FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
For the month of December 2002
GEMPLUS INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
GEMPLUS INTERNATIONAL S.A.
(Translation of registrant's name in English)
Aerogolf Center
1 Hohenhof
L-2633 Senningerberg
Grand Duchy of Luxembourg
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
--- ---
(Indicate by check mark whether the registrant by
furnishing the information contained in this form
is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.)
Yes No X
--- ---
GEMPLUS INTERNATIONAL S.A.
Quarterly Report on Form 6-K
For the period ended September30, 2002
--------------------------------------------------------------------------------
INDEX Page No
-------
Part I - Financial Information
Item 1. Financial Statements................................................2
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited)......................................................2
Condensed Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001.............3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 (Unaudited)........4
Consolidated Statement of Changes in Shareholders' Equity
Nine Months Ended September 30, 2002 (Unaudited).................5
Notes to the Condensed Consolidated Financial Statements
(Unaudited)......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................19
Item 3. Qualitative Disclosures About Market Risk..........................31
Part II - Other Information
Item 1. Legal proceedings..................................................32
Item 2. Changes in securities..............................................32
Item 3. Default upon senior securities.....................................32
Item 4. Submission of Matters to a Vote of Security Holders................32
Item 5. Other Information..................................................32
Item 6. Exhibits and other Reports on Form 6-K.............................32
Signature.....................................................................33
GEMPLUS INTERNATIONAL S.A.
Quarterly Report on Form 6-K
For the period ended September 30, 2002
--------------------------------------------------------------------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Income
--------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited)
--------------------------------------------------------------------
Net sales 205,612 226,105 591,942 771,987
Cost of sales (145,103) (173,582) (446,889) (526,877)
Gross Profit 60,509 52,523 145,053 245,110
Research and development expenses (21,698) (25,605) (72,200) (87,914)
Selling and marketing expenses (24,752) (35,822) (85,340) (128,425)
General and administrative expenses (20,580) (28,271) (65,612) (80,834)
Litigation expenses - (18,120) - (18,120)
Goodwill amortization (22,953) (6,592) (36,331) (21,028)
Operating loss before restructuring (29,474) (61,887) (114,430) (91,211)
Restructuring expenses (8,284) - (70,737) (28,466)
Operating loss (37,758) (61,887) (185,167) (119,677)
Interest income and (expense), net 2,464 6,193 (55,026) 16,266
Other income (expense), net (5,590) 69,941 (15,134) 55,306
Income (loss) before taxes (40,884) 14,247 (255,327) (48,105)
Income taxes benefit (provision) 2,300 (7,661) 31,213 7,739
----------------------------------------------------------------------------------------------------------
Net income (loss) (38,584) 6,586 (224,114) (40,366)
----------------------------------------------------------------------------------------------------------
Net income (loss) per share
Basic (0.06) 0.01 (0.37) (0.06)
Diluted (0.06) 0.01 (0.37) (0.06)
Shares used in net income (loss) per
share calculation
Basic 606,349,540 642,922,022 606,252,885 641,146,203
Diluted 606,349,540 653,512,425 606,252,885 641,146,203
In filings with the Commission des Operations de Bourse and its annual report to
shareholders, the Company has included goodwill amortization below operating
income (loss). See Note 11.
The accompanying notes are an integral part of these condensed financial
statements
GEMPLUS INTERNATIONAL S.A.
Quarterly Report on Form 6-K
For the period ended September30, 2002
--------------------------------------------------------------------------------
Condensed Consolidated Balance Sheets
(in thousands of euros)
---------------------------------------
September 30, 2002 December 31, 2001
---------------------------------------
Assets (unaudited)
Current assets:
Cash and cash equivalents 400,766 490,652
Trade accounts receivable, net 156,259 188,635
Inventory, net 117,407 139,794
Other current assets 101,796 103,733
Total current assets 776,228 922,814
Non-current assets:
Property, plant and equipment, net 243,197 268,784
Goodwill, net 87,344 116,580
Other non-current assets 191,548 222,514
Total non-current assets 522,089 607,878
---------------------------------------------------------------------------------------
Total assets 1,298,317 1,530,692
---------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Accounts payable 96,477 109,661
Accrued liabilities and other 162,551 168,905
Current obligations under capital leases 4,047 3,734
Total current liabilities 263,075 282,300
Non-current liabilities:
Long-term obligations under capital leases 45,968 32,581
Long-term debt, less current portion - 14
Other non-current liabilities 23,778 30,859
Total non-current liabilities 69,746 63,454
Minority interest 15,138 17,176
Shareholders' equity
Ordinary shares no legal par value, 2,000,000,000
shares authorized, 637,859,088 and 641,396,497 shares
issued and outstanding at September 30, 2002 and
December 31, 2001, respectively 127,489 127,056
Additional paid-in capital 1,029,075 1,027,850
Retained earnings (113,581) 125,016
Other comprehensive income 1,701 (3,968)
Less, cost of treasury shares (94,326) (108,192)
Total shareholders' equity 950,358 1,167,762
-------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 1,298,317 1,530,692
-------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial
statements
GEMPLUS INTERNATIONAL S.A.
Quarterly Report on Form 6-K
For the period ended September30, 2002
--------------------------------------------------------------------------------
Condensed Consolidated Statements of Cash Flows
(in thousands of euros)
-----------------------
Nine months ended
September 30,
2002 2001
-----------------------
(unaudited)
Cash flows from operating activities:
Net loss (224,114) (40,365)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization 93,287 89,049
Change in other non-current liabilities (594) (8,064)
Loss / (Gain) on assets sold 3,848 (70,773)
Provision for income taxes (31,213) (7,739)
Other, net 1,080 7,958
Changes in operating assets and liabilities:
Trade accounts receivable and related current liabilities 28,709 95,331
Trade accounts payable and related current assets (20,576) (116,613)
Inventories 17,888 (32,939)
Value-added and income taxes (3,240) (19,618)
Other, net (13,391) (7,666)
Restructuring reserve 40,795 17,269
Litigation expenses (18,120) 18,120
Management severance expenses (10,629) -
Provision for a loan to the former Chairman of the Board 66,938 -
---------------------------------------------------------------------------------------
Net cash used in operating activities (69,332) (76,050)
Cash flows from investing activities:
Sale / (Purchase) of activities net of cash
disposed / (acquired) - 117,001
Other investments (13,901) (34,454)
Purchase of property, plant and equipment (31,919) (94,281)
Purchase of other assets (2,249) (15,997)
Change in non-trade accounts payable and other current assets 3,565 (4,696)
---------------------------------------------------------------------------------------
Net cash used in investing activities (44,504) (32,427)
Cash flows from financing activities:
Proceeds from exercise of share options 1,657 7,117
Purchase of Gemplus S.A. shares - (14,544)
Proceeds from minority contribution 367 -
Payments on long-term borrowings (102) (1,606)
Proceeds from sale-leaseback operations 15,962 -
Principal payments on obligations under capital leases (2,625) (2,494)
Increase (decrease) in bank overdrafts (3,906) 19,243
Dividends paid by subsidiaries to minority shareholders (5,002) (4,256)
Change in treasury shares (617) (6,271)
Interest receivable on loans to senior management (1,706) (3,336)
Change in non-trade accounts payable on financing activities - (8,044)
---------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,028 (14,191)
Effect of exchange rate changes on cash 19,922 (10,823)
Net increase (decrease) in cash and cash equivalents (109,808) (122,668)
Cash and cash equivalents, beginning of period 490,652 636,284
---------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 400,766 502,793
---------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial
statements
GEMPLUS INTERNATIONAL S.A.
Quarterly Report on Form 6-K
For the period ended September30, 2002
--------------------------------------------------------------------------------
Consolidated Statement of Changes in Shareholders' Equity
Additional Other
Number of Share paid-in Retained comprehensive Treasury
shares value capital earnings Net loss income shares Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 641,396,497 127,056 1,027,850 225,236 (100,220) (3,968) (108,192) 1,167,762
------------------------------------------------------------------------------------------------------------------------------------
Allocation of prior year earnings - - - (100,220) 100,220 - - -
Net loss - - - - (224,114) - - (224,114)
Shares issued by Gemplus S.A.
pursuant to share options exercised to
be contributed 699,100 - 992 - - - - 992
Contribution of Gemplus S.A. shares to
Gemplus International S.A. - 353 (353) - - - - -
Shares issued by Gemplus
International S.A. pursuant to share
options exercised 398,350 80 586 - - - - 666
Cancellation of treasury shares (4,634,859) - - (14,483) - - 14,483 -
Purchase of 656,024 shares of treasury
shares - - - - - - (617) (617)
Change in other comprehensive income - - - - - 5,669 - 5,669
------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 (unaudited) 637,859,088 127,489 1,029,075 110,533 (224,114) 1,701 (94,326) 950,358
------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial
statements
GEMPLUS INTERNATIONAL S.A.
Quarterly Report on Form 6-K
For the period ended September 30, 2002
--------------------------------------------------------------------------------
Notes to the Condensed Consolidated Financial Statements
1/ Basis of presentation and accounting policies
These unaudited interim financial statements prepared in accordance with
International Accounting Standards (IAS), reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present
fairly, in all material respects, the financial position of Gemplus
International S.A. (the "Company") and its subsidiaries as of September 30,
2002, and the results of operations for the three-month periods ended September
30, 2002 and 2001. All material intercompany balances have been eliminated.
Because all of the disclosures required by IAS are not included, these interim
statements should be read in conjunction with the audited financial statements
and accompanying notes in the Company's annual report for the year ended
December 31, 2001. The year-end condensed balance sheet data was derived from
the audited financial statements and does not include all of the disclosures
required by generally accepted accounting principles. The statements of
operations for the periods presented are not necessarily indicative of results
to be expected for any future period, nor for the entire year.
