Telit Communications PLC
Annual Report 2006

Plain-text annual report

Neither an audit nor a review provides assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular whether any changes may have occurred to the financial information since first published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area. Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions Telit Communications PLC CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2006 Revenue Cost of sales Gross profit Other income Research and development expenses Selling and marketing expenses General and administrative expenses Other expenses Operating loss Investment income Finance costs Share of results of associated undertakings Loss before income taxes Income taxes Loss for the year from continuing operations Loss for the year from discontinued operations Loss for the year Attributable to: Equity shareholders of the parent Minority interests Basic loss per share (in euro cents) From continued operations From discontinued operations Total continuing and discontinued Diluted loss per share (in euro cents) From continued operations From discontinued operations Total continuing and discontinued (*) See Note 1(z). 27 2 0 0 6 Note €’000 2 0 0 5 (Restated*) €’000 2 4 5 6 7 8 10 11 12 12 86,780 (70,574) 85,914 (71,331) 16,206 14,583 1,438 (8,149) (9,317) (9,968) (563) 1,134 (3,914) (5,293) (7,372) (215) (10,353) (1,077) 190 (1,169) (41) 656 (938) (164) (11,373) (1,523) (11) (1,338) (11,384) (2,861) - (1,306) (11,384) (4,167) (11,319) (65) (11,384) (4,167) - (4,167) (26.2) - (26.2) (26.2) - (26.2) (7.8) (3.5) (11.3) (7.8) (3.5) (11.3) Telit Communications PLC BALANCE SHEETS At 31 December 2006 ASSETS Non-current assets Intangible assets Property, plant and equipment Investments Other long term assets Deferred tax asset Current assets Inventory Trade receivables Other current assets Deposits – restricted cash Cash and cash equivalents Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders’ equity Share capital Other reserve Share premium Translation reserve Retained earnings Total shareholders’ equity Minority interests Total equity Non-current liabilities Loan from parent company Post-employment benefits Deferred tax liabilities Other long-term liabilities Current liabilities Short-term borrowings from banks and other lenders Trade payables Other current liabilities Total equity and liabilities Group Company 2 0 0 6 Notes €’000 2 0 0 5 (Restated*) €’000 2 0 0 6 €’000 2 0 0 5 (Restated*) €’000 13 14 15 17 10 16 17 17 18 18 19 25 20 10 21 21 21 7,710 3,019 579 303 3,696 15,307 10,284 17,452 6,806 7,115 3,926 45,583 60,890 616 1,414 649 73 3,696 6,448 12,030 33,286 4,357 4,000 13,207 66,880 73,328 - - 27,741 - - 27,741 - - 574 7,115 1,376 9,065 36,806 - - 20,652 - - 20,652 - - 493 4,000 11,781 16,274 36,926 627 (260) 29,651 (584) (6,669) 22,765 1,248 627 (260) 29,651 (284) 3,432 33,166 627 5,894 29,651 - (318) 35,854 627 5,894 29,651 - 68 36,240 - - - 24,013 33,166 35,854 36,240 2,035 1,226 1,193 244 4,698 17,375 10,584 4,220 32,179 60,890 3,054 856 - 106 4,016 22,823 8,955 4,368 36,146 73,328 - - - - - - - - - - - 16 936 952 36,806 - 65 621 686 36,926 (*) See Note 1(z). The financial statements on pages 27 to 65 were approved by the board and authorised for issue on 21 March 2007 and are signed on its behalf by: Oozi Cats Director 28 Telit Communications PLC CASH-FLOW STATEMENTS For the year ended 31 December 2006 Group Company 2 0 0 6 €’000 2 0 0 5 (Restated*) €’000 2 0 0 6 €’000 2 0 0 5 (Restated*) €’000 CASH FLOWS – OPERATING ACTIVITIES Net cash from/ (used in) operating activities (Note 26) 8,046 (5,025) (1,058) (41) CASH FLOWS - INVESTING ACTIVITIES Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of intangible assets Acquisition of subsidiaries (nil cash acquired) Investment in subsidiary Loan to subsidiary Additions to financial assets Proceeds from disposal of financial assets Increase in restricted cash deposits Additions to long term receivables (2,074) 25 (513) (5,396) - - - - (3,000) (56) (431) 41 (622) - - - (190) 211 (4,000) (27) - - - - (13) (6,461) - - (3,000) - - - - - - (14,500) - - (4,000) - Net cash used in investing activities (11,014) (5,018) (9,474) (18,500) CASH FLOWS - FINANCING ACTIVITIES Repayment of short-term borrowings from banks and others Short-term borrowings from banks Repayment of loan from parent company Proceeds from issuance of share capital (13,224) 8,000 (1,019) - (7,772) - - 30,019 Net cash (used in)/ from financing activities (6,243) 22,247 - - - - - - - - 30,019 30,019 (Decrease)/ increase in cash and cash equivalents Cash and cash equivalents - balance at beginning of year Effect of exchange rate differences (9,211) 12,204 (10,532) 11,478 13,207 (70) 582 421 11,781 127 - 303 Cash and cash equivalents - balance at end of year 3,926 13,207 1,376 11,781 Supplemental disclosure of cash flow information (included in cash flow from operating activities): Interest paid Interest received Income taxes paid (*) See Note 1(z). 