency change Additions Used Released At December 31, 2005 Obligations for personnel and social expenses Obligations for product warranties Outstanding invoices and other obligations Total 865 155 1,184 2,204 6 - 9 15 795 194 1,440 2,429 (94) (155) (735) (984) - - (92) (92) 1,572 194 1,806 3,572 14. Shareholders' Equity and Comprehensive Income Ordinary shares At December 31, 2004 and 2005, Dialog had authorized 104,311,860 ordinary shares with a par value of £0.10 per share, of which 46,068,930 shares were issued and out- standing. All of the Company’s stock is issued in the form of bearer shares, all shares are fully paid. Additional paid in capital The account comprises additional paid-in capital in connec- tion with the issue of shares. The reduction of €22 in 2004 relates to costs incurred from the offering of 2,000,000 shares to the employee benefit trust. 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 share option trust (“Trust”), to make such shares available for the exercise of stock option rights that had previously been granted to employees. At December 31, 2005 the Trust continued to hold 1,691,155 shares. These shares are legally issued and outstanding, but are not consid- ered 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. Accumulated deficit The accumulated deficit comprises losses and non-distributed earnings of consolidated group companies. Due to the accu- mulated deficit, the Company cannot pay a dividend and does not currently plan to pay dividends in the foreseeable future. Accumulated other comprehensive income The related tax effects allocated to each component of other comprehensive income (loss) for the years ended December 31, 2005 and 2004 are as follows: (in thousands of €) Unrealized (losses) gains on available for sale securities Currency translation adjustment Other comprehensive income (loss) 2005 Pretax Tax effect (271) 137 (134) - 2 2 Net (271) 139 (132) 2004 Pretax Tax effect 59 12 71 (18) (18) (36) Net 41 (6) 35 In 2005, realized losses of €11 (net of €5 tax benefits) on the sale of available for sale securities were reclassified into net loss. 15. 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 €653 (2004: €484). At December 31, 2005, contributions amount- ing to €8 (2004: €59) were payable to the funds and are included in creditors. 44 | Annual Report 2005 (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 16. 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 at any time to 15% of the Com- pany's issued share capital on a diluted basis. At December 31, 2005, 8,129,811 shares could be issued. Stock options granted to employees are granted with an exercise price not less than the quoted price at the date of grant. Those stock options have terms of ten years and vest over periods of one to five years from the date of grant. Upon the commencement of his services as Chief Executive Officer of Dialog on a full-time basis on September 12, 2005, Dr. Jalal Bagherli received a stock option grant of 300,000 restricted shares of Dialog Semiconductor Plc. This option is exercisable in two tranches of 150,000 shares, the first after 91 days and the second after 181 days from his date of join- ing. These restricted shares will vest in 24 equal monthly tranches beginning September 2005. In addition the Com- pany granted an option over 300,000 shares with exercise prices ranging from €2.00 to €8.00, vesting to occur on September 30, 2006, 2007, 2008 and 2009, in equal tranches of 15,000 options for each exercise price. A further 100,000 options with an exercise price of £0.10 and a grant of options with a value of €150 payable in cash or shares have been granted in February 2006 and are subject to the achievement of performance and market targets to vest in eight equal semiannual tranches between March 31, 2006 and September 30, 2009. The fair value of all grants in the two-year period ended December 31, 2005 is estimated using the Black-Scholes option pricing model. Expectations of early exercise are considered in the determination of the expected life of the options. The Company does not have adequate historical development of the share price, especially due to material unusual effects in the stock market in recent years. Further- more, an implicit volatility cannot be determined as none of the Company's options are actively traded. The Company has, therefore, based its calculation of expected volatility on the historical development of other Companies in its business segment. The following assumptions were used for stock option grants for the years ended December 31, 2005 and 2004. 