The annual consolidated financial statements of the Company are prepared in
accordance with IAS. As of January 1, 2001, the Company has adopted the new
standard applicable for the first time to financial statements of periods
beginning after January 1, 2001, relating to Financial Instruments (IAS 39).
2/ Inventories
Inventories are stated at the lower of cost or market (with cost being
determined principally on the weighted average cost basis).
Inventory consists of the following:
(in thousands of euros)
------------------------------------------------------------
September
30, 2002 December
(unaudited) 31, 2001
------------------------------------------------------------
Raw materials and supplies 37,929 63,621
Work-in-process 77,648 79,394
Finished goods 17,527 14,738
------------------------------------------------------------
Inventory, gross 133,104 157,753
------------------------------------------------------------
Less, inventory allowance (15,687) (17,959)
------------------------------------------------------------
Inventory, net 117,417 139,794
------------------------------------------------------------
3/ Common control transactions
As at September 30, 2002, certain shares of Gemplus S.A. held mainly by
employees have not yet been contributed to Gemplus International S.A. for
administrative and legal reasons. The total amount of shares to be issued by
Gemplus International S.A. upon the contribution of Gemplus S.A. shares amounted
to 5,053,750 shares, representing 0.79% of the shareholdings of Gemplus
International S.A., which in total was represented by 637,859,088 shares
outstanding as at September 30, 2002.
4/ Goodwill
The excess of the purchase price over the fair market value of net assets
acquired is recorded as goodwill. The Company's rationale behind its
acquisitions generally relates to (i) acquiring market shares or (ii) acquiring
conventional technology or (iii) acquiring technology in the Company's core
business. Goodwill amounts are amortized over a maximum period of twenty years
on a straight-line basis (20 years, 10 years, and 5 years, respectively, for
acquisitions of type (i), (ii) and (iii)).
Goodwill is reviewed for impairment based on expectations of future cash flows,
at each balance sheet date, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. During the third
quarter of 2002, the Company recorded a goodwill write-down of (euro) 15,700
thousand following the implementation of an impairment testing. This write-down
concerned the goodwill generated following the acquisition of SLP InfoWare SA
("SLP") in October 2000 and was due to significantly declining sales of SLP
software. This charge was included in the statement of income under the caption
"goodwill amortization".
5/ Net income (loss) per share
A reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share is provided in the following table:
-------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited)
-------------------------------------------------------------------------------------------------------------------
Basic and diluted net income (loss) (numerator) (38,584) 6,586 (224,114) (40,366)
-------------------------------------------------------------------------------------------------------------------
Shares used in basic net income (loss) per share
calculation (denominator):
-------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding 637,842,005 642,922,022 639,266,869 641,146,203
Weighted average number of treasury shares (31,492,465) - (33,013,984) -
-------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding (basic) 606,349,540 642,922,022 606,252,885 641,146,203
-------------------------------------------------------------------------------------------------------------------
Dilutive effect of stock options 112,027 10,068,842 1,713,784 29,462,701
Dilutive effect of warrants - 521,561 37,431 1,153,474
Dilutive effect of shares to be issued following
acquisitions of Celocom Ltd and Slp InfoWare SA - - - 252,049
-------------------------------------------------------------------------------------------------------------------
Weighted average diluted number of shares
outstanding 606,461,567 653,512,425 608,004,100 672,014,427
-------------------------------------------------------------------------------------------------------------------
Shares used in diluted net income (loss) per share
(denominator) 606,349,540 653,512,425 606,252,885 641,146,203
-------------------------------------------------------------------------------------------------------------------
6/ Segment reporting
As of January 1, 2002, the Company elected to change the reporting of its
business segments, and restated its prior periods' presentation to conform to
this revised segment reporting.
All the activities formerly reported as part of the Network Systems segment and
the Other operating segment have been transferred to the Financial Services and
Security segment, except the access control systems activities of the Company's
former subsidiary Skidata and the electronic smart labels solutions activities
of the Company's former Tag subsidiary, which have been reported separately
under "Disposed Operations", as they were sold during the third quarter of 2001.
Consequently, the Financial Services and Security segment includes systems and
services based on chip card technology in areas such as financial services,
identification, health care, corporate security, loyalty programs,
transportation access, pay-television applications, e-business security
activities as well as magnetic stripe plastic cards for banking applications.
The Company's activities in this segment also include the sales of smart card
readers to customers as well as smart card interfacing technologies to device
manufacturers. There is no change with respect to the Telecommunications
segment, which includes the Company's wireless solutions, as well as prepaid
telephone cards and other products.
This change in business segment reporting is consistent with the changes in the
Company's financial reporting structure incorporated in its management
reporting. The Company`s two operating segments, the Telecommunications segment
and the Financial Services and Security segment, have a different customer base,
and each of them has separate financial information available. These segments
are evaluated regularly by the management in deciding how to allocate resources
and in assessing performance. The Company's management makes decisions about
resources to be allocated to the segments and assesses their performance using
revenues and gross margins. 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 following tables present selected data for the three-month and nine-month
periods ended September 30, 2002 and 2001:
(in thousands of euros)
------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited)
------------------------------------------------------------------------------------------
Net sales
Telecommunications 139,852 145,005 403,015 525,048
Financial Services and Security 65,760 71,068 188,927 202,661
Disposed Operations - 10,032 - 44,278
------------------------------------------------------------------------------------------
Net sales 205,612 226,105 591,942 771,987
------------------------------------------------------------------------------------------
Gross profit
Telecommunications 45,101 37,681 111,564 188,748
Financial Services and Security 15,408 11,949 33,489 40,301
Disposed Operations - 2,893 - 16,061
------------------------------------------------------------------------------------------
Gross profit 60,509 52,523 145,053 245,110
------------------------------------------------------------------------------------------
Research and development expenses (21,698) (25,605) (72,200) (87,914)
Selling and marketing expenses (24,752) (35,822) (85,340) (128,425)
General and administrative expenses (20,580) (28,271) (65,612) (80,834)
Litigation expenses - (18,120) - (18,120)
Goodwill amortization (22,953) (6,592) (36,331) (21,028)
------------------------------------------------------------------------------------------
Operating loss before restructuring (29,474) (61,887) (114,430) (91,211)
------------------------------------------------------------------------------------------
Restructuring expenses (8,284) - (70,737) (28,466)
------------------------------------------------------------------------------------------
Operating loss (37,758) (61,887) (185,167) (119,677)
------------------------------------------------------------------------------------------
Note:
Disposed operations include Skidata and Tag activities, which were sold during
the third quarter of 2001.
In filings with the Commission des Operations de Bourse and its annual report to
shareholders, the Company has included goodwill amortization below operating
income (loss). See Note 11.
The following is a summary of sales by geographic area for the three-month and
nine-month periods ended September 30, 2002 and 2001:
(in thousands of euros)
--------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited)
--------------------------------------------------------------------------------
Europe, Middle East, Africa 110,412 102,755 306,300 347,990
Asia 52,782 52,369 160,248 224,321
Americas 42,418 60,949 125,394 155,398
Disposed operations - 10,032 - 44,278
--------------------------------------------------------------------------------
Net sales 205,612 226,105 591,942 771,987
--------------------------------------------------------------------------------
Note: Disposed operations include Skidata and Tag activities, which were sold
during the third quarter of 2001, and were reported primarily in the Europe,
Middle East and Africa region.
7/ Ordinary shares
In March and July 2002, the Company issued 699,100 shares following the exercise
of Gemplus SA stock options held by employees.
In April and July 2002, the Company issued 1,759,550 shares following the
contribution of 35,191 shares of Gemplus S.A. held mainly by employees. For
accounting purposes, these shares were already assumed to be a component of
shareholders' equity.
In April 2002, the Company issued 398,350 shares following the exercise of
Gemplus International S.A. stock options held by employees.
As at December 31, 2001, the Company held directly 4,780,907 shares of its
outstanding common stock and an indirect subsidiary held 30,925,029 shares of
its outstanding common stock. At the extraordinary general meeting of
shareholders held on April 17, 2002, shareholders approved the cancellation of
4,634,859 shares held directly pursuant to the Company's stock repurchase
program, as well as the cancellation of the 30,743,679 shares held by its
indirect subsidiary at the time as such shares may be transferred to the
Company. The 4,634,859 shares were cancelled without reduction of the issued
share capital of the Company but with a consequential increase of the accounting
par of the shares in issue. During the third quarter of 2002, the Company
purchased 656,024 shares of its outstanding common stock from two former Celocom
Limited employees pursuant to the provisions of the 2000 Celocom Limited share
purchase agreement. As at September 30, 2002, the Company held 31,727,101 shares
of its outstanding common stock.
As mentioned in Note 3, as at September 30, 2002, the total amount of shares to
be issued by Gemplus International S.A. upon the contribution of Gemplus S.A.
shares amounted to 5,053,750 shares, representing 0.79% of the shareholdings of
Gemplus International S.A., which in total was represented by 637,859,088 shares
outstanding as at September 30, 2002.
8/ Restructuring
In addition to the restructuring program that was put into place in the second
quarter of 2001, the Company announced on February 6, 2002 a further
restructuring and rationalization program. The Company began to implement the
program and recorded a pre-tax restructuring charge of (euro) 19,324 thousand in
the Consolidated Statement of Income for the first quarter of 2002 (Phase 1),
(euro) 43,129 thousand in the Consolidated Statement of Income for the second
quarter of 2002 (Phase 2), and an additional (euro) 8,284 thousand in the
Consolidated Statement of Income for the third quarter of 2002 (Phase 3),
resulting in a total restructuring expense of (euro) 70,737 thousand during the
nine-month period ended September 30, 2002.
