Logistea Annual Report 2006

Plain-text annual report

25 YEARS OF INNOVATIVE DESIGN IN NO VA TION ANNUAL REPORT 2006 N O S E S U O T E V O L E L P O E P S T C U D O R P R E P L A FINANCIAL HIGHLIGHTS HIGH LIGH TS 1,797 1,483 1,268 REVENUE (in millions of U.S. dollars) 1,100 944 736 592 448 99 00 01 02 03 04 05 06 198.9 171.7 181.1 145.6 149.3 123.9 132.2 INCOME (in millions of U.S. dollars) 97.2 98.8 75.0 54.7 41.0 45.1 16.2 30.0 7.1 99 00 01 02 03 04 05 06 OPERATING INCOME NET INCOME SHARE PERFORMANCE (based on an initial investment of 100 Swiss francs) 566 1,120 857 782 618 428 427 100 112 109 100 90 98 63 136 99 00 01 02 03 04 05 06 LOGITECH SWISS PERFORMANCE INDEX MARCH 31,1999 — MARCH 31, 2006 TO OUR SHAREHOLDERS EN We are delighted to present to you Logitech’s Annual Report for Fiscal Year 2006. It has been another successful year for your Company, a year of accelerated revenue growth and many accomplishments. Exceeding the ﬁ nancial goals we had set for ourselves at the beginning of the year, we achieved our eighth year of record sales and proﬁ ts, and our 30th consecutive quarter of double-digit sales growth. The Company sold 143 million products worldwide during the year. We introduced more than 130 new products, helping to maintain our strong global brand and reputation in some categories and to establish ourselves in others. We also completed our new factory in Suzhou, China, which became fully operational in the summer. A NOS ACTIONNAIRS FR Nous sommes heureux de vous présenter le rapport annuel de Logitech pour l’année ﬁ scale 2006, nouvel exercice couronné de succès pour votre entreprise, marqué entre autres par une accélération de la croissance et ponctué de nombreuses réali- sations. Dépassant les objectifs ﬁ nanciers que nous nous étions ﬁ xés, nous avons réalisé la huitième année record en termes de chiffre d’affaires comme de bénéﬁ ce, ainsi que notre 30ème trimestre consécutif de croissance à deux chiffres. Durant ces douze mois, Logitech a vendu 143 millions de produits à travers le monde. Nous avons également introduit plus de 130 nou- veaux produits, ce qui nous a permis de maintenir l’excellente réputation de notre marque sur certains segments et de nous étendre dans d’autres. Nous avons aussi achevé l’installation de notre usine à Suzhou, en Chine, déjà pleinement opérationnelle depuis l’été dernier. AN UNSERE AKTIONÄRINNEN UND AKTIONÄRE DE Wir freuen uns, Ihnen den Geschäftsbericht von Logitech für das Geschäftsjahr 2006 vorlegen zu dürfen. Ihre Gesellschaft kann erneut auf ein erfolgreiches Jahr mit einem beschleunigtem Umsatzwachstum und zahlreichen Errungenschaften zurückblicken. Unsere zu Beginn des Jahres gesetzten Finanzziele wurden übertroffen. So erzielten wir das achte Jahr in Folge Rekordwerte bei Umsatz und Gewinn und das 30. Quartal in Folge ein zweistelliges Umsatzwachstum. Die Gesellschaft hat im Jahresverlauf weltweit 143 Mio. Produkteinheiten abgesetzt. Wir führten über 130 neue Produkte ein und stützten so unsere starke globale Marke. Gleichzeitig stärkte dies unsere Reputation in bestimmten Produktkategorien und erleichterte uns den Aufbau neuer Kategorien. Darüber hinaus haben wir unser neues Werk in Suzhou (China) fertig gestellt und im Sommer vollständig in Betrieb genommen. 1 S. OU NDDIGITAL MUSIC ANYWHERE More ways to appreciate digital music. Une gamme plus large pour apprécier la musique numérique. Noch mehr Möglichkeiten, digitale Musik zu geniessen. Logitech’s revenue grew by 21 percent over FY 2005 to $1.8 billion. Operating income was up by 16 percent to $199 million, and net income was up by 21 percent to $181 million ($1.84 per share). Our gross margin was at the low end of our long-term target range of 32-34 percent, due to the strong growth in our audio category, which has historically included more lower-margin products. Even so, we were able to manage our operating expenses and deliver solid double- digit growth in both operating income and net income. We ended the ﬁ scal year with $231 million in cash, net of short-term debt. This was after investing approximately $241 million in the repurchase of more than 6 million Logitech shares and ADRs as part of our share buyback program, which is our chosen method of returning proﬁ ts to you, in conjunction with the appreciation of our stock. Le chiffre d’affaires de Logitech a progressé de 21% à $1,8 milliard par rapport à l’exercice ﬁ scal 2005. Le bénéﬁ ce opérationnel est en hausse de 16% à $199 millions et le résultat net augmente de 21% à $181 millions ($1,84 par action). En raison de la forte croissance de notre gamme de produits audio à plus faible marge, notre marge brute s’inscrit dans le bas de notre objectif à long terme des 32-34%. Toutefois, nous avons su garder la maîtrise de nos frais opérationnels, ce qui nous a permis de clôturer l’année avec une croissance à deux chiffres, tant du bénéﬁ ce opérationnel que du résultat net. Nous avons terminé l’exercice ﬁ scal avec $231 millions de liquidités nettes après déduction d’environ $241 millions consacrés à l’acquisition de plus de 6 millions d’actions et d’ADRs, dans le cadre de notre programme de rachat d’actions qui, à nos yeux, est le meilleur moyen de vous faire participer aux résultats de la société, en sus de la valorisation de vos actions. Ainsi, durant l’année ﬁ scale écoulée, Der Umsatz von Logitech ist im Geschäftsjahr 2006 um 21% auf USD 1,8 Mrd. gestiegen. Das Betriebsergebnis erhöhte sich um 16% auf USD 199 Mio., der Reingewinn um 21% auf USD 181 Mio. (USD 1,84 je Aktie). Unsere Bruttomarge lag am unteren Ende unserer langfristigen Zielspanne von 32-34%. Dies ist auf das starke Wachstum unseres Audiosegments zurückzuführen, das seit jeher einen höheren Anteil an margenschwächeren Produkten aufweist. Der Betriebsaufwand blieb dennoch unter Kontrolle, und wir konnten ein solides zweistelliges Wachstum von Betriebsergebnis und Reingewinn erzielen. Zum Ende des Geschäftsjahres beliefen sich die liquiden Mittel abzüglich kurzfristiger Verbindlichkeiten auf USD 231 Mio., dies nach Rückkauf von über 6 Mio. Logitech-Aktien und ADR im Gesamtbetrag von rund USD 241 Mio. als Teil unseres Aktienrückkaufprogramms. Dies ist denn auch unsere bevorzugte Methode, in Verbindung mit dem Wertzuwachs der Logitech-Aktie, unsere Aktionäre am Gewinn teilhaben zu lassen. In der Tat stieg die Marktkapitalisierung von Logitech im Geschäftsjahr 2006 von USD 2,9 Mrd. auf USD 3,7 Mrd. Darüber hinaus wurden Investitionen in unsere Informationssysteme getätigt, 3 In fact, Logitech market capitalization grew from $2.9 billion to $3.7 billion in Fiscal 2006. We also invested in information systems that are important to our ability to manage our growth, and we used cash for research and development, operations, infrastructure and marketing to sustain our performance and prepare for our future. We are pleased that all of our sales regions, as well as our OEM sales group, achieved double-digit revenue growth in FY 2006. Compared to Fiscal 2005, the Americas grew by 27 percent, EMEA and Asia Paciﬁ c each grew by 21 percent, while our OEM sales grew by 11 percent. This balanced regional performance underlines one of the elements of the resilience of our business model, because our products appeal to consumers and businesses worldwide. la capitalisation boursière de Logitech a passé de $2,9 à $3,7 milliards. Nous avons investi de façon importante dans les systèmes informa- tiques qui nous permettront de gérer notre croissance et utilisé une partie de nos liquidités pour ﬁ nancer la recherche et le développement, les activités opérationnelles, les infrastructures et le marketing, aﬁ n de soutenir notre performance et de préparer l’avenir. Toutes nos zones géographiques, ainsi que les ventes directes à l’industrie (OEM), ont enregistré une croissance à deux chiffres durant l’année ﬁ scale 2006. En comparaison de l’exercice précédent, les Amériques ont progressé de 27%, l’Europe/Moyen-Orient/Afrique et l’Asie/Paciﬁ que de 21% chacun, tandis que les ventes OEM sont en croissance de 11%. Cette performance souligne l’un des éléments importants de notre «business model»: nos produits plaisent aux particuliers comme aux entreprises, dans l’ensemble du monde. die für die Steuerung unseres Wachstums von grosser Bedeutung sind. Auch für Forschung und Entwicklung, den operativen Bereich, Infra- struktur und Marketing wurden liquide Mittel verwendet, um unsere Leistungsfähigkeit zu erhalten und uns für die Zukunft zu rüsten. Wir sind erfreut, dass sämtliche Vertriebsregionen sowie der OEM- Bereich im Geschäftsjahr 2006 ein zweistelliges Umsatzwachstum erzielten. Im Vergleich zum Geschäftsjahr 2005 legten wir in Nord- und Südamerika um 27%, in Europa, dem Nahen Osten und Afrika bzw. im asiatisch-paziﬁ schen Raum um je21% und im OEM –Bereich um 11% zu. Diese ausgewogene regionale Entwicklung bringt ein zentrales Element der Stärke unseres Geschäftsmodells zum Ausdruck, indem unsere Produkte sowohl für Privat- als auch Geschäftskunden in aller Welt attraktiv sind. Ein Schlüsselfaktor für den Erfolg von Logitech im Berichtsjahr, der uns auch Chancen für die Zukunft eröffnet, ist unsere Fähigkeit, das Potenzial der verschiedensten zentralen Verbrauchertrends weltweit auszuschöpfen. Dazu zählen: A key driver of Logitech’s success this year, one that also brings opportunities for the future, is our ability to leverage multiple key trends among consumers around the world, including: • The growing popularity of digital audio, in the home and on the go. • The increasing pervasiveness of broadband Internet connections in the home, which has led to increased adoption of voice and video communications over the Internet. • The increased complexity and richness of home-entertainment systems in the living room. • The growth and attractiveness of rich media and graphics-intensive applications on PCs and Macs. • The popularity of digital gaming, both on the PC and on consoles. L’un des facteurs clés du succès de Logitech cette année—qui nous ouvre d’ailleurs de belles perspectives d’avenir—tient à notre aptitude à capitaliser sur les diverses tendances dominantes du marché auprès des consommateurs, parmi lesquels on peut citer: • La popularité croissante de l’audio numérique, tant à la maison qu’à l’extérieur. • L’adoption croissante de connections Internet à haut débit dans les foyers, qui permet une utilisation accrue de communications audio et vidéo via Internet. • La complexité croissante et la diversité des systèmes de divertissement installés dans chaque lieu d’habitation. • Le nombre croissant et l’attrait des applications multimédias sur Mac et PC faisant appel à un graphisme sophistiqué. • La popularité des jeux numériques pour consoles et PC. • die wachsende Beliebtheit digitaler Audioprodukte für zu Hause und unterwegs. • die zunehmende Verbreitung von Breitband-Internetanschlüssen bei Privatnutzern, die zu einer Zunahme der Sprach- und Video- kommunikation über das Internet geführt hat. • die steigende Komplexität und Vielfalt von Home-Entertainment- Systeme. • das Wachstum und die Attraktivität von Rich-Media- und graﬁ kintensiven Anwendungen für PC und Mac. • die Beliebtheit von digitalen Spielen auf PC und Spielkonsolen. Millionen von Nutzern speichern und hören bereits digitale Musik auf ihrem Computer, MP3-Player oder iPod®, und ihre Zahl wächst immer schneller. Die von Logitech dazu angebotenen Peripherieg- eräte haben bei diesen Konsumenten grossen Anklang gefunden und 5 Millions of people are storing and playing their digital audio on their PC, MP3 player or iPod®, and the numbers are increasing rapidly. Logitech’s line of peripherals for these consumers has been very successful, contributing to 112 percent sales growth, year over year, for our audio business. The audio category is now Logitech’s second largest business. Among the innovative audio products introduced this year are the Logitech® Z-5450 Digital speakers with dual wireless rear speakers; the Wireless Music System line, which lets you wirelessly stream music from your PC or iPod to your stereo speakers; and speakers and headphones for portable music players. The growing popularity of Internet communications has led to strong demand for our PC headsets and webcams, enabling rich and affordable communication over the Internet. Robust sales of headsets have Des millions d’adeptes stockent et écoutent de la musique numérique sur leur PC, leur lecteur MP3 et leur iPod®. Et leur nombre augmente rapidement. La gamme Logitech de périphériques destinés à ces consommateurs a rencontré un franc succès, contribuant à la hausse de 112% des ventes de produits audio. La catégorie audio est mainten- ant le deuxième secteur d’activités de Logitech. Parmi les innovations introduites durant l’année, notons les haut-parleurs numériques Logitech® Z-5450 comprenant des haut-parleurs arrières doubles, sans ﬁ l; le système de musique «wireless» qui permet la diffusion sans ﬁ l de la musique à partir de votre PC ou de votre iPod® sur les haut-parleurs de votre salon; ainsi que les haut-parleurs et casques pour lecteurs de musique portables. La popularité croissante des communications via Internet a entraîné une forte hausse de la demande pour nos casques et caméras vidéo qui permettent de communiquer facilement, agréablement et à moindre coût, par le biais d’Internet. Les ventes de nos casques ont im Audiosegment zu einem Umsatzwachstum von 112% gegenüber dem Vorjahr beigetragen. Das Audiosegment stellt inzwischen den zweit- grössten Geschäftsbereich von Logitech dar. Zu den im Berichtsjahr eingeführten innovativen Audioprodukten zählen das Lautsprechersystem Logitech® Z-5450 Digital mit zwei kabellosen Rück-Lautsprechern, das Wireless Music System, daskabelloses Musik-Streaming vom PC oder iPod® zu den Lautsprechern der Stereoanlage ermöglicht, sowie Lautsprecher und Kopfhörer für tragbare Musik-Player. Die wachsende Beliebtheit der Internetkommunikation hat zu einer starken Nachfrage nach unseren Headsets und Webkameras für PCs geführt, die eine ausgereifte und erschwingliche Kommunikation über das Internet ermöglichen. Der solide Headseat-Umsatz trug zum bereits erwähnten Wachstum unseres Audiogeschäfts bei. Die erfreulichen Umsatzzahlen bei Webkameras führten darüber hinaus in unserem Videogeschäft zu einem Wachstum von 36% gegenüber C I I N N T T E E R R M E E T T C N N O M M O C I A T E U N I C A TI O U S M M N A D E E A N Y S Keep in touch with friends and family like never before. Encore plus facile de garder le contact avec vos amis et votre famille. Bleiben Sie wie nie zuvor mit Freunden und Familie in Verbindung. contributed to the previously mentioned growth in our audio business. And strong sales of webcams have resulted in year-over-year growth of 36 percent in our video business. Among the innovative new video products introduced this year are the QuickCam® Fusion™ and QuickCam® for Notebooks Pro, as well as the Logitech® Video Effects™ software. The Video Effects software, a key differentiator available only with Log- itech webcams, has become very popular because it lets people transform themselves into fun characters and add face accessories while they are chatting with friends and family over an Internet connection. With the addition of high-deﬁ nition TVs and other new components to people’s home-entertainment systems,, the living room is becoming richer, but d’ailleurs contribué à la croissance de nos activités audio évoquée précédemment. Quant aux caméras web (webcams), leur succès s’est traduit par une croissance de 36% de notre secteur vidéo par rapport à l’exercice précédent. Parmi les innovations introduites dans notre gamme de produits vidéo, citons la QuickCam® Fusion™, une webcam destinée aux ordinateurs de bureaux, la QuickCam® pour Notebooks Pro, conçue spécialement pour les ordinateurs portables, et le logiciel Logitech® Video Effects™. Ce logiciel, uniquement disponible avec les webcams Logitech, est un élément clé de différentiation. Sa popularité tient au fait que les gens peuvent se grimer et adopter les traits de personnages amusants pendant qu’ils parlent avec leurs amis ou les membres de leur famille via Internet. La télévision à haute déﬁ nition et les autres com- posants des systèmes de divertissement à domicile rendent sans conteste l’expérience de l’utilisateur plus riche, mais également plus complexe. Parce dem Vorjahr. In diesem Segment wurden im Berichtsjahr unter anderem die innovativen Videoprodukte QuickCam® Fusion™ und QuickCam® for Notebooks Pro sowie die Logitech® Video Effects™ Software lanciert. Die Video Effects Software—ein Produkt, mit dem sich Logitech deutlich abhebt und das nur mit Logitech-Webkameras eingesetzt werden kann—erfreut sich grosser Beliebtheit, da sich der Nutzer während des Gesprächs mit Freunden oder der Familie über das Internet in lustige Figuren verwandeln oder für sein Gesicht Accessoires auswählen kann. Mit dem Angebot an hochauﬂ ösenden Fernsehern (HDTV) und anderen neuen Komponenten für Home-Entertain- ment-Systeme wird das Unterhaltungsprogramm im Wohnzimmer zwar reichhaltiger, jedoch auch komplexer. Eine zunehmend nachgefragte Lösung bietet deshalb die Harmony®-Fernbedienung von also more complex. The line of Logitech Harmony® remotes is becoming widely acknowledged as the answer to this complexity, with sales of Harmony remotes continuing to grow in the U.S., and beginning to accelerate in Europe. The Harmony line represents our strongest move to date into the living room and the new digital home. Its potential to become the universal control device for enjoying digital entertainment across the home is signiﬁ cant. Increasing numbers of people are using their PC to work or play with rich media—such as video, large graphical images, sound and games—as well as with other applications that generate large ﬁ les. For greater comfort and performance, these people turn to Logitech for mice, key- boards and other control devices. This year, Logitech incorporated laser optical technology into a wider range of its desktop and notebook qu’elle permet de maîtriser cette complexité, la ligne de télécommandes universelles Logitech Harmony® s’est imposée comme la solution de choix. Les ventes de ces télécommandes ont continué leur progression aux Etats-Unis et elles commencent à s’accélérer en Europe. La gamme de produits Harmony représente notre plus sérieuse incursion dans le salon des particuliers et dans la «maison digitale». Son futur est prometteur et nous pensons que les produits de la gamme ont le potentiel pour s’imposer en tant que commandes de référence pour le divertissement numérique à la maison. Un nombre croissant de personnes utilise leur PC pour travailler ou jouer avec des médias enrichis—tels la vidéo, les images graphiques, le son et les jeux—mais aussi utilise d’autres applications générant des ﬁ chiers de taille importante. Pour des performances et une facilité d’utilisation accrues, ces utilisateurs ont recours aux souris, claviers et autres périphériques de contrôle que leur offre Logitech. Cette année, nous avons introduit une technologie optique au laser dans Logitech. So sind in den USA die Verkaufszahlen für dieses Produkt weiter gestiegen, während sich das Umsatzwachstum in Europa zu beschleunigen beginnt. Die Harmony-Serie stellt unseren bisher stärktsten Vorstoss in die Wohnzimmer unserer Kunden und das neue digitale Heim dar. Das Produkt bietet enormes Potenzial, um sich als Universalfernbedienung für digitale Unterhaltung im gesamten Wohnbereich zu etablieren. Immer mehr Menschen verwenden bei Arbeit und Spiel mit ihrem Computer Rich Media (z.B. Video, grosse Graﬁ ken, Audio und Spiele) oder andere Anwendungen, die grosse Dateien erzeugen. Dem Bedürfnis nach grösserer Benutzerfreundlichkeit und Leistungsfähig- keit wird Logitech mit seinem Angebot an Mäusen, Tastaturen und anderen Steuergeräten gerecht. Im Berichtsjahr statteten wir eine breitere Palette von Mäusen für Desktops und Notebooks mit laser- optischer Technologie aus und führten innovative Maus-Tastatur- Kombinationen ein, um den Kunden eine benutzerfreundliche 9 T R O F M O C D N A Y T I L I B A T R O P R O F S N O T U L O S I T O N O B E K O Performance and design for your notebook. Performance et design pour votre portable. Leistungsfähigkeit und Design für Ihr Notebook. mice, and introduced innovative new keyboard-and-mouse combinations, to ensure that customers can navigate comfortably through their applications and ﬁ les. In addition, Logitech began marketing the NuLOOQ navigator™, an innovative device, used in conjunction with a mouse, that brings new levels of control to creative professionals who use the Adobe® Creative Suite 2 on their Mac. PC and console gaming continue to be popular around the world, and Logitech’s range of peripherals is designed to enhance the gaming experience, for casual gamers as well as for expert gamers. For PCs, the high-performance gaming mice and keyboards, introduced last year, have become very popular. Logitech’s products for the PSP™ handheld entertainment system have also been well received, especially the PlayGear™ Pocket case. une large gamme de souris de bureau et d’ordinateurs portables. Nous avons également lancé des combinaisons innovantes clavier-souris, aﬁ n que les consommateurs puissent naviguer confortablement à travers leurs applications et leurs dossiers. De plus, Logitech a lancé la commercialisation du NuLOOQ navigator™, un système novateur qui, utilisé avec une souris, amène de nouveaux niveaux de contrôle aux créatifs utilisant Adobe® Creative Suite 2 sur leur Mac. Les jeux vidéo sur PC et consoles sont toujours prisés à travers le monde et la gamme de périphériques Logitech a été conçue aﬁ n d’accroître le plaisir des joueurs, amateurs et experts. Introduits l’an dernier, les souris et claviers à haute performance pour PC jouis- sent d’une grande popularité, tout comme les produits Logitech pour les systèmes portables PSP™ qui ont rencontré un accueil très favorable, en particulier l’étui PlayGear™ Pocket. Navigation durch Anwendungen und Dateien zu ermöglichen. Zusätzlich begann Logitech mit dem Vertrieb des innovativen NuLOOQ Navigator™, der zusammen mit einer Maus benutzt wird und kreativen professionellen Mac-Nutzern, die mit der Adobe® Creative Suite 2 arbeiten, neue Steuerungsmöglichkeiten eröffnet. Spiele für PC und Spielkonsolen erfreuen sich weltweit weiterhin grosser Beliebtheit. Die Peripheriegeräte von Logitech sollen das Spielerlebnis sowohl für Gelegenheitsspieler als auch für Proﬁ spieler steigern. Im PC-Spielebereich sind die im Berichtsjahr eingeführten hochleistungsfähigen Mäuse und Tastaturen äusserst populär geworden. Auch die Logitech-Produkte für das PSP™ Handheld Entertainment System wurden vom Markt gut aufgenommen, insbesondere die PlayGear™ Pocket-Box. Logitech wurde im Oktober 1981 gegründet und feiert somit in diesem Jahr sein 25-jähriges Jubiläum. Dies soll uns zu einem kurzen 1111 P R D W O R K I N O O U F M C TI O R T A T V D N C I N Y S I T Y L E Become more productive while adding a sense of style and personality to your workspace. Soyez plus productif en ajoutant une touche de style et de personnalité à votre espace de travail. Produktiver werden und gleichzeitig dem individuellen Arbeitsplatz Stil und eine persönliche Note verleihen. Logitech was founded in October 1981, so this year marks the Company’s 25th anniversary. The anniversary provides us an opportunity to reﬂ ect brieﬂ y on the past. Logitech was founded at the beginning of the personal computer industry—the same year in which the IBM PC was introduced—during a time of excitement and anticipation about the possibilities for signiﬁ cantly enhancing ordinary people’s lives with technology. Logitech has been a part of this industry for 25 years, and we are proud to have contributed to its success. We have seen the transformations, the challenges, the hopes and dreams that have come true, as well as the setbacks and difﬁ culties—all of which have brought us to where we are today. It has been an amazing and rewarding journey. In your Annual Report package you will ﬁ nd a T-shirt commemorating our 25th anniversary. We hope you’ll wear it with the same pride we feel as we look back. Fondée en octobre 1981, Logitech fête cette année son 25ème anniversaire. Une étape importante qui nous donne l’opportunité de faire un bref retour en arrière. La société a vu le jour à une époque où l’industrie des ordinateurs personnels faisait ses débuts, de fait l’année où IBM introduisait son premier PC. Epoque excitante, où le potentiel de l’informatique semblait illimité et allait changer la façon de vivre de tout un chacun. Logitech fait partie de cette industrie depuis 25 ans et nous sommes ﬁ ers d’avoir contribué à son succès. Nous avons participé à ses transformations, vécu ses déﬁ s, ses espoirs et ses rêves devenus réalité. Et nous avons aussi survécu à ses revers et ses difﬁ cultés. Ces expériences nous ont amenés là où nous sommes aujourd’hui. Ce fut une expérience fantastique et extraordinairement riche. Dans la pochette contenant votre rapport annuel, vous trouverez un T-shirt commémorant notre 25ème anniversaire. Nous espérons que vous le porterez avec le même sentiment de ﬁ erté que nous ressentons lorsque nous jetons un regard sur ces années passées. Rückblick in die Vergangenheit veranlassen. Das Unternehmen wurde gleichzeitig mit dem Beginn der PC-Branche gegründet—im Jahr der Einführung des IBM-PCs. Damals herrschten grosse Begeisterung und Vorfreude über die Möglichkeiten, den Alltag der Menschen dank neuer Technologien deutlich zu verbessern. Logitech ist seit 25 Jahren Teil dieser Branche, und wir sind stolz, zu ihrem Erfolg massgeblich beigetragen zu haben. Wir waren Zeuge von Veränderungen, Her- ausforderungen, Hoffnungen und Träumen die in Erfüllung gingen, aber auch von Rückschlägen und Schwierigkeiten. Alle diese Erfah- rungen haben uns dahin gebracht, wo wir heute stehen, und lassen uns auf eine faszinierende Reise zurückblicken, die sich gelohnt hat. Zusammen mit unserem Geschäftsbericht erhalten Sie deshalb aus Anlass unseres 25-jährigen Jubiläums ein T-Shirt, mit dem wir Sie an unserem Stolz auf die Geschichte unseres—Ihres—Unternehmens teilhaben lassen möchten. 13 What is notable to us is that 25 years later, the excitement and sense of possibility are just as alive—if not more so—as they were those many years ago. The personal computer industry—which is now a $300 billion dollar industry—is still transforming and full of opportunity. Logitech’s original vision, that the interface between the person and the tech- nology would play a central role in the way people get the most out of their experience in the digital world, is becoming a more and more visible reality. As the excitement and innovation move beyond just the PC or Mac to other platforms that enable a very rich digital lifestyle, Logitech’s personal peripherals create new and inspiring opportunities, especially in the areas of digital audio, Internet communications and home entertainment. Ce qui est vraiment encourageant, c’est que 25 ans plus tard, nous ressentons toujours la même exaltation et que les opportunités semblent toujours aussi excitantes—si ce n’est plus—qu’à nos débuts. L’industrie informatique—qui est aujourd’hui un marché de quelque $300 milliards—est encore et toujours en pleine mutation et riche de promesses. La vision originelle de Logitech, selon laquelle l’interface entre l’homme et la technologie allait jouer un rôle crucial et permettre aux utilisateurs de vivre intensément le monde numérique, est une réalité de plus en plus évidente. Alors que l’innovation et la technologie évoluent au-delà du PC ou du Mac vers d’autres plateformes numéri- ques, qui permettent de proﬁ ter pleinement du monde digital, les périphériques de Logitech ouvrent de nouveaux horizons dans les secteurs de l’audio numérique, des communications Internet et du divertissement à domicile. Besonders bemerkenswert ist, dass auch nach 25 Jahren die Begeisterung und der Glaube an das Potenzial ungebrochen anhalten. Die PC-Branche, die inzwischen USD 300 Mrd. umsetzt, beﬁ ndet sich weiterhin im Wandel und bietet unzählige Möglich- keiten. Dabei wird die ursprüngliche Vision von Logitech mehr und mehr Realität, wonach die Schnittstelle zwischen Anwender und Technologie eine zentrale Rolle spielt, wie die Anwender ihre Erfah- rungen mit der digitalen Welt am besten nutzen können. Die Begeisterung und der Ideenreichtum greifen inzwischen vom PC oder Mac auf andere Plattformen über, die einen vielfältigen „digitalen Lebensstil“ erlauben. Logitech unterstützt diesen Trend mit Peripheriegeräten, die vor allem in den Bereichen digitale Audiosysteme, Internetkommunikation und Home-Entertainment neue und aufregende Möglichkeiten eröffnen. It is also beneﬁ cial to reﬂ ect on what has made Logitech successful. A key factor is our business model. Our portfolio approach to products provides us with resilience—if there is a weakness in one product category, other categories can compensate. Another successful aspect of our business model can be expressed with a metaphor: “We are chefs, not farmers.” We work with the farmers on what they are cultivating, and we then take the best ingredients and put them together in innovative recipes that appeal to our customers. What this means for us, for example, is that we partner with companies who supply us with the very best components and technologies for laser optics or Bluetooth® wireless connectivity. And we partner with other companies on materials for creating the right look and feel of a product. Out of Après 25 ans, il est aussi intéressant de se pencher sur les raisons du succès de Logitech. L’un des facteurs-clés est sans doute notre «business model». La diversiﬁ cation de notre portefeuille de produits nous permet de jouer dans plusieurs catégories: si une catégorie s’affaiblit, d’autres peuvent prendre le relais. Un autre avantage peut être exprimé par la métaphore suivante: «nous sommes des chefs de cuisine et non des fermiers». Nous recherchons les meilleurs ingré- dients et les associons par des recettes qui séduisent nos clients. Ainsi, nous travaillons en partenariat avec des entreprises qui nous fournissent les meilleurs composants et les meilleures technologies dans les secteurs de l’optique au laser et de la connectivité sans ﬁ l Bluetooth®. Nous sommes également en contact avec des sociétés spécialisées dans le domaine des matériaux, qui nous aident à concevoir des produits d’aspect, de texture et d’utilisation agréables. En incorpo- rant ces divers ingrédients, nous Interessant ist rückblickend auch die Frage nach den Gründen des Erfolgs von Logitech. Ein zentraler Faktor ist unser Geschäftsmodell. Unser Ansatz bezüglich Produktportfolio sorgt für Stabilität. Zeigt eine Produktkategorie Schwächeanzeichen, wird dies durch andere Kategorien ausgeglichen. Ein weiterer Erfolgsfaktor unseres Ge- schäftsmodells lässt sich durch folgendes Bild verdeutlichen: “Wir sind Köche, nicht Landwirte”. In diesem Sinn arbeiten wir zwar mit den Landwirten zusammen, wählen als Koch aber selber die besten Produkte und Zutaten aus und kreieren daraus innovative Rezepte, die dem Kunden munden. Konkret bedeutet dies, dass wir mit Unternehmen zusammen arbeiten, die uns mit den besten Komponenten und Technologien versorgen, zum Beispiel für Laseroptik-Produkte oder kabellose Bluetooth®-Verbindungen. Von wieder anderen Unternehmen werden wir darin unterstützt, wenn es um das passende Material für das gewünschte Design und den optimalen 15 PLAY TINEXTREME PERFORMANCE Command the game and play in style. Soyez maître du jeu et jouez avec classe. Das Spiel beherrschen—mit Stil. these ingredients we develop products that consumers want to buy and are delighted to use. Because we are selecting the best ingredients as we need them, we can be ﬂ exible and responsive, to bring the right products to market in a timely fashion, and to face the market and competitive challenges that we meet along the way. We begin Fiscal Year 2007, and our year of celebrating the 25th anniversary, with the best blend of the old and the new, both in terms of our products and our people. While we retain leadership in our core product categories, we also are gaining signiﬁ cant momentum and leadership in new categories. Through employees who have been with the company for many years, we have the wisdom of experience, from our successes as well as our développons des produits que les consommateurs veulent acheter et qu’ils ont plaisir à utiliser. En sélectionnant les meilleurs fournisseurs, en fonction de nos besoins, nous pouvons être ﬂ exibles, à l’écoute du marché, et commercialiser les bons produits, au bon moment. Cette façon de faire nous a permis de demeurer compétitifs et de faire face aux déﬁ s que nous rencontrons chaque jour. Nous entamons l’année ﬁ scale 2007, année de notre 25ème anniversaire, proﬁ tant au mieux de l’équilibre entre «expérience»—notre acquis, notre savoir—et «renouveau constant»—notre futur, nos déﬁ s permanents—tant en termes de collaborateurs que de produits. Nous gardons notre leadership dans nos principales catégories de produits, tout en faisant notre place dans de nouveaux segments de marché. Grâce aux collaborateurs qui sont restés ﬁ dèles à Logitech pendant de nombreuses années, nous avons la sagesse qui vient de l’expérience, tirée aussi bien de nos succès que de nos revers. Fruit de notre croissance et en complément à nos collaborateurs conﬁ rmés, partout Benutzerkomfort eines Produkts geht. Aus diesen Komponenten werden Produkte entwickelt, die beim Kunden Kauﬁ nteresse wecken und von diesem gerne benutzt werden. Da wir entsprechend unseren Anforderungen die besten Komponenten auswählen, können wir ﬂ exi- bel auf die Marktbedürfnisse reagieren, die entsprechenden Produkte zeitnah anbieten und den ständigen Herausforderungen des Marktes und des Wettbewerbs begegnen. Das Geschäftsjahr 2007 und unser 25-jähriges Jubiläum starten wir mit der idealen Mischung aus Altbewährtem und Neuem, sowohl hinsichtlich unserer Produkte als auch unserer Mitarbeiter. Wir behaupten nicht nur unsere Spitzenposition in unseren Kern- produktkategorien, sondern bauen darüber hinaus unseren Marktanteil und unsere Leadership in neuen Kategorien deutlich aus. Dank unserer langjährigen Mitarbeiter verfügen wir über wertvolle Erfahrungen, die aus Erfolgen und Fehlern gewonnen wurden. Diese dem Unternehmen seit vielen Jahren treuen Beschäftigten werden 17 mistakes. Complementing the company veterans are new employees around the world—a beneﬁ t of our growth—who bring different perspectives and professional experience. We added 400 new members to Logitech’s professional staff in the past 12 months. And, three new senior executives complement our strong management team. They come from senior positions held in much larger companies, and will be key contributors to help Logitech scale as we grow. Mark J. Hawkins recently joined the company from a career at Dell and Hewlett-Packard, as our Senior Vice President of Finance and Information Systems and Chief Financial Ofﬁ cer. L. Joseph Sullivan, who joined us last year from Carrier Corporation, a subsidiary of United Technologies, has recently been promoted to Senior Vice President of Worldwide Operations, suc- ceeding Company veteran Erh-Hsun Chang, who we are presenting dans le monde, nous pouvons compter sur de nouvelles forces qui nous enrichissent par l’apport de leurs visions et de leurs expériences professionnelles. Ainsi, au cours des douze derniers mois, nous avons engagé 400 nouveaux professionnels, dont trois nouveaux directeurs qui sont venus compléter notre solide équipe de management. Tous trois ont occupé des postes clés dans des sociétés de premier plan et ils nous aideront à gérer notre croissance. Mark J. Hawkins vient tout juste de nous rejoindre en tant que Senior Vice President «Finance & Information Systems» et Directeur Financier (CFO), après avoir fait carrière chez Dell et Hewlett Packard. Entré chez Logitech l’an dernier, après avoir quitté Carrier Corporation, une ﬁ liale de United Tech- nologies, L. Joseph Sullivan vient d’être promu Senior Vice President «Worldwide Operations», succédant à Erh-Hsun Chang que nous vous proposerons d’élire à notre Conseil d’administration. Gerald P. Quindlen, Senior Vice President «Sales and Marketing», rejoint Logitech après avoir mené une carrière remarquable chez Kodak. ergänzt durch neue Mitarbeiter aus aller Welt—ein positiver Effekt unseres Wachstums—, die unterschiedliche Perspektiven und fachliche Erfahrung einbringen. In den letzten 12 Monaten haben wir 400 neue Fachkräfte eingestellt. Darüber hinaus wird unser bereits starkes Managementteam durch drei neue Geschäftsleitungsmitglieder erweitert, die bisher alle Führungspositionen in wesentlich grösseren Unternehmen bekleideten und entscheidend zum künftigen Wachstum von Logitech beitragen werden. Mark J. Hawkins, der vor kurzem von Dell and zuvor Hewlett-Packard zu uns gestossen ist, nimmt die Funktion eines Senior Vice President of Finance and Information Systems und Chief Financial Ofﬁ cers ein. L. Joseph Sullivan, der letztes Jahr von Carrier Corporation, einer Tochtergesellschaft von United Technologies, zu uns wechselte, wurde vor kurzem zum Senior Vice President of Worldwide Operations befördert. Er folgt damit auf Erh- Hsun Chang, der Logitech seit langem angehört und nun zur Zuwahl in den Verwaltungsrat vorgeschlagen wird. Gerald P. Quindlen to you for election to the Logitech Board of Directors. And Gerald P. Quindlen joined the company as Senior Vice President of Sales and Marketing, after a successful career at Kodak. More than ever, with a 25-year perspective, we see how our employees—more than 7,200 at the end of Fiscal Year 2006— are a critical asset for Logitech. It is through their passion and dedication, contribution and consistent execution that we continue to offer innovative, high-quality products to delight our customers. Investing in their professional development is a focus for the Company. We are continuing the program started last year to develop our future leaders. And we are also maintaining a focus on making continuous training a part of every employee’s job. Plus que jamais, ces 25 années d’expérience nous font comprendre à quel point nos collaborateurs— plus de 7200 à ﬁ n mars 2006—représentent la pierre angulaire de Logitech. C’est grâce à leur passion et à leur engagement, à leur contribution et à leur rigueur d’exécution que nous pouvons continuer à offrir des produits innovants et de qualité, pour satisfaire au mieux nos clients. Le développement professionnel de nos collaborateurs est donc de première importance pour la société et nous entendons poursuivre le programme, initié l’an dernier, destiné à former nos futurs dirigeants. Nous allons également poursuivre nos efforts dans la formation con- tinue, qui est une partie intégrante de chaque emploi chez Logitech. La loyauté de nos clients envers notre marque est un actif extrême- ment précieux. Dans pratiquement tous les pays du monde, les consommateurs utilisent nos produits, les recommandent à leurs schliesslich trat nach einer erfolgreichen Karriere bei Kodak unserer Gesellschaft als Senior Vice President of Sales and Marketing bei. Ausgehend von unserer 25-jährigen Erfahrung betrachten wir unsere Mitarbeiter—zum Ende des Geschäftsjahres 2006 über 7’200—mehr denn je als entscheidenden Erfolgsfaktor von Logitech. Dank ihres begeisterten und engagierten Einsatzes sowie ihres unablässigen Beitrags zur Unternehmensent- wicklung können wir unsere Kunden weiterhin mit innovativen und qualitativ hochwertigen Produkten erfreuen. Im Zentrum stehen deshalb Investitionen in die beruﬂ iche Weiterentwicklung unserer Mitarbeiter. Das im letzten Jahr begonnene Programm, unsere Führungskräfte von morgen auf ihre Aufgabe vorzubereiten, wird fortgesetzt. Ein weiterer Schwerpunkt ist und bleibt daneben die kontinuierliche Fortbildung sämtlicher Mitarbeiter. 19 CO NT ROL HOME ENTERTAINMENT MADE SIMPLE One-touch activity control to tame your home-entertainment system. Une télécommande universelle pour apprivoiser votre système de divertissement. Einmal berühren—und Sie haben Ihr Heimunterhaltungssystem im Griff. Brand loyalty among our customers is also a precious asset for us. Consumers in virtually every country in the world are using our products, and recommending them to friends, colleagues and family, and we strive to maintain their loyalty and trust. Our partners are equally important to Logitech. Over the course of these past 25 years, we have developed lasting relationships with leading distribution and retail partners, technology suppliers and platform companies. On the occasion of this 25th anniversary, we wish to offer them our sincere gratitude. Logitech’s Board of Directors continues to serve the Company well, with signiﬁ cant breadth of experience among the members. We are truly fortunate to have amis, leurs collègues et aux membres de leur famille. Tout est mis en œuvre pour continuer à mériter cette conﬁ ance et cette loyauté. Nos partenaires sont également très importants pour Logitech. Durant ces 25 dernières années, nous avons eu le privilège de développer des relations étroites avec des développeurs, des fournisseurs de technologie et des fabricants de premier plan. A l’occasion de notre 25ème anniversaire, nous tenons à leur exprimer notre sincère gratitude. Le Conseil d’administration de Logitech, qui réunit un large éventail de compétences, est un formidable atout pour la société. Nous pouvons en effet compter sur une équipe de conseillers qui offre une vision très large. Nous apprécions au plus haut point leurs contributions et désirons remercier tout spéciale- ment Frank Gill, qui se retire de notre Conseil après sept ans de services, dont deux en tant que Lead Independant Director. Die Loyalität der Kunden gegenüber unserer Marke ist für uns eben- falls von grösster Bedeutung. Unsere Produkte werden in fast allen Ländern der Welt verwendet. Unsere Kunden empfehlen sie an ihre Freunde, Kollegen und Familien weiter, und wir setzen alles daran, ihre Loyalität und ihr Vertrauen aufrechtzuerhalten. Auch die Beziehungen zu den Partnern von Logitech sind für uns äusserst wichtig. Im Laufe der vergangenen 25 Jahre haben wir langfristige Beziehungen mit führenden Vertriebs- und Einzelhandelspartnern, Technologieunternehmen und Plattformanbietern aufgebaut. An- lässlich unseres 25-jährigen Jubiläums möchten wir diesen Partnern unseren aufrichtigen Dank aussprechen. Die Mitglieder des Verwaltungsrats von Logitech leisten mit ihrem reichen Erfahrungsschatz einen anhaltend wert- vollen Beitrag zur Unternehmensentwicklung. Wir schätzen uns glücklich, mit diesem Gremium über 21 D ES IGNDESIGNED TO MOVE YOU™ a group of advisors with such rich perspectives. We value all their contributions, and wish to offer special acknowledgement to Frank Gill, who is retiring from the Board after seven years of service, including two years as our Lead Independent Director. We also wish to thank you for your sustained support and conﬁ dence in the Company as we build on our current solid foundation to create the Logitech of the next 25 years. DANIEL BOREL Chairman of the Board GUERRINO DE LUCA President and Chief Executive Ofﬁ cer Nous voulons également vous remercier, vous nos actionnaires, de votre soutien sans faille et de votre conﬁ ance dans Logitech, en nous réjouissant de voir votre société entamer un nouveau quart de siècle sur des bases solides. DANIEL BOREL Chairman of the Board GUERRINO DE LUCA President and Chief Executive Ofﬁ cer Berater mit derart vielfältigen Perspektiven zu verfügen. Wir danken allen Verwaltungsratsmitgliedern herzlich für ihren Beitrag. Ein besonderer Dank gilt Frank Gill, der nach sieben Jahren, ein- schliesslich zwei Jahren als Lead Independent Director, aus dem Verwaltungsrat ausscheidet. Wir möchten auch Ihnen, verehrte Aktionärinnen und Aktionäre, her- zlich danken für Ihre fortwährende Unterstützung und Ihr Vertrauen in unsere Gesellschaft. Sie erlauben es uns, auf der Basis eines soliden Fundaments die Logitech der nächsten 25 Jahre zu schaffen. DANIEL BOREL Chairman of the Board GUERRINO DE LUCA President and Chief Executive Ofﬁ cer 23 LOGITECH EXECUTIVE OFFICERS Daniel Borel Chairman of the Board Guerrino De Luca President and Chief Executive Ofﬁ cer Mark J. Hawkins Senior Vice President, Finance and Information Systems, Chief Financial Ofﬁ cer David Henry Senior Vice President, Control Devices Junien Labrousse Senior Vice President, Entertainment and Communications Gerald P. Quindlen Senior Vice President, Worldwide Sales and Marketing L. Joseph Sullivan Senior Vice President, Worldwide Operations Robert Wick Senior Vice President, Strategy BOARD OF DIRECTORS Daniel Borel Chairman of the Board Guerrino De Luca President and Chief Executive Ofﬁ cer Gary Bengier Former Senior Vice President, eBay Inc. Matthew Bousquette Former President Mattel Brands, Mattel, Inc. Erh-Hsun Chang Former Senior Vice President, Worldwide Operations and General Manager, Far East Logitech (To be presented to the shareholders at the Annual General Meeting in June 2006) Kee-Lock Chua Managing Director, Walden International (To be presented to the shareholders for re-election at the Annual General Meeting in June 2006) Frank Gill Former Executive Vice President, Intel Corporation (Retiring from the Board of Directors in June 2006) Shin’ichi Okamoto Research and Development Consultant, Former Chief Technology Ofﬁ cer, Sony Computer Entertainment Inc. Monika Ribar Chief Financial Ofﬁ cer, Senior Vice President of Finance and Information Systems, Panalpina Management Ltd. Visit www.logitech.com for a complete list of Logitech locations Holding Company Logitech International S.A. CH-1143 Apples Switzerland Americas Headquarters Logitech Inc. 6505 Kaiser Drive Fremont, CA 94555 United States Asia Paciﬁ c Headquarters Logitech Asia Paciﬁ c Ltd. Room 1408-10, China Resources Building 26 Harbour Road Wanchai, Hong Kong Europe Headquarters Logitech Europe S.A. Moulin du Choc D CH-1122 Romanel-sur-Morges Switzerland Japan Headquarters Logicool Co. Ltd. Iidabashi MF Bldg., 3F 1-1 Shin Ogawamachi, Shinjuku-ku Tokyo, 162-0814, Japan Worldwide Operational Headquarters Logitech Far East Ltd. #2 Creation Road IV Science-Based Industrial Park Hsinchu, Taiwan Manufacturing Logitech Technology (Suzhou) Co. Ltd. NO. 3, Song Shan Road New District Suzhou City, PRC 215129 © 2006 Logitech. All rights reserved. Logitech, the Logitech logo, and other Logitech marks are owned by Logitech and may be registered. All other trade- marks are the property of their respective owners. LOGITECH FINANCIAL REVIEW 6 0 0 2 T A B L E O F C O N T E N T S T A B L E D E S M A T I È R E S I N H A L T Report on Corporate Governance Logitech’s Report on Corporate Governance provides information on the Company’s structure, its Board members and executive officers, and its corporate governance practices. This Report includes information required by the directives of the SWX Swiss Exchange for SWX-listed issuers and the U.S. Securities and Exchange Commission for foreign registrants. Rapport sur la Gouvernance d’enterprise Le Rapport sur la Gouvernance d’entreprise de Logitech fournit des informations sur la structure de I’entreprise, la composition de son Conseil d’administration, ses cadres dirigeants et ses règles internes. Ce rapport contient aussi les informations requises par les directives de la Bourse suisse SWX pour les entreprises cotées et de la Securities and Exchange Commission américaine pour les entreprises enregistrées à l’étranger. Bericht zur Corporate Governance Der Bericht von Logitech zur Corporate Governance stellt Informationen betreffend die Struktur der Gesellschaft, die Mitglieder von Verwaltungsrat und Geschäftleitung sowie die Corporate Governance-Grundsätze zur Verfügung. Darüber hinaus sind in diesem Bericht Informationen enthalten, die gemäss den Richtlinien der SWX Swiss Exchange für an der SWX gelistete Emittenten und der U.S. Securities and Exchange Commission für kotierte ausländische Unternehmen anzugeben sind. Form 20-F Logitech’s Form 20-F is its annual report to shareholders. The Form 20-F provides information about the Company’s business and operational risks; information about its business and industry; a discussion and analysis of operating results and financial condition; and audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The Form 20-F is required by the U.S. Securities and Exchange Commission (SEC) for foreign registrants and, along with the Report on Corporate Governance, is filed with the SEC. Formulaire 20-F Le Formulaire 20-F de Logitech est le rapport annuel présenté aux actionnaires. Il donne des informations sur les risques commerciaux et opérationnels encourus par l’entreprise, sur son activité et son secteur, ainsi qu’un rapport commenté et une analyse de ses opérations. Par ailleurs il fournit des informations sur la situation financière de l’entreprise et ses résultats, ainsi que les états financiers consolidés et vérifiés, préparés conformément aux normes comptables communément admises aux États-Unis. Le Formulaire 20-F répond aux exigences de la Securities and Exchange Commission américaine envers les entreprises enregistrées à l’étranger. Il est soumis à cette Commission comme le Rapport sur la Gouvernance d’entreprise. “Form 20-F” “Form 20-F” von Logitech ist ihr Geschäftsbericht zuhanden der Aktionäre. “Form 20-F” enthält Informationen über die Markt- und operativen Risiken der Gesellschaft, Angaben zu Geschäftsbereichen und Branche, eine Erörterung und Analyse der operativen Ergebnisse und Finanzlage sowie geprüfte Konzernabschlüsse, die nach in den USA allgemein anerkannten Rechnungslegungsgrundsätzen erstellt wurden. “Form 20-F” wird von der U.S. Securities and Exchange Commission (SEC) von kotierten ausländischen Unternehmen verlangt und wird, gemeinsam mit dem Bericht zur Corporate Governance, der SEC eingereicht. Logitech International S.A., Apples — Swiss Statutory Financial Statements The Swiss Statutory Financial Statements provide the stand-alone audited results of Logitech’s parent company, Logitech International S.A., Apples. These financial statements and accompanying disclosures are presented in Swiss francs and are prepared in accordance with Swiss Law. Logitech International S.A., Apples — Etats financiers réglementaires suisses Les états financiers réglementaires suisses fournissent les résultats isolés et vérifiés de la maison mère de Logitech, Logitech International S.A., à Apples. Ces états financiers et les informations qui les accompagnent sont présentés en francs suisses et préparés conformément à la réglementation helvétique. Logitech International S.A., Apples — Gesetzlicher Jahresabschluss nach Schweizer Recht Im gesetzlichen Jahresabschluss nach Schweizer Recht sind die separat ausgewiesenen geprüften Ergebnisse von Logitech International S.A., Apples, der Muttergesellschaft von Logitech, enthalten. Dieser Jahresabschluss mit den damit verbundenen Angaben wird in Schweizer Franken und nach Schweizer Recht erstellt. Exhibit 15.1 LOGITECH INTERNATIONAL S.A. REPORT ON CORPORATE GOVERNANCE 20-F LISA REPORT ON CORPORATE GOVERNANCE Logitech believes that sound corporate governance practices are essential to an open and responsible corporation. The Company has for many years had a strong commitment to corporate governance and believes that its corporate governance practices reflect a continuing commitment to corporate accountability, sound judgment, and transparency to shareholders. As a company whose securities are traded both on the SWX Swiss Exchange and on the Nasdaq National Market, Logitech’s commitment to sound corporate governance principles is guided by the legal and regulatory requirements of both Switzerland and the United States. In addition, Logitech’s internal guidelines regarding corporate governance are provided in its Articles of Incorporation, Organizational Regulations, and Board Committee Charters. This report conforms to the requirements of the Corporate Governance Directive of the SWX Swiss Exchange and includes certain corporate governance disclosures required by the U.S. Securities and Exchange Commission (“SEC”). 