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 €) 2005 0% 18% - 52% 2.3% - 3.3% 1.0 to 7.0 2.31 2.30 1.31 2004 0% 18% - 52% 3.4% 3.0 to 7.0 3.70 3.70 1.60 Stock option plan activity for the years ended December 31, 2005 and 2004 was as follows: (prices in €) Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Options exercisable at year end 2005 2004 Options 3,299,406 952,000 (305,338) (96,060) 3,850,008 2,250,648 Weighted average exer- cise price 2.34 2.30 0.27 3.13 2.45 2.03 Options 3,412,270 108,960 (64,648) (157,176) 3,299,406 1,827,076 Weighted average exer- cise price 2.32 3.70 0.44 3.48 2.34 1.53 The weighted average share price at the date of exercise of options was €2.45 and €3.23 in the years ended December 31, 2005 and 2004 respectively. (In thousands of € unless otherwise stated) Annual Report 2005 | 45 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 summarizes information about stock options outstanding at December 31, 2005: Range of Exercise Prices €0.00 - 2.98 €3.00 - 8.00 €0.00 - 8.00 Number out- standing at Decem- ber 31, 2005 Options outstanding Weighted average remaining contrac- tual life (in years) Options exercisable Weighted average exercise price Number exercisable at December 31, 2005 Weighted average exercise price 1,773,028 2,076,980 3,850,008 5.7 8.2 7.0 €0.94 €3.75 €2.45 1,131,512 1,119,136 2,250,648 €0.60 €3.47 €2.03 b) ESOP Trust The Company established an employee share option trust (the “Trust”). The Trust purchases shares in the Company for the benefit of employees under the Company’s share option scheme. At December 31, 2005 the Trust held 1,691,155 shares. 17. Commitments The Company leases all of its office facilities, office and test equipment and vehicles under operating leases. In addition the Company has contracted consulting services related to CAD (computer aided designs) until June 30, 2009. Total rentals under these agreements, charged as an expense in the statement of operations, amounted to €2,906 and €7,780 for the years ended December 31, 2005 and 2004 respectively. Future minimum lease payments under rental and lease agreements, which have initial or remaining terms in excess of one year at December 31, 2005, are as follows: (in thousands of €) 2006 2007 2008 2009 2010 Thereafter Total Operating leases 3,817 2,573 1,980 1,068 197 154 9,789 At December 31, 2005, the Company had unused short-term credit lines of €12,500. There were no amounts outstanding under these credit lines at December 31, 2005. The company has contractual commitments for the acquisi- tion of property, plant and equipment in 2006 of €1,176 and for the acquisition of intangible assets of €88. 46 | Annual Report 2005 (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 18. Segment Reporting Segment information is presented according to Dialog’s business and geographical segments. The primary format, business segments, is based on the Company’s principal sales markets. a) Business Segments (in thou- sands of €) Wireless Automo- tive / Indus- trial 2005 Corpo- rate Total conti- nued opera- tions Imaging (discon- tinued opera- tions) Total Wireless Automo- tive / Indus- trial 2004 Corpo- rate Total Total conti- nued opera- tions Imaging (discon- tinued opera- tions) Revenues 1) 103,359 26,047 - 129,406 1,449 130,855 90,359 25,427 - 115,786 258 116,044 Operating profit (loss) Depreciation / amortization Investments 4,514 1,048 (2,863) 2,699 (12,517) (9,818) 5,228 (1,177) (1,756) 2,295 (8,862) (6,567) 6,882 8,444 2,243 3,460 - - 9,125 1,301 10,426 7,001 11,904 935 12,839 10,108 4,310 1,756 - - 11,311 11,864 1,573 12,884 805 12,669 Total assets 57,276 13,787 31,810 102,873 Liabilities 12,817 3,264 990 17,071 265 169 103,138 63,438 12,688 46,764 122,890 4,254 127,144 17,240 14,044 4,656 217 18,917 - 18,917 Dec 31, 2005 Dec 31, 2004 [1] All revenues are from sales to external customers. Corporate expenses include the holding company and other expenses not specifically attributable to the business seg- ments. Corporate assets include certain financial assets such as cash and cash equivalents, marketable securities and de- ferred taxes. Corporate liabilities include liabilities of the holding company and other liabilities not specifically attrib- utable to business segments. Segment assets and segment liabilities comprise all assets and liabilities employed by the relevant business segment to generate the operating segment profit or loss. Investments comprise additions to property, plant and equipment and intangible assets. In 2005 and 2004 the Company had no inter-segment sales, income, expenses, receivables, payables or provisions. All revenues and expenses relating to discontinued opera- tions (see note 4) are shown within the imaging segment. (In thousands of € unless otherwise stated) Annual Report 2005 | 47 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance b) Geographical Segments (in thousands of €) 2005 2004 (in thousands of €) Assets Germany Japan United Kingdom USA Total Assets Revenues Germany Other European countries China Japan Other Asian countries Other countries Total Revenues Investments Germany Japan United Kingdom USA Total Investments 25,446 19,762 21,558 18,886 33,533 11,670 47,719 16,868 19,738 4,839 17,512 9,368 130,855 116,044 12,755 12,490 25 46 13 40 84 55 12,839 12,669 Dec 31, 2005 Dec 31, 2004 101,042 125,183 553 700 843 547 874 540 103,138 127,144 Revenues are allocated to countries based on the location of the shipment destination. Segment investments and assets are allocated based on the geographical location of the asset. 