6 REFERENCE DOCUMENT FISCAL YEAR 2003 In application of COB ruling no. 95-01, the Autorité des Marchés Financiers registered the present Reference Document on September 30, 2004 under no. R 04-185. It can only be used as a support for a financial transaction unless it is accompanied by an Operation Note registered by the AMF. This Reference Document was drawn up by the issuer and is binding for its signatories. The registration, carried out after examination of the pertinence and consistency of the data given on the company situation, does not imply authentication of the accounting and financial data presented. Warning The Autorité des Marchés Financiers draws the attention of the public to the following points: - The statutory auditors have certified the annual and consolidated financial statements for the fiscal year ending December 31,2003 without reserves and with one observation regarding the procedure for determining the provisions relating to the stoppage of production at the Bernin plant, and regarding uncertainty as to the evaluation of these provisions as stated in notes 2.2, 3.11 and 4.8 of the appendix to the annual financial statements and 1.2.2, 1.3.14.1 and 11 of the consolidated financial statements. The statutory auditors maintained their observation in their limited examination report on the mid-term financial statements for the period January 1 to June 30, 2004; - The opinion of the statutory auditors given in paragraph 1.4 mentions that "note 5.9 on page 111 of the Reference Document presents the proforma reclassification of part of the provision for risks and charges as a decrease of the intangible fixed assets items. This reclassification will be corrected in the financial statements closed at December 31, 2004 and for this same proforma data in the financial statements for fiscal year 2003, presented for comparative purposes". - Consolidated losses increased from €27.84 million at December 31, 2002 to €58.63 million at December 31, 2003. At June 30, 2004, consolidated net loss was €4.9 million as against €13.9 million on the same date in 2003; - The contribution value of GalayOr stock set at €8.7 million, and approved by the Extraordinary Shareholder Meeting of October 6, 2003, was fully depreciated in the financial statements for the fiscal year ending December 31, 2003 following the decision to halt the packaged component manufacturing business; - Paragraph 3.2.7 referring to potential capital, including the fact that a 20.45% dilution may give rise to the exercise of stock options, founders' warrants and warrants; - Paragraph 4.2.6 referring to customers, including the fact that the company's revenue is dependent on a limited number of customers; - The company has not paid dividends since its creation and does not intend to do so in the medium term. This document is available at the company's headquarters and can be consulted on own its website (www.memscap.com) and on the AMF website (www.amf -france.org).
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REFERENCE DOCUMENT FISCAL YEAR 2003
In application of COB ruling no. 95-01, the Autorité des Marchés Financiers registered the present Reference Document on September 30, 2004 under no. R 04-185. It can only be used as a support for a financial transaction unless it is accompanied by an Operation Note registered by the AMF. This Reference Document was drawn up by the issuer and is binding for its signatories. The registration, carried out after examination of the pertinence and consistency of the data given on the company situation, does not imply authentication of the accounting and financial data presented.
Warning The Autorité des Marchés Financiers draws the attention of the public to the following points: - The statutory auditors have certified the annual and consolidated financial statements for the fiscal year ending December 31,2003 without reserves and with one observation regarding the procedure for determining the provisions relating to the stoppage of production at the Bernin plant, and regarding uncertainty as to the evaluation of these provisions as stated in notes 2.2, 3.11 and 4.8 of the appendix to the annual financial statements and 1.2.2, 1.3.14.1 and 11 of the consolidated financial statements. The statutory auditors maintained their observation in their limited examination report on the mid-term financial statements for the period January 1 to June 30, 2004; - The opinion of the statutory auditors given in paragraph 1.4 mentions that "note 5.9 on page 111 of the Reference Document presents the proforma reclassification of part of the provision for risks and charges as a decrease of the intangible fixed assets items. This reclassification will be corrected in the financial statements closed at December 31, 2004 and for this same proforma data in the financial statements for fiscal year 2003, presented for comparative purposes". - Consolidated losses increased from €27.84 million at December 31, 2002 to €58.63 million at December 31, 2003. At June 30, 2004, consolidated net loss was €4.9 million as against €13.9 million on the same date in 2003; - The contribution value of GalayOr stock set at €8.7 million, and approved by the Extraordinary Shareholder Meeting of October 6, 2003, was fully depreciated in the financial statements for the fiscal year ending December 31, 2003 following the decision to halt the packaged component manufacturing business; - Paragraph 3.2.7 referring to potential capital, including the fact that a 20.45% dilution may give rise to the exercise of stock options, founders' warrants and warrants; - Paragraph 4.2.6 referring to customers, including the fact that the company's revenue is dependent on a limited number of customers; - The company has not paid dividends since its creation and does not intend to do so in the medium term. This document is available at the company's headquarters and can be consulted on own its website (www.memscap.com) and on the AMF website (www.amf -france.org).
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CONTENTS
CHAPTER 1 - PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT AND FOR AUDITING THE FINANCIAL STATEMENTS - CERTIFICATION........................................................... 9
1.1 PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT .................................................9 1.2 STATEMENT OF THE PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT......9 1.3 PERSONS LEGALLY RESPONSIBLE FOR AUDITING THE FINANCIAL STATEMENTS 9 1.4 OPINION OF THE STATUTORY AUDITORS .................................................................................10 1.5 PERSONS RESPONSIBLE FOR FINANCIAL INFORMATIONS AND INVESTOR RELATIONS…………………………………………………….……………………………………….11
CHAPTER 2 - INFORMATION ON LISTED HOLDINGS ...................................................................12 CHAPTER 3 - GENERAL INFORMATION ON THE ISSUER AND ITS CAPITAL...................13
3.1 GENERAL INFORMATION ON THE ISSUER.................................................................................13 3.2 GENERAL INFORMATION CONCERNING SHARE CAPITAL.................................................18 3.3 GROUP ORGANISATION CHART AT APRIL 30, 2004................................................................32 3.4 FINANCIAL INSTRUMENTS MARKETS.........................................................................................32
CHAPTER 4 - INFORMATION ON COMPANY AND GROUP BUSINESS...................................34 4.1 OVERVIEW....................................................................................................................................................34 4.2 MEMSCAP AND ITS MARKET ENVIRONMENT ......................................................................................37 4.3 MEMSCAP'S STRATEGY...........................................................................................................................40 4.4 MEMSCAP'S OFFER ..................................................................................................................................41 4.5 A STRUCTURE ADAPTED TO COMPANY AMBITIONS AND MARKET NEEDS .............48 4.6 ANALYSIS OF RISK ...............................................................................................................................51 4.7 INSURANCE..............................................................................................................................................57 4.8 EXCEPTIONAL EVENTS AND DISPUTES ......................................................................................57 4.9 INFORMATION ON THE COMPANY................................................................................................57
CHAPTER 5 - COMPANY FINANCIAL INFORMATION: ASSETS, FINANCIAL SITUATION, RESULTS ............................................................................................................................................59
5.1 CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS 2003 AND 2004 .....59 5.2 STATUTORY AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003 ..........................................................................................................................83 5.3 FEES TO STATUTORY AUDITORS AND MEMBERS OF THEIR NETWORKS PAID BY THE COMPANY AND ITS SUBSIDIARIES................................................................................................................................................85 5.4 SUMMARY FINANCIAL STATEMENTS OF MEMSCAP S.A. AT DECEMBER 31, 2003 AND 2002.....86 5.5 GENERAL STATUTORY AUDITORS' REPORT ON THE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003................................................................92 5.6 SPECIAL STATUTORY AUDITORS' REPORT ON THE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003................................................................93 5.7 INFORMATION CONCERNING THE ADOPTION OF IFRS STANDARDS...................................................95 5.8 HALF-YEARLY CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2004 ...................................96 5.9 ACCOMPANYING NOTE TO THE APPENDICES AS REQUIRED BY THE AMF............ 110
CHAPTER 6 - ADMINISTRATION, MANAGEMENT AND CONTROL......................................116 6.1 STRUCTURE AND FUNCTIONING OF ADMINISTRATIVE, MANAGEMENT AND SUPERVISORY BODIES..................................................................................................................................... 116 6.2 MANAGERS' HOLDINGS IN SHARE CAPITAL, IN THE CAPITAL OF A CONTROLLING ENTITY AND IN SUBSIDIARIES' CAPITAL................................................................................................ 120 6.3 PROFIT-SHARING PLANS................................................................................................................. 121 6.4 REPORT BY THE CHAIRMAN OF THE BOARD OF DIRECTORS ON INTERNAL CONTROL............................................................................................................................................................... 122 6.5 STATUTORY AUDITORS' RESPONSE TO THE CHAIRMAN'S REPORT ON INTERNAL AUDIT.. .................................................................................................................................................................... 122
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CHAPTER 7 - RECENT DEVELOPMENTS AND FUTURE PROSPECTS ..................................124 7.1 RECENT DEVELOPMENTS........................................................................................................................ 124 7.2 FUTURE PROSPECTS................................................................................................................................. 125
CHAPTER 8 - APPENDIX: CHAIRMAN'S REPORT ON INTERNAL AUDIT ..........................126 8.1 INTRODUCTION......................................................................................................................................... 126 8.2 CORPORATE GOVERNANCE..................................................................................................................... 126 8.3 OPERATIONAL INTERNAL AUDIT............................................................................................................ 128 8.4 ACCOUNTING AND FINANCE INTERNAL AUDIT ................................................................................... 129
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CHAPTER 1 - PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT
AND AUDITING THE FINANCIAL STATEMENTS - CERTIFICATION
1.1 PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT M. Jean-Michel Karam, Chairman of the Board of Directors of MEMSCAP (hereafter "MEMSCAP" or the "Company").
1.2 CERTIFICATION OF THE PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT "To my knowledge, the data presented in this reference document are a true reflection of the current situation. These data include the information investors require to assess assets, business, the financial situation, earnings and the future prospects of the Company. They do not include any omissions which may alter the meaning of the information contained herein.
Chairman of the Board of Directors M. Jean-Michel Karam
1.3 PERSONS LEGALLY RESPONSIBLE FOR AUDITING THE FINANCIAL STATEMENTS
1.3.1 Statutory Auditors
M. Jean-Marie Bourgeois Parc ACTIMART -Bâtiment 7 7, allée du Pérou 38610 GIERES Date of appointment: November 21, 1997 (creation of the Company). Term of office: The Ordinary Shareholder Meeting called on to rule on the financial statements of the fiscal year ended December 31, 2003. His term of office was renewed for six years by the General Meeting of June 28, 2004 ruling in an ordinary capacity. This new term of office will expire at the end of the Ordinary Shareholder Meeting called on to rule on the financial statements of the fiscal year ending December 31, 2009. ERNST & YOUNG AUDIT Represented by M. Jean-Christophe Develay 3, rue Marcel Deprez 38027 Grenoble Date of appointment: Combined General Meeting of November 21, 2000. Term of office: Ordinary Shareholder Meetingcalled on to rule on the financial statements for the fiscal year ending December 31, 2005.
1.3.2 Alternative Statutory Auditors
M. Philippe Machon 2 C, avenue de Vignate 38610 GIERES Date of appointment: Combined General Meeting of November 21, 2000. Term of office: Ordinary Shareholder Meetingcalled on to rule on the financial statements of the fiscal year ended December 31, 2003. The mandate was renewed for six years by the General Meeting of June 28, 2004 ruling in an ordinary capacity. This new term of office will expire at the end of the Ordinary Shareholder Meetingcalled on to rule on the financial statements of the fiscal year ending December 31, 2009. M. Bruno Perrin 100, rue Raymond Losserand 75004 PARIS Date of appointment: Combined Shareholder Meeting of November 21, 2000. Term of office: Ordinary Shareholder Meetingcalled to rule on the financial statements for the fiscal year ending December 31, 2005.
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1.4 OPINION OF THE STATUTORY AUDITORS In our capacity as statutory auditors of MEMSCAP SA and pursuant to COB ruling 95-01, we proceeded to verify the information concerning the financial situation and company accounts contained in the present Reference Document in accordance with the professional standards applicable in France. This Reference Document was drawn up under the management of Mr Jean-Michel Karam, Chairman of the Board of Directors. It is our duty to express an opinion on the reliability of the information pertaining to the company's financial situation and financial statements. In accordance with the professional standards applicable in France, our diligence focused on appraising the reliability of the information pertaining to the company's financial situation and financial statements and checking their consistency with the financial statements reported. We also reviewed the other information contained in the Reference Document in order to identify any significant inconsistencies with the information concerning the financial situation and financial statements and to report on any evident misstatements noted on the basis of the overall knowledge acquired on the company as part of our mission. This Reference Document does not include any isolated forecasts resulting from a structured development process. The annual financial statements and consolidated financial statements for the fiscal years ended December 31, 2002 and December 31, 2003, approved by the Board of Directors, were audited by our firm according to the professional standards applicable in France. The annual and consolidated financial statements for the fiscal year ended December 31 2002 were certified without reservation or observation. The annual and consolidated financial statements for the fiscal year ended December 31, 2003 were certified without reservation and with an observation on the procedure used to determine provisions concerning the stoppage of production at the Bernin plant and uncertainty as to the evaluation of these provisions as mentioned in notes 2.2, 3.11 and 4.8 of the appendix to the annual financial statements (corresponding to sections 5.4.3.1, 5.4.3.7 and 5.4.3.11 of this Reference Document) and 1.2.2, 1.3.14.1 and 11 of the appendix to the consolidated financial statements (corresponding to sections 5.1.5.1.B2, 5.1.5.1.C14.1 and 5.15.11 of this Reference Document). Pursuant to the provisions of article L.225-235 of the Code de Commerce, introduced by the Financial Security Law of August 1, 2003 and applicable for the first time this fiscal year, we stated the following in our general report and our report on the consolidated financial statements to justify our appraisal: - Regarding the annual fi nancial statements:
Your company set up provisions for risks of €28,096K to cover the financial consequences of production stoppage at the Bernin site and stoppage of GalayOr activities, as described in notes 2.2, 3.11 and 4.8 in the appendix. We appraised the approach chosen by the company as described in note 3.11 of the appendix and on the basis of elements available to date, and are satisfied as to the reasonable nature of the hypotheses used and the resulting evaluations.
Equity interest is posted for a net value of €22,024K in the balance sheet. Note 3.3 of the appendix describes the accounting rules and principles for evaluating the going concern value of this equity interest by the company. As part of our appraisals, we checked the reliability of the chosen approach and the overall consistency of the hypotheses used and of the resulting evaluations.
- Regarding the consolidated financial statements: Your company set up a provision for risks of €28,132K to cover the financial consequences of production stoppage at the Bernin site and stoppage of GalayOr activities, as described in notes 1.2.2, 1.3.14 and 11 in the appendix (corresponding to sections 5.1.5.1.B2, 5.1.5.1.C14.1 and 5.15.11 of this Reference Document). We appraised the approach chosen by the company as described in note 1.3.14 of the appendix (corresponding to section 1.5.1.C.14 of this Reference Document), on the basis of elements available to date, and we are satisfied as to the reasonable nature of the hypotheses used and the resulting evaluations. Goodwill of €5678K net is posted in the consolidated balance sheet. Notes 1.3.10 and 3.1 of the appendix (corresponding to sections 5.1.5.1. C.10 and 5.1.5.3 of this Reference Document) describe the accounting principles and methods pertaining to the approach chosen by your company to evaluate the going concern value of these intangible fixed assets. As part of our appraisals, we checked the reliability of the chosen approach and the overall consistency of the hypotheses used and of the resulting evaluations.
These assessments are part of our general audit of your annual and consolidated financial statements in their entirety and therefore contributed to the formulation of our opinion without reservation and with one observation as expressed in our reports on said annual and consolidated financial statements. The statement of operations and results in the form of mid-term consolidated financial statements for the period 1 January to June 30, 2004, approved by the Board of Directors, was examined on a limited basis by our firm according to the professional standards applicable in France. Our limited analysis report issued without reservation includes one
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observation on the procedure used to determine provisions concerning the stoppage of production at the Bernin plant and uncertainty as to the evaluation of these provisions as mentioned in notes 1.14, 1.3.14.1 and 11 of the appendix (corresponding to sections 5.8.5.1/B.4, 5.8.5.1/ C .14.1 and 5.8.5.8 of this Reference Document). On the basis of this diligence, our comments are as follows concerning the reliability of the information pertaining to the financial situation and the financial statements presented in this Reference Document: Note 5.9 of the Reference Document presents the proforma reclassification of part of the provision for risks and charges less the fixed assets items. This reclassification will be corrected in the financial statements closed at December 31, 2004, as will this same proforma data in the financial statements for fiscal year 2003, presented for comparative purposes.
September 30, 2004
Statutory Auditors
Cabinet Jean-Marie Bourgeois ERNST & YOUNG AUDIT Represented by Jean-Marie Bourgeois Represented by Jean-Christophe Develay
This Reference Document includes:
- The Auditors' General Report (section 5.5) and the Report on the Consolidated Financial Statements (section 5.2) at December 31, 2003 including justification of the appraisals pursuant to the provisions of article L.225-235 of the Code de Commerce on pages 90 and 80 respectively.
- Section 6.5: the Auditors' Report drawn up pursuant to the last paragraph of L.225-235 of the Code de Commerce on the report by the Chairman of the Board of Directors regarding internal auditing procedures for drawing up and processing accounting and financial data.
- Section 5.8.6: the Auditors' Report on the limited analysis of the mid-term accounts at June 30, 2004.
1.5 PERSONS RESPONSIBLE FOR FINANCIAL INFORMATIONS AND INVESTOR RELATIONS M. Philippe Bringuier VP, Chief Financial Officer Parc Technologique des Fontaines Bernin 38926 Crolles Cedex Telephone: 04 76 92 85 00 Fax: 04 76 92 85 01 e-mail: [email protected]
Mrs Aurore Foulon Vice President Corporate Communications & Legal Counsel Parc Technologique des Fontaines Bernin 38926 Crolles Cedex Telephone: 04 76 92 85 00 Fax: 04 76 92 85 01 e-mail: [email protected]
Copies of this Reference Document are available free of charge from the MEMSCAP head office or from the website (www.memscap.com)
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CHAPTER 2 - INFORMATION ON LISTED HOLDINGS
NA
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CHAPTER 3 - GENERAL INFORMATION ON THE ISSUER AND ITS
CAPITAL
3.1 GENERAL INFORMATION ON THE ISSUER
3.1.1 Corporate Name
MEMSCAP
3.1.2 Head Office
Parc Technologique des Fontaines Z.I. Bernin 38926 Crolles Cedex
3.1.3 Date of Creation
The Company was formed on November 21, 1997.
3.1.4 APE Code
APE code: 516 J – Wholesale trade
3.1.5 Legal Form
The Company is a Société Anonyme under French law with a Board of Directors. It is governed by the Code de Commerce and decree no. 67-236 of March 23, 1967 on commercial companies, and by its by -laws.
3.1.6 Duration
The Company has been created for 99 years from the date of registration in the Trade and Companies Register, i.e. November 23, 2096, except in the case of extension or early dissolution provided for in the by-laws.
3.1.7 Trade and Companies Register
The Company was registered on November 24, 1997 in the Trade and Companies Register of Grenoble under the number 414 565 341.
3.1.8 Corporate Purpose (article 2 of the by-laws)
The purpose of the Company in France and abroad, is:
- Research and development, manufacture, marketing and provision of solutions, products and services relating to domestic, industrial, civil or military applications and other applications in the field of MEMS (micro-electro-mechanical systems) technology, particularly for wireless telecommunications and optical communications, and more generally, all operations in the electronic and IT sectors;
- the direct or indirect participation in all commercial and industrial operations relating to one of the aforementioned elements or promoting them, through the creation of new companies, contributions, subscription, purchase of holdings or social rights, mergers, partnerships, joint ventures, etc.;
- in general, all commercial, industrial, personal property and real-estate and financial operations directly or indirectly related to the aforementioned elements or any other similar elements.
3.1.9 Availability of Legal Documents
The by-laws, minutes from meetings and other corporate documents may be consulted at the Company head office.
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3.1.10 Fiscal Year
The fiscal year begins on January 1 and ends on December 31 of each year. The first fiscal year lasted an exceptional 14 months (November 24, 1997 to December 31, 1998).
3.1.11 Earnings Appropriation (article 34 of the by-laws)
The net income from each fiscal year, less overheads and other Company charges and including amortization and provisions, form the profits or losses for the fiscal year.
5% of the profits, less any previous losses, is allocated every fiscal year to the legal reserve fund. This allocation is no longer mandatory once the said fund constitutes a tenth of share capital. It becomes mandatory when the legal reserve falls below this level, regardless of the reason.
Distributable profit is made up of the profits from the fiscal year, less previous losses and sums allocated to the reserve pursuant to the law or the by -laws, plus profit or loss carried forward.
The General Meeting determines the portion allocated to shareholders in the form of dividends and allocates the sums that it deems appropriate to the optional, general or special reserve funds or to retained earnings from this profit.
However, except in the case of a capital reduction, dividends cannot be distributed to shareholders when shareholders' equity is already (or would be afterwards) below the capital amount plus reserves not allowed for distribution according to the law or the by -laws.
The General Meeting can decide to distribute amounts taken from the optional reserves either to distribute or complete a dividend, or as an exceptional distribution. In the latter case, the decision expressly indicates the relevant reserve items. This said, dividends are firstly paid from distributable profits for the fiscal period. Following approval of the financial statements by the General Meeting, any losses are posted in a special account to be charged against the profits for subsequent fiscal years until written off.
3.1.12 Payment of Dividends (article 35 of the by-laws)
The dividend payment procedure is determined either by the General Meeting or the Board of Directors.
The General Meeting can offer the shareholders an option of cash payment or payment in new shares by the Company according to conditions stipulated by law, for all or part of the dividend distributed. The same option may be offered in the case of an interim dividend.
3.1.13 General Meetings (articles 24 to 29 of the by-laws)
Different Forms of General Meeting
Group decisions by shareholders are made at General Meetings, said to be ordinary or extraordinary according to the type of decision that needs to be addressed.
In all cases, all shareholders must participate in the final vote, even if they are absent, dissenting or incompetent.
The Ordinary Shareholder Meetinghears the Board of Directors' management report and the auditors' reports, discusses, approves or adjusts the annual financial statements, rules on revenue allocation and on profit distribution. It appoints and revokes executive officers and sets their remuneration according to the conditions stipulated by the law or the by-laws. It appoints the statutory auditors. It grants the authorisations requested by the board which do not require the approval of an Extraordinary General Meeting. It authorises all bond issuances (pledged or not), other than convertible bonds or bonds which can be exchanged for shares, converted into shares, or warrants.
In general, it rules on all points that do not involve any direct or indirect changes to the by-laws.
The Annual General Meeting is held every year within six months of the end of the previous fiscal year.
In addition to this, the Ordinary Shareholder Meetingmay be called in an extraordinary capacity, even outside of the timeframe given above. The ExtraOrdinary Shareholder Meetingmay change any aspect of the by-laws. On the other hand, it cannot increase shareholders' commitments, or change the Company's nationality, except in accordance with the conditions laid down by the law or international agreements. Only the ExtraOrdinary Shareholder Meetingis apt to check and approve any contributions in kind and specific benefits according to procedures provided for by law, with t he contributor and beneficiary of the specific benefit being unable to participate in the vote.
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Notice To Attend and Venue of the General Meetings The shareholders' meetings are called by the Board of Directors or failing this, by the auditors or any other person authorised by law. The form and timeframes regarding the notice to attend are set by the legislative and regulatory provisions currently in force. The meetings take place at the head office or in another location specified in the notice to attend. Agenda for the General Meetings The agenda for the General Meetings is finalised by the person convening the meeting. However, one or more shareholders or any other person authorised by the law may request the inclusion of draft resolutions in the agenda according to the conditions laid down in the legislative and regulatory provisions in force. The meeting cannot deliberate on an issue not included in the agenda. Nevertheless, it can revoke one or more executive officers and proceed with their replacement in any circumstances. A meeting agenda cannot be changed if the meeting is reconvened. Attending Meetings - Proxy
All shareholders can attend the General Meetings and participate in the deliberations on justification of their capacity, regardless of the number of shares held, but provided that they are fully paid up.
If it sees fit, the Board of Directors may submit named, personal admission cards to the shareholders that it will request on arrival at the meeting.
The right to attend the meetings is subject to the following:
Registered shares: registration in the registers held by the Company or its proxy at least five days before the date of the meeting;
Bearer shares: at the location designated in the notice to attend at least five days before the meeting date, submission of a certificate delivered by an authorised financial intermediary, holder of the shareholders' account, establishing that the shares in this account are unavailable until the meeting date.
The Board of Directors may however shorten or cancel these timeframes.
If they cannot personally attend the meeting, shareholders may choose from one of the four options below: − grant proxy to another shareholder or their spouse, or − use a postal vote by filling out a form that can be requested according to the conditions indicated in the notice
to attend the meeting, or
− grant proxy to the Company without indicating a specific person; the Chairman of the General Meeting shall issue a vote in favour of the draft resolutions presented or approved by the Board of Directors and a vote not in favour of all other draft resolutions. To issue any other votes, the shareholder must choose a proxy accepting to vote according to the shareholder's instructions, or
− vote by telecommunications means (fax, video-conference) according to the conditions laid down in a Conseil d'Etat decree.
However, all shareholders fulfilling the conditions required to attend a meeting, as mentioned above, may do so and take part in the vote, whence any postal vote or proxy requested become null and void. Attendance Sheet An attendance sheet is completed at each meeting and contains the following:
− The surname, first name and address of each shareholder present, represented or voting by postal vote, and the number of shares held, plus the number of votes attached to these shares;
− The surname, first name and address of any proxies and the number of shares held by the principals, and the number of votes attached to these shares.
The attendance sheet must be initialled by the shareholders and proxies present. It must be certified as being accurate by the board of the meeting. The powers conferred to the proxies must be appended to the attendance sheet. The attendance sheet and the appended powers must be kept at the head office and forwarded to any person requesting them in compliance with the conditions set by current legal and regulatory provisions. Meeting Board The meetings are chaired by the Chairman of the Board of Directors, or in his absence, by the Vice-President, or otherwise, by the oldest of the two Vice-Presidents, or failing this by an executive officer specially appointed by the board for this purpose. The meeting is chaired by the author of the notice to attend in the case of a meeting called by the auditors or by a legally authorised representative. In the absence of the person(s) authorised or appointed to chair the meeting, the meeting shall elect its own chairman. If they are present and accept, the two shareholders representing either themselves or as proxies the highest number of votes shall act as scrutators. The thus formed board appoints a secretary who may not be a member of the meeting.
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The board members' mission is to check, certify and sign the attendance sheet, ensure that debates are properly conducted, settle incidents during the session, control votes cast and ensure that rules are respected, and finally, draw up the minutes of the meeting.
3.1.14 Quorum and Vote (article 30 of the by-laws)
At Ordinary or Extraordinary General Meetings, each member of the meeting has the number of votes corresponding to the number of shares owned or represented by proxy, without limitation. However, in compliance with a decision by the EGM of January 29, 2001, according to the proportion of capital represented, double voting rights were granted to all fully paid up shares which have been registered for at least two years in the name of the same shareholder as of the day of listing of Company shares on the Nouveau Marché or thereafter. In the case of capital increase by capitalisation of reserves or share for share exchange in the case of share consolidation or split, or merger, double voting rights are granted to the shares allotted proportionally to shares in the form of registered shares, provided that they themselves have been held in registered form since allotment, on the expiry of a period of two years from registration in registered form of the shares in proportion to which they were granted (article 30 of the by-laws). The merger or split-off of the Company shall not affect the double voting rights which may be exercised within the beneficiary company if its by -laws authorise this. On the other hand, double voting rights shall cease for any share converted into a bearer share or a share which has been transferred, save for registered shares transferred by succession or family donation. The quorum is calculated according to the shares comprising share capital, less shares deprived of voting rights according to the law. At the first notice to attend, the decisions of the Ordinary Shareholder Meeting can only be valid if the shareholders present or represented by proxy, voting by post, or participating in the meeting by video-conference or any other telecommunications means, hold at least a quarter of the shares with voting rights. No quorum is required for the second notice to attend. It rules on the majority of votes held by the shareholders present or represented by proxy or voting by post. The decisions of the ExtraOrdinary Shareholder Meetingcan only be valid if the shareholders present or represented by proxy, or voting by post, or participating in the meeting by video-conference or any other telecommunications means, hold at least a third of the shares with voting rights at the first notice to attend, and a quarter at the second notice to attend. Failing this latter quorum, the second meeting may be postponed for a maximum period of two months. Approval of resolutions requires a majority of the two-thirds of the votes held by the shareholders present or represented by proxy, or voting by correspondence or participating in the meeting by video-conference or other telecommunications means. In the case of a capital increase through capitalisation of reserves, profits or paid-in capital, the ExtraOrdinary Shareholder Meetingrules according to the same conditions of quorum and majority as for Ordinary General Meetings. Votes in the General Meetings are expressed by a show of hands or roll call, secret ballot with ballot papers, electronic vote or scanned ballot papers, according to the decision of the board of the shareholders' meeting. However, a secret ballot can be demanded either by the Board of Directors or by shareholders representing at least a quarter of shareholders' capital and provided that a written request was addressed to the Board of Directors.
3.1.15 Purchase of Own Shares by the Company
The Company has a share buy-back programme for no more than 10% of its capital in accordance with an authorisation granted by the Ordinary Shareholder Meeting of June 20, 2003 and which should be renewed by the OGM of June 28, 2004 for 18 months. The company did not purchase any own shares to adjust share prices or for any other reason (save for operations as part of the liquidity agreement) during the 2003 fiscal year. At December 31, 2003, the Company directly owned 313,767 own shares acquired during the 2001 fiscal year (i.e. 0.48% of capital at this date) for a total cost of €469,000. At December 31, 2003, a provision was posted to cover the unrealised badwill calculated according to the share price at this date. These holdings were disposed of in February 2004. At June 28, 2004, MEMSCAP owned only 44,160 shares indirectly (Company portion as part of the liquidity agreement). Below are the goals to be achieved by acquiring shares in descending order of strategic priority and according to opportunities:
- Buy and/or sell shares depending on market status, - Adjust MEMSCAP's share price by systematically going against market trends in compliance with
regulations in force, - Grant share purchase options to MEMSCAP company and/or group employees and executive officers,
or offer the possibility of acquiring shares according to the conditions stipulated in articles L.443-1 et seq. of the Code du Travail and in the second paragraph of article L.225-196 of the Code de Commerce,
- Allocate shares as part of the Company employee profit-sharing plan,
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- Hold shares which can be granted to members of the Technical Advisory Board by exercising a commitment to sell at a price which cannot be lower than the price at which the Company may grant options to purchase shares, according to the conditions stipulated in article L.225-179 of the Code de Commerce,
- Maintain, dispose of or generally transfer shares in full or in part, mainly by granting shares, particularly in external growth operations or following a share issuance providing access to capital as part of an assets or financial management policy, in compliance with stock market regulations.
The conditions for exercising this authorisation are the same as those given by the General Meeting of June 20, 2003 with the following provisions in particular:
- These shares can be acquired, disposed of or transferred as a whole or in parts by any means, particularly by market related or non market related actions, including transactions on blocks of shares or by using derivative financial instruments such as options or warrants, or any other means allowing the eventual conditional transfer of ownership of said shares, at any time, except if current regulations do not allow this, including during public offerings. Moreover, the shares may be loaned in compliance with the provisions of articles L.432-6 et seq. of the Code Monétaire et Financier.
- These shares cannot be cancelled. - The maximum purchase price per share will be set at €4 and the minimum selling price per share at
€0.20. - The maximum amount given over to share buy-back will be €4 million. - In the case of capital transactions, mainly capital increase by capitalisation of reserves and free
issuances, and share splits or consolidation, the prices mentioned above will be adjusted by a multiplier equal to the relationship between the number of shares composing capital before the operation and the number afterwards.
- Note that the minimum selling price indicated above shall not apply in the case of delivery of shares in exchange or payment as part of an external growth operation.
- The exercise of this authorisation shall not result in the number of shares owned by the company rising to more than 10% of share capital.
The Board of Directors' meeting of July 21, 2004 decided to effectively implement said buy -back programme. The following decisions were made:
- the Company may acquire its own shares up to a level of 3.7% of the number of shares composing share capital, at a maximum share price of €1;
- the Company may sell, dispose of or transfer by any means, all or part of the shares thus acquired for at least €0.20 per share; - the Company may not cancel shares bought back as part of the share buy-back programme; - the maximum amount allocated to the buy-back programme is €4 million;
- this programme shall end on December 28, 2005.
It is also specified that the Company shall acquire shares with a view to the following (in descending order of priority):
• buying and/or selling shares according to market status;
• adjusting the share price by systematically going against market trends in compliance with regulations in force;
• granting stock options to Company and/or group employees and executive officers, or offering the possibility of acquiring shares according to the conditions stipulated in articles L.443-1 et seq. of the Code du Travail and in the second paragraph of article L.225-196 of the Code de Commerce;
• allocating shares as part of the Company employee profit-sharing plan;
• holding shares which can be granted to members of the Technical Advisory Board by exercising a commitment to sell at a price which cannot be lower than the price at which the Company may grant options to purchase shares, according to the conditions stipulated in article L.225-179 of the Code de Commerce,
• maintaining, disposing of or generally transferring shares in full or in part, mainly by granting shares, particularly in external growth operations or following a share issuance providing access to
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capital as part of an assets or financial management policy, in compliance with stock market regulations.
Note also that the first two aforementioned objectives should represent about 85% of the volumes committed in this programme. The remaining 15% is made up of the other objectives. Finally, the Board of Directors specifies that it shall not use derivatives when implementing the share buy-back programme.
Information on the buy-back programme, drawn up in compliance with the provisions of COB ruling no. 98-02 and modified by COB ruling nos. 2000-06, 2003-02 and 2003-06, was approved by the AMF on August 6, 2004 under no. 04-717. This information is available on request from the company or on the website at www.memscap.com.
3.1.16 Double Voting Rights
Following the decision of the EGM of January 29, 2001, article 30 of the by -laws grants double voting rights to all the fully paid up shares justifying nominal registration for at least two years in the name of the same shareholder, from the day the shares were listed on the Nouveau Marché or thereafter.
3.1.17 Identifiable Bearer Shares (article 10 of the by-laws)
The shareholder can choose between registered and bearer shares. At any time and in accordance with the legal and regulatory provisions in force, article 10 of the by -laws offers the Company the right to request the organisation in charge of compensation of securities to reveal the identity of holders of shares granting immediate or deferred voting rights at General Meetings, as well as the number of shares held by each of them, and if relevant, any restrictions on the shares.
3.1.18 Exceeding the Limit (article 12 of the by-laws)
In addition to the legal requirement to inform the Company of ownership of specific fractions of capital or voting rights, any person acting alone or in concert and who directly or indirectly owns or controls a fraction equal to 3% of the capital or voting rights or a fraction equal to a multiple of 3% of capital or voting rights up to 33% of share capital or voting rights inclusive, is required to inform the Company by registered letter with acknowledgement of receipt of the date on which the limit was exceeded, the total number of shares and the number of voting rights owned, the number of holdings owned giving deferred access to capital and the attached voting rights. This must be done within five stock market days of registration of the securities resulting in the limit being reached or exceeded. This additional obligation is governed by the same provisions as those governing the legal requirement. This information shall be given as stipulated above each time that the limit of 3% of capital or voting rights and limits that are multiples of 3% of capital or voting rights are exceeded, or if the owner falls below these limits. Failure to provide the required information shall result in the shares which exceed the limit, and which should have been declared as such, being deprived of voting rights in compliance with the law, inasmuch as one or several shareholders owning at least 3% of capital or voting rights request this at the General Meeting. This sanction is independent of any sanctions which may be pronounced by court judgement on request of the Chairman, a shareholder or the Commission des Opérations de Bourse.
3.2 GENERAL INFORMATION CONCERNING SHARE CAPITAL
3.2.1 Share Capital
Share capital at June 3, 2004 stood at €35,406,153.05 divided into 108,123,061 shares with a nominal value of €0.05. The by -laws do not include any specific provisions concerning changes to share capital or voting rights attached to shares.
3.2.2 Nature and Principal Features of Company Shares
These are same category ordinary shares and are either registered or bearer shares depending on the shareholder's choice. Company shares have been traded on the Nouveau Marché since March 1, 2001 and are listed for Euroclear France (formerly SICOVAM), CEDEL and CLEARSTREAM operations.
3.2.3 Corporate Assets and Company Shares Used as Collateral
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Treasury mutual funds (SICAV monétaires) for €5,630,000 at December 31, 2003 were provided as collateral to financial establishments having granted lease-backs to the Company. The collateralised amount falls with repayment of said lease-backs. Due to a dispute with a supplier claiming €2 million and contested by MEMSCAP, Company goodwill is provided as temporary collateral following unilateral request by the Chairman of the Grenoble Trade Court, not in the presence of the parties, on November 17, 2003, pending the outcome of the dispute between the two parties. The table below gives the details of each type of assets used as collateral. Type of collateral / mortgage
Start date End date Collateralised amount (a)
Total balance sheet item (b) (in
€K) Corresponding
% (a)/(b)
On/ intangible fixed assets
November 2003 * 0* 3505 *
On/ tangible fixed assets
June 2004
June 2004
June 2007 $750K in euros 4 million NOK in
euros
56,966
2%
On/ long-term investments
July 2002 July 2012 €5630K 14,405 39%
TOTAL €6700K 74,876 9% * With the exception of Company goodwill pledged as temporary collateral granted within the context of a dispute
with a supplier, by unilateral request of the Chairman of the Grenoble Trade Court, not in the presence of the parties, on November 17, 2003, and pending the outcome of the dispute between the two parties.