1. Group Structure and Shareholders 1.1 Operational Group Structure The Logitech Group (also referred to as “Logitech”) designs, manufactures, and markets personal peripherals for personal computers and other digital platforms. The Company’s products include webcams, mice, trackballs, and keyboards for the PC; interactive gaming controllers, multimedia speakers, headsets and headphones for the PC and for gaming consoles; headsets for mobile phones; headsets, headphones and speakers for mobile entertainment and communication platforms; advanced remote controls; digital writing solutions; and 3D control devices. Logitech is organized into four business units – Control Devices, Video, Interactive Entertainment and Audio – which develop products and bring them to market. These business units are responsible for product design and development, industrial design, technological innovation and overall product management. Logitech’s marketing and sales organization is responsible for selling the products brought to market by the business units and is structured around two main sales channels, retail and original equipment manufacturers (“OEM”). The retail organization is responsible for sales to direct retail accounts, mass merchants and distributors while the OEM organization is responsible for sales to OEM customers. Logitech’s sales and marketing activities are also organized into three geographic regions: Americas (including North and South America), Europe-Middle-East-Africa, and Asia Pacific. Since 1994, Logitech has had its own manufacturing operations in Suzhou, China, which currently produce approximately half of the Company’s products. The Company outsources the remaining production to contract manufacturers located in Asia. The Company’s other operations support the business units and marketing and sales organizations through management of distribution centers and the product supply chain, and the provision of technical support, customer relations and other services. Logitech International S.A. (also referred to as the “Company”), the parent company of Logitech, is a joint stock company (société anonyme, Aktiengesellschaft) incorporated under the laws of Switzerland, with its registered office located in Apples, Switzerland. The Company’s registered shares are listed on the SWX Swiss Exchange (Ticker: LOGN; security number: 2165533; ISIN: CH0021655334). American Depositary Shares (“ADSs”) are listed on the Nasdaq National Market in the form of American Depositary Receipts (“ADRs”) (Ticker: LOGI; U.S. security number: 541419; ISIN: US5414191073). For information on Logitech’s holdings in its own shares, refer to section 1.2 below. As of March 31, 2006, Logitech’s market capitalization, based on outstanding registered shares of 91,325,697, amounted to CHF 4.8 billion ($3.6 billion). Refer to section 1.2 below for information on Logitech International S.A.’s holdings in the Company’s shares as of March 31, 2006. CG-2 Logitech (Jersey) Ltd., a wholly owned subsidiary of Logitech International S.A., with its registered office in St. Helier, Jersey, Channel Islands, was the issuer of 1% convertible bonds of CHF 170.0 million issued in June 2001 (refer to section 2.7 below for more information on Logitech’s convertible bonds). On August 31, 2005, the Company exercised its right to call the convertible bonds for early redemption in accordance with the terms of the bonds. As of November 11, 2005, all outstanding bonds had been presented for conversion into 5,448,693 Logitech registered shares at the conversion price of CHF 31.20 per share. The conversion was satisfied through delivery of treasury shares. Logitech International S.A. directly or indirectly owns 100% of all the companies in the Logitech Group, through which it carries on its business and operations. Principal operating subsidiaries include: Logitech Europe S.A., Logitech Hong Kong, Ltd., Logitech, Inc., Logitech Technology (Suzhou) Co. Ltd. and Logitech Far East, Ltd. For a list of Logitech subsidiaries, refer to the table on page CG-25. None of Logitech International S.A.’s subsidiaries has securities listed on a stock exchange as of March 31, 2006. 1.2 Significant Shareholders To the knowledge of the Company, the beneficial owners holding more than 5% of the voting rights of the Company as of March 31, 2006 were as follows: Name Number of Shares(2) % of Voting Rights(3) Relevant Date(4) Daniel Borel (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,120,000 6.4% March 31, 2006 (1) Mr. Borel has not entered into any written shareholders’ agreement. (2) Includes shares represented by ADSs. In compliance with Article 20 of the Swiss Federal Act on Stock Exchanges and Securities Trading of March 24, 1995, or SESTA, and Article 13 of the Ordinance of the Swiss Federal Banking Commission on Stock Exchanges and Securities Trading of June 25, 1997, or SESTO-FBC, conversion and acquisition rights are not taken into consideration for the calculation of the relevant shareholdings, unless such rights entitle their holders to acquire, upon exercise, at least 5% of the Company’s voting rights. In compliance with Article 19 paragraph 2 of SESTO-FBC, shareholdings are calculated based on the aggregate number of voting rights entered into the Swiss commercial register. This aggregate number was 95,803,310 voting rights as of March 31, 2006. (3) 20-F (4) For the Company, Directors and Executive Officers, the relevant date is the last day of the fiscal year. Based on a SEC filing by FMR Corp. on February 14, 2006, FMR Corp. was the beneficial holder under applicable US securities laws of 7,098,170 Logitech shares and/or ADSs, representing approximately 7.4% of the Company’s aggregate voting rights, as of December 31, 2005. FMR Corp. is the parent company of Fidelity Investments, a U.S.-based mutual fund company, and its beneficial ownership is as a result of holdings through one or more of its funds. On March 21, 2006 FMR Corp. notified the Company that its shareholdings had fallen to 4.96% of the Company’s aggregate voting rights on March 15, 2006. SESTA requires shareholders who own voting rights exceeding certain percentage thresholds of a company incorporated in Switzerland whose shares are listed on a stock exchange in Switzerland to notify the company and the relevant Swiss exchange of such holdings. Following receipt of this notification, the company is required to inform the public in Switzerland. The Company announced in the Swiss Official Gazette of Commerce dated October 26, 2005 that the holdings of its own shares had fallen below 5% of the total voting rights. During fiscal year 2006, the Company was not otherwise required to make any such announcements in compliance with SESTA. LISA 1.3 Cross-shareholdings Logitech has no shareholdings in companies that to its knowledge have shareholdings in the Company. CG-3 2. Capital Structure 2.1 Share Capital As of March 31, 2006, Logitech International S.A.’s nominal share capital was CHF 47,901,655 ($36.7 million), consisting of 95,803,310 registered shares with a par value of CHF .5 each. An additional 20 million registered shares have been authorized for issuance by the shareholders. In addition, conditional share capital designated to cover employee and director option and stock purchase plan rights amounted to CHF 15,165,465 and conditional capital designated to cover conversion rights granted in connection with the issue of convertible bonds amounted to CHF 2,725,000. Refer to section 2.2 for more information on the Company’s authorized and conditional capital. 2.2 Details on the Company’s Authorized and Conditional Share Capital Authorized share capital. Pursuant to Article 27 of the Company’s Articles of Incorporation, the Board is authorized to increase the share capital of the Company by CHF 10,000,000 through the issuance of 20 million registered shares with a par value of CHF .5 each, to be fully paid-in. This authorization expires on June 24, 2006. Shareholders of the Company will be requested at the 2006 Annual General Meeting to extend this authorization until June 2008. The Board of Directors may restrict the shareholders’ right to subscribe to the newly issued shares by preference, in particular if the shares are placed on international markets or issued in connection with an acquisition or merger. The unexercised preferential subscription rights revert to the Company and their use may be directed by the Board of Directors. The Board sets the price at which the shares will be issued, the manner in which the newly issued shares must be paid-in, and the conditions under which preferential subscription rights can be exercised. First conditional share capital. Pursuant to Article 28 of the Company’s Articles of Incorporation, the share capital of the Company may be increased by CHF 15,165,465 through the issuance of up to 30,330,930 registered shares with a par value of CHF .5 each. The purpose of this conditional share capital is to cover option or other equity rights granted or that may be granted to employees, officers and directors of Logitech under its employee equity incentive plans (refer to section 2.7 for information on Logitech’s stock purchase and stock option plans). The conditional share capital increase does not have an expiration date. The shareholders do not have the preferential right to subscribe to the newly issued shares. Second conditional share capital. Pursuant to Article 29 of the Company’s Articles of Incorporation, the share capital of the Company could have been increased by CHF 2,725,000 through the issuance of up to 5,450,000 registered shares with a par value of CHF .5 each, to be fully paid-in. The purpose of this conditional share capital was to cover conversion rights granted in connection with the issue of Logitech’s convertible bonds in 2001. However, during the 2006 fiscal year the Company satisfied its conversion obligations under the convertible bonds through the delivery of treasury shares rather than the use of conditional capital. As a result, the Company expects to cancel this conditional capital. 2.3 Changes in the Company’s Shareholders’ Equity As of March 31, 2006, 2005, 2004 and 2003, balances in shareholders’ equity of Logitech International S.A., based on the parent company’s Swiss Statutory Financial Statements, were as follows (in thousands of Swiss francs): Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal reserves: General reserve . . . . . . . . . . . . . . . . . . . . . . . Reserve for treasury shares . . . . . . . . . . . . . Unappropriated retained earnings . . . . . . . . As of March 31, 2006 2005 2004 2003 CHF 47,902 CHF 47,902 CHF 47,902 CHF 47,902 9,580 238,707 352,032 9,580 217,873 327,892 66,319 136,590 256,964 87,597 115,313 141,036 Total shareholders’ equity . . . . . . . . . . . . . . . . . . CHF 648,221 CHF 603,247 CHF 507,775 CHF 391,848 CG-4 During the same periods, changes made to the Company’s authorized and conditional share capital were as follows: As of March 31, 2006 2005 2004 2003 Authorized share capital . . . . . . . . . . . . . . . . . . . . . . . . CHF 10,000 CHF 10,000 CHF 10,000 CHF 10,000 . . . . . . . . . . . . . . . . . . . CHF 15,165 CHF 15,165 CHF 15,165 CHF 15,165 First conditional share capital . . . . . . . . . . . . . . . . . CHF 2,725 CHF 2,725 CHF 2,725 CHF 2,725 Second conditional share capital For information on changes in Logitech’s consolidated shareholders’ equity during fiscal years 2006, 2005 and 2004, refer to the Consolidated Statement of Changes in Shareholders’ Equity on page F-6. During fiscal years 2006, 2005 and 2004, the Company repurchased shares under buyback programs authorized by the Board of Directors as follows (in thousands): Date of Announcement Approved Buyback Amount Equivalent USD Amount(1) Expiration Date Program to date 2006 2005 2004 Shares Amount Shares Amount Shares Amount Shares Amount Amount Repurchased During Year Ended March 31,(2) June 2005 . . . . . . . CHF 300,000 April 2004 . . . . . . CHF 250,000 October 2003 . . . . CHF 40,000 $235,000 $200,000 $ 32,090 March 2004 1,330 $ 32,090 — $ — 4,201 $174,613 4,201 $174,613 — $ — — $ — 7,487 $201,264 1,937 $ 66,739 5,550 $134,525 — $ — $32,090 — $ — 1,330 June 2008 June 2006 (1) Represents the approved buyback amount in U.S. dollars, calculated based on exchange rates on the announcement dates. (2) Represents the amount in U.S. dollars, calculated based on exchange rates on the repurchase dates. 2.4 Share Categories Registered Shares. Logitech International S.A. has only one category of shares – registered shares with a par value of CHF .5 per share. Each of the 95,803,310 issued registered shares carries the same rights. There are no preferential rights. However, a shareholder must be entered in the share register of the Company to exercise voting rights and the rights deriving thereof (such as the right to convene a general meeting of shareholders or the right to put an item on the meeting’s agenda). Refer to section 6 for an outline of participation rights of the Company’s shareholders. Refer to section 1.1 and “Logitech ADSs” below for information on Logitech’s ADR program. 20-F Each registered share entitles its owner to dividends declared, even if the owner is not registered in the share register of the Company. Under Swiss law, the Company pays dividends upon approval by its shareholders. This request for shareholder approval typically follows the recommendation of the Board. Although Logitech has paid dividends in the past, the Board of Directors announced in 1997 its intention not to recommend payment of cash dividends in the future in order to retain earnings for use in the operation and expansion of Logitech’s business. Unless this right is restricted in compliance with Swiss law and the Company’s Articles of Incorporation, shareholders have the right to subscribe by preference for newly issued shares. Refer to section 2.2 for a description of the provisions of the Company’s Articles of Incorporation relating to the restriction of the shareholders’ preferential subscription rights. The Company has not issued non-voting shares (“bons de participation,” “Partizipationsscheine”). LISA Logitech ADSs. Through an arrangement with The Bank of New York, as depositary, Logitech American Depository Shares, or ADSs, trade on the Nasdaq National Market. Each ADS represents one Logitech registered share. The ADSs are issued by The Bank of New York pursuant to a Deposit Agreement, dated March 27, 1997, as amended, between Logitech, The Bank of New York, as depositary, and owners and beneficial owners of ADS. The Deposit Agreement governs the rights of holders of Logitech ADSs and has the effect of giving CG-5 holders of ADSs the same economic and voting interest in Logitech as if they were a holder of Logitech registered shares. However, because The Bank of New York actually owns the Logitech registered shares underlying the Logitech ADSs, ADS holders must rely on The Bank of New York to exercise the rights of a shareholder by instructing the depositary in writing the manner in which they wish to vote or exercise their rights as shareholders. The depositary, subject to Swiss laws and the Company’s Articles of Incorporation, is required to vote or exercise such rights as instructed. Each ADS entitles its owner to dividends declared, if any, in respect of Logitech registered shares underlying the ADSs, subject to the terms of the Deposit Agreement. Any cash dividends by Logitech to its shareholders paid in Swiss francs will be converted by the depositary to U.S. dollars and paid by the depositary to holders of ADSs, net of conversion expenses, and in accordance with the Deposit Agreement. As of March 31, 2006, according to the records of The Bank of New York, approximately 17,132,636 ADSs were outstanding in the United States. 2.5 Bonus Certificates The Company has not issued certificates or equity securities that provide financial rights in consideration for rendered or claims waived (referred to as “bonus certificates,” “bons de jouissance,” or services “Genussscheine”). 2.6 Limitations on Transferability and Nominee Registration The Company maintains a share register that lists the names of the registered owners and beneficiaries of the shares. Registration in the Company’s share register occurs upon request and is not subject to any condition. Shareholders can be entered into the share register with voting rights even if they are holding their shares for the account of a third party (nominee registration). Refer to section 6.1 for the conditions of exercise of the shareholders’ voting rights. 2.7 Conversion and Option Rights Conversion Rights. In June 2001, Logitech issued through its wholly owned subsidiary Logitech (Jersey) Ltd. CHF 170.0 million ($95.6 million based on exchange rates at date of issuance) aggregate principal amount of its 1% convertible bonds. The convertible bonds were issued in denominations of CHF 5,000 at par value, with interest at 1.00% payable annually, and final redemption in June 2006 at 105%, representing a yield to maturity of 1.96%. On August 31, 2005, the Company exercised its right to call the convertible bonds for early redemption in accordance with the terms of the bonds. As of November 11, 2005, all outstanding bonds had been presented for conversion into 5,448,693 Logitech registered shares at the conversion price of CHF 31.20 per share ($23.72 based on exchange rates at November 11, 2005). The conversion was satisfied through delivery of treasury shares. Logitech has not issued any other bonds. Warrants. Logitech has not issued warrants on its shares. Employee Stock Options and Stock Purchase Plans. Logitech believes equity compensation is an important part of attracting and retaining high-caliber employees and of aligning the interests of management and the directors of the Company with the interests of the shareholders. Accordingly, Logitech maintains stock purchase and stock option plans for its employees. Under the 1996 Stock Plan, the Company may grant to employees and directors, options to purchase registered shares or ADSs, restricted shares, stock appreciation rights, and stock units, which are bookkeeping entries representing the equivalent of shares. A total of 38,000,000 registered shares and/or ADSs may be issued under this plan. Options generally vest over four years and remain outstanding for periods not to exceed ten years. Options may be granted only at exercise prices of at least 100% of the fair market value of the registered CG-6 shares or ADSs on the date of grant; restricted shares and stock appreciation rights may be granted at prices less than 100% of the fair market value of the registered shares on the date of grant; no cash consideration is required to be paid by employees in connection with the grant of stock units. As of March 31, 2006, Logitech had made no grants of restricted shares, stock appreciation rights or stock units. Under the 1988 Stock Option Plan, options to purchase registered shares were granted to employees and consultants at exercise prices ranging from zero to amounts in excess of the fair market value of the registered shares on the date of grant. The terms and conditions with respect to options granted were determined by the Board of Directors who administered this plan. Options generally vest over four years and remain outstanding for periods not exceeding ten years. Further grants may not be made under this plan. As of March 31, 2006, there were a total of 10,803,972 registered shares subject to outstanding options granted under all plans. Each option entitles the holder to purchase one share of Logitech International S.A. (including shares represented by ADSs) at the strike price. Of these options, 5,254,909 were exercisable, with the balance subject to continued vesting over time. The exercise prices of the currently outstanding options range from $2.00 to $47.99. Logitech shareholders do not have preferential rights to subscribe to employee options. Refer to section 5.6 and note 9 to the Consolidated Financial Statements for more information on the Company’s outstanding stock options. Under the 1996 Employee Share Purchase Plan, eligible employees may purchase registered shares with up to 10% of their earnings at the lower of 85% of the fair market value at the beginning or the end of each six-month offering period. There are two offering periods, each consists of a six-month period during which payroll deductions of employee participants are accumulated under the share purchase plan. Subject to continued participation in these plans, purchase agreements are automatically exercised at the end of each offering period. 3. The Board of Directors The Board of Directors is elected by the shareholders and holds the ultimate decision-making authority of the Company, except for those matters reserved by law or by the Company’s Articles of Incorporation to its shareholders or for those that are delegated to the Executive Officers under the Organizational Regulations. The Board makes resolutions through a majority vote of the members present at the meetings. In the event of a tie, the vote of the Chairman decides. 20-F The Company’s Articles of Incorporation set the minimum number of directors at three. The Company had eight Directors as of May 1, 2006. One of the Company’s current directors, Kee-Lock Chua, is being presented for re-election to the Board of Directors at the Company’s Annual General Meeting in June 2006 as his term expires at that meeting. In addition, another current director, Frank Gill, has informed the Company of his intention to retire from the Board prior to the end of his term, which otherwise expires at the 2008 Annual General Meeting. Erh-Hsun Chang is being presented for election to the Board of Directors at the Annual General Meeting in June 2006. 3.1 Members of the Board Gary F. Bengier, U.S. national, has been a non-executive Director of the Company since June 2002 and will become Lead Independent Director upon Frank Gill’s retirement from the Board of Directors after the Company’s June 2006 Annual General Meeting. In addition to serving on Logitech’s board, Mr. Bengier also serves on the Board of Trustees of the Santa Fe Institute, a U.S. private, non-profit, multidisciplinary research and education center. He also serves as Chair of the Bengier Foundation, a private charitable foundation. Previously, Mr. Bengier served as Senior Vice President, Strategic Planning and Development of eBay Inc., a U.S. based on-line marketplace, from January 2001 until November 2001, and prior to that, as eBay’s Vice President and Chief Financial Officer from November 1997 to January 2001. From February 1997 to October 1997, Mr. Bengier was Vice President and Chief Financial Officer of Vxtreme, Inc., a U.S. developer of Internet LISA CG-7 video streaming products. Prior to that, Mr. Bengier was Corporate Controller at Compass Design Automation, a U.S. publisher of electronic circuit design software, from February 1993 to February 1997. Mr. Bengier has also held senior financial positions at Kenetech Corp., a U.S. energy services company, Qume Corp., a U.S. computer peripheral company, and Bio-Rad Laboratories, a U.S. life sciences company. He also spent several years as a management consultant for Touche Ross & Co, a U.S. consulting firm. Mr. Bengier holds a BBA degree in Computer Science and Operations Research from Kent State University and an MBA from Harvard Business School. Daniel Borel, Swiss national, Chairman of the Board and executive board member, is a founder of the Company. Mr. Borel assumes a leading role in mid- and long-term strategic planning and the selection of top-level management, and he supports major transaction initiatives of Logitech. Mr. Borel has been the Chairman of the Board since May 1988. From July 1992 to February 1998, he also served as Chief Executive Officer. He has held various other executive positions with Logitech. Mr. Borel holds a MS degree in Computer Science from Stanford University and a degree in Physics from the Ecole Polytechnique Fédérale, Lausanne, Switzerland. Matthew Bousquette, U.S. national, has been a non-executive Director of the Company since June 2005. From 1993 to 2005, Mr. Bousquette held a succession of senior roles at Mattel, Inc., a US-headquartered global toy company, most recently as president of the Mattel Brands business unit. His prior roles at Mattel included senior vice president of marketing, general manager of Boys Toys, executive vice president of Boys Toys and president of Boys/Entertainment. Mr. Bousquette joined Mattel from Lewis Galoob Toys, where he served as vice president of marketing between 1992 and 1993. Prior to that, he held a variety of positions in Teleflora, Mattel and Procter & Gamble. Mr. Bousquette holds a Bachelor of Business Administration from the University of Michigan. Erh-Hsun Chang, Taiwanese national, is a Director-elect and is being presented to the shareholders for election to the Board at the Company’s 2006 Annual General Meeting. Until April 2006, Mr. Chang was the Company’s Senior Vice President, Worldwide Operations and General Manager, Far East and is currently an executive officer-at-large with the Company. Mr. Chang first joined Logitech in 1986 to establish its operations in Taiwan. After leaving the Company in 1988, he returned in 1995 as Vice President, General Manager, Far Eastern Area and Worldwide Operations. In April 1997, Mr. Chang was named Senior Vice President, General Manager, Far Eastern Area and Worldwide Operations. Mr. Chang’s other business experience includes tenure as Vice President, Manufacturing Consulting at KPMG Peat Marwick, a global professional services firm, between 1991 and 1994, and as Vice President, Sales and Marketing, Power Supply Division, of Taiwan Liton Electronics Ltd., a Taiwanese electronics company, in 1994 and 1995. Mr. Chang holds a B.S. degree in Civil Engineering from Chung Yuang University, Taiwan, an MBA from the University of Dallas, and an MS in Industrial Engineering from Texas A&M University. Mr. Chang will retire from his current Logitech executive position upon his election as a Director, but will remain Vice Chairman of the Company’s subsidiary in Taiwan. Kee-Lock Chua, Singaporean national, has been a non-executive Director of the Company since June 2000. Mr. Chua has served as a Managing Director of Walden International, a U.S. headquartered venture capital firm, since July 2003. From June 2001 to June 2003, Mr. Chua served as Deputy President of NatSteel Ltd., a Singaporean industrial products company active in Asia Pacific. From October 2000 until June 2001, Mr. Chua was the Chief Executive Officer of Intraco Ltd., a Singapore-listed company focusing in trading and distribution. Prior to joining Intraco, Mr. Chua was the President of MediaRing.com from October 1998 to August 2000, a Singapore-listed company providing voice-over-internet services. Prior to joining MediaRing.com, Mr. Chua was employed by NatSteel Ltd., most recently as Executive Vice President, responsible for the commercial group, production planning, strategic planning and several overseas operations. Prior to joining NatSteel Ltd., Mr. Chua worked for Transpac Capital, a Singapore incorporated venture capital firm, where he served as Vice President, in charge of direct investments into companies in the United States. Mr. Chua holds a BS degree in Mechanical Engineering from the University of Wisconsin, and a MS degree from Stanford University. CG-8 Guerrino De Luca, Italian national, joined the Company as President and Chief Executive Officer in February 1998, and became an executive member of the Board of Directors in June 1998. Mr. De Luca is responsible for the worldwide affairs and operations of Logitech. He manages both the strategic activities of the Company as well as the day-to-day operations. Prior to joining Logitech, Mr. De Luca served as Executive Vice President of Worldwide Marketing for Apple Computer, Inc., a U.S. personal computer company, from February 1997 to September 1997, and as President of Claris Corporation, a U.S. personal computing software vendor, from May 1994 to February 1997. Prior to this, Mr. De Luca held various positions with Apple in the United States and in Europe. Mr. De Luca holds a BS degree in Electronic Engineering from the University of Rome, Italy. Frank Gill, U.S. national, has been a non-executive Director of the Company since June 1999 and serves as Lead Independent Director. Mr. Gill served in a variety of positions in sales and marketing, product development and manufacturing operations at Intel Corporation, a U.S. semiconductor chip maker, from 1975 until his retirement in June 1998, including Executive Vice President in 1996, General Manager of the Internet and Communications Group from 1995, and from 1990 through 1994, General Manager of Intel’s Systems Group. Mr. Gill holds a BS degree in Electrical Engineering from the University of California, Davis. Mr. Gill has informed the Company of his intention to retire from the Board of Directors after the June 2006 Annual General Meeting of the Company. Shin’ichi Okamoto, Japanese national, has been a non-executive Director of the Company since June 2004. Since September 2003, Mr. Okamoto has served as a research and development consultant. Prior to that, he served in executive and management positions with Sony Computer Entertainment Inc., the interactive gaming division of Sony Corporation, a Japanese consumer electronics company. During his time with Sony, Mr. Okamoto served as the Chief Technology Officer from April 2001 to August 2003, Senior Vice President of Research and Development from April 1999 to September 2002, Vice President of Software Development from October 1998 to April 1999, and Director of Development from December 1994 to October 1998. Mr. Okamoto holds Masters and Bachelors degrees in Chemistry from the Waseda University in Tokyo. Monika Ribar, Swiss national, has been a non-executive Director of the Company since June 2004. Since June 2005 Ms. Ribar has served as the Chief Financial Officer and Senior Vice President of Finance of Panalpina Management Ltd., a Swiss freight forwarding and logistics services provider. She has been a member of Panalpina’s executive board since February 2000, and served as Panalpina’s Chief Information Officer from February 2000 to June 2005. From June 1995 to February 2000, she served as Panalpina’s Corporate Controller, and from 1991 to 1995 served in project management positions at Panalpina. Prior to joining Panalpina, she worked at Fides Group (now KPMG Switzerland), a professional service firm, serving as Head of Strategic Planning and was employed by the BASF Group, a German chemical products company. Ms. Ribar holds a Masters degree in Economics and Business Administration from the University of St. Gallen, Switzerland. Messrs. Bengier, Bousquette, Chua, Gill and Okamoto, and Ms. Ribar have never had management responsibility at Logitech or at any of its subsidiaries, and do not have any immediate family members who are employees at Logitech. The Board has determined that they are independent Directors under the rules of the Nasdaq Stock Market. If elected by shareholders at the June 2006 Annual General Meeting, Mr. Chang would be considered a non-independent member of the Board. Other than as described in the biographies above, none of the Directors or Director-elect of the Company has significant business connections with the issuer or one of the issuer’s subsidiaries. 3.2 Involvements Outside Logitech of the Members of the Board Gary F. Bengier currently serves on the Board of Trustees of the Santa Fe Institute, a U.S. private, non-profit, multidisciplinary research and education center, and is Chair of the Bengier Foundation, a private charitable foundation. 20-F LISA CG-9 Daniel Borel serves on the Boards of Nestlé S.A., the Swiss food and beverage company, Phonak Holding Ltd., a Swiss hearing aid device company, and he also serves as a Director of Julius Baer Holding Ltd. and Bank Julius Baer & Co. Ltd., the Swiss parent company and the Swiss banking subsidiary of the Julius Baer banking group. Mr. Borel also serves on the Board of Fondation Defitech, a Swiss foundation which contributes to research and development projects aimed at assisting the disabled. He also serves as Chairman of the Board of SwissUp, a Swiss educational foundation promoting higher learning. Matthew Bousquette currently serves on the Board of Directors of the Library Foundation of Los Angeles, a charity to encourage private support of the Los Angeles Public Library. Kee-Lock Chua serves as a Director of Biosensors International Group Ltd., a drug-coated stents supplier listed on the Singapore Exchange. Mr. Chua also serves on the Board of FreeSystems Pte. Ltd. and Innvo Systems Pte. Ltd., both privately held companies in Singapore. Mr. Chua is also a Board member of Com2us Corporation and Ndoors Ltd., both privately held companies in Korea. Mr. Chua is also a Board member of Sinosun Holding Corporation and Rock Mobile Corporation, privately held companies in China. Mr. Chua is also a Board member of Maris Stella High School, a leading high school in Singapore, Treasurer of MILK, a charity for children, and Chairman of the Singapore Venture Capital Association. Frank Gill currently serves on the Boards of Tektronix, Inc., a U.S. test and measurement company and Pixelworks, Inc., a U.S. semiconductor company. Mr. Gill also serves on the Board of St. Vincent’s Hospital Foundation, a U.S. non-profit organization and serves on the Board of Kryptic Inc., a privately held U.S. company. Shin’ichi Okamoto currently serves on the Board of Directors of Fine Arch Inc. and Digital Media Professional Inc. and Emdigo Inc., all privately held Japanese companies. Monika Ribar currently serves as a Director of Julius Baer Holding Ltd. and Bank Julius Baer & Co. Ltd., the Swiss parent company and the Swiss banking subsidiary of the Julius Baer banking group, and is a member of the Executive Board of Panalpina Management Ltd., a Swiss freight forwarding and logistics services provider. Other than the current employment noted in section 3.1 and involvement noted above, no other Logitech Board member or Director-elect currently has supervisory, management, or advisory functions outside Logitech. None of the Company’s Directors or Director-elects holds any official functions or political posts. 3.3 Cross Involvement Mr. Borel serves on the boards of Nestlé S.A. and Phonak Holding Ltd., both publicly listed companies. Also, both Mr. Borel and Ms. Ribar are members of the Board of Directors of Julius Baer Holding Ltd. and Bank Julius Baer & Co. Ltd., the Swiss parent company and the Swiss banking subsidiary of the Julius Baer banking group. Mr. Gill serves on the boards of Tektronix, Inc. and Pixelworks, Inc., both publicly listed companies. 3.4 Elections and Terms of Office Directors are elected at the Annual General Meeting of Shareholders, upon proposal of the Board of Directors. The proposals of the Board of Directors are made following recommendations of the Nominating Committee. Refer to section 3.5 for more information on the Company’s Nominating Committee. If the agenda of a General Meeting of Shareholders includes an item calling for the election of directors, any shareholder may propose a candidate for election to the Board at the meeting. Also, one or more shareholders who together represent shares representing at least the lesser of (i) one percent of the share capital or (ii) an aggregate par value CG-10 of one million Swiss francs may demand that the election of directors be placed on the agenda of a meeting and propose candidates. Such requests must be made in writing and be received by the Board of Directors at least 60 days prior to the date of the meeting. Refer to section 6.4 for more information on Shareholders’ right to place items on the agenda of a General Meeting of Shareholders. Each Director is elected for a term of 3 years and is eligible for re-election until their seventieth birthday. Directors may not seek re-election after they have reached 70 years of age, unless the Board of Directors adopts a resolution to the contrary. The retirement is effective on the date of the next Annual General Meeting of Shareholders after the Director reaches 70 years of age. A Director’s term of office as Chairman coincides with their term of office as a Director. A Director may be indefinitely re-elected as Chairman, subject to the age limit mentioned above. Although the Company’s Articles of Incorporation and Organizational Regulations do not explicitly require this, the terms of office of the Directors are staggered. Consequently, all Directors will not run for re-election at a single Annual General Meeting. The year of appointment, remaining term of office and age as of March 31, 2006 for each Director are as follows: Name Age Year First Appointed Daniel Borel (1) . . . . . . . . . . . . . . . . . . . . . . . . . . Guerrino De Luca (1) . . . . . . . . . . . . . . . . . . . . . . Frank Gill (2) (4) . . . . . . . . . . . . . . . . . . . . . . . . . Kee-Lock Chua (2) (3) . . . . . . . . . . . . . . . . . . . . . Matthew Bousquette (2) . . . . . . . . . . . . . . . . . . . . Gary Bengier (2) . . . . . . . . . . . . . . . . . . . . . . . . . . Monika Ribar (2) . . . . . . . . . . . . . . . . . . . . . . . . . Shin’ichi Okamoto (2) . . . . . . . . . . . . . . . . . . . . . Erh-Hsun Chang (5) . . . . . . . . . . . . . . . . . . . . . . . 56 53 62 44 47 51 46 47 56 1988 1998 1999 2000 2005 2002 2004 2004 Year Current Term Expires Annual General Meeting 2007 Annual General Meeting 2007 Annual General Meeting 2008 Annual General Meeting 2006 Annual General Meeting 2008 Annual General Meeting 2008 Annual General Meeting 2007 Annual General Meeting 2007 20-F (1) Executive member of the Board of Directors. (2) Non-executive member of the Board of Directors. (3) Mr. Chua’s term expires at the 2006 Annual General Meeting, and he is being presented for re-election to the Board of Directors at that meeting. (4) Mr. Gill has informed the Company of his intention to retire from the Board prior to the expiration of his current term. (5) Mr. Chang is being presented for election to the Board of Directors at the 2006 Annual General Meeting. 3.5 The Functioning of the Board of Directors Allocation of Powers and Responsibilities within the Board of Directors. At the last board meeting prior to each Annual General Meeting of Shareholders, the Board of Directors appoints a Chairman and a Secretary. It is not mandatory that the Secretary be a member of the Board of Directors or a shareholder. As of March 31, 2006, the Chairman was Mr. Daniel Borel and the Secretary was Ms. Catherine Valentine, Vice President, Legal and General Counsel. The Board of Directors is responsible for supervising the management of the business and affairs of the Company. LISA The Board of Directors has determined that each of Mr. Bengier, Mr. Chua, Mr. Gill, Mr. Bousquette, Mr. Okamoto and Ms. Ribar are independent Directors under the listing standards of the Nasdaq National Market and under the Swiss Code of Best Practice for Corporate Governance. As appointed by the Board, Frank Gill serves as the Lead Independent Director. Gary Bengier will replace Mr. Gill as Lead Independent Director upon Mr. Gill’s resignation from the Board of Directors after the Company’s Annual General Meeting in June 2006. CG-11 The responsibilities of the Lead Independent Director include chairing meetings of the non-executive Directors and serving as the presiding Director in performing such other functions as the Board may direct. The Chairman sets the agenda for Board meetings. Any member of the Board of Directors may request that a meeting of the Board be convened. The Directors receive materials in advance of Board meetings allowing them to prepare for the handling of the items on the agenda. The Chairman and Chief Executive Officer recommend Executive Officers who, at the invitation of the Board, attend Board meetings to report on areas of the business within their responsibility, thereby ensuring that the Board has sufficient information to make appropriate decisions. In case of emergency, the Chairman of the Board may have the power to pass resolutions which would otherwise be the responsibility of the Board. Decisions by the Chairman of the Board in this way are subject to ratification by the Board of Directors at its next meeting or by way of written consent. The Chief Executive Officer, Mr. Guerrino De Luca, manages the day-to-day operations of Logitech, with the support of the Executive Officers. Refer to section 3.6 for a description of the powers and responsibilities of the Executive Officers. The CEO has, in particular, the following powers and duties: • • • • • • • • • defining and implementing short and medium term strategies; preparing the budget, which must be approved by the Board of Directors; reviewing and certifying the Company’s annual report; appointing, dismissing and promoting any employees of Logitech other than Executive Officers and the head of the internal audit function; taking immediate measures to protect the interests of the Company where a breach of duty is suspected from Executive Officers until the Board has decided on the matter; carrying out Board resolutions; reporting regularly to the Chairman of the Board of Directors on the activities of the business; preparing supporting documents for resolutions that are to be passed by the Board of Directors; and deciding on issues brought to his attention by Executive Officers. Between April 1, 2005 and March 31, 2006, the Board met 5 times, 4 of which were regularly scheduled meetings and 1 of which was a special meeting. Each regularly scheduled Board meeting lasts a full day and all directors participate in person except in special individual circumstances. Special meetings of the Board may be held by telephone or video-conference and the duration of such meetings varies depending on the subject matters considered. Also, the Board of Directors has adopted a policy of regularly scheduled executive sessions where non-management Directors meet without management present. During fiscal year 2006 executive sessions of the independent Directors were held 4 times. Board Committees The Board has standing Audit, Compensation, Board Compensation and Nominating Committees to assist the Board in carrying out its duties. Each Committee has a written charter approved by the Board. Their chairs determine the meeting agendas. The Board Committee members receive materials in advance of Committee meetings allowing them to prepare for the meeting. CG-12 In fiscal year 2006, the Audit Committee met 9 times, the Compensation Committee met once, the Board Compensation Committee met twice and the Nominating Committee met twice. Attendance information at these meetings was as follows: Board of Directors Audit Committee Compensation Committee Board Compensation Committee Nominating Committee Daniel Borel . . . . . . . . . . . . . . . . Guerrino De Luca . . . . . . . . . . . Frank Gill . . . . . . . . . . . . . . . . . . Kee-Lock Chua . . . . . . . . . . . . . Matthew Bousquette . . . . . . . . . Gary Bengier . . . . . . . . . . . . . . . Monika Ribar . . . . . . . . . . . . . . . Shin’ichi Okamoto . . . . . . . . . . . Audit Committee 5 5 3 5 3 5 5 5 n/a n/a 7 9 n/a 9 9 n/a n/a n/a — n/a 1 n/a n/a 1 2 2 n/a n/a n/a n/a n/a n/a 2 n/a 1 n/a n/a 2 n/a n/a The Audit Committee assists the Board in monitoring the Company’s financial accounting, controls, planning and reporting. Among its duties, the Audit Committee: • • • • • • reviews the adequacy of the Company’s internal controls; reviews the independence, the Company’s independent auditors, and recommends the appointment or replacement of independent auditors to the Board of Directors; fee arrangements, audit scope, and performance of reviews and approves all non-audit work to be performed by the independent auditors; reviews the scope of Logitech’s internal auditing and the adequacy of the organizational structure and qualifications of the internal auditing staff; reviews, before release, the quarterly results and interim financial data; and 20-F reviews, before release, the audited financial statements and “Operating and Financial Review and Prospects” contained in the Company’s Annual Report on Form 20-F, and recommends that the Board of Directors submit these items to the shareholders’ meeting for approval. In fiscal year 2006, the Audit Committee was composed of Gary Bengier, Chairman, Frank Gill, Kee-Lock Chua, and Monika Ribar. The Board of Directors has determined that each member of the Audit Committee meets the independence requirements of the Nasdaq National Market listing standards and the applicable rules and regulations of the SEC. In addition, the Board has determined that Gary Bengier, Frank Gill and Monika Ribar are audit committee financial experts as defined by the applicable rules and regulations of the SEC. Compensation Committee The Compensation Committee reviews and recommends to the Board for approval the compensation of Executive Officers and Logitech’s compensation policies and programs, including share option programs and other incentive-based compensation. Within the guidelines established by the Board and the limits set out in the 1996 Stock Plan, the Compensation Committee also has the authority to grant options to employees other than the Chief Executive Officer without further Board approval. In fiscal year 2006, the Compensation Committee consisted of Frank Gill, Chairman, Matthew Bousquette and Shin’ichi Okamoto who each meet the independence requirements of the Nasdaq National Market listing standards. In addition to its regular meetings, each month the Committee considers for approval option grants to the Company’s employees by written consent. LISA Refer to section 5.1 for information on the Compensation Committee’s criteria and process for evaluating executive compensation. CG-13 Board Compensation Committee The Board Compensation Committee establishes the compensation of the non-executive Directors. This committee consists of Daniel Borel, Chairman of the Board, and Guerrino De Luca, Logitech’s President and Chief Executive Officer. Nominating Committee The Nominating Committee is composed of at least 3 members with the Chairman of the Board chairing this committee. Among its duties, the Nominating Committee: • • • • evaluates the composition of the Board of Directors and its Committees, determines future requirements and makes recommendations to the Board of Directors for approval; determines on an annual basis the desired Board qualifications and expertise and conducts searches for potential Directors with these attributes; evaluates and makes recommendations of nominees for election to the Board of Directors; and evaluates and makes recommendations to the Board concerning the appointment of directors to Board Committees and the selection of Board Committee chairs. This Committee consists of Daniel Borel, Chairman, Gary Bengier and Frank Gill. Upon the Committee’s recommendation of nominees for election to the Board of Directors, the nominees are presented to the full Board. 3.6 Allocation of Powers and Responsibilities between the Board of Directors and Senior Management The Board of Directors has delegated the management of the Company to the Chief Executive Officer and the Executive Officers, except where the law or the Company’s Articles of Incorporation or Organizational Regulations provide differently. The Board of Directors has the responsibility for supervision of Company management. In particular, the Board of Directors has the following non-transferable powers and duties: • • • • • • • • determining strategic objectives, the allocation of resources and Company policy; determining the organizational structure; establishing accounting and financial control principles; overseeing the Company’s accounting, controls, planning and reporting; financial appointing and dismissing the Chief Executive Officer and other Executive Officers and assigning their signatory powers; appointing and dismissing the head of the internal audit function; exercising the ultimate supervision of the Chief Executive Officer and other Executive Officers, and ensuring that the Company remains in compliance with applicable laws, the Articles of Incorporation, the Organizational Regulations and the guidance from the Board of Directors; overseeing the preparation of the annual report, preparing the General Meeting of Shareholders and carrying out shareholders’ resolutions; informing the appropriate authorities in the event of insolvency of the Company; and • making resolutions regarding the payment of non fully paid-in shares. The Board of Directors also has the following responsibilities: • • the signatory power of its members; the approval of the budget submitted by the Chief Executive Officer; CG-14 • • • the approval of any type of investment or acquisition not included in the approved budgets; the approval of any expenditure of more than US$10 million not specifically identified in the approved budgets; and the approval of the sale or acquisition, including related borrowings of the Company’s real estate. Refer to section 3.5 above for an outline of the powers and responsibilities of Logitech’s Chief Executive Officer. 3.7 Supervision and Control Instruments The Board of Directors monitors the responsibility of the Executive Officers using the following methods: • Regular meetings of the full Board of Directors and its Committees where Executive Officers, at the invitation of the Board, report on the financial results of Logitech, its operations, performance and outlook, and on areas of the business within their responsibility, including risk management and the Management Information Systems (MIS), as well as other business matters; • Regular meetings of the non-executive members of the Board of Directors, where Logitech issues are discussed without the presence of executive members of the Board or Executive Officers; • Regularly scheduled reviews of Logitech strategic and operational issues, including discussions of issues placed on the agenda by the non-executive members of the Board of Directors; • The Board of Directors reviewing and approving significant changes in Logitech’s structure and organization and active involvement in significant transactions, including acquisitions, divestitures and major investments; • Board members, at their request, having access to all internal Logitech information; and • The Internal Audit function, reporting to the Audit Committee, which is responsible for evaluating and monitoring the effectiveness of Logitech’s internal controls and governance processes. 20-F 4. Senior Management 4.1 Members of the Senior Management The members of the senior management (“Executive Officers”) of Logitech as of March 31, 2006 were as follows: Name Age Nationality Position Daniel Borel . . . . . . . . . . . . . Guerrino De Luca . . . . . . . . . 56 53 Swiss Italian Chairman of the Board President and Chief Executive Officer, Director Erh-Hsun Chang . . . . . . . . . . 56 Taiwanese Sr. Vice President, Worldwide Operations and General Manager, Far East David Henry . . . . . . . . . . . . . 49 U.S. Sr. Vice President, Control Devices Junien Labrousse . . . . . . . . . . 48 French Sr. Vice President, Entertainment and Communications Kristen Onken . . . . . . . . . . . . 56 U.S. Sr. Vice President, Finance, and Chief Financial Officer Gerald Quindlen . . . . . . . . . . 46 U.S. Sr. Vice President, Worldwide Sales and Marketing LISA Robert Wick . . . . . . . . . . . . . 43 U.S. Sr. Vice President, Strategy Daniel Borel. Refer to section 3.1 above. Erh-Hsun Chang. Refer to section 3.1 above. Guerrino De Luca. Refer to section 3.1 above. CG-15 David Henry joined Logitech as Senior Vice President, Control Devices Business Unit of the Company in August 2001. Prior to that time, Mr. Henry served as Vice President of Product Management and Business Development of Xigo Inc., a U.S. on-line intelligence software company, from January 2000. From October 1997 to January 2000, Mr. Henry held various positions with Iomega, a U.S. portable storage company. His last position with Iomega was Vice President and General Manager of Magnetic Products. Mr. Henry holds a BSME from Union College of Schenectady, New York. Junien Labrousse joined Logitech as Vice President of the Video Division in 1997. He was named Senior Vice President, Video Business Unit in April 2001. Prior to joining Logitech, he was Vice President of Engineering from 1995 to 1997 at Winnov LP, a U.S. company engaged in the development and marketing of multimedia products. For more than 10 years he held several engineering and management positions at Royal Philips Electronics NV, a global electronics company, in research and in the semiconductor business division. Mr. Labrousse holds a MSEE degree from the Ecole Superieure d’Ingenieurs de Marseille, France and an MBA from Santa Clara University. Kristen Onken joined Logitech as Senior Vice President, Finance, and Chief Financial Officer in February 1999. From September 1996 to February 1999, Ms. Onken served as Vice President of Finance at Fujitsu PC Corporation, a U.S. subsidiary of the Japanese personal computer manufacturer. From 1991 to September 1996, Ms. Onken was employed by Sun Microsystems, Inc., a U.S. provider of computer hardware, software and services, first as Controller of the Southwest Area, then from 1992 to 1996 she served as Director of Finance, Sun Professional Services. Ms. Onken holds a BS degree from Southern Illinois University and an MBA in Finance from the University of Chicago. Ms. Onken retired from the Company on May 1, 2006. Gerald Quindlen joined Logitech as Senior Vice President, Worldwide Sales and Marketing in October 2005. From August 1987 to September 2004, Mr. Quindlen worked for Eastman Kodak Company where he was most recently Vice President of Global Sales and Operations for the Consumer and Professional Imaging Division and previously held senior sales or marketing management positions in the United States, Japan and Asia Pacific. Prior to his 17-year tenure at Eastman Kodak, he worked for Mobil Oil Corporation in engineering. Mr. Quindlen holds a B.S. degree in chemical engineering from Villanova University in Pennsylvania, and an M.B.A. in Finance from the University of Pennsylvania’s Wharton School in Philadelphia. Robert Wick joined Logitech with the acquisition of Labtec Inc. as Vice President of the Audio Business Unit in March 2001. He was named Senior Vice President in April 2001, and in October 2002, he was named Senior Vice President of the Audio and Interactive Entertainment Business Units. Prior to joining Logitech, Mr. Wick had been President of Labtec, Inc., a provider of PC speakers, headsets and microphones based in Vancouver, Washington, since December 1998, and served as CEO since August 1999. Prior to joining Labtec, Mr. Wick spent 8 years at Weiser Lock, a division of Masco Corporation, a U.S. manufacturer of home improvement and building products, in various management positions including Vice President of Finance and Logistics. Mr. Wick holds a BS degree in Accounting from the University of Arizona and is a former Certified Public Accountant. Ms. Onken stepped down as Senior Vice President, Finance, and Chief Financial Officer, and Mr. Chang stepped down as Senior Vice President, Worldwide Operations and General Manager, Far East, both effective April 3, 2006. Mark Hawkins was appointed Senior Vice President, Finance and Information Systems, and Chief Financial Officer, and Joseph Sullivan was appointed Senior Vice President, Worldwide Operation, both effective April 3, 2006. 