19. 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 paid by Dialog Semiconductor Plc to Reynolds Porter Chamberlain for legal services rendered were €257 and €172 in 2005 and 2004, respectively. Fees paid by Dialog’s subsidiaries to Reynolds Porter Chamberlain were €30 and €40 in 2005 and 2004, respectively. The compensation of the members of the board of directors is as follows: Name Position Tim Anderson Non-executive Director Dr. Jalal Bagherli Executive Director and CEO since September 12, 2005 Michael Glover Aidan Hughes Non-executive Director Non-executive Director and Chairman of the Audit Committee John McMonigall Non-executive Director Roland Pudelko Executive Director, CEO and President until September 12, 2005, non-executive Director until February 14, 2006 Gregorio Reyes Non-executive Director Michael Risman Non-executive Director Jan Tufvesson Non-executive Chairman Compensation (in €) Bonus / long- term incen- tives Base salary 7,312 71,791 57,400 71,658 30,711 - 74,130 - - - 279,105 42,995 43,872 36,560 78,970 - - - 677,379 117,125 Directors holdings Shares 75,166 150,000 195,000 - - 320,405 35,000 1,172 175,062 951,805 Options - 450,000 - - - 517,450 - - - 967,450 48 | Annual Report 2005 (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 20. Explanation of transition to IFRS As stated in note 2, these are the Company’s first consoli- dated financial statements prepared in accordance with IFRS. The accounting policies set out in note 2 have been applied in preparing the financial statements for the year ended December 31, 2005, the comparative information presented in these financial statements for year ended December 31, 2004 and in the preparation of an opening IFRS balance sheet at January 1, 2004 (the Company’s date of transition). In preparing its opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial state- ments prepared in accordance with its old basis of account- ing (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has affected the Company’s financial posi- tion, financial performance and cash flows is set out in the following tables and the notes that accompany the tables. Reconciliation of net shareholders’ equity at December 31, 2004 and January 1, 2004 (in thousands of €) ASSETS Cash and cash equivalents Marketable securities Trade accounts receivable, net Inventories Deferred taxes Prepaid expenses Other current assets Total current assets Property, plant and equipment, net Intangible assets Deposits Deferred taxes Prepaid expenses TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Trade accounts payable Accrued expenses Income taxes payable Other current liabilities Total current liabilities Ordinary Shares Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Employee stock purchase plan shares Net Shareholders’ equity December 31, 2004 January 1, 2004 Notes UK GAAP Effect of transition to IFRS IFRS UK GAAP Effect of transition to IFRS IFRS 13,977 17,542 24,036 29,794 16,125 1,693 281 - - - - (16,125) (1,077) - 13,977 17,542 24,036 29,794 - 616 281 8,109 44,900 14,338 13,242 16,152 3,058 993 - - - - (16,152) (927) - 8,109 44,900 14,338 13,242 - 2,131 993 103,448 (17,202) 86,246 100,792 (17,079) 83,713 21,238 3,144 194 - - 128,024 15,429 3,084 9 1,275 19,797 7,028 168,505 (67,009) - (297) 108,227 - - - 15,245 1,077 (880) 21,238 20,590 3,144 194 15,245 1,077 4,181 183 - - - - - 20,590 4,181 183 15,272 15,272 927 927 127,144 125,746 (880) 124,866 - (880) - - (880) - 277 681 (958) - - 15,429 2,204 9 1,275 18,917 7,157 3,165 18 1,674 12,014 - (880) - - 7,157 2,285 18 1,674 (880) 11,134 7,028 6,737 168,782 168,527 - 268 6,737 168,795 (66,328) (61,506) (958) (297) - (26) 108,227 113,732 725 (993) - - (60,781) (993) (26) 113,732 20a 20b 20a 20b 20a 20c 20c, 20d, 20e 20d, 20e TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 128,024 (880) 127,144 125,746 (880) 124,866 (In thousands of € unless otherwise stated) Annual Report 2005 | 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 Reconciliation of net loss for the year ended December 31, 2004 (in thousands of €, except per share data) Notes UK GAAP 2004 Effect of transi- tion to IFRS Reclassification of discontinued operations IFRS 20f 20f 20f 20f 20g 20h 20i 20h 20i 20e 20e Revenues Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Amortization of intangible assets Exchange rate losses, net Other operating income Operating profit (loss) Interest income Interest expenses Foreign currency exchange gains and losses, net Other income Income from revaluation of marketable securities Result before income taxes Income tax expense Net income from continuing operations Loss from discontinued operations Net loss Loss per share Basic and diluted 116,044 (79,783) 36,261 (6,237) (5,462) (29,071) (1,383) (719) 54 (6,557) 1,086 (5) (7) - 59 (5,424) (81) (5,505) - (162) (162) (44) (106) (1,746) 1,383 719 (54) (10) - - (719) 54 (59) (734) 17 (717) (258) 652 394 9 11 8,448 - - - 115,786 (79,293) 36,493 (6,272) (5,557) (22,369) - - - 8,862 2,295 - - - - - 8,862 - 8,862 1,086 (5) (726) 54 - 2,704 (64) 2,640 (8,862) (8,862) (5,505) (717) - (6,222) (0.13) (0.01) (0.14) 50 | Annual Report 2005 (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 20a Deferred taxes In accordance with IAS 12.74, deferred tax assets and de- ferred tax liabilities are offset if the Company has a legally enforceable right to set off current tax assets against current tax liabilities. In addition, deferred tax assets and deferred tax liabilities must relate to income taxes levied by the same taxation authority for either the same taxable entity or dif- ferent taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the as- sets and settle the liabilities simultaneously in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. This was the case for the Company’s deferred tax assets and its deferred tax liabilities. Therefore the Company offset the deferred tax assets and liabilities. Furthermore, in accordance with IAS 1.70 deferred tax liabilities and assets should always be classified as non-current. Therefore, in the IFRS balance sheet the net amount of all deferred tax assets and liabilities is shown under non-current assets. Under UK GAAP, the Com- pany showed the net amount of its deferred tax assets under current assets. 20b Prepaid expenses In accordance with IAS 1.57 an asset shall be classified as current when it is expected to be realized within twelve months after the balance sheet date. Included in the Com- pany’s prepayments are advance payments which are ex- pected to be refunded to the Company after the next twelve months. This amount of the prepaid expenses is therefore shown under non-current assets in the Company’s IFRS balance sheet. Under UK GAAP, the Company showed the total amount of prepaid expenses under current assets. 20c Consideration received on the sale of stock purchase plan shares In accordance with IAS 32.33 the Company recognizes the consideration received on the sale of shares directly in eq- uity. In the IFRS balance sheet the Company presents the gain on the sale of those shares as additional share premium. In the Company’s UK GAAP balance sheet, the Company presented this gain within the accumulated deficit. 20d Currency translation adjustment In accordance with IAS 21.39(c) and IAS 21.44 exchange differences resulting from the translation of the financial statements of foreign entities for incorporation in the Com- pany’s financial statements shall be recognized as a separate component of equity. In the Company’s UK GAAP balance sheet this equity component was presented within the Com- pany’s accumulated deficit. 20e Gains or losses on available-for-sale financial assets In accordance with IAS 39.55 (b) a gain or loss arising from a change in the fair value of an available-for-sale financial asset is recognized directly in equity through the statement of changes in equity until the financial asset is derecognized. The Company considers it best practice to show this equity component in a separate line item within the equity section of its IFRS balance sheet. In the Company’s UK GAAP finan- cial statements such a gain or loss is shown as an income or an expense in the Profit and Loss account in the line “Ex- pense from revaluation of marketable securities” with the relating tax effect in the line “income tax benefit”. Accord- ingly in the Company’s UK GAAP Balance sheet the net effect of such a gain or loss from the revaluation of market- able securities is presented within the Company’s accumu- lated deficit. 20f Equity settled share based payment transactions In accordance with IFRS 2.8 goods or services received or acquired in a share based payment transaction which do not qualify for recognition as assets, are recognized as expenses. The Company has a stock-based employee compensation plan which allows Group employees to acquire shares of the Company. The fair value of options granted is recognized as an employee expense with a corresponding increase in equity (IFRS 2.7). The Company considers it best practice to increase retained earnings for the corresponding goods and services received. In the Company’s IFRS Profit and Loss account, the employee expense is allocated to the corresponding operating expenses. Under UK GAAP, no expense and no increase in equity was recorded for equity settled share based payment transactions. 20g Amortization of intangible assets Amortization of intangible assets has been allocated to the functional costs. 20h Foreign currency exchange gains and losses For UK GAAP, the Company allocated its foreign currency exchange gains and losses into operating and non-operating expenses. In the IFRS profit and loss account all foreign currency exchange gains and losses are classified as non- operating expenses. 