** Equipment trust granted to banks in the United States and Norway to secure loans. Finally, no Company shares were pledged as collateral, guarantees or security to the Company's knowledge.
3.2.4 Shares Not Representative of Capital
NA
3.2.5 Changes in Share Capital
Company capital has grown from FRF276,000 to €5,406,153.05 since the Company was created, through successive capital increases in cash, from contributions from the business sector and paid-in capital, and following capital conversion into euros, as specified in the table below. No capital changes have been reported by the Board of Directors since May 17, 2004.
Date Number of shares Type of operations Before Created After Number
of IC Nominal
value (EUR)
Paid-in capital (EUR)
Share capital (EUR)
01/23/01 Increase in number of shares by consolidating IC and VRC (1)
195,496 9,296 204,792 0 10 - 2,047,920
01/29/01 Increase in the number of shares through a share split
204,792 - 40,958,400 0 0.05 - 2,047,920
01/31/01 Increase in capital following the exercise of warrants
40,958,400 1,344,000 42,302,400 0 0.05 - 2,115,120
03/01/01 Cash capital increase (2) 42,302,400 11,511,111 53,813,511 0 0.05 91,513,332.45 2,690,675.55
01/22/02 (3) Increase in capital following the exercise of founders' warrants
53,813,511 140,000 53,953,511 0 0.05 29,960 2,697,675.55
06/14/02 (3) Exercise of stock options 53,953,511 556,800 54,510,311 0 0.05 119,673.60 2,725,515.55 10/31/2002 Contribution of JDSU's
CRONOS business (4) 54,510,311 10,500,000 65,010,311 0 0.05 9,975,000 3,250,515.55 01/23/03 (3) Exercise of stock options 65,010,311 100,800 65,111,111 0 0.05 21,571.20 3,255,555.55
01/23/03 (3) Exercise of founders' warrants 65,111,111 5,600 65,116,711 0 0.05 1,478.40 3,255,835.55
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05/13/03 (3) Exercise of stock options 65,116,711 40,000 65,156,711 0 0.05 8,560 3,257,835.55 06/20/2003 (3) Exercise of stock options 65,156,711 30,000 65,186,711 0 0.05 6,000 3,259,335.55
10/06/2003 Capital increase to acquire GalayOr Inc. stock (Doc E registered by the COB under no. 03-210, October 1, 2003) 65,186,711
19,230,172 &
93,500 shares with warrant attached (B) 84,510,383 0 0.05 7,729,468.80 4,225,519.15
10/06/2003 Cash capital increase (COB authorisation no. 03-864, October 3, 2003) 84,510,383
6,872,177 shares with warrant attached (A) 91,382,560 0 0.05 2,680,149.03 4,569,128
10/27/2003 Exercise of founders' warrants 91,382,560 212,800 91,595,360 0 0.05 45,539.20 4,579,768 11/21/2003 Exercise of warrants (COB
authorisation no. 03-863, October 3, 2003) 91,595,360 3,376,189 94,971,549 0 0.05 1,046,618.59 4,748,577.45
11/27/2003 Capital increase to acquire Opsitech SAS (document E waivered) 94,971,549 8,515,984 103,487,533 0 0.05 3,321,233.80 5,174,376.65
12/29/2003 Cash capital increase (COB authorisation no. 03-1130, December 22, 2003) 103,487,533
2,741,528 shares with warrant attached (C) 106,229,061 0 0.05 1,069,195.92 5,311,453.05
02/07/2004 Exercise of warrants 106,229,061 1,654,348 107,883,409 0 0.05 512,847.88 5,394,170.45 04/20 /2004 Exercise of founders' warrants 107,883,409 28,000 107,911,409 0 0.05 5,992.00 5,395,570.45 05/17/2004 Exercise of founders' warrants,
warrants (A) and warrants (C) 107,911,409 211,652 108,123,061 0 0.05 2,396.80 5,406,153.05
(1) The ExtraOrdinary Sh areholder Meeting of December 23, 1997 decided to proceed with a capital increase by issuing investment certificates (IC) and allocating voting right certificates (VRC).
(2)
The CGM of June 29, 2000 proceeded with the cancellation of the two warrants attached to the shares.
(3) Date of the Board of Directors' meeting reporting said capital increase. (4) This operation was reported in a document E registered by the COB on October 17, 2002 under number E 02-253. It is available
free of charge from the AMF website (www.amf-france.org Section SOPHIE) and on our company website at www.memscap.com.
3.2.6 Non Issued Authorised Capital
Authorisations given to the Board of Directors by the Combined General Meeting of June 20, 2003 1) Stock Options Granted to Employees and Executive Officers The ExtraOrdinary Shareholder Meeting of June 20, 2003 assigned the Board of Directors with the powers to grant employees of the Company and/or its subsidiaries or those specifically designated, registered as employees on the date of the offer, and executive officers as defined in article L. 225-180 of the said Code, options giving subscription rights to new Company shares to be issued as part of a capital increase and options giving purchase rights to Company shares acquired by the Company in compliance with the law. The total number of stock options granted shall give right to a number of shares not exceeding legal limits, and specifically those provided for in the articles L.225-182 and L.225-210, not taking into account any potential adjustments in accordance with current regulations. The stock options granted in view of this authorisation should be exercised at the latest 8 years after allocation and according to the conditions set by the Board of Directors. In any case, an employee or executive officer with more than 10% of company capital may not take advantage of these options. Subscription prices for stock options will be set by the Board of Directors on the day the option is granted and cannot be less than 80% of the average share price listed over the last 20 stock market sessions prior to the day the stock option is granted. No stock options can be granted (i) less than twenty stock market sessions after detachment of a coupon giving dividend rights or after a capital increase, (ii) within the ten stock market sessions before and after the date at which the
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consolidated financial statements, or annual financial statements depending on the case, are published, (iii) within the inclusive period between the date on which the Company's corporate bodies receive information which, if made public, would significantly impact its share price, and the date corresponding to ten stock market sessions after this information is made public. The purchase price for stock options is set by the Board of Directors on the day the option is granted and cannot be less than 80% of the average purchase price of shares owned by the Company in accordance with articles L.225-208 and L.225-209 of the Code de Commerce. To the advantage of the stock subscription option beneficiaries, the decision of the General Meeting also includes express waiver by shareholders of their preferential subscription rights to shares issued as the options are exercised. The Board of Directors can use this authorisation for 38 months following the General Meeting of June 20, 2003. This authorisation may be used more than once. Given the exercise of this resolution on several occasions (cf. table page 26) and capital on May 17, 2004, the unused balance on this same date stood at 32,394,820 options with the right to purchase one new share per option. 2) Capital Increase With Preferential Subscription Rights 1°) For a period of 26 months from the General Meeting, the ExtraOrdinary Shareholder Meeting of June 28, 2004 assigned the Board of Directors with the powers to proceed with a capital increase in one or more stages at its own discretion in terms of proportions and dates, either in euros or foreign currency or any other unit indexed to a pool of currencies on the French market and/or the international market: a) by share, warrant, and /or marketable securities issuances giving immediate or deferred access (except for preferred shares, preferred non-voting stock, or investment certificates), at any time or on a set date, to company shares either by subscription, conversion, exchange, reimbursement, warrant exercise, etc., through a cash or debt netting subscription operation; b) and/or by the incorporation of paid-in capital, reserves, profits, etc. into capital, the capitalisation of which is legal and in compliance with the by-laws, and the granting of free shares or a rise in the nominal value of existing shares; 2°) The General Assembly sets the amount for this authorisation as follows:
a. in the case of a capital increase carried out in accordance with 1 a) above: (i) the maximum nominal amount for shares to be issued may not exceed €5,000,000, or the equivalent value plus the nominal amount of the capital increase resulting from a share issuance required to protect holders' rights in compliance with the law; (ii) the maximum amount of the securities representing debt to the company which may be issued may not exceed the upper limit of €150,000,000 or the equivalent amount. b) in the case of incorporation of paid-in capital, reserves, profits, etc., the maximum capital increase amount shall not exceed the overall amount of the sums to be incorporated, it being understood that the amount of these capital increases will be added to the upper limit amount mentioned above;
3°) If the Board of Directors uses this authorisation as part of the issuances mentioned in 1 (a) above, the General Meeting: a) decides that the issuance(s) will preferably be reserved for shareholders able to apply for exact rights; b) allows the Board of Directors to grant shareholders the right to subscribe for excess rights in proportion to their subscription rights and always within the limit of their request; c) decides that if the applications for exact rights and if necessary excess rights have not absorbed the entire issuance, the Board of Directors may use one or more of the faculties below in compliance with the law and in the order it sees fit: (i) limitation of the capital increase to the subscription amount provided that this comes to at least three-quarters of the increase decided upon; (ii) distribution of all or part of the unsubscribed securities issued (iii) public offering of all or part of the unsubscribed securities issued via the market; d) decides that warrant issuances by the company may be included in a subscription offer according to the conditions mentioned above, or a free issuance to owners of old shares; e) notes and decides that when needed this assignment of powers automatically supersedes, to the advantage of the holders of the securities issued, the express waiver of their preferential subscription right to shares to which the warrants and/or marketable securities issued give access; 4) The General Meeting decided that the Board of Directors will be vested with all powers, with an option to subdelegate granted to the Chairman, to implement this delegation within the conditions stipulated by law and mainly in terms of: a) approving the conditions for one or more capital increases and/or issuances; b) and for all new share issues mentioned in 1 (a) above: (i) determining the number of shares, warrants and/or marketable securities to be issued, their issuance price and the premium amount, the payment of which may be requested at the time of the issuance; (ii) determining the issuance dates and procedure, and the type and form of securities to be created; (iii) determining the procedure for paying up shares and/or securities issued;
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(iv) if necessary, stipulating the procedures for exercising the rights attached to securities that have been issued or that are to be issued, and in particular, setting the date (even retroactive) from which the new shares are participating, as well as all other conditions and procedures for carrying out the issuance(s); (v) setting the procedures according to which the company will, if necessary, be able to buy or trade the securities issued or to be issued on the stock market at any time or within set periods; (vi) setting the procedures according to which, if necessary, the rights of marketable security holders will be protected, eventually giving right to shares in the company, in compliance with legal and regulatory provisions; (vii) on its own initiative, charging costs related to the capital increase(s) to the amount of the associated premiums and allocating from this sum the amount required to bring the legal reserve to a tenth of capital after each capital increase. c) For the incorporation of paid-in capital, reserves or profits, etc. mentioned in 1 (b) above: (i) setting the amount and the type of sums to be incorporated into the capital; (ii) setting the number of shares to be issued or the amount by which the nominal value of the shares making up company capital will be increased; (iii) setting the date (even retroactive) from which the new shares will be participating or on which the rise in the nominal value will be effective; (iv) if necessary and notwithstanding the provisions of article L. 225-149 of the Code de Commerce, deciding that the fractional shares will not be negotiable and that the corresponding shares will be sold with the sums from the sale being allocated to the holders of the rights no later than 30 days after the date of registration to their account of the total number of shares granted; (v) generally, concluding any agreements, particularly to ensure that the planned issuance(s) is/are successfully carried out, taking all measures and carrying out all formalities required for the issuance and financial compliance of the securities issued by virtue of this delegation and the exercise of the associated rights; reporting on each capital increase operation and proceeding with the required changes to the by-laws; 5) The General Assembly noted that, if necessary and up to the outstanding amount, this delegation invalidates all previous delegations regarding the issuance (with maintenance of the preferential subscription right) of securities giving immediate or deferred access to a share of share capital or regarding the incorporation of paid-in capital, reserves or profits into the capital. This authorisation has not been exercised to date. 3) Capital Increase Without Preferential Subscription Rights The ExtraOrdinary Shareholder Meeting of June 28, 2004: 1°) granted powers to the Board of Directors, for a period of 26 months from the said meeting, to proceed with a capital increase in one or more stages, in the proportions and timeframes at its discretion, either in euros or in foreign currency or in any other unit indexed to a pool of currencies on the French and/or international market, by issuing shares, warrants and/or marketable securities giving immediate or deferred access (except for preferred shares, preferred non-voting stock, or investment certificates), at any time or on a set date, to Company shares by subscription, conversion, exchange, reimbursement, warrant exercise, etc., it being understood that these securities may be issued to pay for the securities coming to the Company as part of a tender offer on securities according to the terms of article L.225-148; 2°) decided to withdraw the preferential subscription right of shareholders to the securities issued by virtue of this delegation; 3°) set as follows the maximum nominal amount for shares which may be issued by virtue of this delegation:
a) the maximum nominal amount of shares which can be issued may not exceed €5,000,000 or the equivalent value of this amount increased by the nominal amount of the capital increase resulting from any share issuance carried out to protect the rights of the holders of these securities in compliance with the law;
b) the maximum amount of the marketable securities representing Company debt which can thus be issued cannot exceed the upper limit of €150,000,000 or its equivalent value.
This delegation supersedes, in favour of the issued securities holders, the express waiver by each shareholder of their preferential subscription right to the securities to which the issued marketable securities will give access. The Board of Directors will be vested with all powers, with an option to subdelegate granted to the Chairman, to implement this delegation within the conditions stipulated by law and mainly in terms of: (a) determining issuance terms; (b) determining the number of shares, warrants and/or marketable securities to be issued, their issue price and the premium amount the payment of which may be requested at the time of the issuance; (c) determining the issuance dates and procedures, and the type and form of securities to be created; (d) determining the procedure for paying up the shares and/or securities issued; (e) if necessary, setting the procedures for exercising the rights attached to securities that have been issued or that are to be issued, and in particular, setting the date (even retroactive) from which the new shares are participating, as well as all other conditions and procedures for carrying out the issuance(s); (f) setting the procedures according to which the Company will, if necessary, be able to buy or trade the securities issued or to be issued on the stock market at all times or within specific periods;
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(g) deciding that the outstanding, unsubscribed amount from the issue will be partially or fully distributed according to its diligence or that the issuance amount will be limited to the amount of the subscriptions received, it being understood that the Board of Directors may use one or more of the aforementioned options in the order that it deems appropriate; (h) more particularly, in the case of a share issue to pay for the shares contributed as part of a tender offer: (i) approving the list of securities for the offer; (ii) setting the issuance terms and exchange rate parity, and if necessary, the amount of the payment in cash; (iii) determining the issuance procedures as part of a tender offer, an alternative takeover bid or tender offer, or a principal takeover bid or tender offer with a private tender offer or takeover bid; (iv) carrying out all the formalities required for the issuance and regarding the financial aspects of the securities issued by virtue of this delegation, as well as the exercise of the attached rights, reporting on each capital increase operation and proceeding with the relevant changes to the by-laws; If necessary and up to the outstanding amount, this delegation shall invalidate all previous delegations regarding the issuance, with withdrawal of the preferential subscription right, of securities giving immediate or deferred access to a share of share capital. This authorisation has not been used to date. 4) Overall limitation of issuances carried out by virtue of delegations of powers granted to the Board of Directors in terms of capital increases The General Meeting of June 28, 2004 approved an overall limitation of issuances carried out by virtue of delegations of power granted to the Board of Directors in terms of capital increases as described below:
• the maximum nominal amount of shares which can be issued may not exceed €5,000,000 or the equivalent value of this amount increased by the nominal amount of the capital increase resulting from any share issuance carried out to protect the rights of the holders of these securities in compliance with the law;
• the maximum amount of the marketable securities representing Company debt which can thus be issued cannot exceed the upper limit of €150,000,000 or its equivalent value.
5) Capital increase as part of a tender offer initiated by the Company The ExtraOrdinary Shareholder Meetingof June 20, 2003 granted powers to the Board of Directors, for a period of 26 months from this date, in accordance with the conditions stipulated in paragraph (3) of the above resolution, to issue shares or marketable securities (including warrants issued separately) giving immediate and/or deferred access to Company shares in payment for the securities contributed as part of any tender offer initiated by the Company on the securities of another company allowed to trade on one of the regulated markets mentioned in article L. 225-148. Shareholders' preferential subscription rights to these shares and marketable securities would be withdrawn in favour of the holders of these securities. This authorisation has not been used to date. 6) Authorisation to increase capital or issue shares giving access to capital as part of a takeover bid or tender offer on company securities The ExtraOrdinary Shareholder Meeting of June 28, 2004 renewed the authorisation granted to the Board of Directors at the General Meeting of June 20, 2003 and expressly authorises the Board of Directors, as of this meeting and until the next meeting called to rule on the financial statements for the current fiscal period, to use the delegations mentioned above granted by the Meeting to increase share capital by legal means during takeover bids or tender offers on Company shares. This authorisation has not been used to date.
3.2.7 Potential Capital
1) Stock Options (NB: The amounts relating to plans 1 and 2 have been adjusted according to the share split occurring since they were granted to provide maximum clarity.)
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• PLAN NO. 1: Following the authorisation granted by the ExtraOrdinary Shareholder Meeting of March 7, 2000, the Board of Directors' meeting of March 7, 2000 allotted 412 stock options to 9 employees from the American subsidiary and to one employee from the German subsidiary. After taking into account the share split and capital conversion into euros, each stock option allows the holder to subscribe 5600 shares at a subscription price of €0.264 per share. The stock options can be exercised as of Company listing and until March 7, 2008 at the latest. Following the departure of employees from the Company and the exercise of stock options resulting in the creation of 70,000 shares at April 30, 2004, the remaining options would result in the issuance of 410,000 shares.
• PLAN NO. 2 Moreover, the Board of Directors' meeting of October 20, 2000 granted 7448 stock options to 27 employees from the Company's American, German and Egyptian subsidiaries, with each option allowing the holder to subscribe 200 shares at a subscription price of €0.912 per share, after taking the share split into account. It is specified that following the departure of Company employees, 1904 stock options remained at April 30, 2004, which would result in an issuance of 380,000 shares.
• PLAN NO. 3: Moreover, the Board of Directors' meeting of November 2, 2000 granted 812 stock options to 3 employees from the Company's American subsidiary, with each option allowing the holder to subscribe 200 shares at a subscription price of €0.912 per share, after taking the share split into account.
No stock options are outstanding following the departure of Company employees.
• PLAN NO. 4: On the basis of an authorisation granted by the ExtraOrdinary Shareholder Meetingof January 29, 2001, the Board of Directors' meeting of October 15, 2001 granted 910,000 stock options, each allowing the holder to subscribe one Company share at €1.23 (corresponding to 95% of the average opening price for the 20 stock market sessions prior to October 15, 2001). They were granted to 23 Company employees, 10 employees from the Egyptian subsidiary, 7 from the American subsidiary, 1 from the Japanese subsidiary, 8 from the Finnish subsidiary (i.e. 49 employees in all). On the date of exercise by their owners, these stock options may result in the delivery of shares acquired pursuant to the provisions of article L 225-210 of the Code de Commerce in substitution of shares subscribed through the exercise of options. Given the price of exercising the options, this option is only open to the Company if the average share purchase price is less than €1.53 on the opening date of the period for exercising the options. The options can be exercised at the following times: 25% of options granted as of the first anniversary of the beneficiary's work contract; 25% of options granted as of the second anniversary; 25% of options granted as of the third anniversary and 25% as of the fourth anniversary. These options can be exercised until October 15, 2009. After this date they become obsolete and without effect. No options can be exercised within the 30 days prior to the Ordinary Shareholder Meeting in case this meeting has to vote on a dividend distribution. The shares subscribed by exercising stock options may not be sold or converted into bearer shares before October 15, 2005, it being specified that 50,000 shares are no longer concerned by this restriction following the decision of the Board of Directors' meeting of June 14, 2002. 336,000 stock options are not affected by this obligation. When a beneficiary decides to exercise stock options, the Chairman, empowered by the Board of Directors, is authorised to deliver shares owned by the Company according to the terms indicated in article L225-179 of the Code du Commerce. The shares subscribed or submitted to stock option beneficiaries will be fully assimilated to old Company shares and will have the right to dividends to be paid as of their issue or delivery to said beneficiaries. Note that 193,000 stock options were outstanding at April 30, 2004 following the departure of Company employees. PLAN NO. 5: On the basis of an authorisation granted by the ExtraOrdinary Shareholder Meeting of June 14, 2002, the Board of Directors' meeting on the same day granted 226,500 stock options each allowing the holder to subscribe one Company share at €1.23 (corresponding to 102.2% of the average opening price for the 20 stock market sessions prior to June 14, 2002). They were granted to 22 Group employees including 8 employees from the Norwegian subsidiary, 1 from the Canadian subsidiary, 3 from the Egyptian subsidiary and 10 from MEMSCAP SA. On the date exercised by their beneficiaries, these stock options may result in the delivery of shares acquired pursuant to the provisions of article L 225-179 of the Code de Commerce in substitution of shares subscribed through the exercise of options. Given the price of exercising the stock options, this option is only open to the Company if the average share purchase price is less than €1.53 on the opening date of the period for exercising the options. The options can be exercised at the following times: 25% of the options granted as of the first anniversary of allocation; 25% as of the second anniversary; 25% as of the third anniversary and 25% as of the fourth anniversary. These options can be exercised until June 14, 2010 and provided that the person is an employee of the company on the date said options are exercised. After this date, they will become obsolete and without effect. No options can be exercised within the 30 days prior to the Ordinary Shareholder Meetingin case this meeting has to vote on a dividend distribution.
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The actions subscribed by exercising options may not be sold or converted into bearer shares before June 14, 2006. The shares subscribed or submitted to the stock option beneficiaries if exercised will be fully assimilated to old Company shares and will have the right to dividends to be paid as of their issue or delivery to said beneficiaries. Note that 168,500 options remained outstanding at April 30, 2004 following the departure of Company employees. PLAN NO. 6: On the basis of an authorisation granted by the Extraordinary meeting of June 14, 2002, the Board of Directors' meeting of February 14, 2003 granted 780,100 stock options each allowing the holder to subscribe one company share at €0.45 (corresponding to the average of the twenty stock market sessions prior to February 14, 2003). They were granted to 65 Group employees. From these, 510,000 options granted to 5 employees can be exercised according to the following terms: 25% as of the first anniversary of allocation and at a rate of 1/12 per quarter for the remainder. The 270,000 other stock options granted to 60 employees can be exercised at any time within the four years following allocation. Note that 430,900 stock options remained outstanding at April 30, 2004 following the departure of Company employees.
PLAN NO. 7: On the basis of an authorisation granted by the extraordinary meeting of June 20, 2003, the Board of Directors' meeting of November 19, 2003 granted 500,000 options allowing the holder to subscribe one company share at €0.49, corresponding to the average of the twenty stock market sessions prior to the Board of Directors' meeting of February 19, 2003. They were granted to 14 GalayOr employees. On the date of exercise by their beneficiaries, these stock options may result in the delivery of shares acquired pursuant to the provisions of article L 225-179 of the Code de Commerce in substitution of shares subscribed through the exercise of options. The Board of Directors' meeting of November 19 had decided that the stock options would be issued according to the "Approved 102 Plan" and according to the "Capital Gain Options" method, relating to tax methods used and in effect in Israel and that they may be exercised at the following times: (i) 50% of the options allotted can be exercised within 7 business days of the delivery commercial
DVOA prototypes to customers. This date must be defined by the Optical Business Unit GM and approved by the Chairman.
(ii) 50% of the options allotted can be exercised once the Optical Business Unit has generated accumulated revenue of $1m, in addition to the net sales generated with JDSU as part of the purchase obligation signed on acquiring Cronos.
Following the decision to stop the GalayOr Networks Ltd business, the Board of Directors' meeting of February 5, 2004 decided that from now on 50% of the options allotted would become automatically exercisable from the date of stoppage of GalayOr Networks Ltd's business and until March 1, 2006 at the latest. After this date, they will become obsolete and without effect.
The shares subscribed or submitted to stock option beneficiaries if exercised will be fully assimilated to old Company shares and will have the right to dividends to be paid as of their issuance or delivery to said beneficiaries. Note that 250,000 options remained at April 30, 2004 following the departure of Company employees.
PLAN NO. 8 On the basis of an authorisation granted by the ExtraOrdinary Shareholder Meeting of June 20, 2003, the Board of Directors' meeting of February 5, 2004 granted 1,100,000 options each allowing the holder to subscribe one Company share at €0.36. Granted to 4 executive employees, 25% of these options can be exercised at January 1 every year from January 2005. PLAN NO. 9 On the basis of an authorisation granted by the extraOrdinary Shareholder Meeting of June 20, 2003, the Board of Directors' meeting of March 11, 2004 granted 100,000 options each allowing the holder to subscribe one Company share at €0.36. Granted to an employee from the Norwegian subsidiary, 25% of these options can be exercised every year at the allocation anniversary date. PLAN NO. 10 On the basis of an authorisation granted by the ExtraOrdinary Shareholder Meeting of June 20, 2003, the Board of Directors' meeting of May 7, 2004 granted 613,000 options each allowing the holder to subscribe one Company share at €0.28. These options were mainly granted to Company employees and employees of its American and Norwegian subsidiaries, and to a director (100,000 options). The respective conditions for exercising them are indicated in the summary table in paragraph 3.2.7.4. 2) Warrants
26
? The ExtraOrdinary Shareholder Meeting of October 20, 2000 decided to issue and grant 840 warrants to a director
for 1 franc or €0.152 each. The 840 warrants could not be exercised before October 2, 2002 and no later than October 20, 2005. Each of the 840 warrants allows the holder to subscribe 200 shares for €0.912 per share, after taking the share split
into account. Exercising all of the 840 warrants would result in 168,000 shares being issued, corresponding to a capital increase of a nominal amount of €8400, with total paid-in capital of €144,816.
Ø Moreover, the ExtraOrdinary Shareholder Meeting of November 21, 2000 decided to issue and grant 980 warrants for 1 franc or €0.152 each to 7 of the 8 Technical Advisory Committee members, as specified in point 6.3 hereafter, each receiving 140 warrants. The 980 warrants may not be exercised unless their bearers have been members of the said committee for at least two years or at November 21,2005 at the latest. Each of the 980 warrants allow the holder to subscribe 200 shares for €0.912 per share, after taking the share split into account. Exercising all of the 980 warrants would result in 196,000 shares being issued, corresponding to a capital increase of a nominal amount of €9800, with total paid-in capital of €168,952.
Ø The Board of Directors' meeting of October 15, 2001 decided that this method of allowing Technical Advisory Committee members to share MEMSCAP's profits must be continued for the new members appointed. However, given the difficulties involved in proceeding with a free issuance of warrants to a third party since Company shares have been listed on the Nouveau Marché, Company treasury stock will be sold instead of granting warrants, or stock options will be granted when the situation allows.
Ø JDS Uniphase Warrrants Following the JDSU/CRONOS capital contribution which was included in a document E registered by the COB on October 17, 2002 under no. E 02-253, 6,500,000 shares of common stock with warrants attached were used to form part of the payment for the capital contribution. These registered warrants were issued exclusively to JDSU. A specific procedure called "granting of special benefits" was used for this operation. They can be exercised provided that various conditions are fulfilled as described in the 2002 Reference Document. If the conditions governing the exercise of the warrants are fulfilled, i.e. if revenue generated by ex-Cronos assets exceeds thirty-five million (35,000,000) dollars over the 30 months from November 2002, a maximum of 6,500,000 additional shares will be issued.
Warrants allotted to certain reserved investors on 6 October 2003 (warrant (A)) (cf. document E registered by the COB under no. 03-210 on October 1, 2003).
The Combined General Meeting of October 6, 2003 approved the contribution of all GalayOr capital and the issue of 6,872,177 shares with warrants attached (A) and the stoppage of preferential subscription rights for the relevant persons. The warrants (A) were detached from the shares with warrants attached (A).
A warrant (A) is attached to each share with warrant attached (A) issued on October 6, 2003: i.e. 6,872,177 warrants (A). Four (4) warrants (A) allow the subscription of one MEMSCAP ordinary share at a unit price of €0.05.
Exercising all of the warrants (A) will lead to the creation of 1,718,044 additional shares. The warrants (A) can be exercised at any time between October 7, 2003 and October 6, 2008. Listing of the warrants (A) on the Nouveau Marché will not be requested.
Ø Warrants granted to GalayOr transferring shareholders on October 6, 2003 (warrants (B))
The General Meeting of October 6, 2003 granted transferring shareholders from GalayOr Inc. 93,500 shares of common stock (B) with warrants attached (B) making up part of the contribution payment (COB authorisation no. 03-210, October 1, 2003), following contribution of all of GalayOr Inc.'s shares to MEMSCAP. They can be exercised provided that the following conditions are met:
The warrants (B) initially attached to the shares with warrants attached (B) are immediately detached from the shares with warrants attached (B) following issuance.
93,500 shares with warrant attached (B) were issued all at once on October 6, 2003, with a fixed number of 93,500 warrants (B) attached.
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Each warrant (B) allows the holder to subscribe a maximum of 124 MEMSCAP ordinary shares according to the following terms or uses the rounding rules authorised below:
Ø Warrants granted to certain reserved investors on December 29, 2003 (warrant (C))
A warrant (C) is attached to each share with a warrant attached (C), i.e. 2,741,528 warrants (C). Four (4) warrants (C) allow the holder to subscribe one MEMSCAP ordinary share at a unit price of €0.05. Exercising all of the warrants (C) will lead to the creation of 685,382 additional shares. The warrants (C) can be exercised at any time between December 30, 2003 and December 29, 2008. Listing of the warrants (C) on the Nouveau Marché will not be requested. Warrant (C) beneficiaries have the option of exercising the right attached to the warrants allotted to them.
Ø Warrants granted free of charge to some company shareholders on October 6, 2003 and December 29, 2003 (a) The Combined General Meeting of October 6, 2003 decided to issue 65,186,711 independent warrants granted
free of charge to company shareholders following the stock market session of October 6, 2003 at one warrant for one share owned. Said warrants could be exercised between October 13 and November 11, 2003 and resulted in subscription of 3,376,189 new MEMSCAP shares at a unit price of €0.36.
(b) The ExtraOrdinary Shareholder Meeting of December 29, 2003 decided to issue 103,487,533 independent
warrants granted free of charge to company shareholders following the stock market session of December 31, 2003 (except for certain reserved investors) at one warrant for one share owned. Said warrants could be exercised between January 9, 2004 and February 7, 2004 at 6 warrants for one share and resulted in subscription of 1,654,348 new MEMSCAP shares at a unit price of €0.36.
3) Founders' Warrants • The ExtraOrdinary Shareholder Meetingof March 7, 2000 decided to issue and grant 228 founders' warrants to 28
Company employees. These founders' warrants can be exercised at any time as of Company stock market listing and no later than March 6, 2005. Taking into account the share split and conversion of capital into euros, each founders' warrant allows the holder to purchase 5600 shares at a subscription price of €0.264 euros per share.It is specified that following the departure of Company employees and the exercise of founders' warrants, 143 founders' warrants are outstanding, which would result in an issuance of 800,800 shares.
• Moreover, the ExtraOrdinary Shareholder Meetingof October 20, 2000 decided to issue and grant 10,598 founders' warrants to 41 Company employees. The founders' warrants may only be exercised by their holders after a period of one year from the first listing of Company shares on the Nouveau Marché and no later than October 20, 2005. Each founders' warrant allows the holder 200 shares at €0.912 per share, after taking the share split into account. It is specified that following the departure of Company employees, 6,706 founders' warrants remain outstanding, which would result in an issuance of 1,341,200 shares.
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4) Summary Table Warrants
Warrants
Warrants
JDSU
Warrants (1)
Warrants
(A) (3)
Warrants
(B) (2)
Warrants
(C) (5)
Meeting date
Oct.20, 2000
Nov.21, 2000 Oct.31,
2002
Oct.6, 2003
Oct.6, 2003
Dec. 29, 2003
Number of warrants issued 840 980 6,500,000 6,872,177 93,500 2,741,528 Start of warrant exercise period Oct.2, 2002 Oct.2, 2002 or
Nov.2, 2002 (1) Oct.7,
2003 (2) Dec.30, 2003
Warrant expiry date Oct.20, 2005 Nov.21, 2005 (1) Oct.6, 2008 (2) Dec.29, 2008 Share subscription price €0.912 €0.912 (1) €0.05 (2) €0.05 Total number of subscribable shares at 05/17/04 on warrants previously granted and not yet exercised 168,000 196,000 6,500,000 1,634,392 11,594,000 568,632
Total number of shares subscribed at May 17, 2004 - - - 83,652 - 116,800 -
Summary table of stock option plans
Plan No. 1 Plan No. 2 Plan no. 3 Plan No. 4 Plan No. 5 Plan No. 6 Plan No. 7 Plan No. 8 Plan No. 9 Plan No. 10
Date of General Meetin g March 7, 2000
March 7, 2000
March 7, 2000
Jan.29, 2001
June 14, 2002
June 14, 2002
June 20, 2003
June 20, 2003
June 20, 2003
June 20, 2003
Date of Board of Directors' meeting
March 7, 2000
Oct.20, 2000
Nov.2, 2000
Oct.15, 2001
June 14, 2002
Feb.14, 2003
Nov.19, 2003
Feb.5, 2004
March 11, 2004
May 17, 2004
Total number of shares available for subscription or purchase
410,000 380,000 0 334,000 183,500 500,200 250,000 1,100,000 100,000 613,000
Total number of shares available for subscription or purchase by executive officers
0
0 0 0 0 0 0 0 0 100,000
Total number of shares available for subscription or purchase by the first ten employees granted shares
410,000 324,000 0 266,000 163,500 391,000 235,223
1,100,000 100,000 285,000
Start of option exercise period
March 01, 2001
Feb. 28, 2002
Feb. 28, 2002
(1) (2) (3) (4) Jan. 1, 2005
March 11, 2005
May 17, 2005 (7)
Expiry date March 07, 2008
Oct.20, 2008
Nov.2, 2008
Oct.15, 2009
June 14, 2010
Feb. 14, 2007
March 1, 2006
Jan. 1, 2011
March 11, 2011
May 17, 2008 (7)
Subscription or purchase price
€0.264 €0.912 €0.912 €1.23 €1.23 €0.45 €0.49 €0.36 €0.36 €0.28
Special exercise procedures -- -- -- (1) (2) (3) (4) (5) (6) (7)
Total number of shares subscribed at May 17, 2004
70,000 800 0 0 0 0 0 0 0 0
Stock options cancelled in 2003 until May 17, 2004
0 945,600 0 573,000 24,000 349,200 250,000 0 0 0
Stock options outstanding at May 17, 2004
410,000 380,800 0 193,000 168,500 430,900 250,000 1,100,000 100,000 613,000
(1) The periods for exercising stock options depend on the anniversary date of the relevant employee's work contract. (2) The Board of Directors issued 226,500 stock options to 22 Group employees on June 14, 2002 (8 from the Norwegian
subsidiary, 1 from the Canadian subsidiary, 3 from the Egyptian subsidiary and 10 from MEMSCAP SA). No more than 25% of the options can be exercised on each anniversary date of the first four years since allocation.
(3) The Board of Directors granted 780,100 stock options to 65 Group employees on June 14, 2002. Out of all the stock options granted, 270,000 options granted to 60 people can be exercised at any time in the four years following allocation. The remaining 510,000 options granted to 5 people can be exercised according to the following conditions: No more than 25 % as of the first anniversary of allocation and at a maximum rate of 1/12 per quarter for the remainder.
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(4) The Board of Directors' meeting of November 19, 2003 granted 500,000 options to 14 GalayOr employees. The options granted can automatically be exercised from March 1, 2004 and until March 1, 2006 at the latest.
(5) 25% of these options can be exercised at January 1, of each year from January 2005.
(6) 25% of these options can be exercised every year on the allocation anniversary date.
(7) Out of these 613,000 stock options:
- For 100,000 options, 25,000 shares a year may be exercised and sold on the allocation date anniversary. - For 157,000 options, 25% of shares a year may be exercised and sold on the allocation date anniversary.
- For 356,000 options, 25% of shares a year may be exercised and sold on the allocation date anniversary. These options can be sold as of May 17, 2008.