4.2 Involvements Outside Logitech of the Executive Officers Daniel Borel. Refer to section 3.2 above. David Henry served from July 2003 until May 2006 as a Director of Anoto Group, AB, a publicly traded Swedish high technology company from which Logitech licenses its digital pen technology. CG-16 Junien Labrousse serves as a Director of A4Vision, Inc., a privately held U.S. high technology company from which Logitech licenses its face tracking software. He joined the A4Vision Board in April 2000. No other Logitech Executive Officer currently has supervisory, management, or advisory functions outside Logitech. None of the Company’s Executive Officers hold any official functions or political posts. 4.3 Management Contracts Logitech has not entered into any contractual relationships regarding the management of the Company or its subsidiaries. 5. Compensation, Shareholdings and Loans 5.1 Logitech’s General Compensation Policy Logitech has designed its compensation programs to attract, develop, retain and motivate the high caliber of executives, managers and staff that is critical to the long-term success of its business. Logitech’s compensation package is composed of a base salary that is competitive to comparable companies in the industry and region, periodic cash incentive awards that are based on company performance, and long-term incentive awards that are comprised of stock options. Executive Compensation Programs Logitech’s compensation programs for its Executive Officers are designed to: • • • • provide compensation competitive to comparable companies in the industry and region; provide executives with a competitive compensation that maintains a balance between fixed and variable compensation and places a significant portion of total compensation at risk; align executive compensation with shareholders’ interest by tying a significant portion of compensation to increasing share value; and 20-F support a performance-oriented environment that rewards superior performance. An Executive’s compensation includes the following key components: • • • base salary; short-term incentives (cash bonus programs based on financial performance); and long-term incentives (stock option awards and employee stock purchase program). Base Salary The base salary for Executive Officers is determined on the basis of experience, individual performance, the average salary levels considered appropriate for comparable positions in the industry and the anticipated value of the executive’s future contribution to the Company. The Compensation Committee reviews these factors in approving and recommending to the Board the Executive Officer’s base salary for each fiscal year. In addition to a base salary, Executive Officers are eligible for the same benefits offered by the Company to non-executive employees in their jurisdiction of residence. The cost to Logitech of these benefits is reflected in the compensation of the Executive Officers as disclosed in Section 5.2 below. LISA CG-17 Short-Term Incentives A significant portion of Logitech’s executive cash compensation is variable. The Chairman and the CEO are eligible for annual bonus incentives based on the financial goals of the entire Company as established by the Board. Executive Officers, other than the Chairman and the CEO, are eligible for semi-annual bonuses based on achieving pre-determined financial goals of the Company and/or pre-determined financial goals of the division or regional entity over which the Executive has responsibility. The bonus plans include a basic reward for achieving minimum performance targets and an upside for performance exceeding target expectations. The Board of Directors may authorize additional cash bonus payments based on outstanding performance. The Compensation Committee reviews and recommends to the Board the bonus targets for each Executive Officer in advance of each fiscal year. Long-Term Incentives Logitech provides for stock option grants as part of its executive compensation package. It does so because it believes that a portion of executive compensation should be linked to increasing shareholder value. Stock options have value for an employee only if the Company’s share price increases above the exercise price of the option and the employee remains employed by the Company for the duration of the option vesting period. As with base salary, the stock options granted to Executive Officers are reviewed and recommended to the Board by the Compensation Committee based on grant individual levels for comparable positions in the industry, performance and the anticipated value of the Executive Officer’s future contribution to the Company. Executive Officers are also eligible to participate in the Company’s Employee Share Purchase Plan, under which employees may purchase registered shares with up to 10% of their earnings at the lower of 85% of the fair market value at the beginning or the end of each offering period. There are two offering periods, each consisting of a six-month period during which payroll deductions of employee participants are accumulated under the share purchase plan. The Chief Executive Officer is not present at any deliberations or upon the vote of the Board to approve his salary or equity compensation. Non-Executive Director Compensation The compensation of Logitech’s non-executive Directors is established by the Board Compensation Committee (refer to section 3.5 above). The Board Compensation Committee reviews aggregate data on non-executive Director compensation of comparable companies in setting compensation for Logitech’s non-executive Directors. Under the Company’s current policy, each non-executive Director receives options to purchase 30,000 of the Company’s registered shares upon their election to the Board and options to purchase 15,000 registered shares upon their re-election to the Board. These options are granted at the fair market value at the date of grant and become exercisable over 3 years in equal annual increments. In addition, non-executive Directors are paid an annual retainer of $25,000, or CHF 35,000 and receive $2,000, or CHF 2,500 for each board or committee meeting attended and also for each day of travel to attend board or committee meetings. All Directors are reimbursed for expenses in connection with attendance at Board and Committee meetings. Executive Directors do not receive any compensation for their service on the Board of Directors. CG-18 5.2 Compensation of Directors and Executive Officers The following table sets forth the compensation Logitech paid to non-executive Directors and Executive Officers in all capacities for the fiscal year ended March 31, 2006 (in thousands except share and per share amounts): Name of Group All non-executive Directors as a group Compensation Salary Bonus Options Granted(1) Exercise Price Expiration Year Share Option Value(2) Other(3) (6 individuals) (4) . . . . . . . . . . . . . . . . $ 365 $ — 60,000 $ 30.83 2016 $ 677 $— All Executive Officers as a group (9 individuals) (5)(6) . . . . . . . . . . . . . $2,651 $1,927 480,000 $31.01 to $40.50 2016 $6,863 $ 79 (1) Total options granted to non-executive Directors and Executive Officers represent 31% of the options granted by Logitech in fiscal year 2006. The remainder of the options were granted to 521 of Logitech’s other employees. (2) The options granted provide the right to purchase one share per option. For Executive Officers, the options vest ratably over a 4-year period from the date of grant. For non-executive Directors, the options vest ratably over a 3-year period from the date of grant. These share options have an estimated value of $11.28 per share (approximately CHF 14.34 per share) for non-executive Directors. Share option grants for all Executive Officers range from $12.85 to $15.55 per share (approximately CHF 15.37 to CHF 20.11 per share) for all Executive Officers, based on the Black-Scholes option-pricing model. These numbers are not necessarily indicative of the Company’s future stock performance. If the price of Logitech’s shares does not increase above the exercise price, no value will be realizable from these options. (3) Amounts shown represent matching contributions under Logitech’s 401(k) plan and Logitech’s contributions under its pension plans. (4) Mr. Gill has informed the Company of his intention to retire from the Board prior to the end of his term, which otherwise expires at the 2008 Annual General Meeting. He will not receive any special compensation upon the end of his service as a director. In fiscal year 2006, Marcel Stolk, former Senior Vice President of Sales & Marketing, resigned from Logitech in September 2005 and Gerald Quindlen joined as Mr. Stolk’s replacement in October 2005. The partial-year compensation, as well as the options granted, share option value and other amounts, of both Mr. Stolk and Mr. Quindlen is reflected in the compensation of Executive Officers as a group. (5) (6) On April 3, 2006, Mr. Hawkins was appointed Senior Vice President, Finance and Information Systems, and Chief Financial Officer, and Mr. Sullivan was appointed Senior Vice President, Worldwide Operation. Compensation for Mr. Hawkins and Mr. Sullivan is not reflected in the compensation of Executive Officers for fiscal year 2006. 20-F For further information regarding Mr. De Luca’s compensation, refer to section 5.6 “Option Ownership of Directors and Executive Officers.” There were no other Executive Officer resignations or additions during fiscal year 2006. No additional fees or compensation have been paid during fiscal year 2006 to any Directors or Executive Officers other than as noted above. Logitech has entered into indemnification agreements with its Directors and Officers. These agreements indemnify Directors and Officers to the extent permitted by law against expenses and liabilities incurred in legal proceedings that may arise by reason of their status or service as Directors or Officers. Logitech believes that these agreements are necessary to attract and retain qualified Directors and Officers. At present, there is no pending litigation or proceeding involving any Director or Officer of Logitech as to which indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceedings that might result in a claim for indemnification. LISA CG-19 Logitech currently maintains Director and Officer Liability insurance to insure its Directors and Officers against certain liabilities arising from their status or service as Directors or Officers. 5.3 Compensation to Former Directors and Executive Officers During fiscal year 2006, Logitech did not grant, directly or indirectly, compensation such as fees, salaries, credits, bonuses or benefits in kind to former non-executive Directors or Executive Officers. 5.4 Grant of Shares to Directors and Executive Officers During fiscal year 2006, Logitech did not grant shares of the Company to any of its non-executive Directors or Executive Officers. 5.5 Share Ownership of Directors and Executive Officers The following table presents information as of March 31, 2006 regarding the ownership of Logitech International S.A.’s shares (including shares represented by ADSs), by non-executive Directors and Executive Officers: Name Number of Shares % of Voting Rights (1) All non-executive Directors as a group (6 individuals) . . . . . . . . . . . . . . . . . All Executive Officers as a group (8 individuals) . . . . . . . . . . . . . . . . . . . . . 22,250 6,358,713 0.02% 6.64% (1) In accordance with Article 19 paragraph 2 of SESTO-FBC, the shareholding percentage is calculated based on the aggregate number of voting rights entered into the Swiss commercial register, which were 95,803,310 as of March 31, 2006. The Board of Directors has adopted share ownership guidelines for members of the Board of Directors effective June 2006. Under the guidelines Directors will be required to own at least 2,500 Logitech shares or ADSs. Directors are required to achieve the guideline within three years of joining the Board, or, in the case of Directors serving at the time the guidelines were adopted, within three years of the effective date of adoption of the guidelines. The guidelines will be adjusted to reflect any share or ADS splits or other capital adjustments, and will be re-evaluated by the Board from time to time. 5.6 Option Ownership of Directors and Executive Officers The following tables present information as of March 31, 2006 regarding the option ownership for shares (including shares represented by ADSs) of Logitech International S.A. by Logitech’s non-executive Directors and Executive Officers. Refer to section 2.7 for a description of Logitech’s employee equity compensation plans. Options held by non-executive Directors (in thousands except share and per share amounts): Grant year 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options Held 20,000 20,000 80,000 60,000 Vested Options 20,000 13,334 26,668 — 180,000 60,002 Exercise Price Expiration year $22.71 $19.28 $23.51 $30.83 2013 2014 2015 2016 Value of Options Held (1) 204 169 761 677 $1,811 CG-20 Options held by Executive Officers (in thousands except share and per share amounts): Grant year 2000 . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . Options Held (2) 268,448 440,000 680,274 600,000 340,000 530,000 480,000 Vested Options 268,448 440,000 517,774 265,000 62,500 117,500 — Exercise Price $ 2.42 – $ 4.36 $11.61 – $13.75 $10.43 – $14.75 $13.55 $15.52 $22.89 – $23.58 $31.01 – $40.50 3,338,722 1,671,222 Expiration year Value of Options Held (1) 2010 2011 2012 2013 2014 2015 2016 $ 442 2,343 3,654 4,207 2,573 5,433 6,863 $25,515 (2) (1) Based on the Black-Scholes option-pricing model. These numbers are not necessarily indicative of Logitech’s future stock performance. If the price of Logitech’s shares does not increase above the exercise price, no value will be realizable from these options. Includes 1,788,448 options granted to Mr. De Luca. Mr. De Luca has adopted a trading plan in compliance with Swiss rules and Rule 10b5-1 under the U.S. Securities Exchange Act of 1934 that is designed to eliminate Mr. De Luca’s control over the timing and amount of sales of his Logitech shares. Under the plan, Mr. De Luca has placed some of his options with an independent third party. The third party exercises such options and sells the shares received on exercise in accordance with trading parameters established by Mr. De Luca at the time the plan was adopted. The ability to amend the terms of the plan is limited. Mr. De Luca has had similar plans in place for several years. 5.7 Additional Fees and Remunerations During fiscal year 2006, Logitech did not pay any fees or remunerations other than those mentioned above to its non-executive Directors and Executive Officers. 20-F 5.8 Loans or Credit Facilities In accordance with the United States Sarbanes-Oxley Act of 2002, Logitech does not extend loans or credit facilities to non-executive Directors and Executive Officers. Logitech has no such loans or credit facilities. 5.9 Highest Total Compensation In fiscal year 2006, Mr. De Luca, Logitech’s President and CEO, was the Director that received the highest total compensation from the Company. Mr. De Luca received $.6 million in salary, $.6 million as bonus, and $6,500 in other benefits including 401(k) matching contributions for his services rendered as President and CEO. In April 2005, Mr. De Luca received an option for 200,000 registered shares. This option was granted at an exercise price of CHF 37.10 per share (approximately $31.03), which was the fair market value of the Company’s registered shares on the date of grant. Based on the Black-Scholes option-pricing model, these options have an estimated value of $2.7 million or $13.33 per share bringing his total fiscal year 2006 compensation to $3.9 million. Mr. De Luca did not receive any compensation for his service rendered as a Director. 6. Shareholders’ Participation Rights 6.1 Exercise and Limitations to Shareholders’ Voting Rights LISA Each share confers the right to one vote at the General Meeting of Shareholders. There are no limitations to the number of voting rights that a shareholder or group of shareholders is entitled to exercise, and there are no preferential voting rights. To exercise its voting rights at the General Meeting of Shareholders, a shareholder must have registered its shares by the day the Meeting is convened. Refer to section 2.6 for more information on the registration process. CG-21 Any shareholder may be represented at a meeting by a person of its choice who need not be a shareholder of the Company. The power of attorney must be made in writing. The use of the form prepared by the Company may be required. There are currently no limitations under Swiss law or in the Company’s Articles of Incorporation restricting the rights of shareholders outside Switzerland to hold or vote registered shares or Logitech ADSs. 6.2 Shareholders’ Resolutions for which a Particular Majority is Required In general, the resolutions of the General Meeting of Shareholders are passed with a simple majority of the votes cast. However, the following resolutions may only be passed with a majority of two-thirds of the votes represented. • • • • • • • • • change in the Company’s corporate purpose; creation of shares with privileged voting rights; restriction of the transferability of shares; creation of authorized or conditional capital; capital increases to be paid-in by means of existing reserves, against contributions in kind, or conducted with a view to the acquisition of specific assets; grant of special benefits; suppression or limitation of the shareholders’ preferential subscription right; change of the registered office of the Company; and dissolution without liquidation of the Company (merger). 6.3 Convocation of the General Meeting of Shareholders The Board of Directors generally convenes a General Meeting of Shareholders. The convocation is made in writing and is sent to each shareholder at the address recorded in the share register at least 20 days prior to the meeting. The Company’s share register closes upon convocation of the meeting. Thus, only those shareholders who are registered in the share register on the day the meeting is convened have the right to vote at the meeting. One or more shareholders who represent together at least 10% of the share capital of the Company may demand the Board of Directors convene a meeting. Such demands must be made in writing and received by the Board of Directors at least 60 days before the date of the proposed meeting. The Company has received an exemption as a foreign private issuer from compliance with a Nasdaq listing standard that requires that the quorum for shareholder meetings be at least 33 1⁄ 3% of the outstanding voting shares. Under Swiss law, public companies do not have specific quorum requirements for shareholder meetings. Accordingly, Logitech, like most other Swiss public companies, does not observe quorum requirements with respect to its shareholder meetings. In compliance with Swiss law, Logitech sends an invitation to all of its shareholders and publishes the notice of the meeting in the Swiss financial press. Also, to encourage attendance, Logitech holds its Annual General Meeting close to its operations in Switzerland. 6.4 Shareholders’ Right to Place Items on the Agenda of a Meeting Currently, one or more shareholders who together represent shares representing at least the lesser of (i) one percent of the share capital or (ii) an aggregate par value of one million Swiss francs may demand that an item be CG-22 placed on the agenda of a meeting. The minimum shareholding requirement was lowered based on an amendment to the Company’s Articles of Incorporation, approved by Logitech’s shareholders at the Company’s Annual General Meeting in June 2005. A request to place an item on the General Meeting agenda must be in writing, describe the proposal and be received by the Board of Directors at least 60 days prior to the date of the General Meeting. Such requests should be addressed to: Secretary to the Board of Directors, Logitech International S.A., CH 1143 Apples, Switzerland, or c/o Logitech Inc., 6505 Kaiser Drive, Fremont, CA 94555, USA. The Deposit Agreement under which Logitech ADSs are issued has the effect of giving holders of Logitech ADSs essentially the same voting interest in Logitech as if they were a holder of Logitech registered shares, rather than Logitech ADSs. However, because The Bank of New York actually owns the Logitech registered shares underlying the Logitech ADSs, ADS holders must rely on The Bank of New York to exercise the rights of a shareholder. 6.5 Registration in the Company’s Share Register Registration into the Company’s share register occurs upon request and is not subject to any condition. Refer to section 2.6 for more information on the registration process. 7. Mandatory Offer and Change of Control Provisions 7.1 Mandatory Offer Swiss law requires that any shareholder who acquires more than 33 1⁄ 3% of the voting rights of a Swiss company whose shares are listed in whole or in part in Switzerland is required to make an offer to acquire all listed equity securities of the company at a minimum price. Logitech International S.A.’s Articles of Incorporation do not remove this requirement. The Articles do not increase the participation threshold above which an offer must be made. Consequently, any person having acquired more than a third of the Company’s voting rights will be required to make an offer for all outstanding shares of the Company. 20-F 7.2 Change of Control Provisions Logitech’s Executive Officers generally have Change of Control Severance Agreements with Logitech. Under the terms of these agreements, if the Executive Officer’s employment is involuntarily terminated or they are demoted within 12 months after a change in control of Logitech, the executive would receive his or her base salary, annual and semiannual bonuses, and payment of health benefits for up to a year following the termination, as well as 100% vesting of all unvested stock options. In the case of a demotion, the Executive Officer would be required to remain employed for a period of time (generally 12 months) in order to receive these benefits. There are no agreements providing for payment of any consideration to any non-executive Director upon termination of his services with the Company. 8. Auditors 8.1 Duration of Mandate and Term of Office of the Independent Auditors Under the Company’s Articles of Incorporation, the shareholders appoint the Company’s independent auditors each year at the Annual General Meeting. Re-appointment is permitted. LISA The Company’s Independent Auditors are currently PricewaterhouseCoopers S.A., or PwC, Lausanne branch, 45, Avenue C.F. Ramuz, P.O. Box 1172, CH-1001, Lausanne, Switzerland. PwC assumed its first audit mandate for Logitech in 1988. They were reappointed as the Company’s statutory and group auditors in June 2005. Beginning in fiscal year 2006, the responsible principal audit partner has been Miguel Perry. CG-23 8.2/3 Audit Fees In addition to the audit services PwC provides with respect to Logitech’s annual audited consolidated financial statements and other filings with the Securities and Exchange Commission, PwC has provided non-audit services to Logitech in the past and may provide them in the future. Non-audit services are services other than those provided in connection with an audit or a review of the financial statements of the Company. The Audit Committee of the Board of Directors determined that the rendering of non-audit services by PwC was compatible with maintaining their independence. During fiscal year 2006, PwC performed the following non-audit services that were approved by the Audit Committee: tax planning and compliance advice, advising on other transactions, consultations regarding stock- based compensation, expatriate tax services and the implementation of Section 404 of the Sarbanes-Oxley Act. The following table presents the aggregate fees for professional audit services and other services rendered by PwC to Logitech in fiscal years 2006 and 2005 (in thousands): Audit fees (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit-related fees (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax fees (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other fees (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,364 219 425 54 $ 951 469 356 71 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,062 $1,847 2006 2005 (1) Audit fees represent those fees incurred for the indicated fiscal year, regardless of when they were paid. Audit fees include group and statutory audit fees as well as the reviews of Logitech’s quarterly reports on Form 6-K. (2) Audit-related fees represent services provided in implementing the various provisions of the Sarbanes-Oxley Act and consultation on various accounting issues. (3) Tax fees represent those fees incurred for tax compliance, assistance with tax audits, tax advice and tax planning. (4) All other fees represent services provided to Logitech for expatriate and other consulting services. 8.4 Supervisory and Control Instruments The Company’s Audit Committee pre-approves all audit and non-audit services provided by its Independent Auditors. This pre-approval must occur before the auditor is engaged. Services provided by the Company’s Independent Auditors (other than those required to be provided by law) can be approved no more than 6 months in advance of the services being performed. Services that last longer than a year must be re-approved by the Audit Committee. Logitech’s Audit Committee can delegate the pre-approval ability to a single independent member of the Audit Committee. The delegate must communicate all services approved at the next scheduled Audit Committee meeting. The Audit Committee or its delegate can pre-approve types of services to be performed by the auditors with a set dollar limit per the type of service. The Chief Financial Officer is responsible for ensuring that the work performed is within the scope and dollar limit as approved by the Audit Committee. Management must report to the Audit Committee the status of each project or service provided by the auditors. The Company’s Independent Auditors attend all regular meetings of the Audit Committee. On a quarterly basis, PwC reports on the findings of its audit and/or review work. On an annual basis, the Audit Committee approves PwC’s audit plan and evaluates the performance of PwC and its senior representatives in fulfilling its CG-24 responsibilities. Moreover, the Audit Committee recommends to the Board the appointment or replacement of the external auditor, subject to shareholder approval. Annually, PwC provides a report as to its independence to the Audit Committee. Refer to section 3.5 for additional information on the roles and responsibilities of the Audit Committee. 9. Information Policy The Company reports its financial results quarterly with an earnings press release. In addition, the Company informs its shareholders by means of an annual report and informs the public by the means of press releases upon occurrence of significant events within Logitech. The Company also maintains an investor relations website that provides an archive of its press releases and reports, as well as other information regarding the Company, available at www.logitech.com. The Company has reporting requirements under Swiss law and the regulations of the SWX Swiss Exchange, and to the U.S. Securities and Exchange Commission (“SEC”). The reports submitted to the SEC may be downloaded from http://www.sec.gov. Copies of the quarterly and annual SEC filings as well as press releases are available for download from the Logitech Web site at www.logitech.com. For no charge, a copy of the Company’s filings can be requested via the following address or phone number: Logitech Investor Relations 6505 Kaiser Drive Fremont, CA 94555 USA Main 510-795-8500 20-F LISA CG-25 LOGITECH INTERNATIONAL S.A. Consolidated Subsidiaries Jurisdiction of Incorporation Group Holding % Share Capital Name of Subsidiary EUROPE 3Dconnexion France SARL . . . . . . . . . . . . . . . . . . . . . . . France 3Dconnexion GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Republic of Germany 3Dconnexion Holding S.A. 3Dconnexion Polaska Sp z.o.o . . . . . . . . . . . . . . . . . . . . . Poland 3Dconnexion (U.K.) Limited . . . . . . . . . . . . . . . . . . . . . . United Kingdom Labtec Europe S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland Logi-Computer Hungary Trading and Services Limited . . . . . . . . . . . . . . . . . . . . . . . Switzerland Liability Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hungary Jersey, Channel Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom Logi (U.K.) Ltd. Logitech (Jersey) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Logitech 3D Holding GmbH . . . . . . . . . . . . . . . . . . . . . . Federal Republic of Germany Logitech Czech Republic . . . . . . . . . . . . . . . . . . . . . . . . . Czech Republic Logitech Espana BCN SL . . . . . . . . . . . . . . . . . . . . . . . . . Spain Logitech Europe S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland Logitech France SARL . . . . . . . . . . . . . . . . . . . . . . . . . . . Republic of France Logitech GmbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Republic of Germany Logitech Ireland Services Limited . . . . . . . . . . . . . . . . . . Logitech Italia SRL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Republic of Italy Logitech Nordic AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sweden Logitech Benelux B.V. . . . . . . . . . . . . . . . . . . . . . . . . . . . Kingdom of the Netherlands Logitech Poland Spolka z.o.o. Logitech S.A. Logitech Austria GmBH . . . . . . . . . . . . . . . . . . . . . . . . . . Austria Logitech Middle Tast Fz-LLC . . . . . . . . . . . . . . . . . . . . . United Arab Emirates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switzerland . . . . . . . . . . . . . . . . . . . . . Poland Ireland AMERICAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States of America 3Dconnexion Inc. Logitech (Intrigue) Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada Labtec Inc. Logitech de Mexico S.A. de C.V. . . . . . . . . . . . . . . . . . . . Mexico Logitech Canada, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canada Logitech Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States of America ASIA PACIFIC Japan India . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong LogiCool Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Logitech Electronic (India) Private Limited . . . . . . . . . . . Logitech Far East, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan, Republic of China Logitech Hong Kong, Ltd. Logitech Korea, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Korea Logitech Service Asia Pacific Pte. Ltd. Logitech Singapore Pte. Ltd. Logitech Technology (Suzhou) Co., Ltd. . . . . . . . . . . . . . People’s Republic of China . . . . . . . . . . . . . . . People’s Republic of China Logitech Trading (Shanghai) Co. Ltd. Natural Computing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . Mauritius Suzhou Logitech Computing Equipment Co. Ltd. . . . . . . People’s Republic of China Suzhou Logitech Electronic Co. Ltd. . . . . . . . . . . . . . . . . People’s Republic of China Logitech Asia Logistic Ltd. Logitech Asia Pacific Ltd. Logitech Australia Computer Peripherals Pty, Ltd. . . . . . Commonwealth of Australia . . . . . . . . . . . . . . Republic of Singapore . . . . . . . . . . . . . . . . . . . . . . Republic of Singapore . . . . . . . . . . . . . . . . . . . . . . . Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 EUR EUR CHF PLZ GBP CHF HUF EUR USD USD CZK EUR CHF EUR EUR EUR EUR SEK EUR PLN CHF EUR AED 25,000 27,727 100,000 50,000 1,000 150,000 3,000,000 20,000 188 28,039 200,000 50,000 100,000 182,939 25,565 3 20,000 100,000 18,151 50,000 200,000 35,000 100,000 USD CAD USD MXN CAD USD 70,708 1,661,340 44,864 50,000 100 11,522,396 JPY 155,000,000 107,760 INR TWD 480,000,000 1,282 USD KRW 150,144,225 1 USD SGD 500 22,000,000 USD 1,655,440 CNY USD 1 7,500,000 USD 5,000,000 USD 13 USD 13 USD 12 AUD Due to local legal requirements, there are holders of nominal shares apart from Logitech. CG-26 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2006 Commission File Number: 0-29174 LOGITECH INTERNATIONAL S.A. (Exact name of Registrant as specified in its charter) CG Not Applicable (Translation of Registrant’s name into English) Canton of Vaud, Switzerland (Jurisdiction of incorporation or organization) Logitech International S.A. Apples, Switzerland c/o Logitech Inc. 6505 Kaiser Drive Fremont, California 94555 (510) 795-8500 (Address and telephone number of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered American Depositary Shares, each representing one registered share at par value CHF .5 per share Nasdaq National Market Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None The number of outstanding shares of each of the issuer’s classes of capital or common stock as of March 31, 2006 was 95,803,310 registered shares. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. È Yes ‘ No If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ‘ Yes È No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. È Yes ‘ No LISA Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. È Large accelerated filer ‘ Accelerated filer ‘ Non-accelerated filer registrant check mark which item the statement financial elected has to Indicate by follow. ‘ Item 17 È Item 18 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ‘ Yes È No TABLE OF CONTENTS Part I Item 1. Item 2. Item 3. Item 4. Identity of Directors, Senior Management and Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Offer Statistics and Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information on the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4A. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 5. Item 6. Item 7. Item 8. Item 9. Operating and Financial Review and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors, Senior Management and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Major Shareholders and Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Offer and Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 10. Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Description of Securities Other than Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II Item 13. Defaults, Dividend Arrearages and Delinquencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds . . . . . . . . . . . Item 15. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16A. Audit Committee Financial Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16B. Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16C. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16D. Exemptions from the Listing Standards for Audit Committees . . . . . . . . . . . . . . . . . . . . . . . . Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers . . . . . . . . . . . . . . . . . Part III Item 17. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 18. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 19. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certifications Page 4 4 5 13 32 33 50 51 52 52 55 58 59 60 60 60 60 60 61 61 62 62 62 62 65 In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. In addition, references to “ADSs” are to American Depositary Shares of Logitech International S.A., each representing one registered share. Unless otherwise specified, all references to U.S. dollar, dollar or $ are to the United States dollar, the legal currency of the United States of America. All references to CHF are to the Swiss franc, the legal currency of Switzerland. Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners. 2 FORWARD-LOOKING INFORMATION This Annual Report on Form 20-F contains forward-looking statements based on beliefs of our management as of the filing date of this Form 20-F. These forward-looking statements include statements related to: • • • • • • our business strategy for new areas of growth and for building on the Company’s current strengths; our belief that we are positioned to take full advantage of opportunities in the market for personal peripheral products; our business and product plans for fiscal year 2007 and evolving market trends affecting our products; our expectation that audio, video and advanced remote controls will continue to be the key growth drivers; our expectation that new products to be launched later in fiscal year 2007, particularly in the speaker and cordless categories, will carry higher margins than the products they replace; and CG the sufficiency of our cash and cash equivalents, cash generated from operations, and available borrowings under our bank lines of credit to fund capital expenditures and working capital needs for the foreseeable future. Factors that might affect these forward-looking statements include, among other things: • market acceptance for our products; • • • • • our ability to introduce successful products in a timely manner and to compete effectively in the personal peripherals industry; our ability to implement our business strategy; our ability to accurately predict evolving market trends; our ability to match production levels with product demand and to successfully coordinate worldwide manufacturing and distribution; and general economic and business conditions. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,” “should” and “will” and similar expressions are intended to identify such forward-looking statements. These statements reflect our views and assumptions. All forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from expectations. The factors that could cause our actual results to differ are discussed more fully under Item 3 “Key Information – Risk Factors,” as well as elsewhere in this Annual Report on Form 20-F and in our other filings with the U.S. Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date of this filing. We undertake no obligation to publicly update or revise any forward-looking statements. LISA 3 PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 4 ITEM 3. KEY INFORMATION A. Selected Financial Data The financial data below has been derived from our audited consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America. This financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 20-F. This table should also be read in conjunction with Item 5 “Operating and Financial Review and Prospects.” These historical results are not necessarily indicative of the results to be expected in the future. Consolidated statements of income and cash flow data: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Year ended March 31, 2006 2005 2004 2003 2002 (In thousands, except per share amounts) $1,796,715 574,110 $1,482,626 503,587 $1,268,470 408,922 $1,100,288 364,504 $943,546 315,548 CG Marketing and selling . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . General and administrative . . . . . . . . . . . 223,063 87,953 64,183 201,353 73,900 56,660 156,793 61,289 45,286 Total operating expenses . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share and ADS: 375,199 198,911 $ 181,105 331,913 171,674 $ 149,266 263,368 145,554 $ 132,153 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.00 1.84 $ $ 1.69 1.53 $ $ 1.46 1.34 141,194 56,195 43,233 240,622 123,882 98,843 130,060 50,531 37,739 218,330 97,218 $ 74,956 1.08 0.99 $ $ 0.84 0.75 $ $ $ Shares used to compute net income per share and ADS: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . 90,681 99,385 $ 152,217 88,504 99,125 $ 213,674 90,692 100,320 $ 166,460 91,978 102,819 $ 145,108 89,858 101,878 $112,595 2006 2005 March 31, 2004 (In thousands) 2003 2002 Consolidated balance sheet data: Cash and cash equivalents . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, net of current maturities . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . $ 245,014 $1,057,064 4 $ $ 685,176 $ 341,277 $1,027,697 $ 147,788 $ 526,149 $ 294,753 $ 873,920 $ 137,008 $ 457,080 $ 218,734 $ 744,456 $ 131,615 $ 365,562 $143,101 $599,210 $104,812 $323,017 Exchange Rates Our registered shares traded on the SWX Swiss Exchange are denominated in Swiss francs while our ADSs traded on the Nasdaq National Market are denominated in U.S. dollars. Fluctuations in the exchange rate between the Swiss franc and the U.S. dollar will affect the U.S. dollar equivalent of the Swiss franc price of our registered shares on the SWX Swiss Exchange and, as a result, will likely affect the market price of our ADSs in the United States, and vice versa. LISA 5 The following tables set forth, for the periods indicated, information concerning exchange rates between the U.S. dollar and the Swiss franc based on the noon buying rate as reported by The Bank of New York, expressed in Swiss francs per U.S. dollars. The noon buying rate is the rate in New York City for cable transfers in selected currencies as certified for customs purposes by the Federal Reserve Bank of New York. Average (1) High Low Period End Fiscal 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 1.699 1.469 1.311 1.225 1.270 CHF 1.819 1.674 1.418 1.320 1.326 CHF 1.586 1.325 1.219 1.134 1.179 CHF 1.682 1.354 1.268 1.195 1.303 (1) Represents the average of the noon buying rate on the last business day of each month during the year. Monthly Highs and Lows (over the most recent six month period): November 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low CHF 1.326 CHF 1.321 CHF 1.294 CHF 1.320 CHF 1.320 CHF 1.304 CHF 1.278 CHF 1.279 CHF 1.260 CHF 1.284 CHF 1.289 CHF 1.241 As of May 1, 2006, the noon buying rate between the U.S. dollar and the Swiss franc was CHF 1.239. B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors Risk Factors Our operating results are difficult to predict and fluctuations in results may cause volatility in the price of our registered shares and American Depositary Shares (“ADSs”). Our revenues and profitability are difficult to predict due to the nature of the markets in which we compete and for many other reasons, including the following: • Our operating results are highly dependent on the volume and timing of orders received during the quarter, which are difficult to forecast. Customers generally order on an as-needed basis and we typically do not obtain firm, long-term purchase commitments from our customers. As a result, our revenues in any quarter depend primarily on orders booked and shipped in that quarter. In addition, a significant portion of our quarterly retail sales can occur in the last month of each quarter, further increasing the difficulty in predicting quarterly revenues and profitability. • We must incur a large portion of our costs in advance of sales orders, because we must plan research and production, order components, and enter into development, sales and marketing, and other operating commitments prior to obtaining firm commitments from our customers. This makes it difficult for us to adjust our costs in response to a revenue shortfall, which could adversely affect our operating results. 6 • Fluctuations in currency exchange rates can produce an impact on our revenues and profitability because we report our financial statements in U.S. dollars, whereas we have significant transactions in other currencies. Furthermore, fluctuations in foreign currencies impact our global pricing strategy resulting in our lowering or raising selling prices in a currency in order to avoid disparity with U.S. dollar prices and to respond to currency-driven competitive pricing actions. Fluctuations in our operating results may cause volatility in the price of our registered shares and ADSs. If we do not introduce successful products in a timely manner, our business and operating results could suffer. The personal peripherals industry is characterized by short product life cycles, frequent new product introductions, rapidly changing technology and evolving industry standards. As a result, we must continually introduce new products and technologies and enhance existing products in order to remain competitive. CG The success of our products depends on several factors, including our ability to: • • • anticipate technology, market trends and consumer demands; develop innovative and reliable new products and enhancements in a cost-effective and timely manner; and distinguish our products from those of our competitors. If we do not execute on these factors successfully, products we introduce or technologies or standards that we adopt may not gain widespread commercial acceptance, and our business and operating results could suffer. For example, if we do not address the consumer trend toward notebooks by timely developing products to support the continued growth of the notebook market segment, our sales could be adversely impacted in future periods. Our gross margins can vary significantly depending on product mix, customers and other factors. We have a diversified product portfolio of over 200 different personal peripherals for PCs and other digital platforms. We sell these products through a worldwide network of domestic and international distributors, retailers, and OEM customers. Our gross margins vary significantly by product line and customer type, as well as within product lines. When the mix of products sold shifts from higher margin product lines to lower margin product lines, or to lower-margin products within product lines, our overall gross margins and our profitability may be adversely affected. For example, gross margins in the audio category are lower than the Company’s other core product categories. Overall gross margins in recent quarters has been adversely impacted in part due to the increase in audio sales as a percentage of total sales. If audio sales continue to increase as a percentage of total sales, overall gross margins will be adversely impacted to the extent that gross margin improvements in the audio category, if any, are unable to offset this decrease. Similarly, our gross margins are generally lower for sales to OEM customers compared with sales to our retail customers. Increases in OEM sales or decreases in retail sales relative to total sales may also negatively impact our gross margins. LISA Gross margins can also vary due to consumer demand, competition, product life cycle, new product introductions, unit volumes, commodity and supply chain costs, and the complexity and functionality of new product innovations. The impact of the above on gross margins can create fluctuations in operating results, which may cause volatility in the price of the registered shares and ADSs. 7 If we do not compete effectively, demand for our products could decline and our business and operating results could be adversely affected. Our industry is intensely competitive. It is characterized by short product life cycles, continual performance enhancements, and rapid adoption of technological and product advancements by competitors in our retail market, and a trend of declining average selling prices in the OEM market. We continue to experience aggressive price competition and other promotional activities from our primary competitors and from less-established brands, and we may choose to adjust prices or increase other promotional activities to improve our competitive position. We may also encounter more competition if any of our competitors decides to enter other markets in which we currently operate. In addition, we have been expanding the categories of products we sell, and entering new markets, such as the market for programmable remote controls. As we do so, we are confronting new competitors, many of which have more experience in the categories or markets and have greater marketing resources and brand name recognition than we have. In addition, because of the continuing convergence of the markets for computing devices and consumer electronics, we expect greater competition in the future from well-established consumer electronics companies in our developing categories, as well as future ones we might enter. Many of these companies have greater financial, technical, sales, marketing and other resources than we have. We expect continued pressure in our retail business, particularly in the terms and conditions that our competitors offer customers, which may be more favorable than our terms. Future market conditions, product transitions, and initiatives by our competitors may require us to take actions to increase our customer incentive programs and could impact our revenues and operating margins. Corded and Cordless. Microsoft is our main competitor in retail cordless (mice and desktops) and corded (mice and keyboards) categories. Microsoft’s offerings include a complete line of mice, keyboards and desktops. Microsoft has significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base. We continue to encounter aggressive pricing practices, promotions, and channel marketing on a worldwide basis from Microsoft, which will continue to impact our revenues and margins. We are also experiencing competition and pricing pressure for corded and cordless mice and desktops from less-established brands, in the lower-price segments, which could potentially impact our market share. The emerging Notebook peripheral segment is also an area where we face new competitors that have broader Notebook product offerings, as well as aggressive pricing and promotions. Microsoft is a leading producer of operating systems and applications with which our mice and keyboards are designed to operate. As a result, Microsoft may be able to improve the functionality of its mice and keyboards to correspond with ongoing enhancements to its operating systems and software applications, for example the expected Vista operating system launch expected in early 2007, before we are able to make such improvements. This ability could provide Microsoft with significant lead-time advantages. In addition, Microsoft may be able to offer pricing advantages on bundled hardware and software products that we may not be able to offer. Video. Our main competitor in the U.S. for PC web cameras is Creative Labs, which offers a complete line of PC web cameras. In Europe, our main competitors are Creative Labs and Philips. In view of the rapid growth of this market, we expect additional competitors, including major players such as Microsoft, to enter this category in the near future. We continue to encounter aggressive pricing practices, promotions, and channel marketing on a worldwide basis from Creative Labs, which will continue to impact our revenues and margins. We are also experiencing ongoing competition from less-established providers of PC web cameras that are seeking shelf space and increased market share through price competition. Gaming. Competitors for our interactive entertainment products include Intec, Mad Catz, Pelican Accessories and Saitek Industries. Our cordless controllers for PlayStation®2 also compete against corded controllers offered by Sony. In addition, our cordless controllers for Microsoft Xbox™ are competing against Microsoft corded controllers. 