FORM 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|
|
|
o |
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
OR
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
|
|
|
o |
|
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report ___
Commission file number: 0-31052
Gemplus International S.A.
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of registrants name into English)
Grand Duchy of Luxembourg
(Jurisdiction of incorporation or organization)
46a Avenue J.F. Kennedy
L-1855 Luxembourg
Grand Duchy of Luxembourg
(Address 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:
Ordinary Shares, without par value
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report:
630,369,279 Ordinary Shares, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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.
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.
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. (check one):
Large Accelerated Filer þ Accelerated Filer o Non-accelerated Filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report constitute forward-looking statements. These
statements relate to future events or our future financial performance and involve assumptions,
known and unknown risks, uncertainties and other factors that may cause our or our actual results,
levels of activity, performance or achievements to be materially different from any future results,
levels of activities, performance or achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking statements by terminology such as
may, should, will, intend, seek, predicts, potential, or continue or similar
expressions or the negative of such terms. These statements are only predictions. Actual events or
results may differ materially.
The assumptions, risks and uncertainties involved in forward-looking statements include
without limitation: economic, competitive and technological factors affecting markets, services,
and prices; changes in spending on technology and technology upgrades; the extent and timing of
growth in the telecommunications industry; continued demand for our products and services; the
development of new markets for our products and services; chip card technology being adopted in
wireless transmission standards and other technology standards; political, regulatory and
commercial risks inherent in international operations, including the risk of currency exchange rate
fluctuations; and general economic and business conditions in various regions of the world.
Although we believe that the assumptions on which our forward-looking statements are based are
reasonable in light of available information, any of those assumptions could prove to be
inaccurate, and we cannot guarantee future results, events, levels of activity, performance or
achievements. Factors that could cause actual results to differ materially from those set forth in
the forward-looking statements contained in this Annual Report include, but are not limited to, the
risk factors set forth under Item 3. Key Information Risk Factors, Item 5. Operating and
Financial Review and Prospects and other factors found elsewhere in this Annual Report.
You are cautioned not to place undue reliance on forward-looking statements, which speak only
as of the date of this Annual Report. We are not under any obligation, and we expressly disclaim
any obligation, to update or alter any forward-looking statements, whether as a result of new
information, future events or otherwise, except to the extent that, as a result of fulfilling our
disclosure obligations under applicable securities laws and regulations, we determine that such an
update is necessary.
1
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived from, and is
qualified in its entirety by reference to our audited Consolidated Financial Statements and notes
thereto, which have been prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union (EU), as applicable to the Company. There are no
differences between IFRS as adopted by the EU and IFRS as adopted by the International Accounting
Standards Board (IASB). These standards differ in certain significant respects from generally
accepted accounting principles in the United States, commonly referred to as US GAAP. Note 40 to
our audited Consolidated Financial Statements describes the principal differences between IFRS and
US GAAP as they relate to us, and reconciles our net income and shareholders equity to US GAAP.
Selected consolidated financial data below is in accordance with IFRS except as otherwise
stated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended as at December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
|
|
|
US$(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts or as otherwise stated) |
|
INCOME STATEMENT DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
939 |
|
|
|
1,204 |
|
|
|
865 |
|
|
|
749 |
|
|
|
787 |
|
|
|
1,023 |
|
Cost of sales |
|
|
(629 |
) |
|
|
(807 |
) |
|
|
(595 |
) |
|
|
(542 |
) |
|
|
(587 |
) |
|
|
(716 |
) |
Gross profit |
|
|
310 |
|
|
|
397 |
|
|
|
270 |
|
|
|
207 |
|
|
|
200 |
|
|
|
307 |
|
Research and development expenses |
|
|
(62 |
) |
|
|
(79 |
) |
|
|
(63 |
) |
|
|
(69 |
) |
|
|
(92 |
) |
|
|
(113 |
) |
Selling and marketing expenses |
|
|
(116 |
) |
|
|
(149 |
) |
|
|
(101 |
) |
|
|
(100 |
) |
|
|
(113 |
) |
|
|
(165 |
) |
General and administrative expenses |
|
|
(68 |
) |
|
|
(87 |
) |
|
|
(64 |
) |
|
|
(77 |
) |
|
|
(90 |
) |
|
|
(111 |
) |
Litigation expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
Management severance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26 |
) |
Restructuring reversals (expenses) |
|
|
3 |
|
|
|
4 |
|
|
|
(8 |
) |
|
|
(62 |
) |
|
|
(90 |
) |
|
|
(28 |
) |
Other operating income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Goodwill amortization and impairment |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
(33 |
) |
|
|
(47 |
) |
|
|
(27 |
) |
Operating income (loss) |
|
|
67 |
|
|
|
86 |
|
|
|
26 |
|
|
|
(134 |
) |
|
|
(232 |
) |
|
|
(181 |
) |
Financial income |
|
|
8 |
|
|
|
10 |
|
|
|
8 |
|
|
|
10 |
|
|
|
20 |
|
|
|
28 |
|
Financial expense |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(71 |
) |
|
|
(8 |
) |
Share of profit (loss) of associates |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(8 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
Other non-operating income (expense), net |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(7 |
) |
|
|
(11 |
) |
|
|
(22 |
) |
|
|
55 |
|
Income (loss) before taxes |
|
|
71 |
|
|
|
91 |
|
|
|
19 |
|
|
|
(144 |
) |
|
|
(308 |
) |
|
|
(110 |
) |
Income tax benefit (expense) |
|
|
20 |
|
|
|
26 |
|
|
|
(13 |
) |
|
|
(15 |
) |
|
|
(9 |
) |
|
|
14 |
|
Net income (loss) |
|
|
91 |
|
|
|
117 |
|
|
|
6 |
|
|
|
(159 |
) |
|
|
(317 |
) |
|
|
(96 |
) |
Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders |
|
|
90 |
|
|
|
115 |
|
|
|
5 |
|
|
|
(161 |
) |
|
|
(321 |
) |
|
|
(100 |
) |
Minority interest |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
Net income (loss) per share attributable
to equity holders (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic |
|
|
0.15 |
|
|
|
0.19 |
|
|
|
0.01 |
|
|
|
(0.27 |
) |
|
|
(0.53 |
) |
|
|
(0.16 |
) |
- Diluted |
|
|
0.14 |
|
|
|
0.18 |
|
|
|
0.01 |
|
|
|
(0.27 |
) |
|
|
(0.53 |
) |
|
|
(0.16 |
) |
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended as at December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
|
|
|
US$(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts or as otherwise stated) |
|
Operating income (loss) under US GAAP (3) |
|
|
66 |
|
|
|
85 |
|
|
|
29 |
|
|
|
(119 |
) |
|
|
(257 |
) |
|
|
(117 |
) |
- Net income (loss) under US GAAP (3) |
|
|
89 |
|
|
|
114 |
|
|
|
11 |
|
|
|
(182 |
) |
|
|
(280 |
) |
|
|
(49 |
) |
- Net income (loss) per share under US GAAP (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic (3) |
|
|
0.14 |
|
|
|
0.18 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
|
|
(0.46 |
) |
|
|
(0.08 |
) |
- Diluted (3) |
|
|
0.14 |
|
|
|
0.18 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
|
|
(0.46 |
) |
|
|
(0.08 |
) |
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (4) |
|
|
108 |
|
|
|
138 |
|
|
|
83 |
|
|
|
(39 |
) |
|
|
(98 |
) |
|
|
(60 |
) |
Net cash from (used for) operating activities |
|
|
121 |
|
|
|
155 |
|
|
|
27 |
|
|
|
(10 |
) |
|
|
(63 |
) |
|
|
(23 |
) |
Net cash (used for) investing activities |
|
|
(84 |
) |
|
|
(108 |
) |
|
|
(26 |
) |
|
|
(17 |
) |
|
|
(47 |
) |
|
|
(65 |
) |
Net cash from (used for) financing activities |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
4 |
|
|
|
(35 |
) |
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
418 |
|
|
|
536 |
|
|
|
388 |
|
|
|
391 |
|
|
|
417 |
|
|
|
491 |
|
Trade accounts receivable, net |
|
|
183 |
|
|
|
235 |
|
|
|
149 |
|
|
|
155 |
|
|
|
145 |
|
|
|
189 |
|
Inventory, net |
|
|
108 |
|
|
|
138 |
|
|
|
116 |
|
|
|
99 |
|
|
|
97 |
|
|
|
140 |
|
Derivative financial instruments |
|
|
4 |
|
|
|
5 |
|
|
|
33 |
|
|
|
16 |
|
|
|
10 |
|
|
|
(5 |
) |
Other current receivables |
|
|
82 |
|
|
|
105 |
|
|
|
66 |
|
|
|
67 |
|
|
|
83 |
|
|
|
104 |
|
Total assets |
|
|
1,182 |
|
|
|
1,515 |
|
|
|
1,025 |
|
|
|
1,053 |
|
|
|
1,218 |
|
|
|
1,531 |
|
Minority interest |
|
|
13 |
|
|
|
16 |
|
|
|
11 |
|
|
|
12 |
|
|
|
15 |
|
|
|
17 |
|
Equity attributable to equity holders |
|
|
825 |
|
|
|
1,058 |
|
|
|
711 |
|
|
|
695 |
|
|
|
860 |
|
|
|
1,168 |
|
Total assets under US GAAP |
|
|
1,198 |
|
|
|
1,536 |
|
|
|
1,039 |
|
|
|
1,061 |
|
|
|
1,234 |
|
|
|
1,441 |
|
Shareholders equity under US GAAP (3) |
|
|
836 |
|
|
|
1,072 |
|
|
|
729 |
|
|
|
700 |
|
|
|
879 |
|
|
|
1,078 |
|
|
|
|
(1) |
|
Dollar amounts have been translated for convenience at the Noon Buying Rate (as defined below
in the section Exchange Rate Information and The European
Monetary System) on May 31,
2006, of US$1.00 = 0.78. |
|
(2) |
|
Basic net income per share attributable to our equity holders under IFRS and US GAAP is
calculated by dividing net income attributable to our equity holders by the weighted average
number of our ordinary shares outstanding during each period, in each case adjusted for a
fifty-for-one share split that took place on June 21, 2000. The weighted average number of
shares used in calculating the basic net income per share was 618,337,539, 606,672,060
605,658,965, 606,222,660 and 636,992,392 for the years ended December 31, 2005, 2004, 2003,
2002 and 2001. Diluted net income per share attributable to our equity holders under IFRS and
US GAAP is calculated in the same manner as basic net income per share, except that the
dilutive effect of the exercise of our outstanding share options and warrants is included in
the determination of the weighted average number of shares outstanding for each period. The
weighted average number of shares used in calculating the diluted net income per share was
634,794,569, 619,022,472, 605,658,965, 606,222,660, and 636,992,392 for the years ended
December 31, 2005, 2004, 2003, 2002 and 2001. |
|
(3) |
|
2003 and 2004 US GAAP figures have been restated. Please refer to Note 40 and 41 to our
Consolidated Financial Statements. |
|
(4) |
|
Adjusted EBITDA is defined as earnings attributable to our equity holders before interest
expense (net of interest income), provision for income taxes and depreciation, amortization
expense and impairment of assets. We believe that Adjusted EBITDA is a useful indicator of
operational strength and performance of our business. However, Adjusted EBITDA is not a
measurement of operating performance calculated in accordance with either IFRS or US GAAP, and
therefore should not be considered a substitute for operating income or net income as a
measure of profitability, or a substitute for cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with IFRS or US GAAP. Because all
companies do not calculate EBITDA identically, the presentation of Adjusted EBITDA contained
herein may not be comparable to similarly titled measures provided by other companies. |
3
The reconciliation of Adjusted EBITDA with operating income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
|
|
|
US$ (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Operating income (loss) |
|
|
67 |
|
|
|
86 |
|
|
|
26 |
|
|
|
(134 |
) |
|
|
(232 |
) |
|
|
(181 |
) |
Depreciation, amortization and impairment |
|
|
41 |
|
|
|
52 |
|
|
|
57 |
|
|
|
95 |
|
|
|
134 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
108 |
|
|
|
138 |
|
|
|
83 |
|
|
|
(39 |
) |
|
|
(98 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Dollar amounts have been translated for convenience at the Noon Buying Rate on May 31,
2006, of US$1.00 = 0.78. |
Exchange Rate
Information and The European Monetary System
For your convenience,
this Annual Report contains translations of certain euro amounts into US
dollars. Unless otherwise indicated, US dollar amounts have been translated from euros at the rate
of US $1.00 = 0.78, the Noon Buying Rate for the euro on May 31, 2006. The Noon Buying
Rate is the noon buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York. This does not mean that we
actually converted these amounts into US dollars at that rate, and you should not assume that they
could have been converted at that or any other rate.
Fluctuations in the exchange rate between the euro and the US dollar may affect the US dollar
price of our American Depositary Shares (ADSs) on the NASDAQ National Market.
The following table shows the euro/U.S. dollar exchange rates based on the Noon Buying Rate
expressed in euros per US dollar for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euros |
|
|
|
Period- |
|
|
Average |
|
|
|
|
|
|
|
|
|
end Rate |
|
|
Rate |
|
|
High |
|
|
Low |
|
2001 |
|
|
1.12 |
|
|
|
1.12 |
|
|
|
1.19 |
|
|
|
1.05 |
|
2002 |
|
|
0.95 |
|
|
|
1.06 |
|
|
|
1.16 |
|
|
|
0.95 |
|
2003 |
|
|
0.79 |
|
|
|
0.88 |
|
|
|
0.97 |
|
|
|
0.79 |
|
2004 |
|
|
0.74 |
|
|
|
0.80 |
|
|
|
0.85 |
|
|
|
0.73 |
|
2005 |
|
|
0.84 |
|
|
|
0.80 |
|
|
|
0.86 |
|
|
|
0.74 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
0.84 |
|
|
|
0.84 |
|
|
|
0.85 |
|
|
|
0.83 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
|
|
0.82 |
|
|
|
0.82 |
|
|
|
0.83 |
|
|
|
0.81 |
|
February |
|
|
0.84 |
|
|
|
0.84 |
|
|
|
0.84 |
|
|
|
0.83 |
|
March |
|
|
0.82 |
|
|
|
0.83 |
|
|
|
0.84 |
|
|
|
0.82 |
|
April |
|
|
0.79 |
|
|
|
0.81 |
|
|
|
0.83 |
|
|
|
0.79 |
|
May |
|
|
0.78 |
|
|
|
0.78 |
|
|
|
0.79 |
|
|
|
0.78 |
|
RISK FACTORS
Risks Related to Our Business
Slow growth or downturns in the wireless communications industry may adversely affect our business.
Our business is significantly affected by trends in the wireless communications industry
because a substantial portion of our revenues is derived from sales of wireless products and
services. In 2005, sales of wireless products and services accounted for approximately 70% of our
revenues, as compared to 74% in 2004. The wireless communications industry experienced positive
growth in 2005 as demand for wireless products and services continued to increase. There can be no
assurance, however, that this growth will
4
continue, or that the wireless communications industry will not experience dramatic downturns
similar to those that occurred in the years 2001 and 2002.
Due to the competitive market environment, suppliers to the wireless communications industry
are under constant pressure to reduce selling prices, and while we endeavor to provide a broad
product range to our customers and continually add new high-end products, a reduction in the
average selling price may continue to affect our profitability. In addition, if wireless operators
delay making the necessary investments for the introduction of new wireless systems and
technologies, our business may be adversely affected due to reduced demand for our products.
The markets that we have targeted for a substantial part of our future growth are in the early
stages of development, and may not develop rapidly or at all.
Many of the markets that we target for our future growth are currently small or non-existent
and need to develop for us to achieve our growth objectives. If some or all of these markets do not
develop, or if they develop more slowly than we anticipate, then our business may be adversely
affected. For example:
|
|
|
We are seeking to take advantage of the development of new markets for wireless
communications products and services, including mobile commerce, mobile banking and mobile
Internet services. These markets are still just starting to develop. |
|
|
|
|
We are developing chip card products and services for the financial services market. Chip
card technology has not yet been widely adopted by the financial services industry outside
of France, Germany and the United Kingdom, largely due to the cost of building the necessary
infrastructure, the need for more internationally compatible standards and the relatively
limited capabilities of all but the newest chip cards. |
|
|
|
|
We are investing in identification and security networks products and services, but so
far we have not deployed these products and services on a widespread basis internationally.
Some of our businesses in these markets remain in early-stage operations, and we do not know
whether or when these businesses will be significantly profitable. |
Our success depends upon recruiting and retaining key personnel.
Our products, services and technologies are complex, and our future growth and success depend
to a significant extent on the skills of capable engineers, operators, managers and other key
personnel. Maintaining our know-how, and the continued re-training of currently competent
personnel, are also necessary to maintain an appropriate level of innovation and technological
advancement. The ability to recruit, retain and develop quality personnel is a critical success
factor for us.
We believe that having skilled and stable management is important to our success. We will
undergo certain management changes as part of our integration with Gemalto (see Item 10. Additional Information Material Contracts). We cannot be certain that such changes will not adversely affect our
business.
Chip card technology may not be adopted in new standards for the markets that we target, such that
we may lose some of our existing customers or not be able to obtain new customers.
Our ability to grow depends significantly on whether government and industry organizations
adopt chip card technology as part of their new technology standards. If these entities do not
adopt chip card technology, we might not be able to succeed in some of the new markets we are
targeting, or we may lose our existing customers.
In order for us to achieve our growth objectives, chip card technology must be adopted in a
variety of areas, including in:
|
|
|
certain wireless communication devices and networks that are currently not equipped to use chip cards; |
|
|
|
|
bank credit and debit card systems, which in most countries still use magnetic stripe cards as their primary technology; |
|
|
|
|
computer equipment, which must include chip card readers as standard equipment if the use
of chip cards for Internet and other applications is to become common; |
|
|
|
|
digital signature information technology security systems; and |
5
|
|
|
identity card programs. |
The decisions of standard setting bodies that may decide whether to adopt chip card technology
are likely to be based on factors such as:
|
|
|
the cost of adopting chip card technology relative to alternatives; |
|
|
|
|
the degree of security provided by chip card technology relative to alternatives; |
|
|
|
|
the development of competing technologies to provide security and premium value services; |
|
|
|
|
the relative ease of implementing chip card technology; and |
|
|
|
|
whether chip card technology becomes generally accepted by businesses and consumers. |
Most of our products are subject to competition from other technologies. These technologies
include magnetic stripe payment cards, non-chip based authentication, certain wireless standards
that do not incorporate a SIM card into the network architecture, and non-portable security devices
built into PC motherboards. We believe the chip card has certain advantages, although there may be
viable alternatives to our products.
We
may need to develop further our position as a provider of software and services to earn higher
margins from our technology.
The development of sophisticated operating systems and applications can represent both a
potentially high-margin business and a key driver of more advanced, higher-margin chip card sales.
Although we have had some successes positioning ourselves as a provider of services and systems, we
cannot be assured that we will be successful in developing a profitable business line, or that we
will be able to capture a significant share of the market for the sophisticated services and
systems that we believe are likely to produce more attractive margins in the future.
We may fail to manage optimally our inventories of microcontroller chips or suffer disruptions in
our supply chain.
Our technology is based principally on microcontroller chips. The wireless communications
industry has been volatile in recent years, experiencing rapid growth in 2000, a downturn in 2001
and 2002, signs of growth in 2003 and improved growth in 2004 and 2005. We have had periods of
difficulty managing our inventory levels of microcontroller chips. Failures to manage our inventory
can cause us to lose business to competitors, and have lower margins on existing sales. Managing
our inventory levels is made more difficult by the fact that the lead-times for the procurement of
semiconductors is significant compared to the volatility of demand from our customers. Although in
2005 we managed our inventory at more acceptable levels, managing our inventory supply in the
future, particularly if the industry undergoes significant and rapid change, will remain a
challenge to our procurement strategy.
In addition, if the wireless communications industry experiences a sudden upturn, with
significant levels of growth in the near future, we will need to secure adequate supplies of
microcontroller chips to expand our production. If we are not able to secure these supplies, or
experience supply problems with the newest generation of microcontroller chips that generate our
highest margins, we may record lower revenues and profits and lose market share to competitors that
have secured adequate chip supplies. There may be supply limitations in the future that could
negatively affect our ability to procure microcontroller chips.
In 2005, we purchased the significant majority of our microcontroller chips from three
suppliers. While there are several chip suppliers in the market, the failure by one or more of our
main suppliers to continue to meet our needs could have a material adverse affect on our business.
Major suppliers in this industry include Atmel, Infineon, ST Microelectronics, Philips and Samsung.
We must manage our chip card production capacities optimally in order to be profitable.
Because our activities are based on orders varying in size and requiring different delivery
schedules, we need to accurately anticipate demand from our customers for our products and
effectively allocate our production capacity to such demand in order to meet delivery requirements,
best recapture our fixed costs and maximize our operating margins. In particular, we must make
judgments about when and how to allocate production capacity so as to maximize the likelihood that
we will produce chip cards with the highest margins and operate our facilities and equipment at a
high rate of utilization. Any failure to forecast accurately demand,
6
allocate
our capacity optimally or run our operations efficiently may adversely affect our
revenue and profitability. In addition, we must accurately forecast demand for products in order
to source chips. If we do not accurately forecast our need for chips,
we may be left with high
chip inventories that we may not be able to use or may need to use to produce products that
could have been produced with less powerful and costly chips, which may lead us to record lower
profits on these products.
Also, we may become responsible for indirect damages resulting from our breach of contract
including, without limitation, penalties for failures to meet delivery schedules. If this were to
occur, among other things, we would likely need to defend against claims, which could be time
consuming and expensive, and we may be found liable for breach of
contract.
If our products or production facilities fail to satisfy the standards and criteria of various
industry organizations and bodies, particularly in the financial market, we may not be eligible to
compete for supply contracts to members of such organizations and bodies, which include some of our
important customers.
If we are unable to keep up with rapid changes in chip card technology, our existing products and
services may no longer be competitive or could become obsolete.
The market for our products and services is marked by rapid technological change because of
frequent new product introductions and chip card technology enhancements, uncertain product life
cycles, changes in client demands and evolving industry standards. New products and services based
on new or improved technologies or new industry standards can render existing products and services
obsolete and unmarketable. To succeed, we need to enhance continually our current products and
service offerings and develop new products and services on a timely basis to keep pace with
developments related to chip card technology and to satisfy the increasingly sophisticated
requirements of our customers. Any delays in developing and releasing enhanced or new products and
services, or in keeping pace with continuous technological change, may cause us to lose our
existing customer base or prevent us from expanding it, which could adversely affect our business.
The process of developing our products and services is highly complex and requires significant
continuing development efforts and investments. Our investments in research and development have
been considerable, and while they have declined in recent years, they may need to increase. These
expenses may adversely affect our operating results and financial condition.
Many of our major customers, particularly in our financial services segment, belong to powerful
industry organizations and bodies.
Many of the industry organizations and other bodies to which our customers belong have issued
their own sets of standards and criteria relating to chip card manufacturers facilities and
products, which we must satisfy in order to be eligible to supply products and services to these
customers. We make significant investments in order to meet these standards and criteria, which
vary depending on the organization or body, including investments required to satisfy changes
adopted from time to time by these organizations and bodies in their respective standards and
criteria. Further investments may be costly, and if we are unable to continue to meet these
standards and criteria, we may become ineligible to provide products and services that have
constituted in the past an important part of our revenue and profitability.
Our quarterly financial results fluctuate and are difficult to predict, and if our future results
are below the expectations of investors, the price of our shares or ADSs may decline.
Our operating results have varied from quarter to quarter, and we anticipate that this pattern
will continue. This variability makes it difficult to use a particular quarters results of
operations as an indicator of possible trends.
Although these quarterly variations are a historical part of our business, they could affect
the market price of our shares or ADSs. In particular, if our results of operations in any quarter
are below the expectations of investors, the trading price of our shares or ADSs may decrease
significantly.
In addition to general economic factors and factors that affect companies generally, a number
of factors specific to us are likely to cause quarterly variations, including:
|
|
|
the mix of products and services that we are able to sell, including in particular,
whether we are able to increase the sales of our higher margin product and services, such as
those we sell in the wireless communications market; |
7
|
|
|
the geographical mix of our sales, including the relative extent of our growth in
countries where our products and services are sold at the most attractive prices; |
|
|
|
|
costs related to possible acquisitions of technology or businesses, including costs
related to the integration of acquired businesses into our operations; and |
|
|
|
|
the level of success we achieve in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including third party software
developers, systems integrators and other implementation partners. |
In prior years, we experienced seasonal fluctuations in our operating results but cannot be
sure such fluctuations will continue in the same or another pattern in the future.
The period between our initial contact with a potential customer and the sale of our products or
services to that customer tends to be long and may be subject to delays which may have a negative
affect on our revenues.
The period between our initial contact with a potential customer and the purchase of our
products and services is often long and subject to delays associated with the budgeting, approval
and competitive evaluation processes that frequently accompany significant capital expenditures. A
lengthy sales cycle may have a negative effect on the timing of our revenues, which may cause our
quarterly operating results to fall below investor expectations. A customers decision to purchase
our products and services is often discretionary, involves a significant commitment of resources,
and is influenced by customer budgetary cycles. To sell our products
and services successfully, we
generally must educate our potential customers regarding the uses and benefits of our products and
services, which can require the expenditure of significant time and resources, however, there can
be no assurance that this significant expenditure of time and resources will result in actual sales
of our products and services.
If our products contain defects or if we make errors in providing services, we could lose customers
and revenues and become subject to costly claims.
Complex chip card products such as ours can contain errors and defects, particularly when
first introduced or when new versions or enhancements are released. Similarly, our services can
involve decisions that result in our customers making significant investments and changes to their
business organizations or processes. Serious defects or errors in our products or services could
result in lost revenues or a delay in market acceptance, would be detrimental to our reputation and
could cause us to lose existing customers or prevent us from securing new ones, which would harm
our business, operating results and financial condition.
Defects or other performance problems in our products and services could also result in
financial or other losses to our customers, in which case our customers could seek compensation for
losses from us. If these kinds of legal claims were to be made, they could be expensive, time
consuming and costly to defend against and could harm our reputation, which in turn could result in
a loss of our customers and a decrease in our revenues. Although our sales and services agreements
typically contain provisions designed to limit our exposure to such claims, existing or future laws
or unfavorable judicial decisions could potentially limit the effectiveness of these provisions.
If our strategic relationships terminate or do not develop, we may lose important sales and
marketing opportunities.
We have established strategic relationships, including joint ventures with telecommunications
carriers, third party software developers, financial institutions and several government agencies
and organizations.
These relationships expose our products and services to potential customers to whom we may not
otherwise have access. In addition, these relationships provide us with insights into new
technology and with access to third-party service providers that our customers can use for
implementation assistance. These entities are not always obligated to continue their business
relations with us. These business relations could be terminated, and they may either work instead
with our competitors or become new competitors of ours. If our strategic relationships or joint
ventures are terminated, we might lose important sales and marketing opportunities.
Challenges to our intellectual property rights could cause us to incur costly litigation, and if we
are not successful, could result in our losing valuable assets or market share.
Our success depends, in part, upon our proprietary technology and other intellectual property
rights. If we are not able to defend successfully our industrial or intellectual property rights,
we may lose rights to use technology that we need to develop our business,
8
which may cause us to lose market share, or we might be required to pay significant license
fees for the use of such technology or might be unable to use such technology at all. To date, we
have relied primarily on a combination of patent, trade secret and copyright laws, as well as
nondisclosure and other contractual restrictions on copying, reverse engineering and distribution,
to protect our proprietary technology. We regularly prepare patent applications for technology
related to our chip cards. There can be no assurance that these applications, laws and contractual
restrictions will be successful.
Litigation to enforce our intellectual property rights or protect our trade secrets could
result in substantial costs and may not be successful, which could result in costly judgments,
license fees or injunctions. Any loss of or inability to protect intellectual property in our
technology could seriously harm our business, operating results and financial condition. In
addition, the laws of certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws in the European Union or the United States. Our means of protecting
our intellectual property rights in the European Union, the United States or any other country in
which we operate, may not be adequate to fully protect our intellectual property rights.
Similarly, if third parties claim that we infringe their intellectual property rights, we
may be required to incur significant costs and devote substantial resources to the defense of
such claims, and if we are unsuccessful, we could suffer costly judgments and injunctions that
could materially adversely affect our business, operating results or financial condition.
We
might be forced to change our product and service offerings or be forced to pay higher costs
if the third-party technology that we use in our products changes or if the price of such
technology increases.
Many of our products integrate third-party technologies that we license or otherwise obtain
the right to use, including:
|
|
|
|
software relating to chip card operating systems; |
|
|
|
|
|
security and cryptographic technology for chip card operating systems, which help prevent
unauthorized parties from accessing with or tampering with information; and |
|
|
|
|
|
public key infrastructure technology that is used for Internet transactions and
identification in corporate security networks. |
Technology providers frequently change their products and cease supporting prior versions of
their products. Should such cessation of support occur, we cannot be assured that we will be able
to effectively adapt our products and services to accommodate such changes. If not, we may have to
change the features of our products and services or to discontinue some or all of them. Some
changes in technology may be accompanied by significant price increases that cannot be passed on to
our customers, which could increase our costs and materially affect our business, financial
condition or results of operation.
We have multinational operations that are subject to risks inherent in international operations,
including currency exchange rate fluctuations.
We conduct our business in all regions of the world, including in many countries outside the
United States and the European Union. As a result, we are subject to political, regulatory and
commercial risks inherent in international operations, including the risk of currency exchange rate
fluctuations, particularly in relation to the U.S. dollar, the British pound, the Chinese yuan and
the Singapore dollar.
Our operations are subject to the risks associated with international operations, which
include:
|
|
|
|
a slowdown or a recession in global, regional or national economic growth; |
|
|
|
|
|
tariffs and trade barriers; |
|
|
|
|
|
exchange controls; |
|
|
|
|
|
fluctuations in national currencies; |
|
|
|
|
|
social and political risks; |
|
|
|
|
|
national and regional labor disputes; |
9
|
|
|
|
required compliance with a variety of foreign laws, regulations and standards; and |
|
|
|
|
|
the difficulty of enforcing legal claims and agreements through certain legal systems. |
Our Identity and Security business is, in part, dependent upon government contracts. Those
contracts and related opportunities can be subject to changes in legislation and government policy
and initiatives. Such changes can be difficult to predict with any significant level of
reliability.
To the extent that we incur costs in one currency and make our sales in another, our profit
margins may be affected by changes in the exchange rates between the currencies. A substantial part
of our expenses is in euros, while a significant amount of our sales is in U.S. dollars and other
currencies. The U.S. dollar, and currencies whose exchange rates are tied to the U.S. dollar, have
experienced certain declines and limited recoveries in the recent past. Although our general policy
is to hedge against much of our currency fluctuation risks, given the volatility of currency
exchange rates and the costs of hedging against them, there is no assurance that we will be able to
manage effectively these risks.
Furthermore, our regional businesses are subject to cyclical fluctuations in the economies in
which they operate. Any of the risks above could adversely affect our results of operations.
In 2005, we earned 5% of our revenues in China, and we expect to continue to earn a material
portion of our revenues in China. Conducting business and manufacturing activities in China is
subject to special risks that may not arise in other countries, including:
|
|
|
|
the possible failure to adopt, or the adoption of inconsistent or ineffectual,
market-oriented economic reforms by the government; |
|
|
|
|
|
uncertainties regarding the interpretation and enforcement of laws and regulations; and |
|
|
|
|
|
the devaluation of the local currency or the imposition of restrictions on currency conversion or expatriation of profits. |
We operate in many jurisdictions with highly complex and variable tax regimes, and changes in tax
rules and the outcome of tax assessments and audits could cause a material effect on our financial
results.
We operate in many jurisdictions with highly complex and variable tax regimes. Changes in tax
rules and the outcome of tax assessments and audits could have a material effect on our financial
results. The tax rates that we are subject to are variable. Our effective tax rate in any
jurisdiction may depend on changes in our level of operating profit or in the applicable rate of
taxation there, as well as on changes in estimated tax provisions due to new events. We currently
enjoy tax benefits in certain jurisdictions. These benefits may not be available in the future due
to changes in the relevant tax rules, which could cause our effective tax rate to increase in the
future.
Future acquisitions may adversely affect our business.
Our strategy to achieve growth may lead us to make significant acquisitions of businesses that
we believe to be complementary to our own. Our strategy also depends in part on our ability to
identify suitable acquisition targets, finance their acquisitions and obtain required regulatory
and other approvals. Future acquisitions may require us to use significant financial resources, to
make potentially dilutive issuances of our equity securities, to incur debt and to incur
impairments related to goodwill and other intangible assets. Acquisitions involve numerous other
risks, including difficulties in integrating the operations, technologies and products acquired and
the employees of the acquired businesses, the diversion of managements attention from other
business concerns, the risk of entering geographic markets in which we have little or no prior
experience, and the potential loss of key employees of acquired businesses.
We face risks relating to certain partnerships, joint ventures and subsidiaries that we do not
control.
Some of our activities are, and will in the future be, conducted through entities that we do
not entirely control or in which we have a minority interest, such as in certain joint ventures.
Under the governing documents or agreements for these entities, certain key matters such as the
approval of business plans require the agreement of our partners and, in some cases, decisions
regarding these matters may be made without our approval. There is also a risk of disagreement or
deadlock among the stakeholders of jointly controlled entities
10
and that decisions contrary to our interests will be made. These factors could affect our
ability to pursue our stated strategies with respect to those entities or have a material adverse
effect on our results or financial condition.
The integration of us and Gemalto may be difficult and expensive and may not result in the benefits
that we currently expect.
We have executed an agreement to combine our business with Axalto Holding N.V., to be renamed
Gemalto. The combination involves the integration of two large and complex businesses that
currently operate independently. The achievement of expected synergies from the combination will
require the integration of various aspects of the business of Gemalto and our business.
Gemaltos and our goal in integrating our operations is to increase the revenues and earnings of
the combined businesses through cost savings, including potential rationalization, planning and
operational benefits and, as a combined group, to increase our ability to satisfy the demands of
our customers. In so doing, we may encounter substantial difficulties in integrating our
operations and fail to achieve the increased revenues, earnings, cost savings and operational
benefits that are expected to result from the combination, and we could incur substantial
costs as a result of, among other things:
|
|
|
|
loss of key employees; |
|
|
|
|
|
inconsistencies in standards, controls, procedures and policies, business cultures and
compensation structures between us and Gemalto and the need to implement, integrate and harmonize
various business-specific operating procedures and systems, as well as the financial, accounting,
information and other systems of us and Gemalto; and |
|
|
|
|
|
diversion of managements attention from its other responsibilities as a result of the need
to deal with integration issues. |
The diversion of management attention and any difficulties encountered from integrating the
respective businesses of us and Gemalto could increase our costs or reduce our revenues, earnings
and operating results. For these reasons, we and Gemalto may fail to complete successfully the
necessary integration or realize any of the benefits and synergies that we hope for. If they are
achieved, actual cost savings and operational benefits may be lower than we and Gemalto currently
expect and may take a longer time to achieve than we and Gemplus currently expect.
Regulatory authorities have imposed, and may impose additional conditions on our combination that
could reduce the expected benefits of the combination and may affect the price of our securities.
In
order to secure the approval of our combination with Axalto Holding
N.V., we agreed with the European
Commission to make certain undertakings in respect of our operations. These undertakings
involve a commitment to broadly license certain intellectual property to
competitors under fair and reasonable terms for
ten years, and to provide certain access to information relating to our over-the-air wireless
network gateway software for eight years. While we do not believe that compliance with these
undertakings will have a material adverse effect on our operations, the financial impact on us, and
any impact on the price of our securities, is difficult to predict with certainty.
In addition, antitrust enforcement agencies outside of the European Union frequently review
transactions such as the combination. At any time before or after the consummation of the
transaction, an antitrust enforcement agency in a jurisdiction may take action under the applicable
law of the jurisdiction as it deems necessary or desirable in the public interest, including
seeking to enjoin our combination transaction or otherwise seeking to impose conditions on the
operation of our businesses. Private parties may also bring legal action under the antitrust laws
under some circumstances. Although we believe that the risk is not significant, antitrust, other
regulatory agencies or private parties in a jurisdiction where we or
Gemalto do not have unconditional clearance could take action under applicable law that is adverse to us.
Change of control provisions in our agreements may be triggered upon a combination with Gemalto and
may lead to adverse consequences for us, including the loss of significant contractual rights and
benefits, the termination of joint venture and/or licensing agreements or the need to renegotiate
financing agreements.
We may be a party to joint ventures, licenses and other agreements and instruments that
contain change of control provisions that may be triggered upon the completion of the proposed
combination with Gemalto. Agreements with change of control provisions typically provide for, or
permit the termination of, the agreement upon the occurrence of a change of control of one of the
parties or, in the case of debt instruments, require repayment of all outstanding indebtedness.
These provisions, if any, may be waived with the consent of the other party and we will consider
whether we will seek these waivers. In the absence of these waivers, the operation of
11
the change of control provisions, if any, could result in the loss of significant contractual
rights and benefits, the termination of joint venture agreements and licensing agreements or
require the renegotiation of financing agreements.
In addition, employment agreements with members of our senior management and other of our
employees may contain change of control clauses providing for compensation to be paid in the event
the employment of these employees is terminated, either by us or by those employees, following the
consummation of the proposed combination. These payments, if triggered, could be substantial and
could adversely affect our results of operations in the period they become payable.
Our operating results can vary significantly due to impairment of goodwill and other intangible
assets arising from acquisitions, as well as to impairment of assets due to changes in the business
environment.
As of December 31, 2005, the net value reported on our Consolidated Balance Sheet for goodwill
was
90.8 million
(December 31, 2004:
28.2 million, December 31, 2003: 37.7 million). Because the
market for our products is characterized by rapidly changing technologies, and because of
significant changes in our industry, our future cash flows may not support the value of goodwill
and other intangibles in our balance sheet. We are required to regularly test goodwill and to
assess the carrying values of intangible and tangible assets when impairment indicators exist. As a
result of such tests, we could be required to book an impairment in our statement of income if the
carrying value in our balance sheet is in excess of the fair value. The amount of any potential
impairment is not necessarily predictable since it depends on our estimates of projected market
trends, results of operations and cash flows. Any potential impairment, if required, could have a
material adverse effect on our results of operations.
Changes in International Financial Reporting Standards could affect our reported results.
We have been preparing our consolidated financial statements and reporting our results in
accordance with International Financial Reporting Standards (IFRS) since 2000. Some changes in
IFRS may have a significant impact on our reported operating results.
The International Accounting Standards Board regularly revises current International Financial
Reporting Standards with a view to increasing international harmonization of accounting rules. This
process of amendment and convergence of worldwide accounting rules could result in significant
amendments to existing rules. It is not possible to predict the effect on our reported results
of any such changes which may be made in the future, or whether such rule changes would be
retrospective, potentially requiring us to restate past reported results.
Risks Related to Our Industry
Our markets are highly competitive and competition could harm our ability to sell products and
services and could reduce our margins and market share.
The market for chip card products and services is rapidly changing and intensely competitive.
We expect competition to increase as the industry grows and as some chip card technology matures.
Intense competition has led to increased pricing pressures on our products which, in turn, has
resulted in lower price margins on those products. We may not be able to compete successfully
against current or future competitors, or may not be able to make a profit at the prices we would
need to sell products to be competitive. The competitive pressures facing us may harm our business,
operating results and financial condition.
Our current principal competitors include chip card product and service providers such as
Giesecke & Devrient, Oberthur Card Systems, Sagem Orga and ST Incard. In 2005, this industry also
saw moves towards concentration. Sagem purchased German chip card manufacturer Orga Kartensysteme
in 2005. Also in 2005, M-Systems, a flash memory maker, took over Spanish smart card maker,
Microelectronica Espanola. In 2005, we entered into a Combination Agreement with Axalto Holding
N.V. (Axalto) pursuant to which our Company and Axalto would be combined. See Item 4.
Information on the CompanyHistory and Development of the Company.
There have also been new entrants into the industry with low-cost operating models, especially
in China, with aggressive pricing policies that threaten our market share and our profitability,
and which are gaining ground in emerging markets. As the market for chip card products and services
in the wireless, financial services and Internet security industries grows, and as these markets
converge, we may experience additional competition from companies that are currently our suppliers,
customers and strategic partners, including:
|
|
|
operating system developers, such as Microsoft and IBM;
|
12
|
|
|
electronic security product and service providers, such as RSA, Vasco and Verisign; |
|
|
|
|
|
wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson; |
|
|
|
|
|
systems integrators, such as IBM, Siemens and EDS; |
|
|
|
|
|
microcontroller chip manufacturers, such as STMicroelectronics, Infineon, Philips, Atmel,
Renesas, Samsung and Sony; and |
|
|
|
|
|
wireless infrastructure software providers, such as SmartTrust. |
Some of our competitors and potential competitors may have larger technical staffs, larger
customer bases, more established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we do. Our competitors may be able to develop
products and services that are superior to our products and services, achieve greater
customer acceptance or which have significantly improved functionality as compared to our existing
and future chip card products and services. In addition, our competitors may be able to negotiate
strategic relationships on more favorable terms than we have been or are able to negotiate. Many of
our competitors may also have well-established relationships with our existing and prospective
customers. Increased competition may result in reduced margins, loss of sales or decreased market
shares, which in turn could harm our business, operating results and financial condition.
Communications networks may not expand as a commerce and business medium.
Our growth may suffer if wireless devices do not become a widely used method of accessing the
Internet for commercial transactions.
The acceptance and use of wireless communications networks for Internet commerce, mobile
banking and mobile commerce could be limited by a number of factors, including:
|
|
|
inadequate development of the necessary network infrastructure; |
|
|
|
|
|
inconsistent quality of service; |
|
|
|
|
|
excessive cost of high-speed service; |
|
|
|
|
|
concerns about transaction security and fraud or theft of stored data and information
communicated over wireless communications networks; |
|
|
|
|
|
increased government regulation and the taxation of transactions conducted over wireless
communications networks; and |
|
|
|
|
|
delays in development or adoption of new standards or protocols to handle increased
levels of activity on wireless communication networks. |
In addition, companies and government agencies that have already invested substantial
resources in other methods of conducting business may be reluctant to adopt new methods.
Future regulations may be enacted that either directly restrict our business or indirectly affect
our business by limiting the growth of Internet and mobile commerce.
Our products and services are sold in numerous countries around the world, each of which
imposes regulations affecting our operations, including product controls, trade restrictions,
tariffs and charges, indirect taxes and labor and other social controls. Many countries impose regulatory
restrictions or bans on the use or transfer of cryptography, which is an essential part of our chip
card products and services. Regulation of the Internet in general, and of e-commerce, and mobile
commerce in particular, is largely unsettled.
As Internet and mobile commerce evolve, we expect that various governmental entities will
enact or revise laws, rules and regulations covering issues such as user privacy, consumer fraud,
pricing, content and quality of products and services and the use of cryptography. Such laws, rules
or regulations may increase the costs or administrative burdens of doing business using the
Internet
13
and wireless communications networks and may cause companies to seek alternative means of
transacting business in those countries. The limitations on the use and transfer of cryptography
and the enactment of laws increasing the cost or burdens of using the Internet or wireless
communications would limit the market for our products and services which could have an adverse
effect on our business, financial condition and operations.
New developments may render our chip card encryption technology inadequate or ineffective.
Chip cards use cryptographic technology to secure transactions and exchange confidential
information. Most types of chip cards are equipped with secret keys that are required to encrypt
and decode messages through the application of algorithms. The security afforded by this technology
depends on the integrity of a users secret key and the complexity of the algorithms used to
encrypt and decode information. Any significant advance in techniques for attacking cryptographic
systems, including the successful decoding of cryptographic messages or the misappropriation of
private keys, could result in a decline in the security of our technology and affect the markets
acceptance of, or demand for, our products which could have an adverse effect on our business,
financial condition and results of operation.
The role of chip cards may be relegated to that of simple identity tokens with limited additional
added value.
The primary role of chip cards has historically been to ensure authentication, and they are
widely used as identity tokens. Chip cards can also provide additional value with on-board
applications running in a stand-alone or in a client-server mode. This value is created if:
|
|
|
chip cards are technically enabled to play an effective role in applications; and |
|
|
|
|
|
applications relying on chip cards are actually developed and used. |
If an insufficient number of applications rely on chip cards, chip cards risk having their
role reduced to that of simple identity tokens, providing limited additional value. In these
circumstances, the value of chip cards would not grow, which could materially adversely affect our
business, operating results and financial condition.
Risks Related To Trading of Our Shares and ADSs
Technology-related stock prices are especially volatile, and this volatility may depress our stock
price, and the trading in our shares and ADSs often experiences low volumes.
Because we operate in the highly volatile technology sector, the market price of our shares
and ADSs is likely to continue to be highly volatile. In addition, there is often low market volume
in our shares and ADSs.
If we are unable to meet the continued listing standards of the exchanges or quotation systems
on which our securities trade, or if remaining as a publicly listed company is not considered
economically justified, we may delist and investors may not be able to resell their shares or ADSs
easily.
Because several of our shareholders own a large percentage of our voting stock, other shareholders
effective voting power may be limited.
As of April 25, 2006, Texas Pacific Group, members of the Quandt family, and Groupe Industriel
Marcel Dassault owned or controlled approximately 25%, 18% and 4% of our shares, respectively, or
approximately 23%, 16% and 4% on a fully diluted basis, respectively. As of June 2, 2006,
affiliates of Texas Pacific Group and the Quandt family had transferred all of their shares in our
Company to Axalto, now named Gemalto. If some or all of our significant shareholders act together,
they may have the ability to control matters submitted to our shareholders for approval, including
the election and removal of directors and the approval of any merger, consolidation or sale of all
or substantially all of our assets. This potential concentration of control can affect the value of
our
14
traded securities or limit the effective voting power of small shareholders. In addition,
pursuant to our combination agreement with Axalto Holding N.V., to be renamed Gemalto, a
significant percentage of our shares will be held by that company (see Item 10. Additional Information Material
Contracts).
If we are deemed a passive foreign investment company, certain unfavorable U.S. tax rules may
apply.
Recent increases in our market capitalization have reduced the risk that comparatively minor
changes in our assets or share price could result in our becoming a passive foreign investment
company or PFIC for U.S. tax purposes for reasons outside our control. If there is a decline in
our market capitalization in the future, this risk could become more significant. Certain
unfavorable U.S. tax rules apply to shareholders in companies that are PFICs for even a single
year. See Item 10. Additional Information Taxation United States Federal Income Tax
Considerations Passive Foreign Investment Company Considerations.
Fluctuations in the exchange rate between the U.S. dollar and the euro may reduce the U.S. dollar
market value of our American depositary shares as well as the U.S. dollar value of any dividends we
pay.
We will pay any cash dividends on our shares or American depositary shares in euros, and the
American depositary share depositary will convert such euro amounts into dollars to pay any
dividends on our American depositary shares. Exchange rate movements will affect the dollar value
of these dividends as well as any other dollar distributions paid to you if you hold our American
depositary shares. Exchange rate movements will also affect the market value of our American
depositary shares.
If you hold our American depositary shares rather than our shares, you might not be able to
exercise all the rights provided in our bylaws (statutes) to holders of our shares.
The American depositary share depositary may use discretion to take action or exercise rights
on behalf of each American depositary share holder in certain circumstances, including potentially
in the exercise of rights that holders of American depositary shares may have to subscribe for or
acquire new shares of ours. In addition, holders of our American depositary shares might only be
able to exercise their voting rights by instructing the American depositary share depositary to
vote on their behalf, and, therefore, the process for exercising voting rights may take longer for
holders of our American depositary shares than for holders of our shares. For this reason, a
deadline may be set by the American depositary share depositary by which it must receive voting
instructions from all holders of our American depositary shares. The American depositary share
depositary might not exercise voting rights with regard to any American depositary shares for which
it does not receive voting instructions by the deadline.
As a foreign private issuer, we are permitted to file less information with the Securities and
Exchange Commission than a U.S. domestic issuer would, which may limit the information available to
holders of our securities.
As a foreign private issuer, we are exempt from rules under the Exchange Act that impose
certain disclosure and procedural requirements for the solicitation of proxies for shareholder
meetings. In addition, our officers, directors and significant shareholders are exempt from the
reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and
related rules with respect to their purchases and sales of our securities. Moreover, we are not
required to file periodic reports with the Securities and Exchange Commission as frequently or as
promptly as are U.S. companies whose securities are registered under the Exchange Act. Therefore,
there may be less publicly available information about us than is regularly published by or about
other public companies in the United States.
The market for our shares may be less liquid following completion of the proposed combination with
Gemalto, and the market value of our shares may be lower.
We
have executed an agreement to combine our business with Gemalto. That transaction will
include the exchange of our shares or American depositary shares for shares of Gemalto pursuant to an offer that is expected to reduce the number of holders of our
shares or American depositary shares as well as the number of our shares or American depositary
shares that might otherwise trade publicly and, depending upon the number of our shares or American
depositary shares so exchanged, will likely adversely affect the market value of our shares or
American depositary shares.
Following consummation of the proposed combination with Gemalto, Gemalto will be a holder of a
significant majority of our outstanding shares and may take actions or make decisions not in the
best interest of our remaining minority shareholders.
15
Subsequent to the consummation of the combination with Gemalto, Gemalto will hold a
significant percentage of our outstanding shares and/or American depositary shares. Depending on
the success of the exchange offer that Gemalto is expected to make as part of the proposed
combination, the remaining holders of our securities other than Gemalto will constitute a small
minority of outstanding shares. The interests of Gemalto may be different from the interests of
any of our remaining shareholders. In effecting the combination and otherwise in the direction of
the business of Gemalto, Gemalto may take actions or make decisions that may not be in the best
interest of our other remaining minority shareholders.
Pursuant to a new Luxembourg law, Gemalto may conduct a squeeze-out merger or use some other
means at some date following the combination to obligate the remaining holders of our securities to
sell their securities to Gemalto for consideration of some
combination of cash and/or Gemalto shares.
A new Luxembourg law, adopted pursuant to an EU directive on takeover bids, could make
possible a squeeze-out of the holders of our shares that are not held by Gemalto. In addition,
regulatory agencies in other jurisdictions, such as the Autorité des marchés financiers in France,
have amended their rules to take into account the stock exchange rule modifications that will
result from the adoption of the EU takeover directive. As a result of these changes, if Gemalto
were to hold the required percentage of capital and voting rights either directly or indirectly,
Gemalto may conduct a minority buyout offer (offre publique de retrait) or similar procedure
followed by a squeeze-out (retrait obligatoire) of the holders of our shares not held by Gemalto.
This may also give rise to a delisting of our shares from exchanges
on which our securities are quoted.
We may decide to cease the listing of our shares on the Eurolist exchange of the Euronext
Paris or the quotation of our ADSs on the Nasdaq National Market, and we may decide to cease the
registration of our shares under the 1934 Exchange Act or terminate the depositary agreement
relating to our ADSs, which could negatively affect the value of our shares or ADSs.
The liquidity of our shares or ADSs, the information made publicly available in respect of the
company and other factors benefiting the value of our shares and ADSs may be greater due to their
respective listings on the Eurolist exchange of the Euronext Paris and on the Nasdaq National
Marketplace, and the registration of our ADSs under the 1934 Exchange Act. We may decide, subject
to applicable agreements and regulations, to cease such listings and registration due to a number
of factors, including managements assessment of the costs and benefits of such listings and
registration and as a result of our business combination to form Gemalto.
We may also decide to terminate our depositary agreement relating to our ADSs. If we terminate our
depositary agreement, holders of our ADSs would have the right to receive our shares corresponding
to the number of shares underlying their ADSs, and subject to the payment of certain fees to the
depositary.
If we take any actions to cease the securities exchange listings, registration or the depositary
agreement in respect of our shares and ADSs, the value of our shares or ADS may be negatively
affected.
Item 4. Information on the Company
HISTORY AND DEVELOPMENT OF THE COMPANY
We started our operations in 1988 as a major supplier of prepaid phonecards. Because of our
strength in the prepaid phonecard market during the 1990s, we developed strong ties with the
telecommunications industry and, as a result, we helped pioneer the development of chip card
technology for wireless communications.
Prior to 1999, our business was conducted through a French limited partnership known as
Gemplus S.C.A. In December 1999, we merged Gemplus Associates, the general partner of Gemplus
S.C.A, into Gemplus SCA and transformed the surviving entity into a French corporation, Gemplus
S.A. In February 2000, we reorganized our corporate structure, creating a new holding company,
Gemplus International S.A., a Luxembourg corporation. The shareholders of Gemplus S.A. contributed
to Gemplus International S.A. substantially all of the shares of Gemplus S.A. in exchange for
shares of our capital stock. As a result of these transactions, as of December 31, 2005, we held
more than 99.5% of the outstanding shares of Gemplus S.A.
Texas Pacific Group became one of our shareholders at the time of its equity contribution in
February 2000. In December 2000, we completed an initial public offering of our capital stock, in
the form of ordinary shares and ADSs. In 2004, we completed the planned reorganization of our
corporate structure by transferring most of the subsidiaries of Gemplus S.A. to Gemplus
International S.A. In April 2005, we purchased Setec Oy, a company headquartered in Finland that,
among other things, supplies conventional and electronic travel
passports to various government agencies
and products involving secure printing.
On December 6, 2005, we entered into a Combination Agreement (the Combination Agreement)
with Axalto Holding N.V. (Axalto), certain entities of the Texas Pacific Group (the TPG
Entities) and certain Quandt family entities and members (the Quandt Entities and together with
the TPG Entities, the Significant Shareholders), pursuant to which our Company and Axalto would
be combined (the Combination) and Axalto would be renamed Gemalto N.V. (Gemalto). The TPG
Entities and the Quandt Entities also each respectively entered into a Contribution in Kind
Agreement (together, the Contribution Agreements) with Axalto under which each of them agreed,
subject to various conditions, to contribute shares to Gemalto, constituting an aggregate of 43.6%
of the outstanding ordinary shares (Ordinary Shares) of the Company (the Contribution Shares),
in exchange for shares of Gemalto (the Contribution). In accordance with the Combination
Agreement and the Contribution Agreements, on June 2, 2006, the Contribution of the Contribution
Shares by the Significant Shareholders was made in exchange for shares of Gemalto issued through an
increase in the share capital of Gemalto reserved to the Significant Shareholders, at a ratio of 2
Gemalto shares for every 25 Ordinary Shares (the Exchange Ratio). Concurrent with the
Contribution, the Company commenced a distribution pro rata to all of its shareholders, including
the TPG Entities and the Quandt Entities, of 0.26 per Gemplus share from its available share
premium/reserves (the Distribution) under the terms of the Combination Agreement.
16
On June 2, 2006, in accordance with the terms of the Combination Agreement, Gemalto made the
requisite filing with the French Autorité des marchés financiers (the AMF) to commence a global
offer (the Offer) for the remaining ordinary shares it does not hold, at the Exchange Ratio.
We are organized under the laws of the Grand Duchy of Luxembourg and are registered with the
Commerce and Companies Registry under No. B73145. Our registered office is located at 46a Avenue
J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, telephone +352.26.005.226. Our website
address is www.gemplus.com. The information on our web site is not incorporated by reference into
this Annual Report.
Capital Expenditures and Divestitures
The following table sets forth our capital expenditures, before retirements and disposals, for
each year in the three-year period ended December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(millions of euros) |
|
Property, plant & equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development equipment |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.2 |
|
Manufacturing |
|
|
17.1 |
|
|
|
13.3 |
|
|
|
9.4 |
|
Buildings |
|
|
2.6 |
|
|
|
5.8 |
|
|
|
3.1 |
|
Other |
|
|
4.4 |
|
|
|
2.8 |
|
|
|
1.5 |
|
Total property, plant & equipment |
|
|
25.1 |
|
|
|
22.9 |
|
|
|
15.2 |
|
Intangible assets |
|
|
2.7 |
|
|
|
1.8 |
|
|
|
4.7 |
|
|
Total capital expenditures |
|
|
27.8 |
|
|
|
24.7 |
|
|
|
19.9 |
|
|
In 2005, our capital expenditures related primarily to manufacturing and were mainly to
increase our SIM card production capabilities for our Telecommunication segment to satisfy
increasing demand. In 2004 and 2003, we continued to execute a restructuring and rationalization
program that we commenced in 2002. This program included the rationalization of our office
facilities on a worldwide basis. The capital expenditures relating to manufacturing in 2004 were
made in almost all of our plants, and were focused on increasing our capacity to make SIM cards for
our wireless activities. In 2002 we made a capital expenditure of
17.7 million related to
constructing a research and development and office building located in La Ciotat, France, which was
mainly financed through a sale-leaseback transaction.
We plan to internally fund our capital expenditures, and have budgeted capital expenditures of
approximately
34.0 million, for the year ending December 31, 2006. Of that amount, we anticipate
incurring approximately:
16.0 million mainly for new manufacturing equipment; 11.8 million for
improvements in our management information systems, of which almost
8.0 million are intangible
assets related to software and IT development; and
4.8 million on our facilities.
See Item 5. Operating and Financial Review and Prospects Liquidity and Capital Resources
for a description of our sources of financing for our budgeted capital expenditures.
BUSINESS OVERVIEW
Overview
We are a leading provider of technology products and services that enable wireless network
operators to offer their customers secure voice and data communications and transactions through
mobile phones, and that enable companies, financial institutions and public entities to provide
customized services to their customers and employees through a range of systems, including
financial card networks, loyalty and bonus point programs and identification and Internet security
systems.
In 2005, we reported our results in three main business segments:
|
|
|
Telecommunications, which includes our wireless products such as subscriber
identification modules (SIMs), related software and services, and prepaid phonecards for
fixed telephony operators; |
17
|
|
|
Financial Services, which focuses on applications for the financial services sector to
facilitate secure transactions within a variety of systems; and |
|
|
|
|
|
Identity and Security, which includes systems and services based on chip card technology
in areas such as national ID, healthcare, drivers licenses, car registration, passport and
visa, e-government secured services, physical and logical access control as well as chip
card readers and interfacing technologies. |
We started reporting in three business segments on January 1, 2004. See Item 5. Operating and
Financial Review and Prospects Recent Developments for a description of business segment
reporting, and Note 33.1 to our Consolidated Financial Statements.
Within our Telecommunications business segment, our wireless products and services are based
on subscriber identification modules (SIMs), which are small plastic modules with embedded
microcontroller chips, and related systems. SIMs are used in the
global system for mobile communications (GSM) wireless standard, which is dominant in Europe
and the most widely used system in the world, in terms of both the number of subscribers and number
of countries. SIM cards are also increasingly used in other wireless communications systems
standards, such as in CDMAOne, WCDMA and CDMA2000.
Within our Financial Services segments, our chip card products and services are used by
financial, retail, and other businesses to provide a wide array of services, and to manage customer
relationships. In the financial services market, for example, banks can issue credit and debit
cards with embedded chips to reduce fraud and to provide their cardholders with premium services
and retail applications (e.g., applications that store cash values that can be used to make
purchases) which applications can be transacted in person or on-line.
Within our Identity and Security segment, our products and services are used by private and
public entities to provide secure access to restricted facilities and computer networks through the
use of chip cards, software and related products and services. We also deliver chip card-based
identity solutions to national and local governments to enhance identification processes among
their residents by using chip cards for a range of identity applications, including in the areas of
border control, drivers licenses, vehicle registration and health care. In addition, we offer
contactless electronic passport technology for biometric authentication at national border
controls.
In all our businesses we provide a range of software and services that allow our customers to
implement and manage sophisticated systems. Our software includes card management systems that
allow our customers to manage card issuance, update data, download applications and obtain user
information. Our services include customization, technical support, consulting, system design and
integration and system operation. Many chip card sales are combined and priced or sold together
with sales of these services and software for customers within the applicable reporting segment
and therefore, we do not separately report these sales. See Note 33.1 to our Consolidated Financial
Statements.
We also provide non-chip card products and services in other areas that are related to our
chip card businesses, such as magnetic stripe payment cards for banks and card-based transportation
access products that operate in conjunction with authentication and non-repudiation software. In
addition, we provide chip card readers and other devices, including reader chipsets for use by
third party manufacturers.
Our Strategy
We are pursuing our objectives of expanding and enabling the market for safe electronic
services involving our products, including services delivered through wireless or fixed wire
networks, while increasing the use of widely-held, portable, secure and personalizable devices.
Our strategy for attaining these objectives is to be a leading provider of secure platforms
and related products, and of applications and services that operate such secure platforms,
including chip cards and other devices with embedded microcontrollers. We hope to grow our core
businesses, while continuing to enhance our profitability. Simultaneously, we seek to establish
stronger positions in promising new segments for the use of secure platforms and related software
such as in the identity and corporate security markets.