Founders' Warrants
Founders' warrants
Founders' warrants
Meeting date
March 7, 2000
Oct.20, 2000 Number of warrants issued 228 10,598 Start of warrant exercise period Feb.28, 2001 Feb.28, 2002 Warrant expiry date March 6, 2005 Oct.21, 2005 Share subscription price €0.264 €0.912 Total number of subscribable shares at April 30, 2004 on warrants previously granted and not yet exercised
789,600 1,341,200
Total number of shares subscribed at April 30, 2004 414,400 -
Summary table of securities giving access to capital (1)
A summary of warrant, founders' warrant and stock option activity is presented below: (Number of shares)
Warrants
Founders' Warrants
Stock Options
Total
Balance at December 31, 2001 364,000 2,427,600 3,044,200 5,835,800
Granted ....................................... 6,500,000 - 226.500 6,726,500 Exercised .................................... - (5600) (657,600) (663,200) Cancelled .................................... - (341,600) (215,200) (556,800)
Balance at December 31, 2002 6,864,000 2,080,400 2,397,900 11,342,300
Granted ....................................... 44,282,740 - 1,280,100 45,562,840 Exercised .................................... (3,376,189) (212,800) (70,000) (3,658,989) Cancelled .................................... (14,487,012) - (1,549,500) (16,036,512)
Balance at December 31, 2003 33,283 539 1,867,600 2,058,500 37,209,639
Granted ....................................... - - 1,813,000 1,813,000 Exercised .................................... (1,854,800) (39,200) - (1,894,000) Cancelled .................................... (10,767,715) - -225,300 (10,993,015
Balance at May 17, 2004 20,661,024 1,828,400 3,646,200 26,135,624 Total maximum dilution of capital which would result from exercising all potential capital stands at 24.17% of current share capital.
To date, on the basis of the average MEMSCAP share price which has been between €0.26 and €0.30 since July 2004, the dilution from securities giving access to share capital, whose exercise price is within the prices quoted, would stand at 20.45% of capital.
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3.2.8 Current Breakdown of Capital and Voting Rights
The table below gives the breakdown and voting rights pertaining to the Company at June 30, 2004. No significant changes have occurred since this date.
Capital Voting rights No. shares % No. % Jean-Michel Karam 13,346,470 12.3% 26,692,940 18.9%
Joseph Borel 662,670 0.6% 1,325,340 0.9%
James Spoto 200 0% 400 0%
ETF Investment NV 6,151,381 5.7% 11,856,381 8.4%
SPEF Venture 11,566,703 10.7% 18,905,814 13.4%
Evergreen partners 10,616,935 9.8% 10,616,935 7.5%
STI Venture 5,725,880 5.3% 5,725,880 4.1%
Board of Directors sub-total 48,070,239 44.4% 75,123,690 53.,2
Innovacom 3 4,504,027 4.1% 8,835,939 6.3%
JDS Uniphase 10,500,000 9.7% 10,500,000 7.4%
Bernard Courtois 1,794,057 1.7% 3,588,114 2.5% Public* 43,210,578 40.0% 43,210,578 30.6%
Treasury stock (Indirect) 44,160 0.1% 0
TOTAL 108,123,061 100.0% 142,998,469 100.00% * Public share including registered shares held by individuals
(1) The funds managed by SPEF Venture (formerly SOPAGEST) include the holdings of FCPI Banque Populaire Innovation, FCPI Banque Populaire Innovation 2, FCPI Banque Populaire Innovation 3, FCPI Banque Populaire Innovation 4, FCPI Banque Populaire Innovation 5, FCPI Banque Populaire Innovation 6, FCPI Banque Populaire Innovation 7 and SPEF Pre-IPO European Fund.
(2) In January 2004, the company was notified that FCPR Innovacom 4 had fallen below the 5% threshold of shares and voting rights. This event was reported in an AMF publication (AMF Publication 204C0103 of January 19, 2004). On October 6, 2003, Jean-Michel Karam dropped the 20% capital threshold and on June 3, 2004, the 20% voting right threshold. This information was published by the AMF (AMF Publication 204C0912 of July 16, 2004).
The company was not informed of any other threshold event.
The company has not carried out any new IBS since March 8, 2002. It was estimated that there were about 2100 individual shareholders on this date.
To the Company's knowledge, no other shareholders hold 5% or more of capital or voting rights either directly or indirectly, alone or in concert.
3.2.9 Share Capital Changes over the Last Three Years
The table below summarises capital breakdown over the last three fiscal years. There have been eight major events in Company capital development since the creation of MEMSCAP.
• December 1998: first-round funding (FRF11.2 million) with the entry of Innovacom and Groupe Banques Populaires;
• April 2000: second-round funding (FRF73.5 million) with the entry of ETF Investments and reinforcement from Innovacom and Groupe Banques Populaires;
• In March 2001, listing on the Nouveau Marché with an initial public offering of 23.51% of share capital.
• In October 2002, contribution of JDSU's CRONOS business paid for with shares. This operation is described in detail in a document E registered by the COB on October 17, 2002 under no. E 02-0253 and gave rise to the creation of shares and warrants described above in paragraph 3.2.8, section JDS Uniphase Warrants. The assets contributed by JDS Uniphase mainly included contracts, a large client base, manufacturing equipment
31
and a large patent portfolio. This acquisition reinforced MEMSCAP's presence on the US markets and gave it a well established entity in the MEMS design and foundry services, and in optical MEMS.
§ On October 6, 2003, the Company carried out the following operations:
- The issuance of 19,230,172 new shares at a nominal value of €0.05 and 93,500 shares with warrants attached (B) at a nominal value of €0.05 at €0.45 per share in return for a capital contribution from GalayOr Inc. Overall paid-in capital stood at €7,729,000.
- The issuance of 6,872,177 shares with warrants attached for a total of $3.5 million (€3,024,000). Overall paid-in capital stood at €2,680,000.
• On November 27, 2003, the Company issued 8,515,984 new ordinary shares with a nominal value of €0.05 at €0.44 euros per share in return for a capital contribution from Opsitech. Overall paid-in capital stood at €3,321,000.
• On November 21, 2003 and November 7, 2004, the Company issued 3,376,189 and 1,654,348 new shares respectively with a nominal value of €0.05 and paid-in capital of €1,047,000 and €512,847.88 respectively. These issuances followed the exercise of 16,880,945 and 9,926,088 warrants respectively to limit dilution of public holdings following the issue of shares with warrants attached (A) and (C).
• On December 29, 2003, the Company issued 2,741,528 shares with warrants attached (C) for a total of $1.5 million (€1,206,000). Overall paid-in capital stood at €1,069,000.
SHAREHOLDERS (%
capital) Dec. 98 May 99 Apr. 00 Jan. 01* March 01 March
02
Oct. 02
May 03 Apr. 04
Jean-Michel KARAM 54.74 52.2 36.53 35.37 26.75 26.68 22.14 22.09 13.76 James SPOTO 2.52 2.4 1.68 1.63 1.23 1.23 1.01 1.02 0.61
Joseph BOREL ns ns ns 0 Ns Ns
Executive shareholders. 57.26 54.6 38.21 37 27.98 27.91 23.16 23.11 14.37
Groupe Banques Populaires 12.66 12.07 18.24 17.66 13.64 13.6 11.28 11.26 5.70
ETF Investments 17.77 17.21 13.53 13.49 11.19 9.98 10.72
Innovacom 3 12.66 12.07 10.9 10.55 8.05 8.03 6.66 6.65 4.17
Evergreen Partners 10.46
STI Venture 5.31
Financial investors. 25,32 24.14 46.91 45.42 3.22 35.12 29.15 27.90 36.36
Bernard COURTOIS 6.82 6.51 4.55 4.41 3.33 3.33 2.75 2.75 1.66
Public and individuals 10.6 14.75 10.33 13.17 33.47 33.06 28.29 29.64 37.88
Treasury stock 0.58 0.48 0.48 JDSU 16.15 16.11 9.73
TOTAL 100 100 100 100 100 100 100 100 100
3.2.10 Shareholders' and Other Agreements
There is currently no shareholders' agreement in effect to the Company's knowledge.
3.2.11 Custody Commitme nts
None since March 1, 2002 when the custody commitments subscribed by the shareholders when the Company was listed on the Nouveau Marché expired.
3.2.12 Dividend Distribution Policy
The company has paid no dividends since its creation. The Company intends to allocate all available funds to financing its business and growth and thus does not plan to distribute dividends in the medium term. The dividends go the State after the legal time period of 5 years. Unclaimed dividends are subject to procedures stipulated by law.
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3.3 GROUP ORGANISATION CHART AT APRIL 30, 2004 All subsidiaries are wholly owned.
MEMSCAP also owns a subsidiary in Canada and one in Finland – these are sleeping subsidiaries.
3.4 FINANCIAL INSTRUMENTS MARKETS Company shares have been traded on the Nouveau Marché since March 1, 2001 and are listed for Euroclear France (code 7939) (formerly SICOVAM), CEDEL and CLEARSTREAM operations. Moreover, MEMSCAP has been a member of the Next Economy segment since it was created on January 1, 2002.
MEMSCAP Inc.USA
MEMSCAP ASNorway
MEMSCAP SAFrance
GalayOr Inc.USA
Opsitech SASFrance
MEMSCAP SAEEgypt
MEMSCAP GmbHGermany
MEMSCAP KKJapan
MEMSCAP Inc.USA
MEMSCAP ASNorway
MEMSCAP SAFrance
GalayOr Inc.USA
Opsitech SASFrance
MEMSCAP SAEEgypt
MEMSCAP GmbHGermany
MEMSCAP KKJapan
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MEMSCAP shares varied as follows over the last 18 months (sources: Euronext and Company data).
Date Highs Lows Last price Volumes
Jan. 03 0.61 0.42 0.51 109,367
Feb. 03 0.46 0.34 0.39 63,916
March 03 0.44 0.31 0.35 81,926
April 03 0.39 0.33 0.36 58,759
May 03 0.52 0.33 0.37 69,567
June 03 0.50 0.42 0.46 98,020
July 03 0.45 0.4 0.43 54,725
Aug. 03 0.48 0.4 0.42 81,570
Sept. 03 0.46 0.4 0.43 103,486
Oct. 03 0.66 0.52 0.46 220,067
Nov. 03 0.58 0.49 0.48 320,877
Dec. 03 0.71 0.46 0.42 177,829
Jan. 04 0.41 0.71 0.37 364,820
Feb. 04 0.37 0.36 0.35 208 291
March 04 0.35 0.32 0.30 549,896
April 04 0.40 0.34 0.32 623,469
May 04 0.34 0.31 0.30 184,878
June 04 0.31 0.30 0.30 204,891
July 04 0.34 0.31 0.30 367,889
MEMSCAP Shares (Volume and value)
0
100000
200000
300000
400000
500000
600000
700000
Jan-03
Feb -03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug -03
Sep
-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb -04
Mar-04
Apr -
04
May-04
Jun-04
Jul-04
Date
Vo
lum
e
0
0.1
0.2
0.3
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Volume
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ros
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CHAPTER 4 - INFORMATION ON COMPANY AND GROUP BUSINESS 4.1 Overview
4.1.1 Main Features of Company Business
MEMSCAP provides innovative solutions based on MEMS technology. MEMS (micro-electro-mechanical systems or micro-systems) are microscopic systems formed by mechanical, optical, electromagnetic, thermal and fluidic elements on semi-conductor substrate electronics. They act as sensors able to identify physical parameters in their environment (pressure, acceleration, etc.) and/or actuators able to act on this environment. Product performance, system speed, energy consumption, mass production, miniaturisation, reliability and integration can all be optimised using this technology. MEMSCAP solutions include hardware components and modules, intellectual property elements, software tools and design and production solutions. MEMSCAP's offer is based on two core businesses:
• Standard products including sensors and measuring systems (e.g. Skin Station) for the medical and biomedical sectors and the aeronautical and defence industry; • Custom products including MEMS component production, intellectual property and design software tools
licensing, and customer collaboration projects to develop and produce customised solutions. Some of MEMSCAP's principal customers include Siemens, GE Medical, Philips Medical Systems, Penny & Giles Aerospace, Meggitt Avionics, Knowles, JDS Uniphase, Glimmerglass Networks, Motorola, AKM, NTT, Robert Bosch, Hitachi, Thales and NEC. MEMSCAP is currently ranked independent leader in the MEMS business thanks to its advanced technological offer, its vast IP portfolio, production facilities and highly experienced teams. (Source: Company)
4.1.2 Background
The company was founded in 1997 by Jean-Michel Karam and initially started by marketing MEMS CAD (computer-aided design) software (cf. 4.1.1 for definition of MEMS). MEMS Xplorer, its first software tool, was marketed in November 1998. In 1999, MEMSCAP acquired exclusive rights with Tanner Research, a US firm. These rights now apply to its MEMS Pro software design tool. Starting in 1999 and throughout 2000 in particular, MEMSCAP enhanced its offer by providing MEMS component development solutions for the wireless and optical communications sector. This resulted a wide scale recruitment programme (engineers mainly), patent registrations and the conclusion of several strategic partnerships. Revenue rose from €533K in 1998 to €1745K in 1999 and then to €3057K in 2000. Before its stock market flotation, MEMSCAP raised over €13 million through two funding rounds (the first in November 1998 and the second in April 2000) through the Groupe Banques Populaires, Innovacom and ETF group. In 2001, against a backdrop of difficulties on the stock market, MEMSCAP was listed on the Euronext Nouveau Marché, thus raising more than €101.5 million (€83 million in net proceeds from the capital increase) enabling it to finance:
- the construction of the most state-of-the-art MEMS production plant in the world for the manufacture of optical MEMS components,
- external growth through acquisitions. Business in 2001 saw a host of major events including the start of construction of the Bernin plant. MEMSCAP's consolidated organic revenue for this year stood at €9.8 million reporting a 320% rise on 2000. Consolidated net income/loss was approaching break-even point at €-0.2, as against a net loss of €2.6 million in 2000. Despite this, 2001 ended with the collapse of the optical communications industry. MEMSCAP's customers were affected by this crisis and pulled out of their optical divisions and related businesses. MEM SCAP started building the Bernin plant in 2001 on the basis of a contract with a US firm, which allowed it to finance the plant's operating costs. Following the collapse of the optical communications industry at the end of 2001, this contract was terminated, although it should have enabled the Bernin plant to break-even. Moreover, the buildings
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were finished and clean rooms up and running. MEMSCAP thus sought contracts with other optical customers and high-volume contracts from other businesses such as telecoms. This strategy was unfortunately unsuccessful and MEMSCAP strove to optimise its production capacity in 2003 by grouping all its MEMS silicon production at its North Carolina plant, thus halting production operations at the Bernin plant in France. MEM SCAP is now seeking to sell the Bernin site while striving to obtain the best possible price and looking into alternative rental solutions if the desired selling price is not achieved. In 2002, MEMSCAP started its diversification plan while maintaining its potential and know-how in the communications field. MEMSCAP was thus able to: - finalise the acquisition of the Norwegian company Capto AS, specialising in MEMS technology -based sensors
for the biomedical and medical, aeronautical and defence markets, - finish construction of the Bernin plant and deliver small series of optical components to over 31 customers
from this site, as well as finalising two real estate and personal property lease-back agreements with two banking pools for €37.5 million (only €26.5 million was obtained from these agreements).
- acquire the Cronos division of JDS Uniphase which included equipment for an original value of more than €35 million, thus becoming the exclusive MEMS-based product supplier to this firm (world leader in optical components) with a yearly order minimum assured.
Following this year of diversification, 2003 was hailed as a year of major challenges: visibility was still very limited, revenue for the 2002 fiscal year stood at €5.7 million (down on 2001), the 2003 order book was far from full and staff and operations did not correspond to revenue and the company's cash situation. MEMSCAP drew up a rationalisation plan and a set of new objectives based on the following points: - focusing on business offering strong potential in terms of growth and profitability, - redimensioning of company resources according to the new strategy, - streamlining and drastic reduction of costs (including production stoppage at the Bernin site), - a return to growth in 2003 while preparing a sound base for 2004, - a stronger cash situation. This strategy was implemented principally by two external growth operations with the acquisition of GalayOr Inc. in October 2003 and Opsitech SAS in November 2003.
It was decided to purchase GalayOr for the following reasons:
- Synergies with MEMSCAP activities in optical communication, backed by JDS Uniphase, MEMSCAP's largest customer in this sector, which not only supported this acquisition, but contributed to a co-development programme with GalayOr. GalayOr offered advanced technology allowing new ground to be broken in terms of the commercial offers on the market, but carried a risk factor regarding its degree of maturity.
- The cash capital increase through the GalayOr acquisition enabled MEMSCAP to boost its cash situation by $5 million, including $2.5 million from GalayOr's longstanding investors.
MEMSCAP signed a definitive acquisition contract with GalayOr in August 2003 and finalised the acquisition with a General Meeting at the beginning of October 2003. By August, GalayOr's management had aligned its strategy with MEMSCAP's and accelerated the development process of the first product from its new and promising technology. As of December, it seemed that some elements could not be optimised to meet customers' needs – notably JDSU's – thus increasing risk in terms of the commercial viability of this technology and lengthening development lead-times and pushing up related costs. MEMSCAP therefore decided to stop development of these products and move into the manufacture and sale of non-packaged chip solutions. GalayOr operations were thus stopped. This acquisition did however boost intellectual property (used for licensing), the customer portfolio (customers considering MEMSCAP as a key player in optics following its numerous acquisitions in this area) and the company's cash situation.
This was a risky undertaking, but MEMSCAP came out of it well. Indeed, by the beginning of January 2004, MEMSCAP was once again on track: - company focus on business offering strong potential in terms of growth and profitability, - revenue for 2003 (€7.7 million, $8.8 million) coincided with a return to growth, with 35% growth in euros and
45% in US dollars, plus a well-filled order book for 2004, - the combined resources and expenditure budget for 2004 once again coincided with revenue potential, - operations located in North Carolina (United States) for silicon production, and in Norway for finished
product manufacturing, the central research and development team and general management in France in Bernin, still the company's head office even though production has stopped.
Moreover, the agreement between MEMSCAP and its financial and banking partners at the beginning of March 2004 allowed MEMSCAP to make a cash saving of €3.7 million over the 2004 fiscal year and to reduce long-term debt from its lease-back commitments by €2.9 million.
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4.1.3 Operational Organisation Chart
MEMSCAP's operational organisation is broken down into 2 business units, a centralised research and development organisation and a general management team including finance, counsel, communications, investor relations and human resources.
4.1.4 Key Figures
In 2003, the Company started a general restructuring operation to prepare for its return to operational profitability in the second half of 2004. This meant that in addition to drastic cost reduction measures, MEMSCAP initiated and finalised its reorganisation plan in order to improve the Group's overall efficiency and productivity.
Consolidated at December 31 (thousands of euros)
2000 2001 2002
2003
Revenue 3057 9834 5713 7663 Operating result (3488) (2995) (28,627) (20,966) Net income (loss) (2621) (213) (27,840) (58,036) Net intangible fixed assets 1020 36,523 84,944 80,546 Shareholders' equity 10,359 93,029 70,414 29,204 Total liabilities 1868 14,251 36,303 33,816 Total Assets 12,227 107,280 111,560 97,797 Long-term debt/Shareholders' equity n/s n/s 58.0 % 47.2 %
Net income/loss 2003 includes an exceptional loss of €34.71 million from restructuring over this year, mainly due to the stoppage of production at the Bernin plant and grouping optical services with foundry services. Moreover, consolidated revenue for the first quarter 2004 stood at €2 million ($2.5 million), thus achieving the same level as in the last quarter of 2003 and representing the highest quarterly revenue for MEMSCAP for the 2003 fiscal year. This trend should continue over 2004 while MEMSCAP's order book and its client base are continuing to improve. The consolidated operating loss for the first quarter of 2004 stood at €-1.9 million. Compared to €-12.1 million in for the first semester 2003, this figure shows the success of the reorganisation and rationalisation plan undertaken by the Group in 2003 in a bid to boost efficiency and productivity across its worldwide operations. Indeed, losses were reduced by a factor of exceeding 3 as against the same period 2003. Added to this, the gross margin for the quarter was positive and represented 23% of consolidated revenue.
Custom Products
Standard Products
Central R&D
Corporate G&A
Custom Products
Standard Products
Central R&D
Corporate G&A
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4.2 MEMSCAP AND ITS MARKET ENVIRONMENT
4.2.1 MEMSCAP's Markets
4.2.1.1 MEMS Markets Many sectors use MEMS technology which combines semi-conductor micro-electronics with micro-machining technology to create entire systems on a single chip. MEMS technology first started developing in about 1970, while its actual deployment in commercial applications began in the 1990s, mainly in automobile applications (MEMS sensors for airbags, etc.) and IT peripheral applications (inkjet printer cartridges), as well as in medical, aerospace and defence applications. In 1997, the wireless and optical communication sectors started to use MEMS and MEMSCAP was one of the first players in this domain. A Cahners In-Stat/MDR survey in 2001, confirmed by subsequent research by an independent market study firm, reports that the MEMS market was estimated at €4.7 billion in 2002 and should go up to €7.1 billion in 2004.
This market can be divided into two segments: - the established market segment such as the automobile, IT peripheral, medical and aeronautical segment
representing most of MEMS market share in 2003, - the emerging markets segment such as off-the-shelf applications, communications and biomedical markets
strongly contributing to MEMS market growth. 4.2.1.2 The MEMS Market by and for MEMSCAP MEMSCAP's operates a product-based strategy which varies according to whether the offer is for standard or custom products: - Standard products: medical, biomedical and cosmetic (Skin Station), aeronautical and defence industries. In
this case, MEMSCAP is serving the established market segment, except for the Skin Station which is an emerging application.
- For custom products, MEMSCAP is ranked high in emerging applications, notably off-the-shelf, biomedical and communications applications. Off-the-shelf applications generate high volume production and strong short-term growth, while biomedical applications and communications improve margins also with strong growth rates.
The MEMSCAP offer covers a global market which will be worth over $1.5 billion in 2007 (Company estimation).
.
A. Standard Products
i. Medical Industry The medical industry is a fast-growing sector using MEMS in a host of applications. MEMSCAP solutions include blood and physiological pressure transducers, and particularly invasive blood pressure, blood filtration and dialysis applications, with major development in single-use, disposable products.
3.100 3.5004.300 4.700
5.500
7.100
1999 2000 2001 2002 2003 2004
3.100 3.5004.300 4.700
5.500
7.100
1999 2000 2001 2002 2003 2004
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This market should be worth over $500 million in 2005 (Company estimation).
ii. The Aeronautical and Defence Industry In this sector, MEMSCAP solutions include absolute, relative and differential pressure sensors in the form of non-electronic components and modules integrating electronics and embedded software. The market for pressure sensors supplied in the form of non-electronic components for aerospace applications was estimated at $70 million in 2002. The modules market is estimated at over $100 million (Company estimate).
iii. The Skin Station: for the cosmetic dermatology industry
The Skin Station is an emerging application for the dermatology and cosmetics industry. Its economic model is very varied. Not counting the markets for collected dermatological data management and associated consumables, this market is currently estimated at more than 50,000 machines a year, representing more than $250 million (Company estimation).
B. Custom Products
MEMSCAP supplies the MEMS chip and not the fully finished product for this market. MEMSCAP is positioned on the emerging applications market, offering consumer market applications or applications for the biomedical and communications markets. Accordingly, MEMSCAP supplies MEMS silicon microphone wafers for Knowles, which was the first major success of MEMS in consumer applications. This market is fuelling growth in terms of volume production. From the very first year, MEMSCAP will be supplying several million components. The silicon microphone market is estimated at more than 500 million units per year. At the same time, MEMSCAP supplies the biomedical and communications markets which offer major potential in terms of profit margins and growth. Fuelled by its success, MEMSCAP will be extending its MEMS chip solutions offer to the established market segment (automobiles or IT applications and peripherals) as of 2005. These various solutions combined represent a total market estimated at over $500 million for 2005 (Company estimation).
4.2.2 MEMSCAP's Competitive Edge
MEMSCAP is the only company in the world to cover the entire MEMS value chain. It offers a comprehensive solutions package from component design through to volume production, including assembly, packaging, testing, reliability analysis and quality assurance.
MEMSCAP thus boasts a sharp competitive edge enhanced by a host of features:
• Proven Expertise in MEMS Technology The expert skills and experience of its international teams, its vast MEMS technology intellectual property portfolio and its close working relationships with a host of research & development centres renowned in MEMS technology have helped MEMSCAP to bolster its leading position in this sector. Indeed, MEMSCAP has marketed over 15 products using MEMS technology which is the highest number of MEMS products ever developed by a single company.
• MEMS Production Capacity: the best in the world By acquiring Cronos, former JDS Uniphase division
in November 2002, MEM SCAP gained know-how in fabrication services with proven economic models and an established worldwide reputation. With the North Carolina facility upgrading from the 4-inch to 6-inch wafer format, MEMSCAP boasts some of the largest and most modern production resources in the world. This is the only MEMS plant to boast TL9000 certification.
• High-yield, Cost Effective Volume Production Techniques MEMSCAP's MEMS manufacturing processes use batch production techniques enabling large volumes to be produced. These processes are engineered to guarantee high yields thus resulting in cost-effective production. MEMSCAP's ability to combine the different manufacturing process phases allows it to rapidly design and implement product variations, giving it the added advantage of quick response times to changes in market or customer needs.
• A Diversified Offer MEMSCAP offered innovative solutions for all types of MEMS applications The Group supplies standard solutions and custom products for a whole range of applications for the medical and biomedical markets, consumer and communications markets, and the aeronautical and military sectors. MEMSCAP has thus developed a common technology base to serve different market opportunities.
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• A Wide-Ranging Offer: from pure MEMS components to modules and systems MEMSCAP fully manufactures both the components and modules in the sensor product range. It also develops these components and modules and ensures the system integration of the Skin Station, its dedicated dermatology and cosmetics system.
• A Reliable, Robust and Secure Solution MEMSCAP's components are subject to rigorous design, manufacturing and testing procedures to withstand harsh conditions such as extreme temperatures, shock or vibration. MEMSCAP's MEMS solutions offer completely reliable sensors for the medical and aerospace industries. These sensors have already been deployed in civil aircraft (e.g. Airbus' A319, A320, A340 and A380, or Boeing's B717, B727, B737, B747, B757, B767 and B777) and military aircraft (e.g. Euro fighter, Harrier/AV8-B, Super Puma 1, Westland-Augusta EH101), as well as in medical equipment by major suppliers such as Siemens, GE Medical and Philips. All MEMSCAP's products are certified to relevant standards (CAA/FAA, Exordia, etc.).
• A Vast Intellectual Property Portfolio MEMSCAP has the largest MEMS intellectual property portfolio in the world with more than 200 patents and patent applications.
4.2.3 Competitors
MEMS technology is a semi-conductor technology offering solutions in terms of streamlining costs, miniaturisation and reliability. The markets for MEMS solutions are varied with one thing in common: fast-changing requirements and technological ability. MEMSCAP currently offers both standard and custom products, mainly for the following market segments: medical, avionics and defence for standard products; consumer, communications and biomedical for custom products. MEMSCAP's competitors use either MEMS or other technology. • Medical and Avionics/Military Applications: Competitors in these sectors are:
- Omegadyne, Honeywell and Druck for the avionics and military sectors, - Medex, Becton & Dickenson and Biosensors for the medical sector.
• Custom products: Several companies compete on this market. However, few can be considered as real competitors on certain manufacturing processes. This is the case of Sony, for example, in terms of consumer market applications and notably the silicon microphone.
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4.3 MEMSCAP'S S TRATEGY Since its creation in November 1997, MEMSCAP has developed and acquired skills making it a major player in MEMS technology. Today, MEMSCAP is focusing on business offering high growth and profitability potential and supplies standard and custom products for the entire range of MEMS applications. MEMSCAP is striving to create a world in which every phone-call, data transmission operation, life saved in a hospital or in the fight for freedom and democracy and every plane, train or car journey is possible through MEMS technology. MEMSCAP's strategy is as follows: 1/ An aggressive marketing policy for its products and technology By constantly enhancing its technology portfolio protected by more than 150 patents or patent applications, MEMSCAP plans to roll its products and technology out on the market on a massive scale. On the aeronautical market, MEMSCAP products are used in several applications from air data computers (ADC) to cabin pressure control, engine control to altimeters. With the introduction of the TP3100 sensor series and certification by the Civil Aviation Aut hority, MEMSCAP is extending its offer to supply both components and modules integrating electronics and software, thus significantly contributing to reducing costs for its customers. MEMSCAP is a reputed manufacturer with a large number of aeronautical systems suppliers enabling it to benefit from the volume production projects on offer when an aircraft production program is launched or during aeronautical module replacement programs. In the medical sector, MEMSCAP is planning to roll out blood and physiological pressure transducers with disposable dome accessories, as well as breaking into the blood filtration and dialysis markets. Regarding the Skin Station, MEMSCAP is planning on enhancing its reputation by rolling out this product range to dermatologists through its business partner, Laboratoires La Licorne. In 2005, MEMSCAP will be addressing the pharmacy and luxury cosmetics markets. Finally, in 2006, MEMSCAP plans to break into the consumer cosmetics and end-user markets. In its custom product market, (MEMS chips and silicon wafers), the company has drawn up a strategy based on consumer applications generating large volume production and strong growth, underpinned by the communications and biomedical markets. In 2005, MEMSCAP is focusing on strong growth in these markets, while looking to break into the automobile market. 2/ Production system and resource optimisation In 2003, MEMSCAP focused on optimising its production capacities. It thus grouped the production of silicon MEMS in its North Carolina plant and its finished products (packaging) in Norway. These two plants cover production of custom or standard products and offer significant expansion potential. MEMSCAP stopped all production operations at the Bernin plant. Following this decision, MEMSCAP sought to optimise the use of this plant in conjunction with its financial partners. It is thus trying to sell the Bernin site for the best price. MEMSCAP is also working on alternative solutions in the event of not being able to sell at an adequate price. As part of this new organisation, the optical communications business is focusing on the sale of optical chips and design solutions for companies manufacturing optical components and subsystems, and no longer on packaged components and modules as was planned with GalayOr. The optical assembly and packaging businesses have thus been stopped. MEMSCAP has thus optimised and rationalised its structure. Its order book, potential business volume and operating expense levels are in line with its 2004 strategy aiming to achieve operational profitability in the second semester 2004. 3/ Effective and centralised Research & Development MEMSCAP is pursuing its policy of centralised research and development based in France, while ensuring cooperation between its two business units providing custom products (North Carolina, USA) and standard products (Norway). This department develops the technology used by both business units, while updating and using MEMSCAP's intellectual property portfolio. MEMSCAP works in collaboration with its partners in research programs in a bid to cover this entity's operational costs.
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4.4 MEMSCAP'S OFFER
4.4.1 Products and Services
MEMSCAP offers both custom and standard products for the entire array of MEMS applications. 4.4.1.1 Custom Products Today MEMSCAP offers its clients custom products (MEMS chips) and 4-inch wafer manufacturing services at the North Carolina facility and is currently planning to upgrade to 6-inch format in order to increase its production capacity to meet demand. MEM SCAP is currently the only company offering the skills and resources to handle MEMS production processes, from bulk micro-machining on silicon and silicon on insulator (SOI) to surface micro-machining, including metal processes (thick copper) and micro-electronic compatible processes. The MEMSCAP plant in North Carolina (USA)
MEMSCAP's MEMS manufacturing equipment is probably the best in the world
MEMSCAP also offers prototyping services. Its MUMPS service (CRONOS) is the best known prototyping service in the world. This service started in 1992 and has already been used on more than 2000 projects for over 200 companies and organisations worldwide. This service is also considered as a breeding ground for generating volume manufacturing opportunities.
MUMPS: The best known MEMS prototyping service in the world is a cost-effective way of accessing MEMS technology
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4.4.1.2 Standard Products MEMSCAP supplies sensors and systems for the medical, biomedical (including cosmetics) and aeronautical markets. - Sensors for Medical Applications MEMSCAP's offer is based on two product ranges: multi-purpose AE800 sensors whose main commercial applications are the measurement of respiratory flow in respirators and muscular strength measurement; SP840 transducers for measuring physiological pressure (including blood pressure).
(a) The AE800 multi-purpose sensor (b) The SP844 blood pressure transducer and its disposable dome
The SP840 physiological sensor range offers the greatest potential. The SP844 is a blood pressure transducer for measuring intravascular pressure. The sensor uses disposable accessories (e.g. plastic domes and line sets). This product is now on the market through key monitoring system manufacturers such as Siemens, Philips and GE Medical. Throughout 2002, and using the same technology, MEMSCAP developed products aimed at two new applications: blood filtration (for dialysis) and wireless sensors (Bluetooth). The blood filtration and dialysis market is estimated at more than 100 million procedures a year. - Skin Station for Dermatology and Cosmetics With its partner Laboratoires La Licorne, MEMSCAP developed a system able to measure skin properties in a question of seconds, including pH, humidity, water loss (TEWL), cutaneous print, pigmentation and temperature. This expert system then gives personalised recommendations on the type of cosmetic products adapted to the person's skin type.
Skin Station, dermatological series, version V1.0 This system is to be marketed in three series: - the dermatological series to be used as a diagnosis tool for dermatologists. Over 25 version V1.0 machines
were delivered to dermatologists in the fourth quarter of 2003 and the first quarter of 2004 via the Laboratoires La Licorne.
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- The cosmetics series, which will recommend cosmetics products suited to the user's skin based on a personalised analysis of the skin, will be marketed in 2005. A portable version of this series will also be commercially available in 2005.
- The series sold directly to the consumer. The last version will be marketed in 2006. - Sensors for Aeronautical and Military Applications Since it acquired Capto in December 2001, formerly a subsidiary of the SensoNor group and now MEMSCAP's Sensor Solutions business unit, MEMSCAP can now supply an entire range of high-end, multi-purpose sensors for harsh environments, only available to the medical industry and aeronautical and military sectors until now. MEMSCAP supplies the following to the aeronautical and defence sector:
The SP82 (SP82, SP82T, SP82P) and SP70/SP75 sensor range: These sensors are used for measuring pressure in air data computers and cabins and are used in both international civil aviation (including Airbus' A319, A320, A340 and A380 and Boeing's B717, B727, B737, B747, B757, B767 and B777) and military aviation (including the Euro fighter, Harrier/AV8-B, Super Puma 1, Westland-Augusta EH101). The SP70/SP75 sensors were developed in 2002 for low-cost applications. They use plastic package which also offers excellent performance.
The SP82 pressure sensor
The TP3100 pressure module series: Boasting international DO178B level B certification (one of the strictest certifications for aeronautical products and components) by the Civil Aviation Authority, the TP3100 products are part of MEMSCAP's aeronautical product range. The best-in-class quality, reliability and precision of these sensors, which comply with aerospace and defence standards, offer unmatched performance in a range of applications such as meteorology, instrumentation and ground test systems. The TP3100 is a fully -compensated high-precision unit offering excellent flexibility and potential downtime. It operates in a slave configuration, eliminates the transmission of unrequired data, does not require recalibration and compensates for temperature and non-linearity effects. It is also equipped with a high-end MEMSCAP SP82 sensor.
The TP3100 pressure module 4.4.1.3 Revenue Breakdown by Type of Product and Service and Geographical Location As explained in section 4.1.2, MEMSCAP's business has changed considerably since it was founded 7 years ago. The graph below shows the gradual changes to the MEMSCAP model shaped by the diversification policy launched in 2002, after the collapse of the optical communication business, and the rationalisation operation carried out in 2003.
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0
2
4
6
8
10
2000 2001 2002 2003
Other
CustomProductsStandardProducts
MEMSCAP revenue (millions of euros) over the last four years
The graph clearly shows that MEMSCAP's overall revenue was generated by other activities in 2000 (mainly intellectual property and software licensing and optical communications finished products) as compared to its business activities from 2003. The Company forecasts that virtually all the Group's revenue for 2004 will be generated by the sale of standard and custom products.
2002 2003
Amount % of
revenue Amount % of
revenue Sensors 3575 62.58% 3859 5.36%
Manufacturing/foundry 231 4.04% 1879 24.52% Wireless comm. 123 2.15% 483 6.30% Optical comm. 150 2.,63% 597 7.79% CAD software 1634 28.60% 845 11.03%
TOTAL 5713 100.00% 7663 100.00% Moreover, as MEMSCAP boasts a vast intellectual property portfolio, it is probable that some revenue will be generated from licensing and royalties in the next few years. Sales breakdown by geographical location is summarised below (in €K):
(Thousands) France
Other European countries
United States
Asia
Other countries
Consolidated
€ € € € € € Revenue 2002 ................................................................1526 2132 1758 297 -- 5713 2003 ................................................................463 2393 3633 634 540 7663
4.4.2 MEMSCAP's Technological Portfolio
4.4.2.1 Silicon Technology MEMS are manufactured using traditional techniques and manufacturing processes for semi-conductors, combined with specific micro-machining techniques to etch "sacrificial" layers and allowing suspended structures to be developed. MEMSCAP's design and manufacturing processes for MEMS products offer high volume production potential and are designed to guarantee high yield and reliability. Thanks to its MEMS processing and design technology expertise, the MEMSCAP team of engineers can tailor several stages in the manufacturing process as well as design features in order to obtain maximum yield. MEMSCAP is currently the only company offering the skills and resources to handle MEMS production processes, from bulk micro-machining on silicon and silicon on insulator (SOI), to surface micro-machining, including metal processes (thick copper) and micro-electronic compatible processes. - Surface Micro-Machining
5,1
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In this type of process, one of the substrate layers, called the sacrificial layer, is etched allowing a suspended layer to be developed, known as the mechanical structure. MEMSCAP has mastered this process and it is used in a host of components requiring capacitor measurement or vertical electrostatic activation.
