Telit Communications PLC
Annual Report 2005

Plain-text annual report

Telit Annual Report 2005 Telit’s WORLD WORLD Telit Communications plc is an international provider of cutting-edge cellular m2m Telit Communications plc is an international provider of cutting-edge cellular m2m (machine-to-machine) technology, and a prominent EVAR (Enhanced Value-Added (machine-to-machine) technology, and a prominent EVAR (Enhanced Value-Added Reseller) of a range of advanced cellular phones and accessories worldwide. Reseller) of a range of advanced cellular phones and accessories worldwide. With R&D facility in Italy and strategic sales offices in Copenhagen, London, Madrid, With R&D facility in Italy and strategic sales offices in Copenhagen, London, Madrid, Milan, Munich, Tel Aviv, Telit works hand-in-hand with 22 distributors in 45 countries. Milan, Munich, Tel Aviv, Telit works hand-in-hand with 22 distributors in 45 countries. Committed to performance and guided by two decades of creative innovation, Telit Committed to performance and guided by two decades of creative innovation, Telit is driven by the highest standards of consistency and reliability. is driven by the highest standards of consistency and reliability. As both a producer and a marketer of advanced cellular technology and products, As both a producer and a marketer of advanced cellular technology and products, Telit Communications is uniquely positioned in the cellular market. One of the few Telit Communications is uniquely positioned in the cellular market. One of the few companies in the industry with full control over the underlying technologies in its companies in the industry with full control over the underlying technologies in its products, Telit owns a large number of valuable patents, and boasts especially strong products, Telit owns a large number of valuable patents, and boasts especially strong in-house technology and development expertise. in-house technology and development expertise. Telit Communications is uniquely positioned in the cellular market by holding full Telit Communications is uniquely positioned in the cellular market by holding full control over its core technology (protocol stack). This mix of technological proficiency control over its core technology (protocol stack). This mix of technological proficiency and marketing know-how enables Telit to effectively penetrate numerous market and marketing know-how enables Telit to effectively penetrate numerous market segments by rapidly adapting existing products to meet market demand. From highly segments by rapidly adapting existing products to meet market demand. From highly advanced wireless modules and customised wireless solutions to stylish cutting-edge advanced wireless modules and customised wireless solutions to stylish cutting-edge handsets, Telit enjoys a reputation for meeting and exceeding customer expectations. handsets, Telit enjoys a reputation for meeting and exceeding customer expectations. Two distinct business units: Two distinct business units: • Wireless Solutions Business Unit. The design, development, manufacture, and • Wireless Solutions Business Unit. The design, development, manufacture, and marketing of a wide range of state-of-the-art cellular communications products marketing of a wide range of state-of-the-art cellular communications products for the m2m (Machine-to-Machine) market. These products enable electronic for the m2m (Machine-to-Machine) market. These products enable electronic devices and equipment manufacturers to use the widely deployed GSM/GPRS devices and equipment manufacturers to use the widely deployed GSM/GPRS cellular infrastructure to relay and accept information without human intervention. cellular infrastructure to relay and accept information without human intervention. • • Enhanced Value Added Reseller (EVAR) Business Unit. The customisation and Enhanced Value Added Reseller (EVAR) Business Unit. The customisation and distribution of ‘Telit’ branded cellular products to mobile operators and to distribution of ‘Telit’ branded cellular products to mobile operators and to independent retailers. independent retailers. Table Of Contents Financial Highlights m2m The Wireless Solutions Business Unit The EVAR Business Unit Chairman's Statement CEO's Review Telit’s Board of Directors Corporate Governance Report on Director's Remuneration Directors’ Report Financials 1 2 4 5 6 6 11 13 15 17 18 Telit Annual Report 2005 00 Making Machines talk. Moderate Forecast CELLULAR M2M MODULE SHIPMENTS World Market, Moderate Forecasts: 2003 to 2010 CAGR (05-10) 33% 62.07 48.93 ) s n o i l l i M ( 37.43 28.20 19.87 14.85 11.52 7.99 ABIresearch, Cellular Machine-to-Machine (M2M) Networks, Published 3Q 2005 Traditionally, M2M dealt with telemetry applications where remote potential is derived from the benefits that users can obtain from sensors interacted with servers over a dedicated wire line link. wireless communication between machines. These include, among However, the introduction of wireless M2M has opened up an others, increased efficiency, timesaving, improved customer infinite number of new applications. Machine-to-Machine orientation and greater flexibility. technology provides the basis for enabling machines, equipment or vehicles to communicate with each other via mobile M2M means automatically and wirelessly transferring information communications networks. from machine to machine. In practical terms, this could be a server within a company that collects or forwards data for • • The drive for cost savings by automating machinery and processing. The term M2M describes the transfer of information asset monitoring control without human intervention. from machines to humans. For example, a vending machine can The need for rapid retrieval of information over reliable inform a member of the service team of a detected malfunction communication networks via SMS. With M2M, companies can monitor plants, check fill • Governmental and regulatory pressure aimed at promoting levels, detect malfunctions, maintain systems or control transport safety (auto telematics), security (surveillance), automatic without any human intervention. Investment in conventional, meter reading (AMR) and e-government (DVBT). wired technologies is not required anymore. M2M users can therefore respond more flexibly thus saving resources and costs. M2M is a long-term, fast growing and high-tech marketplace. M2M applications can now be found in a range of industries and This is confirmed by the fact that there are at least ten times sectors including vending machines, remote reading systems more machines, equipment, vehicles and robots than there are (automated meter reading or AMR), transport and logistics, humans in the world. The need to transfer information efficiently healthcare and security technology. between machines or to humans is extremely high. M2M’s major 03 Telit Annual Report 2005 The Wireless Solutions Business Unit The Wireless Solutions Business Unit Wide Product Range Telit has played a key role since the cellular market revolution in the mid 1990s, helping to pioneer the integration of wireless technologies across a wide range of vertical M2M applications. Today Telit is recognised as one of the industry leaders for providing M2M customers with wireless solutions backed by depth of technology, expertise and support. Telit Makes Machines Talk Telit’s Wireless Solutions Business Unit develops, produces and markets GSM/GPRS modules and solutions for machine-to- machine communication (M2M). Telit’s vision is to become the market leader in the most important vertical M2M market segments. This endeavour is backed up by substantial experience, which spans more than 15 years or 400 man-years in the development of this software platform. Telit markets its M2M modules globally through direct sales offices around Europe as well as through well-known distributors in 45 countries including Arrow, the world’s leading marketing company for electronic components. In the United Kingdom, Telit works with the distribution companies Round Solutions, Sequoia and Spectre. Telit’s main target group includes system integrators that develop various vertical M2M applications and require communications modules. Telit Annual Report 2005 04 Telit delivers a full line of wireless modules based on GSM/GPRS technology and in-house know-how by leveraging M2M standardised interfaces and protocols. With the complete command of its core product technology, Telit provides customers of all sizes with an efficient product development cycle offering flexible, customisable, and cost-effective solutions. At the heart of all Telit M2M solutions lies a proprietary software platform and a comprehensive AT-command interface for communication between applications and modules. Telit wireless modules can be easily applied to vertical application areas such as: • Automatic Meter Reading • Car Telematics • • • • • • Mobile Computing (Mobile workforce automation) • • • Healthcare • Fleet Management and Tracking/Logistics Point of Sale Terminals/Handhelds Security Systems and Personal Tracking Devices Public Transportation and Road Tolling Vending Machines Industrial Processes Information Displays Emergency Communication Systems Telit to your friends The EVAR Business Unit Telit Communications provides a comprehensive range of sales, marketing, customisation and post- sales support services for cellular device manufacturers worldwide. With in-depth market knowledge and in-house technical resources, Telit brands, customises, tests and supports cellular devices from manufacturers worldwide. These manufacturers, mainly Original Equipment Manufacturers (OEMs) and Original Design Manufacturers (ODMs) based in the Asia-Pacific, seek to introduce products into the European market in a cost effective manner. Telit’s proposition offers these manufacturers an attractive option to penetrate European markets in a cost effective manner. Telit’s portfolio of devices covers all market segments from entry level handsets to premium phones, including data accessories such as GPRS and WLAN modems, and data cards. Telit distributes products to cellular operators directly, or works through open market wholesale and retail channels according to the region’s market dynamics. Telit’s EVAR (Enhanced Value-Added Reselling) Business Unit provides manufacturers with several cost-savings and benefits: • Rapid Time-To-Market - Ongoing feedback from Telit’s customers ensures that products are delivered to market only if proven attractive, well-adapted and suitably priced. • Development and Localization - Telit offers an end-to-end solution backed by in-house technological expertise, providing technical and testing services. • After Sales Support - Telit offers end-to-end after sales service, saving manufacturers the time and expenses associated with setting up a service infrastructure. • Marketing and Sales Support - Telit’s central location and contacts with operators and the open market enables quick penetration of new products to the European and Israeli markets. Added Value Telit offers operators enhanced competitiveness and added value by branding, testing, developing, customising and supporting each device it distributes. The EVAR Business Unit 05 Telit Annual Report 2005 Chairman’s Statement Chief Executive’s Statement and Review We