Dialog Semiconductor
Annual Report 2009

Plain-text annual report

Dialog Semiconductor Interactive PDF User Guide Welcome to the Dialog annual report and accounts 2009. This interactive pdf allows you to easily access the information that you want, whether printing, searching for a specific item or going directly to another page, section or website. The different features are detailed below. Document controls Use the document controls located in the top margin to navigate through this report. Section navigation Use the links on the Contents page to navigate to the start of a statement. Use the Contents button to return to the conents Search Print Contents Previous page Next page Links Throughout this report there are links to pages, other sections and web addresses for additional information. Examples: This is an example of how the links appear within this document. They are recognisable by the brown underline, simply click to go to the relevant page or web URL (www.dialog-semiconductor.com) Energy management excellence Annual report and accounts 2009 i l D a o g S e m i c o n d u c t o r P l c A n n u a l r e p o r t a n d a c c o u n t s 2 0 0 9 Making it happen! Contents Dialog Semiconductor creates energy-efficient, highly integrated, mixed-signal circuits optimised for personal mobile, lighting & display and automotive applications. The Company provides flexible and dynamic support, world-class innovation and the assurance of dealing with an established business partner. With its unique focus and expertise in system Power Management, Dialog brings decades of experience to the rapid development of integrated circuits for Power Management, audio, display processing and motor control. Dialog’s processor companion chips are key for enhancing both the performance of hand-held products and the consumers’ multimedia experience. With world-class manufacturing partners, Dialog operates a fabless business model. Dialog Semiconductor Plc is headquartered near Stuttgart with a global sales, R&D and marketing organisation. In 2009, it had US$217.6 million in revenue and was one of the fastest growing European public semiconductor companies. At year end 2009, Dialog Semiconductor had 339 employees. The Company is listed on the Frankfurt (FWB: DLG) stock exchange. Section 1: Overview 2 Dialog at a glance 4 Our markets 6 Chairman’s statement 7 Dialog Semiconductor shares in 2009 Section 2: Business review 10 Business review and strategy 12 Chief Executive’s review 15 Solutions, products technology and key customers 18 Financial review 22 Risks and their management 23 Corporate social responsibility Section 3: Management and governance 25 Executive management 26 Board of Directors 27 Directors’ report 29 Corporate Governance 32 Directors’ remuneration report 35 Statement of Directors’ responsibilities 35 Responsibility statement Section 4: Consolidated financial statements and notes 36 Independent Auditors’ report to the members of Dialog Semiconductor Plc 37 Consolidated statement of financial position 38 Consolidated income statement 39 Statement of comprehensive income 40 Consolidated statement of changes in Shareholders’ equity 41 Consolidated statement of cash flows 42 Notes to the consolidated financial statements Section 5: Company financial statements and notes 81 Company statement of financial position 82 Company statement of changes in equity 83 Company statement of cash flows 84 Notes to the Company financial statements Section 6: Additional information 85 Glossary 87 Advisers and corporate information 88 Group directory Capturing the best moments of your life Power Management: Extending battery lifetime of portable devices with a high level of integration and software configurability of power management functionality on a single chip. The DA9052 Power Management IC radically changes how engineers can now implement power management in their portable devices. Section 1 | Overview Dialog at a glance Financial highlights • 34.5% growth in revenue Total revenue: 2007-2009 (US$m) • Full-year 2009 net income of US$32.7 million or 15.0% of sales completing nine quarters of successive profitability 86.8 217.6 161.8 +34.5% 2009 versus 2008 • Improved annual gross margin of 44.9% 2007 2008 2009 • Successful equity offering, raising net proceeds US$59.7 million • Closing year cash balance of US$123.1 million, increase of US$86.2 million over 2008 • Diluted 2009 Earnings Per Share (EPS) – of 60 cents • Dialog remains debt free Operational highlights • Continued Power Management design wins within the smartphone market segment, with 2009 seeing the ramp of high-volume designs in several industry leaders’ products Gross margin: 2007-2009 (%) 44.9 38.7 33.4 +16% 2009 versus 2008 2007 2008 2009 Operating profit: 2007-2009 (US$m) 28.67 +381.8% 2009 versus 2008 • Success within the emerging 3G Android -17.27 5.95 smartphone segment with the first design win announced with LG for China Mobile 2007 2008 2009 • Adoption of our 3G/HSPA Power Management technology in convergent devices, including ebooks and netbooks • Entrance in 2009 to the portable audio market with a very low power solution • Strategic partnership with Intel® and first design wins in 2009 for Power Management companion products for Atom™ processors • Entry to German TecDAX index in September 2009 2 Dialog Semiconductor Plc Annual report and accounts 2009 Enriching your viewing experience Innovative display drivers: SmartExtend™ OLED drivers providing more vivid and brighter displays, improved video performance at lower power consumption and thinner form factors, with our e-ink drivers enabling the adoption of e-readers in next generation portable convergent devices. Section 1 | Overview Our markets Dialog focuses on high-volume, high-growth markets, engaging with the industry leaders in their segments. Dialog is a global designer, developer and supplier of mixed signal integrated circuits with a focus on the integration of Power Management, audio, motor control and display processing functionalities. Dialog’s main markets are high-volume portable products (cellphones, smartphones and other portable consumer electronic devices), automotive and industrial applications. Dialog is a fabless semiconductor company outsourcing the capital intensive production of silicon wafers, packaging and testing of integrated circuits to leading Asian suppliers. Wireless Our wireless Power Management, audio and display semiconductor solutions are designed to meet the needs of the latest smartphones, 3G/HSPA cellphones, netbooks, portable media players, e-readers and other portable convergent devices. Portable media players* (Million units) Netbooks* (Million units) Smartphones*(inc. MID and MM phones) (Million units) 3G/HSPA Cellphones* (Million units) 10% CAGR 450 275 27% CAGR 50 26% CAGR 1,000 16% CAGR 647 15 320 314 2008 2013 2008 2013 2008 2013 2008 2013 *Source Dialog, Venture-Q and IDC 2009 Automotive and Industrial In automotive, Dialog’s products are used in motor control applications for comfort and safety systems and for Power Management in automotive infotainment systems. In the industrial market, Dialog provides power electronics solutions for lighting such as electronic ballasts for fluorescent or high-intensity industrial lighting with the future developments focused on energy-efficient LED lighting solutions. Automotive Motor Control IC TAM (US$ million)* 730 650 600 2009 2010 2011 *Source Dialog 2009 4 Dialog Semiconductor Plc Annual report and accounts 2009 Deep technology base Dialog has long-standing expertise in developing analogue and mixed signal products, with a focus on Power Management integrated circuits. The Company in 2009 has leveraged its expertise to add audio and display integrated circuits to its product portfolio. It aims to offer the highest level of Power Management mixed signal integration in the industry, with rapid design cycle and time-to-volume production. Getting to your destination on time Infotainment: Enabling with Intel® the next generation of automotive infotainment systems with advanced Power Management and clocking companion ICs for the Atom Processors™. Section 1 | Overview Chairman’s statement Dear Shareholders, In 2009, Dialog once again grew at an impressive level and mastered difficult situations. We successfully navigated through a year of worldwide economic downturn, and what was an extremely testing time for our industry. Across all financial fronts, Dialog performed and grew profitably at a rate ahead of the closest peers that we track, and the industry as a whole. A key event in 2009 was the successful equity placing in September 2009 which raised net proceeds of US$59.7 million. This provides Dialog with significant capital with which to make strategic investments and accelerate the development of the Company. We substantially increased our trading liquidity, very often now seeing more than one million shares traded on a daily basis. This increase in liquidity, the strong financial performance reported each quarter, along with the equity offering were instrumental in attracting new high-calibre institutional investors to our Shareholder base. All of this translated into significant share value creation with the share price up more than 11 times from its 2009 opening level. As the economic climate has improved over the past 12 months, Dialog has sought to position itself by developing key technologies and supplying major customers in the portable Power Management market. However, the challenge of diversifying both our product base and addressable market is a journey which we will seek to progress during the coming year. Many employees participate in the success of Dialog through our stock Option Programme and the Long Term Incentive Programmes (which we have in place for the management team). The Board remains committed to providing employees with all the support necessary in terms of performance-based rewards that harmonise the interest of the Company with that of its Shareholders. These instruments are appropriate to maintain Dialog’s attractiveness as an employer in this highly competitive market for specialists. The Board wishes to pay tribute to the management, who have delivered this tremendous performance while overcoming new challenges and developing further as a team. Finally, we have confirmed our excellent position in the market and the outlook is very positive. I would like to thank you for your trust in us and hope that you will continue to accompany us on our journey. We are looking forward to another year of progress. Greg Reyes Chairman 6 Dialog Semiconductor Plc Annual report and accounts 2009 Section 1 | Overview Dialog Semiconductor shares in 2009 Dialog substantially outperformed the market with the share price growing by more than 1,100% in 2009 and share liquidity increasing by 575%. Dialog gains the confidence of the market with many new high-calibre investors attracted as stockholders. Share price development For Dialog shares, 2009 was a record year in terms of growth. Starting the year at €0.66, it steadily rose during the year. In September, an equity offering for 12 million ordinary shares was priced at €3.65; a premium of 4% to the date the offering was announced. Post issuance of the shares, the stock continued to rise steadily reaching a high for the year in December at €8.42 before closing the year at €7.63. The following graphs chart the cumulative Shareholder return of the Company for the past 12 months and for the past five years, compared with selected technical benchmark indices – Germany’s TecDAX index – which Dialog itself entered in September 2009, and the Philadelphia SE Semiconductor index (“SOX”). As can be seen from the graph, for 2009 Dialog outperformed the TecDAX by 55 times and the SOX by more than 17 times. This means that in the course of 2009, we succeeded in achieving one of our most important corporate objectives; namely, to increase the value of the Company for the benefit of the Shareholders. 2009 12-month Dialog Semiconductor share price performance 1400 1200 1000 800 600 400 200 0 9 0 J 9 0 F 9 0 M 9 0 A 9 0 M 9 0 J 9 0 J 9 0 A 9 0 S 9 0 O 9 0 N 9 0 D DIALOG SEMICON. (XET) TECDAX (XETRA) – PRICE INDEX PRIME BIOTECHNOLOGY IG – PRICE INDEX PHILADELPHIA SE SEMICONDUCTOR – PRICE INDEX Dialog Semiconductor Plc Annual report and accounts 2009 7 Section 1 | Overview Dialog Semiconductor shares in 2009 2005-2009 Dialog Semiconductor share price performance 500 400 300 200 100 0 5 0 6 0 7 0 8 0 9 0 DIALOG SEMICON. (XET) TECDAX (XETRA) – PRICE INDEX PRIME BIOTECHNOLOGY IG – PRICE INDEX PHILADELPHIA SE SEMICONDUCTOR – PRICE INDEX Share fundamentals for the financial year 2009 Total number of shares outstanding and registered as of 31 December 2009 Weighted average number of shares during 2009 (diluted) Weighted average number of shares during 2009 (basic) Type Par value (in £) Bloomberg Symbol Reuters Symbol ISIN Key figures for the financial year 2009 based on weighted average number of shares (basic) Sales per share (in US$) Operating profit per share (in US$) Net profit per share (in US$) Book value per share as of 31 December 2009 (in US$) Accounting standards Market data 2009 Exchange segment Germany Designated sponsor Market capitalisation as of 31 December 2009 (in millions of €) Daily Turnover of shares during 2009 8 Dialog Semiconductor Plc Annual report and accounts 2009 61,568,930 54,463,940 48,867,949 Ordinary 0.1 DLG DLGS.DE GB0059822006 4.45 0.59 0.67 3.94 IAS/IFRS Midcap, Prime All Share, Prime Technology, Technology All Share Close Brothers Seydler 469.16 510,571 shares/day Section 1 | Overview Trading in Dialog shares Dialog shares are traded in Germany on the XETRA and Frankfurt regulated official markets and on all other German regional exchanges on the open market. Dividend policy Dialog Semiconductor participates in industries that are considered to be global growth engines and provides its services and products to major players in these industries. Dialog’s Board of Directors is committed to reinvesting all profits into laying the framework for future growth and continues to believe that, in line with the strategic changes under way, this policy is in the best interests of all its Shareholders. Investor relations Dialog Semiconductor understands the importance of clear communication with investors and analysts, particularly during a period of great uncertainty and global economic crisis. During 2009, the management team continued its efforts to ensure that the market was kept up to date with the effect the changing macro environment was having on its business, together with the important and exciting changes under way at the Company. Dialog Semiconductor’s shares are followed by a number of analysts representing major banks and research institutions in Europe. During 2009, we issued trading updates and quarterly earning reports, we held our annual analyst conference, presented at several investor conferences and international roadshows, and, in addition, kept in regular contact with our investors and analysts. Information provided, including presentations, press releases and reports of the Company, as well as the recommendations of analysts covering the Company, can be downloaded from the corporate Website: www.dialog-semiconductor.com. TecDAX Index Dialog was granted entry to the TecDAX index during 2009. The TecDAX tracks the 30 largest and most actively traded companies from the various technology sectors of the Prime Standard segment, excluding those listed in the German DAX index. It is amongst the most important and leading stock indices in Germany and membership is decided by a ranking, based on a company’s free-float market capitalisation and stock market trading volume. Freefloat Dialog’s freefloat is 56,462,392 million shares or 91.7% of the 61,568,930 outstanding shares. The freefloat is calculated by excluding 2,520,960 shares held by Adtran per their last notification and 2,585,578 shares held in the Dialog Semiconductor Plc employee ownership trust as notified on 8 February 2010. The freefloat includes the following shares held on behalf of discretionary clients: • 4,414,925 (7.16%) held by JP Morgan Asset Management Holding Inc., as notified on 6 October 2009; • 2,656,316 (4.31%) held by the Bank of New York Mellon, as per the share registrar on 8 February 2010; • 1,925,965 (3.13%) held by Allianz Global Investors, as per the share registrar on 8 February 2010; • 1,884,864 (2.99%) held by Capital Group International Inc., as notified on 30 November 2009; and • 2,400,000 (3.89%) held by Citibank, as per the share registrar on 8 February 2010. And 2,028,828 shares (3.29%) held by X-Fab Semiconductors AG, as notified on 28 January 2010. Disclosure of interests The provisions of the UK Companies Act 2006 require that any person acquiring a direct interest of 3% or more of a class of shares issued by the Company – with voting rights at the Company’s general meeting – must inform the Company of its interest within two working days. If the 3% interest is exceeded, the Shareholder must inform the Company of any increase or decrease of one percentage point in its interest. With respect to voting rights attached to shares held by investment managers (on behalf of clients), by scheme operators and ICVCs in accordance with DTR 5.1.5, the first threshold for disclosure is set at 5% with the next level set at 10% and every percentage above 10%. Dialog Semiconductor Plc Annual report and accounts 2009 9 Section 2 | Business review Business review and strategy Execution to our strategy has enabled us to again achieve high growth in 2009 – beyond the industry and our peers – with increased profitability, and dramatically improve our cash position from both operations and a successful equity offering. Dialog’s principal objective in recent years has been to be the leading global supplier of high integrated Power Management mixed signal integrated circuits addressing the portable devices market. To meet these objectives, this year Dialog has: Demonstration of Dialog’s Class G Audio Codec IC – DA7210. Expanded its relationships with key industry leaders Grown sales in North America and Asia Dialog has relationships with a number of high-volume customers, Dialog successfully increased its revenue in North America to many of which are key industry leaders in their respective sectors. represent 47.6% of its turnover for the year. Additionally, it achieved Dialog has in 2009 continued to focus its sales and marketing important milestones with major Asian cellphone customers; efforts on these customers to increase its semiconductor content one of which emerged as a greater than 10% revenue customer in the customers’ various portable device platforms. in Q2 2009 and also successfully worked with Samsung with the application of its e-ink display technology into an innovative smartphone keypad design. Increased its customer base by leveraging its portfolio of standard solutions Dialog has increasingly adapted some of its solutions to multiple customers and transitioned its portfolio to offer more standard Continued to focus on fabless business model while optimising operating efficiencies products. Additionally, by engaging in basic corporate identity Dialog remained focused on its existing business model, which and brand development activities in the engineering and design included fully outsourcing silicon wafer production and test to Asian communities worldwide, coupled with the recent expansion of its foundry manufacturing plants and test houses, and supplying ASICs sales force, Dialog in 2009 has laid the foundations for marketing and ASSPs using mainstream CMOS-based process technologies. its products to a much broader customer base. It also invested in increasing operating efficiencies by taking advantage of advanced Management Information Systems for Dialog also continued to expand platform relationships with planning logistics and sales operations. application processor vendors within the portable space, including NEC Electronics; to enter the embedded market; i.e., replacing discrete Power Management solutions with an integrated device for Intel® Atom™-based applications; and to leverage Dialog’s experience to address the motor control and lighting market with energy efficient standard products. 10 Dialog Semiconductor Plc Annual report and accounts 2009 Worked proactively with and refined customers’ system architecture Dialog continued to work with its customers to refine the systems architecture of their various device platforms and provided them high integrated Power Management IC solutions. Dialog achieved this by leveraging the engineering expertise of its employees in design, product development and testing. Maximising run time Audio: Dialog’s new family of ultra low power HiFi audio and headphone drivers CODECS extends the battery lifetimes of mp3 portable media devices. Section 2 | Business review Chief Executive’s review Leading the industry – 2009 was a truly spectacular year and a year to remember for Dialog, and I believe a major turning point in our more than 10-year history as a public company. Dialog’s Board and executive team focused its efforts to solidify our position as a leading Power Management IC provider to industry leaders in smartphones and portable media devices while delivering strong revenue and profitability growth through the industry downturn. We also reinforced our customer relationships and strengthened our balance sheet while our Company’s stock price and market valuation appreciated more than 1,100%. Following a long-standing commitment to Dialog, Apax Partners LLP – the global private equity advisory firm that led the leveraged buyout of the Company in 1998 – placed its remaining shareholding of Dialog with quality institutional investors. Apax’s contribution over the past 11 years has been very important to our development and growth and on behalf of Dialog’s management and its Board, I would like to thank Apax Partners. In September we completed an international equity offering and issued 12 million new shares, raising net proceeds of US$59.7 million. The shares were placed with tier 1 institutional investors, following a very successful roadshow. We now have a healthy balance sheet with US$123.1 million in cash, allowing us to fund our foreseeable future growth. In addition, we plan to expand our engineering and technical support teams, particularly in the US and Asia, and acquire complementary technology and intellectual property. Despite the economic downturn, in 2009 we reached and in some cases exceeded all the important strategic and economic goals which we had set, thereby establishing the basis for the further growth of Dialog. While in 2009, the semiconductor industry, according to analysts, declined 12%, we delivered an impressive 34.5% increase in revenue and, with the close of the last quarter, recorded nine successive quarters of profitability. Already in early 2010, we have demonstrated the first use of these proceeds when we recently acquired specific Power Management technology assets, intellectual property rights and an employee team located in Munich from Diodes Zetex Gmbh. Small acquisitions like this and IP licensing of complementary technology will allow us to further differentiate our products and maintain our leadership. Our gross margin improved 6.2 percentage points for the full year to 44.9%. In addition, our net income margin, increased by 10.8 percentage points to 15.0%. This increase is particularly noteworthy given the continued investments we made in our R&D activities, including increasing our engineering, sales and marketing headcount. This positive business performance reaffirms our determination to continue to execute on our chosen strategy. One year ago I was dissatisfied with our share price development. Today I am extremely pleased that 2009 saw us increasing our share price from €0.66 at the start of the year to close the year at €7.63, an appreciation of more than 1,100%, catching up with the underlying performance of the Company. We experienced an increase in the trading volume of our shares, where the average daily volume traded in the last quarter has increased to 1,072,000 shares – more than six times of that a ear ago. This has helped to make Dialog an attractive investment for the larger European institutional funds, many of whom we saw take a recent position in Dialog. The increase in our market capitalisation and liquidity led us to being admitted in the second half of the year to the important German TecDAX stock index – another important milestone for our Company. Diversification of our revenue sources continues as a strategic initiative for Dialog as it enhances financial stability of the Company. We are achieving this by continuously expanding our customer base – now more than 10 within the cellphone space and selling a broader base of standard products. We have taken far-reaching steps towards this in 2009 where we launched three 12 Dialog Semiconductor Plc Annual report and accounts 2009 Accelerating the transition Smartphones: 2009 saw the rise in adoption of smartphones, with Dialog’s Power Management technologies used by leading smartphone manufacturers. Dialog’s success is based on providing innovative and differentiating technologies to extend the battery lifetime and user experience. Section 2 | Business review Chief Executive’s review The economic crisis which we are all coming through is bringing us not only tremendous challenges but also major opportunities. As a leader in Power Management integrated technology, we’re now a highly respected partner worldwide when it comes to enhancing the battery efficiency of portable devices. We see enormous long-term growth prospects opening up for us in these fields as energy efficiency becomes of ever increasing importance to our society. In 2010 we aim to achieve: (cid:1) continued profitable revenue growth driven by market share gain in Power Management and Audio ICs especially within the smartphone and portable media device market; (cid:1) advanced innovation with our continuing success based on two key factors: a sharp focus on customers and a winning product portfolio based on a solid road map for the future; (cid:1) volume production of our passive matrix OLED IC display technology together with our display module partners, offering superior performance and a more energy efficient solution than incumbent displays today; and (cid:1) continued diversification of our customer and product base in both portable and other industrial markets through both organic development and inorganic activities – including complementary technology-based acquisitions. We concluded the year by winning the prestigious Global Semiconductors Association inaugural EMEA Leadership Council Award, the Elektra Company of the Year and Elektra Fabless Semiconductor Supplier of the Year Awards. This is a strong testament from the semiconductor industry to our core technologies, and the strength of the newly invigorated Dialog, for the Company as a whole to be acknowledged publicly in this way. Global Semiconductor Association (GSA) Award presented to Dialog Semiconductor at US Silicon Valley event in December 2009. As we pursue our long-term corporate strategy, our financial and operational targets are clearly defined where we aim for continued growth ahead of the industry and our closest peers. We will continue to provide transparency regarding current performance, future opportunities and strategies in our communication. This is truly an exciting time to be leading such a dynamic company, and I am confident in the continued future success of Dialog. Dr Jalal Bagherli Chief Executive Officer Layout of a Dialog Power Management Chip. product families that will provide the basis to accelerate further diversification. These include a programmable Power Management device which revolutionises the way analogue designers can now design their system, our first stand-alone Audio IC, which sets a competitive benchmark in the industry for low power consumption. Additionally, to support the increasingly popular Intel® Atom™ micro processors, we provide very high integrated Power Management companion devices and already have announced a strategic partnership with Harman Becker who will use our devices in their automotive infotainment platforms. It was a difficult year for our Automotive and Industrial segment, with the global crisis within the automotive industry affecting sharply our automotive revenue early in the year. However, a pickup was seen late in the year where our shipments recovered to near historical levels. The transition to energy saving lighting, including LEDs, is providing an opportunity for Dialog to further build on our existing lighting business. To capitalise on this opportunity, during the year we announced a joint development centre in Austria with Tridonic Atco – a leader in lighting. Underpinning our success was an exceptional performance by the whole team at Dialog who responded magnificently to the opportunities and challenges of 2009, and to whom I offer my sincere thanks. At the same time, I would like to also thank our customers and business partners for their long-standing loyalty and the trust they put in us. The same applies to our Shareholders, as we strive to continue to deliver sustainable shareholder value. 