MEMS structures developed through surface micro -machining - Bulk Micro-Machining
In this process, the substrate itself is etched to suspend the mechanical structure. Etching can be done using chemical solutions or wet etching, or through reactive ions known as dry etching (deep RIE). This process is used for developing thermal insulation, piezo-resistance measurement (i.e. pressure sensors) or horizontal thermal, magnetic or electrostatic activation.
MEMS structures developed through bulk micro-machining - Micro-electronic Compatible Metal Processes
i. MEMSCAP's patented Above-IC technology allows MEMS components to be placed on fabricated semi-conductor layers. MEMS components can then be connected to integrated circuits on the lower layers of the same chip. This manufacturing process is carried out at low temperatures so that integrated circuit functionality is not damaged and the final structure remains fully reliable. Above-IC technology was developed to achieve better integration of MEMS components and integrated circuits to replace off-chip passive components. Moreover, MEMSCAP's Above-IC technology requires no changes to the micro-electronic manufacturing process or to encapsulation. This patented technology allows passive components such as specific inductors, capacitors and resistors to be developed directly above the integrated circuit, thus replacing discrete ceramic components. This integration improves reliability, performance and quality of signal transmission and reduces the size, weight and cost of
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telecommunications equipment. Indeed, MEMSCAP offers high-quality integrated inductors with a quality factor of up to 55 at 2 GHz. MEMSCAP considers that these values are currently the highest on the market. Standard integrated inductors offer quality factors of between 5 and 17 at 2 GHz, meaning that they are unable to meet the requirements of current wireless transmissions or those of third generation mobile telephony. Consequently, solutions presently commercially available use discrete ceramic inductors. The same applies to high-end capacitors and resistors which are currently developed using discrete components assembled on printed circuits alongside microelectronic chips. Combined or associated with integrated circuits, they form modules which can be active or passive functions. They are used to develop wireless communications systems.
High quality inductors using MEMSCAP's Above-IC technology
ii. The patented 'high-K" material technology allows high density capacitor integration and offers excellent potential as it may solve the problem of integrating technology below 65 nanometres into microelectronics.
4.4.2.2 Manufacturing and Packaging Technology MEMSCAP carries out the following manufacturing processes: • Batch process wafering into single chips;
• optical fibre alignment; • design and development of specific packaging for varied applications, also for harsh environments;
• assembly and packaging. Assembly and packaging of MEMS requires specialised techniques which ensure that any physical constraints created by the processes do not impact the performance or configuration of MEMS components. MEMS components must be assembled in a clean room and sealed in specially designed packaging to guarantee long-term reliability and performance in order to meet customer requirements. Finally, the materials used by MEMSCAP to package its proprietary components are designed to reduce costs and size while ensuring reliable product function in the environment in which it is used. 4.4.2.3 Design and System Integration Technology The Skin Station is a MEMSCAP product integrating component know-how and system and module expertise. It integrates several sensors combined with integrated electronics, communication technology and highly sophisticated software.
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4.4.3 Intellectual Property
4.4.3.1 Patents MEMSCAP's success and competitive edge stem largely from the development of its proprietary technology. This is based on a combination of trade secrets and contractual restrictions stipulated in its licensing agreements aimed at protecting its intellectual property rights on all its products and services. To date, MEMSCAP boasts 200 patents and patent applications covering 77 product ranges. These patent applications have been made in the semi-conductor, communications, medical and biomedical sectors and cover design and manufacturing processes for components and applications regarding this technology. Moreover, MEMSCAP has licensed exclusive and non-exclusive patents for some of its partners. MEMSCAP is planning to continue its strong patent registration policy in order to protect its technological assets and market opportunities. 4.4.3.2 Trademarks MEMSCAP also protects its intellectual property rights through copyright and trademarks. It sometimes uses a number of registered and unregistered trademarks for its products and services. MEMSCAP has registered most of its trademarks in France and the United States. Unregistered trademarks are considered as unimportant and their loss would not have a significant effect on the company.
4.4.4 A Top-Class Customer Portfolio
MEMSCAP boasts a customer portfolio containing key groups operating in a range of business sectors, some of which cannot be revealed to ensure confidentiality. Standard Products The main customers in the medical and biomedical sectors are: - Siemens - Philips - GE Medical - Dräger Medical - Laboratoires La Licorne Main application: blood and physiological pressure measurement. The main customers for the aeronautical and defence sector are: - Meggitt Avionics - Penny & Giles - Smiths Industries - Honeywell - IS&S - Raytheon - Aerosonics The main applications are pressure measurement in air-data computers (ADC), sequencers, cabin pressure and intelligent radios. MEMSCAP's products are now used in international civil aviation (including Airbus' A319, A320, A340 and A380 and Boeing's B717, B727, B737, B747, B757, B767 and B777) and military aviation (including the Euro fighter, Harrier/AV8-B, Super Puma 1, Westland-Augusta EH101) and in over 20,000 aircraft worldwide. Custom Products
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The main customers are: - JDS Uniphase, undisputed leader in optical components, concluded an agreement for MEMSCAP to become
its exclusive supplier of MEMS chip products (optical switches, variable attenuators, MWS) with a guaranteed order minimum for three years from November 2002.
- Glimmerglass Networks, a pioneering firm in transparent connectivity (all-optical connectivity). - Knowles Acoustics for the manufacture of MEMS silicon wafers for its microphones. Other customers, including two in particular, generate significant revenue, but cannot be mentioned for reasons of confidentiality. MEMSCAP has more than 15 customers for custom products, not counting the MUMPS services serving over 200 organisations worldwide. Moreover, the MEMS Pro and MEMS Xplorer software tools have been rolled out in Europe, America, Asia and Australia. MEMSCAP customers with one or several design software licences are 3M, Motorola, Lockheed Martin, Schlumberger, Robert Bosch, ST, Walsin Lihwa, Nortel, NEC, NTT, Fujitsu, Hitachi, Fuji Xerox, Yamatake Corporation, DSTO, Nasa and CNES. For the 2003 fiscal year, MEMSCAP's top 5 customers generated 31% of revenue and the top ten 47%. For comparative purposes, in the 2002 fiscal year, MEMSCAP's top five customers generated 54% of revenue and the top ten 70%.
4.5 A STRUCTURE ADAPTED TO COMPANY AMBITIONS AND MARKET NEEDS
4.5.1 Research and Development
MEMSCAP's future competitive edge will depend on its ability to create new MEMS products and generate new generations of products to keep abreast of the needs of its different customers. In 2003, MEMSCAP restructured its Research and Development business. Research and development work has been centralised at the Company head office in Grenoble. Only the specific development activities continue to be carried out in the business units in Norway and North Carolina. MEMSCAP has set up a team of highly qualified engineers with wide experience in MEMS design, development and manufacturing, offering a level of technical skills and know-how which sets it apart from its competitors. This multi-disciplinary team is organised on a skills basis and was formed of about 12 employees at December 31, 2003, completed by another six or so people in Norway and the United States. This central Research and Development team has the following mission: - to develop the basic technological bricks to meet the requirements of the planned business unit development map
in terms of standard and custom products, - to work in conjunction with customers unable to manufacture so as to validate their product design and prepare to
manufacture their products in large volumes at the MEMSCAP plant in North Carolina, - to manage and operate the MEMSCAP patent portfolio, - to ensure a technological watch to detect the emerging MEMS applications offering strong potential. During the 2003 fiscal year, the Company continued its efforts in terms of R&D by streamlining the process. Research and development expenditure continued but on a smaller scale: it fell from €9.5 million in 2002 (166% of revenue in 2002) to €5.3 million in 2003 (70% of revenue in 2003), while the patent portfolio (over 175 patents at December 31, 2002) was also streamlined in a bid to maintain only the most relevant patents. Moreover, by reorganising R&D, it was possible to self-finance many of the company's research projects through contracts won by this business unit. This expenditure meant that new products were marketed, such as the TP3100 sensor range for aerospace and military applications and recently certified by the Civil Aviation Authority (CAA), or the Skin Station whose first 25 machines were delivered to French dermatologists through the Company's partner, Laboratoires La Licorne, and which should see a substantial rise in business in the fourth quarter of 2004. In addition to its own teams of researchers, MEMSCAP also boasts outside R&D partners made possible by its intensive technological partnership policy, mainly with top laboratories such as TIMA (France), ESIEE (France), LETI (France), CNES (France), EPFL (Switzerland), Fujita Laboratories (Japan) and Carnegie Mellon University (United States).
4.5.2 Production: Manufacturing, Assembly, Testing and Validation, Failure Analysis
MEMS production technology involves integrating mechanical parts performing sensor or actuator functions and micro-electronic components on one or several semi-conductor substrates. While the electronic components are manufactured using integrated circuits and manufacturing sequences such as CMOS and BiCMOS, micro-mechanical components are
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manufactured using batch process micro-machining techniques which etch selected semi-conductor wafer parts or add new structural layers to form electromechanical components. MEMSCAP has only one operational production site for silicon and a single finished product site (assembly and packaging) since the stoppage of business at the Bernin plant: - Its class 10 North Carolina plant with a surface area of 320m², TL9000 certified, silicon production in 4-inch
wafers with the possibility of upgrading to 6 inches to meet increasing requirements, - A clean room for assembly and packaging of medical and aerospace products (250m², class 10,000), located in
Horten, Norway. MEMSCAP's central research unit can also use the common MEMSCAP - ESIEE facility (300m², class 10,000), located in Paris Marne-La-Vallée, for R&D needs. In addition to this, MEMSCAP works with the CNES (National Space Research Center) at a joint laboratory in Toulouse on failure analysis of mechanisms.
4.5.3 MEMSCAP's Sales Structure: Integrated Business Unit Organisation
The business units have a specialised sales and marketing structure. The sales manager reports to the business unit director who reports to the Chairman and CEO, in charge of global revenue. On January 1, 2004, MEMSCAP had 5 sales employees for Standard Products and 5 for Custom Products. To complement this direct sales force, MEMSCAP also operates indirectly in twelve countries via distributors and representatives, notably in India, Taiwan, Singapore, Japan, Israel, Canada, England, Germany, China, Korea and Australia.
4.5.4 Personnel To Meet Growth Requirements
In 2003, a plan to rationalise and downsize was initiated thus bringing personnel levels down to less than 150 in April 2004. Below is the breakdown of personnel at December 31, 2003:
FUNCTION Dec.31, 2002 Dec.31, 2003 Production 79 56
R & D 126 109 Sales & Marketing 13 9
Administrative 38 32 TOTAL 256 206
Country 2000 2001 2002
2003
France 65 98 116 69 United States 11 13 35 33 Germany 4 8 2 1 Japan NA 1 1 NA Egypt 22 39 56 45 Norway NA NA 46 44 Israel NA NA NA 14 TOTAL 100 170 256 206
At April 30, 2004, there were 147 employees worldwide: 35 in France, 36 in the United States, 36 in Egypt, 39 in Norway and 1 in Germany. Average age is 40. Training expenditure stood at €15.7K for 2003. Training topics included technical aspects (agreement with the CNES) and health and safety. Work contracts for all MEMSCAP employees in France come under the provisions of the Convention Collective de la Métallurguie, an agreement covering employees working in the metallurgical sector and applicable to MEMSCAP's
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staff. Moreover, and in compliance with French legal requirements, management regularly organises meetings with the Works Committee, which has a representative on the Board of Directors. MEMSCAP has implemented measures pertaining to the 35-hour working week in France in compliance with the law, since April 1, 2002, thus granting additional holidays to staff. According to MEMSCAP, it s future success partly depends on its ongoing ability to attract, recruit, keep and motivate highly-qualified technical and management personnel and maintain its management team and key technical staff. MEMSCAP therefore offers incentives such as stock options.
4.5.5 Facilities
MEMSCAP's European head office is located at Parc des Fontaines, Z.I. Bernin, 38926 Crolles Cedex, France, near Grenoble, where it occupies part of the 6500m² of offices available and clean rooms and plants. MEMSCAP concluded a lease-back agreement with a banking pool in 2002 for the Bernin site that it had built. The Bernin site comprises: - 1000m², class 10, for handling SMIF wafers for the manufacture of silicon wafers (front-end), - 350m², class 10, for first-level assembly and packaging, - 350m², class 10,000, for second-level assembly and packaging, - 1500m² of shared laboratories for testing, validation and maintenance, - 6500m² of offices. This site became the Group's headquarters in June 2002 and remains so despite the stoppage of production mentioned in paragraph 4.1.2. In addition to its head office, MEMSCAP also has access to the following facilities in France through partnerships:
• a common laboratory with the CNES in Toulouse, • a common manufacturing facility with the ESIEE in Marne-La-Vallée.
All MEMSCAP's international facilities are located in rented offices offering potential for short and mid-term growth, except for Egypt where MEMSCAP owns a two-storey building in Cairo's free zone. MEMSCAP rents clean rooms from MCNC in North Carolina. Cf. paragraph 5.1.5.17 for the Group's dry lease commitment details. MEMSCAP's two main subsidiaries:
• MEMSCAP Inc (United States) forms the core of MEMSCAP's custom products business. These operations are based in North Carolina at MEMSCAP's only active silicon production plant.
At December 31, 2003, the assets used by this subsidiary were the property of MEMSCAP SA. The possibility of transferring these assets (production equipment) to this subsidiary is to be studied in 2004. The offices and plant are rented.
• MEMSCAP AS, in Norway is the core of MEMSCAP's standard products business. With an assembly and packaging plant, it serves the medical, avionics and military markets.
This subsidiary owns the assets it uses, principally production equipment. It rents its plant. Key figures for these subsidiaries are given in note 5.1.5.19 of the consolidated appendix and in the subsidiaries and holdings table in the annual financial statements appendix for MEMSCAP SA. The key figures for the two main subsidiaries are: (In millions of euros)
MEMSCAP Inc (United States) MEMSCAP AS (based in Norway)
Revenue 2.8 3.9 Operating result (4.1) (1.0) Net income/loss (4.4) (1.1)
4.5.6 Relationship between MEMSCAP SA and its Subsidiaries
The relationship between MEMSCAP and its subsidiaries is governed by agreements. These can be broken down as follows:
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• MEMSCAP SA provides strategic, sales and administrative support to its American, Egyptian and Norwegian
subsidiaries. The total amount for service invoicing stood at €326,146 with a 5% profit margin for the 2003 fiscal year.
• MEMSCAP SA grants its American, Egyptian and Norwegian subsidiaries cash advances with loan contracts
governing payment terms. The total amount of financial interest invoiced by MEMSCAP SA for the 2003 fiscal year stood at €163,779 calculated on the basis of loan contracts.
• MEMSCAP rents 4-inch format manufacturing equipment to its American subsidiary for a total amount of €158,499. This includes the re-invoicing of equipment amortization with a 1% margin, and royalties of 2% of revenue for the use of trademarks and patents.
All of these agreements and the breakdown of re-invoicing by subsidiary are mentioned in auditors' special report in paragraph 5.6 of this report. The total amount invoiced by MEMSCAP SA to its subsidiaries for these agreements for the 2003 fiscal period stood at €648,424.
4.5.7 Investment
MEMSCAP carried out more divestment operations than investment operations in the 2003 fiscal year allowing it to generate €8.5 million in cash. This mainly concerned income from the sale of machines for €4.8 million and mutual funds previously used as collateral for €3.2 million. The main investments over the 2003 fiscal year were: - €2.7 million in capital assets acquired with the takeover of Opsitech SAS and paid for by MEMSCAP shares
(contribution value: €3.7 million). - €2.8 million in tangible fixed assets financed by shareholders' equity mainly corresponding to the purchase of
machines ordered in 2002 and installed in 2003, and to the construction of a building in the free zone in Egypt. - €1.6 million in intangible fixed assets financed by shareholders' equity, corresponding to the purchase of a
marketing licence for the Skin Station device and to the purchase of software licences, - €8.8 million of GalayOr Inc. securities paid for with MEMSCAP shares. Future investment is mainly focused on maintaining the company's resources and upgrading some machines used for production so as to increase their production capacity if necessary.
4.6 ANALYSIS OF RISK
4.6.1 Market Risks
MEMSCAP's ability to rival strong competition The market for MEMS-based systems features strong, highly fragmented competition and fast-growing technological needs and ability. According to MEMSCAP, the main market competition factors are: performance, functionality, price, ease of use, customisation, power consumption, reliability, the modular and extendible nature of the solutions, robustness and yield. Current or future competitors can develop MEMS-based solutions able to offer efficiency or other advantages superior to MEMSCAP's solutions. MEMSCAP considers its competition to be sustainable. However, MEMSCAP's position as a key player in the MEMS market with its solutions, patents and resources offers it a comfortable position. Dependence on developments and growth in the aeronautical, medical and consumer markets Which companies become MEMSCAP's main customers depends on developments and growth in the products and services markets in the medical, aerospace and consumer markets, in addition to the communications sector. MEMSCAP cannot guarantee a growth rate for these markets.
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However, this dependence should fall somewhat with more commercial opportunities for MEMS applications and the flexible nature of MEMSCAP's offer in terms of standard products and custom products.
4.6.2 Risk Related To The Business
MEMSCAP sees a long sales cycle for its standard products in the aeronautical and medical markets In the aeronautical sector, the time period between the first contact with a potential customer and receiving a prototype request for qualification is between one and three months as a rule. Qualification then takes another three to six months. Then there is a final period of up to one year which includes the launch of the programme won by the customer (new aircraft, replacement programme). It is only once this programme has started that production can begin. Long sales cycles may also be the case in the medical market where qualification phases are particularly long. Most of the phases in the product sales cycle integrating MEMSCAP technology are out of its control and are difficult to plan. Consequently, it is difficult to forecast quarterly results, which may cause major fluctuations in results from one quarter to another, independent of the long-term trends related to its business, but possibly having a negative impact on its share price. However, this risk should be gradually reduced thanks to its mature relationships with its main customers for whom production is already under way. Moreover, annual forecasts are given and adjusted on a quarterly basis in its blanket contracts. Dependence on a limited number of customers in some sectors MEMSCAP's dependence on a limited number of customers in some sectors may have fallen with its strategy to diversify its customer base in 2003. Thus 31% of revenue generated in 2003 came from 5 customers and 47% from 10 customers, as against 54% and 70% respectively in 2002. In MEMSCAP's market sector, customers' orders can be irregular and non recurrent. This situation can cause major quarterly variations in revenue and operating results. Moreover, a fall in business with its customers or loss of a customer would result in a fall in MEMSCAP's revenue and operating result. The invoice payment period granted to customers is 45 to 60 days. MEMSCAP's revenue is currently largely generated abroad, and shall continue to be so. This may expose it to risk. MEMSCAP's revenue outside of France formed 56% of consolidated revenue in 1999, 79% in 2000 and 80% in 2001, 73.3% in 2002 and 94% in 2003. MEMSCAP forecasts that revenue from abroad will continue to form a major part of its total revenue. For this reason, it is exposed to risks from (i) exchange rate variations, (ii) difficulties and longer time periods for collecting accounting information, (iii) customs and commercial barriers, and (iv) local regulations and changes in them. MEMSCAP cannot guarantee that these risks will not affect its business, financial situation and operating results, and consequently its stock market price. Moreover, changes in dollar/euro parity and NOK/euro parity may affect also its financial situation. Dependence on a limited number of suppliers for some materials Like some of its partners, MEMSCAP uses and plans to continue using a limited number of suppliers for the procurement of materials to manufacture its standard and custom products. MEMSCAP generally purchases through purchase orders and has no specific procurement guarantee from most of these suppliers. Material delivery times vary greatly and depend on a host of factors including the supplier, the amount of the order, the contract terms and current market demand for these materials. Any interruption or delay in delivery and the impossibility of obtaining these materials from other sources at acceptable prices and within reasonable timeframes would prevent MEMSCAP from delivering to its customers within their required timeframes. This situation may lead customers to cancel their orders and seek competitors for their requirements. MEMSCAP has not yet been faced with such a situation, but is still looking into new sources of procurement. However, in order to optimise its purchasing costs, MEMSCAP has opted to source from a limited number of suppliers. Potential change management difficulties
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Following its creation in November 1997, MEMSCAP witnessed strong business and personnel growth – 35 employees at the end of 1999 up to 256 employees at December 31, 2002, falling to less than 150 at the end of 2003. Its ability to effectively manage such changes means that it must monitor the suitability of its operational and financial structure against the increase, training and management of its personnel. The Company's new structural and operations organisation should allow it to better manage these flows.
4.6.3 Industrial and Environmental Risks
A production site fully compliant with safety standards MEMSCAP is obliged to store dangerous products on its production sites due to the nature of its business. To minimise risk to the environment, MEMSCAP ensures that its sites fully comply with safety standards. There are no toxic emissions from its production sites to the Company's knowledge. MEMSCAP's premises and its suppliers' or partners' research and development facilities may suffer losses which could affect its business MEMSCAP's, its manufacturers' and partners' research and development facilities may suffer major losses. The loss of any of these facilities may interrupt MEMSCAP's business or delay production and would result in major reconstruction costs. All of this is however covered by appropriate insurance policies.
4.6.4 Legal Risks
The importance of intellectual property and proprietary rights MEMSCAP currently owns over 150 patents and patent applications. The company plans to uphold its patent registration strategy as it considers that its inventions, trademarks, copyright and other intellectual property rights are crucial to its success. It relies on current regulations applicable to protect its proprietary rights. Its ability to combat competition will depend on its ability to protect and ensure the respect of its proprietary rights. Any failure to do so may affect its business, operating results and financial situation. MEMSCAP cannot guarantee that any future patent application will be successful or not be successfully contested by third parties, that its own patents will effectively protect its technology or intellectual property, or that other patents will not prevent it from exercising its business. Moreover, it cannot guarantee that other companies will not develop their own similar technology or designs with their own patents. MEMSCAP owns several trademarks (registered and unregistered) in France and the United States. MEMSCAP also operates in jurisdictions other than France and the United States and cannot guarantee that these trademarks will not be contested (claims from third parties concerning its trademarks or actions already using the same or similar trademarks). MEMSCAP relies on trade secrets to shield its proprietary technology. However, other companies could develop or acquire identical technology or obtain technology registered by MEMSCAP. Moreover, the company cannot guarantee that third parties will not obtain rights on trade secrets that it has not registered. MEMSCAP also uses non-disclosure agreements and copyright clauses in its commercial agreements and work contracts to respectively limit access to confidential information and obtain ownership of any technology developed by an employee or consultant. MEMSCAP cannot guarantee that the measures taken to protect its intellectual property rights will be suitable and opportune, or that it will be able to detect any prohibited use of its rights. In the future, MEMSCAP may have to deal with disputes concerning its intellectual property rights. In most of its licensing agreements, MEMSCAP provides for the payment of compensation to customers to cover any illegal imitation of its intellectual property licensed or used in its marketed products. MEMSCAP plans to enter into cross licensing agreements in the future. Its ability to conclude such agreements will mainly depend on whether it can maintain its intellectual property rights. While cross licensing agreements are common in the MEMS sector and do not generally give rise to skills transfer or registered rights, the license holders may, alone or in concert with others, develop rival products and designs.
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On the other hand, MEMSCAP may have to obtain a technology licence from another company. It cannot guarantee that this licence will be available in reasonable conditions. The impossibility of obtaining licenses from other companies required to develop new products and/or to fine-tune existing products may force it to seek replacement technology offering lower quality or performance, or at a higher price, which would then impact its business and results. Risk of dispute, mainly in terms of intellectual property, which may divert executives' attention and prevent it from selling or using the relevant technology It is possible that in the future MEMSCAP may be involved in legal procedures occurring as part of the usual framework of its business, including disputes relating to the application or defence of intellectual property rights. Such events may lead to MEMSCAP having to pay major damages and invalidate registered rights. Moreover, as the Company owns or rents plants, it may be required to appear as a principle or subsidiary element in disputes concerning its plants, occupation and damages resulting from them or relating to them.
4.6.5 Risks from Group Employees
Dependence on key employees and difficulties in recruiting qualified personnel As MEMSCAP depends on some key people to operate in a fast-changing market, the loss of these employees and the difficulties involved in recruiting new qualified personnel quickly may affect its business, its financial situation and operating results. MEMSCAP's future success mainly depends on the ongoing contribution from its executive managers. Its managers and employees may leave at any time after notice of 3 months in France and 1 month in the United States. Competition for this qualified personnel is strong and the number of people with MEMS technology experience is limited. The departure of one of its key directors or employees may delay the development and manufacture of its products which would affect its ability to keep up relations with its customers and thus negatively affect its business, financial situation and operating results. Its ability to attract and keep highly-qualified personnel will be a key element in its success. MEMSCAP might fail to attract, train and keep qualified personnel to fulfil its current and future needs, which may affect its business on a daily basis, the development and realisation of its long-term strategy and thus adversely affect its business. Company risks
• Law on the 35-hour week: This has been implemented since 1 April 2002 for companies in France.
• Ability to manage changes in personnel numbers: Over the last five years, MEMSCAP has seen a considerable rise in its personnel numbers. At the end of 2002, MEMSCAP launched a rationalisation, cost and downsizing policy in France and in its foreign subsidiaries. Having to manage a strike situation is always possible, even if this has never occurred at MEMSCAP. However, the possibility for employees to share in profits through stock option and warrants plans limits this risk considerably.
4.6.6 Financial and Other Risks
Ability to manage external growth Acquisitions have been a major part of MEMSCAP's strategy over the last two years. To manage a future acquisition, MEMSCAP could issue shares to dilute its existing shareholders, or initiate a debt policy. These acquisitions also carry a number of risks, particularly (i) difficulties in terms of integrating the business, technology or products acquired, (ii) the attention of executives in charge of the acquisition being diverted from their traditional business, (iii) unfavourable impact on current commercial relations with suppliers and customers, and (iv) the risks involved in entering a market in which MEMSCAP has little or no experience. However, MEMSCAP has carried out four external growth operations to date (Capto, Cronos, GalayOr and Opsitech) and these have not generated any of the potential negative effects mentioned. Assets required for operations
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In general, MEMSCAP owns the assets required for it to carry out its business with the exception of the rented premises in the United States and Norway. Interest rate risks Virtually all bank debt at December 31, 2003 was at a fixed interest rate thus shielding the Company from this risk. The Company therefore does not require interest rate cover. Only investment securities (in short-term treasury mutual funds) held in the portfolio are sensitive to interest rate changes as a 1% rise in the interest rate would increase financial income by €56,300 a year on the basis of the €5,630,000 in mutual funds held at December 31, 2003. At December 31, 2004, long-term debt was as follows:
(thousands of euros) DD to 1 yr 1 to 5 years Beyond Financial liabilities 4714 12,477 8285 Financial assets 11,690 - -
Net position before factoring (6976) 12,477 8285 Off-balance sheet 519 1063 - Net position after factoring (6457) 13,540 8285
For the fiscal year ended December 31, 2004, a 1% change in interest rates applied to the debt and variable rate investment items would have led to a €5K variation in the financial result.
As mentioned in note 5.1.5.12, 96% of long-term debt comes from lease-backs, 3.4% from equity loans and 0.6% from bank overdrafts. These debts are not governed by financial covenants. Only reimbursable loans must be paid back according to the commercial success of projects financed in this way. Exchange rate risk As part of the conversion of its subsidiaries' financial statements into euros, the company was open to dollar/euro, NOK/euro and Yen/euro parity variations. Group exposure at December 31, 2003 was as follows: Changes in financial statements caused by a 1% variation in currency.
US$
(thousands) NOK
(thousands) Yen
(thousands) Assets 2629 34,572 1,752Liabilities 13,445 25,099 42,469
Net position before factoring (10,816) 9473 (40,717)Off-balance sheet 0 0 0Net position after factoring (10,816) 9473 (40,717)
1% variation in currency 1% +1% +1%Impact in millions of euros of the 1% variation in currency on the net position (86) 11 (3) Exposure to the exchange rate remains limited as only 26% of shareholders' equity is in foreign currency. Consequently, a 1% variation in currency rates would result in a 0.26% variation in shareholders' equity expressed in euros. Given the limited nature of this risk to date, the company has not needed to use currency hedge instruments. However, the company continues to monitor this risk, draws up consolidated financial statements every quarter and calculates the consolidated exchange rate losses or gains, then duly informs the company management of these. Liquidity risk
Balance sheet closed at December 31, 2003 in descending order of liquidity:
Assets In €m Liabilities In €m Net cash 6.1 Suppliers 6.5
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Customers 3.0 Other debts 1.9
Stocks 1.2 Long-term debts 25.5 Other receivables 4.5 Dispute customer 2.4
At 31 December 2003, the Company held the following authorisations:
1. Discount line: 0 € 2. Documentary credit: 0€ 3. Forward exchange: 0 € 4. Factoring and bank overdraft: €238,000. This bank overdraft line was obtained in 2002 for 2 million
NOK (€238K) and raised to 4 million NOK in the first quarter 2004.
The following table summarises the liquidity risk against Group long-term debt.
Nature of shares issued or loans taken out
Fixed or variable
rate
Overall amount of lines used at
December 31, 2003. Due dates Hedging Bank loans NA - Debt from lease-back agreement restatements Fixed 24,464 2012 No Equity loans NA 869 2005 No Bank overdrafts Variable 143 2004 No
As specified above, diversification followed by cost reduction and restructuring measures and external growth operations may require more resources and oblige MEMSCAP to raise additional capital to manage its financing requirements.
Share risk MEMSCAP's cash situation is solely made up of cash and treasury mutual funds. It is therefore not open to share risks. Moreover, at December 31, 2003, MEMSCAP held own shares for a gross amount of €469K, provisioned for €350K. Additional financing needs Diversification followed by cost reduction and restructuring measures and external growth operations may require additional resources and oblige MEMSCAP to raise more capital. MEMSCAP may find it impossible to raise capital in acceptable conditions. Moreover, by issuing new shares, existing shareholders would be diluted and new shares may benefit from more advantageous rights. If it was impossible to raise funds in acceptable conditions, the company would be unable to take advantage of future opportunities or respond to unanticipated needs, and this could affect the continuity of its business. Flotation risks MEMSCAP has been listed on the Euronext Nouveau Marché since March 1, 2001. The financial markets suffered from a high level of volatility not linked to company performance. These market fluctuations can lead to a fall in MEMSCAP share prices, not due to performance. In addition to random market events, the MEMSCAP share price may vary significantly due to a certain number of factors, some of which are out of its control, notably (i) quarterly variations in revenue and half-yearly variations in its operating results, (ii) revised financial evaluations by stock market analysts, (iii) revised financial evaluations by other solutions manufacturers for MEMS technology or by technology firms in general, (iv) publications regarding the launch of new products, major technical innovations, contracts, strategic acquisitions or partnerships by MEMSCAP or its competitors, (v) market rumour, (vi) the loss of a major customer, (vii) the recruitment or departure of key employees, (viii) changes to the general economic outlook, (ix) any deviation in revenue or losses from financial analysts' forecasts and (x) the sale of a large number of MEMSCAP shares. While MEMSCAP's share liquidity in 2003 was one of the highest on the Nouveau Marché, the company cannot however guarantee that its shares will benefit from enough liquidity in the future, which could affect its ability to sell
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shares and thus its share price. Moreover, it is clear that since being listed on Euronext, the liquidity of MEMSCAP's shares in the SBF 250 and ITCAC50 indexes has increased.
4.7 INSURANCE Key players : MEMSCAP's future success largely depends on the ongoing contribution of the members of its Board of Directors and its Chairman, Jean-Michel Karam, in particular. This is why the company has taken out a life insurance policy for Mr Karam. This is guaranteed for €381,000 at present. Contacts have been initiated with other companies to raise this amount to €5 million. Executive Officers' Civil Liability: An "Executive Officers' Civil Liability" insurance policy for MEMSCAP SA and its subsidiaries covers this risk for €5 million per loss with an upper limit of €25 million. Damage to goods and business interruption: This insurance covers all risk relating to property for MEMSCAP SA (coverage limit: €38 million), furniture (coverage limit: €15 million), goods and supplies (coverage limit: €50,000) and business interruption (coverage limit: €3 million). Transported goods: MEMSCAP SA and its subsidiaries have insurance to cover risk related to the transport of goods from leaving the plant until delivery to the customer. Coverage limit is €200,000 per shipment by a third-party, €76,240 per shipment by MEMSCAP itself and €7622 per shipment by La Poste. Transport of persons: MEMSCAP has taken out a policy to cover employees during business trips. Medical costs are covered for €1 million (outside of the home country of the employees) and death/disability benefits are covered for €152,449 per employee. This amount is added to the amount provided for in employees' complementary health policies. The amount of insurance premiums paid by MEMSCAP in France for 2003 stood at about €181,000. This amount was about €15,000 for subsidiaries.
4.8 EXCEPTIONAL EVENTS AND DISPUTES Throughout 2003, MEMSCAP was involved (either as a requesting party or defending party) in disputes or arbitration procedures, mainly regarding disputes referred to the prud'hommes (labour relations board), disagreements with suppliers and the non payment of a debt by a foreign customer (cf. note 5.1.5.11 of the appendix to the consolidated accounts). There is a dispute with a supplier claiming the payment of €2 million which MEMSCAP contests. The Grenoble Trade Court judged the supplier's claim as inadmissible in March 2004 and ordered that an arbitration commission be set up. The supplier appealed to this decision. The judgement of the Appeals Court was adjourned until the end of September 2004. The group provides for disputes depending on the level of the declared dispute or on the initiation of the pre-litigation phase. These procedures cannot be avoided in MEMSCAP's business and may continue to occur throughout the life of the Company. This is why MEMSCAP has set up a proactive strategy aimed at preventing or limiting the onset of conflict leading to a dispute, and favouring mutual agreement. With the exception of the disputes mentioned above, no other exceptional events, dispute or arbitration which could have or has previously had a significant effect on the issuer's financial situation, business, results or group in the recent past have occurred to the Company's knowledge.
4.9 INFORMATION ON THE COMPANY Potential investors should read all of this document and not rely on any other information other than that contained in this Reference Document. In particular, they should not consider that any statement made in the press or any information which cannot be found in this document to be accurate. The schedule for financial information for the current fiscal year is as follows: - March 25: publication of the annual results for 2003 - April 21: publication of first quarter 2004 revenue and operating result -June 28: Annual Shareholders' Meeting - July22: publication of second quarter and first half 2004 revenue and operating result - August 25: publication of half-yearly results at June 30, 2004
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- October 21: publication of third quarter 2004 revenue and operating result - January 25, 2005: publication of fourth quarter 2004 and annual revenue and operating result - March 2005: publication of the annual results for 2004. Those who wish to do so may register on the company website (www.memscap.com) to receive press releases directly. Company policy is not to communicate forecast information to the press, analysts and the market in general.
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CHAPTER 5 - COMPANY FINANCIAL INFORMATION: ASSETS, FINANCIAL SITUATION, RESULTS
5.1 CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS 2003 AND 2004
5.1.1 CONSOLIDATED BALANCE SHEET
(thousands of euros)
Note
December
31, 2003
December 31, 2002
€ € Assets
Fixed assets Goodwill ................................................................................................................. 5.1.5.3 5670 5229 Intangible assets ..................................................................................................... 5.1.5.4 3505 2491 Tangible assets ....................................................................................................... 5.1.5.5 56,966 68,175 Financial assets ...................................................................................................... 5.1.5.6 14,405 9,049 80,546 84,944 Current assets Inventories .............................................................................................................. 5.1.5.7 1203 1733 Trade accounts receivable ...................................................................................... 5.1.5.8 5446 6309 Other receivables .................................................................................................... 5.1.5.9 4542 4855 Cash and cash equivalents ...................................................................................... 5.1.5.12 6060 13,719 17,251 26,616 Total assets 97,797 111,560
Liabilities Shareholders' equity Capital 5311 3251 Additional paid-in capital ....................................................................................... 114,129 98,674 Consolidated reserves and income (loss) ............................................................... (89,464) (30,828) Conversion adjustment ........................................................................................... (772) (683) 5.1.5.10 29,204 70,414 Provisions for risks and charges
5.1.5.11
34,777
4843
Liabilities
Loans and long-term debt ...................................................................................... 5.1.5.12 25,476 26,614 Trade accounts payable .......................................................................................... 5.1.5.13 6475 7215 Other payables ........................................................................................................ 5.1.5.13 1865 2474 33,816 36,303 Total liabilities 97,797 111,560
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5.1.2 CONSOLIDATED INCOME STATEMENT
Fiscal year ended December 31,
Note
2003
2002
€ € Revenue ....................................................................................................................5.1.5.1/C5 7663 5713 Production costs for sales from the period ............................................................... (8065) (2368) Costs from the manufacturing unit in France ........................................................... (7157) (11,248) Gross margin ......................................................................................................5.1.5.1/C6 (7,559) (7,903) Operating exp enses Research and development .......................................................................................5.1.5.1/C7 (5331) (9500) Sales and marketing costs ......................................................................................... (3335) (4268) General management and administrative costs ........................................................ (4741) (6956) Total operating expenses .................................................................................... (13,407) (20,724)
Operating income (loss).............................................................................. (20,966) (28,627) Investment expenses .................................................................................................