Phases 1 to 3 of the 2002 restructuring program relate to the termination of 854
employees. The Company expects that additional initiatives (non-renewal of
temporary employment contracts and reduction of subcontractors) combined with
natural attrition will bring the overall reduction in employees to approximately
1,140 in 2002, representing 16% of the Company's global workforce as at December
31, 2001.
The 2002 restructuring program affects all areas within the Company
(Manufacturing, Selling, Marketing, Research and Development and General and
Administrative functions). The overall reduction of the workforce is broken down
as follows:
o Manufacturing organization: 550 employees,
o General and administrative functions: 245 employees,
o Selling and marketing organization: 215 employees, and
o Research and development organization: 130 employees.
Phase 1 of the 2002 restructuring program involved the termination of 236
employees, mainly in North and South America, the United Kingdom, Northern
Europe and Asia. The restructuring charge also included costs related to the
rationalization of office facilities in North America, the United Kingdom and
Northern Europe, as well as asset write-offs related to the rationalization of
these facilities.
Phase 2 of the 2002 restructuring program related to the termination of 531
employees, with a majority of reductions relating to the social plans in France
(385 employees) and Germany (69 employees). It also included further reductions
made in the United Kingdom, Southern Europe, North America and Asia. In France
and Germany, the Company was required to carry out consultations with employee
representatives before implementing workforce reductions. This consultation
process was completed during the second quarter of 2002 and the content of the
plan was finalized and communicated to the employees. In France, the social plan
is based on voluntary leave with a total target of 385 departures. The Company
had previously announced a reduction of 416 employees; however, there were 31
departures prior to the finalization of the procedure. In addition to the charge
associated with the termination of employees, the restructuring charge recorded
during the second quarter of 2002 also included costs related to the shutdown of
a personalization center in the Paris, France, area, the reduction of office
space in the south of France, the reduction of production floor space in one of
the German factories, and the close of office facilities in North America and
Spain. The restructuring charge recorded during the second quarter of 2002 also
included asset write-offs related to the rationalization of these facilities, as
well as charges for the write-off of certain generic reader inventories.
Phase 3 of the 2002 restructuring program related to the termination of 30
employees around the world and to a material adjustment to the restructuring
charge recorded in respect of employee reductions in France, resulting from a
precise calculation following the end of the voluntary period (July 12, 2002)
for most of the French employees. The end of the voluntary period for the French
social plan will occur in November 2002 and will mainly concern employees
involved in manufacturing activities. In addition to the charge associated with
the termination of employees, the restructuring charge recorded during the third
quarter of 2002 also included costs related to office space reductions in the
south of France and to the partial closing of office space in Dubai. It also
included asset write-offs related to the rationalization of these offices.
In total, the restructuring charge estimated for 2002 is expected to be
approximately (euro) 74 million, of which:
Phase 1 - (euro) 19.3 million charge consisting of (euro) 8.8
million for headcount reductions, (euro) 6.5 million for
consolidation of facilities, (euro) 2.2 for other exit
costs and (euro) 1.8 million related to fixed asset
write-offs.
Phase 2 - (euro) 43.1 million charge consisting of (euro) 34.9
million for headcount reductions, (euro) 3.1 million for
consolidation of facilities, (euro) 0.7 for other exit
costs, (euro) 3.3 million related to fixed asset write-offs
and (euro) 1.1 million related to inventory write-offs.
Phase 3 - (euro) 8.3 million charge consisting of (euro) 5.9
million for headcount reductions, (euro) 0.5 million for
consolidation of facilities and (euro) 1.9 million related
to asset write-offs.
In a fourth phase (Phase 4), the Company expects to record approximately an
additional maximum of (euro) 3 million restructuring charge related to
additional employee terminations and costs related to the rationalization of
office facilities in North America and Europe. These costs will be recorded
during the fourth quarter of 2002.
In 2002, total cash outlays for the restructuring programs are expected to
amount to approximately (euro) 35 - 36 million, of which:
- (euro) 5-6 million for the restructuring program implemented in 2001,
- (euro) 29 million for Phases 1 to 3 of the 2002 restructuring program,
- (euro) 1 million for Phase 4 of the 2002 restructuring program.
Restructuring activity at the end of September 2002 was as follows:
- Concerning the 2001 restructuring program:
(in thousands of euros)
---------------------------------------------------------------------------------------------
Reduction of
workforce and Non-cash
other cash write-offs
2001 restructuring program outflows of assets Total
---------------------------------------------------------------------------------------------
2001 restructuring charge 22,022 6,444 28,466
---------------------------------------------------------------------------------------------
Amounts utilized in 2001 (15,466)
Exchange rate differences (379)
Restructuring reserve as at December 31, 2001 6,177
---------------------------------------------------------------------------------------------
Amounts utilized in first quarter 2002 (3,902)
Exchange rate differences 30
Restructuring reserve as at March 31, 2002 2,305
---------------------------------------------------------------------------------------------
Amounts utilized in second quarter 2002 (706)
Exchange rate differences (140)
Restructuring reserve as at 1,459
June 30, 2002
---------------------------------------------------------------------------------------------
Amounts utilized in third quarter 2002 (375)
Exchange rate differences 41
Restructuring reserve as at 1,125
September 30, 2002
---------------------------------------------------------------------------------------------
- Concerning the 2002 restructuring program:
(in thousands of euros)
---------------------------------------------------------------------------------------------
Reduction of
workforce and Non-cash
other cash write-offs
2002 restructuring program outflows of assets Total
---------------------------------------------------------------------------------------------
First quarter 2002 restructuring charge 18,065 1,259 19,324
Amounts utilized in first quarter 2002 (4,568)
Exchange rate differences (75)
---------------------------------------------------------------------------------------------
Restructuring reserve as at March 31, 2002 13,422
---------------------------------------------------------------------------------------------
Second quarter 2002 restructuring charge 39,059 4,070 43,129
Amounts utilized in second quarter 2002 (6,339)
Exchange rate differences (865)
---------------------------------------------------------------------------------------------
Restructuring reserve as at June 30, 2002 45,277
---------------------------------------------------------------------------------------------
Third quarter 2002 restructuring charge 6,252 2,032 8,284
Amounts utilized in third quarter 2002 (6,895)
Exchange rate differences 91
---------------------------------------------------------------------------------------------
Restructuring reserve as at September 30, 2002 44,725
---------------------------------------------------------------------------------------------
9/ Comprehensive income
Certain items defined as other comprehensive income, such as foreign currency
translation adjustments, are reported separately from retained earnings and
additional paid-in-capital in the shareholders' equity section of the balance
sheets.
The components of cumulative other comprehensive income in the shareholders'
equity section of the balance sheets as at September 30, 2002 and December 31,
2001, respectively, were as follows:
(in thousands of euros)
--------------------------------------------------------------------------------
September 30, December 31,
2002 2001
(unaudited)
--------------------------------------------------------------------------------
Cumulative translation adjustment (2,763) (3,567)
Net unrealized gain (loss) on hedging instruments
qualifying as effective 4,464 (401)
--------------------------------------------------------------------------------
Cumulative other comprehensive income 1,701 (3,968)
--------------------------------------------------------------------------------
The components of comprehensive income (loss) for the three-month and nine-month
periods ended September 30, 2002 and 2001, respectively, were as follows:
(in thousands of euros)
-----------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited)
-----------------------------------------------------------------------------------------------------------
Net income (loss) (38,584) 6,586 (224,114) (40,366)
-----------------------------------------------------------------------------------------------------------
Change in cumulative translation adjustment (885) (999) 803 (863)
Effect of adopting IAS 39 as at January 1, 2001 - - - 9,093
Change in fair value of available-for-sale financial
assets - - - (286)
Change in fair value of derivatives qualifying as
effective hedging instruments (4,108) (1,891) 4,865 (8,807)
-----------------------------------------------------------------------------------------------------------
Change in cumulative other comprehensive income (loss) (4,993) (2,890) 5,668 (863)
-----------------------------------------------------------------------------------------------------------
Comprehensive net income (loss) (43,577) 3,696 (218,446) (41,229)
-----------------------------------------------------------------------------------------------------------
10/ Differences between International Accounting Standards and U.S.
Generally Accepted Accounting Principles
The Company's consolidated financial statements are prepared in accordance with
IAS, which differ in certain respects from generally accepted accounting
principles in the United States (U.S. GAAP).