14 Dialog Semiconductor Plc Annual report and accounts 2009 Section 2 | Business review Solutions, products technology and key customers Dialog has combined its Power Management technology leadership and dedicated customer support, delivering fully optimised integrated products and solutions. Our solutions Our solutions address two major markets: mobile handset and portable electronic devices, and automotive and industrial electronics. The continuing decrease in size – and increase in capabilities – of portable devices is a major driver in the development of our solutions. High-speed data, video and high-quality audio on mobile telephones and other hand-held products, make huge demands on battery energy management, as well as on the technology which controls the quality of images and displays. Our skill in developing highly integrated silicon solutions enables our customers to design products which deliver excellent performance as well as market-leading talk and standby times. In the automotive market customers use our products in the comfort and safety systems, as well as in the management and control of the electronic systems they design for cars; and in the industrial market customers use our products in highly integrated smart-power management systems, such as intelligent electronic ballasts for fluorescent lighting. Design, development and production We are justifiably recognised for the quality and feature-rich functionality of our mixed signal standard Integrated Circuit (“IC”) and Application Specific Integrated Circuit (“ASIC”) solutions. We nevertheless continually work to increase our digital and analog design expertise, and to develop our software. During 2009, we invested US$42.6 million in research and development. Our ability to develop mixed signal ASIC and Application Specific Standard Product (“ASSP”) designs rapidly, enables us to respond to customers’ needs for new solutions that increase performance, while at the same time reducing cost. Our strategy of modifying and reusing a wide set of specialised analog building blocks speeds up the design process; in addition, our use of industry standard design tools increases the level of automation and the quality of verification in our products. Our commitment to continuously deepening our expertise has resulted in increased levels of integration and product innovation in all business sectors. Power Management and Audio ICs Effective Power Management – in which the design of chips used in hundreds of millions of mobile phones and other portable devices has given us a great deal of experience – is increasingly one of the fundamentals of system design. However, Power Management constantly presents new challenges with the introduction of multi-core processors, increased peak currents due to lower geometry technologies and multiple sleep modes. Lithium batteries need to charge faster, safer and from a wider variety of sources such as USB ports demanding, for example, powerpath control. These trends impact the Power Management IC directly, and we constantly evolve our core technology and intellectual property to extend our market-leading status. With a long legacy of delivering different Power Management designs for world-leading mobile phone manufacturers and portable consumer OEMs, we optimise all aspects of the design including electrical, thermal and mechanical (packaging) considerations. These designs offer unprecedented integration with multiple Power Management and analogue functions on the chip, including programmable high-performance LDOs (low drop-out voltage regulators), high-efficiency DC-DC voltage converters, intelligent battery charging circuits, software programmable LED drivers, sensor ADCs, USB interfaces, and multichannel audio capabilities. By capitalising on our experience in integrating high- and low-voltage circuits on CMOS – the most widely used semiconductor technology – and combining it with our experience in developing and integrating high-performance CODECs and other analog functions, we are able to offer a selection of differentiated Power Management and audio solutions. The integration of more than 30 different functions on a single chip delivers significant space, power and cost savings to our customers. In 2009, we launched a new class of Power Management product – DA9052, an advanced system Power Management integrated circuit (PMIC) that offers designers greater flexibility in reducing power consumption, size and cost in mobile phones and other portable multimedia devices. Conceived as a platform-PMIC, capable of supporting all major families of application and mobile graphics processors, DA9052 offers a superior level of user configurability compared to standard PMIC products. Dialog Semiconductor Plc Annual report and accounts 2009 15 Section 2 | Business review Solutions, products technology and key customers Display drivers and related-system ICs The demands from the market for the next generation of portable displays to be “always on”, thinner, with longer battery life with higher visual and video performance even in bright sunlight means the current technology based on Liquid Crystals (LCD) is struggling. To address these important market needs a number of new display technologies, such as OLED, e-paper and MEMs have been launched. Dialog has not only worked closely with the key innovators of these display technologies but also key users to develop and introduce a range of truly innovative low power silicon driver solutions. Dialog in 2009 together with TDK has been working on completing the development of a passive matrix OLED panel which is based on Dialog’s SmartXtend™ driver technology. The technology uses a number of innovative techniques, including a unique addressing scheme, accurate dynamic current matching and state-of-the-art Power Management to outperform LCD displays. SmartXtend™ will form the basis of a new family of PM-OLED drivers which will be brought to production. This technology has a very strong value proposition in terms of power consumption, performance and cost over competing technologies. Dialog provides ASICs for windscreen wiper motors, electric window motors and active restrainer seat belt systems. Its partnership with leading automotive suppliers has resulted in development of integrated circuits which can be connected directly to a car battery without external protection circuits. For the industrial market, Dialog develops innovative control ASICs both for conventional light sources, such as fluorescent or high-intensity discharge (“HID”) lamps, and for emerging LEDs. These devices seek to deliver optimal control and regulation of light sources, while maximising their service life. Through intelligent control, using advanced digital signal processing, these devices help to minimise energy consumption. Manufacture, assembly and testing We outsource our wafer production to selected foundries, principally in Singapore and Taiwan, which provide high-quality products and have the ability to meet both our stringent qualification requirements and tight deadlines. Our choice of CMOS, rather than bipolar, technology enables more transistors to be integrated on a single chip – a necessary requirement for our target markets – and the end products are less power hungry. Automotive and industrial system ICs Dialog supplies ASICs to leading European automotive suppliers who in turn deliver Dialog-based products to many leading car manufacturers. These devices capitalise on Dialog’s expertise and knowledge of technology, ranging from Power Management systems and mixed signal design, to high voltage circuits and embedded microprocessors on a single integrated circuit in an automotive-qualified CMOS process (including flash memory). The final assembly of our chips is outsourced to a number of qualified subcontractors in Asia. Our test programmes, based on our own and individual customers’ specifications, are developed by our test engineers in parallel with the design process. All test development is undertaken at our Nabern facility using the same type of test equipment and handling interfaces that are used in our offshore test subcontractors in order to speed up the volume ramp and production transfer process. All production testing Dialog operates a fabless model and minimises capital expenditure by outsourcing its manufacturing, assembly and test to Asian foundries – while maintaining control over the quality and reliability of its products. Presentation to Dialog from our long-standing silicon foundry partner TSMC, in commemoration of the Swindon, UK, office opening. 16 Dialog Semiconductor Plc Annual report and accounts 2009 Section 2 | Business review Dialog’s devices are de-capsulated, either fully or in part, and then inspected with a scanning electron microscope. This gives information about the device’s surface topography, contamination and other properties. Principal customers Many of Dialog’s principal customers are leading portable device and automotive and industrial equipment manufacturers that purchase both ASICs and ASSPs solutions. Customers with a significant contribution to revenue include Apple, Bosch, RIM (Research in Motion), SonyEricsson and TridonicAtco. Given the rapidly evolving nature of the technology used in Dialog’s target markets, the Company strives to develop long- term relationships with its major customers and seeks to adopt a partnership approach for both standard products and custom solutions. Customers look to Dialog for its technical expertise, while close working relationships with customers provide Dialog with an opportunity to develop and refine market-leading products with recognised industry leaders. and warehousing of final product is outsourced to our Asian test subcontract partners enabling direct drop shipments to our end customers. We have also created a specialist offshore operations and support centre in Taiwan. We have our own manufacturing and technical engineers close to foundries, and assembly and test subcontractors in Asia. By being “on the spot” to resolve any potential engineering issues quickly, they can forestall potential delays in production. Quality and environment control We have an uncompromising approach to quality assurance in every area of our operations and an uncompromising goal to deliver “zero fail” products. Active employee participation in error prevention approaches has enabled us to win the approval of all our major customers and to exceed their parts per million (ppm) failure rate expectations. The overall objective of our quality management system is to provide all our customers with the assurance that our products and services not only fulfil their current contractual requirements, but will also meet their future needs. We are committed to minimising our impact on the environment by developing and promoting environmentally compatible products, and operate in accordance with the ISO 14001 international environmental quality standard. We continuously promote awareness and knowledge of environmental issues throughout the organisation to ensure that they become a natural part of the decision-making process. As we demand the same standards from our suppliers we only form supply partnerships with those who are accredited to the same international quality standards. For more detailed information on specific products, please see our Website: www.dialog-semiconductor.com. Dialog Semiconductor Plc Annual report and accounts 2009 17 Section 2 | Business review Financial review “A strong balance sheet with sustained, profitable growth positions us well going forward.” Jean-Michel Richard, CFO, Vice-President Finance. The following tables detail the historical consolidated statements of the operations of Dialog for the years ended 31 December 2009 and 2008: Revenues Audio & Power Management Display systems Automotive/Industrial Corporate Sector Revenues Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Other operating income Restructuring and related impairment charges Operating profit (loss) Interest income and other financial income Interest expense and other financial expense Foreign currency exchange gains and losses, net Result before income taxes Income tax benefit Net profit 2009 2008 US$000 % of revenues US$000 % of revenues 176,569 5,987 33,531 1,526 217,613 (119,886) 97,727 (14,183) (12,584) (42,621) 333 – 28,672 203 (212) 162 28,825 3,902 32,727 81.1 2.8 15.4 0.7 100.0 (55.1) 44.9 (6.5) (5.8) (19.6) 0.2 0.0 13.2 0.1 (0.1) 0.1 13.3 1.7 15.0 121,355 5,149 35,193 133 161,830 (99,217) 62,613 (11,007) (9,853) (36,721) 775 145 5,952 874 (919) 126 6,033 728 6,761 75.0 3.2 21.7 0.1 100.0 (61.3) 38.7 (6.8) (6.1) (22.7) 0.5 0.1 3.7 0.5 (0.6) 0.1 3.7 0.5 4.2 Change % 45.5 16.3 (4.7) 1,047.4 34.5 20.8 56.1 28.9 27.7 16.1 (57.0) (100.0) 381.7 (76.8) (76.9) 28.6 377.8 436.0 384.1 Results of operations Segment reporting Revenues in the audio & power management segment for the year ended 31 December 2009 were US$176.6 million compared with US$121.4 million in 2008, an increase of 45.5%. The increase in this sector is primarily driven by the success of our growing range of 3G/HSPA integrated Power Management and audio products and Power Management solutions for Portable Media Players. Our 3G/HSPA customer base now includes six cellular customers. Additionally, we continue to see the adoption of our solutions by leading Smartphone manufacturers in more of their products. The operating profit in the audio & power management segment (see note 24a to the consolidated financial statements) increased to US$47.0 million compared with US$21.9 million in the same period 2008, an increase of 114.9%. Revenues in the display systems segment were US$6.0 million for the year ended 31 December 2009 (2008: US$5.1 million). Whilst 2009 revenue was partially generated from funded research and development activity, in late Q2-2009, we started first shipment to Samsung of our innovative power-saving keypad driver using e-ink technology. The operating loss in this segment (see note 24a to the consolidated financial statements) for year ended 31 December 2009 was US$12.4 million (2008: US$11.0 million). These losses reflect our investment in the emerging ultra low power display technology. 18 Dialog Semiconductor Plc Annual report and accounts 2009 Section 2 | Business review Revenues from our automotive/industrial applications segment were US$33.5 million for the year ended 31 December 2009 (2008: US$35.2 million), representing 15.4% of our total revenues (2008: 21.7%). Operating loss in the segment (see note 24a to the consolidated financial statements) was US$3.6 million for the year ended 31 December 2009 (2008: US$875,000 operating losses). This set of results reflects the difficult global environment experienced during most of 2009 in the automotive industry. Revenues in the corporate sector for year ended 31 December 2009 were US$1.5 million (2008: US$0.1 million). The amount in 2009 primarily relates to the unexpected cash settlement against revenues which had not been recognised in 2006 as a result of the insolvency of BenQ Mobile. For further information, please refer to note 27. The operating losses recorded in the corporate sector for the year ended 31 December 2009 of US$2.3 million (2008: US$4.1 million) (see note 24a to the consolidated financial statements) are primarily resulting from sales discounts for early payments, the costs of the holding company, stock option expenses and from expenses in relation to the Long Term Incentive Plan introduced in 2008. 217.6 Revenues FY 2009 Revenues Total revenues for the year ended 31 December 2009 were US$217.6 million (2008: US$161.8 million. This increase of 34.5% results mainly from higher sales volumes in our audio & Power Management sector as described above. Excluding the effect of the cash settlement from BenQ Mobile insolvency recorded in April 2009 (see note 27), revenues for the full year 2009 would have been US$215.7 million. 161.8 2009 2008 61.3 Cost of sales as % of revenue FY 2009 Cost of sales Cost of sales consists of material costs, the costs of outsourced production and assembly, related personnel costs and applicable overhead and depreciation of test and other equipment. For the year ended 31 December 2009, cost of sales increased by 20.8% to US$119.9 million (2008: US$99.2 million), resulting from increased revenues recorded during the year. However, as a percentage of total revenues, cost of sales in the same periods decreased from 61.3% to 55.1%. This demonstrates the gains made possible 2008 2009 55.1 by our continuous efforts to improve the Company’s product mix, test time and yields. Excluding the effect of the cash settlement from BenQ Mobile insolvency (see note 27), cost of sales as a percentage of revenue would have been 55.6% for the full year 2009. Gross profit Gross profit for the year ended 31 December 2009 was US$97.7 million (2008: US$62.6 million). Our gross profit increased from 38.7% of revenues in 2008 to 44.9% of revenues for the year ended 31 December 2009, driven by lower cost of sales as a percentage of revenue and the accelerated introduction of new products as prescribed above. Excluding the effect of the cash settlement from BenQ insolvency recorded in Q2-2009 (see note 27), gross margin would have been 44.4% for the full year 2009. Selling and marketing expenses Selling and marketing expenses consist primarily of salaries, sales commissions, travel expenses, advertising and other marketing costs. In 2009, selling and marketing expenses increased to US$14.2 million (2008: US$11.0 million) in line with increased production volume and as a result of the Company’s investment in creating value by increasing staff in strategic marketing functions. However, given the increased revenues recorded in 2009 over 2008, selling and marketing expenses decreased from 6.8% of total revenues in 2008 to 6.5% of total revenues in the year ended 31 December 2009. General and administrative expenses General and administrative expenses consist primarily of personnel and support costs for our finance, human resources and other management departments. In 2009 general and administrative expenses increased to US$12.6 million (2008: US$9.9 million). This mainly reflects the increase in share-based compensation expenses recorded in 2009 in line with the Company share price performance during the same period. For the year ended 31 December 2009, general and administrative expenses as a percentage of revenues were 5.8% compared with 6.1% in 2008. Research and development expenses Research and development expenses consist principally of design and engineering-related costs associated with the development of new Application Specific Integrated Circuits (“ASICs”) and Application Specific Standard Products (“ASSPs”). Research and development expenses (net of customer-funded projects) increased to US$42.6 million in 2009 (2008: US$36.7 million). The absolute US$ increase in research and development expenses was primarily due to an increased headcount of our R&D personnel in support of our growth strategy. As a percentage of total revenues, research and development expenses decreased from 22.7% (2008) to 19.6% (2009), resulting from a higher revenue base in the latter period. Dialog Semiconductor Plc Annual report and accounts 2009 19 Section 2 | Business review Financial review Other operating income Other operating income of US$0.3 million in the year ended 31 December 2009 relates to the unexpected settlement against receivables which had been written down in 2006 as a result of the insolvency of BenQ Mobile. For further information, please refer to note 27. Other operating income in 2008 relates to the release of two reserves: one in connection with the spin-off of the digital imaging business (DIS), the other in connection with a warranty claim. In 2008 the Company was able to release those reserves after both issues were closed. Operating profit We reported an operating profit of US$28.7 million for the year ended 31 December 2009 (2008: US$6.0 million). The improvement primarily resulted from increased revenues and gross profits recognised in 2009. Operating profit FY 2009 28.7 6.0 Excluding the effect of the BenQ Mobile settlement recorded in Q2-2009 – see above and note 27 – operating profits for year ended 31 December 2009 would have been US$26.4 million or 12.2% of total revenues. 2008 2009 Interest income and other financial income For the year ended 31 December 2009, interest income and other financial income from the Company’s investments (primarily short term) was US$203,000 compared with US$874,000 in the previous year. The reduction is primarily the result of lower interest rates despite increased liquidity. Interest expense and other financial expense Interest expense and other financial expense consist primarily of expenses from the Group’s factoring arrangement. Interest and other financial expenses in 2009 were US$212,000 (2008: US$919,000). The reduction is primarily the result of reduced factoring utilisation and lower interest rates. Income taxes For the year ended 31 December 2009, an income tax benefit of US$3.9 million was recorded (2008: US$0.7 million). The amount in 2009 consists of a current tax expense of US$3.2 million and a deferred tax benefit of US$7.1 million. In Q4 2009 previously unrecognised deferred tax assets were recognised. This resulted in a contribution of US$7.5 million to the Company’s net profit (for further information, please refer to note 4). 20 Dialog Semiconductor Plc Annual report and accounts 2009 32.7 Net income FY 2009 Net profit For the reasons described above, in 2009, net profit increased by US$26.0 million to US$32.7 million or 15.0% of total revenues (2008: US$6.8 million or 4.2% of total revenues). For the year ended 31 December 2009, basic earnings per share were US$0.67 (2008: US$0.15) and diluted earnings per share were US$0.60 (2008: US$0.15). Excluding the effect of the cash settlement from the BenQ Mobile insolvency recorded in April 2009 (see above and note 27), net income for year ended 31 December 2009 would have been US$30.4 million. 2009 2008 6.8 Liquidity and capital resources Cash flows Cash generated from operating activities was US$33.2 million (2008: US$9.3 million). The cash inflow in 2009 mainly resulted from the operating income (before depreciation, amortisation and other non-cash effective expenses) and higher trade accounts payable. This cash inflow was partly offset by increased trade accounts receivables and inventory balances. The cash inflow in 2008 related primarily to the operating income (before depreciation, amortisation and other non-cash effective expenses). This cash inflow was partly offset by cash used to finance the increased working capital. Cash used for investing activities in 2009 was US$12.3 million (2008: cash generated US$12.1 million). Cash used for investing activities in 2009 consisted primarily of the purchase of tooling (masks), laboratory equipment, probe cards, load boards and other advanced test equipment for a total of US$5.9 million (2008: US$3.5 million), the purchase of intangible assets of US$1.8 million (2008: US$2.8 million) and payments related to capitalised development costs of US$1.0 million (2008: US$1.4 million). In addition, the cash outflow in 2009 includes a balance sheet reclassification of US$3.0 million from cash to restricted cash (for further information, please refer to note 25 of the consolidated financial statements). 2008 cash inflow from investing activities resulted primarily from the net sale of securities of US$19.7 million. Section 2 | Business review Liquidity At 31 December 2009 we had cash and cash equivalents and restricted cash of US$123.1 million (31 December 2008: US$36.9 million). The working capital (defined as current assets minus current liabilities) was US$134.4 million (31 December 2008: US$47.4 million). 2009 we had no amounts outstanding under these facilities. In addition, we have a factoring agreement which provides the Company with up to US$30.0 million of readily available cash. 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 if needed. If necessary, we have available for use short-term credit facilities amounting to US$14.2 million that bear interest at rates between LIBOR +0.75 and LIBOR +1% per annum. At 31 December 2009 US$000 123,148 45,663 168,811 9,807 5,005 1,174 7,514 2008 US$000 36,915 30,388 67,303 7,734 4,640 676 – Change US$000 86,233 15,275 101,508 2,073 365 498 7,514 % 233.6 50.3 150.8 26.8 7.9 73.7 – 192,311 80,353 111,958 139.3 34,380 952 156,979 192,311 19,877 271 60,205 80,353 14,503 681 96,774 111,958 73.0 251.9 160.7 139.3 Non-current liabilities relate to capital lease and hire purchase commitments. Shareholders’ equity increased to US$157.0 million (US$60.2 million at 31 December 2008) which is mainly the result of the September 2009 capital increase (please refer to note 19) and our net profit. The equity ratio (equity over total assets) was 81.6% (74.9% at 31 December 2008). Statement of financial position Assets Cash and cash equivalents and restricted cash All other current assets Total current assets Property, plant and equipment, net Intangible assets All other non-current assets Deferred tax assets Total assets Liabilities and Shareholders’ equity Current liabilities Non-current liabilities Net Shareholders’ equity Total Liabilities and Shareholders’ equity Balance sheet total was US$192.3 million at 31 December 2009 (31 December 2008: US$80.4 million). Cash and cash equivalents and restricted cash increased by 233.6% to US$123.1 million at 31 December 2009 (31 December 2008: US$36.9 million). This increase is mainly related to the net cash proceeds from the September 2009 capital increase (US$59.7 million) received in Q4-2009 and an operating cash inflow as prescribed above. Other current assets increased by 50.3% to US$45.7 million (31 December 2008: US$30.4 million), driven by higher trade accounts receivables and inventory balances. Total non-current assets increased by 80.1% to US$23.5 million. This increase is mainly due to recognised deferred tax assets in Q4-2009 amounting to US$7.5 million (2008: nil), higher balances of property, plant and equipment and intangible assets as capital expenditures and investments were higher than depreciation and amortisation and impairment charges. Dialog Semiconductor Plc Annual report and accounts 2009 21 Section 2 | Business review Risks and their management The market The market in which we compete is intensely competitive and highly cyclical, and is characterised by continuous development and technological improvement. Our future success depends on our ability to anticipate and respond to new market trends, to implement new designs rapidly to meet customers’ needs, and to keep abreast of the technological changes. As a result, we invest in research and development to enable us to create innovative designs and products on a cost-effective, timely basis. Revenue and profitability We returned to profitability in 2008 after having not been profitable for the prior seven financial years, and cannot guarantee that we will remain profitable in the future. But we constantly seek to improve profitability by launching new products and acquiring new customers. Since we continue to rely on a relatively small number of customers for a substantial proportion of our revenue, the loss of one or more of these customers would be likely to have a material effect. Our goal is to spread this risk by acquiring more customers. We are attempting to reduce the risk of our revenues, profitability and growth being affected by a slow down in the wireless communications market by winning customers in other sectors. Third-party costs During 2007, we outsourced our manufacturing and testing to lower-cost environments, where there is excellent capacity, to overcome the potential problem of an inability to access manufacturing capacity which would result in increased costs and, therefore, decreased revenue. Supplier risk If any of the Company’s suppliers were to become insolvent, there could be a risk of the Company’s production being interrupted. For this reason, the Company tries to source its components from at least two different suppliers and from different sites. In addition, the Company takes the precautions for supplier insolvency with its risk management system in which information on the creditworthiness of suppliers is kept. This seeks to identify suppliers at risk at an early stage. Intellectual property We seek to protect our intellectual property from being copied or used by others by appropriate use of patents, copyrights and trademarks. 