5.1.5.15
(1733)
(1157)
Investment income .................................................................................................... 5.1.5.15 306 471 Conversion adjustment ............................................................................................. (929) (721) Pre-tax income (loss) .................................................................................. (23,322) (30,034)
Extraordinary income (loss) ......................................................................... 5.15.16 (34,714) - Corporate income tax ................................................................................................
5.1.5.14
-
2775
Income (loss) before amortisation of goodwill ............................................ (58,036) (27,259) Amortisation of goodwill .......................................................................................... 3.1 (598) (581) Net income (loss) .........................................................................................
(58,634)
(27,840)
Basic net earnings (loss) per share ............................................................................ (0.75) (0.50) Number of shares taken into account in the calculation of basic net earnings
(loss) per share ............................................................................................ 77,843,919 56,000,038
Diluted net earnings (loss) per share ........................................................................ (0.75) (0.50) Number of shares taken into account in the calculation of diluted net earnings
(loss) per share .................................................................................................... 77,843,919 56,000,038
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5.1.3 CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands except
Shares
Investment certificates
Additional paid-in capital
Consolidated reserves
Cumulated conversion adjustment
Total shareholders' equity
data per share) Number Number Amount € € € € € Balance at December 31, 2000 ................................39,099,200 1,859,200 2,048 11,014 (2714) 11 10,359 Conversion of investment
certificates into shares................................
1,859,200 (1,859,200)
- New shares................................................................
1,344,000 67 (63) 4
Listing on the Nouveau Marché................................
11,511,111 576 82,660
83,236
Exercise of warrants ................................ 37 37 Net loss ................................................................ (213) (213) Conversion adjustment ................................ (394) (394) Balance at December 31, 2001 53,813,511 - 2691 93,674 (2953) (383) 93,029 Exercise of founders' warrants................................ 1 1 New shares................................................................11,196,800 560 5 000 (36) 5524 Net loss................................................................ (27,840) (27,840) Conversion adjustment ................................ (300) (300) Balance at December 30, 2002 ................................65,010,311 - 3251 98,674 (30,828) (683) 70,414 Exercise of founders' warrants
and options................................ 101 101
Exercise of warrants ................................ 1215 1215 New shares................................................................41,218,750 2060 15,455 (1318) 16,197 Net loss................................................................ (58,634) (58,634) Conversion adjustment ................................ (89) (89) Balance at December 31, 2002 ................................106,229,061 - 5311 114,129 (89,464) (772) 29,204
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5.1.4 CONSOLIDATED CASH FLOW STATEMENT
2003
2002 € € Business-related cash flows Net income (loss) ................................................................................................................. (58,634) (27,840) Elimination of non-monetary items Amortisation and provisions ............................................................................................. 39,846 2,421 Capital gain and loss write-off .......................................................................................... 1413 179 Cash increase (decrease) on: Trade accounts receivable .............................................................................................. (155) 3 551 Inventories ..................................................................................................................... 334 (131) Other receivables and accrued income .......................................................................... 688 10 428 Trade accounts payable ................................................................................................ (2565) (7302) Accrued expenses and other debts ................................................................................. 32 (1343) Net cash flows used by operating activities ............................................................ (19,041) (20,037) Net cash flows used by investment activities
Acquisition of tangible assets .............................................................................................. (1610) (26,100) Acquisition of intangible assets ........................................................................................... (669) (426) Acquisition of long-term investments .................................................................................. (40) (8802) Impact of variations in securities pledged as collateral ....................................................... 3172 - Income from sale of assets ................................................................................................ 4794 295 Impact of changes in group structure ................................................................................... 2833 (7676) Net cash flows generated (used) by investment activities ................................ 8480 (42,709) Cash flows generated by financing activities
Lease-back financing ........................................................................................................... - 26,586 Lease-back repayment .......................................................................................................... (2742) (984) Exercise of founders' warrants, warrants and stock options ................................................ 1316 1 Net income from capital increases ....................................................................................... 3757 148 Net cash flows generated by financing activities .................................................... 2331 25,751 Effect of exchange rate variations on net cash ................................................................
592
(334)
Decrease in net cash ........................................................................................................... (7638) (37,329) Net cash at opening of accounts ...........................................................................................
13 555
50 884
Net cash at closing of accounts .......................................................................................... 5 917 13,555 Active cash ...........................................................................................................................Passive cash ..........................................................................................................................
6060 (143)
13,719 (164)
Net cash at closing of accounts ............................................................................. 5917 13,555
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5.1.5 APPENDIX TO THE CONSOLIDATED FINANCIAL STATEMENTS
5.1.5.1. OVERVIEW OF THE BUSI NESS AND ACCOUNTING METHODS AND RULES A. Nature of the business
MEMSCAP SA ("MEMSCAP SA", "the Company" or "MEMSCAP") is a société anonyme under French law, created in November 1997. MEMSCAP provides innovative solutions based on MEMS technology. MEMS (micro-electro-mechanical systems) are microscopic systems combining mechanical, optical, electromagnetic, thermal and fluidic elements with semi-conductor substrate electronics. The MEMSCAP solutions include hardware components, intellectual property elements, software tools and design and manufacturing services. In 2003, MEMSCAP operated in five areas: wireless communications, optical communications, sensor solutions, the manufacture of MEMS for clients and the computer-assisted design (CAD) of MEMS. MEMSCAP's key customers are located in Europe, the United States and South-East Asia. At December 31, 2003, the Company and its subsidiaries employed 206 people including 69 in France, 44 in Norway, 45 in Egypt, 33 in the United States, 14 in Israel and 1 in Germany.
B. Key events in 2003
B.1. Acquisition of GalayOr Inc. and Opsitech SAS
On October 6, 2003, the company acquired GalayOr Inc., an Israeli firm specialised in optical components and connectors. This €8.70 million acquisition was financed by issuing ordinary shares and shares with warrants attached (cf. note 5.1.5.10 B). At November 27, 2003, the Company acquired Opsitech SAS for €3.75 million payable by an ordinary share issuance. Opsitech is a French company specialised in integrated optics (cf. note 5.1.5.10B).
B.2. Restructuring of Company activities
Following a period of diversification, the Company decided that the 2003 fiscal year would be devoted to a reorganisation and refocusing on its core business in a bid to boost the growth rate in coming years. The Company is thus organised around two main businesses from now on: § Standard products, including sensor products and the Skin Station;
§ Custom products, including manufacturing services and software.
As part of this new organisation, the optical communications business now focuses on the sale of optical chips and design solutions for optical component and subsystems companies and no longer on packaged components and modules. The optical assembly and packaging businesses have thus been stopped.
Moreover, the Company decided to group chip manufacturing at its production plant in North Carolina and thus halt production at its Bernin plant in France. In October 2003, these restructuring operations led to the stoppage of production and development operations at the Bernin plant and, at the beginning of 2004, of business carried out by the GalayOr Inc. subsidiary, and resulted in an extraordinary expense of €31.9 million being posted (cf. note 5.1.5.16).
B.3. Capital increases The Company carried out various capital increase operations aiming to finance the different external growth operations (Galayor and Opsitech), fully paid for by share exchange, and to strengthen its cash situation by cash capital increases. These cash capital increases stood at €5.3 million for 2003, including paid-in capital (cf. note 5.5.10.B).
C. Accounting Principles Used to Draw Up the Consolidated Financial Statements
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The consolidated financial statements were drawn up in accordance with accounting standards and principles generally accepted in France, in particular with Ruling no. 99-02 of the Comité de la Réglementation of June 22, 1999. The main accounting principles applied by the Company are the following:
C.1. Corporate Structure and Consolidation Methods
The Company's consolidated financial statements include the financial statements of MEMSCAP S.A. and all its wholly owned (100%) subsidiaries. All are fully consolidated.
There were 8 consolidated companies at December 31, 2003.
Country
Companies Date of entry into the consolidation
(*)
% of ownership at December 31,
2003
Consolidation method
France
MEMSCAP, S.A. Opsitech, S.A.S.
-
November 2003
Parent company
100%
Full consolidation Full consolidation
United States of America
MEMSCAP, Inc. February 1999 100% Full consolidation
Norway
MEMSCAP, AS
January 2002 100% Full consolidation
Egypt MEMSCAP, Ltd MEMSCAP, SAE
July 2000 December 2003
100% 100%
Full consolidation Full consolidation
Germany MEMSCAP, GmbH
December 1999 100% Full consolidation
Japan MEMSCAP, KK
December 2001 100% Full consolidation
(*) Excluding MEMSCAP AS, MEMSCAP SAE and Opsitech, S.A.S., the dates of entry into the consolidation correspond to the dates on which the companies were created.
The main changes to the consolidation structure during fiscal year 2003 concerned the acquisition of Opsitech, S.A.S. on November 27, 2003. Following the delocalisation of the Egyptian activities into the free zone, all assets and liabilities of MEMSCAP Ltd were transferred to MEMSCAP SAE. This contribution in shares did not affect the comparison of balance sheet items with those of the previous fiscal year. In light of the decision to shut down the GalayOr Inc. business (cf. note) and the fact that its assets, liabilities and operational items are not material in terms of the consolidated group structure, this subsidiary was not consolidated at December 31, 2003. The consolidated companies closed their accounts on December 31, 2003. Inter-company balances and transactions have been eliminated on consolidation.
C.2. Use of Estimates
Drawing up the financial statements in accordance with generally accepted accounting principles requires a certain degree of estimation and assumption from the Management, which in turn affects the reported amounts of assets and liabilities and disclosure of unrealised assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses for the fiscal periods presented. Actual results may differ from these estimates.
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C.3. Translation of Financial Statements
The consolidated financial statements for the fiscal year ending December 31, 2003 were drawn up in euros. All monetary balance sheet items have been translated into euros at year-end current exchange rates, except for the net shareholders' equity, expressed in terms of its historical value. Income statement items in currency format are translated using average annual exchange rates, applied to all transactions. Gains or losses resulting from the application of these different exchange rates on net income (loss) are not included in the income for the fiscal period but posted directly as conversion adjustment of shareholders' equity. Unrealised foreign exchange gains and losses on currency items that are an integral part of net investment in foreign subsidiaries are posted as conversion adjustment of shareholders' equity. The exchange rates used can be translated into euros as follows:
Currencies
Average Rate Fiscal Year 2002
Average Rate Fiscal Year 2003
Average Rate at December 31, 2002
Average Rate at December 31, 2003
US Dollar Norwegian Kroner Egyptian Pound Yen (Base 100)
1.05760 0.13318 0.23402 0.84700
0.88400 0.12495 0.14990 0.76350
0.95350 0.13745 0.21143 0.80390
0.79170 0.11884 0.12947 0.74040
C.4. Foreign Currency Transactions
Foreign currency transactions are translated using the historical exchange rate. At year-end, foreign currency debts and receivables are translated at year-end exchange rates and the resulting unrealised conversion adjustment reflected in net income (loss). The Company did not use a derivative financial instrument to cover its exchange risk.
C.5. Revenue Recognition
The Company derives revenue mainly from the sale of products, software licences and associated services, intellectual property and research and development services. Revenue from the sale of products is recognised on delivery. Software licences are sold either directly by the Company to end users or via distributors. Services associated with the sale of software licences include maintenance and technical assistance, consulting, training and porting fees. When software licences comprise more than one product and/or service components, the Company divides the total sales price by each component of the contract, based on the comparative fair value of each component, determined using the fair value shown and documented by the Company. The Company recognises revenue from software licences on delivery, except when the amount owed is considered variable or determinable, or when recoverability is not considered likely. For contracts with payment terms of longer than 12 months, or contracts with extended payment terms, the contract amount is considered variable or determinable. When recoverability is not considered likely, revenue from the contract is recognised on receipt of payment. Revenue from customer assistance is recognised on a straight-line basis over the duration of the service provided. Revenue from the sale of intellectual property licences (operating licences for manufacturing processes) and from granting user rights for the accompanying software is recognised at the sale of the licence. Revenue from research and development services is recognised when the Company considers that it has been received from the customer in accordance with the terms of the contract. This type of revenue may thus be acknowledged in line with progress made on the project or on a straight-line basis over the duration of the service provided. Payments made at the signing of a contract, even if not reimbursable, are phased over the term of the contract, unless they represent a deposit for products delivered or services provided that may be considered in terms of a direct sales process.
C.6. Gross Margin
Gross margin is calculated based on the difference between total revenue and the following:
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§ "total production costs for sales from the fiscal year". This means total production costs from the chip production site in the United States of America and from the Norwegian sensor assembly factory.
§ and "total costs from the French manufacturing unit". In 2002, these costs included costs for starting up and
commissioning the Bernin site. In 2003, these costs include working costs from Bernin up to October 15, 2003, when the Company announced the stoppage of its production activities in France (cf. note). From October 15, 2003, costs incurred from the stoppage of business at this factory have been posted under extraordinary expenses to the amount of €1.70 million.
C.7. Research and Development Expenses
Charges from research and development mainly comprise expenses from software development and design costs for chips and sensors. All costs incurred from designing and manufacturing prototypes are recorded as "research and development expenses". Downstream production costs are reflected in gross margin, while marketing costs are posted as "business and marketing expenses". Certain software development costs incurred after the viability of the technology has been demonstrated are capitalised, taking on board the probable realisable value of the asset in the future, and amortised over the estimated service life of the software. For fiscal year 2003, all costs relating to research and development have been posted under research and development expenses in the income statement. In France research and development expenses entitle the Company, subject to certain conditions, to a tax credit, which is recorded during expense recognition. This research tax credit is posted under "corporate income tax" in the income statement.
C.8. Tax
Deferred tax is calculated based on the differences between the fiscal and book values of the assets and liabilities posted in the balance sheet. These differences are determined in terms of current fiscal provisions and tax rates at the time of calculation. Net deferred tax debits are not accounted for when recoverability is not considered likely. Based on its loss history, the Company considers that the recoverability of deferred tax debits generated by loss carry-over is unlikely. As a result, the Company did not account for deferred tax debits generated by loss carry-over in 2002 and 2003.
C.9. Net Earnings (Loss) per Share
Basic earnings per share is calculated based on the weighted average number of ordinary shares in circulation during the fiscal period. Diluted earnings per share is based on the weighted mean of ordinary shares in circulation during the fiscal period, adjusted for the effect of contingent ordinary shares from exercising stock options, subscription warrants and other financial instruments potentially convertible into ordinary shares, if dilutive. As losses have been reported in the fiscal years ended December 31, 2002 and 2003, the dilutive effect of stock options and subscription warrants has been excluded from calculations of loss per share because their being taken into account would reduce the total loss per share.
C.10. Goodwill
Goodwill is based on the difference between the acquisition cost of the securities and the assessment of assets and liabilities identified at the date of purchasing. It is posted under fixed assets and amortised over a period reflecting the theories or objectives set at the time of purchasing.
Whenever there is an indication that the share price is going to fall, and at each year-end, goodwill is tested for impairment by comparing the net book value with an appraisal value based on a market value or going concern value to the Company. The market value is calculated using the revenue multiples method. The going concern value is calculated using the discounted cash flow method.
When the appraised value is judged to be too low in comparison to the net book value, a provision for depreciation is reported.
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C.11. Intangible Assets
Intangible assets comprise software licences and patents and trademarks recorded in the balance sheet for their acquisition cost or their contribution value. They are amortised using the straight-line method over the following time periods:
Licences and Software................................................................................................ 1-2 years Patents and Trademarks ................................................................................................ 10 years
C.12. Tangible Assets
Tangible assets are posted in the balance sheet at their acquisition cost. Amortisation is calculated using the straight-line method over the estimated duration of use of the different asset categories. The following categories are amortised over the following periods of time:
Factory Buildings ........................................................................................................... 20 years Office Buildings ............................................................................................................. 30 years Construction Fixtures................................................................................................ 5-15 years Equipment and Tools ................................................................................................ 4-6 years Furniture......................................................................................................................3-5 years Transport Equipment ................................................................................................ 5 years Office and IT Equipment................................................................................................ 2-3 years Office Furniture .............................................................................................................5-10 years
C.13. Lease-back Operations
Some fixed assets are governed by rental contracts for the duration of which the Company assumes the advantages and risks linked to the property. In this case, the asset is restated in order to recognise the value of the leased property, in terms of assets, and the corresponding long-term debt, in terms of liabilities. The fixed asset is amortised over the period of useful life for the Company. The debt is amortised over the term of the lease-back contract.
C.14. Long-lived Assets
The Company assesses the recoverability of its long-lived assets whenever events or changes in the operating environment or conditions indicate that the value of the asset posted in the balance sheet might not be recoverable. Following the restructuring activities presented in the note, the Company entered extraordinary depreciations on assets related to the Bernin production site and the GalayOr Inc. subsidiary into its accounts on December 31, 2003. (cf. note 5.1.5.16)
C.14.1. Assets from the Bernin Production Site The appraised value of these assets, as determined on December 31, 2003 by the Company, is based on the following evaluation elements:
§ Net book value of the machinery and tools transferred to the Company's other production sites.
§ For assets to be sold:
Factory building, construction fixtures and clean room Market value based on an expert evaluation report
Machinery and tools Market value based on similar recent transactions
The difference between the appraised value and the net book value of these assets underwent extraordinary depreciation recorded as a provision for risk.
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Appraisal of this provision is based on asset transfer estimates in turn based on an expert report and on market values determined using similar recent transactions. Given the specific nature of the market on which the Company operates, the market values of assets to be sold can vary significantly and thus require the provisioned amounts to be revised.
C.14.2. GalayOr Inc. Shares Following the stoppage of all GalayOr Inc. activities scheduled for the beginning of 2004, the Company posted an extraordinary depreciation for all the assets (at acquisition price of securities), subtracting liabilities (debts), to which were added closing expenses.
C.15. Inventories
The inventories mainly comprise raw materials, consumables, goods in process and finished goods and are valued at their lowest purchase price or market value. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating the estimated recoverable amount.
C.16. Cash and Cash Equivalent
The Company defines short-term investment securities (cash equivalent) as securities with a maturity of not more than three months and without material interest-rate risk. Securities are mainly comprised of treasury mutual fund units. Their acquisition prices are close to market value. Mutual fund units used as collateral with a limit of more than three months are recorded as long-term investments.
C.17. Own Shares
The purpose of MEMSCAP S.A. own shares is to regulate the company's market price. They are recorded as cash equivalent. A provision is recorded at year-end to bring the historical value back to market value based on the market price at December 31, 2003.
C.18. Credit Risk and Concentration of Risk
The main financial items concerned by credit risk or foreign exchange risk for the Company are cash, investment securities, supplier debts and trade accounts receivable. The Company has implemented a cash management policy to limit investments to short-term and low risk financial instruments. The Company's cash is mainly expressed in euros, US dollars and Norwegian kroner and pooled in leading financial institutions. Trade accounts receivable mainly stem from revenue from customers based in Europe, the United States, Taiwan and Norway. The Company assesses the credit risk and financial situation of its customers on a regular basis and does not usually require a guarantee. Potential loss on non-recoverable receivables is provided for based on specific customer risk, background and other information.
C.19. Information on Sectors and Geographical Zones
The Company reports information about its business sectors in its consolidated financial statements based on information used within the company for assessing business sector performance and deciding how to allocate resources. At December 31, 2003, the Company Management evaluated performance on the following five business sectors: wireless communications, optical communications, MEMS computer-assisted design software, sensor solutions and MEMS manufacturing services for external customers. The Company also reported information on products and services, geographical zones and key customers.
C.20. Labour-related Benefits and Retirement Indemnities
Depending on the country and current legislation on pensions and retirement, employees' rights are reported as a charge or a provision for charges.
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In accordance with French law, MEMSCAP and its subsidiary Opsitech pay into pension schemes for employees in France via contributions based on salaries, paid to the relevant government agencies. The Company is under no other obligations in this context. French law also requires payment of a lump sum retirement indemnity to all employees of the Company at the time of their retirement based on years of service and salary level. In the United States, MEMSCAP Inc. adopted a retirement savings plan qualified under Section 401(k) of the American Inland Revenue Code. The scheme was adopted in November 2000 and comprises a tax-free savings plan that covers the majority of the Company's American employees. In Norway, pension benefits are covered by a contract with a company. The payments made to this company are reported as charges and cover the discounted value of pension benefits. None of MEMSCAP's other subsidiaries currently have a pension plan.
5.1.5.2. CHANGES IN CONSOLIDATION THAT AFFECT THE COMPARISON OF FINANCIAL S TATEMENTS WITH THE PREVIOUS
PERIOD OR YEAR
Changes in group structure during the fiscal year due to the acquisition and consolidation of Opsitech S.A.S. (cf. note) have caused the consolidated balance sheet items, revenue and operating income to vary by less than 5%.
5.1.5.3. GOODWILL A. Positive Goodwill
December31
December 31
(in thousands of euros)
2003 2002
Goodwill on MEMSCAP AS ................................................................................................ 5810 5810 Amortisation of goodwill on MEMSCAP AS ................................................................ (1162) (581)
Net change MEMSCAP AS ...................................................................................... 4648 5229 Goodwill on Opsitech S.A.S. ................................................................................................ 1039 - Amortisation of goodwill on Opsitech S.A.S. ................................................................ (17) -
Net change Opsitech S.A.S. ...................................................................................... 1022 -
Net goodwill ................................................................................................................................5670 5229 Goodwill on the acquisition of MEMSCAP AS is amortised on the basis of a fixed 10-year period. Depreciation expenses reported December 31, 2003 totalled €581,000. Goodwill on the acquisition of Opsitech S.A.S. is amortised on the basis of a fixed period of 5 years. Depreciation expenses reported at December 31, 2003 totalled €17,000. A valuation test relating to goodwill on MEMSCAP AS was carried out in accordance with the Company's accounting principles (cf. note C.5.1.5.1.C.10). The market value thus determined was higher than the net book value of the goodwill: no depreciation was therefore posted at December 31, 2003. Regarding Opsitech S.A.S., the novelty of the transaction (cf. note 5.1.5.1.B.1) and the expected benefits of the acquisition made reporting any depreciation of the goodwill unnecessary.
B. Negative Goodwill
December 31 December 31
70
(in thousands of euros) 2003 2002 Opening balance ................................................................................................................................4259 4406 Recognition of goodwill as income (loss) ................................................................(881) (147)
Closing balance ................................................................................................ 3378 4259 The negative goodwill on the acquisition of the Cronos business in November 2002, reported under provisions for risks and charges (cf. note) is recognised as profit in the operating income statement on a gradual basis, as the fixed assets that made up its capital are amortised. The process should take approximately 5 years.
5.1.5.4. INTANGIBLE ASSETS
The Company's intangible assets can be broken down as follows:
December 31
December 31
(in thousands of euros) 2003 2002 Software ................................................................................................................................ 2051 1393 Patents and trademarks ................................................................................................ 3671 2160 Other intangible assets ................................................................................................ 113 36 Intangible assets (1)................................................................................................5835 3589 Accumulated depreciation and amortisation ................................................................ (2330) (1098)
Total intangible assets ................................................................................................(net)
3505 2491
(1) The change in the gross value of the intangible assets can be broken down as follows:
December 31 December 31 (in thousands of euros) 2003 2002
Opening balance ................................................................................................................................3589 1042 Change in group structure - Acquisition of Capto AS ................................................................ - 118 Change in group structure - Acquisition of Opsitech S.A.S. ................................................................721 - Acquisitions ............................................................................................................................. 1571 2565 Disposals ................................................................................................................................ (2) (105) Conversion adjustment ................................................................................................ (44) (31)
Closing balance ................................................................................................................................5835 3589 The acquisitions comprise the purchase of a marketing licence for "Skin Station", the cutaneous analysis tool, and purchases of software licences. Amortisation charges in the income statement totalled €976,000 on December 31, 2003 and €569,000 on December 31, 2002.
5.1.5.5. TANGIBLE ASSETS
The Company's tangible assets can be broken down as follows:
December 31
December 31
(in thousands of euros) 2003 2002 Land (1) ................................................................................................................................ 244 210 Buildings (1) ................................................................................................................................18,194 17,848
71
Fixtures and fittings ................................................................................................ 20,509 20,717 Machinery (1) ................................................................................................................................28,588 32,255 Vehicles ................................................................................................................................ - 27 Office furniture and other equipment (1) ................................................................ 459 657 IT equipment (1) ................................................................................................................................1399 1486 Assets in progress ................................................................................................ - - Tangible assets ................................................................................................................................69,393 73,200 Accumulated depreciation and amortisation ................................................................ (12,427) (5025)
Total tangible assets (net)................................................................................................ 56,966 68,175 (1) including assets financed by leasing:
December 31,
December 31,
(in thousands of euros)
2003 2002
Land ................................................................................................................................ 210 210 Buildings ................................................................................................................................ 17,848 17,848 Machinery ................................................................................................................................ 6410 7595 Office furniture and other equipment ................................................................................................14 14 IT equipment ................................................................................................................................131 88 Tangible Assets ................................................................................................................................24,613 25,755 Accumulated depreciation and amortisation ................................................................ (3041) (1160)
Total tangible assets financed by leasing (net)................................................................21,572 24,595 The change in the gross value of the tangible assets can be broken down as follows:
December 31, December 31, (in thousands of euros) 2003 2002
Opening balance ................................................................................................................................73,200 36,713 Change in group structure - Acquisition of Capto AS ................................................................ - 2167 Change in group structure - Acquisition of Opsitech S.A.S. ................................ 1943 - Acquisitions ............................................................................................................................ 2809 34,818 Disposals ................................................................................................................................ (7856) (455) Conversion adjustment ................................................................................................ (703) (43)
Closing balance ................................................................................................................................69,393 73,200 The transfers include the sale of machinery to the amount of €4.3 million from the closure of the Bernin production site. Capital loss from transfers to the amount of €1.3 million has been recorded under extraordinary income (loss) (cf. note 15). Amortisation charges in the income statement totalled €8,115,000 on December 31, 2003 and €4,106,000 on December 31, 2002.
5.1.5.6. LONG-TERM INVESTMENTS
December 31, December 31,
(in thousands of euros) 2003 2002 Securities used as collateral ................................................................................................ 5630 8802 Equity interests ................................................................................................................................8764 146 Other long-term investments ................................................................................................ 26 117 Tangible assets ................................................................................................................................14,420 9064 Minus provisions for depreciation ................................................................................................(15) (15)
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Total long-term investments (net) ................................................................................................14,405 9049 The securities are from treasury mutual funds with a limit of more than 3 months. These mutual fund units are used as collateral for financial institutions that have granted leases. The amount of mutual fund units used as collateral decreases as lease fees are paid. Equity interests mainly comprise shareholding in GalayOr. Following the stoppage of GalayOr Inc. activities at the beginning of 2004, the Company reported an extraordinary depreciation for the total purchase price of the securities, posted as a provision for risk (cf. note 5.1.5.11).
5.1.5.7. INVENTORIES Inventories can be broken down as follows:
December 31, December 31, (in thousands of euros) 2003 2002 Raw materials ................................................................................................................ 457 720 Goods in process ........................................................................................................... 134 127 Finished products .......................................................................................................... 703 988
Sub-total .................................................................................................................. 1294 1835 Minus provisions for depreciation ................................................................................. (91) (102)
Total inventories (net)....................................................................... 1203 1733
5.1.5.8. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable can be broken down as follows:
December 31, December 31, (in thousands of euros) 2003 2002 Trade accounts receivable ............................................................................................. 5384 6414 Customers to be invoiced .............................................................................................. 192 25
Sub-total....................................................................................... 5576 6439 Minus provisions for depreciation.............................................................. (130) (130)
Total trade accounts receivable (net)...................................................... 5446 6309 In 2003, €2.4 million was allocated to a provision for risk concerning a customer dispute and posted as extraordinary income (loss) (cf. note 5.1.5.16). At December 31, 2002, 2 customers represented 45% and 26% respectively of the Company's trade accounts receivable and one customer 21% of 2002 net revenue. At December 31, 2003, 2 customers represent 44% and 10% respectively of the Company's trade accounts receivable. The Company's top 5 customers represented 31% of its net revenue on December 31, 2003.
5.1.5.9. OTHER RECEIVABLES AND RELATED ACCOUNTS
Other receivables can be broken down as follows:
December 31 December 31
(in thousands of euros) 2003 2002 Tax receivables .............................................................................................................. 893 767 Research tax credit ........................................................................................................ 2962 2777
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Prepaid expenses ........................................................................................................... 424 762 Other receivables ........................................................................................................... 263 549
Total other receivables ............................................................................................ 4542 4855 Tax receivables at December 31, 2003 mainly comprised a VAT credit of €840,000.
5.1.5.10. NET S HAREHOLDERS' EQUITY OF THE CONSOLIDATED ENTITY A. Equity Capital
At December 31, 2003, the Company's capital comprised 106,229,061 shares with a nominal value of €0.05.
B. Change in the Net Shareholders' Equity
Changes in the various items that constitute the Company's shareholders' equity are listed in the table of change in consolidated net shareholders' equity. Changes in the shareholders' equity in 2003 can largely be attributed to the following capital increases:
§ On January 23, 2003, the Company issued 106,400 new shares with a nominal value of €0.05 for a premium of €23,000. This issue follows on from operations carried out in 2002 and 2003:
- In 2002, 20 founders' warrants were exercised and thus 5,600 shares subscribed to at €0.264 per share.
- 100,800 stock options were exercised and thus 100,800 shares subscribed to at €0.264 per share during the first half 2003.
§ On May 13, 2003, the Company issued 40,000 new shares with a nominal value of €0.05 for a premium of €9,000. This issue follows on from the first half 2003 when 40,000 stock options were exercised and thus 40,000 shares subscribed to at €0.264 per share.
§ On June 20, 2003, the Company issued 30,000 new shares with a nominal value of €0.05 for a premium of €6,000. This issue follows on from the first half 2003 when 30,000 stock options were exercised and thus 30,000 shares subscribed to at €0.264 per share.
§ On October 6, 2003, the Company carried out the following operations:
- The exercise of 19,230,172 new shares with a nominal value of €0.05 and 93,500 shares with warrants attached (B) with a nominal value of €0.05 at €0.45 per share for contribution of GalayOr Inc. shares. Paid-in capital totalled €7,729,000.
- The exercise of 6,872,177 shares with warrants attached (A) for a total of US$3.5 million (€3,024,000). The share premium totalled €2,680,000.
§ On October 22, 2003, the Company issued 212,800 new shares with a nominal value of €0.05 for a premium of €45,000. This issue follows on from the exercise of 212,800 founders' warrants and the resulting subscription of 212,800 shares at €0.264 per share.
§ On November 21, 2003, the Company issued 3,376,189 new shares with a nominal value of €0.05 with a premium of €1,047,000. This issue follows on from the exercise of 16,880,945 independent warrants, issued in order to limit the dilution of the free float following the issue of the shares with warrants attached (A).
§ On November 27, 2003, the Company issued 8,515,984 new ordinary shares with a nominal value of €0.05 at €0.44 per share for contribution of Opsitech shares. Paid-in capital totalled €3,321,000.
§ On December 29, 2003, the company issued 2,741,528 shares with warrants attached (C) for a total of US$1.5 million (€1,206,000). The share premium totalled €1,069,000.
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C. Warrants
Warrants
Warrants
"JDSU"
Warrants (1)
Warrants
(A) (3)
Date of meeting
Oct. 20, 2000
Nov. 21, 2000
Oct. 31, 2002
Oct. 6, 2003 Total number of warrants issued 840 980 6,500,000 6,872,177 Start date for exercising the warrants Oct. 2, 2002 Oct.2, 2002 or
Nov.2, 2002 (1) Oct.7, 2003
Expiry date of the warrants Oct.20, 2005 Nov.21, 2005 (1) Oct.6, 2008 Option price per share 0.912 € 0.912 € (1) 0.05 € Total number of shares that may be optioned
at 31 December 2003 using warrants that have been granted but not exercised
168,000 196,000 6,500,000 1,718,044
Total number of shares optioned at 31 December 2003
- - - -
Warrants
(B) (2)
Independent
Warrants (4)
Warrants
(C) (5)
Independent
Warrants (6)
Date of meeting
Oct.6, 2003
Oct.6, 2003
Dec.29, 2003
Dec.29, 2003 Total number of warrants issued 93,500 65,186,711 2,741,528 103,487,533 Start date for exercising the warrants (2) Oct.9, 2003 Dec.30, 2003 Jan.9, 2004 Expiry date of the warrants (2) Nov.8, 2003 Dec.29, 2008 Feb.7, 2004 Option price per share (2) 0.36 € 0.50 € 0.36 € Total number of shares that may be optioned at 31
December 2003 using warrants that have been granted but not exercised
11,594,000 - 685,432 12,422,063
Total number of shares optioned at 31 December 2003
- 3,376,189 - -
(1) Following the JDSU / Cronos share contribution operation that took place in 2002, 6,500,000 warrants were issued for the sole use of JDSU. The conditions for exercising these shares hinged on the achievement of objectives concerning the revenue generated by the contributed assets.
(2) The issue of the 96,500 warrants (B) resulted from the detachment of warrants (B) attached to shares issued on October 6, 2003 in the scope of the contribution of GalayOr shares (cf. note 5.1.5.10.B). This issue was reserved to a select group of GalayOr shareholders.
(3) The issue of the 6,872,177 warrants (A) resulted from the detachment of warrants (A) attached to shares issued on
October 6, 2003 (cf. note 5.1.5.10.B). This issue was reserved to a select group of GalayOr and MEMSCAP shareholders.
(4) Given the reserved nature of the capital increases carried out in the scope of the contribution of GalayOr shares, the
Company issued 65,186,711 independent warrants in a bid to limit the dilution of the free float following the issue of the shares with warrants attached (A). This operation resulted in the exercise of 16,880,945 warrants and the issue of 3,376,189 new shares.
75
(5) The issue of the 2,741,728 warrants (C) resulted from the detachment of warrants (C) attached to shares issued on December 29, 2003 (cf. note 5.1.5.10.B). This issue was reserved to a select group of GalayOr and MEMSCAP shareholders.
(6) Given the reserved nature of the capital increases carried out in the scope of the contribution of Opsitech shares and the issue of shares with warrants attached (C), the Company issued 103,487,533 independent warrants in a bid to limit the dilution of the free float. This operation resulted in the issue of 1,645,348 new MEMSCAP shares for a total option amount of €596,000 (cf. note 5.1.5.21).
D. Founders' Warrants
Founders' Warrants
Founders' Warrants
Date of meeting
Mar. 7, 2000
Oct. 20 , 2000 Total number of warrants issued 228 10,598 Start date for exercising the warrants Feb. 28, 2001 Feb. 28, 2002 Expiry date of the warrants Mar. 6, 2005 Oct. 21, 2005 Option price per share 0.264 € 0.912 € Total number of shares that may be optioned at 31 December 2003 using warrants that have been granted but not exercised
817,600 1,050,000
Total number of shares optioned at 31 December 2003 358,400 -
E. Stock Options
Plan 1
Plan 2
Plan 3
Plan 4
Plan 5
Plan 6
Plan 7
Meeting date
Mar.7, 2000
Mar.7, 2000
Mar.7, 2000
Jan. 29, 2001
June 14,
2002
June 14,
2002
June 14,
2002 Date of Board meeting Mar.7,
2000 Oct.20, 2000
Nov.2, 2000
Oct.15, 2001
June 14,
2002
Feb.14, 2003
Nov.19, 2003
Total number of options granted
412 7 448 812 910,000 226,500 780,100 500,000
Start date for exercising the options
Mar.1, 2001
Feb.28, 2002
Feb.28, 2002
(1) (2) (3) (4)
Expiry date of the options
Mar.7, 2008
Oct. 20, 2008
Nov. 2, 2008
Oct. 15, 2009
June 14,
2010
Feb. 14, 2007
Mar. 2006
Option price per share €0.264 €0.912 €0.912 €1.23 €1.23 €0.45 €0.49 Total number of shares that may be optioned at 31 December 2003 using options that have been granted but not exercised
410,000 380,800 0 334,000 183,500 500,200 250,000
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Total number of shares optioned at 31 December 2003
70,000 - - - - - -
(1) The period of time during which an option may be exercised depends on the anniversary date of the employee's contract. (8) The Board of Directors granted 226,500 options to 22 of the Group's employees (8 from the Norwegian subsidiary,
1 from the Canadian subsidiary, 3 from the Egyptian subsidiary and 10 from MEMSCAP SA) on June 14, 2002. Only 25% of the options may be exercised every 12 months, running from each of the four anniversaries of the allocation date.
(9) The Board of Directors granted 780,100 options to 65 of the Group's employees on June 14, 2002. Of these options, 270,000 options granted to 60 employees can be exercised at any time within the four years following allocation. The remaining 510,000 options granted to 5 employees can be exercised in the following conditions: 25% as of the first anniversary of allocation and at a maximum rate of 1/12 per quarter for the remainder.
(10) The Board meeting of November 19, 2003 granted 500,000 options to 14 GalayOr employees. These options will become exercisable from March 1, 2004 for a maximum period of two years (to March 1, 2006 at the latest).