Achieving and maintaining profitable growth by continuing to follow through on our restructuring
and efficiency initiatives, and through innovation and continued cost
control
18
|
|
|
We are continuing to adapt our cost structure and increase our competitiveness in an
environment where price is an overriding factor. |
|
|
|
|
We are continuing to organize our business to better align to market structures. We are
continuing to enhance our customer-facing front-end and supply chain related back-end
processes to most effectively and efficiently serve our markets. |
|
|
|
|
We are continuing to work on increasing our market share in higher margin products in the
wireless communications and other sectors by innovating, working closely with key customers,
enhancing our product mix, improving our supply chain and business processes, and using
differentiating account strategies. |
Differentiating on value
Our strategy includes focusing on a number of growing segments in addition to our traditional
businesses, including:
|
|
|
Software and services in wireless communications, including SIM administration, content
delivery, mobile-payment, and over the air (OTA) platforms. We believe that our position as
a leading supplier of OTA platforms should enable us to further strengthen our relationship
with our customers and facilitate the advancement of the value that SIM cards can add to
wireless networks. |
|
|
|
|
Identity card programs. National identity programs for electronic Identity Cards and
e-Passport represent a large and growing opportunity for us. We are continuing our
development efforts in this area with the objective of tapping into this significant market
potential. In addition, we are seeking to form alliances with strategic partners to enhance
our prospects for success in this area. |
|
|
|
|
Corporate security (controlling access to buildings and computer networks). With our
experience in relevant security technologies, we hope to become a leader in this field, while being
able to provide complete subsystems for strong authentication and other security functions. |
Getting closer to our customers
We are continuing to strengthen our regional structures in order to improve our customer
responsiveness worldwide. We believe that improved regional sales and sales support functions will
enhance our customer relationships by combining the ability to design and deliver complex high-end
solutions using our products and services with support from local offices and direct supply chain
management on commodities.
Technology Overview
Chip Card Technology
Our products and services are part of a class of technology that involves small modules or
cards with embedded electronic chips, known as chip cards or smart cards. Chip card technology
has evolved significantly since chip cards were first introduced in the 1970s. Since our inception
in 1988, we have played, and continue to play, an important role in the evolution of chip cards and
related applications.
There are two major categories of chip cards:
|
|
|
Memory cards containing chips that provide only secure storage of data can be modified at
a special terminal. Memory cards are used for single applications that do not require
sophisticated data processing functions, such as prepaid phonecards and certain loyalty
cards. |
|
|
|
|
Microcontroller cards containing chips that are capable of storing and processing data
like a miniature computer, can transfer processed data to a network and run software
programs or applets that interact remotely with server-based applications. The most
sophisticated new chip cards, such as subscriber identification modules (SIMs) used in
wireless communications, are all microcontroller cards. |
19
Chip card technology is developing rapidly as the capability of microcontroller chips to
conduct sophisticated operations expands. Some of the most important recent technological
developments in chip card technology include:
|
|
|
The development of operating systems for microcontroller chips that allow card issuers to
load multiple applets onto a single card. This allows our customers to offer their users
several functions on the same card. For example, a single multi-application card can be used
to access facilities or computer networks, to make payments as a debit or credit card, to
store bonus points that can be used to make purchases and to authenticate Internet
transactions. |
|
|
|
|
The development of open standards for chip card operating systems. These operating
systems contain an embedded virtual machine or interpreter which interacts with the
operating system and a documented application programming interface (API) to execute
applets. The API allows software programmers to design new applets in a standardized format,
without reference to the technical specifications of the interpreter, improving ease of use
and programming time. In addition, microcontroller chips based on open operating systems are
interoperable with more systems. This means that software programmers can create new
applications based on a standard language or protocol, which can be used to provide services
through the chip cards of different manufacturers. The most widely used open platforms today
are based on Java Card technology, a software API specification for chip cards based on
technology from Sun Microsystems. |
|
|
|
|
The development of sophisticated card management software for chip cards to help card
issuers take advantage of new chip card capabilities by enabling the issuers to manage the
cards remotely, and to update, download and install new information or applets as they
become available, without replacing the cards. These new software capabilities have also
created a demand for system design, integration and management services that allow chip card
technology companies to develop closer ties with their customers. |
|
|
|
|
Significant advances in the memory structure and capacity of microcontroller chips,
including the development of flash memory technology. Chips based on this technology are
able to store substantially more information, conduct more sophisticated operations and load
a higher number of applets. In addition to greater memory capacity, flash memory chips can
give card manufacturers increased flexibility to modify the chips operating system. |
|
|
|
|
The development of chip cards designed to work with the most advanced security
technologies, such as public key infrastructure (PKI) systems and secure downloadable
applets. Cards with PKI capability offer a higher level of security
for customers, including individuals or companies that conduct transactions or business over the Internet, and banks
that implement mobile payment systems. |
|
|
|
|
Innovative form factors for embedding of microprocessor technologies in new devices such
as USB dongles, e-tokens, key fobs, flash memory cards, e-passports and other complete high
security IT devices. |
|
|
|
|
The increased use of contactless chip cards which include an antenna that allows the card
to communicate using radio waves. Contactless cards provide the benefits of easy access
since insertion into a card reader is not required. This technology is becoming increasingly
attractive for identity programs and payment systems. |
|
|
|
|
The inclusion of flash memory in chip cards that allow for the delivery and storage of
large multi-media files. |
We believe that chip card products and related services include features that are attractive
to customers in sophisticated wireless, financial, Internet and corporate security markets. The
features that we believe are most significant include:
|
|
|
Security. Chip cards are capable of storing complex algorithms that can be used to
identify a user or to encrypt information, such as a digital certificate. Because a user
needs both a card and an activation mechanism, such as a personal identification number
(PIN), to use a card, security is not entirely compromised by just the loss of a card or the
communication of a PIN. As a result, using chip cards to authenticate mobile and electronic
commerce transactions, can significantly reduce the incidence of fraud. In addition,
microcontroller chip cards can be equipped with sophisticated cryptographic algorithms and
functions that prevent unauthorized parties from tampering with the contents of the card. |
|
|
|
|
Portability. Chip cards can be easily transferred from one device to another. As a
result, for example, a mobile phone subscriber can purchase and immediately use a new mobile
phone without changing his or her service subscription, a feature that mobile phone network
operators find attractive as it reduces customer turnover. Similarly, a chip card used to
authenticate |
20
|
|
|
the user of a companys computer network can be inserted into any computer equipped with a
reader, and include certain user profile and other information so the user is less dependent
on a particular computer. |
|
|
|
Flexibility. The newest chip cards can carry and run multiple applets that can be updated
remotely without the need to replace the card. This increases the flexibility of banks and
other companies that use chip cards as customer management tools by changing applications in
response to changes in product offerings or customer preferences. This also allows them to
offer multiple services, such as wireless, banking, payment and loyalty applications, on a
single platform. |
Despite these advantages, chip card technology has not yet been widely deployed in some areas,
particularly in financial services markets. This is primarily because the replacement of existing
terminals with devices capable of reading chip cards, and the development of related network
infrastructure, is costly and time consuming. See Item 3. Key Information-Risk Factors-Risks
Related to Our Business.
Use of Our Chip Card Technology in Wireless Communications
Currently, one of the largest uses for chip card technology is in wireless communications, due
to the security and flexibility provided by chip cards. There are various wireless network
standards:
|
|
|
Wireless 2G standards are the second major type of technology used for wireless
communication. Wireless 2G standards mainly support voice transmission, but also support
some data transmission capability. The global system for mobile (GSM) communications is the
most widely used 2G standard, both in terms of number of subscribers and number of
countries. The GSM standard requires the use of subscriber identification module (SIM)
technology. |
|
|
|
|
Wireless 2.5G standards support higher data transmission capability than GSM and other 2G
standards. Wireless 2.5G standards incorporate identification module technology similar to
that used in 2G SIM cards. The technology is included in a removable card or in the
telephone handset. In the transition from 2G to 2.5G, some operators located outside of
Europe are migrating to the European GSM-originated standard. |
|
|
|
|
Wireless 3G standards, including WCDMA and CDMA2000, which support higher data
transmission capability than 2.5G, are in the process of being deployed. As with 2.5G, the
wireless 3G standards incorporate identification module technology similar to that used in
SIM cards, either as a removable card or in the telephone handset. |
The following table generally summarizes the principal 2G, 2.5G and 3G transmission standards,
indicating the principal geographical regions where they are used and whether they incorporate
removable identification module technology. Some countries use more than one standard, and are
listed in more than one place in the table.
|
|
|
|
|
|
|
|
|
Use of Removable Card |
Transmission Standard |
|
Principal Regions |
|
Identification Modules |
2G |
|
|
|
|
GSM
|
|
Europe, Asia (including China),
several regions in the United
States
|
|
Yes |
|
|
|
|
|
CDMA
|
|
United States, China
|
|
No |
|
|
|
|
|
TDMA
|
|
United States
|
|
No |
|
|
|
|
|
2.5G |
|
|
|
|
GPRS (based on GSM)
|
|
Europe, most of Asia
|
|
Yes |
|
|
|
|
|
CDMAOne
|
|
United States, China, South Korea
|
|
Yes in China and South Korea |
|
|
|
|
|
IDEN
|
|
United States, Korea
|
|
Yes |
|
|
|
|
|
3G |
|
|
|
|
WCDMA
|
|
Europe, Asia (including Japan),
United States
|
|
Yes |
|
|
|
|
|
|
|
|
|
|
CDMA2000
|
|
United States, Asia
|
|
Operator-specific |
Industry Overview
The industry for chip card technology, products and services is growing, both in terms of size
and sophistication. According to Eurosmart, 2,626 million chip cards including microcontroller
cards and memory cards were sold worldwide in 2005, compared to 2,290 million in 2004. Using data
provided by Eurosmart, we estimate that we are the worlds largest chip card provider, with 25.6%
of the global industry in terms of volume in 2005, compared to 28.6% in 2004.
21
Wireless Segment
The wireless communications market, particularly over networks using GSM standards, recorded
strong growth prior to 2001, primarily as a result of a significant increase in the use of mobile
phones around the world for voice transmission. The market suffered a slowdown in 2001 and 2002.
Demand began to return in 2003 due to consumer equipment replacement, driven significantly by the
availability of handsets with color displays, and growth in emerging markets. There was further
market growth in 2005 and 2004. According to Eurosmart, approximately 1,390 million SIM cards were
sold in 2005, compared to 1,050 million in 2004.
In established markets, wireless communication operators are seeking to enhance their
offerings with new premium value services based on the increasing use of wireless data transmission
services. For example, short message service (SMS) allows text messaging through mobile phones. In
anticipation of the growing demand for wireless data services, including the provision of pictures,
streaming audio and video, and high-speed Internet access through mobile phones, operators have
made significant investments in 3G licenses (government provided licenses to use frequency bands
for 3G data communication), and are continuing to develop the infrastructures necessary to deliver
3G services. To date, we have been involved in the launch of every commercial 3G network worldwide.
We believe that the growth of the wireless data market is important for the growth of the chip card
market, and that demand for new wireless data services could increase demand for more sophisticated
chip cards. Because identification module technology helps wireless operators to facilitate and
control the access between wireless subscribers and content providers, we believe that our chip
card products, software and services can be a core technology for our wireless customers to address
this new market.
Financial Services Segment
According to Eurosmart, approximately 336 million chip cards were sold in the financial
services industry in 2005, compared to 280 million in 2004. According to Frost & Sullivan, we
estimate that we are one of the top three providers of chip cards in the banking and retail sectors
with approximately 21.5% of the market in terms of units sold in 2005, compared to 20% in 2004. We
believe use of chip card products and services will grow due to enhanced security requirements and
increased fraud rates among conventional cards.
Identity and Security Segment
The Identity and Security market, while still relatively small, has experienced solid growth
over the past few years. The convergence of physical and logical access control continues to drive
the enterprise security segment, and is expected to reach over three billion dollars in 2007
according to Datamonitor. In the enterprise security market, Fortune 500 companies and federal
agencies are implementing chip cards as a means to govern employee access to physical and logical
resources. The Government ID market is escalating rapidly with many ongoing nationwide identity
programs expected to be rolled out over the next few years. We are involved in several of these ID
programs, including national projects in the Middle-East in Oman and the United Arab Emirates, and
Indias vehicle registration card program with a market potential of over 100 million cards to be
issued nationwide over the next five years. The demand for contactless chip cards in the Identity
and Security market is also expanding quickly, mainly through mass-transit and physical access
applications, and also through the introduction of electronic passports. We also sell chip card
readers in the Identity and Security market, and we remained the worlds leading supplier of chip
card readers in 2005, with a 34.6% market share according to Frost & Sullivan.
Our Products and Services
The following table sets forth our revenues for the year ended December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Year ended December 31, |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions of |
|
|
(as a % of total |
|
|
(in millions of |
|
|
(as a % of total |
|
|
(in millions of |
|
|
(as a % of total |
|
|
|
euros) |
|
|
revenues) |
|
|
euros) |
|
|
revenues) |
|
|
euros) |
|
|
revenues) |
|
|
Telecommunications |
|
|
654.5 |
|
|
|
70% |
|
|
|
641.8 |
|
|
|
74% |
|
|
|
542.5 |
|
|
|
72% |
|
Financial Services |
|
|
202.9 |
|
|
|
22% |
|
|
|
182.2 |
|
|
|
21% |
|
|
|
168.2 |
|
|
|
23% |
|
Identity and Security |
|
|
81.5 |
|
|
|
8% |
|
|
|
41.0 |
|
|
|
5% |
|
|
|
38.5 |
|
|
|
5% |
|
|
Total |
|
|
938.9 |
|
|
|
100% |
|
|
|
865.0 |
|
|
|
100% |
|
|
|
749.2 |
|
|
|
100% |
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Year ended December 31, |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions of |
|
|
(as a % of total |
|
|
(in millions of |
|
|
(as a % of total |
|
|
(in millions of |
|
|
(as a % of total |
|
|
|
euros) |
|
|
revenues) |
|
|
euros) |
|
|
revenues) |
|
|
euros) |
|
|
revenues) |
|
|
EMEA |
|
|
491.0 |
|
|
|
52% |
|
|
|
443.1 |
|
|
|
51% |
|
|
|
407.7 |
|
|
|
54% |
|
Asia |
|
|
172.7 |
|
|
|
19% |
|
|
|
194.3 |
|
|
|
23% |
|
|
|
171.9 |
|
|
|
23% |
|
Americas |
|
|
275.2 |
|
|
|
29% |
|
|
|
227.6 |
|
|
|
26% |
|
|
|
169.6 |
|
|
|
23% |
|
|
Total |
|
|
938.9 |
|
|
|
100% |
|
|
|
865.0 |
|
|
|
100% |
|
|
|
749.2 |
|
|
|
100% |
|
|
See Item 5. Operating and Financial Review and Prospects for a discussion of our total revenues,
broken down by category of activity and geographic market, for each of the last three financial
years.
Delivering a complete solution
We provide our customers with a portfolio of products, software and services that enable the
delivery of complete solutions:
|
|
|
Chip Card Products. We provide a complete range of chip card products, from low-end to
high-end, with proprietary and open operating systems, offering various amounts of
available memory, some with features and embedded applications dedicated to specific
markets. We also provide conventional government-issued passports and
microcontroller-embedded passports with sophisticated printed security features. Our chip
card reader products and software development tools are a direct complement to our chip
cards. |
|
|
|
|
Software. We provide software that helps us manage the client-server architecture and
enable interactions between the applets stored on chip cards and the card issuers computing
system. We also provide card management systems that enable the tracking of issued cards and
the management of information stored on the chip card. |
|
|
|
|
Technical Support. We provide our customers with a full range of maintenance and
technical support including help desk services for their card solutions. Our regional
service centers are responsible for our help desk services in their region, with several
sub-regional or local technical support staffs as needed. |
|
|
|
|
Consulting, System Design, Customization and Integration. Our consulting services focus
on key topics and issues in the development and implementation of chip card systems,
including marketing and commercial analysis and recommendations, feasibility and security
studies, and the development of possible implementation scenarios. We also provide our
customers with training in chip card technology and software applications. |
|
|
|
|
Our system design services provide our customers with flexibility in the overall design
of chip card systems, including security parameters and detailed component design. |
|
|
|
|
Our customization services include the development of customized software applets for
particular card issuers. |
|
|
|
|
We provide system integration services to deliver complete systems using a project
management approach. This approach involves coordinating with contractors to obtain and
integrate the required system components, including customized software applications and
providing operational system support during acceptance testing, pilot programs and the
roll-out of the final, customized card system. |
|
|
|
|
Personalization. Our personalization services involve the process of loading personal
data or premium value applications onto the memory or microcontroller chips embedded in
cards. We also emboss and print customized card bodies for our customers, and customize the
associated packaging and card carriers used to deliver cards to end-users. Our card printing
capabilities include technically advanced, high quality techniques. We often prepare and
distribute products directly to end-users on behalf of our customers. |
|
|
|
|
Outsourced Operations. We provide a variety of services associated with the
administration of card management systems, including card profile update campaigns, network
management, server management and data encryption and archiving. We also provide other
operational services for our customers chip card system managers, such as mapping and
profiling, certificate authority and management services to work with trusted third party
systems and certification authorities. |
Telecommunications Products and Services
Our telecommunications products and services consist primarily of SIM-based products, software
and services for wireless communications operators, and chip-based prepaid phonecards for public
pay telephone operators.
23
Wireless Products, Software and Services
SIM cards were introduced to provide standardized and secure subscriber identification and
authentication. Evolution of technology and subscriber demands has helped turn the SIM card into a
wireless data service enabler within an open client-server architecture.
SIM cards are well adapted for applications that need to be highly personalized, secure and
portable. SIM-enabled systems can be used to enhance customer relationships, to enable content
delivery and to secure mobile transactions. We design many of our products around interoperable SIM
platforms that connect to networks and remote applications and over the air (OTA) platform
technology. These telecommunications products include:
|
|
|
GemXplore the card platform and associated software applications. We offer a range of
products for all major wireless network types and generations. Working primarily with open,
Java-based operating systems, we provide developers with software development tools to
create and test applications. |
|
|
|
|
GemConnect software modules and agents that communicate with remote content and
services. Our open OTA infrastructure is an essential link between subscribers and
personalized content as it provides card, service and handset management. |
|
|
|
|
GemSuite enables value-added solutions including mobile entertainment, location-based
services, instant messaging and mobile payment. Our wireless partner program, known as
SIMXplore, integrates third party solutions, such as content and application providers. |
|
|
|
|
GemServices card issuance, professional services and outsourcing. Our professional
services group provides wireless communication operators with the expertise to design,
develop and deploy mobile services. These services cover all phases from consulting,
development and integration to post-installation, support and training. Our outsourced
solutions can increase our customers service portfolios, while limiting infrastructure and
resource investments. Customers can access our equipment, technology and expertise through a
connection to our hosting center. |
Phonecards
Based on information published by Eurosmart in its 2005 report, we believe we are one of the
worlds leading manufacturers of prepaid phonecards and associated phonecard security products with
a 40% share of the worldwide phonecard market in 2005, compared to 47% in 2004. As of May 2006, we
have produced over 3.7 billion phonecards since our inception in 1988. Our main customers include
more than 20 major telecommunications operators, including China Telecom, France Telecom, and
Telmex. Our multi-application solutions help telecommunications operators take advantage of the
convergence of telephony with banking, loyalty and transportation applications. These products
generate increased revenues by helping to enable innovative marketing opportunities.
Scratch Cards
We provide a range of scratch cards under the name GemScratch, which contain a scratch-off
panel revealing unique numbers to be used by the end-user of the card in order to place a prepaid
telephone call. We sell our GemScratch cards primarily to our wireless customers who provide
prepaid services. Our GSM Prepaid Kit includes a SIM card and a scratch card in a single package,
allowing wireless operators to offer their subscribers an integrated communications package. Our
scratch-off products are also used by fixed-line telecommunications operators to provide calling
card services to their customers.
Financial Services
Secure chip card technology offers a platform for a variety of financial and banking service
applications, such as credit/debit cards (payment cards), e-purse cards (cards that store cash
values that can be used to make purchases), multi-application services and mobile banking services.
Chip-based payment cards and e-purse cards contain an embedded microcontroller chip that processes
transaction information received at the point of sale and carries information that allows a card
reader to accept or reject a transaction up to a specified amount without on-line authorization.
The chip card reduces fraud associated with existing magnetic stripe card-based systems by helping
to prevent, among other things, the use of stolen cards to make unauthorized purchases because the
cardholder enters a PIN code with the reader at the point of sale rather than simply signing a printed
card receipt. Furthermore, microcontroller
24
chips for this market contain sophisticated cryptographic algorithms and functions that help
prevent unauthorized parties from tampering with their contents, in contrast with the more limited
security safeguards of magnetic stripe cards.
Several large payment card associations, including Visa International and MasterCard
International, as well as American Express, have introduced chip cards in some of the payment cards
in their systems. Banking and credit card associations in countries around the world, such as
Australia, Austria, Brazil, China, Denmark, Japan, Taiwan, Korea, Malaysia, Finland, Spain and
Switzerland, have recently announced plans to adopt chip cards to replace some of their magnetic
stripe cards. The adoption of chip card technology in these countries represents a new phase in the
financial services industry, which has been slow to broadly adopt this technology, in large part
due to the cost of associated infrastructure. We believe that several continuing developments have
the potential to accelerate the adoption of chip card technology in the financial services
industry, including:
|
|
|
Interoperability. One obstacle to the widespread adoption of microcontroller chip
technology is that many card specifications were adopted by each country on an individual
basis, preventing the interoperability of payment cards issued in different countries. To
address this problem, in 1996, the major payment card associations, Europay International,
MasterCard International and Visa International (together known as EMV), adopted standard
specifications for payment cards, which enable interoperability between different payment
systems. We believe that migration to the EMV standard is now a well-established expectation
that could contribute to a structural change in the financial services market. |
|
|
|
|
New Services. The capabilities of microcontroller chip technology permit banks to offer
their customers services that were not available when banks initially studied the
technology. New services include online authentication, instant rewards and more advanced
loyalty and coupon programs, mobile banking, mobile commerce and other services made
available with the development of multi-application cards. |
Single Application Cards
We design and develop chip card products and services that enable financial card issuers to
offer a wide range of single-application services to their customers. Our financial services
products are designed to meet the requirements and specifications of the most important industry
standards, such as the EMV specifications for payment cards. In addition, our chip card products
have been individually certified by the major financial and banking organizations and bodies, such
as Visa International, Europay International, MasterCard International, Cartes Bancaires (France),
Banksys (Belgium) and APACS (United Kingdom). Our main product offering includes:
|
|
|
GemVision, a range of payment cards developed for banks that are members of Visa International; |
|
|
|
|
GemShare, a range of payment cards developed for members of Europay International and MasterCard International; and |
|
|
|
|
GemValue, a range of payment cards developed in compliance with both Visa and MasterCard specifications. |
We have also developed and market a full range of chip cards for e-purse systems, which are
cards that store cash values that can be used to make payments. Our e-purse products have been
individually certified by the major e-purse system operators, such as CEPS, Zentral Kredit Auschuss
(Germany), Proton World International, Visa International and Mondex. Our main product offerings in
this market include Geldkarte, an e-purse card developed for German e-purse systems, and Mondex
E-Purse, an e-purse application developed for the Multos multi-application card that is mainly used
in the United Kingdom, Latin America, South Korea, Australia and the Philippines.
Multi-Application Cards
One of our main multi-application cards for financial services is based on MPCOS, a
multi-application standard, commonly used in Asia. This card contains credit/debit and e-purse
applications, loyalty programs and transportation ticketing functionality. This card is also
available in a contact/contactless mode under the designation GemCombi that allows interaction
with the card using radio frequencies. We have also developed a line of multi-application
Java-based cards that provide our customers with the flexibility to quickly develop and bring to
market new services. Our line of Java-based financial cards, GemXpresso, is also targeted to retail
banking and e-commerce payment applications.
Loyalty and Retail
25
We have developed chip card products for a wide variety of loyalty and retail programs,
including bonus point and reward programs, such as our microcontroller chip card-based system for
Boots, a United Kingdom retailer, Shell U.K., and Esso Netherlands. Our loyalty applications can
also be combined with other applications, such as payment cards and e-purse applications, by using
our multi-application chip cards. We believe that chip cards should facilitate the next generation
of loyalty programs because they enable retailers to set up card-based programs to offer customers
a combination of in-store and Internet-based benefits, such as instant rewards, online coupons and
privileged access to websites and points systems.
Bank and Retail Conventional Cards
In addition to chip cards, we provide our customers with magnetic stripe (conventional)
cards that typically do not contain embedded microchips. We launched these operations in 1995 in
order to strengthen our position both in the financial services market and in several geographic
areas, such as the United States.
We offer a wide range of magnetic stripe and encoding options to meet the demands of our
different customers. We delivered over 286 million magnetic stripe cards to our customers in the
banking sector in 2004, according to the 2005 Nilson Report. We also provide certified card
personalization and production and disaster recovery services to MasterCard, Visa and American
Express card issuers in various regions around the world.
Other Businesses
We also serve customers where our cards are used for identification together with a payment
application such as:
|
|
|
transportation access, which includes contactless chip systems that are used for highway
tolls and access to public transportation and other transportation facilities; |
|
|
|
|
pay television chip cards, which are used to allow pay television subscribers access to
programs and services over cable and satellite television systems; and |
|
|
|
|
loyalty and identification programs that do not use chip cards. |
Identity and Security Services
The chip card is a security device that serves as a component in enabling identity management
systems for governments and corporations. Chip card technology allows users to access corporate and
external networks, digitally sign transactions and documents and identify themselves
electronically. Due to customer demand and opportunities presented in the Identity and Security
market, our organization for this market is divided into two sections that are driven by
applications and usage:
Enterprise Security
In this area, we are continuing to work actively with our corporate customers to design
security software and services based on microcontroller chip technology to control access to
corporate computer networks and to permit the secure exchange of information. In November 2003, we
introduced SafesITe, a subsystem that integrates with enterprise systems and applications to
combine logical access (i.e., access to computing devices or systems) and physical access control
with employee identity badges. The SafesITe components are chip cards (either Java Card, PKI,
contact, or contactless with a diverse memory capacity range), readers (either contact or
contactless for both logical and physical access control), software (including public key and
password authentication, digital signing, password management, and e-purse), and card management
(utilizing integrated solutions from a variety of vendors) as well as related consulting, project
management, custom design and implementation services.
Government ID
In the Government ID market, programs include identification (including passports and drivers
licenses), healthcare services, citizens rights projects, freedom and privacy and fraud
prevention. For these markets, we offer a subsystem called ResIDent, designed specifically for
national ID and e-government applications. Through ResIDent we offer the necessary components of a
full chip card-based ID system, including printed security features, chip card modules, operating
systems and applets design, chip card readers, client/server software, card management and issuance
systems, personalization services, consulting, integration, training and
26
maintenance services. We also deliver electronic passport technology through our GemBorder
solution for contactless biometric authentication at border controls.
Typical Government ID applications include:
|
|
|
Chip card-based vehicle registration and drivers license systems for government
agencies, allowing authorities to track vehicle ownership and driving records, and to verify
fines and offenses. |
|
|
|
|
Chip card systems for accurate identification of travelers at borders and other ports of
entry into a country, enabling authorities to facilitate the entry of foreign travelers or
workers while helping to ensure compliance with national immigration regulations. |
|
|
|
|
Chip card-based national identification programs involving the issuance of chip cards by
national governments to their residents. For example, in the Sultanate of Oman and United
Arab Emirates, we are currently delivering a national identification program, including
consultancy, project management and integration services, as well as software and chip
cards. |
|
|
|
|
Conventional government-issued passports and visas, and microcontroller-embedded
passports, with sophisticated printed security features. Our business in this area has been
expanded by our acquisition of Setec Oy in 2005. |
GemVentures
To promote the use of chip card technology and applications across a broad range of markets,
we created GemVentures, a wholly-owned venture capital company. GemVentures has invested in start
up and developing companies that create and market innovative technologies, applications and
services in our core markets, such as wireless communications and computer security infrastructure
and service providers. GemVentures leverages our expertise in the chip card industry to provide
portfolio companies with strategic advice and support in the development of new chip card
technologies, applications and services.
Customers
We have a broad base of customers, including many of the largest wireless operators in each of
the markets in which we operate, as well as major banking and financial institutions around the
world.
In 2005, no single customer accounted for more than 10% of our revenues. Our largest customer
represented 7% of our total revenues, and our five largest customers together represented 25% of
our total revenues. Our ten largest customers together represented approximately 34%, and our
fifteen largest customers together represented approximately 41% of our total revenues.
Suppliers
We rely on a number of different suppliers of materials and components to manufacture our
products. The two basic components of our products are silicon microcontroller and memory chips
and plastic cards and other materials used in the manufacturing process, such as lamination film
and inks.
We
have structured our silicon chip-purchasing strategy in an effort to implement more
balanced sourcing with four major suppliers that we anticipate should be able to meet our
requirements in terms of cost and volumes. Major suppliers in this industry include Atmel,
Infineon, ST Microelectronics, Philips, Renesas and Samsung. Our main plastic supplier is Bayer AG,
which produces several types of resins for injection-molding in Europe, Asia and the United States.
We also have supply arrangements for specific types of plastic with BASF, Dupont, Klockner, Lucasi
and several other plastic suppliers. We have diverse supply arrangements for our other materials,
including ink and lamination film, for each of which we have at least two supply sources.
In 2005, we made additional improvements to our purchasing strategies (including further
multi-sourcing for certain products and better forecasting systems). There are some signs that
there may be supply limitations for microcontroller chips in the future that could negatively
affect our ability to procure such chips at favorable prices. There are also indications of
possibly higher prices for some metals and petroleum-based plastics used in the manufacture
of some of our products in the future. We believe, however, that our improved purchasing strategies will help
mitigate the effects of price increases or supply restrictions if they arise. Nevertheless, in the
event of higher sales volumes, our gross margins may be negatively effected, in particular, by
higher chip prices.
Competition
27
The chip card market is highly competitive. We face competition in all of our markets from
chip card and chip manufacturers, software developers, and security providers. Moreover, our
customers and companies with whom we currently have strategic relationships may become competitors
in the future.
Chip card manufacturers are currently our main source of competition in all of our segments.
According to Gartner Dataquest, our overall share of the global chip card industry was
approximately 23.9% in terms of chip card units sold on a worldwide basis in 2005, followed by
Axalto with approximately 20.4%, Giesecke & Devrient with approximately 13.2%, Oberthur Card
Systems with approximately 7.1%, Sagem Orga with approximately 6.8% and EastcomPeace with 3.5%. The
relative strengths and market shares of each of our competitors, however, vary in each of the chip
card segments, depending on their core competencies and their strategic alliances and partnerships.
Certain of our customers, suppliers and companies with whom we currently have strategic
relationships may become competitors in the future. There are also signs of increasing
concentration in the industry. Sagem purchased Orga, the German chip card company, in 2005.
M-Systems, a flash memory maker, took over Spanish smart card maker, Microelectronica Espanola in
2005. In 2005, we entered into a Combination Agreement with Axalto. See Item 4. Information on the
CompanyHistory and Development of the Company. There are also new entrants to the industry, such
as the Chinese chip card manufacturers EastcomPeace Smart Card Co., Datang Microelectronics
Technology Co. and WatchData System Co. Some of these new entrants have low-cost operating models
and aggressive pricing policies that are reducing our market share and profit margins in certain
emerging markets.
See Item 3. Key Information Risk Factors Risks Related to Our Business.
Telecommunications Segment
Wireless Products and Services
The market for wireless infrastructure products and services is characterized by intense
competition and rapidly changing technology. Our main competitors in this market have included
Axalto, Giesecke & Devrient, Oberthur Card Systems and Sagem Orga. In December 2005, we entered
into a Combination Agreement with Axalto, and on June 2, 2006, in accordance with the Combination
Agreement, the first steps to the Combination were completed. See Item 4. Information on the
CompanyHistory and Development of the Company.
Success in this market is determined by the ability to consistently provide products and
software at attractive prices that enable our customers to provide premium value services to their
customers. We believe that our research and development activities position us as an innovator in
SIM technology, and our global manufacturing capacity provides us with production volumes that
enable us to offer competitive prices. In addition, our experience in over-the-air (OTA) server
software helps expand the potential of SIM-based technologies by creating a unique link between
wireless operators and their customers and provides us with a more strategic role within the
wireless network. Because wireless infrastructure providers work closely with wireless operators to
design and implement customized SIM-based systems, the development of strong customer relationships
and the joint creation of product development plans are also important elements in competing in
this market.
Because of the enhanced capabilities of microcontroller chip technology, we may face new
competition from operating system and software application developers. The development of open
operating systems and platforms are expected to lead to the creation of a new market for
application development tools, in which software development providers create and market premium
value applications, either as generic packages or customized software for specific customers. The
enhanced capabilities of chip cards are expected to create the potential for a variety of products
and services that may attract a number of new competitors into software, services and
infrastructure markets, including:
|
|
|
operating system developers, such as Microsoft and IBM; |
|
|
|
|
electronic security product and service providers, such as RSA, Vasco and Verisign; |
|
|
|
|
wireless device manufacturers, such as Nokia, Motorola, Samsung and Sony-Ericsson; |
|
|
|
|
systems integrators, such as IBM, Siemens and EDS; |
28
|
|
|
silicon chip manufacturers, such as STMicroelectronics, Infineon, Philips, Renesas, Samsung, Sony and Atmel; and |
|
|
|
|
wireless infrastructure software providers, such as SmartTrust and Sicap. |
Phonecards
Public telephony is a mature market, and is highly competitive. Our presence in this market
since its origins in the late 1980s has allowed us to become a leading provider of phonecards on a
worldwide basis. According to Eurosmart, approximately 580 million phonecards were sold worldwide
in 2005, compared to 670 million in 2004. Our main competitor in this market has been Axalto,
followed by other chip card manufacturers such as Giesecke & Devrient and Oberthur Card Systems.
The ability to deliver large volumes of phonecards at competitive prices, as well as the capability
of meeting changing customer demands, such as increased volume requirements, in a short time frame
are key competitive factors in this market.
Financial Services Segment
The financial services market is currently fragmented and subject to intense competition. Many
of the companies that provide chip card products and services to banks also manufacture
conventional bank cards with magnetic stripes. Our competitors in this market have included
Giesecke & Devrient, Oberthur Card Systems and Axalto. The financial chip card market is currently focused in Europe, where competitors such
as Oberthur Card Systems have a strong presence in the banking industry.
Identity and Security Segment
The market for identification and security products is currently in its development stage.
There are a number of contracts for government identification and security chip card-based systems
that are currently being offered through public tender procedures. We and our competitors compete
in these tenders in association with major system integrators to provide the chip card products
used in these systems.
Marketing
We use a direct sales force to market and sell our products and services. In addition, we use
some local distributors and agents in certain markets.
Strategic relationships and sales through other channels are an important part of our overall
marketing strategy. Through our Partners Program we facilitate new product development,
collaborative marketing initiatives and joint sales efforts with a select group of value-added
resellers, systems integrators, consultants and developers.
Intellectual Property
We take appropriate measures under the intellectual property laws of applicable jurisdictions
in an effort to protect our rights to our chip card technology. Performance in the chip card
industry can depend, among other factors, on patent protection. Our policy is to regularly identify
patentable inventions that we develop, and to systematically seek to acquire patent rights upon
such technologies. Many of our current patents expire between 2008 and 2021. We mainly develop and
patent technology in the fields of card body manufacturing, chip operating system software, card
readers, chip design and cryptographic processes. We seek to obtain a reasonably broad territorial
protection for our patented technologies. We usually file initial patent applications in the
country of invention, according to the location of the applicable engineers, and subsequently
extend such protection to the European Union, the United States, Canada and Japan, as well as China
and other foreign countries depending on the relevant circumstances. We also hold certain
co-ownership rights in patents developed through joint venture companies established with our
business partners. Proprietary rights in technologies developed through such joint ventures usually
vest in the jointly owned companies.
We have entered into non-exclusive licenses from third parties for technologies relevant to
our business, such as from Sun Microsystems with respect to Java Card
technology and from IBM with
respect to IBM mask data for certain chip cards operating systems. We have also entered into a
comprehensive patent cross-license with Axalto and its subsidiary CP8 Technologies. See Item 3.
Key Information Risk Factors and Item 10. Additional Information Material Contracts. We include third party
technology in our products, and our business would be harmed if we were not able to continue using
this third party technology.
29
Despite our efforts to protect our intellectual property rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our property is difficult, and while we are sometimes
able to determine and reduce the extent to which misappropriation of our intellectual property
rights occurs, such infringement can be expected to be a persistent problem. In addition, the laws
of some foreign countries do not protect our proprietary rights to as great an extent as do the
laws of the European Union and the United States. Our means of protecting our proprietary rights
might not be adequate and our competitors may independently develop similar technology, duplicate
our products or design around our patents.
Due to the importance of proprietary technology in the chip card industry, our business
involves a substantial risk of overlap with third party patents and subsequent litigation with
competitors or patent-holders. Any claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or cause us to enter into royalty-bearing
licensing agreements.
Regulation
Encryption Technology Controls
Our security products and services rely on the ability of our chip cards to perform
cryptographic functions, such as the encryption and decryption of information sent by chip card
users over the Internet. The domestic use and transfer, and the export of systems and equipment
with encryption capabilities, including hardware, software, modules and cards, have been subject to
national regulation in many countries and to international controls. As a result, the domestic use
and transfer, and the export of cryptographic products are subject in many countries to strict
controls and governmental scrutiny, often requiring the user or transferor to obtain special
licenses.
In an effort to reduce delays arising from the above restrictions in the development and
delivery of our chip card-based security technology, we have created a centralized organization to
coordinate all of our operations that involve the transfer of our cryptographic-enabled products
and services and to ensure compliance with all relevant laws and regulations.
Environmental Matters
Our manufacturing and personalization operations may be subject to extensive, evolving and
increasingly stringent environmental and occupational health and safety laws and regulations in a
number of jurisdictions, including regulations governing the management, use and release or
discharge of hazardous and toxic materials into the environment.
As part of our sustainable development initiatives and to avoid incurring liability under
applicable environmental, health and safety laws and regulations, we have adopted global
environment, health and safety guidelines for the layout, construction and operation of our
facilities. These guidelines have been defined to comply with current laws and regulations and are
completed or modified by our local environment, health and safety officers to ensure compliance
with all applicable local laws and regulations. If there are no local environmental, health and
safety laws or regulations, or if our guidelines contain environmental, health and safety rules
that are stricter than local laws or regulations, our guidelines will be generally applied in those
localities.
Geographic Organization
We are a global company, with headquarters located in Luxemburg. We have operations and
facilities located throughout Europe, North America, South America and Asia. We have organized our
global operations into three world regions:
|
|
|
EMEA, which consists of Europe, the Middle East and Africa; |
|
|
|
|
the Americas, which consists of North, Central and South America and the Caribbean; and |
|
|
|
|
Asia, which consists of South East Asia, Japan, Korea, and Greater China. |
Our manufacturing and research and development activities are organized on a global basis,
while our sales and marketing activities are organized on a regional basis. As of December 31,
2005, we operated approximately 50 sales and marketing offices, 17 personalization centers and 11
manufacturing centers and research and development centers in 4 countries.
Organizational Structure
30
We are the sole parent company of our group with approximately 60 direct and indirect
subsidiaries located throughout the world. In May 2004, we completed an internal reorganization
intended to better align our legal structures to our business operations. This involved the
transfer of 27 subsidiaries from Gemplus S.A. to Gemplus International S.A. and had no effect on
our Consolidated Financial Statements.
The
following table sets forth our significant direct and indirect
subsidiaries as of June 2, 2006.
|
|
|
|
|
Name of company |
|
Percentage Owned |
|
Gemplus Finance S.A., Swiss Branch, a Swiss branch of a Luxemburg corporation |
|
|
100 |
% |
Gemplus S.A., a French corporation |
|
|
99.8 |
%(1) |
Gemplus Limited, a British corporation |
|
|
100 |
% |
Gemplus Corp., a Delaware (U.S.) corporation |
|
|
100 |
% |
Gemplus Industrial S.A. de C.V., a Mexican corporation |
|
|
100 |
% |
Gemplus Microelectronics Asia Pte Limited, a Singapore corporation |
|
|
100 |
% |
Gemplus Technologies Asia Pte Ltd, a Singapore corporation |
|
|
100 |
% |
Setec Oy, a Finnish corporation |
|
|
100 |
% |
Gemplus GmbH, a German corporation |
|
|
100 |
% |
Gemplus Japan Co. Ltd, a Japanese corporation |
|
|
100 |
% |
|
|
|
(1) |
|
The remaining shares are held mainly by our employees following the exercise of stock
options; such shares may be contributed to us in exchange for our shares. For accounting
purposes, these shares are already assumed to be a component of shareholders equity. |
Property, Plant and Equipment
Our manufacturing operations are organized on a global basis with a view toward achieving
timely and cost-efficient production and delivery of our products in each of our regions. Our
expertise in chip card manufacturing includes:
|
|
|
Chip Design. We work with our main suppliers to design chips that meet our customers
requirements, including chip geometry, circuit and architecture design. |
|
|
|
|
Micro-electronics. We receive memory and microcontroller chips from our suppliers in
wafer form. In clean rooms, rooms that have a high level of dust filtration, we assemble our
chip modules, each of which consists of a chip and a printed circuit board, using
microelectronic technologies. |
|
|
|
|
Embedding. The printed card body is prepared for the assembled chip module, which is then
embedded onto the card body using various techniques. |
Our chip cards are subject to in-process visual inspections designed to ensure that each card
meets the customers physical specifications. We perform a series of electric tests on our modules
prior to embedding them onto the card body. These tests are designed to ensure the electrical
functionality of our chip cards. We also perform a final visual inspection of our chip cards to
ensure quality control and compliance with our chip card specifications.
We constantly seek to enhance the efficiency of our global manufacturing operations in order
to increase production capacity, to reduce production and delivery time and to lower operational
costs, through upgrades in our chip card manufacturing technology, by outsourcing non-critical
manufacturing processes and by constructing new manufacturing capacity in lower-cost regions. To
further these and related goals, commencing in the second quarter of 2001, we implemented three
successive restructuring plans. This restructuring included the closure of a factory in Seebach,
Germany in 2003, and in Herne, Germany in 2005, and also a reallocation of our production
requirements among our manufacturing and other facilities around the world. See Item 6. Directors,
Senior Management and Employees Employees.
Our main chip card manufacturing centers are currently located in France, Germany, Poland,
China, Singapore, Mexico and the United States. All of these centers have microcontroller and
memory card manufacturing capabilities. Our main plastic card manufacturing centers are located in
China, Germany, Singapore, the United Kingdom and the United States.
31
Our material tangible fixed assets, including leased properties, include the following
facilities:
|
|
|
|
|
|
|
Location |
|
Primary Activities |
|
Gross Floor Area (m2) |
Cuernavaca, Mexico |
|
embedding, personalization |
|
|
6,664 |
* |
|
|
|
|
|
|
|
Gemenos, France |
|
embedding, personalization |
|
|
25,502 |
|
|
|
|
|
|
|
|
Havant, United
Kingdom |
|
plastic cards, personalization, embedding |
|
|
6,332 |
|
|
|
|
|
|
|
|
Madrid, Spain |
|
personalization |
|
|
1,340 |
|
|
|
|
|
|
|
|
La Ciotat, France |
|
microcontroller module production and |
|
|
|
|
|
|
assembly |
|
|
5,871 |
|
|
|
|
|
|
|
|
Montgomeryville, |
|
plastic cards, embedding, personalization |
|
|
|
|
Pennsylvania, United States |
|
|
|
|
8,535 |
|
|
|
|
|
|
|
|
Singapore |
|
microcontroller module assembly, embedding, personalization, |
|
|
20,984 |
* |
|
|
contactless cards, Plastic cards |
|
|
|
|
|
|
|
|
|
|
|
Tczew, Poland |
|
embedding, personalization |
|
|
8,393 |
* |
|
|
|
|
|
|
|
Tianjin,
China1 |
|
embedding, personalization, microcontroller module assembly |
|
|
12,730 |
** |
|
|
|
|
|
|
|
Zhuhai, China2 |
|
plastic cards, personalization, embedding, contactless cards |
|
|
2,722 |
* |
|
|
|
|
|
|
|
Bangkok, Thailand |
|
personalization |
|
|
66 |
|
|
|
|
|
|
|
|
Johannesburg, South Africa |
|
personalization |
|
|
330 |
|
|
|
|
|
|
|
|
Sao Paulo/Brazil3 |
|
personalization |
|
|
403 |
|
|
|
|
|
|
|
|
Filderstadt, Germany |
|
embedding, personalization |
|
|
9,424 |
|
|
* Facilities owned by the Company. **
Facilities partially owned and partially leased. All
others are leased. |
1 The property and equipment used in our activities in Tianjin, China, are divided between a
legal entity that we wholly own, and another legal entity in which we hold 51% of the equity.
2 The property and equipment used in our activities in Zhuhai, China, are held by a legal entity
in which we have a 65% equity interest.
3 The property and equipment used in our activities in Sao Paulo, Brazil, are held by a legal
entity in which we have a 50% equity interest.
As of June 1, 2006, our approximate annual practical capacity in millions of units for the
manufacture of the following products is:
|
|
|
|
|
Activity |
|
Capacity |
|
Chip card modules |
|
|
888 |
|
Chip card embedding |
|
|
832 |
|
Conventional polyvinyl chloride (PVC) plastic cards (including magnetic stripe) |
|
|
572 |
|
In addition to the tangible fixed assets that we use in our manufacturing activities, we lease
office space in various countries throughout the world, including a significant building in La
Ciotat, France, which we use for activities including research and development and product sales
and marketing. See Note 19 to our Consolidated Financial Statements.
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects
32
OPERATING RESULTS
The financial information included in the discussion below for the three years prior to
December 31, 2005 is derived from the Consolidated Financial Statements included in this Annual
Report. You should read the following discussion together with the Consolidated Financial
Statements and related notes. Our Consolidated Financial Statements have been prepared in
accordance with IFRS, which differ from US GAAP. Note 40 to our Consolidated Financial Statements
describes the principal differences between IFRS and US GAAP as they relate to us, and reconciles
our net income and shareholders equity to US GAAP.
Overview
2005 was another year of substantial achievements for us. We strengthened our position,
notably in higher-end wireless products and in the financial services segment. We also strongly
improved our financial performance, for both gross and operating margin. At the same time, we
undertook two important strategic moves. We acquired the Setec group, a leading company in
electronic passports and security printing technologies. This acquisition strengthened in
particular our position in the government identity sector. In addition, in December 2005, we
entered into a Combination Agreement with Axalto, a leading competitor, and on June 2, 2006, the
first steps to the Combination were completed. See Item 4.
Information on the CompanyHistory and
Development of the Company.
Our 2005 financial results reflect a very strong year of continuous improvement. Our revenue
grew by 8.5% to 938.9 million in 2005, compared to 865.0 million in 2004. In addition,
our gross margin improved by 1.7 percentages points to reach 33% in 2005, mainly driven by a
favorable business mix in our Telecommunications and Identity and Security segments. We also achieved strong
improvement in operating income, which delivered an above 7% operating margin. Our net income
attributable to equity holders substantially improved to 89.9 million in 2005, compared to
4.7 million in 2004.
The year 2005 confirmed our momentum in the sale of wireless products, despite ongoing price
pressure. We increased our shipments of microprocessor cards by 34% in 2005, largely driven by
increased sales in the Americas and Europe. The increase in our shipments of wireless products was
also assisted by sales growth in developing countries, other than China. The demand for 3G wireless
products continues to increase, and we maintained our leading position in this high-end segment. In
our Telecommunications segment, we also recorded a rapid decrease in the net sales of our payphone
cards sub-segment in 2005. We also launched the first multimedia SIM cards at the 3GSM Congress in
February 2005, with the first commercial roll-out made by Orange in November 2005.
In 2005, we consolidated and improved our position in microprocessor payment cards. The
Financial Services segment in 2005 was driven by further deployment in EMV (Europay MasterCard
Visa), the new standard for payment cards. We played a key role in EMV deployment in 2005, with the
first EMV cards delivered in Japan, China and Italy. In 2005, we also participated in the first
deployment of contactless payment cards in the United States and Australia.
With the acquisition of Setec, and an increasing number of e-government initiatives, we
achieved almost triple digit growth in our Identity and Security segment including electronic
passports, identity cards, healthcare and car registration programs. For example, we are a supplier
in a major identity project in the United Arab Emirates. We also delivered the first e-passports in
Norway and Sweden.
Our operating income increased by 154% to 66.8 million in 2005, compared to 26.3
million in 2004, driven by the combination of improvements in our performance. This growth was
reflected in our operating margin, which reached 7.1% of net sales in 2005, compared to 3.0% of net
sales in 2004.
We recorded net income attributable to equity holders of 89.9 million in 2005, compared
to 4.7 million in 2004, mainly driven by the improvement in our operating income and the
benefit from the recognition of deferred tax assets in the amount of 26.9 million.
We generated net cash flow 29.2 million in 2005, even after an outlay of 63.4
million as part of the acquisition of Setec, compared to 2.5 million of cash used in 2004. The
improvement in our net cash flow benefited from the release of 22.5 million from an escrow
account in relation to the successful outcome of a legal action.
33
Factors Affecting Revenues
Most of our revenues were earned from sales of our chip card products, which are typically
invoiced to customers on the basis of the number of cards supplied. We generally record revenues
from our product sales when we transfer title and risk of loss of those products to the customer.
We recognize revenues in our systems design and integration services as the services are completed.
Our sales of wireless products in our Telecommunications segment continue to represent a large
percentage of our sales. The prices for our most sophisticated wireless subscriber identification
module (SIM) cards are higher than our prices for our earlier generation SIM cards. When we
introduce a new chip card, it can initially have the effect of decreasing our average prices as
prices decline for our earlier generation cards before sales volumes migrate to the new card.
For our Financial Services segment, which also includes systems and services based on chip
card technology in areas such as financial services loyalty programs, transportation access,
pay-television applications, as well as magnetic stripe cards for banking applications, our
revenues can vary over the life of our contracts with our customers. The revenues for design,
development and implementation of chip card-based products are usually earned earlier in the term
of the agreements, while revenues for card issuances and replacements may begin later and be earned
over a longer period of time.
Revenues in our Identity and Security segment include those from both software and hardware
product sales. Similar to the sales in our Financial Services segment, the revenues from the
customers of our Identity and Security segment for design, development and implementation of chip
card-based products is usually earned earlier in the term of the agreements. Additional revenues
are then generated over the life of the contracts as chip cards are supplied, along with revenue
for technology support and maintenance. For system deliveries, we also typically record a larger
share of our revenues early in the life of a contract, when we receive progress and completion
revenues for the implementation of a system, and card sale revenues to supply the initial needs of
a customer. As a contract matures, our revenues consist, to a greater extent, of sales of cards as
new cardholders join the system and replace cards that have expired or were lost.
Factors Affecting Operating Income
Our operating income is affected by a number of factors. The most significant factor in recent
years has been our product mix, as our wireless products and services have generated margins that
were higher than many of our other products and services, particularly our magnetic stripe bank
cards. Historically, as our sales of wireless products and services have grown, our gross margin
and operating margin have also grown. Starting in 2001, however, the overall market decline led us
to reduce our prices on wireless communications products, which reduced our gross margin. New
competition, especially in China, has also led to reduced average prices.
Our cost of sales consists principally of the cost of our microcontroller chips, the plastic
that is used in our cards, tools and equipment used to manufacture and personalize our chip cards,
and personnel related to manufacturing, supply, logistics and management of production. Our margins
are significantly affected by the extent to which we are able to match our inventory and production
capacity with demand for our products. Our operating income is also affected by our selling and
marketing, research and development and administrative expenses, all of which are typically a
function of planning that is based on projected business demand.
When we initiate a major card program or open a new manufacturing facility, we typically incur
costs in connection with the establishment of the program or the facility, including the cost of
manufacturing tools and equipment and personnel who are trained to implement the program or hired
to operate the new facility. Depending on when the start up phase occurs in relation to our
accounting periods, we may incur significant start up costs in a period before we earn substantial
revenues. When this happens, our operating income is negatively affected in the period that the
start up phase occurs. In contrast, once the program begins to generate revenues or the new
manufacturing facility begins to run, our operating income typically increases.
Effect of Exchange Rates
We report our Consolidated Financial Statements in euros. Because we earn a significant
portion of our revenues, and incur expenses, in countries where the euro is not the local currency,
exchange rate fluctuations between the euro and other currencies can significantly affect our
results of operations. These currencies are primarily the US dollar, the British pound, the Chinese
yuan and the Japanese yen. In 2005, we earned 14% of our revenues in the United States, 12% in the
United Kingdom, 5% in China and 5% in
34
Japan.
We seek to mitigate our exposure to currency fluctuations by matching currency of costs and
revenue (natural hedging) and engaging in hedging transactions as we deem appropriate. We have
hedged certain foreign currency positions for 2006. We cannot predict, however, all changes in
currency, inflation or other factors that could affect our international business. We provide
information on a currency-adjusted basis to help in the comparison of changes in our results of
operations over time. We calculate the impact of currency variances by converting the figures from
the current year in local currencies using the applicable exchange rates of the previous year.
The following table sets forth information relating to the average exchange rates between the
euro and the British pound, the Chinese yuan, the US dollar and the Singapore dollar since January
1, 2003, calculated based on daily indicative fixing publicly supplied by the European Central Bank
(ECB) and indicative quotations supplied by recognized data providers for currencies on which the
ECB does not establish fixing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(yearly average, in euros, per unit of foreign currency) |
Years ended December 31 |
|
2005 |
|
2004 |
|
2003 |
|
British pound |
|
|
0.6851 |
|
|
|
0.6773 |
|
|
|
0.6887 |
|
Chinese yuan |
|
|
10.2382 |
|
|
|
10.2936 |
|
|
|
9.2584 |
|
US dollar |
|
|
1.2457 |
|
|
|
1.2412 |
|
|
|
1.1289 |
|
Japanese yen |
|
|
137.2473 |
|
|
|
134.1150 |
|
|
|
130.5399 |
|
|
Seasonality
In prior years, we have experienced limited seasonal fluctuations, where a greater percentage
of our net sales are recorded in the fourth quarter. A significant factor causing this seasonality
has been the replacement of mobile telephone handsets towards the year-end holiday season. In 2003
and 2004, we experienced a limited recurrence of this seasonality. In 2005, we earned 28% of our
net sales in the fourth quarter, the same level as the last quarter of 2004.
Reporting segments
We started reporting in three business segments in the year 2004. All identity and security
activities in the previous Financial and Security Services segment have been transferred to a new
segment, entitled Identity and Security. See Note 33 to our Consolidated Financial Statements.
The Financial Services segment includes systems and services based on chip card technology in
areas such as financial services, loyalty programs, transportation access, e-business security, and
pay-television applications, as well as magnetic stripe cards for banking applications. The
Identity and Security segment includes systems and services based on chip card technology in areas
such as national ID, healthcare, drivers licenses, car registration, passport and visa,
e-government secured services, physical and logical access control as well as chip card readers and
interfacing technologies. Our activities in both these segments include the sales of chip card
readers to our customers and chip card interfacing technologies to device manufacturers. There is
no change with respect to the Telecommunications segment, which includes our wireless solutions, as
well as prepaid telephone cards and other products. This change in the Financial Services and
Security segment reporting is consistent with our managements financial reporting structure. For a
discussion of recent developments, see Item 5. Operating and Financial Review and Prospects -
Results of Operations-Recent Developments.
Recent Developments
In
2005, we largely completed the integration of the operations of Setec Oy into our business
following our acquisition of that company in June 2005. This acquisition added new capabilities to
our activities, especially in the area of manufacturing electronic and conventional passports.
35
Year ended December 31, 2005, compared to year ended December 31, 2004
Net sales
The following table shows the breakdown of our net sales in 2005 and 2004 by reporting segment
(our reporting segments are further described in Note 33 to our Consolidated Financial Statements).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
% change |
|
% change, adjusted (1) |
|
Telecommunications |
|
|
654.5 |
|
|
|
641.8 |
|
|
|
2 |
% |
|
|
1 |
% |
Financial Services |
|
|
202.9 |
|
|
|
182.2 |
|
|
|
11 |
% |
|
|
5 |
% |
Identity and Security |
|
|
81.5 |
|
|
|
41.0 |
|
|
|
99 |
% |
|
|
47 |
% |
|
Total |
|
|
938.9 |
|
|
|
865.0 |
|
|
|
9 |
% |
|
|
4 |
% |
|
|
|
|
(1) |
|
Currency adjusted, and adjusted to exclude the effect of the consolidation of Setec. |
The net sales of our Telecommunications segment improved slightly by 2% in 2005, compared
to 2004. The growth of revenue in our Telecommunications segment was primarily driven by an 8%
increase, 6% on a currency adjusted basis, in sales of our wireless products, to 600.4 million
in 2005 from 558.5 million in 2004. Our SIM card shipments rose by 34% to 342 million units in
2005, driven by strong growth in the Americas and Europe. Our marketing of the value that
higher-end SIM cards can provide, helped promote a shift towards sales of these products, including
products for use in 3G networks and advanced applications. As a result, our sales of these
higher-end cards increased to 10% of our total shipments in 2005,
from 6.6% of our total shipments
in 2004. This shift helped to partially offset the continued price pressure we have been
experiencing, which resulted in a 21% decline in our average selling price per unit for wireless
products in 2005. Our net sales of other cards in our Telecommunications segment reduced
significantly in 2005, mainly caused by the continuous volume decrease in our prepaid phone cards
subsegment in Latin America. Our Telecommunications segment represented 70% of our revenues in
2005, compared to 74% in 2004.
The net sales of our Financial Services segment increased by 11% in 2005, compared to 2004.
The revenue of our Financial Services segment reflects strong growth in microprocessor payment
cards, as well as incremental revenue from the acquisition of Setec. The net sales increase in this
segment was driven by continued EMV migration, with substantial new programs in certain European
countries and continued expansion of existing programs in Europe and Latin America. Sales of these
products in the United Kingdom and Continental Europe continued to grow, although at a slower pace
than in emerging countries. Shipments of microprocessor cards for payment applications increased by
36% in 2005 compared to 2004, reaching 70 million units, with an increase in revenue from these
products of 25% in 2005 compared to 2004. In addition, we made our first shipments of EMV cards in
China in the fourth quarter of 2005. Our Financial Services segment represented 22% of our revenues in
2005, compared to 21% in 2004.
Our acquisition of Setec made a significant contribution (50%) to revenue growth in our
Identity and Security segment. The organic growth of net sales in our Identity and Security segment
(47%) was driven by a substantial increase in government identity card projects, particularly in
the United States, Asia and the Middle East and in corporate security programs mainly in the United
States. Our Identity and Security segment represented 8% of our revenues in 2005, including Setec,
compared to 5% in 2004.
We organize our operations into three geographic regions: EMEA (Europe, Middle East and
Africa), Asia and the Americas.
The following table breaks down the net sales among our three regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
% change |
|
% change, adjusted (1) |
|
EMEA |
|
|
491.0 |
|
|
|
443.1 |
|
|
|
11 |
% |
|
|
2 |
% |
Asia |
|
|
172.7 |
|
|
|
194.3 |
|
|
|
(11 |
%) |
|
|
(13 |
%) |
Americas |
|
|
275.2 |
|
|
|
227.6 |
|
|
|
21 |
% |
|
|
21 |
% |
|
Total |
|
|
938.9 |
|
|
|
865.0 |
|
|
|
9 |
% |
|
|
4 |
% |
|
|
|
|
(1) |
|
Currency adjusted, and adjusted to exclude the effect of the consolidation of Setec. |
36
The increase in revenue in the Americas was mainly driven by increased sales of wireless
products in our Telecommunications segment. The revenue growth in EMEA was mainly due to the
acquisition of Setec and the growth in sales of wireless products. Our Americas and EMEA regions
represented 29% and 52% of our total revenue in 2005, compared to 26% and 51% in 2004,
respectively. The revenue in our Asia region represented 19% of our revenue in 2005, compared to
23% in 2004. The revenue in our Asia region decreased by 11%, mainly due to decreased sales in our
Telecommunications segment and, to a lesser extent, in our Financial Services segment in that
region.
Gross profit
We experienced further improvement in our gross profit in 2005, with a 15% increase, to
309.9 million, compared to 270.5 million in 2004. Our gross margin increased from 31.3% in
2004 to 33.0% in 2005. This increase in gross margin of 1.7 percentage points was mainly driven by
an improved business mix (i.e., weighted towards higher-end products), substantial volume growth
and lower chip purchasing prices. These improvements more than offset the strong price competition
that we experienced in 2005. Our gross profit also benefited from other improvements in our cost
structure.