8 Audio. Competitors in audio devices vary by product In the PC, mobile entertainment and communication platform speaker business, competitors include Altec Lansing, Creative Labs and Bose Corporation. In the PC and console headset, telephony and microphone business, our main competitors include Plantronics and its Altec Lansing subsidiary. line. Advanced Remote Controls. With our acquisition of Intrigue Technologies in May 2004, we expanded our product portfolio to include a new line of personal peripheral devices for home entertainment systems. We have greatly expanded our market share in this business recently. With many companies offering universal remote controls, our success will likely attract more competition. Our competitors include, among others, Philips, Universal Remote, Universal Electronics, RCA and Sony. If we do not continue to distinguish our products, particularly our retail products, through distinctive, technologically advanced features, design, and services, as well as continue to build and strengthen our brand recognition and our access to distribution channels, our business could be harmed. If we do not compete effectively, demand for our products could decline, our gross margins could decrease, we could lose market share, and our revenues could decline. CG If we do not continue to improve our product demand forecasting our business and operating results could be adversely affected. We use our forecasts of demand for our products to make decisions regarding investments of our resources and production levels of our products. Although we receive forecasts from many of our customers, they are not always obligated to purchase the forecasted demand. Also, actual sales volumes for individual products in our retail distribution channel can be volatile due to changes in consumer preferences and other reasons. In addition, our retail products have short product life cycles, so a failure to accurately predict high demand for a product can result in lost sales that we may not recover in subsequent periods, or higher product costs if we meet demand by paying higher costs for materials, production and delivery. We could also frustrate our customers and lose shelf space. Our failure to predict low demand for a product can result in excess inventory, lower cash flows and lower margins if we are required to reduce product prices in order to reduce inventories. We have rapidly and significantly expanded the number and types of products we sell, and the geographic markets in which we sell them, and we will endeavor to further expand our product portfolio and sales reach. The growth of our product portfolio and our sales markets has increased the difficulty of accurately forecasting product demand. We have experienced large differences between our forecasts and actual demand for our products and expect differences to arise in the future. If we do not continue to improve the accuracy of our forecasts our business and operating results could be adversely affected. Our business depends in part on access to third party platforms or technologies, and if the access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change without notice to us, our business and operating results could be adversely affected. In recent years we have expanded our product portfolio to include products designed for use with third party platforms such as the Apple iPod, Microsoft Xbox™, Sony Playstation, and the Sony PSP. The growth of our business is in part due to sales of these products. However, our business in these categories relies on our access to the platforms of third parties, which can be withdrawn, denied or not be available on terms acceptable to us. For example, to date Microsoft has not licensed us, or any other manufacturer, to produce third party wireless peripherals for use with their new Xbox 360™ gaming console. LISA Our access to third party platforms may require our paying a royalty, which lowers our product margins, or may otherwise be on terms that are not acceptable to us. In addition, the third party platforms or technologies 9 used to interact with our product portfolio can change without prior notice to us, which can result in our having excess inventory or lower margins. For example, when Apple changed the connector for the iPod with the release of the iPod Nano without notice to us, we experienced increased inventories and lower prices than we had anticipated on headset products we had designed for use with the iPod. If we are unable to access third party platforms or technologies, or if our access is withdrawn, denied, or is not available on terms acceptable to us, or if the platforms or technologies change without notice to us, our business and operating results could be adversely affected. If we do not successfully introduce and market products for notebook PCs our business and results of operations may suffer. We have historically targeted peripherals for the PC platform, a market that is dynamically changing as a result of the increasing popularity of notebook products over desktop PCs. In our OEM channel, this shift could adversely affect our sales of OEM mice, which are sold with name-brand desktop PCs. Our OEM mice sales have historically made up the bulk of our OEM sales, and our OEM sales accounted for 12% and 13% of total revenues during fiscal year 2006 and 2005. If the desktop PC market continues to experience slower growth or decline, and if we do not successfully grow our non-mouse OEM business, our OEM revenues could be adversely affected. In our retail channels, the impact of the growing popularity of notebook PCs is uncertain, but may result in a decreased need by consumers for keyboards. This could adversely affect our sales of keyboards and desktops (mouse and keyboard combination). If we do not suitably adapt our product offerings to successfully introduce products for the notebook PC, consumers may decrease purchases of our products, which would adversely affect our business and results of operations. Our business could be negatively impacted by delays and complications resulting from our implementation of a new enterprise resource planning system. We use enterprise resource planning (“ERP”) software in the operation of our business and maintenance of business and financial data related to our daily operations. We are in the process of upgrading this software, and we anticipate transitioning to a new version in the second quarter of fiscal 2007. If the upgrade is materially delayed, or if we are unable to effectively implement the new software, we may be unable to timely or accurately process or access business and financial information stored on the system, which could adversely impact our daily operations and the timely reporting of financial results. We are exposed to increased costs and risks associated with complying with Section 404 of the Sarbanes- Oxley Act. Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies in the United States evaluate and report on their systems of internal controls over financial reporting. Further, Section 404 requires the company’s independent public accountants to attest to and report on management’s evaluation of those controls. As a foreign private issuer, we are not required to comply with the requirements of Section 404 until our fiscal year ending March 31, 2007. We are currently in the process of documenting and testing our internal controls over financial reporting to comply with these requirements. We are also in the process of upgrading our ERP software. Both efforts require substantial time and resources to successfully complete. In addition, the timing of the ERP implementation has a significant impact on the potential cost of the compliance effort. We have recently experienced delays in the ERP implementation. If the ERP implementation is further delayed and the time period available to assess and evaluate internal control effectiveness is shortened, our compliance costs could increase substantially and our ability to timely complete our evaluation of our internal controls may be impacted. We have committed substantial time and resources to evaluate and assess the effectiveness of our internal controls and to implement ERP software. During these processes, we have identified deficiencies and may identify others in our system of internal controls over financial reporting that may require remediation. Our 10 evaluation and testing is ongoing, and there can be no assurance that we will not identify further deficiencies that would require remediation. If we are not able to remediate identified deficiencies in a timely manner that either alone or together constitute material weaknesses in our internal controls, we will not be able to determine that our internal controls over financial reporting are effective and comply with Section 404 in a timely manner. This could result in a negative perception of the reliability of our financial statements and subsequently a decline in the price of our securities. Our principal manufacturing operations and third-party contract manufacturers are located in China, which exposes us to risks associated with doing business in that country. Our principal manufacturing operations and third-party contract manufacturers are located in China. Our manufacturing operations in Suzhou, China could be severely impacted by evolving interpretation and enforcement of legal standards, by strains on Chinese energy, transportation, communications, trade, public health and other infrastructures, by conflicts, embargoes, increased tensions or escalation of hostilities between China and Taiwan, and by other trade customs and practices that are dissimilar to those in the United States and Europe. Interpretation and enforcement of China’s laws and regulations continue to evolve and we expect differences in interpretation and enforcement to continue in the foreseeable future. CG Our Suzhou facilities are managed by several of our key Taiwanese expatriate employees. The loss of these employees, either voluntarily or as a consequence of deterioration in relations between China and Taiwan, could diminish the productivity and effectiveness of our Suzhou manufacturing operations. Further, we may be exposed to fluctuations in the value of the Chinese yuan renminbi (“CNY”), the local currency of China. In recent years, China has been under international pressure to revalue its currency, which certain of its trading partners assert is undervalued. In July 2005, the Chinese government restructured the country’s exchange rate system, pegging the CNY to a basket of currencies rather than just the U.S. dollar. In the months following the revaluation, the CNY appreciated 2% against the U.S. dollar. While the revaluation continues to limit the CNY to float within a narrow percentage band each day, we believe that the change to a more flexible system based on a basket of foreign currencies could lead to a further, gradual rise in the CNY’s value. Significant future appreciation of the CNY could increase our component and other raw material costs, as well as our labor costs and could adversely affect our financial results. We purchase key components and products from a limited number of sources, and our business and operating results could be harmed if supply were delayed or constrained or if there were shortages of required components. We purchase certain products and key components from a limited number of sources. If the supply of these products or key components were to be delayed or constrained, we may be unable to find a new supplier on acceptable terms, or at all, or our new and existing product shipments could be delayed, any of which could harm our business, financial condition and operating results. For example, in the second half of fiscal year 2006 we were unable to meet demand for our V400 laser cordless mouse for notebooks resulting in lost sales, because of the inability of a supplier to provide us with a critical component. Lead times for materials, components and products ordered by us or by our contract manufacturers can vary significantly and depend on factors such as contract terms, demand for a component, and supplier capacity. From time to time, we have experienced component shortages. We continue to experience extended lead times on semiconductors and base metals used in our products. Shortages or interruptions in the supply of components or subcontracted products, or our inability to procure these components or products from alternate sources at acceptable prices in a timely manner, could delay shipment of our products or increase our production costs, which could adversely affect our business and operating results. LISA 11 If we do not successfully coordinate the worldwide manufacturing and distribution of our products, we could lose sales. Our business requires us to coordinate the manufacture and distribution of our products over much of the world. We increasingly rely on third parties to manufacture our products, manage centralized distribution centers, and transport our products. If we do not successfully coordinate the timely manufacture and distribution of our products, we may have insufficient supply of products to meet customer demand and we could lose sales, or we may experience a build-up in inventory. We rely on commercial air freight carriers, ocean freight carriers, trucking companies and other transportation companies for the movement of our products. Consequently, our ability to ship products to our distribution centers could be adversely impacted by shortages in available cargo capacity. The logistics and supply chain infrastructure in China, where our products are manufactured, has not kept pace with the rapid expansion of China’s economy, resulting in periodic capacity constraints in the transportation of goods. If we are unable to secure cost-effective freight resources in a timely manner, we could incur incremental costs to expedite delivery, which could adversely affect our gross margins, and we could experience delays in bringing our products to market, resulting in lost product sales or the accumulation of excess inventory. Air and ground transportation costs remain under upward pressure primarily due to high fuel costs. Further increases in the worldwide cost of fuel could result in higher transportation costs which could adversely affect gross margins. A significant portion of our quarterly retail orders and product deliveries generally occur in the last month of the fiscal quarter. This places pressure on our supply chain and could adversely impact our revenues and profitability if we are unable to successfully fulfill customer orders in the quarter. We conduct operations in a number of countries and the effect of business, legal and political risks associated with international operations could significantly harm us. We conduct operations in a number of countries. There are risks inherent in doing business in international markets, including: • • • • • • • • difficulties in staffing and managing international operations; compliance with laws and regulations, including environmental laws, which vary from country to country and over time, increasing the costs of compliance and potential risks of non-compliance; exposure to political and financial instability, leading to currency exchange losses and collection difficulties or other losses; exposure to fluctuations in the value of local currencies; difficulties or increased costs in establishing sales and distribution channels in unfamiliar markets, with their own market characteristics and competition, particularly in Latin America, Eastern Europe and Asia; changes in value-added tax (“VAT”) or VAT reimbursement; imposition of currency exchange controls; and delays from customs brokers or government agencies. Any of these risks could significantly harm our business, financial condition and operating results. We may be unable to protect our proprietary rights. Unauthorized use of our technology may result in the development of products that compete with our products. Our future success depends in part on our proprietary technology, technical know-how and other intellectual property. We rely on a combination of patent, trade secret, copyright, trademark and other intellectual property laws, and confidentiality procedures and contractual provisions such as nondisclosure terms and licenses, to protect our intellectual property. 12 We hold various United States patents and pending applications, together with corresponding patents and pending applications from other countries. It is possible that any patent owned by us will be invalidated, deemed unenforceable, circumvented or challenged, the patent rights granted will not provide competitive advantages to us, or that any of our pending or future patent applications will not be issued. In addition, other intellectual property laws or our confidentiality procedures and contractual provisions may not adequately protect our intellectual property. Also, others may independently develop similar technology, duplicate our products, or design around our patents or other intellectual property rights. In addition, unauthorized parties have copied and may in the future attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Any of these events could significantly harm our business, financial condition and operating results. that Product quality issues could adversely affect our reputation and could impact our operating results. The market for our products is characterized by rapidly changing technology and evolving industry standards. To remain competitive, we must continually introduce new products and technologies. The products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell. Failure to do so could result in product recalls, product redesign efforts, lost revenue, loss of reputation, and significant warranty and other expenses to remedy. CG Our effective tax rates may increase in the future, which could adversely affect our operating results. We operate in multiple jurisdictions and our profits are taxed pursuant to the tax laws of these jurisdictions. Our effective tax rate may be affected by changes in or interpretations of tax laws in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical allocation of income and expense, and changes in management’s assessment of matters such as the realizability of deferred tax assets. In the past, we have experienced fluctuations in our effective income tax rate. Our effective income tax rate in a given fiscal year reflects a variety of factors that may not be present in the succeeding fiscal year or years. There is no assurance that our effective income tax rate will not change in future periods. The amount of income taxes we pay could be subject to ongoing audits in various jurisdictions and a material assessment by a governing tax authority could affect our profitability. If our effective tax rate increases in future periods, our operating results could be adversely affected. ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company Logitech International S.A. was incorporated under the laws of Switzerland in 1981. In 1988, the Company listed its shares in an initial public offering in Switzerland. In March 1997, the Company sold 4,000,000 registered shares from treasury in a U.S. initial public offering in the form of 4,000,000 American Depositary Shares (ADSs), which were listed on the Nasdaq National Market. The address of the Company’s registered office is CH-1143 Apples, Switzerland; and the telephone number is 41-(0)21-800-53-54. The Company has manufacturing facilities in Asia and offices in major cities in North America, Europe and Asia Pacific. Important Events During the past few years, Logitech has significantly broadened its product offerings and the markets in which it sells them. During the same period, the Company’s sales have grown significantly. Most of this growth has been organic, a result of the Company’s own product and marketing development activities. However, its business has also grown as a result of a limited number of acquisitions that have expanded the Company’s business into new product categories. LISA Connectix – Web Cameras. In September 1998, the Company acquired the QuickCam® PC web camera business of Connectix Corporation for $26.2 million in cash, including closing and other transaction costs. The acquisition was part of the Company’s strategy to pursue new areas of growth and to enter the PC web camera 13 market. The Connectix business has been integrated into the Company’s video division. The acquisition allowed the Company to take advantage of new technologies in digital imaging and the growth of the market for PC web cameras. With the success of its line of PC web cameras, the Company has emerged as a market leader in this product category. Labtec – Audio. In March 2001, Logitech acquired Labtec Inc., a publicly traded provider of PC speakers, headsets and microphones based in Vancouver, Washington, for $73 million in cash and stock, and $3.3 million in closing and transaction costs. The acquisition strengthened Logitech’s market presence in the audio interface space and furthered its strategy to move the Company beyond the PC platform and into markets such as mobile telephony. The Company integrated the Labtec business, and has expanded the Labtec brand to encompass additional product categories such as mice and web cameras. Intrigue – Advanced Remote Controls. In May 2004, the Company acquired Intrigue Technologies, Inc., a privately held provider of advanced remote controls, based in Mississauga, Canada. Under the terms of the purchase agreement, Logitech acquired all the outstanding shares of Intrigue for $29 million in cash, and $1.6 million in closing and transaction costs. The agreement also provides for deferred payments to Intrigue’s former shareholders based on the highest net sales from products incorporating Intrigue’s technology during the revenue measurement period, defined as any consecutive four-quarter period beginning in April 2006 through September 2007. The total deferred payment amount will vary with net sales in the revenue measurement period. The payment amount would approximate 27% of such net sales at the highest net sales level, although the percentage could be higher at lower net sales levels. No deferred payments are required if the highest net sales level in the revenue measurement period is less than $55.0 million. Net sales of remote controls have been increasing in the recent quarters and, if current sales growth in this category continues, the Company will be obligated to make the deferred payment. The deferred payment, if any, will be recorded as an adjustment to goodwill. The total payment amount will not be known until the end of the revenue measurement period. The acquisition was part of the Company’s strategy to pursue new opportunities in the living room environment, positioning Logitech at the convergence of consumer electronics and personal computing in the digital living room. The Company has integrated Intrigue’s business into its existing operations. Principal Capital Expenditures Logitech’s capital expenditures for property, plant and equipment for fiscal years 2006, 2005 and 2004 were $54.1 million, $40.5 million and $24.7 million. During fiscal years 2006 and 2005, capital expenditures were mainly for construction of a new factory in Suzhou, China as well as investments for information systems upgrades and normal expenditures for tooling costs. Investment during fiscal year 2004 related to normal expenditures for tooling costs, machinery and equipment and computer equipment and software. The Company’s capital requirements are primarily financed through cash flow from operations. The Company’s principal manufacturing operations are located in Suzhou, China. The Company has expanded operations in the region with the construction of a new factory that has 30% greater capacity than the first factory with the potential to double beyond that. Operations were moved to the new facility in the summer of 2005. Principal Equity Investments As of March 31, 2006, Logitech had equity investments in various technology companies totaling $36.4 million. During fiscal year 2006, the Company did not make any investments, but recorded an increase in fair value of one investment based on quoted market prices. During fiscal years 2005 and 2004, the Company made investments of $.7 million and $15.2 million. In fiscal year 2006, the Company sold or impaired investments amounting to $1.6 million. The Company did not sell or impair any of its investments in fiscal year 2005. During fiscal year 2004, the Company sold or impaired investments amounting to $.5 million. The Company accounts for one investment as available-for-sale securities at fair value and uses the cost method for all other investments. 14 In July 2003, the Company made a $15.1 million cash investment in the Anoto Group AB (“Anoto”), which represented approximately 9.5% of Anoto’s outstanding shares as of March 31, 2006. The investment was subsequently decreased to 5.5% of Anoto’s outstanding shares due to a sale of securities in April 2006. In connection with this investment, a Logitech executive was elected to the Anoto board of directors. Anoto is a publicly traded Swedish high technology company from which Logitech licenses digital pen technology. The license agreement requires Logitech to pay a license fee for the rights to use the Anoto technology and a license fee on the sales value of digital pen solutions sold by Logitech. Also, the agreement requires Logitech to pay non-recurring engineering (“NRE”) service fees primarily for specific development and maintenance of Anoto’s licensed technology. In prior years and most recently in May 2004, Logitech made cash investments in A4Vision, Inc. (“A4Vision”) totaling $1.2 million, which represented approximately 4% of A4Vision’s outstanding shares. In connection with this investment, a Logitech executive was appointed to the A4Vision board of directors. During fiscal year 2006, the Company determined that a decrease in A4Vision’s value is more than temporary based on a review of its fair value and impaired the investment. A4Vision is a privately held company from which Logitech licenses face tracking software. The license agreement requires Logitech to pay a license fee based on the number of its products sold with A4Vision’s licensed software. CG B. Business Overview Company Overview Logitech is a leader in the design, manufacture and marketing of personal peripherals for PCs and other digital platforms. For the PC, the Company’s products include mice, trackballs, keyboards, gaming controllers, multimedia speakers, headsets and webcams. For digital music devices, the Company’s products include speakers and headphones. For gaming consoles, the Company offers a range of controllers, audio products and other accessories. In addition, Logitech offers wireless music solutions for the home and advanced remote controls for home-entertainment systems. Logitech also offers digital writing solutions, 3D control devices, and headphones for mobile phones. The Company’s products, many with software included, provide user-centric solutions intended to be easy to install and easy to use. Logitech’s personal peripheral products are often the most frequent point of physical interaction between people and the digital world. As such, they are a significant factor in determining the man/ machine interface and in increasing its richness. These products allow users to personalize and enrich their digital environment, and to easily operate in a variety of applications. The Company is committed to offering products that bring together the tools that business people, consumers, and computer and console gamers need to make their experience more effective, comfortable, and enjoyable. The Company’s products are sold through a variety of channels, including consumer electronics retailers; mass merchandisers; specialty electronics stores; computer and telecom stores; value-added resellers; online merchants and OEMs. The Company’s retail products target and appeal directly to consumers and businesses as they purchase add-on devices for their PC, gaming console, mobile entertainment and communication device, or home entertainment system. Logitech’s products are purchased as add-ons to enable or improve applications that require dedicated devices, including webcams, PC headsets, speakers, steering wheels and joysticks for PC and gaming consoles, and media-control devices. The products are also purchased to replace the basic peripherals that originally came with the platform (PC, gaming console, mobile entertainment and communication device, or home entertainment system) with devices that offer increased comfort, flexibility and functionality. Logitech’s OEM products are a frequent choice among PC manufacturers, who need high-quality, affordable, and functional personal peripherals in high volumes. LISA Over the past 20 years, Logitech has established itself as a leader in the design, manufacturing and marketing of PC control devices. Building on this leadership position, the Company has capitalized on the growth in personal computing and the advent and growth of the Internet by significantly expanding its product 15 offerings to include a wide range of personal peripherals for the PC. Logitech is a worldwide leader in radio- based cordless input devices, offering a comprehensive selection of cordless keyboards, mice and gaming controllers. The Company also has become a leader in the PC webcam market. In addition, Logitech has emerged as a leading provider of multimedia speaker systems and PC headset products. Further, working with industry partners, the Company is a pioneer in the area of digital writing. Logitech also produces personal peripherals for platforms such as gaming consoles, mobile entertainment and communication devices, and home entertainment systems. The Company produces controllers for the popular gaming consoles and supports features for specific games. Logitech’s product offerings for gaming consoles also include speakers, headsets and other accessories. For mobile phones, Logitech offers both Bluetooth mono headsets and stereo headsets for communication and entertainment on the new generation of music phones. For mobile entertainment platforms, Logitech offers complementing devices for iPod as well as other digital music players, including portable speakers, wireless headphones and noise canceling headphones. For home entertainment systems, Logitech offers a line of advanced remote controls that are designed to provide simple, intuitive control of even the most elaborate entertainment system, as well as wireless music systems that enable consumers to stream their digital music from either the PC or iPod directly to the stereo or home theater system. Competitive Strengths The Company believes its key competitive strengths include: Product Definition, Technology and Industrial Design Excellence Logitech understands the balance between features and complexity, functionality and style, price and performance. The Company believes its ability to produce world-class, user-centric industrial designs, coupled with innovative technologies that deliver true benefit to the consumer, sets it apart from competitors. Logitech has repeatedly received awards for design and innovation. During calendar year 2005, the Company’s product designs received the following honors: “red dot” awards, iF Industrie Forum Design awards, Good Design awards, CES Innovations Design and Engineering awards, and an ID Magazine’s Design Distinction award. Logitech’s advanced technology, evidenced by products such as the G7 Laser Cordless Mouse, the G5 Laser Mouse, the QuickCam® Fusion™ Webcam, the Cordless Desktop® MX™ 3100, the V500 Cordless Notebook Mouse, the Harmony® 880 Advanced Universal Remote, the mm50 Portable Speakers for iPod®, the Z-5500 Digital Speakers, the V20 Notebook Speakers, and others, garnered numerous top billings, including Editors’ Choice, Product of the Year, World Class Award, Top 100 Gadgets of the Year, and more, in a variety of publications such as Popular Mechanics, PC World, PC Magazine, CNET, Computer Shopper, Macworld, Maximum PC, and in many other media outlets worldwide. Substantial Technical Expertise Logitech has accumulated significant expertise in the key engineering disciplines that underlie its products. For example, Logitech engineers have continually enhanced motion-encoding technology for control devices over several distinct generations. They have developed several radio transmission technologies for cordless operations, developed new applications for webcams, enabled the integration of new controllers in console gaming, and developed innovative database and web-based systems to configure the Company’s advanced remote controls. Many of the technologies involved in these developments have applications across multiple product offerings, allowing the Company to leverage its accumulated investment. Logitech believes its future lies not only in its strong internal technical resources, but also in partnering with other industry leaders with complementary technologies that promise to make the interface more productive, natural and enjoyable. Technological Innovation Logitech has long been at the forefront of technological innovation, with a list of more than 75 industry “firsts” to its name and a patent portfolio of more than 100 patents. 16 The Company has continually embraced new connectivity technologies and standards. The Company led in optical sensing technology with the opto-mechanical mouse in 1982. The Company was also among the first to market a digital still camera in 1991. Logitech demonstrated the first working USB prototype at the Fall Comdex in 1995. In 2001, Logitech introduced the first cordless optical mouse. With the Cordless Presenter™, the Company introduced its first Bluetooth personal peripheral and in 2004, with the MXTM1000, the first laser mouse. Also in 2004, Logitech extended the use of its proprietary 2.4 GHz technology to its mice products, further reducing power consumption and size, and enhancing the range of operation. In 2005, Logitech included the Z-wave radio technology in its high end advanced remote controls, to enable simple home automation tasks based on this emerging connectivity standard. Logitech continues to monitor the connectivity environment to optimize the user experience when interfacing with digital information. Retail Brand and Shelf Space The Company believes the Logitech brand name and industrial designs are recognized worldwide as symbols of product quality, innovation, ease of use and price performance. The Company enjoys a strong and growing brand presence in more than 100 countries. During fiscal year 2006, the Company sold 72 million Logitech-branded products. The Company believes that in the consumer market, brand identity and brand awareness are important components of the purchase decision, and that as competition intensifies, the ability to secure shelf space will increasingly become a competitive advantage. Logitech’s brand has enabled the Company to build an extensive retail distribution network and to obtain this critical shelf space. The strength of this brand is apparent in the OEM channel as well, where systems manufacturers and integrators, as well as game publishers, and other partners are choosing to bundle Logitech-branded products with their offerings. CG Volume Manufacturing Capability Resulting from Strong OEM Relationships The Company believes its manufacturing capabilities are a significant competitive advantage. Over the past 11 years the Company has built a significant manufacturing presence in Asia, where its ISO 9000-certified manufacturing facilities are currently producing more than 60 million units per year. As a result, Logitech has been able to maintain strong quality process controls and has realized significant cost efficiencies. Further, the Company expanded its Suzhou operations with the construction of a new factory to provide for additional production capacity. The new facility has 30% greater capacity than the Company’s first factory with the potential to double beyond that. The Company’s manufacturing expertise extends beyond production to include logistical support, just-in-time supply and process engineering. Logitech’s manufacturing capability has allowed the Company to continue its long-established relationships with large OEM customers. The Company currently sells to the majority of the world’s largest PC manufacturers, as well as to most of the next layer of systems manufacturers and system integrators. Because Logitech’s engineering and design staffs work collaboratively with OEM customers on the specifications for future products, the Company believes its OEM relationships provide it with valuable insight into the future of the computer marketplace and technology trends. Further, Logitech plans to extend its OEM presence both with its traditional customer base, and with new classes of customers including console platform manufacturers, game publishers and mobile technology vendors. The combination of a strong retail brand and a high-volume manufacturing operation linked to its OEM relationships, provides Logitech with a competitive advantage that the Company believes is unparalleled by its competitors. Global Presence Logitech is a global company capable of drawing upon the strengths of its global resources, global distribution system and geographical revenue mix. With manufacturing facilities in Asia, engineering teams in North America, Europe and Asia, major distribution centers in North America, Europe and Asia, as well as with sales and marketing offices in major cities worldwide, the Company has access to leading technology, markets, personnel and ideas from around the world. 17 LISA Strength on the Desktop As it broadens its product portfolio beyond the PC platform, Logitech has also continued to expand its presence on the PC desktop, with its product portfolio encompassing a broader range of personal peripherals that people use everyday as they work, communicate and play at their PC. The Company’s personal peripherals bring together on the desktop a broad variety of products that individuals – business people, home users, gamers and others – need to make their time on the Internet and time at the computer more productive, comfortable and enjoyable. As a result, the Company is positioned to offer “one-stop shopping” for peripherals that have been designed to work seamlessly together. Industry Overview Increasingly affordable prices and wider availability of business, consumer, education, and communication applications have created a very large installed base of personal computers. Logitech believes that the market penetration of PCs and other information access devices, already high in developed countries, is likely to increase worldwide. In addition, continuing growth in processing power and communications bandwidth, the increased accessibility of digital content and the pervasive access and use of the Internet, create opportunities for new applications, new users and dramatically richer interactions between users and digital information. These developments create new demands by users wanting to take full advantage of this increased processing power, new applications and new technologies in an intuitive, productive, comfortable and convenient manner. Today’s PCs have evolved from productivity tools for word processing into affordable multimedia appliances or “digital hubs” capable of creating and manipulating vast amounts of graphics, sound and video. The interface devices sold with most new PCs can be quite limited in the functionality they provide. This is especially true where the need to offer new personal computers at low prices dictates basic, no-frills peripherals such as a basic mouse and an alphanumeric keyboard. Logitech believes the expanded capabilities of PCs, and the large installed base, present a significant opportunity for companies that provide innovative personal peripheral products for the computer, as basic input devices alone do not fully enable many of the newest applications. Therefore, on one hand, PC manufacturers continue to require large volumes of simple personal peripherals. On the other hand, the after-market (that is, the market for peripheral upgrades and add-ons sold separately from the basic PC) grows as consumers demand more function-rich personal peripheral tools, and as the PC plays an increasing role in the new digital lifestyle. In addition, Logitech believes that trends established in the consumer technology market, such as brand identity, affordability, ease of installation and use as well as visual appeal, have become important aspects of a purchase decision when buying a PC and personal peripherals. Logitech believes similar industry dynamics and personal peripheral device opportunities exist for non-PC platforms, such as video game consoles, mobile entertainment and communication devices, and home entertainment systems. As these additional platforms deliver new functionality, increased processing power and growing communications capabilities, Logitech expects demand to increase for add-on, complementary devices, connected to these platforms. The product expertise Logitech has developed around the PC platform extends to these other platforms as well and provides further opportunity for growth and leverage. Business Strategy Logitech’s objective is to strengthen its leadership in the growing market for personal peripherals, linking people to the digital world wherever and whenever they need to access digital information to communicate, learn and play. The Company has historically served the installed base of PCs by offering innovative personal 18 peripherals to address the needs of the desktop. While PCs are being used more and more as the digital hub to access information and communicate, other platforms such as game consoles, mobile phones, mobile entertainment and communication devices and home entertainment systems are also becoming a rich resource for people to access information, communicate, listen to music and enjoy an expanding offering of interactive games. To achieve the Company’s objective, the key elements of Logitech’s strategy consist of the following: Technological Innovation To capitalize on market opportunities for personal peripherals, Logitech recognizes that continued investment in product research and development is critical to facilitating innovation of new and improved products and technologies. Beyond updating its existing line of personal peripherals, the Company will continue to lead the development of new technologies and to create product innovations such as the G7 and G5 Laser Gaming Mice. In 2005, Logitech included the Z-wave radio technology in its high end advanced remote controls, to enable simple home automation tasks based on this emerging connectivity standard. Logitech is committed to meeting customer needs for personal peripheral devices and believes that innovation and product quality are important elements to gaining market acceptance and strengthening its market leadership. CG Manufacturing To effectively respond to rapidly changing demand and to leverage economies of scale, the Company will continue its hybrid model of in-house manufacturing and third-party contract manufacturers to supply its products. Through its high-volume ISO 9000-certified manufacturing operations located in Suzhou, China, Logitech believes it has been able to maintain strong quality process controls and has realized significant cost efficiencies. The expansion of its Suzhou operations, which was completed in the summer of 2005, provides for increased production capacity and greater flexibility in managing product demand. Further, by outsourcing the manufacturing of certain products, the Company aims to reduce the volatility in production volumes and to reduce time to market. Information Technology Logitech is making investments to upgrade its business applications and information technology systems. Logitech’s investments in information technology are focused on positioning the Company for future growth by improving its operational and financial processes to realize cost structure improvements and to effectively manage the increased complexity of its business through standardization and integration of its IT environments. Geographic Expansion Logitech believes that the market penetration for its products is particularly low in developing markets such as Latin America, Eastern Europe and China. The Company is committing substantial resources to capitalize on the growth opportunities in these regions, including securing new channel partners, strengthening relationships with existing partners, expanding its sales force and investing in product and marketing initiatives. Product Strategy To capitalize on the many opportunities in the growing digital marketplace, Logitech’s product strategy LISA focuses on personal peripherals surrounding three digital environments: • • • The Office Environment – Desktop and Notebook Computers The Living Room Environment – Game Consoles and Home Entertainment Systems The Mobile Environment – Notebook Computers, Mobile Entertainment and Communication Platforms, and Digital Writing 19 The Office Environment Logitech has successfully broadened its desktop presence by introducing new, more innovative, high- performance pointing devices that have gained market acceptance. In addition, Logitech has expanded beyond its traditional role as a provider of pointing devices for the desktop into a leading brand for video imaging products, keyboards, PC audio products and control devices for 3D applications such as Adobe Creative Suite and CAD/ CAM. The Company has the ability to introduce an even greater number of essential personal peripherals that people touch and use every day. The Living Room Environment Logitech offers a broad spectrum of products for gaming consoles and PCs, including driving wheels, cordless gamepads, speakers, audio headsets, keyboards, mice and cameras. With its expertise in force and vibration feedback, cordless connectivity, voice input and video input, Logitech is enabling a broad range of new gaming experiences for all three of the top console platforms (Playstation®2, Xbox™® and GameCube™). With many of its products, Logitech can efficiently leverage its investments for one platform – desktop PC – into other platforms – game consoles. The Company has expanded its product portfolio to include a new line of advanced remote controls for home entertainment. This is part of the Company’s strategy to pursue new opportunities in the living room environment, positioning Logitech at the convergence of consumer electronics and personal computing in the digital living room. The Company’s line of advanced remote controls, with Smart State Technology™, provides simple, intuitive control of even the most elaborate entertainment system. The Mobile Environment As digital information and communication are evolving into the mobile environment, the opportunity exists for Logitech to support a broader set of platforms. Logitech believes that the growing number of users of mobile phones, notebook computers and mobile entertainment and communication platforms, such as portable digital music players and gaming devices, will bring additional demand for complementary personal peripherals. Additionally, new technology provides the ability to digitally capture handwritten notes and messages, and thus creates further opportunities in the mobile environment. Wherever and whenever people want to access, create or consume digital information, the need exists for devices that allow users to conveniently access the digital world in an intuitive and personal way. Logitech plans to support this need in mobile environments, as it does in the office and in the home environment. Products Logitech operates in a single industry segment encompassing the design, development, production, marketing and support of personal peripheral products. Most of the Company’s products share certain characteristics such as common customers, common sales channels or common company infrastructure requirements. Logitech’s personal peripheral products include input and pointing devices such as corded and cordless mice, trackballs, and keyboards; headsets and webcams for voice and video communications; interactive gaming devices for PCs such as joysticks, gamepads and steering wheels; interactive gaming devices and accessories for game consoles; speakers, headphones and wireless music systems for digital audio; advanced remote controls; 3D motion controllers; headsets for mobile phones; and digital writing solutions. The Company’s product families are summarized below. Mice and Keyboards Mice Logitech offers many varieties of mice, sold through OEM, system builder and retail channels. Most cordless pointing devices from Logitech use the Company’s proprietary, 27 MHz or 2.4 GHz digital radio 20 technology to transmit data to the host computer. Optical (Laser or LED) technology has substantially replaced the ball with a tracking system that works via light, using a light beam to illuminate surfaces on which the mouse is traveling. The Company’s introduction of the Logitech MX™1000 Laser Cordless Mouse in 2004 marked an important milestone: the first laser-based optical system. The nearly singular wavelength of laser light is capable of revealing much greater surface detail than LED technology, enabling laser mice to track reliably on virtually any surface – even on tricky polished or wood-grain surfaces. Combining laser with Logitech’s powerful MX processing engine and Fast RF™ wireless technology, the Logitech MX1000 Laser Cordless Mouse set a new performance benchmark for responsiveness and accuracy. Subsequent to the launch of MX1000 Laser Cordless Mouse, Logitech extended its precision laser technology. The product line now includes G5 and G7, the MX610 Laser Cordless Mouse for desktop PCs, and the V400 Laser Cordless Mouse for notebook PCs. The G5 and G7 mice for gamers represent several performance breakthroughs, including: use of full-speed USB to transmit data at faster rates; 2.4 GHz digital cordless technology for a stronger wireless connection; 2000 dpi resolution for superior speed; custom weight tuning for the G5; and swappable, rechargeable lithium-ion batteries for the G7. The MX610 Laser Cordless Mouse is the first mouse to receive and process wireless communication from the PC, using 2.4 GHz digital cordless technology and a sophisticated on-board microprocessor to provide message notifications to users. The V200 Cordless Mouse for notebook PCs features up to a 12-month battery life, a significant milestone for optimized battery performance in mice. CG All of Logitech’s premium retail mice are bundled with Logitech SetPoint® software, enabling users to program mouse buttons for specific tasks. The Company also sells both corded and cordless mice that are designed specifically for OEM customers. Trackballs Logitech produces several trackballs for the retail channel. All corded and cordless models use the Company’s patented Marble® optical sensing technology, which enables reliable, accurate operation without the need to regularly clean the device to prevent buildup of dust or grease. The Cordless Optical TrackMan® trackball features a “cruise control” scrolling feature as well as several programmable buttons to enhance usability. Keyboards and Desktops Logitech offers a variety of corded and cordless keyboards and desktops (keyboard-and-mouse combinations) from the award-winning top-of-the-line diNovo™ Media Desktop™ Laser to the basic Media™ Keyboard. In 2005, Logitech introduced an enhanced version of the award-winning diNovo Media Desktop with sleek, ultra-flat styling, a separate MediaPad™, the MX1000 Laser Mouse for Bluetooth, and a new wireless hub featuring Bluetooth 2.0 Enhanced Data Rate (EDR) that seamlessly integrates other Bluetooth devices with the PC. The Company also introduced the Cordless Desktop® MX™5000, featuring a keyboard LCD for instant feedback and Bluetooth 2.0 EDR wireless technology. Logitech believes that the Logitech Cordless Desktop MX5000 sets a new performance benchmark for ergonomics, comfort, responsiveness and accuracy. To meet the needs of people using their computer as a personal media center, Logitech also unveiled a stylish keyboard, mouse, and media remote, the Cordless Desktop® S 510 Media Remote, offering much of the functionality of a media PC at a lower cost. The latest LX line of keyboards features a low-profile Zero-Degree Tilt™ design that brings a new level of comfort and convenience. LISA 21 All premium keyboards offer Logitech’s innovative SetPoint™ software, which enables one-touch access to a variety of common tasks, including launching music software, accessing the Internet, and starting a chat with your favorite Instant Messenger software. Voice and Video Communications PC Headsets and Microphones Logitech offers a complete line of headsets and microphones designed for PC voice communications (VoIP) applications, for online gaming, and for speech recognition. At the high end, the Company’s Premium USB Headset 350 offers a high-performance stereo audio experience with its 40 mm neodymium drivers, a comfortable fit with cushioned ear pads and adjustable headband, and advanced voice technology with a noise- canceling microphone that filters out background noise. Web Cameras Logitech’s industry-leading QuickCam® family of webcams make it easy for friends and family to keep in touch by seeing and talking to each other using their computers. The Company works closely with leading application developers to help deliver the video communications services and software that connect consumers and create demand for webcams. In 2005, Logitech introduced the QuickCam Fusion™ webcam, establishing a higher level of consumer webcam performance with its breakthrough audio, video, and software technologies. With a true 1.3 megapixel sensor, RightLight™ technology, RightSound™ technology and an integrated microphone, the QuickCam Fusion webcam improved audio and video performance over previous-generation webcams. The new webcam also marked the introduction of Logitech’s Video Effects avatars and face accessories, allowing people to transform themselves into animated characters or don cartoon-like accessories. Subsequently, Logitech extended many of these technologies into its other high-end webcams, including the award-winning Logitech QuickCam Orbit™ MP, which features a motorized camera head that can follow a user as he or she moves around a room. Logitech also expanded its line of webcams for the growing notebook PC market with the introduction of the flagship QuickCam for Notebooks Pro, QuickCam for Notebooks Deluxe and QuickCam for Notebooks. Logitech also introduced a new value line of webcams featuring a redesign of its iconic eyeball to satisfy modern tastes. The entry line features QuickCam IM™ (Connect in Europe, Middle East and Africa), QuickCam Messenger™, QuickCam Chat™ and QuickCam Express™. Gaming PC Game Controllers Logitech offers a full range of dedicated game controllers for PC gamers. The products address key game genres: joysticks for flying; steering wheels for driving; gamepads for sports, action, and adventure games; mice and keyboards for strategy, RPG, and first-person gaming; and headsets for online gaming. Though the products are very different in nature due to their different target applications, they are united by Logitech’s attention to quality and excellence of design. They also share some core Logitech technologies, such as cordlessness, force feedback, optical sensing, and interactive LCD displays. In 2005, Logitech unveiled the G5 and G7 mice (see Mice, above) and the G15 Gaming Keyboard as the first members of the new G-series family of gaming peripherals, designed to deliver premium technical performance and key features that give gamers a competitive edge. The Logitech G15 keyboard features built-in auxiliary LCD display and 18 programmable gaming keys, providing gamers an unprecedented level of programmability and control. 