Due to the combination with Gemplus, Gemalto's financial statements haveundergone significant change, due in particular to the accounting treatmentof this transaction in accordance with IFRS 3 "Business Combination". Tosupplement the financial statements presented on an IFRS basis, the Grouppresents the pro forma and adjusted pro forma information described in thetable below.
Pro forma measures
The pro forma income statement for the first half 2006 has been preparedassuming that the combination had taken place as of January 1, 2005 , allowingthe Group to present it in comparison with the first half 2005. The one-off,combination related items are therefore charged to the first half 2005 proforma income statement, so that the first half 2006 income statement onlyreflects the recurring intangible asset amortization charge resulting fromthe Purchase Price Allocation and the additional stock-based compensationcharge.
Adjusted measures exclude certain business combination accountingentries, and expenses directly incurred in connection with the combinationwith Gemplus, that the Group believes are helpful in understanding its pastfinancial performance and its future results. Adjusted financial measures arenot meant to be considered in isolation or as a substitute for comparableIFRS measures, and should be read only in conjunction with condensedconsolidated interim financial statements prepared in accordance with IFRS.Management regularly uses these supplemental adjusted financial measuresinternally to understand, manage and evaluate the business and take operatingdecisions. These adjusted measures are among the primary factors managementuses in planning for and forecasting future periods. Compensation ofexecutives is based in part on the performance of the business based on theseadjusted measures. Adjusted financial measures reflect adjustments based onthe following items, as well as the related income tax effect:
- Amortization of inventory step-up: IFRS 3 "Business Combination"requires Gemalto to value work-in progress and finished goods assumed inconnection with the combination at net realizable value (the estimatedrevenue derived from the future sale of these goods less expected sellingcost). Therefore, the value of this inventory in the books of Gemplus oncombination date was adjusted accordingly (step-up). Thus, subsequent salesof the work-in-progress and finished products carried in Gemplus' inventoryat the time of the combination generate a lower margin than if they weremanufactured after the acquisition, all other factors being equal. Theamortization expense related to this step up is therefore disclosed in theincome statement under a separate line below Cost of Sales. The adjustment,eliminating amortization of inventory step-up, is intended to restore thenormal margin of such sales. The Group believes this adjustment is useful toinvestors as a measure of the ongoing performance of its business.
- Additional stock-based compensation charge: As prescribed by IFRS 2"Share-based payment" and IFRS 3 "Business Combination", vested and unvestedstock options or awards granted by an acquirer in exchange for stock optionsor awards held by employees of the purchased company, or any substantiallyequivalent commitment by the acquirer to assume the obligations of theacquirer with regards to stock options granted to the latter's employees, asis the case for Gemalto under the Combination Agreement, shall be consideredto be part of the purchase price for the acquirer, and the fair value (at theeffective date of the acquisition or merger) of the new (acquirer) awardsshall be included in the purchase price. It leads to increase thecompensation charge related to stock-options granted by Gemplus prior to theacquisition. The adjustment, eliminating the additional stock-basedcompensation charge, is intended to reflect the compensation charge thatGemplus would expense if the company continued to operate on a standalonebasis. The Group believes this adjustment is useful to investors as a measureof the ongoing performance of its business.