22 Dialog Semiconductor Plc Annual report and accounts 2009 Interest rate risk The Group earns interest from bank deposits and uses money market deposits with highly rated financial institutions. During the year, the Group has held cash on deposit with a range of maturities from one week to three months. This can vary in view of changes in the underlying currency’s interest rates and the Group’s cash requirements. The Group has no long-term debt and no amounts outstanding under short-term credit facilities as at 31 December 2009 (2008: US$nil). The Group’s policy is to manage its interest income using a mix of fixed and variable interest rate debts. In order to achieve this policy, the Group invests in highly liquid funds having a matching investment strategy. Once the operating business has been financed, short-term excess funds are invested with reputable financial institutions. Currency risk The Company’s functional – and presentational – currency is the US dollar, and the majority of its revenue and expenses are in that currency. There are, however, foreign exchange risks associated with transactions, and recognised assets and liabilities in other currencies, primarily the euro and the pound sterling. Transaction currency exposures arise from sales or purchases in currencies other than the US dollar. We use forward currency contracts to eliminate our exposure associated with the payment of salaries and wages in other currencies. We maximise the effectiveness of our hedge derivatives by matching the terms and conditions of the hedge to those of the underlying obligation. (See note 25 on page 76 for further information.) Other price risks IFRS 7 requires us to disclose how hypothetical changes in risk variables, such as stock exchange prices, would affect the price of financial instruments. In 2008, the Group sold all securities for cash, eliminating all price risk associated with such instruments. Credit risk The Company is exposed to credit risk from its operating activities and certain of its financing activities. We ensure that our exposure to bad debt is minimised by monitoring all customers who trade on credit terms, and receivable balances. In August 2007, we entered into a factoring agreement with a reputable German financial institution for a total of €10 million to finance our growth. In 2008, the amount was increased to US$ 30.0 million. Since the financial institution assumes all risks associated with the collection of receivables from selected customers, the agreement significantly reduces our risks associated with their collection. We, in turn, have pledged US$6.5 million of our securities to the financial institution concerned. These will be drawn on only if an action of ours partially or completely invalidates the claim on a receivable that had been financed through the factoring programme. In 2008, the securities were converted to cash. Section 2 | Business review Risks and their management Corporate social responsibility In 2009, the pledge amount was reduced to US$3.0 million and converted to cash. Our exposure to credit risks arising from other financial assets, such as cash and cash equivalents, available-for- sale and held-to-maturity financial investments, would arise from the default of a counterparty and is limited to the carrying amount of the particular instruments. Liquidity risk We monitor our liquidity on a quarterly basis with the objective of avoiding interest on short-term bank liabilities or overdrafts. Our policy is to structure the maturity of our current financial assets in the Group to meet 100% of the respective maturities and liabilities. An international equity offering was launched in Q3 2009, with the subscription being approximately three times oversubscribed. Twelve million new ordinary shares were priced at €3.65, representing a premium of 4% to the price on the offer announcement date. The shares were placed with a number of Tier 1 institutional investors to raise gross proceeds of €43.8 million (US$ 64.3 million). Net proceeds (after deduction of offering expenses of US$4.7 million) were US$59.7 million. The proceeds from the offering will be used to increase our working capital resources to fund future growth, to acquire complementary technology and intellectual property and expand our design and technical support teams, particularly in the US and Asia. By providing an exciting work experience in an attractive environment, with investment in our people and resources, Dialog continues to attract leading talent in the industry. Dialog considers that the social challenges of corporate responsibility should be based on fair wages, healthy and safe working conditions, respect for human rights, honest relationships and commitment to community development. With regard to these challenges, Dialog is committed to the adoption of the Electronics Industry Code of Conduct (EICC) standard as the model for ensuring that working conditions for internal and external suppliers are safe and that all workers are treated with respect and dignity. This commitment is reflected in Dialog’s own “Code of Conduct”, which addresses all the key areas defined in the EICC standard along with recognised standards such as International Labour Organization Standards (ILO), Universal Declaration of Human Rights (UDHR), Social Accountability International (SAI) and the Ethical Trading Initiative (ETI). In addition, the Company complies with the worldwide ISO 14001 Environmental Standard – and expects its suppliers to do the same – in order to ensure that all manufacturing processes are environmentally compliant. Human rights and code of conduct Dialog’s philosophy is that all its suppliers must demonstrate a commitment to upholding workers’ human rights and to treating them with dignity and respect. Standards such as the UDHR, SAI and the ETI have been used as a basis for these requirements. All labour must be given voluntarily and workers must be free to leave their employment on reasonable notice. Child labour must not be used at any stage of manufacturing. Working hours must not exceed the maximum set by local laws and wages must comply with all applicable laws. Dialog and its suppliers must ensure that workers are not threatened or subjected to inhumane or harsh treatment, harassment or any form of unlawful discrimination. Open communication and direct engagement between workers and management is encouraged, even in those countries where there is no meaningful legal protection. In order to promote its philosophy several new initiatives have been introduced to all of Dialog’s manufacturing partners during 2009, including a detailed code of conduct for them to review and implement. Detailed self-audits have been performed by all our suppliers in order to verify the implementation of this code of conduct and on-site audits and inspections are performed regularly by Dialog to verify its continuing maintenance. Health and safety Dialog considers a safe and healthy working environment to be essential in the maintenance of employees’ morale and in the Dialog Semiconductor Plc Annual report and accounts 2009 23 Section 2 | Business review Corporate social responsibility production of high-quality and innovative products. As a result, we require our major suppliers also to be committed to ensuring the creation of healthy and safe working conditions. We expect them to provide evidence of suitable controls, safe working procedures, preventative maintenance and general protective measures in their working environments. When hazards cannot be adequately controlled by these means alone, suitable protective clothing or equipment is supplied, and evacuation procedures and facilities are in place at Dialog’s and suppliers’ premises. Connecting with employees Dialog aims to attract and retain the best people by ensuring that all employees receive comprehensive on-the-job formal training, coaching and mentoring. Clear and regular communication is achieved through regular Company-wide information sessions, led by the CEO, and every effort is made to keep employees fully aware of Company matters that affect them. We encourage employee feedback at all levels for new ideas to improve business efficiency and performance. We support initiatives and fundraising in the local communities in which we work. Ethics Dialog believes that continued success in the semiconductor market can be achieved only by adopting high standards of ethical behaviour when dealing with customers, suppliers and workers. It is particularly important to protect Intellectual Property (“IP”), which is the key to ensuring the development of innovative solutions to complex problems. Any transfer of technology or know-how is always done in a manner that protects IP rights; effective protection also means that products can be discussed openly with our business partners. The disclosure of information which is related to business activities, structure, our financial situation and performance is always carried out in accordance with applicable regulations and prevailing industry practices. We expect the highest standards of integrity from all Dialog stakeholders; any malpractice is strictly prohibited and may result in immediate termination and legal action. Neither we nor our suppliers offer or accept inducements or any other means of obtaining undue or improper advantage. We have a “whistle-blower” policy in place to protect employees’ confidentiality and encourage our suppliers to do the same. Management systems Dialog’s management system complies with the EICC code. It is certified to the ISO 9001 international standard as a formal implementation of the code and is committed to implementing and facilitating continuous improvements, and to mitigating operations-related risks. To enable us to comply with all applicable 24 Dialog Semiconductor Plc Annual report and accounts 2009 laws, regulations and customer requirements, as required by the code, we also ensure that all our major supply-chain partners are accredited at least to the same standard. To ensure that we constantly improve our management systems, we regularly review and audit internal and supply-chain management systems. The environment and environmental protection The environmental agenda at Dialog considers climate change environmental protection aspects (air, land and water quality), effective resource management (eco-efficiency) and sustainability. Our commitment to the environment is evidenced by our ISO14001 certification. Since we firmly believe that sustainable development can be secured only if we safeguard our valuable resources, we deal only with suppliers that have similar environmental goals and are also accredited to the ISO14001 standard. Within our supply chain, we continually emphasise that environmental issues should be an instinctive part of any decision-making process, and that suppliers should use environmentally friendly technology to: (cid:1) reduce and eliminate emissions of ozone-depleting, and other volatile organic chemicals (VOC); (cid:1) design and manufacture only environmentally friendly products; (cid:1) manage, reduce and dispose of hazardous substances safely; (cid:1) monitor and control waste water and solid waste emissions; (cid:1) reduce and eliminate all types of waste, including water and energy; (cid:1) reduce waste by maximising product yields; and (cid:1) ensure all environmental permits are obtained, maintained and kept current. As a fabless semiconductor company, it is important to Dialog that all of its manufacturing partners also follow their requirement to respect the environment. To this end every supplier is required to complete a self-audit questionnaire to identify and document compliance to Dialog’s environmental requirements. Also, evidence of compliance to requirements is checked during regular supplier on-site audits. Some recent examples of the environmental improvements implemented by our suppliers are: (cid:1) reduction of VOC Emissions through the use of local scrubbers; (cid:1) reduction in water usage by 2% due to water recycling and developing of rainwater drainage systems to increase the collection of rainwater for reuse; (cid:1) reduction of scrap (failed devices) by maximising product yields; and (cid:1) use of recycling facilities for extractions and reuse of precious metal and plastic. This has enabled a raw material recycle rate increase of around 7% compared to 2008. Section 3 | Management and governance Executive management From left to right: Dr Jalal Bagherli, Gary Duncan, Peter Hall, Udo Kratz, Jean-Michel Richard, Jürgen Friedel, Manoj Thanigasalam, Mark Tyndall and Mohamed Djadoudi. Dr Jalal Bagherli Chief Executive Officer Jalal joined Dialog, as CEO, in September 2005. He was previously Vice President and General Manager of the Mobile Multimedia business unit for Broadcom Corporation and the CEO of Alphamosaic. He has extensive experience of the semiconductor industry through his previous professional and executive positions at Texas Instruments and Sony, and a wealth of knowledge about the Far Eastern, European and North American markets. He is a non-executive Director of Lime Microsystems Ltd. Gary Duncan Vice President, Engineering Gary, who joined the Company in 1987, is responsible for the design and development of our semiconductor products. Before joining Dialog, he held senior engineering and management roles at Plessey and ES2. Peter Hall Vice President, Supply Operations and Facilities Peter joined Dialog in 1987 and is responsible for supply operations, procurement and facilities. He also reports directly to the Audit Committee in his role as Internal Audit Manager. His previous experience includes management and engineering positions at STC Semiconductors and MEM in Switzerland. Peter holds a BSc in electrical and electronic engineering from Newcastle University and an MSc in digital design techniques from Herriot Watt University, Edinburgh, and an MBA from the Open University, United Kingdom. Mark Tyndall VP Business Development and Corporate Strategy Mark Tyndall joined Dialog Semiconductor as Vice President of Business Development and Corporate Strategy in September 2008. Prior to Dialog, Mark was Vice President of Business Development and Corporate Relations at MIPS Technologies. From 1999 to 2006, he held the position of Vice President of Business Development at Infineon and has also served as a Board Director of a number of start-up companies, several of which were successfully acquired. Earlier in his career, Mark held management positions in marketing at Fujitsu Microelectronics and in design at Philips Semiconductors. Mohamed Djadoudi Vice President, Global Manufacturing Operations and Quality Mohamed joined Dialog in March 2007 and is responsible for product engineering, test and assembly development, data automation, software support, offshore manufacturing operations and quality. Mohamed has 25 years’ experience in the field of semiconductor manufacturing operations, starting initially with IBM in France and the US. He was previously Senior Vice President and Chief Technology Officer of the Unisem group, an assembly and test subcontractor based in Malaysia and China. He also held the position of Vice President of Test Operations at ASAT based in Hong Kong before becoming one of the original members of the management buy-out team of ASAT UK (Atlantis Technology UK), where he served as the Technical Director. Mohamed holds an Electronic and Electrotechnic degree from the Paris University of Technology. Udo Kratz Vice President, General Manager Audio and Power Management Business Unit Udo joined Dialog in May 2006. He is responsible for the Audio and Power Management Business Unit, which makes products for the mobile phone and portable consumer markets. His 20+ years’ experience in the semiconductor industry was gained in general management, senior marketing and engineering at Robert Bosch GmbH, Sony Semiconductor and Infineon Technologies. Udo holds an electronic engineering degree from the University for Applied Sciences, Mannheim. Jean-Michel Richard CFO, Vice President Finance Jean-Michel joined the Company in September 2006 to head up its finance department. He was previously Finance Director for the Global Manufacturing and Technology Division of ON Semiconductor, in Phoenix, Arizona, and before that held senior finance and treasury positions at ON and Motorola, in Europe and the US. Jean-Michel holds a Masters in Economics from the University of Geneva, Switzerland. Jürgen Friedel Vice President, General Manager Automotive and Industrial Business Unit Jürgen joined Dialog in 1999 and is responsible for the Automotive and Industrial Business Unit. He previously held senior management positions at SEL/ITT and National Semiconductor, in Germany. Jürgen holds a diploma in communications engineering from the University for Applied Sciences, Esslingen. Manoj Thanigasalam Vice President, General Manager Display Systems Business Unit Manoj joined the Company in March 2006. Responsible for the Display Systems Business Unit, he was previously Vice President of Business Development at ZBD Displays and, before that, was General Manager of marketing for the Digital TV and wireless communications market at Sony Semiconductor. He has also worked for Texas Instruments, Philips, ARM and LSI Logic. Manoj holds a degree in physics and electronics from Bradford University. Dialog Semiconductor Plc Annual report and accounts 2009 25 Section 3 | Management and governance Board of Directors From left to right: Gregorio Reyes, Jalal Bagherli, Chris Burke, Aidan Hughes, John McMonigall, Russ Shaw, Peter Tan and Peter Weber. Gregorio Reyes Chairman Gregorio joined the Board in December 2003. His experience is primarily in data storage and magnetic recording, semiconductors, and telecommunications. He was President and CEO of National Micronetics from 1981 to 1984, and Chairman and CEO of American Semiconductor Equipment Technologies from 1986 to 1990. He co-founded Sunward Technologies in 1985 and was Chairman and CEO until 1994. He is currently non-executive Chairman of LSI Logic and a non-executive director of Seagate Technology. Dr Jalal Bagherli Chief Executive Officer Jalal joined Dialog, as CEO, in September 2005. He was previously Vice President & General Manager of the Mobile Multimedia business unit for Broadcom Corporation and the CEO of Alphamosaic. He has extensive experience of the semiconductor industry, through his previous professional and executive positions at Texas Instruments and Sony, and a wealth of knowledge about the Far Eastern, European and North American markets. He is a non-executive director of Lime Microsystems Ltd. Chris Burke Non-executive Director Chris joined the Board in July 2006. Until the end of 2004, he was CTO at Vodafone UK Limited and was previously CTO at Energis, after spending 15 years in Research & Development at Northern Telecom. He holds appointments at Connectivity Ltd (an Esprit, and 3i Portfolio Company) and OneAccess. He invests from his own fund and provides strategic advice to a wide range of investors and technology companies, including HP Communications & Media, Juniper Networks and a variety of venture capital funds. Aidan Hughes Non-executive Director, Chair of Audit Committee Aidan joined the Board 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 was Finance Director of the Sage Group plc from 1993 until 2000 and, from December 2001 to August 2004, was a director of Communisis Plc. He is a director of, and investor in, a number of UK private technology companies. John McMonigall Non-executive Director John joined the Board in March 1998. He has been a director at Apax Partners since 1990 and, between 1986 and 1990, held a variety of senior positions at British Telecommunications plc and was also a member of the management board. He is currently on the board of several other public and private companies, including Autonomy Plc. Russ Shaw Non-executive Director, Chair of Remunerations & Nominations Committee Russ joined the Board in July 2006. He is currently the Vice President & General Manager for Skype with responsibilities for its Mobile Division as well as Europe, Middle East and Africa. Previously, he was at Telefonica where he was the Global Director of Innovation. Before joining Telefonica, he was the Innovation Director at O2, which he joined as Marketing Director in 2005. The strong brand and product range he established resulted in significant customer growth. His more-than 20 years’ senior marketing and brand management experience in the telecoms and financial services area has enabled him to bring an excellent level of knowledge to Dialog. Peter Tan Non-executive Director Peter joined the Board in July 2006. He has held senior management roles across a wide range of technology companies, including National Semiconductors Pte Ltd, Molex Singapore Pte Ltd, Apple Computer Inc. and Flextronics International Inc. He is presently Managing Partner of JP Asia Capital Partners Pte Ltd, and also sits on the board of Vacuumschmelze (VAC) Luxembourg S.a.r.l., VariOptic SA, Innotek Limited and SMRT Corporation Ltd. Besides his Board role, Peter has an advisory function in the National University of Singapore BTech Program and is a member of the International Evaluation Panel for the Singapore National Research Foundation. Peter holds a Diploma in Management Studies from the University of Chicago and an Executive MBA Degree from the Golden Gate University, San Francisco. Peter Weber Non-executive Director Peter joined Dialog on 1 February 2006. He brought with him 35 years’ experience, gained at a broad range of companies in the semiconductor sector, including Texas Instruments, Intel, Siliconix, the Temic Group and Netro Corporation. Since 1998 he has been an investor and management consultant, and is a director of a number of companies in Europe and the US. Peter holds an MSEE degree in communications engineering. 26 Dialog Semiconductor Plc Annual report and accounts 2009 Section 3 | Management and governance Directors’ report The Directors of Dialog Semiconductor Plc (“Dialog” or “the Company”) present their annual report and audited financial statements for the year ended 31 December 2009. These accounts have been prepared under IFRS for UK reporting purposes and are available on the Company’s Website: www.dialog-semiconductor.com. Principal activities and review of the business Dialog Semiconductor creates some of the world’s most energy- efficient, highly integrated, mixed-signal integrated circuits. These are optimised for personal mobile, industrial and automotive applications. The Company provides flexible and dynamic support, world-class innovation, and the assurance of dealing with an established business partner. Customers with a significant contribution to revenue include Sony Ericsson, Apple, RIM, Bosch and Tridonic Atco. With its unique focus and expertise in system Power Management, Dialog brings decades of experience to the rapid development of integrated circuits for power and motor control, audio and display processing. Dialog’s processor companion chips are essential for enhancing both the performance of hand-held products and the consumers’ multimedia experience. Automotive applications include intelligent motor control for comfort and safety systems. With world-class manufacturing partners, Dialog operates a fabless business model. Dialog Semiconductor Plc is headquartered near Stuttgart, Germany, with operations in Austria, China, Germany, Japan, Korea, Taiwan, the UK and the USA. The Company employs 339 worldwide and is listed on the Frankfurt (FWB: DLG) stock exchange. Going concern After reviewing the 2010 budget and longer-term plans, the Directors are satisfied that, at the time of approving the financial statements, it is appropriate to adopt the going-concern basis in preparing the financial statements of the Company. Dividends The Directors do not recommend the payment of a dividend (2008: nil). They are committed to re-investing all profits into the business and believe that this policy is in the best interests of its Shareholders. Purchase of own shares The Company operates an Employee Share Option Trust which purchases shares in the Company for the benefit of employees under the Company’s share option scheme. Since the Company has de facto control of the assets and liabilities of the Trust, they are included in the Company and Group balance sheets. At 31 December 2009, the Trust held 2,663,318 shares, which represented 4.3% of the total called-up share capital, at a nominal value of £266,332. Share capital Details of the share capital are set out in note 19 to the consolidated financial statements. Substantial shareholdings Details of substantial shareholdings are on page 9 of this annual report. More information about the business is set out in the Chairman’s statement, on page 6, and in the Business review, on pages 10 to 24. Directors The Directors, together with their biographies, are listed on page 26 of this report. Future developments The Group’s stated objective is to be the leading global supplier of lowest-power, highest-quality mixed-signal components and system level solutions to the wireless and automotive markets. The Company is currently leveraging its expertise to expand its stand- alone audio product portfolio, capitalising on the success of its newly introduced low power and high quality Audio IC, and to add innovative ultra low power display technologies such as PM-OLED. Retirement On 22 April 2009, Michael Glover retired from the Company’s Board of Directors. Directors’ remuneration and interests Directors’ remuneration and interests are detailed in the Directors’ remuneration report on pages 32 to 34 of this annual report. Research and development (R&D) The Group believes that its future competitive position will depend on its ability to respond to the rapidly changing needs of its customers by developing new designs in a timely and cost-effective manner. To this end, the Company’s management is committed to investing in researching and developing new products and customising existing products. To date, R&D projects have been in response to key customers’ requests to assist in the development of new products, and for the development of application-specific standard products (ASSPs). The Company does not expect any material change to this approach in the foreseeable future. No Director had a material interest during the year ended 31 December 2009 in any contract of significance with any Group company. Directors’ third-party indemnity provisions The Company has granted an indemnity to its Directors against proceedings brought against them by third parties, by reason of their being Directors of the Company, to the extent permitted by the Companies Act 2006. Such indemnity remains in force as at the date of approving the Directors’ report. Dialog Semiconductor Plc Annual report and accounts 2009 27 Responsibility statement under the Disclosure and Transparency Rules Each of the Directors listed on page 26 confirm that to the best of their knowledge: (cid:1) the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and (cid:1) the Directors’ report and the Group Operating and Financial Review include a fair review of the development and the performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Annual General Meeting The notice convening the Annual General Meeting will be published separately and posted on the Company’s Website. The meeting will be held at Tower Bridge House, St Katherine’s Way, London E1W 1AA on 5 May 2010 at 9am. Auditors In accordance with Section 384 of the Companies Act 2006, a resolution for the re-appointment of Ernst & Young LLP as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the Board Dr Jalal Bagherli Director 11 February 2010 Section 3 | Management and governance Directors’ report Election and re-election of Directors In accordance with the Company’s Articles of Association, one-third of the non-executive Directors have to stand for re-election at the Annual General Meeting. The next Annual General Meeting will be held on 5 May 2010 at 9am. Corporate Governance The Company’s Corporate Governance statement is set out on pages 29 and 31 of this report. Supplier payment policy It is the Group’s policy to pay creditors in accordance with the terms and conditions agreed with them, and in accordance with contractual and other legal obligations. Days payable outstanding for the Group at 31 December 2009 was 52 days (2008: 47 days). Financial instruments The Group’s financial risk management and policies, and exposure to risks, are set out on pages 22 to 23. Political and charitable contributions The Group made no political contributions during the period. We made charitable contributions of US$6,542 to local community projects (2008: US$8,993). Employee policies It is our policy to support our people through training, career development and opportunities for promotion. We operate an open management approach and consult with our staff on matters which are of concern to them. We share information with employees on the performance of the Company which, together with profit related bonuses and stock option awards, encourage staff involvement. Disabled persons Our policy provides for disabled persons, whether registered or not, to be considered for employment, training and career development in accordance with their aptitudes and abilities. Statement on disclosure of information to auditors The Directors who were members of the Board at the time of approving the Directors’ report are listed on page 26. Having made enquiries of fellow Directors and of the Company’s auditors, each of the Directors affirms that: (cid:1) to the best of their knowledge and belief, there is no information relevant to the preparation of their report of which the Company’s auditors are unaware; and (cid:1) they have taken all reasonable steps to be aware of relevant audit information and to establish that the Company’s auditors are aware of that information. 