20i Other income The Company recovered a part of an investment which was previously was written off (for further information see note 7 to the Company’s December 31, 2004 consolidated financial UK GAAP statements). For UK GAAP, the Company showed this benefit within the operating result. In the IFRS Profit and Loss account this benefit is shown as non-operating income. (In thousands of € unless otherwise stated) Annual Report 2005 | 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 In 2005 the Company has improved its operating profitability and grown its revenue. In early 2005 the Board decided to spin out the loss-making Imaging business, which, as it de- veloped over time, did not fit with the Company's core busi- ness. Our then CEO Mr. Roland Pudelko was given the task to make the spin out possible; Dr Jalal Bagherli was hired as our new CEO for the remaining core business of the Company. As reported in February 2006, the refinancing of the Imaging business was successful, effective February 14, 2006. The Company will now concentrate on its key technology exper- tise, which is power management for mobile applications. During the year the Board oversaw the functioning of execu- tive management of the Company at the quarterly Board Meetings of February 16, April 13, July 13 and October 12, 2005 and assured itself of the proper conduct of executive management during that year. At such Board Meetings the Board received and analyzed reports from the Chief Execu- tive 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 Michael Risman, Michael Glover and Greg Reyes, met in October 2005 to discuss the achievements of the Management during that year and to establish the individual objectives of the Man- agement for 2006. The Audit Committee, comprising Aidan Hughes, Jan Tufvesson and Michael Glover, met on a quar- terly 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 stan- dards for fair and responsible financial reporting and corpo- rate governance. The Nomination Committee, comprising Greg Reyes, Jan Tufvesson and Michael Glover, met regularly throughout the year to consider the issue of new Board ap- pointments. The Company’s audited financial statements for the year ended December 31, 2004, 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 11, 2005, at which KPMG, the Company’s independent auditor, was reappointed until the following Annual General Meeting of the Company. 52 | Annual Report 2005 The Board extends its thanks and appreciation to the Execu- tive Management and all employees for their hard work and considerable achievements in 2005. Corporate Governance Principles High corporate governance standards Dialog Semiconductor Plc is committed to comply with Ger- man and US accepted standards for fair and responsible corporate governance. Accordingly, Dialog Semiconductor (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 Governance”. Also, in accordance with the US Sarbanes-Oxley Act of 2002, Dialog has adopted a Code of Business Conduct and Ethics and maintains an Audit Committee. 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 publishes key information relating to the AGM on its web site on the day of the annual meeting. Board of Directors’ compensation Directors’ compensation, shareholdings and options are dis- closed in note 19 to the consolidated financial statements. Variable compensation of the Chief Executive Officer is measured based on the revenue and profitability of the Com- pany as well as success in reaching specific strategic goals. Audit Committee, Compensation Committee and Nomina- tion Commitee Dialog has established an Audit Committee of the Board of Directors consisting of independent directors: Messrs. Hughes (Chairman of the Audit Committee), Glover and Tufvesson. To maintain independence, members of the Committee are Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance financial statements or services by the principal accountant, KPMG, were as follows: (in thousands of €) 2005 2004 Audit fees Tax fees 192 60 252 174 110 284 Tax services rendered in 2005 were pre-approved by the Audit Committee in accordance with § 401(i) of the US Sar- banes – Oxley Act of 2002. 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, May 2006 Jan Tufvesson, Chairman not to receive payment from the Company for consulting, advisor, 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. Ris- man (Chairman of the Compensation Committee), Glover and Reyes. None of the members of this Committee should serve as an employee of the Company. Our Nomination Committee consists of Messrs. Reyes (Chairman of the Nomination Committee), Tufvesson and Glover and sits with the purpose of seeking to ensure that the Board has directors of the right skills and experience to help guide the Management. 