are pleased to present Telit Communications Introduction PLC's first Annual Report since the Company’s admission to trading on the AIM market of the London Stock Exchange plc in April 2005. I am delighted to be able to inform shareholders that, in line with the indications we provided in our preliminary results on 1 March 2006, the results for the year demonstrate significant improvement in the Company’s performance. We have achieved significant growth, especially in the second half of the year, during which we have won several important new contracts, both in the Wireless Solutions as well as in the EVAR Business Units. Our technical innovation and focus on R&D has ensured that we remain at the forefront of our industry. We look forward to another year of continued growth. Avigdor Kelner Chairman 21 June 2006 Telit Annual Report 2005 06 We are pleased to present Telit Communications PLC’s preliminary report for the year ended 31 December 2005, and I am delighted to be able to inform shareholders that we have achieved strong growth, especially in the second half of the year. Corporate governance Telit has established itself as a UK company with high levels of corporate governance, financial reporting and controls, and investor relations. At Telit, we have put in place a professional and experienced board, with two independent directors as well as remuneration and audit committees. We report under International Financial Reporting Standards, and we have recently launched a new investor relations website at www.telit.com. Financial results In line with the indications we provided in our preliminary results on 1 March 2006, the results for the year demonstrate significant improvement in the Company’s performance. Sales reached €86.4 million for the full year, an increase of 16%. Gross profit increased 33% to €15.1 million with the gross profit margin reaching a level of 17.5%, an increase of 15% against 2004. These improvements in sales and gross profit margin have led to a 44% decrease in operating losses and in pre-tax loss. The Company made significant progress during the second Avigdor Kelner Chairman Oozi Cats Chief Executive Officer half of 2005 by achieving a 36% increase in turnover and a 77% decrease in operating loss from €1.2 million to €0.2 million compared to the first half of the year. was launched exclusively. We maintained our ongoing sales to Vodafone, Eplus, KPN and Telcel Mexico and have introduced a new UMTS model that was launched by Telecom Italia Mobile (TIM). We believe that more products will follow in the future. EVAR Business Unit During 2005 the Company increased its number of suppliers The EVAR Business Unit is currently Telit’s main revenue and from three in 2004 to seven in 2005. New agreements with profit generator. The EVAR Business Unit develops software and hardware in its laboratories located in Trieste, Italy and Tel Aviv, Israel for integration into cellular phones as well as other cellular-communication- based devices. We offer a comprehensive product portfolio that includes several different types of mobile handsets, including CDMA, GSM, Smart phones and UMTS end user equipment. cellular equipment suppliers from the Far East, including Bellwave, Amoi and Pantech & Curitel will enable us to broaden our line of products, as well as to offer a full range of devices to the market from entry level to UMTS phones. In addition, we have maintained our strong relationship with Curitel, a Korean supplier, in the CDMA market and have expanded our cooperation with a new line of UMTS devices. Telit incorporates its own comprehensive design and then New supplier agreements have allowed Telit's EVAR to introduce distributes the products to mobile operators and independent a total of twelve new handsets this year compared with the five resellers under the well-known brand Telit. handsets that we introduced in 2004. During 2005, Branded EVAR sales increased by approximately Our sales in the open market in Italy were generated by distribution 11% compared to 2004. In addition to the increase in sales, the agreements with some of the largest distributors in Italy. We gross profit margin increased by 20% reaching a level of 16% in have continued our productive relationship with ADR throughout 2005. These results have led to an 11% increase in operating profits for the Branded EVAR Business Unit compared to the corresponding period last year. We have significantly increased sales to operators, particularly in Israel and Italy, and during the second half of 2005 this division increased sales by 20% compared to the first half. Italy, and new agreements were signed with “Rilcla” in Italy (a retail chain with 2,000 stores), “Merchantone Uno” (an Italian retail chain), “APF” in Slovenia (a distributor) and “Davon Business SL” in Spain. As a result of these sales activities, we expect to be able to sustain our growth rates in this highly profitable and cash generative business. Customer satisfaction with our Company’s products is encouraging, and we expect sales to increase as customers Sales to Italian operator Wind continued with a new model that experience Telit’s quality of service. 07 Telit Annual Report 2005 Chief Executive’s Statement and Review Wireless Solutions Business Unit leaded process. In 2005, the Company established a new The development of the Wireless Solutions Business Unit is the production line at Celestica Rajecko for RoHS (European Union key to our future value creation, and we have invested heavily Restriction of Hazardous Substances) processes. The focus of in it. The Wireless Solutions Business Unit conducts intensive research and development to enable the Company to offer an advanced and diverse portfolio of products. We have a full line of machine- to-machine (m2m) GSM/GPRS products based on our proprietary production activities in 2005 was the transition of production process from leaded to lead-free. This activity was completed successfully and all new production starting from Q1/06 will be based on a lead-free (RoHS compliant) process (EU Directive 2002/95/EG). technology. Our data products are suitable for a variety of The Company uses other EMS facilities for prototyping and small applications, including remote metering and monitoring, vending production series. machines, security systems, fleet management and point of sales terminals. Celestica is a world leader in the delivery of innovative EMS. Celestica operates a highly sophisticated global manufacturing The Wireless Solutions division achieved sales growth of 47% network with operations in Asia, Europe and the Americas, compared to 2004, and this has led to a 24% decrease in operating providing a broad range of integrated services to leading original loss. During the second half of 2005 this division increased sales by 150%, leading to a 53% decrease in operating loss compared to the first half of the year. equipment manufacturers (OEMs) across a variety of industries. Celestica's expertise in quality, technology and supply chain management and leadership in the global deployment of Lean principles, enable the company to provide competitive advantage to our customers by improving time-to-market, scalability and Performance during 2005, along with our reinforced focus on manufacturing efficiency. the m2m business, has positioned Telit as a leading supplier in the Italian market. Our sales growth exceeds the industry’s (GSM/GPRS) growth, which as indicated in ABI research grew only by 6.7% in 2005 while our sales grew by 47%. Our product offering that contained two products in 2004 has been diversified into four families of products offering seven products during 2005. Our products are cost optimised, scalable solutions offering the latest technology from leading suppliers Celestica is our main contract manufacturer (EMS), supplying us with finished goods (turn-key) according to our manufacturing forecast and purchase orders. Telit renewed its ISO9001: 2000 certification in November 2005, for the 3rd consecutive year. This certification covers Telit's business operations related to: development, sales and delivery of wireless solutions m2m applications and EVAR activities. such as Infineon and SiRF. Our customers benefit from our IPR, Furthermore, to ensure that overall quality standards are met GPRS Platform and protocol stack and our fully furnished test and maintained, Telit uses ISO-certified component suppliers and laboratory for CE and R&TTE measurements that support them. works with Celestica, in Rajecko, Czech Republic for all of its Telit outsources the manufacturing of its products utilising production. The Celestica facility is ISO-certified. electronics manufacturing services (EMS). In 2005 the major Telit received the approval of two patent applications filed in EMS-manufactured product has been Solectron, based on regular 2004; these patents enhance the Company’s IP portfolio. Telit Annual Report 2005 08 Chief Executive’s Statement and Review We offer our customers a competitive edge by reducing solution cards to cellular operators Wind (Italy) and KPN (Netherlands), cost and optimising performance of their applications. We offer and signed agreements with Base (Belgium) and Eplus (Germany) a wide variety of features and services such as Quad-band for future sales. GSM/GPRS technology, unique BGA mounted module, application engineering for design-in support and complete application development, technical approvals including FTA and CE preparations and co-ordination, customisation ser vices: Integration of specific customer features in the product, support hotline for feedback on customers’ requests within 48 hours worldwide, full control of production line, fast hardware customisation as well as full project development chain. To continue the Company’s successful growth within the cellular m2m market, we implemented a systematic product and sales strategy that converts opportunities into customers within a six to twelve months sales cycle. The Company currently utilises direct and indirect distribution channels to reach the market. In addition to setting up our own sales offices in Copenhagen, Our commitment to global marketing was demonstrated by our participation in international exhibitions including the 3GSM World Congress in Cannes, France and CeBit 2005 in Hanover, Germany. By displaying Telit’s portfolio of products in this way, we have generated a network of connections, and have developed processes and customisations for future customers, which we expect to yield significant benefits in terms of increased sales over the next two years. The potential growth of the Wireless Solutions Business Unit depends on our continuing successful development of state of the art products as well as on securing the necessary distribution agreements as well as our direct sales. At this point, our team of engineers are supporting over 500 new customer designs in London, Madrid, Milan, Munich, Rome and Tel Aviv, we have progress. extended our global distribution network to include most relevant component distributors as well as product specialists for cellular solutions covering 45 countries to date: • Microdis covering Turkey, Poland, Czech Republic, Slovakia, Hungary, Baltic States and CIS countries, We are pleased to report a number of developments, which we believe will significantly increase future sales over the next two years. These developments include: • Winning contracts with IBM for the development and supply of a GPRS based communications solution as part of an • Azzurri Technologies covering Germany, Austria and AMR project. The Telit designed AMR solution allows for Switzerland, • • Sequoia covering UK and Ireland Elektroinvest covering Bulgaria • Arrow, global market leader in electronic component distribution - a new contract was signed with Arrow Nordic automated meter readings whereby energy providers will be able to read their customers’ electricity and gas meters through m2m (”machine to machine”) wireless communication. Telit’s GPRS modules will be integrated into electricity meters in households in Europe as part of the AMR rollout within the utility sector. covering the Nordic and Baltic countries. Due to the extensive R&D necessary for the project, Telit’s • Glynn - a new contract was signed covering Australia and New Zealand. module will be an integral part of the design and functionality of the AMR device. Shipments are planned for March 2006 and we have plans to supply around 250,000 units within the next New customers were acquired and we supplied wireless data 2 years. 