896 1,029 - - 318 336 320 307 739 1,240 - - 29 Telit Communications PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2006 Year ended 31 December 2006 Share capital €’000 Share premium €’000 Other reserve €’000 Translation adjustment €’000 Retained earnings €’000 Total €’000 Minority interest €’000 Total €’000 1 January 2006 627 29,651 (260) (284) 3,432 33,166 - 33,166 Arising on acquisition Translation adjustments Share-based payment charge Loss for the year 31 December 2006 - - - - - - - - - - - - - (300) - - - - - 1,317 1,317 (300) (4) (304) 1,218 1,218 - 1,218 (11,319) (11,319) (65) (11,384) 627 29,651 (260) (584) (6,669) 22,765 1,248 24,013 Year ended 31 December 2005 Share capital €’000 Share premium €’000 Other reserve €’000 Translation adjustment €’000 Retained earnings €’000 Total €’000 1 January 2005 Arising on transfer of subsidiaries under common control - - - - Issue of share capital 627 29,651 Translation adjustments Share-based payment charge Loss for the year 31 December 2005 - - - - - - - (915) 7,067 6,152 (260) - - - - - - 631 - - - - - 532 (260) 30,278 631 532 (4,167) (4,167) 627 29,651 (260) (284) 3,432 33,166 The other reserve arose on the transfer of the subsidiaries under common control and represents the nominal value of shares issued in this transaction. 30 Telit Communications PLC COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2006 Year ended 31 December 2006 Share capital €’000 Share premium €’000 Other reserve €’000 Retained earnings €’000 Total €’000 1 January 2006 627 29,651 5,894 68 36,240 Loss for the year - - - (386) (386) 31 December 2006 627 29,651 5,894 (318) 35,854 Year ended 31 December 2005 Share capital €’000 Share premium €’000 Other reserve (Restated*) €’000 Retained earnings €’000 1 January 2005 - - - Issue of share capital 627 29,651 5,894 Loss for the year - - - 31 December 2005 627 29,651 5,894 - - 68 68 Total €’000 - 36,172 68 36,240 (*) See Note 1(z). The other reserve arose on the issue of 1,790,785 shares to Polar Investments Ltd. (“Polar”) in consideration for the transfer of Polar’s investment in Dai Telecom Holdings (2000) Ltd. and Dai Telecom Ltd., the assets and liabilities of which were recorded at their previous carrying value. 31 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 1. ACCOUNTING POLICIES (a) General information The consolidated financial statements for the years ended 31 December 2006 and 31 December 2005 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and in accordance with the provisions of the Companies Act 1985 applicable to companies reporting under IFRS and Article 4 of the EU IAS Regulation. Telit Communications PLC is a public limited company registered in England and Wales. The registered office is given on page 66. The nature of the Group’s operations and its principal activities are set out in note 3 and in the Chief Executive's statement and review on pages 9 to 14. The financial statements have been prepared on the historical cost basis, except for the revaluation of certain assets and liabilities which are measured at fair value and in accordance with Companies Act 1985 and applicable IFRSs. The principal accounting policies adopted are set out below. (b) Functional and presentational currency The consolidated financial statements are presented in Euros as this is the primary economic environment of the Group, which differs from the functional currency of those subsidiaries that are not located in the euro zone. The assets and liabilities of the Company’s subsidiaries that have a functional currency other than the Euro are translated at the closing exchange rates prevailing on the balance sheet date. Income and expense items and cash flows are translated at the average exchange rates for the period. Exchange rate differences arising, from the translation of the above mentioned items, are recorded directly to the shareholders’ equity as a separate component called "translation adjustment". Goodwill and intangible assets arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity. (c) 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 so as to obtain benefits from its activities. The results of subsidiaries acquired during the year are included in the consolidated income statement from the effective date of acquisition. All intra-group transactions and balances between the Group’s companies are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. 