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 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 for the audit of annual Annual Report 2005 | 53 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance Executive Management Dr. Jalal Bagherli Chief Executive Officer (50) Dr. Jalal Bagherli joined Dialog Semiconductor in September 2005 as CEO. Prior to this, he was Vice President & General Manager for the Mobile Multimedia business unit for Broad- com Corporation and the CEO of Alphamosaic. Dr Bagherli has extensive experience of the semiconductor industry with a wealth of knowledge about the Far Eastern, European and North American markets, gained through his previous profes- sional and executive positions with Texas Instruments and Sony. He is also a non executive director of Lime Microsys- tems Ltd. Bill Caparelli Vice President, Sales (62) Joined the company in June 2005, adding extensive experi- ence of growing businesses within the semiconductor indus- try, having held senior sales and general management posi- tions in major US companies Gary Duncan Vice-President, Engineering (50) With the Company since 1987, he is responsible for the de- sign and development of semiconductor products. Prior ex- perience includes various senior engineering and manage- ment positions at Plessey and ES2. Peter Hall Vice-President, Operations and Quality (54) Joined in 1987 and is responsible for operations and quality. Previous management and engineering positions were at STC Semiconductors and MEM in Switzerland. 54 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance Martin Klöble Vice-President, Finance and Controlling (47) With the company since 1999 and previously a partner with KPMG. An MBA graduate, qualified tax consultant and certi- fied public accountant in Germany (Wirtschaftsprüfer) and in the United States (CPA). Richard Schmitz Vice-President, Advanced Technology (49) Joined in 1989 and is responsible for addressing future prod- uct development and advanced technology trends as well as other future R&D needs. Previously at Hewlett Packard's instruments division and the Institute for Microelectronics, Stuttgart. Masayuki Suzuki Vice-President, Japan (55) Joined in December 2005 as President and representative director of Dialog Semiconductor KK. He has more than 30 years experience in the semiconductor industry, gained in various senior level sales, marketing and management posi- tions at Fairchild, LSI Logic and Chartered Semiconductor in Japan. Organizational Changes Roland Pudelko, our previous CEO, stepped down as Chief Executive Officer and President on September 12, 2005 fol- lowing his decision to concentrate on implementing the new strategy for the imaging business of Dialog. He is seeking to develop this business with the participation of external in- vestors. Dr. Jalal Bagherli was appointed as his successor as Chief Executive Officer on September 12, 2005. Erwin Hopf, formerly Vice-President, Operations, left the company on May 31, 2005. Peter Hall, Vice-President, Quality and Tech- nical Support, has resumed responsibility for the Operations department. Martin Klöble, Vice-President, Finance and Controlling, has resumed responsibility for the IT department. Martin Sallenhag, formerly Director of Product Marketing, has taken responsibilities in the imaging business, reporting to Mr. Pudelko. Bill Caparelli joined the company as Vice President, Sales, in June 2005. Masayuki Suzuki joined in December 2005 as President and representative director of Dialog Semiconduc- tor KK. In March 2006, the Company introduced a new organiza- tional structure. As a result Engineering will be unified in a single unit led by Gary Duncan, Vice President, Engineering. Richard Schmitz, previously serving as Vice-President, Engi- neering – Mixed Signal ICs, will address future product de- velopment, advanced technology trends and our R&D needs as Vice President of Advanced Technology. Annual Report 2005 | 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 Board of Directors Jan Olof Ingemar Tufvesson, Chairman (67) 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 University of Technology in Stockholm with a masters degree in elec- tronic engineering in 1962. Mr. Tufvesson retired from Erics- son in 1998 and is now based in Stockholm. Timothy Richard Black Anderson (44) – until February 1, 2006 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. Mr. Anderson stepped down on February 1, 2006 as a non-executive director but will remain as secre- tary to the Company. Dr. Jalal Bagherli, Chief Executive Officer (50) joined Dialog Semiconductor in September 2005 as CEO. Prior to this, he was Vice President & General Manager for the Mobile Multimedia business unit for Broadcom Corporation and the CEO of Alphamosaic. Dr Bagherli has extensive ex- perience of the semiconductor industry with a wealth of knowledge about the Far Eastern, European and North Ameri- can markets, gained through his previous professional and executive positions with Texas Instruments and Sony. He is also a non executive director of Lime Microsystems Ltd. Michael John Glover (67) 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 management in 1985. He has a degree in economics from the University of Birmingham. Mr. Glover is currently Managing Director of Aylestone Strategic Management Limited and serves as a director of other companies. 56 | Annual Report 2005 Shareholder Information Corporate Profile Management Report Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Governance Aidan Hughes (45) 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 Mr. Hughes was a director of Commu- nisis Plc. 