09 Telit Annual Report 2005 Chief Executive’s Statement and Review • Selection by DKTS, a leading systems integrator, to supply development of value-added information technology services GPRS modules for the connection of cash registers in Serbia owned by IRI and Ferrovie dello Stato. and Montenegro. IR Electronic, an Arrow company, will act as Telit's distribution partner for this transaction. We expect the Company's participation in this new application field to lead to significant future sales. Board changes In September 2005, Avigdor Kelner was appointed to replace Yitzhak Apeloig as Chairman of the Board. Mr. Kelner’s vast • Signing a Memorandum of Understanding with the European experience and contacts within Telit’s marketplace is a great Commission's Emergency Call initiative ("eCall") in order to resource for our Group. Mr Kelner is a partner of Shrem, Fudim, secure an EU-wide commitment to creating an in-vehicle Kelner & Co. and Chairman and CEO of Polar Investments Ltd., emergency call service to help reduce the number of fatalities as well as Urdan Industries. Mr Kelner co-founded Telit and in and accidents on European roads. An on-board GSM-based his career spanning over 30 years, managed numerous global emergency call system can significantly shorten the time it mergers and acquisitions and acquired vast experience and takes emergency services to be deployed. The consequence expertise in the communications, technology, industrial and real of the eCall campaign is that all cars sold from 2009 will be estate sectors. equipped with GPRS modules. Telit will be at the forefront of this campaign and we will be able to position ourselves as a key supplier. Also in September 2005, Avi Israel was appointed to the Board as a non-executive Director. Mr. Israel, with his strong background in the industry and experience with public companies, is making The Company has appointed Chicco Testa as a member of the a significant contribution to Telit. Mr. Israel is currently Vice Board of Directors of our Italian subsidiary. Mr. Testa served as President and Chief Financial Officer of Polar Investments Ltd. Chairman of the Board at ENEL SpA (the Italian provider of Previously Mr. Israel was employed at Formula Systems Group, power and gas) and was a founder and member of the Board a NASDAQ traded Company. of Directors at WIND SpA. Mr. Testa is currently a member of the Board of Directors of Rothschild SpA, Executive President Outlook at Roma Metropolitane SpA (the company building the new Telit is positioned within strong growth markets and, over the underground lines in Rome), Vice Chairman of the World Energy past year, we have achieved significant increases in turnover whilst Council and Senior Partner of the Franco Bernabe Group, which dramatically reducing operating losses. owns several investments in the IT sector. We expect the profitable Branded EVAR Business Unit to The Company has appointed Tommaso Pompei as Chairman of continue its steady growth over the next financial year and are the Italian Subsidiary. Tommaso Pompei is the CEO of Tiscali, the confident that losses from the Wireless Solutions Business Unit main independent European Internet Communication Company, will further reduce over the period. since October 31st 2005. Since 1997 Mr. Pompei was CEO at Wind, the main alternative operator to Telecom Italia on the Italian TLC market, guiding the company from the start-up to the sale. Prior to Wind, he had been CEO of Pronto Italia – which later merged to become Omnitel Pronto Italia and today Vodafone Italia - and of Sigma, a company specialised in the 21 June 2006 Oozi Cats Chief Executive Officer Telit Annual Report 2005 10 Telit’s Board of Directors Avigdor Kelner, Chairman Oozi Cats, Director and Chief Executive Officer Inbal Barak-Etzion, Director and Financial Director David Charles Denholm Hobley, Non Executive Director Avigdor Kelner, Chairman A partner in Shrem, Fudim, Kelner & Co., Mr. Kelner is Chairman and CEO of Polar Investments Ltd. and of Urdan Industries Ltd. For over three decades, Mr. Kelner has been involved in investments in Israel and overseas, and has acquired vast experience and expertise in industrial, real estate communication and technology Haifa, and attended special courses in Finance at the University of Massachusetts and Bentley College. Inbal Barak-Etzion, Director and Financial Director Ms. Barak-Etzion has been acting as Chief Financial Officer of the projects. Prior to joining SFK in 1994, Mr. Kelner held senior Telit Communications since January 2002. Prior to this position, management positions in the Clal Group, including CEO of from 1999 to 2002, she was an Executive of New Pharm Azorim Investment Development & Construction Ltd. (1988- Drugstores Ltd and April Cosmetics Chain Ltd, leading retailers, 1993). Under Mr. Kelner’s leadership, Azorim became a profitable with more than 60 stores throughout Israel, where she held the division of Clal. Mr. Kelner is dedicated to serving the community, position of Chief Financial Officer from 2000. Ms Barak-Etzion acting as Chairman of the Board of Trustees -Emek Yezreel holds a BA in Business Administration and Accounting from the College, member of the Board of Governors of the Ben-Gurion College of Management Academic Studies located in Rishon University in Beer Sheva, and previously a member of the Board LeZion, Israel's leading academic college, and is a certified Public of Governors of the Weizmann Institute of Science. Accountant. She originally trained as an accountant at KPMG in Mr. Kelner holds a B.A. in Economics and Statistics and an MBA Israel. from the Hebrew University in Jerusalem and is a graduate of the Harvard University Management Program. Mr. Kelner is a Colonel (res.) in the Israeli Army. Oozi Cats, Director and Chief Executive Officer Mr. Cats has 18 years experience creating and leading business David Charles Denholm Hobley, Independent Non Executive Director Mr. Hobley is a Fellow of the Institute of Chartered Accountants in England and Wales, having qualified at Deloitte and subsequently employed at Coopers and Lybrand Geneva. Since 1971, he has ventures. Mr. Cats co-founded the Telit Group in 2000, and has worked in investment banking firstly with SG Warburg & Co. managed it since its inception. From 1994 to 1999 Mr. Cats Ltd. (later SBC Warburg) for some 25 years and then since 1998 founded and managed Auto Depot Ltd, the Israeli mass with Deutsche Bank, London. In his banking career, he has merchandising chain for vehicle supplies and services. From 1997 undertaken significant M&A assignments, provided advice to to 2002 Mr. Cats acted as a director at HaMashbir Fashion Ltd, Central Banks and Governments and undertaken many IPOs an Israeli mass merchandising public company, traded on the Tel and privatisations. He is an independent director of Orange SA Aviv Stock Exchange. Mr. Cats has studied at the University of and of several Orange Group companies. 11 Telit Annual Report 2005 Telit’s Board of Directors Andrea Giorgio Mandel-Mantello, Non Executive Director Avi Israel, Non Executive Director Tommaso Pompei, Director of Italian Subsidiary Chicco Testa, Director in the Italian Subsidiary Andrea Giorgio Mandel-Mantello, Independent Non Executive Director Mr. Mandel-Mantello is the founding partner of AdviCorp PLC, a UK investment Bank regulated by the UK Financial Services Authority. Prior to his work at AdviCorp, Mr. Mandel-Mantello spent 9 years at SBC Warburg ("SBCW" now known as UBS) Applicom. Mr. Israel holds an EMBA from Bar Ilan University, a BA in Economics & Accounting from Bar Ilan University, and is also a Certified Public Accountant (Israel). Tommaso Pompei, Director of Italian Subsidiary Tommaso Pompei is the CEO of Tiscali, the main independent in London in various management positions including Executive European Internet Communication Company, since October Director of SBC Warburg, member of the Board of SBC Warburg 31st 2005. Previously he has been - since 1997 - CEO in Wind, Italia SIM S.p.A., and Country Head for Israel. Prior to working the main alternative operator to Telecom Italia on the Italian TLC at SBCW, Mr. Mandel-Mantello spent 2 years at Chemical Bank market, guiding the company from the start-up to the sale. Before International Ltd. In London and 3 years at Banca Nazionale that, he had been CEO of Pronto Italia - later merged to become dell'Agricoltura in Rome. Mr. Mandel-Mantello is a director of Omnitel Pronto Italia and today Vodafone Italia - and of Sigma, Coraline S.p.A., a company which has recently acquired the a company specialized in the development of value-added business of Frette S.p.A. Italy's leading producer and retailer of information technology services owned by IRI and Ferrovie dello. Home Ware; he is a director of MOTO S.p.A. a joint venture in the motorway restaurants business Compass Group PLC and Cremonini S.p.A.; he is a director of B.O.S. Better On Line systems, Chicco Testa, Director in the Italian Subsidiary Born in Italy in 1952, Chicco Testa has an important professional a Nasdaq listed Israeli company involved in VoIP and enterprise background. Among his several experiences, between 1996 and solutions. He holds a Bachelor degree in Economics and Political 2002 Chicco Testa was Chairman of the Board at ENEL S.p.A. Science from Yale University. Avi Israel, Non Executive Director The Vice President of Polar investments, Mr. Israel has significant (the Italian provider of power and gas) and founder and member of the Board of Directors at WIND S.p.A. Chicco Testa is actually Member of the Board of Rothschild S.p.A, Executive President at Roma Metropolitane S.p.A (the company realizing the new experience in US and European financial markets, and is active Underground lines in Rome), Vice Chairman of the World Energy in a number of Polar Investments portfolio companies, holding Council and Senior Partner at Franco Bernabè Group, which Director-level positions. Previously, he served as Vice President owns several participations in the IT sector. M&A for Matrix IT, and Vice President Finance and CFO for New Telit Annual Report 2005 12 Corporate Governance