32 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 (d) Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets and liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. (e) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and short term deposits with maturity of three months or less that are readily convertible to cash and are subject to an insignificant risk of changes in value. (f) Trade receivables Trade receivables are recognised and carried at original invoice amount, which the Directors consider to be equal to fair value. Approximate allowances for estimated uncollectible amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. (g) 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 labour 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. (h) Investments Investments in associated undertakings 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. Any excess of the cost of acquisition over the Group’s share of the fair value of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. 33 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 Company - Investments in subsidiaries Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. (i) Impairment of investments in associated undertakings The Company considers at each balance sheet date whether there are any indications of impairment in the value of its investment in associated undertakings. If the book value of an investment in a non- subsidiary investee exceeds its recoverable value, the Company recognises an impairment loss. (j) 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 10-14 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 recognised in the income statement. (k) Goodwill Goodwill arising on the acquisition of an entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is held in the currency of the acquired entity and revalued to the closing rate at each balance sheet date. Goodwill is not subject to amortisation. For the purposes of impairment testing, goodwill is allocated to the cash-generating unit to which it relates. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. 34 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 (l) Other intangible assets Other intangible assets with finite lives are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets from the date they are available for use. The amortisation rates are as follows: Software- 3 years Customer relationships – 5 years Development cost– 3 years (m) Impairment of tangible and intangible assets excluding goodwill 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. (n) 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. 35 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 (o) Trade payables Trade payables are not interest bearing and are stated at their nominal value. (p) Provision for warranty costs A 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. (q) 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 income statement 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. The values attributed to plan liabilities that are material to the financial statements are assessed in accordance with the advice of independent qualified actuaries. (r) 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. (s) Leases Rentals payable under operating leases are charged to statement of income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the lease term. (t) Borrowing costs Borrowing costs are recognised in profit or loss in the period in which they are incurred. (u) Government grants Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met. Government grants relating to employment are recognised as income over the periods necessary to match them with the related cost and are recognised in other income. 36 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 (v) 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. (w) 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 behavioral considerations. (x) Loss per share Basic and diluted loss 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. (y) Foreign currencies In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. (z) Restatements According to IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, the Group has presented grant income of €530,000 within other income. Prior periods have been adjusted in order to conform with the current period presentation. This presentational change has no impact on the reported net loss. Restricted cash of €4.0 million, previously reported within cash and cash equivalents in the cash flow statement for the year ended 31 December 2005, has been excluded as it does not meet the definition set out in IAS 7 “Cash flow statements”. The increase in the year has been shown as an investing cash outflow and the cash flow statement restated accordingly. The Company balance sheet as at 31 December 2005 has been restated as a result of an error in the application of the accounting for the acquisition of Dai Holdings (2000) Limited and a 20% stake in Dai Telecom Limited. Investments in subsidiary undertakings and shareholders’ equity were understated by €9.2 million as a result. Investments and shareholders’ equity have been restated by this amount. There is no profit effect of this adjustment. (aa) Critical accounting judgments and key sources of uncertainty In the process of applying the Group’s accounting policies, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements. 