The principal differences between IAS and U.S. GAAP are presented below:
(in thousands of euros, except for net income per share)
----------------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with IAS (38,584) 6,586 (224,114) (40,366)
----------------------------------------------------------------------------------------------------------------------
Capitalized development costs (273) (1,561) (1,650) (2,239)
Share options accounting (5,018) (7,357) 2,249 67,864
Purchase consideration (1,512) - (2,351) -
Goodwill amortization 1,697 - 15,075 -
Other differences 95 223 396 313
Deferred tax effect of U.S. GAAP adjustments 56 1,243 (610) 1,447
----------------------------------------------------------------------------------------------------------------------
Total differences between U.S. GAAP and IAS (4,955) (7,452) 13,109 67,385
----------------------------------------------------------------------------------------------------------------------
Net income (loss) per U.S. GAAP before change in
accounting principle (43,539) (866) (211,005) 27,019
----------------------------------------------------------------------------------------------------------------------
Change in accounting principles - Hedge accounting - - - (8,807)
----------------------------------------------------------------------------------------------------------------------
Net income (loss) per U.S. GAAP (43,539) (866) (211,005) 18,212
----------------------------------------------------------------------------------------------------------------------
Change in cumulative other comprehensive income in
accordance with IAS (4,993) (2,890) 5,668 (863)
Change in effect of IAS/US GAAP adjustments on other
comprehensive income 60 78 (919) (305)
----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of taxes (4,933) (2,812) 4,749 (1,168)
----------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) per U.S. GAAP (48,472) (3,678) (206,256) 17,044
----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share
Basic (0.07) (0.00) (0.35) 0.03
Diluted (0.07) (0.00) (0.35) 0.03
Number of shares
Basic 606,349,540 642,922,022 606,252,885 641,146,203
Diluted 606,349,540 642,922,022 606,252,885 672,014,427
(in thousands of euros)
-------------------------------------------------------------------------------
September December
30, 2002 31, 2001
(unaudited)
-------------------------------------------------------------------------------
Shareholders' equity in accordance with IAS 950,358 1,167,762
-------------------------------------------------------------------------------
Capitalized development costs (7,168) (5,518)
Loans related to share options (4,918) (71,856)
Purchase consideration (10,455) (8,104)
Goodwill amortization 15,075 -
Effect of IAS / U.S. GAAP adjustments on other
comprehensive income (5,830) (4,911)
Other differences 86 (310)
Deferred tax effect of U.S. GAAP adjustments 623 1,224
-------------------------------------------------------------------------------
Total difference between U.S. GAAP and IAS (12,587) (89,475)
-------------------------------------------------------------------------------
Shareholders' equity in accordance with US GAAP 937,771 1,078,287
-------------------------------------------------------------------------------
11/ Presentation of the consolidated statement of income
For purposes of filing the Company's Annual Report on form 20-F with the U.S.
Securities and Exchange Commission, the consolidated statements of income
prepared in accordance with IAS include goodwill amortization above operating
income (loss).
As a result of the adoption of SFAS 142 as of January 1, 2002, the Company no
longer amortizes goodwill under US GAAP (see Note 12). Consequently, goodwill
amortization no longer represents a presentation difference between operating
income (loss) under IAS and operating income (loss) under US GAAP. However
goodwill write-down recorded following the implementation of an impairment
testing still represents a presentation difference between operating income
(loss) under IAS and operating income (loss) under US GAAP. During the
three-month period ended September 30, 2002, the Company recorded a goodwill
write-down of (euro) 15,700 thousand under IAS (see Note 4). Under US GAAP, the
write-down would have amounted to (euro) 21,256 thousand, as the carrying value
of the goodwill reviewed for impairment was higher because the Company no longer
amortizes goodwill under US GAAP since January 1, 2002.
The operating income (loss) would have been as follows under US GAAP:
(in thousands of euros)
----------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited)
----------------------------------------------------------------------------------------
Operating loss per IAS (14,805) (55,295) (148,836) (98,649)
Goodwill amortization (22,953) (6,592) (36,331) (21,028)
----------------------------------------------------------------------------------------
Operating loss - US presentation (37,758) (61,887) (185,167) (119,677)
----------------------------------------------------------------------------------------
Goodwill amortization 1,697 - 15,075 -
Purchase consideration (1,512) - (2,351) -
Capitalized development costs (273) (1,561) (1,650) (2,239)
Share options accounting (5,018) (7,357) 2,249 67,864
Interest accrued on loans related
to share options - 1,540 1,706 3,336
Provision for a loan related to
share options - - (66,938) -
Other differences 95 223 396 313
----------------------------------------------------------------------------------------
Operating income (loss) per US GAAP (42,769) (69,042) (236,680) (50,403)
----------------------------------------------------------------------------------------
12/ New accounting pronouncements under US GAAP
For the presentation of its consolidated net income and total shareholders'
equity under US GAAP, the Company adopted the following new standards:
SFAS 142:
On January 1, 2002 the Company adopted the provisions of the Statement of
Financial Accounting Standard SFAS N(degree)142, "Goodwill and other intangible
assets", issued by the Financial Accounting Standards Board ("FASB") in July
2001. SFAS 142 requires that goodwill and intangible assets with indefinite
lives no longer be amortized but be tested for impairment at least annually in
accordance with the provisions of SFAS 142. Statement 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values and be reviewed for
impairment in accordance with SFAS N(degree)144, "Accounting for the impairment
of long-lived assets to be disposed of", which was also adopted on January 1,
2002. For the period ended September 30, 2002, as a result of its adoption, the
Company did not recognize amortization expense under US GAAP. The Company has
reassessed the useful lives of its intangible assets and has not made any
adjustment. The Company did not reclassify any indefinite-life intangible assets
from goodwill, nor did the Company reclassify any intangible assets as goodwill.
In accordance with SFAS 142, the Company has six months from the date of
adoption to complete its initial impairment testing. In the event an impairment
loss is determined in the initial phase, the Company has until December 31, 2002
to finalize the calculation or effectively until June 30, 2003, the date on
which the Company's Form 20-F is due (six months after year-end). As at June 30,
2002, the Company completed its impairment testing, resulting in no material
change to the carrying value of goodwill as a result of the adoption of SFAS
142.
SFAS 144
As mentioned above, the Company adopted SFAS N(degree)144, "Accounting for the
impairment or disposal of long-lived assets", which was issued by the FASB on
October 3, 2001. SFAS 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of".
However, it retains many of the fundamental provisions of that Statement. SFAS
144 also amends the accounting and reporting provisions of APB 30, "Reporting
the Results of Operations-Discontinued Events and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", to broaden the definition of
what constitutes a discontinued operation, amends the accounting and
presentation for discontinued operations, and amends ARB 51, "Consolidated
Financial Statements to eliminate the exception to consolidation for a
temporarily controlled subsidiary". SFAS 144 is effective for fiscal years
beginning after December 31, 2001. The adoption of this standard does not have a
material impact on the Company's consolidated net income and total shareholders'
equity under US GAAP.
SFAS 141
In July 2001, the FASB issued Statement No 141, "Business Combinations". The
provisions of this Statement were required to be adopted immediately. Statement
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that must be met in order for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. During the nine-month period ended September 30, 2002, the Company has
not entered into any business combination transactions.
13/ Related party transactions
During the nine-month period ended September 30, 2002, the Company paid amounts
totaling (euro) 10,629 thousand in connection with the resignation and
cessation, respectively, of its former Chief Executive Officer, Mr. Perez, on
December 19, 2001 and its former Chairman of the Board of Directors, Dr. Lassus,
on January 10, 2002. The payment to Dr. Lassus also included an amount in
relation to costs for pledging the shares of the Company held by Dr. Lassus (the
shares ultimately were not pledged, as discussed further below).
During the nine-month period ended September 30, 2002, upon the advice of its
external auditors, the Company recorded a financial expense of (euro) 67 million
following the write-down of a loan granted to its former Chairman of the Board
of Directors, Dr. Lassus. This loan was granted to Dr. Lassus by one of the
Company's indirect subsidiaries in 2000 to permit him to exercise stock options,
pursuant to his then-current terms of employment. The write-down was recorded to
cover the risk of possible non-reimbursement, as the Company has not yet
received the guarantees of reimbursement (including a pledge of his option
shares) that Dr. Lassus was required to provide, inter alia and as confirmed in
the letter agreement signed with him on December 19, 2001. The Company however
has not forgiven the loan and still expects to be fully reimbursed by Dr.
Lassus. The Company's Board of Directors has established a special committee
that recommended that it was appropriate for the Company's indirect subsidiary
to take action to seek security for the loan and its repayment. The Company's
Board of Directors agreed on the special committee's recommendations based on
the opinion of special independent legal counsel.
During 2001, the Company entered into an agreement with a service company whose
Chief Executive Officer, Mr. Ronald Mackintosh, also served on our Board of
Directors. Mr. Mackintosh served as our interim Chief Executive Officer from
December 19, 2001 to August 30, 2002 and resigned as Chief Executive Officer of
the service company effective on December 19, 2001. He remains a member of its
board of directors and our board of directors. This service company was
appointed to provide an independent review of the Company's management,
information, organization and business systems as well as identification and
recommendation of improvements. In 2002, the Company continued to use the
services of this company and the total cost recorded in its consolidated
statement of income in the nine-month period ended September 30, 2002 for this
arrangement amounted to (euro)1,454 thousand.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements reflecting management's
current expectations regarding our future financial performance. Such
expectations are based on certain assumptions and involve risks and
uncertainties. These uncertainties include, but are not limited to:
o trends in the wireless communication and financial services markets,
o trends in the growth of mobile commerce, mobile banking and internet
business,
o the effect of the adoption of competing technologies in our target markets,
o the profitability of our market expansion strategy,
o our ability to develop and take advantage of new software and services,
o our ability to develop and market new chip card technologies to meet market
demands,
o our ability to attract and retain qualified executives and personnel,
o our ability to manage our inventories of microprocessor chips,
o challenges to or loss of our intellectual property rights regarding our chip
card technology,
o expected intense competition in our main markets,
o our ability to implement our restructuring plans effectively, and
o trade risks, legal risks, and social and economic risks, and other risks
that are described in our filings with the U.S. Securities and Exchange
Commission.
You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date hereof. 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 the U.S. securities laws and regulations, we
determine that such an update is necessary.
Results of Operations
Third quarter 2002 compared with third quarter 2001
Net Sales
Net sales for the third quarter ended September 30, 2002 amounted to
(euro) 205.6 million, a 9% decrease compared with net sales of (euro) 226.1
million for the same period in 2001. Excluding our disposed operations, i.e. the
SkiData and Tag activities sold during the third quarter of 2001, net sales
recorded in the third quarter of 2001 amounted to (euro) 216.1 million,
resulting in an adjusted 5% decrease of net sales in the third quarter of 2002
as compared to the same period in 2001. The decrease was primarily due to the
impact of currency exchange rate movements, as all four of the major non-euro
currencies in which we recorded our net sales (the Chinese Renminbi, the US
Dollar, the Singapore Dollar and the British Pound) weakened against the euro.