Introduction Telit Communications PLC was listed on the AIM Market operated by the London Stock Exchange on 4 April 2005. Although the rules of AIM do not require the Company to comply with the Combined Code on Corporate Governance (”the Code”), the controls and for reviewing the effectiveness of the Company's systems of internal control. Remuneration Committee The Remuneration Committee consists of Andrea Mandel- Company fully supports the principles set out in the Code and Mantello, Chairman, David Hobley and Avigdor Kelner, and meets will attempt to comply wherever appropriate, given the Company's at least once a year. The Remuneration Committee has a size, the constitution of the Board and the resources available primary responsibility to review the performance of the Company's to the Company. Details are provided below of how the Company executive directors and senior employees and to set their applies those parts of the Code, which it believes to be appropriate. remuneration and other terms of employment. The remuneration Directors The Board of Directors comprises two Executive Directors, two independent Non-executive Directors, and two Non-executive Directors nominated by the majority shareholder of the Company, committee is also responsible for administering the employee share option scheme. Shareholder relations The Company meets with its institutional shareholders and Polar Investments Ltd., one of whom is Chairman. analysts from time to time and will use the AGM to encourage The Board generally meets a minimum of once every quarter communication with private shareholders. In addition, the Company and receives a Board pack comprising a report from senior intends to facilitate communication with shareholders via the management together with any other material deemed necessary annual report and accounts, interim statement, press releases as for the Board to discharge its duties. It is the Board’s responsibility required during the ordinary course of business and the Company for formulating, reviewing and approving the Group’s strategy, web site (www.telit.com). budgets, major items of expenditure and acquisitions. Audit Committee The Audit Committee consists of David Hobley, Chairman, Going concern The directors have satisfied themselves that the Company and Group has adequate resources to continue in operational Andrea Mandel-Mantello and Inbal Barak-Etzion and meets at existence for the foreseeable future, and for this reason the least twice a year. The Audit Committee is primarily responsible financial statements are prepared on a going concern basis. for ensuring that the financial performance of the Company is properly measured and reported on, for reviewing reports from the auditors relating to the Company's accounting and internal Internal control The Board is responsible for the system of internal control and 13 Telit Annual Report 2005 Corporate Governance for reviewing its effectiveness. Such systems are designed to manage rather than eliminate risks and can provide only reasonable and not absolute assurance against material misstatement or loss. Each year, on behalf of the Board, the Audit Committee reviews the effectiveness of these systems. This is achieved primarily by considering the risks potentially affecting the Group and from discussions with the external auditors. Each year, the Group is subject to internal audit, the results of which are presented to the Audit Committee. A comprehensive budgeting process is completed once a year and is reviewed and approved by the Board. The Group’s results, as compared against budget, are reported to the Board on a quarterly basis and discussed in detail at each meeting of the Board. The Group maintains appropriate insurance cover in respect of any legal actions against the Directors as well as against material loss or claims against the Group and reviews the adequacy of the cover regularly. The Company has adopted a code for dealings in its shares by Directors and senior employees who are appropriate for an AIM-quoted company. On behalf of the Board, 21 June 2006 Inbal Barak-Etzion Director Telit Annual Report 2005 14 Report on Director’s Remuneration The remuneration committee is headed by Andrea Mandel- Oozi Cats and Inbal Barak-Etzion are each engaged pursuant Mantello and also comprises Avigdor Kelner and David Hobley. to letters of appointment with the Company dated 29 March Remuneration policy The remuneration packages of directors and senior managers are structured so as to reward them on the basis of their 2005, terminable by either the Company or the director on 6 months' notice except in certain specific circumstances where short notice can be given by the Company. achievements and responsibilities, and to encourage them to David Hobley and Andrea Mandel Mantello were appointed remain with the Company for the long-term benefit of pursuant to letters of appointment with the Company dated 29 shareholders. The main components of these remuneration March 2005, terminable on 6 months' rolling notice. packages are: • Basic salary: An individual’s salary is reviewed and determined Avi Israel was appointed as a director on 16 September 2005. • • by the committee, taking into account his additional incentives and to align their interests within the Group. Service contracts: No service contracts have notice periods of more than six months. Bonus arrangements: The Company operates a discretionary bonus scheme and the directors have a right to participate in any bonus arrangement. The Remuneration Committee will determine bonuses for executive directors. • Pension arrangements: Except for Inbal Barak-Etzion, who is covered for retirement, death or disability through insurance (as is customary in Israel), none of the directors receives any pension benefits. The services of the directors are provided to the Group as follows: Avigdor Kelner was appointed as a director and Chairman of the Board on 30 September 2005. Salary and fees Benefit in kind Annual bonus Total 2005 Total 2004 Executive Avigdor Kelner Oozi Cats Yitzhak Apeloig Inbal Barak-Etzion Non executive David Hobley Andrea Mandel-Mantello Avi Israel Total - 372 144 101 35 35 12 - 22 - 7 - - - - 300 42 40 - - - - 694 186 148 35 35 12 - 405 144 109 - - - 699 29 382 1,110 658 21 June 2006 Andrea Mandel-Mantello Chairman of the Remuneration Committee 15 Telit Annual Report 2005 Directors’ Report The directors submit their report and the financial statements 7. Under the terms of the Share Purchase Deed, dated 24 of the Group for the period ended 31 December 2005. March 2005, the Company allotted 3,883,925 ordinary Incorporation and admission onto the AIM Market shares of 1p each to certain officers and directors of the Group, in consideration for their waiver of options held by them over shares in Dai Telecom Ltd. and Dai Telecom Holdings (2000) Ltd. Pursuant to the Share Purchase Deed, 1. The Company was incorporated on 30 November 2004 under certain conditions, Polar Investments Ltd, the parent with a share capital of £50,000 divided into 50,000 ordinary company of the Company, has a call option for no shares of £1 each of which two shares were in issue. consideration, in respect of part of such shares issued to 2. On 22 December 2004 the subscriber shares were transferred officers and directors, in the event that the officers and to Polar Industries Ltd in consideration of that company’s directors ceases to hold office within the Group. undertaking to pay up such shares in full. 3. On 17 February 2005 the Company allotted 49,499 ordinary shares of £1 each to Polar Investments Ltd and 499 Ordinary Share options On 30 September 2005 the employees of Dai Telecom and Telit shares of £1 each to Polar Industries Ltd. Italy were granted options to purchase approximately 5 percent 4. On 24 March 2005, 499 ordinary shares of £1 each were of the Company's issued and outstanding shares at an exercise transferred from Polar Industries Ltd to Polar Investments price of £1.40. The options vest in four equal instalments starting Ltd. from the date of grant, through to 30 September 2009. The 5. On 24 March 2005 the Company passed an ordinary options expire within five years. resolution to sub-divide the issued authorised ordinary shares of £1 each in the capital of the Company into 100 shares of 1p each, and an ordinary resolution to increase the Review of business and future developments A full business review is given within the Chief Executive Officer’s authorised share capital of the Company to £ 800,000 statement on pages 6 to 10. divided into 80,000,000 shares of lp each. 6. Pursuant to the Share Purchase Deed dated 24 March 2005, the Company issued to its parent company - Polar Investments Ltd, 17,901,785 ordinary shares of 1p each in the capital of Dividends The Company is unable to pay a dividend in respect of the the Company. period. Telit Annual Report 2005 16 Directors’ Report Directors The following directors have held office during the year: Number of shares Percentage of issued Yizhak Apeloig (appointed 29 March 2005; resigned New Star Asset Management 2,749,848 30 September 2005) (New Star Hedge Fund) Avigdor Kelner (appointed 30 September 2005) Oozi Cats Oozi Catz (appointed 29 March 2005) Chase Nominees Limited 2,700,357 1,528,609 Polar Investments Limited 22,556,685 52.20% 6.36% 6.25% 3.53% Inbal Barak-Etzion (appointed 29 March 2005) David Hobley (appointed 29 March 2005) Andra Mandel-Mantello (appointed 29 March 2005) Avi Israel (appointed 16 September 2005) Supplier payment policy The Group does not operate a standard code in respect of payments to suppliers. It has due regard to the payment terms of suppliers and generally settles all undisputed accounts within Directors'- interests in shares and share options 60 days of the date of invoice, except where different arrangements At the balance sheet date Following Admission Number of ordinary shares Percentage of ordinary share capital Number of ordinary shares capital Percentage of ordinary share 401,785 2,700,357 267,857 15,000 nil nil nil 0.93% 6.25% 0.62% 0.03% - - - 401,785 2,142,857 267,857 0.93% 4.96% 0.62% nil nil nil nil - - - - Directors Yizhak Apeloig Oozi Cats* Inbal Barak-Etzion** David Hobley Andrea Mandel- Mantello Avigdor Kelner Avi Israel * of the Ordinary Shares held by Mr Cats, 535,714 are subject to a call option by Polar Investments Ltd if Mr Cats ceases to be CEO of the Group prior to 30 December 2006 and 267,857 are subject to the call option if Mr Cats ceases to be employed by the Group after 30 December 2006 but before 30 December 2008. ** of the shares held by Ms Barak-Etzion, two thirds are subject to a call option by Polar Investments Ltd if Ms Barak-Etzion ceases to be employed by the Group before 30 December 2006, and one third are subject to the call option if Ms Barak-Etzion ceases to be employed by the Group after 30 December 2006 but before 30 December 2008. Substantial shareholdings At 19 May 2006 the Company has been informed of the following interests of 3% or more in its ordinary shares of 1p each in issue at that date: have been agreed with suppliers. At 31 December 2005, the Group had an average of 75 days outstanding to EVAR creditors and an average of 30 days outstanding to M2M creditors, a total average of 67 days outstanding to creditors. Auditors Baker Tilly have resigned as auditors of the Company, effective as of the date of the adoption by the shareholders of the financial statements, and Deloitte have agreed to offer themselves for appointment as auditors of the Company. 