28 Dialog Semiconductor Plc Annual report and accounts 2009 Section 3 | Management and governance Corporate Governance Governance standards Dialog Semiconductor Plc is committed to implementing high levels of 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”. Dialog’s Corporate Governance principles are published on its Website (www.dialog-semiconductor.com). The Website also contains a full version of the Company’s Code of Business Conduct and Ethics. This details Dialog’s expectations regarding the ethical standards that each Director, officer and employee should follow while acting on the Company’s behalf. Corporate Governance information relating to the past financial year is set out below. Shareholders and the Annual General Meeting (“AGM”) The AGM, at which the annual financial statements and audit reports are presented, is the main forum for Shareholders to exercise their voting rights. Directors appointed by the Board during any given year are subject to Shareholder approval at the AGM. In addition, one-third of the Directors must resign each year and may put themselves forward for re-election. Changes to the constitution of the Company are decided by Shareholders’ resolution. Similarly, the AGM is the forum at which Shareholders can authorise the Directors to issue new shares. Dialog does not have any shares in issue which have multiple voting rights, preferential voting rights or maximum voting rights. Board of Directors The Board is responsible for determining Dialog’s business strategy and ensuring that an executive is appointed to implement it. It is also responsible for overseeing the financial aspects of the business. The Board, which met five times during the year, currently consists of seven non-executive Directors and one executive Director. The compensation provided to each Director is detailed in the Directors’ remuneration report on pages 32 to 34. The executive Director’s remuneration is performance related and is connected to a set of goals and Dialog’s profitability. Audit Committee, and Remuneration and Nomination Committee Dialog’s Audit Committee comprises the following Directors: Aidan Hughes (Chairman), John McMonigall and Peter Tan. The Committee is responsible for monitoring financial statements and reviewing the performance of the external auditors. It also assesses the efficiency of the audit process and (among other things) considers compliance with accounting standards. The Chief Executive Officer, Chief Financial Officer, the Company Secretary and representatives of the external auditors usually attend Audit Committee meetings. The Remuneration and Nomination Committee is chaired by Russ Shaw who is assisted by Chris Burke and Peter Weber. The responsibility of the Committee, among other things, is to determine subject to Board approval, the salaries and incentives of Dialog’s senior executives and decide on the size and composition of the Board. Corporate Governance is monitored at Board level – a reflection of the importance it is given by the Board. During the year, the Audit, and Remuneration and Nomination Committees met frequently to analyse issues under their jurisdiction, usually on the day before each Board meeting. Dialog Semiconductor Plc Annual report and accounts 2009 29 Section 3 | Management and governance Corporate Governance Transparency Under UK Disclosure and Transparency Rules, significant Shareholders are required to notify Dialog of a shareholding of 3% or more. Dialog must then notify BaFin and the Stock Exchange. Under S.15a of the German Securities Trading Act (Wertpapierhandelsgesetz) transactions in the Company’s shares carried out by members of the Board of Directors and their family members are reported and published without delay. The Company operates a Code of Dealing in its shares which is designed to prevent insider trading and the abuse of price- sensitive information. The Board appreciates the value of keeping Shareholders informed of Dialog’s performance throughout the year. As a result, it publishes quarterly financial reports, together with key information on the AGM, on its Website. Takeovers directive At 31 December 2009, the Company’s issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital can be found in note 19 consolidated financial statements. On a show of hands at a general meeting of the Company every holder of shares present in person and entitled to vote shall have one vote and on a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of the general meeting specifies deadlines for exercising voting rights either by proxy notice or present in person or by proxy in relation to resolutions to be passed at general meeting. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the annual general meeting and published on the Company’s website after the meeting. There are no restrictions on the transfer of ordinary shares in the Company other than: (cid:1) certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws); (cid:1) employees of the Company are not allowed to trade in shares or exercise options in certain close periods (such close periods normally start two weeks before the end of each quarter and end 48 hours after the release of the financial results). Changes in the share capital of the Company in 2009 were as follows: (cid:1) On 25 September 2009, the shareholders of the Company approved an offering of 12 million new ordinary shares of 10 pence each in the capital of the Company; (cid:1) On 20 October 2009, the Company completed an offering of 3,500,000 previously unissued ordinary shares at 10 pence each to its employee share options trust. Details of both changes in share capital can be found in note 19 to the consolidated financial statements. Besides that, the Company did not purchase own shares and the Company holds no shares in treasury. The Company is not aware of any agreements between Shareholders that may result in restrictions on the transfer of securities and for voting rights. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. The agreements between the Company and its Directors for compensation for loss of office are given in the Directors remuneration report on page 32. The Company’s articles of association may only be amended by a special resolution at a general meeting of Shareholders. 30 Dialog Semiconductor Plc Annual report and accounts 2009 Section 3 | Management and governance Internal control In accordance with the EU Transparency Directive (DTR 7.2.5), Dialog’s Board of Directors and Audit Committee acknowledge that they are responsible for the Company’s processes of internal control and for reviewing its effectiveness. Such processes are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The Company has an ongoing process for identifying, evaluating and managing the significant risks it faces. This process is reviewed in accordance with the EU Transparency Directive. The process was in place during 2009 and up to the date of the approval of the 2009 annual report and financial statements. The Company’s Board and Audit Committee can confirm that necessary actions have been taken to remedy any significant failings or weaknesses identified from these process reviews and from two additional independent IT audits performed during 2009. Business conduct and ethics Dialog seeks to comply with all laws and regulations that have an impact on its business. In addition, the Company expects its employees and Directors to act with honesty, integrity and fairness in the conduct of its business. Dialog’s Code of Business Conduct and Ethics is published on the Company’s Website. Dialog is committed to taking account of interests outside the Company, including those of employees, business partners, the environment and the local communities on which it has an impact. The Board values, and has developed, a culture of corporate social responsibility that takes the above factors into consideration. Audit and auditors The consolidated financial statements have been audited by Dialog’s auditors, Ernst and Young (“E&Y”). E&Y were appointed in October 2006 following a tender process. The remuneration given to the auditors over the past two financial years is detailed in notes 3 and 31 to the consolidated financial statements on pages 55 and 84. The Company’s audited financial statements for the year ended 31 December 2008, and the reports from the Directors and auditors thereon, were presented to, and approved by, the Shareholders at the AGM of the Company held on 22 April 2009. E&Y, the Company’s independent auditors, were reappointed until the following AGM. Declaration of conformity with regard to the German Corporate Governance Code Dialog Semiconductor Plc has established and published its own Corporate Governance principles corresponding in substance to the provisions of the German “Corporate Governance Code” as amended on 14 June 2007 thereby adopting in substance the recommendations of the Government Commission on the German Corporate Governance Code. This declaration is available on the internet at: www.dialog-semiconductor.com. Gregorio Reyes Chairman 11 February 2010 Dialog Semiconductor Plc Annual report and accounts 2009 31 Section 3 | Management and governance Directors’ remuneration report Policy on Directors’ remuneration The Board is responsible for setting the Company’s policy on Directors’ remuneration; the Remuneration and Nomination Committee agrees the remuneration for each executive Director. The primary objectives of the Company’s policy on executive Directors’ remuneration are, first, that it should be structured so as to attract and retain executives of a high calibre, with the skills and experience necessary to develop the Company successfully and, second, to reward them in a way which encourages the creation of value for the Company’s Shareholders. The performance measurement of each executive Director and the determination of his annual remuneration package are undertaken by the Remuneration and Nomination Committee. No Director is involved in deciding his or her own remuneration. The Remuneration and Nomination Committee comprises non-executive Directors and its role is, inter alia, to apply the Board’s policy on remuneration. The current members of the Committee are Russ Shaw (Chairman), Chris Burke and Peter Weber. The Company has one executive Director, Dr Jalal Bagherli, who was appointed on 12 September 2005. The executive Director’s remuneration consists of three components: 1. Salary – reflects the executive’s experience, responsibilities and market value; 2. Bonus – as part of his remuneration, Dr Bagherli receives bonuses based on objectives set by the Remuneration and Nomination Committee relative to the performance of the Group, as an incentive to Dr Bagherli to achieve relevant and demanding targets, in relation to revenue growth, operating profit, design wins; and 3. Share options – details are set out in note 21 to the consolidated financial statements. Compensation of non-executive Directors Non-executive Directors, for example, are paid quarterly for their roles as Directors. Additional fees are paid to the Chairman of the Company’s Board committees, the Audit Committee, and the Remuneration and Nomination Committee. Our Directors are all reimbursed for any reasonable travel expenses incurred in connection with their attendance at Board meetings or Board committees; they are also eligible to receive share options. There is no contractually agreed termination benefit for non-executive Directors. Directors’ contracts The service agreement with Dr Jalal Bagherli, executive Director, dated 19 July 2005, is of unlimited duration. The agreement may be terminated by either party on six months’ notice but increasing to 12 months on a change of control of the Company. Performance graph Details are set out on pages 7 and 8 of this report. Share options Details are set out in note 21 to the consolidated financial statements, on pages 67 to 69. Directors’ share interests Directors’ beneficial interests (as defined by the Companies Act 2006) in 10 pence ordinary shares of the Company are set out in note 21a, on page 67, in the notes to the consolidated financial statements. Directors’ pension arrangements The Company contributes 9% of the executive Director’s basic salary to a pension scheme. There are no pension arrangements for non-executive Directors. Non-executive Directors’ terms All non-executive Directors are appointed for up to three years by the Board of Directors, subject to any earlier requirements to stand for a re-election as required by the Articles of Association (one-third of the non-executive Directors must stand for re-election at each AGM). 32 Dialog Semiconductor Plc Annual report and accounts 2009 Section 3 | Management and governance The compensation of the members of the Board of Directors is as follows: Name and position Dr Jalal Bagherli Base salary US$ Bonus US$ Pensions contribution US$ Other US$ 2009 Total US$ 2008 Total US$ Directors’ holdings at 31 December 2009 Shares Options Executive Director and CEO 313,085 211,333 28,178 24,233 576,829 439,872 600,576 102,624 Chris Burke Non-executive Director Michael Glover 39,136 Non-executive Director until 22 April 2009 9,629 Aidan Hughes Non-executive Director and Chairman of the Audit Committee 46,963 John McMonigall Non-executive Director Gregorio Reyes Non-executive Chairman Russ Shaw 39,136 46,963 Non-executive Director and Chairman of the Remuneration and Nomination Committee 46,963 Peter Tan Non-executive Director Peter Weber Non-executive Director 39,136 39,136 – – – – – – – – – – – – – – – – – – – – – – – – 39,136 36,706 15,493 69,378 9,629 36,706 262,000 – 46,963 45,876 25,000 110,000 39,136 36,701 100,000 110,000 46,963 45,876 130,000 58,340 46,963 41,288 19,891 110,000 39,136 36,701 – 70,000 39,136 36,701 72,172 29,828 620,147 211,333 28,178 24,233 883,891 756,427 1,225,132 660,170 Share options granted to the executive Directors As of 31 December 2009, Jalal Bagherli, executive Director held 102,624 options over ordinary shares which entitle him to acquire the same amount of shares. Exercise price Date of grant Expiry date Vesting period 31 December 2008 Forfeited Exercised Replaced Returned Market price Gain on of exercised options1 € the exercise of options € 31 December 2009 €2.00 12.09.2005 11.09.2015 4 years 60,000 €3.50 12.09.2005 11.09.2015 4 years 60,000 €5.00 12.09.2005 11.09.2015 4 years 60,000 €6.50 12.09.2005 11.09.2015 4 years 60,000 €8.00 12.09.2005 11.09.2015 4 years 60,000 – – – – – (60,000) – – – – £0.10 01.02.2006 18.07.2015 1-44 months 37,500 (2,907) (34,593) £0.10 01.02.2006 18.07.2015 1-44 months 23,055 (1,789) (21,266) – – – – – – – (60,000) (60,000) (60,000) (60,000) –– –– €1.52 13.05.2009 12.05.2016 1-44 months – – – 102,624 – 102,624 360,555 (4,696) (115,859) 102,624 (240,000) 102,624 1) The market price is a weighted average price. –– 7.32 319,500 – – – – – – – – – – – – 3.67 122,548 3.67 75,643 – – – 517,692 Dialog Semiconductor Plc Annual report and accounts 2009 33 Section 3 | Management and governance Directors’ remuneration report Share options granted to the non-executive Directors Each non-executive Director was entitled to an initial grant of 50,000 options vesting monthly in 48 equal tranches. At each AGM, non-executive Directors receive a further 20,000 options vesting over 12 months. Options may be exercised at the market price prevailing at the date of grant. The non-executive Directors are not subject to performance criteria related to their remuneration. The stock options granted to non-executive Directors are not, therefore, subject to the achievement of performance targets. The share option grants to non-executive Directors are as follows: Exercise price Vesting 31 December 31 December options of options Director € Date of grant Expiry date period 2008 Forfeited Granted Exercised 2009 € € Market price Gain on of exercised the exercise Chris Burke 1.40 12.07.2006 11.07.2013 48 months 1.80 10.05.2007 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months 1.17 22.04.2009 21.04.2016 12 months Michael Glover 1.27 19.06.2006 18.06.2013 48 months 1.80 10.05.2007 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months Aidan Hughes 1.27 19.06.2006 18.06.2013 48 months 1.80 10.05.2007 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months 1.17 22.04.2009 21.04.2016 12 months John McMonigall 1.27 19.06.2006 18.06.2013 48 months 1.80 10.05.2007 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months 1.17 22.04.2009 21.04.2016 12 months Gregorio Reyes 1.27 19.06.2006 18.06.2013 48 months 1.80 10.05.2007 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months 1.17 22.04.2009 21.04.2016 12 months Russ Shaw 1.40 12.07.2006 11.07.2013 48 months Peter Tan 1.80 10.05.2007 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months 1.17 22.04.2009 21.04.2016 12 months 1.40 12.07.2006 1.80 10.05.2007 11.07.2013 48 months 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months 1.17 22.04.2009 21.04.2016 12 months Peter Weber 1.27 19.06.2006 18.06.2013 48 months 1.80 10.05.2007 09.05.2014 12 months 1.35 30.04.2008 29.04.2015 12 months 1.17 22.04.2009 21.04.2016 12 months 50,000 20,000 20,000 – 50,000 20,000 20,000 50,000 20,000 20,000 – 50,000 20,000 20,000 – 50,000 20,000 20,000 – 50,000 20,000 20,000 – 50,000 20,000 20,000 – 50,000 20,000 20,000 – (14,588) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 20,000 (40,622) – – – (35,412) (20,000) (20,000) 9,378 20,000 20,000 20,000 5.62 171,425 – – – – – – – – – 6.20 6.20 6.20 174,581 88,000 97,000 – – – – – – 20,000 – – – 20,000 – – – 20,000 – – – 20,000 – – – – – – – – (41,664) (9,996) – – – – – – 50,000 20,000 20,000 20,000 50,000 20,000 20,000 20,000 8,336 10,004 20,000 20,000 50,000 20,000 20,000 20,000 50,000 – – – – – – (20,000) (20,000) 20,000 – 20,000 – – – (42,706) (20,000) (17,466) 20,000 – 7,294 – 2,534 20,000 – – – – – – – – – – – – – – – – 5.60 5.60 180,405 37,985 – – – – – – – 7.33 7.33 – 7.12 7.12 7.12 – – – – – – – – 110,500 119,500 – 249,830 106,400 100,779 – Total 720,000 (14,588) 140,000 (287,866) 557,546 1,436,405 Approved by the Board of Directors and signed on its behalf by: Tim Anderson Secretary 11 February 2010 34 Dialog Semiconductor Plc Annual report and accounts 2009 Section 3 | Management and governance Statement of Directors’ responsibilities Statement of Directors’ responsibilities The Directors are responsible for preparing the IFRS report and accounts 2009 and the Group and parent company financial statements in accordance with the applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under the law the Directors are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and have elected to prepare the parent company financial statements on the same basis. The Group and parent company financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position of the Group and the parent company and the performance for that period; the Companies Act 2006 provides in relation to such financial statements that references in the relevant part of the Act to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing each of the Group and parent company financial statements, the Directors are required to: (cid:1) select suitable accounting policies and then apply them consistently; (cid:1) make judgements and estimates that are reasonable and prudent; (cid:1) state whether they have been prepared in accordance with IFRS as adopted by the EU; and (cid:1) prepare the financial statements on the going-concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report and Directors’ remuneration report that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s Website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislations in other jurisdictions. Responsibility statement To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group, and the Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group. Dr Jalal Bagherli Chief Executive Officer Jean-Michel Richard CFO, Vice President Finance 11 February 2010 Dialog Semiconductor Plc Annual report and accounts 2009 35 Section 4 | Consolidated financial statements and notes Independent Auditors’ report to the members of Dialog Semiconductor Plc We have audited the financial statements of Dialog Semiconductor Plc for the year ended 31 December 2009 which comprise the Group and Parent Company Statements of Financial Position, the Group Statement of Comprehensive Income, the Group and Parent Company Cash Flow Statements, the Group and Parent Company Statements of Changes in Equity and the related notes 1 to 34. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 35, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. Opinion on financial statements In our opinion: (cid:1) the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2009 and of the Group’s profit for the year then ended; (cid:1) the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; (cid:1) the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and (cid:1) the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: (cid:1) the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; (cid:1) the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and (cid:1) the information given in the Corporate Governance Statement set out pages 29 to 31 and the web-address (www.dialog- semiconductor.com) with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: (cid:1) adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or (cid:1) the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or (cid:1) certain disclosures of Directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Kevin Harkin (Senior Statutory Auditor) for and on behalf of Ernst & Young LLP Statutory Auditor Reading 11 February 2010 36 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes Consolidated statement of financial position As at 31 December 2009 Assets Cash and cash equivalents Restricted cash Trade accounts receivable and other receivables Inventories Income tax receivables Other financial assets Other current assets Total current assets Property, plant and equipment Intangible assets Deposits Income tax receivables Deferred tax assets Total non-current assets Total assets Liabilities and Shareholders’ equity Trade and other payables Other financial liabilities Provisions Income taxes payable Other current liabilities Total current liabilities Provisions Other non-current financial liabilities Total non-current liabilities Ordinary shares Additional paid-in capital Accumulated deficit Other reserves Employee stock purchase plan shares Net Shareholders’ equity Notes At 31 December 2009 US$000 At 31 December 2008 US$000 5 25 6 7 4 8 9 10 11 4 4 14 15 16 4 17 16 18 120,148 3,000 17,486 26,193 69 – 1,915 168,811 9,807 5,005 804 370 7,514 23,500 192,311 17,304 679 1,784 3,305 11,308 34,380 252 700 952 11,825 283,733 (135,667) (2,102) (810) 19 156,979 36,915 – 7,455 19,938 80 1,532 1,383 67,303 7,734 4,640 286 390 – 13,050 80,353 12,996 994 1,290 160 4,437 19,877 – 271 271 9,328 223,005 (169,758) (2,231) (139) 60,205 Total liabilities and Shareholders’ equity 192,311 80,353 These financial statements were approved by the Board of Directors on 11 February 2010 and were signed on its behalf by: Dr Jalal Bagherli Director Dialog Semiconductor Plc Annual report and accounts 2009 37 Section 4 | Consolidated financial statements and notes Consolidated income statement For the year ended 31 December 2009 Revenue Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Other operating income Gains and losses from restructuring Operating profit Interest income and other financial income Interest expense and other financial expense Foreign currency exchange gains and losses, net Result before income taxes Income tax benefit Net profit Earnings per share (in US$) Basic Diluted Notes 3, 24, 27 24 3, 27 24 3 3 4 Weighted average number of shares (in thousands) 2 Basic Diluted 2009 US$000 217,613 (119,886) 97,727 (14,183) (12,584) (42,621) 333 – 28,672 203 (212) 162 28,825 3,902 32,727 2008 US$000 161,830 (99,217) 62,613 (11,007) (9,853) (36,721) 775 145 5,952 874 (919) 126 6,033 728 6,761 2009 2008 0.67 0.60 0.15 0.15 48,868 54,464 45,125 45,408 38 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes Statement of comprehensive income For the year ended 31 December 2009 Net profit Exchange differences on translating foreign operations Available-for-sale financial assets Cash flow hedges Income tax relating to components of other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive income for the year 2009 US$000 32,727 (113) – (179) 421 129 32,856 2008 US$000 6,761 (249) (312) (282) (887) (1,730) 5,031 Dialog Semiconductor Plc Annual report and accounts 2009 39 Section 4 | Consolidated financial statements and notes Consolidated statement of changes in Shareholders´ equity For the year ended 31 December 2009 Balance at 1 January 2008 Total comprehensive income (loss) Sale of employee stock purchase plan shares Equity settled transactions, net of tax Changes in Equity total Balance at 31 December 2008/1 January 2009 Total comprehensive income (loss) Capital increase public offering (gross proceeds) Transaction costs of capital increase – public offering Capital increase for employee share option plan (gross proceeds) Transaction costs of capital increase – employee share option plan Sale of employee stock purchase plan shares Equity settled transactions, net of tax Changes in Equity total Additional paid-in Accumulated Ordinary Shares US$000 capital US$000 deficit US$000 Currency translation adjustment US$000 9,328 222,914 (177,844) (902) Cash flow Available-for-sale hedges US$000 89 securities US$000 312 Employee stock purchase plan shares US$000 Total US$000 (205) 53,692 Other reserves – – – – – 91 – 91 6,761 (1,136) (282) (312) – 1,325 – – – – – – 8,086 (1,136) (282) (312) 9,328 223,005 (169,758) (2,038) (193) – – 32,727 308 (179) 1,922 62,421 – (4,685) 575 473 (41) 2,560 – – – – 1,364 – – – – – – – – – – – – – – – – – (179) (372) – 66 – 66 5,031 157 1,325 6,513 (139) 60,205 – 32,856 – – 64,343 (4,685) (1,048) – – (41) 377 2,937 – 1,364 (671) 96,774 (810) 156,979 – – – – – – – – – – 2,497 60,728 34,091 308 Balance at 31 December 2009 11,825 283,733 (135,667) (1,730) 40 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes Consolidated statements of cash flows For the year ended 31 December 2009 Cash flows from operating activities: Net profit Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Interest expense (income), net Income tax benefit Impairment of inventories Depreciation of property, plant and equipment Amortisation of intangible assets Losses on disposals of fixed assets and impairment of fixed and financial assets Expense related to share-based payments Changes in working capital: Trade accounts receivable and other receivables Factoring Inventories Prepaid expenses Trade accounts payable Provisions Other assets and liabilities Cash generated from operations Interest paid Interest received Income taxes paid Cash flow from operating activities Cash flows from investing activities: Cash transferred to Restricted cash Sale of property, plant and equipment Purchases of property, plant and equipment Purchases of intangible assets Payments for capitalised development costs Investments and deposits made Purchase of securities Sale of securities Cash flow from (used for) investing activities Cash flows from financing activities: Cash flow from capital increase Sale of employee stock purchase plan shares Cash flow from financing activities Cash flow from operating, investing and financing activities Net foreign exchange difference Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Notes 2009 US$000 2008 US$000 32,727 6,761 3 4 10 11 21 6 25 25 10 11 11 6, 14 6, 14 9 (3,902) 973 4,473 2,146 723 1,364 (12,498) 2,485 (7,228) (337) 4,196 416 7,573 33,120 (109) 219 (46) 33,184 (3,000) – (5,925) (1,828) (972) (530) – – (12,255) 59,617 2,937 62,554 83,483 (103) (728) 1,220 5,614 2,124 1,016 1,325 (5,584) 632 (4,105) (73) (1,451) 470 1,837 8,955 (654) 1,077 (45) 9,333 – 64 (3,474) (2,758) (1,431) (13) (3,050) 22,758 12,096 – 157 157 21,586 (250) (594) 83,233 36,915 120,148 20,992 15,923 36,915 Dialog Semiconductor Plc Annual report and accounts 2009 41 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 1. General The consolidated financial statements of Dialog Semiconductor Plc (“Dialog or the Group”) for the year ended 31 December 2009 were authorised for issue in accordance with a resolution of the Directors on 11 February 2010. Dialog Semiconductor Plc is a company incorporated in the UK, whose shares are publicly traded. The principal activities of the Group are set out in the segment reporting (note 24). Company name and registered office Dialog Semiconductor Plc Tower Bridge House St Katharine’s Way London E1W 1AA United Kingdom Basis of presentation The consolidated financial statements are prepared on the historical cost basis except that financial instruments classified as available-for-sale and derivative financial instruments are stated at their fair value. The consolidated financial statements are presented in US dollars (“US$”) and all values are rounded to the nearest thousand (US$000) except when otherwise stated. Statement of compliance The accompanying consolidated financial statements have been prepared on the basis of the recognition and measurement requirements of International Financial Reporting Standards (IFRS) and its interpretation as adopted by the EU. Based on these standards, management has applied the accounting policies as provided in note 2. 2. Summary of significant accounting policies Changes in accounting policies and disclosures The accounting policies are consistent with those of the previous financial year except for the changes resulting from the adoption of the following revised and new Standards and new IFRIC interpretations during the year IAS 1 – Presentation of Financial Statements (revised) The revised IAS 1 was issued in September 2007 and is effective for periods beginning on or after 1 January 2009. The changes made are to require information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. The revised standard gives preparers of financial statements the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements. The Group has opted to present the items of comprehensive income in a separate statement. IAS 23 – Borrowing Costs The principal change to the Standard was to eliminate the option to expense all borrowing costs when incurred. This change did not have an impact on these financial statements as there are currently no qualifying assets. IFRS 7 Financial Instruments: Disclosures (amended) The amended IFRS 7 was issued in March 2009 and is effective for periods beginning on or after 1 January 2009. The amendments improve the disclosure requirements about fair value measurements and reinforce existing principles for disclosures about the liquidity risk associated with financial instruments. The amendments to IFRS 7 introduce a three-level hierarchy for fair value measurement disclosures and require entities to provide additional disclosures about the relative reliability of fair value measurements. In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk. However, it is no requirement to provide comparative disclosures in the first year of application. 