The following table shows the breakdown of our gross profit and gross margin in 2005 and 2004
by reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
% change |
Years ended December 31 |
|
(in millions of euros) |
|
|
(% of sales) |
|
(in millions of euros) |
|
|
(% of sales) |
|
in gross profit |
|
Telecommunications |
|
|
241.4 |
|
|
|
36.9 |
% |
|
|
220.8 |
|
|
|
34.4 |
% |
|
|
9 |
% |
Financial Services |
|
|
41.9 |
|
|
|
20.6 |
% |
|
|
37.7 |
|
|
|
20.7 |
% |
|
|
11 |
% |
Identity and
Security |
|
|
26.6 |
|
|
|
32.5 |
% |
|
|
12.0 |
|
|
|
29.4 |
% |
|
|
120 |
% |
|
Total |
|
|
309.9 |
|
|
|
33.0 |
% |
|
|
270.5 |
|
|
|
31.3 |
% |
|
|
15 |
% |
|
The gross margin of our Telecommunications segment increased from 34.4% in 2004 to 36.9% in
2005. This increase resulted primarily from an improved business mix (i.e., weighted towards higher
volumes in wireless products), higher volumes of SIM cards shipped, and lower purchase prices for
wireless chips. These improvements more than offset the continuing price competition and a chip
quality problem that we experienced in 2005.
The gross margin of our Financial Services segment remained stable at 20.6% in 2005, compared
to 20.7% in 2004. The gross margin in this segment benefited from higher volumes shipped in chip
cards for payment applications, driven by further expansion in EMV programs in EMEA and Latin
America. These improvements, however, were offset by a less favorable sales mix.
The gross margin of our Identity and Security segment increased to 32.5% in 2005, compared to
29.4% in 2004. The growth of gross margin in our Identity and Security segment was mainly driven by
a favorable business mix, with significant growth on higher-end cards for government identity
programs. As part of the acquisition of Setec, certain contractual customer relationships were
recognized at fair value on the date of acquisition. Such assets are amortized on the basis of the
revenue actually earned. Most of the revenue earned by Setec in 2005 resulted from contracts that
existed on the acquisition date. As a result, the amortization of these assets substantially offset
the gross margin earned by Setec in 2005.
Operating expenses
Our operating expenses totaled 243.2 million in 2005, compared to 244.2 million in
2004. The decrease in operating expenses occurred despite the overall growth in volumes shipped,
the Setec acquisition, share-based compensation expense and the costs of Sarbanes-Oxley Act
compliance. Our operating expenses in 2005 benefited from a reversal of restructuring provisions in
the amount of 3.2 million, compared to a net restructuring expense of 8.4 million in
2004. In addition, we had no goodwill amortization or impairment in 2005, compared to 7.7
million in goodwill amortization in 2004. Accordingly, operating expenses represented 25.9% of
sales in 2005, compared to 28.2% in 2004.
Our research and development expenses remained stable at 63.2 million in 2005, compared
to at 63.9 million in 2004, and represented 6.6% of our net sales in 2005, compared to 7.2% in
2004. Our selling and marketing expenses increased by 14% to 116.1 million in 2005, compared
to 101.5 million in 2004, mainly due to the overall growth of our business and the
consolidation of Setec. Selling and marketing expenses as a percentage of net sales
increased to 12.4% in 2005, compared to 11.7% in 2004.
37
Our general and administrative expenses increased by 6% to 68.0 million in 2005, from
63.9 million in 2004. These expenses represented 7.2% of our net sales in 2005, compared to
7.4% in 2004. Our general and administrative expenses benefited from the reversal of a 5.2
million provision for a legal action established in 2003. The increase of our general and
administrative expenses was mainly driven by share-based compensation expenses following the
adoption of IFRS 2 Share Based Payments, the cost of the Sarbanes-Oxley Act compliance and the
consolidation of Setec.
In 2005, we recorded a release of unused restructuring provisions amounting to 3.2
million, mainly related to our third restructuring plan, compared to a total pre-tax net
restructuring charge of 8.4 million in 2004.
In accordance with the provisions of IFRS 3 Business Combinations, IAS 36 Impairment of
Assets and IAS 38 Intangible Assets adopted as of January 1, 2005, we discontinued amortization
of goodwill. In 2005 we tested our goodwill for impairment, which resulted in no impairment charge.
Goodwill amortization and impairment amounted to 7.7 million in 2004.
The
following table breaks down our operating expenses in 2005 and 2004 by
reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
% change in |
Years ended December 31 |
|
in millions of euros) |
|
|
(% of sales) |
|
(in millions of euros) |
|
|
(% of sales) |
|
operating expenses |
|
Telecommunications |
|
|
158.7 |
|
|
|
24.2 |
% |
|
|
149.0 |
|
|
|
23.2 |
% |
|
|
6 |
% |
Financial Services |
|
|
43.2 |
|
|
|
21.3 |
% |
|
|
63.9 |
|
|
|
35.1 |
% |
|
|
(32 |
%) |
Identity and Security |
|
|
41.3 |
|
|
|
50.7 |
% |
|
|
31.3 |
|
|
|
76.3 |
% |
|
|
32 |
% |
|
Total |
|
|
243.2 |
|
|
|
25.9 |
% |
|
|
244.2 |
|
|
|
28.2 |
% |
|
|
0 |
% |
|
The operating expenses of our Telecommunications segment increased by 6% to 158.7 million
in 2005, compared to 149.0 million in 2004. This increase was mainly driven by additional
selling and marketing expenses in 2005, compared to 2004, and the consolidation of Setec.
The operating expenses of our Financial Services segment were reduced by 32% to 43.2
million in 2005, compared to 63.9 million in 2004. This decrease was mainly driven by lower
restructuring expenses and no further goodwill amortization, compared to 2004. General and
administrative expenses decreased in 2005, compared to 2004, mainly due to the reversal of a 5.2
million provision for a legal action made in 2003.
Operating expenses in our Identity and Security segment increased by 32% to 41.3 million
in 2005, compared to 31.3 million in 2004. This increase was mainly caused by the
consolidation of Setec, and was partly offset by the discontinuation of goodwill amortization in
2005. These increases in operating expenses included additional selling and marketing expenses
associated with the growth of our sales.
Operating income (loss)
In 2005, we significantly improved our operating income, which more than doubled to 66.8
million, compared to 26.3 million in 2004. Our operating margin improved to 7.1% of our 2005
total net sales, compared to 3.0% of our 2004 total net sales. This increase in our operating
income of 40.4 million in 2005, compared to 2004, reflects the overall growth in our business,
the substantial progress in our gross margin, and a decrease in our operating expenses driven by
lower restructuring costs and no further goodwill amortization.
The following table breaks down our operating income among our reporting segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
Change in operating income (loss) |
|
|
Telecommunications |
|
|
82.9 |
|
|
|
71.8 |
|
|
|
11.1 |
|
Financial Services |
|
|
(1.3 |
) |
|
|
(26.3 |
) |
|
|
25.0 |
|
Identity and Security |
|
|
(14.8 |
) |
|
|
(19.2 |
) |
|
|
4.4 |
|
|
Total |
|
|
66.8 |
|
|
|
26.3 |
|
|
|
40.4 |
|
|
The operating income in our Telecommunications segment increased by 11.1 million to
82.9 million in 2005, compared to 71.8 million in 2004. This increase was mainly due to
improved gross margin that we recorded for sales of our wireless products, and was partly offset by
increased operating expenses.
38
The operating loss in our Financial Services segment decreased by 25.0 million to 1.3
million in 2005, compared to 26.3 million in 2004. Our Financial Services segment significantly
improved its performance due to strong growth in microprocessor payment cards, additional savings
in operating expenses, and the reversal of a 5.2 million provision for a legal action.
The
operating loss of our Identity and Security segment decreased by 4.4 million to 14.8
million in 2005, compared to 19.2 million in 2004.
Financial income (expense), net
Our financial income (expense), net, increased to 7.7 million in 2005, compared to 5.7
million in 2004. Interest income on short-term investments increased to 7.6 million in 2005,
compared to 7.4 million in 2004, due to a higher average effective rate of return.
Share of profit (loss) of associates
In
2005, share of loss of associates amounted to 0.5 million, compared to 6.0 million in
2004. This decrease is due to the absence of impairment in 2005 and the impact of adopting IFRS 3,
starting January 1, 2005. According to the provisions of IFRS 3, we discontinued the amortization
of goodwill that amounted to 3.5 million in 2004. In 2005, we also recorded a gain on disposal
amounting to 0.8 million.
Other non-operating income (loss), net
In
2005, we recorded a net non-operating loss of 2.3 million, compared to 6.8 million in
2004. This loss included foreign exchange losses amounting to 4.3 million in 2005, compared to
5.9 in 2004, change in valuation allowance of available-for-sale financial assets amounted to a
2.8 million loss, compared to 0.9 million loss in 2004, and a gain on disposal of
available-for-sale financial assets amounted to 4.8 million in 2005, compared to zero in 2004. In
2004, an inactive company in which we were a shareholder was the target of a reverse takeover and
was subsequently listed on a US regulated market. In 2005, we took advantage of the listing to sell
this investment.
Income tax benefit (expense)
We recorded an income tax benefit of 19.8 million in 2005, which reflected a credit of
26.9 million resulting primarily from the recognition of previously unrecognized deferred tax
assets. Our 2005 profitability, for the second year in a row, led to the reassessment of the
probability of the future use of these tax assets within a reasonable time frame, mainly in France
and Germany. In 2004, we recorded an income tax expense of 13.0 million, which included 3.0
million relating to the discounting of a receivable resulting from a carry back of tax losses in
France, 1.6 million of additional provision for tax risk and a partial write-down of deferred tax
assets.
Net income
We significantly improved our net income to 91.4 million in 2005, compared to 6.3 million
in 2004. This corresponds to a diluted net income per share attributable to equity holders of
0.14, compared to 0.01 in 2004.
Year ended December 31, 2004, compared to year ended December 31, 2003
Net sales
The following table shows the breakdown of our net sales in 2004 and 2003 by reporting segment
(our reporting segments are further described in Note 33 to our Consolidated Financial Statements).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
|
|
2004 |
|
|
2003 |
|
|
% change |
|
% change, currency adjusted |
Years ended December 31 |
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
Telecommunications |
|
|
641.8 |
|
|
|
542.5 |
|
|
|
18 |
% |
|
|
24 |
% |
Financial Services |
|
|
182.2 |
|
|
|
168.2 |
|
|
|
8 |
% |
|
|
12 |
% |
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
|
|
2004 |
|
|
2003 |
|
|
% change |
|
% change, currency adjusted |
Years ended December 31 |
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
Identity and Security |
|
|
41.0 |
|
|
|
38.5 |
|
|
|
7 |
% |
|
|
11 |
% |
|
Total |
|
|
865.0 |
|
|
|
749.2 |
|
|
|
15 |
% |
|
|
20 |
% |
|
On a currency adjusted basis, the net sales of our Telecommunications segment experienced
strong growth of 24% in 2004 compared to 2003. The growth of revenue in our Telecommunications
segment was primarily driven by a 28% increase in sales of our wireless products, to 558.5
million in 2004 from 436.7 million in 2003. On a currency adjusted basis, this increase in the
sales of our wireless products was 34%.
In 2004, SIM card shipments rose 39% from 2003, to 255 million units, driven by growth in the
Americas, emerging markets in South East Asia and demand in Europe. The shift towards more high-end
SIM cards, including those with higher storage capacity and those for use in 3G networks helped to
partially offset the continued price pressure we have been experiencing in certain markets, as well
as unfavorable currency fluctuations. Our net sales of other cards continued to drop in 2004, as
they did in 2003, mainly due to lower selling prices offered by certain competitors and reduced
volumes supplied in Asia and in the EMEA region. The Telecommunications segment represented 74% of
our revenues in 2004, as compared to 72% in 2003.
In 2004, our Telecommunications segment net sales also benefited from our deliveries of more
complete solutions to certain customers, including our Over-The-Air software platforms that allow
operators to remotely manage SIM cards and provide additional services, resulting in enhanced
sources of revenue from our chip card customers. This strategy also helped us to maintain a leading
position within advanced 3G markets.
After adjusting for currency fluctuations, the net sales of our Financial Services segment
increased by 12% in 2004 compared to 2003. Financial Services segment revenue was mainly driven by
EMV migration. This included a significant rollout of EMV cards in the United Kingdom, and
increasing deliveries of EMV cards in France, Turkey, Mexico, South America and Malaysia. The
volume of shipments of microcontroller payment cards increased 33%, reaching 51 million units in
2004, with an increase in net sales of such products by 29% in 2004 compared to 2003. The Financial
Services segment represented 21% of our revenues in 2004, compared to 23% in 2003.
The net sales of our Identity and Security segment increased by 11% in 2004 compared to 2003
on a currency adjusted basis. The growth of net sales in our Identity and Security segment was
mainly driven by the sale of enterprise security solutions, particularly in the United States and
the United Kingdom. Our continuing strategy of marketing subsystems based on software components,
value-added services and high-end chip cards led to a significant improvement in the product mix of
this segment (i.e., weighted more towards products with higher margins). Our Identity and Security
segment represented 5% of our revenues in 2004, unchanged from 2003.
We organize our operations into three geographic regions: EMEA (Europe, Middle East and
Africa), Asia and the Americas.
The following table breaks down the net sales among our three regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
Years ended December 31 |
|
2004 |
|
|
2003 |
|
|
% change |
|
% change, currency adjusted |
|
EMEA |
|
|
443.1 |
|
|
|
407.7 |
|
|
|
9 |
% |
|
|
8 |
% |
Asia |
|
|
194.3 |
|
|
|
171.9 |
|
|
|
13 |
% |
|
|
22 |
% |
Americas |
|
|
227.6 |
|
|
|
169.6 |
|
|
|
34 |
% |
|
|
48 |
% |
|
Total |
|
|
865.0 |
|
|
|
749.2 |
|
|
|
15 |
% |
|
|
20 |
% |
|
The increase in revenue in the Americas and Asia regions was mainly driven by increased sales
of wireless products in our Telecommunications segment. Our Americas and Asia regions represented
26% and 23% of our total revenue in 2004, respectively, compared to 23% and 23% in 2003. The
revenue in our EMEA region represented 51% of our revenue in 2004, compared to 54% in 2003. The
increase in sales in our EMEA region in 2004 was mainly driven by increased sales in our Financial
Services segment and, to a lesser extent, the sales of wireless products in our Telecommunications
segment.
40
In 2004, we experienced a significant increase in our Telecommunications sales in the United
States, which was our most dynamic region in 2004 for wireless products, fueled by the rapid
adoption of communication systems that require SIM cards. Among other factors, we believe wireless
carriers in the United States have been adopting SIM card-based systems because these systems
represent a less expensive path towards the implementation of more advanced communication
standards, such as 3G networks, that will allow carriers to provide enhanced services to their
customers. There are also continued signs of a similar trend towards adoption of chip card-based
technologies in Latin America.
Gross profit
We experienced a substantial improvement in our gross profit, with a 30% increase, to 270.5
million in 2004 from 207.3 million in 2003. Our gross margin increased to 31.3% in 2004 from
27.7% in 2003. This increase in gross margin of 3.6 percentage points was mainly driven by an
improved business mix (i.e., weighted towards more wireless products and high-end products), strong
volume growth and lower chip purchasing prices. These improvements more than offset the continuing
price competition and adverse currency fluctuations that we experienced in 2004. Our gross profit
also benefited from savings resulting from our restructuring and other improvements in our cost
structure.
The following table shows the breakdown of our gross profit and gross margin in 2004 and 2003
by reporting segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
2003 |
|
|
|
|
|
|
% change |
Years ended December 31 |
|
(in millions of euros) |
|
|
(% of sales) |
|
(in millions of euros) |
|
|
(% of sales) |
|
in gross profit |
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
Telecommunications |
|
|
220.8 |
|
|
|
34.4 |
% |
|
|
166.8 |
|
|
|
30.7 |
% |
|
|
32 |
% |
Financial Services |
|
|
37.7 |
|
|
|
20.7 |
% |
|
|
32.0 |
|
|
|
19.0 |
% |
|
|
18 |
% |
Identity and
Security |
|
|
12.0 |
|
|
|
29.4 |
% |
|
|
8.5 |
|
|
|
22.2 |
% |
|
|
41 |
% |
|
Total |
|
|
270.5 |
|
|
|
31.3 |
% |
|
|
207.3 |
|
|
|
27.7 |
% |
|
|
30 |
% |
|
The gross margin of our Telecommunications segment increased to 34.4% in 2004 from 30.7% in
2003. This increase resulted primarily from higher volumes of SIM cards shipped, lower purchase
prices for wireless microcontroller chips and a more favorable product mix (i.e., weighted towards
high-end wireless products). The gross margin in this segment also benefited from restructuring and
other improvements in our cost structure. These improvements more than offset the continuing price
competition and adverse currency fluctuations that we experienced in 2004.
The gross margin of our Financial Services segment increased to 20.7% in 2004 from 19.0% in
2003. This was mainly driven by higher volumes shipped of microcontroller chip cards for payment
applications. This included a large rollout of EMV cards in the United Kingdom, and EMV ramp-up in
France, Turkey, Mexico, South America and Malaysia.
The gross margin of our Identity and Security segment increased to 29.4% in 2004 from 22.2% in
2003. The growth of gross margin in our Identity and Security segment was mainly driven by the
results of our strategy of marketing subsystems based on software components, value-added services
and high-end chip cards.
Operating expenses
In 2004, our operating expenses totaled 244.2 million, a decrease of 28% from 2003. These
expenses represented 28% of our net sales, compared to 46% in 2003. This decrease was mainly driven
by lower restructuring and general and administrative expenses, and the absence of previously
experienced adverse effects from goodwill impairment. The decrease also reflects benefits achieved
from earlier restructuring and other cost reduction measures.
Our general and administrative expenses decreased by 17% to 63.9 million in 2004, compared
to 77.3 million in 2003. Our research and development expenses decreased by 10% to 62.6 million
in 2004, compared to 69.2 million in 2003. Our selling and marketing expenses increased by 1% to
101.5 million in 2004, compared to 100.2 million in 2003, due to our higher sales.
In 2004, we recorded a total pre-tax restructuring charge of 20.2 million in our annual
Consolidated Statement of Income, mainly related to our third restructuring program. This 2004
expense was partially offset by a release of unused provisions amounting to 11.8 million, mainly
related to our second restructuring plan. As a result, the total pre-tax net restructuring charge
recorded in 2004 amounted to 8.4 million, compared to the total pre-tax net restructuring charge
recorded in 2003 of 62.0 million.
41
Goodwill amortization and impairment amounted to 7.7 million 2004, compared to 33.1
million in 2003. In 2003, we incurred a goodwill impairment charge of 19.9 million, resulting
from the revision of the business plan of the activities of Celocom Limited which we acquired in
November 2000.
The
following table breaks down our operating expenses in 2004 and
2003 by reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
2003 |
|
|
|
|
|
|
% change |
Years ended December 31 |
|
(in millions of euros) |
|
|
(% of sales) |
|
(in millions of euros) |
|
|
(% of sales) |
|
in operating expenses |
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
Telecommunications |
|
|
(149.0 |
) |
|
|
23.2 |
% |
|
|
(196.1 |
) |
|
|
31.6 |
% |
|
|
(24 |
%) |
Financial Services |
|
|
(63.9 |
) |
|
|
35.1 |
% |
|
|
(88.5 |
) |
|
|
52.6 |
% |
|
|
(28 |
%) |
Identity and Security |
|
|
(31.3 |
) |
|
|
76.3 |
% |
|
|
(56.4 |
) |
|
|
146.5 |
% |
|
|
(45 |
%) |
|
Total |
|
|
(244.2 |
) |
|
|
28.2 |
% |
|
|
(341.0 |
) |
|
|
45.5 |
% |
|
|
(28 |
%) |
|
The operating expenses for our Telecommunications segment decreased by 24% to 149.0 million
in 2004, compared to 196.1 million in 2003. This decrease was mainly driven by the reduction of
restructuring costs in 2004 and lower depreciation of our capitalized research and development
projects.
The operating expenses for our Financial Services segment decreased by 28% to 63.9 million
in 2004, compared to 88.5 million in 2003. This decrease was mainly driven by the reduction of
restructuring expenses in 2004 and lower general and administrative expenses in 2004 compared to
2003, mainly due to the provision for a pending lawsuit that we recorded in 2003. See Item 8.
Financial Information Legal Proceedings.
The operating expenses for our Identity and Security segment decreased by 45% to 31.3
million in 2004, compared to 56.4 million in 2003. In 2003, we incurred a goodwill impairment
charge of 19.9 million, relating to the activities of Celocom Limited. This decrease was also
driven by the reduction of restructuring costs in 2004 compared to 2003.
Operating income (loss)
In 2004, we recorded operating income of 26.3 million, compared to an operating loss of
133.8 million in 2003. The increase in our operating income of 160.1 million was mainly driven by
increased volumes of chip cards shipped, improved gross margin in all of our segments, and
decreases in our operating expenses mainly driven by lower restructuring and general and
administrative expenses, and lower charges for goodwill amortization and impairment. Our operating
income in 2004 also reflects the overall benefits achieved by earlier restructuring and other cost
reduction measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
|
|
|
|
2004 |
|
|
2003 |
|
|
Change in operating income (loss) |
|
Years ended December 31 |
|
|
|
|
|
(Restated) |
|
|
|
|
|
Telecommunications |
|
|
71.8 |
|
|
|
(29.3 |
) |
|
|
101.1 |
|
Financial Services |
|
|
(26.3 |
) |
|
|
(56.6 |
) |
|
|
30.3 |
|
Identity and Security |
|
|
(19.2 |
) |
|
|
(47.9 |
) |
|
|
28.7 |
|
|
Total |
|
|
26.3 |
|
|
|
(133.8 |
) |
|
|
160.1 |
|
|
The operating income for our Telecommunications segment improved by 101.1 million to an
operating profit of 71.8 million in 2004, compared to an operating loss of 29.3 million in
2003. This increase was mainly due to significantly higher sales, resulting in a higher gross
profit, and the decrease in our operating expenses.
The operating loss for our Financial Services segment decreased by 30.3 million to an
operating loss of 26.3 million in 2004, compared to an operating loss of 56.6 million in 2003.
This decrease is the result of higher sales, resulting in a higher gross profit, and the benefits
from the earlier implementation of restructuring programs and other cost reduction measures.
The operating loss for our Identity and Security segment decreased by 28.7 million to 19.2
million, compared to 47.9 million in 2003. The decrease was mainly due to higher sales, reduced
costs and lower charges for goodwill amortization and impairment in 2004.
42
Financial income (expense), net
Our financial income (expense), net, decreased to 5.7 million in 2004 from 8.2 million in
2003. Interest income on short-term bank deposits decreased to 7.4 million in 2004 from 8.4
million in 2003 due to lower average effective interest rates. Currency exposure on intercompany
financing and related hedges generated a 1.4 million gain in 2003, and no effect on the
Consolidated Statement of Income in 2004.
Share of profit (loss) of associates
In
2004, share of loss of associates was 6.0 million, compared to 7.6 million in 2003. This
loss included goodwill amortization of 3.5 million, compared to 3.3 million in 2003, and
impairment losses of 0.7 million, compared to 2.7 million in 2003.
Other non-operating income (loss), net
In
2004, we recorded a net non-operating loss of 6.8 million, compared to 11.1 million in
2003. This loss included foreign exchange loss amounting to 5.9 million in 2004, compared to
8.6 million loss in 2003, and net losses in available-for-sale financial assets amounting to 0.9
million in 2004, compared to 2.5 million in 2003.
Income tax benefit (expense)
We recorded an income tax expense of 13.0 million in 2004, which reflected a charge of 3.0
million relating to the discounting of a receivable resulting from carry back of tax losses in
France, a net charge from a provision for tax risk of 1.6 million and a partial write-down of
deferred tax assets. In 2003, we recorded an income tax expense of 14.7 million, which included
7.5 million of write-down of deferred tax assets recognized in previous years.
Net income
We reported a net income of 6.3 million in 2004, compared to a net loss of 159.0 million
in 2003, corresponding to a net income per share attributable to equity holders of 0.01 in 2004,
and a net loss per share of 0.27 in 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position remained strong during the year 2005. Cash and cash equivalents were
418.4 million at December 31, 2005, compared to 388.4 million at December 31, 2004.
Operating activities generated 121.4 million of cash in 2005, compared to 27.0 million in
2004. The cash generated by our operating activities in 2004 was affected by a cash outlay of
34.9 million related to a tax assessment in France and by the settlement of 22.0 million in an
escrow account in relation to a legal action, which was released upon a successful outcome in 2005.
The cash generated by our operating activities in 2005 was also affected by the payment of 15.8
million in connection with our restructuring programs, compared to 18.3 million in 2004.
Net cash used in investing activities during the year 2005 was 83.8 million, including a
63.4 million net outflow related to the acquisition of Setec, compared to 26.1 million used in
the year 2004. In 2005, we used 25.1 million for our capital expenditures, compared to 22.9
million in 2004.
Financing activities used 8.3 million of cash during the year 2005, compared to 3.4
million cash used in the year 2004.
On February 28, 2006, our shareholders approved a distribution of reserves (share premium) of
an amount of 0.26 per share, subject to the satisfaction of conditions precedent relating to the
completion of the proposed Combination with Axalto. The distribution was initiated on June 2, 2006.
The total amount of the distribution will be approximately 164.0 million, based on the number of
shares currently outstanding, and would equal approximately 185.0 million on a fully diluted
basis.
We believe that our existing cash resources and our anticipated cash flow from operations are
sufficient to provide for our foreseeable liquidity needs within the next two years.
43
We also use certain financial instruments in our foreign currency hedges. For a description of
our foreign currency hedges, see Item 11. Quantitative and Qualitative Disclosures About Market
Risk and Note 9 to our Consolidated Financial Statements.
Critical Accounting Estimates and Policies
Our annual Consolidated Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the EU.
We consider our critical accounting policies to be those that: (1) involve significant
judgments and uncertainties; (2) require estimates that are more difficult for management to
determine; and (3) have the potential to result in materially different outcomes under varying
assumptions and conditions. On an ongoing basis, we evaluate our estimates which are based on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. We believe that the following represent critical accounting policies that require
significant management judgments and estimates. For a summary of our significant accounting
policies, including the critical accounting policies discussed below, see Note 2 to our
Consolidated Financial Statements.
Revenue recognition
Revenues from product sales are recorded upon transfer of title and risk of loss provided that
no significant obligations of ours remain and collection of the resulting receivable is probable.
We record deferred revenue for cards that are invoiced to customers but not shipped because they
require customization by us. Procedures exist which are regularly reviewed to ensure that the
policies are consistently applied throughout our subsidiaries worldwide.
Impairment of goodwill and other long-lived assets
Goodwill is reviewed for impairment based on expectations of future cash flows, which by
definition are uncertain, at each balance sheet date, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Impairment losses on
goodwill are not reversed. Future cash flows are computed based on the revenue estimates for the
next five years, and include a terminal value assumption. Whenever possible, forecast and long
range planning data approved by management are used in those computations. Future cash flows are
discounted using our cost of capital at the time of the acquisition to which the goodwill is
related. We also consider significant underperformance relative to expected historical or projected
future operating results, significant change in the manner we use the acquired assets or the
strategy for our overall business, and significant negative industry or economic trends. We believe
that the estimates of future cash flows and fair value are reasonable; however, changes in
estimates resulting in lower future cash flows and fair value due to unforeseen changes in business
assumptions, such as a drastic decline in consumer demand, could negatively affect the valuations
of goodwill.
Other long-lived assets that are subject to amortization and depreciation are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized for the amount by which the assets carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less
costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows (cash-generating units).
Non-financial assets other than goodwill that suffered an impairment are reviewed for possible
reversal of the impairment at each reporting date.
Inventory
Our industry is highly competitive and influenced by rapid technological change, frequent new
product developments, changes in demand, product pricing pressure and rapid product obsolescence. We
regularly review inventory quantities on hand for excess inventory, obsolescence and declines in
market value below cost and record an allowance against the inventory balance for such declines.
These reviews are primarily based on managements estimated forecast of future product demand and
production requirements. Possible changes in these estimates could result in revisions to the
valuation of inventory. Inventories are carried at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method. Cost elements included in inventories are
raw materials, labor and manufacturing overhead, excluding the impact of low activity, if any. A
significant component of the cost of production relates to the acquisition of microprocessor chips.
Our provision for microprocessor chips inventory is determined based on the anticipated net
realizable value of finished products which includes cost of production, raw materials, labor and
manufacturing overheads.
44
Research and development
Our results of operations depend on the continued successful development and marketing of new
and innovative products and services. The development of new products and services requires
significant capital investment by our businesses and the success of these products depends on
their acceptance by customers and business associates. Further, our businesses are characterized by
rapid technological changes and corresponding shifts in customer demand, resulting in unpredictable
product transitions, shortened life cycles and increasing emphasis on being first to market new
products and services.
There can be no assurance that we will successfully introduce new products and services, that
these products and services will be accepted by customers, or that our businesses will recoup or
realize a return on their capital investments. We capitalize certain development costs when it is
probable that a development project will be a success and once technological feasibility is
established, otherwise such costs are recognized as an expense when incurred. These costs are
capitalized through the time the product under development is produced and future profitability is
demonstrated. These costs are then amortized over their expected useful lives which, due to the
constant development of new technologies, does not exceed three years. During the development
stage, management must exercise judgment in determining technological feasibility and future
profitability of these projects as well as their expected useful lives. Should a product fail to
substantiate its estimated feasibility or life cycle, we may be required to write off excess
development costs in future periods.
In addition, from time to time, we may experience difficulties or delays in the development,
production or marketing of new products and services. Consequently, we continually evaluate the
recoverability of capitalized costs and make write-downs when necessary.
Income taxes
We estimate our income tax liability in each jurisdiction in which we do business. This
requires that we estimate our actual current tax expense and evaluate temporary differences
relating to items which are treated differently for tax and accounting purposes. These differences
result in potential deferred tax assets and liabilities. Before we recognize a potential deferred
tax asset, we must determine that it is more likely than not that the asset will be recovered from
future taxable income within a reasonable time frame. The recognition of deferred tax assets is
based on our estimates of taxable income by country.
Significant management judgment is required in determining our provision for income taxes and
our recognized deferred tax assets and liabilities.
Hedge accounting
We enter into derivative transactions principally to minimize risks in relation to foreign
currency transactions.
We account for derivative financial instruments in accordance with IAS 39. This requires that
derivatives are initially recognized at fair value on the date the derivative contract is entered
into and subsequently measured at their fair value. The method of recognizing the resulting gain or
loss depends on whether the derivative is designated and qualifies as a hedging instrument for
accounting purposes and, if so, on the nature of the item being hedged. We make significant
estimates when calculating the fair value of our derivative instruments and when identifying the
amount and timing of the items being hedged.
Fair value of the forward exchange contracts at inception is zero. Fair value during the life
and at expiration of the forward contract is calculated according to the following parameters
communicated by our banks or official financial information providers: (i) spot foreign exchange
rate at the date the valuation is performed; (ii) interest rate differential between the two
currencies; (iii) time to expiration; and (iv) notional amount of the contract. Fair value is then
obtained by discounting, for the remaining maturity, the difference between the contract rate and
the market forward rate multiplied by the nominal amount.
Fair value of the option contracts at inception equals the option premiums. Option contracts
are marked-to-market during their life and at expiration using standard option pricing method (such
as Black-Scholes option pricing model), based on market parameters obtained from official
financial information providers or our banks, and using the following
variables: (i) spot foreign exchange rate; (ii) option strike price; (iii) volatility; (iv) risk-free
interest rate; and (v) expiration date of the option.
45
Large shifts in the market conditions above could lead to significant changes in the fair
value of our financial instruments which could result in material movements in the Consolidated
Financial Statements.
Changes in accounting rules could affect our reported results
The International Accounting Standards Board regularly revises current International Financial
Reporting Standards with a view to increasing international harmonization of accounting rules. This
process of amendment and convergence of worldwide accounting rules could result in significant
amendments to the existing rules. It is not possible to predict the impact on our reported results
of any such rule changes which may be made in the future, or whether such rule changes would be
retrospective, potentially requiring us to restate past reported results.
Market Risk
In the conduct of our business, we are exposed to a number of market risks, including currency
exchange risks, interest rate risks and credit risks. To hedge our market risk exposures, we use
several types of derivative instruments. We discuss our exposure to market risks and our hedging
activities in Item 11. Quantitative and Qualitative Disclosures About Market Risk.
US GAAP Reconciliation
We prepare our Consolidated Financial Statements in accordance with IFRS as adopted by the EU,
which vary in certain significant respects from US GAAP. As a result, our net income and
shareholders equity are different under US GAAP and under IFRS.
The following table sets forth our consolidated net income under IFRS and under US GAAP for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(in millions of euros) |
|
IFRS net income (loss) |
|
|
91.9 |
|
|
|
6.3 |
|
|
|
(159.0 |
) |
Total differences between US GAAP and IFRS |
|
|
(3.1 |
) |
|
|
4.7 |
|
|
|
(22.7 |
) |
|
|
|
|
|
|
|
|
|
|
US GAAP net income (loss) |
|
|
88.8 |
|
|
|
11.0 |
|
|
|
(181.7 |
) |
|
|
|
|
|
|
|
|
|
|
Until December 31, 2004, one of the principal differences between US GAAP and IFRS resulted
from the granting of share options to our executive officers and employees. In accordance with
IFRS, the issuance of share options had no effect on net income at the time of grant or of exercise
of the options. Under IFRS, upon exercise of the options, the price paid for the underlying shares
was allocated to share capital and paid-in-capital. Under US GAAP, the difference between the
exercise price and the fair market value of our shares at the time the options are granted
generates compensation expense. Consequently, the accounting for share options in accordance with
US GAAP resulted in a net compensation expense of 7.0 million for the year ended December, 31,
2004 and 6.4 million for the year ended December 31, 2003. As a result of the adoption of IFRS 2
starting January 1, 2005, we charge the cost of these transactions to the income statement. We
measure the cost of services rendered by reference to the fair value of equity instruments granted
(see Note 2.4 to our Consolidated Financial Statements).
Until December 31, 2004, another significant difference affecting the determination of our net
income under US GAAP compared with IFRS resulted from goodwill amortization. As a result of the
adoption of SFAS 142 as of January 1, 2002, we no longer amortize goodwill under US GAAP, as
opposed to IFRS where, until December 31, 2004, goodwill was (i) amortized on a straight-line basis
over a period ranging from five to twenty years; and (ii) assessed for an indication of impairment
at least at each balance sheet date. In accordance with the provisions of IFRS 3 Business
Combinations, adopted as of January 1, 2005, (i) we discontinued amortization of goodwill from
January 1, 2005; (ii) accumulated amortization as of January 1, 2005 has been eliminated with a
corresponding decrease in the cost of goodwill; and (iii) from the year ended December 31, 2005,
onwards, goodwill is tested annually for impairment, as well as when there are indications of
impairment, i.e. whenever events or changes in circumstances indicate that the carrying value may
not be recoverable (see Note 2.4 to our Consolidated Financial Statements).
The following table sets forth our shareholders equity under IFRS and US GAAP as of the dates
indicated.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
|
|
|
|
IFRS shareholders equity |
|
|
837.7 |
|
|
|
721.3 |
|
|
|
707.1 |
|
Total differences between US GAAP and IFRS |
|
|
(1.2 |
) |
|
|
7.3 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
US GAAP shareholders equity |
|
|
836.5 |
|
|
|
728.6 |
|
|
|
700.1 |
|
|
|
|
|
|
|
|
|
|
|
For a discussion of the differences between IFRS and US GAAP as they relate to our
consolidated net income and shareholders equity, see Note 40 to our Consolidated Financial
Statements.
RESEARCH AND DEVELOPMENT
We maintain a longstanding commitment to investing in a broad range of research and
development initiatives to strengthen our leadership in chip card technology and software, such as
our research initiatives in open operating systems, cryptographic processes and application
development and remote management tools. The focus of our research and development is to develop
new software and integrated systems based on our microcontroller chip technology and to reduce the
time required to bring new products and applications to market.
We carry out our research and development activities on chip card operating systems through a
centralized group responsible for the business lines of all three reporting segments
(Telecommunications, Financial Services and Identity and Security). In addition, there are separate
teams for all other research and development initiatives undertaken by each reporting segment.
Our research and development activities are organized on a global basis, with our main
research and development centers located in France, Singapore, Germany and China. We believe we
have one of the largest research and development teams in the chip card industry both in terms of
gross research and development expenditures and number of employees. As of December 31, 2005, we
had 728 engineers working in our research and development centers around the world, compared to 608
engineers as of December 31, 2004.
In 2005, our gross research and development expenditures were 69.4 million, or approximately
7.4% of our net sales, compared to gross research and development expenditures of 68.2 million
(2003: 63.9 million), or approximately 7.9% of our net sales in 2004 (2003: 8.5 million). A
portion of these expenditures was financed through grants and research tax credits available under
certain government programs, which amounted to 5.1 million in 2005, compared to 4.3 million in
2004 and 2.7 million in 2003.
We also maintain certain licenses to third parties technologies. See Item 4. Information on
the Company Business Overview Intellectual Property.
TREND INFORMATION
Trends in the Markets for our Telecommunications Segment
After a market downturn starting in 2001 and continuing into early 2002, growth in the markets
for our wireless products (primarily SIM cards) started to re-emerge in 2003 and was strong in 2004
and 2005. This corresponded with new demand for more advanced wireless telecommunications services,
including wireless data transmission, and growth linked to further adoption of wireless
communication systems using SIM cards. In addition, wireless telecommunications services continued
to become more financially accessible in developing economies, along with continued improvement in
the wireless communications infrastructure in those areas.
The portion of increased demand that most positively affected our performance was demand for
higher priced wireless products (primarily SIM cards with greater capabilities). In 2004 and
continuing in 2005, the favorable shift to these higher-end wireless products and the stronger
overall demand for wireless products were sufficient to overcome the continuous selling price
pressure in this segment.
We believe that our Telecommunications segment should benefit if the wireless sector continues
to gain momentum through 2006. Growth in our Telecommunications segment may, however, be somewhat
lessened by continued declines in the demand for public telephony phonecards and by price pressures
due to increased competition.
47
Wireless carriers are increasingly recognizing the flexible and strategic role of SIM cards
for offering improved and new value-added services to their customers. This should increase the
demand for higher priced SIM cards with greater memory and processing power. We believe this, in
turn, should result in a further improved business mix towards higher priced products and help
offset pressures to lower prices on our more mature products. This improved product mix should also
be aided by further growth in the United States and Latin America, where carriers are adopting SIM
card-based systems and by the growth related to the progressive implementation of 3G networks.
The market for SIM cards continues to grow with emerging markets contributing a substantial
portion of such growth. It appears that the overall average selling price of SIM cards may continue
to decline by approximately 20 to 30% year-to-year as price pressure due to competition continues,
and with the demand for low to mid range products in emerging markets
growing at a faster pace than well
established markets where more higher end products are sold. The average purchase price of
components, materials and labor costs per unit is also expected to continue declining in line with
average selling prices. That is expected to help us maintain margin levels similar to 2005. We
also see the load in our factories producing SIM cards at high levels, which should lead to
investments in equipment to address the high level of demand that is anticipated to continue.
Trends in the Markets for our Financial Services Segment
Progress in the markets for our financial services products was also negatively affected by
the downturns of 2001 and 2002. A significant hindrance to growth in the past has been the absence
of widely accepted technology standards for improved interoperability of products. The continued
adoption of the EMV standard for chip card-based payment systems should be a positive impact in the
adoption of chip cards in 2006.
We foresee continued growth in demand for our financial services products, led strongly by
chip cards used for payments with continued migration towards these products in Latin America,
Southern Europe and Japan. In mature markets for payment chip cards, we anticipate maintaining a
stable position. We also see the market for contactless payment cards as potentially expanding in
the Asia-Pacific area, along with deliveries of such products in the U.S. The development of
on-line authentication products in the banking segment is also growing. This trend may allow us to
deliver more sophisticated and higher valued products to financial services institutions.
Trends in the Markets for our Identity and Security Segment
As government and corporate demand increases toward more secure systems for authenticating
persons and controlling access to networks and facilities, there should be opportunities to promote
the adoption of chip card-based security systems. Our strategy is focused on selling subsystems
based on software components, value-added services and high-end cards. We believe our Identity and
Security segment also stands to benefit from broader acceptance of technology standards that
will allow larger organizations to implement chip card security and identity systems with more
confidence in system interoperability and forward compatibility.
We believe our abilities to produce large volumes of chip cards and deliver associated
infrastructure and integration services should position us to capture market share as spending
increases in this sector.
Trends in Our Development
In 2004, we realigned our business units into three segments: Telecommunications, Financial
Services and Identity and Security. This realignment separated our former Financial Services and
Security segment into two business units. We continued with these segments in 2005. While our
Identity and Security segment started from a small base, we believe its potential growth merits its
continued treatment as a separate business unit. We also believe this realignment has enabled us to
better serve our customers over time through more focused sales and marketing efforts in all our
business units.
The restructuring programs that we implemented in recent years have delivered lower fixed
costs. We intend to continue to keep focusing on managing costs, and are further implementing
processes to better control our expenses.
The anticipated improvement in our profitability, however, assumes an average exchange rate of
approximately US$ 1.25 per euro. The effects of currency fluctuations have played a significant
factor in our results in the recent past and may continue to do so; however, we have attempted to
mitigate our losses through our hedging programs. See Note 9 to our Consolidated Financial
Statements.
48
Following the combination with Axalto, we anticipate that we will be better positioned to
capitalize on opportunities in the markets we serve, and to achieve cost-saving benefits from our
combined operations.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet transactions that have, or are reasonable likely to have, a
current or future effect on our financial condition, revenues, expenses, results of operations,
liquidity, capital expenditures, or capital resources that would be material to our shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
|
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Performance, down payment and bid bonds |
|
|
11.7 |
|
|
|
10.4 |
|
|
|
10.8 |
|
Other bank guarantees related to operations |
|
|
2.5 |
|
|
|
3.8 |
|
|
|
6.5 |
|
|
Total bank guarantees issued to third parties |
|
|
14.2 |
|
|
|
14.2 |
|
|
|
17.3 |
|
|
As of December 31, 2005, bank guarantees, mainly performance bonds and bid bonds, amounted to
14.2 million. These guarantees are issued as part of our normal operations in order to secure our
performance under contracts or tenders for business. These guarantees become payable based upon
non-performance by us.
As of December 31, 2005, guarantees related to operations included an amount of 2.1 million
(2004: 2.7 million) relating to a potential liability in respect of the restricted cash in China
(see Notes 10 and 38 to our Consolidated Financial Statements). In 2005, we recorded a provision in
an amount of 0.6 million with respect to this guarantee.
CONTRACTUAL OBLIGATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of payments |
|
|
(in millions of euros) |
|
|
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31, 2005 |
|
Total |
|
|
Less than 1 year |
|
|
1 to 5 years |
|
|
More than 5 years |
|
|
Borrowings |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.1 |
|
Finance lease obligations |
|
|
35.8 |
|
|
|
6.6 |
|
|
|
20.9 |
|
|
|
8.3 |
|
Operating lease obligations |
|
|
35.8 |
|
|
|
10.1 |
|
|
|
16.0 |
|
|
|
9.7 |
|
Purchase obligations (1) |
|
|
114.5 |
|
|
|
110.6 |
|
|
|
3.9 |
|
|
|
|
|
|
Total |
|
|
186.8 |
|
|
|
127.4 |
|
|
|
41.3 |
|
|
|
18.1 |
|
|
|
|
|
(1) |
|
Including 69.4 million related to microprocessor chips purchase commitments, and other
purchase commitments for materials.. |
As of December 31, 2005, no obligations or commitments other than those disclosed above would
have a significant affect on our Consolidated Financial Statements.
We also have certain commitments arising from our foreign currency hedges. For a description
of our foreign currency hedges, see Item 11. Quantitative and Qualitative Disclosures About Market
Risk and Note 9 to our Consolidated Financial Statements.
See Item 4. Information on the Company Capital Expenditures and Divestitures.
Item 6. Directors, Senior Management and Employees
BOARD OF DIRECTORS
Under Luxembourg law, our board of directors is vested with broad powers to manage our
Company. All powers not expressly reserved by law or by the articles of incorporation to the
shareholders fall within the powers of the board of directors.
During 2005 and until June 2, 2006, our board of directors had twelve members. Members of our
board of directors are appointed by the shareholders to serve terms not to exceed three years and
may be re-appointed for consecutive terms. They may resign at any
49
time, and their functions as members of our board of directors may be terminated at any time
by a simple majority of the votes of the shareholders voting at a general meeting. Under Luxembourg
law, a director may be an individual or a corporation.
Our board of directors conducts its activities in accordance with governance principles set
forth in applicable regulations, exchange rules, our articles of incorporation, our Code of Ethics,
committee charters and other adopted practices.
Our board of directors held eight meetings in 2005. At these meetings, the average attendance
(physically and by telephone) was approximately 89%.
As of January 1, 2004, our board of directors consisted of Mr. Dominique Vignon (Chairman),
Mr. David Bonderman (Vice Chairman), Mr. Alex Mandl, Mr. Randy Christofferson, Mr. Thierry
Dassault, Mr. Geoffrey Fink, Mr. Werner Koepf, Dr. Johannes Fritz, Dr. Peter Kraljic, Mr. Daniel Le
Gal, Mr. Ronald W. Mackintosh and Mr. William S. Price III.
On April 27, 2004, Mr. Ron Mackintosh and Mr. Thierry Dassault ceased being members of our
board of directors, and our shareholders elected Mr. Michel Akkermans and Mr. Kurt Hellström to our
board of directors. As of May 31, 2004, Mr. Randy Christofferson ceased to be a member of our board
of directors. Effective June 1, 2004, Mr. John Ormerod became a member of our board of directors.
As of June 1, 2006, the following individuals comprised our board of directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
Expiration |
|
|
Name |
|
Age |
|
appointment |
|
of Term |
|
Occupation |
Mr. Dominique Vignon
|
|
|
58 |
|
|
June 21, 2002
|
|
April 2007
|
|
Chairman of our board of directors |
|
|
|
|
|
|
|
|
|
|
|
Mr. David Bonderman
|
|
|
63 |
|
|
December 19, 2001
|
|
April 2007
|
|
Vice-Chairman of our board of directors; |
|
|
|
|
|
|
|
|
|
|
Managing Partner, Texas Pacific Group |
|
|
|
|
|
|
|
|
|
|
|
Mr. Alex Mandl
|
|
|
62 |
|
|
October 29, 2002
|
|
April 2007
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
Mr. Michel Akkermans
|
|
|
46 |
|
|
April 27, 2004
|
|
April 2007
|
|
Founder and Chairman, Clear2Pay |
|
|
|
|
|
|
|
|
|
|
|
Mr. Geoffrey Fink
|
|
|
36 |
|
|
October 28, 2003
|
|
April 2007
|
|
Principal, Texas Pacific Group |
|
|
|
|
|
|
|
|
|
|
|
Mr. Johannes Fritz
|
|
|
51 |
|
|
December 19, 2002
|
|
April 2007
|
|
Managing Director, Quandt family office |
|
|
|
|
|
|
|
|
|
|
|
Mr. Kurt Hellström
|
|
|
62 |
|
|
April 27, 2004
|
|
April 2007
|
|
Advisor, Investor AB |
|
|
|
|
|
|
|
|
|
|
|
Mr. Werner Koepf
|
|
|
64 |
|
|
October 28, 2003
|
|
April 2007
|
|
Non-Executive Director, Telent plc |
|
|
|
|
|
|
|
|
|
|
London UK |
|
|
|
|
|
|
|
|
|
|
|
Mr. Peter Kraljic
|
|
|
66 |
|
|
April 17, 2002
|
|
April 2007
|
|
Member of the McKinsey Advisory Council |
|
|
|
|
|
|
|
|
|
|
|
Mr. Daniel Le Gal
|
|
|
55 |
|
|
April 17, 2002
|
|
April 2007
|
|
Partner and Managing Director, Finadvance |
|
|
|
|
|
|
|
|
|
|
|
Mr. John Ormerod
|
|
|
57 |
|
|
June 1, 2004
|
|
April 2007
|
|
Chairman, Walbrook Group Limited |
|
|
|
|
|
|
|
|
|
|
|
Mr. William S. Price
|
|
|
50 |
|
|
February 1, 2000
|
|
April 2007
|
|
Managing Partner, Texas Pacific Group |
On
June 2, 2006, following the first steps taken to effect to the
Combination and in accordance with the
associated resolutions of our shareholders and board of directors, changes were made to the
composition and structure of our board of directors. These changes included setting the number of
members of our board of directors at five directors, and changing its composition to consist of
Messrs. Alex Mandl, Olivier Piou, Werner Koepf, Daniel Le Gal and Michel Soublin.
Board Committees
Until July 26, 2005, our board of directors had three committees and one subcommittee: an
Audit Committee, a Compensation Committee (with a Stock Administration Committee as a subcommittee)
and a Strategy Committee. On July 26, 2005, our board of directors formed an additional committee,
the Governance and Nominating Committee, and adopted a new charter for the M&A and Strategy
Committee (formerly the Strategy Committee).
On June 2, 2006, our board of directors changed the composition of its Audit Committee and
Compensation Committee, and eliminated its Governance and Nominating Committee, M&A and Strategy
Committee and Stock Administration Committee.
Audit Committee
In 2005, the members of our Audit Committee were Messrs. John Ormerod (Chairman), Werner
Koepf, and Johannes Fritz, and William Price who resigned from the Audit Committee on April 13, 2005.
On June 2, 2006, Messrs. Michel Soublin, Werner Koepf and Daniel Legal were appointed to our Audit
Committee in place of Messrs. Ormerod and Fritz.
50
Our Audit Committee held eight meetings in 2005. At seven of these Audit Committee meetings,
all members were in attendance (physically or by telephone). At one Audit Committee meeting, there
were three members out of four in attendance.
The activities of the committee are governed by a specific committee charter. Among other
things, this committee reviews our financial statements, the evolution of our significant
litigations and claims, potential conflicts of interests with
directors, related party
transactions and engages in all other activities as required by law and securities exchange rules.
During 2005, our Audit Committee reviewed, among other items, our Consolidated Financial Statements
for 2004, our quarterly financial statements for 2005, our quarterly accounting judgments and
material comments made by our auditors and reports on related party
transactions, as well as reports on the implementation of regulations arising under the Sarbanes-Oxley Act. Main
off-balance sheet liabilities (and particularly guarantees and foreign exchange operations) were
also regularly reviewed by our Audit Committee and our Chief Financial Officer.
The Audit Committee has the sole authority with respect to the recommendation, compensation,
retention and oversight of the work of our independent auditors. Luxembourg law requires our
auditors to be appointed by our shareholders; therefore, our shareholders appoint the auditors upon
recommendation of the Audit Committee after review of the auditors performance and fulfillment of
certain specific criteria. The Audit Committee has not established any pre-approval procedures for
permissible non-audit services proposed to be performed by our independent auditors, and requires
each engagement for non-audit services to be approved in advance by the Audit Committee (except for
delegation to the Chairman of the Committee of the authority to approve in advance all audit and
non-audit services to be provided by the auditors if presented to the Committee at the next
regularly scheduled meeting ).
Governance and Nominating Committee
As
from its creation on July 26, 2005, the members of our Governance and Nominating Committee
were Mr. Dominique Vignon (Chairman), Mr. David Bonderman, Mr. Johannes Fritz and Mr. Kurt
Hellström.
Our Governance and Nominating Committee held one meeting in 2005. At this meeting, all members
were in attendance (physically or by telephone).
The activities of the committee prior to its dissolution were governed by a specific committee
charter. Among other things, this committee formulated, recommended to the board and oversaw the
implementation and administration of our corporate governance structure and framework; monitored
and reviewed any issues regarding the independence of directors or involving potential conflicts
of interest; reviewed our Corporate Governance Guidelines at least annually and recommended
changes, as necessary, to the board; reviewed and reported on additional corporate governance
matters as necessary or appropriate or as directed by the chairman or the board of directors; lead
the search for, screened, evaluated and recommended to the board of directors qualified candidates
or nominees for election or appointment as directors; recommended board committee assignments and
committee chairs for consideration, including where relevant, on the determination of director
independence. This committee also periodically administered and reviewed with the board an
evaluation of the processes, structure and performance of the board in order to identify areas of
concern or potential issues relating to board and committee processes, performance and
effectiveness and to assess and evaluate the overall effectiveness of individual directors;
assessed and recommended to the board potential candidates for succession to the position of Chief
Executive Officer; and recommended to the board the initial compensation of the Chief Executive
Officer.
In 2005, the Corporate Governance and Nominating Committee reviewed the composition of our
board of directors and concluded that no immediate changes were necessary. The board also discussed
several scenarios concerning plans for succession of management and reported to the board of
directors.
The Governance and Nominating Committee was dissolved by the board on June 2, 2006.
Compensation Committee
In 2005, the members of our Compensation Committee were Messrs. Dominique Vignon (Chairman),
Geoffrey Fink and Werner Koepf. On July 26, 2005, Mr. Kurt
Hellström was also appointed as a member
of this committee. On October 21, 2005, Mr. Geoffrey Fink replaced Mr. Dominique Vignon as Chairman
of the Committee. On June 2, 2006, Messrs. Werner Koepf, Alex Mandl and Olivier Piou were appointed
to our Compensation Committee in place of Messrs. Vignon and Fink.
51
The Compensation Committee held four meetings in 2005, and passed three unanimous written
consents without a meeting. At two of these meetings, all members were in attendance (physically
or by telephone), and in two of these meetings there were three members out of four in attendance.
The activities of the committee are governed by a specific committee charter. Among other
things, this committee reviews our Chief Executive Officers compensation and makes recommendations
on the compensation of our executive officers and directors.
In 2005, the Stock Administration Committee, acting as a subcommittee to the Compensation
Committee, consisted of Messrs. Alex Mandl, Philippe Duranton, Frans Spaargaren, and Stephen Juge.
As of January 1, 2006, Mr. Xavier Molinié replaced
Mr. Philippe Duranton as a member of the Stock
Administration Committee. The activity of this committee is governed by a specific committee
charter. The Stock Administration Committees role is to advise the board of directors concerning
stock option issuances and related matters. Stock options are generally granted to executives and
certain other personnel when they are hired, and potential additional grants are subject to annual
review based on individual and collective company achievement criteria.
On June 2, 2006, our board of directors changed the composition of the Compensation Committee
to be Messrs. Alex Mandl, Werner Koepf and Olivier Piou. The Stock Administration Committee was
eliminated by the board on June 2, 2006.
M&A and Strategy Committee
On July 26, 2005, the Strategy Committee, which consisted of Messrs. Dominique Vignon
(Chairman), Peter Kraljic, Daniel Le Gal, Alex Mandl and William S. Price III, was reorganized into
the M&A and Strategy Committee. As part of that reorganization, Messrs. Dominique Vignon, Daniel Le
Gal and Bill Price resigned from the Strategy committee, and Messrs. Alex Mandl (Chairman),
Geoffrey Fink, Johannes Fritz and Peter Kraljic were appointed as members of the committee.
The M&A and Strategy Committee held six meetings during 2005 with all members in attendance.
The M&A and Strategy Committees role was to advise the board of directors concerning our overall
strategy and long-term planning.
The M&A and Strategy Committee was dissolved by the board on June 2, 2006.
SENIOR MANAGEMENT
Our board of directors has, with the authorization of our shareholders, delegated the
day-to-day management of our Company, including the power to act on our behalf and sub-delegate
powers, to the Chief Executive Officer, for matters up to 30 million euros. This delegation is
subject to certain powers reserved by law to the board of directors or our shareholders.
In September 2002, Mr. Alex Mandl became our Chief Executive Officer, replacing Mr. Ronald
Mackintosh. In January 2004, Mr. Jacques Seneca was appointed as the head of the newly formed
Identity and Security business unit, Mr. Philippe Combes was appointed as the head of the Financial
Services business unit and Mr. Ernest Berger was appointed President of Gemplus North America. On
June 1, 2004, Mr. Frans Spaargaren was appointed as our Chief Financial Officer, replacing Mr. Yves
Guillaumot. On April 18, 2005, Mr. Martin McCourt was appointed President of Gemplus Asia.
In February 2003, Mr. Philippe Combes was appointed as our Executive Vice President,
Operations, and he was appointed as head of our Financial Services Business Unit in January 2004.
Mr. Combes ceased his employment with us in January of 2006, and was replaced as Executive Vice
President, Operations by Mr. Emmanuel Unguran. In May 2003, Mr. Philippe Duranton was appointed as
our Executive Vice President, Human Resources. Mr. Duranton ceased his employment with us in
January of 2006.
The following table sets forth the name, age and current position of each of our top executive
officers as of June 1, 2006.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Mr. Alex Mandl
|
|
|
62 |
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
Mr. Ernest Berger
|
|
|
51 |
|
|
Executive Vice President, Gemplus Americas |
|
|
|
|
|
|
|
Mr. Stephen Juge
|
|
|
52 |
|
|
Executive Vice President, General Counsel |
|
|
|
|
|
|
|
Mr. Martin McCourt
|
|
|
44 |
|
|
Executive Vice President, Gemplus Asia |
|
|
|
|
|
|
|
Mr. Jean-François Schreiber
|
|
|
33 |
|
|
Executive Vice President, Strategy |
|
|
|
|
|
|
|
Mr. Jacques Seneca
|
|
|
46 |
|
|
Executive Vice President, President EMEA |
|
|
|
|
|
|
|
Mr. Frans Spaargaren
|
|
|
50 |
|
|
Executive Vice President, Chief Financial Officer |
52
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Mr. Emmanuel Unguran
|
|
|
41 |
|
|
Executive Vice President, Operations |
|
|
|
|
|
|
|
Mr. Philippe Vallée
|
|
|
41 |
|
|
Chief Technology Officer and
Executive Vice President, Product and Marketing |
On June 2, 2006, as a
consequence of our combination with Axalto Holding N.V. and associated
resolutions of our board of directors, certain changes were made in our management. These changes
included the appointment of Mr. Frans Spaargaren as our Chief Executive Officer to replace Mr. Alex
Mandl who resigned from that position, in addition Mr. Spaaragarens continuing role as our Chief
Financial Officer.
DIRECTORS AND EXECUTIVE OFFICERS BIOGRAPHIES
Dominique Vignon
served as Chairman of the board of directors from June 21,
2002 until June 2, 2006. Mr.
Vignon served as Chairman of the board of directors and Chief Executive Officer of the Framatome
Group from 1996 to 2001, where he also developed that groups connector business (FCI). From the
end of 2000 to the end of 2001, he served as President of Framatome ANP and led the merger of the
Framatome and Siemens corresponding activities. From 1995 to 1996, he was President of Framatomes
nuclear business. From 1993 to 1995, he was Chairman of Jeumont Industrie. From 1990 to 1993, Mr.
Vignon was General Manager of Nuclear Power International (NPI), the joint venture of Framatome and
Siemens. From 1975 to 1990, he worked at Electricité de France, where he was in charge of major new
generation projects in France and abroad. Mr. Vignon is a graduate of Frances Ecole Polytechnique,
and of the leading French Engineering School, the Ecole Nationale des Ponts et Chaussées (civil
engineering). He also holds a Master in Economics. Mr. Vignon serves on the boards of Completel
Europe N.V. and CMR (Contrôle-Mesures-Régulations).
Alex Mandl
served as Chief Executive Officer from September 2002 until
June 2, 2006, and as director since
October 29, 2002. Mr. Mandl is now Executive Chairman of Gemalto
N.V. From April 2001 through August 2002, Mr. Mandl was a principal in ASM Investments
focusing on technology investments. Previously, Mr. Mandl served as Chairman and CEO of Teligent, a
company he started in 1996, offering the business markets an alternative to the local Bell
Companies for telecommunication/internet services. From 1991 to 1996, Mr. Mandl was with AT&T where
he served as President and Chief Operating Officer with responsibility for long distance, wireless,
local communications and Internet services. Prior to his President/COO position, he was AT&Ts
Chief Financial Officer. Between 1987 and 1991, Mr. Mandl was Chairman and CEO of Sea-Land
Services, Inc., the worlds leading provider of ocean transport services. In 1980, he joined
Seaboard Coastline Industries, a diversified transportation company, as Senior Vice President and
Chief Financial Officer. Mr. Mandl began his career in 1969, when he joined Boise Cascade Corp. as
a merger and acquisition analyst, and he held various financial positions during the next eleven
years. Mr. Mandl holds a Master of Business Administration from the University of California at
Berkeley and a Bachelor of Arts degree in economics from Willamette University in Salem, Oregon.
Mr. Mandl serves on the boards of Dell Computer Corporation, the Walter A. Haas School of Business
at the University of California at Berkeley, Willamette University and the American Enterprise
Institute for Public Policy Research.