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), Chairman and CEO of American Semiconductor Equipment Technologies (1986- 1990) and of Sunward Technologies (1990-1994). John McMonigall (62) has served as one of our directors since March 1998. He joined Apax Partners as a director in 1990 and is currently the direc- tor responsible for investments in telecommunications, soft- ware and related fields. Between 1986 and 1990, Mr. McMoni- gall held a variety of senior positions at British Telecom, in- cluding Managing Director of the customer service division. He was also a member of the management board of British Telecom. He is currently on the board of five other public and private companies, including Crane Telecommunications Ltd, Autonomy Plc and Amphion Ltd. Roland Pudelko, (52) - until February 14, 2006 joined us in 1989 as Managing Director and served as Execu- tive Director, CEO and President from March 1998 to Septem- ber 12, 2005. He has over 20 years experience in electronics and microelectronics, primarily in management positions within the Daimler-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. Gregorio Reyes (64) joined us as a director in December 2003 and has been a pri- vate investor and management consultant since 1994 with current board positions at companies including LSI Logic Michael Risman (37) joined us as a director in August 1999, having been closely involved with our Company since March 1998. Until 2005, he was an equity partner at Apax Partners where he held respon- sibility for their European IT investment activities and served as a member of their International Approval Committee. Be- fore joining Apax 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 and has served on the boards of a number of public and private companies. Peter Weber (60) joined us on February 1, 2006 bringing to the company 35 years of experience in the semiconductor sector. He has gained his experience of the high-tech industry with a broad range of companies, including Texas Instruments, Intel, Sili- conix, the Temic Group and Netro Corporation. During his 35 years in the industry he has held a number of general man- agement and senior marketing roles at these companies, both in Germany and Silicon Valley. Since 1998 he has been an investor and management consultant, serving on the boards of a number of companies in Europe and the US. He holds a MSEE degree in communications engineering. Annual Report 2005 | 57 Glossary 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. Mixed signal Describes a combination of analog and digital signals being generated, controlled or modified on the same chip. 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. Audio CODEC The interface between analog signals (such as the human voice) and the digital data processing inside a mobile phone, determining voice 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. 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. LDO Low Dropout voltage regulators are used in battery operated systems, where the output voltage 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. 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. 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. NiMH, L Ion and polymer Various battery technologies. OEM An Original Equipment Manufacturer is a company that builds products or components that are used in products sold by another company. PDA Personal digital assistants are handheld devices that were originally designed as personal organizers, but became much more versatile over the years. A basic PDA usually includes date book, address book, task list, memo pad, clock, and calculator software. 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. 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. WCDMA Wideband CDMA, a 3G (third generation) wireless standard, also referred to as UMTS. 58 | Annual Report 2005 Financial Glossary CAGR Compound Annual Growth Rate is a method of assessing the average growth of a value over time. 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). Gross Margin Gross Margin equals the difference between revenues and cost of sales as presented in the statement of operations. 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 Annual Report 2005 | 59 Investor Information Corporate Calendar July 19, 2006 Release of second quarter results October 25, 2006 Release of third quarter results Corporate Counsel Certified Public Accountants Reynolds Porter Chamberlain London, United Kingdom KPMG Deutsche Treuhand-Gesellschaft Stuttgart, Germany US Listing 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 P.O. Box 11230 New York, NY 10203-0230 Telephone: +1 (888) 269-2377 Facsimile: +1 (212) 571-3050 Please direct inquiries to: www.dialog-semiconductor.com Dialog Semiconductor Neue Straße 95 D-73230 Kirchheim/Teck - Nabern Telephone +49-7021-805-412 +49-7021-805-200 Fax dialog@fd.com E-mail: 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. 

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