42 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 2. Summary of significant accounting policies continued IFRS 8 – Operating Segments IFRS 8 Operating Segments which replaces IAS 14 Segment Reporting was issued in November 2006 and is effective for annual periods beginning on or after 1 January 2009. The IFRS requires an entity to adopt the “management approach” to reporting on the financial performance of its operating segments. Generally, the information to be reported would be what management uses internally for evaluating segmental performance and deciding how to allocate resources to operating segments. In contrast to the former reporting structure with two operating segments, in accordance with IFRS 8, the Group now separately reports on three operating segments which are Audio & Power Management, Display Systems and Automotive & Industrial. Prior-year figures have been adjusted accordingly. All other amended, revised or new standards and interpretations did not result in changes to the accounting policies or did not have a material effect on the financial statements: Interpretation/ Standard Title IFRS 1 IFRS 2 IAS 32 IAS 39 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and separate Financial Statements Share-Based Payments (vesting conditions and cancellations) Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements (Puttable Financial Instruments) Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments Disclosures (Effective Date and Transition) IAS 39 Improvements to IFRSs A collection of amendments to International Financial Reporting Standards (annual Financial Instruments and IFRIC 9 Reassessment of embedded derivatives IFRIC 12 IFRIC 13 IFRIC 15 IFRIC 16 improvements project) Service Concession Agreements Customer Loyalty Programmes Agreements for the Construction of Real Estate Hedges of a Net Investment in a Foreign Operation 1) for periods ending on or after that date Principles of consolidation and investments in affiliated companies As in 2008, the consolidated financial statements include Dialog Semiconductor Plc and its subsidiaries as at 31 December each year: Name Dialog Semiconductor GmbH Dialog Semiconductor (UK) Limited Dialog Semiconductor, Inc. Dialog Semiconductor KK Registered office Kirchheim/Teck, Germany Swindon, UK Wilmington, Delaware, USA Tokyo, Japan Effective date 1 January 2009 1 January 2009 1 January 2009 1 July 2008 30 June 20091 1 January 2009 1 January 2008 1 July 2008 1 January 2009 1 October 2008 Participation 100% 100% 100% 100% Subsidiaries are fully consolidated from the date of acquisition, being the date on which Dialog obtains control, and continue to be consolidated until the date such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-Group balances, income and expenses, and unrealised gains and losses resulting from intra-Group transactions are fully eliminated. Foreign exchange The functional currency for the Group entities is generally the currency in which they primarily generate and expend cash. Each entity in the Group determines its own functional currency. Accordingly, the assets and liabilities of companies whose functional currency is other than the US dollar are included in the consolidation by translating the assets and liabilities into the presentation currency (US$) at the exchange rates applicable at the end of the reporting period. Equity accounts are measured at historical rates. The statements of income and cash flows are translated at the average exchange rates during the year. The exchange differences arising on the translation are directly recognised in equity (other reserves). Dialog Semiconductor Plc Annual report and accounts 2009 43 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 2. Summary of significant accounting policies continued Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. All differences are taken to profit and loss with the exception of differences on monetary items that form part of a net investment in a foreign operation as well as differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment at which time they are recognised in profit or loss. Tax charges and credits attributable to exchange differences on those monetary items and borrowings are also dealt with in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Foreign currency transaction gains and losses are disclosed separately in the income statement, at each reporting period. Key exchange rates against US dollars used in preparing the consolidated financial statements were: Currency Great Britain Japan Euro Exchange rate at Annual average exchange rate 31 December 2009 US$1 = 0.62 92.41 0.69 31 December 2008 US$1 = 0.69 90.43 0.72 2009 US$1 = 0.64 93.15 0.71 2008 US$1 = 0.54 103.43 0.68 Financial instruments A financial instrument is any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another. Financial assets include, in particular, cash and cash equivalents, trade receivables and other loans and receivables, held-to-maturity investments and derivative and non-derivative financial assets accounted for at fair value through profit or loss, as well as investments available for sale. Financial liabilities generally substantiate claims for repayment in cash or another financial asset. In particular, this includes trade payables, liabilities to banks and derivative financial liabilities. Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the entity currently has a legal right to set off the recognised amounts and intends to settle on a net basis. Financial assets Financial assets within the scope of IAS 39 are classified as being at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. When financial assets are first recognised, they are measured at fair value, plus, in case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets on first recognition and, where allowed and appropriate, re-evaluates this designation at each financial year end. All regular purchases and sales of financial assets are recognised on the settlement date, which is the date that the Group receives the asset. Regular purchases or sales are classified as purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention of the market place. At each reporting date, the Group assesses whether a financial asset or group of financial assets is impaired. 44 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 2. Summary of significant accounting policies continued Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to do so. After initial measurement, held-to-maturity investments are measured at amortised cost using the effective interest method. The effective interest method takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Gains and losses are recognised in profit or loss when the investments are de-recognised or impaired, as well as through the amortisation process. The carrying amount of financial assets held-to-maturity are tested at each reporting date to determine whether there is objective, material evidence of impairment as outlined in IAS 39.59. Any impairment losses caused by the fair value being lower than the carrying amount are recognised in profit or loss. The Group does not use allowance accounts in order to record the impairment in the statement of financial position but credits the impairment loss directly against the book value of the financial assets. If in a subsequent period the fair value increases and this increase can be related objectively to events occurring after the impairment was recognised, the impairment loss is reversed to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. The fair value which is required for impairment testing corresponds to the present value of the estimated future cash flows discounted using the original effective interest rate. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market, such as trade account receivables. Loans and receivables are recorded initially at fair value and do not bear interest. As of 31 December 2009 as well as 31 December 2008, loans and receivables of the Group comprise mostly trade accounts receivables from customers. The Group also classified cash, cash equivalents (except for deposits designated as hedging instruments) and restricted cash as loans and receivables. After initial recognition, loans and receivables are subsequently carried at amortised cost using the effective interest method, less any allowance for impairment, if necessary. Gains and losses are recognised in the income statement when the loans and receivables are de-recognised or impaired. Interest income and expense on the application of the effective interest method are also recognised in profit or loss. The Group continuously reviews its allowance for doubtful accounts. Management considers the collectability of a trade account receivable to be impaired when it is probable that the Group will be unable to collect all amounts due according to the sales terms, based on current information and events regarding the customers’ ability to meet their obligations. The amount of the impairment loss on loans and receivables is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows, discounted at the original effective interest rate of the financial asset. The amount of the impairment loss is recognised in profit or loss. If, in a subsequent reporting period, the amount of the impairment loss decreases, and the decrease can objectively be related to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed and recognised in profit or loss. When a trade receivable is considered to be impaired, any credit losses are included in the allowance for doubtful accounts through a charge to bad debt expenses. Account balances are set off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Recoveries of trade receivables previously written-off are recorded as other income when received. Reversals of impairment losses are recognised in profit and loss. The Group does not have any off-balance sheet credit exposure related to its customers. Receivables from work in process for customer specific development projects according to IAS 11 are recorded in the balance sheet line “trade account receivables and other receivables” and are disclosed in the notes respectively. Dialog Semiconductor Plc Annual report and accounts 2009 45 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 2. Summary of significant accounting policies continued Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or as financial assets at fair value through profit or loss. After initial measurement available-for-sale financial assets are measured at fair value. Unrealised gains and losses, net of the related tax effect, on available-for-sale financial assets are excluded from earnings and are reported as a component of other reserves until realised, or the investment is determined as being impaired. At each reporting date, the carrying amounts of available-for-sale assets are assessed to determine whether there is objective, significant evidence of impairment as outlined in IAS 39.59. Any impairment losses on available-for-sale financial assets are charged to earnings. The Group does not use allowance accounts in order to record the impairment in the statement of financial position but credits the impairment loss directly against the book value of the financial assets. If this impairment relates to losses previously recognised in equity then the impairment loss is transferred from equity to the income statement. Reversals of impairment losses in respect of equity instruments or investment funds that are classified as available-for-sale are not recognised in profit or loss. Reversals of impairment losses on debt instruments are reversed through profit or loss if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss. The fair value of available-for-sale financial assets actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the reporting date. For investments in which there is no active market, fair value is determined using valuation techniques, including recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; discounted cash flow analysis; or other valuation models. If the fair value of unquoted equity instruments cannot be measured with sufficient reliability, these instruments are measured at cost (less any impairment losses, if applicable). Derecognition of financial assets A financial asset is derecognised when:  the right to receive cash flows from the asset have expired;  the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass through agreement”; or  the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in it. Financial liabilities Financial liabilities primarily include trade accounts payable, liabilities due to banks, derivative financial liabilities and other liabilities. Financial liabilities measured at amortised costs After initial recognition at fair value, less directly attributable transaction costs, financial liabilities are subsequently measured at amortised cost using the effective interest method. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Gains and losses on liabilities held for trading are recognised in profit or loss. During the financial years 2009 and 2008 the Group did not classify any financial liabilities as financial liabilities at fair value through profit or loss. 46 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 2. Summary of significant accounting policies continued Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Hedging instruments and hedge accounting The Group uses derivative financial instruments, such as forward contracts, mainly for the purposes of hedging currency risks that arise from its operating activities. Beside the derivative financial instruments the Group designates certain deposits as hedging instruments in order to hedge foreign currency risks as well. Such derivative financial instruments and deposits are initially recognised at fair value on the date on which a derivative contract is entered into or the cash deposit is designated as a hedging instrument and is subsequently remeasured at fair value on each subsequent reporting date. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains and losses arising from changes in the fair value on derivatives and the deposits during the year that do not qualify for hedge accounting are taken directly to profit or loss. The fair value of quoted derivatives is equal to their positive or negative market value. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of the deposits is measured based on foreign currency market rates at each reporting date. The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group first becomes party to the contract. Reassessment occurs only if there is a change in the terms of the contract that significantly modify the cash flows that would otherwise be required. If the requirements for hedge accounting set out in IAS 39 are met, the Group designates and documents the hedge relationship from the date a derivative contract is entered into or the cash deposit is designated as a hedging instrument, either as a fair value hedge or a cash flow hedge. The Group did not enter into fair value hedges in 2009 and 2008. In a cash flow hedge, the variability of cash flows to be received or paid related to a recognised asset or liability, or a highly probable forecast transaction, or a firm commitment (in case of currency risks) is hedged. To hedge a currency risk of an unrecognised firm commitment, the Group makes use of the option to recognise this as a cash flow hedge. The documentation of the hedge relationship includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows, and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognised in other reserves, net of applicable taxes, while any ineffective portion of the fair value changes are recognised immediately in profit or loss. Amounts taken to equity are transferred to the income statement when the hedged transaction affects the income statement, such as when the forecast or committed expenses occur. If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument does not, or no longer, qualifies for hedge accounting because the qualifying criteria for hedge accounting are not, or are no longer met, the derivative financial instruments are classified as held for trading and the deposits are classified as loans and receivables. Amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction or the firm commitment occurs. Dialog Semiconductor Plc Annual report and accounts 2009 47 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 2. Summary of significant accounting policies continued Cash and cash equivalents Cash and cash equivalents include highly liquid investments with original maturity dates of three months or less and are subject to an insignificant risk of changes in value. The financial position cash and cash equivalents also include deposits designated as hedging instruments. 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 and net realisable value. Cost, which includes direct materials, labour and overhead, plus indirect overhead, is determined using the first-in, first-out (FIFO) method. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs to make the sale. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. These include the cost of replacing part of the plant and equipment when that cost is incurred, if the recognition criteria are met. Depreciation is charged on a straight-line basis over the estimated useful lives of the assets as follows: Equipment Test equipment Leasehold improvements Office and other equipment Useful life Three to eight years Shorter of useful life or lease term 18 months to 13 years The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end. Intangible assets Purchased intangible assets with definite useful lives primarily consist of licences, software and patents, and are recorded at acquisition cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised on a straight-line basis over the estimated useful lives of three to five years. For a particular software licence a useful life of ten years was estimated. Amortisation expenses are allocated to the cost of goods sold, selling expenses, research and development expenses, or general administration expenses. The Group has no intangible assets with an indefinite useful life. Self-developed intangible assets are recorded on a cost basis. They are amortised on a straight-line basis over the estimated usefulness of 12-60 months. The costs of internally generated intangible assets comprise all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in a manner intended by management, e.g. costs of materials and services used or consumed in generating the intangible asset, costs of employee benefits or fees to register a legal right. Reference is also made to the accounting policy regarding research and development costs in this section. Patents have been granted by the relevant government agency for a certain period, depending on the specific country, with the option of renewal at the end of this period. In most cases the maximum lifetime of the patents is 20 years. They are amortised over the shorter period of expected future benefit, which is principally ten years. Acquisition costs for patents are based on the cost of patent registration. 48 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 2. Summary of significant accounting policies continued Impairment of non-monetary assets In accordance with IAS 36, at each reporting date an assessment is made as to whether there is an indication that a non-monetary asset, such as property, plant and equipment or purchased intangibles, may be impaired. If any such indication exists, an estimate is made of the asset’s recoverable amount: the higher of an asset’s fair value, less cost to sell and its value in use. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining the fair value less costs to sell, an appropriate valuation model is used. For assets, an assessment is made at each reporting date as to whether any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, an estimation of the recoverable amount is made. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount, however, cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. For arrangements entered into before 1 January 2005, the date of inception is deemed to be 1 January 2005 in accordance with the transitional requirements of IFRIC 4. Where the Group is lessee, finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in profit and loss. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Revenue from the sale of goods is derived from the sale of products, application specific integrated circuit (“ASIC”) and application specific standard product (“ASSP”) to end customers. These products are manufactured and tested in accordance with customers’ technical specifications prior to delivery. Revenue is recognised when title passes, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable, and collection of the related receivable is probable. Revenues are recorded net of sales taxes and customer discounts, if any. The Group 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. Customer returns are permitted only for quality-related reasons within the applicable warranty period and any potential warranty claims are subject to the Group’s determination that it is at fault for damages. Such claims must usually be submitted within a short period of the date of sale. Research and development Revenue from customer-specific research and development contracts involving the development of new customer-specific technology is recognised on the percentage of completion basis when the outcome of the contract can be estimated reliably. A contract’s outcome can be estimated reliably when total contract revenue can equally be estimated, it is probable that economic benefits associated with the contract will flow to the Group, and the stage of contract completion can be measured reliably. When the Group is not able to meet those conditions, the policy is to recognise revenues only to the extent the expenses incurred are eligible to be recovered. Completion is measured by reference to costs incurred to date as a percentage of estimated total project costs. The percentage of completion method relies on estimates of total expected contract revenue and costs, as well as the dependable Dialog Semiconductor Plc Annual report and accounts 2009 49 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 2. Summary of significant accounting policies continued measurement of the progress made towards completing the particular project. Losses on projects in progress are recognised in the period they become likely and can be estimated. Government grants Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Grants are deducted in reporting the related expense. The Group does not receive grants that relate to assets. Cost of sales Cost of sales consists of the costs of outsourced production, assembly and test, personnel costs and applicable overheads and depreciation of equipment. Provisions for estimated product warranties are recorded in cost of sales at the time the related sale is recognised. Sales and marketing expenses Sales and marketing expenses consist primarily of salaries, travel expenses, sales commissions, bad debt expenses and costs associated with advertising and other marketing activities. General and administrative expenses General and administrative expenses consist primarily of personnel and support costs for finance, human resources, ERP system and other management departments 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 on an individual project are capitalised as an intangible asset and amortised over the period of expected future benefit if the Group can demonstrate the following:  the technical feasibility of completing the intangible asset so that it will be available for use or sale;  its intention to complete the intangible asset and use or sell it;  its ability to use or sell the intangible asset;  how the intangible asset will generate probable future economic benefits. Among other things, the Group 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;  the availability of adequate technical, financial and other resources to complete the development and use or sell the intangible asset; and  its ability to measure reliably the expenditure attributable to the intangible asset during its development. Interest income/expense Interest income is recognised as interest accrues. Interest income includes interest income from investments in securities, cash and cash equivalents. Income and expense resulting from the allocation of premiums and discounts is also included. Interest expense is generally expensed as incurred. Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. The Group capitalises borrowing costs for all eligible assets where construction was commenced on or after 1 January 2009. The Group continues to expense borrowing costs relating to construction projects that commenced prior to 1 January 2009. In previous periods the Group expensed borrowing costs as incurred. The change in accounting policy did not result in amounts of borrowing costs being capitalised as there were no qualifying assets in 2009. Foreign currency exchange gains and losses The foreign currency exchange gains and losses mainly result from foreign currency cash transactions and period end revaluation of foreign currency denominated cash into US dollars. It is the Group’s view that these gains and losses are driven by the financing activities of the Group and are therefore shown as non-operating results. Employee benefits – defined contribution plans Contributions to defined contribution and state-funded pension plans are recognised in the income statement as incurred. 50 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 2. Summary of significant accounting policies continued Income taxes Current income taxes for current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are accounted for using the liability method and are recognised for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities, and their respective tax bases, as well as on the carry-forward of unused tax losses that can be utilised. Deferred tax assets and liabilities are measured using tax rates that have been enacted, or substantially enacted, by the reporting date and which are 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 recognised in income in the period that includes the enactment date. A deferred tax asset is recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent, that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists, to set off current tax assets against current tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. Share-based payments The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date, reflects the extent to which the vesting period has expired and the best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense in the period. Stock options The Group has established an equity-settled share option scheme under which employees and Directors may be granted stock options to acquire shares of Dialog. The fair value of options granted is recognised as a compensation 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 on which the options were granted. Expectations of early exercise are accounted for within the average life of the options. The Group applies IFRS 2 to all options granted after 7 November 2002 that had not been vested as of 1 January 2005. Executives’ Long Term Incentive Plan The Group operates an equity settled Long-Term Incentive Plan (LTIP). Under this plan, key executives are eligible to share in a percentage of the value created for Shareholders in excess of an annual return hurdle measured over a three year performance period. Each participant in the LTIP is awarded a number of units which convert into Company shares according to the level of outperformance of the Company’s share price over the annual return hurdle. If this hurdle is not reached no units convert into Company shares. The fair value of the awards is recognised as a compensation expense with a corresponding increase in equity. The fair value is measured at grant date, using a Monte Carlo Model, taking into account the terms and conditions on which awards are granted and is spread over the service period during which the key executives become unconditionally entitled to the awards. Employee share trust – Treasury shares The Group has established an employee share trust. The share trust is separately administrated and is funded by the Group, which consolidates the assets, liabilities, income and expenses in its own accounts. The shares held by the trust are recorded at cost and are shown under “Employee stock purchase plan shares” in the statement of changes in Shareholders’ equity. Dialog Semiconductor Plc Annual report and accounts 2009 51 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 2. Summary of significant accounting policies continued Earnings per share Basic earnings per share amounts are calculated by dividing net profit (loss) for the year attributable to ordinary equity holders of Dialog by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Dialog by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued if all the securities or other contracts to issue ordinary shares were exercised. The weighted average number of shares outstanding is as follows: Basic number of shares Effect of dilutive options outstanding Dilutive number of shares 2009 000 48,868 5,596 54,464 2008 000 45,125 283 45,408 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements. The amount of anti-dilutive share options outstanding was 650,800 (2008: 2,892,211). Significant accounting judgements, estimates and assumptions The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Subject to such estimates and judgements is the following: Impairment of non-financial assets The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. In case of such an indicator, an impairment test is made. This requires the determination of the value in use and the fair value less costs to sell respectively of the assets. Estimating the value in use requires management to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of such assets at 31 December 2009 was US$13,413,000 (2008: US$12,374,000). Further information regarding impairment charges is provided in notes 3 and 10. Deferred tax assets Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing of future taxable profits, together with future tax planning strategies. At year end 2009, net deferred tax assets amounting to US$7,514,000 were recognised (2008: nil). The unrecognised deferred tax assets at 31 December 2009 were US$45,783,000 (2008: US$51,552,000). Further information regarding the assessment of future taxable income is disclosed in note 4. Share-based employee compensation awards Stock options Share-based payment transactions for stock options are measured by reference to the fair value at the date on which they are granted. The fair value of share-based payments is determined using the Black-Scholes model, which involves making assumptions about interest rates, volatilities, market conditions and fluctuation. Due to the nature of these assumptions, such estimates are subject to significant uncertainty. In 2009, the expense related to stock options was US$851,000 (2008: US$940,000). For further information on stock options please refer to note 21. 