The decrease in net sales impacted both our telecommunications segment and our
financial services and security segment.
In our telecommunications segment, which consists of wireless products,
prepaid phone cards and other products, sales decreased 4% in the third quarter
of 2002 as compared to the same period in 2001. Our telecommunication segment
experienced strong price pressure, as well as lower demand for our prepaid phone
cards. Net sales of wireless products increased, however, despite continuous
price pressure, due to increased volumes (SIM card shipments in the third
quarter of 2002 were up 52% as compared to same period last year) and
improvement of our sales mix as we see indications that demand is progressively
shifting towards higher value added wireless products.
Net sales in the financial services and security segment, which
consists of products and services based on chip card technology in areas such as
financial services, identification, health care, corporate security, loyalty
programs, transportation access, pay-television applications, as well as
magnetic stripe plastic cards for banking applications and smart card readers
and interfacing technologies, decreased 8% in the third quarter of 2002 as
compared to the same period in 2001.
The following table shows the breakdown of our net sales in the
three-month periods ended September 30, 2002 and 2001 by market segment.
Three months ended
September 30,
------------------ --------
2002 2001 % change
------ ------ --------
(millions of euros)
Telecommunications......................... 139.9 145.0 (4%)
Financial services and security ........... 65.7 71.1 (8%)
Disposed operations(*) .................... - 10.0 (100%)
----- ----- ------
Total...................................... 205.6 226.1 (9%)
===== ===== ======
(*) includes SkiData and Tag activities, which we sold during the third quarter
of 2001.
Our telecommunications segment was favorably impacted by wireless sales
in the third quarter of 2002. We recorded net sales of wireless products and
services of (euro) 104.7 million in the third quarter of 2002, representing an
increase of 6% as compared to (euro) 100.1 million recorded in the third quarter
of 2001. The increase resulted primarily from higher volume, as shipments of SIM
cards were up 52% as compared to the same period last year, and from the
improvement of sales mix in SIM cards, driven in particular by the dynamic
end-user menu-displayed equipped SIM cards. However, these favorable factors
were partially offset by strong price pressure in the wireless market in all
regions and unfavorable currency fluctuations.
The decrease in net sales in the telecommunications segment was
attributable to phone card sales, resulting from lower demand in all regions,
with a significant slowdown in the Americas and Asia, price pressure in the
whole market and unfavorable currency fluctuations.
The telecommunications segment represented 68% of our revenues in the
third quarter of 2002, as compared to 67% of our revenues in the same period in
2001 (excluding disposed operations).
The financial services and security segment revenues decreased 8% in
the third quarter ended September 2002 compared to the same period in 2001. The
decrease in net sales resulted from challenging market conditions with EMV roll
out delays in western Europe (EMV is the major global credit card payment
association, including Europay International, MasterCard International and Visa
International), a severe contraction of the US banking and retail card market
and strong competition and severe price pressure in the Asian market. The
decrease was also attributable to unfavorable currency fluctuations. However, we
experienced a sustained level of banking activity in Europe in relation to the
Geldkarte program in Germany, although we expect that Geldkarte sales should
gradually start declining in the fourth quarter of 2002.
The financial services and security segment represented 32% of our
revenues in the second quarter of 2002, as compared to 33% of our revenues in
the same period in 2001 (excluding disposed operations).
During the third quarter of 2002, our net sales decreased in the
Americas, increased in the Europe, Middle East and Africa region and remained
stable in Asia, as compared to the same period in 2001.
The following table breaks down our net sales among our three regions:
Three months ended
September 30,
------------------ --------
2002 2001 % change
------ ------ --------
(millions of euros)
Europe, Middle East and Africa............. 110.4 102.8 +7%
Asia....................................... 52.8 52.4 +1%
Americas................................... 42.4 60.9 (30%)
Disposed operations........................ - 10.0 (100%)
----- ----- ------
Total...................................... 205.6 226.1 (9%)
===== ===== ======
The Europe, Middle East and Africa region, which represented 54% of the
third quarter net sales in 2002, experienced an increase of 7% as compared to
the same period in 2001. This resulted from increased net sales in our financial
services and security segment which benefited from stronger demand in the
banking segment driven by the Geldkarte program in Germany. In the
telecommunications segment, stronger demand for wireless SIM cards was fully
offset by price pressure and lower demand for other products.
The Asia region, which represented 26% of the third quarter net sales
in 2002, remained quite stable as compared to the same period in 2001. The
highly competitive environment in Asia affected both segments. This primarily
reflected the significant pressure on wireless sales prices despite higher
shipments of wireless products and was combined with decreased net sales in the
financial services and security segment, due to lower demand for contactless
products in Asia.
Revenues in the Americas, which represented 20% of the third quarter
net sales in 2002, decreased 30% from the same period in 2001. This resulted
primarily from lower demand for micro-processor cards primarily attributable to
a severe contraction of the US banking and retail smart card market for our
financial services and security segment in the third quarter of 2002, as
compared to the same period last year. In the telecommunications segment,
despite higher SIM card shipments, revenues declined due to lower demand for
phone cards in Latin America and strong price pressure on the whole market.
Gross profit
Gross profit increased 15% from (euro) 52.5 million in the third
quarter of 2001 to (euro) 60.5 million in the third quarter of 2002. Our gross
margin increased from 23.2% in the third quarter of 2001 to 29.4% in the same
period in 2002. Excluding disposed operations, gross profit increased 22% from
(euro) 49.6 million in the third quarter of 2001 to (euro) 60.5 million in the
same period in 2002 and our gross margin increased from 23.0% in the third
quarter of 2001 to 29.4% in the third quarter of 2002.
Gross profit increased despite price pressure affecting both our
telecommunications and financial services and security segments. Three main
favorable factors contributed to the improvement in our gross profit in the
third quarter of 2002:
- Volume improvement, driven by a significant increase of SIM card shipments
(52% increase in the third quarter of 2002 as compared to the third quarter
of 2001).
- Favorable impact of lower purchase prices for wireless microprocessor chips,
- Increased demand for higher value added wireless SIM card products and
favorable regional mix.
The following table breaks down our gross profit and gross margin by
segment.
Three months ended September 30,
2002 2001
---- ----
(millions of (% of (millions of (% of % change in
euros) sales) euros) sales) gross profit
------------ ------ ------------ ------ ------------
Telecommunications .................. 45.1 32.2% 37.7 26.0% +20%
Financial services and security...... 15.4 23.4% 11.9 16.7% +29%
Disposed operations ................. - - 2.9 29.0% (100%)
-----------------------------------------------------------
Total................................ 60.5 29.4% 52.5 23.2% +15%
==== ====
The telecommunications segment gross margin increased from 26.0% in the
third quarter of 2001 to 32.2% in the third quarter of 2002. The gross margin
increase, despite price pressure on wireless SIM card products, was mainly
attributable to lower chip purchase prices, volume improvement and favorable
product and region mix.
The financial services and security segment gross margin increased from
16.7% in the third quarter of 2001 to 23.4% in the third quarter of 2002. The
efforts to reduce our service cost structure, the favorable product mix towards
smart cards and better absorption of manufacturing fixed costs were only
partially offset by price erosion and currency fluctuations.
Operating loss
We recorded an operating loss before restructuring expenses of (euro)
22.9 million for the third quarter of 2002, compared to an operating loss of
(euro) 61.9 million in the third quarter of 2001, or (euro) 41.7 million
excluding our disposed operations and the one-time (euro)18.1 million Humetrix
litigation expense. Operating expenses before goodwill amortization and
restructuring expenses decreased by 38% from (euro) 107.8 million in the third
quarter of 2001 to (euro) 67.0 million in the third quarter of 2002, as a result
of the disposal of our Skidata and Tag businesses, the one-time Humetrix
litigation charge, the continued implementation of our restructuring programs
and sustained tight cost controls and improved business processes. Excluding
goodwill amortization, disposed operations and non recurring litigation
expenses, operating expenses before restructuring expenses decreased 21%, from
(euro) 84.7 million in the third quarter of 2001 to (euro) 67.0 million in the
third quarter of 2002.
Research and development expenses decreased 15%, from (euro) 25.6
million in the third quarter of 2001 to (euro) 21.7 million in the third quarter
of 2002. Excluding disposed operations, research and development expenses
decreased 12%, from (euro) 24.7 million in the third quarter of 2001 to (euro)
21.7 million in the third quarter of 2002. The effects of our restructuring
plans and tight cost controls on our contractors' expenses also contributed to
the decline in expenses as compared to the same period in 2001.
Selling and marketing expenses decreased 31%, from (euro) 35.8 million
in the third quarter of 2001 to (euro) 24.8 million in the third quarter of
2002. Excluding disposed operations, selling and marketing expenses decreased by
23% and amounted to (euro) 32.4 million in the third quarter of 2001 compared to
(euro) 24.8 million in the third quarter of 2002. The decrease was due to the
implementation of our restructuring plans within our business units, the lower
sales bonuses paid to certain employees resulting from the lower sales
performance and the implementation of cost reductions on marketing events and
related activities.
General and administrative expenses decreased 27% from (euro) 28.3
million in the third quarter of 2001 to (euro) 20.6 million in the third quarter
of 2002. Excluding disposed operations, general and administrative expenses
decreased by 26% from (euro) 27.6 million in the third quarter of 2001 to (euro)
20.6 million in the third quarter of 2002, due primarily to the implementation
of our restructuring plans, a rightsizing of management information system
activities and sustained tight cost controls.