David Bonderman
served as Vice-Chairman of the board of directors from
December 2001 until June 2, 2006. Mr. Bonderman is now a member
of the board of directors of Gemalto. He
is a principal, general partner and one of the founders of Texas Pacific Group (TPG) and its
Asian affiliate, Newbridge Capital. Prior to forming TPG in 1992, Mr. Bonderman was Chief Operating
Officer of the Robert M. Bass Group, Inc. (now doing business as Keystone, Inc.) (RMBG) in Fort
Worth, Texas. Prior to joining RMBG in 1983, Mr. Bonderman was a partner in the law firm of Arnold
& Porter in Washington, DC, where he specialized in corporate, securities, bankruptcy, and
antitrust litigation. From 1969 to 1970, Mr. Bonderman was a Fellow in Foreign and Comparative Law
in conjunction with Harvard University and from 1968 to 1969, he was Special Assistant to the U.S.
Attorney General in the Civil Rights Division. From 1967 to 1968, Mr. Bonderman was Assistant
Professor at Tulane University School of Law in New Orleans. Mr. Bonderman graduated magna cum
laude from Harvard Law School in 1966. He was a member of the Harvard Law Review and a Sheldon
Fellow. He is a 1963 graduate of the University of Washington in Seattle. Mr. Bonderman serves on
the boards of CoStar Group Inc. and Ryanair Holdings, plc, of which he is Chairman. He also serves
on the boards of The Wilderness Society, The Grand Canyon Trust, the World Wildlife Fund and the
American Himalayan Foundation, the University of Washington Foundation as well as the Harvard Law
School Deans Advisory Board.
Michel Akkermans served as one
of our directors from April 27, 2004 until June 2, 2006. Mr. Akkermans is a
successful entrepreneur specializing in information technology for the banking industry. Mr.
Akkermans holds a Master of Science in Electronic Engineering and Computer Sciences and a degree in
Economics & Finance from the University of Leuven in Belgium. He is currently Chairman and Chief
Executive of Clear2Pay, a software solutions company that helps financial institutions to provide
branded electronic payment services. Mr. Akkermans was previously Chairman and CEO of FICS and
Former Executive Chairman of NASDAQ-listed S1 Corporation, the market leader in internet banking.
In addition to Clear2Pay, he also serves on the boards of Capco, Approach, Quest for Growth,
Proficient, and is a member of the Advisory Board of GIMV.
53
Ernest
Berger has served as President of Gemplus Americas since
January 2004 and President of Gemplus North America since
June 2, 2006. He has 15
years of experience in the financial services sector, including at American Express from 1990 to
1995, and at First USA from 1995 to 1999, where he held senior management positions. More recently,
Mr. Berger was a member of the executive team at the New York office of Walker Digital, and then
managed his own consulting firm. He holds a Bachelor of Science in Mechanical Engineering from
Columbia University in New York, and an Master of Business Administration from the Wharton School,
University of Pennsylvania, in Philadelphia.
Philippe
Combes served as our Executive Vice President, Operations since February 2003, and was
appointed as head of our Financial Services Business Unit as of January 20, 2004. Mr. Combes
ceased his employment with us in January of 2006. Prior to joining Gemplus, Mr. Combes had been
running his own Executive Coaching consultancy. From 1998 to 2002, he was CEO of Philips Displays,
based in Holland, the worldwide leader in consumer displays. From 1988 to 1998, Mr. Combes served
in general management positions for Thomson Multimedia in Hong Kong, China, Poland and France,
including VP Operations for Displays. In 1975 he joined Schlumberger Industries where he held
various operational responsibilities in France, Brazil and Indonesia. Mr. Combes has a Bachelor of
Arts degree from ENSAM (Ecole Nationale Supérieure dArts et Métiers) with a masters in robotics
and electronics.
Philippe Duranton served as our Executive Vice President, Human Resources from May 2003 to
December 2005. Prior to joining Gemplus, Mr. Duranton served as Human Resources EVP at Canal+ and
Co-Managing Director, General Affairs, for the Television and Film Division of Vivendi Universal
from 1998 to 2002. Prior to joining Canal+, Mr. Duranton spent nine years (1989 to 1998) at Thales
where he held numerous Human Resource management positions across the companys divisions. Mr.
Duranton began his career in education and held various positions from 1985 to 1988 in both the
public and private sectors. Mr. Duranton holds a variety of academic distinctions including a
D.E.S.S. diploma in Human Resource Management from the Institute of Administration for Business,
Bordeaux, France, and a masters degree in History.
Geoffrey
D. Fink served as a director from October 2003 until June 2,
2006. Mr. Fink is now a member of the board of directors of Gemalto. Mr. Fink is a London-based
Principal in Texas Pacific Groups operating group, which he joined in December 2000. From May 1998
to December 2000, Mr. Fink was a Vice-President and subsequently Senior Vice-President with
Security Capital Group. Between August 1999 and December 2000, Mr. Fink was also Chief Operating
Officer, head of the Management Committee, and board member of Access Space. In 1993 and from 1995
to 1998, Mr. Fink was a Consultant and then Engagement Manager with McKinsey & Company in London.
Prior to joining McKinsey, Mr. Fink worked in the M&A departments of both Goldman Sachs in London
and PaineWebber in New York. Mr. Fink received a Bachelor of Arts degree summa cum laude from Yale
University, a Juris Doctor degree magna cum laude from Harvard University and a Masters degree
focused on international business from the Fletcher School of Law and Diplomacy. He is a member of
the New York Bar.
Johannes
Fritz served as a director from December 2002 until June
2, 2006. Mr. Fritz is now a member of the board of directors of
Gemalto. He has been the managing director
of the Quandt family office since June 2000. From 1991 to June 2000, he was a managing director
responsible for all financial affairs of the Quandt family office and running its
day-to-day-business. In 1989 he joined the Quandt family office. Prior to that, he spent five years
at KPMG covering financial institutions and industrial companies. From 1982 to 1983, he worked with
Bertelsmann AG in the area of human resources as an assistant to a board member. Mr. Fritz studied
at Mannheim University where he was awarded a Master and Doctor degree in Business Administration.
As a research associate he followed a postgraduate education at the Stern Business School (New York
University). Mr. Fritz earned a degree as a tax advisor and a certified public accountant (CPA). He
serves on the supervisory board of Solarwatt AG and Drees & Sommer AG, is a member of the regional
council of Deutsche Bank and of the advisory boards of BHF-Bank and LRP Landesbank Rheinland-Pfalz.
Kurt
Hellström served as a director from April 27, 2004
until June 2, 2006. Mr. Hellström is the former
President and Chief Executive Officer of Ericsson, the major telecommunications group, where he
spent almost 20 years in a number of senior roles. Earlier in his career, he held commercial
positions with Jugner Instrument and Standard Radio & Telephone. Mr. Hellström holds a Master of
Science in Electrotechnology. He serves on the Boards of Atlas Copco, Bharti Televentures Ltd,
Spirent Ltd, Sim2Travel, Kineto Wireless Inc, VTI, Symsoft, FarEastTone and The Swedish Trade
Council.
Werner Karl Koepf has served as a director since October 2003. Mr. Koepf currently holds
various senior management positions at Telent plc London UK; in particular he serves as director
and member of the audit, nominations, remunerations and operations review committee. Mr. Koepf
serves as Chairman of the supervisory board of Telent GmbH Backnang Germany. From 1993 to
2002, Mr. Koepf was successively Vice President and General Manager of the General Business Group
of Compaq Computer, Europe Middle East and Africa (EMEA) and Chief Executive Officer and Chairman
for Compaq Computer, EMEA. From 1989 to 1993, Mr. Koepf was Chairman and Chief Executive Officer
for European Silicon Structures S.A. in Luxemburg. Previously, Mr. Koepf held various management
positions at Texas Instruments Inc., including as Vice-President and General Manager of several
divisions of the group. Mr. Koepf received a Master of Business Administration from Munich
University and a Bachelor of Electrical Engineering
54
degree with honors from the Technical College in St. Poelten in Austria. Mr. Koepf is an
advisor for Techno Venture Management GmbH, a venture capital company in Munich and Boston
(Massachusetts). Mr. Koepf is Consultant for Invision AG, a venture capital company in Zug,
Switzerland. Mr. Koepf is Chairman of the board of directors of PXP Software AG in Austria. Since
February 2006, he has been a board member of SCM Microsystems Inc.
Stephen Juge has served as our Executive Vice President, General Counsel since November 2000.
Prior to joining Gemplus, Mr. Juge served from January to October 2000, as Senior Vice President
and General Counsel of Walt Disney Europe. From April 1996 to January 2000, Mr. Juge served as
Senior Vice President and European Legal Counsel of The Walt Disney Company (Europe) S.A. From
November 1987 to March 1996, Mr. Juge served as Vice President and General Counsel of Disneyland
Paris Resort (Euro Disney S.C.A.). Prior to joining Disneyland Paris, Mr. Juge was an associate at
the international law firm of Coudert Frères in Paris between 1981 and 1987. Mr. Juge attended
Louisiana State University, received a Juris Doctor degree from the Tulane University School of Law
and studied comparative law at the University of Oxford on a Marshall Foundation Fellowship.
Peter Kraljic
served as a director from April 2002 until June 2, 2006. Dr. Kraljic joined McKinsey in 1970 and has worked
extensively on strategic, organizational, operational and restructuring programs for industrial
companies in Germany, Austria, France as well as in Central and Eastern Europe. He
was a senior director with
McKinsey & Co. Inc. in New York until July 2002. From 1993 to 1998,
he was responsible for McKinseys activities in France as Directeur Général. Prior to joining
McKinsey, Dr. Kraljic worked as a researcher in La Continentale Nucleaire, Luxembourg, as well as
for the Welding Institute Ljubljana, Slovenia. Dr. Kraljic holds a degree in metallurgy from the
University of Ljubljana, a Doctorate from the Technical University Hanover and a Masters in
Business Administration from INSEAD, Fontainebleau, France. Dr. Kraljic serves on the supervisory
board of the Wolfsburg AG association, LEK d.d. and of IEDC Bled Management School.
Daniel Le Gal has served as a
director since April 2002, and as Chairman since June 2, 2006. He currently serves as a partner and
Managing Director of Finadvance. One of our co-founders in 1988, Mr. Le Gal served as our Chief
Executive Officer from 1997 to 1999, prior to which he held several management positions in Sales,
Marketing and Strategic Planning for our Company. Prior to founding our Company, from 1982 to 1987,
Mr. Le Gal served as Marketing Manager in the Telecommunication Unit of Thomson Semiconductors.
From 1975 to 1982, he held various positions at France Telecom. Daniel Le Gal holds an Engineering
Degree from Supelec, in Paris, France. Mr. Le Gal serves on the boards of directors of Tornado,
T.O.D, Qualicontrol and S.E.A.
Martin McCourt has served as President
of Gemplus Asia since April 2005, responsible for the
whole of Asia, including Asia Pacific, Greater China, Japan and Korea. He has 20 years of
experience in the telecommunications sector, including several years focused on Asian markets. He has held
leadership roles in R&D, Sales and Marketing, Operations, Strategy and M&A and was most recently
Vice President of Corning Cable systems Project Services business. Mr. McCourt has a Master of
Business Administration from INSEAD, a Ph.D in Integrated Optics from the Institut National
Polytechnique in Grenoble and a Bachelor of Electronic Engineering from University College Dublin.
John
Ormerod served as our director from June 1, 2004 until June
2, 2006. Mr. Ormerod is now a member of the board of directors of
Gemalto. Mr. Ormerod is presently the Chairman of Walbrook Group
Limited. Mr. Ormerod became a Senior
Partner in the UK practice of Deloitte & Touche LLP, the international accounting firm from 2002
until May 2004 and a member of the firms UK Executive and Board. In 1981, Mr. Ormerod was a
Partner of Andersen. He served two years on Andersens Worldwide Chief Executives Advisory Council
and was European Technology, Media & Telecommunications (TMT) practice leader and member of the
Global TMT Industry team executive. Mr. Ormerod was the Chairman of Andersens UK Partnership
Council (from 1999 until 2000) and Andersens UK managing partner (from 2001 until 2002) Mr.
Ormerod was educated at Oxford and is a Chartered Accountant. He serves on the board and chairs the
audit committee of Transport for London. Mr. Ormerod is a non-executive director of BMS Associates Limited, trustee of the
Roundhouse Trust and member of the Global Advisory Board of London Business School. Since October
1, 2005, Mr. Ormerod has been the Senior Independent Director and Chairman of the Audit Committee of
Misys plc.
Olivier Piou has served as one of our directors since June 2, 2006. He is also a director of
Gemalto N.V. He has been a director and the Chief Executive Officer of Axalto Holding N.V. since
February 2004. After graduating from the Ecole Centrale de Lyon, he began his career with
Schlumberger in 1981 and has held different management positions in the technology, marketing and
operations divisions of Schlumberger in France and in the United States. From 1994 to 1997, he was
Vice President of Marketing and Technology of the e-Transactions business and from 1998 to 2000 he
was President of the Smart Cards business. From 2001 to 2004, he was President of Volume Products
business and Global Markets Segments. He is also the Chairman of Eurosmart, the international
non-profit association based in Brussels, which represents the chip card industry globally, and
member of the board of INRIA (Institut National de Recherche en Informatique et en Automatique),
the French national institute for research in computer science and control.
55
William S. Price, III served as a
director from February 2000 until June 2, 2006. Mr. Price was a founding
partner of the Texas Pacific Group in 1992. Prior to forming the Texas Pacific Group, Mr. Price was
Vice President of Strategic Planning and Business Development for General Electric Capital
Corporation. From 1985 to 1991, Mr. Price was employed by the management consulting firm of Bain &
Company, attaining partnership status and acting as co-head of the Financial Services Practice.
Prior to 1985, Mr. Price was employed as an associate specializing in corporate securities
transactions with the law firm of Gibson, Dunn & Crutcher LLP. Mr. Price is a member of the
California Bar and graduated with honors in 1981 from the Boalt Hall School of Law at the
University of California, Berkeley. He is a 1978 Phi Beta Kappa graduate of Stanford University.
Mr. Price serves on the boards of directors of Bally International, British Vita, Cranium, DoveBid
Inc, Grohe A.G. and IRMC.
Jean-Francois Schreiber was nominated Executive Vice-President on January 9, 2006
and has been heading the Strategy department of Gemplus since 2004 covering strategic planning,
Merger and Acquisitions, GemVentures as well as market intelligence. Mr. Schreiber joined
Gemplus in 1998 and has held various Management positions in R&D, Marketing and Strategy or more
recently as a principal of GemVentures, Gemplus Venture Capital arm. Mr. Schreiber is an engineer
graduated from Ecole Centrale (Lyon, France) and holds a MBA from Essec (Paris, France).
Jacques Seneca was nominated
Executive Vice-President, President EMEA on January 1, 2006.
Previously, Mr. Seneca served as our Executive Vice President, Business Development Unit since January 2003, and
as head of the ID & Security Business Unit with effect as of January 20, 2004. Prior to that date,
he served as General Manager of our GemVentures Services Unit from September 1, 2001. Mr. Seneca
joined Gemplus in 1989 as Project Manager. He has held several management positions as Products
Department Manager, General Manager for Sales and Manufacturing Operations in Germany, General
Manager for the Telecom Business Division, and as Executive Vice President for Gemplus Marketing &
Technology. Mr. Seneca has been a member of the Gemplus Executive Committee since 1990. Prior to
joining our Company, he worked with STMicroelectronics where he held various positions in the
fields of manufacturing, marketing and business development. Mr. Seneca holds a Degree in
Engineering from ENSAM (Ecole Nationale Supérieure dArts et Métiers) and a Business Administration
degree from IAE of Aix-en-Provence in France.
Michel Soublin has served as a director since June 2, 2006. He is also a director of Gemalto
Holding N.V. and has been a director of Axalto Holding N.V. He is a graduate of the Institute of
Political Studies in Paris and of the Faculty of Law and Economics. He is currently Financial
Adviser, Schlumberger Limited. He joined Schlumberger in 1973 and has held several positions in the
financial sector in Paris, New York and Moscow, most recently, financial director of Oilfield
Services from 1996 to 1998, seconded as Finance Director to OAO NK Yukos from 1999 to 2001 and
Schlumberger Group Treasurer from 2001 to February 2005. From 1983 to 1990, he was the Chief
Executive Officer of Schlumbergers e-Transactions subsidiary (Smart cards, POS terminals, service
station equipment and parking divisions). He is a member of the supervisory board of Atos Origin.
He is a founding member of the Association Française des Trésoriers dEntreprises and Chairman of
the Comité de la Charte, a French non-profit organization.
Frans Spaargaren has served as our Chief Financial Officer and Executive Vice President of
Gemplus since June 2004. Mr. Spaargaren is currently both our Chief
Executive Officer and Chief Financial Officer. Before joining Gemplus he was Executive Vice President of Philips
International, with responsibility for Philips joint venture operations with LG Electronics. From
May 1998 till November 2001 he was Chief Financial Officer and Executive Vice President of Philips
Components. Prior to that he held various positions in general and financial management at Varta
Batteries, latest as a Member of the Divisional Board of Varta Portable Batteries. Mr. Spaargaren
has a Bachelors degree in Economics and Accounting from Utrecht University, a post-graduate
Diploma in Financial Management, and a Master in Business Administration from Henley Management
College, United Kingdom.
Emmanuel Unguran was nominated Executive Vice-President of Gemplus Operations on January 9,
2006. Emmanuel Unguran is responsible for the development and implementation of Gempluss
Manufacturing strategy in accordance with overall Company strategy. Emmanuel joined Gemplus in
1997 where he held managerial positions in the Industrial Coordination group, specializing in
Personalization, and in the Gémenos Memory Card plant (France). From 1999 to 2003, he was relocated
to Cuernavaca, Mexico where he began as plant Manager and then became the Regional Manufacturing
Manager for the Americas. From 2003 to 2005, he was in charge of the worldwide industrialization
coordination and then took on responsibility for the European manufacturing operations. Prior to
joining Gemplus, Emmanuel worked from 1990 to 1997 for Labinal and its Purflux automobile branch as
Methods & Industrialization Manager. He started his career in 1987 in the USA with the Vallourec
group working on the startup of a new US manufacturing plant. Emmanuel Unguran graduated from ENSAM
with a degree in metallurgy.
Philippe Vallée was appointed Chief Technology Officer and Executive Vice-President Product
and Marketing on January 9, 2006. As such, he oversees new product introductions for all business
segments within Gemplus as well as the innovation process. He served as our Executive
Vice-President, Telecom Business Unit since February 2002. He was Vice-President Marketing of the
Telecom
56
Business Unit from May 2001 to February 2002. He was previously based in Singapore as
Executive Vice-President of Gemplus Technologies Asia, and headed the marketing and development
activities and professional services operations of Gemplus Asia Pacific. Mr. Vallée has 12 years of
experience in the chip card industry and has served in various marketing, product management and
sales capacities in our Company. Prior to joining our Company, Mr. Vallée served as product manager
on the first generation of GSM mobile phones for Matra Communications (now Lagardère Group) in
France. Mr. Vallée has a Bachelors degree in Electronics and Telecommunications Engineering and a
Master of Science in Marketing Management from ESSEC.
COMPENSATION OF DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS
Aggregate compensation paid by us with respect to our directors and executive officers as a
group for the fiscal year ended December 31, 2005 was approximately 11,954 thousand, including
8,970 thousand to our senior executive officers (individuals who have been Executive Vice
Presidents during the year 2005) and 2,984 thousand to our directors. The amount of 11,954
thousand includes 1,694 thousand related to share-based compensation expense, accounted for in
accordance with IFRS 2 as adopted by us starting January 1, 2005. In addition, a total of 7,870,000
options were granted to our directors and executive officers as a group during 2005.
The following table presents the gross amounts of the compensation paid for the fiscal year
ended December 31, 2005 to our directors and Chief Executive
Officer.
|
|
|
|
|
|
|
Total amount in |
|
Name |
|
Thousands of euros |
|
Michel Akkermans |
|
|
50 |
|
David Bonderman |
|
|
51 |
|
Geoffrey Fink |
|
|
63 |
|
Johannes Fritz |
|
|
65 |
|
Kurt Hellström |
|
|
50 |
|
Werner Karl Koepf |
|
|
63 |
|
Peter Kraljic |
|
|
56 |
|
Alex J.
Mandl1 |
|
|
2,033 |
|
Daniel Le Gal |
|
|
50 |
|
John Ormerod |
|
|
78 |
|
William S. Price |
|
|
52 |
|
Dominique Vignon |
|
|
373 |
|
Total |
|
|
2,984 |
|
|
|
|
1 |
|
Includes bonus and housing allowance. See Item 19. Exhibits. |
At the annual meeting of the shareholders held on April 27, 2004, our shareholders approved
the principles of the compensation of directors amounting to a
maximum of
1 million in the aggregate. Subsequently, on April 27, 2004, our board of directors decided to allocate compensation to
individual directors of 50 thousand per year per director as compensation in connection with
services performed as a member of our board of directors, plus 20 thousand for the Audit
Committee Chairman, 10 thousand for elected committee Chairmen, plus 1 thousand per committee
meeting attendance for each committee member. On April 26, 2005, our board of directors decided,
subject to the shareholders approval of the principles of the amount of the compensation, to
allocate compensation to individual directors in the same manner as decided on April 27, 2004. At
the annual meeting of the shareholders held on April 26, 2005, our shareholders re-approved the
principles of the compensation of directors amounting to a maximum of 1 million. Mr. Thierry
Dassault waived his compensation for 2004. At the annual meeting of the shareholders held on April
25, 2006, our shareholders confirmed the principles of compensation of directors amounting to a
maximum of
1 million, with our Chief Executive Officer not being entitled to these fees,
None of the non-employee directors
has any agreement with us that provides for benefits upon
termination of service. In 2005, Mr. Vignon was an employee of our Company in respect of his capacity as a
Chairman of our board of directors and, therefore, may be entitled to certain benefits upon
termination of his employment, including up to one-year compensation upon
termination of his employment contract with the Company.
57
STOCK OPTIONS
In General
On July 27, 2000, we adopted a stock option plan that provides for the grant of stock options
to our employees. The term of the options granted under the plan is determined by the notice of
grant, and will not exceed ten years from the date of the grant of the option. Pursuant to an
authorization of the shareholders during an extraordinary general meeting held on April 29, 2003,
options may be granted under the current plan until May 31, 2006.
The maximum number of shares of common stock that may be issued under the current stock option
plan is 50,000,000. As of March 31, 2006, 28,454,036 stock options were outstanding.
Our employees are also currently
beneficiaries under the stock option plans previously adopted
for Gemplus S.A., our main operating subsidiary in France. Our employees may contribute the
stock options or the shares of Gemplus S.A. received upon exercise of
these options to us in exchange for
options or shares, as applicable, of our Company. As of March 31, 2006, 197,249 options for
subscription of shares of Gemplus S.A. were outstanding under plans
pre-existing the formation of our Company. If such Gemplus S.A.
stock options outstanding as of March 31, 2006 were exercised or exchanged for options of our
Company and if all the shares resulting from the exercise of these options were contributed to our
Company, the beneficiaries would be the holders of 9,862,450 of our shares. In addition, certain
employees of Gemplus S.A. have elected to receive stock options of our Company in exchange for
their Gemplus S.A. stock options. As of March 31, 2006, 2,011,250 options resulting from the
conversion of Gemplus S.A. stock options were outstanding.
The terms and conditions of Gemplus S.A.s stock option plans are substantially consistent
with those of our stock option plan as described below, except for the method of determination of
the option exercise price and the vesting period. The exercise price was determined at the time of
issuance of the options based on the fair market value of the securities as determined by the board
of directors of Gemplus S.A. One-third of the options vest each year over a three-year term for
beneficiaries in France under the Gemplus S.A. stock option plan issued to employees in France in
1999 and 2000, while 25% of the options vest each year over a four-year term for beneficiaries
outside of France. No additional options may be granted under the Gemplus S.A. stock option plans.
Plan Administration
During
2005 and until June 2, 2006, stock option plans were administered by a Stock Administration Committee that reported
plan activities to the Compensation Committee of our board of directors on a quarterly basis. Under
the option plan and other guidelines, the Stock Administration Committee had limited authority to
determine, in its discretion:
|
|
|
the persons to whom options are granted (except any grant of options to directors and
senior executive officers, which is under the authority of the Compensation Committee); |
|
|
|
|
the vesting schedule and conditions under which the options may be exercised, including any lockup periods; and |
|
|
|
|
any other matters necessary or desirable for the
administration of the option plans. |
Our Stock Administration Committee
was dissolved by our board of directors on June 2, 2006.
Vesting Period
Unless otherwise decided by the Stock Administration Committee during its existence, the
vesting period for options granted under our stock option plans will be four years, with 25% of the
granted options vesting in each year, exercisable upon each anniversary of the date of grant,
subject to specific provisions pursuant to local regulations as applicable.
Option Exercise Price
Our stock option plans require that the exercise price for issued options be 100% of the fair
market value of the underlying shares of common stock on the date of grant as determined by the
Compensation Committee or the Stock Administration Committee, as applicable, subject to specific
provisions pursuant to local regulations as applicable. The exercise price may not be less than
100% of the value of the underlying shares on the relevant stock exchange on the date of grant,
subject to applicable law.
58
On April 17, 2002, our board of directors approved a plan whereby our employees were offered
the opportunity to waive and cancel 0%, 50% or 100% of the stock options previously granted between
July 2000 and December 31, 2001 and to receive newly issued options. This plan was launched on May
23, 2002. On June 5, 2002, 17,106,162 options were cancelled according to the instructions of the
option holders. The new options vest over a period of 3.5 years subject to the following schedule:
25% vest after 6 months from the date of grant, 25% vest after 1.5 years from the date of grant,
25% vest after 2.5 years from the date of grant, 25% vest after 3.5 years from the date of grant
(subject to certain specific provisions pursuant to local regulations). Out of the 17,034,084 new
stock options granted in connection with this exchange on December 10, 2002 for worldwide employees
and July 22, 2003 for employees in the UK, 10,302,502 stock options were outstanding as of March
31, 2006.
General Plan Provisions
Share Counting. If any outstanding option expires, terminates or is canceled for any reason,
the shares of common stock subject to the unexercised portion of such option will become available
for future grants under the option plan.
Effect of Termination of Employment. If an option holders employment is terminated:
|
|
|
for any reason other than the option holders death, he or she may exercise options which
were exercisable at the time of the option holders termination within twelve months after
such termination, and all other options will expire at such time; |
|
|
|
|
in the event of the death of the option holder, his or her designated beneficiary may
exercise all options granted to the beneficiary within six months following the option
holders death. |
Adjustments upon Changes in Capitalization. Our stock option plans provide for an adjustment
in the number of shares of common stock available to be issued under the plans, the number of
shares subject to options and the exercise prices of options upon changes in our capitalization.
On December 6, 2005, we entered into a Combination Agreement with Axalto pursuant to which we
and Axalto agreed that prior to such combination, Gemplus would make a distribution of its
available reserves in the amount of 0.26 per share to our shareholders (the Distribution).
The Distribution was approved by a majority of our shareholders at the general shareholders
meeting held on February 28, 2006. The Distribution was to occur subject to satisfaction of
conditions precedent to the transaction, such as receipt of regulatory approvals, including the
filing with the Autorité des marchés financiers in France of Gemaltos exchange offer to Company
shareholders to exchange their Company shares for Gemalto shares at a ratio of two Gemalto shares
for every twenty-five Company shares. We have announced that the conditions precedents have been
satisfied and the Distribution was initiated June 2, 2006. The terms of the Company stock option plans require adjustments to be made to
Company stock options should our Company distribute to its shareholders all or a portion of its
reserves. Consequently, the exercise price of Company stock options and the number of Company
shares to be received upon exercise of Company stock options will be adjusted based on a formula
determined under French law and applied to the Company globally as determined by management as a
result of the Distribution.
Adjustments upon Change of Control. Our stock option plans provide for certain rights relating
to vesting of outstanding employee options upon the occurrence of a change of control and similar
events.
No Assignment or Transfer. During an option holders lifetime, each option granted to an
option holder is exercisable only by him or her and is not transferable.
Amendment. During its existence, our Stock Administration Committee could at any time amend
the stock option plans to adjust to or comply with applicable local legal, tax and accounting
requirements. However, any modification or adaptation that would impair the rights of an option
holder requires the prior consent of that option holder.
Senior Management Stock Options
On November 10, 2000, our shareholders authorized our board of directors to increase our share
capital and issue up to 60,000,000 shares to our directors and executive officers (including any of
its subsidiaries or affiliates) in the form of stock options or, except in the case of directors,
in the form of free shares, in each case on terms and conditions determined by our board of
directors in its sole discretion. Our board of directors may issue these stock options and free
shares from time to time over a five-year period from the date of publication of the shareholder
resolution and in accordance with Luxembourg law. As of March 31, 2006, 30,696,160 such stock
59
options were outstanding. The stock options issued pursuant to this shareholder resolution are
not subject to the terms and conditions of our stock option plans, but are subject to the terms of
a separate plan for this reserve of stock options.
On April 17, 2002, our board of directors approved a plan whereby members of our senior
management were offered the opportunity to waive and cancel 0%, 50% or 100% of the stock options
previously granted between July, 2000 and December 31, 2001 and receive newly issued options. This
plan was launched on May 23, 2002. On June 5, 2002, 250,000 options were cancelled according to the
instructions of the holders. On December 10, 2002, 250,000 new options were granted. The new
options vest over a period of 3.5 years subject to the following schedule: 25% vest after 6
months from the date of grant, 25% vest after 1.5 years from the date of grant, 25% vest after 2.5
years from the date of grant, and 25% vest after 3.5 years from the date of grant (subject to
certain specific provisions pursuant to local regulations). As of March 31, 2006, 187,500 of the
stock options granted on December 10, 2002 were outstanding.
During 2005, our executive officers were granted 7,870,000 stock options at an exercise price
of 2.00, 1.82 and 1.73. None of such options were exercised during 2005.
On May 23, 2005, our board of directors resolved to grant certain stock options under
authorizations from our shareholders. Under this arrangement, our board of directors decided to
issue options for 5,524,140 shares to certain senior managers under substantially the same vesting
conditions and other terms as our existing stock option plans. Our board of directors also decided
under this arrangement to issue options for 6,000,000 shares to certain senior executives,
excluding our Chief Executive Officer, with vesting linked to our share price performance and at an exercise price of
2. These more stringent vesting conditions for the options for senior executives are generally
as follows: 100 % of the options will vest if our share price reaches 4 as an average for a
consecutive 90 day period before the end of the first quarter of 2008; 80% of the options will vest
if our share price reaches 3.5 as an average for a consecutive 90 day period before the end of
the first quarter of 2008; 40% of the options will vest if our share price reaches 3 as an
average for a consecutive 90 day period before the end of the first quarter of 2008; and none of
the options will vest if our share price does not reach 3 as an average for a consecutive 90
day period before the end of the first quarter of 2008. The board of directors resolved that
the Company issue these stock options and delegated the implementation of the plan to the
Compensation Committee and the Stock Administration Committee, as applicable.
Stock options granted to directors and officers of the Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
granted and |
|
|
stock options |
|
|
|
|
|
|
|
|
|
|
|
|
not exercised |
|
|
exercisable |
|
|
Aggregate number |
|
|
|
|
|
|
|
|
|
as of |
|
|
as of |
|
|
of shares that may |
|
|
Expiration |
|
|
Exercise price |
|
|
|
December 31, 2005 |
|
|
December 31, 2005 |
|
|
be issued |
|
|
date |
|
|
(in euros) |
|
David Bonderman |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
04/28/2013 |
|
|
|
0.96 |
|
Alex Mandl |
|
|
8,000,000 |
|
|
|
6,000,000 |
|
|
|
8,000,000 |
|
|
|
08/28/2012 |
|
|
|
0.84 |
|
|
|
|
4,000,000 |
|
|
|
3,000,000 |
|
|
|
4,000,000 |
|
|
|
08/28/2012 |
|
|
|
2.25 |
|
Dominique Vignon |
|
|
1,000,000 |
|
|
|
750,000 |
|
|
|
1,000,000 |
|
|
|
13/07/2012 |
|
|
|
1.424 |
|
Peter Kraljic |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
04/28/2013 |
|
|
|
0.96 |
|
Daniel Le Gal |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
04/28/2013 |
|
|
|
0.96 |
|
William S. Price III |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
04/28/2013 |
|
|
|
0.96 |
|
Johannes Fritz |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
04/28/2013 |
|
|
|
0.96 |
|
Major grants and exercise of stock options by employees of the Company
The following table sets forth certain information with respect to: (i) stock options granted
to the ten employees of our Company (i.e., excluding the non-employee directors) who received the
largest number of stock options granted in 2005; and (ii) the exercise of stock options by the ten
employees who, by exercising stock options during 2005, acquired the largest of shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
Total number |
|
|
price of the |
|
|
|
|
|
|
of options |
|
|
options granted |
|
|
|
|
|
|
granted or |
|
|
or shares |
|
|
|
|
|
|
shares |
|
|
subscribed or |
|
|
|
|
|
|
subscribed |
|
|
acquired |
|
|
|
|
|
|
or acquired |
|
|
(in ) |
|
|
Stock Option Plan |
|
Options for shares in Gemplus
International S.A.
granted in 2005 to
the 10 employees
who received the
largest number of
stock options |
|
|
6,700,000 |
|
|
|
1.99 |
|
|
Plan adopted on November 10, 2000 and June 30, 2005 |
Options for shares in Gemplus
International S.A.
exercised in 2005
by the 10 employees
who, by exercising
stock options,
acquired the
largest number of
shares |
|
|
691,875 |
|
|
|
1.36 |
|
|
Plan adopted on July 27, 2000 and November 10, 2000 and Rollover plan adopted on December 10, 2002 |
Options for shares in Gemplus S.A.
exercised in 2005
by the 10 employees
who, by exercising
stock options,
acquired the
largest number of
shares |
|
|
5,205 |
|
|
|
1.56 |
|
|
Plan adopted on December 17, 1997 and July 22, 1998 |
SHARE
OWNERSHIP OF DIRECTORS AND PRINCIPAL EXECUTIVE OFFICERS
60
As of March 31, 2006, Mr. Alex Mandl owned 503,130 of our common shares, representing less
than one percent of our shares on a fully diluted basis, and had options to subscribe to 12 million
of our common shares, with a purchase price of 0.84 and 2.25 for, respectively, 8 million
shares and 4 million of such options, that, upon exercise, would represent approximately 1.7% of
our shares on a fully diluted basis.
As of April 25, 2006, Mr. David Bonderman was a Managing Partner of Texas Pacific Group, Mr.
William Price was a Managing Partner of Texas Pacific Group, and Mr. Geoffrey Fink was a Principal
of Texas Pacific Group. As of April 25, 2006, affiliates of the Texas Pacific Group held
159,305,600 of our shares, representing approximately 25% of the shares outstanding. Messrs.
Bonderman, Fink and Price have disclaimed beneficial ownership of any of these shares. As of June 2, 2006, affiliates of Texas Pacific Group had
transferred their shares in our Company to Axalto, now named Gemalto.
As of April 25, 2006, Mr. Johannes Fritz was the managing director of the Quandt family
office. As of April 25, 2006, the members of the Quandt family and its affiliates owned 115,508,200
of our shares, representing approximately 18% of the shares outstanding. Mr. Fritz has disclaimed
beneficial ownership of any of these shares. As of June
2, 2006, affiliates of the Quandt family had transferred their shares in our Company to Gemalto.
None of our other officers or directors was the beneficial owner of more than 1% of our
capital stock. See Item 7. Major Shareholders and Related
Party TransactionsMajor Shareholders.
EMPLOYEES
The following table sets forth the number of employees and a breakdown of employees by main
category of activity and geographic location as of the end of each year in the three-year period
ended December 31, 2003 through December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
Number of employees |
|
|
5,037 |
|
|
|
5,476 |
|
|
|
6,347 |
|
Category of activity |
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
2,892 |
|
|
|
3,261 |
|
|
|
3,837 |
|
Research and Development |
|
|
557 |
|
|
|
608 |
|
|
|
728 |
|
Sales and Marketing |
|
|
694 |
|
|
|
705 |
|
|
|
837 |
|
Services |
|
|
277 |
|
|
|
286 |
|
|
|
242 |
|
General and Administrative |
|
|
617 |
|
|
|
616 |
|
|
|
703 |
|
Geographic location |
|
|
|
|
|
|
|
|
|
|
|
|
France |
|
|
1,702 |
|
|
|
1,701 |
|
|
|
1,727 |
|
Rest of Europe, Middle East and Africa |
|
|
1,049 |
|
|
|
1,056 |
|
|
|
1,455 |
|
Asia |
|
|
1,603 |
|
|
|
1,673 |
|
|
|
1,682 |
|
Americas |
|
|
683 |
|
|
|
1,046 |
|
|
|
1,483 |
|
In the second quarter of 2001, we implemented the first of three restructuring and
rationalization programs. The second and third programs were announced in the first and fourth
quarters of 2002, respectively. The primary objective of the restructuring and worldwide
rationalization programs was to reduce operating costs by consolidating, eliminating and/or
downsizing existing operating locations, i.e., manufacturing plants and sales offices. We expect
that all actions related to the restructuring were completed by the end of 2005. There were no
significant remaining activities to be terminated as part of these programs at December 31, 2004.
On May 15, 2003, Gemplus S.A. entered into an agreement with certain labor unions representing
some members of its workforce in France that amended and replaced a previous agreement dated April
15, 2003, which provides for a period of three years for minimum production volumes in the
manufacturing facilities of Gemplus S.A. located in Gémenos and
La Ciotat, France, on the condition that
such facilities meet certain productivity criteria. The agreement also provides for maintaining
certain marketing, research and development, new product introduction and related administrative
functions in the Gémenos and La Ciotat areas. Effective February 1, 2004, this agreement was
amended primarily to provide greater flexibility regarding the methods of maintaining production
volumes while continuing to further the objective of maintaining employment levels in manufacturing
at the Gémenos and La Ciotat sites.
Under French law, all employers of more than 20 employees in France are required to implement
a 35-hour workweek. In February 1999, we entered into an agreement to implement the 35-hour
workweek mandated by French law. Under this agreement, employees could work more than 35 hours in
some weeks, but in exchange were required to reduce the number of hours worked in
61
other weeks to ensure that they did not work more than 35 hours per week on an annual basis.
This agreement was modified in the beginning of 2000. Under the new agreement, the number of hours
worked during the week has not been modified (i.e., employees can work 40 hours a week), but the
employees are entitled to 22 additional paid days off a year. Although the workweek is shorter on
average and we have not reduced salaries, the agreement allows us greater flexibility than before
to organize the use of employee time. We believe this added flexibility partly compensates for the
reduction in hours, and that the mandated 35-hour week should not have a material adverse effect on
our operations or financial condition.
We use temporary labor from time to time to provide short-term increases in capacity as and
when required. During 2005, we did not employ a significant number of full time equivalent
temporary staff.
Item 7. Major Shareholders and Related Party Transactions
MAJOR SHAREHOLDERS
Our capital stock consists of ordinary shares, with no par value, which are issued in
registered form. Under our articles of incorporation, each ordinary
share represents one vote. To the best of our knowledge, the following table sets forth information with respect to the beneficial ownership of our shares by
persons who beneficially own more than 2% of our outstanding shares as of
April 26, 2006. As of June 2, 2006, affiliates of Texas Pacific Group and the Quandt family had
transferred all of their shares in our Company to Axalto, now named Gemalto N.V. See Item 10.
Additional Information Material Contracts. The existence of treasury shares accounts for the difference between the outstanding
shares percentage and voting rights percentage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares |
|
Percentage of outstanding shares |
|
Percentage of voting rights |
|
|
April 27, 2004 |
|
|
April 26, 2005 |
|
|
February 28, |
|
|
April 27, |
|
|
April 26, |
|
|
February 28, |
|
|
April 27, |
|
|
April 26, |
|
|
February 28, |
|
|
|
|
|
|
|
|
2006 |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
Texas Pacific Group(1) |
|
|
159,305,600 |
|
|
|
159,305,600 |
|
|
|
159,305,600 |
|
|
26.2% |
|
|
26.2% |
|
|
25.3% |
|
|
26.3% |
|
|
26.3% |
|
|
23.3% |
Quandt family(2) |
|
|
115,508,200 |
|
|
|
115,508,200 |
|
|
|
115,508,200 |
|
|
19.0% |
|
|
19.0% |
|
|
18.3% |
|
|
19.1% |
|
|
19.1% |
|
|
18.4% |
Groupe Dassault |
|
|
32,659,866 |
|
|
|
31,990,066 |
|
|
|
26,690,066 |
|
|
5.4% |
|
|
5.4% |
|
|
4.2% |
|
|
5.4% |
|
|
5.4% |
|
|
4.2% |
GE Capital |
|
|
24,093,311 |
|
|
|
(3) |
|
|
|
(3) |
|
|
4.0% |
|
|
4.0% |
|
|
(3) |
|
|
4.0% |
|
|
4.0% |
|
|
(3) |
Brunei Investmane Agency |
|
|
15,750,000 |
|
|
|
15,750,000 |
|
|
|
15,750,000 |
|
|
2.6% |
|
|
2.6% |
|
|
2.5% |
|
|
2.6% |
|
|
2.6% |
|
|
2.5% |
Nordea 1 SICAV |
|
|
|
|
|
|
|
|
|
|
34,267,172 |
(4) |
|
|
|
|
|
|
|
|
|
5.4% |
|
|
|
|
|
|
|
|
|
|
5.4% |
Treasury shares |
|
|
1,290,129 |
|
|
|
1,261,465 |
|
|
|
761,465 |
|
|
0.2% |
|
|
0.2% |
|
|
0.1% |
|
|
n/a |
|
|
n/a |
|
|
n/a |
Other shareholders |
|
|
258,513,415 |
|
|
|
284,995,950 |
|
|
|
278,086,776 |
|
|
42.6% |
|
|
38.9% |
|
|
44.2% |
|
|
42.6% |
|
|
38.9% |
|
|
44.2% |
|
Outstanding shares |
|
|
607,120,521 |
|
|
|
608,811,281 |
|
|
|
630,369,279 |
|
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
|
|
|
(1) |
|
Texas Pacific Group is a group of investment funds founded by Messrs. David Bonderman, James G. Coulter and William S. Price III to pursue investment opportunities through a variety of means, including leveraged
buyouts, recapitalizations, joint ventures, restructurings and strategic public securities investments. Messrs. Bonderman, Coulter and Price are the shareholders of the general partner of the Texas Pacific Group funds.
Each of Messrs. Bonderman, Coulter and Price disclaims beneficial ownership of the shares of our Company held by Texas Pacific Group. Until June 2, 2006 and the contribution in kind by Texas Pacific Group and the Quandt
family in accordance with the Contribution Agreements with Axalto (see Item 10. Additional InformationMaterial Contracts), Messrs. Bonderman, Price and Fink were also directors of our Company. |
|
(2) |
|
Mr. Stefan Quandt was a member of the board of directors of Gemplus S.A. from July 1999 to February 2000, and of our board of directors from February to November 2000. On May 2, 2002, the Quandt family reorganized
their holdings of our shares. As of that date, 100 shares were held of record by Stefan Quandt and 100 shares were held of record by Johanna Quandt. In addition, 33,236,428 shares were held by Acton 1 Beteiligungs GmbH,
35,700,770 shares by Acton 2 Beteiligungs GmbH and 46,570,802 shares by Acton 3 Beteiligungs GmbH, all companies controlled by members of the Quandt family. On June 2, 2006, affiliates of the Quandt family transferred
their shares in our Company to Gemalto (see Item 10. Additional Information Material Contracts). |
62
|
|
|
(3) |
|
Further to the notification by GE Capital of a crossing of shareholding threshold dated September 28, 2004, the number of shares held by GE Capital as of September 28, 2004 was equal to 8,469,663 shares representing
approximately 1.4% of the issued capital of our Company. |
|
(4) |
|
According to a declaration made by Nordea 1 SICAV on February 2, 2006. |
The Companys major shareholders do not have different voting rights than its other
shareholders.
As
of March 31, 2006, to the best of our knowledge, there were 6,386,841 of our ADSs outstanding, representing 12,773,682
ordinary shares, or 2.02% of our total shares outstanding.
See Item 6. Directors, Senior Management and Employees Share Ownership.
RELATED PARTY TRANSACTIONS
We have engaged in the following related party transactions:
GemVentures
1 NV, a wholly owned subsidiary of our Company, and Dassault Multimedia SAS are
minority shareholders of Welcome Real Time SA. Mr. Thierry Dassault, who was one of our directors
until April 2004, is also the Chairman of Dassault Multimedia, which is part of Groupe Industriel
Marcel Dassault, which is one of our shareholders. On October 9, 2003, GemVentures and Dassault
Multimedia entered into an agreement providing for a loan by GemVentures to Dassault Multimedia of
Welcome Real Time shares constituting 1.5% of Welcome Real Times capital. The loan grants Dassault
Multimedia the dividend and voting rights associated with the shares in exchange for the right to
receive a certain percentage of any dividends that Dassault Multimedia might receive in respect of
the loaned shares. Upon expiration of the agreement on September 30, 2009, Dassault Multimedia is
obligated to return the shares to GemVentures. Upon the occurrence of certain events set forth in
the agreement, GemVentures may request that the shares will be returned within two months from the
date of the event. On the same date, GemVentures also entered into another agreement with an
unrelated party for the loan of the same number of Welcome Real Time shares on identical
arms-length terms.
On March 9, 2004, Apeera Inc. entered into a share and asset purchase agreement with Intuwave
Ltd by which the shares of Apeera France SAS, a wholly owned subsidiary of Apeera Inc., and certain
assets were sold to Intuwave for consideration payable in shares with a value of 3,000
thousand, plus an additional 1,000 thousand upon fulfillment of certain technological and
commercial conditions. GemVentures (a wholly owned subsidiary of our Company) and TPG Ventures,
L.P., both shareholders of Apeera Inc., were parties to such agreement for the purposes of
guaranteeing the obligations of Apeera Inc., in respect of the warranties and indemnities given by
Apeera Inc. TPG Ventures, L.P. is managed by Texas Pacific Group, which was one of our shareholders
until June 2, 2006. Three of our Directors at the time of the execution of the Combination
Agreement were, respectively, managing partners and a principal of Texas Pacific Group.
On July 30, 2004, Certplus SA, a French company in which Gemplus Trading SA, indirectly a
wholly owned subsidiary of our Company, holds 99.9% of the shares, and Infrasec, a French company,
entered into a contribution agreement. As a result of this agreement, Certplus contributed to
Infrasec its certification services operator business division. In return, Certplus received 19.1%
of the shares of Infrasec. Dassault Multimedia, which is part of Groupe Industriel Marcel Dassault,
which is one of our shareholders, became shareholder of Infrasec with 1.2% of the share capital of
Infrasec, and Mr. Thierry Dassault, who was one of our directors until April 2004, has become
Chairman of the Board of Directors of Infrasec. Thereafter, Infrasec was renamed as Keynectis.
Tianjin Gemplus Smart Card Co. Ltd (TGSC) is a joint venture established initially between a
French subsidiary of our Company, Gemplus SA, owning 51% of the total equity interest in TGSC, and
Tianjin Telephone Equipments Factory (TTEF) owning the remaining 49% of the total equity interest
in TGSC. Gemplus (Tianjin) New Technologies Co. Ltd (GTNT), an indirectly wholly-owned subsidiary
of our Company, has agreed to make a time deposit with China Everbright Bank (the Bank) following
a pledge, in favor of the Bank, by TTEF of 30% of the total equity interest to secure a loan of CNY
90,000 thousand made
by the Bank to TTEF. Thereafter, TTEF transferred its entire equity interest held in TGSC to a
parent company named Tianjin Zhong Tian Telecommunications Co. Ltd
(ZT) with the consent of Gemplus SA, subject to an increase of the pledge from 30% to 45.8% of the total equity interest in TGSC. In the
event of (i) a failure to comply with conditions and warranties agreed by TTEF and/or Shanghai Post
Telecommunications Equipment (SPTE); which are the co-shareholders of ZT, and (ii) the subsequent
activation of the pledge,
63
GTNT or
we would be required to re-purchase the entire equity interest held by
ZT in TGSC, using the amount of the time-deposit. As of December 31, 2005, CNY 20,000 thousand
( 2,079 thousand as of December 31, 2005) remains to be reimbursed by TTEF under the loan
agreement, secured by a corresponding time deposit amount made by GTNT (see Note 10 to our
Consolidated Financial Statements).
In 2005, TGSC (the joint venture between a French subsidiary of our Company, Gemplus SA,
owning 51% of the total equity interest in TGSC, and Tianjin Zhong Tian Telecommunications Co. Ltd
(ZT) owning the remaining 49% of the total equity interest in TGSC) entered into a tripartite
loan agreement with ZT and China Construction Bank, pursuant to which TGSC agreed to make available
RMB 5,000 thousand, for a loan to be granted by
China Construction Bank to ZT. ZT is
responsible for the repayment of the loan and its repayment is
secured by the 2005 dividends of
TGSC to be declared. As of December 31, 2005, the entire amount of the loan ( 520 thousand)
remained to be reimbursed.
In 2005, an executive vice president of our Company exercised warrants granted to him in 2001
for the purchase of 3,934 shares in GemVenturesGemVentures 1 NV, a wholly-owned subsidiary of our
Company. Pursuant to a put option agreement entered into in 2001 between our Company and
the executive, in 2005 we acquired the 3,934 shares in GemVentures 1 NV
purchased by the executive for
393 thousand, with additional payments to be made to the executive if GemVentures NV 1 realizes
certain financial gains. Such additional consideration has been
accrued for the executive in an
amount of 170 thousand in 2005.
In 2005, an affiliate of our Company entered into an agreement with Clear2Pay Services NV, a
Belgian company, to supply chip cards for up to 210 thousand. Mr. Michel
Akkermans, one of our directors, is also the chairman and CEO of Clear2Pay. Mr. Akkerman had no
involvement in this transaction.
In 2005, an affiliate of our Company entered into an agreement with Sim2Travel Inc., a
Taiwanese company, to supply chip cards for approximately 240 thousand. Mr.
Kurt Hellström, one of our directors, is also a director and minority investor of Sim2Travel Inc.
Mr. Hellström had no involvement in this transaction.
In 2005, a subsidiary of our Company entered into an agreement for the provision of human
resources management services with SuccessFactors, Inc., a California company, in which TPG
Ventures, LP holds a 20% equity interest and has board representation. The contract is valued at
approximately 300 thousand to 400 thousand. TPG Ventures, LP is under common control with TPG
Partners III, LP, which held an equity interest in our Company at the time of the execution of the
Combination Agreement. Messrs. David Bonderman and William S. Price III, who were directors of our
Company at the time of the execution of the Combination Agreement, were also officers, directors
and equity owners of the entities that manage and control TPG Partners III, LP and TPG Ventures,
LP. Mr. Geoffrey Fink was also a director of our Company at the relevant time and a principal
of the manager of TPG Partners III, LP. Messrs. Bonderman, Price and Fink had no involvement in the
approval of this transaction.
In 2005, an affiliate of our Company entered into an agreement with DataCard Corporation, a US
company, to purchase equipment and related services (software, maintenance and training), spare
parts and consumables until the end of 2007 for our Company and its affiliates. In 2005, we
purchased 8,115 thousand of equipment and services under this agreement. DataCard Corporation
is a related party to certain individual members of the Quandt family who themselves controlled
entities which were shareholders of our Company at the time of the execution of the agreement with
DataCard Corporation. The individual members of the Quandt family had no involvement in this
transaction.
Item 8. Financial Information
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
See Item 18. Financial Statements and pages F-1 through F-67.
OTHER FINANCIAL INFORMATION
Legal Proceedings
We are involved in litigation from time to time in the ordinary course of business. We believe
that none of the ordinary course litigation in which we are currently involved will have a material
adverse effect on our results of operations, liquidity or financial condition.
64
In July 2004, we finalized an agreement with the French tax authority relating to a tax
assessment primarily for the fiscal years 1998 through 2000. The tax assessment resulted in a net
income tax charge over the period 2002 to 2004 in an amount of 4 million (a provision of
5.8 million was accounted for in 2002, the provision was revised downwards in 2003 in an amount of
1.9 million and upwards in 2004 in an amount of 66 thousand), in addition to the tax
payable recorded from 1998 through 2000 of 6.0 million. The tax assessment resulted in an
amount payable by our Company of 34 million and the recognition of tax losses carried over
amounting to 24 million. In 2004, we made a cash settlement of the amount payable of 34
million and elected to carryback the recognized tax losses of 24 million. Our recovery of the
carryback is expected in mid-2007. This carryback has been discounted in accordance with IFRS,
resulting in additional income tax expense of 3 million and financial income of 273
thousand in 2004. As at December 31, 2005, the present value of the carryback receivable, amounting
to
22.4 million, is recorded in Other non-current receivables. As part of this tax
assessment, a certain number of VAT and other tax liabilities have been recognized for an amount of
506 thousand in 2004 ( 1.8 million in year 2003 and prior).
In December 1997, Mr. Alain Nicolaï and other parties brought a legal action before the
Marseille Commercial Court against Gemplus S.A., our main French subsidiary, and other parties
alleging a breach of contract relating to the promotion of a chip
card reading system and device used with casino slot machines. On March 18, 2004, the Marseille Commercial Court ordered Gemplus
S.A. to pay the plaintiffs 22 million in damages. We appealed to the Aix-en-Provence
Court of Appeal. On April 2, 2004, the Court of Appeal suspended the enforcement of the decision of
the Marseille Commercial Court and ordered Gemplus S.A. to make a cash deposit of 22 million
into an escrow account as security pending the decision on the appeal. On May 26, 2005, the Court
of Appeal rendered a decision in favor of Gemplus S.A., reversed the judgment of the Marseille
Commercial Court, dismissed all the plaintiffs claims for damages and ordered the plaintiffs to
pay court costs and expert fees. As a result of the decision of the Court of Appeal, the escrow
deposit of 22 million was released in full to Gemplus S.A. Also following the decision of the
Court of Appeal, we decided to release the provision we had recorded for this matter on December
31, 2003, in the amount of 5.2 million. This release was recorded in our consolidated accounts
in June 2005. See Note 37 to our Consolidated Financial Statements. This case is subject to a
request for appeal to the French Supreme Court, which would require that courts approval
and would be limited strictly to questions of law.
Prior to 2004, we recorded a provision of 9.0 million for the risks related to a patent
litigation with British Technology Group under the caption Non-current portion of provisions (see
Note 20.1 to our Consolidated Financial Statements). Because some risks remain in certain areas,
and as five divisional patent applications are still being examined by the European Patent Office,
we have decided to maintain this provision at the end of 2005. In the first quarter of 2006, based
on managements evaluation of the circumstances of the matter, we reduced our provision for this
matter by 2.9 million leaving a provision of 6.1 million.
Certain of our subsidiaries have been under tax audit in Germany and Singapore. We increased
our provision for tax risk in Singapore at December 31, 2004, to an amount of 1.78 million
from 1.59 million. As a result of a settlement with the German tax authorities in 2005, we
used our provision of 2.09 million.
Dividend Policy
We have not declared any dividends on our ordinary shares since our inception, and do not
anticipate paying dividends in the foreseeable future. We currently expect to retain all future
earnings, if any, for use in the operation and expansion of our business.
We may declare dividends out of funds or reserves legally available for distribution upon the
recommendation of our board of directors and the approval of our shareholders at their annual
general meeting. In general, under Luxembourg law, only realized profits or distributable reserves
(including profits that are carried forward) determined in accordance with Luxembourg accounting
principles are available for distribution as dividends. Luxembourg law requires us to allocate 5%
of our annual net profits to a legal reserve. We must make this annual allocation until the legal
reserve reaches 10% of our subscribed capital.
We discuss certain aspects of Luxembourg and U.S. taxation of dividends in Item 10.
Additional Information-Taxation in this Annual Report.
SIGNIFICANT CHANGES
For
a discussion of recent developments, see Item 4.
Information on the CompanyHistory and
Development of the Company, Item 5. Operating and Financial Review and
ProspectsResults of
Operations-Recent Developments and Item 6.
Directors, Senior Management and EmployeesBoard of
DirectorsSenior ManagementDirectors and Executive Officers
Biographies.
65
Item 9. The Offer and Listing
NATURE OF TRADING MARKET
Deutsche Bank Trust Company Americas is currently the depositary for our American Depositary
Shares (ADSs) pursuant to a Supplemental Agreement to Deposit Agreement dated February 11, 2003.
Our ADSs have traded on the Nasdaq National Market under ticker symbol GEMP and our ordinary shares
have traded on the Premier Marché of Euronext Paris under the ticker symbol LU0121 706294-GEM since
December 11, 2000.
The following table sets forth, for the periods indicated, the reported high and low sales
prices for our ordinary shares and ADSs from December 11, 2000, the first day on which our ordinary
shares traded on the Premier Marché and our ADSs traded on the Nasdaq National Market. See Item 3.
Key Information-Exchange Rate Information with respect to rates of exchange between the dollar and
the euro applicable during the periods set forth below.
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euronext Paris |
|
|
Nasdaq National Market |
|
|
|
per share |
|
|
U.S.$ per ADS |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
2001 |
|
|
9.90 |
|
|
|
1.93 |
|
|
$ |
17.88 |
|
|
$ |
3.60 |
|
2002 |
|
|
3.08 |
|
|
|
0.37 |
|
|
$ |
5.47 |
|
|
$ |
0.77 |
|
2003 |
|
|
1.92 |
|
|
|
0.63 |
|
|
$ |
4.69 |
|
|
$ |
1.47 |
|
2004 |
|
|
2.26 |
|
|
|
1.28 |
|
|
$ |
5.80 |
|
|
$ |
3.13 |
|
2005 |
|
|
2.46 |
|
|
|
1.61 |
|
|
$ |
5.70 |
|
|
$ |
4.09 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2.26 |
|
|
|
1.62 |
|
|
$ |
5.80 |
|
|
$ |
4.08 |
|
Second Quarter |
|
|
2.20 |
|
|
|
1.52 |
|
|
|
5.15 |
|
|
|
3.61 |
|
Third Quarter |
|
|
1.79 |
|
|
|
1.28 |
|
|
|
4.25 |
|
|
|
3.13 |
|
Fourth Quarter |
|
|
1.77 |
|
|
|
1.43 |
|
|
|
4.73 |
|
|
|
3.59 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
|
2.13 |
|
|
|
1.71 |
|
|
$ |
5.35 |
|
|
$ |
4.52 |
|
Second quarter |
|
|
1.97 |
|
|
|
1.61 |
|
|
|
5.05 |
|
|
|
4.09 |
|
Third quarter |
|
|
2.39 |
|
|
|
1.82 |
|
|
|
5.70 |
|
|
|
4.38 |
|
Fourth quarter |
|
|
2.46 |
|
|
|
1.99 |
|
|
|
5.69 |
|
|
|
4.79 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
|
2.56 |
|
|
|
1.91 |
|
|
$ |
6.17 |
|
|
$ |
4.60 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
2.46 |
|
|
|
2.13 |
|
|
$ |
5.69 |
|
|
$ |
5.02 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
|
|
2.40 |
|
|
|
2.02 |
|
|
$ |
5.87 |
|
|
$ |
4.88 |
|
February |
|
|
2.23 |
|
|
|
1.91 |
|
|
|
5.32 |
|
|
|
4.60 |
|
March |
|
|
2.56 |
|
|
|
2.04 |
|
|
|
6.17 |
|
|
|
4.80 |
|
April |
|
|
2.62 |
|
|
|
2.30 |
|
|
|
6.48 |
|
|
|
5.72 |
|
May |
|
|
|
|
|
|
|
|
|
|
|
|
Trading on the Premier Marché
A single listing, entitled Eurolist by Euronext, was adopted on February 21, 2005. Eurolist
by Euronext has replaced the three regulated markets that were formerly operated by Euronext Paris:
the Premier Marché, Second Marché and Nouveau Marché. Companies on this regulated market are
classified in alphabetical order and identified by market
capitalization, making it convenient to locate
small caps (market capitalization under 50 million), mid-caps ( 150 million to 1
billion) and large caps (over 1 billion). Eurolist is operated and managed by Euronext
Paris, a market operator (entreprise de marché) responsible for the admission of securities and the
supervision of trading in listed securities. Companies on Eurolist are subject to a single set of
listing and disclosure rules, reflecting the regulatory context in Europe.
66
Trading by our Company in its own shares
Under Luxembourg law, we may not issue shares to our Company, but we may purchase our shares
in limited cases. In accordance with Luxembourg law, we may repurchase our own shares subject to
certain limits and conditions, including, in several cases, with the prior approval of a general meeting
of shareholders and subsequent approval by the Autorité des Marchés Financiers. At the
extraordinary general meeting held on April 25, 2006, our shareholders authorized us to repurchase
our shares from time to time through October 25, 2006, in an aggregate amount of up to 10% of our
issued shares of capital stock. These shares can be purchased at prices ranging from 1.00 to
4.00 per share. Under Luxembourg law, we cannot lend or grant security for, or give financial
assistance in the purchase of, our own shares, except for any loans, guarantees or other financial
assistance provided to our employees.