21 June 2006 Inbal Barak-Etzion Director 17 Telit Annual Report 2005 Telit Communications PLC DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards. Company law requires the directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. a. b. c. Select suitable accounting policies and then apply these consistently; Make judgments and estimates that are reasonable and prudent; State whether applicable accounting standards have been followed, subject to any material changes disclosed and explained in the financial statements; d. Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the requirements of the Companies Act 1985. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities 18 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF TELIT COMMUNICATIONS PLC We have audited the financial statements on pages 20 to 48. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the Chief Executive’s Statement, Directors’ Report, Remuneration Report and Report of the Directors on Corporate Governance. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view, in accordance with International Financial Reporting Standards, of the state of the Group’s and Company’s affairs as at 31 December 2005 and of the Group’s loss for the year then ended and have been properly prepared in accordance with the Companies Act 1985. BAKER TILLY Registered Auditor Chartered Accountants 2 Bloomsbury Street, London WC1B 3ST 21 June 2006 19 Telit Communications PLC CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Revenues Cost of sales Gross profit Research and development expenses Selling and marketing expenses General and administrative expenses Operating loss Financial costs, net Operating loss after financial expenses, net Other income (Loss) income before income taxes Income taxes (Loss) income after income taxes Share of results of associate Net (loss) income for the year from continuing operations Loss for the year from discontinued operations 7 (Loss) income for the year Basic (loss) earnings per share from continued operation Notes 2005 €’000 1 2 3 6 5 86,444 71,331 ____________ 15,113 (3,914) (5,293) (7,372) ____________ (1,466) (282) ____________ (1,748) 389 ____________ (1,359) (1,338) ____________ (2,697) 2004 €’000 74,522 63,174 _________ 11,348 (4,201) (2,143) (7,602) _________ (2,598) (650) _________ (3,248) 12,914 __________ 9,666 (327) __________ 9,339 (164) ____________ (321) __________ (2,861) 9,018 (1,306) ___________ (4,167) ========== (596) _________ 8,422 ======== (7.76) 50.38 Basic loss per share from discontinued operation (3.54) (3.33) Basic (loss) earnings per share 8 Diluted (loss) earnings per share from continued operation (11.3) ========== (7.76) 47.05 ======== 50.38 Diluted (loss) earnings per share from discontinued operations (3.54) (3.33) Diluted (loss) earnings per share (11.3) ========== 47.05 ======== 20 Telit Communications PLC CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2005 Notes 2005 €’000 2004 €’000 ASSETS Current assets Cash and cash equivalents Trade accounts receivable Receivables and other current assets Inventory Non-current assets Investment in associate Deferred expenses Property, plant and equipment Intangible assets Deferred income tax asset LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings from banks and other lenders Trade accounts payable Payables and other current liabilities Non current liabilities Loan from parent company Retirement benefit costs Provisions and other long-term liabilities Shareholders’ equity Share capital Other reserve Share premium Translation adjustments Retained earnings 9 9 10 11 12 13 14 15 16 15 18 19 17,207 33,286 4,357 12,030 _________ 66,880 -------------- 649 73 1,414 616 3,696 _________ 6,448 ------------- 73,328 ======== 22,823 8,955 4,368 _________ 36,146 ------------- 3,054 856 106 __________ 4,016 --------------- 627 (260) 29,651 (284) 3,432 __________ 33,166 --------------- 73,328 ========= 582 34,777 8,400 6,093 __________ 49,852 --------------- 746 46 1,558 86 3,687 __________ 6,123 --------------- 55,975 ========= 28,022 6,297 9,633 __________ 43,952 --------------- 4,121 1,591 159 __________ 5,871 --------------- - - - (915) 7,067 __________ 6,152 --------------- 55,975 ========= The financial statements on pages 20 to 48 were approved by the board and authorised for issue on 21 June and are signed on its behalf by: 2006 Oozi Cats Director 21 2005 €’000 15,781 - 145 348 __________ 16,274 --------------- 11,426 __________ 11,426 27,700 ========= 65 621 __________ 686 - --------------- 627 (260) 29,651 631 (3,635) __________ 27,014 --------------- 27,700 ========= Telit Communications PLC COMPANY BALANCE SHEET AT 31 DECEMBER 2005 Notes ASSETS Current assets Cash and cash equivalents Trade accounts receivable Receivables and other current assets Related parties Non-current assets Investments LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Trade accounts payable Payables and other current liabilities Shareholders’ equity Share capital Other reserve Share premium Translation adjustments Retained earnings 9 9 11 14 18 19 The financial statements on pages 20 to 48 were approved by the board and authorised for issue on 21 June 2006 and are signed on its behalf by: Oozi Cats Director 22 Telit Communications PLC CONSOLIDATED CASH-FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 CASH FLOWS – OPERATING ACTIVITIES Net (loss) income for the year Adjustments to reconcile loss to net cash provided by (used in) continuing operating activities (Appendix A) Net cash used in continuing operating activities Net cash used in continuing discontinued activities Net cash used in operating activities CASH FLOWS - INVESTING ACTIVITIES Additions to fixed assets Proceeds from disposal of fixed assets Additions to financial assets Investment in associate Addition to intangible assets Additions to long-term receivable Sales of financial assets Net cash used in investing activities CASH FLOWS - FINANCING ACTIVITIES Short-term borrowings from banks and others, net Proceeds from issuance of share capital Loan from parent company Proceeds from issuance of capital Net cash provided by financing activities Effect of exchange rate differences Increase (decrease) in cash and cash equivalents Cash and cash equivalents-balance at beginning of year Cash and cash equivalents-balance at end of year Supplemental disclosure of cash flow information: Interest paid Income taxes paid 23 2005 €’000 ___________ 2004 €’000 _________ (4,167) 8,422 443 ___________ (43,366) __________ (3,724) (34,944) (1,301) ___________ (5,025) ----------------- (431) 41 (190) - (622) (27) 211 ___________ (1,018) ----------------- (7,772) 368 - 29,651 ___________ 22,247 ----------------- 421 ----------------- ___________ 16,625 582 ___________ (429) __________ (35,373) --------------- (298) 215 - (409) (10) - - __________ (502) --------------- 26,234 - 4,121 - __________ 30,355 --------------- (1) --------------- __________ (5,521) 6,103 __________ 17,207 ========== 582 ========= 1,029 ========== 1,240 ========== 503 ========= 609 ========= Telit Communications PLC CONSOLIDATED CASH-FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Appendix A - Adjustments to reconcile net income to net cash provided by operating activities 2005 €’000 ___________ 2004 €’000 __________ Income and expenses not involving cash flows: Depreciation and amortisation Deferred taxes Other income Write-off of long term loan (Decrease) increase in liability for retirement benefit costs Capital fund to employees (Increase) decrease in deposit designated for investment in associate Equity in results of associate Discontinued operations Income from financial assets 661 9 (2) - (735) 532 (24) 164 1,306 (21) 665 (5) (3) (12,090) 33 - 3 321 596 - Changes in assets and liabilities: Decrease (increase) in trade receivables Decrease (increase) in receivables and other current assets Increase in inventory Increase (decrease) in trade payables Decrease in other current liabilities 3,439 4,039 (5,952) 2,681 (5,654) __________ 443 ========= (24,685) (685) (1,889) (4,563) (1,064) __________ (43,366) ========= 24 Telit Communications PLC STATEMENT OF CHANGES IN EQUITY 31 DECEMBER 2005 Year ended 31 December 2005 Share capital €’000 _______ - Other reserve €’000 ______ - Share premium, Net €’000 ________ - Translation adjustment Retained earnings Total €’000 __________ (915) €’000 __________ 7,067 €’000 ________ 6,152 1 January 2005 Reverse acquisition capital adjustment - Issue of share capital 388 239 - - Initial offering public Translation adjustments, net Compensation employee Options plan for Loss for the year 31 December 2005 (260) - - - - - - 29,651 - - - - - 631 - - - - (260) 388 29,890 631 - 532 532 - ______ - ______ - ________ - _________ (4,167) _________ (4,167) ________ 627 ====== (260) ====== ======= 29,651 (284) ========= ====== 3,432 33,166 ======= Year ended 31 December 2004 Share capital €’000 ________ Translation adjustment €’000 _________ Retained earnings €’000 _________ Total €’000 _________ 1 January 2004 Translation adjustments, net - - (645) (270) (1,355) (2,000) - (270) Income for the year 31 December 2004 - ________ - __________ 8,422 __________ 8,422 __________ (915) ========= ========= ========= 6,152 7,067 - ======= 25 Telit Communications PLC ACCOUNTING POLICIES For the year ended 31 December 2005 Basis of accounting The consolidated financial statements for the years then ended 31 December 2005 and 31 December 2004 have been prepared in accordance with International Financial Reporting Standards (IFRS). The principal accounting policies used for the preparation of the financial statements are set out below. Reverse acquisition accounting The consolidated financial statements of the Company and the Group have been prepared based upon the accounting policies set out in the financial statements of Dai Telecom Holdings (2000) Ltd for the year ended 31 December 2004 .The Group has adopted IFRS2 Share-based payment for the first time in these financial statements. The Company has treated the acquisition of Dai Telecom Holdings (2000) Ltd in accordance with the reverse acquisition method described in IFRS 3 Business combinations. Accordingly the acquisition has been treated as if Dai Telecom Holdings (2000) Ltd had acquired the Company. The comparative figures relate to Dai Telecom Holdings (2000) Ltd. The accounting policies applied in these financial statements are consistent with those of Dai Telecom Holdings (2000) Ltd for the year ended 31 December 2004 which were prepared under International Financing Reporting Standards (IFRS). Functional and presentational currency The consolidated financial statements are presented in Euros, which differs from the Company’s functional currency for its operations in Israel (the New Israeli Shekel- NIS). The assets and liabilities of the company’s operations are translated at the closing exchange rates prevailing on the balance sheet date. Income and expense items and cash flow data are translated at the average exchange rates for the period. Exchange rate differences arising, from the retranslation of opening equity, are recorded directly to the shareholders’ equity as a separate component of shareholders equity. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December, each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity (including leased going concern) so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to align the accounting policies to those of the Group. 26 Telit Communications PLC ACCOUNTING POLICIES For the year ended 31 December 2005 All significant intra-group transactions and balances between the group’s companies are eliminated on consolidation. Cash and cash equivalents Cash and cash equivalents include bank demand deposits, as well as unrestricted short-term deposits with original maturities of less than three months. Trade accounts receivable Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts Inventories Commercial finished goods are presented at the lower of cost or net realisable value, with cost determined on a "first-in, first-out" method. Produced finished goods are stated at the lower of cost or net realisable value. Cost comprises direct materials and, where applicable, direct labor costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Raw materials - are presented at the lower of cost or net realisable value, with cost calculated using the weighted average method. Investments in associate An associate is an entity over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the associate. The results, and assets and liabilities of the associate are incorporated in the financial statements using the equity method of accounting. The investment in the associate is carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of the associate in excess of the group’s interest in those associates are not recognised. Impairment of investments in associate The Company considers at each balance sheet date whether there are any indications of impairment in the value of its investments in the associate. If the book value of an investment in a non-subsidiary investee exceeds its recoverable value, the Company recognises an impairment loss. 27 Telit Communications PLC ACCOUNTING POLICIES For the year ended 31 December 2005 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost over the estimated useful life of the assets, using the straight-line method. Depreciation rates are as follows: Office furniture and equipment Computers and software Vehicles Leasehold improvements Machines and equipment % 6-15 33 15 10 10-25 The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in the income statement. Internally-generated intangible assets - research and development costs The cost of research activities is recognized as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group's expenditure on development is recognized only if all of the following conditions are met: • An asset is created that can be identified (such as software or a new processes); • It is probable that the asset created will generate future economic benefits; and • The development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basis over their useful lives. Where no internally generated intangible asset can be recognised, development costs are recognised as an expense in the period in which they are incurred. Impairment of tangible and intangible assets At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. 28 Telit Communications PLC ACCOUNTING POLICIES For the year ended 31 December 2005 Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash- generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Income taxes The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Trade payables Trade payables are not interest bearing and are stated at their nominal value. Provision for warranty costs The provision for warranty costs is recognised at the date of sale of the relevant products, at the best estimate of the expenditure required to settle the Group's liability. 29 Telit Communications PLC ACCOUNTING POLICIES For the year ended 31 December 2005 Retirement benefit costs For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are recognised when goods are delivered and title has passed. Revenues from services are recognised as the services are provided. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals payable under operating leases are charged to statement of income on a straight-line basis over the term of the relevant lease. Advertising costs Advertising costs are recognised in the financial statements in the period in which they are incurred. Borrowing costs Borrowing costs are recognised in profit or loss in the period in which they are incurred. Government grants Government grants are recognised as income over the periods necessary to match them with the related costs. 30 Telit Communications PLC ACCOUNTING POLICIES For the year ended 31 December 2005 Financial instruments Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Share-based payments The Group has applied the requirements of IFRS 2 Share-based payment. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. Fair value is measured using the Black & Scholes model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural consideration. (Loss) earnings per share Basic and diluted (loss) earnings per share is computed on the basis of the weighted average of paid up capital shares during the year in accordance with IAS 33 (Revised) Earnings per share. Foreign currencies Transactions in currencies other than the Euro are recorded at the rates of exchange prevailing on the dates of the transactions or translated at the average exchange rates for the period. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. 31 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 1 REVENUES Sales of goods Services Government grants 2005 €’000 82,614 3,300 530 _____ 86,444 2004 €’000 71,402 2,918 202 _____ 74,522 SEGMENTAL ANALYSIS For management purposes, the Group is currently organised into two operating divisions, Wireless Solutions and Enhanced Value Added Reseller (“EVAR”). These divisions are the basis on which the Group reports its segment information. Segmental information for these businesses is presented below. REVENUES EVAR WIRELESS SOLUTIONS Total revenue OPERATING PROFIT (LOSS) EVAR WIRELESS SOLUTIONS Unallocated corporate expenses Operating loss Net assets EVAR WIRELESS SOLUTIONS Investment in equity method associated Discontinued segment assets Unallocated assets 2005 €’000 70,677 15,767 86,444 3,929 (4,530) (601) (865) (1,466) 33,006 7,433 649 122 32,118 2004 €’000 63,784 10,738 74,522 3,541 (6,000) (2,459) (139) (2,598) 33,465 6,306 746 193 15,265 Total assets 73,328 55,975 32 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 GEOGRAPHICAL SEGMENTS The Group’s operations are located in Israel and Italy. The Group’s BEVAR activity is located in Israel and Italy. The design, development, manufacturing of Data Products is carried out in Italy and selling in Europe and Israel. The following table provides an analysis of the Group’s revenues by geographical market, irrespective of the origin of the goods or services: Revenues by geographical market: 2005 €’000 28,691 52,419 5,334 86,444 Europe Israel Other 2004 €’000 20,485 50,521 3,516 74,522 The following table provides an analysis of the group’s carrying amount of assets by geographical segment: Assets by geographical market 2004 2005 €’000 Europe Israel 44,965 28,363 73,328 €’000 28,998 26,977 55,975 2 GENERAL AND ADMINISTRATIVE EXPENSES 2005 €’000 2004 €’000 Composition: Wages and fringe benefits Consulting fees and business brokerage Rental and maintenance Depreciation and amortisation Travel Professional fees Vehicle expenses Management fees to related parties Doubtful debt Others Auditors’ remuneration Audit services (1) Non audit services (2) 2,993 1,747 752 383 284 610 58 82 50 413 7,372 264 55 2,316 3,000 712 485 417 273 95 81 79 144 7,602 74 56 (1) Includes €100,800 payment to the Group auditors (2004: € nil). (2) Includes €13,940 payment to the Group auditors (2004: € nil). In addition to the above, amount of €210,000 payable to the Group auditors and €50,000 to other auditors have been charged to the share premium account. 33 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 3 FINANCIAL INCOME (EXPENSES) 2005 €’000 2004 €’000 Financial income Interest income from bank deposits Gain on financial instruments Interest from related parties, net Exchange rate gains (losses) Finance cost Interest expense on bank credit, net Interest on customer and supplier credit, net Bank fees and others Financial expenses, net 4 EMPLOYEES (334) (235) (42) (45) (656) 903 3 32 938 282 - - 7 (43) (36) 389 193 104 686 650 2005 No. 2004 No. The average monthly number of persons (including directors) employed by the Group during the year was: Discontinued operating Sales and marketing Research and development General and administration Operating 42 46 63 33 33 42 32 64 45 17 Staff costs for above persons: Wages and salaries Social security costs Other pension costs Directors’ emoluments Remuneration for management services 217 200 2005 €’000 9,088 1,725 (193) 10,620 2005 €’000 1,110 2004 €’000 6,833 1,488 372 8,693 2004 €’000 658 Details of highest paid director’s emoluments Emoluments 694 405 34 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 5 INCOME TAXES A. Current taxes Deferred taxes Adjustment in respect of prior years 2005 €’000 1,129 (10) 219 1,338 2004 €’000 269 (5) 63 327 B. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. C. Effective tax rate: The charges for the year can be reconciled to the profit per the income statement as follows: 2005 €’000 2004 €’000 (Loss) income before income tax (1,359) 9,666 Ordinary rates of income tax (in Israel) Tax computed using ordinary rates Tax adjustments arising from: Expenses which are not deductible (income exempted) in determining taxable profit Decrease in taxes resulting from a different tax rate Utilisation of tax losses Income on which tax expense was not recorded Adjustments in respect of prior year Other differences 34% (466) 612 (752) 1,778 219 (53) 35% 3,383 (4,389) - 1,283 62 - (12) 1,338 327 6 OTHER INCOME Other income in 2005 includes income of €548,000 resulting from the final settlement of litigation as described in note 17B, net of expenses. Other income for 2004 includes the write off of a loan made in the amount of €12.1 million. 