37 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 Key sources of estimation uncertainty The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Recoverability of deferred tax assets Under IFRS, a deferred tax asset arising on trading losses is only recognised where it is probable that future taxable profits will be available to utilise the losses. The key judgments in assessing the recognition of a deferred tax asset are: • • the probability of taxable profits being available in the future; and the quantum of taxable profits that are forecast to arise. This requires management to exercise judgement in forecasting future results. There are a number of assumptions and estimates involved in estimating the future results of the relevant entity in which the trading losses arose, including: • • • management’s expectations of growth in revenue; changes in operating margins; and uncertainty of future technological developments. Changing the assumptions selected by management could significantly affect the Group’s results. As at 31 December 2006, the Group had recognised a deferred tax asset of € 3,696,000. See note 10 for further information. Allocating fair values in a business combination Acquisitions of shares in subsidiaries are accounted for using the purchase method whereby their aggregate consideration is allocated to the fair value of the assets acquired and liabilities assumed based on management’s best estimates. Management is required to exercise judgment in the determination of the fair value of identified assets and liabilities, and particularly intangible assets. As at 31 December 2006, the carrying value of intangible assets other than the goodwill acquired in business combinations was €4,343,000. For applicable amortization rate see note 1(l) above. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash- generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. There are a number of assumptions and estimates involved in calculating the net present value of future cash flows from the Group’s cash-generating units, including: • • • • • management’s expectations of growth in revenue; changes in operating margins; uncertainty of future technological developments; long-term growth rates; and the selection of discount rates to reflect the risks involved. 38 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 Changing the assumptions selected by management, in particular the discount rate and growth rate assumptions used in the cash flow projections could significantly affect the Group’s results. As at 31 December 2006, the amount of goodwill included in the consolidated balance sheet was €1,439,000. Recoverability of investments in associated undertaking Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying value of assets can be supported by the net present value of future cash flows derived from such assets using cash flow projections which have been discounted at an appropriate rate. In calculating the net present value of the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters, as noted below. IFRS requires management to test for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Group management currently undertakes an annual impairment test for investments in associated undertakings at least annually to consider whether a full impairment review is required. If the book value of an investment in a non-subsidiary investee exceeds its recoverable value, the Company recognizes an impairment loss. As at 31 December 2006, the book value of the investment in associated undertakings was €579,000. Grant income Income relating to government grants is recognized when there is reasonable assurance that the Company will comply with the conditions attaching to it and the grant will be received. Management is required to exercise judgement in determining when compliance with the terms of the grant and receipt of the grant are probable. The amount of grant income recognized in the income statement for the year ended 31 December 2006 was €686,000. And as at 31 December 2006 an amount of €1,044,000 is recorded in other debtors. (ab) New standards and interpretations not yet applied During the year, the IASB and IFRIC have issued a number of new standards, interpretations and amendments to existing standards which will be effective for the Group in future accounting periods, including: IFRS 7 Financial instruments: Disclosures; and the related amendment to IAS 1 on capital disclosures Operating Segments the Restatement Approach under IAS 29 Financial Reporting in IFRS 8 IFRIC 7 Applying Hyperinflationary Economies Scope of IFRS 2 Reassessment of Embedded Derivatives Interim Financial Reporting and Impairment IFRS 2—Group and Treasury Share Transactions IFRIC 8 IFRIC 9 IFRIC 10 IFRIC 11 IFRIC 12 Service Concession Arrangements The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application except for additional disclosures on capital and financial instruments when the relevant standards come into effect for periods commencing on or after 1 January 2007. 