52 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 2. Summary of significant accounting policies continued Executives’ Long Term Incentive Plan The fair value of the awards is recognised as a compensation expense with a corresponding increase in equity. The fair value is measured at grant date, using a Monte Carlo Model, based on standard inputs such as the Company’s share price, interest rate, volatility of the Company’s share price, dividend yield and expected life. In 2009 an expense of US$514,000 was booked (2008: US$385,000 for the period of nine months the LTIP was in place). Further information regarding LTIP is provided in note 21b. Customer-specific research and development For the determination of revenue and costs for customer-specific research and development contracts, management judgement is required. It is, therefore, necessary to determine the stage of completion based on the progress made towards completing the particular project, as well as the contract revenue and the contract costs. Besides an advance payment received from one customer, at 31 December 2009 no receivables or liabilities from constructions contracts were outstanding (2008: US$nil). Self-developed intangible assets Development costs are capitalised in accordance with the accounting policy mentioned above, i.e. they are recorded on a cost basis. However, initial capitalisation of costs is based on management’s judgement that technological and economical feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. In determining the probable future economic benefits of the self-developed intangible asset, management makes assumptions regarding the expected future cash generation of the assets, discount rates to be applied and the expected period of benefits. At 31 December 2009, the carrying amount of capitalised development costs was US$1,305,000 (2008: US$1,271,000). Actual results may differ from those estimates. Recently issued accounting standards not yet adopted (Standards and Interpretations are endorsed by the EU except as noted otherwise) IFRS 1 First-time Adoption of International Financial Reporting Standards (revised) The IASB has released a restructured version of IFRS 1 First-time-Adoption of International Reporting Standards in November 2008 (updated in respect of the effective date in December 2008) which is effective for periods beginning on or after 1 July 2009. The restructuring of IFRS 1 was aimed to make IFRS 1 easier for the reader to understand and to design it to better accommodate future changes. The new version of IFRS 1 retains the substance of the previous version, but within a changed structure. IFRS 1 First-time Adoption of International Financial Reporting Standards (amended) The amended IFRS 1 was issued in July 2009 and is effective for periods beginning on or after 1 January 2010. The amendments exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets as well as exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4 Determining whether an Arrangement contains a Lease when the application of their national accounting requirements produced the same result. The revised standard has not yet been endorsed by the EU. IFRS 2 Share-based payment (amended) The amended IFRS 2 Share-based Payment was issued in June 2009 and is effective for periods beginning on or after 1 January 2010. The amended standard clarifies the accounting for group cash-settled share-based payment transactions in the financial statements of an individual subsidiary in a group as well as the interaction of IFRS 2 and other standards. The amendments to IFRS 2 also incorporate guidance previously included in IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions. As a result, the IASB has withdrawn IFRIC 8 and IFRIC 11. The revised standard has not yet been endorsed by the EU. IFRS 3 Business Combinations (revised) and IAS 27 Consolidated and Separate Financial Statements (amended) The revised IFRS 3 and the amended IAS 27 were issued in January 2008 and are effective for annual periods beginning on or after 1 July 2009. The changes made to the existing standards are comprehensive and mainly address the accounting for acquisition costs, contingent considerations, goodwill and non-controlling interests, step acquisitions, partial disposal of an investment while a controlling interest is retained or control is lost, and acquisition of additional shares after control is obtained. Dialog Semiconductor Plc Annual report and accounts 2009 53 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 2. Summary of significant accounting policies continued IFRS 9 Financial Instruments The new IFRS 9 was issued in November 2009 and is effective for periods beginning on or after 1 January 2013. The new standard for financial instruments sets out provisions for the classification and measurement of financial assets. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. The revised standard has not yet been endorsed by the EU. IAS 24 Related Party Disclosures (revised) The revised IAS 24 was issued in November 2009 and is effective for periods beginning on or after 1 January 2011. The changes to IAS 24 simplify the disclosure requirements for government-related entities and clarify the definition of a related party. The revised standard has not yet been endorsed by the EU. IAS 32 Financial Instruments: Presentation (amended) The amended IAS 32 was issued in October 2009 and is effective for periods beginning on or after 1 February 2010. The amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency other than the functional currency of the issuer. Previously such rights issues were accounted for as derivative liabilities. However, the amendment requires that, provided certain conditions are met, such rights issues are classified as equity regardless of the currency in which the exercise price is denominated. IAS 39 Financial Instruments: Recognition and Measurement The amended IAS 39 Financial Instruments: Recognition and Measurement was issued in July 2008 and is effective for periods beginning on or after 1 July 2009. The amended standard clarifies how the existing principles underlying hedge accounting should be applied in two particular situations. The Group does not expect material changes of its hedge accounting. Improvements to IFRSs – a collection of amendments to International Financial Reporting Standards (annual improvements project) The IASB has also issued a collection of amendments to various IFRSs (“Improvements to IFRSs”) in April 2009. This includes amendments to various existing IFRSs. The Group does not expect material changes on its accounting due to the changes. The revised standard has not yet been endorsed by the EU. In addition, the following interpretations and amendments to interpretations have been issued: Interpretation Title IFRIC 14 IFRIC 17 IFRIC 18 IFRIC 19 Amendment to IFRIC 14 Prepayments of a minimum funding requirement1 Distributions of non-cash assets to owners Transfers of assets from customers Extinguishing financial liabilities with equity instruments1 1) Interpretation has not yet been endorsed by the EU. Effective date 1 January 2011 1 July 2009 1 July 2009 1 July 2010 The above listed interpretations and amendments to interpretations will not have an effect on the financial statements as they currently do not apply to the Group. The Group does not intend to make early application of the amended or revised Standards and Interpretation listed above. 54 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 3. Other disclosures to the income statements a) Operating expenses and revenues The operating result before income taxes is stated after charging: Auditors' remuneration for the audit 1) Depreciation of property, plant and equipment Amortization of intangible assets Personnel costs Wages and salaries Social and security costs Share-based payment Pension costs from defined contribution plans 2) Included in revenues Revenue from the sale of goods Revenue from customer specific research and development contracts Income attributable to prior periods from BenQ cash settlement (see note 27) Included in cost of sales: Costs in relation to customer specific research and development contracts Amount of inventory recognized as expense Impairment of inventories recognized as an expense Included in other operating income 2009 US$000 (443) (4,473) (2,146) 2008 US$000 (423) (5,614) (2,124) (36,771) (28,787) (4,811) (1,364) (2,569) (2,758) (1,325) (2,321) (45,515) (35,191) 211,912 5,701 1,961 (5,701) (98,947) (973) 157,569 4,261 – (4,261) (78,807) (1,220) Income from recoveries on trade accounts receivable derecognized in prior periods 349 302 1) In addition to the auditors’ remuneration included in the operating result, in 2009 US$ 287,000 was paid to the auditors in relation to the capital increase. These costs were deducted from equity (see note 19). 2) The pension costs from defined contribution plans include costs for the state funded pension plan in Germany of US$1,339,000 (2008: US$1,158,000). b) Directors’ remuneration Aggregate remuneration in respect of qualifying services Number of Directors who received shares in respect of qualifying services Number of Directors who exercised share options In respect of the highest paid Director: Aggregate remuneration Pension contribution for the year The highest paid director exercised 115,859 share options during the year. 2009 US$000 884 2009 No. 8 6 2009 US$000 577 28 2008 US$000 756 2008 No. 8 – 2008 US$000 440 30 Dialog Semiconductor Plc Annual report and accounts 2009 55 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 3. Other disclosures to the income statements continued c) Interest and other financial income and expense Interest income and other financial income and expense comprise the following items: Interest income Other financial income Interest expense Other financial expenses ca) Interest income and interest expense Interest income and expenses comprise the following items: Interest income Interest expense Of which: from financial instruments relating to categories in accordance with IAS 39 Loans and receivables Financial liabilities measured at amortised costs Available-for-sale financial assets cb) Other financial income and other financial expenses Other financial income and expenses comprise the following items: Other financial income Other financial expenses Composition and categories in accordance with IAS 39: Gain from the sale of available-for-sale financial assets Loss from the sale of as held to maturity classified financial assets 2009 US$000 203 – 203 (212) – (212) 2009 US$000 203 (212) (9) 94 (103) – (9) 2009 US$000 – – – – – – 2008 US$000 776 98 874 (673) (246) (919) 2008 US$000 776 (673) 103 (519) (18) 640 103 2008 US$000 98 (246) (148) 98 (246) (148) d) Government grants The Group receives government grants for research and development activities of its Edinburgh design centre. Under the condition that Dialog remains located in Scotland and employs an agreed amount of employees in Scotland until 29 January 2011, the total grant that can be received is US$2.0 million (£1.3 million). In 2009 the Group received grants in the amount of US$879,000 (2008: US$654,000). In the profit and loss account the grants received were deducted from research and development expenses. 56 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 3. Other disclosures to the income statements continued e) Headcount The average number of persons employed by the Group (including the Executive Director) during the year, analysed by category, was as follows: Research and Development Production Sales and Marketing Admin IT Income taxes 4. Income (loss) before income taxes consists of the following: Germany Foreign Income tax income (expense) is comprised of the following components: Current taxes: Germany Foreign Deferred taxes: Germany Foreign Income tax benefit Current taxes: Current income tax charge Adjustments in respect of current income tax of previous year Deferred taxes: Relating to origination and reversal of temporary differences Relating to recognition of previously unrecognised deferred tax assets Income tax benefit 2009 191 46 39 24 10 310 2009 US$000 31,490 (2,665) 28,825 2009 US$000 (3,069) (122) 7,514 (421) 3,902 2009 US$000 (3,191) – (421) 7,514 3,902 2008 154 41 28 22 10 255 2008 US$000 3,643 2,390 6,033 2008 US$000 (139) (20) – 887 728 2008 US$000 (159) – 887 – 728 The deferred tax benefit in 2009 mainly relates to the recognition of previously unrecognised deferred tax assets on carryforwards of unused tax losses. Although Dialog is a UK company, its principal operations are located in Germany and its operating subsidiaries are all owned by its German subsidiary. Accordingly, the following information is based on German corporate tax law. Dialog Semiconductor Plc Annual report and accounts 2009 57 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 Income taxes continued 4. The tax rate for its German subsidiary is 15%; considering the impact of the solidarity surcharge of 5.5%, the federal corporate tax rate amounts to 15.825%. Combining the federal corporate tax rate with the trade tax rate of 12.551%, the combined statutory tax rate of the German subsidiary is 28.376%. A reconciliation of income taxes determined using the combined German income tax rate of 28.376% (2008: 28.376%), is as follows: Expected income tax benefit (expense) Tax rate differential Non-deductible portion of share based payments Tax free income (non-deductible expenses) Recognised deferred tax assets from prior periods Benefit from previously unrecognised deferred tax assets that is used to reduce current tax expense Adjustments recognised for tax of prior periods Temporary differences arising from differences between functional currency and tax currency Other Actual income tax benefit Deferred income tax assets and liabilities are summarised as follows: Property, plant and equipment Net operating loss carryforwards Liabilities Deferred taxes in relation to share option expenses Deferred taxes in relation to tax credits Other Deferred tax assets Property, plant and equipment Intangible Assets Other Deferred tax liabilities Net deferred tax assets Recognised net deferred tax assets Unrecognised deferred tax assets 2009 US$000 (8,179) 2 176 (109) 7,514 4,248 (88) 342 (4) 3,902 2008 US$000 (1,712) (9) (332) (186) – 2,046 626 291 4 728 At 31 December 2009 US$000 At 31 December 2008 US$000 206 46,427 2,841 3,021 1,250 33 53,778 (7) (363) (111) (481) 53,297 7,514 45,783 296 47,130 3,403 – 1,049 32 51,910 (12) (335) (11) (358) 51,552 – 51,552 58 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes Income taxes continued 4. Tax loss carryforwards, temporary differences and net deferred tax assets are summarised as follows: 31 December 2009 31 December 2008 Tax loss carryforwards US$000 149,554 11,974 4,580 3,764 28 Temporary differences US$000 8,476 11,160 – – 222 Tax credits US$000 – 4,465 – – – Net deferred tax assets US$000 43,577 7,728 1,557 339 96 53,297 Tax loss carryforwards US$000 161,918 1,922 4,486 3,871 – Temporary differences US$000 10,590 1,055 – – 176 Tax credits US$000 – 3,746 – – – Net deferred tax assets US$000 47,725 1,882 1,525 348 72 51,552 Germany UK US Federal State Other Total In assessing whether the deferred tax assets can be used, management considers the probability that some, or all, of the deferred tax assets will not be realised. The utilisation of deferred tax assets depends upon generating taxable profit during the periods in which those temporary differences become deductible or tax-loss carryforwards can be utilised. Management considers the reversal of deferred tax liabilities, projected future taxable income, benefits that could be realised from available tax planning strategies and other positive and negative factors in making this assessment. The Group recorded the ninth consecutive quarter of positive net income in the fourth quarter of 2009. Therefore, based on the expected positive net result for the near future, the management concluded to capitalise deferred tax assets in an amount of US$7,514,000 (2008: nil). The assessment was based on the business plan for 2010 and beyond. Due to uncertainties immanent in the business of the Group, no further tax assets have been recognised. The Group did not recognise deferred tax assets in an amount US$ 45,783,000 (31 December 2008: 51,552,000). The tax loss carryforwards in the US will expire between 2010 and 2023; other tax loss carryforwards have no expiration date. Included in unrecognised deferred tax assets is an amount of US$1,250,000 (2008: US$1,049,000) (the increase results from foreign currency adjustments) in relation to tax credits in the UK. This asset may be recovered against future taxable profits derived from certain overseas dividends for the company concerned. The amount shown under “income tax receivables” in the statement of financial position includes a corporation tax refund claim of the Group’s German subsidiary. The total amount the German subsidiary is entitled to receive amounts to EUR 414,000 to be paid out in ten equal amounts during 2008 to 2017. The amount shown within the non-current assets represents the discounted part of the claim that is due after 2010. The amount that will be paid in 2010 is shown within the current assets. 5. Cash, cash equivalents and restricted cash Cash at bank Short-term deposits Deposits designated as a hedging instrument Cash and cash equivalents Restricted Cash 2009 US$000 40,552 33,050 46,546 120,148 3,000 2008 US$000 14,222 22,693 – 36,915 – Cash, cash equivalents and restricted cash 123,148 36,915 Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group. Deposits designated as a hedging instrument are classified as cash flow hedges to cover firm commitments and forecast transactions in euros and pound sterling. Please refer to note 25 Financial risk management objectives and policies – Hedging activities. Cash and cash equivalents earn interest at the respective short-term deposit rates. The fair value of the cash and cash equivalents approximates its book value. As prescribed in note 25, in 2007 the Group entered into a selective factoring agreement. Included in cash at bank is an amount of US$12,030,000 (2008: US$ US$9,545,000) held at Dialog Semiconductor Plc Annual report and accounts 2009 59 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 5. Cash, cash equivalents and restricted cash continued the factoring bank which represents the cash value of selected receivables sold to the factoring bank. This amount is non-interest bearing until the related receivables have been entirely settled. The factoring bank charges interest on amounts drawn from the account. Funds classified as long-term Restricted Cash serve as collateral for the Group’s factoring agreement. As part of the factoring agreement, in the first quarter 2009 the Group had pledged US$6.5 million of cash to the factoring institution. The institution would draw down on these only if a commercial action by Dialog were to invalidate – partly or completely – the claim on a receivable financed by the factoring programme. For further information on the Group’s factoring agreement, please refer to note 25. In the second quarter 2009 the factoring bank decreased the pledged amount to $3.0 million. 6. Trade accounts receivable and other receivables Trade accounts receivables Receivables from factoring agreement 2009 US$000 15,365 2,121 17,486 2008 US$000 3,837 3,618 7,455 Trade receivables are non-interest bearing and are generally on 30-60-day terms. As described in note 25, in 2007 the Group entered into a selective factoring agreement. The amount shown as receivables from the factoring agreement represents a 15% retainer kept by the factoring bank against sold receivables. The retainer is released only once the receivable is fully paid by the customer, at the latest, 120 days after the receivable becomes due or if the insurance event occurs. The amounts are non-interest bearing and are generally on 30-60-day terms. The recorded trade accounts receivable for which an impairment has been recognised, was US$1,406,000 and US$1,656,000 at 31 December 2009 and 2008, respectively. The related allowance for doubtful accounts was US$1,406,000 and US$1,656,000 at 31 December 2009 and 2008, respectively. The allowance for doubtful accounts developed as follows: Allowance for doubtful accounts at beginning of year Additions charged to bad debt expense Write-offs charged against the allowance Reductions credited to income Effect of movements in foreign currency 2009 US$000 1,656 163 – (349) (64) 2008 US$000 1,624 16 – (2) 18 Allowance for doubtful accounts at end of year 1,406 1,656 60 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 6. Trade accounts receivable and other receivables continued As at 31 December 2009 and 2008, the aging analysis of trade account receivables is as follows: Receivables neither past due nor impaired Receivables past due, not impaired individually Less than 30 days 30 to 59 days 60 to 89 days 90 to 280 days Total 2009 US$000 13,924 – 1,440 – 1 0 2008 US$000 3,076 – 646 – 92 23 15,365 3,837 With respect to the receivables that are neither past due nor impaired, there are no indications as at the reporting date that the debtors will not meet their payment obligations. Inventories 7. Inventories are comprised of the following: Raw materials Work-in-process Finished goods The carrying amount of inventories carried at net realisable value at 31 December 2009 is US$nil (2008: US$nil). 8. Other financial assets Other financial assets comprise: Deposits for hedging contracts Hedging instruments At 31 December 2009 US$000 At 31 December 2008 US$000 4,260 5,528 16,405 26,193 3,074 4,814 12,050 19,938 At 31 December 2009 US$000 At 31 December 2008 US$000 – – – 1,079 453 1,532 The deposits for hedging contracts were an advance settlement for hedging instruments with a negative fair value. The deposits are interest bearing with 1% below the current base rate and are offset with amounts due when the hedge is settled. The amount shown under hedging instruments includes the fair value of derivative financial instruments used for cash flow hedges. The Group is exposed to currency risks in the course of its operating activities. These risks are reduced by the use of forward currency exchange contracts. The Group has clear guidelines as to the use of those derivatives, and compliance is constantly monitored. For further information on the Group’s hedging policy please see note 25. Dialog Semiconductor Plc Annual report and accounts 2009 61 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 9. Other current assets Other current assets comprise: Prepaid expenses Other tax receivables Other At 31 December 2009 US$000 At 31 December 2008 US$000 1,165 448 302 1,915 807 508 68 1,383 10. Property, plant and equipment, net A summary of activity for property, plant and equipment for the years ended 31 December 2009 and 2008 is as follows: Test equipment US$000 Leasehold improvements US$000 Office and other equipment Advance payments US$000 US$000 Cost Balance at 1 January 2008 Effect of movements in foreign currency Additions Reclassifications Disposals Balance at 31 December 2008/1 January 2009 Effect of movements in foreign currency Additions Reclassifications Disposals Balance at 31 December 2009 Depreciation and impairment losses Balance at 1 January 2008 Effect of movements in foreign currency Depreciation charge for the year Impairment charges Disposals Balance at 31 December 2008/1 January 2009 Effect of movements in foreign currency Depreciation charge for the year Disposals Balance at 31 December 2009 Net book value At 1 January 2008 At 31 December 2008/1 January 2009 At 31 December 2009 70,799 (49) 1,358 6 (119) 71,995 19 2,302 – (127) 74,189 (63,334) 47 (3,930) (599) 116 (67,700) (18) (2,221) 126 (69,813) 7,465 4,295 4,376 1,154 (251) 209 – – 1,112 118 1,205 40 (781) 1,694 (900) 204 (101) (102) – (899) (80) (172) 759 (392) 254 213 1,302 19,715 (680) 2,334 – (1,278) 20,091 253 2,915 – (1,937) 21,322 (16,988) 618 (1,583) – 1,048 (16,905) (205) (2,080) 1,648 (17,542) 2,727 3,186 3,780 6 (10) 50 (6) – 40 5 346 (40) (2) 349 – – – – – – – – – – 6 40 349 Total US$000 91,674 (990) 3,951 – (1,397) 93,238 395 6,768 – (2,847) 97,554 (81,222) 869 (5,614) (701) 1,164 (85,504) (303) (4,473) 2,533 (87,747) 10,452 7,734 9,807 Impairment of property, plant and equipment Impairment charges on test equipment in 2008 relate to the write-down of display testers to reduce the carrying amount to the value in use following an underutilisation of this equipment. In determining the value in use for test equipment the expected future cash flows were discounted at a rate of 10.5% on a pre-tax basis. In the income statement those impairment charges are recognised in the line item “cost of sales” and are allocated to the display systems segment. Impairment charges on leasehold improvements in 2008 relate to installed equipment in a rented office that the Group 62 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 10. Property, plant and equipment, net continued vacated in 2009. The lease contract for this office was cancelled in December 2008. In the income statement this impairment charge was recognised in the line item “general and administrative expenses” and it is allocated to the corporate segment. Finance leases The carrying value of property, plant and equipment held under finance leases at 31 December 2009 was US$1,005,000 (31 December 2008: US$364,000). Additions during the year were US$940,000 (2008: US$481,000). As of the reporting date future minimum lease payments under those finance lease contracts were US$1,107,000 (2008: US$353,000). The present value of the net minimum lease payments was US$974,000 (2008: US$326,000). 11. Intangible assets A summary of activity for intangible assets for the years ended 31 December 2009 and 2008 is as follows: Cost Balance at 1 January 2008 Effect of movements in foreign currency Additions Disposals Balance at 31 December 2008/1 January 2009 Effect of movements in foreign currency Additions Disposals Balance at 31 December 2009 Amortisation and impairment losses Balance at 1 January 2008 Effect of movements in foreign currency Amortisation charge for the year Disposals Balance at 31 December 2008/1 January 2009 Effect of movements in foreign currency Amortisation charge for the year Impairment charges Disposals Balance at 31 December 2009 Net book value At 1 January 2008 At 31 December 2008/1 January 2009 At 31 December 2009 Purchased software, licenses and other US$000 Patents US$000 Intangible assets from internal development US$000 13,672 (382) 2,681 (421) 15,550 124 1,526 (937) 16,263 (11,826) 325 (1,354) 323 (12,532) (102) (1,149) (343) 867 – – 364 – 364 – 404 – 768 – – (13) – (13) – (59) Total US$000 14,396 (382) 4,476 (421) 18,069 124 2,902 (937) 724 – 1,431 – 2,155 – 972 – 3,127 20,158 (127) – (757) – (884) (938) – (11,953) 325 (2,124) 323 (13,429) (102) (2,146) (343) 867 (13,259) (72) (1,822) (15,153) 1,846 3,018 3,004 – 351 696 597 1,271 1,305 2,443 4,640 5,005 The impairment charges in 2009 relate to a licence that is no longer in use. In the income statement those impairment charges were recognised in the line item “research and development expenses” and are allocated to the automotive and industrial segment. Acquisitions to purchased software, licenses and other intangible assets in 2009 and 2008 mainly comprise software. Dialog Semiconductor Plc Annual report and accounts 2009 63 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 11. Intangible assets continued Hire purchase The carrying value of intangible assets held under hire purchase leases at 31 December 2009 was US$441,000 (31 December 2008: US$253,000). Additions during the year were US$244,000 (2008: US$304,000). As of the reporting date future minimum payments under those hire purchase contracts were US$504,000 (2008: US$301,000). The present value of the net minimum payments was US$405,000 (2008: US$283,000). 