See Item 10. Additional Information Articles of Incorporation.
Item 10. Additional Information
NASDAQ RULE EXEMPTIONS
Quorum (Marketplace Rule 4350(f)). Nasdaq requires issuers by-laws to establish a minimum
quorum of 33 1/3% for any meeting of the holders of common stock. Luxembourg corporate law does not
provide for a quorum requirement for any meetings of shareholders other than extraordinary general
meetings acting on specific resolutions. A special quorum, however, is required by Luxembourg law
to amend a companys articles of incorporation. The absence of a quorum requirement in our Articles
of Incorporation is consistent with Luxembourg law and such a requirement would be contrary to
generally accepted business practice in Luxembourg. None of our shareholders meetings since our
initial listing in 2000 has had less than 33 1/3% of the holders of common stock present.
Solicitation of Proxies (Marketplace Rule 4350 (g)). Nasdaq requires each issuer to solicit
proxies and to provide proxy statements for all meetings of shareholders. In accordance with
Luxembourg practice, we inform our shareholders of all meetings in a public notice, which contains
details regarding how shareholders may participate in the meeting. The convening notice for the
annual general meeting of our shareholders is made publicly available, is delivered to registered
shareholders and to holders of our American depositary shares. The information in the convening notice includes, among other things, audited financial
statements, information on the compensation of the Chief Executive
officer and the board of directors, draft
resolutions and a form of proxy along with instructions for its
completion and delivery. Our practice of not soliciting proxies and providing proxy statements is
consistent with Luxembourg law and a requirement to do so would be contrary to generally accepted
business practice in Luxembourg.
Shareholder Approval (Marketplace Rule 4350(i)). Nasdaq requires each issuer to obtain
shareholder approval prior to the issuance of certain securities, including when an issuance will
result in a change of control or in connection with the acquisition of the stock or assets of
another corporation. Luxembourg law requires that shareholder approval shall be obtained for all
issuances of securities. Luxembourg law permits shareholders to approve certain delegations to the
board of directors regarding the issuance of securities with certain limitations on the purposes
for, and time during which, the delegation may be used.
Distribution of Annual Reports (Marketplace Rule 4350(b)). Nasdaq requires that issuers
distribute to shareholders and file with Nasdaq a copy of their annual report prior to their annual
meeting, and make available certain quarterly reports. Luxembourg law requires that a company send
to its shareholders copies of the companys balance sheets, the profit and loss account, and the
report of its statutory auditors. We follow Luxembourg law and business practice in the reports we
distribute to our shareholders. We make available copies of quarterly reports including statements
of operating results to our shareholders.
Compensation of Officers (Marketplace Rule 4350(c)(3)). Nasdaq requires that the compensation
of the chief executive officer and all other executive officers be determined, or recommended to
the board for determination, either by a majority of the independent directors or a compensation
committee comprised solely of independent directors. Our board of directors has a compensation
committee that recommends to the board for determination the compensation of our chief executive
officer, and consults with the chief executive officer in the determination of the compensation of
all other executive officers. At least one member of our compensation committee is not independent
under applicable rules of the Nasdaq. Our practice is permissible under Luxembourg law.
Nomination of Directors (Marketplace Rule 4350(c)(4)). Nasdaq requires that director nominees
must either be selected, or recommended to the board for selection, either by a majority of the
independent directors or a nominations committee comprised
67
solely of independent directors. Our board of directors determines the director nominees
without reliance upon recommendations by a majority of the independent directors or a nominations
committee. Our practice is permissible under Luxembourg law.
ARTICLES OF INCORPORATION
The following description summarizes several aspects of our articles of incorporation and our
share capital, which consists of ordinary shares only. A copy of our articles of incorporation has
been filed as an exhibit to this Annual Report.
Directors
Our articles of incorporation provide that in the case of a conflict of interest of a
director, the director must inform the board of directors of the conflict, have a record of his
statement included in the minutes of the meeting, and refrain from deliberating and voting on the
matter. At the following general meeting, a special report shall be made on any transactions in
which any of the directors has had an interest conflicting with our own. Our articles of
incorporation provide that the age limit of directors is seventy (70) years. There is no share
ownership requirement for directors. See Item 6. Directors, Senior Management and Employees-Board
of Directors for additional information about our board of directors. There is no explicit
restriction in the articles of incorporation on the borrowing power of directors. Director
compensation is determined by the Compensation Committee.
Share Capital
As
of March 31, 2006, our subscribed capital was fixed at 133,734,415.07 consisting of
631,630,771 shares with no par value. As of such date, our authorized
share capital is 400 million, consisting of 1,889,466,226 shares with no par value. Our
authorized share capital
may be increased or reduced by resolution passed with a two-thirds majority vote at a meeting
of shareholders. Luxembourg law provides that shareholders have preemptive rights to subscribe for
any new shares issued by us for cash consideration.
Out of the authorized share capital, the board of directors is authorized to issue further
shares up to the total authorized share capital in whole or in part from time to time with or
without reserving any pre-emptive subscription rights for existing shareholders and as it may in
its discretion determine within a period expiring, for issues of shares reserved pursuant to items
(i) to (iv) in the paragraph below, on the fifth anniversary after the date of publication of the
minutes of the extraordinary general meeting held on April 25, 2006, and for any other issues of
shares on the third anniversary after the date of publication of the minutes of the extraordinary
general meeting held on April 27, 2004 (with each time subject to extensions) and to determine the
conditions of any such subscription.
Out of the authorized share capital the following shares are reserved and are not subject to
shareholders pre-emption rights:
(i) |
|
the issue of a maximum of 20 million shares in exchange for shares in Gemplus S.A.
at a ratio of fifty new shares of our Company for one share of Gemplus S.A.; |
|
(ii) |
|
the issue of a maximum of 56,845,700 shares either in exchange for shares of
Gemplus S.A. to be issued under any of the Gemplus S.A. stock option plans in existence
on February 1, 2000 or before or with respect to options to be issued by our Company to
subscribe for shares in our Company upon terms identical to those existing for options
issued under any of the Gemplus S.A. stock option plans in existence
on or prior to February 1, 2000, against surrender or exchange of, or
renunciation of, such latter stock
options in the same amounts on an adjusted basis (subject to the applicable ratio); |
|
(iii) |
|
the issue of a maximum of 50 million shares with respect to the options granted to
the employees or officers of our Company (including any subsidiaries or affiliates) in
accordance with the stock option plans as from time to time determined by the board of
directors, subject to such further conditions as may be imposed by the general meeting of
shareholders; |
|
(iv) |
|
the issue of a maximum of 60 million shares without nominal
value to senior management, directors and/or executives of our Company by way of stock
options, the terms and conditions to be determined by the
board of directors in its sole discretion, and/or, except in the case of board members,
by way of free shares, of free shares, on terms and conditions determined by the board of
directors in its sole discretion. Upon any issue of free shares, we will be required to
record an amount equal to the accounting par value of these shares in our shareholders
equity |
68
|
|
and deduct an equivalent amount from our realized profits or distributable reserves, which
may limit our ability to pay dividends or make other distributions to our shareholders. |
Notwithstanding the foregoing, any other issues of shares within the authorized share capital
may be made with or without reserving to the existing shareholders a preferential subscription
right as determined by the board of directors, including but without
limitation, for issues of
shares in the cases foreseen under paragraphs (i) to
(iv) above, but for a higher number of
shares.
Form, Ownership and Transfer
Our shares are issued in registered form. Pursuant to Luxembourg law, we keep a register of
all of the holders of our registered shares. The shares are either registered under the owners
name, or under Euroclear when held through Euroclear. Ownership of registered shares will be
established by inscription in the register and confirmation of these inscriptions are issued to our
shareholders upon request. We may appoint registrars in different jurisdictions, each of whom will
maintain a separate register for the shares entered in each of these registers. Holders of our
shares may elect to be entered in one of these registers and to transfer their shares from one
register to another. We currently have no separate registers other than our Luxembourg share
register.
The transfer of our shares is governed by Luxembourg law and our articles of incorporation.
Transfers of our shares are carried out by means of a declaration of transfer entered in the
register, dated and signed by the transferor and the transferee or by their duly authorized
representatives. Transfers will be accepted and entered in the register by presentation of
correspondence or other documents recording the agreement between the transferor and the
transferee.
Voting Rights
Each share is entitled to one vote. directors are elected by the simple majority of votes of
the shareholders present or represented and voting at the relevant meeting pursuant to the simple
majority rules for election of directors under applicable Luxembourg law. A shareholder may appear
and act at any general meeting of shareholders by appointing a proxy in writing, cable, telegram,
telex or facsimile sent to our registered designee. The board of directors may establish other
conditions that must be fulfilled by shareholders to take part in any general meeting of
shareholders, including the determination of the record date on which
a shareholder must be
registered.
Shareholder resolutions at an annual general meeting are approved by a simple majority of the
shares represented at the meeting in person or by proxy. There are no quorum requirements
applicable to annual general meetings. Amendments to our articles of incorporation require approval
at an extraordinary general meeting, at which at least 50% of the voting shares must be present or
represented, by shareholders present in person or by proxy, holding at least two thirds of the
voting shares present or represented. If the quorum requirement for an extraordinary shareholders
meeting is not met, the resolution to amend the articles may be passed at a second extraordinary
shareholders meeting with no quorum requirement. Amendments to change our jurisdiction or to
impose additional financial obligations on the shareholders may only be approved with the unanimous
consent of all shareholders.
Dividend Rights/Exchange Controls
Our shares will be entitled to any dividends declared by the shareholders at a general
shareholders meeting or by our board of directors out of funds or reserves legally available for
distributions. In general, under Luxembourg law, only realized profits or distributable reserves
(including profits that are carried forward) determined in accordance with Luxembourg accounting
principles are available for distribution as dividends. Interim dividends can be declared by our
board of directors up to two times in any fiscal year if a financial statement prepared for the
declaration of interim dividends shows that there are sufficient funds available for distribution.
Luxembourg law requires us to allocate 5% of our annual net profits to a legal reserve. We
must make this annual allocation until the legal reserve reaches 10% of our subscribed capital. If
we issue new shares, we will be required to continue making this annual allocation until the legal
reserve reaches 10% of our subscribed capital once more. The legal reserve is not available for
dividends.
MATERIAL CONTRACTS
On December 6, 2005, we entered into a Combination Agreement with Axalto Holding, N.V., the
TPG Entities and the Quandt Entities, pursuant to which our Company and Axalto would be combined
(the Combination) and Axalto would be renamed Gemalto
69
N.V. (Gemalto). The TPG Entities and the Quandt Entities
(the Quandt Entities and the TPG Entities together, the
Significant Shareholders) also each respectively entered into
a Contribution in Kind Agreement (together, the Contribution Agreements) with Axalto under which
each of them agreed, subject to various conditions, to contribute shares to Gemalto, constituting
an aggregate of 43.6% of the outstanding ordinary shares (Ordinary Shares) of the Company (the
Contribution Shares), in exchange for shares of Gemalto (the Contribution). In accordance with
the Combination Agreement and the Contribution Agreements, on June 2, 2006, the Contribution of the
Contribution Shares by the Significant Shareholders was made in exchange for shares of Gemalto
issued through an increase in the share capital of Gemalto reserved to the Significant
Shareholders, at a ratio of 2 Gemalto shares for every 25 Ordinary Shares (the Exchange Ratio).
Concurrent with the Contribution, the Company commenced the distribution pro rata to all of its
shareholders, including the TPG Entities and the Quandt Entities, of 0.26 per Gemplus share from
its available share premium/reserves (the Distribution) under the terms of the Combination
Agreement. On June 2, 2006, in accordance with the terms of the Combination Agreement, Gemalto made
the requisite filing with the French AMF to commence a global offer (the Offer) for the remaining
ordinary shares it does not hold, at the Exchange Ratio. As part of this transaction, we have
agreed to pay certain customary fees to service providers and provide certain indemnities. The
majority of the expenses we have incurred as part of the transaction will be reimbursed by Gemalto.
On May 15, 2003, Gemplus S.A. entered into an agreement with certain labor unions representing
some members of its workforce in France that amended and replaced a previous agreement dated April
15, 2003. It provides for minimum production volumes in the manufacturing facilities of Gemplus
S.A. located in Gémenos and La Ciotat, France, on the condition that such facilities meet certain
productivity criteria for a period of three years. The agreement also provides for maintaining
certain marketing, research and development, new product introduction and related administrative
functions in the Gémenos and La Ciotat areas. Effective February 1, 2004, this agreement was
amended primarily to provide greater flexibility regarding the methods of maintaining production
volumes while continuing to further the objective of maintaining employment levels in manufacturing
at the Gémenos and La Ciotat sites.
On April 22, 2005, our Company and its wholly owned subsidiary, Gemplus Nordic Oy, and the
shareholders and owners of stock options of Setec Oy entered into a share purchase agreement for
the acquisition of Setec Oy, a Finnish company. The agreement provided for the sale of all the
equity of Setec Oy to Gemplus Nordic Oy. In return, the sellers of Setec Oy received a cash base
purchase price of 30 million at closing on June 1, 2005; 19 million newly issued shares of our
Company at closing; and a deferred payment of 30 million paid on December 31, 2005.
On January 14, 2005, we entered into broad patent cross-licenses with Axalto and its
subsidiary, CP8 Technologies. Under these agreements, each party released potential patent claims
against each other and agreed that each party may conduct its existing business without claims
under the other partys existing patents.
See Item 5. Operating and Financial Review and Prospects-Operating Income (Loss) Management
severance expenses and Item 7. Major Shareholders and Related Party Transactions-Related Party
Transactions.
TAXATION
The following is a summary of the principal Luxembourg and U.S. federal income tax
considerations that are likely to be material to the ownership and disposition of ordinary shares
or ADSs. The summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to the ownership and disposition of ordinary shares or ADSs.
This summary applies to you only if you hold ordinary shares or ADSs as capital assets for tax
purposes, and does not apply to you if you are a member of a class of holders subject to special
rules, such as:
|
|
a dealer in securities or currencies; |
|
|
|
a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings; |
|
|
|
a bank; |
|
|
|
a life insurance company; |
|
|
|
a tax-exempt organization; |
|
|
|
a person that holds ordinary shares or ADSs that are a hedge or that are hedged against interest rate or currency risks; |
|
|
|
a person that holds ordinary shares or ADSs as part of a straddle or conversion transaction for tax purposes; |
70
|
|
a person whose functional currency for tax purposes is not the U.S. dollar; or |
|
|
|
a person that holds ordinary shares or ADSs and owns or is deemed to own 10% or more of any class of our stock. |
The summary is based on laws, treaties and regulatory interpretations in effect on the date
hereof, all of which are subject to change. You should consult your own adviser regarding the tax
consequences of owning or disposing of the ordinary shares or ADSs in the light of your particular
circumstances, including the effect of any state, local, or other national laws.
Luxembourg Tax Considerations
The following is a summary of the principal Luxembourg tax considerations that are likely to
be material to the ownership and disposition of ordinary shares or ADSs by you if you are not
domiciled, resident, or formerly resident in Luxembourg and do not hold ordinary shares or ADSs in
connection with a permanent establishment or fixed base in Luxembourg.
Dividends on Ordinary Shares or ADSs
Dividends paid with respect to the ordinary shares or ADSs are generally subject to Luxembourg
withholding tax at a rate of 20%. You may, however, qualify for a reduced rate of withholding under
an applicable income tax treaty. The income tax treaty between Luxembourg and the United States
(the Treaty) generally provides for Luxembourg withholding tax at a reduced rate of 15%. You
should consult your own adviser regarding the specific procedures for entitlement to a reduced rate
of withholding tax under an applicable income tax treaty.
Sale or other Disposition of Ordinary Shares or ADSs
Holders of ordinary shares or ADSs that (i) are not Luxembourg residents, (ii) have not
formerly been Luxembourg residents and (iii) have never owned (alone or together with a spouse or
any children under age, directly or indirectly) more than 10% of the ordinary shares or ADSs will
not be subject to Luxembourg tax on capital gains on a disposal of the ordinary shares or ADSs.
United States Federal Income Tax Considerations
The following is a summary of the principal U.S. federal income tax considerations that are
likely to be material to the ownership and disposition of ordinary shares or ADSs by you if you are
a U.S. holder. You are a U.S. holder if you are a resident of the United States for the purposes
of, and fully eligible for benefits under, the Treaty. You will generally be entitled to Treaty
benefits in respect of ordinary shares or ADSs if you are:
|
|
the beneficial owner of the ordinary shares or ADSs (and any dividends paid with respect
thereto); |
|
|
|
(i) an individual citizen or resident of the United States that has a substantial
presence, permanent home or habitual abode in the United States or (ii) a U.S. corporation; |
|
|
|
not also a resident of Luxembourg for Luxembourg tax purposes; and |
|
|
|
not subject to an anti-treaty shopping article, which generally apply only under limited circumstances. |
The Treaty benefits discussed herein generally are not available to holders that hold ordinary
shares or ADSs in connection with the conduct of a business through a permanent establishment, or
the performance of personal services through a fixed base, in Luxembourg. This summary does not
discuss the treatment of such holders.
In general, if you hold ADSs, you will be treated as the holder of the ordinary shares
represented by those ADSs for U.S. federal income tax purposes.
Dividends on Ordinary Shares or ADSs
The gross amount of any dividends distributed with respect to the ordinary shares or ADSs
(including any amounts withheld in respect of Luxembourg tax) generally will be subject to U.S.
federal income taxation as ordinary income to a U.S. holder. Such
71
dividends generally will be treated as foreign source income and will generally be classified
as passive income for U.S. foreign tax credit purposes. A U.S. holder will include dividends paid
in a currency other than the U.S. dollar in income in a dollar amount calculated by reference to
the exchange rate in effect on the date a U.S. holder received the dividends (or, in the case of
ADSs, the date the depositary receives them). Certain dividends received from U.S. domestic
corporations and qualifying non-U.S. corporations will be taxed at a maximum rate of 15%. A
qualifying non-U.S. corporation is a corporation that is eligible for benefits of a comprehensive
income tax treaty with the U.S. or a non-U.S. corporation whose shares with respect to which such
dividend is paid is readily tradable on an established securities market in the U.S. Specifically
excluded from the definition of a qualifying non-U.S. corporation are passive foreign investment
companies, foreign investment companies and foreign personal holding companies. To be eligible for
the 15% tax rate, the shares must be held for more than 61 days during the 121-day period beginning
60 days before the ex-dividend date.
If dividends paid in a currency other than U.S. dollars are converted into U.S. dollars on the
date of receipt, the U.S. holder should not be required to recognize foreign currency gain or loss
in respect of the dividend income. A U.S. holder may be required to recognize foreign currency gain
or loss on the receipt of a refund of Luxembourg withholding tax pursuant to the Treaty to the
extent the U.S. dollar value of the refund differs from the U.S. dollar equivalent of that amount
on the date of receipt of the underlying dividend.
Subject to generally applicable limitations under U.S. law, Luxembourg withholding tax at the
rate provided under the Treaty will constitute a foreign income tax that is eligible for credit
against a U.S. holders U.S. federal income tax liability or, at the election of the recipient, may
be deducted in computing taxable income. Foreign tax credits will not be allowed for withholding
taxes imposed in respect of certain short-term or hedged positions and arrangements in which the
U.S. holders expected economic profit is insubstantial.
Sale or other Disposition of Ordinary Shares or ADSs
Subject to the discussion below under Passive Foreign Investment Company Considerations, for
U.S. federal income tax purposes, gain or loss realized by a U.S. holder on the sale or other
disposition of ordinary shares or ADSs will be capital gain or loss and will be long-term capital
gain or loss if the ordinary shares or ADSs were held for more than one year. The maximum tax rate
on capital gains is 15% for regular tax and alternative minimum tax purposes. This tax rate is
effective for taxable years beginning before January 1, 2009, after which the rate becomes 20%. A
U.S. holders ability to use capital losses to offset ordinary income is limited.
Passive Foreign Investment Company Considerations
Unfavorable U.S. tax rules apply to companies that are considered passive foreign investment
companies (PFICs). We will be classified as a PFIC in a particular taxable year if either:
|
|
75% or more of our gross income is treated as passive income for purposes of the PFIC
rules; or |
|
|
the average percentage of the value of our assets that produce or are held for the
production of passive income is at least 50%. |
Depending on our market capitalization, comparatively minor changes in the relative proportion
of our assets that would be considered to produce passive income for purposes of the PFIC rules
could result in our becoming a PFIC. U.S. holders should consult their own advisers regarding the
advisability of making a mark-to-market election, as described below.
If we are a PFIC in respect of any year, a U.S. holder who holds ordinary shares or ADSs
during that year and does not make a mark-to-market election will be subject to a special tax at
ordinary income tax rates on certain dividends received with respect to the ordinary shares or ADSs
and on any gains realized on a sale of the ordinary shares or ADSs (excess distributions) in all
subsequent years, without regard to whether we were a PFIC in the year an excess distribution was
received. The amount of this tax will be increased by an interest charge to compensate for tax
deferral, calculated as if the excess distribution had been earned ratably over the period the U.S.
holder held its ordinary shares or ADSs. If we are a PFIC in respect of any year, there may also be
other adverse tax consequences, including the denial of a step-up in the basis of ordinary shares
and ADSs at the death of a U.S. holder of the ordinary shares or ADSs and the inapplicability of
the maximum U.S. tax rate on dividends of 15%.
A U.S. holder may avoid the unfavorable rules described above by electing to mark such U.S.
holders ordinary shares or ADSs to market. For any year in which we are a PFIC, a U.S. holder who
makes a mark-to-market election would include as ordinary income
72
the excess of the fair market value of the ordinary shares or ADSs at year-end over the
holders basis in those ordinary shares or ADSs. In addition, any gain recognized upon a sale of
ordinary shares or ADSs would be taxed as ordinary income in the year of sale.
We do not intend to furnish U.S. holders with the information necessary to make a qualified
electing fund election.
U.S. holders should consult their own advisers regarding the U.S. federal income tax
considerations discussed above and should carefully consider whether to make a mark-to-market
election.
U.S. Information Reporting and Backup Withholding Rules
Payments in respect of the ordinary shares or ADSs that are made in the U.S. or by a U.S.
related financial intermediary will be subject to information reporting and may be subject to
backup withholding unless you:
|
|
are a corporation or other exempt recipient; or |
|
|
|
provide a U.S. taxpayer identification number and certify that no loss of exemption from backup withholding has occurred. |
If you are not a U.S. person, you generally are not subject to these rules, but you may be
required to provide a certification of your non-U.S. status in order to establish that you are not
subject to these rules.
DOCUMENTS ON DISPLAY
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended. In accordance with these requirements, we file reports and other information with the U.S.
Securities and Exchange Commission. These materials, including this Annual Report and the exhibits
thereto, may be inspected and copied at the SECs public reference room at 100 F Street, N.E.,
Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on the public
reference room and its copy charges. Our SEC filings are also available on the Internet at the
SECs website at http://www.sec.gov.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of financial risks in the normal course of our business: currency
risk, interest rate / re-investment risk, financial counter-party risk and credit risk. Our overall
risk management program focuses on the unpredictability of financial markets and seeks to minimize
potential adverse effects on our financial performance. We use derivative financial instruments to
hedge identified currency risk exposures.
Currency risk
We operate worldwide and are therefore exposed to foreign exchange risk on our commercial
transactions.
We have developed risk management guidelines that set forth our tolerance for risk and our
overall risk management policies. We have also established processes to measure our exposure to
foreign exchange risk and to monitor and control hedging transactions in a timely and accurate
manner. Such policies are approved by our Audit Committee and reviewed annually.
Our policy is to hedge a portion of our subsidiaries known or forecasted commercial
transactions not denominated in their functional currencies. In order to achieve this objective, we
use foreign currency derivative instruments by entering into foreign exchange forward contracts and
foreign exchange options. We do not enter into financial derivative contracts for purposes other
than hedging. No option is sold except where there is a corresponding option purchased by us. This
combination strategy reduces the cost of hedging without creating speculative positions. All
hedging instruments are allocated to underlying commercial transactions. The financial derivative
contracts are traded over the counter with major financial institutions and generally mature
within 12 months.
Most of the financial instruments we use to hedge our exposure to foreign currency risk are
qualified as cash flow hedges under IAS 39. Non-qualified hedging instruments are mainly options sold as part of combination strategies.
The table below is a summary of the outstanding financial instruments qualifying as cash flow
hedges under IAS 39 (notional amounts) and our commercial exposure to currency risk. In the amounts
reported below: (i) hedging positions in parentheses indicate our forward commitment or option to
sell the currency against the euro; other hedging positions indicate our forward commitment or
73
option to buy the currency against the euro; and (ii) positive exposures indicate our
receivables in the currency, or forecasted sales in the currency; exposures in parentheses indicate
our payables in the currency, or forecasted purchases in the currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros (1)) |
|
December 31 |
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others (2) |
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others (2) |
|
|
Hedging positions (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
|
(88,172 |
) |
|
|
(7,930 |
) |
|
|
(10,807 |
) |
|
|
15,970 |
|
|
|
(129,656 |
) |
|
|
(23,519 |
) |
|
|
(12,710 |
) |
|
|
5,560 |
|
Option contracts (4) |
|
|
(64,384 |
) |
|
|
(13,786 |
) |
|
|
(11,224 |
) |
|
|
7,159 |
|
|
|
(140,101 |
) |
|
|
(25,741 |
) |
|
|
(22,849 |
) |
|
|
12,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(152,556 |
) |
|
|
(21,716 |
) |
|
|
(22,031 |
) |
|
|
23,129 |
|
|
|
(269,757 |
) |
|
|
(49,260 |
) |
|
|
(35,559 |
) |
|
|
17,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial transactions
not settled at year end |
|
|
25,718 |
|
|
|
(1,174 |
) |
|
|
2,675 |
|
|
|
(10 |
) |
|
|
37,483 |
|
|
|
7,414 |
|
|
|
6,706 |
|
|
|
6,136 |
|
Forecasted commercial
transactions |
|
|
161,709 |
|
|
|
31,209 |
|
|
|
29,810 |
|
|
|
(12,966 |
) |
|
|
252,980 |
|
|
|
51,838 |
|
|
|
36,598 |
|
|
|
(28,485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
187,427 |
|
|
|
30,035 |
|
|
|
32,485 |
|
|
|
(12,976 |
) |
|
|
290,463 |
|
|
|
59,252 |
|
|
|
43,304 |
|
|
|
(22,349 |
) |
|
|
|
|
(1) |
|
Currency amounts are converted to euros at year end closing rates. |
|
|
(2) |
|
Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW
and SGD. |
|
|
(3) |
|
Financial instruments that hedge our commercial currency exposure and that are
effective hedges under IAS 39 qualify as cash flow hedges. |
|
|
(4) |
|
Option hedges qualifying as effective hedges under IAS 39 are purchased options to
sell or buy currency against the euro. |
|
|
(5) |
|
Our policy is to hedge all our actual commercial currency exposure as well as a
time-weighted proportion of forecasted commercial currency exposure. |
Outstanding financial instruments not qualifying as effective hedges under IAS 39 are
described below (notional amount).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros (1)) |
|
December 31 |
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others (2) |
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others (2) |
|
|
Forward contracts |
|
|
(8,447 |
) |
|
|
|
|
|
|
|
|
|
|
3,350 |
|
|
|
|
|
|
|
|
|
|
|
(2,990 |
) |
|
|
88 |
|
Option contracts (3) |
|
|
(4,196 |
) |
|
|
|
|
|
|
(974 |
) |
|
|
3,021 |
|
|
|
(75,882 |
) |
|
|
(7,253 |
) |
|
|
(10,890 |
) |
|
|
7,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(12,643 |
) |
|
|
|
|
|
|
(974 |
) |
|
|
6,371 |
|
|
|
(75,882 |
) |
|
|
(7,253 |
) |
|
|
(13,880 |
) |
|
|
7,721 |
|
|
|
|
|
(1) |
|
Currency amounts are converted to euros at year end closing rates. |
|
(2) |
|
Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW and SGD. |
|
(3) |
|
Options that do not qualify as effective hedges under IAS 39 are options that we
sell as part of our combination strategies. |
The fair market value of our financial instruments is recorded in current assets or
current liabilities as Derivative financial instruments, and consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Fair value of the financial instruments qualifying as cash flow hedges under IAS 39 |
|
|
1,488 |
|
|
|
33,135 |
|
|
|
16,986 |
|
Fair value of financial instruments not qualifying as effective hedges under IAS 39 |
|
|
107 |
|
|
|
252 |
|
|
|
(560 |
) |
|
Total fair value of derivative financial instruments |
|
|
1,595 |
|
|
|
33,387 |
|
|
|
16,426 |
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Derivatives financial instruments under Current Assets |
|
|
4,187 |
|
|
|
33,387 |
|
|
|
16,426 |
|
Derivatives financial instruments under Current Liabilities |
|
|
(2,592 |
) |
|
|
|
|
|
|
|
|
|
Total fair value of derivative financial instruments |
|
|
1,595 |
|
|
|
33,387 |
|
|
|
16,426 |
|
|
In addition, because we have subsidiaries that present their financial statements in a
currency different from euro, the euro-denominated value of our consolidated equity is exposed to
fluctuations in exchange rates. All exchange differences resulting from translating those financial
statements into our reporting currency, the euro, are classified as translation difference in our
consolidated equity. We do not hedge our equity exposure arising from
net investments in entities outside the euro zone.
See Note 9 to our Consolidated Financial Statements.
Interest Rate and Re-investment Risk
The following maturity schedule describes our exposure to interest rate risk.
We are in a net, short duration, financial asset position. Financial assets are short-term
investments in money market instruments with a duration of three months or less. Financial
liabilities are mainly leases with floating rates.
We consider we are not significantly exposed to interest rate risk fluctuations, and
consequently we do not enter into any derivative contracts to hedge interest rate risk. However, we
do face re-investment risk: when interest rates increase (decrease),
interest income increases (decreases, respectively). This risk remains un-hedged.
In 2005, the average interest rate for our financial liabilities was 3.27%.
See Item 5. Operating and Financial Review and Prospects Operating Income (Loss); Notes 6
and 19 to our Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From December 31 , 2005 |
|
|
|
|
|
|
|
(in thousand of euros (1)) |
|
To December 31 , 2006 |
|
|
From 1 year to 5 years |
|
|
Beyond 5 years |
|
Financial assets |
|
|
418,365 |
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
|
418,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
(6,610 |
) |
|
|
(19,463 |
) |
|
|
(6,616 |
) |
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
|
(6,610 |
) |
|
|
(19,463 |
) |
|
|
(6,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance sheet position before hedging |
|
|
411,755 |
|
|
|
(19,463 |
) |
|
|
(6,616 |
) |
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
|
411,755 |
|
|
|
(19,463 |
) |
|
|
(6,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed to floating rate |
|
|
|
|
|
|
|
|
|
|
|
|
Floating to fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance sheet position after hedging |
|
|
411,755 |
|
|
|
(19,463 |
) |
|
|
(6,616 |
) |
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate |
|
|
411,755 |
|
|
|
(19,463 |
) |
|
|
(6,616 |
) |
|
|
|
(1) |
|
Assets are presented as positive amounts and liabilities as negative amounts. |
75
Equity Risk in Minority Investments
We
do not trade or hold marketable securities as a part of our
activities. We do have, however,
investments in several non-public start-up companies. The majority of these investments are held by
one of our direct subsidiaries, GemVentures, our venture capital company. These investments are
deemed to be held for the medium term. Certain of our personnel are dedicated to managing our
venture capital activities in accordance with our internal investment policies, and they produce
quarterly reports to our finance department on their activities.
Associates are all entities over which we have significant influence but not control,
generally with a shareholding of between 20% and 50% of the voting rights. Our investments in
associates are accounted for by the equity method of accounting and are initially recognized at
cost. These investments are presented on our Consolidated Balance Sheet under the caption
Investments in associates and are accounted for in accordance with the accounting policies
described in Note 2.2 to our Consolidated Financial Statements.
We also have minority shareholdings in other non-public start-up companies. For these
investments, we hold less than 20% of the investees outstanding shares or voting rights, and these
companies are not in substance controlled or under significant influence by us. These investments
are presented on the Consolidated Balance Sheet under the caption Available-for-sale financial
assets in non-current assets, and are accounted for in accordance with the accounting policies
described in Note 2.12. A write-down of these assets is recorded when there is sufficient reason to
believe that an impairment in value that is other than temporary has occurred, typically based on
questions regarding the companys business model or failure to accomplish its business plan.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
As of November 10, 2000, our board of directors was authorized by our shareholders to issue
additional shares within our authorized capital with or without reserving preferential subscription
rights for existing shareholders in respect of specified stock option plans and contributions of
shares in Gemplus S.A. until May 31, 2006 (the fifth anniversary after the date of publication of
the minutes of the extraordinary general meeting held on November 10, 2000), and for public
offerings until December 5, 2005, up to a limited number of shares. As of November 10, 2000, the
board of directors was also authorized to issue further shares within our authorized capital for
other purposes with or without reserving preferential subscription rights for existing
shareholders. At the extraordinary general meeting of shareholders held on April 27, 2004, the
authorization of the board of directors to issue shares for such other purposes was renewed until
the third anniversary of the publication of the minutes of such meeting. These authorizations do
not affect the rights of security holders beyond this limited delegation of authority to the board
of directors. At the extraordinary meeting of shareholders held on April 25, 2006, the
authorization of the board of directors to issue additional shares
within our authorized capital,
with or without reserving preferential subscription rights for existing shareholders in respect of
specified stock option plans and contributions of shares in Gemplus
S.A., was renewed until the
fifth anniversary after the date of publication of the minutes of such meeting.
As previously authorized by the board of directors, on May 27, 2005, we issued 19 million
shares, valued at 34,824,286, without reserving any pre-emptive rights in respect of our
acquisition of Setec Oy. This issue was made pursuant to the authorization given to the board of
directors to issue, out of the authorized share capital, further shares up to the total authorized
share capital in whole or in part from time to time with or without reserving any pre-emptive
subscription rights for existing shareholders and as it may in its discretion determine.
76
Item 15. Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, has
conducted an evaluation as to the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded
that our disclosure controls and procedures are effective as of the end of the period covered by
the annual report and that there have been no changes in our internal controls over financial
reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act that
occurred during the period covered by this annual report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 16. (Reserved.)
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that we have had at least one audit committee financial
expert serving on our Audit Committee. During 2005 through June 2, 2006, Mr. John Ormerod has acted
as the audit committee financial expert. We believe that Mr. Ormerod is an independent director as
such term is defined by the Securities and Exchange Commission (SEC) rules as codified in 17 CFR
240.10A-3 and NASDAQ Marketplace Rule 4350. According to the SEC, an audit committee financial
expert must have: an understanding of generally accepted accounting principles and financial
statements; the ability to assess the general application of such generally accepted accounting
principles in connection with the accounting for estimates, accruals, and reserves; experience
preparing, auditing, analyzing or evaluating financial statements that present a breadth and level
of complexity of accounting issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the registrants financial statements, or
experience actively supervising one or more persons engaged in such activities; an understanding of
internal controls and procedures for financial reporting; and an understanding of audit committee
functions. Our current audit committee financial expert is Mr. Michel Soublin.
Item 16B. Code of Ethics
In December 2003, our board of directors approved a Code of Ethics applicable to all
directors, officers and employees of our Company. The Code of Ethics is reasonably designed to
deter wrongdoing and promote: honest and ethical conduct; full, fair, accurate, timely and
understandable disclosure in reports filed or submitted to the SEC and other financial and
regulatory bodies; compliance with applicable governmental laws, rules and regulations; prompt
internal reporting of violations of the code; and accountability for adherence to the code. To
date, no substantive amendments to the code have been made, and no waivers from any provision of
the code have been granted.
Individuals can contact the Gemplus Investor Relations Department to request a copy of the
Code of Ethics, at no charge, by post at: 2-4, Place des Alpes, 1201 Geneva, Switzerland.
Item 16C. Principal Accountant Fees and Services
PricewaterhouseCoopers has served as our independent public accountant for each of the
financial years in the four-year period ended December 31, 2005, for which audited financial
statements appear in this annual report on Form 20-F. Additionally, PricewaterhouseCoopers has
served as our Luxembourg Statutory auditor (Réviseur dEntreprises) for the same period.
Audit Fees
The aggregate fees billed in 2005 for professional services rendered by our principal
accountant for the audit of the annual financial statements totaled 1,663 thousand. The
aggregate fees billed in 2004 for professional services rendered by our principal accountant for
the audit of the annual financial statements totaled 1,637 thousand. Audit fees consist of
fees for professional services rendered for the audits and reviews of the consolidated financial
statements of Gemplus International S.A. and other services normally provided in connection with
statutory and regulatory filings.
Audit-Related Fees
The aggregate fees billed in 2005 for professional services rendered by our principal
accountant for assurance and related services related to the audit of the financial statements
totaled 290 thousand. The aggregate fees billed in 2004 for professional services rendered by
our principal accountant for assurance and related services related to the audit of the financial
statements totaled 144 thousand. These services consist of fees for assurance and related
services that are traditionally performed by independent accountants. These services include
accounting consultations as well as audits in connection with acquisitions or divestments.
77
Tax Fees
The aggregate fees billed in 2005 for professional services rendered by our principal
accountant for tax services totaled 62 thousand. The aggregate fees billed in 2004 for
professional services rendered by our principal accountant for tax compliance, tax advice and tax
planning services totaled 156 thousand. These services consist of fees for tax compliance and
tax planning services and tax advice.
All Other Fees
In 2005 and 2004, our principal accountant did not bill us for any services other than Audit
Fees, Audit-Related Fees and Tax Fees.
Our Audit Committee requires prior approval of all audit and permissible non-audit services to
be performed by our auditors and, therefore, the Audit Committee has decided not to establish a
detailed set of pre-approval policies and procedures at this time. Therefore, none of the services
described under the sections titled Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees
were approved by Audit Committee pursuant to pre-approval policies.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
PART III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See
pages F-1 through F-65, incorporated herein by reference.
Item 19. Exhibits
(a) List of Financial Statements (incorporated herein by reference)
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-1 |
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003
|
|
F-2 |
Consolidated Balance Sheets as of December 31, 2005, 2004 and 2003
|
|
F-3 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
|
|
F-4 |
Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31, 2005, 2004 and 2003
|
|
F-5 |
Notes to the Consolidated Financial Statements
|
|
F-8 |
(b) List of Exhibits
1 |
|
Updated and consolidated Articles of Incorporation of Gemplus International S.A. as amended to date (English
translation). |
|
|
2 |
|
Deposit Agreement and Supplemental Agreement to Deposit Agreement, incorporated by reference to the filing on Form F-6
dated February 28, 2003. |
|
|
4.1 |
|
Employment Agreement among Gemplus International S.A., Gemplus Corp., Gemplus Management & Trading SA and Alex Mandl
dated August 29, 2002, incorporated by reference to the annual
report on Form 20-F dated July 15, 2003. |
78
4.2 |
|
Agreement among Gemplus S.A., Gemplus Trading SA, Gemplus Electronics SA, Gemplus Telematics SARL, Gemplus Support
GIE, Gemplus Development GIE, Gemplus Europe Services and Unions U.S.G, C.F.D.T., C.F.T.C, and C.F.E.-C.G.C. dated May
15, 2003, incorporated by reference to the annual report on Form 20-F dated July 15, 2003. |
|
|
4.3 |
|
Amendment dated February 1, 2004, to the Agreement among Gemplus S.A., Gemplus Trading SA, Gemplus Electronics SA,
Gemplus Telematics SARL, Gemplus Support GIE, Gemplus Development GIE, Gemplus Europe Services and Unions U.S.G,
C.F.D.T., C.F.T.C, and C.F.E.-C.G.C. dated May 15, 2003, incorporated by reference to the annual report on Form 20-F dated
June 30, 2004. |
|
|
4.4 |
|
Share Purchase Agreement by and among the Holders of Shares
and Stock Options of Setec Oy, Gemplus Nordic Oy and
Gemplus International S.A. concerning the shares and stock options of Setec Oy dated April 22, 2005, incorporated by
reference to the annual report on
Form 20-F dated June 30, 2005. |
|
|
4.5 |
|
(a) Patent Cross License Agreement, (b) Patent License Agreement for Terminals and (c) Amendment to Patent License
Agreement between Gemplus International S.A. and Axalto Holdings N.V. and between Gemplus International S.A. and CP8
Technologies S.A. dated January 1, 2005, incorporated by reference to the annual report on Form 20-F dated June 30, 2005. |
|
|
4.6 |
|
Combination Agreement among Axalto Holding N.V., Gemplus International S.A., T3 Partners, LP, TPG Giant, LLC, TPG
Partners III, LP, Acton 1. Beteilingungs GMBH, Acton 2. Beteilingungs GMBH, Acton 3. Beteilingungs GMBH, Johanna
Quandt and Stefan Quandt dated December 6, 2005. |
|
|
8 |
|
List of significant subsidiaries. |
|
|
12 |
|
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
13 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
15 |
|
Consent of Independent Registered Public Accounting Firm. |
79
SIGNATURE
The company certifies that it meets all of the requirements for filing on Form 20-F and has
duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date:
June 30, 2006
|
|
|
|
|
|
|
GEMPLUS INTERNATIONAL S.A. |
|
|
|
|
|
|
|
By:
|
|
/s/ Frans Spaargaren |
|
|
|
|
|
|
|
|
|
Frans Spaargaren |
|
|
|
|
Chief Executive Officer and
Chief Financial Officer |
80
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders,
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of cash flows and of changes in shareholders equity present fairly, in all
material respects, the financial position of Gemplus International SA
and its subsidiaries (the Company) at
December 31, 2005, 2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005, in accordance with International
Financial Reporting Standards as adopted in the European Union. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits of these statements in accordance 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.
As discussed in Notes 2.4 to
the financial statements, the Company changed the manner in which it
accounts for stock based compensation and goodwill as of
January 1, 2005.
International Financial
Reporting Standards adopted in the European Union vary in certain significant respects from accounting
principles generally accepted in the United States of America. Information relating to the nature
and effects of such differences, as restated, is presented in Note 40 to the Consolidated Financial Statements.
PricewaterhouseCoopers
Paris, France
March 6, 2006
F-1
Consolidated Financial Statements
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros, except shares and per share amounts) |
|
Years ended December 31 |
|
Notes |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net sales |
|
|
(26 |
) |
|
|
938,875 |
|
|
|
865,034 |
|
|
|
749,203 |
|
Cost of sales |
|
|
|
|
|
|
(628,967 |
) |
|
|
(594,533 |
) |
|
|
(541,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
309,908 |
|
|
|
270,501 |
|
|
|
207,256 |
|
|
Research and development expenses |
|
|
(13 |
) |
|
|
(62,269 |
) |
|
|
(62,592 |
) |
|
|
(69,223 |
) |
Selling and marketing expenses |
|
|
|
|
|
|
(116,088 |
) |
|
|
(101,493 |
) |
|
|
(100,181 |
) |
General and administrative expenses |
|
|
|
|
|
|
(67,983 |
) |
|
|
(63,895 |
) |
|
|
(77,317 |
) |
Restructuring reversals (expenses) |
|
|
(22 |
) |
|
|
3,235 |
|
|
|
(8,384 |
) |
|
|
(61,973 |
) |
Other operating income (expense), net |
|
|
|
|
|
|
(48 |
) |
|
|
(101 |
) |
|
|
703 |
|
Goodwill amortization and impairment |
|
|
(12 |
) |
|
|
|
|
|
|
(7,718 |
) |
|
|
(33,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
66,755 |
|
|
|
26,318 |
|
|
|
(133,786 |
) |
|
Financial income (expense), net |
|
|
(28 |
) |
|
|
7,659 |
|
|
|
5,653 |
|
|
|
8,204 |
|
Share of profit (loss) of associates |
|
|
(15 |
) |
|
|
(531 |
) |
|
|
(5,970 |
) |
|
|
(7,561 |
) |
Other non-operating income (expense), net |
|
|
(29 |
) |
|
|
(2,301 |
) |
|
|
(6,757 |
) |
|
|
(11,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
|
|
|
|
71,582 |
|
|
|
19,244 |
|
|
|
(144,282 |
) |
|
Income tax benefit (expense) |
|
|
(30 |
) |
|
|
19,816 |
|
|
|
(12,953 |
) |
|
|
(14,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
|
|
|
|
91,398 |
|
|
|
6,291 |
|
|
|
(158,955 |
) |
|
Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the Company |
|
|
|
|
|
|
89,890 |
|
|
|
4,674 |
|
|
|
(161,107 |
) |
Minority interest |
|
|
|
|
|
|
1,508 |
|
|
|
1,617 |
|
|
|
2,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to
equity holders of the Company (in euros) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(32 |
) |
|
|
0.15 |
|
|
|
0.01 |
|
|
|
(0.27 |
) |
Diluted |
|
|
(32 |
) |
|
|
0.14 |
|
|
|
0.01 |
|
|
|
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income (loss) per share
calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
618,337,539 |
|
|
|
606,672,060 |
|
|
|
605,658,965 |
|
Diluted |
|
|
|
|
|
|
634,794,569 |
|
|
|
619,022,472 |
|
|
|
605,658,965 |
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-2
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
Notes |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
(6 |
) |
|
|
418,365 |
|
|
|
388,430 |
|
|
|
390,684 |
|
Trade accounts receivable, net |
|
|
(7 |
) |
|
|
183,022 |
|
|
|
148,512 |
|
|
|
154,727 |
|
Inventory, net |
|
|
(8 |
) |
|
|
107,673 |
|
|
|
115,610 |
|
|
|
98,673 |
|
Derivative financial instruments |
|
|
(9 |
) |
|
|
4,187 |
|
|
|
33,387 |
|
|
|
16,426 |
|
Other current receivables |
|
|
(10 |
) |
|
|
82,128 |
|
|
|
66,160 |
|
|
|
66,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
795,375 |
|
|
|
752,099 |
|
|
|
726,759 |
|
|
Non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
(11 |
) |
|
|
158,284 |
|
|
|
148,916 |
|
|
|
175,706 |
|
Goodwill, net |
|
|
(12 |
) |
|
|
90,826 |
|
|
|
28,197 |
|
|
|
37,727 |
|
Deferred development costs, net |
|
|
(13 |
) |
|
|
21,227 |
|
|
|
19,222 |
|
|
|
17,916 |
|
Other intangible assets, net |
|
|
(14 |
) |
|
|
23,600 |
|
|
|
8,965 |
|
|
|
16,157 |
|
Deferred income tax assets |
|
|
(30 |
) |
|
|
32,788 |
|
|
|
6,264 |
|
|
|
31,860 |
|
Investments in associates |
|
|
(15 |
) |
|
|
16,309 |
|
|
|
12,864 |
|
|
|
19,216 |
|
Available-for-sale financial assets, net |
|
|
(16 |
) |
|
|
2,469 |
|
|
|
4,752 |
|
|
|
647 |
|
Other non-current receivables, net |
|
|
(17 |
) |
|
|
40,846 |
|
|
|
43,900 |
|
|
|
27,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
386,349 |
|
|
|
273,080 |
|
|
|
326,480 |
|
|
TOTAL ASSETS |
|
|
|
|
|
|
1,181,724 |
|
|
|
1,025,179 |
|
|
|
1,053,239 |
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
106,085 |
|
|
|
94,025 |
|
|
|
95,582 |
|
Derivative financial instruments |
|
|
(9 |
) |
|
|
2,592 |
|
|
|
|
|
|
|
|
|
Salaries, wages and related items |
|
|
|
|
|
|
62,641 |
|
|
|
55,199 |
|
|
|
42,742 |
|
Current portion of provisions and other liabilities |
|
|
(18 |
) |
|
|
73,434 |
|
|
|
50,217 |
|
|
|
78,090 |
|
Current income tax liabilities |
|
|
(30 |
) |
|
|
5,228 |
|
|
|
6,581 |
|
|
|
1,903 |
|
Other current tax liabilities |
|
|
|
|
|
|
20,821 |
|
|
|
19,127 |
|
|
|
12,770 |
|
Current obligations under finance leases |
|
|
(19 |
) |
|
|
5,539 |
|
|
|
6,005 |
|
|
|
5,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
276,340 |
|
|
|
231,154 |
|
|
|
237,015 |
|
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current obligations under finance leases |
|
|
(19 |
) |
|
|
26,425 |
|
|
|
33,663 |
|
|
|
38,893 |
|
Non-current portion of provisions |
|
|
(20 |
) |
|
|
23,482 |
|
|
|
25,696 |
|
|
|
57,082 |
|
Other non-current liabilities |
|
|
(20 |
) |
|
|
13,417 |
|
|
|
13,353 |
|
|
|
13,164 |
|
Deferred income tax liabilities |
|
|
(30 |
) |
|
|
4,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
|
|
|
|
67,678 |
|
|
|
72,712 |
|
|
|
109,139 |
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares no legal par value, 1,889,466,226
shares authorized, 630,880,979, 608,482,253,
and 607,312,796 shares issued at December 31,
2005, 2004 and 2003, respectively |
|
|
(23 |
) |
|
|
133,466 |
|
|
|
128,643 |
|
|
|
127,889 |
|
Additional paid-in capital |
|
|
|
|
|
|
1,063,145 |
|
|
|
1,031,558 |
|
|
|
1,028,849 |
|
Retained earnings |
|
|
|
|
|
|
(365,940 |
) |
|
|
(459,560 |
) |
|
|
(464,221 |
) |
Other comprehensive income |
|
|
(25 |
) |
|
|
(4,407 |
) |
|
|
11,956 |
|
|
|
4,570 |
|
Less, cost of treasury shares |
|
|
(23 |
) |
|
|
(1,395 |
) |
|
|
(1,985 |
) |
|
|
(2,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity attributable to equity holders
of the Company |
|
|
|
|
|
|
824,869 |
|
|
|
710,612 |
|
|
|
695,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
12,837 |
|
|
|
10,701 |
|
|
|
12,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
|
|
|
|
837,706 |
|
|
|
721,313 |
|
|
|
707,085 |
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
1,181,724 |
|
|
|
1,025,179 |
|
|
|
1,053,239 |
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-3
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
|
Notes |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
91,398 |
|
|
|
6,291 |
|
|
|
(158,955 |
) |
Adjustments to reconcile net income (loss)
to net cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and impairment |
|
|
(36 |
) |
|
|
41,369 |
|
|
|
56,691 |
|
|
|
95,071 |
|
Changes in non-current portion of provisions and other
liabilities, excluding restructuring |
|
|
(20 |
) |
|
|
(3,367 |
) |
|
|
(32,930 |
) |
|
|
4,228 |
|
Deferred income taxes (benefit) expense |
|
|
(30 |
) |
|
|
(26,851 |
) |
|
|
3,661 |
|
|
|
8,644 |
|
(Gain) / loss on sale and disposal of assets |
|
|
|
|
|
|
(4,612 |
) |
|
|
2,582 |
|
|
|
2,005 |
|
Share of (profit) loss of associates |
|
|
(15 |
) |
|
|
571 |
|
|
|
5,970 |
|
|
|
9,098 |
|
Share-based compensation |
|
|
(2.4 |
) |
|
|
4,320 |
|
|
|
|
|
|
|
|
|
Other, net |
|
|
|
|
|
|
(3,651 |
) |
|
|
(2,700 |
) |
|
|
10,840 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable and related current liabilities |
|
|
(36 |
) |
|
|
(12,133 |
) |
|
|
(2,962 |
) |
|
|
(12,292 |
) |
Trade accounts payable and related current assets |
|
|
(36 |
) |
|
|
822 |
|
|
|
20,774 |
|
|
|
32,485 |
|
Inventories |
|
|
(36 |
) |
|
|
22,661 |
|
|
|
(19,466 |
) |
|
|
(9,189 |
) |
Value-added and income taxes |
|
|
(36 |
) |
|
|
(1,021 |
) |
|
|
21,288 |
|
|
|
6,674 |
|
Salaries, wages and other |
|
|
(36 |
) |
|
|
4,429 |
|
|
|
14,161 |
|
|
|
3,306 |
|
Restricted cash |
|
|
(17 |
) |
|
|
23,277 |
|
|
|
(28,018 |
) |
|
|
|
|
Restructuring reserve payable |
|
|
(22 |
) |
|
|
(15,847 |
) |
|
|
(18,307 |
) |
|
|
(2,027 |
) |
|
Net cash (used for) from operating activities |
|
|
|
|
|
|
121,365 |
|
|
|
27,035 |
|
|
|
(10,112 |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Purchase) / Sale of activities net of cash (acquired) / disposed |
|
|
(5.2 |
) |
|
|
(63,457 |
) |
|
|
(2,898 |
) |
|
|
114 |
|
Other investments |
|
|
|
|
|
|
(1,674 |
) |
|
|
(2,982 |
) |
|
|
(931 |
) |
Purchase of property, plant and equipment |
|
|
(11 |
) |
|
|
(25,078 |
) |
|
|
(22,888 |
) |
|
|
(15,237 |
) |
Purchase of other assets |
|
|
|
|
|
|
(2,693 |
) |
|
|
(1,725 |
) |
|
|
(1,406 |
) |
Proceeds from sale of property and non-current assets |
|
|
|
|
|
|
7,025 |
|
|
|
1,300 |
|
|
|
|
|
Change in non-trade accounts payable and other |
|
|
|
|
|
|
2,074 |
|
|
|
3,064 |
|
|
|
780 |
|
|
Net cash used for investing activities |
|
|
|
|
|
|
(83,803 |
) |
|
|
(26,129 |
) |
|
|
(16,680 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
2,790 |
|
|
|
1,479 |
|
|
|
173 |
|
Payments on borrowings |
|
|
|
|
|
|
(1,231 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale-leaseback operations |
|
|
|
|
|
|
|
|
|
|
956 |
|
|
|
2,142 |
|
Principal payments on obligations under finance leases |
|
|
(19 |
) |
|
|
(5,938 |
) |
|
|
(5,827 |
) |
|
|
(5,973 |
) |
Increase (decrease) in bank overdrafts |
|
|
|
|
|
|
(2,657 |
) |
|
|
1,660 |
|
|
|
(51 |
) |
Dividends paid by subsidiaries to minority shareholders |
|
|
|
|
|
|
(1,307 |
) |
|
|
(1,724 |
) |
|
|
(2,627 |
) |
Change in non trade accounts payable on financing activities |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
Change in treasury shares |
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
|
|
|
Net cash used for financing activities |
|
|
|
|
|
|
(8,324 |
) |
|
|
(3,366 |
) |
|
|
(6,336 |
) |
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
697 |
|
|
|
207 |
|
|
|
6,586 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
29,238 |
|
|
|
(2,461 |
) |
|
|
(33,128 |
) |
Cash and cash equivalents, beginning of the year |
|
|
(6 |
) |
|
|
388,430 |
|
|
|
390,684 |
|
|
|
417,226 |
|
|
Cash and cash equivalents, end of the year |
|
|
(6 |
) |
|
|
418,365 |
|
|
|
388,430 |
|
|
|
390,684 |
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-4
Consolidated Statement of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros, except number of shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to equity holders of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
Number |
|
|
Share |
|
|
Additional |
|
|
Retained earnings |
|
|
Other |
|
|
Treasury |
|
|
Minority |
|
|
Total share |
|
|
|
|
|
|
|
of shares |
|
|
value |
|
|
paid-in |
|
|
Prior |
|
|
Net income |
|
|
comprehensive |
|
|
shares |
|
|
interest |
|
|
holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital |
|
|
years |
|
|
(loss) |
|
|
income |
|
|
|
|
|
|
|
|
|
|
equity |
|
|
Balance at December 31, 2002 |
|
|
|
|
|
|
637,859,088 |
|
|
|
127,644 |
|
|
|
1,028,920 |
|
|
|
110,533 |
|
|
|
(320,891 |
) |
|
|
8,571 |
|
|
|
(94,326 |
) |
|
|
15,167 |
|
|
|
875,618 |
|
|
Cumulative translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,333 |
) |
|
|
|
|
|
|
(2,619 |
) |
|
|
(10,952 |
) |
Net unrealized gain (loss) on hedging
instruments qualifying as effective |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,332 |
|
|
|
|
|
|
|
|
|
|
|
4,332 |
|
Net income (loss) recognized directly
in equity under other comprehensive income |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,001 |
) |
|
|
|
|
|
|
(2,619 |
) |
|
|
(6,620 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161,107 |
) |
|
|
|
|
|
|
|
|
|
|
2,152 |
|
|
|
(158,955 |
) |
Dividend paid to minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,627 |
) |
|
|
(2,627 |
) |
Allocation of prior year loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(320,891 |
) |
|
|
320,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued by Gemplus SA pursuant
to share options exercised to be contributed |
|
|
(23 |
) |
|
|
17,550 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Contribution of Gemplus SA shares
to Gemplus International SA |
|
|
(23 |
) |
|
|
|
|
|
|
207 |
|
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued by Gemplus International SA
pursuant to share options exercised |
|
|
(23 |
) |
|
|
179,837 |
|
|
|
38 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
Cancellation of 30,743,679 treasury shares |
|
|
(3 |
) |
|
|
(30,743,679 |
) |
|
|
|
|
|
|
|
|
|
|
(92,756 |
) |
|
|
|
|
|
|
|
|
|
|
92,756 |
|
|
|
|
|
|
|
|
|
Purchase of 487,957 treasury shares |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505 |
) |
|
|
|
|
|
|
(505 |
) |
|
Balance at December 31, 2003 |
|
|
|
|
|
|
607,312,796 |
|
|
|
127,889 |
|
|
|
1,028,849 |
|
|
|
(303,114 |
) |
|
|
(161,107 |
) |
|
|
4,570 |
|
|
|
(2,075 |
) |
|
|
12,073 |
|
|
|
707,085 |
|
|
Cumulative translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,951 |
) |
|
|
|
|
|
|
(1,265 |
) |
|
|
(11,216 |
) |
Net unrealized gain (loss) on hedging
instruments qualifying as effective |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,337 |
|
|
|
|
|
|
|
|
|
|
|
17,337 |
|
Net income (loss) recognized directly
in equity under other comprehensive income |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,386 |
|
|
|
|
|
|
|
(1,265 |
) |
|
|
6,121 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,674 |
|
|
|
|
|
|
|
|
|
|
|
1,617 |
|
|
|
6,291 |
|
Dividend paid to minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,724 |
) |
|
|
(1,724 |
) |
Allocation of prior year loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161,107 |
) |
|
|
161,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued by Gemplus SA pursuant
to share options exercised to be contributed |
|
|
(23 |
) |
|
|
901,250 |
|
|
|
|
|
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,151 |
|
Contribution of Gemplus SA shares
to Gemplus International SA |
|
|
(23 |
) |
|
|
|
|
|
|
697 |
|
|
|
(697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued by Gemplus International SA
pursuant to share options exercised |
|
|
(23 |
) |
|
|
268,207 |
|
|
|
57 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328 |
|
Sale of 28,664 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
77 |
|
Minority shareholders contribution
not resulting in a change of subsidiary ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,984 |
|
|
Balance at December 31, 2004 |
|
|
|
|
|
|
608,482,253 |
|
|
|
128,643 |
|
|
|
1,031,558 |
|
|
|
(464,234 |
) |
|
|
4,674 |
|
|
|
11,956 |
|
|
|
(1,985 |
) |
|
|
10,701 |
|
|
|
721,313 |
|
|
Cumulative translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,127 |
|
|
|
|
|
|
|
1,448 |
|
|
|
14,575 |
|
Net unrealized gain (loss) on hedging
instruments qualifying as effective |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,490 |
) |
|
|
|
|
|
|
|
|
|
|
(29,490 |
) |
Net income (loss) recognized directly
in equity under other comprehensive income |
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,363 |
) |
|
|
|
|
|
|
1,448 |
|
|
|
(14,915 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,890 |
|
|
|
|
|
|
|
|
|
|
|
1,508 |
|
|
|
91,398 |
|
Impact of adopting IFRS 2 - Share-based Payment as of January 1, 2005 |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payments, value of
employee services |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,320 |
|
Transfer of 500,000 treasury shares |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(590 |
) |
|
|
|
|
|
|
|
|
|
|
590 |
|
|
|
|
|
|
|
|
|
Dividend paid to minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,090 |
) |
|
|
(1,090 |
) |
Allocation of prior year income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,674 |
|
|
|
(4,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Setec |
|
|
(5.2, 23 |
) |
|
|
19,000,000 |
|
|
|
4,022 |
|
|
|
29,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270 |
|
|
|
33,958 |
|
Shares issued by Gemplus SA pursuant
to share options exercised to be contributed |
|
|
(23 |
) |
|
|
328,150 |
|
|
|
|
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464 |
|
Contribution of Gemplus SA shares
to Gemplus International SA |
|
|
(23 |
) |
|
|
|
|
|
|
414 |
|
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued by Gemplus International SA
pursuant to share options exercised |
|
|
(23 |
) |
|
|
1,830,376 |
|
|
|
387 |
|
|
|
1,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,258 |
|
|
Balance at December 31, 2005 |
|
|
|
|
|
|
629,640,779 |
|
|
|
133,466 |
|
|
|
1,063,145 |
|
|
|
(455,830 |
) |
|
|
89,890 |
|
|
|
(4,407 |
) |
|
|
(1,395 |
) |
|
|
12,837 |
|
|
|
837,706 |
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-5
Notes to the Consolidated Financial Statements
1. THE COMPANY
Gemplus International SA, including its consolidated subsidiaries (the Company), is a
leading provider of enabling technology products and services for secure wireless communications
and transactions.