35 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 7 DISCONTINUED OPERATIONS During year 2003 the Group reorganised its activities, at which point the Group discontinued the activity of developing, manufacturing and selling its own cellular handsets in Italy. The results of the discontinued operations which have been included in the consolidated statements of operations statement for the year ended 2005, as a separate component (profit (loss) from discontinued operations) are as follows: Cost of sales Operating expenses 2005 €’000 338 968 1,306 2004 €’000 596 - 596 8 (LOSS) INCOME PER SHARE Basic and diluted earnings 2005 €’000 2004 €’000 The calculations of basic and diluted earnings per ordinary share are based on the following results and numbers of shares: (Loss) income for the year (4,167) (9,666) Weighted average number of shares 2005 No. of Shares 2004 No. of shares For basic and diluted earnings per share 36,886,157 17,901,785 Loss per share (11.3p) (47.05p) 36 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 9 RECEIVABLES GROUP Due within one year: Trade debtors Other debtors Due after one year: 2005 €’000 33,286 4,357 37,643 2004 €’000 34,777 8,400 43,177 Deferred income tax asset 3,696 3,687 COMPANY Due within one year: Due from Group undertakings Other debtors Prepayments and accrued income 10 INVENTORY GROUP Finished goods Spare parts Raw materials 2005 €’000 348 129 16 493 2005 €’000 8,128 1,892 2,010 12,030 2004 €’000 3,891 711 1,491 6,093 37 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 11 INVESTMENTS GROUP Investment in associated undertaking, Cell-Time Ltd Cost of shares Translation adjustments Losses accumulated since acquisition Deposit in trust for associate Cost of shares includes goodwill as follows: Cost Translation adjustments Amortisation 2005 €’000 1,135 (41) (445) 649 - 649 875 (92) (184) 599 Summarised financial information of Cell-Time Ltd is as follows: 2005 €’000 789 52 ------------------ 841 ========== 666 6 ------------------ 672 ========== 3,288 (3,105) ------------------ 183 (495) (3) ------------------ (315) - ------------------ (315) ========== Balance sheet Assets Current assets Property, plant and equipment Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Income statement Revenues Cost of sales Gross profit Operating expenses Financial (expenses) income, net Income tax Loss for the year 38 2004 €’000 927 (83) (281) 563 183 746 666 (64) (117) 485 2004 €’000 378 48 ------------------ 426 ========== 163 2 ------------------ 165 ========== 892 (840) ------------------ 52 (390) 7 ------------------ (331) - ------------------ (331) ========== Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 11 INVESTMENTS (CONT.) COMPANY Investment in subsidiaries Additions 31 December 2005 Investment in Dai Telecom Ltd Investment in Dai Holdings Ltd Telecom (2000) Total €’000 (2,520) (554) ------------------ ------------------ (554) ========== ========== (2,520) (11,426) ------------------ (11,426) ========== Details of the investments undertakings of the Company are as follows: Name of company Dai Telecom Holdings (2000) Ltd. ("Dai Holdings") (formerly: “Polar Trade and Services Ltd”). Subsidiaries of Dai Telecom Holdings (2000) Ltd: Dai Telecom Ltd ("Dai Telecom") Communications Telit (Formerly: Dai Telecom SpA), ("Telit Italy") SpA Country of incorporation and operation Type shares of Ownership interest and voting rights Israel Ordinary 100% Principal activity Intermediate holding company Israel Ordinary 100% Italy Ordinary 100% Selling and marketing cellular phones, accessories and spare parts and after sales support Development, manufacturing and data selling products and distributing cellular products Intermediate holding company Dai Telecom Far East Pte Ltd Singapore Ordinary 100% Telit Communications Spain SL Spain Ordinary 100% Dormant Telit Laboratories Ltd Israel Ordinary 100% Cell – Time Ltd Israel Ordinary 29% Technical services for cellular products Development, marketing and operation of pre- call billing systems of cellular phones. 39 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 12 PROPERTY, PLANT AND EQUIPMENT GROUP Office Leasehold Computers €’000 equipment €’000 Vehicles €’000 Improvements Total €’000 €’000 COST 1 January 2005 Exchange rate differences Charge for the year Disposals 228 10 109 - 2,085 9 256 (22) 244 17 - (52) As at 31 December 2005 347 2 ,328 209 DEPRECIATION 1 January 2005 Exchange rate differences Charge for the year Disposals 31 December 2005 Net book value 31 December 2005 31 December 2004 129 9 54 - 192 155 99 914 2 459 (8) 97 7 36 (29) 1 ,367 111 961 98 1 ,171 147 186 14 66 - 266 45 3 18 - 66 200 141 2,743 50 431 (74) 3 ,150 1,185 21 567 (37) 1 ,736 1,414 1 ,558 13 INTANGIBLE FIXED ASSETS Software Exclusive Total GROUP Cost 1 January 2005 Additions 31 December 2005 Amortisation 1 January 2005 Charge for the year 31 December 2005 Net book value 31 December 2005 31 December 2004 €’000 rights €’000 299 123 422 (213) (93) (306) 116 86 €’000 - 500 500 299 623 922 - - - (213) (93) (306) 500 616 - 86 40 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 14 CURRENT LIABILITIES GROUP Bank overdraft Short-term bank loans Factoring companies Current maturities of long term loans 2005 €’000 - 19,535 2,270 1,018 Total short-term borrowing from bank and other lenders 22,823 Trade creditors Other creditors and accruals Total current liabilities 8,955 4,368 36,146 2004 €’000 2 24,230 3,790 - 28,022 6,297 9,633 43,952 Short terms bank loan are repayable on demand and secured as described in note 17. COMPANY Trade creditors Accruals and deferred income 15 LONG-TERM LIABILITIES GROUP Loan from parent company Provisions and others long-term liabilities Analysis of bank and other loans: Repayable within one year Repayable in two to five years The long-term loans from parent company bears no interest. 2005 €’000 3,054 106 3,160 1,019 3,054 4,073 2005 €’000 65 621 686 2004 €’000 4,121 159 4,280 - 4,121 4,121 41 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 16 PROVISIONS FOR LIABILITIES AND CHARGES A. The Group operates a defined benefit scheme for all employees of Telit Italy. Under the scheme, employees are entitled to retirement benefit based on the accumulated contributions upon attainment of the retirement age or when leaving the company. The scheme is a funded scheme and no other post retirement benefit is provided. The actuarial present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method. B. The Group's liability for severance pay for Israeli resident employees is calculated pursuant to the Israeli Severance Pay Law, based on the most recent salaries and length of employment, and is covered by payments to insurance companies and pension funds. Amounts accumulated in the insurance companies and pension funds are not included in the financial statements since they are not under the control and management of the Group .The accrued severance pay liability included in the balance sheet in respect of the Israeli resident employees represents the balance of the liability not covered by the above-mentioned deposits and/or insurance policies for which a fund is maintained (in the Group's name) at a recognised pension fund. C. The amount included in the balance sheet arising from the obligations in respect of the defined scheme of Dai Italy and the accrued severance pay of Dai Telecom is as follows: Net liability 1 January 2005 Expense recognised in the income statement Contributions 31 December 2005 2005 €’000 1,591 (191) (544) 856 2004 €’000 1,558 500 (467) 1,591 D. Amounts recognised in income statement in respect of the defined benefit scheme are as follows: Current service cost Interest cost Experience adjustments Actuarial gain Total (expense) income included in income statement E. Financial assumptions Discount rate Salary increase rate Inflation 2005 €’000 281 78 - (550) (191) 2005 4.15% 3.50% 2.00% 2004 €’000 284 81 264 (129) 500 2004 5.40% 3.50% 2.00% 42 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 17 COMMITMENTS AND CONTINGENT LIABILITIES Commitments Legal proceedings A. Ixfin Magneti Marelli Eletronica Ltda summoned Telit Italy before the Court of Sumaré, San Paolo (Brazil) in order to obtain compensation for damages suffered as a consequence of Finmek Telit SpA’s several breaches of the obligations provided by two contracts (“Contracts”) executed between the parties on 28 October 2002 and assigned to Telit Italy by Finmek Telit SpA by a lease of going concern agreement entered into on December 23, 2002. The lawsuit was filed by IXFIN on November 2004, seeking the sum of €3,260,000. Telit Italy filed a defence brief. Telit Italy's lawyer has advised that it is probable that Telit Italy will make no payment. B. Following the final settlement of all litigation between the Company’s subsidiary Telit Italy and Nuove Iniziative SpA and the mutual waivers of all claims filed by Telit Italy and Finmek SpA, Telit Italy recorded net income of €548,000 resulting from offsetting of all the outstanding balances between the parties as other income in the income statement for the year ended 31 December 2005. Guarantees and liens A. As security for loans and guarantees provided to it, Dai Telecom Ltd has registered a floating lien on all of its assets, including rights and insurance proceeds, in favour of a bank. Moreover, liens were registered on all the funds due to Dai from its major customer in connection with specific orders received from the later. The following table outlines the composition of the secured liabilities: Composition: Short-term credit Trade accounts payable 2005 €’000 17,663 14 17,677 2004 €’000 29,283 89 29,372 B. The Company provides certain guarantees for its subsidiary; Telit Communications SpA (“Telit Italy”). On 6 November 2005, the Company's Board of Directors authorised the Company to provide a guarantee to a modules supplier of Telit Italy, to sustain a credit line to be granted by the modules supplier in respect of purchases made by Telit Italy. The guarantee shall not exceed the amount of € 7 million or a higher amount to be agreed from time to time. In addition, the Company deposited an amount of € 4 million, in a bank account, bearing annual interest of 2.3%, as security in favour of a credit line granted to Telit Italy by an Italian bank. C. See Note 23. 43 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 18 SHARE CAPITAL GROUP 2005 €’000 2004 €’000 Authorised 80,000,000 ordinary shares of 1 Pence each. Allotted, issued and fully paid: 43,214,281 ordinary shares of 1 Pence each Issued in the year 627 627 627 - - - Under reverse acquisition accounting, the share capital at the start of the period represents the amount of share capital in this Company’s subsidiary undertaking, Dai Holdings (2000) LTD (formerly: Polar trade and services). The additions in the year represents the share capital issued in Telit Communications PLC. Incorporation and admission onto the AIM Market The Company was incorporated on 30 November 2004 with a share capital of £50,000 divided into 50,000 ordinary shares of £1 each of which two shares were in issue. On 22 December 2004 the subscriber shares were transferred to Polar Industries Ltd in consideration of that company’s undertaking to pay up such shares in full. On 17 February 2005 the Company allotted 49,499 ordinary shares of £1 each to Polar Investments Ltd and 499 Ordinary shares of £1 each to Polar Industries Ltd. On 24 March 2005, 499 ordinary shares of £1 each were transferred from Polar Industries Ltd to Polar Investments Ltd. On 24 March 2005 the Company passed an ordinary resolution to sub-divide the issued authorised ordinary shares of £1 each in the capital of the Company into 100 shares of 1p each, and an ordinary resolution to increase the authorised share capital of the Company to £800,000 divided into 80,000,000 shares of lp each. Pursuant to the Share Purchase Deed dated 24 March 2005, the Company issued to its parent company - Polar Investments Ltd, 17,901,785 ordinary shares of 1p each in the capital of the Company. Under the terms of the Share Purchase Deed, dated 24 March 2005, the Company allotted 3,883,925 ordinary shares of 1p each to certain officers and directors of the Group, in consideration for their waiver of options held by them over shares in Dai Telecom Ltd. and Dai Telecom Holdings (2000) Ltd. Pursuant to the Share Purchase Deed, under certain conditions, Polar Investments Ltd, the parent company of the Company, has a call option for no consideration, in respect of part of such shares issued to officers and directors, in the event that the officers and directors ceases to hold office within the Group. Share options On 30 September 2005 the employees of Dai Telecom and Telit Italy were granted options to purchase approximately 5 percent of the Company's issued and outstanding shares at an exercise 44 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 price of £1.40. The options vest in four equal instalments starting from the date of grant, through to 30 September 2009. The options expire within five years. 