12. Investments The Group holds a 7.66% interest in Digital Imaging Systems GmbH (DIS), a private entity that is not listed on a public stock exchange. As the fair value cannot be reliably determined, the investment in DIS is accounted for at acquisition cost less accumulated impairment charges. The total investment in DIS was US$2,662,000. In 2007, based on business and cash flow projections, the Group recognised a 100% impairment loss. Accordingly the book value for DIS at 31 December 2009 and 2008 was nil. 13. Held-to-maturity securities In the third quarter of 2007, securities totalling US$4.0 million were reclassified from “available-for-sale” to “held to maturity”. Whilst the Group intention was always to hold those securities to maturity (12 August 2010), the rapidly worsening economic environment forced management to review this position. After careful consideration, the management concluded in the fourth quarter 2008 that it was more prudent to convert these securities into cash. As a result of this, the entire US$4 million worth of securities were sold for cash. Management sees this as an isolated event that was beyond its control, one that could not have been reasonably anticipated back in 2007. 14. Trade and other payables Trade and other payables comprise: Trade accounts payable Other payables At 31 December 2009 US$000 At 31 December 2008 US$000 15,074 2,230 17,304 11,033 1,963 12,996 Terms and conditions of the above other current liabilities:  trade payables are non-interest bearing and are normally settled on 30-60-day terms; and  other payables are non-interest bearing and have an average term of five months. 15. Other financial liabilities Other financial liabilities include hire purchase agreements and finance lease obligations. In addition other financial liabilities in 2008 included the fair value of derivative financial instruments used for cash flow hedges. The Group is exposed to currency risks in the course of its operating activities. These risks are reduced by the use of forward currency exchange contracts. 64 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 16. Provisions The Group issues various types of contractual product warranties under which it guarantees the performance of products delivered for a certain period or term. The estimated provision is based on historical warranty data. The provision for dilapidation includes costs of dismantling and restoring the offices of the Group to their original condition at end the end of the lease terms. The provision for rental obligations relates to an office that the Group vacated in 2009 as it relocated to larger premises. The office was vacated before the end of the contractual lease term. As the likelihood of the Group being able to sublet this office is low the Group has accounted for the rental obligations for the period the building is not used. The changes in the provision are summarised as follows: Balance at 1 January 2009 US$000 Currency change US$000 Discount US$000 Additions US$000 Used US$000 Released US$000 At 31 December 2009 US$000 515 366 387 22 – 1,290 – – 1,290 – 18 44 (3) 7 66 – 66 – – – – – – 11 11 11 326 159 – – 328 813 241 241 (72) (241) (3) (19) – – (50) – – – 769 252 428 – 335 (335) (50) 1,784 – – – – 252 252 1,054 (335) (50) 2,036 Obligations for product warranties Dilapidation Rental obligations Restructuring Pending legal claims Total current Dilapidation Total non-current Total 17. Other current liabilities Other current liabilities comprise: Obligations for personnel and social expenses Advances received in relation to customer specific research and development contracts Other At 31 December 2009 US$000 At 31 December 2008 US$000 7,836 939 2,533 11,308 2,311 1,000 1,126 4,437 Terms and conditions of the above other current liabilities:  obligations for personnel and social expenses have an average term of three months (2008: three months); and  other payables are non-interest bearing and are normally settled on 30 day terms. 18. Other non-current financial liabilities Other non-current financial liabilities include hire purchase agreements and finance lease obligations. 19. Shareholders’ equity and other reserves Capital increase On 25 September 2009 the shareholders of the Company approved an offering of 12 million new ordinary shares of 10 pence each in the capital of the Company (the “New Shares”) with new and existing institutional investors at a price of EUR 3.65 per share to raise gross proceeds of 43.8 million € (US$64.3 million); net proceeds (after deduction of offering expenses of US$4.7 million) were US$59.7 million. The trading of the New Shares commenced on the Regulated Market (Regulierter Markt) of the Frankfurt Stock Exchange on 30 September 2009. On 20 October 2009, the Company completed an offering of 3,500,000 previously unissued ordinary shares at £0.10 per share to its employee share options trust (“Trust”) at a price of EUR 0,20 per share, to make such shares available for the exercise of stock option rights that had previously been granted to employees. At 31 December 2009 and 31 December 2008, the Trust continued to hold 2,663,318 and 641,259 shares respectively. These Dialog Semiconductor Plc Annual report and accounts 2009 65 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 19. Shareholders’ equity and other reserves continued shares are legally 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. Ordinary shares At 31 December 2009, Dialog had authorised 104,311,860 (2008: 104,311,860) ordinary shares with a par value of £0.10 per share, of which 61,568,930 (2008: 46,068,930) shares were issued and outstanding. At 1 January 2008 and 2009 Issued on 25 September 2009 Issued on 20 October 2009 At 31 December 2009 amount of shares 46,068,930 12,000,000 3,500,000 US$000 9,328 1,922 575 61,568,930 11,825 Dialog’s stock was previously issued in the form of bearer shares. On 16 November 2009, all shares were converted in registered shares. All shares are fully paid. Share premium The account comprises additional paid-in capital in connection with the issue of shares. Accumulated deficit The accumulated deficit comprises losses and non-distributed earnings of consolidated Group companies. Because of the accumulated deficit, the Group cannot pay a dividend and does not plan to pay dividends in the foreseeable future. Other reserves Currency translation reserve The currency translation reserve is used to record exchange differences arising from the translation of the financial statements of subsidiaries whose functional currency is not the US$. Cash flow hedge reserve The cash flow hedge reserve is used to record the portion of the gain or loss on a hedging instrument that is determined to be a highly effective cash flow hedge. Available-for-sale securities reserve The available-for-sale securities reserve is used to record fair value changes on available-for-sale investments. The related tax effects allocated to each component of other reserves for the years ended 31 December 2009 and 2008 are as follows: Unrealised losses on available-for-sale securities Currency translation adjustment Cash flow hedges Other comprehensive income (loss) Pre-tax US$000 – (113) (179) (292) 2009 Tax effect US$000 Net US$000 Pre-tax US$000 2008 Tax effect US$000 – 421 – 421 – 308 (179) 129 (312) (249) (282) (843) – (887) – (887) Net US$000 (312) (1,136) (282) (1,730) In 2008 the Group sold all of its available-for-sale securities. The net realised gain of US$10,000 from those sales that had been previously (Q3 2008) recognised directly in equity were recycled into profit and loss. 66 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 20. 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 US$1,229,000 (2008: US$1,163,000). At 31 December 2009, contributions amounting to US$150,000 (2008: US$69,000) were payable to the funds and are included in other current liabilities. Pension costs also include payments to the state funded pension plan in Germany in the amount of US$1,339,000 (2008: US$1,158,000). 21. Share-based payments a) Stock option plans On 7 August 1998, the Group adopted a stock option plan (the “Plan”) under which employees, the executive management and the Executive 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 Group’s authorised but unissued ordinary shares. On 16 May 2002 the Shareholders of the Group approved a resolution increasing the maximum amount of stock options which may be granted by the Group at any time, to 15% of Dialog’s issued share capital on a diluted basis. At 31 December 2009, 10,865,105 shares could be issued. Unless otherwise determined by the board, stock options granted to employees are granted with an exercise price not less than the quoted price at the date of grant, and vest during the service period of the employee without any further vesting conditions. Stock options granted before 31 October 2006 have terms of ten years and vest over periods of one or five years from the grant date. On 19 June 2006 the Board amended the stock option plan under which stock options now have a seven-year life and vest monthly over a period of one to 48 months. The new stock options may not be exercised until they have been held for one calendar year from the grant date. The new rules were implemented on grants made on or after 31 October 2006. The stock option plan was extended by the Board in 2009 to expire 31 January 2012. At the 2006 Annual General Meeting, Shareholders approved a stock option plan for Non-executive Directors. Each Non-executive Director is entitled to an initial grant of 50,000 options vesting over four years and each year thereafter, soon after each Annual Shareholder Meeting, a further 20,000 options vesting over 12 months are granted. Options are exercisable at the market price prevailing at the date of grant. On 22 April 2009 the Board of Directors of the Company decided to offer the employees an option replacement programme for options which had an exercise price which was below the current market price (underwater options). Under this option replacement programme option holders were offered to replace their underwater options against a reduced number of replacement options with an exercise price set at the market price of the Company´s shares at the replacement date. The total value of the replacement options was equal to the total value of the underwater options. The options value was derived from a Black-Scholes valuation model as at the date of conversion. 107 employees decided to replace in total 1,098,952 underwater options for 534,192 replacement options. The fair value of all grants in the two-year period ended 31 December 2009 was 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 Group does not have adequate historical development of the share price, particularly as a result of material unusual effects in the stock market in recent years. Furthermore, implicit volatility cannot be determined since none of the Group’s options are actively traded. The Group has therefore based its calculation of expected volatility on an average of its own volatility and the historical development of other companies in its business segment. The following assumptions were used for stock option grants for the years ended 31 December 2009 and 2008: Expected dividend yield Expected volatility Risk free interest rate Expected life (in years) Weighted average share price during the year (in US$) Weighted average share price for Option grants (in US$) Weighted average exercise price (in US$) Weighted-average fair value (in US$) 2009 0% 42–54% 4.25% 2.0–6.0 6.57 5.23 5.23 2.08 2008 0% 40–48% 4.2% 2.0–6.0 1.32 1.43 1.43 0.84 Dialog Semiconductor Plc Annual report and accounts 2009 67 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 21. Share-based payments continued Stock option plan activity for the years ended 31 December 2009 and 2008 was as follows: Outstanding at beginning of year Granted Exercised Forfeited Options replaced Options returned Outstanding at end of year Options exercisable at year end 2009 2008 Weighted average exercise price US$ 2.56 6.58 1.88 1.74 2.08 5.33 3.27 2.26 Options 5,796,510 1,244,901 (1,558,152) (115,157) 534,192 (1,098,952) 4,803,342 1,877,812 Weighted average exercise price US$ 2.77 1.43 0.42 2.79 – – 2.56 3.09 Options 5,372,006 997,776 (405,128) (168,144) – – 5,796,510 3,329,250 The weighted average share price at the date of exercise of options was US$7.47 and US$1.12 in the years ended 31 December 2009 and 2008 respectively. Liabilities from share option exercises to employees were US$614,000 at 31 December 2009 (2008: nil). The following table summarises information on stock options outstanding at 31 December 2009: Range of Exercise Prices €0.00 - 2.98 €3.00 - 8.00 €0.00 - 8.00 Options outstanding Weighted average Options exercisable Number outstanding at 31 December 2009 remaining contractual life (in years) Weighted average exercise price US$ Number exercisable at 31 December 2009 Weighted average exercise price US$ 3,769,800 1,033,542 4,803,342 5.0 6.2 5.3 1.85 8.46 3.27 1,652,686 225,126 1,877,812 1.89 5.00 2.26 b) Executives’ Long Term Incentive Plan (LTIP) The Group also operates the Dialog Semiconductor Plc Long Term Incentive Plan (LTIP) which was approved by shareholders at the Annual General Meeting in April 2008. Under the LTIP, key executives are eligible to share in a percentage of the value created for shareholders in excess of an annual return hurdle measured over a three-year performance period. This value is delivered to a participant in the form of a series of so called nil-cost options which can be exercised within five years of the date of grant. The first award under the LTIP was made on 8 May 2008. At the Annual General Meeting in April 2009, the LTIP was extended by one year. The fair value of the LTIP, where the number of nil-cost options granted to an individual is contingent upon the returns to Shareholders, was calculated using a Monte Carlo simulation model. As a portion of each award is capable of vesting at three separate measurement dates each tranche has been valued separately in accordance with IFRS2. 68 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 21. Share-based payments continued The fair values used in the calculations are as follows: Inputs Share price at grant date Exercise price Expected life (years) Expected volatility Risk-free-interest-rate Tranche 1 Tranche 2 Tranche 3 LTIP extension € 1.40 £ 0.10 0.64 40% € 1.40 £ 0.10 1.64 40% € 1.40 £ 0.10 2.64 40% € 4.077 £ 0.10 2.35 42% 4.8202% 4.8202% 4.8202% 1.4900% Expected volatility has been determined on the same basis as the input into the fair value calculation for share options granted during the year. Measurement date 31 January 2009 The measurement share price at 31 January 2009 (average share price over the prior 30 days) was €0.63. As this price was below the return hurdle for January 2009 of €1.62 (initial price of €1.44 +12.5%), no share options were granted in 2009. Measurement date 31 January 2010 (subsequent event) The measurement share price at 31 January 2010 (average share price over the prior 30 days) was €9.8942. As this price was above the return hurdle for January 2010 of €1.82 (prior year return hurdle of €1.62 +12.5%), 3,055,064 nil cost option grants were approved by the board on 4th February 2010, with 25% exercisable from February 22nd 2010 and the remaining 75% exercisable for 4 years from 21 February 2011. c) ESOP Trust The Group established an employee share option trust (the “Trust”). The Trust purchases shares in the Group for the benefit of employees under the Group’s share option scheme. At 31 December 2009 the Trust held 2,663,318 shares (2008: 641,259). Dialog Semiconductor Plc Annual report and accounts 2009 69 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 22. Additional disclosures on financial instruments Carrying amounts, amounts recognised and fair values by classes of financial assets and liabilities as well as by category: Amounts recognised in the statement of financial position according to IAS 39 Category in accordance with IAS 39 Carrying amount 31 December 2009 Amortised cost US$000 US$000 Fair value recognised in equity US$000 Fair value recognised in profit or loss US$000 Fair value 31 December 2009 US$000 Cost US$000 Assets Cash at bank and short-term deposits Restricted cash Deposits designated as a hedging instrument Trade accounts receivable and other receivables Other non-derivative financial assets Deposits for hedging contracts Derivative financial assets Derivatives without hedging relationship Derivatives with hedging relationship Liabilities Trade account payables Other payables Other financial liabilities Derivative financial liabilities Derivatives without hedging relationship Derivatives with hedging relationship LaR LaR n/a LaR LaR n/a n/a FLAC FLAC FLAC n/a n/a Of which aggregated by category in accordance with IAS 39: Loans and receivables (LaR) Deposits designated as a hedging instrument Held-to-maturity investments (HtM) Available-for-sale financial assets (AfS) Derivatives without hedging relationship Derivatives with hedging relationship 73,602 3,000 46,546 73,602 3,000 – 17,486 17,486 – – – 292 – – 15,074 2,230 1,379 15,074 2,230 1,379 – – – – 94,088 46,546 – – – – 94,380 – – – – – Financial liabilities at amortised cost (FLAC) (18,683) (17,304) – – – – – – – – – – – – – – – – – – – 46,546 – – – – – – – – – – 46,546 – – – – – – – – – – – – – – – – – – – – – – – 73,602 3,000 46,546 17,486 292 – – 15,074 2,230 1,379 – – 94,380 46,546 – – – – (17,304) 70 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 22. Additional disclosures on financial instruments continued Amounts recognised in the statement of financial position according to IAS 39 Category in accordance with IAS 39 Carrying amount 31 December 2008 Amortised cost US$000 US$000 Fair value recognised in equity US$000 Fair value recognised in profit or loss US$000 Fair value 31 December 2008 US$000 Cost US$000 Assets Cash at bank and short-term deposits Trade accounts receivable and other receivables Other non-derivative financial assets Deposits for hedging contracts Derivative financial assets Derivatives without hedging relationship Derivatives with hedging relationship Liabilities Trade account payables Other payables Other financial liabilities Derivative financial liabilities Derivatives without hedging relationship Derivatives with hedging relationship LaR LaR 36,915 36,915 7,455 7,455 LaR 1,079 1,079 n/a n/a FLAC FLAC FLAC n/a n/a – – 11,033 1,963 619 – – 453 11,033 1,963 619 – 646 Of which aggregated by category in accordance with IAS 39: Loans and receivables (LaR) 45,449 45,449 Held-to-maturity investments (HtM) Available-for-sale financial assets (AfS) Derivatives without hedging relationship Derivatives with hedging relationship – – – (193) – – – – Financial liabilities at amortised cost (FLAC) (13,615) (12,996) – – – – – – – – – – – – – – – – – – 453 – – – 646 – – – – (193) – – – – – – – – – – – – – – – – 36,915 7,455 1,079 – 453 11,033 1,963 619 – 646 45,449 – – – (193) (12,996) The fair value of derivatives has been determined with reference to available market information (Level 2). The carrying amounts of the loans and receivables and financial liabilities approximate their fair values due to short-term maturities. 23. Commitments Operating lease, software and service commitments The Group leases all its office facilities and vehicles, and some of its office and test equipment, under operating leases. Future minimum lease payments under rental and lease agreements, which have initial or remaining terms in excess of one year at 31 December 2009 and payments for other commitments are as follows: Dialog Semiconductor Plc Annual report and accounts 2009 71 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 23. Commitments continued Within one year Between one and two years Between two and three years Between three and four years Between four and five years Thereafter Total minimum payments Operating leases and software commitments Other commitments Operating leases and software commitments Other commitments 2009 US$000 4,543 2,287 1,337 853 574 – 9,594 2009 US$000 2,429 2,497 2,411 1,173 150 – 8,660 2008 US$000 3,060 1,608 742 397 371 536 2008 US$000 1,411 205 69 – – – 6,714 1,685 Total payments for operating leases and software commitments, charged as an expense in the income statement, amounted to US$4,689,000 and US$3,929,000 for the years ended 31 December 2009 and 2008 respectively. Finance lease, hire purchase and software commitments The Group has finance leases and hire purchase contracts for test and IT equipment and has software contracts. The leases have terms of renewal but no purchase options and escalation clauses. Renewals are at the option of the specific entity that holds the lease. Future minimum payments under finance leases and hire purchase and software contracts together with the present value of the net minimum payments are as follows: Within one year Between one and two years Between two and three years Between three and four years Total minimum payments Less amounts representing finance charges Present value of minimum payments Minimum payments 2009 US$000 793 364 341 113 1,611 (232) 1,379 2008 US$000 418 303 – – 721 (50) 671 Capital commitments The Group has contractual commitments for the acquisition of property, plant and equipment in 2009 of US$2,484,000 (2008: US$377,000) and for the acquisition of intangible assets of US$614,000 (2008: US$181,000). 24. Segmental reporting Since 2009 the Group applies IFRS 8 “Operating Segments”. Following the provisions of IFRS 8, reportable operating segments are identified based on the “management approach”. The management approach requires external segment reporting based on the Group’s internal organisational and management structure and on internal financial reporting to the chief operating decision maker, which considered the Group as being the Board of Management. 72 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 24. Segmental reporting continued In contrast to the former reporting structure, the Group reports on three operating segments, which are independently managed by bodies responsible for the respective segments depending on the nature of products offered. The identification of Company components as business segments is based in particular on the existence of business unit managers who report directly to the CEO of Dialog and who are responsible for the performance of the segment under their charge. In accordance with IFRS 8, the former Wireless Segment was divided into the Audio and Power Management Segment and the Display Systems Segment which are now reported separately as operating segments. Prior-year figures have been adjusted accordingly. a) Operating segments The Group’s operating segments are: Audio and Power Management This segment includes our power management and audio chips especially designed to meet the needs of the wireless systems markets. Display Systems The products in this segment include a range of advanced driver technologies for low power display applications – from PMOLEDs, to electronic paper and MEMS displays. Automotive and Industrial In the automotive and industrial market our products address the safety, management and control of electronic systems in cars and for industrial applications. Revenues 1) R&D expenses Operating profit (loss) 2) Depreciation/ amortisation Impairment and disposal losses Investments Total assets Liabilities 2009 2008 Audio & Power Management Display Systems 3)/4) Automotive/ Industrial US$000 US$000 US$000 Corporate 5) US$000 Total US$000 Audio & Power Management Display Systems 3)/4) Automotive/ Industrial US$000 US$000 US$000 Corporate US$000 Total US$000 176,569 24,383 5,987 8,312 33,531 9,513 1,526 217,613 121,355 413 42,621 19,816 5,149 7,025 35,193 9,453 133 427 161,830 36,721 47,048 (12,395) (3,636) (2,345) 28,672 21,892 (10,972) (875) (4,093) 5,952 3,535 1,490 1,594 – 6,619 3,769 2,060 1,909 – 7,738 1,076 5,447 43,605 16,025 179 2,296 4,308 6,756 441 2,457 At 31 Dec 2009 1,696 – 10,200 1,171 4,110 454 2,247 362 2,083 249 – 2,236 8,440 At 31 Dec 2008 13,366 131,032 192,311 28,410 7,227 5,324 35,332 9,367 4,679 5,121 10,349 4,746 36,915 914 80,353 20,148 [1] All revenues are from sales to external customers [2] Certain overhead costs are allocated mainly based on sales and headcount. [3] Revenue is partially generated from funded research and development activity. [4] The operating loss reflects the investment in the emerging display technology. [5] Corporate revenue in 2009 includes US$ 1.961,000 relating to the BenQ Cash settlement (see note 27). Corporate expenses and income include sales discounts on early payment, the holding company, stock option expenses, expenses for the Management Long Term Incentive Plan (LTIP), the restructuring expenses and income and other expenses not specifically attributable to the operating segments. Corporate assets include certain financial assets such as cash and cash equivalents, and marketable securities. Corporate liabilities include liabilities of the holding company and other liabilities not specifically attributable to operating segments. Segment assets and liabilities comprise all assets and liabilities employed by the relevant business segment to generate the operating segment’s profit or loss. Investments comprise additions to property, plant and equipment, and intangible assets. In 2009 and 2008 the Group had no inter-segment sales, income, expenses, receivables, payables or provisions. Dialog Semiconductor Plc Annual report and accounts 2009 73 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 24. Segmental reporting continued There are no differences between the measurements of the reportable segments profits and losses, assets and liabilities and the entities profit and losses, assets and liabilities. b) Geographic information – Revenues by shipment destination Revenues United Kingdom Hungary Other European countries China Other Asian countries Other countries Total revenues Investments Germany Japan United Kingdom Other Total investments Assets Germany Japan United Kingdom Other Total assets 2009 US$000 2008 US$000 434 17,444 20,600 145,986 23,047 10,102 217,613 7,809 350 2,022 19 10,200 1,222 17,056 9,205 100,323 12,546 21,478 161,830 7,658 32 749 1 8,440 At 31 December 2009 US$000 At 31 December 2008 US$000 185,656 854 5,577 224 192,311 77,359 736 2,083 175 80,353 Revenues are allocated to countries based on the location of the shipment destination. Segmental investments and assets are allocated based on the geographic location of the asset. 25. Financial risk management objectives and policies Vulnerability due to certain significant risk concentrations The Group’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Group’s future operating results and cause actual results to vary materially from historical results include, but are not limited to, the highly cyclical nature of both the semiconductor and wireless communications industries, dependence on certain customers and the ability to obtain adequate supply of sub-micron wafers. The Group's products are generally utilised in the wireless and automotive industries. The Group generates a substantial portion of its revenue from the wireless communications market, which accounted for 84% and 78% of its total revenue for the years ended 31 December 2009 and 2008, respectively. The Group’s revenue base is diversified by geographic region and by individual customer. Changes in foreign currency exchange rates influence the Group’s results of operations. The Group’s sales, purchases of raw materials and manufacturing services are primarily denominated in US$. The Group also has foreign currency exchange risks with respect to its net investments in foreign subsidiaries and branches in the United Kingdom, Japan, Taiwan, Hong Kong and Korea. Fluctuations in these currencies could have a significant impact on the Group’s reported results from operations. 