Goodwill amortization amounted to (euro) 22.9 million in the third
quarter of 2002, compared to (euro) 6.6 million in the third quarter of 2001.
During the third quarter of 2002, we recorded a goodwill write-down of (euro)
15.7 million following the implementation of an impairment testing. This
write-down concerned the goodwill generated following the acquisition of SLP
InfoWare SA ("SLP") in October 2000 (see Note 4 to our financial statements
included in Item 1 of this Form 6-K)..
Restructuring expenses
We recorded a restructuring charge of (euro) 8.3 million in the third
quarter of 2002 pursuant to the restructuring and rationalization program
announced on February 6, 2002. The restructuring charge recorded in the third
quarter of 2002 was attributable to the third phase of the 2002 restructuring
program, including the termination of 30 employees around the world and a
material adjustment to the restructuring charge recorded in France, resulting
from a precise calculation following the end of the voluntary period (July 12,
2002) for most of the French employees. In addition to the charge associated
with the termination of employees, the restructuring charge recorded during the
third quarter of 2002 also included costs related to office space reductions in
the south of France and to the partial closing of office space in Dubai, as well
as asset write-offs related to the rationalization of these offices. (see Note 8
to our financial statements included in Item 1 of this Form 6-K).
Net interest income and expense
We recorded net interest income of (euro) 2.5 million in the third
quarter of 2002, compared to net interest income of (euro) 6.2 million in the
third quarter of 2001, reflecting primarily the decrease in our cash balances
and the decrease in the market interest rate. Interest receivable on loans to
senior management also accounted for a material part of the difference between
the 2001 and 2002 figures. In the third quarter of 2001, interest was accrued on
the loans granted in 2000 by one of our indirect subsidiaries to Mr. Perez, our
former Chief Executive Officer and to Dr. Lassus, our former Chairman of the
Board and a current Director. During 2001, Mr. Perez partially reimbursed the
loans that were granted to him and the unreimbursed portion of the loans was
charged to our Consolidated Statement of Income. Interest accrued in the third
quarter of 2002 on the loan granted to Dr. Lassus was totally provided to cover
the risk of possible non-reimbursement of the loan. However, we have not
forgiven the loan and expect to be fully reimbursed by Dr. Lassus.
Other income and expense, net
We recorded net other expense of (euro) 5.6 million in the third
quarter of 2002, compared to net other income of (euro) 69.9 million in the
third quarter of 2001. Net other expense in the third quarter of 2002 was
primarily attributable to foreign exchange losses ((euro) 3 million) and
minority interests ((euro) 1.4 million). Net other income in the third quarter
of 2001 primarily included a (euro) 69.0 million one-time gain generated from
our Skidata and Tag divestitures.
Income tax
We recorded an income tax credit of (euro) 2.3 million in the third
quarter of 2002, representing an effective tax rate of 12.8%, as compared to an
income tax provision of (euro) 7.7 million in the third quarter of 2001,
representing an effective tax rate of 36.8%. In the third quarter of 2001, our
effective tax rate was impacted by the one-time (euro) 69.0 million gain from
the Skidata and Tag divestitures.
Net loss
We recorded a net loss of (euro) 38.6 million in the third quarter of
2002, or (euro) 0.06 per share, as compared to net income of (euro) 6.6 million
in the third quarter of 2001, or (euro) 0.01 per share. Net loss recorded in the
third quarter of 2002 primarily reflected a restructuring charge ((euro) 8.3
million), foreign exchange losses ((euro) 3 million) and a goodwill write-down
((euro)15.7 million), which were only partially offset by an improvement in our
operating results (operating loss before restructuring was limited to (euro) 6.5
million owing to gross profit improvement and a reduction in operating expenses
as a result of the implementation of our restructuring programs). Net income
recorded in the third quarter of 2001 primarily reflected the one-time impact of
the (euro) 69.0 million gain from our Skidata and Tag divestitures, which was
primarily offset by a (euro) 37.2 million operating loss and the (euro) 18.1
million charge related to our Humetrix litigation.
Nine Months 2002 compared with Nine Months 2001
Net Sales
Net sales for the nine-month period ended September 30, 2002 amounted
to (euro) 591.9 million, a 23% decrease compared with net sales of (euro) 772.0
million for the same period in 2001. Excluding our disposed operations, net
sales recorded in the nine-month period ended September 30, 2001 amounted to
(euro) 727.7 million, resulting in an adjusted 19% decrease of net sales as
compared to the same period in 2001. Approximately 2% of this decrease in net
sales was due to the impact of currency exchange rate movements.
The decrease in net sales was mainly concentrated in our
telecommunications segment, in which sales decreased 23% in the nine-month
period ended September 30, 2002 as compared to the same period in 2001. This
decrease was primarily attributable to price pressure resulting in lower prices,
primarily in Asia and Europe. Net sales also decreased due to a decline in sales
of prepaid phone cards, which was mainly driven by lower demand in the Americas
and Asia and unfavorable exchange rate movements.
Net sales in the financial services and security segment decreased 7%
in the nine-month period ended September 30, 2002 as compared to the same period
in 2001. The decrease in our financial services and security segment was mainly
due to the slowdown of non-strategic business such as plastic and Other
Equipment Manufacturers products ("OEM" products) and contactless cards for
transport activity.
The following table shows the breakdown of our net sales in the
nine-month periods ended September 30, 2002 and 2001 by market segment.
Nine months ended
September 30,
------------------ --------
2002 2001 % change
------ ------ --------
(millions of euros)
Telecommunications......................... 403.0 525.0 (23%)
Financial services and security ........... 188.9 202.7 (7%)
Disposed operations(*) .................... - 44.3 (100%)
----- ----- ------
Total...................................... 591.9 772.0 (23%)
===== ===== =====
(*) includes SkiData and Tag activities, which we sold during the third quarter
of 2001.
In our telecommunications segment, a 22% decrease in net sales of
wireless products and services accounted for most of the decrease in net sales.
We recorded net sales of wireless products and services of (euro) 294.1 million
in the nine-month period ended September 30, 2002 as compared to (euro) 378.4
million recorded in the same period in 2001. During the nine-month period ended
September 30, 2002, the decrease reflected primarily price pressure in the
wireless market in all regions and unfavorable exchange rate movements, which
were only partly offset by stronger volume, as we sold approximately 10% more
units in the nine-month period ended September 30, 2002 compared with the same
period in 2001.
Phone card sales decreased 28% in the nine-month period ended September
30, 2002 compared to the same period in 2001, resulting from lower demand in all
regions, with a significant slowdown in the Americas and Asia, from price
pressure and from unfavorable exchange rate movements.
Due to lower revenues, the telecommunications segment represented 68%
of our total revenues in the nine-month period ended September 30, 2002, as
compared to 72% of our total revenues in the same period in 2001 (excluding
disposed operations).
The proportion of revenues from the financial services and security
segment in our total revenues increased due to the decline in sales in the
telecommunications segment. As a result, the financial services and security
segment represented 32% of our revenues in the nine-month period ended September
30, 2002, as compared to 28% of our revenues in the same period in 2001
(excluding disposed operations).
During the nine-month period ended September 30, 2002, our net sales
decreased in all regions, as compared to the same period in 2001.
The following table breaks down our net sales among our three regions:
Nine months ended
September 30,
------------------
2002 2001 % change
------------------ --------
(millions of euros)
Europe, Middle East and Africa............. 306.3 348.0 (12%)
Asia....................................... 160.2 224.3 (29%)
Americas................................... 125.4 155.4 (19%)
Disposed operations........................ - 44.3 (100%)
----- ----- ------
Total...................................... 591.9 772.0 (23%)
===== ===== =====
The Europe, Middle East and Africa region, which represented 52% of the
net sales during the nine-month period ended September 30, 2002, decreased 12%
from the same period in 2001 excluding our disposed operations. This resulted
from the pressure on SIM card prices and lower demand for wireless products.
This was partly offset by favorable sales growth in the financial services and
security segment, primarily driven by banking activity in Germany and France.
The Asia region, which represented 27% of net sales in the nine-month
period ended September 30, 2002, decreased 29% from the same period in 2001.
This primarily reflected the significant pressure on the sales prices of
wireless products, combined with a decrease in the financial services and
security segment net sales due to lower demand for identification, security and
contactless products in Asia, as well as unfavorable exchange rate fluctuations.
Revenues in the Americas, which represented 21% of net sales in the
nine-month period ended September 30, 2002, decreased 19% from the same period
in 2001, resulting primarily from lower demand for phone cards in Latin America
and from a severe contraction of the US banking and retail smart card market.
Gross profit
Gross profit decreased 41% from (euro) 245.1 million in the nine-month
period ended September 30, 2001, to (euro) 145.1 million in the same period in
2002. Our gross margin decreased from 31.8% in the nine-month period ended
September 30, 2001 to 24.5% in the nine-month period ended September 30, 2002.
Excluding disposed operations, gross profit decreased 37% from (euro) 229.1
million in the nine-month period ended September 30, 2001, to (euro) 145.1
million in the same period in 2002 and our gross margin decreased from 31.5% in
the nine-month period ended September 30, 2001 to 24.5% in the same period in
2002.
Three unfavorable factors contributed to the decline in our gross
profit in the nine-month period ended September 30, 2002. First, the wireless
industry faced greater price pressure on SIM cards compared to the same period
of the prior year. Second, the business mix between the telecommunications and
the financial services and security segments was unfavorable with a higher
proportion of sales in our financial services and security segment where we
generate lower margins. Financial services and security gross profit remained
below that of telecommunications, and both decreased in the nine-month period
ended September 30, 2002 as compared to the same period in 2001. Third, the nine
month period ended September 30, 2001 included a one-time favorable (euro) 10
million royalty expense adjustment resulting from the partial reversal of a
provision for a patent claim that was settled as of June 30, 2001.
