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
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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