39 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 2. REVENUE Sales of goods Services Revenue Investment income 3. SEGMENTAL ANALYSIS 2 0 0 6 €’000 84,940 1,840 86,780 2 0 0 5 €’000 (Restated) 82,614 3,300 85,914 190 656 86,970 86,570 For management purposes, the Group is currently organised into two operating divisions, Wireless Solutions and Wireless Products. These divisions are the basis on which the Group reports its primary segment information. Principal activities are as follows: - Wireless Solutions business unit – designs, develops, manufactures and sells cellular GSM/GPRS/CDMA/UMTS module products mainly to the machine-to-machine (M2M) application markets. - Wireless Products business unit – distributes third party cellular handsets and accessories in European and Israel markets, including the products of Far East manufacturers, and provides the aftermarket activities for all devices sold by it. Segmental information for these businesses is presented below. REVENUE Wireless Products Wireless Solutions Total sales Eliminations (*) Total external sales (*) Inter- segment transactions are charged at prevailing market prices. OPERATING PROFIT (LOSS) Wireless Products Wireless Solutions Unallocated corporate expenses Operating loss Investment income Finance costs Share of results in associated undertakings Loss before income tax 40 2 0 0 6 €’000 2 0 0 5 (Restated) €’000 59,086 28,709 87,795 (1,015) 86,780 (1,540) (7,680) (9,220) (1,133) (10,353) 190 (1,169) (41) (11,373) 70,677 15,237 85,914 - 85,914 4,318 (4,530) (212) (865) (1,077) 656 (938) (164) (1,523) Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 3. SEGMENTAL ANALYSIS (CONT.) 2 0 0 6 €’000 2 0 0 5 €’000 14,327 25,135 579 20,849 60,890 3,147 8,124 25,606 36,877 33,006 7,433 649 32,240 73,328 6,517 830 32,815 40,162 2 0 0 6 2 0 0 5 Wireless Products €’000 Wireless Solutions €’000 Wireless Products €’000 Wireless Solutions €’000 314 10,410 158 896 110 - 150 878 1,359 500 38 340 89 - 50 433 571 - - 99 Total assets Wireless Products Wireless Solutions Investment in associated undertaking Unallocated assets Total assets Total liabilities Wireless Products Wireless Solutions Unallocated liabilities Total liabilities Other segment items: Capitalized tangible and intangible asset additions Non-cash items: Depreciation and amortization Impairment losses Bad debt expense Share-based payments GEOGRAPHICAL SEGMENTS The following table provides an analysis of the Group’s revenues by geographical market, irrespective of the origin of the goods or services, and the Group’s carrying amount of segment assets and capital expenditure on tangible and intangible fixed assets by geographical segment: 2 0 0 6 €’000 49,356 31,591 5,833 - 86,780 Europe Israel Asia Pacific Rest of World Revenue 2 0 0 5 €’000 (Restated) Assets 2 0 0 6 €’000 2 0 0 5 €’000 Capital expenditure 2 0 0 5 2 0 0 6 €’000 €’000 28,161 52,419 5,334 - 85,914 38,663 10,959 10,847 421 60,890 44,965 28,363 - - 73,328 2,934 314 7,308 168 10,724 896 158 - - 1,054 41 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 4. OTHER INCOME Government grants Other 2 0 0 6 €’000 686 752 1,438 2 0 0 5 (Restated) €’000 530 604 1,134 In 2006, “Other” principally relates to amounts due to a supplier that have been waived as part of the overall settlement with that supplier (see note 23.D). In 2005, “Other” principally related to €548,000 received from the final settlement of litigation, net of expenses, as described in note 23.B. The Group’s Italian subsidiary has been declared eligible to receive an €11.4 million grant, and has secured a €14.1 million loan facility, under a business development program sponsored by the Ministry of Trade and Commerce in Italy. The funds, totaling €25.5 million, were awarded to Telit Italy to invest in research and development in a new R&D centre in preferred areas in Italy. As of 31 December 2006 Telit Italy invested approximately €2.5 million in this grant project, and has received a bank loan of €8.0 million as an advance against the expected cash inflow from the Ministry of Trade and Commerce (see note 25). 5. OTHER EXPENSES For the year ended 31 December 2006, other expenses principally comprise an impairment of intangible assets of €500,000 whilst for the year ended 31 December 2005 other expenses principally comprise amounts relating to the settlement of a VAT dispute. 