The following table breaks down our gross profit and gross margin by
segment.
Nine months ended September 30,
-------------------------------
2002 2001
---- ----
(millions of (millions of % change in
euros) (% of sales) euros) (% of sales) gross profit
------------ ------------ ------------ ------------ ------------
Telecommunications ................... 111.6 27.7% 188.7 35.9% (41%)
Financial services and security....... 33.5 17.7% 40.4 19.9% (17%)
Disposed operations .................. - - 16.0 36.1% (100%)
------------------------------------------------------------------------
Total................................. 145.1 24.5% 245.1 31.7% (41%)
===== =====
The telecommunications segment gross margin decreased from 35.9% in the
nine-month period ended September 30, 2001, to 27.7% during the same period in
2002. This decrease was mainly attributable to price pressure on wireless SIM
cards. In addition, gross profit recorded in the nine-month period ended
September 30, 2001 had been favorably impacted by a one-time royalty expense
adjustment resulting from the partial reversal of a provision for a patent
claim.
The financial services and security segment gross margin decreased from
19.9% in the nine-month period ended September 30, 2001 to 17.7% during the same
period in 2002. The financial services and security segment gross margin
suffered from an unfavorable product mix and from the underabsorption of certain
manufacturing fixed costs, which was only partially offset by the trend towards
better absorption of these costs in the third quarter of 2002. In addition,
gross profit recorded in the nine-month period ended September 30, 2001 had been
favorably impacted by the one-time royalty expense adjustment.
Operating loss
We recorded an operating loss before restructuring expenses of (euro)
114.4 million in the nine-month period ended September 30, 2002, compared to an
operating loss of (euro) 91.2 million in the same period of 2001. The operating
loss before restructuring expenses amounted to (euro) 114.4 million in the
nine-month period ended September 30, 2002, compared to an operating loss of
(euro) 82.1 million in same period in 2001, excluding our disposed operations,
SkiData and Tag activities. Operating expenses before restructuring expenses and
goodwill amortization decreased by 29% from (euro) 315.3 million in the
nine-month period ended September 30, 2001 to (euro) 223.2 million in the same
period in 2002, as a result of the disposal of our SkiData and Tag businesses
and the one-time Humetrix litigation charge in the period in 2001 and the
effects of the continued implementation of our restructuring programs and the
sustained tight cost controls and improved business processes in the period in
2002. Excluding disposed operations and goodwill amortization, operating
expenses before restructuring expenses were (euro) 290.2 million in the
nine-month period ended September 30, 2001, as compared to (euro) 223.2 million
in the same period in 2002.
Research and development expenses decreased 18%, from (euro) 87.9
million in the nine-month period ended September 30, 2001 to (euro) 72.2 million
in the same period in 2002. Excluding disposed operations, research and
development expenses decreased 10%, from (euro) 80.3 million in the nine-month
period ended September 30, 2001 to (euro) 72.2 million in the same period in
2002. The effects of our restructuring plans and tight cost controls brought
additional savings compared to the prior period.
Selling and marketing expenses decreased 34%, from (euro) 128.4 million
in the nine-month period ended September 30, 2001 to (euro) 85.3 million in the
same period in 2002. Excluding disposed operations, selling and marketing
expenses decreased by 25% and amounted to (euro) 114.2 million in the nine-month
period ended September 30, 2001 compared to (euro) 85.3 million in the same
period in 2002. The decrease was due to the implementation of our restructuring
plans within our business units and cost reduction measures on marketing events
and related activities.
General and administrative expenses decreased 19% from (euro) 80.8
million in the nine-month period ended September 30, 2001 to (euro) 65.6 million
in the same period in 2002. Excluding disposed operations, general and
administrative expenses decreased by 15% from (euro) 77.6 million in the
nine-month period ended September 30, 2001 to (euro) 65.6 million in the same
period in 2002, due primarily to a rightsizing of management information system
activities and sustained tight cost controls in the nine-month period ended
September 30, 2002.
Goodwill amortization amounted to (euro) 36.3 million in the nine-month
period ended September 30, 2002, compared to (euro) 21.0 million in the
nine-month period ended September 30, 2001. Goodwill amortization in the
nine-month period ended September 30, 2002 included a goodwill write-down of
(euro) 15.7 million following the implementation of an impairment testing. This
write-down concerned the goodwill generated following the acquisition of SLP
InfoWare SA ("SLP") in October 2000 (see Note 4 to our financial statements
included in Item 1 of this Form 6-K).. Goodwill amortization recorded in the
nine-month period ended September 30, 2001 included a one-time (euro) 1.1
million charge resulting from a write-off of goodwill previously recorded from
the acquisition of a 21% equity interest in Softcard due to Softcard's decision
to cease its operations.
Restructuring expenses
We recorded a restructuring charge of (euro) 70.7 million in the
nine-month period ended September 30, 2002, as compared to a restructuring
charge of (euro) 28.5 million in the nine-month period ended September 30, 2001.
The restructuring charge recorded in the nine-month period ended September 30,
2002 was related to the restructuring and rationalization program announced on
February 6, 2002, and included the reduction of the workforce and the
rationalization of office facilities on a worldwide basis, pursuant to phases 1
to 3 of the 2002 restructuring program. The restructuring charge recorded in the
nine-month period ended September 30, 2001 was related to the restructuring
program announced on May 2, 2001 and was primarily attributable to the closure
of a manufacturing facility in Germany, a reduction of the workforce following
the combination of the our financial services and internet business security
activities, and the rationalization of office facilities on a worldwide basis
(see Note 8 to our financial statements included in Item 1 of this Form 6-K).
Net interest income and expense
We recorded net interest expense of (euro) 55.0 million in the
nine-month period ended September 30, 2002, compared to net interest income of
(euro) 16.3 million in the same period of 2001. Net interest expense and income
were impacted by the following specific factors:
o Provision for a loan to the former Chairman of the Board: net interest
expense incurred in the nine-month period ended September 30, 2002, included
a (euro) 67.0 million non-cash financial charge following the provision
recorded to cover the risk of possible non-reimbursement of a loan granted
by one of our indirect subsidiaries in 2000 to Dr. Marc Lassus, our former
Chairman of the Board and a current Director. We have not forgiven the loan
and expect to be fully reimbursed by Dr. Lassus.
o Interest receivable on loans to senior management: net interest expense
incurred in the nine-month period ended September 30, 2001, included a
(euro) 3.3 million interest income on the loans granted in 2000 by one of
our indirect subsidiaries to Mr. Perez, our former Chief Executive Officer,
and to Dr. Lassus. During 2001, Mr. Perez partially reimbursed the loans
that were granted to him and the unreimbursed portion of the loans was
charged to our Consolidated Statement of Income. Net interest accrued in the
nine-month period ended September 30, 2002 on the loans granted to Dr.
Lassus was (euro)1.7 million.
o Measurement at amortized cost of an advance made to a trade supplier: net
interest income incurred in the nine-month period ended September 30, 2001
included a (euro) 2.3 million interest expense following the measurement at
amortized cost of an advance made to a trade supplier, as compared to a
(euro) 1.0 million interest income following such measurement in the
nine-month period ended September 30, 2002.
Excluding these specific items, net interest income reported in the
nine-month period ended September 30, 2002 amounted to (euro) 9.2 million, as
compared to net interest income of (euro) 15.2 million in the same period in
2001, reflecting primarily the decrease in our cash balances and the decrease in
the market interest rate.
Other income and expense, net
We recorded net other expense of (euro) 15.1 million in the nine-month
period ended September 30, 2002, compared to net other income of (euro) 55.3
million in the nine-month period ended September 30, 2001. Net other expense in
the nine-month period ended September 30, 2002 was primarily attributable to
losses on investments and foreign exchange losses. Net other income in the
nine-month period ended September 30, 2001 primarily included a (euro) 69.0
million one-time gain generated from our Skidata and Tag divestitures, which was
only partially offset by foreign exchange losses and minority interests.
Income tax
We recorded an income tax credit of (euro) 31.2 million in the
nine-month period ended September 30, 2002, representing an effective tax rate
of 14.3%, as compared to an income tax credit of (euro) 7.7 million in the
nine-month period ended September 30, 2001, representing an effective tax rate
of 28.6%. In the nine-month period ended September 30, 2002, our effective tax
rate declined primarily due to the (euro) 67 million non-cash write-down of a
loan granted to one of our directors. In the nine-month period ended September
30, 2001, our effective tax rate was impacted by the one-time (euro) 69.0
million gain from the Skidata and Tag divestitures.
Net loss
We recorded a net loss of (euro) 224.1 million in the nine-month period
ended September 30, 2002, or (euro) 0.37 per share, as compared to a net loss of
(euro) 40.4 million in the nine-month period ended September 30, 2001, or (euro)
0.06 per share. The net loss recorded in the nine-month period ended September
30, 2002 primarily reflected the (euro) 70.7 million restructuring charge, the
(euro) 67 million non-cash write-down of a loan granted in 2000 to one of our
directors and the decline in our gross margin that was only partially offset by
the reduction of our operating expenses as a result of the implementation of our
restructuring program. The net loss recorded in the nine-month period ended
September 30, 2001 primarily reflected the decrease of our operating income, the
(euro) 28.5 million restructuring expense and the (euro) 18.1 million one-time
charge for our Humetrix lawsuit, which were partially offset by the impact of
the (euro) 69.0 million one-time gains from our Skidata and Tag divestitures.
Liquidity and Capital Resources
Our financial position remained strong in the nine-month period ended
September 30, 2002. Cash and cash equivalents were (euro) 400.8 million at
September 30, 2002 as compared to (euro) 490.7 million at December 31, 2001.