22 Console Game Controllers and Accessories Since entering the console market in 2001, Logitech has consistently broadened its line with popular products in strategic segments. Logitech offers products for top console platforms, such as PlayStation®2 and Xbox 360™, and works with the platform providers and game developers throughout the world to develop new applications and technologies for this market. With its expertise in vibration and force feedback, cordlessness, voice input, and video input, Logitech is enabling a broad range of new gaming experiences. To enable the Company’s hardware controllers and promote high-quality support within games, Logitech also provides advanced software drivers and tools to game developers. Logitech’s cordless game controllers for Xbox® and PlayStation, which feature advanced 2.4 GHz wireless technology, have become popular among gamers by alleviating the problems cords can create in the living room. In 2005, Logitech extended its gaming product family by supporting the PSP™ (PlayStation® Portable) handheld entertainment system with new audio peripherals and protective accessories. The Company’s stylish PlayGear Pocket™ case became a best-seller in many regions, offering a protective polycarbonate shell and clear plastic lid that allowed users to personalize the case with custom “skins.” CG Digital Audio Logitech designs and manufactures a wide variety of multimedia speakers designed for basic PC users, audio enthusiasts and gamers. The Company offers a range of models from its flagship 5.1-channel multi- platform, 505-watt Logitech® Z-5500 Digital speakers and Z-5450 Digital speakers with convenient wireless rear satellite speakers – both of which work with PCs, game consoles, televisions and DVD players and feature THX certification – to high-volume, two-piece speaker systems. The flagship models consistently garner multiple best-in-class awards, affirming the Logitech brand in the speaker market. The Company’s new digital music portfolio enhances the iPod and other devices on the go and around the home. The product line includes premium-performance speakers optimized for the iPod as well as for a wide variety of portable platforms, from MP3 and CD players to notebooks. In this category, Logitech’s mm50 Portable Speakers for iPod® have become one of the Company’s best-selling audio products. Logitech is also offering headphones that feature a range of styles for iPod and other MP3 players, including the industry-first Wireless Headphones for iPod, using advanced Bluetooth wireless technology that supports high-performance stereo audio. The Company also offers the Wireless Music System for PC, which enables consumers to stream any format of PC audio to a stereo or home-entertainment system; the Wireless Music System for iPod wirelessly connects an iPod or MP3 player to a stereo system; and the Wireless Headphones for PC streams PC audio to wireless headphones. Advanced Remote Controls Logitech has expanded its presence in the digital living room by offering advanced universal remote controls for home-entertainment systems. The Company’s current line of Harmony® advanced remote controls with patented Smart State Technology® provides simple, complete control of even the most elaborate entertainment system, including one-touch control of entertainment activities. The Company’s online database includes codes and characteristics needed to control more than 120,000 different home-entertainment devices models from more than 3,300 different manufacturers. These advanced remote controls offer interactive media capabilities, allowing users to select TV shows, movies or music titles from the interactive display. The latest addition to the company’s retail product line is the Harmony 890 remote, which includes radio frequency (RF) wireless technology, providing the ability to control components and systems that are hidden behind closed cabinets. Logitech also offers high-end solutions for custom installers and high-end audio/video dealers; these solutions can control multi-room entertainment systems and some advanced lighting systems. LISA 3D Motion Controllers The Company’s subsidiary, 3Dconnexion, offers 3D input devices for the growing field of 3D motion control, used in the CAD (Computer Aided Design), EDA (Electronic Design Automation), GIS (Geographic 23 Information Systems) and DCC (Digital Content Creation) markets. More than 300,000 professionals use 3Dconnexion motion controllers, including its SpaceBall®, SpaceMouse®, CadMan®, and SpaceTraveler™. All 3Dconnexion motion controllers leverage the productivity benefits and comfort of working with two hands – one hand on the mouse to select, modify or annotate, and the other hand on the motion controller to navigate. 3Dconnexion also recently introduced the NuLOOQ™ Professional Series to address the time-intensive elements of design – navigating images, adjusting option values and accessing menus – to help designers focus without being interrupted by the tasks of locating and adjusting tools, as well as precisely positioning the cursor. Digital Writing The Logitech io™ and io2 Digital Pens established a new category of input devices by bridging handwritten information and the digital world. The latest Logitech io2 pen, based on the Anoto digital pen and paper functionality, lets people easily store, organize, and retrieve their handwritten information by simply writing with ink on paper. The pen is used with special Anoto grid paper. An optical sensor embedded in the pen captures the handwritten images, storing up to 40 pages in memory. This captured digital information can then be transferred into the PC by synching the pen via a USB cradle. The Logitech io2 Digital Writing system is marketed through Logitech’s retail channel. The Logitech io2 pen is also sold to companies who are enabling next-generation forms processing solutions in areas such as healthcare, manufacturing and logistics. Mobile Phone Headsets Logitech’s family of stylish corded and cordless mobile phone headsets addresses the on-the-go lifestyle of its users. Logitech introduced the Mobile Traveller™ and Mobile Freedom headsets, each featuring advanced Bluetooth technology that enables them to wirelessly connect directly to many of today’s best-selling mobile phones. In both of these new models, Logitech also offers its innovative WindStop™ technology, which enables clear communication on a headset even in adverse conditions by reducing the disruptive effects of wind noise. Logitech is also working with advanced Bluetooth technologies that enable the transmission of high-quality stereo music from the latest generation of music phones, for rich mobile entertainment. Technology Logitech products are sophisticated systems that combine multiple engineering disciplines – lightweight radio frequency transmission, optical, mechanical, electrical, acoustical and software – and incorporate both cognitive and physiological elements in user-centric industrial designs. These systems share common design elements, including: sensors to detect and encode motion, images, sound or other analog data into electrical signals; custom ASICs; microcontrollers to convert and process signals received from the sensor; a communications subsystem to exchange signals with an attached computer or other intelligent host; and a suite of driver, utility and user interface software modules and Web sites. The Company believes the software modules and Web support complete a seamless user-centric solution for information input, access and control. Logitech’s products incorporate the following principal technologies: RF Technologies and Cordless Product Design Logitech is a leader in the development of low-power radio frequency (RF) technologies for use over short distances. The Company is focusing its current cordless development efforts primarily in three RF technology areas: Fast RF cordless technology, proprietary and non-proprietary 2.4 GHz-based cordless technologies and Bluetooth® wireless technology, a communications standard with a broad range of applications. Fast RF cordless technology is designed to provide excellent performance for everyday computing applications with a very long battery life and mass market price points. 2.4 GHz technology, designed by Logitech especially for game controllers, satisfies gamers who value high-speed performance. Logitech’s cordless gaming devices, on PC, PS2 and Xbox™ platforms have generated frequent industry and media accolades. Logitech’s proprietary 2.4 GHz technology is also the technology of choice for mice products which need to achieve small size and high range of operation. Logitech believes Bluetooth® wireless technology is an enabler of a much wider acceptance of 24 cordless products in the marketplace. In fiscal year 2006, the Company introduced Cordless Desktop MX 5000 Laser, the first smart desktop taking advantage of Bluetooth 2.0. For its wireless music products, the Company uses Bluetooth wireless technology with the Advanced Audio Distribution Profile (A2DP), an emerging standard for high-quality wireless stereo sound. Motion Sensing The Company’s sensors transform analog motion and images into electronic signals. Logitech, with the patented Marble® technology, was the first company to introduce optical sensing in pointing devices. Optical motion sensors are developed in partnership with technology suppliers, allowing Logitech to improve the optical sensing quality, lower the cost, and increase the reliability of its optical mouse products. Similarly, Logitech’s Web cameras use optical sensors to detect colors, shapes and other image attributes, and to convert these attributes into electronic signals. Signal Processing Algorithms CG Logitech engineers employ sophisticated signal processing algorithms across many product lines to compute spatial displacements, enhance color image quality and compress or format data for transmission. For example, in the Company’s Internet Web cameras, signal-processing algorithms are used for color extraction, image enhancement and data compression. Power Management The Company’s products use advanced power management, including techniques to reduce power consumption when needed. Cables connected to separate power supplies are inconvenient in the case of products such as corded pointing devices, and impossible in the case of cordless devices. Consequently, the Company believes low power consumption is an essential product attribute for the consumer marketplace. Force Feedback Force feedback adds a real physical sensation to computer and console systems, enabling users to feel surfaces, bumps, vibrations, textures, inertia, liquids, springs, and many other physical phenomena. This licensed technology is primarily used in joysticks and steering wheels where game players can experience the actual physical sensation of being at the controls of a fighter jet or at the wheel of a racing car. Software The Company is focusing its software development efforts on enabling efficient PC navigation, expanding gaming functionality and providing real-time video communication products and services such as video calling and video instant messaging. Also, the Company has developed software development kits, or SDKs, to enable support for a variety of peripherals on gaming consoles. These include SDKs for force feedback joysticks and wheels, mice, keyboards, cameras and headsets. The SDKs are used in many of the top-selling console games and make it easy for users to leverage the latest features of Logitech’s gaming peripherals. The Company’s line of Harmony advanced universal remote controls is powered by web-based software that minimizes the amount of technical knowledge required for users to program and use their remote controls. Database Logitech’s acquisition, in 2004, of Intrigue Technologies, Inc. brought with it a large and growing database of information about consumer technology devices. Information contained in the Harmony database includes rich sets of characteristics for a large number of consumer devices, ranging from older devices to the latest offerings. This information helps give users full control of their devices, even if they are not aware of the intricacies of their home-entertainment devices. LISA 25 Audio The Company’s audio development resources cover a wide range of audio technologies. In speaker systems, Logitech uses advanced computer-aided design tools for amplifier and printed circuit board design. Sophisticated laser and PC-based technologies support speaker transducer design. For headsets, in-house engineering and testing technology ensure high-resolution voice recognition microphones. Computer-aided design and in-house rapid prototyping technology speed the overall process and help ensure that products meet design and performance goals. Research and Development Logitech believes that continued investment in product research and development is critical to its success. The Company believes that its international structure provides advantages and synergies to its overall product development efforts. Logitech’s product research and development activities are mainly carried out at engineering centers located in Romanel-sur-Morges, Switzerland; Hsinchu, Taiwan; Fremont, California; Vancouver, Washington; Mississauga, Canada; and Seefeld, Germany. Logitech’s Swiss engineering center provides the Company with advanced sensing and cordless technologies. In addition, the Swiss center is a convenient point for gaining access to leading European technologies. Logitech has been successful in recruiting and retaining top engineering graduates from leading Swiss universities because it is one of the few personal computer technology companies with research and development activities in Switzerland. Through its Taiwanese subsidiary, the Company has established access to key Asian markets, engineering resources and high-tech manufacturing. Taiwan is a world leader in manufacturing and engineering. In particular, Taiwan is a world leader in the design and manufacture of semiconductors, notebook computers, scanners, monitors and related products, and possesses a concentration of companies that specialize in advanced plastic injection blow molding and tooling. Moreover, the common language of Taiwan and China facilitates the transfer of products from the Company’s engineering launch site in Taiwan to its high-volume manufacturing site in China. The location of the Company’s Fremont, California facility allows Logitech access to Silicon Valley’s talent pool, particularly important in the development of Internet applications, software and video technologies. In addition, this location in the midst of the world’s leading technology market enables the Company to compile market intelligence to define and position products and develop key strategic alliances. Logitech’s Vancouver, Washington engineering center designs and develops the Company’s audio products. The facility specializes in acoustic research and development, including model and simulation work. Areas of development cover cordless audio applications, demanding applications for audio input such as voice recognition, and audio output for PC speakers. Test capabilities include theoretical environments in an anechoic chamber (a room isolated from external sound), real-world environments for office settings, and pre-compliance testing. Logitech’s Mississauga, Canada engineering center designs and develops the Company’s web-connected advanced remote control products. In addition, Logitech’s Canadian engineering center develops and maintains Logitech’s on-line Smart State database of infrared codes and device characteristics used in programming the web-connected advanced remotes. All of these remotes are designed to use Logitech’s patented Smart State Technology™. The Company’s subsidiary, 3Dconnexion, whose research and development facility is located in Seefeld, Germany, provides Logitech with its ongoing research in 3D controller devices. The location of the facility provides Logitech with access to Germany’s leading automotive manufacturers who are also important 3Dconnexion customers. In addition, this facility is in close proximity to the Munich office of the German Institute of Robotics and Mechatronics, a leading research center in robotics and from which Logitech has licensed some of its 3D technology. 26 The Company’s research and development expenses for fiscal years 2006, 2005 and 2004 amounted to $88.0 million, $73.9 million and $61.3 million. The Company expects to continue to devote significant resources to research and development to sustain its competitive position. Marketing, Sales and Distribution The Company’s retail products are targeted at consumers and businesses, as add-on peripherals for their PC, gaming console, mobile entertainment and communication device, or home entertainment system. Logitech’s OEM products are sold to PC manufacturers, who need high-quality, affordable, and functional personal peripherals in high volumes; and also to console platform manufacturers, game publishers and mobile-technology vendors. The primary user markets for Logitech mice, trackballs and keyboards have traditionally been consumers, small office and home office, or SoHo users, and through its OEM customers, corporate buyers. The primary user market for Logitech entertainment devices, such as joysticks, gamepads, steering wheels and advanced remote controls, is consumers. The primary users for Logitech’s audio products are consumers, SoHo, and OEM customers. The Company’s user markets for its PC web cameras are SoHo users, corporate buyers and consumers. Logitech’s primary user markets are in North America, Europe and Asia Pacific. It also markets its products in Latin America, the Middle East and Africa. CG Logitech builds awareness of its products and recognition of its brand through targeted advertising, public relations efforts, distinct packaging of its retail products, in-store promotions and merchandising, a worldwide Web site and other efforts. It also acquires knowledge of its users through customer feedback and market research, including focus groups, product registrations, user questionnaires, primary and multi-client surveys and other techniques. In addition, manufacturers of PCs and other products also receive customer feedback and perform user market research, which sometimes result in specific requests to the Company for specific products, features or enhancements. Logitech sells through many distribution channels, including distributors, OEMs and regional and national retail chains, including online retailers. The Company supports these retail channels with third-party distribution centers located in North America, Europe and Asia Pacific. These centers perform final configuration of products and product localization with local language manuals, packaging, software CDs and power plugs. In addition, Logitech’s distribution mix includes e-commerce in the U.S. as well as e-commerce capabilities in several European countries. In retail channels, Logitech’s direct sales force sells to distributors and large retailers. Its distributor customers typically resell products to retailers, value-added resellers, and systems integrators with whom Logitech does not have a direct relationship. These distributors in the U.S. include Ingram Micro Inc. and Tech Data Corporation, and in Europe include Tech Data Corporation, Ingram Micro, Actebis and many strong national distributors such as Banque Magnetique in France, GEM in the United Kingdom and Also-ABC in Switzerland. Logitech’s products can be found in major retail chains, where they typically enjoy access to significant shelf space. These chains in the U.S. include Best Buy Co., Inc., CompUSA, Inc., Office Depot, Inc., Staples, Inc., Target and Wal-Mart, and in Europe include MediaMarkt/Saturn, Carrefour, KESA Group, FNAC, Dixons Stores Group PLC and most key national consumer electronics chains. Logitech products also can be found at the top online e-tailers, which include Amazon.com, Buy.com, CDW, Insight, and others. LISA Logitech’s OEM products are sold to large OEM customers through a direct sales force, and the Company supports smaller OEM customers through distributors. The Company counts the majority of the world’s largest PC manufacturers among its customers. Through its operating subsidiaries, the Company maintains sales offices or sales representatives in more than 30 countries and throughout the United States. 27 Principal Markets The Company operates as one business segment, which is the design, development, production, marketing and support of personal peripherals. Net sales to unaffiliated customers by geographic region were as follows (in thousands): Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 887,736 617,942 291,037 $ 733,667 503,356 245,603 $ 592,067 454,587 221,816 Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,796,715 $1,482,626 $1,268,470 Year ended March 31, 2006 2005 2004 Customer Service and Technical Support The Company maintains customer service and technical support operations in the United States, Canada, Europe, Asia and Australia. Customer service and technical personnel provide support services to retail purchasers of products through telephone, email, facsimile and the Logitech Web site. This site is designed to expedite overall response time while minimizing the resources required for effective customer support. In general, OEMs provide customer service and technical support for their products, including components purchased from suppliers such as Logitech. The Company provides a warranty on its branded products from one to five years. Manufacturing The Company’s manufacturing operations consist principally of final assembly and testing. Logitech’s high- volume manufacturing is located in Suzhou, China. Logitech expanded its Suzhou operations with the construction of a new factory to provide for additional production capacity to meet future demand. The new facility has 30% greater capacity than the Company’s first factory with the potential to double beyond that. Operations were moved to the new facility in the summer of 2005. The Suzhou facilities are designed to allow production growth as well as flexibility in responding to changing demands for the Company’s products. The Company continues to focus on improving the efficiency at the Suzhou facilities, including the implementation of total quality management and total employee involvement programs. New product launches, process engineering, commodities management, logistics, quality assurance, operations management and management of Logitech’s contract manufacturers occur in Hsinchu, Taiwan, Suzhou, China and Hong Kong, China. Certain components are manufactured to the Company’s specifications by vendors in Asia, the United States and Europe. Logitech also uses contract manufacturers to supplement internal capacity and to reduce volatility in production volumes. In addition, some products, including most keyboards, certain gaming devices and audio products, are manufactured by third-party suppliers to the Company’s specifications. Retail product localization with local language manuals, packaging, software CDs and power plugs is performed at distribution centers in North America, Europe and Asia Pacific. Competition Logitech’s industry is intensely competitive. It is characterized by short product life cycle, continual performance enhancements, and rapid adoption of technological and product advancements by competitors in our retail market and a trend of declining average selling prices in the OEM market. Logitech continues to experience aggressive price competition and other promotional activities from its primary competitors and from less- established brands, and the Company from time to time adjusts prices or increases other promotional activities to improve its competitive position. The Company may also encounter more competition if any of its competitors decides to enter other markets in which the Company currently operates. 28 In addition, the Company has been expanding the categories of products it sells, and entering new markets, such as the market for programmable remote controls. As the Company does so, is confronting new competitors, many of which have more experience in the categories or markets and have greater marketing resources and brand name recognition than it has. In addition, because of the continuing convergence of the markets for computing devices and consumer electronics, the Company expects greater competition in the future from well-established consumer electronics companies in its developing categories, as well as future ones it might enter. Many of these companies have greater financial, technical, sales, marketing and other resources than the Company has. it The Company expects continued pressure in its retail business, particularly in the terms and conditions that Logitech’s competitors offer customers, which may be more favorable than Logitech’s terms. Future market conditions, product transitions, and initiatives by the Company’s competitors may require it to take actions to increase its customer incentive programs and could impact its revenues and operating margins. Corded and Cordless. Microsoft is the Company’s main competitor in retail cordless (mice and desktops) and corded (mice and keyboards) categories. Microsoft’s offerings include a complete line of mice, keyboards and desktops. Microsoft has significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base. The Company continues to encounter aggressive pricing practices, promotions and channel marketing on a worldwide basis from Microsoft, which will continue to impact its revenues and margins. Logitech is also experiencing competition and pricing pressure for corded and cordless mice and desktops from less-established brands, in the lower-price segments, which could potentially impact its market share. The emerging Notebook peripheral segment is also an area where we face new competitors that have broader Notebook product offerings, as well as aggressive pricing and promotions. CG Microsoft is a leading producer of operating systems and applications with which Logitech’s mice and keyboards are designed to operate. As a result, Microsoft may be able to improve the functionality of its mice and keyboards to correspond with ongoing enhancements to its operating systems and software applications – for example the expected Vista operating system launch expected in early 2007 – before Logitech is able to make such improvements. This ability could provide Microsoft with significant lead-time advantages. In addition, Microsoft may be able to offer pricing advantages on bundled hardware and software products that Logitech may not be able to offer. Video. The Company’s main competitor in the U.S. for PC web cameras is Creative Labs, which offers a complete line of PC web cameras. In Europe, the Company’s main competitors are Creative Labs and Philips. In view of the rapid growth of this market, the Company expects additional competitors, including major players such as Microsoft, to enter this category in the near future. Logitech continues to encounter aggressive pricing practices, promotions and channel marketing on a worldwide basis from Creative Labs, which will continue to impact revenues and margins. The Company is experiencing ongoing competition from less-established providers of PC web cameras that are seeking shelf space and increased market share through price competition. Gaming. Competitors for the Company’s interactive entertainment products include Intec, Mad Catz, Pelican Accessories and Saitek Industries. Logitech’s cordless controllers for PlayStation®2 also compete against corded controllers offered by Sony. In addition, the Company’s cordless controllers for Microsoft Xbox™ are competing against Microsoft corded controllers. Audio. Competitors in audio devices vary by product line. In the PC and mobile entertainment and communication platform speaker business, competitors include Altec Lansing, Creative Labs and Bose Corporation. In the PC and console headset, telephony and microphone business, our main competitors include Plantronics and its Altec Lansing subsidiary. LISA Advanced Remote Controls. With the Company’s acquisition of Intrigue Technologies in May 2004, Logitech expanded its product portfolio to include a new line of personal peripheral devices for home 29 entertainment systems. The Company has greatly expanded its market share in this business recently. With many companies offering universal remote controls, the Company’s success will likely attract more competition. The Company’s competitors include, among others, Philips, Universal Remote, Universal Electronics, RCA and Sony. Refer to the discussion in Item 3D. Risk Factors – “If we do not compete effectively, demand for our products could decline and our business and operating results could be adversely affected.” Intellectual Property and Proprietary Rights Intellectual property rights that apply to Logitech’s products and services include patents, trademarks, copyrights and trade secrets. The Company holds various United States patents and pending applications, together with corresponding patents and pending applications from other countries. While Logitech believes that patent protection is important, the Company also believes that patents are of less competitive significance than factors such as technological expertise and innovation, ease of use, and quality design. No single patent is in itself essential to Logitech as a whole. From time to time the Company receives claims that it may be infringing on patents or other intellectual property rights of others. Claims are referred to counsel, and current claims are in various stages of evaluation and negotiation. If necessary or desirable, the Company may seek licenses for certain intellectual property rights. Refer also to the discussion in Item 3D Risk Factors – “We may be unable to protect our proprietary rights. Unauthorized use of our technology may result in the development of products that compete with our products.” To distinguish genuine Logitech products from competing products and counterfeit products, Logitech has used, registered, and/or applied to register certain trademarks and trade names in the U.S. and in foreign countries and jurisdictions. Logitech enforces its trademark and trade name rights in the U.S. and abroad. In addition, the software for Logitech’s products and services is entitled to copyright protection, and the Company generally requires its customers to obtain a software license before providing them with that software. Logitech also protects details about its products and services as trade secrets through employee training, license and non-disclosure agreements and technical measures. Governmental Regulation The European Union (“EU”) has adopted the Directive on the Restriction of Use of Certain Hazardous Substances in Electrical and Electronics Equipment, or RoHS. This directive restricts the placement into the EU market of electrical and electronic equipment containing certain hazardous materials including, lead, mercury, cadmium, chromium, and halogenated flame-retardants. RoHS is to take effect beginning July 2006 with a limited number of exceptions. Most Logitech products are affected by the directive and must be modified to some extent to be RoHS compliant. Logitech has an active program to ensure compliance with the RoHS directive and continues to source and introduce the use of RoHS compliant components and manufacturing methods in order to comply with the requirements of the directive. Further, the EU has adopted the Waste Electrical and Electronic Equipment Directive, or WEEE. This directive requires that producers of electrical goods be financially responsible for specified collection, recycling, treatment and disposal of covered electrical and electronic products. The original implementation date proposed by the WEEE Directive for enactment of national legislation by EU member states was August 2004. Producers are to be financially responsible under the WEEE Directive beginning in August 2005. Producer obligations also include specified collection, recycling, treatment and disposal of equipment that had been placed in the EU marketplace prior to August 2005, and has reached its end of life. To date, specific legal requirements have not been finalized by all member states, with certain member states delaying implementation until late 2006. All Logitech products are currently covered by the obligations of the WEEE Directive. In those countries which have enacted legislation, the Company expects to incur costs for managing and recycling historical waste equipment 30 and make provisions for costs related to future waste. These costs are expected to be based on the Company’s estimated market share of the total cost, which will depend on a number of factors, including administration, recycling and treatment costs as well as the commercial cost of recycling. Similar environmental legislation may be enacted in other geographies, the cumulative impact of which could be significant. If such legislation is enacted in other countries, Logitech intends to develop compliance programs as necessary. However, until that time, Logitech is not able to estimate any possible impact. The effects on Logitech’s business of complying with other government regulations are limited to the cost of allocation of the appropriate resources for agency fees and testing as well as the time it takes to obtain agency approvals. The costs and schedule requirements are industry requirements and, therefore, do not represent an undue burden relative to Logitech’s competitive position. As regulations change, the Company will modify its products or processes to address these changes. Seasonality CG Sales of Logitech’s retail products are seasonal. Sales are typically highest during the third fiscal quarter, due primarily to the increased demand for Logitech’s products during the year-end holiday buying season, and to a lesser extent in the fourth fiscal quarter. Logitech sales in the first and second quarters can vary significantly as a result of new product introductions and other factors. Accordingly, year-over-year comparisons are more indicative of variability in the Company’s results of operations than quarter-over-quarter comparisons. Materials Logitech purchases some of its products and key components used in the Company’s products from a limited number of sources. Refer to the discussion in Item 3D Risk Factors – “We purchase key components and products from a limited number of sources, and our business and operating results could be harmed if supply were delayed or constrained or if there were shortages of required components.” C. Organizational Structure The following lists the Company’s significant subsidiaries: Name Country of Incorporation Ownership Interest Logitech Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Logitech Hong Kong, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Logitech Far East Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Logitech Technology (Suzhou) Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Logitech Europe S.A. U.S. Hong Kong Taiwan China Switzerland 100% 100% 100% 100% 100% D. Property, plant and equipment Logitech’s Europe headquarters are in Romanel-sur-Morges, Switzerland. This Company-owned facility comprises 33,300 square feet and includes research and development, product marketing, technical support, administration and certain Logitech group activities including finance. The Company leases an additional 8,400 square feet in Morges, Switzerland to supplement the space of the owned facility; sales and marketing, including sales management, are located in this facility. This lease expires in May 2009, with the option for Logitech to terminate the lease in May 2007. In addition, the Company has signed a lease on a new facility to be built, also located in Morges, Switzerland. It is anticipated that this new facility will be available for occupation in spring 2007. The facility will comprise approximately 50,000 square feet and will include sales and marketing management, technical support, administration and certain Logitech group activities, including finance, legal and human resources. The lease is expected to begin in January 2007 and will continue for 10 years, with the option for Logitech to terminate the lease after 5 years. LISA 31 Logitech’s U.S. subsidiary has headquarters in Fremont, California in three leased buildings comprised of approximately 148,000 square feet. These facilities are occupied by Logitech’s Americas headquarters, including research and development, product marketing, sales management, technical support and administration. The Company’s Fremont lease expires in March 2013. During fiscal year 2006, the Company signed a lease for an additional 24,000 square feet in an adjacent building to supplement the space of the currently leased buildings. The lease also expires in March 2013. The audio business unit is located in 28,700 square feet of leased office space in Vancouver, Washington. The lease has terms through April 2009. The Company also leases an 80,000 square foot warehouse facility in Vancouver, Washington. The warehouse facility, with a lease term through April 2006, is no longer being used because the Company has moved all of its North American distribution to a third-party facility in Memphis, Tennessee. Logitech’s subsidiary, 3Dconnexion, has leased a 5,500 square foot office in San Jose, California through December 2007. In Seefeld, Germany, 3Dconnexion has leased 15,000 square feet through the year 2010 for its European headquarters, research and development, and manufacturing. Logitech also has sales offices in more than 46 locations in 30 countries. These offices are leased with various expiration dates from 2006 to 2015. Worldwide operations and engineering occupy a Company-owned 112,000 square foot facility in Hsinchu, Taiwan, and includes mechanical engineering, new product launches, process engineering, commodities management, logistics, quality assurance, and administration. Personnel in Hsinchu manage distribution of product throughout Asia through the use of externally administered warehouses in Taiwan, China and Singapore. Logitech’s high-volume manufacturing is located in Suzhou, China, in a Company-owned 253,700 square foot building and a leased 91,500 square foot building. The lease on the building expires in July 2008. The Company expanded its Suzhou operations with the construction of a new factory to provide for additional production capacity to meet future demand. The new site includes approximately 600,000 square feet of factory space and includes dormitory space to house the Company’s workforce. The facility initially has 30% greater capacity than the Company’s first Suzhou factory as well as the potential to double beyond that. Operations at the new facility commenced in the summer of 2005. In addition to its distribution centers in Asia, Logitech has major distribution centers in Memphis, Tennessee and in the Netherlands. The 474,000-square foot facility in Memphis is contracted with a third-party logistics company that leases and manages the distribution center for Logitech. The Company plans to move with the third-party logistics company in July 2006 to a new regional distribution facility in South Haven, Mississippi and extended the arrangement with the management company through December 2006 with an option to renew annually. The South Haven facility is approximately 550,000 square feet. The Company has two distribution centers in the Netherlands; the Company’s main European distribution location is located in Venray, Netherlands and a smaller facility is located in Venlo, Netherlands. Both facilities are contracted with warehouse management companies that lease and manage the distribution centers for Logitech. The Venray warehouse is approximately 183,400 square feet and the arrangement with the management company is through December 2006. The Venlo facility is approximately 80,000 square feet, and the arrangement with the management company is through December 2007. Additionally, the Company has a 45,500-square foot distribution center in Zalaegerzeg, Hungary, which is also contracted with a warehouse management company. Logitech also contracts with various distribution services throughout the world for additional warehouses in which the Company stores inventory. Logitech believes that the Company’s manufacturing and distribution facilities are adequate for its ongoing needs and continues to evaluate the need for additional facilities to meet anticipated future requirements. ITEM 4A. UNRESOLVED STAFF COMMENTS Not applicable. 32 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This Annual Report on Form 20-F to shareholders contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these statements as a result of certain factors, including those set forth above in Item 3D “Risk Factors,” and below in Item 11 “Quantitative and Qualitative Disclosure about Market Risk.” Overview Logitech is a leading global technology company and earns revenues and profits from the sale of personal peripherals that serve as the primary physical interface between people and their personal computers and other digital platforms. For the PC, the Company’s products include mice, trackballs, keyboards, gaming controllers, multimedia speakers, headsets and webcams. For digital music devices, the Company’s products include speakers and headphones. For gaming consoles, the Company offers a range of controllers, audio products and other accessories. In addition, Logitech offers wireless music solutions for the home and advanced remote controls for home entertainment systems. Logitech also offers digital writing solutions, 3D control devices, and headphones for mobile phones. The Company sells its products to both original equipment manufacturers (“OEMs”) and to a network of distributors and resellers (“retail”). CG The Company’s markets are extremely competitive. Some of our competitors are well established with substantial resources, others are less established and compete at lower price points. These markets are characterized by aggressive promotional and pricing practices, short product life cycles, rapidly changing technology and evolving customer demands. In order to remain competitive, continued investment in product research and development is critical to driving innovation with new and improved products and technologies. Logitech is committed to meeting customer needs for personal peripheral devices and believes innovation and product quality are important elements to gaining market acceptance and strengthening market leadership. The Company has historically targeted peripherals for the PC platform, a market that is dynamically changing as a result of consumer trends toward notebooks. Logitech remains focused on strengthening its market leadership in the PC market with the introduction of products that support the continued growth of the notebook market segment. The Company has also expanded into peripherals for other platforms, including video game consoles, mobile phones, home entertainment systems and most recently, mobile entertainment and digital music systems. Over the last several years, Logitech has laid a foundation for long-term growth, expanding and improving its supply chain operations, investing in product development and marketing, delivering innovative new products and pursuing new market opportunities beyond the PC platform. During this time, the Company has significantly broadened its product offerings and the markets in which it sells them. Although most of this expansion has been organic, the Company’s business has also grown as a result of a limited number of acquisitions that have expanded the Company’s business into new product categories. In fiscal year 2006, revenues increased 21% to $1.8 billion and net income increased 21% to $181.1 million reflecting the results of the Company’s continued investment in new product categories and diversification of the existing product portfolio. Audio and video retail sales were the key growth categories contributing to the Company’s fiscal 2006 financial performance and are expected to continue driving growth in the near term. Sales of advanced remote controls have contributed to the increased revenue and present growth potential for the future. The Company’s focus in fiscal year 2007 is to capture the growth opportunities in the business and improve profitability. Audio, video and advanced remote controls will continue to be the key growth drivers. Cordless desktops and mice are also expected to return the cordless category to solid growth as a result of focused product and marketing initiatives. New products to be launched later in fiscal year 2007, particularly in the speaker and cordless categories, are expected to carry higher margins than the products replaced as a result of the Company’s product development efforts. Further, Logitech is investing in business applications and information technology upgrades. These investments are necessary to position Logitech for future growth by improving operational and LISA 33 financial processes to realize cost structure improvements and to more effectively manage increased marketplace and business complexity. Also, the new manufacturing facility in Suzhou, China provides increased production capacity and greater flexibility in fulfilling product demands. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and in compliance with relevant Swiss law requires the Company to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates. Logitech considers an accounting estimate critical if: (i) it requires management to make judgments and estimates about matters that are inherently uncertain; and (ii) is important to an understanding of the Company’s financial condition and operating results. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors. The Company believes the following accounting estimates are most critical to its business operations and to an understanding of its financial condition and results of operations, and affect the more significant judgments and estimates used in the preparation of its consolidated financial statements. They should be read in conjunction with the Company’s consolidated financial statements. Customer Programs The Company records accruals for customer programs and incentive offerings, including certain rights of return, price protection, consumer rebates, volume-based incentives and other customer marketing programs. The estimated cost of these programs is accrued in the period the Company sells the product or commits to the program as a reduction to revenue or as an operating expense, if Logitech receives an identifiable benefit from the customer and can reasonably estimate the fair value of that benefit. Significant management judgments and estimates must be used to determine the cost of these programs in any accounting period. The Company grants limited rights of return for certain products. Estimates of expected future product returns are based on analyses of historical return trends by customer and by product, inventories owned by and located at distributors and retailers, current customer demand, current operating conditions, and other relevant customer and product information. Return trends are influenced by the timing of the sale, the type of customer, operational policies and procedures, product sell-through, product quality issues, sales levels, market acceptance of products, competitive pressures, new product introductions, product life cycle status, and other factors. Return rates can fluctuate over time. The Company has agreements with most of its retail customers that contain terms allowing price protection credits to be issued in the event of a subsequent price reduction. The Company’s decision to make price reductions is influenced by channel inventory levels, product life cycle stage, market acceptance of products, the competitive environment, new product introductions and other factors. Credits are issued for units that customers have on hand at the date of the price reduction. Reserves for the estimated amounts to be reimbursed to qualifying customers are established quarterly based on planned price reductions and analyses of qualified inventories on hand with distributors and retailers. Certain incentive programs, including consumer rebates, require management to estimate the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of particular programs. Estimated costs of consumer rebates and similar incentives are accrued when the Company commits to the program. The Company offers volume rebates to its distribution and retail customers and records reserves for such rebates at the time of shipment. Estimates of required reserves are determined based on consideration of historical experience, anticipated volume of future purchases, and inventory levels in the channel. 34 The Company also enters into cooperative marketing arrangements with most of its distribution and retail customers allowing customers to receive a credit equal to a set percentage of their purchases of the Company’s products for various marketing programs. The objective of these programs is to encourage advertising and promotional events to increase sales of the Company’s products. Accruals for the estimated costs of these marketing programs are recorded based on the contractual percentage of product purchased in the period the Company recognizes revenue. The Company regularly evaluates the adequacy of its accruals for customer programs and incentive offerings. Future market conditions and product transitions may require the Company to take action to increase such programs. In addition, when the variables used to estimate these costs change, or if actual costs differ significantly from the estimates, the Company would be required to record incremental reductions to revenue or increased operating expenses. If, at any future time, the Company becomes unable to reasonably estimate the cost of customer programs and incentive offerings, recognition of revenue might be deferred until products are sold to end-users, which would adversely impact revenue in the period of transition. Allowance for Doubtful Accounts The Company sells its products through a domestic and international network of distributors, retailers and OEM customers. Logitech generally does not require any collateral from its customers. However, the Company seeks to control its credit risk through ongoing credit evaluations of its customers’ financial condition and by purchasing credit insurance on U.S. and European retail accounts receivable balances. The Company regularly evaluates the collectibility of its accounts receivable and maintains allowances for doubtful accounts. The allowances are based on management’s assessment of the collectibility of specific customer accounts, including their credit worthiness and financial condition, as well as the Company’s historical experience with bad debts and customer deductions, receivables aging, current economic trends and geographic or country-specific risks. As of March 31, 2006, three customers represented 14%, 13% and 10% of total accounts receivable. The customers comprising the ten highest outstanding trade receivable balances accounted for approximately 60% of total accounts receivable as of March 31, 2006. A deterioration of a significant customer’s financial condition could cause actual write-offs to be materially different from the estimated allowance. If any of these customers’ receivable balances should be deemed uncollectible or if actual write-offs are higher than historical experience, the Company would have to make adjustments to its allowance for doubtful accounts, which could result in an increase in the Company’s operating expenses. CG Inventory Valuation The Company must order components for its products and build inventory in advance of customer orders. the Company’s industry is characterized by rapid technological change, short-term customer Further, commitments and rapid changes in demand. The Company records inventories at the lower of cost or market value and records write-downs of inventories which are obsolete or in excess of anticipated demand or market value. A review of inventory is performed each period that considers factors including the marketability and product life cycle stage, product development plans, component cost trends, demand forecasts and current sales levels. Inventory exposures are identified by comparing inventory on hand and on order to forecasted sales over the next six, nine and twelve month periods. Inventory on hand which is not expected to be sold or utilized based on review of forecasted sales and utilization is considered excess, and the Company recognizes the write-off in cost of sales at the time of such determination. At the time of loss recognition, a new, lower-cost basis for that inventory is established and subsequent changes in facts and circumstances would not result in an increase in the cost basis. If there were an abrupt and substantial decline in demand for Logitech’s products or an unanticipated change in technological or customer requirements, the Company may be required to record additional write-downs which could adversely affect gross margins in the period when the write-downs are recorded. LISA 35 Accounting for Income Taxes Logitech operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. The Company’s effective tax rate may be affected by the changes in or interpretations of tax laws in any given jurisdiction, utilization of net operating loss and tax credit carry forwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred tax assets. As a result of these considerations, the Company must estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely, a valuation allowance is established for any amounts the Company believes will not be recoverable. Establishing or increasing a valuation allowance increases income tax expense in such period, while releasing a valuation allowance reduces income tax expense or increases additional paid-in capital in certain circumstances in such period. Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. Logitech has recorded a valuation allowance at March 31, 2006 due to uncertainties related to its ability to utilize some of the deferred tax assets before they expire. The valuation allowance is based on estimates of future taxable income by jurisdiction in which the Company operates and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates or the estimates are adjusted in future periods, the Company may need to release a valuation allowance or establish an additional valuation allowance which could materially impact the Company’s financial position and results of operations in the period when the valuation allowances are adjusted. In addition, the Company is subject to examination by various taxing authorities. The Company believes it has adequately provided in the financial statements for additional taxes that it estimates may be required to be paid as a result of such examinations. If the payment ultimately proves to be unnecessary, the reversal of the tax liabilities would result in tax benefits being recognized in the period the Company determines the liabilities are no longer necessary. If a final tax assessment exceeds the Company’s estimate of tax liabilities, an additional charge to expense will result. See Note 10—“Income Taxes” for further discussion. Valuation of Long-Lived Assets The Company reviews long-lived assets, such as investments, property, plant and equipment, and goodwill and other intangible assets for impairment whenever events indicate that the carrying amount of these assets might not be recoverable. Factors considered as important which could require it to review an asset for impairment include the following: • • • • • significant underperformance relative to historical or projected future operating results; significant changes in the manner of its use of the acquired assets or the strategy for its overall business; significant negative industry or economic trends; significant decline in its stock price for a sustained period; and its market capitalization relative to net book value. Recoverability of investments, property, plant and equipment, and other intangible assets is measured by comparing the projected undiscounted cash flows the asset is expected to generate with its carrying amount. If an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. The Company evaluates goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable from its estimated future cash flows. 36 Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired, and a second test is performed to measure the amount of impairment loss. While the Company has fully integrated all of its acquired companies, it continues to maintain discrete financial information for 3Dconnexion and accordingly determines impairment for the goodwill acquired with the 3Dconnexion acquisition at the entity level. All other acquired goodwill is evaluated for impairment at a total enterprise level. In determining fair value, the Company considers various factors including estimates of future market growth and trends, forecasted revenue and costs, expected periods over which its assets will be utilized, and other variables. The Company calculates its fair value based on the present value of projected cash flows using a discount rate determined by management to be commensurate to the risk inherent in the Company’s current business model. To date, the Company has not recognized any impairment of its goodwill. Logitech bases its fair value estimates on assumptions it believes to be reasonable, but which are inherently uncertain. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which requires companies to expense the fair value of employee stock options and other forms of share-based compensation. Accordingly, SFAS 123R eliminates the use of the intrinsic value method to account for share-based compensation transactions as provided under Accounting Principles Board Opinion No. 25. Under SFAS 123R, the Company is required to determine the the amortization method for to be used to value share-based payments, appropriate fair value model compensation cost and the transition method to be used at the date of adoption. In addition, the adoption of SFAS 123R will require additional accounting related to tax benefits on employee stock options and for shares issued under the Company’s employee stock purchase plan. The Company is required to adopt SFAS 123R in the first quarter of fiscal year 2007. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” which provides the SEC’s interpretation of SFAS 123R and its views regarding the valuation of share-based payments for public companies. The Company is evaluating the requirements of SFAS 123R and SAB 107 and expects stock-based compensation expense of $16 to $19 million, net of income taxes, to be reflected in the Company’s net income for fiscal year 2007. Results of Operations Year Ended March 31, 2006 Compared with Year Ended March 31, 2005 Net Sales Net sales by channel and product family for fiscal years 2006 and 2005 were as follows (in thousands): 2006 2005 Change % Net sales by channel: Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,588,033 208,682 $1,294,404 188,222 Total net sales . . . . . . . . . . . . . . . . . . . . . $1,796,715 $1,482,626 Net sales by product family: Retail – Cordless . . . . . . . . . . . . . . . . . . . . . . . Retail – Corded . . . . . . . . . . . . . . . . . . . . . . . . Retail – Video . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Audio . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Gaming . . . . . . . . . . . . . . . . . . . . . . . Retail – Other . . . . . . . . . . . . . . . . . . . . . . . . . OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,358 314,695 273,340 334,496 136,944 80,200 208,682 $ 453,519 296,346 201,626 158,134 146,517 38,262 188,222 Total net sales . . . . . . . . . . . . . . . . . . . . . $1,796,715 $1,482,626 23% 11% 21% (1)% 6% 36% 112% (7)% 110% 11% 21% 37 CG LISA Logitech’s cordless and corded product families include the Company’s mice, trackballs, keyboards and desktops; video is comprised of PC webcams; audio includes multimedia speakers and headset products for the PC, and mobile entertainment and communication platforms; gaming includes console and PC peripherals; and other is primarily comprised of the Company’s advanced remote control, as well as 3D input device offerings. Net sales in fiscal year 2006 increased significantly from the prior year due to continued growth in demand for the Company’s retail and OEM products. Retail sales growth was largely attributable to strong demand for the audio product line and increased demand for video and remote control products. OEM sales also returned to growth due to increased demand for mice. Approximately 50% of the Company’s sales were denominated in currencies other than the U.S. dollar in fiscal year 2006. Retail Cordless. Sales of the Company’s retail cordless products in fiscal year 2006 decreased 1% compared with fiscal year 2005, while units sold increased 14%. New cordless optical and notebook mice products launched during the year, including the V200 cordless notebook mouse, generated higher sales and units sold, increasing cordless mice sales by 8% and units by 21%. Cordless desktop sales declined 9% while units increased 5%, due to lower sales in the mid-range and high-end segments of the product line, offset by strong growth in the mass-market segment. Retail Corded. Sales of corded products increased 6% while units grew 13% compared with the prior year. Sales of corded mice increased 4% and units increased 11%, driven largely by the popularity of the MX518 gaming mouse and the G5 laser mouse. In addition, sales of corded desktops increased by 63% with units growing 64% due to the growth in sales of low-end corded desktops. Retail Video. Reflecting the increased use of video communications over the Internet, retail video sales grew 36% and units increased 53% compared with the prior year. Demand was strong across all categories, especially for lower-priced mass-market webcam products and certain high-end products, such as the QuickCam Fusion webcam. Retail Audio. Retail audio sales increased 112% and units increased 85% compared with the prior year. The significant growth came primarily from higher sales of speakers and PC headsets during fiscal year 2006. The Company’s speakers were the most significant contributors to the growth, with sales increasing 116% and units increasing 111%, reflecting continued strength in PC speakers throughout the year, as well as the success of the portable speakers for iPod. Sales of headsets for iPod and MP3 also contributed to the significant growth, with sales more than doubling and unit sales increasing 76%. Retail Gaming. Sales in retail gaming declined 7% while units sold grew 21% compared with the prior year. Sales of console gaming peripherals were down 9%. Last year, the Company achieved significant sales and unit shipments from cordless controllers for the Playstation®2 and Xbox™ platforms and from console steering wheels, reflecting the popularity of a newly-launched racing game. In fiscal 2006, sales of console peripherals decreased due to the anticipated transition to new console platforms and, in particular for wheels, by the lack of popular new driving games. Units sold for console gaming peripherals grew 45%, driven by accessories for the Playstation Portable (“PSP”). The market demand for PC gaming products remains stagnant and, as a result, sales of PC gaming peripherals declined 3% with units sold decreasing 3%. Retail Other. Sales in the other retail category increased 110% compared with the prior year, primarily due to accelerating market demand for Harmony remotes. Retail Regional Performance. The Americas, Europe and Asia Pacific regions all achieved strong retail sales growth in fiscal year 2006. Retail sales in the Americas region grew 27%, driven by the significant growth in the audio category, as well as strong sales in video and remote control products. European retail sales increased 21%, largely due to strong sales growth in audio and video products. Remote controls also ramped up strongly in Europe. In Asia Pacific, retail sales grew 21%, led by strong sales of corded and audio products. 38 OEM. OEM revenues increased 11% compared with fiscal year 2005 and represented 12% of total sales in fiscal year 2006, the same proportion as last year. OEM units increased 16%, mainly driven by strong growth in corded mice sales to PC manufacturers, supported by increased OEM sales of gaming products. The timing and size of the opportunities for Logitech’s OEM gaming products are difficult to predict, as they are sensitive to trends in these industries, including customer preferences, the popularity and nature of games introduced, and the products with which our products may be bundled. Gross Profit Gross profit for fiscal years 2006 and 2005 was as follows (in thousands): Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . $1,796,715 1,222,605 $1,482,626 979,039 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 574,110 $ 503,587 21% 25% 14% CG Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.0% 34.0% 2006 2005 Change % Gross profit consists of net sales, less cost of goods sold which includes materials, direct labor and related overhead costs, costs of manufacturing facilities, costs of purchasing components from outside suppliers, distribution costs and impairment of inventories. The increase in gross profit resulted from the net sales increase over the prior year. The decline in the Company’s gross margin is primarily due to the higher percentage of audio sales in fiscal year 2006, representing 19% of total net sales compared with 11% in fiscal year 2005. Margins in the audio category, although improved from the prior year, are lower than the Company’s other product categories. Gross margin also reflected a return to more sustainable margin levels in a number of product categories from the higher margins experienced last year. Operating Expenses Operating expenses for fiscal years 2006 and 2005 were as follows (in thousands): 2006 2005 Change % Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . % of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . % of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . % of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $223,063 $201,353 12.4% 87,953 4.9% 64,183 3.6% 13.6% 73,900 5.0% 56,660 3.8% Total operating expenses . . . . . . . . . . . . . . . . . . . . . $375,199 $331,913 11% 19% 13% 13% Marketing and Selling Marketing and selling expense consists of personnel and related overhead costs, corporate and product marketing, promotions, advertising, trade shows, customer and technical support and facilities costs. LISA Higher marketing and selling expense in absolute dollars and as a percentage of sales compared with the prior year reflects increased customer marketing development initiatives, higher personnel costs and higher outside commission expenses to support higher retail sales levels and expanded territorial coverage. The Company increased its market penetration in developing markets, such as Latin America, Eastern Europe and China, by securing new channel partners, strengthening relationships with existing partners, and investing in 39 additional marketing initiatives. In addition, the Company’s operating expenses benefited from the strengthening of the U.S. dollar relative to the Euro and Swiss franc due to exchange rate changes on translation to the U.S. dollar financial statements. Research and Development Research and development expense consists of personnel and related overhead costs, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products. The increase in research and development expense reflects the Company’s commitment to continued investments in research and product development efforts. Investments in audio, video and remote control groups were the most significant contributors to the increase, driven by higher headcount and related personnel costs, as well as higher prototyping expenses. The impact of exchange rate changes on translation to the Company’s U.S. dollar financial statements was not material. General and Administrative General and administrative expense consists primarily of personnel and related overhead and facilities costs for the finance, information systems, executive, human resources and legal functions. General and administrative expense increased primarily as a result of increased headcount to support the business growth. In addition, costs incurred for Sarbanes-Oxley consultation and implementation and for process changes occurring in the Company contributed to the higher general and administrative expense. The Company’s operating expenses also benefited from the strengthening of the U.S. dollar relative to the Euro and Swiss franc due to exchange rate changes on translation to the U.S. dollar financial statements. Interest Income (Expense), Net Interest income and expense for fiscal years 2006 and 2005 were as follows (in thousands): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,512 (1,921) $ 3,771 (3,630) 46% (47)% Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . $ 3,591 $ 141 2447% 2006 2005 Change % Interest income was higher compared with the prior year due to higher invested cash balances and higher including lower returns earned on invested amounts. Interest expense decreased due to lower interest, amortization of the accreted redemption premium, as a result of conversion of the convertible bond during the third quarter of fiscal year 2006. Other Income, Net Other income and expense for fiscal years 2006 and 2005 were as follows (in thousands): Foreign currency exchange gains, net . . . . . . . . . . . . . . . . . Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . Write-off of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,580 560 (1,168) 380 $3,522 — — 269 Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,352 $3,791 115% — — (41)% 94% 2006 2005 Change % 40 The increase in net foreign currency exchange gains in fiscal year 2006 primarily resulted from a one-time gain of $3 million related to an exchange of the Company’s Euro currency for U.S. dollars. The Company does not speculate in currency positions, but is alert to opportunities to maximize its foreign exchange gains. The Company also impaired an investment and recorded a gain on the sale of another investment. Provision for Income Taxes The provision for income taxes and effective tax rate for fiscal years 2006 and 2005 were as follows (in thousands): Provision for income taxes . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . $28,749 $26,340 13.7% 15.0% 2006 2005 The provision for income taxes consists of income and withholding taxes. The decrease in effective tax rate is primarily due to changes in the geographic mix of income. CG Year Ended March 31, 2005 Compared with Year Ended March 31, 2004 Net Sales Net sales by channel and product family for fiscal years 2005 and 2004 were as follows (in thousands): 2005 2004 Change % Net sales by channel: Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,294,404 188,222 $1,020,290 248,180 Total net sales . . . . . . . . . . . . . . . . . . . . . $1,482,626 $1,268,470 Net sales by product family: Retail – Cordless . . . . . . . . . . . . . . . . . . . . . . . Retail – Corded . . . . . . . . . . . . . . . . . . . . . . . . Retail – Video . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Audio . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Gaming . . . . . . . . . . . . . . . . . . . . . . . Retail – Other . . . . . . . . . . . . . . . . . . . . . . . . . OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 453,519 296,346 201,626 158,134 146,517 38,262 188,222 $ 341,082 294,829 166,418 118,641 82,872 16,448 248,180 Total net sales . . . . . . . . . . . . . . . . . . . . . $1,482,626 $1,268,470 27 % (24)% 17 % 33 % 1 % 21 % 33 % 77 % 133 % (24)% 17 % Overall sales growth in fiscal year 2005 reflected retail sales growth across all major product categories, with console gaming and cordless mice contributing most significantly. The decline in OEM sales reflected the absence of sales to Sony of the EyeToyTM camera and the USB headsets for the Playstation®2. Approximately 53% of the Company’s sales were denominated in currencies other than the U.S. dollar in fiscal year 2005. While the Euro was stronger compared with the prior year, the benefit from the strengthening Euro in fiscal year 2005 was less than the prior year. Any benefit did not take into account the impact that currency fluctuations had on the Company’s pricing strategy resulting in lowering or raising selling prices in one currency to avoid disparity with U.S. dollar prices and to respond to currency-driven competitive pricing actions. The Company believed that currency fluctuations did not have a material impact on its revenue growth in fiscal year 2005. LISA Retail Cordless. Cordless mice sales drove the majority of the growth in the retail cordless category, with sales increasing 69% and unit shipments up 59% over the prior year. The introduction of the laser cordless mouse in September 2004 made a significant contribution to this growth. Also, demand for Logitech’s cordless optical mice for notebooks, including the high-end V500 contributed to the growth. Demand for the media cordless 41 mouse and value cordless offerings also contributed to higher sales during fiscal year 2005. Cordless desktops sales were also higher due to strong demand for the Company’s new LX desktop family. Contributions from the Company’s value desktop offerings and the cordless desktop for notebooks further drove growth in the cordless desktop category. Retail Corded. The migration by consumers to cordless peripherals impacted sales for the Company’s corded products. The largest component of the corded product category, corded mice, was essentially flat and unit shipments were lower by 1% compared with fiscal year 2004. Sales of corded keyboards declined 7% while unit shipments increased 11%. The decrease in sales, despite an increase in unit shipments, reflected a shift in the product mix. Retail Video. Demand for video products was strong due to the increased popularity of PC webcams spawned by the growth of instant messaging and broadband connectivity. Sales of PC webcams grew 32% and unit shipments increased 53% due to demand for both the Company’s premium high-end products and lower priced mass-market offerings. The increase in video sales was mitigated by the absence of the Company’s dualcam products, a category Logitech discontinued late in fiscal year 2004. Retail Audio. Sales of audio products were higher by 33% in fiscal year 2005 and unit shipments increased 12% compared with the prior fiscal year. The growth in both sales and units in the audio category was driven primarily by strong demand for the Company’s Logitech branded PC speaker line. In particular, the success of the X family series, a mid-range speaker line, made a major contribution to this growth. The Company also benefited from higher PC headset sales. To a lesser extent, higher sales of headsets for mobile phones and the Xbox™ also contributed to higher sales in the audio category. Retail Gaming. Sales of retail gaming peripherals grew considerably in fiscal year 2005 compared with fiscal year 2004. The growth came primarily from the Company’s console gaming peripherals, with sales increasing 172% and unit shipments growing 219% compared with a year ago. The most significant growth came from sales of cordless gamepads for the Playstation®2 and Xbox™ platforms. Sales of console steering wheels also showed growth and contributed to the increase in console gaming. Sales of gaming peripherals for the PC grew at a slower rate, increasing 21% with unit shipments higher by 24%. The growth in PC gaming peripherals was driven by higher sales for both PC gamepads and steering wheels. Retail Regional Performance. Retail sales in the Company’s Americas region grew 30% in fiscal year 2005, significantly faster than the 6% growth in fiscal year 2004. Strong demand for cordless, video, audio and console gaming products contributed to the increased sales, partially offset by reductions in sales of corded and PC gaming products. Contribution from the remote control line also benefited sales in the region. In Europe, retail sales also showed growth, increasing 32% compared with fiscal year 2004. While the Euro was stronger compared with the prior year, the benefit from the strengthening Euro in fiscal year 2005 was less than in fiscal year 2004. Further, this benefit did not take into account the impact that currency fluctuations had on the Company’s pricing strategy resulting in lowering or raising selling prices in a currency to avoid disparity with U.S. dollar prices and to respond to currency-driven competitive pricing actions. European sales growth occurred across all core product categories in fiscal year 2005, with the most significant growth coming from sales of cordless mice, PC webcams, headsets and console gaming. Retail performance in Asia Pacific declined 3% in fiscal year 2005, due to significantly lower sales in China, partially offset by higher sales in Japan. OEM. OEM revenues declined 24% in fiscal year 2005 compared with fiscal year 2004 and represented 13% of total sales compared with 20% of total sales in the prior year. The most significant driver of the decline was the absence of sales to Sony of peripherals for the Playstation®2, which included USB headsets and the EyeToyTM camera. While corded products were the most significant component of OEM sales, demand for OEM cordless products continued to grow. In particular, sales of OEM cordless mice grew considerably compared with fiscal year 2004. 42 Gross Profit Gross profit for fiscal years 2005 and 2004 was as follows (in thousands): Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . $1,482,626 979,039 $1,268,470 859,548 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 503,587 $ 408,922 17% 14% 23% Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.0% 32.2% 2005 2004 Change % The increase in gross profit correlated with increased revenues during the same period. The increase in gross margin primarily reflected a shift in the mix between retail and OEM sales, as well as improved retail gross margins. As a percentage of total sales, OEM revenues were significantly lower in fiscal year 2005, representing 13% of total sales compared to 20% in the prior year. Overall, retail margins improved in fiscal year 2005 compared with fiscal year 2004. In particular, gross margins for the Company’s video products improved most significantly, primarily as a result of the Company’s exit from the dualcam category. Gross margin in fiscal year 2005 improved in spite of increases for certain material and fuel costs. During fiscal year 2005, the Company incurred incremental costs in connection with the introduction and phase-in of a large number of retail products, which included significant freight costs to expedite delivery of products to meet higher than expected customer demand. CG Operating Expenses Operating expenses for fiscal years 2005 and 2004 were as follows (in thousands): 2005 2004 Change % Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . % of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . % of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . % of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $201,353 $156,793 13.6% 12.4% 73,900 61,289 5.0% 4.8% 56,660 45,286 3.8% 3.6% 28% 21% 25% Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . $331,913 $263,368 26% Marketing and Selling Higher marketing and selling expense in fiscal year 2005 in absolute dollars and as a percentage of sales compared with the prior year reflects increased investments in marketing and sales for expanded territory coverage, to strengthen brand awareness across all geographies and to support higher retail sales levels. Correlating with the higher sales during the year, expenses incurred for commissions and marketing development initiatives with customers were higher than the prior year. Personnel costs were also higher due to increased headcount for expanded territory coverage for certain key markets, including China, Eastern Europe and the retail mass channel in the United States. The impact of exchange rate changes on translation to the Company’s U.S. dollar financial statements, particularly from the stronger Euro and Swiss franc relative to the U.S. dollar, also contributed to the increase. LISA Research and Development To support the development of a broader product portfolio, the Company expanded its research and development staff in fiscal year 2005. Higher personnel costs contributed most significantly to the increased expense. Investments in product development focused on the Company’s cordless, audio and advanced remote 43 control product programs. The impact of exchange rate changes on translation to the Company’s U.S. dollar financial statements, particularly from the stronger Swiss franc relative to the U.S. dollar, also contributed to the increase compared with the prior year. General and Administrative General and administrative expense increased in fiscal year 2005 primarily as a result of higher personnel costs due to increased headcount to support the growth of the Company’s business. Also, costs incurred for Sarbanes-Oxley consultation and implementation, investments to upgrade business applications and information technology systems, and legal costs related to patent infringement claims inherited with the Company’s acquisition of Intrigue contributed to higher general and administrative spending in fiscal year 2005. The impact of exchange rate changes on translation to the Company’s U.S. dollar financial statements, particularly from the stronger Euro and Swiss franc relative to the U.S. dollar, also contributed to the increase compared with the prior year. Interest Income (Expense), Net Interest income and expense for fiscal years 2005 and 2004 were as follows (in thousands): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,771 (3,630) $ 2,278 (4,136) 66 % (12)% Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . $ 141 $(1,858) (108)% 2005 2004 Change % Interest income was higher in fiscal year 2005 due to higher invested cash balances and higher returns earned on invested amounts. Interest expense was lower in fiscal year 2005 primarily due to the Company incurring a $.8 million financing charge in fiscal year 2004 in connection with the sale of a portion of a VAT receivable to a bank. Other Income, Net Other income and expense for fiscal years 2005 and 2004 were as follows (in thousands): 2005 2004 Change % Foreign currency exchange gains, net . . Write-off of investments . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . $3,522 — 269 $2,966 (515) (478) Other income, net . . . . . . . . . . . . . . . . . . $3,791 $1,973 19 % (100)% 156 % 92 % The increase in other income, net in fiscal year 2005 was primarily due to increased favorable fluctuations in exchange rates. Also, the Company incurred losses in fiscal year 2004 totaling $1.0 million for the write-down of an investment and the provision for a potentially non-recoverable insurance loss. Provision for Income Taxes The provision for income taxes and effective tax rate for fiscal years 2005 and 2004 were as follows (in thousands): Provision for income taxes . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . $26,340 $13,516 15% 9% 2005 2004 44 The provision for income taxes consists of income and withholding taxes. During the third quarter of fiscal year 2004, the Company released $13.4 million of its valuation allowance on specific deferred tax assets, primarily as a result of achieving sustained profitability in certain tax jurisdictions. Additionally, a reassessment of its tax position resulted in an adjustment of the Company’s effective income tax rate to 15% in the fourth quarter of fiscal year 2004 from 20% in prior periods. This was primarily due to changes in the geographic mix of income. As a result of the release of its valuation allowance and the adjustment of its effective income tax rate, the Company’s provision for income taxes in fiscal year 2004 was 9%. Excluding the impact of the $13.4 million valuation allowance released in the third quarter, the effective tax rate for fiscal year 2004 would have been 18%. Liquidity and Capital Resources Cash Balances, Available Borrowings, and Capital Resources At March 31, 2006, net working capital was $407.9 million, compared with $452.7 million at March 31, 2005. The decrease in working capital was primarily due to a significant decrease in cash and cash equivalents, partially offset by the increases in accounts receivable and inventory. CG Cash and cash equivalents totaled $245.0 million at March 31, 2006, a decrease of $96.3 million from March 31, 2005. The Company used $241.4 million to repurchase shares under the share buyback program and $54.1 million for capital expenditures, including investments for information system upgrades, construction of the new factory in Suzhou, China, and normal expenditures for tooling costs. The use of cash was partially offset by $152.2 million of cash provided by operating activities and $49.2 million in proceeds from the sale of shares under the Company’s employee option and share purchase plans. The Company’s normal short-term liquidity and long-term capital resource requirements are provided from three sources: cash flow generated from operations, cash and cash equivalents on hand and borrowings, as needed, under its credit facilities. The Company has credit lines with several European and Asian banks totaling $153.6 million as of March 31, 2006. As is common for businesses in European and Asian countries, these credit lines are uncommitted and unsecured. Despite the lack of formal commitments from its banks, the Company believes that these lines of credit will continue to be made available because of its long-standing relationships with these banks. As of March 31, 2006, $139.6 million was available under these facilities. There are no financial covenants under these lines of credit with which the Company must comply. Cash Flow from Operating Activities The following table presents selected financial information and statistics for fiscal years 2006, 2005 and 2004 (dollars in thousands): 2006 2005 2004 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Days sales in accounts receivable (DSO) (1) . . . . . . . . Inventory turnover (ITO) (2) . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . $289,849 $196,864 $407,923 56 days 6.4x $152,217 $229,234 $175,986 $452,663 51 days 6.1x $213,674 $206,187 $135,561 $410,908 53 days 6.8x $166,460 (1) DSO is determined using ending accounts receivable as of the most recent quarter-end and net sales for the (2) most recent quarter. ITO is determined using ending inventories and annualized cost of goods sold (based on the most recent quarterly cost of goods sold). LISA During fiscal year 2006, the Company’s operating activities generated net cash of $152.2 million compared with $213.7 million in the prior year. Stronger business results were offset by increased accounts receivable 45 balances, resulting from significantly higher sales in fiscal year 2006 and an increase in DSO. Although partially offset by higher collections, accounts receivable increased to $289.8 million at March 31, 2006, compared with $229.2 million last year. In addition, the Company increased its inventory levels and purchases to respond to the sales increases in fiscal year 2006. At March 31, 2006, inventory was $196.9 million compared with $176.0 million at March 31, 2005. The increase was predominantly in finished goods, intended to ensure sufficient supply on hand to meet demand. Increased operating expenses also affected cash flow from operating activities in fiscal year 2006. The Company invested in additional personnel, marketing and product initiatives, and infrastructure improvements to support the expanding sales base. The Company’s operating activities generated net cash of $213.7 million during fiscal year 2005 compared with $166.5 million in the prior year. The increase in cash flow generated from operations was due to higher sales and better management of outstanding receivables. Also contributing to improved cash from operations were refunds for value-added taxes from the Chinese government related to certain calendar year 2003 claims. Partially offsetting the increase in cash flow from operations was increased spending for inventory purchases and for operating expenses. The increase in inventory in fiscal year 2005 reflected the Company’s anticipation of product demand by key retail accounts and raw material buffer stock required to manage shortages or interruptions in component supplies. Also, cash flows from operations were impacted by increased operating expenses, which included higher personnel costs, spending for marketing and product development initiatives and investments in infrastructure improvements. Cash Flow from Investing Activities Cash flows from investing activities during fiscal years 2006, 2005 and 2004 were as follows (in thousands): . . . . . . . . . Purchases of property, plant and equipment Acquisitions and investments, net of cash acquired . . . . Premium paid on cash surrender value of life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 2005 2004 $(54,102) 860 $(40,541) (30,494) $(24,718) (15,490) (1,464) — — Net cash used in investing activities . . . . . . . . . . . $(54,706) $(71,035) $(40,208) During fiscal year 2006, the Company’s purchases of property, plant and equipment were primarily for construction of the new factory in Suzhou, China, information system upgrades, and normal expenditures for tooling. The Company also invested participant deferrals of $1.5 million from its management deferred compensation plan in life insurance contracts. In addition, the Company received proceeds from the sale of an investment. The Company’s purchases of property, plant and equipment in fiscal year 2005 were primarily normal expenditures for tooling costs, machinery and equipment, and computer equipment and software. Capital expenditures also included the cost of information system upgrades and construction of a new factory in Suzhou, China. In connection with the acquisition of Intrigue Technologies in May 2004, the Company paid net cash of $29.8 million, acquiring all of Intrigue’s outstanding shares. Also, the Company made other equity investments of $.6 million, primarily for funding in A4Vision, Inc., a privately held company from which Logitech licenses face tracking software used in its PC webcams. During the year ended March 31, 2004, the Company used cash of $24.7 million to acquire property, plant and equipment, primarily for tooling and computer equipment purchases. Also, the Company used cash of $15.5 million to invest in two technology companies, $15.1 million of which was invested in the Anoto Group AB, a Swedish high technology company from which Logitech licenses digital pen technology. 46 Cash Flow from Financing Activities The following tables present information on the Company’s cash flows from financing activities, including information on its share repurchases during fiscal years 2006, 2005 and 2004 (in thousands except per share amounts): Borrowings (repayments) of short-term debt . . . . . . . Repayments of long-term debt . . . . . . . . . . . . . . . . . . Purchases of treasury shares . . . . . . . . . . . . . . . . . . . . Proceeds from sale of shares upon exercise of 2006 2005 2004 $ 5,235 (43) (241,352) $ (4,073) (475) (134,525) $ — (1,331) (79,162) options and rights . . . . . . . . . . . . . . . . . . . . . . . . . . 49,206 45,985 31,404 Net cash used in financing activities . . . . . . . . . $(186,954) $ (93,088) $(49,089) Number of shares repurchased . . . . . . . . . . . . . . . . . . Value of shares repurchased . . . . . . . . . . . . . . . . . . . . Average price per share . . . . . . . . . . . . . . . . . . . . . . . 6,138 $ 241,352 39.32 $ 5,550 $ 134,525 24.24 $ 4,398 $ 79,162 $ 18.00 2006 2005 2004 CG Cash used in financing activities during fiscal year 2006 included treasury stock repurchases of 6,138,000 shares, totaling $241.4 million pursuant to the Company’s buyback programs. The buyback program announced in April 2004 authorized the purchase of up to CHF 250 million (approximately $200 million based on exchange rates at the date of announcement). The buyback program announced in June 2005 authorized the purchase of up to CHF 300.0 million (approximately $235.0 million based on exchange rates at the date of announcement). Proceeds included $49.2 million from the sale of 3,533,000 shares under the Company’s employee option and share purchase plans and $5.2 million from short-term borrowing in Japanese yen, to benefit from low interest rates and to offset exposures in yen-denominated assets. During fiscal year 2006, all of the Company’s convertible bonds were converted into a total of 5,448,693 Logitech registered shares through delivery of treasury shares which had no cash impact on financing activities. Cash used in financing activities during fiscal year 2005 included treasury stock repurchases of 5,550,000 shares, totaling $134.5 million pursuant to the Company’s buyback program announced in April 2004. Debt repayments totaling $4.5 million primarily related to the Company’s Swiss mortgage loan that matured in April 2004. Proceeds totaling $46.0 million were realized from the sales of shares pursuant to the Company’s employee option and share purchase plans. Cash used in financing activities during fiscal year 2004 included treasury stock repurchases totaling $79.2 million and repayment of debt obligations of $1.3 million. The Company completed purchases under its buyback program announced in February 2003, purchasing 3,068,472 shares for $47.1 million. Also, pursuant to a new program announced in October 2003, authorizing the purchase of up to CHF 40 million (approximately $32 million based on exchange rates at the date of announcement) of Logitech shares, the Company completed the purchase of 1,330,000 shares for $32.1 million. The Company realized cash proceeds of $31.4 million from the sale of shares pursuant to the Company’s employee option and share purchase plans in fiscal year 2004. Cash Outlook LISA The Company’s working capital requirements and capital expenditures could increase to support future expansion of Logitech operations. Future acquisitions or expansion of the Company’s operations may be significant and may require the use of cash. In June 2005, the Company announced the approval by its board of directors of a new buyback program of up to CHF 300.0 million (approximately $235.0 million based on exchange rates at the date of announcement). 47 The program expires at the Company’s 2008 Annual General Meeting at the latest. Under this program, the Company repurchased 4.2 million shares for $174.6 million during the year ended March 31, 2006. The approved amount remaining under this program at March 31, 2006 is CHF 76.1 million ($58.3 million based on exchange rates at March 31, 2006). The Company plans to continue repurchasing shares in fiscal year 2007 under this program. Also in fiscal year 2007, the Company plans to continue investing in tooling and other manufacturing and operating infrastructure, particularly in the Asia Pacific region. In May 2004, the Company acquired Intrigue Technologies, Inc., a privately held provider of advanced remote controls. The purchase agreement provides for deferred payments to Intrigue’s former shareholders based on the highest net sales from products incorporating Intrigue’s technology during the revenue measurement period, defined as any consecutive four-quarter period beginning in April 2006 through September 2007. The total deferred payment amount will vary with net sales in the revenue measurement period. The payment amount would approximate 27% of such net sales at the highest net sales level, although the percentage could be higher at lower net sales levels. No deferred payments are required if the highest net sales level in the revenue measurement period is less than $55.0 million. Net sales of remote controls have been increasing in recent quarters and, if current sales growth in this category continues, the Company will be obligated to make the deferred payment. The deferred payment, if any, will be recorded as an adjustment to goodwill. The total payment amount will not be known until the end of the revenue measurement period. The Company believes that its cash and cash equivalents, cash flow generated from operations, and available borrowings under its bank lines of credit will be sufficient to fund capital expenditures and working capital needs for the foreseeable future. Contractual Obligations and Commitments As of March 31, 2006, the Company’s outstanding contractual obligations and commitments included: (i) amounts drawn on its credit lines, (ii) equipment financed under capital leases, (iii) facilities leased under operating lease commitments, and (iv) purchase commitments and obligations. The following summarizes Logitech’s contractual obligations and commitments at March 31, 2006 (in thousands): Lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase commitments – inventory . . . . . . . . . . . . . . . . . Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments Due by Period Total $ 14,023 52 35,532 128,603 8,709 Less than 1 year $ 14,023 48 7,479 128,603 8,709 1-3 years 3-5 years $ — $ — — 4 8,751 12,298 — — — — More than 5 years $ — — 7,004 — — Total contractual obligations and commitments . . . . . . . . $186,919 $158,862 $12,302 $8,751 $7,004 For additional information on the Company’s outstanding debt obligations, see Note 7—“Financing Arrangements” of the Notes to Consolidated Financial Statements. Lines of Credit The Company’s line of credit is denominated in Japanese yen and is due on demand. 48 Operating and Capital Leases The remaining terms on the Company’s non-cancelable operating leases expire in various years through 2015. The Company had minimal commitments on capital leases as of March 31, 2006. Purchase Commitments – Inventory The Company has fixed purchase commitments for inventory of $128.6 million as of March 31, 2006. Inventory purchase commitments are made in the normal course of business and are to contract manufacturers and other suppliers. Although open purchase commitments are considered enforceable and legally binding, the terms generally allow the Company the option to reschedule and adjust its requirements based on the business needs prior to the delivery of the purchases. The purchase commitments for inventory are expected to be fulfilled within one year. Purchase Obligations CG Purchase obligations represent an estimate of all open purchase orders and contractual obligations for capital and other expenditures, for which the goods or services are not received. These purchase obligations are primarily related to commitments for manufacturing equipment and software, as well as consulting, marketing and advertising arrangements. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to cancel, reschedule, and adjust its requirements based on the business needs prior to the delivery of goods or performance of services. Off-Balance Sheet Arrangements The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose it to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company. Guarantees The Company has guaranteed the purchase obligations of some of its contract manufacturers to certain component suppliers. These guarantees have a term of one year and are automatically extended for one or more years as long as a liability exists. The amount of the purchase obligations of these manufacturers varies over time, and, therefore, the amounts subject to the Company’s guarantees similarly vary. At March 31, 2006, the amount of these outstanding guaranteed purchase obligations was approximately $1.3 million. Logitech does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements. Indemnifications The Company indemnifies certain of its suppliers and customers for losses arising from matters such as intellectual property rights and safety defects, subject to certain restrictions. The scope of these indemnities varies and may include indemnification for damages and expenses, including reasonable attorneys’ fees. No amounts have been accrued for indemnification provisions as of March 31, 2006. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under its indemnification arrangements. LISA Research and Development For a discussion of the Company’s research and development activities, patents and licenses, please refer to Item 4B “Business Overview.” 49 Trend Information For a discussion of significant trends in the Company’s financial condition and results of operations, please refer to Item 5 “Results of Operations” and “Liquidity and Capital Resources.” ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management Information concerning Directors and Senior Management of Logitech appears in Section 3 “The Board of Directors” and Section 4 “Senior Management” in Exhibit 15.1 to the Form 20-F and is incorporated herein by reference. B. Compensation of Executive Officers and Directors Information concerning the compensation of Executive Officers and Directors of Logitech appears in Section 5.2 “Compensation of Directors and Executive Officers” in Exhibit 15.1 to the Form 20-F and is incorporated herein by reference. C. Board Practices Information concerning the Company’s board practices appears in Section 3 “The Board of Directors” in Exhibit 15.1 to the Form 20-F and is incorporated herein by reference. D. Employees The number of people employed worldwide by the Company was as follows: Category Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing and distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing, sales and support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of March 31, 2006 2005 2004 807 5,081 678 642 7,208 645 5,108 639 506 6,898 459 4,506 511 384 5,860 Of the total number of employees as of March 31, 2006, 978 were in North America, 641 were in Europe and 5,589 were in Asia. None of the Company’s U.S. employees are represented by a labor union or are subject to a collective bargaining agreement. Certain foreign countries, such as China, provide by law for employee rights, which include requirements similar to collective bargaining agreements. The Company believes that its employee relations are good. E. Share Ownership Share and option ownership of the Company’s Directors and Executive Officers appears in Section 5.5 “Share Ownership of Directors and Executive Officers” and Section 5.6 “Option Ownership of Directors and Executive Officers” in Exhibit 15.1 to the Form 20-F and is incorporated herein by reference. Information concerning the Company’s employee stock-based compensation arrangements including stock option plans and stock purchase plans is disclosed in Note 9—“Employee Benefit Plans” of the Notes to Consolidated Financial Statements included in Item 18 “Financial Statements.” 50 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders The following table sets forth certain beneficial ownership information as of March 31, 2006 of each shareholder known by the Company to beneficially own 5% or more of the Company’s registered shares or ADSs. The Company does not believe it is directly or indirectly owned or controlled by any corporation or by any foreign government. The voting rights of Logitech shares held by major shareholders are the same as the voting rights of shares held by all other shareholders. The Company is unaware of any arrangement that might result in a change in its control. Name of Beneficial Owner Shares Beneficially Owned(1) Percentage(2) Daniel Borel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,120,000 6.4% (1) Beneficial ownership is determined in accordance with rules of the SEC that deem shares to be beneficially owned by any person who has voting or investment power with respect to such shares. The beneficial owners have furnished this information. Unless otherwise indicated below, the persons named in the table have sole voting and sole investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable. Registered shares subject to options that are currently exercisable or exercisable within 60 days after March 31, 2006 are deemed to be issued and beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person but are not treated as issued for the purpose of computing the percentage ownership of any other person. (2) Percentage ownership is calculated based on 95,803,310 registered shares issued as of March 31, 2006. CG Based on a SEC filing by FMR Corp. on February 14, 2006, FMR Corp. was the beneficial holder under applicable US securities laws of 7,098,170 Logitech shares and/or ADSs, representing approximately 7.4% of the Company’s aggregate voting rights, as of December 31, 2005. FMR Corp. is the parent company of Fidelity Investments, a U.S.-based mutual fund company, and its beneficial ownership is as a result of holdings through one or more of its funds. On March 21, 2006 FMR Corp. notified the Company that its shareholdings had fallen to 4.96% of the Company’s aggregate voting rights on March 15, 2006. Refer also to Item 9C “Markets on which our Shares Trade” for information regarding the number of ADSs held in the United States. B. Related Party Transactions In connection with the Company’s investment in the Anoto Group AB, a Logitech executive was elected to the Anoto board of directors. Anoto is a publicly traded Swedish high technology company from which Logitech licenses digital pen technology. The license agreement requires Logitech to pay a license fee for the rights to use the Anoto technology and a license fee on the sales value of digital pen solutions sold by Logitech. Also, the agreement includes non-recurring engineering (“NRE”) service fees primarily for specific development and maintenance of Anoto’s licensed technology. During fiscal year 2006, expenses incurred for license fees to Anoto were $.5 million. Expenses incurred for license fees and NRE service fees to Anoto were $.7 million in fiscal year 2005. LISA Also, in connection with the Company’s investment in A4Vision, Inc. a Logitech executive was appointed to the A4Vision board of directors. A4Vision is a privately held company from which Logitech licenses face tracking software. The license agreement requires Logitech to pay a license fee based on the number of its products sold with A4Vision’s licensed software. During fiscal year 2006, expenses incurred for license fees to A4Vision were immaterial. Expenses incurred for license fees to A4Vision amounted to $.2 million in fiscal year 2005. 