6. OPERATING LOSS Operating loss is stated after charging / (crediting) 2 0 0 6 €’000 2 0 0 5 €’000 (160) 763 706 500 8,149 188 7 1,409 66,030 221 567 93 - 3,914 50 - 903 64,792 Net foreign exchange (gains) / losses Depreciation of owned fixed assets (note 14) Amortisation of intangible assets (note 13) Impairment of intangible fixed assets (note 13) Research and development expenditure Bad debt expense Loss on disposal of property, plant and equipment Advertising costs Costs of inventory recognised as an expense 42 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 6. OPERATING LOSS (CONT.) Fees payable to the Company’s auditors for the audit of the Company’s annual accounts Fees payable to the Company’s auditors and their associates for other services to the Group The audit of the Company’s subsidiaries pursuant to legislation Total audit fees Tax services Total non-audit fees 2 0 0 6 €’000 2 0 0 5 €’000 99 133 232 31 263 101 163 264 55 319 Fees payable to Deloitte & Touche LLP and their associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements are required to disclose such fees on a consolidated basis. 7. INVESTMENT INCOME Interest income from bank deposits Gain on financial instruments Interest from related parties Exchange rate (losses)/ gains 8. FINANCE COSTS Interest expense on factoring arrangements Interest expense on bank loans and overdrafts Other 2 0 0 6 €’000 2 0 0 5 €’000 318 - - (128) 190 334 235 42 45 656 2 0 0 6 €’000 2 0 0 5 €’000 200 792 177 1,169 145 758 35 938 43 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 9. EMPLOYEES The average monthly number of persons (including executive directors) during the year was: Sales and marketing Research and development General and administration Operations Discontinued operations Their aggregate remuneration comprised: Wages and salaries Social security costs Other pension costs 2 0 0 6 €’000 2 0 0 5 €’000 50 109 31 53 - 243 10,862 1,946 950 13,758 46 63 33 33 42 217 9,088 1,725 (193) 10,620 Directors’ remuneration disclosures described within the Directors’ Remuneration Report as audited form part of these financial statements on page 20. 10. INCOME TAXES A. United Kingdom corporate tax at 30%: Current year taxes Overseas corporate tax: Current year taxes Adjustment in respect of prior years Deferred taxes: Overseas deferred taxes 2 0 0 6 €’000 2 0 0 5 €’000 - 264 29 30 1,099 219 (282) (10) 11 1,338 B. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. 44 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 10. INCOME TAXES (CONT.) C. Factors affecting the tax expense for the year The table below explains the differences between the expected tax credit on continuing operations, at the UK statutory rate of 30% for 2006 and 2005, and the Group’s total tax expense for the year: 2 0 0 6 €’000 2 0 0 5 €’000 Loss before income tax from continuing operations (11,373) (1,523) Tax credit computed at 30% Tax adjustments arising from: Expenses which are not deductible (income exempted) in determining taxable profit Decrease in taxes resulting from a different tax rate of subsidiaries operating in other jurisdictions Tax losses not utilised Adjustments in respect of prior year Other differences Tax charge (3,412) (457) (37) (151) 3,582 29 - 11 612 (810) 1,778 219 (4) 1,338 D. Deferred tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior year, after offset of balances within countries: At 1 January 2006 Arising on acquisition Translation adjustments Credit to income At 31 December 2006 Net operating loss €’000 Other timing differences €’000 3,667 - - 48 3,715 29 (1,374) 6 234 (1,105) Total €’000 3,696 (1,374) 6 282 2,610 The following is the analysis of the deferred tax balances for financial reporting purposes: Deferred tax liabilities Deferred tax assets-non current assets Deferred tax assets-current assets 45 2 0 0 6 €’000 (1,193) 3,696 107 2,610 2 0 0 5 €’000 - 3,696 - 3,696 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 10. INCOME TAXES (CONT.) The Group has previously recorded a deferred tax asset of €3.7 million relating to losses incurred in its Italian subsidiary, Telit Communications SpA. The directors consider that under existing Italian tax law, the time period over which these losses are available for relieving future profits is unlimited. Telit Communications SpA has incurred losses to date since formation in 2003, and has incurred further losses in 2006. The Group has approved a four year business plan for Telit Communications SpA. The four year business plan assumes substantial growth in revenues over this period relating to m2m modules sales. The assumed growth in revenue is based on management’s best estimates, having had regard to the revenue growth experienced during 2006 in this division, which is expected to continue at a similar rate in 2007, together with independent industry analysts’ market projections, and forecasts of growth in the M2M marketplace for years beyond 2007. The business plan is also showing forecast gross margins that are substantially in line with the subsidiary’s current financial performance in 2007, with some further improvement due to increasing sales volumes and purchasing benefits. Operating expenses have been forecast based on the current and expected future infrastructure required to execute the assumed revenues. Additionally, Telit Communications SpA is