19 OTHER RESERVE In connection with the acquisition of Dai Telecom Holdings (2000) Ltd by Telit Communications plc, the Company issued to Polar investment Ltd 1,790,785 shares for transferring the investments. The other reserve represents the par value of these shares. 20 SHARE - BASED PAYMENTS A. Composition: Number 2005 Outstanding at beginning of year 3,883,925 Granted during the year 1,976,570 Outstanding at year end 5,860,495 2004 - 3,883,925 3,883,925 B. Telit Communications PLC had authorised an equity-settled share option plan with effect from 30 December 2004. According to the plan, the Group’s senior employees were granted 3,883,925 options exercisable into 3,883,925 ordinary shares free from exercise price. 2,455,355 options granted are vested at the date of grant and 1,428,570 options were equally granted throughout two vesting periods over 4 consecutive years with the first vesting period scheduled 24 months after the date of grant. The options expire within 5 years from the date of grant. The incremental fair value of the options granted that according to management estimates will satisfy the vesting conditions is €1,693,000 to be expensed over the period of vesting. The inputs into the Black & Scholes model are as follows: Share price Exercise price Expected volatility Expected life Risk free rate € 1.792 Par Value (1 Pence) 40% 2.5-4.5 3.63 % C. On 30 September 2005 the employees of Dai Telecom and Telit Italy were granted 1,976,570 options exercisable into 1,976,570 ordinary shares (approximately 5% of Telit’s issued and outstanding shares) at an exercise price of ₤1.40. The options vest in four equal instalments starting from the date of grant, through to 30 September 2009. The options expire within five years. The incremental fair value of the options granted that according to management estimates will satisfy the vesting conditions is €434 thousand, to be expensed over the period of vesting. The inputs into the Black & Scholes model are as follows: 45 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 Share price Exercise price Expected Volatility Expected life Risk free rate € 1.4065 € 1.792 40% 3-4.5 3.31% D. Additional information: The expected volatility was determined as a weighted average of the historical volatility of Telit’s share price calculated over the period from share listing through options awards and the historical volatility of similar entity. The expected life used in the model has been determined based on management’s best estimates for effects of non-transferability, exercise restrictions and behavioural considerations. The Company recognised a total expense of €532,000 in respect of the options granted in the year ended 31 December 2005. 21 FINANCIAL RISK MANAGEMENT Financial risk management is an integral part of the way the group is managed. The Board establishes the Group’s financial policies and the Chief Executive officer establishes objectives in line with this policies. In the course of its business the Group is exposed mainly to financial market risks and credit risks. Financial market risks are essentially caused by exposure to foreign currencies and interest rates. Foreign currency risk Foreign currency risk arises because the Group undertakes transactions in foreign currency such as import and sale of cellular handsets. The Group uses short-term borrowings from banks in the same foreign currency of those transactions to reduce the Group’s exposure to foreign currency risk. Translation exposure arises because the Group’s financial information is presented in Euros while some of the Group’s transactions are denominated in other currencies. As a result, material fluctuations in the exchange rate between the Euro and other currencies (mainly US Dollar and NIS) can have an impact on the Group's financial results. Interest rate risk Interest rate risk comprises the interest cash flow risk resulting from short-term borrowings at variable rates. The Group’s working capital is funded through short-term borrowings of variable interest rate. As a result, material fluctuations in the market interest rate can have an impact on the Group’s financial results. Concentration of credit risk Financial instruments that potentially subject the company and his subsidiaries to concentration of credit risk consist principally of trade receivables. The Group’s trade receivables are mainly derived from sales to major costumer in Israel and other customers in Italy. The Group performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is determined with respect to those amounts that the company has determined to be doubtful from collection. 46 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 Fair value of financial instruments The financial instruments held by the group are primarily comprised of non-derivative assets and liabilities (non-derivative assets include cash and cash equivalents, trade accounts receivable and other receivables; non-derivative liabilities include bank loans, trade accounts payable, other payables and other current liabilities). Due to the nature of these financial instruments, there are no material differences between the fair value of the financial instruments and their carrying amount included in the financial statements. 22 BALANCES AND TRANSACTION WITH RELATED PARTIES A. The Group is engaged in management agreement with Polar Investment Ltd (“Polar”) (parent company) Polar provided management services during year ended 31 December 2005 in consideration for an annual payment in the amount of US $100,000. B. In 1 October 2003 Dai Telecom entered into a lease agreement with Polar, for a three-year period, of facilities located in Tel Aviv, for a monthly rental payment of approximately €4,500. Each party to the agreement has an option to lengthen the lease period for additional two periods of 3 and 4 years upon 2 months notice, for monthly rental of app. €8,000. C. On 30 December 2004 the Company granted the following key personnel options exercisable into ordinary shares with no exercise price. Number of options granted Vested date of grant at Unvested at date of grant Chief Executive Officer Former director Financial director Senior manager Former Chief Executive Officer in Israel Chief Operating Officer in Telit Italy Chief of marketing 2,142,857 401,785 267,857 294,642 294,642 160,714 267,857 1,607,143 401,785 89,286 98,214 98,214 53,571 89,286 535,714 - 178,571 196,428 196,428 107,143 178,571 The compensation attributable to the key personnel calculated as the incremental fair value of the options to be expensed over the period of vesting is €635 thousand. 47 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2005 23 SSUBSEQUENT EVENTS A. The Company provides certain guarantees for its subsidiary, Telit Italy. On 10 April 2006, the Company's Board of Directors authorised the Company to provide a guarantee to a supplier of Telit Italy in the handset business, to sustain a credit line to be granted by the supplier in respect of purchases made by Telit Italy. The guarantee shall not exceed the amount of € 1.5 million. On 17 May 2006, the Company's Board of Directors authorised the Company to provide a guarantee to a modules supplier of Telit Italy, to sustain a credit line to be granted by the modules supplier in respect of purchases made by Telit Italy. The guarantee shall not exceed the amount of € 4 million. B. On May 30, 2006 the company signed agreement to acquire 75% of Bellwave m2m Co. Ltd, the machine to machine (“m2m”) division of Bellwave Co. Ltd (“Bellwave”), a South Korea wireless communications developer, in a cash transaction totaling US $6.18 million. Bellwave Co. Ltd will retain the remaining 25% of Bellwave m2m, however, Telit holds a call option to purchase the remaining 25% for US$2 million exwrcisable until December 2006. Bellwave m2m business has a net asset value of approximately US$2 million. Bellwave m2m, which developed and marketed the world’s smallest CDMA data communications module, has currently 40 employees the majority of who are engineers. The company will focus on the development of CDMA 1X and EVDO products for Asian and American markets and the development of WCDMA/UMTS products for global distribution. The company will also serve as Telit’s sales gateway to the emerging Asia Pacific markets for both CDMA and GSM/GPRS product line. The company acquisition closed on June 5, 2006. C. On April 18, 2006, Telit Italy has been declared eligible to receive €11.4 million grant, and has secured €14.1 million loan facility, from the Ministry of Attivita Produttive in Italy. The funds, totaling €25.5 million, were awarded to Telit Italy to invest in a new research and development center in preferred areas in Italy. 48 Telit Communications PLC COMPANY INFORMATION Directors, Secretary and Advisers Company Registration No. 05300693 Directors Avigdor Kelner, Chairman Oozi Cats, Chief Executive Officer Inbal Barak-Etzion, Finance Director Avi Israel, Non-Executive Director David Hobley, Non Executive Director Andrea Mandel-Mantello, Non Executive Director Company Secretary Gravitas Company Secretarial Services Limited Registered Office 110 Cannon St. London EC4N 6AR Nominated Adviser and Broker Seymour Pierce Limited Bucklersbury House, 3 Queen Victoria Street, London EC4N 8EL Solicitors Halliwells 1 Threadneedle Street London EC2R 8AW Independent Auditors Baker Tilly 2 Bloomsbury Street, London WC1B 3ST Registrar Capita Registrars Limited The Registry 34 Beckenham Road, Beckenham, Kent BR3 4TU 49 Telit Offices World Wide Telit UK Regus House – Highbridge Oxford Road – Uxbridge UB8 1HR London, United Kingdom Phone +44 (0) 8703517290 Fax +44 (0) 870 351 7291 Telit Israel 3 Nirim St. Tel Aviv 67060, Israel Phone +972 3 7914000 Fax +972 3 7914008 Telit Italy Via della Stazione di Prosecco 5/B Sgonico, Trieste – Italy Phone +39 040 4192 491 Fax +39 040 4192 383 C.so Vercelli 11 20144 Milan, Italy Phone + 39 02 430019079 Fax + 39 02 430019060 Telit Germany Joseph Wild Str. 20 - 81829 Munich, Germany Phone +49 (0)8943737902 Telit Nordics Walgerholm 3, 3500 Vaerloese Denmark Mobile +45 2345 7112 Telit Spain Paseo della castellana 141 Planta 20, 28046 Madrid, Spain Phone + 34 91 749 8000 Office + 34 91 7893491 Fax + 34 91 570 7199 Telit Korea Bellwave M2M Co., Ltd. Korea Specialty Construction Building 395-70, Shindaebang-Dong Dongjak-Gu, Seoul, Korea 156-714 m o c . n a h s i m - v o n t r o p w w w . : n o i t c u d o r P & n g i s e D Regus House - Hughbridge Oxford Road - Uxbridge UB8 1HR London, United Kingdom Ph +44 0 870 351 7290 Fx +44 0 870 351 7291 3 Nirim St. Tel Aviv 67060, Israel Tel +972 3 791 4000 Fax +972 3 791 4008 

Continue reading text version or see original annual report in PDF format above