51 C. Interests of Experts and Counsel Not applicable. ITEM 8. FINANCIAL INFORMATION A. Consolidated Statements and Other Financial Information Please refer to Item 18 “Financial Statements” and pages F-1 through F-25 of our Consolidated Financial Statements. In addition, for more information regarding our results of operations, please refer to Item 5 “Operating and Financial Review and Prospects.” Legal Proceedings From time to time, Logitech becomes involved in claims and legal proceedings that arise in the ordinary course of its business. The Company is currently subject to several such claims and legal proceedings and intends to defend against them vigorously. However, there can be no assurance that our defenses will be successful, or that any judgment or settlement in any of these lawsuits or claims would not have a material adverse impact on the Company’s business, financial condition and results of operations. Further, because of technological changes in the computer and consumer electronics industries, current extensive patent coverage granted to third parties, and the rapid rate of issuance of new patents, it is possible certain components of our products or our business methods may unknowingly infringe existing patents of third parties. The Company has from time to time been notified that it may be infringing certain patents or other intellectual property rights of others. Pending and future litigation and disputes arising over patent infringement claims, or over commercial matters, or other litigation involving us, whether as plaintiff or defendant, regardless of outcome, may result in significant diversion of our management and technical resources, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements, any of which could adversely affect our business, financial condition and operating results. Dividends Under Swiss law, a corporation pays dividends upon a vote of its shareholders. This vote typically follows the recommendation of the corporation’s board of directors. Although the Company has paid dividends in the past, Logitech’s board of directors announced in 1997 its intention not to recommend to shareholders any payment of cash dividends in the future in order to retain any future earnings for use in the operation and expansion of the business. In more recent years, the Company has also used retained earnings to repurchase its shares. B. Significant Changes None. ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details Stock Price Information Registered Shares Logitech’s registered shares are listed and traded on the SWX Swiss Exchange, where the share price is denominated in Swiss francs. 52 The following table sets forth certain historical share price information for the Company’s registered shares. The information presented is based on (i) the high and low closing sales prices quoted in Swiss francs for the registered shares on the SWX Swiss Exchange, and (ii) the U.S. dollar equivalent based on the noon buying rate on the trading day of the month in which the high or low closing sales price occurred. The noon buying rate is the rate in New York City for cable transfers in selected currencies as certified for customs purposes by the Federal Reserve Bank of New York. Share prices have been adjusted to reflect a two for one share split in June 2005. Annual Highs and Lows: Fiscal 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quarterly Highs and Lows: Fiscal 2005: First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2006: First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monthly Highs and Lows (over the most recent six month period): October 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price per Registered Share on the Swiss Exchange High CHF Low CHF High $ Low $ 39.85 41.63 32.00 38.45 65.00 30.95 31.00 34.90 38.45 41.85 52.35 63.00 65.00 53.65 60.20 63.00 65.00 56.00 55.25 14.50 15.75 19.23 26.38 34.20 28.00 26.38 30.33 32.50 34.20 41.20 47.75 50.90 47.75 50.25 58.90 51.20 51.30 50.90 23.69 26.30 25.88 32.11 50.55 23.66 24.81 30.70 32.11 32.72 40.61 47.73 50.55 41.20 45.79 47.73 50.55 42.81 42.37 8.96 10.49 14.13 21.48 28.74 21.49 21.48 24.93 27.41 28.74 31.60 36.89 39.48 36.89 38.94 45.67 40.52 39.36 39.48 CG LISA 53 American Depositary Shares Logitech’s ADSs are traded on the Nasdaq National Market. The following table sets forth certain historical market price information for the Company’s ADSs. ADS prices have been adjusted to reflect a two for one split in June 2005. Annual Highs and Lows: Fiscal 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quarterly Highs and Lows: Fiscal 2005: First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2006: First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monthly Highs and Lows (over the most recent six month period): October 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price per ADS on Nasdaq High $ Low $ 24.13 26.63 25.65 32.95 51.31 24.48 24.65 30.60 32.95 32.88 40.75 48.48 51.31 41.46 45.80 48.48 51.31 42.65 42.70 9.06 10.93 13.98 21.00 28.57 21.45 21.00 24.34 27.23 28.57 32.39 37.10 39.22 37.10 39.76 45.20 40.11 40.00 39.22 B. Plan of Distribution Not applicable. C. Markets Logitech Registered Shares The principal trading market for Logitech’s registered shares is the SWX Swiss Exchange, on which registered shares have been traded since 1988 under the symbol “LOGN.” As of March 31, 2006, there were 95,803,310 registered shares issued and outstanding (including 4,477,613 shares held as treasury stock) held by 12,670 holders of record. Logitech American Depositary Shares Logitech ADSs, each representing one registered share, have since March 27, 1997 been listed on the Nasdaq National Market under the symbol “LOGI.” The Bank of New York serves as depositary with respect to 54 the Logitech ADSs traded on that market. As of March 31, 2006, according to the records of the Bank of New York, approximately 17,132,636 ADSs were outstanding in the United States. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. ITEM 10. ADDITIONAL INFORMATION A. Share Capital Not applicable. B. Memorandum and Articles of Incorporation CG Set forth below is certain information and references to information concerning Logitech’s share capital, material provisions of applicable Swiss law and the Company’s Articles of Incorporation and Organizational Regulations (bylaws). Logitech incorporates by reference an English translation of the Company’s Articles of Incorporation as set forth in Exhibit 1.1 to its Report on Form 6-K filed with the SEC on August 5, 2005 and its Organizational Regulations, as amended and set forth in Exhibit 1.2 of the Company’s Annual Report on Form 20-F, File No. 0-29174 filed with the SEC on May 19, 2004. The information below and information incorporated by reference are a summary which does not purport to be complete and are qualified in their entirety by reference to the Articles of Incorporation, the Organizational Regulations, and Swiss law. Purpose Article 2 of the Company’s Articles of Incorporation establishes the principal objective of the Company as the coordination of the activity of its Swiss and foreign subsidiaries. Board of Directors Information concerning directors’ power under the Company’s bylaws and Swiss law appears in Section 3 “Board of Directors” in Exhibit 15.1 to this Form 20-F and is incorporated herein by reference. Rights, Preferences and Restrictions Information concerning the rights, preferences and restrictions attaching to each of the Company’s share categories appears in Section 2 “Capital Structure” and Section 6 “Shareholders’ Participation Rights” in Exhibit 15.1 to this Form 20-F and is incorporated herein by reference. LISA General Meeting of Shareholders Information concerning the conditions governing the manner in which the Company’s Annual General Meeting of Shareholders is convoked and conditions for admission appears in Section 6.3 “Convocation of the General Meeting of Shareholders” in Exhibit 15.1 to this Form 20-F and is incorporated herein by reference. 55 Change of Control Provisions Information concerning the provisions relating to a change of control of the Company appears in Section 7 “Mandatory Offer and Change of Control Provisions” in Exhibit 15.1 to this Form 20-F and is incorporated herein by reference. Disclosure of Shareholder Ownership Information concerning ownership thresholds above which shareholder ownership must be disclosed appears in Section 1.2 “Significant Shareholders” in Exhibit 15.1 to this Form 20-F and is incorporated herein by reference. C. Material Contracts There were no material contracts entered into other than in the ordinary course of business during the previous two years immediately preceding filing of this Annual Report on Form 20-F. D. Exchange Controls As a Swiss corporation, Logitech is subject to requirements not generally applicable to United States corporations. Among other things, Logitech’s issuances of capital stock generally must be submitted for approval at a general meeting of shareholders. In addition, under Swiss law, the issuance of capital stock is generally subject to shareholder preemptive rights, except to the extent that these preemptive rights have been excluded or limited by the shareholders. In addition, U.S. securities laws may restrict the ability of U.S. ADS holders to participate in Logitech rights offerings, share dividends or warrant dividends in the event that Logitech is unable or chooses not to register these securities under U.S. securities laws and cannot rely on an exemption from registration. Logitech is not currently planning any rights offering or to issue any share or warrant dividends, or any similar transaction. Logitech may choose to do so in the future and there can be no assurance that it will be feasible to include U.S. persons in the transaction. If Logitech does issue these types of securities in the future, it may issue them to the Bank of New York, as Depositary under its ADS facility, which may sell the securities for the benefit of the holders of Logitech ADSs. There can be no assurance as to the value, if any, the Depositary would receive upon the sale of these securities. There are no legislative or other legal provisions currently in effect in Switzerland or arising under Logitech’s Articles of Incorporation restricting the export or import of capital, or that affect the remittance of dividends, interest or other payments to non-resident holders of Logitech securities. Cash dividends payable in Swiss francs on shares and ADSs may be officially transferred from Switzerland and converted into any other convertible currency. There are no limitations imposed by Swiss laws or Logitech’s Articles of Incorporation on the right of non-Swiss residents to hold or vote the shares or ADSs. E. Taxation The following is a summary of certain Swiss tax matters that may be relevant with respect to the acquisition, ownership and disposition of registered shares or ADSs. This summary addresses laws in Switzerland currently in effect, as well as the 1997 Convention (entered into force on December 1997) between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (the “Treaty”), both of which are subject to change (or changes in interpretation), possibly with retroactive effect. 56 For purposes of the Treaty and the Internal Revenue Code of 1986, as amended (the “Code”), United States holders of ADSs are treated as the owners of the registered shares corresponding to such ADSs. Accordingly, the Swiss tax consequences discussed below also generally apply to United States holders of registered shares. Swiss Taxation Gain on Sale Under Swiss law, a holder of registered shares or ADSs who (i) is a non-resident of Switzerland, (ii) during the taxable year has not engaged in a trade or business through a permanent establishment within Switzerland and (iii) is not subject to taxation by Switzerland for any other reason, will be exempted from any Swiss federal, cantonal or municipal income or other tax on gains realized during the year on the sale of registered shares or ADSs. Stamp, Issue and Other Taxes CG Switzerland generally does not impose stamp, registration or similar taxes on the sale of registered shares or ADSs by a holder thereof unless such sale or transfer occurs through or with a Swiss securities dealer (as defined in the Swiss Stamp Duty Law). Withholding Tax Under Swiss law, any dividends paid in respect of registered shares will be subject to the Swiss Anticipatory Tax at the rate of 35%, and the Company will be required to withhold tax at this rate from any dividends paid to a holder of registered shares. Such dividend payments may qualify for refund of the Swiss Anticipatory Tax by reason of the provisions of a double tax treaty between Switzerland and the country of residence or incorporation of a holder, and in such cases such holder will be entitled to claim a refund of all or a portion of such tax in accordance with such treaty. The Swiss-U.S. tax treaty provides for a mechanism whereby a United States resident or United States corporations can generally seek a refund of the Swiss Anticipatory Tax paid on dividends in respect of registered shares, to the extent such withholding exceeds 15%. F. Dividends and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display Whenever a reference is made in this Form 20-F to any contract, agreement or other document, the reference may not be complete and you should refer to the copy of that contract, agreement or other document filed as an exhibit to one of our previous SEC filings. We file annual and special reports and other information with the SEC. You may read and copy all or any portion of this Form 20-F and any other document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. Such material may also be obtained at the Internet site the SEC maintains at www.sec.gov. LISA I. Subsidiary Information Not applicable. 57 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates and interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company’s financial results. Foreign Currency Exchange Rates The Company is exposed to foreign currency exchange rate risk as it transacts business in multiple foreign currencies, including exposure related to anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. dollar. Logitech transacts business in over 30 currencies worldwide, of which the most significant to operations are the Euro, British pound sterling, Swiss franc (“CHF”), Japanese yen, Chinese yuan renminbi (“CNY”), Taiwanese dollar and Mexico peso. With the exception of its operating subsidiaries in China, which use the U.S. dollar as their functional currency, Logitech’s international operations generally use the local currency of the country as their functional currency. Accordingly, unrealized foreign currency gains or losses resulting from the translation of net assets denominated in foreign currencies to the U.S. dollar are accumulated in the cumulative translation adjustment component of other comprehensive loss in shareholders’ equity. The table below provides information about the Company’s underlying transactions that are sensitive to foreign exchange rate changes, primarily assets and liabilities denominated in currencies other than the functional currency, where the net exposure is greater than $.5 million at March 31, 2006. The table below represents the U.S. dollar impact on earnings of a 10% appreciation and a 10% depreciation of the functional currency as compared with the transaction currency (in thousands): Functional Currency Transaction Currency Chinese yuan renminbi . . . . . . U.S. dollar . . . . . . . . . U.S. dollar . . . . . . . . . Swiss franc . . . . . . . . . . . . . . . U.S. dollar . . . . . . . . . Mexican peso . . . . . . . . . . . . . Japanese yen . . . . . . . . . . . . . . U.S. dollar . . . . . . . . . Singapore dollar . . . . . . . . . . . U.S. dollar . . . . . . . . . Czech koruna . . . . . . . . . . . . . U.S. dollar . . . . . . . . . Euro . . . . . . . . . . . . . . . . . . . . U.S. dollar . . . . . . . . . Taiwanese dollar U.S. dollar . . . . . . . . . . . . . . . . . . . British pound sterling . . . . . . . Euro . . . . . . . . . . . . . . Swiss franc . . . . . . . . . . . . . . . Euro . . . . . . . . . . . . . . Russian rouble . . . . . . . . . . . . Euro . . . . . . . . . . . . . . Swedish kroner . . . . . . . . . . . . Euro . . . . . . . . . . . . . . Hungarian forint . . . . . . . . . . . Euro . . . . . . . . . . . . . . Net Exposed Long (Short) Currency Position FX Gain (Loss) From 10% Appreciation of Functional Currency FX Gain (Loss) From 10% Depreciation of Functional Currency $100,226 3,959 3,134 1,449 899 (655) (1,026) (11,930) 18,254 1,071 995 (1,276) (1,429) $113,671 $ (9,111) (360) (285) (132) (82) 60 93 1,085 (1,659) (97) (90) 116 130 $(10,332) $11,136 440 348 161 100 (73) (114) (1,326) 2,028 119 111 (142) (159) $12,629 Long currency positions represent net assets being held in the transaction currency while short currency positions represent net liabilities being held in the transaction currency. In July 2005, the Chinese government restructured the country’s exchange rate system, pegging the CNY to a basket of currencies rather than just the U.S. dollar. In the months following the revaluation, the CNY appreciated 2% against the U.S. dollar. The Company’s principal manufacturing operations are located in China, with much of its component and raw material costs transacted in CNY. However, the functional currency of its Chinese operating subsidiary is the U.S. dollar as its sales and trade receivables are transacted in U.S. dollars. To hedge against potential significant 58 appreciation of the CNY, the Company has transferred a portion of its cash investments to CNY accounts. At March 31, 2006, net assets held in CNY totaled $100.2 million. While the revaluation continues to limit the CNY to float within a narrow percentage band each day, the Company believes that the change to a more flexible system based on a basket of foreign currencies could lead to a further, gradual rise in the CNY’s value. foreign exchange forward contracts outstanding for From time to time, the Company enters into foreign exchange forward contracts to hedge against exposure to changes in foreign currency exchange rates related to forecasted inventory purchases by subsidiaries. These forward contracts are denominated in the same currency as the underlying transactions. The Company does not use derivative financial instruments for trading or speculative purposes. As of March 31, 2006, the notional amounts of forecasted inventory purchases were $13.6 million. These forward contracts generally mature within three months. Deferred realized gains totaled $.2 million at March 31, 2006 and are expected to be reclassified to cost of goods sold when the related inventory is sold. If the U.S. dollar had appreciated by 10% as compared with the hedged foreign currency, an unrealized gain of $1.3 million in the foreign exchange forward contract portfolio would have occurred. If the U.S. dollar had depreciated by 10% as compared with the hedged foreign currency, a $1.4 million unrealized loss in the foreign exchange forward contract portfolio would have occurred. CG Interest Rates Changes in interest rates could impact the Company’s anticipated interest income on its cash equivalents and interest expense on variable rate short-term debt. The Company analyzed its interest rate exposures to assess the impact of hypothetical changes in interest rates. Based on the results of these analyses, a 100 basis point decrease or increase in interest rates from the March 31, 2006 and March 31, 2005 period end rates would not have a material effect on the Company’s results of operations or cash flows. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. LISA 59 PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS On July 5, 2000, a two-for-one stock split was effected for holders of registered shares and ADSs. At that time, each ADS represented one-tenth of a registered share. In August 2001, the Company completed a ten-for-one stock split for shares traded on the SWX Swiss Exchange. ADSs traded on the Nasdaq National Market were not affected. As a result, the ratio of ten ADSs to one registered share changed to a new ratio of one ADS to one registered share. On June 30, 2005, a two-for-one stock split was effected for holders of registered shares and ADSs. ITEM 15. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report on Form 20-F, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures are effective as of March 31, 2006 to provide reasonable assurance that information required to be disclosed in filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Changes in Internal Controls During the period covered by this report, no changes in the Company’s internal control over financial reporting have occurred that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT The Audit Committee of the Board of Directors consists of four non-employee directors, Mr. Gary Bengier, Mr. Kee-Lock Chua, Mr. Frank Gill and Ms. Monika Ribar, each of whom meets the independence requirements of the Nasdaq National Market listing standards and the rules and regulations of U.S. Securities and Exchange Commission. The Board affirmatively determined that Mr. Gill, Mr. Bengier and Ms. Ribar are audit committee financial experts. Refer also to the information in Exhibit 15.1 under Section 3.5 “The Functioning of the Board of Directors – Audit Committee.” ITEM 16B. CODE OF ETHICS The Company’s code of ethics policy entitled, “Business Ethics and Conflict of Interest Policy of Logitech International S.A.,” covers members of the Company’s board of directors and its executive officers (including the principal executive officer, principal financial officer and controller) as well as all other employees. 60 The code of ethics addresses, among other things, the following items: • Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; • Full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Commission and in other public communications made by us; • Compliance with applicable governmental laws, rules and regulations; • The prompt internal reporting to an appropriate person or persons identified in the code of violations of any of the provisions described above; and • Accountability for adherence to the code. Any amendments or waivers of the code of ethics for members of the Company’s board of directors or executive officers will be disclosed in the investor relations section of the Company’s Web site within five business days following the date of the amendment or waiver and will also be disclosed either on a Form 6-K or the Company’s next Form 20-F filing. During fiscal year 2006, no waivers or amendments were made to the code of ethics for any Director or Executive Officer. CG Logitech’s code of ethics is available on the Company’s Web site at www.logitech.com, and for no charge, a copy of the Company’s code of ethics can be requested via the following address or phone number: Logitech Investor Relations 6505 Kaiser Drive Fremont, CA 94555 USA Main 510-795-8500 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning accountant fees and services appears in Section 8.2 and 8.3 “Audit Fees” and Section 8.4 “Supervisory and Control Instruments” in Exhibit 15.1 to this Form 20-F and is incorporated herein by reference. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. LISA 61 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The following table sets forth certain information related to purchases made by Logitech of its equity securities (in thousands, except share and per share amounts): Average Price Paid Per Share Period April 2005 . . . . . . . . . . . . . . . . . . . May 2005 . . . . . . . . . . . . . . . . . . . . June 2005 . . . . . . . . . . . . . . . . . . . . July 2005 . . . . . . . . . . . . . . . . . . . . August 2005 . . . . . . . . . . . . . . . . . . September 2005 . . . . . . . . . . . . . . . October 2005 . . . . . . . . . . . . . . . . . November 2005 . . . . . . . . . . . . . . . December 2005 . . . . . . . . . . . . . . . January 2006 . . . . . . . . . . . . . . . . . February 2006 . . . . . . . . . . . . . . . . March 2006 . . . . . . . . . . . . . . . . . . Total Number of Shares Purchased as Part of the Programs 81,000 450,000 500,000 60,000 270,000 240,000 45,000 306,257 210,000 203,500 3,352,000 420,000 in CHF CHF 35.78 CHF 36.22 CHF 37.90 CHF 46.25 CHF 48.85 CHF 47.56 CHF 49.61 CHF 52.77 CHF 60.41 CHF 54.98 CHF 52.63 CHF 54.68 Total . . . . . . . . . . . . . . . . . . . . 6,137,757 CHF 50.04 in USD $29.96 $30.53 $30.73 $36.02 $37.85 $37.85 $38.39 $41.43 $45.93 $41.71 $41.26 $41.69 $39.32 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs $ 63,050 49,312 33,947 31,786 21,567 12,483 10,755 234,332 224,688 216,200 77,896 60,386 In fiscal year 2006, the Company repurchased shares pursuant to the Company’s buyback program announced in April 2004, authorizing the purchase of up to CHF 250 million of shares (approximately $200 million based on exchange rates at the date of announcement). The Company completed this share buyback program in November 2005 and initiated the purchases under an additional share buyback program announced in June 2005. The Company is authorized to purchase up to CHF 300 million of shares (approximately $235 million based on exchange rates on the date of announcement) under this program which will terminate, at the latest, on the date of the Company’s Annual General Meeting in 2008. PART III ITEM 17. FINANCIAL STATEMENTS The Company has responded to Item 18. ITEM 18. FINANCIAL STATEMENTS Reference is made to pages F-1 through F-25 and is incorporated herein by reference. ITEM 19. EXHIBITS a. Financial Statements Report of the Group Auditors to the General Meeting of Logitech International S.A., Apples, Switzerland Consolidated Balance Sheets – March 31, 2006 and 2005 Consolidated Statements of Income – Year Ended March 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows – Year Ended March 31, 2006, 2005 and 2004 Consolidated Statements of Changes in Shareholders’ Equity – Year Ended March 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements Unaudited Quarterly Financial Data 62 b. Exhibits Exhibit No. 1.1 1.2 2.1 2.2 2.3 2.4 4.1 4.2 4.3 4.4 4.5 8.1 12.1 15.1 15.2 Exhibit Form File No. Filing Date Exhibit No. Filed Herewith Incorporated by Reference Articles of Incorporation of Logitech International S.A. as amended. 6-K 0-29174 08/05/05 1.1 Organizational Regulations of Logitech International S.A. as amended. Form of Deposit Agreement dated March 27, 1997 as amended July 5, 2000 and as further amended on August 2, 2001, among Logitech International S.A., the Bank of New York, as Depositary, and owners and beneficial owners of American Depositary Receipts (including as an exhibit of the form of American Depositary Receipt.) Deposit Agreement dated June 1, 2001 by and among Logitech (Jersey) Limited, Logitech International S.A. and Credit Suisse. Bond Purchase, Paying and Conversion Agency Agreement dated June 1, 2001 by and among Logitech (Jersey) Limited, Logitech International S.A., Credit Suisse First Boston and Banque Cantonale Vaudoise. Guarantee dated June 8, 2001 by Logitech International S.A. 20-F 0-29174 05/19/04 1.2 S-8 333-100854 05/27/03 4.1 CG 6-K 0-29174 08/14/01 99.2 6-K 0-29174 08/14/01 99.1 6-K 0-29174 08/14/01 99.3 1996 Stock Plan, as amended. S-8 333-100854 05/27/03 1996 Employee Share Purchase Plan, as amended. S-8 333-100854 10/30/02 20-F 0-29174 05/21/03 4.2 4.3 4.1 Form of Director and Officer Indemnification Agreement with Logitech International S.A. Form of Director and Officer Indemnification Agreement with Logitech Inc. Credit Agreement dated March 2001 by and between Logitech International S.A. and Credit Suisse. List of subsidiaries of Logitech International S.A. Consent of Independent Registered Public Accounting Firm Report on Corporate Governance prepared under the rules of the SWX Swiss Exchange. Charter for the Audit Committee of the Board of Directors of Logitech International S.A. (as amended October 12, 2004) 63 20-F 0-29174 05/21/03 4.2 F-4/A 333-56072 03/13/01 10.2 X X X LISA 6-K 0-29174 02/04/05 15.1 Exhibit No. Exhibit Incorporated by Reference Form File No. Filing Date Exhibit No. Filed Herewith 31.1 31.2 32.1 * Certification by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Certification by Chief Executive Officer pursuant to section 302 of Sarbanes-Oxley Act of 2002. Certification by Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.* X X X This exhibit is furnished herewith, but not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we explicitly incorporate it by reference. 64 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf. Logitech International S.A. Guerrino De Luca President and Chief Executive Officer CG Mark J. Hawkins Chief Financial Officer, and U.S. Representative May 19, 2006 LISA 65 LOGITECH INTERNATIONAL S.A. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of the Group Auditors to the General Meeting of Logitech International S.A., Apples, Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets – March 31, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income – Year Ended March 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows – Year Ended March 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . Consolidated Statements of Changes in Shareholders’ Equity – Year Ended March 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page F-2 F-3 F-4 F-5 F-6 F-7 CG Unaudited Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25 LISA F-1 REPORT OF THE GROUP AUDITORS TO THE GENERAL MEETING OF LOGITECH INTERNATIONAL S.A., APPLES, SWITZERLAND As Group auditors, we have audited the consolidated financial statements of Logitech International S.A. and its subsidiaries, set out on pages F-3 to F-24, consisting of the consolidated balance sheets at March 31, 2006 and 2005, the consolidated statements of income, of cash flows and of changes in shareholders’ equity for the years ended March 31, 2006, 2005 and 2004 and the notes to the consolidated financial statements. These consolidated financial statements are the responsibility of the Board of Directors of Logitech International S.A. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We confirm that we meet the Swiss legal requirements concerning professional qualification and independence. We conducted our audits in accordance with the Swiss Auditing Standards and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Logitech International S.A. and its subsidiaries at March 31, 2006 and 2005 and the results of operations and their cash flows for the years ended March 31, 2006, 2005 and 2004 in accordance with accounting principles generally accepted in the United States of America and comply with Swiss law. We recommend that the consolidated financial statements submitted to you be approved. PricewaterhouseCoopers S.A. M. Perry F. Rast Lausanne, May 19, 2006 F-2 LOGITECH INTERNATIONAL S.A. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) March 31, 2006 2005 Current assets: ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245,014 289,849 196,864 34,479 $ 341,277 229,234 175,986 34,326 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766,206 36,414 74,810 135,396 11,175 33,063 780,823 16,793 52,656 134,286 15,816 27,323 CG Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,057,064 $1,027,697 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,071 181,290 162,922 358,283 4 13,601 371,888 $ 9,875 177,748 156,575 344,198 147,788 9,562 501,548 Commitments and contingencies Shareholders’ equity: Registered shares, par value CHF .5 – 115,803,310 authorized, 35,780,930 conditionally authorized, 95,803,310 issued and outstanding at March 31, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital Less registered shares in treasury, at cost, 4,477,613 at March 31, 2006 and 33,370 100,339 33,370 125,745 7,321,094 at March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (186,080) 765,758 (28,211) (173,728) 584,653 (43,891) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685,176 526,149 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,057,064 $1,027,697 LISA The accompanying notes are an integral part of these consolidated financial statements. F-3 LOGITECH INTERNATIONAL S.A. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Year ended March 31, 2006 2005 2004 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,796,715 1,222,605 $1,482,626 979,039 $1,268,470 859,548 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574,110 503,587 408,922 223,063 87,953 64,183 375,199 198,911 3,591 7,352 209,854 28,749 201,353 73,900 56,660 331,913 171,674 141 3,791 175,606 26,340 156,793 61,289 45,286 263,368 145,554 (1,858) 1,973 145,669 13,516 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181,105 $ 149,266 $ 132,153 Net income per share and ADS: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.00 1.84 $ $ 1.69 1.53 $ $ 1.46 1.34 Shares used to compute net income per share and ADS: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,681 99,385 88,504 99,125 90,692 100,320 The accompanying notes are an integral part of these consolidated financial statements. F-4 LOGITECH INTERNATIONAL S.A. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended March 31, 2006 2005 2004 Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash items included in net income: $ 181,105 $ 149,266 $132,153 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . Write-off of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of investment Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on cash surrender value of life insurance policies . . . . . . . . . Release of tax valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes and other . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets and liabilities, net of acquisitions: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,880 4,641 1,168 (560) 1,169 (1,523) — (4,870) (66,651) (25,425) (5,416) 5,162 33,537 26,041 6,320 — — 111 — — (3,698) (14,140) (35,276) 8,675 30,373 46,002 26,164 5,240 515 — 788 — (13,350) 8,550 (14,085) (5,307) 749 9,812 15,231 Net cash provided by operating activities . . . . . . . . . . . . . . . . 152,217 213,674 166,460 CG Cash flows from investing activities: Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . Acquisitions and investments, net of cash acquired . . . . . . . . . . . . . . . . Premiums paid on cash surrender value life insurance policies . . . . . . . (54,102) 860 (1,464) (40,541) (30,494) — (24,718) (15,490) — Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (54,706) (71,035) (40,208) Cash flows from financing activities: . . . . . . . . . . . . . . . . . . . . . Borrowings (repayments) of short-term debt Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of shares upon exercise of options and rights . . . . . 5,235 (43) (241,352) 49,206 (4,073) (475) (134,525) 45,985 — (1,331) (79,162) 31,404 Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . (186,954) (93,088) (49,089) Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . (6,820) (3,027) (1,144) Net increase (decrease) in cash and cash equivalents . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . (96,263) 341,277 46,524 294,753 76,019 218,734 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245,014 $ 341,277 $294,753 Supplemental cash flow information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1,582 6,456 Non-cash financing activities: Conversion of convertible debt to registered shares . . . . . . . . . . . . . . . . $ 138,674 $ $ $ 1,560 6,588 $ 1,515 6,056 $ LISA — $ — The accompanying notes are an integral part of these consolidated financial statements. F-5 LOGITECH INTERNATIONAL S.A. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands) March 31, 2003 . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . Deferred realized hedging gains . . . . Total comprehensive income . . . . . . Tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . Purchase of treasury shares . . . . . . . Sale of shares upon exercise of options and purchase rights . . . . . Registered shares Shares Amount Additional paid-in capital Treasury shares Shares Amount Retained earnings Accumulated other comprehensive loss 95,803 — $33,370 — $150,849 — 4,908 — $ (76,891) $303,234 132,153 — $(45,000) — — — — — — — — — — — — — — — — — 4,200 — — 4,398 — (79,162) (22,252) (3,503) 53,656 — — — — — 2,009 914 — — — March 31, 2004 . . . . . . . . . . . . . . . . 95,803 33,370 132,797 5,803 (102,397) 435,387 (42,077) Net income . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . Deferred realized hedging gains . . . . Total comprehensive income . . . . . . Tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . Purchase of treasury shares . . . . . . . Sale of shares upon exercise of options and purchase rights . . . . . — — — — — — — — — — — — — — — — — — 10,157 — — 5,550 — — — — (134,525) (17,209) (4,032) 63,194 149,266 — — — — — — (2,522) 708 — — — March 31, 2005 . . . . . . . . . . . . . . . . 95,803 33,370 125,745 7,321 (173,728) 584,653 (43,891) Total $ 365,562 132,153 2,009 914 135,076 4,200 (79,162) 31,404 457,080 149,266 (2,522) 708 147,452 10,157 (134,525) 45,985 526,149 181,105 Net income . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . Unrealized gain on investment, net of tax . . . . . . . . . . . . . . . . . . . . . . . Deferred realized hedging loss . . . . . Total comprehensive income . . . . . . Tax benefit from exercise of stock options . . . . . . . . . . . . . . . . . . . . . Purchase of treasury shares . . . . . . . Sale of shares upon exercise of options and purchase rights . . . . . . . . . Conversion of convertible debt — — — — — — — — — — — — — — — — — — — — — — — — 15,714 — — 6,138 — — — — — (241,352) (46,716) 5,596 (3,533) (5,449) 95,922 133,078 181,105 — — — — — — — — (3,314) (3,314) 19,611 (617) — — — — 19,611 (617) 196,785 15,714 (241,352) 49,206 138,674 March 31, 2006 . . . . . . . . . . . . . . . . 95,803 $33,370 $100,339 4,477 $(186,080) $765,758 $(28,211) $ 685,176 The accompanying notes are an integral part of these consolidated financial statements. F-6 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 — The Company: Logitech International S.A. designs, manufactures and markets personal peripherals for PCs and other digital platforms. The Company’s products include webcams, mice, trackballs, and keyboards for the PC; interactive gaming controllers, multimedia speakers, headsets and headphones for the PC and for gaming consoles; headsets for mobile phones; headsets, headphones and speakers for mobile entertainment and communication platforms; advanced remote controls; digital writing solutions; and 3D control devices. The Company sells its products to both original equipment manufacturers (“OEMs”) and to a network of distributors and resellers. Logitech was founded in Switzerland in 1981, and in 1988 listed its registered shares in an initial public offering in Switzerland. In 1997, the Company sold shares in a U.S. initial public offering in the form of American Depositary Shares (“ADSs”) and listed the ADSs on the Nasdaq National Market. The Company’s registered office is located in Apples, Switzerland. The Company has manufacturing facilities in Asia and offices in major cities in North America, Europe and Asia Pacific. CG Note 2 — Summary of Significant Accounting Policies: Basis of Presentation The consolidated financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and comply with Swiss law. Certain prior year balance sheet amounts have been reclassified to conform to the current year presentation. The Company’s fiscal year ends on March 31. Interim quarters are thirteen-week periods, each ending on a Friday. For purposes of presentation, the Company has indicated its quarterly periods as ending on the month end. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. Actual results could differ from those estimates. Foreign Currencies The functional currency of the Company’s operations is primarily the U.S. dollar. To a lesser extent, certain operations use the Euro, Swiss franc, Taiwanese dollar and Japanese yen as their functional currencies. The financial statements of the Company’s subsidiaries whose functional currency is other than the U.S. dollar are translated to U.S. dollars using period-end rates of exchange for assets and liabilities and using monthly average rates for revenues and expenses. Cumulative translation gains and losses are included as a component of shareholders’ equity in accumulated other comprehensive loss. Gains and losses arising from transactions denominated in currencies other than a subsidiary’s functional currency are reported in other income (expense), net in the statement of income. LISA Revenue Recognition Revenues are recognized when all of the following criteria are met: • • evidence of an arrangement exists between the Company and the customer; delivery has occurred and title and risk of loss transfer to the customer; F-7 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • • the price of the product is fixed or determinable; and collectibility of the receivable is reasonably assured. Revenues from sales to distributors and authorized resellers are recognized net of estimated product returns and expected payments for customer programs and incentive offerings, including price protection, consumer rebates, volume-based incentives and other customer marketing programs. Expected future product returns are estimated, and periodically adjusted, based on analyses of historical trends by customer and by product, distributor and retailer inventory levels and other factors, and are recorded as a reduction of revenue. Estimates of the cost of price protection programs are recorded based on planned price reductions and units held by qualifying customers. The costs of consumer rebates are estimated based on historical experience and the specific terms and conditions of the incentive, and are recorded at the time the incentive is offered. Volume rebates are recorded at the time of shipment based on historical experience and other factors. The costs of customer marketing programs are contractual in nature and are estimated and periodically adjusted based on levels of customer product purchases. Advertising Costs Advertising costs are expensed as incurred and amounted to $144.2 million, $125.1 million and $82.1 million in fiscal years 2006, 2005 and 2004. Advertising costs are recorded as either a marketing and selling expense or a deduction from revenue. Advertising costs reimbursed by the Company to a customer must have an identifiable benefit and an estimable fair value in order to be classified as an operating expense. If these criteria are not met, the cost is classified as a deduction from revenue. Cash Equivalents The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with various financial institutions to limit exposure with any one financial institution. The Company sells to large OEMs, distributors and key retailers and, as a result, maintains individually significant receivable balances with such customers. As of March 31, 2006, three customers represented 14%, 13% and 10% of total accounts receivable. As of March 31, 2005, three customers represented 14%, 12% and 11% of total accounts receivable. The Company’s OEM customers tend to be well-capitalized, multi-national companies, while distributors and key retailers may be less well-capitalized. The Company manages its accounts receivable credit risk through ongoing credit evaluation of its customers’ financial condition and by purchasing credit insurance on U.S. and European retail accounts receivable. The Company generally does not require collateral from its customers. Allowance for Doubtful Accounts Allowances for doubtful accounts are maintained for estimated losses resulting from the inability of the Company’s customers to make required payments. The allowances are based on the Company’s regular assessment of the credit worthiness and financial condition of specific customers, as well as its historical experience with bad debts and customer deductions, receivables aging, current economic trends, geographic or country-specific risks and the financial condition of its distribution channels. F-8 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of activity in the Company’s allowance for doubtful accounts was as follows (in thousands): Year ended March 31, 2006 2005 2004 Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,166 9 (2,187) $6,068 55 (957) $ 7,716 1,271 (2,919) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,988 $5,166 $ 6,068 Inventories Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. The Company records write-downs of inventories which are obsolete or in excess of anticipated demand or market value based on a consideration of product life cycle stage, technology trends, product development plans, component cost trends and assumptions about future demand and market conditions. CG Investments Investments consist of companies in which Logitech owns less than a 20% interest. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” investments with a quoted market value are classified as available-for-sale. Such investments are reported at fair value with the unrealized gains and losses included as a separate component of shareholders’ equity. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. Realized gains and losses upon the sale or disposition of such investments are based on the average cost of the specific investments sold. The cost method is used for all other investments which are adjusted for any decrease in value deemed to be other than temporary in nature. Property, Plant and Equipment Property, plant and equipment are stated at cost. Additions and improvements are capitalized, and maintenance and repairs are expensed as incurred. The Company capitalizes the cost of software developed for internal use in connection with major projects. Costs incurred during the feasibility stage are expensed, whereas costs incurred during the application development stage are capitalized. With the exception of tooling, depreciation is provided using the straight-line method. Plant and buildings are depreciated over estimated useful lives from ten to twenty-five years, equipment over useful lives from three to five years, software development over useful lives of three to five years and leasehold improvements over the life of the lease, not to exceed five years. Tooling is depreciated over the forecasted life of the tool, not to exceed one year from the time it is placed into production. Depreciation for tooling is calculated based on the forecasted production volume and adjusted quarterly based on actual production. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are relieved from the accounts and the net gain or loss is included in the determination of net income. Goodwill and Other Intangible Assets The Company’s intangible assets principally include goodwill, acquired technology, trademarks and customer contracts. Intangible assets with finite lives, which include acquired technology, trademarks and customer contracts, are recorded at cost and amortized on the straight-line method over their useful lives ranging from four to ten years. Intangible assets with indefinite lives, which include goodwill, are recorded at cost and evaluated at least annually for impairment. LISA F-9 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Impairment of Long-Lived Assets The Company reviews long-lived assets, such as investments, property and equipment, and intangible assets, for impairment whenever events indicate that the carrying amounts might not be recoverable. Recoverability of investments, property and equipment, and other intangible assets is measured by comparing the projected undiscounted net cash flows associated with those assets to their carrying values. If an asset is considered impaired, it is written down to fair value, which is determined based on the asset’s projected discounted cash flows or appraised value, depending on the nature of the asset. Goodwill is evaluated for impairment at least annually. Income Taxes The Company provides for income taxes using the liability method, which requires that deferred tax assets and liabilities be recognized for the expected future tax consequences of temporary differences resulting from differing treatment of items for tax and accounting purposes. In estimating future tax consequences, expected future events are taken into consideration, with the exception of potential tax law or tax rate changes. Fair Value of Financial Instruments The carrying value of certain of the Company’s financial instruments, including cash and cash equivalents and accounts receivable, accounts payable, short-term debt and current maturities of long-term debt approximates fair value due to their short maturities. The estimated fair value of publicly traded financial equity instruments are determined by quoted market prices. Net Income per Share and ADS Basic net income per share and ADS is computed by dividing net income by the weighted average outstanding registered shares. Diluted net income per share and ADS is computed using the weighted average outstanding registered shares and dilutive registered share equivalents. The registered share equivalents are registered shares issuable upon the exercise of stock options computed using the treasury stock method, and upon the conversion of convertible debt computed using the if-converted method. For the fiscal years ended March 31, 2006, 2005 and 2004, the conversion of convertible debt was included in the registered share equivalents due to its dilutive effect. The computations of the basic and diluted net income per share amounts for the Company were as follows (in thousands except per share amounts): Year ended March 31, 2006 2005 2004 Net income – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible debt interest expense, net of income taxes . . . . . . . . . . . . . . . . . . . $181,105 1,520 $149,266 2,877 $132,153 2,550 Net income – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $182,625 $152,143 $134,703 Weighted average shares – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of dilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of dilutive convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share and ADS – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Net income per share and ADS – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,681 5,690 3,014 99,385 88,504 5,172 5,449 90,692 4,180 5,448 99,125 100,320 2.00 1.84 $ $ 1.69 1.53 $ $ 1.46 1.34 F-10 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) During fiscal years 2006, 2005 and 2004, 807,778, 2,019,886 and 4,140,852 share equivalents attributable to outstanding stock options were excluded from the calculation of diluted net income per share and ADS because the exercise prices of these options were greater than the average market price of the Company’s registered shares, and therefore their inclusion would have been anti-dilutive. Stock-Based Compensation Plans The Company currently measures compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the Company recognizes compensation expense only when it grants options with a discounted exercise price. The Company applies the pro forma disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure,” which require companies to measure employee stock compensation based on the fair value method of accounting. CG If the Company had used SFAS 123 to account for stock plan compensation expense, net income and net income per share and ADS would have been as follows (in thousands except per share amounts): Year ended March 31, 2006 2005 2004 Net income: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduct: Total stock-based compensation expense using the fair value $181,105 $149,266 $132,153 method, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,882) (18,509) (16,690) Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $166,223 $130,757 $115,463 Basic net income per share and ADS: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted net income per share and ADS: $ As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.00 1.83 1.84 1.69 $ $ $ $ 1.69 1.48 1.53 1.35 $ $ $ $ 1.46 1.27 1.34 1.18 The fair value of employee stock options granted and shares purchased under the Company’s purchase plans was estimated using the Black-Scholes option-pricing model applying the following assumptions and values: Year ended March 31, Purchase Plans Stock Option Plans 2006 2005 2004 2006 2005 2004 Dividend yield . . . . . . . . . . . . . . . . . . . . . . . Expected life . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . Weighted average fair value per grant . . . . $ 0% 6 months 26% 3.67% 0% 6 months 33% 2.06% 0% 6 months 52% 1.29% 8.41 $ 6.27 $ 6.04 $ 0% 3.7 years 47% 4.16% 14.94 $ 0% 3.5 years 58% 3.15% 10.23 $ 0% 3.5 years 65% 1.81% 7.59 LISA In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment,” which requires companies to expense the fair value of employee stock options and other forms of share-based compensation. Accordingly, SFAS 123R eliminates the use of the intrinsic value method to account F-11 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) for share-based compensation transactions as provided under APB Opinion No. 25. Under SFAS 123R, the Company is required to determine the appropriate fair value model to be used to value share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. In addition, the adoption of SFAS 123R will require additional accounting related to tax benefits on employee stock options and for shares issued under the Company’s employee stock purchase plan. The Company is required to adopt SFAS 123R in the first quarter of fiscal year 2007. In March 2005, the SEC issued SAB No. 107, “Share- Based Payment,” which provides its interpretation of SFAS 123R and its views regarding the valuation of share- based payments for public companies. The Company is evaluating the requirements of SFAS 123R and SAB 107 and will record stock-based compensation expense beginning in the quarter ended June 30, 2006, which will reduce operating results in that quarter and future periods. Comprehensive Income Comprehensive income is defined as the total change in shareholders’ equity during the period other than from transactions with shareholders. Comprehensive income consists of net income and other comprehensive income, a component of shareholders’ equity. Other comprehensive income is comprised of foreign currency translation adjustments from those entities not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable equity securities and net deferred gains and losses on hedging activity. Note 3 — Acquisitions: In May 2004, the Company acquired Intrigue Technologies, a privately held provider of advanced remote controls, based in Mississauga, Canada. The acquisition is part of the Company’s strategy to pursue new opportunities in the living room environment, positioning Logitech at the convergence of consumer electronics and personal computing in the digital living room. Under the terms of the purchase agreement, the Company acquired all the outstanding shares of Intrigue Technologies for $29.0 million in cash. An additional $1.6 million was incurred for transaction costs. The agreement provides for deferred payments to Intrigue’s former shareholders based on the highest net sales from products incorporating Intrigue’s technology during the revenue measurement period, defined as any consecutive four-quarter period beginning in April 2006 through September 2007. The total deferred payment amount will vary with net sales in the revenue measurement period. The payment amount would approximate 27% of such net sales at the highest net sales level, although the percentage could be higher at lower net sales levels. No deferred payments are required if the highest net sales level in the revenue measurement period is less than $55.0 million. The total payment amount will not be known until the end of the revenue measurement period and will be recorded as an adjustment to goodwill. The acquisition has been accounted for using the purchase method of accounting. Therefore, the assets acquired and liabilities assumed were recorded at their estimated fair values as determined by Company management based on information available at the date of acquisition. The Company obtained an independent appraisal to assist management in its determination of the fair values of the acquired identifiable intangible assets. The results of operations of the acquired company were included in Logitech’s consolidated statement of income from the acquisition date forward. Pro forma results of operations are not presented, as the results of operations of Intrigue at the time of acquisition were not material to the Company’s consolidated financial statements. F-12 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The total purchase price was allocated to the fair values of assets acquired and liabilities assumed as follows (in thousands): Tangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets acquired: $ 3,410 Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trademark/trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability related to intangible assets acquired . . . . . . . . . . . . . . . . . . . . Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,700 2,400 900 600 23,163 36,173 (2,339) (1,734) (1,550) CG Total consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,550 The acquired database consists of various proprietary databases developed by Intrigue, including its device infrared-controlled devices made by manufacturers. The acquired and infrared database, which support technology relates to developed software used in Intrigue’s line of advanced remote controls. Trademark/trade name relates to the Harmony brand name under which the remote controls are sold and which Logitech has continued to use in its product portfolio. Customer contracts relate to certain existing relationships with distributors through established contracts. The value of the database, acquired technology and trademark/trade name were determined using the royalty savings approach, which estimates the value of the assets by capitalizing the royalties saved as a result of acquiring the assets. The value of the customer contracts was determined using the cost savings approach, which estimates the amount saved by the Company as a result of acquiring the asset. The acquired intangible assets are amortized on a straight-line basis over their estimated useful lives. The database is being amortized over an estimated useful life of ten years and all other acquired intangible assets are being amortized over estimated useful lives of five years. Goodwill associated with the acquisition is not subject to amortization and is not expected to be deductible for income tax purposes. Note 4 — Investments: In July 2003, the Company made a $15.1 million cash investment in the Anoto Group AB (“Anoto”), a publicly traded Swedish technology company from which Logitech licenses its digital pen technology. The investment represented approximately 9.5% of Anoto’s outstanding shares as of March 31, 2006. The Company accounts for the investment as available-for-sale securities and reported its fair value of $36.3 million based on quoted market prices on the balance sheet as of March 31, 2006. During fiscal year 2006, the Company recorded a gross unrealized gain of $21.3 million associated with the Anoto investment, which is included net of tax in accumulated other comprehensive loss. In connection with the investment, a Logitech executive was elected to the Anoto board of directors. The license agreement requires Logitech to pay a license fee for the rights to use the Anoto technology and a license fee on the sales value of digital pen solutions sold by Logitech. Also, the agreement includes non-recurring engineering (“NRE”) service fees primarily for specific development and maintenance of Anoto’s licensed technology. During fiscal year 2006, expenses incurred for license fees to Anoto were $.5 million. Expenses incurred for license fees and NRE service fees to Anoto were $.7 million in fiscal year 2005. In April 2006, the Company sold 42% of its Anoto stock and recognized a gain of $6.6 million, which will be included in other income, net in the first quarter of fiscal year 2007. The Company’s remaining interest represents approximately 5.5% of Anoto’s outstanding shares. F-13 LISA LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In prior years and most recently in May 2004, the Company made cash investments in A4Vision, Inc. totaling $1.2 million, which represented approximately 4% of A4Vision’s outstanding shares. The Company accounts for the investment under the cost method. In connection with the investment, a Logitech executive was appointed to the A4Vision board of directors. During fiscal year 2006, the Company determined that a decrease in A4Vision’s value is more than temporary based on a review of its fair value and wrote off the investment. The investment loss was recorded in other income, net. A4Vision is a privately held company from which Logitech licenses face tracking software. The license agreement requires Logitech to pay a license fee based on the number of its products sold with A4Vision’s licensed software. During fiscal year 2006, expenses incurred for license fees to A4Vision were immaterial. Expenses incurred for license fees to A4Vision amounted to $.2 million in fiscal year 2005. Note 5 — Balance Sheet Components: The following provides a breakout of certain balance sheet components (in thousands): March 31, 2006 2005 Accounts receivable: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for customer programs and returns . . . . . . . . . . . . . . . . . . . $ 356,883 (2,988) (64,046) $ 274,538 (5,166) (40,138) $ 289,849 $ 229,234 Inventories: Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,607 184 162,073 $ 39,162 572 136,252 $ 196,864 $ 175,986 Other current assets: Tax and VAT refund receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,565 8,517 14,397 $ 13,384 7,408 13,534 Property, plant and equipment: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plant and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,479 $ 34,326 $ 3,029 32,181 80,379 60,848 15,288 191,725 (116,915) $ 2,017 21,558 82,698 63,110 16,136 185,519 (132,863) $ 74,810 $ 52,656 Other assets: Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash surrender value of life insurance contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits and other $ — 21,560 9,421 2,082 $ 651 16,712 8,211 1,749 $ 33,063 $ 27,323 F-14 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 6 — Goodwill and Other Intangible Assets: The Company’s acquired other intangible assets subject to amortization were as follows (in thousands): March 31, 2006 March 31, 2005 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trademark/tradename . . . Technology . . . . . . . . . . . Customer contracts . . . . . $16,897 25,423 600 $42,920 $(13,497) (18,028) (220) $ 3,400 7,395 380 $(31,745) $11,175 $16,902 25,423 600 $42,925 $(11,450) (15,559) (100) $ 5,452 9,864 500 $(27,109) $15,816 For the years ended March 31, 2006, 2005 and 2004, amortization expense for other intangible assets was $4.6 million, $6.3 million and $5.2 million. The Company expects that annual amortization expense for the fiscal years ending 2007, 2008, 2009, 2010 and 2011 will be $3.9 million, $2.5 million, $1.6 million, $.7 million and $.6 million; and $1.9 million in total thereafter. In connection with Logitech’s acquisition of Intrigue Technologies in May 2004, the Company recorded goodwill of $23.2 million based on estimated fair values at the date of acquisition. In the fourth quarter of fiscal year 2005, goodwill was reduced by $.3 million for purchase price adjustments related to the Intrigue acquisition. Also, during fiscal year 2005, the Company recorded additions to goodwill of $2.8 million for foreign currency translation adjustments. The Company performs its annual goodwill impairment test during its fiscal fourth quarter. While the Company has fully integrated all of its acquired companies, the Company continues to maintain discrete financial information for 3Dconnexion and, accordingly, determines impairment of the goodwill acquired with the 3Dconnexion acquisition at the entity level. All other acquired goodwill is evaluated for impairment at the total enterprise level. Based on impairment tests performed, there has been no impairment of the Company’s goodwill to date. CG Note 7 — Financing Arrangements: Short-term Credit Facilities The Company had several uncommitted, unsecured bank lines of credit aggregating $153.6 million at March 31, 2006. There are no financial covenants under these lines of credit with which the Company must comply. Borrowings outstanding were $14.1 million and $9.9 million at March 31, 2006 and 2005. The borrowings under these agreements were denominated in Japanese yen at a weighted average annual interest rate of 1.3% at March 31, 2006 and 2005 and were due on demand. Long-term Debt Long-term debt was comprised of the following (in thousands): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible debt Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2006 $— 52 52 48 2005 $147,738 92 147,830 42 LISA Long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $147,788 F-15 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) On June 8, 2001, Logitech sold CHF 170.0 million ($95.6 million based on exchange rates at date of issuance) aggregate principal amount of its 1% convertible bonds. The net proceeds of the convertible bond offering were used to refinance debt associated with the Company’s acquisition of Labtec in March 2001. The convertible bonds were issued in denominations of CHF 5,000 at par value, with interest at 1.00% payable annually, and final redemption in June 2006 at 105%, representing a yield to maturity of 1.96%. At March 31, 2005, the carrying amount of the convertible bonds, including the accrued redemption premium, was CHF 176.5 million ($147.7 million based on exchange rates at March 31, 2005). On August 31, 2005, the Company exercised its right to call the convertible bonds for early redemption in accordance with their terms. As of November 11, 2005, all outstanding bonds had been presented for conversion into 5,448,693 Logitech registered shares at the conversion price of CHF 31.20 per share ($23.72 based on exchange rates at November 11, 2005). The conversion was satisfied through delivery of treasury shares. Note 8 — Shareholders’ Equity: In June 2004, the Company’s shareholders renewed the approval of 20 million authorized registered shares for use in acquisitions, mergers and other transactions, valid through June 24, 2006. Shareholders of the Company will be requested at the 2006 Annual General Meeting to extend this authorization until June 2008. In addition, the Company has conditionally authorized shares totaling 30,330,930 to cover option rights granted or other equity rights that may be granted to employees, officers and directors of Logitech under its employee equity incentive plans. The conditional share capital increase does not have an expiration date. Pursuant to Swiss corporate law, Logitech International S.A. may only pay dividends in Swiss francs. The payment of dividends is limited to certain amounts of unappropriated retained earnings ($269.7 million at March 31, 2006) and is subject to shareholder approval. The Company will recommend to its shareholders that no cash dividends be paid in 2006. Under Swiss corporate law, a minimum of 5% of the Company’s annual net income must be retained in a legal reserve until this legal reserve equals 20% of the Company’s issued and outstanding aggregate par value per share capital. These legal reserves represent an appropriation of retained earnings that are not available for distribution and totaled $7.3 million at March 31, 2006. Additionally, under Swiss corporate law, the Company is required to establish a reserve equal to the amount of treasury shares repurchased at year-end. The reserve for treasury shares, which is not available for distribution, totaled $182.9 million at March 31, 2006. In June 2005, the Company announced the approval by its board of directors of a new buyback program of up to CHF 300.0 million (approximately $235.0 million based on exchange rates at the date of announcement). The program expires at the Company’s 2008 Annual General Meeting at the latest. Under this program, the Company repurchased 4.2 million shares for $174.6 million during the year ended March 31, 2006. The approved amount remaining under this program at March 31, 2006 is CHF 76.1 million ($58.3 million based on exchange rate at March 31, 2006). F-16 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) During fiscal years 2006, 2005 and 2004, the Company repurchased shares under buyback programs authorized by the Board of Directors as follows (in thousands): Date of Announcement Approved Buyback Amount Equivalent USD Amount(1) Expiration Date Program to date 2006 2005 2004 Shares Amount Shares Amount Shares Amount Shares Amount June 2005 April 2004 October 2003 CHF 300,000 CHF 250,000 CHF 40,000 $235,000 $200,000 $ 32,090 4,201 $174,613 4,201 $174,613 — $ — — $ — June 2008 June 2006 7,487 $201,264 1,937 $ 66,739 5,550 $134,525 — $ — March 2004 1,330 $ 32,090 — $ — — $ — 1,330 $32,090 Amount Repurchased During Year ended March 31,(2) (1) Represents the approved buyback amount in U.S. dollars, calculated based on exchange rates on the announcement dates. (2) Represents the amount in U.S. dollars, calculated based on exchange rates on the repurchase dates. CG Note 9 — Employee Benefit Plans: Employee Share Purchase Plan Under the 1996 Employee Share Purchase Plan, eligible employees may purchase registered shares at the lower of 85% of the fair market value at the beginning or the end of each six-month offering period. Subject to continued participation in these plans, purchase agreements are automatically executed at the end of each offering period. Stock Option Plans Under the 1996 Stock Plan, the Company may grant to employees options for registered shares or ADSs, restricted shares, stock appreciation rights, and stock units, which are bookkeeping entries representing the equivalent of shares. A total of 38,000,000 registered shares and/or ADSs may be issued under this plan. Options generally vest over four years and remain outstanding for periods not to exceed ten years. Options may only be granted at exercise prices of at least 100% of the fair market value of the registered shares on the date of grant. Restricted shares and stock appreciation rights may be granted at prices less than 100% of the fair market value of the registered shares on the date of grant; no cash consideration is required to be paid by employees in connection with the grant of stock units. The Company has made no grants of restricted shares, stock appreciation rights or stock units. As of March 31, 2006, a total of 7,118,322 options were available for grant under the 1996 Stock Plan. Under the 1988 Stock Option Plan, options to purchase registered shares were granted to employees and consultants at exercise prices ranging from zero to amounts in excess of the fair market value of the registered shares on the date of grant. The terms and conditions with respect to options granted were determined by the Board of Directors who administered this plan. Options generally vest over four years and remain outstanding for periods not exceeding ten years. Further grants may not be made under this plan. Compensation expense is recognized over the vesting period when the exercise price of an option is less than the fair market value of the underlying stock on the date of grant. No compensation expense was recognized in fiscal years 2006, 2005, or 2004. LISA F-17 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of activity under the stock option plans is as follows (exercise prices are weighted averages): Year ended March 31, 2006 2005 2004 Number Exercise Price Number Exercise Price Number Exercise Price Outstanding, beginning of year . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . Cancelled or expired . . . . . . . . . . 12,948,662 1,725,735 (3,238,116) (632,309) Outstanding, end of year . . . . . . . 10,803,972 Exercisable, end of year . . . . . . . 5,254,909 $16 $38 $13 $20 $19 $14 14,328,196 2,593,460 (3,657,356) (315,638) 12,948,662 5,561,180 $13 $24 $11 $18 $16 $13 15,474,272 2,499,760 (3,155,288) (490,548) 14,328,196 6,583,468 $11 $17 $ 8 $17 $13 $10 The following table summarizes information regarding stock options outstanding at March 31, 2006 (exercise prices and contractual lives are weighted averages): Options Outstanding Options Exercisable Range of Exercise Price $ 2 – $ 10.99 . . . . . . . . . . . . . . . . . . . $ 11 – $ 14.99 . . . . . . . . . . . . . . . . . . . $ 15 – $ 17.99 . . . . . . . . . . . . . . . . . . . $ 18 – $ 22.99 . . . . . . . . . . . . . . . . . . . $ 23 – $ 35.99 . . . . . . . . . . . . . . . . . . . $ 36 – $ 47.99 . . . . . . . . . . . . . . . . . . . Number 1,325,958 1,777,584 2,974,024 2,397,821 972,050 1,356,535 $ 2 – $ 47.99 . . . . . . . . . . . . . . . . . . . 10,803,972 Exercise Price Contractual Life (years) $ 5 $14 $16 $22 $26 $40 $20 3.6 6.0 6.6 7.5 8.3 9.5 6.9 Number 1,210,958 1,264,821 1,609,786 947,460 221,884 — 5,254,909 Exercise Price $ 5 $ 14 $ 16 $ 21 $ 25 $ — $ 14 Defined Contribution Plans Certain of the Company’s subsidiaries have defined contribution employee benefit plans covering all or a portion of their employees. Contributions to these plans are discretionary for certain plans and are based on specified or statutory requirements for others. The charges to expense for these plans for the years ended March 31, 2006, 2005 and 2004, were $5.9 million, $4.7 million and $5.1 million. Defined Benefit Plan One of the Company’s subsidiaries sponsors a noncontributory defined benefit pension plan covering substantially all of its employees. Retirement benefits are provided based on employees’ years of service and earnings. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations. Net pension costs for the years ended March 31, 2006, 2005 and 2004 were $.8 million, $1.2 million and $.9 million. The plan’s net pension liability at March 31, 2006 and 2005 was $3.2 million and $2.5 million. Deferred Compensation Plan One of the Company’s subsidiaries offers a management deferred compensation plan which permits eligible employees to make 100%-vested salary and incentive compensation deferrals within established limits, which are invested in Company-owned life insurance contracts held in a Rabbi Trust. The Company does not make F-18 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) contributions to the plan. The cash surrender value of the insurance contracts was approximately $9.4 million and $8.2 million at March 31, 2006 and 2005 and was included in other assets. Expenses and gains or losses related to the insurance contracts are included in other income, net and have not been significant to date. The unsecured obligation to pay the compensation deferred, adjusted to reflect the positive or negative performance of investment measurement options selected by each participant, was approximately $10.7 million and $8.2 million at March 31, 2006 and 2005 and was included in other liabilities. The additional compensation expenses related to investment performance have not been significant to date. Note 10 — Income Taxes: The Company is incorporated in Switzerland but operates in various countries with differing tax laws and rates. Further, a portion of the Company’s income before taxes and the provision for income taxes are generated outside of Switzerland. The portion of the Company’s income before taxes for fiscal years 2006, 2005 and 2004 subject to foreign income taxes was $92.2 million, $58.2 million, and $57.0 million. Consequently, the weighted average expected tax rate may vary from period to period to reflect the generation of taxable income in different tax jurisdictions. CG The provision for income taxes consists of the following (in thousands): Year ended March 31, 2006 2005 2004 Current: Swiss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,950 31,497 $ 2,773 29,637 $ 1,481 19,451 Deferred: Swiss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (178) (6,520) (620) (5,450) (192) (7,224) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,749 $26,340 $13,516 Deferred income tax assets and liabilities consist of the following (in thousands): March 31, 2006 2005 Net operating loss carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development and other tax credit carry forwards . . . . . Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,198 11,525 25,946 2,742 $ 25,229 11,547 18,816 3,915 Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,411 59,507 Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,112) (614) Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,334) (35,387) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,965 $ 23,506 LISA The current and deferred tax provision is calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed. Adjustments for differences between the tax provisions and tax returns are recorded when identified, which is generally in the third or fourth quarter of the subsequent year. F-19 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company maintains reserves for tax contingencies within the accrued liabilities account. These reserves involve considerable judgment and estimation and are continuously monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases, and other information. The Company is currently under examination by various taxing authorities. Although the outcome of any tax audit is uncertain, management believes it has adequately provided in the Company’s financial statements for any additional taxes that it may be required to pay as a result of such examinations. If the payment ultimately proves to be unnecessary, the reversal of the tax liabilities would result in tax benefits being recognized in the period the Company determines such liabilities are no longer necessary. However, if a final tax assessment exceeds the Company’s estimate of tax liabilities, an additional tax provision will be recorded. Such adjustments could have a material impact on the Company’s results of operations in future periods. Management regularly assesses the ability to realize deferred tax assets recorded in the Company’s entities based upon the weight of available evidence, including such factors as the recent earnings history and expected future taxable income. In November 2003, the Company released a valuation allowance on specific deferred tax assets after it had determined that the valuation allowance was no longer required. As a result, the income tax provision and net income for fiscal year 2004 included a one-time favorable impact of $13.4 million. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate. Deferred tax assets of $47.3 million at March 31, 2006 pertain to net operating loss (“NOL”) and tax credit carry forwards resulting from the exercise of employee stock options. Management believes that it is more likely than not that the Company will not realize these deferred tax assets and, accordingly, a valuation allowance has been established for such amounts. When this valuation allowance is released through generating sufficient taxable income to utilize the NOL deductions and tax credits, the benefit of the release of the valuation allowance will be accounted for as a credit to shareholders’ equity rather than as a reduction of the income tax provision. During the fiscal years 2006, 2005 and 2004, the valuation allowance increased by $11.9 million, $1.3 million, and $.7 million, due to exercises of employee stock options. As of March 31, 2006, the Company’s foreign net operating loss and tax credit carry forwards for income tax purposes were $102.6 million and $69.5 million. If not utilized, these carry forwards will begin to expire in fiscal year 2007. The expected tax provision at the weighted average rate is generally calculated using pre-tax accounting income or loss in each country multiplied by that country’s applicable statutory tax rates. The difference between the provision for income taxes and the expected tax provision at the weighted average tax rate is reconciled below (in thousands): Year ended March 31, 2006 2005 2004 Expected tax provision at weighted average rate . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . Research and development tax credits . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,073 — (140) (184) $26,513 — (304) 131 $ 27,655 (13,350) (892) 103 Total provision for income taxes . . . . . . . . . . . . . . . $28,749 $26,340 $ 13,516 F-20 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 11 — Derivative Financial Instruments – Foreign Exchange Hedging: The Company enters into foreign exchange forward contracts (accounted for as cash flow hedges) to hedge against exposure to changes in foreign currency exchange rates related to forecasted inventory purchases by subsidiaries. Hedging contracts generally mature within three months. Gains and losses in the fair value of the effective portion of the contracts are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. If the underlying transaction being hedged fails to occur or if a portion of the hedge does not generate offsetting changes in the foreign currency exposure of forecasted inventory purchases, the Company immediately recognizes the gain or loss on the associated financial instrument in other income (expense). The Company did not record any gains or losses due to hedge ineffectiveness during fiscal years 2006, 2005 and 2004. The notional amounts of foreign exchange forward contracts outstanding at March 31, 2006 and 2005 were $13.6 million and $20.0 million. The notional amount represents the future cash flows under contracts to purchase foreign currencies. Deferred realized gains totaled $.2 million at March 31, 2006 and are expected to be reclassified to cost of goods sold when the related inventory is sold. Realized net losses reclassified to cost of goods sold during fiscal years 2006, 2005 and 2004 were $2.6 million, $1.0 million and $3.5 million. CG The Company also enters into foreign exchange forward contracts to hedge against foreign currency exposures inherent in forecasted sales denominated in non-functional currencies, also designated as cash flow hedges. The foreign exchange forward contracts are entered into on a monthly basis and generally mature between one to two months, corresponding with the expected payment terms on the Company’s sales. Further, the Company may enter into foreign exchange swap contracts to extend the terms of its foreign exchange forward contracts. Gains and losses in the fair value of the effective portion of the contracts are deferred as a component of accumulated other comprehensive loss until the hedged receivable is settled, at which time the gains or losses are reclassified to other income (expense). The notional amounts of foreign exchange forward contracts outstanding at March 31, 2006 and 2005 were $8.6 million and $5.0 million. The notional amounts of foreign exchange swap contracts outstanding at March 31, 2006 and 2005 were $5.9 million and $2.7 million. Deferred gains on the contracts recorded in accumulated other comprehensive loss were immaterial at March 31, 2006. Note 12 — Commitments and Contingencies: The Company leases facilities under operating leases, certain of which require it to pay property taxes, insurance and maintenance costs. Operating leases for facilities are generally renewable at the Company’s option and usually include escalation clauses linked to inflation. Future minimum annual rentals under non-cancelable operating leases at March 31, 2006 are as follows (in thousands): Year ending March 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,479 6,496 5,802 4,712 4,039 7,004 $35,532 LISA Rent expense was $8.7 million, $7.0 million and $6.9 million during the years ended March 31, 2006, 2005 and 2004. F-21 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) At March 31, 2006, the Company had approximately $128.6 million in fixed purchase commitments with suppliers for inventory. Fixed commitments for capital and other expenditures approximated $8.7 million and primarily related to commitments for manufacturing equipment and software, as well as consulting, marketing and advertising arrangements. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to reschedule and adjust its requirements based on the business needs prior to the delivery of goods or performance of services. The Company has guaranteed the purchase obligations of some of its contract manufacturers to certain component suppliers. These guarantees have a term of one year and are automatically extended for one or more additional years as long as a liability exists. The amount of the purchase obligations of these manufacturers varies over time, and therefore the amounts subject to Logitech’s guarantees similarly varies. At March 31, 2006, the amount of these outstanding guaranteed purchase obligations was approximately $1.3 million. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements. Logitech indemnifies some of its suppliers and customers for losses arising from matters such as intellectual property rights and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances, includes indemnification for damages and expenses, including reasonable attorneys’ fees. No amounts have been accrued for indemnification provisions at March 31, 2006. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under its indemnification arrangements. All of the Company’s products are subject to the European Union’s (“EU”) Waste Electrical and Electronic Equipment Directive (“WEEE”), which require producers of electrical goods be financially responsible for specified collection, recycling, treatment and disposal of covered products. The original implementation date proposed by the WEEE Directive for enactment of national legislation by EU member states was August 2004. Producers are to be financially responsible under the WEEE legislation beginning in August 2005. Producer obligations also include specified collection, recycling, treatment and disposal of equipment that had been placed in the EU marketplace prior to August 2005, and has reached its end of life. To date, specific legal requirements have not been finalized by all member states, with certain member states delaying implementation until late 2006. In those countries which have enacted legislation, the Company expects to incur costs for managing and recycling historical waste equipment and make provisions for costs related to future waste. These costs are expected to be based on the Company’s estimated market share of the total cost, which will depend on a number of factors, including administration, recycling and treatment costs as well as the commercial cost of recycling. The Company is involved in a number of lawsuits and claims relating to commercial matters that arise in the normal course of business. The Company believes these lawsuits and claims are without merit and intends to vigorously defend against them. However, there can be no assurances that its defenses will be successful, or that any judgment or settlement in any of these lawsuits would not have a material adverse impact on the Company’s business, financial condition and results of operations. F-22 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 13 — Interest and Other Income: Interest and other income, net was comprised of the following (in thousands): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange gains, net . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-off of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ended March 31, 2006 2005 2004 $ 5,512 (1,921) $ 3,591 $ 7,580 560 (1,168) 380 $ 7,352 $ 3,771 (3,630) 141 $ $ 3,522 — — 269 $ 3,791 $ 2,278 (4,136) $(1,858) $ 2,966 — (515) (478) $ 1,973 CG Note 14 — Segment Information: The Company operates in one operating segment, which is the design, manufacturing and marketing of personal peripherals for personal computers and other digital platforms. Geographic net sales information in the table below is based on the location of the selling entity. Long-lived assets, primarily fixed assets, investments and other non-current assets, are reported below based on the location of the asset. Retail and OEM net sales to unaffiliated customers by geographic region were as follows (in thousands): Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 887,736 617,942 291,037 $1,796,715 $ 733,667 503,356 245,603 $1,482,626 $ 592,067 454,587 221,816 $1,268,470 Year ended March 31, 2006 2005 2004 No single country other than the United States and Germany represented more than 10% of the Company’s total consolidated net sales in fiscal year 2006. In fiscal years 2005 and 2004, no single country other than the United States represented more than 10% of the Company’s total consolidated net sales. In fiscal year 2006, two customers represented 14% and 11% of net sales. In fiscal year 2005, one customer represented 14% and another customer represented 10% of net sales. In fiscal year 2004, one customer represented 10% of net sales. As of March 31, 2006, three customers represented 14%, 13% and 10% of total accounts receivable. As of March 31, 2005, three customers represented 14%, 12% and 11% of total accounts receivable. Net sales by product family for fiscal years 2006, 2005 and 2004 were as follows (in thousands): Year ended March 31, 2006 2005 2004 Retail – Cordless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Corded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Video . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Audio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Gaming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail – Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,358 314,695 273,340 334,496 136,944 80,200 208,682 $1,796,715 $ 453,519 296,346 201,626 158,134 146,517 38,262 188,222 $1,482,626 $ 341,082 294,829 166,418 118,641 82,872 16,448 248,180 $1,268,470 LISA F-23 LOGITECH INTERNATIONAL S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Long-lived assets by geographic region were as follows (in thousands): Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,557 57,340 40,390 $27,329 39,929 29,514 Total long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $144,287 $96,772 March 31, 2006 2005 The United States, China and Switzerland each represents more than 10% of the Company’s total consolidated long-lived assets at March 31, 2006 and 2005. Note 15 — Other Disclosures Required by Swiss Law: Balance Sheet Items The amounts of certain balance sheet items were as follows (in thousands): Prepayments and accrued income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension liabilities, current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fire insurance value of property, plant and equipment . . . . . . . . . . . . . . . . . . . $ 8,430 $290,858 $ 43 $146,077 $ 11,011 $246,874 $ 38 $120,508 March 31, 2006 2005 Statement of Income Items Total personnel expenses amounted to $173.5 million, $146.4 million and $111.4 million in fiscal years 2006, 2005 and 2004. F-24 LOGITECH INTERNATIONAL S.A. QUARTERLY FINANCIAL DATA (Unaudited) The following table contains selected unaudited quarterly financial data for fiscal years 2006 and 2005 (in thousands except per share amounts): Year ended March 31, 2006 Year ended March 31, 2005 First Second Third Fourth First Second Third Fourth Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $334,702 $422,101 $573,856 $466,056 $266,594 $329,568 $483,816 $402,648 Gross profit 135,124 Operating expenses: . . . . . . . . . . . . . . . . . . . . . . 107,372 185,507 132,362 168,328 148,869 109,269 90,866 Marketing and selling . . . . . . . . . . Research and development . . . . . . General and administrative . . . . . . 46,293 21,018 14,834 57,703 21,491 14,928 66,380 22,380 16,074 52,687 23,064 18,347 39,569 16,679 13,042 49,233 17,503 12,986 61,020 19,160 14,547 51,531 20,558 16,085 CG 88,174 Total operating expense . . . . . Operating income . . . . . . . . . . . . . . . . . . 46,950 Net income . . . . . . . . . . . . . . . . . . . . . . . $ 22,397 $ 36,237 $ 71,348 $ 51,123 $ 18,855 $ 25,989 $ 64,189 $ 40,233 Net income per share and ADS: 104,834 80,673 79,722 29,547 94,098 54,771 94,727 73,601 69,290 21,576 82,145 25,227 94,122 38,240 Basic . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . $ .25 $ .23 $ .41 $ .37 $ .77 $ .71 $ .55 $ .52 $ .21 $ .19 $ .29 $ .27 $ .73 $ .66 $ .45 .41 Shares used to compute net income per share and ADS: Basic . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . 88,457 98,906 88,689 99,835 92,897 100,190 92,683 98,057 89,656 100,590 88,224 98,438 87,657 98,353 88,452 99,067 The following table sets forth certain quarterly financial information as a percentage of net sales: Year ended March 31, 2006 Year ended March 31, 2005 First Second Third Fourth First Second Third Fourth Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit Operating expenses: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.1 33.6 31.4 32.3 33.2 34.8 31.9 34.1 Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development General and administrative . . . . . . . . . . . . . . 13.8 6.3 4.5 13.7 5.1 3.5 11.6 3.9 2.7 11.3 4.9 3.9 Total operating expense . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.6 7.5 6.7% 22.3 9.1 8.6% 12.4% 11.0% 18.2 14.1 20.1 11.8 14.8 6.3 4.9 26.0 8.1 7.1% 14.9 5.3 4.0 12.6 4.0 3.0 12.8 5.1 4.0 24.2 9.0 7.9% 13.3% 10.0% 19.6 15.2 21.9 11.7 LISA F-25 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-100854) of Logitech International S.A. of our reports dated May 19, 2006 relating to the financial statements, which appear in this Form 20-F. Exhibit 12.1 PricewaterhouseCoopers S.A. M. Perry F. Rast Lausanne, May 19, 2006 CG LISA Exhibit 31.1 CERTIFICATIONS I, Guerrino De Luca, certify that: 1. I have reviewed this annual report on Form 20-F of Logitech International S.A.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. May 19, 2006 Guerrino De Luca Chief Executive Officer Exhibit 31.2 CERTIFICATIONS I, Mark J. Hawkins, certify that: 1. I have reviewed this annual report on Form 20-F of Logitech International S.A.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; CG 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. May 19, 2006 Mark J. Hawkins Chief Financial Officer LISA CERTIFICATIONS Exhibit 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(B) OR RULE 15D-14(B) AND SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE The certification set forth below is being submitted in connection with this annual report on Form 20-F (the “Report”) of Logitech International S.A. (“the Company”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code. Guerrino De Luca, the Chief Executive Officer and Mark J. Hawkins, the Chief Financial Officer of the Company, each certify that, to the best of his or her knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. May 19, 2006 Guerrino De Luca Chief Executive Officer Mark J. Hawkins Chief Financial Officer LOGITECH INTERNATIONAL S.A., APPLES CG SWISS STATUTORY FINANCIAL STATEMENTS 20-F LOGITECH INTERNATIONAL S.A., APPLES SWISS STATUTORY FINANCIAL STATEMENTS TABLE OF CONTENTS Swiss Statutory Balance Sheets (unconsolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LISA-3 Swiss Statutory Statements of Income (unconsolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LISA-4 Notes to Swiss Statutory Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LISA-5 Proposal of the Board of Directors for Appropriation of Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . LISA-8 Report of the Statutory Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LISA-9 Page LISA-2 LOGITECH INTERNATIONAL S.A., APPLES SWISS STATUTORY BALANCE SHEETS (unconsolidated) (In thousands of Swiss francs) March 31, 2006 2005 Current assets: ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest and other receivables . . . . . . . . . . . . . . . . . . . . . . . Advances to and amounts receivable from group companies . . . . . . CHF Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term assets: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions on investments in and loans to subsidiaries . . . . . . . . . . . Treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments and loans, net of provisions and write-off of CHF 8,253 as of March 31, 2006 and CHF 7,318 as of March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 1,659 — 840 48,256 50,755 897 379,411 21,776 (2,507) 233,284 20,495 653,356 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 704,111 CHF CHF LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Payables to group companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accruals and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred unrealized exchange gains . . . . . . . . . . . . . . . . . . . . . . . . . CHF Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities: Payables to group companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity: Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal reserves: General reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unappropriated retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,742 2,950 4,216 22,908 32,982 55,890 47,902 9,580 238,707 352,032 648,221 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . CHF 704,111 CHF CG 20-F 1,183 118,408 1,178 22,228 142,997 2,759 350,370 102,615 (2,507) 217,873 22,982 694,092 837,089 22,592 2,163 8,049 32,804 201,038 233,842 47,902 9,580 217,873 327,892 603,247 837,089 The accompanying notes are an integral part of these financial statements. LISA-3 LOGITECH INTERNATIONAL S.A., APPLES SWISS STATUTORY STATEMENTS OF INCOME (unconsolidated) (In thousands of Swiss francs) Year ended March 31, 2006 2005 Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 62,000 CHF 112,565 34,904 Royalty fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,597 Interest income from third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,236 Interest income from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,118 Realized exchange gains, net of exchange losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Provision on investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Gain on disposal of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,682 1,788 6,657 9,753 — 401 21,544 Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brand development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank interest and charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income, capital and non-recoverable withholding taxes . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,825 167,674 4,975 22,475 1,862 6,885 2 1,966 62,927 1,749 10 102,851 3,177 21,236 1,815 13,767 2 1,406 30,799 — — 72,202 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 44,974 CHF 95,472 The accompanying notes are an integral part of these financial statements. LISA-4 LOGITECH INTERNATIONAL S.A., APPLES NOTES TO SWISS STATUTORY FINANCIAL STATEMENTS Note 1 — Basis of Presentation: The Swiss statutory financial statements of Logitech International S.A. (“the Holding Company”) are prepared in accordance with Swiss Law. The financial statements present the financial position and results of operations of the Holding Company on a standalone basis and do not represent the consolidated financial position of the Holding Company and its subsidiaries. Note 2 — Contingent Liabilities: Logitech International S.A. issued guarantees to various banks for CHF 34,220,900 for lines of credit available to its subsidiaries. At March 31, 2006 the aforementioned credit line facilities were not drawn down. Logitech International S.A. purchases foreign exchange contracts for and on behalf of an operating subsidiary. The notional amount of foreign exchange contracts outstanding at March 31, 2006 was CHF 17’753’440. The notional amount represents the future cash flows under contracts to purchase foreign currencies. Net unrecognized gains totaled CHF 273,000 at March 31, 2006. Such contracts were purchased for and on behalf of an operating subsidiary and any gain or loss will be effectively transferred to the subsidiary on maturity. Note 3 — Investments: Principal operating subsidiaries include the following: Logitech Europe S.A., Logitech Hong Kong, Ltd., Logitech Inc., Suzhou Logitech Electronic Co. Ltd, and Logitech Technology Suzhou Co. Ltd. All subsidiaries are directly or indirectly 100% owned by the Holding Company. Note 4 — Treasury Shares: During fiscal years 2005 and 2006, repurchases of and issuances from the Company’s treasury shares were as follows (total cost in thousands): CG 20-F Number of shares Total cost Held by the holding company at March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,804,256 CHF 136,590 167,670 5,550,000 (86,387) (4,033,162) Held by the holding company at March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,321,094 CHF 217,873 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over/ (under) valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,137,757 (8,981,238) 307,223 (286,389) (5,423) Held by the holding company at March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,477,613 CHF 233,284 All references to the number of shares have been adjusted to reflect the effect of the share split undertaken by the Holding Company in June 2005. In April 2004, the Company announced a new buyback program of up to CHF 250,000,000 of the Holding Company’s registered shares. The program expires at the Company’s 2006 Annual General Meeting. In June 2004, the Company’s shareholders approved a proposal authorizing the number of share repurchases to exceed 10% of the Company’s share capital. At March 31, 2006, the Company had repurchased 7,487,257 registered shares, under this program, for approximately CHF 250,000,000. LISA-5 LOGITECH INTERNATIONAL S.A., APPLES NOTES TO SWISS STATUTORY FINANCIAL STATEMENTS—(Continued) In June 2005, the Board of Directors authorized the repurchase of up to CHF 300,000,000 of the Holding Company’s registered shares/ADSs. This program expires at the Company’s 2008 Annual General Meeting. At March 31, 2006, the Company had repurchased 4,200,500 registered shares for approximately CHF 223,760,000. Treasury shares are recorded as a long-term asset at the lower of cost or market value. The disposal of treasury shares during the period was to the Company’s directors and employees under the Holding Company’s share option and share purchase plans as well as for the conversion of one subsidiary’s convertible debt. The gain or loss on the disposal of repurchased treasury shares is recorded in the statement of income. Note 5 — Authorized and Conditional Share Capital Increases: Share split In June 2005, the Company’s shareholders approved a two-for-one share split whereby one share with a par value of CHF 1 was converted into two shares with a par value of CHF 0.50 per share. All references to the number of shares have been adjusted to reflect the effect of the share split undertaken by the Holding Company. Authorized capital In June 2004, the Company’s shareholders renewed their approval of 20,000,000 authorized registered shares for use in acquisitions, mergers and other similar transactions, valid through the period ending June 2006. Conditional capital In June 1996 and June 1995, the Company’s shareholders approved the availability of 16,000,000 and 12,000,000 conditional registered shares. In June 2002, the shareholders approved the continued availability of the aforementioned amounts and approved an additional 12,000,000 conditional registered shares. The remaining number of conditional registered shares at March 31, 2006 was 30,330,930, which are available for issuance upon the exercise of employee stock options and the issuance of shares under the Company’s employee share purchase plans. During fiscal years 2006 and 2005, no shares were issued from the aforementioned amounts of conditional shares available. In fiscal years 2006 and 2005, all stock options and purchase plan commitments were satisfied from treasury shares held by the Holding Company. In addition to the aforementioned, the shareholders in June 2001 approved the creation of an additional 5,450,000 conditional registered shares to cover the conversion rights associated with the issue of a convertible bond by Logitech Jersey Ltd, a subsidiary of the Holding Company. As at March 31, 2006, none of the aforementioned conditional registered shares had been issued. Note 6 — Significant Shareholders: The Holding Company’s share capital consists of registered shares. To the knowledge of the Holding Company, the only beneficial owner holding more than 5% of the voting rights of the Holding Company at March 31, 2006 is Mr. Daniel Borel, a founder of the Company and its Chairman of the Board, who holds 6,120,000 shares or approximately 6.38%. LISA-6 LOGITECH INTERNATIONAL S.A., APPLES NOTES TO SWISS STATUTORY FINANCIAL STATEMENTS—(Continued) Note 7 — Movements on Retained Earnings: During fiscal years 2005 and 2006, movements on retained earnings were as follows (in thousands): Retained earnings at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF 327,892 CHF 256,964 (24,544) Attribution to reserve for treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,472 Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,834) 44,974 Retained earnings at the disposal of the Annual General Assembly . . . . . . . . . . . . CHF 352,032 CHF 327,892 Year ended March 31, 2006 2005 ******************************** CG 20-F LISA-7 PROPOSAL OF THE BOARD OF DIRECTORS FOR APPROPRIATION OF RETAINED EARNINGS Proposal of the Board of Directors for appropriation of retained earnings were as follows during fiscal years 2005 and 2006 (in thousands): To be carried forward . . . . . . . . . . . . . . . . . . . . . CHF 352,032 CHF 327,892 Year ended March 31, 2006 2005 Proposal of the Board of Directors Resolution of the General Assembly LISA-8 REPORT OF THE STATUTORY AUDITORS Report of the Statutory Auditors to the General Meeting of Logitech International S.A., Apples As statutory auditors, we have audited the accounting records and the financial statements (balance sheet, income statement and notes) of Logitech International S.A. for the year ended March 31, 2006. These financial statements are the responsibility of the board of directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence. Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accounting records and financial statements and the proposed appropriation of available earnings comply with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. PricewaterhouseCoopers SA CG 20-F M. Perry Lausanne, Switzerland May 19, 2006 F. Rast LISA-9 Visit www.logitech.com for a complete list of Logitech locations Holding Company Logitech International S.A. CH-1143 Apples Switzerland Americas Headquarters Logitech Inc. 6505 Kaiser Drive Fremont, CA 94555 United States Asia Pacific Headquarters Logitech Asia Pacific Ltd. Room 1408-10, China Resources Building 26 Harbour Road Wanchai, Hong Kong Europe Headquarters Logitech Europe S.A. Moulin du Choc D CH-1122 Romanel-sur-Morges Switzerland Japan Headquarters Logicool Co. Ltd. Iidabashi MF Bldg., 3F 1-1 Shin Ogawamachi, Shinjuku-ku Tokyo, 162-0814, Japan Worldwide Operational Headquarters Logitech Far East Ltd. #2 Creation Road IV Science-Based Industrial Park Hsinchu, Taiwan Manufacturing Logitech Technology (Suzhou) Co. Ltd. NO. 3, Song Shan Road New District Suzhou City, PRC 215219 © 2006 Logitech. All rights reserved. Logitech, the Logitech logo, and other Logitech marks are owned by Logitech and may be registered. All other trademarks are the property of PN: 706614-0000 their respective owners.

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