The Company designs, develops, manufactures and markets microprocessor solutions and non-chip-based
products for customers in the Telecommunications, Financial Services, Identity and Security
industries.
The Company is incorporated in the Grand Duchy of Luxemburg.
The Companys ordinary shares of common stock are listed on the Euronext Paris Market and in the
form of American Depositary Shares on the Nasdaq National Market.
These Consolidated Financial Statements have been approved by the Board of Directors on March 3,
2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these Consolidated Financial
Statements are set out below. These policies have been consistently applied to all the years
presented, unless otherwise stated.
2.1 Basis of presentation
The annual Consolidated Financial Statements of the Company have been prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted by the EU. The adoption of IFRS,
as formulated by the International Accounting Standards Board, would have no impact on the
Companys consolidated financial statements.
The Consolidated Financial Statements have been prepared under the historical cost
convention, as modified by the revaluation of available-for-sale financial assets, as well as
financial assets and liabilities (derivative instruments) measured at fair value.
A reconciliation of net income and shareholders equity between IFRS and the accounting principles
generally accepted in the United States (US GAAP) is included in Note 40.
The preparation of Consolidated Financial Statements in conformity with IFRS requires the use of
certain critical accounting estimates. It also requires management to exercise judgment when
applying the Companys accounting policies. The areas involving a higher degree of judgment or
complexity, or the areas where assumptions and estimates are significant to the Consolidated
Financial Statements, are disclosed in the notes below.
2.2 Principles of consolidation
(a) Subsidiaries
Subsidiaries are all entities over which the Company has the power to govern the financial and
operating policies generally accompanying a shareholding of more than one half of the voting
rights. The existence and effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Company controls another entity. Subsidiaries
are fully consolidated from the date on which control is transferred to the Company. They are
de-consolidated from the date that control ceases.
The Company uses the purchase method of accounting to account for the acquisition of subsidiaries.
The cost of an acquisition is measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange, plus costs directly
attributable to the acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their fair values at the
acquisition date, irrespective of the extent of any minority interest. The excess of the cost of
acquisition over the fair value of the Companys share of the identifiable net assets acquired is
recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of
the subsidiary acquired, the difference is recognized directly in the income statement.
Inter-company transactions, balances and unrealized gains on transactions between group companies
are eliminated.
F-6
Accounting policies of subsidiaries have been changed where necessary to ensure consistency with
the policies adopted by the Company.
(b) Associates
Associates are all entities over which the Company has significant influence but not control,
generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in
associates are accounted for by the equity method of accounting and are initially recognized at
cost.
The Companys investment in associates includes goodwill (net of any accumulated impairment loss)
identified on acquisition (see Note 15).
The Companys share of its associates post-acquisition profits or losses is recognized in the
income statement, and its share of post-acquisition movements in reserves is recognized in
reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the
investment. When the Companys share of losses in an associate equals or exceeds its interest in
the associate, including any other unsecured receivables, the Company does not recognize further
losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealized gains on transactions between the Company and its associates are eliminated to the
extent of the Companys interest in the associates. Unrealized losses are also eliminated unless
the transaction provides evidence of an impairment of the asset transferred.
2.3 Foreign currency
(a) Functional and presentation currency
Items included in the Consolidated Financial Statements of each of the Companys entities are
measured using the currency of the primary economic environment in which the entity operates (the
functional currency). The Consolidated Financial Statements are presented in euros.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. The exchange rates prevailing at the dates of the
transactions are approximated by a single rate per currency for each month (unless these rates are
not reasonable approximations of the cumulative effect of the rates prevailing on the transaction
dates). Foreign exchange gains and losses resulting from the settlement of such transactions and
from the translation at year-end exchange rates of monetary assets and liabilities denominated in
foreign currencies are recognized in the income statement, except when deferred in equity within
Other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Translation differences on non-monetary financial assets, such as equities classified as
available-for-sale, are included in Other comprehensive income within shareholders equity until
the financial asset is derecognized, when such amounts are recognized in the Consolidated Income
Statement.
(c) Group companies
None of the Companys entities has the functional currency of a hyperinflation economy.
The results and financial position of all the Company entities that have a functional currency
different from the presentation currency are translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at the closing rate at
the date of that balance sheet;
(ii) income and expenses for each income statement are translated at a monthly average exchange
rate (unless this rate is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated at the dates
of the transactions); and
(iii) all resulting exchange differences are recognized as a separate component of shareholders
equity within Other comprehensive income.
F-7
On consolidation, exchange differences arising from the translation of the net investment in
foreign operations including monetary items that form part of the reporting entitys net investment
in foreign entities, and of borrowings and other currency instruments designated as hedges of such
investments, are taken to shareholders equity. When a foreign operation is sold, exchange
differences that were recorded in equity in other comprehensive income are recognized in the income
statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as
assets and liabilities of the foreign entity and translated at the closing rate.
2.4 Change in accounting policies
Interpretations and amendments to published standards effective in 2005
The following amendments and interpretations to standards are mandatory for the Companys
accounting periods beginning on or after September 1, 2004:
|
|
|
SIC 12 (Amendment), Consolidation Special purpose entities (effective from January 1,
2005); and |
|
|
|
|
IAS 39 (Amendment), Transition and Initial recognition of Financial Assets and Financial
Liabilities (effective from January 1, 2005) |
SIC 12 (Amendment), was adopted, as well as IAS 39 (Amendment) as part of the adoption of IAS 39
(Revised), and had no material effect on the Companys policies.
Standards effective in 2005 and early application of standards amendments
In 2005, the Company adopted the IFRS below, which are relevant to its operations. The 2004 and
2003 Consolidated Financial Statements have been amended in accordance with the relevant
requirements.
IAS 32 (revised 2003) Financial instruments: Disclosure and Presentation
IAS 36 (revised 2004) Impairment of Assets
IAS 38 (revised 2004) Intangible Assets
IAS 39 (revised 2004) Financial instruments: Recognition and Measurement
IAS 39 Amendment: Cashflow Hedge accounting of forecast intragroup transactions
IFRS 2 (issued 2004) Share-based Payment
IFRS 3 (issued 2004) Business Combinations
IFRS 5 (issued 2004) Non-current assets held for sale and discontinued operations
IFRS 2 (issued 2004) Share-based Payment
The adoption of IFRS 2 has resulted in a change in the accounting policy for share-based payments.
Until December 31, 2004, the provision of share options to employees did not result in a charge to
the income statement. Subsequent to that date, the Company charges the cost of share options to the
income statement (see Note 2.22 (c)).
The adoption of IFRS 2 has been performed in accordance with the following transitional provisions:
- |
|
The Company has applied this standard to share options granted after
November 7, 2002, and not yet vested at January 1, 2005; |
|
- |
|
For all grants of share options to which this standard has not been applied
(e.g. granted on or before November 7, 2002), information required by the
standard has been disclosed in Note 24. |
F-8
The adoption of IFRS 2 resulted in the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros except for per share amounts) |
|
|
|
Retained earnings |
|
|
|
|
|
|
Stock based |
|
|
|
|
|
|
|
|
|
|
compensation |
|
|
|
|
|
|
|
|
|
|
|
reserve |
|
|
Prior years |
|
|
Net income |
|
|
Balance at December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of first adoption of IFRS 2 at January 1, 2005 |
|
|
4,513 |
|
|
|
(4,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense for the year ended
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
(807 |
) |
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
(320 |
) |
Selling and marketing expenses |
|
|
|
|
|
|
|
|
|
|
(1,526 |
) |
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
(1,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact on net income |
|
|
4,320 |
|
|
|
|
|
|
|
(4,320 |
) |
|
|
Balance at December 31, 2005 |
|
|
8,833 |
|
|
|
(4,513 |
) |
|
|
(4,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on basic earnings per share (in euros) |
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
Impact on diluted earnings per share (in euros) |
|
|
|
|
|
|
|
|
|
|
(0.01 |
) |
The restated comparatives for the years-ended December 31, 2004 and 2003 following the
adoption of IFRS 2 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
(restated) |
|
|
(restated) |
|
|
Net sales |
|
|
938,875 |
|
|
|
865,034 |
|
|
|
749,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
309,908 |
|
|
|
270,501 |
|
|
|
207,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
66,755 |
|
|
|
23,393 |
|
|
|
(135,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
91,398 |
|
|
|
3,366 |
|
|
|
(160,197 |
) |
Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity holders of the Company |
|
|
89,890 |
|
|
|
1,749 |
|
|
|
(162,349 |
) |
Minority interest |
|
|
1,508 |
|
|
|
1,617 |
|
|
|
2,152 |
|
Net income (loss) per share attributable to
equity holders of the Company (in euros) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.15 |
|
|
|
0.00 |
|
|
|
(0.27 |
) |
Diluted |
|
|
0.14 |
|
|
|
0.00 |
|
|
|
(0.27 |
) |
|
Additional details on the application of IFRS 2 are provided in Note 24.
IFRS 3 (issued 2004), IAS 36 (revised 2004) and IAS 38 (revised 2004)
The adoption of IFRS 3, IAS 36 (revised 2004) and IAS 38 (revised 2004) resulted in a change in the
accounting policy for goodwill. Until December 31, 2004, goodwill was:
|
|
|
Amortized on a straight-line basis over a period ranging from five to twenty years; and |
|
|
|
|
Assessed for an indication of impairment at least at each balance sheet date. |
In accordance with the provisions of IFRS 3 Business Combinations, adopted as of January 1, 2005:
|
|
The Company discontinued amortization of goodwill from January 1, 2005; |
|
|
|
Accumulated amortization as of January 1, 2005, has been eliminated with a corresponding
decrease in the cost of goodwill; and |
F-9
|
|
From the year ended December 31, 2005, onwards, goodwill is tested annually for impairment,
as well as when there are indications of impairment, i.e. whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. |
The Company has reassessed the useful lives of its intangible assets in accordance with the
provisions of IAS 38. No adjustment resulted from this reassessment.
F-10
The table below shows the impact on the Consolidated Income Statement if IFRS 3 (issued 2004), IAS
36 (revised 2004) and IAS 38 (revised 2004) had been applied for the financial years ended December
31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
(in thousands of euros, except for per share amounts) |
|
Years ended December 31 |
|
2004 |
|
|
2003 |
|
|
Decrease in goodwill amortization expense |
|
|
7,718 |
|
|
|
7,947 |
|
Decrease in share of loss of associates |
|
|
2,810 |
|
|
|
2,828 |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net income attributable to equity holders
of the Company |
|
|
10,528 |
|
|
|
10,775 |
|
|
|
|
|
|
|
|
|
|
|
Increase in basic earnings per share (in euros) |
|
|
0.02 |
|
|
|
0.02 |
|
Increase in diluted earnings per share (in euros) |
|
|
0.02 |
|
|
|
0.02 |
|
|
Standards, interpretations and amendments to published standards that are not yet effective
Certain new standards, amendments and interpretations to existing standards have been published
that are mandatory for the Companys accounting periods beginning on or after January 1, 2006 or
later periods but which the Company has not early adopted, as follows:
|
|
|
IAS 19 (Amendment), Employee Benefits (effective from January 1, 2006). This amendment
introduces the option of an alternative recognition approach for actuarial gains and
losses. It also adds new disclosure requirements. The Company will consider applying this
amendment from annual periods beginning January 1, 2006. |
|
|
|
|
IAS 39 (Amendment), The Fair Value Option (effective from January 1, 2006). This
amendment provides options that the Company has decided not to apply. Therefore, the
Company has concluded that this amendment is not relevant to the Company. |
|
|
|
|
IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts (effective from January 1,
2006). This amendment requires issued financial guarantees, other than those previously
asserted by the entity to be insurance contracts, to be initially recognised at their fair
value, and subsequently measured at the higher of (a) the unamortized balance of the
related fees received and deferred, and (b) the expenditure required to settle the
commitment at the balance sheet date. Management considered this amendment to IAS 39 and
concluded that it should not have a significant impact on the accounting policies of the
Company. |
|
|
|
|
IFRS 7, Financial Instruments: Disclosures, and a complementary Amendment to IAS 1,
Presentation of Financial Statements Capital Disclosures (effective from January 1,
2007). IFRS 7 introduces new disclosures to improve the information about financial
instruments. It requires the disclosure of qualitative and quantitative information about
exposure to risks arising from financial instruments, including specified minimum
disclosures about credit risk, liquidity risk and market risk, including sensitivity
analysis to market risk. It is applicable to all entities that report under IFRS. The
amendment to IAS 1 introduces disclosures about the level of an entitys capital and how it
manages capital. The Company assessed the impact of IFRS 7 and the amendment to IAS 1 and
concluded that the main additional disclosures will be the sensitivity analysis to market
risk and the capital disclosures required by the amendment of IAS 1. The Company will apply
IFRS 7 and the amendment to IAS 1 from annual periods beginning January 1, 2007. |
|
|
|
|
IFRIC 4, Determining whether an Arrangement contains a Lease (effective from January 1,
2006). IFRIC 4 requires the determination of whether an arrangement is or contains a lease
to be based on the substance of the arrangement. It requires an assessment of whether: (a)
fulfilment of the arrangement is dependent on the use of a specific asset or assets (the
asset); and (b) the arrangement conveys a right to use the asset. Management is currently
assessing the impact of IFRIC 4, and believes that it should not have a significant impact
on the Companys operations. |
|
|
|
|
IFRIC 6, Liabilities arising from Participating in a Specific Market Waste Electrical
and Electronic Equipment (effective from December 1, 2005). Management is currently
assessing the impact of IFRIC 6, and believes that it should not have a significant impact
on the Companys operations. |
F-11
2.5 Revenue recognition
Revenue comprises the fair value for the sale of goods and services, net of value-added tax,
rebates and discounts, and after eliminating sales within the Company. The Company retained the
following definition of revenue components:
(a) Sales of goods
Revenues from product sales are recorded upon transfer of title and risk of loss provided that no
significant obligations of the Company remain and collection of the resulting receivable is
probable. The Company records deferred revenue for cards that are invoiced to customers but not
shipped because they require customization by the Company. Revenue on sales with resellers and
distributors is recognized only when there is no right of return and collection of the receivable
is probable.
(b) Sales of services
The Company also provides system design and integration services. Revenues are recognized by
reference to the stage of completion at the balance sheet date, provided that the outcome of the
contracts can be estimated reliably. The Company determines the percentage of completion based on
costs incurred to date over total estimated costs, which are mainly labor costs. When the outcome
of the contracts cannot be measured reliably, revenue and costs are deferred until the termination
of the agreement.
2.6 Trade receivables
Trade receivables are recognized initially at fair value and subsequently measured at
amortized cost using the effective interest method, less provision for impairment. A provision for
impairment of trade receivables is established when there is objective evidence that the Company
will not be able to collect all amounts due according to the original terms of receivables. The
amount of the provision is the difference between the assets carrying amount and the present value
of estimated future cash flows, discounted at the effective interest rate. The amount of the
provision is recognized in the Consolidated Statement of Income within operating income or loss.
2.7 Inventory
Inventories are carried at the lower of cost or net realizable value, with cost being
determined using the first-in, first-out (FIFO) method. Cost elements included in inventories are
raw materials, labor and manufacturing overhead, excluding the impact of low activity, if any. The
Company regularly reviews inventory quantities on hand for excess inventory, obsolescence and
declines in market value below cost and records an allowance against the inventory balance for such
declines. A significant component of the cost of production relates to the acquisition of
microprocessor chips. Our provision for microcontroller chips inventory is determined based on the
anticipated net realizable value of finished products which includes cost of production, raw
materials, labor and manufacturing overheads.
2.8 Property, plant and equipment
All property, plant and equipment (P, P&E) are stated at historical cost, less depreciation.
Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the assets carrying amount or recognized as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will
flow to the Company and the cost of the item can be measured reliably. All other repairs and
maintenance are charged to the Consolidated Income Statement during the financial period in which
they are incurred.
Land is not depreciated. Depreciation on other assets is calculated, using the straight-line method
to allocate their cost to their residual values over their estimated useful lives as follows:
|
|
|
|
|
|
Buildings |
|
20-30 years |
|
Equipment and machinery related to microprocessor chip cards |
|
5 years |
|
Equipment and machinery related to magnetic stripe cards |
|
7 years |
|
Furniture and fixtures |
|
5-10 years |
|
Leasehold improvements |
|
8-12 years |
|
F-12
Useful lives reflect the rapid technological changes and corresponding shifts in customer
demand, resulting in unpredictable product transitions and shortened life cycles.
The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each
balance sheet date.
An assets carrying amount is written down immediately to its recoverable amount if the assets
carrying amount is greater than its estimated recoverable amount.
Gains and losses on sales are determined by comparing proceeds with carrying amount. These are
included in the Consolidated Income Statement under Other operating income (expense), net.
Leases of property, plant and equipment where the Company has substantially all the risks and
rewards of ownership are classified as finance leases. Finance leases are capitalized at the
leases commencement at the lower of the fair value of the leased property and the present value of
the minimum lease payments. Each lease payment is allocated between the liability and finance
charges in order to achieve a constant rate on the finance balance outstanding. The corresponding
rental obligations, net of finance charges, are included in current and non-current obligations
under finance leases. The interest element of the finance cost is charged to the income statement
over the lease period so as to produce a constant periodic rate of interest on the remaining
balance of the liability for each period. The property, plant and equipment acquired under finance
leases are depreciated over the shorter of the useful life of the asset or the lease term.
2.9 Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Companys
share of the net identifiable assets of the acquired subsidiary/associate at the date of
acquisition. Goodwill on acquisitions of subsidiaries is presented on the Consolidated Balance
Sheet under the caption Goodwill. Goodwill on acquisitions of associates is included in
investments in associates.
Goodwill is tested annually for impairment, as well as when there are indications of impairment,
and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not
reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill
related to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The
allocation is made to those cash-generating units or groups of cash-generating units that are
expected to benefit from the business combination in which the goodwill arose. The Company
allocates goodwill to each business segment in which it operates.
(b) Patents
Patents and patent rights are stated at cost and are amortized using the straight-line method over
their economic useful life, which does not exceed the shorter of three years or the legal lifetime.
(c) Computer software
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire
and bring to use the specific software. These costs are amortized over their estimated useful lives
(not exceeding five years).
Certain direct development costs associated with internal-use software including external direct
costs of material and services and payroll costs for employees devoting time to the software
products are included in other intangible assets and are amortized over a period not to exceed five
years beginning when the asset is substantially ready for use. Costs incurred during the
preliminary project stage, as well as maintenance and training costs, are expensed as incurred.
(d) Research and development
Research and development costs are expensed as incurred, except for development costs where it is
expected that the product under development will be produced and will be profitable, and technical
feasibility has been demonstrated. Such costs are capitalized and amortized over their estimated
useful life, which normally does not exceed three to five years. Costs
F-13
are capitalized through the
time the product under development is produced and future profitability is demonstrated by net
present value computations, using a discount rate based on the Companys cost of capital.
Development costs of a project are written down to the extent that the unamortized balance is no
longer capable of being recovered from the expected future economic benefits and when the criteria
for recognition of the development costs as an asset cease to be met. The write-down or write-off
is recognized as an expense in the period in which such determination is made.
2.10 Impairment of non-financial assets
Goodwill is reviewed for impairment based on expectations of future cash flows, which by
definition are uncertain, at each balance sheet date, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Future cash flows are
computed based on the revenue estimates for the next five years, and include a terminal value
assumption. Whenever possible, forecast and long range planning data approved by the management of
the Company are used in those computations. Future cash flows are discounted using the cost of
capital of the Company at the time of the acquisition to which the goodwill is related. In
performing its review, the Company considers factors such as significant underperformance in
comparison to expected historical or projected future operating results, significant changes in
strategy or in the business model related to the acquired Company and significant negative industry
or economic trends.
Other long-lived assets that are subject to amortization and depreciation are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized for the amount by which the assets carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less
costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows (cash-generating units).
Non-financial assets other than goodwill that suffered an impairment are reviewed for possible
reversal of the impairment at each balance sheet date.
2.11 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by
the lessor are classified as operating leases. Payments made under operating leases (net of any
incentives received from the lessor) are charged to the Consolidated Income Statement on a
straight-line basis over the period of the lease.
2.12
Financial assets
The Company classifies its financial assets in the following categories: financial assets and
liabilities at fair value through profit and loss, loans and receivables, and available-for-sale.
The classification depends on the purpose for which the financial assets were acquired. Management
determines the classification of its financial assets at initial recognition and re-evaluates this
designation at every balance sheet date.
(a) Financial assets and liabilities at fair value through profit and loss
This category has two sub-categories: financial assets held for trading, and those designated at
fair value through profit or loss at inception. A financial asset is classified in this category if
acquired principally for the purpose of selling in the short term or if so designated by
management. Derivatives are categorized as held for trading unless they are designated as hedges.
All derivatives are designated as hedges. Assets and liabilities in this category are classified as
current assets if they are either held for trading, or are expected to be realized within 12 months
of the balance sheet date.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that
are not quoted in an active market. They are included in current assets, except for maturities
greater than 12 months after the balance sheet date which are classified as non-current assets.
Loans and receivables are classified in trade and other current receivables in the Consolidated
Balance Sheet.
(c) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category
or not classified in any of the other categories. They are included in non-current assets unless
management intends to dispose of the investment within 12 months of the balance sheet date.
F-14
Equity investments in which the Company has less than 20% of the investees outstanding shares or
voting rights, and that are not in substance controlled or under significant influence, are
classified as available-for-sale financial assets and are
presented under Available-for-sale financial assets in non-current assets. Marketable investments
are accounted for at fair value with changes recognized directly through shareholders equity.
Non-marketable investments are accounted for as follows:
|
|
If the fair value of unquoted investments in equity securities is determinable by valuation
techniques appropriate for the nature of the security, these items are accounted for at fair
value with changes recognized directly through shareholders equity. |
|
|
|
If fair value cannot be reliably measured, these items are accounted for using the cost method. |
Gains or losses recognized on the sale of equity securities are recorded in the Consolidated Income
Statement under the caption Other non-operating income (expense), net. Any loss resulting from
impairment in the value of investments which represents an other than temporary decline is recorded
in the period in which the loss occurs. The Company assesses at each balance sheet date whether
there is objective evidence that a financial asset or a group of financial assets is impaired. In
the case of non-marketable equity investments classified as available-for-sale, a significant or
prolonged decline in the fair value of the security below its cost is considered in determining
whether the securities are impaired.
2.13 Derivative financial instruments and hedging activities
Derivatives are initially recognized at fair value on the date a derivative contract is
entered into and are subsequently remeasured at their fair value. These instruments are presented
under Derivative financial instruments in current assets or liabilities since they are expected
to mature within 12 months of the balance sheet date. The method of recognizing the resulting gain
or loss depends on whether the derivative is designated and qualifies as a hedging instrument for
accounting purposes and, if so, on the nature of the item being hedged. Most of the derivative
financial instruments used to hedge the Companys foreign exchange exposure qualify as cash flow
hedges since they reduce the variability in cash flows attributable to the Companys forecasted
transactions.
The Company documents at the inception of the transaction the relationship between hedging
instruments and hedged items, as well as its risk management objective and strategy for undertaking
various hedge transactions. The Company also documents its assessment, both at hedge inception and
on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items. The fair values of
the derivative instruments used for hedging purposes are disclosed in Note 9. Movements on the
hedging reserve within Other comprehensive income are shown in Note 25.
The effective portion of changes in fair value of derivatives that are designated and qualify as
cash flow hedges is recognized in equity under Other comprehensive income. The gain or loss
relating to the ineffective portion is recognized immediately in the income statement within the
foreign exchange gains and losses included in the line item Other non-operating income (expense),
net. Amounts accumulated in equity are recycled in the Consolidated Income Statement in the
periods when the hedged items will affect profit or loss. When a hedging instrument expires or is
sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or
loss existing in equity at that time remains in equity and is recognized when the forecast
transaction is ultimately recognized in the income statement. When a forecasted transaction is no
longer expected to occur, the cumulative gain or loss that was reported in equity is immediately
transferred to the Consolidated Income Statement.
For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in
the fair value of the hedging instruments are recorded immediately as foreign exchange gains and
losses for the period, in Other non-operating income (expense), net.
2.14 Estimation of fair value of derivatives
The fair value of financial instruments traded in active markets (such as publicly traded
derivatives, and trading and available-for-sale securities) is based on quoted market prices at the
balance sheet date.
The fair value of financial instruments that are not traded in an active market (for example,
over-the-counter derivatives) is determined by using valuation techniques. The fair value of
derivative financial instruments is calculated at inception and over the life of the derivative.
F-15
The fair value of the forward exchange contracts at inception is zero. Fair value during the life
and at expiration of the forward contract is calculated according to the following parameters
communicated by the Companys banks or official financial information providers: (i) spot foreign
exchange rate; (ii) interest rate differential between the two currencies; (iii) time to
expiration; and (iv) notional amount of the contract. Fair value is then obtained by discounting,
for the remaining maturity, the difference between the contract rate and the market forward rate
multiplied by the nominal amount.
The option contracts value at inception is the initial premium paid or received. Over the life of
the option and at expiration, fair value is determined using standard option pricing models (such
as the Black & Scholes option pricing model), based on market parameters obtained from the
Companys banks or official financial information providers, and using the following variables: (i)
spot foreign exchange rate; (ii) option strike price; (iii) volatility; (iv) risk-free interest
rate; and (v) expiration date of the option.
2.15 Cash and cash equivalents
Cash and cash equivalents include cash in hand, short-term deposits and other short-term
highly liquid investments. Bank overdrafts are classified within current liabilities on the
Consolidated Balance Sheet. All significant cash deposits are made with major financial
institutions having an investment grade rating and are invested in euro money market fixed term
deposits or mutual funds. In some countries, the Company has temporary exposure to non-investment
grade institutions following payments made by customers, until the Company transfers such amounts
to investment grade institutions.
When some cash or cash equivalent is restricted as to withdrawal, either under a legal restriction
or due to foreign countries exchange controls restrictions, it is not presented as part of Cash
and cash equivalents. It is presented within current or non-current assets based on its expected
release date, and is disclosed as such in the notes to the Consolidated Financial Statements.
2.16 Other income
Income arising from the use by others of entity assets yielding interest and dividends are
presented within Financial income (expense), net as they are not arising in the course of
ordinary activity.
Dividend income is recognized when the right to receive payment is established.
2.17 Income taxes
Deferred income tax is provided for in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their carrying amounts in
the Consolidated Financial Statements. Deferred income tax is not provided for, however, where the
tax arises from a transaction that does not affect accounting taxable profit or loss (for the
period in which the transaction occurs) and that is not a business combination. Deferred income tax
is determined using tax rates (and other provisions of the law) that have been enacted or
substantially enacted by the balance sheet date and that are expected to apply when the related
deferred income tax asset is realized or the deferred income tax liability is settled.
The Company recognizes deferred tax assets when it determines that it is more likely than not that
the asset will be recovered from future taxable income within a reasonable time frame. The Company
provides for deferred tax liabilities arising on investments in subsidiaries and associates except
where the timing of the reversal of the related temporary difference is controlled by the Company
and it is probable that the temporary difference will not reverse in the foreseeable future.
2.18 Research tax credit and government grants
In France, the Company performs technical and scientific research that qualifies for a
government grant in the form of a research tax credit. Because this tax credit can be recovered
irrespective of whether the Company ever pays taxes, the Company records the credit as a reduction
of research and development expense. The Company records the benefit of this credit, however, only
once all qualifying research has been performed.
In addition, grants may be available to companies that perform technical and scientific research.
Such grants are typically subject to performance conditions over an extended period of time. The
Company recognizes these grants when the performance conditions are met and any risk of repayment
is assessed as remote.
F-16
2.19 Earnings per share
Basic earnings per share are calculated by dividing the profit attributable to equity holders
of the Company by the weighted average number of ordinary shares in issue during the year,
excluding ordinary shares purchased by the Company and held as treasury shares.
Diluted earnings per share are computed by dividing net income attributable to equity holders of
the Company by the weighted average number of shares outstanding, plus dilutive potential ordinary
shares outstanding, i.e., additional share equivalents, using the treasury stock method assuming
the exercise of warrants and stock options. Dilutive potential ordinary shares are additional
ordinary shares to be issued. The effects of anti-dilutive potential ordinary shares are ignored in
calculating diluted earnings per share. When net losses are reported, the dilutive potential
ordinary shares outstanding are excluded from the net loss per share calculation.
2.20 Share capital and treasury shares
Incremental costs directly attributable to the issue of new shares or options are shown in
equity as a deduction, net of tax, from the proceeds.
From time to time, with the prior approval of the Companys shareholders, the Company may
repurchase a portion of its outstanding ordinary shares. Shares repurchased by the Company
(treasury shares) could be cancelled or used to fulfill its obligations under the stock option
plans or for any other purpose as defined by the Companys shareholders, subject to applicable laws
and regulations. Where the Company repurchases treasury shares, the consideration paid, including
any directly attributable incremental costs (net of tax) is deducted from equity attributable to
the equity holders of the Company until the shares are cancelled, used for determined purposes or
disposed of (subject to applicable laws and regulations). Where such shares are subsequently sold
or used (subject to applicable laws and regulations), any consideration received, net of any
directly attributable incremental transaction costs and the related income tax effects, is included
in equity attributable to the Companys equity holders.
2.21 Provisions
Provisions for customer and warranty claims, legal claims and legal actions are recognized
when:
|
|
the Company has a present legal or constructive obligation as a result of past events; |
|
|
|
it is more likely than not that an outflow of resources will be required to settle the
obligation; |
|
|
|
and the amount has been reliably estimated. |
Restructuring provisions comprise lease termination penalties and employee termination payments.
Provisions are not recognized for future operating losses.
2.22 Employee benefits
(a) Pension obligations
The Company operates various pension schemes under both defined benefit and defined contribution
plans.
The liability recognized in the balance sheet in respect of defined benefit pension plans is the
present value of the defined benefit obligation at the balance sheet date less the fair value of
plan assets, together with adjustments for unrecognized actuarial gains or losses and past service
costs. The defined benefit obligation is calculated annually by independent actuaries using the
projected unit credit method. The present value of the defined benefit obligation is determined by
discounting the estimated future cash outflows using interest rates of high-quality corporate bonds
that are denominated in the currency in which the benefits will be paid, and that have terms to
maturity approximating the terms of the related pension liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions
in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit
obligation are charged or credited to income over the employees expected average remaining working
lives.
Past-service costs are recognized immediately in income, unless the changes to the pension plan are
conditional on the employees remaining in service for a specified period of time (the vesting
period). In this case, the past-service costs are amortized on a straight-line basis over the
vesting period.
F-17
For defined contribution plans, the Company pays contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company
has no further payment obligations once the contributions have been paid. The contributions are
recognized as employee benefit expense when they are due. Prepaid contributions are recognized as
an asset to the extent that a cash refund or a reduction in the future payments is available.
(b) Other post-employment benefits
Substantially all of the Companys employees are covered under government-sponsored post-retirement
health and life insurance benefit plans. Accordingly, the Company has no significant liability to
its employees in terms of post-retirement benefits other than pensions and therefore no provision
is made.
(c) Share-based compensation
The Company operates equity-settled, share-based compensation plans. The fair value of the employee
services received in exchange for the grant of the options is recognized as an expense. The total
amount to be expensed over the vesting period is determined by reference to the fair value of the
options granted, excluding the impact of any non-market vesting conditions (for example,
profitability and sales growth targets). Non-market vesting conditions are included in assumptions
about the number of options that are expected to become exercisable. At each balance sheet date,
the Company revises its estimates of the number of options that are expected to become exercisable.
It recognizes the impact of the revision of original estimates, if any, in the income statement,
and a corresponding adjustment to equity over the remaining vesting period. The proceeds received
net of any directly attributable transaction costs are credited to share capital (nominal value)
and paid-in capital when the options are exercised.
Fair value is measured by use of a lattice-based option-pricing model. This model is derived from
the standard binomial model and takes into account the effects of nontransferability, exercise
restriction, as well as behavioral considerations.
2.23 Advertising and promotional costs
The Company expenses the costs of advertising and promotional expenses when such costs are
incurred. Advertising and promotional expenses were 5,984 thousand, 5,406 thousand and
5,760
thousand for the years ended December 31, 2005, 2004 and 2003, respectively.
2.24 Comparatives
In 2004, due to the early adoption of IAS 1 (revised 2003) Presentation of Financial
Statements, the Company modified its 2003 Consolidated Balance Sheet and its 2003 Consolidated
Statement of Income for the first time in its 2004 Annual Report.
The prior line item Other income (expense), net was broken down on the face of the Consolidated
Statement of Income as follows:
|
|
Gain (loss) on sales of the Companys fixed assets amounting to 703 thousand in 2003 within
Other operating income (expense), net in the operating income (loss). |
|
|
|
Income (loss) on investments in associates amounting to (7,561) thousand in 2003 within
Share of profit (loss) of associates. |
|
|
|
Minority interest amounting to (2,152) thousand in 2003 within the allocation of Net income
(loss). |
|
|
|
Gain (loss) on investments amounting to (2,487) thousand in 2003 and Foreign exchange gain
(loss) amounting to (8,652) thousand in 2003 within Other non-operating income (expense),
net. |
Derivative financial instruments were excluded from Other current receivables and Other current
liabilities and included in the face of the balance sheet in Derivative financial instruments.
The prior line item Investments was broken down on the face of the balance sheet between
Investments in associates for investments accounted for under the equity method and
Available-for-sale financial assets that comprises net value of the investments in non-marketable
equity securities.
The prior line item Other non-current assets was broken down on the face of the balance sheet
between Other intangible assets, net and Other non-current receivables that comprise
receivables or prepaid expenses that are expected to be realized in more than 12 months after the
balance sheet date.
F-18
3. FINANCIAL RISK MANAGEMENT
The Company is exposed to a variety of financial risks in the normal course of its business:
currency risk, interest rate / re-investment risk, financial counter-party risk and credit risk.
The Companys overall risk management program focuses on the unpredictability of financial markets
and seeks to minimize potential adverse effects on the Companys financial performance. The Company
uses derivative financial instruments to hedge identified currency risk exposures.
3.1 Companys risk exposure
(a) Currency risks
The Company operates worldwide and is therefore exposed to foreign exchange risk on its commercial
transactions.
The Company has developed risk management guidelines that set forth its tolerance for risk and its
overall risk management policies. The Company has also established processes to measure its
exposure to foreign exchange risk and to monitor and control hedging transactions in a timely and
accurate manner. Such policies are approved by the Companys Audit Committee and reviewed annually.
The policy of the Company is to hedge a portion of its subsidiaries known or forecasted commercial
transactions not denominated in their functional currencies.
In order to achieve this objective, the Company uses foreign currency derivative instruments by
entering into foreign exchange forward contracts and foreign exchange options.
The Company does not enter into financial derivative contracts for purposes other than hedging. No
option is sold except where there is a corresponding option purchased by the Company. This
combination strategy reduces the cost of hedging without creating speculative positions. All
hedging instruments are allocated to underlying commercial transactions.
The financial derivative contracts are traded over the counter with major financial institutions
and generally mature within 12 months.
(b) Interest rate and re-investment risk
The Company is in a net, short duration, financial asset position. Financial assets are short-term
investments in money market instruments with a duration of three months or less. Financial
liabilities are mainly floating rates leasing.
The Company considers it is not significantly exposed to interest rate risk fluctuations, and
consequently does not enter into any derivative contract to hedge interest rate risk.
However, the Company is facing re-investment risk: when interest rates are increasing (decreasing),
interest income is increasing (decreasing respectively). This risk remains un-hedged.
(c) Financial counter-party risk
Derivatives and all significant cash deposits are held with major financial institutions of
investment grade. The Company has temporary exposure to non-investment grade institutions on
payments made by customers in certain countries, until the Company transfers such amounts to
investment grade institutions.
(d) Concentration of credit risk
The Companys broad geographic and customer distribution limits the concentration of credit risk.
No single customer accounted for more than 10% of the Companys sales during the years ended
December 31, 2005, 2004 and 2003.
In 2005, 2004 and 2003, the Company maintained adequate allowances for potential credit losses and
performed ongoing credit evaluations.
4. CRITICAL ACCOUNTING ESTIMATES
The preparation of Consolidated Financial Statements in conformity with generally accepted
accounting principles requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the Consolidated Financial Statements and the reported amounts
F-19
of revenue and expenses during the reporting period. Estimates are used for, but not limited to,
the accounting of doubtful accounts, depreciation, amortization and impairment, sales returns,
income taxes and contingencies. Actual results could differ from these estimates.
Estimates and judgments are continually evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the
circumstances.
The Company makes estimates and assumptions concerning the future. The resulting accounting
estimates will, by definition, seldom equal the related actual results. The estimates and
assumptions that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year are discussed below.
(a) Impairment of goodwill
The Company tests annually whether goodwill has suffered any impairment, in accordance with the
accounting policy stated in Note 2.11. The recoverable amounts of cash-generating units have been
determined based on value-in-use calculations.
(b) Income taxes
The Company is subject to income taxes in many jurisdictions. Because the final tax determination
of transactions is often uncertain, significant judgment is required in determining the worldwide
provision for income taxes. The Company adjusts the provision for income taxes if it revises its
estimate of the amount of taxes due. Where the final amount of taxes due differs from the amounts
previously recorded, such differences will impact current and deferred income taxes in the period
in which such differences are determined.
The Company recognizes deferred tax assets when it determines that it is more likely than not that
the asset will be recovered from future taxable income within a reasonable time frame, which
requires significant judgment.
(c) Legal claims
The estimates for provisions for legal actions, including those related to intellectual property,
are based upon available information and advice of counsel and are regularly reviewed on this basis
by management.
(d) Business combination
In accordance with IFRS 3, and as part of the accounting for the business combination with
Setec (see Note 5), the Company has identified separately, at the acquisition date, the acquirees
identifiable assets that satisfied the recognition criteria for intangible assets. The Company
recognized in its Consolidated Balance Sheet customer contractual relationships for an amount of
17,584 thousand and acquired technology for an amount of 3,200 thousand under the caption Other
intangible assets, net (see Note 14). The customer contractual relationships are amortized based
on the revenue earned on the related customer contracts and relationships, and acquired technology
is amortized using the straight-line method over 6 years. These intangible assets are tested for
impairment in accordance with the accounting policy stated in Note 2.9.
F-20
5. BUSINESS COMBINATIONS
5.1 Proposed combination of Gemplus International SA and Axalto NV
On December 6, 2005, the Company and Axalto NV executed an agreement for the proposed
combination between the two companies. The transaction is subject to anti-trust, other regulatory
approvals and certain contractual conditions. The accounting for the business combination will take
place after the closing and may affect the carrying value of certain assets and liabilities of the
Company.
5.2 Acquisition of Setec
In June 2005, the Company closed the acquisition of Setec Oy, the holding company of the
Setec group (Setec), based in Finland. The Company acquired 100% of the share capital of Setec Oy
along with its direct and indirect subsidiaries, including two affiliates in which Setec Oy owns
56% and 90% of the voting rights. The Company accounts for minority interest related to these two
affiliates for 44% and 10% respectively. Setec operates mainly in the electronic passport business
and security printing technologies.
The
acquired business contributed revenues of 38,494 thousand and
net income of 32
thousand, including additional depreciation and amortization expenses recorded in relation to the
fair value adjustments of property, plant & equipment and
intangible assets for an amount of
(2,746) thousand for the period from June 1, 2005, to December 31, 2005.
As part of the acquisition of Setec, the Company agreed that, if certain conditions were met as of
December 31, 2005, a contingent payment would be made in the
amount of 30,000 thousand in
January 2006 (see Note 18), and such amount was placed in an escrow account. On December 31, 2005,
the escrow account and accrued interest totaled an amount of 30,366 thousand (see Note 10).
Because the applicable conditions were met as of December 31,
2005, the amount of 30,000
thousand was paid to the sellers on January 5, 2006.
Details of net assets acquired and goodwill are as follows:
|
|
|
|
|
(in thousands of euros) |
|
Purchase consideration: |
|
|
|
|
Cash paid |
|
|
33,400 |
|
Contingent consideration (see Note 18) |
|
|
30,000 |
|
Direct costs relating to the acquisition |
|
|
2,202 |
|
Fair value of 19,000,000 shares issued (see Note 23) |
|
|
34,048 |
|
|
Total purchase consideration |
|
|
99,650 |
|
|
Fair value of net assets acquired |
|
|
(38,945 |
) |
|
Goodwill (see Note 12) |
|
|
60,705 |
|
|
The goodwill is attributable to production know-how in secure printing, leadership on e-passport
and Identity and Security market, leadership position on EMV Nordic market, and synergies on
telecom chips purchases.
The fair value of the shares issued was based on the average published share price 2 days before
and after the date that the terms of the acquisition were agreed to and announced.
F-21
The assets and liabilities arising from the acquisition are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
|
|
|
Acquirees |
|
|
|
Notes |
|
|
Fair value |
|
|
carrying amount | |
|
Cash and cash equivalents |
|
|
|
|
|
|
2,145 |
|
|
|
2,145 |
|
Trade accounts receivables, net |
|
|
(36 |
) |
|
|
9,910 |
|
|
|
9,910 |
|
Inventory, net |
|
|
(36 |
) |
|
|
10,330 |
|
|
|
10,330 |
|
Property, plant and equipment,net |
|
|
(11 |
) |
|
|
16,863 |
|
|
|
9,620 |
|
Acquired technology |
|
|
(14 |
) |
|
|
3,200 |
|
|
|
|
|
Contractual customer relationships |
|
|
(14 |
) |
|
|
17,584 |
|
|
|
|
|
Intangible assets |
|
|
(14 |
) |
|
|
214 |
|
|
|
214 |
|
Investment in associates |
|
|
(15 |
) |
|
|
4,537 |
|
|
|
|
|
Available-for-sale investments |
|
|
(16 |
) |
|
|
121 |
|
|
|
121 |
|
Other assets |
|
|
|
|
|
|
2,040 |
|
|
|
2,040 |
|
Trade accounts payable |
|
|
(36 |
) |
|
|
(5,303 |
) |
|
|
(5,303 |
) |
Retirement benefit obligations plans |
|
|
(21 |
) |
|
|
(347 |
) |
|
|
(347 |
) |
Accrued vacations |
|
|
|
|
|
|
(2,970 |
) |
|
|
(2,970 |
) |
Deferred revenue |
|
|
|
|
|
|
(4,550 |
) |
|
|
(4,550 |
) |
Borrowings |
|
|
|
|
|
|
(3,798 |
) |
|
|
(3,798 |
) |
Warranty provisions |
|
|
(20.1 |
) |
|
|
(1,579 |
) |
|
|
(1,579 |
) |
Bank overdrafts |
|
|
|
|
|
|
(1,915 |
) |
|
|
(1,915 |
) |
Other liabilities |
|
|
|
|
|
|
(3,632 |
) |
|
|
(12,403 |
) |
Net deferred tax liabilities |
|
|
|
|
|
|
(5,550 |
) |
|
|
|
|
|
Net assets |
|
|
|
|
|
|
39,215 |
|
|
|
3,430 |
|
Minority interest |
|
|
|
|
|
|
(270 |
) |
|
|
|
|
Net assets acquired |
|
|
|
|
|
|
38,945 |
|
|
|
|
|
|
Purchase consideration settled in cash |
|
|
|
|
|
|
|
|
|
|
65,602 |
|
Cash and cash equivalents in subsidiary acquired |
|
|
|
|
|
|
|
|
|
|
(2,145 |
) |
|
Cash outflow on acquisition |
|
|
|
|
|
|
|
|
|
|
63,457 |
|
|
6. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
December 31 |
|
2005 |
|
2004 |
|
2003 |
|
Cash at bank and on hand |
|
|
36,788 |
|
|
23,846 |
|
|
45,955 |
Short term investments |
|
|
381,577 |
|
|
364,584 |
|
|
344,729 |
|
Cash and cash equivalents |
|
|
418,365 |
|
|
388,430 |
|
|
390,684 |
|
The average effective interest rate on short-term investments was 2.11% in 2005, 2.04% in
2004 and 2.35% in 2003; these investments have an initial term of
three months or less.
F-22
7. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Trade accounts receivable, gross |
|
|
189,341 |
|
|
|
155,750 |
|
|
|
163,621 |
|
Less, provision for impairment of receivables |
|
|
(6,319 |
) |
|
|
(7,238 |
) |
|
|
(8,894 |
) |
|
|
Trade accounts receivable, net |
|
|
183,022 |
|
|
|
148,512 |
|
|
|
154,727 |
|
|
The fair value of trade accounts receivable based on discounted cash flows does not differ
from the net book value because the Company does not have trade accounts receivable with payment
terms exceeding one year.
The Company has recognized a net income of 111 thousand related to the release of provision for
impairment of its trade accounts receivable during the year ended December 31, 2005 (a net expense
of 591 thousand in 2004, a net income of 1,958 thousand in 2003). The income or expense has
been included in General and administrative expenses in the Consolidated Statement of Income.
8. INVENTORY
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Raw materials and supplies |
|
|
31,751 |
|
|
|
38,208 |
|
|
|
27,456 |
|
Work-in-progress |
|
|
71,505 |
|
|
|
74,296 |
|
|
|
67,066 |
|
Finished goods |
|
|
10,746 |
|
|
|
10,517 |
|
|
|
10,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory, gross |
|
|
114,002 |
|
|
|
123,021 |
|
|
|
104,680 |
|
|
Less, inventory allowance |
|
|
(6,329 |
) |
|
|
(7,411 |
) |
|
|
(6,007 |
) |
|
|
Inventory, net |
|
|
107,673 |
|
|
|
115,610 |
|
|
|
98,673 |
|
|
The cost of inventories recognized as expense and included in Cost of sales amounted to
544,408 thousand, 495,117 thousand and 446,660 thousand as of December 31, 2005, 2004 and 2003
respectively.
In 2005, the Company reversed unused provisions amounting to 1,307 thousand relating to previous
inventory write-down (2004: 511 thousand, 2003: nil). The amount reversed has been included in
Cost of sales in the Consolidated Statement of Income.
9. DERIVATIVE FINANCIAL INSTRUMENTS
As indicated in Note 4, the Company uses financial instruments to manage its foreign currency
exposure incurred in the normal course of business. Most of the financial instruments used by the
Company to hedge its exposure to foreign currency risk are qualified as cash flow hedges under IAS
39. Non-qualified hedging instruments are mainly the options sold as part of combination
strategies.
The following table is a summary of the outstanding financial instruments qualifying as cash flow
hedges under IAS 39 (notional amounts) and of the Companys commercial exposure to currency risk.
In the amounts reported below:
|
|
hedging positions in parentheses indicate the Companys forward commitment or option to sell
the currency against the euro; other hedging positions indicate the Companys forward
commitment or option to buy the currency against the euro; |
F-23
|
|
positive exposures indicate the Companys receivables in the currency, or forecasted sales in
the currency; exposures in parentheses indicate the Companys payables in the currency, or
forecasted purchases in the currency. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros (1)) |
|
December 31 |
|
|
2005 |
|
2004 |
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others(2) |
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others(2) |
|
|
Hedging positions (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
|
(88,172 |
) |
|
|
(7,930 |
) |
|
|
(10,807 |
) |
|
|
15,970 |
|
|
|
(129,656 |
) |
|
|
(23,519 |
) |
|
|
(12,710 |
) |
|
|
5,560 |
|
Option contracts (4) |
|
|
(64,384 |
) |
|
|
(13,786 |
) |
|
|
(11,224 |
) |
|
|
7,159 |
|
|
|
(140,101 |
) |
|
|
(25,741 |
) |
|
|
(22,849 |
) |
|
|
12,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(152,556 |
) |
|
|
(21,716 |
) |
|
|
(22,031 |
) |
|
|
23,129 |
|
|
|
(269,757 |
) |
|
|
(49,260 |
) |
|
|
(35,559 |
) |
|
|
17,764 |
|
|
Exposure (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial transactions
not settled at year end |
|
|
25,718 |
|
|
|
(1,174 |
) |
|
|
2,675 |
|
|
|
(10 |
) |
|
|
37,483 |
|
|
|
7,414 |
|
|
|
6,706 |
|
|
|
6,136 |
|
Forecasted commercial
transactions |
|
|
161,709 |
|
|
|
31,209 |
|
|
|
29,810 |
|
|
|
(12,966 |
) |
|
|
252,980 |
|
|
|
51,838 |
|
|
|
36,598 |
|
|
|
(28,485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
187,427 |
|
|
|
30,035 |
|
|
|
32,485 |
|
|
|
(12,976 |
) |
|
|
290,463 |
|
|
|
59,252 |
|
|
|
43,304 |
|
|
|
(22,349 |
) |
|
|
|
|
(1) |
|
Currency amounts are converted to euros at year end closing rates. |
|
(2) |
|
Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW
and SGD. |
|
(3) |
|
Financial instruments that hedge the Companys commercial currency exposure and that
are effective hedges under IAS 39 qualify as cash flow hedges. |
|
(4) |
|
Option hedges qualifying as effective hedges under IAS 39 are purchased options to
sell or buy currency against the euro. |
|
(5) |
|
The Companys policy is to hedge all its actual commercial currency exposure as well
as a time-weighted proportion of its forecasted commercial currency exposure. |
Outstanding financial instruments not qualifying as effective hedges under IAS 39 are
described below (notional amount).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros (1)) |
|
December 31 |
|
2005 |
|
2004 |
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others(2) |
|
|
USD |
|
|
GBP |
|
|
JPY |
|
|
Others(2) |
|
|
Forward contracts |
|
|
(8,447 |
) |
|
|
|
|
|
|
|
|
|
|
3,350 |
|
|
|
|
|
|
|
|
|
|
|
(2,990 |
) |
|
|
88 |
|
Option contracts (3) |
|
|
(4,196 |
) |
|
|
|
|
|
|
(974 |
) |
|
|
3,021 |
|
|
|
(75,882 |
) |
|
|
(7,253 |
) |
|
|
(10,890 |
) |
|
|
7,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(12,643 |
) |
|
|
|
|
|
|
(974 |
) |
|
|
6,371 |
|
|
|
(75,882 |
) |
|
|
(7,253 |
) |
|
|
(13,880 |
) |
|
|
7,721 |
|
|
|
|
|
(1) |
|
Currency amounts are converted to euros at year end closing rates. |
|
(2) |
|
Other currencies include mainly the CHF, NOK, PLN, CAD, AED, ZAR, AUD, KRW and SGD. |
|
(3) |
|
Options that do not qualify as effective hedges under IAS 39 are the options that
the Company sells as part of its combination strategies. |
F-24
The fair market value of the Companys financial instruments is recorded in current assets or
current liabilities as Derivative financial instruments, and consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Fair value of the financial instruments qualifying as cash
flow hedges under IAS 39 |
|
|
1,488 |
|
|
|
33,135 |
|
|
|
16,986 |
|
Fair value of financial instruments not qualifying as
effective hedges under IAS 39 |
|
|
107 |
|
|
|
252 |
|
|
|
(560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of derivative financial instruments |
|
|
1,595 |
|
|
|
33,387 |
|
|
|
16,426 |
|
|
Derivatives financial instruments under Current Assets |
|
|
4,187 |
|
|
|
33,387 |
|
|
|
16,426 |
|
Derivatives financial instruments under Current Liabilities |
|
|
(2,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of derivative financial instruments |
|
|
1,595 |
|
|
|
33,387 |
|
|
|
16,426 |
|
|
10. OTHER CURRENT RECEIVABLES
Other current receivables include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Value added tax receivable |
|
|
17,832 |
|
|
|
16,679 |
|
|
|
18,677 |
|
Other taxes receivable |
|
|
2,277 |
|
|
|
4,111 |
|
|
|
11,255 |
|
Research tax credit (current portion) |
|
|
3,253 |
|
|
|
|
|
|
|
|
|
Advance facility to supplier |
|
|
|
|
|
|
|
|
|
|
12,001 |
|
Advance payments to non-trade suppliers |
|
|
1,229 |
|
|
|
826 |
|
|
|
1,099 |
|
Prepaid expenses (current portion) |
|
|
13,228 |
|
|
|
10,090 |
|
|
|
15,780 |
|
Advance payments to trade suppliers |
|
|
4,099 |
|
|
|
3,804 |
|
|
|
3,454 |
|
Restricted cash (current portion) |
|
|
36,222 |
|
|
|
27,405 |
|
|
|
|
|
Other current assets |
|
|
3,988 |
|
|
|
3,245 |
|
|
|
3,983 |
|
|
Total other current receivables |
|
|
82,128 |
|
|
|
66,160 |
|
|
|
66,249 |
|
|
Prepaid expenses mainly include royalties paid in advance, insurance costs, and deferred
costs related to the proposed combination.
As part of the proposed combination described in Note 5.1, the Company incurred external costs.
Direct costs including fees paid to outside consultants for legal, finance, or technical services
have been deferred in prepaid expenses for an amount of 3,259 thousand and will be included in
the cost of the proposed business combination to take place in fiscal year 2006. A letter of
understanding has been signed between Axalto and the Company whereby the accounting acquirer will
pay for the combination related costs if the combination takes place. Indirect expenses related to
the transaction have been expensed as incurred.
As of December 31, 2005, restricted cash was mainly composed of 30,366 thousand (including
interest amounting to 366 thousand) paid in an escrow account in relation to the contingent
consideration recorded as part of the acquisition of Setec (see Note 5.2).
As of December 31, 2005, restricted cash included 1,476 thousand (2004:
2,657 thousand, of
which 886 thousand were reported under the caption Other non-current receivables, see Note 17),
which were related to a time deposit in China to secure a loan in favor of Tianjin Telephone
Equipments Factory (see Note 38).
F-25
As of December 31, 2005, restricted cash was also composed of an amount of 3,776 thousand (2004:
3,409 thousand) related to Gemplus China Investment (GCI), a wholly owned subsidiary of the
Company. However, the Company can only withdraw this cash when GCI is liquidated, which is the
intention of the Company.
As of December 31, 2004, restricted cash was mainly composed of 22,225 thousand (including
interest amounting to 273 thousand) related to the Nicolaï case (see Note 37). In 2005, following
the successful outcome of this legal action, the total escrow deposit was released to the Company,
including interest.
During the fourth quarter of 2000, to reduce supply risk associated with obtaining microprocessor
chips, the Company entered into a long-term supply agreement with a major microprocessor
manufacturer. In connection with this supply agreement, the Company financed enhancements of this
suppliers production capacity with an unsecured advance facility. By December 31, 2004, the
supplier had paid in full the advance facility and related interest.
11. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (P,P&E) can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
Land |
|
|
Buildings |
|
|
Machinery |
|
|
Total 2005 |
|
|
Total 2004 |
|
|
Total 2003 |
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1 |
|
|
6,015 |
|
|
|
161,678 |
|
|
|
296,328 |
|
|
|
464,021 |
|
|
|
476,583 |
|
|
|
512,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
2,625 |
|
|
|
22,453 |
|
|
|
25,078 |
|
|
|
22,888 |
|
|
|
15,237 |
|
Disposals |
|
|
(838 |
) |
|
|
(10,731 |
) |
|
|
(26,453 |
) |
|
|
(38,022 |
) |
|
|
(28,228 |
) |
|
|
(31,669 |
) |
Acquisition (disposal) of subsidiary (see Note 5) |
|
|
|
|
|
|
1,532 |
|
|
|
15,331 |
|
|
|
16,863 |
|
|
|
|
|
|
|
(597 |
) |
Currency adjustments |
|
|
177 |
|
|
|
2,762 |
|
|
|
10,274 |
|
|
|
13,213 |
|
|
|
(7,222 |
) |
|
|
(19,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
5,354 |
|
|
|
157,866 |
|
|
|
317,933 |
|
|
|
481,153 |
|
|
|
464,021 |
|
|
|
476,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1 |
|
|
|
|
|
|
(63,498 |
) |
|
|
(251,607 |
) |
|
|
(315,105 |
) |
|
|
(300,877 |
) |
|
|
(295,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
(9,699 |
) |
|
|
(23,437 |
) |
|
|
(33,136 |
) |
|
|
(42,243 |
) |
|
|
(51,064 |
) |
Reversal of impairment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,555 |
|
Disposals |
|
|
|
|
|
|
6,951 |
|
|
|
27,030 |
|
|
|
33,981 |
|
|
|
23,449 |
|
|
|
30,794 |
|
Disposal of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
Currency adjustments |
|
|
|
|
|
|
(937 |
) |
|
|
(7,672 |
) |
|
|
(8,609 |
) |
|
|
4,566 |
|
|
|
12,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
|
|
|
|
(67,183 |
) |
|
|
(255,686 |
) |
|
|
(322,869 |
) |
|
|
(315,105 |
) |
|
|
(300,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as of December 31 |
|
|
5,354 |
|
|
|
90,683 |
|
|
|
62,247 |
|
|
|
158,284 |
|
|
|
148,916 |
|
|
|
175,706 |
|
Including: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P, P&E under finance lease contracts, gross |
|
|
2,809 |
|
|
|
63,197 |
|
|
|
159 |
|
|
|
66,165 |
|
|
|
69,871 |
|
|
|
68,926 |
|
P, P&E under finance lease contracts, depreciation |
|
|
|
|
|
|
(28,428 |
) |
|
|
|
|
|
|
(28,428 |
) |
|
|
(26,992 |
) |
|
|
(22,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value under finance lease
contracts as of December 31 |
|
|
2,809 |
|
|
|
34,769 |
|
|
|
159 |
|
|
|
37,737 |
|
|
|
42,879 |
|
|
|
46,237 |
|
|
No interest was capitalized in 2005, 2004 and 2003.
Capital expenditures by geographic areas are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Europe, Middle East and Africa |
|
|
18,150 |
|
|
|
12,846 |
|
|
|
9,993 |
|
Asia |
|
|
2,157 |
|
|
|
5,492 |
|
|
|
2,723 |
|
Americas |
|
|
4,771 |
|
|
|
4,550 |
|
|
|
2,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
|
25,078 |
|
|
|
22,888 |
|
|
|
15,237 |
|
|
F-26
Depreciation expense for P,P&E has been charged to the statement of income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Cost of sales |
|
|
(22,932 |
) |
|
|
(30,248 |
) |
|
|
(36,884 |
) |
Research and development expenses |
|
|
(3,506 |
) |
|
|
(3,638 |
) |
|
|
(4,196 |
) |
Selling and marketing expenses |
|
|
(2,380 |
) |
|
|
(2,610 |
) |
|
|
(3,536 |
) |
General and administrative expenses |
|
|
(4,318 |
) |
|
|
(5,747 |
) |
|
|
(6,448 |
) |
Restructuring expenses (see Note 22) |
|
|
|
|
|
|
|
|
|
|
2,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense |
|
|
(33,136 |
) |
|
|
(42,243 |
) |
|
|
(48,509 |
) |
|
12. GOODWILL
Until December 31, 2004, goodwill was analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
2004 |
|
|
2003 |
|
|
Cost |
|
|
|
|
|
|
|
|
As of January 1 |
|
|
156,081 |
|
|
|
165,443 |
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
5,901 |
|
Purchase price adjustments |
|
|
(820 |
) |
|
|
|
|
Disposals and transfers |
|
|
(36,791 |
) |
|
|
(9,918 |
) |
Currency adjustments |
|
|
(2,088 |
) |
|
|
(5,345 |
) |
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
116,382 |
|
|
|
156,081 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and impairment |
|
|
|
|
|
|
|
|
As of January 1 |
|
|
(118,354 |
) |
|
|
(92,256 |
) |
|
|
|
|
|
|
|
|
|
|
Impairment charge |
|
|
|
|
|
|
(19,879 |
) |
Amortization |
|
|
(7,718 |
) |
|
|
(13,172 |
) |
Disposals and transfers |
|
|
36,791 |
|
|
|
4,543 |
|
Currency adjustments |
|
|
1,096 |
|
|
|
2,410 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
(88,185 |
) |
|
|
(118,354 |
) |
|
|
|
|
|
|
|
|
|
|
Net book value as of December 31 |
|
|
28,197 |
|
|
|
37,727 |
|
|
F-27
Following the adoption of IFRS 3 as of January 1, 2005, goodwill can be analyzed as follows:
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
2005 |
|
|
Net book value as of January 1 |
|
|
28,197 |
|
|
Acquisition of subsidiary (see Note 5) |
|
|
60,705 |
|
Impairment charge |
|
|
|
|
Currency adjustments |
|
|
1,924 |
|
|
|
|
|
|
|
Net book value as of December 31 |
|
|
90,826 |
|
|
Goodwill is allocated as follows to the Companys cash-generating units (CGU) identified
according to the operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Telecommunications |
|
|
6,256 |
|
|
|
247 |
|
|
|
296 |
|
Financial Services |
|
|
45,762 |
|
|
|
24,773 |
|
|
|
30,434 |
|
Identity and Security |
|
|
38,808 |
|
|
|
3,177 |
|
|
|
6,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
90,826 |
|
|
|
28,197 |
|
|
|
37,727 |
|
|
Impairment tests for goodwill
In 2005 and 2004, the Company did not record any goodwill impairment charge. In 2003 the Company
recorded a goodwill impairment charge of 19,879 thousand as a result of its impairment test
(recorded in Identity and Security segment). This write-down resulted from the revision of the
business plan of the acquired activities of Celocom Limited in November 2000.