74 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 25. Financial risk management objectives and policies continued The Group depends on a relatively small number of customers for a substantial portion of its revenues, and the loss of one or more of these customers may result in a significant decline in future revenue. During 2009 two customers individually accounted for more than 10% of the Group's revenues. Total revenues from these two customers were US$145,271,000. Net receivables from these two customers were US$9,342,000 at 31 December 2009. During 2008 two customers individually accounted for more than 10% of the Group's revenues. Total revenues from these two customers were US$104,227,000 or 64%. Net receivables from these two customers were US$344,000 at 31 December 2008. The Group performs ongoing credit evaluations of its customers' financial condition. Both customers are part of the Audio & Power Management Segment. Financial risk management objectives and policies The Group’s principal financial instruments, other than derivatives, comprise cash, cash equivalents, restricted cash and short-term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has other financial instruments which mainly comprise trade receivables and trade payables which arise directly from its operations. The Group also entered into derivative transactions (forward currency contracts). The purpose is to manage the currency risks arising from the Group’s operations. It is, and has been throughout 2009 and 2008, the Group’s policy that no trading in derivatives shall be undertaken. Exposure to market risk, credit risk and liquidity risk arises in the normal course of the Group’s business. The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below: Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise three types of risk: interest rate risk, currency risk and other price risk, such as equity risk. Financial instruments affected by market risk include loans and borrowings, deposits, available-for-sale investments, and derivative financial instruments. Interest risk The Group earns interest from deposits and uses money market deposits with highly rated financial institutions. During the year, the Group has held cash on deposit with a range of maturities from one week to one month. This can vary in view of changes in the underlying currency’s interest rates and the Group’s cash requirements. The Group spends interest on amounts received in connection with the factoring agreement as prescribed below. The Group has no long-term debt and no amounts outstanding under short-term credit facilities as at 31 December 2009 (2008: US$nil). The Group’s policy is to manage its interest income using a mix of fixed and variable interest rate debts. In order to achieve this policy, the Group invests in highly liquid funds having a matching investment strategy. Once the operating business has been financed, short-term excess funds are invested in floating interest rate securities. Only short-term deposits bear fixed interest rates. Dialog Semiconductor Plc Annual report and accounts 2009 75 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 25. Financial risk management objectives and policies continued The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax as well as the Group’s equity: 2009 2008 Currency risk Increase/decrease in basis points Effect on profit US$000 Effect on equity US$000 17 (17) 12 (12) 137 (137) 29 (29) 137 (137) 29 (29) The main functional currency within the Group and the presentation currency for the consolidated financial statements is the US$. Accordingly, foreign exchange risks arise from transactions, and recognised assets and liabilities, the functional currency of which is not the US$. The currencies giving rise to these exposure risks are primarily the euro and pound sterling. The majority of the Group’s revenue and material expenses are denominated in US$. The majority of other operating expenses are denominated in euros and pounds sterling. The Group has transactional currency exposures. Such exposure arises from the sales or purchases by an operating unit in currencies other than the unit’s functional currency. In 2009 and 2008 nearly all the Group’s sales were denominated in US$. The Group uses forward currency contracts as well as certain deposits (together referred to as the “hedging instruments”) to eliminate the currency exposure of recurring expected payments, such as salaries, wages and office rents non-US$ denominated. The hedging instruments must be the same currency as the hedged item. It is the Group’s policy not to enter into forward contracts nor classify deposits as non-derivative hedging instruments until a firm commitment is in place and to maximise hedge effectiveness by negotiating the terms of hedge instruments to match the terms of the hedged item. The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Group’s profit before tax (resulting from changes in the fair value of monetary assets, excluding securities, and liabilities) and the Group’s equity (resulting from changes in the fair value of deposits designated as cash flow hedges and in 2008 from the fair value of exchange contracts). 2009 Euro Pound sterling Euro Pound sterling 2008 Euro Pound sterling Euro Pound sterling Increase/decrease against US$ Effect on profit US$000 Effect on equity US$000 7% 12% (12%) (7%) 12% 2% (12%) (2%) 1,373 1,909 (2,354) (1,113) 161 35 (161) (35) 2,848 3,109 (4,883) (1,813) 1,621 151 (1,621) (151) 76 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 25. Financial risk management objectives and policies continued Credit risk The Group is exposed to credit risk from its operating activities and certain financing activities. The Group trades only with recognised, creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis, with the result that the Group’s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in note 6. Regarding the risk concentration please see above, “vulnerability due to certain significant considerations”. In order to finance its growth, in August 2007 the Group entered into a factoring agreement with a reputable German financial institution. Initially the maximum amount of cash that can be received under this agreement was €10.0 million (or US$ equivalent). In 2008 the amount was increased to US$30.0 million. The agreement, which comprises receivables from selective customers, significantly reduces the underlying credit risk because the financial institution assumes all credit risks associated with the collection of the receivables financed under the programme. As part of the factoring agreement, the Group has pledged US$6.5 million of cash to the factoring institution in the first quarter of 2009. The institution would draw down on these only if a commercial action by Dialog were to invalidate – partly or completely – the claim on a receivable financed by the factoring program. In the second quarter of 2009, the factoring bank decreased the pledged amount to US$3.0 million. In the statement of financial position the amount is shown under restricted cash. The Group’s exposure to credit risk arising from other financial assets of the Group, which comprise cash, cash equivalents and restricted cash, would arise from default by a counterparty. The maximum exposure is equal to the carrying amount of the instruments. Liquidity risk The Group uses quarterly cash flow forecasts to monitor its liquidity risk. It takes financial investments and financial assets (e.g. trade accounts receivables and other financial assets) into consideration, as well as projected cash flows from operations. The Group’s objective is to minimise interest expense by avoiding the use of short-term bank liabilities or bank overdrafts within the Group. At 31 December 2009, the Group had cash, cash equivalents and restricted cash of US$123,148,000 (2008: US$36,915,000). The Group’s policy is to structure its maturities of current financial assets within the Group to meet 100% of the respective maturities of the liabilities. The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2009, based on contractual undiscounted payments: Financial year ended 2009 Trade accounts payable Other payables Other financial liabilities 1) Financial year ended 2008 Trade accounts payable Other payables Other financial liabilities 1) Less than 3 months US$000 3 to 12 months US$000 1 to 5 years US$000 15,074 2,230 679 17,983 11,019 1,395 956 13,370 – – – – 14 568 38 620 – – – – – – – – Total US$000 15,074 2,230 679 17,983 11,033 1,963 994 13,990 1) Other financial liabilities consist of derivative financial instruments At 31 December 2009, the Group had unused short-term credit lines of US$14,200,000 (2008: US$8,945,000 (€6.4 million)). There were no amounts outstanding under these credit lines at 31 December 2009 (2008: nil). Dialog Semiconductor Plc Annual report and accounts 2009 77 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 25. Financial risk management objectives and policies continued Capital management The primary objective of the Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and strategies for growth. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions. To maintain or adjust its capital structure, the Group may generally issue new shares. No changes were made in the objectives, policies or processes during the years ending 31 December 2009 and 31 December 2008. The Group monitors capital using an equity ratio (total equity divided by total assets). The equity ratio as of 31 December 2009 was 81.6% (2008: 75.0%). Capital includes net Shareholders’ equity. The Group’s policy is to finance business development and growth with equity rather than long-term liabilities. It is, therefore, also its policy to keep a strong equity ratio. This policy will be reconsidered as soon as sustainable profits are earned in order to achieve leverage. Hedging activities At 31 December 2009, the Group held deposits (referred to as the “hedging instruments”) designated as hedges of firm commitments and forecast transactions in euros and pounds sterling. The hedging instruments are being used to hedge the foreign currency risk of contractual cash flows, principally resulting from wages and salaries, and rental payments with the aim of eliminating the currency risk by transforming these cash flows from euros or pounds sterling into US dollars. The fair values of the deposits and forward exchange contracts which equal the book values are as follows: Fair values Forward exchange contracts Deposits At 31 Dec 2009 At 31 Dec 2008 Assets US$000 Liabilities US$000 – 46,546 – – Assets US$000 453 – Liabilities US$000 646 – The critical terms of the deposits have been set to match the terms of the hedged cash flows. The cash flow hedges of the expected future cash flows in each month from January 2010 to December 2010 and January 2009 to May 2009 respectively were assessed to be highly effective and, at 31 December 2009, a net unrealised loss of US$372,000 was included in equity in respect of these cash flows (2008: loss of US$193,000). During the financial year 2009 a profit of US$197,000 (2008: loss of US$2,026,000) was recognised in equity and a profit of US$376,000 (2008: loss of US$1,744,000) was removed from equity and recognised in profit and loss. The months of occurrence of the cash flows are the same as the month when the income statement is affected. 78 Dialog Semiconductor Plc Annual report and accounts 2009 Section 4 | Consolidated financial statements and notes 25. Financial risk management objectives and policies continued The following tables show the contractual maturities of the payments for which deposits are used as hedging instruments, i.e., when the hedged item will be recognised in profit or loss: Maturity 2009 January 2010 February 2010 March 2010 April 2010 May 2010 June 2010 July 2010 August 2010 September 2010 October 2010 November 2010 December 2010 2008 January 2009 February 2009 March 2009 April 2009 May 2009 Maturity 2009 January 2010 February 2010 March 2010 April 2010 May 2010 June 2010 July 2010 August 2010 September 2010 October 2010 November 2010 December 2010 2008 January 2009 February 2009 March 2009 April 2009 May 2009 Nominal amount €000 Forward rate Nominal amount €000 Spot rate Derivatives Deposits – – – – – – – – – – – – 2,000 2,000 2,000 2,000 1,000 – – – – – – – – – – – – 1.3889 1.3891 1.3575 1.2591 1.3780 1,725 1,725 2,325 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 – – – – – 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 1.4750–1.4765 - - - - - Nominal amount £000 Forward rate Nominal amount £000 Spot rate Derivatives Deposits – – – – – – – – – – – – 915 700 700 800 400 – – – – – – – – – – – – 1.7645 1.7626 1.6352 1.4849 1.5399 833 833 1,283 783 783 783 783 783 783 783 783 783 – – – – – 1.5807 1.5807 1.5807 1.5807 1.5807 1.5807 1.5807 1.5807 1.5807 1.5807 1.5807 1.5807 – – – – – Dialog Semiconductor Plc Annual report and accounts 2009 79 Section 4 | Consolidated financial statements and notes Notes to the consolidated financial statements For the year ended 31 December 2009 26. Transactions with related parties For the relationship between the parent company, Dialog Semiconductor Plc, and its subsidiaries please see note 2. Related parties are comprised of eight non-executive members of the Board of Directors and nine members of the executive management which are named in the management and governance section. These are the only related parties of the Group. Compensation of key management personnel of the Group For the composition of our key management please see management and governance beginning on page 25. Compensation of key management personnel of the Group is as follows: Short term employee benefits Post-employment benefits 1) Share-based payments 1) The amounts include payments for defined contribution plans. 2009 US$000 3,499 137 635 4,272 2008 US$000 2,391 147 608 3,146 Compensation of Non-executive Directors The compensation of Non-executive Directors was US$307,000 (2008: US$316,000). As at 31 December 2009 the amount of US$55,000 for Board member fees was outstanding (2008: US$38,000). For further information please see the Directors’ remuneration report within the management and governance section on pages 32 to 34. Other related party transactions In 2009 and 2008 there were no other transactions with related parties. 27. BenQ settlement In the second quarter 2009 the Company received an unexpected cash settlement of US$2.3 million. This cash settlement was against receivables which had previously been written down and revenues that had not been recognised in 2006 as a result of the insolvency of BenQ Mobile. The amount represents 35% of the original claim to BenQ Mobile. Of this amount US$2.0 million was classified as revenue and US$0.3 million was classified as other operating income. The amount shown as revenue represents prior period revenue. As one of the criteria for revenue recognition under IFRS was not met, for this amount the related revenue was not accounted for in 2006. The amount shown under other operating income was previously recognised as revenue in the periods preceding the insolvency but the underlying receivables were written down against other operating expenses. 28. Subsequent event No subsequent events of material impact occurred after the reporting date. 80 Dialog Semiconductor Plc Annual report and accounts 2009 Section 5 | Company financial statements and notes Company financial statements On the following pages information regarding the holding company Dialog Semiconductor Plc is given. Company statement of financial position For the year ended 31 December 2009 Assets Cash and cash equivalents Amounts owed by Group undertakings Prepaid expenses Other current assets Total current assets Investments Amounts owed by Group undertakings (due after more than one year) Total non-current assets Total assets Trade accounts payables Other payables Total current liabilities Ordinary shares Share premium Retained deficit Other reserves Employee stock purchase plan shares Total Shareholders’ equity Total liabilities and Shareholders´ equity Notes At 31 December 2009 US$000 At 31 December 2008 US$000 29 71,924 44,542 67 296 116,829 97,521 – 97,521 21,630 33,533 67 – 55,230 97,521 1,278 98,799 214,350 154,029 475 471 946 11,825 283,733 (80,972) (372) (810) 28 330 358 9,328 223,005 (78,523) – (139) 32 213,404 153,671 214,350 154,029 Profit for the financial year As permitted by Section 408 of the Companies Act 2006, the parent company’s profit and loss account has not been included in these financial statements. The parent company’s loss after taxation was US$2,449,000 (2008: profit of US$3,163,000). These financial statements were approved by the Board of Directors on 11 February 2010 and were signed on its behalf by: Dr Jalal Bagherli Director Dialog Semiconductor Plc Annual report and accounts 2009 81 Section 5 | Company financial statements and notes Company financial statements Company statement of changes in equity For the year ended 31 December 2009 Other reserves Ordinary Shares US$000 Additional paid-in capital US$000 Accumulated deficit US$000 Cash flow hedges US$000 Available-for-sale securities Employee stock purchase plan shares US$000 312 (312) – (312) – – – – – – – – – US$000 Total US$000 (205) 150,663 – 66 66 2,851 157 3,008 (139) 153,671 – – (2,821) 64,343 (1,048) (5,733) – – 377 (671) 1,048 (41) 2,937 59,733 (810) 213,404 Balance at 1 January 2008 Total comprehensive income (loss) Sale of employee stock purchase plan shares Changes in Equity total Balance at 31 December 2008 / 1 January 2009 Total comprehensive income (loss) Capital increase public offering (gross proceeds) Transaction costs of capital increase – public offering Capital increase for employee share option plan (gross proceeds) Transaction costs of capital increase – employee share option plan Sale of employee stock purchase plan shares 9,328 222,914 (81,686) – – – – 91 91 3,163 – 3,163 9,328 223,005 (78,523) – – (2,449) 1,922 62,421 – (4,685) 575 473 – – (41) 2,560 60,728 – – – – – – – – – – (372) – – – – – Changes in Equity total 2,497 (2,449) (372) Balance at 31 December 2009 11,825 283,733 (80,972) (372) 82 Dialog Semiconductor Plc Annual report and accounts 2009 Section 5 | Company financial statements and notes Company statement of cash flows For the year ended 31 December 2009 Cash flows from operating activities: Net profit (loss) Adjustments to reconcile net profit (loss) to net cash provided by (used for) operating activities: Interest income, net Hedging Losses on disposals financial assets Changes in working capital: Trade accounts payable Other assets and liabilities Cash generated from (used for) operations Interest received Cash flow from (used for) operating activities Cash flows from investing activities: Loans made to other group companies Purchase of securities Sale of Securities Cash flow from (used for) investing activities Cash flows from financing activities: Cash flow from capital increase Sale of employee stock purchase plan shares Cash flow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period 2009 US$000 2008 US$000 (2,449) 3,163 (713) (372) – 415 (122) (3,241) 165 (3,076) (9,184) – – (9,184) 59,617 2,937 62,554 50,294 21,630 (3,267) – 147 (218) (10) (185) 1,002 817 240 (3,050) 22,758 19,948 – 157 157 20,922 708 Cash and cash equivalents at end of period 71,924 21,630 Dialog Semiconductor Plc Annual report and accounts 2009 83 Section 5 | Company financial statements and notes Company financial statements Notes to the Company financial statements For the year ended 31 December 2009 29. Investments This represents the investment of the Company in Dialog Semiconductor GmbH. Investments in subsidiaries are stated at cost less any provision for impairment in value. The aggregate amount of capital and reserves and the results of this undertaking were as follows: 2009 US$0001 (28,226) 25,889 2008 US$000 (3,068) 3,938 At 31 December 2009 US$000 At 31 December 2008 US$000 1,732 1,250 (104) 2,878 – 2,878 173 1,049 – 1,222 – 1,222 2009 US$000 2008 US$000 388 287 675 355 – 355 Capital and reserves Profit (loss) for the year 1) Based on preliminary unaudited results. 30. Deferred tax Net operating loss carryforwards Deferred taxes in relation to tax credits Other Net deferred tax assets Recognised net deferred tax assets Unrecognised deferred tax assets For further information on deferred taxes see note 4. 31. Auditors’ remuneration Auditors' remuneration audit in relation to capital increase 32. Share capital and share options Details of the Company’s share capital and share options are set out in notes 19 and 21. 33. Headcount and costs The Company does not have any employees. 34. Events after the reporting period No subsequent events of material impact occurred after the reporting period. 84 Dialog Semiconductor Plc Annual report and accounts 2009 Section 6 | Additional information 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. 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 company that designs and delivers semiconductors by outsourcing the fabrication (manufacturing) process. Foundry A manufacturing plant where silicon wafers are produced. HiFi High-Fidelity: the reproduction of sound with little or no distortion. 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 organisers, 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. Mixed signal A combination of analog and digital signals being generated, controlled or modified on the same chip. 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. OEM Original Equipment Manufacturer: a company that builds products or components that are used in products sold by another company. OLED Organic Light Emitting Diode. Passive Matrix OLED or PMOLED Passive Matrix OLED a display type formed by creating an array of OLED pixels which are driven by row and column (x-y) coordinates. 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. Smartphone A mobile phone offering advanced capabilities, often with pc-like functionality (PC-mobile handset convergence). A smartphone runs complete operating system software providing a standardised interface and platform for application developers. Smart Mirror™ A technology patented by Dialog Semiconductor which simplifies circuit design and provides very low current consumption in Power Management circuits. SmartXtend™ A technology patented by Dialog Semiconductor that extends the life and reduces power consumption of high- resolution, passive matrix OLED displays. Subcontractor A business that signs a contract to perform part or all of the obligations of another’s contract. TAM Total addressable market TAM measures the potential market for your product – and your product only – assuming you could reach 100% of your customers. USB Universal Serial Bus: a universal interface standard to connect different electronics devices. 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. Dialog Semiconductor Plc Annual report and accounts 2009 85 Section 6 | Additional information Glossary Financial glossary AGM Annual General Meeting. EURIBOR (Euro Interbank Offered Rate) is the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to CAGR Compound Annual Growth Rate: a method of assessing the average another prime bank. growth of a value over time. Freefloat the proportion of an issuer’s share capital that is available for Cash flow The primary purpose of a statement of cash flow is to provide purchase in the public equity markets by investors. relevant information about the cash receipts and cash payments of an Gross margin equals the difference between revenues and cost of sales enterprise during a period. It helps to assess the enterprise’s ability to as presented in the statement of operations. generate positive future net cash flows. A statement of cash flows shall Impairment is the condition that exists when the carrying amount of a explain the change in cash and cash equivalents during the period by long-lived asset exceeds its fair value (the sum of the undiscounted cash classifying cash receipts and payments according to whether they stem flows expected to result from the use and eventual disposition of the asset). from operating, investing, or financing activities. IFRS (International Financial Reporting Standards) accounting standards Cash flow from operating activities includes all transactions and other generally to be used for financial years commencing on or after 1 January events that are not defined as investing or financing activities in paragraphs. 2005 by all publicly-listed European Union companies in compliance with Operating activities generally involve producing and delivering goods and the European Parliament and Council Regulation adopted in July 2002. providing services. Cash flows from operating activities are generally the Prime Standard The new segmentation of the equity market of the cash effects of transactions and other events that enter into the German Stock Exchange comprises a Prime Standard segment in addition determination of net income. Comprehensive Income The purpose of reporting comprehensive income to the General Standard segment that applies the statutory minimum requirements. The Prime Standard segment addresses companies that wish is to report a measure of all changes in equity of an enterprise that result to target international investors. These companies are required to meet high from recognised transactions and other economic events of international transparency criteria, over and above those set out by the the period other than transactions with owners such as capital increases General Standard. or dividends. An example of items effecting comprehensive income is Restructuring charges Costs associated with an exit or disposal foreign currency translation adjustments resulting from the process of activity, e.g. termination benefits provided to employees that are translating an entity’s financial statements in a foreign currency into the involuntarily terminated. reporting currency. Securities Debt securities are instruments representing a creditor Corporate governance is the system by which business corporations are relationship with an enterprise and include government securities, directed and controlled. The corporate governance structure specifies the corporate bonds, commercial paper, and all securitised debt instruments. distribution of rights and responsibilities among different participants in Available-for-sale securities are debt securities not classified as held the corporation, such as the Board, managers, shareholders and other to maturity or trading securities. stakeholders, and spells out the rules and procedures for making decisions Shareholders’ equity reflects the investment of shareholders in a company. on corporate affairs. By doing this, it also provides the structure through Shareholders’ equity comprises ordinary shares, additional paid-in capital, which the company’s objectives are set, and the means of attaining those retained earnings and accumulated other comprehensive income. objectives and monitoring performance. Stock option plans include all agreements by an entity to issue shares of Deferred taxes Deferred tax assets or liabilities are temporary differences stock or other equity instruments to employees. Stock option plans provide between the tax basis of an asset or liability and its reported amount in the employees the opportunity to receive stock resulting in an additional financial statements that will result in taxable or deductible amounts in compensation based on future share price performance. The purpose of future years when the reported amount of the asset or liability is recovered stock option plans is to motivate employees to increase Shareholder value or settled, respectively. on a long-term basis. Derivative financial instruments A financial instrument that derives its Total assets include all current and non-current assets. Total assets equal value from the price or expected price of an underlying asset (e.g. a security, total liabilities and shareholders’ equity. currency or bond). Working capital is represented by the excess of current assets over current Dividends are payments made by a company to its shareholders. liabilities and identifies the relatively liquid portion of total enterprise capital When a company earns a profit, that money can be put to two uses: that constitutes a margin or buffer for meeting obligations within the it can either be re-invested in the business (called retained earnings), ordinary operating cycle of the business. or it can be paid to the shareholders of the company as a dividend. 86 Dialog Semiconductor Plc Annual report and accounts 2009 Section 6 | Additional information Advisers and corporate information Public relations FD Holborn Gate 26 Southampton Buildings London EC4R 9HA UK FD GmbH Park Tower Bockenheimer Anlage 44 60322 Frankfurt am Main Germany Registered office Dialog Semiconductor Plc Tower Bridge House St Katharine’s Way London E1W 1AA UK Website: www.dialog-semiconductor.com Registered number 3505161 Financial calendar Annual General Meeting Q1 2010 Results Q2 2010 Results Q3 2010 Results Preliminary results for 2010 5 May 2010 10 May 2010 20 July 2010 26 October 2010 February 2011 Legal adviser Reynolds Porter Chamberlain LLP Tower Bridge House St Katharine’s Way London E1W 1AA UK Auditors Ernst & Young LLP Apax Plaza Reading Berkshire RG1 1YE UK Principal banker Deutsche Bank AG Global Banking Am Hafenmarkt D-73728 Esslingen Germany Designated sponsor Close Brothers Seydler Schillerstrasse 27-29 D-60313 Frankfurt Germany Shares Information on the Company’s shares and on significant shareholdings can be found on pages 7 to 9. Dialog Semiconductor Plc Annual report and accounts 2009 87 Section 6 | Additional information Group directory Germany Dialog Semiconductor GmbH Neue Strasse 95 D-73230 Kirchheim/Teck-Nabern Germany Phone: (+49) 7021 805-0 Fax: (+49) 7021 805-100 Email: dialog.nabern@diasemi.com United Kingdom Dialog Semiconductor (UK) Ltd Delta 200 Delta Business Park Welton Road Swindon, Wiltshire SN5 7XB,UK Phone: (+44) 1793 757700 Fax: (+44) 1793 757800 Email: dialog.swindon@diasemi.com North America Dialog North America 440 Oakmead Parkway Sunnyvale, CA 94085 USA Phone: (+1) 888-809-3816 Fax: (+1) 408-328-9275 Email: NA_sales_enquiries@diasemi.com Japan Dialog Semiconductor K.K. Mita Kokusai Bldg 16F 1-4-28, Mita, Minato-ku Tokyo, 108-0073 Japan Phone: (+81) 3 3769 8123 Fax: (+81) 3 3769 8124 Email: dialog.tokyo@diasemi.com Taiwan & Greater China Dialog Semiconductor GmbH Taiwan Branch Chu-Nan 3rd Factory No. 118 Chung-Hua Road Chu-Nan, Miao-Li 350 Taiwan R.O.C. Tel: (+852) 9055 3888 Tel: (+886) 22542 1579 Email: dialog.taiwan@diasemi.com Korea Dialog Semiconductor (UK) Ltd Korea Branch #3010, 30th Floor, Trade Tower 159-1, Samsung-Dong, Gangnam-gu, Seoul, 135-729, Korea Phone: (+82) 2 6007 2303 Fax: (+82) 2 6007 2723 Email: dialog.korea@diasemi.com 88 Dialog Semiconductor Plc Annual report and accounts 2009 Designed and produced by 85FOUR. Printed in England by Cousin, environmentally accredited printers, ISO 14001. Dialog Semiconductor Plc Tower Bridge House St Katherine’s Way London E1W 1AA UK www.dialog-semiconductor.com l i D a o g S e m i c o n d u c t o r P l c A n n u a l r e p o r t a n d a c c o u n t s 2 0 0 9 

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