Excluding non-recurring items, primarily restructuring charges, one-time royalty
prepayment, amounts paid in connection with a litigation expense and management
severance costs accrued in 2001, cash outflows during the first nine months of
2002 were contained. We also used limited amounts of cash to fund our purchases
of property, plant and equipment and investments.
Operating activities used (euro) 69.3 million of cash during the
nine-month period ended September 30, 2002, compared to (euro) 76.0 million of
cash used during the same period in 2001. Net cash used in operating activities
in the first nine months of 2002 was impacted by four non-recurring items: (i)
(euro) 22.8 million paid in connection with our restructuring program, (ii)
(euro) 11.2 million of a one-time royalty prepayment for the period through
2004, (iii) (euro) 18.1 million paid with respect to the exceptional costs
relating to the Humetrix litigation and (iv) (euro) 10.6 million paid in
management severance costs accrued in 2001. Excluding these exceptional items,
net cash used in operating activities in the first nine months of 2002 was
limited to (euro) 6.6 million, as a result of significant improvements produced
by working capital management. Inventory levels declined (euro) 22 million in
the first nine months of 2002 as compared to December 31, 2001, representing 78
days supply compared to 71 days at the end of the second quarter of 2002, 94
days at the end of the first quarter of 2002, 110 days at the end of December
2001 and 121 days at the end of September 2001. Accounts receivable declined
(euro) 32 million as compared to December 31, 2001, reflecting the lower revenue
levels. We reported a good performance with respect to the days of sales
outstanding, at 57 days, compared to 53 days at the end of the second quarter of
2002, 63 days at the end of the first quarter of 2002, 57 days at the end of
December 2001 and 66 days at the end of September 2001.
Net cash used in investing activities in the nine-month period ended
September 30, 2002 was (euro) 44.5 million, compared to (euro) 32.4 million in
the same period in 2001. Cash used in investing activities in the nine-month
period ended September 30, 2001 included a cash inflow of (euro) 117 million due
to the divestiture of our Skidata and Tag businesses. Excluding this one-time
item, net cash used in investing activities in the nine-month period ended
September 30, 2001 amounted to (euro) 149.4 million. The decrease in cash used
in investing activities in the nine-month period ended September 30, 2002 was
primarily due to the decrease in capital expenditures as compared to the same
period in 2001. Capital expenditures were (euro) 31.9 million in the nine-month
period ended September 30, 2002 as compared to (euro) 94.3 million in the same
period in 2001. In the first nine months of 2002, capital expenditures were made
primarily in Europe, and included principally (euro) 17.2 million related to a
research and development and office building located in La Ciotat, France, which
was mainly financed through a sale-leaseback transaction. Cash used in investing
activities in the first nine months of 2002 also included (euro) 13.9 million in
connection with investments in start-up technology companies. Cash used in
investing activities in the first nine months of 2001 included a (euro) 13
million cash disbursement for the purchase of 20% of Skidata's issued share
capital in anticipation of the sale of this subsidiary which was completed
during the third quarter of 2001, as well as investments made primarily in two
technology companies in the wireless communications market. Cash used in
investing activities in the first nine months of 2001 also included a (euro) 14
million loan to Mr. Perez, our former Chief Executive Officer, to fund tax
liabilities relating to his receipt of a grant of free shares in 2000.
Financing activities generated (euro) 4.0 million of cash during the nine-month
period ended September 30, 2002, compared to (euro) 14.2 million used by our
financing activities during the same period in 2001. The 2002 figure was
primarily the result of the (euro) 16.0 million proceeds generated by a
sale-leaseback transaction entered into to finance land and a research and
development and office building located in La Ciotat, France. Cash generated by
financing activities in the nine-month period ended September 30, 2002 was also
impacted by the payment of dividends to minority shareholders of one of our
Asian subsidiaries in the amount of (euro) 5.0 million. Negative cash flow from
financing activities during the nine-month period ended September 30, 2001 was
principally attributable to the purchase of shares of Gemplus SA at fair market
value for (euro) 14.5 million, the payment of (euro) 8 million concerning
expenses incurred in 2000 in connection with sales of equity securities to Texas
Pacific Group and with respect to the initial public offering, the repurchase of
shares of our outstanding common stock for (euro) 6.3 million and the payment of
dividends to minority shareholders of one of our Asian subsidiaries of (euro)
4.3 million.
We entered into a (euro) 150 million revolving credit facility in 1999
with a syndicate of international banking institutions that bears interest at a
floating rate. (euro) 76.9 million of loan commitments under the revolving
credit facility expired without being used ((euro) 52.5 million in July 2000 and
(euro) 24.4 million in July 2002). Out of the remaining (euro) 73.1 million,
(euro) 24.4 million will expire in July 2003 and (euro) 48.7 million in July
2004. As of September 30, 2002, we had not drawn any amounts under the revolving
credit facility.
We believe that our existing cash resources, our anticipated cash flow
from operations and amounts available for drawdowns under our working capital
facility are sufficient to provide for our foreseeable near term and medium term
liquidity needs. At September 30, 2002, cash and cash equivalents amounted to
(euro) 400.8 million.
Item 3. Qualitative Disclosures About Market Risk
We develop products in our worldwide manufacturing centers and sell
these products and provide related services around the world. Generally, our
sales are made in the local currency of the place of delivery or where the
service is rendered, and part of our manufacturing costs are incurred in the
local currency of the place of each of our manufacturing sites. As a result, our
results of operations are affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. To
minimize the impact of these factors on the profitability of our business and
our overall financial performance, we seek to provide cost efficient funding to
our business and our subsidiaries and to identify, evaluate and hedge financial
risks in cooperation with our subsidiaries around the world.
Our policy is to hedge against changes in foreign currency rates. The
management of our hedging activity is carried out centrally by our corporate
treasury in accordance with the objectives and procedures established by
management and approved by our Audit Committee. Our operating policies cover
specific areas such as foreign exchange risk (including the use of derivative
financial instruments), interest rate risk and credit risk. Affiliated companies
are not permitted to enter into derivative contracts other than with our
corporate treasury. Derivative instruments are used for hedging purposes only.
Foreign exchange risk
We measure our foreign exchange exposure based on anticipated and
identified transactions, both on purchases and sales. Each of our subsidiaries
regularly measures its exposure and reports it to our corporate treasury. Our
corporate treasury department seeks to hedge our foreign currency exposure on
most of our firm and anticipated purchases and sales commitments denominated in
currencies other than its subsidiaries' functional currencies for periods
commensurate with its known or forecasted transactions. Our foreign currency
hedging contracts generally mature within twelve months. Our corporate treasury
uses currency derivative instruments such as foreign exchange forward contracts
and foreign exchange option contracts. These derivative instruments are
generally traded over-the-counter with major financial institutions. From its
trade date, each hedging operation is allocated to an underlying exposure.
The financing of most of our subsidiaries is managed by our corporate
treasury through inter-company current accounts, using foreign exchange spot and
forward transactions to convert our cash denominated in euros into the
subsidiary's functional currency. We place any excess liquidity in money market
investments with not more than three-month maturity dates. Our money market
investments are placed with major financial institutions in order to reduce our
credit risk exposure.
In addition, because we have subsidiaries located outside the euro-zone
whose functional currencies are different than the euro, the euro-denominated
value of our consolidated equity is exposed to fluctuations in exchange rates.
Equity changes caused by movements in foreign exchange rates are shown as a
translation difference in our consolidation.
Interest rate risk
We are not materially exposed to interest rates fluctuations. Our
indebtedness was significantly reduced during 2000 with the proceeds of our
capital increases and we have few fixed rate borrowings. Cash and cash
equivalents are invested in money market accounts that pay interest at a
floating rate. Debts and cash are mostly denominated in euros. As of September
30, 2002, we had not entered into any interest rate risk hedging transactions.
Equity risk in minority investments
We have several minority equity investments in publicly traded
companies. The book value of our minority equity investments in publicly traded
companies was totally provided for as of September 30, 2002. Because these
investments are relatively small, we currently do not have any outstanding
derivative financial instruments to hedge fluctuations in these marketable
equity investments.
Part II -Other Information
Item 1. Legal proceedings
We are subject to legal proceedings, claims and litigation arising in the
ordinary course of business. Our management does not expect that the ultimate
costs to resolve these matters will have a material adverse effect on our
consolidated financial position, results of operations, or cash flows.
Item 2. Changes in securities
Not applicable
Item 3. Default upon senior securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Further information can be found on the Company in the Annual Report on Form
20-F filed with the Securities and Exchange Commission on July 1, 2002, as
amended on July 24, 2002.
Item 6. Exhibits and other reports on Form 6-K
(a) Exhibits:
Not applicable
(b) Other reports on Form 6-K:
A report on Form 6-K was filed in September 2002 containing our report on our
results of operations for the second quarter of 2002.
A report on Form 6-K was filed in October 2002 reporting the cancellation of the
extraordinary shareholders' meeting convened for October 22, 2002.
A report on Form 6-K was filed in October 2002 reporting the convening of a new
extraordinary shareholders' meeting for November 21, 2002.
A report on Form 6-K was filed in November 2002 reporting our press release and
analysts' presentation dated October 31, 2002, on our results of operations for
the third quarter of 2002.
A report on Form 6-K was filed in November 2002 reporting the adjournment of the
Extraordinary General Meeting of shareholders held on November 21, 2002 and the
rescheduling of a new Extraordinary General Meeting of shareholders on December
19, 2002 with the same agenda.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GEMPLUS INTERNATIONAL S.A.
Date: December 2, 2002
By: /s/ Yves Guillaumot
-----------------------------------
Name: Yves Guillaumot
Title: Chief Financial Officer