13. DEFERRED DEVELOPMENT COSTS
Deferred development costs relate to capitalized software costs. They can be analyzed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Gross amount at the beginning of the year |
|
|
55,846 |
|
|
|
54,651 |
|
|
|
56,658 |
|
Accumulated amortization at the beginning of the year |
|
|
(36,624 |
) |
|
|
(36,735 |
) |
|
|
(30,748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
|
|
19,222 |
|
|
|
17,916 |
|
|
|
25,910 |
|
|
|
Deferred during the year |
|
|
10,418 |
|
|
|
9,595 |
|
|
|
10,757 |
|
Less, allowances |
|
|
(8,413 |
) |
|
|
(8,289 |
) |
|
|
(18,751 |
) |
|
Impact for the year on income before tax |
|
|
2,005 |
|
|
|
1,306 |
|
|
|
(7,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year |
|
|
21,227 |
|
|
|
19,222 |
|
|
|
17,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount at the end of the year |
|
|
55,456 |
|
|
|
55,846 |
|
|
|
54,651 |
|
Accumulated amortization |
|
|
(34,229 |
) |
|
|
(36,624 |
) |
|
|
(36,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year |
|
|
21,227 |
|
|
|
19,222 |
|
|
|
17,916 |
|
|
Research and development expenses incurred during the year consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Research and development expenditures |
|
|
69,400 |
|
|
|
68,208 |
|
|
|
63,918 |
|
Deferred development costs, net |
|
|
(2,005 |
) |
|
|
(1,306 |
) |
|
|
7,994 |
|
Grants received including research tax credit |
|
|
(5,126 |
) |
|
|
(4,310 |
) |
|
|
(2,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
|
62,269 |
|
|
|
62,592 |
|
|
|
69,223 |
|
|
F-28
14. OTHER INTANGIBLE ASSETS
Other intangible assets can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
Customers |
|
|
|
|
|
|
Patents and |
|
|
|
|
|
|
|
|
|
|
|
|
Acquired |
|
|
contractual |
|
|
|
|
|
|
patent |
|
|
|
|
|
|
|
|
|
|
|
|
technology |
|
|
relationships |
|
|
Software |
|
|
rights |
|
|
Total 2005 |
|
|
Total 2004 |
|
|
Total 2003 |
|
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1 |
|
|
|
|
|
|
|
|
|
|
35,289 |
|
|
|
6,428 |
|
|
|
41,717 |
|
|
|
46,864 |
|
|
|
54,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
2,693 |
|
|
|
|
|
|
|
2,693 |
|
|
|
1,779 |
|
|
|
4,728 |
|
Disposals and write-offs |
|
|
|
|
|
|
|
|
|
|
(1,678 |
) |
|
|
(34 |
) |
|
|
(1,712 |
) |
|
|
(6,724 |
) |
|
|
(12,018 |
) |
Acquisition
of subsidiary (see Note 5) |
|
|
3,200 |
|
|
|
17,584 |
|
|
|
214 |
|
|
|
|
|
|
|
20,998 |
|
|
|
|
|
|
|
|
|
Currency adjustments |
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
257 |
|
|
|
386 |
|
|
|
(202 |
) |
|
|
(518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
3,200 |
|
|
|
17,584 |
|
|
|
36,647 |
|
|
|
6,651 |
|
|
|
64,082 |
|
|
|
41,717 |
|
|
|
46,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
As of January 1 |
|
|
|
|
|
|
|
|
|
|
(26,881 |
) |
|
|
(5,871 |
) |
|
|
(32,752 |
) |
|
|
(30,707 |
) |
|
|
(23,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(311 |
) |
|
|
(2,620 |
) |
|
|
(5,016 |
) |
|
|
(286 |
) |
|
|
(8,233 |
) |
|
|
(6,730 |
) |
|
|
(10,956 |
) |
Disposals and write-offs |
|
|
|
|
|
|
|
|
|
|
822 |
|
|
|
|
|
|
|
822 |
|
|
|
4,603 |
|
|
|
3,957 |
|
Currency adjustments |
|
|
|
|
|
|
|
|
|
|
(115 |
) |
|
|
(204 |
) |
|
|
(319 |
) |
|
|
82 |
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
(311 |
) |
|
|
(2,620 |
) |
|
|
(31,190 |
) |
|
|
(6,361 |
) |
|
|
(40,482 |
) |
|
|
(32,752 |
) |
|
|
(30,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
As of December 31 |
|
|
2,889 |
|
|
|
14,964 |
|
|
|
5,457 |
|
|
|
290 |
|
|
|
23,600 |
|
|
|
8,965 |
|
|
|
16,157 |
|
|
Amortization has been charged to the Consolidated Statement of Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Cost of sales |
|
|
4,467 |
|
|
|
2,031 |
|
|
|
2,182 |
|
Research and development expenses |
|
|
2,082 |
|
|
|
2,306 |
|
|
|
6,366 |
|
Selling and marketing expenses |
|
|
792 |
|
|
|
893 |
|
|
|
914 |
|
General and administrative expenses |
|
|
892 |
|
|
|
1,500 |
|
|
|
1,494 |
|
Restructuring expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization |
|
|
8,233 |
|
|
|
6,730 |
|
|
|
10,956 |
|
|
F-29
15. INVESTMENTS IN ASSOCIATES
Investments in associates can be analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
As of January 1 |
|
|
12,864 |
|
|
|
19,216 |
|
|
|
21,008 |
|
|
Change in perimeter (1) |
|
|
|
|
|
|
|
|
|
|
7,090 |
|
Acquisition of subsidiary (see Note 5) |
|
|
4,537 |
|
|
|
|
|
|
|
|
|
Change in valuation allowance of shares in associates |
|
|
(1,314 |
) |
|
|
(5,970 |
) |
|
|
(7,561 |
) |
Currency adjustments |
|
|
222 |
|
|
|
(382 |
) |
|
|
(1,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
16,309 |
|
|
|
12,864 |
|
|
|
19,216 |
|
|
|
|
|
(1) |
|
Change in perimeter comprises the impact of changes in ownership interest
leading to reclassifications between subsidiaries, available-for-sale financial assets and
investments in associates. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Change in valuation allowance of shares in associates |
|
|
(1,314 |
) |
|
|
(5,970 |
) |
|
|
(7,561 |
) |
Gain on disposal of shares in associates |
|
|
783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of (loss) profit of associates |
|
|
(531 |
) |
|
|
(5,970 |
) |
|
|
(7,561 |
) |
|
The Company has investments in associates in several non-public start-up companies. These
investments are accounted for in accordance with the accounting policies described in Note 2.3.
Note 38 provides a summary of transactions between the Company and these entities.
In 2005, the Company sold entirely three of its investments and acquired one new investment (see
Note 5). The sale of the three investments resulted in a gain on disposal of 783 thousand.
As indicated in Note 2.2.b, the Companys investment in associates includes goodwill (net of any
impairment loss) identified on acquisition. As of December 31, 2005, 2004 and 2003, the net book
value of goodwill in associates amounted to 5,362 thousand, 6,616 thousand and
10,851
thousand, respectively.
As of December 31, 2005, the Companys investments in associates over which the Company has
significant influence, but not control, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
|
|
|
|
of |
|
|
|
|
|
of |
Name of the company |
|
Country |
|
ownership |
|
Name of the company |
|
Country |
|
ownership |
|
Leigh Mardon Gemplus Pty Ltd
|
|
Australia
|
|
|
50 |
% |
|
CLM GmbH & Co. KG
|
|
Germany
|
|
|
50 |
% |
Solutions Fides
|
|
Canada
|
|
|
49 |
% |
|
CLM GmbH
|
|
Germany
|
|
|
50 |
% |
Atchik-Realtime A/S
|
|
France
|
|
|
23.8 |
% |
|
Toppan Gemplus Services Co. Ltd
|
|
Japan
|
|
|
50 |
% |
Welcome Realtime SA
|
|
France
|
|
|
49 |
% |
|
Concesionaria Renave SA de CV
|
|
Mexico
|
|
|
20 |
% |
Immotec Systemes SAS
|
|
France
|
|
|
49 |
% |
|
Gemplus EDBV Smart Labs Pte Ltd
|
|
Singapore
|
|
|
50 |
% |
Gkard SAS
|
|
France
|
|
|
50 |
% |
|
Gemplus EDBV Smart Labs Management Pte Ltd
|
|
Singapore
|
|
|
50 |
% |
Netsize SA
|
|
France
|
|
|
24 |
% |
|
AB Svenska Pass
|
|
Sweden
|
|
|
50 |
% |
Setelis SA
|
|
France
|
|
|
21.6 |
% |
|
|
|
|
|
|
|
|
At December 31, 2004 and 2003, the summarized financial information relating to the Companys
associates was as follows (in thousands of euros):
F-30
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
December 31, 2003 |
|
|
Net sales |
|
|
109,577 |
|
|
|
79,209 |
|
Assets |
|
|
52,232 |
|
|
|
41,612 |
|
Liabilities |
|
|
43,891 |
|
|
|
30,530 |
|
|
Profit (loss) |
|
|
(6,493 |
) |
|
|
(10,622 |
) |
|
16. AVAILABLE-FOR-SALE FINANCIAL ASSETS
Available-for-sale financial assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Investments in non-marketable equity securities |
|
|
15,680 |
|
|
|
23,512 |
|
|
|
18,549 |
|
Provision for impairment of available-for-sale assets |
|
|
(13,211 |
) |
|
|
(18,760 |
) |
|
|
(17,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale financial assets, net |
|
|
2,469 |
|
|
|
4,752 |
|
|
|
647 |
|
|
Changes in available-for-sale financial assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
As of January 1 |
|
|
4,752 |
|
|
|
647 |
|
|
|
2,080 |
|
|
Additions |
|
|
424 |
|
|
|
5,300 |
|
|
|
1,140 |
|
Acquisition of subsidiary (see Note 5) |
|
|
121 |
|
|
|
|
|
|
|
|
|
Disposals |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
Change in valuation allowance (see Note 29) |
|
|
(2,807 |
) |
|
|
(858 |
) |
|
|
(2,487 |
) |
Currency adjustments |
|
|
|
|
|
|
(337 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
2,469 |
|
|
|
4,752 |
|
|
|
647 |
|
|
The Company neither trades nor holds marketable securities and has minority shareholdings in
several non-public start-up companies. These shareholdings are accounted for in accordance with the
accounting policies described in Note 2.12. A write-down is recorded when there is reason to
believe that an impairment in value that is other than temporary has occurred, i.e., that the
business model is questioned or that the business plan is not met.
In 2004, an investment in equity securities for which the carrying value was nil was the target of
a reverse take-over and was subsequently listed on a US regulated market. In 2005, the Company took
advantage of the listing to sell its investment. The sale resulted in a gain on disposal amounting
to 4,782 thousand (see Note 29).
17. OTHER NON-CURRENT RECEIVABLES
Other non-current receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
Notes |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Loans receivable from senior management, net of provision
(68,828 in 2005, 69,885 in 2004 and 69,220 in 2003) |
|
|
(37 |
) |
|
|
9,937 |
|
|
|
8,880 |
|
|
|
9,546 |
|
Research tax credit (non-current portion) |
|
|
|
|
|
|
3,805 |
|
|
|
11,259 |
|
|
|
10,206 |
|
Rental deposits |
|
|
|
|
|
|
1,047 |
|
|
|
716 |
|
|
|
855 |
|
Employee loans and other related loans |
|
|
|
|
|
|
699 |
|
|
|
402 |
|
|
|
719 |
|
Prepaid expenses (non-current portion) |
|
|
|
|
|
|
916 |
|
|
|
|
|
|
|
4,329 |
|
Carry-back receivable from tax authority |
|
|
(20.1 |
) |
|
|
22,389 |
|
|
|
21,295 |
|
|
|
|
|
Restricted cash (non-current portion) |
|
|
(10 |
) |
|
|
150 |
|
|
|
886 |
|
|
|
|
|
Other loans and assets |
|
|
|
|
|
|
1,903 |
|
|
|
462 |
|
|
|
1,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-current receivables |
|
|
|
|
|
|
40,846 |
|
|
|
43,900 |
|
|
|
27,251 |
|
|
F-31
18. CURRENT PORTION OF PROVISIONS AND OTHER LIABILITIES
Current portion of provisions and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Current portion of provisions |
|
|
4,358 |
|
|
|
22,196 |
|
|
|
44,763 |
|
Other current liabilities |
|
|
69,076 |
|
|
|
28,021 |
|
|
|
33,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
73,434 |
|
|
|
50,217 |
|
|
|
78,090 |
|
|
Variation analysis of the current portion of provisions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
Amount |
|
|
Amount |
|
|
Reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
changes in |
|
|
|
|
|
|
unused |
|
|
used |
|
|
within |
|
|
|
|
Current portion |
|
December 31, |
|
|
December 31, |
|
|
exchange |
|
|
Increase in |
|
|
during |
|
|
during the |
|
|
balance |
|
|
December 31, |
|
of provisions |
|
2003 |
|
|
2004 |
|
|
rate |
|
|
current liabilities |
|
|
the period |
|
|
period |
|
|
sheet items |
|
|
2005 |
|
|
Provision for restructuring
(see Note 22) |
|
|
38,951 |
|
|
|
16,619 |
|
|
|
72 |
|
|
|
|
|
|
|
(1,948 |
) |
|
|
(11,993 |
) |
|
|
850 |
|
|
|
3,600 |
|
Allowances for customer claims |
|
|
612 |
|
|
|
377 |
|
|
|
9 |
|
|
|
181 |
|
|
|
(115 |
) |
|
|
(294 |
) |
|
|
|
|
|
|
158 |
|
Provision for legal action (see Note 37) |
|
|
5,200 |
|
|
|
5,200 |
|
|
|
|
|
|
|
600 |
|
|
|
(5,200 |
) |
|
|
|
|
|
|
|
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current portion of provisions |
|
|
44,763 |
|
|
|
22,196 |
|
|
|
81 |
|
|
|
781 |
|
|
|
(7,263 |
) |
|
|
(12,287 |
) |
|
|
850 |
|
|
|
4,358 |
|
|
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Deferred revenue |
|
|
26,339 |
|
|
|
17,317 |
|
|
|
19,409 |
|
Customer deposits |
|
|
5,235 |
|
|
|
5,228 |
|
|
|
5,690 |
|
Bank overdrafts |
|
|
979 |
|
|
|
1,752 |
|
|
|
99 |
|
Borrowings (current portion) |
|
|
118 |
|
|
|
|
|
|
|
|
|
Contingent consideration related to the acquisition of Setec (see Note 5) |
|
|
30,000 |
|
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
|
6,405 |
|
|
|
3,724 |
|
|
|
8,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities |
|
|
69,076 |
|
|
|
28,021 |
|
|
|
33,327 |
|
|
Deferred revenue mainly relates to cards invoiced to customers but not shipped because the
products require customization to be performed by the Company and to sales to resellers and
distributors for which revenue recognition criteria described in Note 2.5 have not yet been met.
Bank overdrafts either result from the daily usage of cash in some of the Companys foreign
locations or from subsidiaries that are not wholly owned and that do not benefit from the Companys
treasury management.
F-32
19. CURRENT AND NON-CURRENT OBLIGATIONS UNDER FINANCE LEASES
Finance leases obligations outstanding as of December 31, 2005, are analyzed as follows:
|
|
|
|
|
|
(in thousands of euros) |
|
Not later than 1 year |
|
|
6,595 |
|
Later than 1 year and not later than 5 years |
|
|
20,903 |
|
Later than 5 years |
|
|
8,313 |
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
35,811 |
|
|
|
|
|
|
|
Less, amount representing interest |
|
|
(3,847 |
) |
|
|
|
|
|
|
Present value of minimum obligations under finance leases |
|
|
31,964 |
|
|
|
|
|
|
|
Less, current portion of obligations under finance leases |
|
|
(5,539 |
) |
|
|
|
|
|
|
Non-current obligations under finance leases |
|
|
26,425 |
|
|
The present value of finance lease liabilities is as follows:
|
|
|
|
|
|
(in thousands of euros) |
|
|
Not later than 1 year |
|
|
6,479 |
|
Later than 1 year and not later than 5 years |
|
|
18,951 |
|
Later than 5 years |
|
|
6,534 |
|
|
|
|
|
|
|
Present value of minimum obligations under finance leases |
|
|
31,964 |
|
|
In 2001, the Company entered into a sale-leaseback transaction with a major financial
institution related to an office building located in La Ciotat, France. The capital lease has a
duration of 12 years ending in September 2014. The related proceeds received amounted to nil in
2005, 956 thousand in 2004 and 2,142 thousand in 2003. This sale-leaseback transaction resulted
in no gain or loss in the Consolidated Statement of Income.
20. NON-CURRENT PORTION OF PROVISIONS AND OTHER LIABILITIES
20.1 Non-current portion of provisions
Variation analysis of the non-current portion of provisions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
|
|
|
|
Effect of |
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Amount |
|
|
Reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
changes in |
|
|
Acquisition |
|
|
Increase in |
|
|
unused |
|
|
used |
|
|
within |
|
|
|
|
Non-current portion |
|
December 31, |
|
|
December 31, |
|
|
exchange |
|
|
of subsidiary |
|
|
non-current |
|
|
during |
|
|
during the |
|
|
balance |
|
|
December 31, |
|
of provisions |
|
2003 |
|
|
2004 |
|
|
rate |
|
|
(see Note 5) |
|
|
liabilities |
|
|
the period |
|
|
period |
|
|
sheet items |
|
|
2005 |
|
|
Provision for patent claims |
|
|
9,000 |
|
|
|
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000 |
|
(see Note 37)
Provision for income tax claims |
|
|
41,017 |
|
|
|
7,440 |
|
|
|
86 |
|
|
|
|
|
|
|
895 |
|
|
|
(1,555 |
) |
|
|
(2,238 |
) |
|
|
|
|
|
|
4,628 |
|
Provision for pension costs
(see Note 21) |
|
|
1,562 |
|
|
|
2,845 |
|
|
|
111 |
|
|
|
347 |
|
|
|
1,603 |
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
4,706 |
|
Provision for restructuring
(see Note 22) |
|
|
|
|
|
|
4,036 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
(974 |
) |
|
|
(932 |
) |
|
|
(850 |
) |
|
|
1,437 |
|
Other provisions |
|
|
5,503 |
|
|
|
2,375 |
|
|
|
5 |
|
|
|
1,579 |
|
|
|
484 |
|
|
|
(672 |
) |
|
|
(629 |
) |
|
|
569 |
|
|
|
3,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
57,082 |
|
|
|
25,696 |
|
|
|
359 |
|
|
|
1,926 |
|
|
|
2,982 |
|
|
|
(3,201 |
) |
|
|
(3,999 |
) |
|
|
(281 |
) |
|
|
23,482 |
|
|
Provision for income tax claims
Upon filing a tax return, and in certain other limited circumstances (e.g. change in
jurisprudence), the Company may have varying degrees of confidence that the tax position taken will
ultimately be sustainable. The Company assesses the sustainability of the position in determining
the provision for tax claims in the year the tax position is taken. The Company then reassesses the
provision based upon the most current information available and managements judgment regarding the
likely
F-33
outcome of any potential tax claims. The provision for income tax claims amounted to 41,017
thousand, 7,440 thousand and 4,628 thousand as of December 31, 2003, 2004 and 2005,
respectively.
A tax audit of the Companys German subsidiaries was closed in 2005. The terms of the audit
settlement were not significantly different from the agreement in principle that the Company had
previously reached with the German tax authority. This resulted in the use of the related provision
in an amount of 2,092 thousand and the release of the unused portion of the provision in an
amount of 508 thousand.
In 2002, certain French subsidiaries of the Company, including Gemplus SA, received a tax
assessment from the French tax authority primarily relating to the fiscal years 1998 through 2000.
The tax assessment resulted in an amount payable by the Company of 34,012 thousand in 2004 and
the recognition of tax losses carried over amounting to 24,040 thousand. To secure this tax
credit, the Company elected to carry back these tax losses. The recovery of this carry back being
expected in mid-2007, the amount has been discounted in accordance with IFRS. As of December 31,
2004 and 2005, the present value of the carry back receivable, amounting to 21,295 thousand and
22,389 thousand, respectively, is recorded in other non-current receivables ( see Note 17).
20.2 Other non-current liabilities
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Unrecognized Government grants |
|
|
2,918 |
|
|
|
3,973 |
|
|
|
3,618 |
|
Management compensation and severance liability (see Note 37) |
|
|
9,937 |
|
|
|
8,880 |
|
|
|
9,546 |
|
Borrowings ( non-current portion) |
|
|
562 |
|
|
|
|
|
|
|
|
|
Others |
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities |
|
|
13,417 |
|
|
|
13,353 |
|
|
|
13,164 |
|
|
21. PENSION PLANS
In France, the Company contributes to the national pension system and its obligations to
employees in terms of pensions are limited to a lump-sum equal to the length of service award
payable on the date the employee reaches retirement age, such award being determined for each
individual based upon years of service provided and projected final salary. The current evaluation
of the future length of service award liability is recorded as a non-current liability in the
balance sheet together with pension liabilities. The pension obligations in France amounted to
1,857 thousand, 1,119 thousand and 1,176 thousand at December 31, 2005, 2004 and 2003
respectively.
The Company also offers an Employee Investment Plan (EIP) to all US employees under section 401 (k)
of the US Internal Revenue Code. Company contributions to the EIP plan amounted to approximately
906 thousand, 728 thousand and 898 thousand in 2005, 2004 and 2003, respectively.
The Company operated its principal defined benefit plan in the United Kingdom which is now closed
to new members. A stakeholder scheme and a defined contribution scheme now apply. Net periodic
pension costs for the defined benefit plan for the years ended December 31, 2005, 2004 and 2003,
are included in the analysis below. Actuarial evaluations have been performed at December 31, 2005,
2004 and 2003.
Other less significant defined benefit plans which apply in other countries are included in the
figures below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Current year service cost |
|
|
1,878 |
|
|
|
1,418 |
|
|
|
1,217 |
|
Past service cost |
|
|
106 |
|
|
|
|
|
|
|
|
|
Interest accrued on pension obligations |
|
|
2,166 |
|
|
|
1,669 |
|
|
|
1,465 |
|
Actual loss (return) on plan assets |
|
|
(3,709 |
) |
|
|
(1,612 |
) |
|
|
(2,049 |
) |
Net amortization and deferral |
|
|
2,790 |
|
|
|
763 |
|
|
|
1,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension costs |
|
|
3,230 |
|
|
|
2,238 |
|
|
|
1,918 |
|
|
F-34
The following tables set forth the funded status of the defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Accumulated benefit obligation |
|
|
46,384 |
|
|
|
34,896 |
|
|
|
30,141 |
|
Projected benefit obligation |
|
|
49,778 |
|
|
|
36,981 |
|
|
|
30,666 |
|
Plan assets at fair value |
|
|
26,713 |
|
|
|
19,509 |
|
|
|
16,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation in excess of plan assets |
|
|
(23,065 |
) |
|
|
(17,472 |
) |
|
|
(13,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss |
|
|
18,360 |
|
|
|
14,627 |
|
|
|
11,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payable pension cost(see Note 20.1) |
|
|
(4,706 |
) |
|
|
(2,845 |
) |
|
|
(2,157 |
) |
|
The following weighted average rates were used in the calculation of projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Discount rate |
|
|
4.00% - 4.75 |
% |
|
|
5.00% - 5.25 |
% |
|
|
4.50% - 5.50 |
% |
Expected rate of return on plan assets |
|
|
5.25% - 7.00 |
% |
|
|
7.00 |
% |
|
|
7.00 |
% |
Assumed rate of compensation increase |
|
|
3.00% - 3.75 |
% |
|
|
3.00% - 3.75 |
% |
|
|
3.00% - 3.75 |
% |
|
In the UK, plan assets are comprised of 57% of equity securities and 43% of corporate bonds.
The investment strategy generally consists of matching the commitment, considering the age of the
employees, their expected retirement date and the ratio between retired and active employees. The
Company estimates the expected rate of return on plan assets using risk free rates, risk premiums
and average dividend yields corresponding to its investment portfolio.
The change in fair value of the plan asset and the projected benefit obligation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Projected benefit obligation as of January 1 |
|
|
36,981 |
|
|
|
30,666 |
|
|
|
29,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
|
1,878 |
|
|
|
1,418 |
|
|
|
1,217 |
|
Interest cost |
|
|
2,166 |
|
|
|
1,669 |
|
|
|
1,465 |
|
Acquisition of subsidiary |
|
|
2,330 |
|
|
|
|
|
|
|
|
|
Plan participants contributions |
|
|
387 |
|
|
|
400 |
|
|
|
444 |
|
Actuarial (gain) loss |
|
|
6,016 |
|
|
|
3,747 |
|
|
|
1,037 |
|
Benefits paid |
|
|
(888 |
) |
|
|
(738 |
) |
|
|
(662 |
) |
Currency adjustments |
|
|
908 |
|
|
|
(181 |
) |
|
|
(2,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation as of December 31 |
|
|
49,778 |
|
|
|
36,981 |
|
|
|
30,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Fair value of plan assets as of January 1 |
|
|
19,509 |
|
|
|
16,828 |
|
|
|
15,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
3,709 |
|
|
|
1,612 |
|
|
|
2,049 |
|
Employer contribution |
|
|
1,540 |
|
|
|
1,488 |
|
|
|
1,045 |
|
Plan participants contributions |
|
|
387 |
|
|
|
400 |
|
|
|
444 |
|
Benefits paid |
|
|
(889 |
) |
|
|
(738 |
) |
|
|
(662 |
) |
Acquisition on subsidiary |
|
|
1,983 |
|
|
|
|
|
|
|
|
|
Currency adjustments |
|
|
474 |
|
|
|
(81 |
) |
|
|
(1,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets as of December 31 |
|
|
26,713 |
|
|
|
19,509 |
|
|
|
16,828 |
|
|
F-35
22. RESTRUCTURING
In 2001 and 2002, the Company announced three restructuring programs. The impacts of such
programs on the financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
Effect |
|
|
|
|
|
|
Amount |
|
|
Amount |
|
|
|
|
|
|
|
Provision for reduction |
|
|
|
|
|
of changes |
|
|
|
|
|
|
unused |
|
|
used |
|
|
Reclassification |
|
|
|
|
of workforce and |
|
January 1, |
|
|
in exchange |
|
|
Increase in |
|
|
during |
|
|
during |
|
|
within balance |
|
|
December 31, |
|
other cash outflows |
|
2003 |
|
|
rate |
|
|
provision |
|
|
the period |
|
|
the period |
|
|
sheet items |
|
|
2003 |
|
|
May 2001 restructuring program |
|
|
2,058 |
|
|
|
(263 |
) |
|
|
89 |
|
|
|
|
|
|
|
(881 |
) |
|
|
|
|
|
|
1,003 |
|
February 2002 restructuring program |
|
|
38,605 |
|
|
|
(817 |
) |
|
|
246 |
|
|
|
(170 |
) |
|
|
(27,247 |
) |
|
|
|
|
|
|
10,617 |
|
December 2002 restructuring program |
|
|
312 |
|
|
|
(38 |
) |
|
|
54,848 |
|
|
|
|
|
|
|
(27,791 |
) |
|
|
|
|
|
|
27,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40,975 |
|
|
|
(1,118 |
) |
|
|
55,183 |
|
|
|
(170 |
) |
|
|
(55,919 |
) |
|
|
|
|
|
|
38,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion (see Note 18) |
|
|
40,975 |
|
|
|
(1,118 |
) |
|
|
55,183 |
|
|
|
(170 |
) |
|
|
(55,919 |
) |
|
|
|
|
|
|
38,951 |
|
Non-current portion (see Note 20) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40,975 |
|
|
|
(1,118 |
) |
|
|
55,183 |
|
|
|
(170 |
) |
|
|
(55,919 |
) |
|
|
|
|
|
|
38,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
Effect |
|
|
|
|
|
|
Amount |
|
|
Amount |
|
|
|
|
|
|
|
Provision for reduction |
|
|
|
|
|
of changes |
|
|
|
|
|
|
unused |
|
|
used |
|
|
Reclassification |
|
|
|
|
of workforce and |
|
January 1, |
|
|
in exchange |
|
|
Increase in |
|
|
during |
|
|
during |
|
|
within balance |
|
|
December 31, |
|
other cash outflows |
|
2004 |
|
|
rate |
|
|
provision |
|
|
the period |
|
|
the period |
|
|
sheet items |
|
|
2004 |
|
|
May 2001 restructuring program |
|
|
1,003 |
|
|
|
7 |
|
|
|
|
|
|
|
(312 |
) |
|
|
(589 |
) |
|
|
|
|
|
|
109 |
|
February 2002 restructuring program |
|
|
10,617 |
|
|
|
(9 |
) |
|
|
143 |
|
|
|
(5,579 |
) |
|
|
(2,134 |
) |
|
|
|
|
|
|
3,038 |
|
December 2002 restructuring program |
|
|
27,331 |
|
|
|
13 |
|
|
|
16,395 |
|
|
|
(3,664 |
) |
|
|
(22,567 |
) |
|
|
|
|
|
|
17,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
38,951 |
|
|
|
11 |
|
|
|
16,538 |
|
|
|
(9,555 |
) |
|
|
(25,290 |
) |
|
|
|
|
|
|
20,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion (see Note 18) |
|
|
38,951 |
|
|
|
12 |
|
|
|
15,402 |
|
|
|
(9,555 |
) |
|
|
(25,290 |
) |
|
|
(2,901 |
) |
|
|
16,619 |
|
Non-current portion (see Note 20) |
|
|
|
|
|
|
(1 |
) |
|
|
1,136 |
|
|
|
|
|
|
|
|
|
|
|
2,901 |
|
|
|
4,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
38,951 |
|
|
|
11 |
|
|
|
16,538 |
|
|
|
(9,555 |
) |
|
|
(25,290 |
) |
|
|
|
|
|
|
20,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
Effect |
|
|
|
|
|
|
Amount |
|
|
Amount |
|
|
|
|
|
|
|
Provision for reduction |
|
|
|
|
|
of changes |
|
|
|
|
|
|
unused |
|
|
used |
|
|
Reclassification |
|
|
|
|
of workforce and |
|
January 1, |
|
|
in exchange |
|
|
Increase in |
|
|
during |
|
|
during |
|
|
within balance |
|
|
December 31, |
|
other cash outflows |
|
2005 |
|
|
rate |
|
|
provision |
|
|
the period |
|
|
the period |
|
|
sheet items |
|
|
2005 |
|
|
May 2001 restructuring program |
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
62 |
|
February 2002 restructuring program |
|
|
3,038 |
|
|
|
186 |
|
|
|
|
|
|
|
(670 |
) |
|
|
(744 |
) |
|
|
(403 |
) |
|
|
1,407 |
|
December 2002 restructuring program |
|
|
17,508 |
|
|
|
43 |
|
|
|
|
|
|
|
(2,252 |
) |
|
|
(12,134 |
) |
|
|
403 |
|
|
|
3,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20,655 |
|
|
|
229 |
|
|
|
|
|
|
|
(2,922 |
) |
|
|
(12,925 |
) |
|
|
|
|
|
|
5,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion (see Note 18) |
|
|
16,619 |
|
|
|
72 |
|
|
|
|
|
|
|
(1,948 |
) |
|
|
(11,993 |
) |
|
|
850 |
|
|
|
3,600 |
|
Non-current portion (see Note 20) |
|
|
4,036 |
|
|
|
157 |
|
|
|
|
|
|
|
(974 |
) |
|
|
(932 |
) |
|
|
(850 |
) |
|
|
1,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20,655 |
|
|
|
229 |
|
|
|
|
|
|
|
(2,922 |
) |
|
|
(12,925 |
) |
|
|
|
|
|
|
5,037 |
|
|
F-36
The impact of restructuring activity on the Consolidated Statement of Income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Reduction of workforce and other cash outflows |
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expenses |
|
|
|
|
|
|
16,538 |
|
|
|
55,183 |
|
Release of unused provisions |
|
|
(2,922 |
) |
|
|
(9,555 |
) |
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(2,922 |
) |
|
|
6,983 |
|
|
|
55,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash write-offs of assets |
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expenses |
|
|
|
|
|
|
3,695 |
|
|
|
9,515 |
|
Release of unused provisions |
|
|
(313 |
) |
|
|
(2,294 |
) |
|
|
(2,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(313 |
) |
|
|
1,401 |
|
|
|
6,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring (reversals)expenses |
|
|
(3,235 |
) |
|
|
8,384 |
|
|
|
61,973 |
|
|
The market value for assets related to closed sites and buildings is the estimated realizable
value. The estimated realizable value is determined with reference to expert valuations that
include the analyses of discounted cash flows, comparable transactions, bids or selling price of
the building, as applicable.
As of December 31, 2005, there were no significant activities to be terminated with respect to
these restructuring programs.
23. SHAREHOLDERS EQUITY
23.1 Ordinary shares
Gemplus International SA is a corporation incorporated in the Grand Duchy of Luxemburg. The
authorized share capital of the Company is currently 400 million consisting of one billion eight
hundred and eighty-nine million four hundred and sixty-six thousand two hundred and twenty-six
shares (1,889,466,226) of no nominal value.
As previously authorized by the Board of Directors, on May 27, 2005, the Company issued 19 million
shares in exchange for a cash contribution of 33,688 thousand, net of cost of issuing shares
amounting to 360 thousand, in connection with the acquisition of Setec Oy, without
reserving any pre-emptive rights. This issue was made pursuant to the authorization given to the
Board of Directors to issue, out of the authorized share capital, further shares up to the total
authorized share capital in whole or in part from time to time with or without reserving any
pre-emptive subscription rights for existing shareholders and as it may in its discretion
determine.
23.2 Contribution of Gemplus SA shares and issuance of shares following stock option
exercise
In February 2000, 95.1% of the shareholders of Gemplus SA, a French corporation and former
holding company of the Group, exchanged their shares of Gemplus SA for shares in Gemplus
International SA, a newly formed Luxemburg corporation on a one to fifty basis. This transaction
has been accounted for using historical cost basis accounting. As of December 31, 2005, certain
shares held by employees or former employees had not yet been contributed. Gemplus SA shares still
to be contributed correspond to the equivalent of 511,700 Gemplus International SA shares
representing 0.08% of the shareholdings of Gemplus International SA, which in total was represented
by 630,880,979 shares as of December 31, 2005. As of December 31, 2005, certain options held by
employees under the Gemplus SA stock option plans had not been exercised. Following exercise of
these options, the corresponding Gemplus SA shares may be contributed by their holders to Gemplus
International SA. Since the shares of Gemplus SA are not available for sale to the general public
but can be converted into shares of Gemplus International SA upon request, it has been considered
certain that the shares (including shares issued following exercise of Gemplus SA stock options)
will eventually be converted. These shares are therefore assumed to be a component of shareholders
equity. Thus, they have been included in both the basic and diluted earnings per share
calculations.
F-37
During 2003, 2004 and 2005, Gemplus SA issued respectively 17,550, 901,250 and 328,150 shares of
Gemplus SA following the exercise of Gemplus SA stock options held by employees.
During 2003, 2004 and 2005, the Company issued respectively 1,010,900, 3,295,800 and 1,956,900
shares following the contribution of respectively 20,218, 65,916 and 39,138 shares of Gemplus SA
held mainly by employees.
During 2003, 2004 and 2005, the Company issued respectively 179,837, 268,207 and 1,830,376 shares
following the exercise of Gemplus International SA stock options held by employees.
23.3 Treasury shares
On April 17, 2002, the Extraordinary General Meeting cancelled 4,634,859 shares held by the
Company at the time and authorized the Company to cancel, when owning them directly, the 30,743,679
shares returned by Mr. Perez, a former Chief Executive Officer and held by an indirect subsidiary.
In accordance with this decision, on March 10, 2003, the 30,743,679 shares were cancelled, without
any effect on the Companys shareholders equity in accordance with accounting principles described
in Note 2.19. The cancellation of these shares did not result in a reduction of the issued share
capital of the Company; however, it resulted in an increase of the par value of the issued shares.
During 2003, the Company purchased 487,957 shares of its outstanding common stock from former
Celocom Limited employees pursuant to the conditions stipulated in the 2000 Celocom Limited share
purchase agreement.
In 2005, the Company granted 500,000 restricted shares to one of its executives.
As of December 31, 2005, the Company held 942,715 shares of its outstanding common stock.
Change in treasury shares is as follows:
|
|
|
|
|
|
|
Number of treasury shares |
|
|
As of December 31, 2002 |
|
|
31,727,101 |
|
|
Cancellation of treasury shares |
|
|
(30,743,679 |
) |
|
|
|
|
|
Purchase of shares pursuant to the 2000 Celocom Limited share purchase agreement |
|
|
487,957 |
|
|
|
|
|
|
As of December 31, 2003 |
|
|
1,471,379 |
|
|
|
|
|
|
|
Sale of treasury shares |
|
|
(28,664 |
) |
|
|
|
|
|
As of December 31, 2004 |
|
|
1,442,715 |
|
|
|
|
|
|
|
Grant of restricted shares |
|
|
(500,000 |
) |
|
|
|
|
|
|
As of December 31, 2005 |
|
|
942,715 |
|
|
The number of shares as of December 31, 2005, can be analyzed as follows:
|
|
|
|
|
|
Number of shares outstanding |
|
|
630,369,279 |
|
|
Gemplus SA shares to be contributed (1) |
|
|
511,700 |
|
|
|
|
|
|
|
Number of shares outstanding including shares to be contributed |
|
|
630,880,979 |
|
|
Treasury shares |
|
|
(942,715 |
) |
|
|
|
|
|
|
Basic number of shares outstanding |
|
|
629,938,264 |
|
|
|
|
|
|
|
Options outstanding |
|
|
78,526,053 |
|
|
|
Warrants outstanding |
|
|
2,561,973 |
|
|
|
|
|
|
|
Number of shares on a fully diluted basis |
|
|
711,026,290 |
|
|
F-38
|
|
|
(1) |
|
This number of shares includes Gemplus SA shares issued following the
exercise of Gemplus SA stock options until December 31, 2005, but that have not yet been
recorded by the Gemplus SA Board of Directors, being specified that part of those shares
(1,240,200) have been contributed to Gemplus International SA, in exchange for shares in
Gemplus International SA. |
As of December 31, 2005, 45,820,277 options are authorized but not yet granted under the
different stock option plans (see Note 24).
23.4 Additional paid-in capital
Based on a decision by the Board of Directors of the Company of December 7, 2000, pursuant to
Luxemburg law on the minimum value of shares, as of December 31, 2005, 648,191 thousand of the
additional paid-in capital constitute an undistributable reserve ( 624,758 thousand as of December
31, 2004 and 621,094 thousand as of December 31, 2003). Such reserve could, under current
legislation, be distributed only in accordance with the rules applicable to reductions in share
capital.
24. STOCK OPTION PLANS
The Company may grant, under various stock option plans (the Plans), options to purchase or
subscribe for ordinary shares to its employees and officers. Under the various Plans, the exercise
price of options granted may be less than the fair market value of the ordinary common shares at
the date of grant. The options must generally be exercised within seven to ten years from the date
of grant and typically vest in equal amounts over a period of three to four years, subject to
certain exceptions as described hereafter.
On May 23, 2005, the Board of Directors of the Company resolved to grant certain stock options
under authorizations from our shareholders. Under this arrangement, the Board of Directors of the
Company decided to issue options for 6,000,000 shares to certain senior executives, excluding the
CEO of the Company, with vesting linked to the share price performance and at an exercise price of
2.00. These more stringent vesting conditions for the options for senior executives are generally
as follows: 100% of the options will vest if the share price reaches 4.00 as an average for a
consecutive 90 day period before the end of the first quarter of 2008; 80% of the options will vest
if the share price reaches 3.50 as an average for a consecutive 90 day period before the end of
the first quarter of 2008; 40% of the options will vest if the share price reaches 3.00 as an
average for a consecutive 90 day period before the end of the first quarter of 2008; and none of
the options will vest if the share price does not reach 3.00 as an average for a consecutive 90
day period before the end of the first quarter of 2008. The Board of Directors has resolved that
the Company should issue these stock options and has delegated the implementation of the plan to
the Compensation Committee and the Stock Administration Committee.
F-39
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized not |
|
|
Number of options |
|
|
|
|
|
|
Average Price |
|
|
|
yet granted |
|
|
outstanding |
|
|
Price per share |
|
|
per share |
|
|
Balances, December 31, 2002 |
|
|
69,135,081 |
|
|
|
76,017,819 |
|
|
|
0.83 - 7.96 |
|
|
|
2.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(197,387 |
) |
|
|
0.83 - 1.13 |
|
|
|
0.88 |
|
Options granted |
|
|
(16,140,000 |
) |
|
|
16,140,000 |
|
|
|
0.83 - 1.52 |
|
|
|
1.37 |
|
Options lapsed |
|
|
|
|
|
|
(10,500 |
) |
|
|
0.83 |
|
|
|
|
|
Options forfeited |
|
|
2,243,169 |
|
|
|
(9,675,019 |
) |
|
|
0.83 - 6.00 |
|
|
|
2.52 |
|
Options authorized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2003 |
|
|
55,238,250 |
|
|
|
82,274,913 |
|
|
|
0.83 - 6.00 |
|
|
|
1.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(1,169,457 |
) |
|
|
0.83 - 1.71 |
|
|
|
1.26 |
|
Options granted |
|
|
(3,200,000 |
) |
|
|
3,200,000 |
|
|
|
1.45 - 1.82 |
|
|
|
1.66 |
|
Options lapsed |
|
|
|
|
|
|
(65,000 |
) |
|
|
1.35 |
|
|
|
|
|
Options forfeited |
|
|
2,598,602 |
|
|
|
(10,168,141 |
) |
|
|
0.96 - 6.00 |
|
|
|
2.63 |
|
Options authorized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004 |
|
|
54,636,852 |
|
|
|
74,072,315 |
|
|
|
0.83 - 6.00 |
|
|
|
1.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(2,158,526 |
) |
|
|
0.96 - 1.71 |
|
|
|
1.29 |
|
Options granted |
|
|
(12,363,140 |
) |
|
|
12,363,140 |
|
|
|
1.73 - 2.02 |
|
|
|
1.89 |
|
Options lapsed |
|
|
|
|
|
|
(74,150 |
) |
|
|
1.52 |
|
|
|
|
|
Options forfeited |
|
|
3,546,565 |
|
|
|
(5,676,726 |
) |
|
|
0.96 - 6.00 |
|
|
|
2.13 |
|
Options authorized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 |
|
|
45,820,277 |
|
|
|
78,526,053 |
|
|
|
0.83 - 6.00 |
|
|
|
1.88 |
|
|
F-40
The following table summarizes information with respect to stock options outstanding and
exercisable as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted |
|
|
Number |
|
|
|
Exercise prices |
|
|
of options |
|
|
average remaining |
|
|
of options |
|
|
|
(ineuros) |
|
|
outstanding |
|
|
contractual life (years) |
|
|
exercisable |
|
|
|
|
0.83 |
|
|
|
2,000,000 |
|
|
|
7.6 |
|
|
|
1,000,000 |
|
|
|
0.84 |
|
|
|
8,000,000 |
|
|
|
6.7 |
|
|
|
6,000,000 |
|
|
|
0.96 |
|
|
|
50,000 |
|
|
|
7.3 |
|
|
|
50,000 |
|
|
|
1.13 |
|
|
|
11,144,664 |
|
|
|
6.9 |
|
|
|
6,899,143 |
|
|
|
1.14 |
|
|
|
20,000 |
|
|
|
6.6 |
|
|
|
15,000 |
|
|
|
1.23 |
|
|
|
1,700,000 |
|
|
|
7.6 |
|
|
|
875,000 |
|
|
|
1.24 |
|
|
|
247,875 |
|
|
|
7.6 |
|
|
|
52,923 |
|
|
|
1.25 |
|
|
|
200,000 |
|
|
|
7.5 |
|
|
|
100,000 |
|
|
|
1.28 |
|
|
|
133,250 |
|
|
|
6.7 |
|
|
|
89,350 |
|
|
|
1.42 |
|
|
|
1,000,000 |
|
|
|
6.5 |
|
|
|
750,000 |
|
|
|
1.45 |
|
|
|
400,000 |
|
|
|
8.3 |
|
|
|
100,000 |
|
|
|
1.46 |
|
|
|
4,038,125 |
|
|
|
7.8 |
|
|
|
1,550,625 |
|
|
|
1.49 |
|
|
|
40,000 |
|
|
|
7.8 |
|
|
|
20,000 |
|
|
|
1.52 |
|
|
|
6,366,400 |
|
|
|
7.5 |
|
|
|
3,123,900 |
|
|
|
1.58 |
|
|
|
1,000,000 |
|
|
|
8.4 |
|
|
|
250,000 |
|
|
|
1.66 |
|
|
|
550,000 |
|
|
|
8.8 |
|
|
|
137,500 |
|
|
|
1.71 |
|
|
|
2,851,700 |
|
|
|
2.0 |
|
|
|
2,851,700 |
|
|
|
1.73 |
|
|
|
1,365,000 |
|
|
|
9.4 |
|
|
|
|
|
|
|
1.77 |
|
|
|
3,946,800 |
|
|
|
9.4 |
|
|
|
|
|
|
|
1.79 |
|
|
|
1,000,000 |
|
|
|
8.3 |
|
|
|
250,000 |
|
|
|
1.82 |
|
|
|
650,000 |
|
|
|
8.9 |
|
|
|
62,500 |
|
|
|
1.99 |
|
|
|
39,000 |
|
|
|
9.7 |
|
|
|
|
|
|
|
2.00 |
|
|
|
5,250,000 |
|
|
|
9.4 |
|
|
|
|
|
|
|
2.02 |
|
|
|
400,000 |
|
|
|
9.7 |
|
|
|
|
|
|
|
2.25 |
|
|
|
4,000,000 |
|
|
|
6.7 |
|
|
|
3,000,000 |
|
|
|
2.29 |
|
|
|
12,531,650 |
|
|
|
3.3 1 |
|
|
|
2,531,650 |
|
|
|
2.60 |
|
|
|
74,200 |
|
|
|
6.1 |
|
|
|
55,650 |
|
|
|
2.68 |
|
|
|
235,900 |
|
|
|
6.1 |
|
|
|
176,925 |
|
|
|
2.87 |
|
|
|
15,500 |
|
|
|
5.8 |
|
|
|
15,500 |
|
|
|
2.90 |
|
|
|
376,400 |
|
|
|
5.7 |
|
|
|
376,400 |
|
|
|
3.17 |
|
|
|
35,000 |
|
|
|
5.9 |
|
|
|
35,000 |
|
|
|
3.18 |
|
|
|
50,000 |
|
|
|
5.9 |
|
|
|
50,000 |
|
|
|
3.51 |
|
|
|
6,797,250 |
|
|
|
4.5 |
|
|
|
6,797,250 |
|
|
|
3.79 |
|
|
|
301,213 |
|
|
|
5.5 |
|
|
|
301,213 |
|
|
|
4.14 |
|
|
|
4,650 |
|
|
|
5.5 |
|
|
|
4,650 |
|
|
|
6.00 |
|
|
|
1,711,476 |
|
|
|
4.9 |
|
|
|
1,711,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,526,053 |
|
|
|
6.4 |
|
|
|
49,233,355 |
|
|
Weighted average exercise price (options outstanding): |
|
|
|
|
|
|
1.88 |
|
Weighted average exercise price (options exercisable): |
|
|
|
|
|
|
2.07 |
|
|
On April 17, 2002, the Companys Board of Directors voted to approve a rollover plan whereby
the employees were offered an option to cancel stock options previously granted under plans adopted
in 2000 and received reissued options at a new exercise price. This plan was launched on May 23,
2002 and 17,106,162 stock options with an average exercise price of 4.52 were cancelled on June
5, 2002. 17,034,084 new stock options were granted on December 10, 2002 at an exercise price of 1.13 corresponding to the market price of the Companys shares on the date of the
grant.
As of December 31, 2005, 11,199,539 of the stock options resulting from the rollover were
outstanding.
F-41
Stock options fair value is measured by use of a lattice-based option-pricing model. This model is
derived from the standard binominal model and takes into account the effects of
non-transferability, exercise restriction, as well as behavioral considerations. Inputs of the
model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Gemplus stock |
|
|
Average stock |
|
|
Average risk- |
|
|
|
|
|
|
contractual |
|
|
price on grant |
|
|
option exercise |
|
|
free interest |
|
|
Average |
|
|
|
maturity |
|
|
date |
|
|
price |
|
|
rate |
|
|
volatility |
|
|
Stock options granted in 2002 |
|
10 years |
|
|
1.13 |
|
|
|
1.13 |
|
|
|
3.30 |
% |
|
|
53 |
% |
Stock options granted in 2003 |
|
10 years |
|
|
1.29 |
|
|
|
1.25 |
|
|
|
2.34 |
% |
|
|
43 |
% |
Stock options granted in 2004 |
|
10 years |
|
|
1.79 |
|
|
|
1.66 |
|
|
|
2.64 |
% |
|
|
38 |
% |
Stock options granted in 2005 |
|
10 years |
|
|
1.84 |
|
|
|
1.89 |
|
|
|
2.78 |
% |
|
|
34 |
% |
|
For each grant, the volatility was determined by calculating the one-year historical volatility of
the Companys share price returns, over the last 250 market-days prior grant date.
Forfeiture rates as well as early leavers statistics (i.e. the likelihood an employee with vested
stock options leaves the company prior stock options contractual maturity) have been estimated
based on historical data.
Warrants
The Company has issued certain warrants which have not been exercised and remain outstanding
as of December 31, 2005. These warrants give right to purchase 2,561,973 ordinary shares at a
purchase price of 2.338 per share at any time before December 2007.
25. COMPREHENSIVE INCOME
Comprehensive income is the change in equity attributable to equity holders of the Company
during the year due to transactions and other events, other than dividends paid, treasury stock and
common stock transactions. It includes net income and other comprehensive income for the year.
Other comprehensive income is composed of: (i) the current years currency translation adjustment;
(ii) the current years unrealized gains and losses on available-for-sale securities, net of tax;
and (iii) the changes in fair value of effective hedges, net of tax.
The components of other comprehensive income in the shareholders equity section of the balance
sheets as of December 31, 2005, 2004 and 2003, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Cumulative translation adjustment |
|
|
(3,284 |
) |
|
|
(16,411 |
) |
|
|
(6,460 |
) |
Net unrealized gain (loss) on hedging instruments
qualifying as effective |
|
|
(1,123 |
) |
|
|
28,367 |
|
|
|
11,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
(4,407 |
) |
|
|
11,956 |
|
|
|
4,570 |
|
|
F-42
The components of comprehensive income for the years ended December 31, 2005, 2004 and 2003,
respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income (loss) |
|
|
91,398 |
|
|
|
6,291 |
|
|
|
(158,955 |
) |
|
Change in cumulative translation adjustment |
|
|
13,127 |
|
|
|
(9,951 |
) |
|
|
(8,333 |
) |
Change in fair value of derivatives qualifying
as effective hedging instruments |
|
|
(29,490 |
) |
|
|
17,337 |
|
|
|
4,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative other comprehensive income |
|
|
(16,363 |
) |
|
|
7,386 |
|
|
|
(4,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income (loss) |
|
|
75,035 |
|
|
|
13,677 |
|
|
|
(162,956 |
) |
|
26. NET SALES
Analysis of net sales by category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Sales of goods |
|
|
900,357 |
|
|
|
826,644 |
|
|
|
711,323 |
|
Sales of services |
|
|
36,658 |
|
|
|
35,591 |
|
|
|
34,218 |
|
Other net sales |
|
|
1,860 |
|
|
|
2,799 |
|
|
|
3,662 |
|
|
Total net sales |
|
|
938,875 |
|
|
|
865,034 |
|
|
|
749,203 |
|
|
License fees and royalties are included in other net sales.
27. EXPENSES BY NATURE
Expenses by nature are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Depreciation, amortization and impairment |
|
|
(41,369 |
) |
|
|
(56,691 |
) |
|
|
(95,071 |
) |
External labor costs |
|
|
(19,258 |
) |
|
|
(41,212 |
) |
|
|
(28,254 |
) |
Employee benefit expenses |
|
|
(281,176 |
) |
|
|
(263,005 |
) |
|
|
(276,507 |
) |
Material costs |
|
|
(367,135 |
) |
|
|
(327,080 |
) |
|
|
(285,146 |
) |
Other expenses |
|
|
(163,182 |
) |
|
|
(150,728 |
) |
|
|
(198,011 |
) |
|
Total expenses |
|
|
(872,120 |
) |
|
|
(838,716 |
) |
|
|
(882,989 |
) |
|
Employee benefit expenses by nature are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Wages and salaries |
|
|
(255,987 |
) |
|
|
(246,588 |
) |
|
|
(259,670 |
) |
Pension benefits Defined contribution plans |
|
|
(11,850 |
) |
|
|
(8,922 |
) |
|
|
(9,580 |
) |
Pension benefits Defined benefit plans (see Note 21) |
|
|
(3,230 |
) |
|
|
(2,238 |
) |
|
|
(1,918 |
) |
Share-based compensation expense (1) |
|
|
(4,320 |
) |
|
|
|
|
|
|
|
|
Other expenses |
|
|
(5,789 |
) |
|
|
(5,257 |
) |
|
|
(5,339 |
) |
|
Total employee benefit expenses |
|
|
(281,176 |
) |
|
|
(263,005 |
) |
|
|
(276,507 |
) |
|
|
|
|
(1) |
|
The Company has adopted IFRS 2 Share-based Payments starting January 1, 2005. |
Headcount was 6,347, 5,476, and 5,037 as of December 31, 2005, 2004 and 2003, respectively.
F-43
28. FINANCIAL INCOME AND EXPENSE, NET
Financial income and expense, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2004 |
|
|
2004 |
|
|
2003 |
|
|
Financial income |
|
|
8,821 |
|
|
|
8,245 |
|
|
|
10,484 |
|
Financial expense |
|
|
(1,162 |
) |
|
|
(2,592 |
) |
|
|
(2,280 |
) |
|
Financial income (expense), net |
|
|
7,659 |
|
|
|
5,653 |
|
|
|
(8,204 |
) |
|
Financial income is mainly composed of the return on short-term investments (see Note 6).
Financial expense is mainly composed of finance lease interest (see Note 19).
29. OTHER NON-OPERATING INCOME AND EXPENSE, NET
Other non-operating income and expense, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
Notes |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Change in valuation allowance of available-for-sale financial assets |
|
|
(16 |
) |
|
|
(2,807 |
) |
|
|
(858 |
) |
|
|
(2,487 |
) |
Gain on disposal of available-for-sale financial assets |
|
|
(16 |
) |
|
|
4,782 |
|
|
|
|
|
|
|
|
|
Net foreign exchange gains (losses) |
|
|
(31 |
) |
|
|
(4,276 |
) |
|
|
(5,900 |
) |
|
|
(8,652 |
) |
|
Other non-operating income and expense, net |
|
|
|
|
|
|
(2,301 |
) |
|
|
(6,758 |
) |
|
|
(11,139 |
) |
|
Net foreign exchange gains (losses) is mainly composed of the ineffective portion of
hedging instruments, and of exchange gains and losses on transactions of subsidiaries whose
currency exposure is not managed at the Companys corporate treasury level. Effective portion of
hedging instruments, and exchange gains and losses on hedged commercial transactions, are reported
in Cost of sales (see Note 31).
30. INCOME TAX EXPENSE
The components of income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Current taxes |
|
|
(7,035 |
) |
|
|
(9,292 |
) |
|
|
(3,329 |
) |
Deferred taxes |
|
|
26,851 |
|
|
|
(3,661 |
) |
|
|
(11,344 |
) |
|
Total income tax benefit (expense) |
|
|
19,816 |
|
|
|
(12,953 |
) |
|
|
(14,673 |
) |
|
F-44
A reconciliation between the reported income tax expense and the theoretical amount that
would arise using a standard tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Income (loss) before taxes |
|
|
71,582 |
|
|
|
19,244 |
|
|
|
(144,282 |
) |
|
Income tax calculated at corporate tax rate (1) |
|
|
(21,746 |
) |
|
|
(5,846 |
) |
|
|
43,833 |
|
Effect of tax exemption |
|
|
6,668 |
|
|
|
1,174 |
|
|
|
5,438 |
|
Effect of different tax rates |
|
|
8,853 |
|
|
|
4,679 |
|
|
|
12,053 |
|
Effect of utilization of unrecognized tax assets |
|
|
9,245 |
|
|
|
9,706 |
|
|
|
1,854 |
|
Effect of the reassessment of the recognition of deferred tax assets |
|
|
25,767 |
|
|
|
(2,901 |
) |
|
|
(8,648 |
) |
Effect of unrecognized tax assets |
|
|
(6,474 |
) |
|
|
(12,829 |
) |
|
|
(53,689 |
) |
Provision for tax risks (see Note 20) |
|
|
660 |
|
|
|
(1,559 |
) |
|
|
186 |
|
Discounting of carry back receivable (see Note 20) |
|
|
|
|
|
|
(3,018 |
) |
|
|
|
|
Effect of expenses non deductible and revenues non taxable and others |
|
|
(3,157 |
) |
|
|
(14 |
) |
|
|
(5,659 |
) |
Effect of goodwill amortization resulting from
mergers and acquisitions |
|
|
|
|
|
|
(2,345 |
) |
|
|
(10,041 |
) |
|
Income tax benefit (expense) |
|
|
19,816 |
|
|
|
(12,953 |
) |
|
|
(14,673 |
) |
|
|
|
|
(1) |
|
Luxemburg tax rate of 30.38% in 2005, 2004 and 2003. |
At each balance sheet date, the Company reassesses the recognition of its deferred tax assets.
The Company recognizes deferred tax assets when it determines that it is more likely than not that the asset will be recovered
from future taxable income. In certain jurisdictions, this time frame has been limited to two years to reflect the cyclical nature
of the industry, rapid technological changes and shifts in customer demand. In these jurisdictions, the Company does not believe that it is more likely than
not that it will have sufficient taxable income in the future to realize the unrecognized deferred tax asset.
The Company returned to profitability in 2004, a trend
which has been confirmed in 2005. This led the Company to recognize in 2005 deferred tax assets in
certain tax jurisdictions.
In 2005, previously unrecognized deferred tax assets were recognized for an amount of 25,767
thousand, in France, Germany, Mexico and Italy. In 2004 and 2003, the Company reduced the amount of
deferred tax assets recognized in previous years by 2,901 thousand and 8,648 thousand,
respectively, primarily reflecting the impact of business changes in certain tax jurisdictions.
The components of the net deferred tax assets recorded at December 31, 2005, 2004 and 2003 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Loss carryforwards |
|
|
24,104 |
|
|
|
3,098 |
|
|
|
29,223 |
|
Excess book over tax depreciation and amortization |
|
|
1,844 |
|
|
|
1,091 |
|
|
|
1,585 |
|
Other temporary differences |
|
|
10,021 |
|
|
|
2,253 |
|
|
|
1,635 |
|
|
Total (1) |
|
|
35,969 |
|
|
|
6,442 |
|
|
|
32,443 |
|
|
To be recovered after more than 12 months |
|
|
26,922 |
|
|
|
3,621 |
|
|
|
29,163 |
|
To be recovered within 12 months |
|
|
9,047 |
|
|
|
2,821 |
|
|
|
3,280 |
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax over book depreciation and amortization |
|
|
(7,121 |
) |
|
|
(178 |
) |
|
|
(294 |
) |
Other temporary differences |
|
|
(414 |
) |
|
|
|
|
|
|
(289 |
) |
|
Total |
|
|
(7,535 |
) |
|
|
(178 |
) |
|
|
(583 |
) |
|
Payable after more than 12 months |
|
|
(7,121 |
) |
|
|
(178 |
) |
|
|
(294 |
) |
Payable within 12 months |
|
|
(414 |
) |
|
|
|
|
|
|
(289 |
) |
|
Deferred tax assets, net |
|
|
28,434 |
|
|
|
6,264 |
|
|
|
31,860 |
|
|
Deferred tax assets |
|
|
32,788 |
|
|
|
6,264 |
|
|
|
31,860 |
|
Deferred tax liabilities |
|
|
4,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrecognized deferred tax assets amounted to 307,905 thousand at December
31, 2005 ( 328,339 thousand and 212,368 thousand at December 31, 2004 and 2003,
respectively). |
F-45
The Company had no net deferred tax liability at December 31, 2004 and 2003. As of December
31, 2005, the Company had net deferred tax liabilities for an amount of 4,354 thousand, mostly
due to the fact that the assets acquired as part of the Setec business combination (see Note 5)
have been recognized at their fair value whereas, for tax purposes, the assets retain their basis
in hands of the seller.