F. Summary of Warrant, Founders' Warrant and Stock Option Plans
A summary of activity in terms of warrant, founders' warrant and stock option plans is presented below:
(In number of shares)
Warrants
Founders' Warrants
Stock Options
Total
Balance at December 31, 2001 364,000 2,427,600 3,044,200 5,835,800
Granted ....................................... 6,500,000 - 226,500 6,726,500 Exercised .................................... - (5,600) (657,600) (663,200) Cancelled .................................... - (341,600) (215,200) (556,800)
Balance at December 31, 2002 6,864,000 2,080,400 2,397,900 11,342,300
Granted ....................................... 44,282,740 - 1,280,100 45,562,840 Exercised .................................... (3,376,189) (212,800) (70,000) (3,658,989) Cancelled .................................... (14,487,012) - (1,549,500) (16,036,512)
Balance at December 31, 2003 33,283,539 1,867,600 2,058,500 37,209,639
5.1.5.11. PROVISIONS FOR RISKS AND CHARGES Reversals of the fiscal year
(in thousands of euros)
Balance at Dec. 31, 2002
Accrued expenses
of the fiscal
period
Provisionused
Provision unused
Conversion
adjustment
Balance at Dec. 31,
2003
Negative goodwill (1) ................................ 4259 - (881) - - 3378 Provisions for stoppage of activities (2) ................................- 28,132 - - - 28,132 Provisions for legal disputes (3)................................372 2 817 - - (78) 3111
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Other provisions for risks and charges ................................212 72 (101) - (27) 156
Provisions for risks and charges ................................ 4843 31,021 (982) - (105) 34,777 (1) The negative good will concerns the acquisition of Cronos assets in November 2002. (cf. note 5.1.5.3.B) (2) The provisions for stoppage of activity refer to the GalayOr Inc. subsidiary, for €8.7 million and the Bernin
production site for €19.4 million. In terms of the Bernin site, the provisions comprise the extraordinary depreciation of part of the real estate assets, machinery and equipment, a year's post-production expenses running until the probable date of sale of these assets and provisions for redundancies linked to the shutdown.
(3) The provisions for legal disputes cover business risk linked to a particular customer dispute (cf. note 8) and various
other risks linked to employees.
5.1.5.12. NET DEBT
December 31,
December 31,
(in thousands of euros) 2003 2002 Loans and long-term debt (1) ..........................................................................................25,476 26,614 Mutual funds used as collateral with a limit of more than three months ................................ (5630) (8802) Cash (2) ................................................................................................ (6060) (13,719)
Net debt ................................................................................................................................ 13,786 4093 (1) The repayment schedule for loans and long-term debts is as follows: December 31, 2003 Dec. 31 (in thousands of euros) Less than
12 months1-5 years More than
5 years Total 2002
Bank loans ................................................................................................- - - - - Debt from lease-back operations ................................................................4571 11,608 8285 24,464 26,237 Equity loans ................................................................................................- 869 - 869 213 Bank overdrafts ................................................................ 143 - - 143 164
Loans and long-term debts ................................................................4714 12,477 8285 25,476 26,614
At December 31, 2003, the most important loans undertaken by the Company were in euros and taken out at a fixed rate of 5.9%. (2) Cash and cash equivalent comprise:
December 31,
December 31,
(in thousands of euros) 2003 2002 Cash ................................................................................................................................ 2223 4401 Cash equivalent (2.1) ................................................................................................3718 9162 Own shares (2.2)................................................................................................119 156
Total ................................................................................................................................ 6060 13,719
(2.1) At December 31, 2003, cash equivalent constituted treasury mutual fund units for which no capital gain had been realised at year-end.
(2.2) The Company did not buy back any of its own shares in 2003. At December 31, 2003, the Company owned
313,767 of its own shares for the purpose of regulating its market price.
December 31
78
(in thousands of euros) 2003 Number of own shares ................................................................................................ 313,767 Gross value (in euros) ................................................................................................ 469,000 Unrealised capital loss................................................................................................(350,000)
Net book value ................................................................................................ 119,000
5.1.5.13. OPERATING DEBT
The Company's operating debt can be broken down as follows:
December 31 December 31 (in thousands of euros) 2003 2002
Trade accounts payable ................................................................................................ 6475 7215 Fiscal and corporate debts ................................................................................................ 1314 1850 Advances and paid deposits on orders in progress ................................................................ 283 60 Other debts ................................................................................................................................ 268 564
Total operating debt ................................................................................................ 8340 9689
5.1.5.14. TAX
Loss before tax can be broken down as follows:
December 31 December 31 (in thousands of euros) 2003 2002
France ................................................................................................................................ (51,483) (24,003) Others ................................................................................................................................ (7151) (6031)
Total income (loss) before tax ................................................................ (58,634) (30,034) The reconciliation between the estimated tax credit, calculated at the current rate in France (34.33% in 2003 and in 2002) and the actual tax credit can be broken down as follows:
December 31 December 31 (in thousands of euros) 2003 2002
Estimated tax credit, calculated at the current French rate ................................ 20,119 10,311 Loss carry-over ................................................................................................(20,119) (10,311) Research tax credit ................................................................................................ - 2777 Other ................................................................................................ - (2)
Total tax credit (expense) ..............................................................................................- 2775 Unrealised tax at December 31, 2003 mainly comprised loss carry-over in the following proportions:
a. €62,305,000 in France, indefinitely carried over.
b. €9,167,000 for the Company's American subsidiary due to expire between 2014 and 2018.
c. €4,233,000 for the other subsidiaries.
79
Based on its loss history, the Company considers that the recoverability of deferred tax debits generated by loss carry-over is unlikely. As a result, the Company has not accounted for deferred tax debits generated by loss carry-over.
5.1.5.15. INVESTMENT INCOME (LOSS)
Investment income totalled €306,000 at December 31, 2003 and €471,000 at December 31, 2002. This income came from remuneration from the Company's liquid assets, mainly invested in treasury mutual funds. Investment expenses totalled €1,733,000 at December 31, 2003 and €1,157,000 at December 31, 2002. These expenses mainly comprise interest on lease contracts.
5.1.5.16. EXTRAORDINARY INCOME (LOSS)
Extraordinary income (loss) for 2003 comprises the following expenses:
Provisions Extraordinary expenses
Total
(in thousands of euros) 2003 2003 2003 Stoppage expenses for the Bernin production site ................................(19,437) (3723) (23,160) Stoppage expenses for GalayOr Inc. ................................ (8696) - (8696) Provisions for legal disputes ................................................................ (2817) - (2817) Other extraordinary expenses ................................................................ - (41) (41)
Extraordinary loss ................................................................ (30,950) (3764) (34,714)
Expenses from the stoppage of activities at the Bernin factory, effective as of 15 October 2003, total €23.2 million and have been posted as extraordinary income (loss). These expenses can be broken down as follows: - The depreciation of the Bernin factory assets in terms of their appraised value (cf. note 5.1.5.1.C.14.1). - Expenses relating to employee redundancies - Running costs of the factory from October 15, 2003, when activities were shut down, to December 31, 2003
inclusive. - Projected post-production costs over 12 months to the estimated date by which the factory assets will have been
sold or transferred. - Costs relating to the sale of factory equipment (cf. note 5.1.5.5). Following the stoppage of all GalayOr Inc. activities scheduled for the beginning of 2004, the Company posted an extraordinary depreciation for all the assets (at purchase price of securities), subtracting liabilities (debts), to which were added closing expenses. In 2003, €2.4 million was allocated to a provision for risk concerning a customer dispute.
5.1.5.17. OFF-BALANCE S HEET COMMITMENTS
A. Commitments Related to Current Activity
December 31, December 31, (in thousands of euros) 2003 2002
80
Counter-guarantee securities on contracts ................................................................- --
Assigned future receivables (Dailly law)................................................................- ---
Mortgages and collateral................................................................................................* --
Pledges, securities and guarantees................................................................- --
Other commitments ................................................................................................475 --
Total ................................................................................................ 475 -
* Apart from the use of Company goodwill as temporary collateral in the case described below in note C, no other mortgages on the Company's intangible assets were carried out.
B. Other Commitments and Contractual Obligations
December 31, 2003 Dec. 31, (in thousands of euros) Less than
12 months 1-5 years More than
5 years Total 2002
Contractual obligations reported in the balance sheet
Long-term debts ................................................................
- 869 - 869 213
Lease-back/financing obligations ................................4571 11,608 8285 24,464 26,237 Sub-total 4571 12,477 8285 25,333 26,450
Contractual obligations reported as off-balance sheet commitments
Lease contracts ................................................................
519 1063 - 13,540 1625
Irrevocable purchase bonds ................................
- - - - -
Other long-term obligations ................................
- - - - -
Sub-total 519 1063 - 1582 1625 Total ................................................................ 5090 13,540 8285 26,915 28,075
C. Other Commitments
In the scope of a partnership contract, the Company undertook the free transfer of equipment, originally valued at €1.5 million, in 2006. In terms of the acquisition contract for the Cronos assets, in 2002 the Company:
§ granted 6,500,000 warrants to JDS Uniphase, thus enabling JDSU to option 6,500,000 MEMSCAP shares for €0.05 each if the revenue generated by the Cronos assets reached certain thresholds (cf. note 5.1.5.10.C).
§ became the sole supplier to JDSU, which undertook to purchase MEMSCAP products and services at a minimum price and for a minimum period of three years.
In the scope of the acquisition contract for GalayOr Inc. securities, in fiscal year 2003 the Company granted 93,500 warrants to a select group of GalayOr shareholders thus enabling them to option 11,594,000 MEMSCAP shares, subject to certain conditions linked to the company's activity. In the scope of equipment and building lease contracts, the Company had granted the lessor financial institutions €5,630,000 in treasury mutual fund units as collateral at December 31, 2003 (cf. note 5.1.5.6).
81
Due to a dispute with a supplier, Company goodwill was provided as temporary collateral following the unilateral request by the Chairman of the Grenoble Trade Court not in the presence of the parties on December 17, 2003 while awaiting the outcome of the dispute between the two parties. To the Company's knowledge, no other material off-balance sheet commitments existed at December 31, 2003.
5.1.5.18. DISPUTES
In the scope of its everyday business, the Company may enter into various proceedings and receive different claims. At December 31, 2003, MEMSCAP S.A. and its subsidiaries were engaged in various legal proceedings. After assessing each case and seeking legal advice, the required provisions have been implemented, if deemed necessary, to cover the estimated risks (cf. note 5.1.5.11).
5.1.5.19. INFORMATION ON S ECTORS AND GEOGRAPHICAL ZONES
2003 business sectors: the Company identifies its business sectors based on the analysis carried out by the Management of company financial information, business activities and management responsibilities. The Company develops and provides components and related design technologies for telecommunications equipment integrating micro-electronico-mechanical systems (MEMS). In 2003, the Company operated on the five following sectors: wireless communications, optical communications, MEMS computer-assisted design software, manufacturing services and sensor solutions. § WIRELESS COMMUNICATI ONS: This sector comprises design, development and marketing activities for
technology solutions for better integration of components in wireless communication systems.
§ OPTICAL COMMUNICATIONS: This sector comprises development and marketing activities for optical communication products for various applications: optical switches, variable optical attenuators and tunable filters for all levels of a communications network.
§ MEMS CAD: This sector comprises development and marketing activities for MEMS computer-assisted design software, required to implement a comprehensive infrastructure for rolling out MEMS-based technology solutions.
§ MANUFACTURING SERVICES: This sector comprises MEMS foundry services undertaken in 2003 by the Bernin and North Carolina production sites for external customers.
§ SENSOR SOLUTIONS: This sector comprises design, development and marketing activities for air and blood
pressure sensors used in the aerospace and medical industries.
Results for each business sector can be broken down as follows:
(In thousands)
Wireless
Optical CAD
Software Manufac-
turing Sensor
Solutions Consolida-
ted
€ € € € € € Year ended December 31, 2002
Net revenue ................................. 123 150 1634 231 3575 5713 Operating income (loss)................... (5410) (17,150) (3223) (985) (1859) (28,627) Assets, excluding cash and cash equivalent ....................................
4818 83,876 3625 318 5204 97,841
Year ended December 31, 2003 Net revenue ................................. 483 597 845 1879 3859 7663 Operating income (loss)................... (5643) (7863) (2670) (3439) (1351) (20,966) Assets, excluding cash and cash equivalent ....................................
4056 76,189 1676 1171 8645 91,737
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Revenue and total assets by geographical zone can be broken down as follows:
(In thousands) France
Other European countries
United States
Asia
Other countries
Consolidated
€ € € € € € Revenue: 2002................................................................1526 2132 1758 297 -- 5713 2003................................................................463 2393 3633 634 540 7663
(In thousands) France
Norway
United States
Asia
Others
Eliminated
Consolidat-ed
Total assets: € € € € € € € 2002................................................................113,758 5057 1978 28 1127 (10,388) 111,560 2003................................................................100,518 8619 1282 13 919 (13,554) 97,797
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5.1.5.20. INFORMATION ON EMPLOYEES
The Company's workforce (full-time equivalent) can be broken down as follows:
Year ending December 31, 2003 2002
Production ........................................................................................................ 45 79 Research and development ................................................................ 109 126 Sales and marketing ................................................................................................9 13 General management and administrative staff................................................................32 38 Total full-time equivalent employees ............................................... 195 256
Payroll costs, including payroll taxes, totalled €10,749,000 in 2003 and €12,795,000 in 2002. Remuneration of the Company's managers (6 persons in 2003 and 7 in 2002) for the fiscal years ended 31 December 2003 and 2002 totalled €893,000 and €1,456,000 respectively.
5.1.5.21. SUBSEQUENT EVENTS A. Restructuring of the Long-term Debt from Lease Contracts for the Bernin Site
At the beginning of fiscal year 2004 the Company signed an agreement with lessor financial institutions in an effort to restructure debt from the Bernin site equipment and building lease contracts. § In terms of the building lease contracts, the agreement freezes the capital part of quarterly rents in 2004 and
smoothes outstanding capital for the rest of the contract term. § In terms of the equipment lease contracts, the agreement reduces long-term debts by €2.9 million through the
sale of assets. B. Capital Increases
Given the reserved nature of the capital increases in the scope of the contribution of Opsitech shares and the issue of shares with warrants attached (C), the Company issued 103,487,533 independent warrants on December 29, 2003 in a bid to limit the dilution of the free float. This operation resulted in the issue of 1,645,348 new MEMSCAP shares for a total subscription amount of €596,000 at the beginning of 2004.
C. Sale of Treasury Stock
In February 2004, the Company sold its 313,767 treasury shares.
5.2 S TATUTORY AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL S TATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2003
To all Shareholders,
In accordance with our appointment as auditors through your General Meeting, we have audited the consolidated financial
statements of MEMSCAP for the year ended December 31, 2003, as set out in the present report:
The consolidated financial statements have been approved by the Board of Directors. Our role is to provide an opinion on
these financial statements, based on our audit.
84
I. Opinion on the consolidated financial statements
We have conducted our audit in accordance with the professional standards applicable in France. These standards
require that we plan and perform the audit in order to obtain reasonable assurance that the consolidated financial
statements are free of any significant anomalies. An audit involves examining, on a test basis, evidence supporting the
information contained in these statements. It also involves assessing the accounting principles used and significant
estimates made on approval of the statements, as well as evaluating the overall presentation. We believe that our audit
provides a reasonable basis for the opinion stated hereafter. We certify that the consolidated financial statements have been drawn up in accordance with the generally accepted
accounting principles in France, are consistent and sincere and give a faithful representation of the asset base, the
financial situation, in addition to the results of the companies included in the consolidation.
Without contradicting the opinion thus expressed, we bring to your attention the methods used to calculate the
provisions for the stoppage of activity at the Bernin production site, as described in notes 5.1.5.1.B.2, 5.1.5.1.C.14.1 and
5.1.5.11 of the appendix, in addition to the uncertainty over the assessment of these provisions.
II. Justification of the assessments
In terms of the justification of our assessment and pursuant to the provisions of Article L225-235 of the Code de
Commerce, introduced by the Financial Security Law of August 1, 2003 and applicable for the first time this fiscal year,
we would like to bring the following elements to your attention:
• Your company allocated a provision for risk of €28,096K to cover the financial consequences of the stoppage of
activity at the Bernin production site and of GalayOr, as described in notes 1.B.1, 1.C.14.1 and 11 of the appendix.
We appraised the methods used by your company as described in note 1.C.14 of the appendix and on the basis of
the information available to date, we are satisfied as to the reasonable nature of the hypotheses used and the
resulting evaluations.
• Goodwill of €5678K net is posted in the consolidated balance sheet. Notes 5.1.5.1.C.10 and 5.1.5.3.A of the
appendix describe the accounting principles and methods pertaining to the approach chosen by your company to
evaluate the going concern value of these intangible assets. As part of our appraisals, we checked the reliability of
the chosen approach and the overall consistency of the hypotheses used and of the resulting evaluations.
These assessments are part of our general audit of your consolidated financial statements in their entirety and therefore
contributed to the formulation of our opinion without reserve as expressed in the first part of this report.
III. Specific Checks and Controls
Furthermore, in accordance with the professional standards applicable in France, we have also carried out the specific
checks and controls of information concerning the group, given in the management report.
With the exception of the potential impact of events described above, we have no observation to make on the fairness and
consistency of this information in relation to the consolidated financial statements.
May 4, 2004 Statutory Auditors
Jean-Marie BOURGEOIS ERNST & YOUNG Audit
Jean-Christophe DEVELAY
85
5.3 FEES TO S TATUTORY AUDITORS AND MEMBERS OF THEIR NETWORKS PAID BY THE COMPANY AND ITS
SUBSIDIARIES
For fiscal years ended December 31, the fees can be broken down as follows:
Ernst & Young J.M. Bourgeois
Amount % Amount % 2003 2002 2003 2002 2003 2002 2003 2002
Audit - Auditing, certification, examination
of individual and consolidated accounts
- Additional missions
154 * 41
130 36
76 20
72 20
15 -
13 -
15 * -
100 -
Sub-total 195 166 96 92 15 13 100% 100% Other services - Legal, tax, employment
8
14
4
8
-
-
-
-
Sub-total 8 14 4 8 - - - - TOTAL
203
180
100%
100%
15
13
100%
100%
* Statutory auditors' fees for 2003 can be broken down as follows:
(in €K) Ernst & Young J.M. Bourgeois MEMSCAP SA – annual financial statements
25 7
MEMSCAP SA – consolidated financial statements
37 5
Half-yearly financial statements 16 3 Sub-total for France 78 15
Subsidiaries 76 - Total 154 15
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5.4 SUMMARY FINANCIAL S TATEMENTS OF MEMSCAP S.A. AT DECEMBER 31, 2003 AND 2002
5.4.1 BALANCE S HEET
Dec. 31, Dec. 31,
2003 2002 Assets €
Fixed assets
Intangible assets ................................................................3039 2422
Tangible assets................................................................33,017 40,732 Long-term investments ................................................................27,674 18,581 63,730 61,735 Current assets Inventories ................................................................................................5 268 Advances and reserved deposits on orders ................................ 12 Trade accounts receivable ................................................................ 3626 5063 Other receivables ................................................................................................17,320 16,763 Cash equivalent ................................................................................................3016 8224 Cash 219 4053 24,198 34,371 Other current assets ................................................................ 899 1058 Conversion adjustment ................................................................ 5054 2390 Total assets
93,881 99,554
Liabilities
Shareholders' equity Capital 5311 3251 Additional paid-in capital ................................................................119,253 103,798 Reserves ................................................................ 82 84 Retained earnings ................................................................................................(23,636) 1038 Income (loss) of the period................................................................(56,427) (24,674) 44,583 83,497 Provisions for risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35,826 2390 Liabilities Long-term debt ................................................................................................557 215 Advances and paid deposits on orders in progress ................................273 52 Operating debt ................................................................................................5896 8137 Other payables ................................................................................................4132 3231 10,859 11,635 Prepaid income 1640 1720 Conversion adjustment 973 312 Total liabilities 93,881 99,554
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5.4.2 INCOME S TATEMENT
Dec 31, Dec 31, 2003 2002
€ Net revenue................................................................ 968 1559 Other operating income ................................................................660 2817 Operating expenses ................................................................23,115 (29,642)
Total operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(21,486) (25,266)
Investment income ................................................................3266 1096 Investment expenses ................................................................5825 (3212) Total investment income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(2559) (2116) Extraordinary income ................................................................
3764
25,527
Extraordinary expenses ................................................................36,122 (25,596)5) Total extraordinary income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(32,358) (69) Corporate income tax ................................................................
22
2777
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(56,427) (24,674)4)
5.4.3 EXTRACTS FROM THE APPENDIX TO THE ANNUAL FINANCIAL STATEMENTS AT DECEMBER
31, 2003
The remaining items in the appendix not included in this report do not contain any additional information for investors.
5.4.3.1 Main Features of the Business These features are described above, in section 5.1.5.1.B. 5.4.3.2 Intangible Assets
Intangible assets include software licences and patents and trademarks, posted in the balance sheet at their acquisition cost or contribution value. They are amortised using the straight-line method over the following time periods:
§ Software licenses: 1-2 years § Patents and Trademarks: 10 years
5.4.3.3 Tangible Assets
Tangible assets are posted in terms of their acquisition cost (acquisition price and incidental expenses) or their contribution value. Depreciation is calculated based on the following methods and time periods:
Factory buildings: Straight-line 20 years Office and guard room buildings Straight-line 30 years Fixtures and fittings: Straight-line 5-15 years Machinery and tools: Straight-line 4-6 years Office and IT equipment: Diminishing balance 3 years and straight-line
2-3 years Furniture Straight-line 3-5 years
88
5.4.3.4 Long-term Investments
Long-term investments mainly comprise the following: - Securities from subsidiaries and equity interests, posted in the balance sheet as "other investments" for their acquisition
cost. If the balance sheet value of these investments and other long-term securities is lower than their acquisition value, a provision for depreciation, to the amount of the difference between the two values, is recorded. The balance sheet value is calculated based on the restated net assets, cost-effectiveness, future prospects and usefulness of the investment for the company. The estimated balance sheet value can therefore justify the posting of a net value higher than the share of the net book assets.
- Mutual funds used as collateral with a limit of more than three months, posted under "other long-term securities"
- Deposits and guarantees posted under "other long-term investments" 5.4.3.5 Cash Equivalent
The Company defines short-term investment securities (cash equivalent) as securities with a maturity of not more than three months and without material interest-rate risk. Securities are mainly comprised of treasury mutual fund units. Their acquisition prices are close to market value. Mutual funds used as collateral with a limit of more than three months are recorded as long-term investments.
5.4.3.6 Long-lived Assets
The Company assesses the recoverability of its long-lived assets whenever events or changes in the operating environment or conditions indicate that the value in the balance sheet of a long-lived asset might not be recoverable. Following the restructuring activities described above, the Company entered extraordinary depreciations concerning assets from the Bernin production site and equity interests from GalayOr into its accounts on December 31, 2003.
5.4.3.7 Assets from the Bernin Production Site
The appraised value of these assets, as determined on December 31, 2003 by the Company, is based on the following evaluation elements: 1. For assets to be sold:
Factory building, construction fixtures and clean room................................Market value based on an expert evaluation report
Machinery and tools ................................................................Market value based on similar recent transactions
For assets t ransferred to other Company production sites: net book value. Appraisal of this provision is based on asset transfer estimates in turn based on an expert report and on market values determined using similar recent transactions. Given the specific nature of the market on which the Company operates, the market values of assets to be sold can vary significantly and thus require the provisioned amounts to be revised. The difference between the appraised value and the net book value of these assets underwent extraordinary depreciation recorded as a provision for risk.
5.4.3.8 GalayOr Inc. Equity Interests
Following the stoppage of the GalayOr Inc. activities at the beginning of 2004, the Company reported an extraordinary depreciation for the total acquisition price of the securities, reported as provision for risk.
5.4.3.9 Own Shares
89
The Company did not buy back any of its own shares in 2003. At December 31, 2003, the Company owned 313,767 of its own shares for the purpose of regulating the Company's market price.
December 31,
(in thousands of euros) 2003 Number of own shares ................................................................................................ 313,767 Gross value (in euros) ................................................................................................ 469,000 Unrealised capital loss ................................................................................................(350,000)
Net book value ................................................................................................
119,000
5.4.3.10 Shareholders' Equity
A. Structure of the Equity Capital At December 31,2003, the Company's capital comprised 106,229,061 shares with a nominal value of €0.05.
B. Change in Shareholders' Equity
Changes to the shareholders' equity can be broken down as follows:
In €K Capital Share
premium Legal reserve Regulated
reserves Other reserve
s
Retained earnings
Income (loss)
Total net shareholders' equity
at December 31, 2002 3251 103,798 65 17 2 1038 (24,674) 83,497
2002 net income (loss) appropriation
(24,674) 24,674 0
Founders' warrants and options exercised
19 84 (2) 101
New shares
1872 14,324 16,196
Exercise of warrants
169 1047 1216
2003 income (loss) (56,427) (56,427)
at December 31, 2003 5311 119,253 65 17 0 (23,636) (56,427) 44,583
5.4.3.11 Provisions
Changes in provisions posted in the balance sheet are listed in table no. 2056.
§ A provision of €300K was allocated at December 31, 2003 to cover employee disputes.
§ Provisions of €28,096K were allocated for stoppage of activities. They can be broken down as follows:
- Stoppage of activities at the Bernin production site: €19,400K
This provision comprises the depreciation of the Bernin factory assets (cf. note), estimated costs for maintaining the facilities in the future and a provision to cover the redundancy costs of employees at the factory.
- Stoppage of activities at the GalayOr subsidiary: €8,696K. This provision is based on the acquisition price of GalayOr Inc. securities (cf. note).
90
§ A provision for risk of €2.375K was allocated to cover a customer dispute.
§ A provision for currency losses of €5,055K was posted to cover conversion adjustment. 5.4.3.12 Extraordinary Income and Expenses
Extraordinary income and expenses are described in detail in the appendix, in tax declaration no. 2053.
5.4.3.13 Lease-back A. Transportation Vehicle Lease-back
This means lease contracts of up to 24 months for nine vehicles during the period. The total amount of these contracts at December 31, 2003 is €84,773, of which €62,678 are due to be paid within a year.
B. Property and Equipment Leas-back
A 10-year property lease contract, effective October 16, 2002, was signed with a banking consortium for €19,537,000 (pre-tax). A 5-year equipment lease contract, effective July 20, 2002, was signed with a banking consortium for €7,049,293 (pre-tax).
Balance Sheet Items Entry Cost (1) Net Value
for the year (2) cumulated (2)
Land 210,403 210,403
Buildings 17,848,093 463,241 926,482 16,921,611 Technical Equipment, Materials and Tools 7,092,759 591,063 1,182,126 5,910,633
Other Tangible Assets 14,485 1,448 4,208 10,277
Fixed Assets under Construction -
Total 25,165,740 1,055,752 2,112,816 23,052,924
(1) Value of the goods on signing of the contracts
(2) Expenses for the year and cumulated expenses that would have been posted for these goods
if they had been acquired by the Company.
Depreciation Expenses
Leased Assets
In the scope of equipment and building lease contracts, the Company granted the lessor financial establishments €5,630,444 in mutual fund units as collateral at December 31, 2003.
5.4.3.14 Employees
The average employee base of MEMSCAP S.A. in 2003 was 86 staff and, at December 31, 2003, 59 staff. 5.4.3.15 Subsidiaries and Investments (in euros)
91
5.4.3.16 Subsequent Events A. Restructuring of the Long-term Debt from Lease-back Contracts for the Bernin Site
At the beginning of 2004 the Company signed an agreement with lessor financial institutions in an effort to restructure long-term debt from the Bernin site equipment and building lease-back contracts. § In terms of the building lease-back contracts, the agreement freezes the capital part of quarterly rents in 2004
and smoothes outstanding capital for the rest of the contract term.
Gross Net
1. Subsidiaries owned at more than 50%
Memscap GmbH25,000 848,402 - 100% 25,000 - 941,841 - 84,377 32,661 - - (2)
Memscap Inc (USA)$10 -$11,065,104 100% 9 9 9,137,826 - 2,804,050 4,428,291 - -
(2)
Memscap Ltd (Egypt) 425,500 16,909,596 - 100% 107,284 - 2,204,645 - - 2,125,921 - -
Memscap SAE (Egypt) 250,000 - 100% 221,061 221,061 581,804 - - - -
Memscap OY (Finland) € 8,000 -€ 169,517 100% 8,000 - 177,463 - - - - (2)
Memscap KK (Japan) 10,000,000 -50,717,039 100% 92,234 - 330,161 - - 89,025 - - (2)
Memscap ASkr 18,275,000 -kr 8,802,000 100% 9,360,072 9,360,072 1,300,480 - 3,858,608 1,130,206 - -
Memscap Inc Canada $10,000 -$37,628 100% 7,238 - 246,188 - - - - (2)
Opsitech, S.A.S€ 336,993 € 2,098,768 100% 3,747,033 3,747,033 800,000 - - 50,179 2,291,447 - -
GalayOr Inc.$11,000 $477,000 100% 8,695,652 8,695,652 170,230 - - 1,867,008 - -
2. Investments
None
22,263,583 22,023,827 13,950,178
(1) The amounts listed in first two columns are in local currency: (2) Loans and advances of subsidiaries are written down in the following amounts:
-Memscap GmbH: €. -Memscap GmbH: €.823.402
-Memscap Inc (USA): US$ -Memscap OY (Finland): €.177.463
-Memscap Ltd (Egypt): EGP -Memscap Inc (Canada): €.246.188
-Memscap SAE (Egypt): EGP -Memscap KK (Japan): €.301.469)
-Memscap OY (Finland): €. -Memscap Ltd (Egypt): €.2.134.333
-Memscap KK (Japan): JPY
-Capto AS: NOK
-Memscap Inc (Canada): CAN$
- GalayOr Inc: US$
- Opsitech, S.A.S: €.
Subsidiary name Capital (1) Shareholders' equity other than the capital (1)
% of ownership interest
NotesIncome/loss of the latest fiscal year (in euros)
Dividends received by the company during the latest fiscal year (in euros)
Net book value of the securities (in euros)
Outstanding loans and advances granted by the company (in euros)
Amount of pledges and securities given by the company (in euros)
Pre-tax revenue of the latest fiscal year (in euros)
92
§ In terms of the equipment lease-back contracts, the agreement reduces long-term debts by €2.9 million through
the sale of assets.
B. Capital Increases
Given the reserved nature of the capital increases in the scope of the contribution of Opsitech shares and the issue of shares with warrants attached (C), the Company issued 103,487,533 independent warrants on December 29, 2003 (cf. note 10.3) in a bid to limit the dilution of the free float. This operation resulted in the issue of 1,645,348 new MEMSCAP shares for a total subscription amount of €596,000 at the beginning of 2004.
C. Sale of Treasury Shares
In February 2004, the Company sold 313,767 treasury shares.
5.5 GENERAL S TATUTORY AUDITORS' REPORT ON THE ANNUAL FINANCIAL S TATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2003 To all Shareholders,
In accordance with our appointment as auditors through your General Meeting, we present our report for the year ended
December 31, 2003 on the following subjects:
• the audit of the annual financial statements of MEMSCAP, as set out in the present report,
• the justification of our assessments,
• the specific checks and statutory information as required by French law.
The annual financial statements have been approved by the Board of Directors. Our role is to provide an opinion on these
financial statements, based on our audit.
I. Opinion on the annual financial statements
We have conducted our audit in accordance with the professional standards applicable in France. These standards require that
we plan and perform the audit in order to obtain reasonable assurance that the annual financial statements are free of any
significant anomalies. An audit involves examining, on a test basis, evidence supporting the information contained in these
statements. It also involves assessing the accounting principles used and significant estimates made on approval of the
statements, as well as evaluating the overall presentation. We believe that our audit provides a reasonable basis for the
opinion stated hereafter. We certify that the annual financial statements have been drawn up in accordance with the generally accepted accounting
principles in France, are consistent and sincere and give a faithful representation of the asset base and financial situation of
the company at the end of this fiscal year.
Without contradicting the opinion thus expressed, we bring to your attention the methods used to calculate the provisions
concerning the stoppage of production activities at the Bernin factory, as described in notes 2.2, 3.11 and 4.8 of the appendix.
• Appraisal of these provisions is based on asset transfer estimates based in turn on an expert report and on market values
determined using similar recent transactions. Given the specific nature of the market on which the Company operates, the
market values of assets to be sold can vary significantly and thus require the provisioned amounts to be revised.
93
II. Justification of the assessments
In terms of the justification of our assessment and pursuant to the provisions of Article L225-235 of the Code de Commerce,
introduced by the Financial Security Law of August 1, 2003 and applicable for the first time this fiscal year, we would like to
bring the following elements to your attention:
• Your company allocated a provision for risk of €28,096K to cover the financial consequences of the stoppage of
activity at the Bernin production site and of GalayOr, as described in notes 2.2, 3.11 and 4.8 in the appendix. We
appraised the methods used by the company as described in note 3.11 of the appendix and on the basis of the information
available to date, we are satisfied as to the reasonable nature of the hypotheses used and the resulting evaluations.
• Equity interests with a net value of €22,024K are posted in the balance sheet. Note 3.3 of the appendix describes the
accounting rules and principles for evaluating the going concern value of these equity interests by the company. As part
of our appraisals, we checked the reliability of the chosen approach and the overall consistency of the hypotheses used
and of the resulting evaluations.
These assessments are part of our general audit of your annual financial statements in their entirety and therefore contributed
to the formulation of our opinion without reserve and one observation, as expressed in the first part of this report.
III. Specific checks and statutory information
In accordance with professional standards applicable in France, we also carried out the specific checks and controls required
by law.
We have no observation to make on the fairness and consistency of the information set out in the management report from
the Board of Directors and in the documents about the financial situation and financial statements issued to shareholders in
relation to the annual financial statements.
In accordance with French law, we have ensured that all information pertaining to investments, controlling interests and
shareholder identities has been communicated to you in the management report.
May 4, 2004
Statutory Auditors
Jean-Marie BOURGEOIS ERNST & YOUNG Audit Represented by Jean-Christophe DEVELAY
5.6 S PECIAL S TATUTORY AUDITORS' REPORT ON THE ANNUAL FINANCIAL S TATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2003
To all Shareholders,
In our capacity as statutory auditors to your company, we hereby present our report on regulated agreements.
It is not for us to seek out agreements that may exist, but to communicate, based on the information given to us, the essential
terms and conditions of the agreements about which we have been informed, without having to give an opinion as to their
usefulness or relevance. It is your responsibility, according to the terms of Article 92 of the French government decree of
March 23, 1967, to evaluate the importance of the conclusion of these agreements and their approval.
We state for the record that we have received no notice of any agreements concluded during the year as stipulated in Article
L226-10 of the French Code de Commerce.
94
Furthermore, pursuant to the decree of March 23, 1967, we have been informed that the performance of the following
agreements, approved during previous fiscal years, continued during the last fiscal year.
1. For MEMSCAP Inc.
Type, purpose and conditions
MEMSCAP S.A. provides manufacturing facilities (acquired via the Cronos asset contribution operation) for its subsidiary
MEMSCAP Inc. Cronos customers are therefore served via these facilities, located in North Carolina (United States of
America). MEMSCAP S.A. confers all responsibility for these production facilities in the USA on its subsidiary MEMSCAP
Inc. In order to enable MEMSCAP Inc. to run these facilities at their full potential, MEMSCAP S.A.: - leases the 4-inch wafer equipment to MEMSCAP Inc.; - grants MEMSCAP Inc. a license concerning patents, knowledge and trademarks used for this activity.
The amounts pertaining to these transactions in fiscal year 2003 are as follows: - Revenue from leasing 4-inch wafer equipment: €135,921 - Charges for the operating licence for patents, trademarks and knowledge: €22,578
2. For MEMSCAP Inc., MEMSCAP AS and MEMSCAP GmbH
a. Type, purpose and conditions
MEMSCAP S.A. provides assistance in terms of strategy, marketing and management to its subsidiaries MEMSCAP Inc.,
MEMSCAP AS and MEMSCAP GmbH. The terms under which this assistance is provided and invoices issued by
MEMSCAP S.A. to its subsidiaries are governed by service contracts.
The amounts concerned by these service invoices, including a 5% margin, for the fiscal year ended December 31, 2003 are as
follows: MEMSCAP Inc.: €137,985 MEMSCAP AS: €183,980 MEMSCAP GmbH: €4181 Total amount of service invoices (pre-tax): €326,146
b. Type, purpose and conditions
MEMSCAP S.A. provides its subsidiaries MEMSCAP Inc., MEMSCAP AS and MEMSCAP GmbH with cash advances.
The terms of these advances, paid back at EURIBOR interest rates over 3 months and +0.5%, are governed by loan contracts
between MEMSCAP S.A. and the relevant subsidiary.