In 2003, 2004 and 2005, the Company did not recognize potential deferred tax assets in amounts of
212,368 thousand, 328,339 thousand and 307,905 thousand, respectively, excluding
amounts subject to change of ownership limitations ( 7,412 thousand , 6,796 thousand and
7,775 thousand, respectively, as of December 31, 2003, 2004 and 2005).
The Company offsets deferred tax assets and liabilities when it has a legally enforceable right to
set off current tax assets against current tax liabilities, both of which relate to income taxes
levied by the same taxation authority.
The gross variation in deferred income tax assets is as follows:
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
2005 |
|
|
2004 |
|
|
As of January 1 |
|
|
6,264 |
|
|
|
31,860 |
|
|
Income statement benefit (charge) |
|
|
26,851 |
|
|
|
(3,661 |
) |
Acquisition of subsidiaries |
|
|
(5,550 |
) |
|
|
|
|
Impact of tax loss carryback election (see Note 20) |
|
|
|
|
|
|
(24,040 |
) |
Other balance sheet reclassifications |
|
|
511 |
|
|
|
2,178 |
|
Exchange differences |
|
|
358 |
|
|
|
(73 |
) |
|
As of December 31 |
|
|
28,434 |
|
|
|
6,264 |
|
|
Loss carryforwards
As of December 31, 2005, the Company had total deferred tax assets available related to net
operating loss carryforwards in the amount of 331,254 thousand. The carryforward of
20,272 thousand is limited to 20 years from the year the losses arose and substantially all of the
remainder may be used indefinitely.
Taxes on undistributed earnings
Deferred taxes on the undistributed earnings of the Companys foreign subsidiaries are
provided for unless the Company intends to indefinitely reinvest the earnings in the subsidiaries.
The Company intends to indefinitely reinvest undistributed earnings of its foreign subsidiaries in
most countries. For subsidiaries where the Company does not have this intention, a distribution of
the related earnings would not trigger taxes. Thus, the Company did not provide for deferred taxes
on the earnings of those subsidiaries.
F-46
31. NET FOREIGN EXCHANGE GAINS (LOSSES)
The foreign exchange gains and losses (charged) credited to the Consolidated Statement of
Income are included as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net sales |
|
|
8,580 |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
15,204 |
|
|
|
12,494 |
|
|
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administration expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income (expense), net (see Note 29) |
|
|
(4,276 |
) |
|
|
(5,900 |
) |
|
|
(8,652 |
) |
|
Total net foreign exchange gains (losses) |
|
|
4,304 |
|
|
|
9,304 |
|
|
|
3,842 |
|
|
Effective portion of qualified hedging instruments is recorded within operating income.
Ineffective portion of qualified hedging instruments and exchange gains and losses on transactions
not hedged are recorded within non-operating income (expense).
Since January 1, 2005, foreign exchange gains or losses arising from the Companys business
activities and qualified hedges under IAS 39 are no longer exclusively recorded in cost of sales.
Instead, the gains or losses are allocated to the portion of the income statement relating to the
underlying currency exposure.
32. NET INCOME (LOSS) PER SHARE CALCULATION
A reconciliation of the numerator and denominator of basic and diluted net income per share
is provided as follows:
As net loss was reported in 2003, the dilutive effects of stock options, warrants and shares to be
issued were excluded from the net loss per share calculation in this period, as the effect would be
anti-dilutive.
Gemplus SA shares to be contributed are included in the weighted average number of common shares
outstanding (see Note 23).
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros, except shares and per share data) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income (loss) attributable to equity holders
of the Company (numerator) |
|
|
89,890 |
|
|
|
4,674 |
|
|
|
(161,107 |
) |
|
Shares used in basic net income (loss) per share
calculation (denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding |
|
|
618,337,539 |
|
|
|
606,672,060 |
|
|
|
605,658,965 |
|
|
Dilutive effect of stock options |
|
|
16,457,030 |
|
|
|
12,350,412 |
|
|
|
5,625,142 |
|
|
Weighted average diluted number of shares
outstanding |
|
|
634,794,569 |
|
|
|
619,022,472 |
|
|
|
611,284,107 |
|
Shares used in diluted net income (loss) per share
(denominator) |
|
|
634,794,569 |
|
|
|
619,022,472 |
|
|
|
605,658,965 |
|
|
Net income (loss) per share attributable to
equity holders of the Company (in euros) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.15 |
|
|
|
0.01 |
|
|
|
(0.27 |
) |
Diluted |
|
|
0.14 |
|
|
|
0.01 |
|
|
|
(0.27 |
) |
|
F-47
33. SEGMENT INFORMATION
33.1 Primary reporting format operating segments
In 2005, the Company continued to report in three operating segments: (i) Telecommunications
segment, (ii) Financial Services segment, and (iii) Identity and Security segment, according to the
operating structure set up in 2004.
There are no changes with respect to the Telecommunications segment, which includes our wireless
solutions, as well as prepaid telephone cards and other products.
The Financial Services segment remains unchanged and includes systems and services based on chip
card technology in areas such as financial services, loyalty programs, transportation access and
pay-television, as well as magnetic strip plastic cards for banking applications.
The Identity and Security segment is unchanged and includes systems and services based on chip card
technology in areas such as national ID, healthcare, drivers license, car registration, passport
and visa, e-government secured services, physical and logical access control as well as smart card
readers and interfacing technologies.
Our activities in Financial Services and Identity and Security segments include the sales of chip
card readers to our customers and chip card interfacing technologies to device manufactures.
These three segments have different customer bases, and each of them has separate financial
information available. Management evaluates these segments regularly, decides how to allocate
resources and assesses their performance. The Companys management makes decisions about resources
to be allocated to the segments and assesses their performance using net sales, gross profit and
operating income (loss). The Company does not identify or allocate assets to the operating or
geographic segments nor does management evaluate the segments on this criterion on a regular basis.
The accounting policies of the segments are substantially the same as those described in the
summary of significant accounting policies as discussed in Note 2.
The following tables present selected segment data for the years ended December 31, 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications |
|
|
654,516 |
|
|
|
641,775 |
|
|
|
542,534 |
|
Financial Services |
|
|
202,870 |
|
|
|
182,237 |
|
|
|
168,167 |
|
Identity and Security |
|
|
81,489 |
|
|
|
41,022 |
|
|
|
38,502 |
|
|
Net sales |
|
|
938,875 |
|
|
|
865,034 |
|
|
|
749,203 |
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications |
|
|
241,517 |
|
|
|
220,781 |
|
|
|
166,776 |
|
Financial Services |
|
|
41,873 |
|
|
|
37,672 |
|
|
|
31,951 |
|
Identity and Security |
|
|
26,518 |
|
|
|
12,048 |
|
|
|
8,529 |
|
|
Gross profit |
|
|
309,908 |
|
|
|
270,501 |
|
|
|
207,256 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications |
|
|
(158,657 |
) |
|
|
(148,982 |
) |
|
|
(196,123 |
) |
Financial Services |
|
|
(43,198 |
) |
|
|
(63,948 |
) |
|
|
(88,527 |
) |
Identity and Security |
|
|
(41,298 |
) |
|
|
(31,253 |
) |
|
|
(56,392 |
) |
|
Operating expenses |
|
|
(243,153 |
) |
|
|
(244,183 |
) |
|
|
(341,042 |
) |
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications |
|
|
82,859 |
|
|
|
71,799 |
|
|
|
(29,347 |
) |
Financial Services |
|
|
(1,325 |
) |
|
|
(26,276 |
) |
|
|
(56,576 |
) |
Identity and Security |
|
|
(14,779 |
) |
|
|
(19,205 |
) |
|
|
(47,863 |
) |
|
Operating income (loss) |
|
|
66,755 |
|
|
|
26,318 |
|
|
|
(133,786 |
) |
|
F-48
33.2 Secondary reporting format geographical segments
The Companys three business segments operate in three main geographical areas, even though
they are managed on a worldwide basis.
The following is a summary of sales to external customers by geographic area for the years ended
2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Europe, Middle East and Africa |
|
|
491,050 |
|
|
|
443,141 |
|
|
|
407,718 |
|
Asia |
|
|
172,649 |
|
|
|
194,292 |
|
|
|
171,860 |
|
Americas |
|
|
275,176 |
|
|
|
227,601 |
|
|
|
169,625 |
|
|
Net sales |
|
|
938,875 |
|
|
|
865,034 |
|
|
|
749,203 |
|
|
Revenues from external customers are based on the customers billing location. Accordingly,
there are no sales transactions between operating segments. The Company does not allocate
long-lived assets by location for each geographic area. The Companys country of domicile is
Luxemburg in which sales to customers are insignificant.
34. DIVIDENDS PER SHARE
The Company did not pay any dividend during 2005, 2004 and 2003.
35. FINANCIAL ASSETS AND LIABILITIES AT FAIR MARKET VALUE
Derivative financial instruments (forward exchange contracts; currency options contracts) are
accounted for at fair value. Non marketable investments for which fair value cannot be measured
reliably are carried at cost, net of any accumulated impairment. The carrying amount of financial
assets and liabilities which can be measured reliably is a reasonable approximation of their fair
value.
36. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
1,666 |
|
|
|
1,987 |
|
|
|
3,069 |
|
Income taxes |
|
|
9,591 |
|
|
|
36,206 |
|
|
|
3,651 |
|
|
Changes in trade accounts receivable and related current liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of |
|
|
|
|
|
|
|
|
|
|
As of January 1, |
|
|
Change in |
|
|
Currency |
|
|
subsidiary |
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
working capital |
|
|
adjustments |
|
|
(see Note 5) |
|
|
Transfers |
|
|
2005 |
|
|
Trade accounts receivable, net |
|
|
(148,512 |
) |
|
|
(15,590 |
) |
|
|
(9,010 |
) |
|
|
(9,910 |
) |
|
|
|
|
|
|
(183,022 |
) |
Related current liabilities |
|
|
22,545 |
|
|
|
3,457 |
|
|
|
893 |
|
|
|
4,679 |
|
|
|
|
|
|
|
31,574 |
|
|
Trade accounts receivable and
related current liabilities |
|
|
(125,967 |
) |
|
|
(12,133 |
) |
|
|
(8,117 |
) |
|
|
(5,231 |
) |
|
|
|
|
|
|
(151,448 |
) |
|
F-49
Changes in trade accounts payable and related current assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
Acquisition |
|
|
|
|
|
|
|
|
|
|
As of January 1, |
|
|
Change in |
|
|
non-trade |
|
|
Currency |
|
|
of subsidiary |
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
working capital |
|
|
accounts payable |
|
|
adjustments |
|
|
(see Note 5) |
|
|
Transfers |
|
|
2005 |
|
|
Trade accounts payable net |
|
|
94,025 |
|
|
|
3,589 |
|
|
|
155 |
|
|
|
2,146 |
|
|
|
5,303 |
|
|
|
867 |
|
|
|
106,085 |
|
Related current assets |
|
|
(12,548 |
) |
|
|
(2,767 |
) |
|
|
(674 |
) |
|
|
(402 |
) |
|
|
(1,294 |
) |
|
|
398 |
|
|
|
(17,287 |
) |
|
Trade accounts payable and
related current assets |
|
|
81,477 |
|
|
|
822 |
|
|
|
(519 |
) |
|
|
1,744 |
|
|
|
4,009 |
|
|
|
1,265 |
|
|
|
88,798 |
|
|
Changes in inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
Acquisition |
|
|
|
|
|
|
|
|
|
|
As of January 1, |
|
|
working |
|
|
Currency |
|
|
of subsidiary |
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
capital |
|
|
adjustments |
|
|
(see Note 5) |
|
|
Transfers |
|
|
2005 |
|
|
Inventories |
|
|
(115,610 |
) |
|
|
22,661 |
|
|
|
(4,394 |
) |
|
|
(10,330 |
) |
|
|
|
|
|
|
(107,673 |
) |
|
Changes in salaries, wages and other include mainly the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, |
|
|
working |
|
|
Currency |
|
|
Acquisition |
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
capital |
|
|
adjustments |
|
|
of subsidiary |
|
|
Transfers |
|
|
2005 |
|
|
Salaries, wages |
|
|
55,198 |
|
|
|
2,437 |
|
|
|
1,335 |
|
|
|
3,844 |
|
|
|
(76 |
) |
|
|
62,738 |
|
Other operating (assets) and liabilities |
|
|
(4,191 |
) |
|
|
1,992 |
|
|
|
(554 |
) |
|
|
291 |
|
|
|
(1,556 |
) |
|
|
(4,018 |
) |
|
Salaries, wages and other |
|
|
51,007 |
|
|
|
4,429 |
|
|
|
781 |
|
|
|
4,135 |
|
|
|
(1,632 |
) |
|
|
58,720 |
|
|
Depreciation, amortization and impairment include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
Notes |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Property, plant and equipment, depreciation |
|
|
(11 |
) |
|
|
33,136 |
|
|
|
42,243 |
|
|
|
51,064 |
|
Goodwill amortization and impairment |
|
|
(12 |
) |
|
|
|
|
|
|
7,718 |
|
|
|
33,051 |
|
Other intangible assets depreciation |
|
|
(14 |
) |
|
|
8,233 |
|
|
|
6,730 |
|
|
|
10,956 |
|
|
Depreciation, amortization and impairment |
|
|
|
|
|
|
41,369 |
|
|
|
56,691 |
|
|
|
95,071 |
|
|
Changes in value-added and income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, |
|
|
working |
|
|
Currency |
|
|
Acquisition |
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
capital |
|
|
adjustments |
|
|
of subsidiary |
|
|
Transfers |
|
|
2005 |
|
|
Value-added and income taxes |
|
|
4,175 |
|
|
|
(1,021 |
) |
|
|
95 |
|
|
|
2,800 |
|
|
|
(699 |
) |
|
|
5,350 |
|
|
F-50
37. COMMITMENTS AND CONTINGENCIES
Legal proceedings
On May 26, 2005, the Aix-en-Provence Court of Appeal rendered a decision in favor of Gemplus
SA in a proceeding originally brought by Mr. Alain Nicolaï. That decision reversed a judgment of
the Marseille Commercial Court against Gemplus SA in the amount of 21,952 thousand, and
ordered the reimbursement of an escrow in such amount that Gemplus SA had established in 2004. In
2005, the Company recorded the reimbursement of the escrow, and reversed a provision for this
matter that it had recorded on December 31, 2004, in the amount of 5,200 thousand. The
claimants in this action have filed requests for further review by the French Supreme Court and the
Aix-en-Provence Court of Appeal, which are currently pending, and which the Company believes are
without merit.
In 2000, Marc Lassus, a former chairman of the Companys Board, was granted a loan of 71,900
thousand to finance the exercise of stock options. In December 2001, Mr. Lassus ceased his
positions with the Company. In the second quarter of 2002, the Company learned that Mr. Lassus had
financial difficulties that would affect his ability to repay the loan. Accordingly, the Company
recorded a provision amounting to 67,582 thousand, taking into account an outstanding
liability of USD 10,000 thousand (corresponding to 8,392 thousand, 7,335 thousand and
8,001 thousand as of December 31, 2005, 2004 and 2003, respectively) relating to a severance
payment and an amount of 1,545 relating to employment payments, which are conditioned on
reimbursement of the loan. In proceedings brought by the Company, in April 2004, an arbitral
tribunal issued a final award in favor of the Company and its indirect subsidiary against Mr.
Lassus in the amount of 71,900 thousand, plus accrued interest and attorneys fees and costs.
The Company has not forgiven the loan or released the arbitration award.
Prior to 2005, the Company recorded a provision of 9,000 thousand for the risks related to a
patent legal action under the caption Non-current portion of provisions (see Note 20.1). Because
some risks remain in certain areas, the Company has decided to maintain this provision. The Company
estimates that the ultimate resolution of the matter could result in a loss of up to 6,000
thousand in excess of the amount accrued.
In the first quarter of 2006, the Sanctions Commission of the Autorité des Marchés Financiers
(AMF) imposed upon the Company a fine of 600 thousand. This sanction was in respect of the
documents de référence filed by the Company in respect of the years 2000 and 2001. The Commission
ruled that the Company had not communicated any misleading information with respect to its
accounting results. The Company has decided to appeal this decision before the Paris Court of
Appeal. The Company recorded a provision in the amount of 600 thousand in respect of this
matter in the fourth quarter of 2005.
As of December 31, 2005, 2004 and 2003, there is no situation where no accrual is made for a loss
contingency because the amount of loss cannot be reasonably estimated, or because the probability
that the loss may have been incurred is less than probable and more than possible.
In addition to the legal action and claims mentioned above, the Company is subject to legal
proceedings, claims and legal actions arising in the ordinary course of business. The Companys
management does not expect that the ultimate costs to resolve these other matters will have a
material adverse effect on the Companys consolidated financial position, results of operations or
cash flows.
F-51
Contractual obligations
The Company leases some of its manufacturing and office space under non-cancelable operating
leases. These leases contain various expiration dates and renewal options. Future minimum lease
payments under all non-cancelable operating leases as of December 31, 2005, 2004 and 2003 are
described in the table below.
As of December 31, 2005, 2004 and 2003, the Companys contractual obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of payments |
(in thousands of euros) |
|
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31, 2005 |
|
Total |
|
|
Less than 1 year |
|
|
1 to 5 years |
|
|
More than 5 years |
|
|
Borrowings |
|
|
725 |
|
|
|
131 |
|
|
|
512 |
|
|
|
82 |
|
Finance lease obligations |
|
|
35,811 |
|
|
|
6,595 |
|
|
|
20,903 |
|
|
|
8,313 |
|
Operating lease obligations |
|
|
35,778 |
|
|
|
10,123 |
|
|
|
16,004 |
|
|
|
9,651 |
|
Purchase obligations (1) |
|
|
114,506 |
|
|
|
110,612 |
|
|
|
3,894 |
|
|
|
|
|
Other long-term obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
186,820 |
|
|
|
127,461 |
|
|
|
41,313 |
|
|
|
18,046 |
|
|
|
|
|
(1) |
|
Including 69,400 thousand related to microprocessor chips purchase commitments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of payments |
(in thousands of euros) |
|
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31, 2004 |
|
Total |
|
|
Less than 1 year |
|
|
1 to 5 years |
|
|
More than 5 years |
|
|
Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease obligations |
|
|
44,549 |
|
|
|
7,235 |
|
|
|
25,392 |
|
|
|
11,922 |
|
Operating lease obligations |
|
|
18,412 |
|
|
|
3,894 |
|
|
|
6,119 |
|
|
|
8,399 |
|
Purchase obligations (2) |
|
|
60,934 |
|
|
|
60,934 |
|
|
|
|
|
|
|
|
|
Other long-term obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
123,895 |
|
|
|
72,063 |
|
|
|
31,511 |
|
|
|
20,321 |
|
|
|
|
|
(2) |
|
Including 46,800 thousand related to microprocessor chips purchase commitments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of payments |
(in thousands of euros) |
|
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31, 2003 |
|
Total |
|
|
Less than 1 year |
|
|
1 to 5 years |
|
|
More than 5 years |
|
|
Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease obligations |
|
|
51,151 |
|
|
|
7,377 |
|
|
|
25,961 |
|
|
|
17,813 |
|
Operating lease obligations |
|
|
16,098 |
|
|
|
5,187 |
|
|
|
7,446 |
|
|
|
3,465 |
|
Purchase obligations (3) |
|
|
79,202 |
|
|
|
78,106 |
|
|
|
1,096 |
|
|
|
|
|
Other long-term obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
146,451 |
|
|
|
90,670 |
|
|
|
34,503 |
|
|
|
21,278 |
|
|
|
|
|
(3) |
|
Including 54,500 thousand related to microprocessor chips purchase commitments. |
As of December 31, 2005, 2004 and 2003, no obligations or commitments other than those
disclosed in the note above would have a significant impact on the Companys Consolidated Financial
Statements.
F-52
Off-balance sheet arrangements
The Company enters into off-balance sheet arrangements in the ordinary course of its
business. These arrangements include purchase and lease obligations, operating leases (both
presented in the tabular disclosure of contractual obligations above) and bank guarantees issued to
third parties.
Bank guarantees issued to third parties can be presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
As of December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Performance, down payment and bid bonds |
|
|
11,670 |
|
|
|
10,340 |
|
|
|
10,817 |
Other bank guarantees related to operations |
|
|
2,514 |
|
|
|
3,811 |
|
|
|
6,518 |
|
Total bank guarantees issued to third party |
|
|
14,184 |
|
|
|
14,151 |
|
|
|
17,335 |
|
As of December 31, 2005, bank guarantees, mainly performance bonds and bid bonds, amounted to
14,184 thousand. These guarantees are issued as part of the Companys normal operations in
order to secure the Companys performance under contracts or tenders for business. These guarantees
become payable based upon non-performance of the Company.
As of December 31, 2005, guarantees related to operations included an amount of 2,079 thousand
(2004: 2,658 thousand) relating to a potential liability in respect of the restricted cash in
China (see Notes 10 and 38). In 2005, the Company recorded a provision in an amount of 603
thousand with respect to this guarantee.
38. RELATED PARTY TRANSACTIONS
The following transactions were carried out with related parties:
a) Key management
Compensation of key management personnel
The compensation of key management personnel (persons having the authority and responsibility for
planning, directing and controlling the activities of the Company, directly or indirectly,
including any director whether executive or otherwise of the Company) paid in 2005, 2004 and
2003 by the Company is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Salaries and other short-term employee benefits |
|
|
8,834 |
|
|
|
8,052 |
|
|
|
6,191 |
Termination benefits |
|
|
1,393 |
|
|
|
261 |
|
|
|
1,219 |
Post-employment benefits |
|
|
33 |
|
|
|
19 |
|
|
|
|
Other long-term benefits |
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense (1) |
|
|
1,694 |
|
|
|
|
|
|
|
|
|
Total compensation of key management personnel |
|
|
11,954 |
|
|
|
8,332 |
|
|
|
7,410 |
|
|
|
|
(1) |
|
The Company has adopted IFRS 2 Share-based Payments starting January 1,
2005. Accounting for Share-based compensation under IFRS 2 would have resulted in a
compensation expense amounting to 1,416 thousand and 371 thousand for the year ended
December 31, 2004, and 2003 respectively. |
During 2005, 2004 and 2003, the Company has issued, respectively 7,870,000, 2,400,000 and
3,650,000 stock options to the members of its key management personnel. During 2005, the Company
also granted 500,000 restricted shares to a member of its key management personnel.
F-53
Loans to key management personnel
In 2002 and 2003, loans totaling an amount of 317 thousand were granted to three members of
the key management personnel. As of December 31, 2003, these loans were fully reimbursed. In 2000,
a loan was granted to Mr. Lassus and has not been reimbursed as of December 31, 2005 (see Note 37).
During 2005, 2004 and 2003, no loans were granted to key management personnel.
b) Purchases of goods and services
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Associates |
|
|
4,277 |
|
|
|
3,192 |
|
|
|
940 |
Related parties |
|
|
10,844 |
|
|
|
6,146 |
|
|
|
6,679 |
|
Total purchases of goods and services |
|
|
15,121 |
|
|
|
9,338 |
|
|
|
7,619 |
|
In 2005, an affiliate of the Company entered into an agreement with Dell Products to purchase
computer equipment for the Company and its affiliates. The Company estimates that it will purchase
up to 4,000 thousand of equipment under this agreement in the period commencing in 2005
through December 31, 2006. Mr. Alex Mandl, the Companys CEO and one of its directors, is also a
director of Dell Computer Corporation. Mr. Mandl had no involvement in this transaction.
In 2005, a subsidiary of the Company entered into an agreement for the provision of human resources
management services with SuccessFactors, Inc., a California company, in which TPG Ventures, LP
holds a 20% equity interest and has board representation. The contract is valued at approximately
300 to 400 thousand. TPG Ventures, LP is under common control with TPG Partners III, LP, which
holds an equity interest in the Company. Messrs. David Bonderman and William S. Price III, who are
directors of the Company, are also officers, directors and equity owners of the entities that
manage and control TPG Partners III, LP and TPG Ventures, LP. Mr. Geoffrey Fink, who is also a
director of the Company, is a principal of the manager of TPG Partners III, LP. Messrs. Bonderman,
Price and Fink had no involvement in the approval of this transaction.
In 2005, an affiliate of the Company entered into an agreement with DataCard Corporation, a US
company, to purchase equipment and related services (software, maintenance and training), spare
parts and consumables until the end of 2007 for the Company and its affiliates. In 2005, the
Company purchased 8,115 thousand of equipment and services under this agreement. DataCard
Corporation is a related party to certain individual members of the Quandt family who themselves
control entities which are shareholders of the Company. The individual members of the Quandt family
had no involvement in this transaction.
c) Sales of goods and services
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Associates |
|
|
555 |
|
|
|
|
|
|
|
|
Related parties |
|
|
85 |
|
|
|
|
|
|
|
|
|
Total sales of goods and services |
|
|
640 |
|
|
|
|
|
|
|
|
|
In 2005, an affiliate of the Company entered into an agreement with Clear2Pay Services NV, a
Belgian company, to supply certain volumes of chip cards for up to 210 thousand. Mr. Michel
Akkermans, one of the Companys directors, is also the chairman and CEO of Clear2Pay. Mr. Akkerman
had no involvement in this transaction.
In 2005, an affiliate of the Company entered into an agreement with Sim2Travel Inc., a Taiwanese
company, to supply certain volumes of chip cards for approximately 240 thousand. Mr. Kurt
Hellström, one of the Companys directors, is also a director and minority investor of Sim2Travel
Inc. Mr. Hellström had no involvement in this transaction.
F-54
d) Year-end balances arising from sales/purchases of goods and services
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Receivables from: |
|
|
|
|
|
|
|
|
|
|
|
Associates |
|
|
295 |
|
|
|
|
|
|
|
|
Related parties |
|
|
|
|
|
|
|
|
|
|
|
|
Total receivables |
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Payables to: |
|
|
|
|
|
|
|
|
|
|
|
Associates |
|
|
279 |
|
|
|
405 |
|
|
|
173 |
Related parties |
|
|
2,140 |
|
|
|
1,379 |
|
|
|
1,385 |
|
Total payables |
|
|
2,419 |
|
|
|
1,784 |
|
|
|
1,558 |
|
e) Loans receivable from/payable to Associates
As of December 31, 2005, the Company had loans receivable from Associates for an amount of 495
thousand. As of December 31, 2005, the Company had no loans payable to Associates.
f) Related Party Transactions
GemVentures 1 NV, a wholly owned subsidiary of the Company and Dassault Multimedia SAS are minority
shareholders of Welcome Real Time SA. Mr. Thierry Dassault, who was one of the Companys directors
until April 2004, is also the Chairman of Dassault Multimedia, which is part of Groupe Industriel
Marcel Dassault, which is a shareholder of the Company. On October 9, 2003, GemVentures and
Dassault Multimedia entered into an agreement providing for a loan by GemVentures to Dassault
Multimedia of Welcome Real Time shares constituting 1.5% of Welcome Real Times capital. The loan
grants Dassault Multimedia the dividend and voting rights associated with the shares in exchange
for the right to receive a certain percentage of any dividends that Dassault Multimedia might
receive in respect of the loaned shares. Upon expiration of the agreement on September 30, 2009,
Dassault Multimedia is obligated to return the shares to GemVentures. Upon the occurrence of
certain events set forth in the agreement, GemVentures may request that the shares will be returned
within two months from the date of the event. On the same date, GemVentures also entered into
another agreement with an unrelated party for the loan of the same number of Welcome Real Time
shares on identical arms-length terms.
On March 9, 2004, Apeera Inc. entered into a share and asset purchase agreement with Intuwave Ltd
by which the shares of Apeera France SAS, a wholly owned subsidiary of Apeera Inc., and certain
assets were sold to Intuwave for a consideration payable in shares with a value of 3,000
thousand, plus an additional 1,000 thousand upon fulfillment of certain technological and
commercial conditions. GemVentures (a wholly owned subsidiary of the Company) and TPG Ventures,
L.P., both shareholders of Apeera Inc., were parties to such agreement for the purposes of
guaranteeing the obligations of Apeera Inc., in respect of the warranties and indemnities given by
Apeera Inc. TPG Ventures, L.P. is managed by Texas Pacific Group, which is a shareholder of our
Company. Three of our Directors are respectively managing partners and a principal of Texas Pacific
Group.
On July 30, 2004, Certplus SA, a French company in which Gemplus Trading SA, indirectly a wholly
owned subsidiary of the Company, holds 99.9% of the shares, and Infrasec, a French company, entered
into a contribution agreement. As a result of this agreement, Certplus contributed to Infrasec its
certification services operator business division. In return, Certplus received 19.1% of the shares
of Infrasec. Dassault Multimedia, which is part of Groupe Industriel Marcel Dassault, which is a
shareholder of the Company, became shareholder of Infrasec with 1.2% of the share capital of
Infrasec, and Mr. Thierry
F-55
Dassault, who was one of the Companys directors until April 2004, has become Chairman of the Board
of Directors of Infrasec. Thereafter Infrasec was renamed as Keynectis and Certplus was renamed as
Gemplus Participations.
Tianjin Gemplus Smart Card Co. Ltd (TGSC) is a joint venture established initially between a
French subsidiary of the Company, Gemplus SA, owning 51% of the total equity interest in TGSC, and
Tianjin Telephone Equipments Factory (TTEF) owning the remaining 49% of the total equity interest
in TGSC. Gemplus (Tianjin) New Technologies Co. Ltd (GTNT), an indirectly wholly-owned subsidiary
of the Company, has agreed to make a time deposit with China Everbright Bank (the Bank) following
a pledge, in favor of the Bank, by TTEF of 30% of the total equity interest to secure a loan of CNY
90,000 thousand made by the Bank to TTEF. Afterwards, TTEF transferred its whole equity interest
held in TGSC to a parent company named Tianjin Zhong Tian Telecommunications Co. Ltd (ZT) with
Gemplus SA consent subject to an increase of the pledge from 30% to 45.8% of the total equity
interest in TGSC. In the event of (i) a failure to comply with conditions and warranties agreed by
TTEF and/or Shanghai Post Telecommunications Equipment (SPTE) which are the co-shareholders of
ZT, and (ii) the subsequent activation of the pledge, GTNT or the Company would have to purchase
back the whole equity interest held by ZT in TGSC, using the amount of the time-deposit. As of
December 31, 2005, CNY 20,000 thousand ( 2,079 thousand as of December 31, 2005) remains to be
reimbursed by TTEF under the loan agreement, secured by a corresponding time deposit amount made by
GTNT (see Note 10).
In 2005, TGSC (the joint venture between a French subsidiary of the Company, Gemplus SA, owning 51%
of the total equity interest in TGSC, and Tianjin Zhong Tian Telecommunications Co. Ltd (ZT)
owning the remaining 49% of the total equity interest in TGSC) entered into a tripartite loan
agreement with ZT and China Construction Bank, pursuant to which TGSC agreed to make available to
the Bank a loan of CNY 5,000 thousand, for a loan to be granted by the Bank to ZT. ZT is
responsible for the repayment of the loan and its repayment is secured out of the 2005 dividends of
TGSC to be declared. As of December 31, 2005, the entire amount of the loan ( 520 thousand)
remained to be reimbursed.
In 2005, an executive vice president of the Company, exercised warrants granted to him in 2001 for
the purchase of 3,934 shares in Gemventures 1 NV, a wholly-owned subsidiary of the Company.
Pursuant to a put option agreement between the Company and this executive entered into in 2001, the
Company acquired in 2005 the 3,934 shares in Gemventures 1 NV purchased by this executive for
393 thousand, with additional payments to be made to this executive if Gemventures NV 1 realizes
certain financial gains. Such an additional consideration has been accrued for this executive in an
amount of 170 thousand in 2005.
39. EVENTS AFTER THE BALANCE SHEET DATE
On February 28, 2006, the Companys shareholders approved a distribution of reserves (share
premium) of an amount of 0.26 per share, subject to the satisfaction of a condition precedent
relating to the completion of the proposed combination with Axalto N.V. The total amount of the
distribution would be approximately 164,000 thousand, based on the number of shares currently
outstanding, and would equal approximately 185,000 thousand on a fully diluted basis.
F-56
40. DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EU AND
AS ADOPTED BY THE IASB AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Companys Consolidated Financial Statements are prepared in accordance with IFRS as
adopted by the EU, which differ in certain respects from generally accepted accounting principles
in the United States (US GAAP). There are no differences between IFRS as adopted by the EU and IFRS
as adopted by the IASB, as applied to the Company.
The principal differences between IFRS as adopted by the EU and US GAAP are presented below with
explanations of certain adjustments that affect consolidated net income and total shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros, except shares and per share amounts) |
|
Years ended December 31 |
|
2005 |
|
|
2004 (restated) |
|
|
2003 |
|
|
Net income (loss) in accordance with IFRS |
|
|
91,938 |
|
|
|
6,291 |
|
|
|
(158,955 |
) |
Minority interest |
|
|
(1,508 |
) |
|
|
(1,617 |
) |
|
|
(2,152 |
) |
Capitalized development costs |
|
|
|
|
|
|
|
|
|
|
7,321 |
|
Goodwill amortization on consolidated subsidiaries |
|
|
|
|
|
|
7,718 |
|
|
|
13,172 |
|
Goodwill impairment on consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
(34,893 |
) |
Goodwill amortization and impairment on investments in associates |
|
|
|
|
|
|
2,810 |
|
|
|
3,199 |
|
Reversal of restoration of impairment losses on long-lived assets |
|
|
117 |
|
|
|
19 |
|
|
|
(2,555 |
) |
Stock options accounting |
|
|
2,689 |
|
|
|
(6,950 |
) |
|
|
(6,399 |
) |
Purchase accounting |
|
|
|
|
|
|
|
|
|
|
(837 |
) |
Discounting of tax carryback receivable |
|
|
(1,095 |
) |
|
|
2,754 |
|
|
|
|
|
Deferred combination costs |
|
|
(3,259 |
) |
|
|
|
|
|
|
|
|
Other differences |
|
|
(9 |
) |
|
|
(57 |
) |
|
|
26 |
|
Deferred tax effect of US GAAP adjustments |
|
|
(35 |
) |
|
|
(3 |
) |
|
|
393 |
|
|
Total differences between US GAAP and IFRS |
|
|
(3,100 |
) |
|
|
4,674 |
|
|
|
(22,725 |
) |
|
Net income (loss) in accordance with US GAAP |
|
|
88,838 |
|
|
|
10,965 |
|
|
|
(181,680 |
) |
|
Change in cumulative other comprehensive adjustment
in accordance with IFRS |
|
|
(16,364 |
) |
|
|
7,386 |
|
|
|
(4,001 |
) |
Currency translation adjustment |
|
|
(934 |
) |
|
|
(2 |
) |
|
|
1 |
|
Change in minimum pension liability |
|
|
(1,784 |
) |
|
|
(659 |
) |
|
|
239 |
|
Other comprehensive income (loss)
in accordance with US GAAP, net of tax |
|
|
(19,082 |
) |
|
|
6,725 |
|
|
|
(3,761 |
) |
|
Comprehensive income (loss) in accordance with US GAAP |
|
|
69,756 |
|
|
|
17,690 |
|
|
|
(185,441 |
) |
|
Net income (loss) per share in accordance with US GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.14 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
Diluted |
|
|
0.14 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
|
Number of shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
618,337,539 |
|
|
|
606,672,060 |
|
|
|
605,658,965 |
|
Diluted |
|
|
634,794,569 |
|
|
|
619,022,472 |
|
|
|
605,658,965 |
|
|
F-57
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2005 |
|
|
2004 (restated) |
|
|
2003 |
|
|
Shareholders equity in accordance with IFRS |
|
|
837,706 |
|
|
|
721,313 |
|
|
|
707,085 |
|
|
Minority interest |
|
|
(12,837 |
) |
|
|
(10,701 |
) |
|
|
(12,073 |
) |
Goodwill amortization on consolidated subsidiaries |
|
|
45,883 |
|
|
|
45,883 |
|
|
|
38,165 |
|
Goodwill impairment on consolidated subsidiaries |
|
|
(12,769 |
) |
|
|
(12,769 |
) |
|
|
(12,769 |
) |
Goodwill amortization and impairment on investments in associates |
|
|
8,069 |
|
|
|
8,069 |
|
|
|
5,259 |
|
Reversal of restoration of impairment losses
on long-lived assets |
|
|
(2,393 |
) |
|
|
(2,148 |
) |
|
|
(2,555 |
) |
Non-recourse loans |
|
|
(4,276 |
) |
|
|
(4,276 |
) |
|
|
(4,276 |
) |
Purchase consideration |
|
|
(11,292 |
) |
|
|
(11,292 |
) |
|
|
(11,292 |
) |
Currency translation adjustment |
|
|
(81 |
) |
|
|
(137 |
) |
|
|
(135 |
) |
Minimum pension liability |
|
|
(10,212 |
) |
|
|
(8,428 |
) |
|
|
(7,769 |
) |
Discounting of tax carryback receivable |
|
|
1,659 |
|
|
|
2,754 |
|
|
|
|
|
Deferred combination costs |
|
|
(3,259 |
) |
|
|
|
|
|
|
|
|
Other differences |
|
|
10 |
|
|
|
19 |
|
|
|
76 |
|
Deferred tax effect of US GAAP adjustments |
|
|
266 |
|
|
|
301 |
|
|
|
363 |
|
|
Total differences between US GAAP and IFRS |
|
|
(1,232 |
) |
|
|
7,275 |
|
|
|
(7,006 |
) |
|
Shareholders equity in accordance with US GAAP |
|
|
836,474 |
|
|
|
728,588 |
|
|
|
700,079 |
|
|
Restatement of previously issued US GAAP reconciliation
Accounting for a tax carryback receivable
The Company determined that it was required to restate the discounting of its carryback under
US GAAP. A carryback was recognized in 2004. As the cash settlement of this receivable will occur
in mid-2007, the carryback has been discounted under IFRS. Under US GAAP, as the carryback is the
indirect consequence of a tax settlement and paragraph 3(e) of APB 21 specifically exempts tax
settlements from its scope, the impact of discounting has been restated to present the carryback
receivable at nominal value.
F-58
The following table presents the impact of the restatement adjustment on the Companys previously
reported 2004 US GAAP reconciliation:
|
|
|
|
|
|
|
|
|
(in thousands of euros, except shares and per share amounts) |
|
Years ended December 31 |
|
2004 (as previously reported) |
|
|
2004 (restated) |
|
|
Net income in accordance with IFRS |
|
|
6,291 |
|
|
|
6,291 |
|
Minority interest |
|
|
(1,617 |
) |
|
|
(1,617 |
) |
Reversal of restoration of impairment losses on long-lived assets |
|
|
19 |
|
|
|
19 |
|
Stock options accounting |
|
|
(6,950 |
) |
|
|
(6,950 |
) |
Goodwill amortization and impairment |
|
|
10,528 |
|
|
|
10,528 |
|
Discounting of tax carryback receivable |
|
|
|
|
|
|
2,754 |
|
Other differences |
|
|
(57 |
) |
|
|
(57 |
) |
Deferred tax effect of US GAAP adjustments |
|
|
(3 |
) |
|
|
(3 |
) |
|
Total differences between US GAAP and IFRS |
|
|
1,920 |
|
|
|
4,674 |
|
|
Net income in accordance with US GAAP |
|
|
8,211 |
|
|
|
10,965 |
|
|
Change in cumulative other comprehensive adjustment
in accordance with IFRS |
|
|
7,386 |
|
|
|
7,386 |
|
Change in effect of IFRS/US GAAP adjustments
on other comprehensive income |
|
|
(661 |
) |
|
|
(661 |
) |
Other comprehensive income (loss)
in accordance with US GAAP, net of tax |
|
|
6,725 |
|
|
|
6,725 |
|
|
Comprehensive income in accordance with US GAAP |
|
|
14,936 |
|
|
|
17,690 |
|
|
Net income per share in accordance with US GAAP: |
|
|
|
|
|
|
|
|
Basic |
|
|
0.01 |
|
|
|
0.02 |
|
Diluted |
|
|
0.01 |
|
|
|
0.02 |
|
|
Number of shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
606,672,060 |
|
|
|
606,672,060 |
|
Diluted |
|
|
619,022,472 |
|
|
|
619,022,472 |
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
December 31 |
|
2004 |
|
|
2004 |
|
|
|
(as previously reported) |
|
|
(restated) |
|
|
Shareholders equity in accordance with IFRS |
|
|
721,313 |
|
|
|
721,313 |
|
|
Minority interest |
|
|
(10,701 |
) |
|
|
(10,701 |
) |
Reversal of restoration of impairment losses
on long-lived assets |
|
|
(2,148 |
) |
|
|
(2,148 |
) |
Non-recourse loans |
|
|
(4,276 |
) |
|
|
(4,276 |
) |
Purchase consideration |
|
|
(11,292 |
) |
|
|
(11,292 |
) |
Goodwill amortization and impairment |
|
|
41,183 |
|
|
|
41,183 |
|
Other comprehensive income |
|
|
(8,565 |
) |
|
|
(8,565 |
) |
Discounting of tax carryback receivable |
|
|
|
|
|
|
2,754 |
|
Other differences |
|
|
19 |
|
|
|
19 |
|
Deferred tax effect of US GAAP adjustments |
|
|
301 |
|
|
|
301 |
|
|
Total differences between US GAAP and IFRS |
|
|
4,521 |
|
|
|
7,275 |
|
|
Shareholders equity in accordance with US GAAP |
|
|
725,834 |
|
|
|
728,588 |
|
|
F-59
Reporting discontinued operations
The Company decided to terminate the activities of its subsidiaries SLP Infoware SA (SLP) in
2003 and Certplus in 2004. Under IFRS, the Company assessed that those activities were not separate
lines of business and recorded the impact of the discontinuation of the activity within operating
income. Under US GAAP, the Company determined that it was required to report the discontinuation of
SLP and Certplus as discontinued operations. Under US GAAP, a component of an entity that has been
disposed and in which the entity will not have any significant continuing involvement after the
disposal transaction, is reported in discontinued operations.
The following table presents the impact of the restatement adjustments on the Companys 2004 and
2003 net income (loss) from continuing operations in accordance with US GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros, except shares and per share amounts) |
|
Years ended December 31 |
|
2004 |
|
|
|
|
|
2003 |
|
|
|
|
|
|
(as reported |
|
|
2004 |
|
|
(as previously |
|
|
2003 |
|
|
|
above) |
|
|
(restated) |
|
|
reported) |
|
|
(restated) |
|
|
Net income (loss) from continuing operations
in accordance with US GAAP |
|
|
10,965 |
|
|
|
12,519 |
|
|
|
(181,680 |
) |
|
|
(146,093 |
) |
Loss on discontinued operations |
|
|
|
|
|
|
(1,554 |
) |
|
|
|
|
|
|
(35,587 |
) |
|
Net income (loss) in accordance with US GAAP |
|
|
10,965 |
|
|
|
10,965 |
|
|
|
(181,680 |
) |
|
|
(181,680 |
) |
|
Net income (loss) from continuing operations per share in accordance with US GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
|
|
(0.24 |
) |
Diluted |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
|
|
(0.24 |
) |
|
Net income (loss) from discontinued operations per share in accordance with US GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
(0.00 |
) |
|
|
|
|
|
|
(0.06 |
) |
Diluted |
|
|
|
|
|
|
(0.00 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
Net income (loss) from per share in accordance with US GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
|
|
(0.30 |
) |
Diluted |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
|
|
(0.30 |
) |
|
Explanations of certain adjustments
Minority interest
Under IAS 1 (revised 2003), minority interest is presented within net income. The portion of
net income attributable to equity holders of the Company and to minority interest is presented at
the foot of the consolidated statements of income. Minority interest is also presented within
equity in the consolidated balance sheet. Under US GAAP, net income and shareholders equity are
presented net of minority interest.
Capitalized development costs
The Company capitalizes certain research and development costs other than for software
development where it is expected that the product under development will be produced and will be
profitable. Such capitalized research and development
costs are amortized over a period no longer than three to five years. Under US GAAP, research and
development costs other than for software development are expensed as incurred.
Goodwill amortization and impairment
Under US GAAP, goodwill is not amortized but tested for impairment at least annually at the
reporting unit level. If the carrying amount of the reporting unit exceeds its fair value, any
excess of the carrying amount of goodwill over the implied fair value of reporting unit goodwill is
recorded as an impairment loss. Intangible assets with indefinite useful lives are not amortized
but tested for impairment annually, or more frequently if events or circumstances indicate that the
asset may be impaired. If the
F-60
carrying value of an indefinite-lived asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess.
In 2003 and 2004, under IFRS, the Company amortized goodwill for an amount of 19,199 thousand
and 11,953 thousand respectively. The Company adopted the provisions of IFRS 3 Business
Combinations whereby goodwill amortization was discontinued as of January 1, 2005 and goodwill is
tested annually for impairment at the cash-generating units level.
Under US GAAP, as a result of performing its impairment testing at the reporting unit level, the
Company recorded a goodwill impairment charge in 2003 amounting to 57,600 thousand. Under
IFRS, the Company performed its impairment testing at the level of the cash-generating units, which
are the smallest identifiable group of assets that generate cash inflows. As a result, for IFRS
purposes, certain charges recorded in 2003 under US GAAP have already been considered in a previous
period. The Company recorded a goodwill impairment charge of 19,879 thousand in 2003 under
IFRS.
Under US GAAP, the balance of goodwill as of December 31, 2005, 2004 and 2003 was respectively
118,553 thousand, 55,101 thousand and 55,913 thousand.
Reversal of restoration of impairment losses on long lived assets
Under US GAAP, reversal of impairment losses are prohibited whereas under IFRS they are
required under certain circumstances.
Stock options accounting
Until December 31, 2004, under IFRS, share-based payment transactions had no impact in the
Consolidated Statement of Income. As a result of the adoption of IFRS 2 starting January 1, 2005,
the Company charges the cost of these transactions to the income statement. The Company measures
the cost of services rendered by reference to the fair value of equity instruments granted (see
Note 2.4).
Stock option plans are also treated as compensatory plans under US GAAP. For the purpose
of this reconciliation, the Company has adopted Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for
its employees stock options. Under APB 25, unearned compensation is recognized as a reduction in
shareholders equity when the exercise price of stock options is below the fair value of the
underlying shares on the grant date. This approach does not take into account the fair value of the
equity instruments granted.
For purposes of financial reporting under US GAAP, the Company is required to follow the disclosure
provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, amended by FAS 148, Accounting for Stock-Based Compensation Transition
and Disclosure, which requires that the Company discloses pro forma net income and earnings per
share as if the Companys compensation expense had been calculated using the fair value based
method prescribed by SFAS 123.
Had compensation expense for the Plans been determined based upon the estimated grant date fair
value using the fair value method as provided by SFAS 123, the Companys net income and earnings
per share for the years ended December 31, 2005, 2004 and 2003, would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros, except for earnings per share) |
|
Years ended December 31 |
|
2005 |
|
|
2004 (restated) |
|
|
2003 |
|
|
Net income (loss) in accordance with US GAAP, as reported |
|
|
88,838 |
|
|
|
10,965 |
|
|
|
(181,680 |
) |
Add: total stock-based compensation expense
included in reported net income, net of related tax effect |
|
|
1,631 |
|
|
|
6,950 |
|
|
|
6,399 |
|
Deducted: total stock-based compensation
expense determined under fair value based method for
all awards, net of related tax effects |
|
|
(13,911 |
) |
|
|
(27,379 |
) |
|
|
(17,674 |
) |
|
Pro forma US GAAP net income (loss) |
|
|
76,558 |
|
|
|
(9,464 |
) |
|
|
(192,955 |
) |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
|
0.14 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
Basic pro forma |
|
|
0.12 |
|
|
|
(0.02 |
) |
|
|
(0.32 |
) |
Diluted as reported |
|
|
0.14 |
|
|
|
0.02 |
|
|
|
(0.30 |
) |
Diluted pro forma |
|
|
1.12 |
|
|
|
(0.02 |
) |
|
|
(0.32 |
) |
|
F-61
Purchase accounting
Under US GAAP, certain considerations exchanged in a business combination that require
continued employment of the selling shareholders, are treated as compensation expenses, with a
cumulative impact on the Companys shareholders equity of 11,292 thousand since December 31,
2003. Under IFRS, these considerations are treated as part of the purchase price allocation.
Under IFRS, when accounting for business combinations, additional consideration, which is
contingent on achieving specified earnings levels in future periods, is estimated based on the most
probable amount payable. Under US GAAP, the fair value of the consideration is recorded only when
the contingency is resolved. As of December 31, 2004, additional consideration amounting to
500 thousand was recorded under IFRS in other non-current liabilities against goodwill ( 1,000
thousand as of December 31, 2003) in relation to an earn-out provision. This additional
consideration was not recorded under US GAAP. Consequently, goodwill and other non-current
liabilities have not been reduced. This difference between IFRS and US GAAP had no impact on net
income or shareholders equity, and as of December 31, 2005, no such difference remains.
Deferred combination costs
The Company incurred certain external costs, which have been deferred under IFRS and will be
included in the cost of the proposed business combination to take place in 2006. Under US GAAP, the
combination costs are expensed as incurred.
Non-recourse loans
In 2000, the Company entered into arrangements with certain executives whereby they were
granted a certain number of options and loans. The loans were treated as non recourse loans at
origination. Non-recourse loans are shown as a reduction of shareholders equity under US GAAP.
Other comprehensive income
After the implementation of IAS 39, there are no reconciling items between IFRS and US GAAP
related to other comprehensive income, except for the accounting for pensions ( 10,212 thousand
in 2005, 8,428 thousand in 2004 and 7,769 thousand in 2003) and for the foreign currency
translation adjustment related to US GAAP adjustments ( 81 thousand in 2005, 137 thousand
in 2004 and 135 thousand in 2003). FASB Statement No. 87, Employers Accounting for Pension,
requires the Company to recognize a minimum pension liability equal to the amount by which the
actuarial present value of the accumulated benefit obligations exceeds the fair value of plans
assets, i.e. the unfunded amount. This liability is recorded, net of tax, within other
comprehensive income.
F-62
41.
OTHER REQUIRED DISCLOSURES UNDER US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Income taxes
The components of income (loss) before tax and minority interest are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Domestic (1) |
|
|
7,683 |
|
|
|
19,590 |
|
|
|
14,195 |
|
Foreign |
|
|
63,899 |
|
|
|
(346 |
) |
|
|
(158,477 |
) |
|
Income (loss) before tax and minority interest |
|
|
71,582 |
|
|
|
19,244 |
|
|
|
(144,282 |
) |
|
Presentation of the Consolidated Statement of Income
The operating income (loss) would have been as follows under US GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of euros) |
|
Years ended December 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Operating income (loss) in accordance with IFRS |
|
|
66,755 |
|
|
|
26,318 |
|
|
|
(133,786 |
) |
|
Goodwill amortization on consolidated subsidiaries |
|
|
|
|
|
|
7,718 |
|
|
|
18,237 |
|
Reversal of restoration of impairment losses on long-lived
assets |
|
|
117 |
|
|
|
19 |
|
|
|
(2,555 |
) |
Purchase consideration |
|
|
|
|
|
|
|
|
|
|
(837 |
) |
Capitalized development costs |
|
|
|
|
|
|
|
|
|
|
7,321 |
|
Stock options accounting |
|
|
2,689 |
|
|
|
(6,950 |
) |
|
|
(6,399 |
) |
Deferred combination costs |
|
|
(3,259 |
) |
|
|
|
|
|
|
|
|
Other differences |
|
|
9 |
|
|
|
(57 |
) |
|
|
26 |
|
|
Operating income (loss) in accordance with US GAAP as previously reported |
|
|
66,311 |
|
|
|
27,048 |
|
|
|
(154,467 |
) |
Loss on discontinued operations |
|
|
|
|
|
|
(1,554 |
) |
|
|
(35,587 |
) |
Operating income (loss) in accordance with US GAAP as restated |
|
|
66,311 |
|
|
|
28,602 |
|
|
|
(118,880 |
) |
|
Recently issued accounting standards under US GAAP, which could affect the reconciliation
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
Inventory Costs (FAS 151). FAS 151 amends the guidance in Accounting Research Bulletin No. 43,
Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) should be recognized as current-period charges and
requires the allocation of fixed production overheads to inventory based on normal capacity of the
production facilities. This statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of FAS 151 is not expected to have an impact on the
Companys financial position, results of operations or cash flows.
In December 2004, the FASB issued FAS 123 (revised 2004), Share-Based Payment (FAS 123R) which is
effective in annual periods commencing after June 15, 2005 and will require that the Company use
the fair value method to calculate the
F-63
expense related to employee share based awards. The Company currently uses the intrinsic value
method to measure compensation expense for share-based awards to the Companys employees. Included
in the US GAAP disclosures is the pro forma net income and earnings per share as if the Company had
used a fair-value-based method similar to the methods required under FAS 123R to measure the
compensation expense for employee share awards during its 2005, 2004 and 2003 fiscal years. The
company uses the fair value method under IFRS.
In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, which offers guidance on FAS
123R. SAB 107 was issued to assist preparers by simplifying some of the implementation challenges
of FAS 123R while enhancing the information that investors receive. SAB 107 creates a framework
that is premised on two overarching themes: (a) considerable judgment will be required by preparers
to successfully implement FAS 123R, specifically when valuing employee stock options; and (b)
reasonable individuals, acting in good faith, may conclude differently on the fair value of
employee stock options. Key topics covered by SAB 107 include valuation models, expected volatility
and expected term. In October 2005, the FASB issued FSP FAS 123(R)-2, Practical Accommodation to
the Application of Grant Date as Defined in FAS 123(R). In November 2005, the FASB issued FSP FAS
123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards. These interpretations provide further guidance on the implementation of FAS 123R as set
out in their respective titles. The Company will apply the principles of SAB 107 and these
interpretations in conjunction with its adoption of FAS 123R.
In May 2005, the FASB issued FAS No. 154, Accounting Changes and Error Corrections (FAS 154),
which replaced APB No. 20, Accounting Changes and FAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. FAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle by requiring voluntary changes in accounting
principles to be reported using retrospective application, unless impractical to do so. FAS 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47), which states that a company must recognize a liability for the fair value
of a legal obligation to perform asset retirement activities that are conditional on a future event
if the amount can be reasonably estimated. FIN 47 clarifies that conditional obligations meet the
definition of an asset retirement obligation in FAS No. 143, Accounting for Asset Retirement
Obligations, and therefore should be recognized if their fair value is reasonably estimable. FIN
47 is effective no later than the end of the first fiscal year ending after December 15, 2005, and
will be adopted by the Company beginning December 1, 2005. The adoption of this interpretation is
not expected to have a material effect on the Companys financial condition or results of
operations
In June 2005, the Emerging Issues Task Force reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements (EITF 05-6.). EITF 05-6 provides guidance on
determining the amortization period for leasehold improvements acquired in a business combination
or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively
and is effective for periods beginning after June 29, 2005. Adoption of this standard is not
expected to have a material impact on the Companys financial position or results of operations.
In June 2005, the FASB issued Staff Position FAS 143-1, Accounting for Electronic Equipment Waste
Obligations (FSP 143-1), which provides guidance on the accounting for certain obligations
associated with the Waste Electrical and Electronic Equipment Directive (the Directive), adopted
by the European Union (EU). Under the Directive, the waste management obligation for historical
equipment remains with the commercial user until the customer replaces the equipment. FSP 143-1 is
required to be applied to the later of the first reporting period ending after June 8, 2005 or the
date of the Directives adoption into law by the applicable EU member countries in which the
manufacturers have significant operations. Adoption of this standard is not expected to have a
material impact on the Companys financial position or results of operations.
In September 2005, the FASB issued EITF Issue No. 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty (EITF 04-13). The issue provided guidance on the
circumstances under which two or more inventory transactions with the same counterparty should be
viewed as a single nonmonetary transaction within the scope of APB Opinion No. 29, Accounting for
Nonmonetary Transactions. The issue also provided guidance on circumstances under which
nonmonetary exchanges of inventory within the same line of business should be recognized at fair
value. EITF 04-13 will be effective for transactions completed in reporting periods beginning after
March 15, 2006. The Company is evaluating the impact that this will have on its consolidated
financial statements.
F-64
42. LIST OF SUBSIDIARIES
In 2005, 2004 and 2003, the Company acquired interests in various companies, mainly with
activities related to its core business.
As of December 31, 2005, the list of subsidiaries was as follows:
|
|
|
Name of the company |
|
Country |
Gemplus Finance SA
|
|
Luxemburg
|
Gemplus Argentina SA
|
|
Argentina
|
Gemplus NV
|
|
Belgium
|
Gemventures 1 NV
|
|
Belgium
|
Gemplus do Brasil Produtos Electronicos, Ltda
|
|
Brasil
|
Gemplus Bank Note, Ltda
|
|
Brasil
|
Gemplus Canada Inc
|
|
Canada
|
Gemplus International Trading Shanghai Co. Ltd
|
|
China
|
Gemplus China Investment Co. Ltd
|
|
China
|
Tianjin Gemplus Smart Card Co. Ltd
|
|
China
|
Goldpac Datacard Solutions Zhuhai Co. Ltd
|
|
China
|
Goldpac SecurCard Zhuhai Co. Ltd
|
|
China
|
Gemplus Tianjin New Technologies Co. Ltd
|
|
China
|
Silver Dragon Microelectronics Co. Ltd
|
|
China
|
Gemplus Beijing Electronics R&D Co. Ltd
|
|
China
|
Gemplus de Colombia SA
|
|
Colombia
|
Gemplus SRO
|
|
Czech Republic
|
Setec Danmark A/S
|
|
Denmark
|
Gemplus Nordic Oy
|
|
Finland
|
Setec Oy
|
|
Finland
|
Setec Corporate Holding Oy
|
|
Finland
|
Gemplus SA
|
|
France
|
Gemplus Trading SA
|
|
France
|
ST GEM GIE
|
|
France
|
Gemplus Participations SA
|
|
France
|
SLP SAS
|
|
France
|
Gemplus GmbH
|
|
Germany
|
Celo communications GmbH
|
|
Germany
|
Zenzus Holdings Ltd
|
|
Gibraltar
|
Great Steps Ltd
|
|
Hong Kong
|
Goldpac Datacard Solutions Co. Ltd
|
|
Hong Kong |
Gemplus India Ptd Ltd
|
|
India |
Celocom Ltd
|
|
Ireland |
Gemplus Italia Srl
|
|
Italy |
Gemplus Japan Co. Ltd
|
|
Japan |
Gemcard Sdn BhD Pte Ltd
|
|
Malaysia |
Gemplus Industrial SA de CV
|
|
Mexico |
Gemplus BV
|
|
Netherlands |
Celo communications BV
|
|
Netherlands |
Setec Norge AS
|
|
Norway |
Gemplus Pologne Sp zo o
|
|
Poland |
Polski Plastik Sp zo o
|
|
Poland |
Gemplus Sp zo o
|
|
Poland |
Gemrokitki Sp zo o
|
|
Poland |
Gemplus LLC
|
|
Russia |
Gemplus Technologies Asia Pte Ltd
|
|
Singapore |
SecurCard Gemplus Pte Ltd
|
|
Singapore |
Gemplus Microelectronics Asia Pte Ltd
|
|
Singapore |
Gemplus Asia Pacific Pte Ltd
|
|
Singapore |
Gemplus Southern Africa Pty Ltd
|
|
South Africa |
Gemplus Card International España SA
|
|
Spain |
Setec Sverige AB
|
|
Sweden |
Setec Tag AB
|
|
Sweden |
Gemplus Management and Trading SA
|
|
Switzerland |
Setec Card Ltd
|
|
Thailand |
GemCard (Thailand) Co. Ltd
|
|
Thailand |
Gemplus Middle-East FZ-LLC
|
|
UAE |
Gemplus Ltd
|
|
United Kingdom |
Gemplus Associates International Ltd
|
|
United Kingdom |
Gemplus Corp.
|
|
USA |
Gemplus Card International de Venezuela, CA
|
|
Venezuela |
|
|
|
F-65