The amounts concerned by financial interests invoiced by MEMSCAP S.A. for the fiscal year ended December 31, 2003 are
as follows: MEMSCAP Inc.: €110,079 MEMSCAP AS: €27,844
95
MEMSCAP GmbH: €25,856 Total amount of financial interests invoiced: €163,779 The amounts granted by MEMSCAP S.A. in terms of cash advances at 31 December 2003 are as follows: MEMSCAP Inc.: €8,730,539 MEMSCAP AS: €1,088,656 MEMSCAP GmbH: €911,804 Total amount of advances granted: €10,730,999
We have carried out our work in accordance with professional standards applicable in France. These standards require us to
verify the consistency of the information that was given to us with the original document from which it was derived.
May 4, 2004
Statutory Auditors
Jean-Marie BOURGEOIS ERNST & YOUNG Audit
Represented by Jean-Christophe DEVELAY
5.7 INFORMATION CONCERNING THE ADOPTION OF IFRS S TANDARDS
In application of European ruling no. 1606/2002 and in accordance with IFRS standard 1, "First-time adoption of international financial reporting standards", the consolidated financial statements of the MEMSCAP group for the fiscal year ended December 31, 2005 will be drawn up in accordance with International Financial Reporting Standards (IFRS) effective as of December 31, 2005, with comparable financial statements for the fiscal year ended 31 December 2004 drawn up in accordance with these same standards.
In order to prepare for the migration of its financial reporting to these new standards, the Group has created a Project team grouping representatives from its head office, subsidiaries and statutory auditors.
The role of this IFRS Project team is to:
• identify the main differences between accounting principles and methods currently applied by the Group and the IFRS standards;
• define the changes to be made to the presentation of the Group's financial reports;
• assess the adaptations required for the information systems;
• measure the impact of the changes brought by the new standards on the opening balance sheet of 1 January 2004, start date for the application of IAS/IFRS standards and date from which the impact of the new system will be visible in terms of shareholders' equity.
Despite the fact that some of the standards have not yet been finalised by the IAS, the main changes that have already been identified concern the following points:
• Development costs, which are currently posted as expenses, will have to be accounted for in accordance with criteria set by the standard IAS38.
• Goodwill that is currently amortised will have to undergo annual valuation tests.
• Stock options granted to employees will have to be posted as expenses.
The presentation of financial reports, the income statement in particular, will be modified in order to comply with IAS1.
96
5.8 HALF-YEARLY CONSOLIDATED FINANCIAL S TATEMENTS AT JUNE 30, 2004
The half-yearly financial statements posted on August 25, 2004 show improvement in all the Group's financial indicators, thus justifying its strategy for a return to operational profitability in the second half. This general improvement included the following points in particular:
- the 5th consecutive half-year of growth in the group's consolidated revenue, - an positive gross margin that constitutes 35% of the half-yearly revenue, - division of the operating loss by 4 on the same period of 2003, - a €3-million decrease in long-term debt on December 31, 2003, - a significant decrease in cash burn from operations: reduced to €158,000, excluding redundancy costs, - a well-filled order book and increased variation in the customer base, - rising productivity across the board thanks to the concentration of the workforce on 3 sites in North Carolina,
France and Norway, - the conclusion of an agreement with financial partners aimed at optimising Group assets from the Bernin site and
thus making cash savings of €3.7 million in fiscal year 2004, - the conclusion of various business deals with a number of key customers, such as Knowles Acoustics,
Glimmerglass Networks, Aerosonic and Sedat, - the Civil Aviation Authority certification for a module pressure sensor for high-end aeronautical applications, the
launch of the production volume expansion programme at the North Carolina factory thanks to the upgrade from 4 to 6-inch silicon wafers.
97
5.8.1 Consolidated Balance Sheet at June 30, 2004 (in thousands of euros)
June 30, 2004
December 31, 2003
€K
€K Assets
Fixed assets Goodwill..................................................................................... 5276 5670 Intangible assets ............................................................................ 2765 3505 Tangible assets.............................................................................. 51,410 56,966 Long-term investments .......................................................................................... 13,865 14,405 73,316 80,546 Current assets Inventories................................................................................... 1059 1203 Trade accounts receivable ................................................................ 5268 5446 Other receivables ........................................................................... 2129 4542 Cash and cash equivalent ...................................................................................... 3853 6060 12,309 17,251 Total assets 85,625 97,797
Liabilities
Shareholders' equity Capital..................................................................................................................... 5406 5311 Additional paid-in capital ................................................................ 34,581 114,129 Consolidated reserves and income (loss)................................................ (14,306) (89,464) Conversion adjustment ................................................................ (848) (772) 24,833 29,204 Provisions for risks and charges
29,507
34,777
Liabilities
Loans and long-term debts ................................................................ 22,496 25,476 Trade accounts payable................................................................ 6425 6475 Other payables .............................................................................. 2364 1865 31,285 33,816 Total liabilities 85,625 97,797
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5.8.2 Consolidated Income Statement at June 30, 2004 (in thousands of euros)
Half-year ended June 30,
Year ended December 31,
2004
2003
2003
€K €K €K Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4746 3828 7663 Production costs for sales from the period ...............................................(3066) (3779) (8065) Costs from the Bernin production site.................................................... - (4782) (7157) Gross margin ................................................................ 1680 (4733) (7559) Operating expenses: Research and development ................................................................(2053) (2626) (5331) Sales and marketing costs ........................................................................................(863) (1767) (3335) General management and administrative costs................................ (1912) (2831) (4741) Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(4828) (7224) (13,407) Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3148)
(11,957) (20,966)
Investment expenses ................................................................
(1056)
(869)
(1733)
Investment income ................................................................................................533 116 306 Net foreign exchange gain (loss) ................................................................ 30 (222) (929) Pre-tax income (loss) ................................................................(3641) (12,932) (23,322) Extraordinary income (loss) .............................................................
(870)
(651)
(34,714)
Corporate income tax ................................................................
-
-
-
Income (loss) before amortisation of goodwill ................................ (4511) (13,583) (58,036) Amortisation of goodwill ................................................................(394) (290) (598) Net income (loss) ................................................................ (4905) (13,873) (58,634) Basic net earnings (loss) per share ........................................................(0.05) (0.21) (0.75) Number of shares taken into account in the calculation of the basic net earnings (loss) per share................................................................
107,588,458 65,115,227 77,843,919
Diluted net earnings (loss) per share......................................................(0.05) (0.19) (0.75) Number of shares taken into account in the calculation of the diluted net earnings (loss) per share.......................................................
107,588,458 53,989,764 77,843,919
99
5.8.3 Change in Consolidated Net Shareholders' Equity (in thousands of euros, except for the data per share)
Shares
Additional paid-in capital
Consolidated reserves
Cumulated conversion adjustment
Total net
shareholders' equity
Number Amount €K €K €K €K €K Balance at December 31, 2001
53,813,511 2691 93,674 (2953) (383) 93,029
Exercise of founders' warrants................................
1 1
New shares ................................11,196,800 560 5000 (36) 5524Net loss ................................ (27,840) (27,840)Conversion adjustment ................................ (300) (300)Balance at December 31, 2002 ................................................................
65,010,311 3251 98,674 (30,828) (683) 70,414
Exercise of founders' warrants and options ................................
101 101
Exercise of warrants ................................ 1215 1215New shares ................................41,218,750 2060 15,455 (1318) 16,197Net loss ................................ (58,634) (58,634)Conversion adjustment ................................ (89) (89)Balance at December 31, 2003 ................................................................
106,229,061 5311 114,129 (89,464) (772) 29,204
Exercise of founders' warrants ................................................................
7 7
Exercise of warrants ................................ 603 603 New shares ................................1,894,000 95 515 (610) - Retained earnings offset with paid-in capital (80,063) 80,063 - Net loss ................................ (4905) (4905) Conversion adjustment ................................ (76) (76) Balance at June 30, 2004................................108,123,061 5406 34,581 (14,306) (848) 24,833
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5.8.4 Consolidated Cash Flow Statement (in thousands of euros)
Half-year
ended June 30, 2004
Year ended December 31,
2003
€K
€K
Business-related cash flows Net income (loss)................................................................................. (4905) (58,634) Elimination of non-currency items: - - Amortisation and provisions.................................................................. (3859) 39,846 Capital gain and loss write-off ................................................................ 3940 1413 Cash increase (decrease) on: - - Trade accounts receivable ....................................................................................... 208 (155) Inventories .................................................................................... 145 334 Other receivables and current assets ...................................................... 2468 688 Trade accounts payable ........................................................................................... (76) (2565) Accrued expenses and other debts......................................................... 647 32 Net cash flows used by operating activities *. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1432)* (19,041)
Cash flows used by investment activities
Acquisition of tangible assets ........................................................................................ (620) (1610) Acquisition of intangible assets ................................................................ (17) (669) Acquisition of long-term investments ........................................................................... - (40) Change in securities pledged as collateral .................................................... 540 3172 Income from sale of assets ...................................................................... 1994 4794 Change in group structure....................................................................... - 2833 Net cash flows, generated (used) by investment activities
1897 8480
Cash flows generated by financing activities
Debt financing ................................................................................... 611 - Lease repayment .......................................................................................................... (3669) (2742) Exercise of founders' warrants, warrants and stock options............................... 95 1316 Net income from capital increases ............................................................ 515 3757 Net cash flows, generated (used) by financing activities . . . . . . . . . . . . . . . . . (2448) 2331 Impact of exchange rate variations on cash and cash equivalent ................................
(300)
592
Decrease in cash and cash equivalent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2283) (7638)
Cash and cash equivalent at opening of accounts............................................
5917
13555
Cash and cash equivalent at close of accounts ** .........................................................
3634 5 917
* At June 30,2004, net cash flow used by operating activities, excluding redundancy costs (even from the GalayOr
shutdown), totalled €(158)K. **
Cash and cash equivalent Overdraft
3853 (219)
6060 (143)
Net cash and cash equivalent ................................................................ 3634 5917 Mutual funds pledged as collateral, posted as long-term investments 5090 5630
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Total cash and cash equivalent and mutual funds pledged as collateral 8724 11,547
5.8.5 Appendices to the Half-yearly Consolidated Financial Statements
5.8.5.1 Presentation of the Business and Accounting Methods and Principles
A. Main Features of the Business
MEMSCAP, S.A. (hereafter the "Company" or "MEMSCAP") is a société anonyme under French law, which was created in November 1997. MEMSCAP supplies innovative solutions based on MEMS (micro-electronico-mechanical systems) technology. At July 1, 2004, the Company and its subsidiaries employed 105 staff, of which 29 are based in France, 39 in Norway, 1 in Egypt and 36 in the United States of America.
B. Major Events from the First Half 2004
B.1 Financial Agreement with Financial Partners
At the beginning of 2004 the Company signed agreements with lessor financial institutions in an effort to restructure debt from the Bernin site equipment and building lease contracts.
§ In terms of the building lease contracts, these agreements freeze the capital part of quarterly rents in
2004 and smooth outstanding capital for the rest of the contract term.
§ In terms of the equipment lease contracts, long-term debts have been reduced by €3.5 million in the first half 2004.
B.2 Using the Research Tax Credit
The Company generated €2.2 million during the half-year ended on June 30, 2004 via its use of the research tax credit held by MEMSCAP S.A.
B.3 Capital Increases
Given the reserved nature of the capital increases in the scope of the contribution of Opsitech shares and the issue of shares with warrants attached (C), the Company issued 103,487,533 independent warrants on December 29, 2003 in a bid to limit the dilution of the free float. This operation resulted in the issue of 1,645,348 new MEMSCAP shares for a total subscription amount of €596,000 at the beginning of 2004.
B.4 Implementation of the Restructuring Plan drawn up at the end of 2003
The stoppage of activity at the Bernin production site and at GalayOr Inc., decided at the end of 2003 and provided for in the financial statements for the year ending December 31, 2003, was implemented at the beginning of 2004. Following staff redundancies made in France and Israel and the sale of machinery from the Bernin site, provisions were restated and extraordinary expenses and income posted in the half-yearly financial statements for the period ending June 30, 2004 (cf. note 14).
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B.5 Closure of Sites in Egypt and Germany
The Company continued to apply its strategy for returning to operational profitability in the second half 2004 and refocusing on its highest potential businesses in terms of financial growth, by closing down a software business, its site in Egypt and its German offices. All redundancy costs for the 39 MEMSCAP employees in Egypt, France and Germany were posted as extraordinary expenses in the half-yearly financial statements at June 30, 2004.
C. Accounting Principles
The consolidated financial statements were drawn up in accordance with French accounting standards and principles and in particular with Ruling no. 99-02 of the Comité de la Réglementation Comptable of June 22, 1999. Note C.14 on Long-lived Assets is reproduced here in its entirety.
C.14 Long-lived Assets
The Company assesses the recoverability of its long-lived assets whenever events or changes in the operating environment or conditions indicate that the value in the balance sheet of a long-lived asset might not be recoverable. Following the restructuring activities planned in 2003, the Company entered extraordinary depreciations concerning assets related to the Bernin production site and the GalayOr Inc. subsidiary into its accounts on December 31, 2003. In terms of the half-year ended June 30, 2004, the Company had used €4.6 million of the €28.1 million provisions for stoppage of activities posted at December 31, 2003 (cf. note 10).
C.14.1 Assets from the Bernin Production Site
The value of the assets from the Bernin production site was depreciated by the Company at December 31, 2003, based on their estimated sales value calculated based on the following elements:
§ Net book value of the equipment and tools transferred to the Company's other production sites.
§ For assets to be sold:
Factory building, construction fixtures and clean room Market value based on an expert
evaluation report Machinery and tools Market value based on similar recent
transactions
The difference between the appraised value and the net book value of these assets underwent extraordinary depreciation recorded at December 31, 2003 as a provision for risk.
Appraisal of this provision is based on asset transfer estimates in turn based on an expert report and on market values determined using similar recent transactions. Given the specific nature of the market on which the Company operates, the market values of assets to be sold can vary significantly and thus require the provisioned amounts to be revised.
C14.2 GalayOr Inc. Shares
103
Following the stoppage of the all GalayOr Inc. activities, at December 31, 2003 the Company posted an extraordinary depreciation for all assets (at acquisition price of securities), subtracting liabilities (debts), to which were added closing expenses.
5.8.5.2 Changes in Consolidation that Affect the Comparison of Financial Statements with
the Previous Period or Year
The MEMSCAP KK subsidiary in Japan is no longer part of the consolidation (since January 1, 2004); however, since this company has stopped trading, its exit from the consolidation has had no significant impact on the group.
5.8.5.3 Goodwill
A. Positive Goodwill
June 30, December
31, (in thousands of euros) 2004 2003 Goodwill from the acquisition of MEMSCAP AS ................................ 5810 5810 Amortisation of goodwill from MEMSCAP AS ................................................................(1452) (1162)
Net change MEMSCAP AS ...................................................................................... 4358 4648 Goodwill from the acquisition of Opsitech S.A.S. ................................ 1039 1039 Amortisation of goodwill from Opsitech S.A.S. ................................................................(121) (17)
Net change Opsitech S.A.S. ...................................................................................... 918 1022
Net goodwill ................................................................................................................................5276 5670
Goodwill from the acquisition of MEMSCAP AS is amortised on the basis of a fixed period of 10 years. Depreciation expenses reported at June 30, 2004 totalled €290,481. A valuation test was carried out on the goodwill from MEMSCAP AS in accordance with the Company's accounting principles. The market value thus determined was higher than the net book value of the goodwill: no depreciation was therefore posted at June 30, 2004. Goodwill from the acquisition of Opsitech S.A.S. is amortised on the basis of a fixed period of 5 years. Depreciation expenses reported at June 30, 2004 totalled €104,000.
B. Negative Goodwill
June 30, December 31, (in thousands of euros) 2004 2003 Opening balance ................................................................................................ 3378 4259 Recognition of goodwill as income ................................................................(441) (881)
Closing balance ................................................................................................ 2937 3378
The negative goodwill from the acquisition of the Cronos business in November 2002, reported as a provision for risks and charges, is recognised as profit in the operating income statement on a gradual basis, as the assets that made up its capital are amortised. This process should take approximately 5 years.
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5.8.5.4 Tangible assets The Company's tangible assets can be broken down as follows:
June 30, December 31, (in thousands of euros) 2004 2003 Land (1) ................................................................................................ 246 244 Buildings (1) ................................................................................................ 18,395 18,194 Fixtures and fittings ................................................................................................20,512 20,509 Machinery (1) ................................................................................................21,087 28,588 Vehicles ................................................................................................................................ 4 - Office furniture and other equipment (1)................................................................ 450 459 IT equipment (1)................................................................................................1411 1399 Tangible assets (2)................................................................................................62,105 69,393 Accumulated depreciation and amortisation ................................................................(10,695) (12,427)
Total tangible assets (net)..............................................................................................51,410 56,966 (1) including assets financed by leasing:
June 30, December 31, (in thousands of euros) 2004 2003 Land ................................................................................................ 210 210 Buildings ................................................................................................17,848 17,848 Machinery ................................................................................................2815 6410 Office furniture and other equipment ................................................................................................14 14 IT equipment ................................................................................................131 131 Tangible assets................................................................................................21,018 24,613 Accumulated depreciation and amortisation ................................................................(2066) (3041)
Total tangible assets financed by leasing (net)................................................................18,952 21,572
(2) Change in the tangible assets can be broken down as follows:
June 30, December 31, (in thousands of euros) 2004 2003 Opening balance................................................................................................69,393 73,200 Change in group structure – Acquisition of Opsitech, S.A.S. ................................ - 1943 Acquisitions.............................................................................................................................. 557 2809 Disposals ................................................................................................(7881) (7856) Conversion adjustment ................................................................................................36 (703) Closing balance................................................................................................62,105 69,393
Amortisation charges were reported in the income statement as €671,000 at June 30, 2004 and €4,257,000 at December 31, 2003.
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5.8.5.5 Long-term Investments
June 30, December 31, (in thousands of euros) 2004 2003 Securities pledged as collateral ................................................................................................ 5090 5630 Equity interests ................................................................................................................................ 8764 8764 Other long-term investments ................................................................................................ 26 26
Long-term investments ................................................................................................................................13,880 14,420
Minus provisions for depreciation ................................................................................................ (15) (15) Total long-term investments (net) ................................................................................................13,865 14,405
Long-term investments comprise €5,090,000 in treasury mutual funds with a 3-month limit. These mutual funds are used as collateral by financial institutions that have granted leases. The amount of units from mutual funds pledged as collateral decreases as lease fees are paid.
5.8.5.6 Other receivables Other receivables can be broken down as follows:
June 30, December 31, (in thousands of euros) 2004 2003
Tax receivables ...................................................................................
407 893
Research tax credit ............................................................................... 754 2962 Prepaid expenses.................................................................................. 514 424 Other receivables ................................................................................. 454 263
Total other receivables ...................................................................... 2129 4542
Tax receivables posted at June 30, 2004 mainly comprise a €200,000 VAT credit, since the research tax credit was reduced by €2.2 million following its use by MEMSCAP SA. The use of this credit generated €2.2 million in cash flow during the half year ended June 30, 2004.
5.8.5.7 Net Shareholders' Equity
A. Equity Capital
At June 30, 2004, the Company's capital comprised 108,123,061 shares with a nominal value of €0.05.
B. Change in Net Shareholders' Equity Changes in the various items that constitute the Company's shareholders' equity are listed in the table of change in consolidated net shareholders' equity. Changes in the shareholders' equity during the first half of 2004 can mainly be attributed to the following capital increases:
§ On February 7, 2004, the Company issued 1,654,348 new shares of a nominal value of €0.05 with a premium of €513,000. The Company had issued 103,487,533 independent warrants on December 29, 2003 in a bid to limit the dilution of the free float, given the reserved nature of the capital increases from the contribution of Opsitech
106
shares and the issue of the warrants (C). This operation resulted in the creation of 1,645,348 MEMSCAP shares for a total subscription amount of €596,000 at the beginning of 2004.
§ On April 20, 2004, the Company issued 28,000 new shares of a nominal value of €0.05 with a premium of €6,000. This issue follows on from the exercise of founders' warrants and the corresponding option of 28,000 shares at €0.264 per share.
§ On May 17, 2004, the Company issued 211,652 new shares of a nominal value of €0.05 with a premium of €2,000. This issue follows on from the exercise of founders' warrants, 58,904 warrants (A) and 82,244 warrants (C) and the corresponding subscription of 35,287 shares at €0.05 per share and 33,600 shares at €0.264 per share during the first half 2004.
5.8.5.8 Provisions for Risks and Charges
(in thousands of euros) Balance Movements of the period Balance December
31, 2003 Allocations Provisions
used Conversion adjustment
June 30, 2004
Negative goodwill (1) ................................ 3378 -- (441) -- 2937 Provisions for stoppage of activities (2) ................................28,132 -- (4589) -- 23,543 Provisions for legal disputes (3)................................3111 79 (427) 17 2780 Other provisions for risks and charges ................................
156 94 -- (3) 247
Total provisions for risks and charges ................................
34,777 173 (5457) 14 29,507
(1) The negative goodwill concerns the acquisition of Cronos assets in November 2002. (2) Out of the €28.1 million of provisions posted at December 31, 2003 for the stoppage of activities at
GalayOr Inc. (€8.7 million) and of production activities at the Bernin site in France (€19.4 million), €4.6 million were used for redundancy costs paid out during the first half of 2004 and to cover capital loss on the sale of machinery and post-production costs at the Bernin factory.
(3) The provisions for legal disputes mainly cover business risk linked to a customer dispute and various
other risks linked to employees.
5.8.5.9 Net debt
June 30,
December 31,
(in thousands of euros) 2004 2003 Loans and long-term debt (1) ..........................................................................................
22,496 25,476
Mutual funds pledged as collateral with a limit of more than three months ................................(5090) (5630) Cash and cash equivalent (2)...........................................................................................(3853) (6060)
Net debt................................................................................................ 13,553 13,786
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(1) The repayment schedule for loans and long-term debt is as follows: (2)
June 30, 2004 Dec. 31 (in thousands of euros) Less than
12 months
1-5 years More than 5 years
Total 2003
Bank loans ................................................................194 423 -- 617 -- Debt from lease-back operations................................3259 9017 8514 20,790 24,464 Equity loans................................................................-- 869 -- 869 869 Bank overdrafts................................................................220 -- -- 220 143
Loans and long-term debt ................................ 3673 10,309 8514 22,496 25,476
(2) Cash and cash equivalent comprise:
June 30, December 31, (en milliers d’Euros) 2004 2003
Cash ................................................................................................ 3480 2223 Cash equivalent ................................................................................................
373 3718
Own shares ................................................................................................ -- 119
Total................................................................................................................................ 3853 6060 (2.1) Cash equivalent comprised units in treasury mutual funds at June 30, 2004. Their acquisition prices
are close to market value.
(2.2) The Company sold all its treasury stock during the first half 2004. Capital loss from this sale amounted to €363,000 at June 30, 2004. This loss was covered by the reversal of a €350,000 provision made at December 31, 2003.
5.8.5.10 Investment Income (Loss)
At June 30, 2004, the Company's loss on investments stemmed from financial income to the amount of €533,000, net exchange rate gain of €30,000 and investment expenses of €1,056,000. These expenses refer mainly to interest on lease contracts.
5.8.5.11 Extraordinary Income (Loss) Extraordinary loss in the first half of 2004 can be broken down as follows:
(in thousands of euros)
Allocations to
provisions
Reversal of provisions
Extraordinary expenses and
income
Total
Stoppage expenses for the Bernin production site ................................ -- 4589 (4921) (332)
Costs from the closure of sites in Egypt and Germany and a software business (119) -- (411) (530)
Other ................................................................................................ (82) 12 62 (8) Extraordinary loss ................................................................ (201) 4601 (5270) (870)
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5.8.5.12 Commitments A Commitments and Contractual Obligations
June 30, 2004 Dec. 31 (in thousands of euros) Less
than 12 months
1-5 years
More than 5 years
Total 2003
Contractual obligations reported in the balance sheet
Loans from financial institutions
194 423 -- 617
Long-term debts ................................................................ 869 -- 869 869 Lease-back/financing obligations ................................
3259 9017 8514 20,790 24,464
Sub-total 3453 10,309 8514 22,276 25,333 Contractual obligations reported as off-balance sheet commitments
Lease contracts ................................................................ 282 103 -- 385 1582 Irrevocable purchase bonds ................................................................-- -- -- -- -- Other long-term obligations ................................................................-- -- -- --
Sub-total 282 103 385 1582 Total ................................................................................................3735 10,412 8514 22,661 26,915
B Other Commitments
In the scope of a partnership contract, the Company undertook the free transfer of equipment with an original value of €1.5 million in 2006.
In terms of the acquisition contract for the Cronos assets, in 2002 the Company:
§ granted 6,500,000 warrants to JDS Uniphase, thus enabling JDSU to option 6,500,000 MEMSCAP shares for €0.05 each if the revenue generated by the Cronos assets reached certain thresholds.
§ became the sole supplier to JDSU, which undertook to purchase MEMSCAP products and services at a minimum price for a minimum period of three years from the date of acquisition.
In the scope of the acquisition contract for GalayOr Inc. securities, in 2003 the Company granted 93,500 warrants to a select group of GalayOr shareholders thus enabling them to option 11,594,000 MEMSCAP shares, subject to certain conditions linked to the company's activity. In the scope of equipment and building lease contracts, the Company granted the lessor financial establishments €5,090,000 in treasury mutual fund units as collateral at June 30, 2004 (cf. note 12). Due to a dispute with a supplier, Company goodwill was provided as temporary collateral following the unilateral request by the Chairman of the Grenoble Trade Court not in the presence of the parties on December 17, 2003 while awaiting the outcome of the dispute between the two parties. In the scope of a US$750,000 loan over 3 years granted in June 2004 by an American bank to the American subsidiary MEMSCAP Inc., the latter provided US$3 million in assets as a guarantee for the loan and has undertaken to not use its intellectual property as collateral. This loan is also subject to MEMSCAP Inc.'s compliance with its profitability and liquidity ratios.
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In the scope of an overdraft with a maximum limit of €474,000 (NOK 4 million) granted by a Norwegian bank to the Norwegian subsidiary MEMSCAP AS, the latter has provided the bank with €474,000 in trade accounts receivable and €474,000 in inventories as a guarantee.
To the Company's knowledge, no other material off-balance sheet commitments existed at June 30, 2004.
5.8.5.13 Disputes In the scope of its everyday business, the Comp any may enter into various proceedings and receive different claims. The Company provides for unrealised losses when it becomes likely that future expenses will be realised and that these expenses can be estimated to within reasonable doubt.
According to the Management, there are no proceedings currently underway whose outcome is likely to have a significant negative effect on the Company's financial situation or income from operations and that has not been taken into account in the financial statements.
5.8.6 Statutory Auditors' Report on the Half-yearly Financial Statements at June 30, 2004
In our capacity as statutory auditors to your company and in accordance with Article L232-7 of the Code de Commerce, we
have carried out the following tasks:
• the assessment on a limited basis of the statement of operations and consolidated results in the form of mid-term
consolidated financial statements for MEMSCAP SA, in accordance with accounting methods and principles applicable
in France, from the fiscal half-year ended June 30, 2004, as set out in the present report.
• the verification of information given in the half-yearly report.
These mid-year consolidated financial statements were drawn up under the supervision of the Board of Directors. Our role is
to provide an opinion on these financial statements, based on our limited analysis report. We have conducted our assessment in accordance with the professional standards applicable in France. These standards
require that we plan and perform our assessment in order to obtain assurance, to a lesser extent than in the case of an actual
audit, that the mid-term financial statements are free of any significant anomalies. An assessment of this type does not
comprise all the checks and controls of an audit, but is limited to implementing analytical measures and obtaining the
information we deem necessary from the management or the relevant competent person or persons. Based on our limited analysis report, we did not find any significant anomalies that would prejudice the consistency and
reliability of the mid-term consolidated financial statements, drawn up in accordance with accounting methods and principles
applicable in France, or the faithful representation they give of the asset base and financial situation as well as the results of
the companies included in the consolidation.
Without contradicting the opinion thus expressed, we bring to your attention the methods used to calculate the provisions
concerning the stoppage of production activities at the Bernin factory, as described in notes 1.1.4, 1.3.14.1 and 11 of the
appendix, in addition to the uncertainty over the assessment of these provisions.
110
In accordance with professional standards applicable in France, we also carried out the specific checks and controls of the
information given in the half-yearly report concerning the mid-term consolidated financial statements, the subject of our
limited analysis report. We have no observations to make on the fairness and consistency of this information with the mid-
term consolidated financial statements. August 26, 2004
Statutory Auditors
ERNST & YOUNG Audit Jean-Marie BOURGEOIS
Jean-Christophe Develay
5.9 ACCOMPANYING NOTE TO THE APPENDICES AS REQUIRED BY THE AMF
5.9.1 On Balance Sheet Presentation:
Provisions for risks and charges presented in the liabilities section of the balance sheet at December 31, 2003 and June 30, 2004 include provisions for the stoppage of activities at GalayOr Inc. and at the Bernin production site in France. At the request of the AMF and in accordance with CRC Ruling 2000-06 on liabilities, those provisions for risks and charges linked to the stoppage of activities and relating to assets have been reclassified in the balance sheets minus the said assets.
111
5.9.1.1 Consolidated Balance Sheet at December 31, 2003 A. Pro-forma Consolidated Balance Sheet
Provisions for risks and charges for the stoppage of activities and in terms of assets have been reclassified in the consolidated balance sheet minus the said assets, as follows:
In thousands of euros
December 31,
2003
Reclassification
December 31,
2003 Pro-forma
Assets Fixed assets Goodwill ................................................................................................ 5670 5670 Intangible assets ................................................................................................ 3505 3505 Tangible assets ................................................................................................ 56,966 (17,700) 39,266
Long-term investments ..........................................................................................
14,405 (8696) 5709
80,546 (26,396) 54,150 Current assets Inventories ................................................................................................ 1203 1203 Trade accounts receivable ......................................................................................
5446 5446
Other receivables ................................................................................................ 4542 4542 Cash and cash equivalent ...................................................................................... 6060 6060 17,251 17,251 Total assets 97,797 (26,396) 71,401
Liabilities
Shareholders' equity Capital 5311 5311 Additional paid-in capital ......................................................................................114,129 114,129 Retained earnings ................................................................................................
(89,464) (89,464)
Conversion adjustment ..........................................................................................
(772) (772)
Total shareholders' equity
29,204 -- 29,204
Total provisions for risks and charges
34,777
(26,396)
8381
Liabilities
Loans and long-term debt ......................................................................................25,476 25,476 Trade accounts payable .......................................................................................... 6475 6475 Other payables ................................................................................................ 1865 1865 33,816 33,816 Total liabilities 97,797 (26,396) 71,401
The reclassification does not affect the shareholders' equity or the net income (loss) of the fiscal year.
112
B. Modification of Note 5.1.5.5 on Tangible Assets
Following the reclassification as shown above, the tables in note 5.1.5.5 are modified as follows:
December 31, December 31, (in thousands of euros) 2003 2002
Land (1) ................................................................................................................................ 244 210 Buildings (1) ................................................................................................................................18,194 17,848 Fixtures and fittings ................................................................................................................................20,509 20,717 Machinery (1) ................................................................................................................................28,588 32,255 Vehicles ................................................................................................................................ - 27 Office furniture and other equipment (1) ................................................................................................459 657 IT equipment (1) ................................................................................................................................1399 1486 Assets in progress ................................................................................................................................ - - Tangible assets ................................................................................................................................69,393 73,200 Accumulated depreciation and amortisation ................................................................ (12,427) (5025) Provision for depreciation ................................................................................................ (17,700) --
Total tangible assets (net) ................................................................................................ 39,266 68,175 (1) including assets financed by leasing:
December 31, December 31, (in thousands of euros) 2003 2002 Land ................................................................................................ 210 210 Buildings ................................................................................................17,848 17,848 Machinery ................................................................................................................................6410 7595 Office furniture and other equipment ................................................................................................14 14 IT equipment ................................................................................................................................131 88 Tangible assets ................................................................................................................................24,613 25,755 Accumulated depreciation and amortisation ................................................................ (3041) (1160) Provision for depreciation ................................................................................................ (7600) --
Total tangible assets financed by leasing (net) ................................................................13,972 24,595
C. Modification of Note 5.1.5.6 on Long-term Investments
Following the reclassification as shown above in section A, the tables in note 5.1.5.6 are modified as follows:
December 31, December 31, (in thousands of euros) 2003 2002 Securities pledged as collateral ................................................................................................ 5630 8802 Equity interests ................................................................................................................................ 8764 146 Other long-term investments ................................................................................................ 26 117 Tangible assets ................................................................................................................................14,420 9064
Minus provisions for depreciation ................................................................................................ (15) (15) Provision for depreciation (8696) --
Total long-term investments (net) ................................................................................................5709 9049
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5.9.1.2 On the Presentation of the Corporate Balance Sheet at December 31, 2003 Provisions for risks and charges for the stoppage of activities and in terms of assets have been reclassified in the balance sheet minus the said assets, as follows:
December 31,
2003
Reclassificatio
n
December 31,
2003 Pro-forma
Assets €K €K €K Fixed assets Intangible assets ................................................................ 3039 3039 Tangible assets..............................................................................33,017 (10,100) 22,917 Long-term investments ................................................................ 27,674 (8696) 18,978 63,730 (18,796) 44,934 Current assets Inventories ................................................................................................ 5 5 Advances and reserved deposits on orders ............................................................ 12 12 Trade accounts receivable ...................................................................................... 3626 3626 Other receivables ................................................................................................ 17,320 17,320 Cash equivalent ................................................................................................ 3016 3016 Cash 219 219 24,198 -- 24,198 Other current assets ................................................................................................ 899 899 Conversion adjustment ................................................................................................5054 5054 Total assets 93,881 (18,796) 75,085
Liabilities Shareholders' equity Capital 5311 5311 Additional paid-in capital ......................................................................................119,253 119,253 Reserves ..................................................................................... 82 82 Retained earnings ................................................................................................(23,636) (23,636) Income (loss) of the period................................................................(56,427) -- (56,427) 44,583 44,583 Provisions for risks ................................................................
35,826 (18,796) 17,030
Liabilities Long-term debt ................................................................................................
557 557
Advances and paid deposits on orders in progress ................................ 273 273 Operating debt ................................................................................................ 5896 5896 Other payables ................................................................................................ 4132 4132 10,859 10,859 Prepaid income 1640 1640 Conversion adjustment 973 973 Total liabilities 93,881 (18,796) 75,085 The reclassification does not affect the shareholders' equity or the net income (loss) of the fiscal year.
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5.9.1.3 On the Presentation of the Half-yearly Consolidated Balance Sheet at June 30, 2004
A. Pro-forma Balance Sheet Provisions for risks and charges from the stoppage of activities and in terms of assets have been reclassified in the half-yearly balance sheet for the period ended June 30, 2004 minus the said assets, as follows:
December 31,
2003 Pro-forma
June 30, 2004
Reclassificatio
n
June 30, 2004
Pro-forma
Assets €K €K €K €K Fixed assets
Goodwill ................................................................................................ 5670 5276 5276 Intangible assets ................................................................................................ 3505 2765 2765 Tangible assets ................................................................................................ 39,266 51,410 (14,361) 37,049
Long-term investments ..........................................................................................
5709 13,865 (8696) 5169
54,150 73,316 (23,057) 50,259 Current assets Inventories ................................................................................................ 1203 1059 1059 Trade accounts receivable ......................................................................................
5446 5268 5268
Other receivables ................................................................................................ 4542 2129 2129 Cash and cash equivalent ...................................................................................... 6060 3853 3853 17,251 12,309 -- 12,309 Total assets 71,401 85,625 (23,057) 62,568
Liabilities
Sharehol ders' equity Capital 5311 5406 5406 Additional paid-in capital ......................................................................................114,129 34,581 34,581 Retained earnings ................................................................................................(89,464) (14,306) (14,306) Conversion adjustment .......................................................................................... (772) (848) (848) Total shareholders' equity 29,204 24,833 -- 24,833 Total provisions for risks and charges
8381
29,507
(23,057)
6450
Liabilities
Loans and long-term debt ......................................................................................25,476 22,496 22,496 Trade accounts payable .......................................................................................... 6475 6425 6425 Other payables ................................................................................................ 1865 2364 2364 33,816 31,285 -- 31,285 Total liabilities 71,401 85,625 (23,057) 62,568
The reclassification does not affect the shareholders' equity or the net income (loss) of the fiscal half-year.
B. Modification of Note 5.7.5.4 on Tangible Assets
Following the reclassification as shown above, the tables in note 5.7.5.4 are modified as follows:
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June 30, December 31, (in thousands of euros) 2004 2003 Land (1) ................................................................................................ 246 244 Buildings (1) ................................................................................................ 18,395 18,194 Fixtures and fittings ................................................................................................20,512 20,509 Machinery (1) ................................................................................................21,087 28,588 Vehicles ................................................................................................ 4 - Office furniture and other equipment (1) ................................................................ 450 459 IT equipment (1)................................................................................................1411 1399 Tangible assets ................................................................................................................................62,105 69,393 Accumulated depreciation and amortisation ................................................................(10,695) (12,427) Provision for depreciation (14,361) (17,700)
Total tangible assets (net)..............................................................................................37,049 39,266
(1) including assets financed by leasing: June 30, December
31, (in thousands of euros) 2004 2003
Land ................................................................................................ 210 210 Buildings ................................................................................................17,848 17,848 Machinery ................................................................................................2815 6410 Office furniture and other equipment ................................................................ 14 14 IT equipment ................................................................................................131 131 Tangible assets................................................................................................21,018 24,613 Accumulated depreciation and amortisation ................................................................(2066) (3041) Provision for depreciation (6230) (7600)
Total tangible assets financed by leasing (net)................................................................12,722 13,972
5.9.1.4 On the Appendix to the Consolidated Financial Statements Note 5.1.5.1/C1 presented the stoppage of activities at GalayOr Inc. and the fact that its assets, liabilities and operational items were not material in terms of the consolidation as the reasons for which this subsidiary was not consolidated at December 31, 2003. At the request of the AMF, it is stipulated that the non-justified aspects of this operation are justified by the fact that in 2003 GalayOr revenue and total assets constituted 0% and 0.7% respectively of those of MEMSCAP, as shown in the following table:
GalayOr $K
GalayOr €K
MEMSCAP €K
% GalayOr/MEMSCAP
Revenue 0 0 7,663 0% Total assets 914 723 97,797 0.7%
Note 5.1.5.7: The supplier dispute referred to in note 5.1.5.17 concerns debt to the amount of €2 million, disputed by MEMSCAP.
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CHAPTER 6 - ADMINISTRATION, MANAGEMENT AND CONTROL
6.1 S TRUCTURE AND FUNCTIONING OF ADMINISTRATIVE, MANAGEMENT AND S UPERVISORY BODIES
6.1.1. Board of Directors
6.1.1.1. Structure of the Board of Directors The MEMSCAP Board of Directors currently comprises 6 members and one proctor. Board members are appointed by the Ordinary Shareholder Meetingfor a six-year mandate. The following table lists the name and age of the 2 private individuals on the Board, the name of the permanent representatives of corporate general partners on the Board and the start and end dates of current mandates:
Name Age Date of appointment
Mandate ending
(OGM held to approve financial statements for year ending)
Jean-Michel Karam – Chairman 34 06/04/1998 12/31/2009 (mandate renewed by GM of June 28,
2004) James Spoto (independent director) 52 01/29/2001 12/31/2006 SPËF Venture, represented by Valérie Gombart n/a 10/02/2000 12/31/2005 ETF Investments N.V., represented by Chris Pelly
n/a 10/02/2000 12/31/2005
Evergreen Partners, represented by Adi Gan n/a 10/06/2003 12/31/2008 STI Ventures, represented by Erez Aluf n/a 10/06/2003 12/31/2008 At present, there are no employee-appointed directors on the Board. MEMSCAP has one independent director, defined as a director who is not a manager within the company, does not represent a financial fund, of venture-capital or any other type, and has no family or capital-related connection with the financial funds that own MEMSCAP capital or with Jean-Michel Karam, Chairman of the Board of Directors. Furthermore, the ExtraOrdinary Shareholder Meetingheld on 10/31/2002 appointed JDS Uniphase, whose representative on the Board of Directors is Mr Martin Muendel, as "proctor" to the Board. The proctor's mandate runs until the Ordinary Shareholder Meetingheld to approve the financial statements for the year ending December 31, 2005. Following the General Meeting held on June 28, 2003, Mr Joseph Borel submitted his resignation from the Board due to retirement. Other Mandates held by Members of the Board of Directors Jean-Michel Karam holds no other director mandates outside the MEMSCAP group.
Valérie Gombart, permanent representative of SPEF Venture on the MEMSCAP SA Board of Directors, is also SPEF VENTURE's permanent representative on the Maximiles, Vistaprint (incorporated in Delaware, USA), Optogone, Eureka Soft and Sefas boards. She is also Director of Investments and a member of the management board at SPEF Venture. Chris Pelly is a director of ETF Group SA (Switzerland) and the permanent representative of this company on the Board of Directors of Itim Group plc. (UK). He is a director on the boards of E-Work Exchange Inc. (USA), Buildonline (Holdings) Ltd. (Ireland), eGovernment Solutions Ltd. (England) and eGovernment Solutions (UK) Ltd. (England). James Spoto is also Chairman, CEO and a director of Applied Wave Research and a member of the AXYS Design technical advisory board. Adi Gan, permanent representative of Evergreen Partners, is a director of Gilian Technologies Ltd. (Israel), SolGel Technologies (Israel), Flash NWs Ltd. (Israel) and Amimon Inc. (USA).
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Erez Aluf, permanent representative of STI Ventures, is a member of the STI Ventures board of directors. He holds no other director mandates at French companies other than MEMSCAP. Positions Held by the Permanent Representatives in the Companies They Represent - Valérie Gombart is an employee of SPEF Venture where she acts as Director of Investments and is a member of the
SPEF Venture management board. - Chris Pelly is an employee of ETF Investments N.V. where he acts as Chief Financial Officer. - Adi Gan is an employee of Evergreen Partners where he is a Partner. - Erez Aluf is an employee of STI Ventures where he acts as Managing Director and is a member of the STI
Ventures board of directors. 6.1.1.2. Functioning of the Board of Directors The Board of Directors met 17 times in fiscal year 2003 on the following dates: 01/23/03, 02/14/03, 03/18/03, 04/23/03, 05/13/03, 06/20/03, 07/16/03, 07/18/03, 07/22/03, 07/29/03, 08/26/12, 09/18/03, 10/09/03, 10/22/03, 11/10/03, 11/19/03 and 12/09/03. The average participation rate for the year was 68%, as shown in the following table:
Date of Board
Meeting % participation
Number of members
present
Jan 23 100% 5/5 Feb 14 60% 3/5 Mar 18 80% 4/5 Apr 23 60% 3/5 May 13 60% 3/5 June 20 80% 4/5 July 16 60% 3/5 July 18 60% 3/5 July 22 60% 3/5 July 29 60% 3/5 Aug 26 60% 3/5 Sept 18 60% 3/5 Oct 09 60% 3/5 Oct 22 57% 4/7 Nov 10 86% 6/7 Nov 19 71% 5/7 Dec 09 86% 6/7
Average 68% Each director owns at least one Company share, as required by French law.
6.1.2. Corporate Governance
6.1.2.1. Charter of Ethics and Best Practices The Board Meeting held on July 9, 2001 adopted a principle for drawing up a Charter of Best Practices to govern the Directors. The Board Meeting held on October 15, 2001 approved the charter, as set out below:
"The utmost discretion is required from directors and all persons called to meetings of the Board of Directors, or to expert committees created by the Board, concerning information designated as confidential by the Chairman of the Board of Directors. Given that companies whose shares are traded on an official market are bound to various obligations concerning the general public in terms of the flow of financial information, whether continuous, periodical or relating to specific operations and while each director is responsible for his/her personal compliance with these obligations, efficient
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corporate management requires that only the Chairman of the Board of Directors, or those persons appointed by the Chairman, speak for the Company in order to abide by said obligations. In terms of the main obligations by which the directors and managers of companies listed on an official market must abide, in particular:
- Articles L225-109 and L247-4 of the Code de Commerce, which stipulates that company shares owned by directors must be presented in their nominative format;
- Article L465-1, clauses 1 and 2 of the Code Monétaire et Financier regarding insider trading and the fact that managers described in Article L225-109 of the Code de Commerce are "primary" insiders likely to have access to privileged information on the outlook and position of MEMSCAP and as a result may not, firstly, carry out or knowingly enable another party to carry out, directly or indirectly, or via a third party, a financial operation (sale or acquisition of securities) before this information is made known to the public; secondly, communicate privileged information to a third party except in terms of the generally accepted context of his/her profession or duties;
- COB Ruling no. 90-08 regarding the use of privileged information; - Article L465-1, clause 3 of the Code Monétaire et Financier, which penalises the circulation of false or
misleading information to the public concerning the outlook or position of an issuer or the development outlook of a financial instrument listed on an official market, susceptible to influence its price;
- Ruling no. 98-07 regarding the release of information to the general public; - Article L465-2 of the Code Monétaire et Financier, which criminalises taking or attempting to take action in
such a way as to hinder the normal functioning of a financial instrument on the market by misleading others. The Board of Directors and each individual Director undertake to comply with these rules at all times, thus preserving the integrity of the MEMSCAP share price. Furthermore, the directors undertake to act with loyalty and care, in the best interest of the company and that of its shareholders at all times. In particular, each director undertakes to report any future conflict of interest with the company and to refrain from voting or participating in the decision-making process of the Board of Directors should such a conflict of interest arise. Lastly, each director undertakes to perform his/her duties with the necessary care, in particular via the application of his/her duty to monitor and inform, always in the best interest of MEMSCAP."
This Charter has been signed by all the Company Directors. In addition, works committee representatives to the Board of
Directors have been duly informed of their duty in terms of confidentiality requirements and the resulting responsibilities.
6.1.2.2. Performance Evaluation of the Board of Directors
Regarding self-assessment, the Board of Directors monitors quantitative indicators (i.e., meeting frequency, rate of participation, etc.) and assesses its chosen strategy and actions in terms of both quantity and quality. The Board of Directors participates in defining group strategy, drawing up budgets and decision-making in terms of reorganisation plans required to adapt to the market, external growth opportunities and balance-sheet operations. All major decisions regarding the MEMSCAP operations, business and strategy are made by the Board of Directors before being implemented by the Management. In 2003, the main decisions made by the Board of Directors concerned the following subjects:
a. Accounting and finance: approval of the annual financial statements, budget forecast and associated investment strategy, approval of quarterly revenue and half-yearly results, cash management;
b. Acquisition policy: finalisation of Opsitech and GalayOr acquisitions and various cash capital increase operations;
c. 3-year strategic plan for 2004-2006; d. Plan for streamlining costs and workforce; e. Group resource management strategy, including the Bernin site; f. Strategy in the event of legal disputes; g. Stock option allocation plans
At present no measures have been taken to evaluate the performance of the Board of Directors but consideration of how to address this subject is underway. Thus, in accordance with the recommendations of the report entitled "Toward Better
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Governance of Listed Companies", which was compiled by the working group chaired by Mr Daniel Bouton and released on September 22, 2002, the Company is planning to draw up new by-laws to define the process by which the Board of Directors would address self-assessment. 6.1.2.3. Expert Committees: Strategic Committee Following a proposal from the Board of Directors, the Combined General Meeting for Shareholders held on October 6, 2003 voted to establish a Strategic Committee, which met 3 times in 2003, and a new by -law. The following table lists dates and participation rates for these Strategic Committee meetings:
SC meeting date % participation
Number of members present
Oct 22 67% 2/3 Nov 19 100% 3/3 Dec 19 67% 2/3
Average 78% The committee comprises 3 members of the Board of Directors: - Jean-Michel Karam, as Chairman, - Valérie Gombart, representative of SPEF Venture, - Adi Gan, representative of Evergreen Partners. Its purpose is to assess the company's strategic plan and to process all operations with a budget of more than €1 million, before submitting its conclusions and proposals to the Board of Directors.
6.1.3. Operational Management
The Company's management team, which reports to the Chairman, is structured as follows:
Jean-Michel Karam, 34, Chairman and CEO and Chairman of the Board of Directors. Mr Karam has a PhD in microelectronics from the Institut National Polytechnique of Grenoble (1996), a postgraduate degree in microelectronics from the Université de Paris VII and a degree in engineering from the Ecole Supérieure d'Ingénieurs en Electrotechnique et Electronique (1993). He joined French research institute Laboratoire TIMA, based in Grenoble, in 1994 and went on to create the Microsystems group in 1995, building the company up to a team of more than 35 engineers specialised in developing MEMS. Mr Karam founded MEMSCAP in 1997 and was appointed Chairman and CEO the following year. He has co-founded a number of other technology companies and acts as a consultant to other businesses and investors. Philippe Bringuier, 41, Vice President and Chief Financial Officer. A qualified CPA and statutory auditor, Philippe Bringuier joined MEMSCAP in November 2002 after more than 15 years working in KPMG's audit department serving companies worldwide. At KPMG, he worked in particular on the accounts of listed French companies (CAC 40 and the Nouveau Marché) and specialised in the Electronics, IT and Media sectors. He has partnered a number of companies in external growth and internal reorganisation operations (acquisition audits, evaluations, disposals of business units, etc.). Aurore Foulon, 32, Vice President, Corporate Communications and Legal Counsel. Prior to joining MEMSCAP in August 2001, Aurore Foulon gained extensive experience working in law and for the international press. At MEMSCAP, she is in
Jean Michel KaramChairman & CEO
Aurore FoulonVP, Corporate Communications
& Legal Counsel
Gaëtan MenozziVP & Central R&D Director
Per Arne LislienVP & GM
Standard Products BU
Philippe BringuierVP & Chief Financial Officer
Ron WagesVP & GM Custom Products
& Manufacturing Services BU
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charge of corporate communications and marketing and heads the legal department. Mrs Foulon has an LLB from Université de Paris I – Panthéon Sorbonne and another from King's College London. She also has a master's degree in European law from the Université Libre de Bruxelles and an MBA from the ESSEC School of Management. Ron Wages, 42, Vice President and General Manager of the Custom Products and Manufacturing Services Business Unit. Prior to joining MEMSCAP, Ron Wages worked in the MEMS Department at JDS Uniphase. He also spent 10 years at Texas Instruments in the position of International DSP Marketing Manager for the Texas Instruments TMS320 product range. He has been Vice Chairman, Marketing at Spectrum Signal Processing and Vice Chairman, Sales and Marketing at D2 Technologies and, finally, Vice Chairman, Business Development at Virata Corporation. Ron Wages has a master's degree in electrical engineering from the University of Maryland College Park and an MBA from the University of Houston. Per Arne Lislien, 41, Vice President and General Manager of the Standard Products Business Unit. Mr Lislien began his career as a European logistics manager at Kongsberg Automotive ASA. He went on to join Norwegian company Scan-Sense AS (manufacturer of sensors for Norway's petroleum and gas industries) in the position of Vice Chairman and Director of Operations for Norway and later CEO of the company's UK subsidiary. Prior to joining Capto as CEO in March 2001, he also held the position of Vice Chairman, Operations at SensoNor, Norwegian manufacturer of MEMS for automotive applications. Per Arne Lislien has managed the Standard Products Business Unit since Capto's acquisition by MEMSCAP in December 2001. Gaëtan Menozzi, 61, Vice President and Central Research and Development Director. Before joining MEMSCAP, Gaëtan Menozzi worked for 31 years in the aerospace-defence sector in Valence, France, for Crouzet, later known as Sextant Avionique and then Thomson CSF. He held the position of Marketing Manager for Technology and Programmes in the Sensors Business Unit for the development of MEMS sensors in aeronautics and defence for 6 years. He joined MEMSCAP in July 2000 as Director of Programmes. He is Chairman of two European MEMS organisations: Nexus, the European Network of Excellence in Microsystems, and Eurimus, the Eureka Industrial Initiative for Microsystems Uses. Mr Menozzi has a degree in physical and electronics engineering from ICPI in Lyons. NB: Jean-Michel Karam, Philippe Bringuier and Aurore Foulon are also members of the Board of Directors at MEMSCAP's Norwegian and Egyptian subsidiaries.
6.1.4. Technical Advisory Board
The role of the Technical Advisory Board is to monitor international technological progress and provide the Company's management team with the most up-to-date information possible about rival or new technologies. It comprises the following members: − Gary Fedder, professor at Carnegie Mellon University;
− Hiroyuki Fujita, professor at the University of Tokyo and a director at Fujita Lab;
− Philippe Renaud, professor at the Ecole Polytechnique de Lausanne (EPFL);
− Tank Bourouina, senior lecturer at the University of Tokyo and a project manager at LIMS;
− Constant Axelrad, programme manager and director of Marketing Studies at CEA/LETI;
− Pierre Guillon, director of research at the CNRS and a director at IRCOM;
− Serge Spirkovitch, director of manufacturing processes at MEMSCAP;
− Bernard Courtois, director of research at the CNRS and a director at TIMA;
− Nico de Rooij, director of the Institute of Microtechnology at the University of Neuchâtel.
6.2 MANAGERS' HOLDINGS IN S HARE CAPITAL, IN THE CAPITAL OF A CONTROLLING ENTITY AND IN S UBSIDIARIES' CAPITAL
6.2.1 Compensation of the Corporate Mandate Holders
No director's fees were paid in fiscal year 2003. Gross annual compensation and benefits (company car) paid by the Company and its subsidiaries, in terms of Article
L233-16 of the Code de Commerce to corporate mandate holders totalled €298,928 for the fiscal year ended December 31, 2003. This sum was paid in full to Mr Jean-Michel Karam by MEMSCAP SA.
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Compensation paid by MEMSCAP to Mr Jean-Michel Karam has, at his request, been reduced by 50% for fiscal year 2004 in order to cut general Company costs. Mr Karam also contributed to the Company's latest capital increase.
In addition, Mr Jean-Michel Karam received benefits (company car) totalling €2,928 in fiscal year 2003.
6.2.2 Share Subscription and Purchase Options Granted to Corporate Mandate Holders and Options Exercised
No share subscription or purchase options, founders' warrants or other warrants were granted to the Company's corporate mandate holders in 2003. The Board Meeting held on May 17, 2004 granted 100,000 options to Joseph Borel (for more information, see option plan no. 10, chapter 3).
6.2.3 Regulated Agreements Concluded between the Company and its Directors and certain Shareholders
A regulated agreement has been concluded between Laboratoires La Licorne SA, of which Jean-Michel Karam is a shareholder, and MEMSCAP SA according to which La Licorne SA grants MEMSCAP SA the option of marketing its "Skin Station" products in return for payment of fees. This agreement was approved by the Board of Directors prior to its conclusion. No fees were paid by MEMSCAP SA during fiscal year 2003.
No other operations (excluding current operations concluded under normal conditions) were concluded between the
Company and its Directors, or the Company and shareholders who hold more than 5% voting rights, or for shareholding companies, their parent company, during the fiscal year ended December 31, 2003 (for more information, see special statutory auditors' report, paragraph 5.6).
6.2.4 Assets Owned Directly or Indirectly by Senior Company Managers or Members of their Family
At present, no Company assets are owned either directly or indirectly by a senior company manager or a member of his/her family. Furthermore, no lease contracts have been concluded with a company controlled by a senior company manager or a member of his/her family.
6.2.5 Loans and Guarantees Granted or Established on Behalf of Members of the Administrative and Management Bodies
No loans or guarantees have been granted or established on behalf of members of the Company's administrative or management bodies.
6.3 PROFIT-SHARING PLANS
6.3.1 Profit-sharing and Investment Contracts
None
6.3.2 Information on Share Subscription and Purchase Options
SHARE SUBSCRIPTION OR PURCHASE OPTIONS GRANTED TO THE FIRST TEN NON- CORPORATE MANDATE HOLDER EMPLOYEES AND OPTIONS
EXERCISED BY THE LATTER
Total number of options granted, subscribed or
bought Weighted
average price Plan no. 1 Plan no. 6 Plan no. 7
Options granted, during fiscal year 2003, by MEMSCAP and by any company within the share allocation scope to the issuer's ten employees and any company within this scope that has the greatest number of options granted in this way (overall information)
Granted: 846,311
-- -- 475,000 371,311
Options held on the issuer and companies previously mentioned, exercised during the fiscal year, by the ten employees of the issuer and these companies that has the greatest number of options bought or subscribed in this way (overall information)
70,000 €0.264 0 / 70,000 -- --
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6.3.3 Information on Warrants granted to the Ten First Employees and Corporate Mandate Holders
Warrants granted to corporate mandate holders, listed in the table below; have all been referred to in information documents set out or recorded by the AMF during the final quarter of fiscal year 2003. Independent warrants that have now become obsolete are not included.
Directors JMK SPEF ETF Innov Evergreen STI J. Borel J. Spoto Warrant (A) (1) 451,600 3,838,602 446,381 172,115 956,377 613,587 0 0 Warrant (B) (2) 0 0 0 0 25,970 15,177 0 0 Warrant (C) (3) 0 0 0 0 1,335,352 856,728 0 0
Total granted 451,600 3,838,602 446,381 172,115 2,317,699
1,485,492 0 0
Number of warrants exercised at June 30, 2004 0 0 0 0 0 0 0 0
(1) 4 warrants (A) grant the right to subscribe to 1 share at €0.05 (2) Each warrant (B) grants the right to subscribe to 124 shares at €0.05 per share (3) 4 warrants (C) grant the right to subscribe to 1 share at €0.05
WARRANTS GRANTED TO THE TOP TEN NON-MANDATE HOLDING EMPLOYEES AND
WARRANTS EXERCISED BY THE LATTER
Total number of warrants granted/shares subscribed Weighted
average price Issue
Warrants granted, during the fiscal year 2003, by MEMSCAP to the issuer's ten employees and any company within the share allocation scope that has the greatest number of warrants granted in this way (overall information)
1.244 / -- --
Warrants held on the issuer and companies previously mentioned, exercised during the fiscal year, by the ten employees of the issuer and these companies that has the greatest number of options subscribed in this way (overall information)
0 -- --
6.4 REPORT BY THE CHAIRMAN OF THE BOARD OF DIRECTORS ON INTERNAL AUDIT
The Chairman's report on internal control is included in full in the appendix to this Reference Document.
6.5 S TATUTORY AUDITORS' RESPONSE TO THE CHAIRMAN'S REPORT ON INTERNAL AUDIT
(Drawn up in application of the final clause of article L225-235 of the Code de Commerce, on the report by the Chairman of
the MEMSCAP Board of Directors with regard to the internal audit procedures for drawing up and processing accounting and
financial information).
To all Shareholders,
In accordance with our appointment as Statutory Auditors to MEMSCAP and in application of the provisions of the final
clause of article L225-235 of the Code de Commerce, we hereby present our response to the report compiled by the Chairman
of your company in conformity with the provisions of article L225-37 of the Code de Commerce for the fiscal year ended
December 31, 2003.
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Under the supervision of the Board of Directors, the management is responsible for defining and implementing appropriate
and effective internal audit procedures. It is the Chairman's duty to take note, in his report, of the conditions for preparing
and organising the work of the Board of Directors and the internal audit procedures implemented within the company. Our role is to inform you of our observations concerning the information given in the Chairman's report pertaining to internal
audit procedures for drawing up and processing accounting and financial information.
We have conducted our audit in accordance with the professional standards applicable in France. These standards require that
we plan and perform the audit to obtain reasonable assurance that the information given in the Chairman's report pertaining to
internal audit procedures for drawing up and processing accounting and financial information, is reliable. Our audit placed
particular emphasis on the following: - taking into account the objectives and general organisation of the internal audit procedures, as well as methods used to
draw up and process the accounting and financial information, described in the Chairman's report;
- taking into account the underlying work involved in providing the information given in the report;
- examining the assessment of the adequacy and effectiveness of these procedures, considering in particular the pertinence
of the evaluation process that has been established and tests carried out;
- carrying out the tests we deem necessary in addition to our audit, regarding the design and functioning of these
procedures, in order to corroborate the information given and declarations made in this respect in the Chairman's report.
On the basis of this work, we have no observation to make concerning the information given regarding the company's internal
audit procedures for drawing up and processing accounting and financial information, presented in the report by the
Chairman of the Board of Directors and compiled in application of the provisions of the final clause of article L225-37 of the
Code de Commerce.
May 4, 2004 Statutory Auditors
Jean-Marie BOURGEOIS ERNST & YOUNG Audit Represented by Jean-Christophe DEVELAY
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CHAPTER 7 - RECENT DEVELOPMENTS AND FUTURE PROSPECTS
7.1 RECENT DEVELOPMENTS
In terms of business, MEMSCAP has concluded a number of agreements since the beginning of 2004 that reflect the strategic direction chosen by the Company:
• April 2004: Signing of a key contract with American company Knowles Acoustics for the production of MEMS
silicon microphone wafers;
• May 5, 2004: Signing of a contract with another American customer, Glimmerglass Networks, a pioneer in transparent connectivity (all-optical connectivity), for the production of MEMS components;
• May 26, 2004: SEDAT, the French healthcare company, chooses "Nautiflux", MEMSCAP SP844 disposable
medical transducer;
• June 16, 2004: Aerosonic Corporation adopts MEMSCAP pressure sensors as part of its range of cockpit instruments;
• August 08, 2004: MEMSCAP has provided Knowles Acoustics with more than 1 million MEMS components and increases production capacity at its North Carolina site.
Lastly, MEMSCAP's new module pressure sensor for high-end aeronautic applications, TP 3100, was launched this year on schedule. This product has just obtained the Civil Aviation Authority's DO178B certification, which should lead to a significant increase in demand.
In terms of finance, in 2003 the Company undertook a general reorganisation programme in a bid to facilitate a return to profitability in the second half of 2004. As a result and in order to avoid taking drastic cost cutting action, MEMSCAP began and completed a reorganisation programme to improve overall efficiency and productivity within the Group. The Company now focuses on two core businesses: Standard Products (comprising sensors and the Skin Station) and Custom Products (comprising foundry services, i.e. custom manufacturing, and software) and is structured by business unit, the whole supported by a central research division and the general management team. The Group's structure has thus been clarified and streamlined. The Group continued this programme into the first half of 2004, concluding a new agreement with its financial partners, strengthening its order book and building up its customer base. The new financial agreement, a key stage of the Group's strategy for returning to operational profitability and optimising assets on the Bernin site, will enable the Company to make savings of €3.7 million in fiscal year 2004, as well as to reduce its long-term debt from lease-back contracts by €2.9 million. Moreover, the Company's consolidated revenue for the first half 2004 totalled €4.7 million ($5.8 million), as against €3.8 million the previous year; consolidated operating loss fell to €3.1 million compared to €12.1 million in 2003. Gross margin climbed to €1.7 million, thus representing more than 35% of revenue for the half-year, while operating expenses were down. The Company made net losses of €4.9 million, an improvement on the same period of 2003 (€13.9 million). Net loss per share was reduced by a factor of five and came to €0.046.
In thousands of euros First
quarter 2004
Second quarter 2003
First quarter 2003
Second quarter 2002
First quarter 2002
Revenue
4746 3835 3828 3240 2473
Gross margin 1680 (2826) (4733) (8071) 168 Operating income (loss) (3148) (9009) (11,957) (19,203) (9424) Net income (loss) (4905) (44,761) (13,873) (17,555) (10,285) Employees 143
at June 30, 2004 105
195 at Dec 31, 2003
226 at June 30, 2003
256 at Dec 31, 2002
214 at June 30, 2002
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at July 1, 2004 At June 30, 2004, MEMSCAP had €3.8 million in available funds and €5.1 million invested in mutual funds used as collateral for lease-back contracts. Financial statements for the first half 2004 show improvement in all the Group's indicators, thus justifying its strategy for a return to operational profitability in the second half. This general improvement included the following points in particular:
- the 5th consecutive half-year of growth in the group's consolidated revenue, - a positive gross margin that constitutes 35% of the half-yearly revenue, - division of the operating loss by 4 on the same period of 2003, - a €3-million decrease in financial debt on December 31, 2003, - a significant decrease in the consumption of cash by operations, reduced to €158,000 over 6 months, excluding
redundancy costs, - a well-filled order book and increased variation in the customer base, - rising productivity across the board thanks to the concentration of the workforce on 3 sites in North Carolina,
France and Norway, - the conclusion of an agreement with financial partners aimed at optimising Group assets from the Bernin site and
thus making cash savings of €3.7 million in fiscal year 2004, - the conclusion of various business deals with a number of key customers, such as Knowles Acoustics,
Glimmerglass Networks, Aerosonic and Sedat, - certification from the Civil Aviation Authority for the module pressure sensor for high-end aeronautical
applications. These results are in line with the Group's strategy for a return to operational profitability in the second half, a strategy supported by an order book worth €4.6 million at the beginning of July, to be invoiced during the second half, and by a continuation of the company's cost reduction plan via the pooling of human resources at 3 sites in North Carolina, France and Norway. MEMSCAP forecasts around 50% growth of its activity in 2005. Lastly, the Company has not ruled out engaging in financial operations that would enable it to increase funds, if necessary.
7.2 FUTURE PROSPECTS
The momentum begun during the second quarter 2004 should continue throughout the year. As a result, MEMSCAP forecasts substantial growth in its revenue for fiscal year 2004 and a return to operational profitability during the second half of the year. A planned schedule for the Group's financial communication is presented in paragraph 4.9 of this document.
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CHAPTER 8 - APPENDIX: CHAIRMAN'S REPORT ON INTERNAL AUDIT
8.1 INTRODUCTION
In accordance with the provisions of article L225-37 of the Code de Commerce, the purpose of this report is to report on the conditions surrounding the preparation and organisation of the Board's work and internal audit procedures set up by MEMSCAP. Given that the Law on Financial Security was only passed recently, this first report will present the company's internal audit procedures from a descriptive point of view only. Since its creation, MEMSCAP has set up internal audit measures with the following objectives:
n to enable the company to meet its objectives in terms of strategy;
n to ensure its business processes function efficiently and prevent major risks to which it is subject, given its
field of activity;
n to comply with internal operating rules;
n to comply with laws and legislation, especially in terms of production and accounting and financial
information.
This document describes the main points of this initiative in terms of organisation and processes.
8.2 CORPORATE GOVERNANCE
8.2.1 The Board of Directors
The Board of Directors comprises 7 directors and one proctor, without voting rights. The current members of the board are as follows:
– Mr Jean-Michel Karam (Chairman of the Board of Directors and Chief Executive Officer),
– Mr Joseph Borel,
– Mr James Spoto,
– Mrs Valérie Gombart, permanent representative of SPEF VENTURE,
– Mr Chris Pelly, permanent representative of ETF INVESTMENTS N.V.,
– Mr Erez Aluf, permanent representative of STI VENTURES,
– Mr Adi Gan, permanent representative of EVERGREEN PARTNERS.
Moreover, the ExtraOrdinary Shareholder Meetingheld on 31/10/2002 appointed JDS Uniphase, whose representative on the Board of Directors is Mr Martin Muendel, as "proctor" to the Board. The proctor's mandate runs until the Ordinary Shareholder Meetingheld to approve the financial statements for the year ending December 31, 2005. The Board of Directors exercises continuous control over the management of the company via its Chairman, Mr Jean-Michel Karam. It meets as often as necessary, convened by the Chairman. Prior to each meeting, the members receive the agenda and information required for them to carry out their respective roles. The Board of Directors met 17 times in 2003. The main subjects addressed at these meetings were as follows:
– Approval of the annual and half-yearly financial statements, as well as the quarterly revenue and
operating income (loss);
– Feedback from business plans and budgets;
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– Acquisitions policy;
– Financing;
– Operations to streamline costs and improve workforce efficiency;
The Board Meeting held on July 9, 2001 adopted a principle for drawing up a Charter of Best Practices to govern the directors. This Charter has been signed by all Company directors. In addition, works committee representatives to the Board of Directors have been duly informed of their duty in terms of confidentiality requirements and the resulting responsibilities.
8.2.2 The Strategic Committee
The MEMSCAP Board of Directors has appointed a Strategic Committee whose purpose is to monitor the Company's major orientations pertaining to operations, activity and strategy. This committee comprises 3 members:
– Mr Jean-Michel Karam, Chairman of the Board of Directors and Chief Executive Officer;
– Mrs Valérie Gombart, permanent representative of SPEF VENTURE,
– Mr Adi Gan, permanent representative of EVERGREEN PARTNERS.
It was set up in October 2003 and met 3 times during that year. Its purpose is to assess the company's strategic plan and to process all operations with a budget of more than €1 million, before submitting its conclusions and proposals to the Board of Directors.
8.2.3 General Management
MEMSCAP General Management is undertaken by the Chairman of the Board of Directors.
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8.3 OPERATIONAL INTERNAL AUDIT
8.3.1 Instigators of Operational Internal Audit
In order to take recent developments and geographical coverage into account, MEMSCAP is now divided into two business units assisted by supporting departments, under the supervision of the General Management.
The General Management team, which reports to the Chairman, is structured as follows:
– Mr Philippe Bringuier, Chief Financial Officer,
– Mrs Aurore Foulon, Director of Corporate Communications and Legal Counsel,
– Mr Ron Wages, General Manager of the Standard Products Business Unit,
– Mr Per Arne Lislien, General Manager of the Custom Products Business Unit,
– Mr Gaëtan Menozzi, Central Research and Development Director.
A meeting of all General Management team members is held each quarter. These meetings are held to assess key management indicators of MEMSCAP business, follow up on strategy and budgets and all other elements considered important in terms of the company's activity.
In addition, the Business Unit Directors report back on their respective activities to the Chairman on a weekly basis.
8.3.2 Operational Internal Audit Processes
Internal audit measures and processes have been set up within MEMSCAP to limit significant risk. The main measures and processes of this kind concern the following:
n Innovation
MEMSCAP places particular emphasis on customer satisfaction. Business monitoring carried out by the Management enables the company to take customer needs into account in its offer, in particular in terms of developing added value products and services. The quality control system is applied throughout the design and production process in order to ensure that products and services comply with the relevant protocol. As a result of its acquisitions operations and research efforts, MEMSCAP has access to the world's most innovative technology in the field of MEMS.
General ManagementManagement and Supervision
Business Units• Standard products: groups sensor products and the skin station
• Custom products: groups foundry services and software
Support Departments• Research and development• Finance• Legal Counsel• Corporate Communications• Quality
General ManagementManagement and Supervision
Business Units• Standard products: groups sensor products and the skin station
• Custom products: groups foundry services and software
Support Departments• Research and development• Finance• Legal Counsel• Corporate Communications• Quality
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Moreover, MEMSCAP has also set up a Technical Advisory Board, whose role is to monitor international technological progress and therefore provide the Company's management team with the most up-to-date information possible about rival or new technologies.
n Industrial Property
MEMSCAP holds more than 200 patents and patents pending divided into 77 groups. The Company applies an aggressive policy concerning the filing of patents, supported by close surveillance, in order to protect and ensure respect of its property rights.
n Control Processes at MEMSCAP Subsidiaries
MEMSCAP is the sole shareholder in all its subsidiaries. Legal and operational control of the subsidiaries is carried out via the following:
– An operational director, present at all Group subsidiaries, who reports directly to Jean-Michel Karam,
Chairman and CEO of MEMSCAP, and a financial controller. The latter reports to the MEMSCAP
Chief Financial Officer.
– Detailed monthly performance reports (revenue and profit indicators) by subsidiary, submitted to the
Chairman and the Chief Financial Officer of MEMSCAP.
– Regular management meetings between MEMSCAP General Management and the operational
directors of the various subsidiaries.
n Employees
Employment contracts include clauses governing compliance with general ethical rules at company level, including confidentiality, respect for customers and compliance with principles governing the ownership of results.
n IT Organisation
Decisions made by the Company in terms of information system architecture (technical solutions, clearance, backup procedure, archiving, etc.) aim to limit breakdowns and system alterations.
8.4 ACCOUNTING AND FINANCE INTERNAL AUDIT
8.4.1 Instigators of Internal Audit for Accounting and Finance
The MEMSCAP Finance Department, which reports to the Chief Financial Officer, comprises: n an accounting division, n a human resources division, n a financial controller for each operational unit.
This structure enables the department to set budget objectives and centralise results on a monthly basis and analyse
accounting and financial information in detail. In addition to the organisational measures and internal audit procedures described above, separate internal audit measures
have been set up for the accounting and finance department, to govern accounts, management control and cash management. These measures are described below, as well as the Company's relationship with external auditors.
The Chief Financial Officer is responsible for centralising and submitting all management indicators monitored by the
General Management and Board of Directors.
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8.4.2 Accounting / Finance
MEMSCAP governs its accounts independently. The Accounting Department writes up the accounts, balances the books and draws up the Company's corporate financial statements.
In France, the Company's accounting and financial information is managed using SAP.
8.4.3 Management Control
Every year, an annual budget is drawn up and validated by the Board of Directors. This budget is used to guide the financial performance of each Group process and legal entity.
Monthly reports are compiled on key management indicators along with detailed half-yearly reports, thus enabling the
centralisation and performance evaluation of the various MEMSCAP entities.
8.4.4 Consolidation
The consolidation process is centralised within the MEMSCAP Group. Financial reports from the subsidiaries are centralised in local format and then restated in order to harmonise local-based accounts with the Group's generally accepted financial principles.
The financial reports from each subsidiary are assessed and corrected, if necessary, by the Finance Department prior to
their integration into the consolidated results.
8.4.5 Cash Management
MEMSCAP has adopted a cautious policy in terms of processing extraordinary cash surpluses: these are only invested in money market products. The Company's cash is mainly expressed in euros, US dollars and Norwegian kroner and pooled in leading financial institutions.
Management of financial equilibrium between Group entities is generally carried out via:
– annual cash forecasts, revised on a monthly basis,
– a centralised cash management system headed by the parent company.
8.4.6 External Audit
In accordance with French law, MEMSCAP financial statements are audited by independent statutory auditors. The scope of their work comprises all companies included in the consolidation. Each company undergoes a full audit or a limited analysis, depending on the situation, twice a year.
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