the Group’s principal supplier of m2m modules to other Group companies, predominantly in the United States, which is expected to generate additional sales for the Group. Based on the business plan prepared, management expects to begin to recover the deferred tax asset during the year ending 31 December 2008, and full recovery is forecast in the year ending 31 December 2010. As this assessment is a judgment about future events, there is no certainty as to this matter. E. Factors affecting the tax charge in future years Factors that may affect the Group’s future tax charge include the finalization and acceptance of tax returns with relevant tax authorities, corporate acquisitions and disposals, changes in tax legislation and rates, the availability and use of brought forward tax losses, and the realization or otherwise of recognised deferred tax assets. At 31 December 2006, the gross amount and expiry dates of losses available for carry forward are as follows: Losses for which a deferred tax asset is recognised Losses for which no deferred tax asset is recognised 11. DISCONTINUED OPERATIONS Unlimited €’000 11,266 18,706 29,972 During year 2003 the Group reorganized 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 31 December 2005, as a separate component are as follows: Cost of sales Operating expenses Loss for the year 46 2 0 0 6 €’000 - - - 2 0 0 5 €’000 338 968 1,306 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 12. LOSS PER SHARE 2 0 0 6 2 0 0 5 €’000 €’000 The calculations of basic and diluted earnings per ordinary share are based on the following results and numbers of shares: Loss for the year attributable to the equity shareholders of the parent (11,319) (4,167) Weighted average number of shares: For basic and diluted earnings per share Loss per share from continuing operations (euro cents) Loss per share from discontinued operations (euro cents) Loss per share (euro cents) No. of Shares No. of Shares 43,214,281 36,886,157 (26.2) - (26.2) (7.8) (3.5) (11.3) Number of options that are antidilutive: 2,216,687 1,976,570 47 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 13. INTANGIBLE FIXED ASSETS Finite lived intangible assets Exclusive rights €’000 Customer relationships €’000 Development cost €’000 - 500 500 - - - 500 - - - - (500) - (500) - - - - (15) 4,306 4,291 - - - (504) - 3 (501) - - - - (1) 689 688 - - - (135) - - (135) Software €’000 299 123 422 1,860 - 19 2,301 (213) (93) (306) (67) - - (373) Goodwill €’000 Total €’000 - - - - (6) 1,445 1,439 - - - - - - - 299 623 922 1,860 (22) 6,459 9,219 (213) (93) (306) (706) (500) 3 (1,509) 1,928 - 3,790 553 1,439 7,710 GROUP Cost 1 January 2005 Additions 31 December 2005 Additions Translation adjustments Arising on acquisition 31 December 2006 Accumulated impairment losses and amortization 1 January 2005 Charge for the year 31 December 2005 Charge for the year Impairment losses Translation adjustments 31 December 2006 Net book value 31 December 2006 31 December 2005 116 500 - - - 616 The goodwill is related to the acquisition of Bellwave M2M Company Limited, subsequently renamed Telit Wireless Solutions Co Limited, which is included within the Wireless Solutions business unit and the Asia Pacific geographical segment. Management considers that there are no indicators of impairment in the goodwill balance at the year- end. 48 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 14. PROPERTY, PLANT AND EQUIPMENT GROUP COST As at 1 January 2005 Translation adjustments Additions for the year Disposals As at 31 December 2005 Translation adjustments Additions for the year Disposals Arising on acquisition As at 31 December 2006 DEPRECIATION 1 January 2005 Translation adjustments Charge for the year Disposals 31 December 2005 Translation adjustments Charge for the year Disposals 31 December 2006 Net book value 31 December 2006 31 December 2005 Computers €’000 Office equipment €’000 Vehicles €’000 Leasehold Improvements €’000 Total €’000 228 10 109 - 347 (3) 503 (6) 20 861 (129) (9) (54) - (192) 5 (96) - 2,085 9 256 (22) 2,328 (3) 1,369 - 311 4,005 (914) (2) (459) 8 (1,367) (608) - 244 17 - (52) 209 (4) 9 (58) - 156 (97) (7) (36) 29 (111) 3 (23) 32 186 14 66 - 266 (5) 193 - - 454 (45) (3) (18) - (66) 2 (36) - 2,743 50 431 (74) 3,150 (15) 2,074 (64) 331 5,476 (1,185) (21) (567) 37 (1,736) 10 (763) 32 (283) (1,975) (99) (100) (2,457) 578 155 2,030 961 57 98 354 200 3,019 1,414 15. INVESTMENTS GROUP Investment in associated undertaking, Cell-Time Ltd Cost Translation adjustments Losses accumulated since acquisition 2 0 0 6 €’000 2 0 0 5 €’000 1,135 (70) (486) 579 1,135 (41) (445) 649 49 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 15. INVESTMENTS (CONT.) The accounts of Cell-Time Ltd are drawn up to 31 December 2006 for inclusion in the consolidated financial statements. The summarised financial information of Cell-Time Ltd is as follows: Balance sheet Assets Current assets Property, plant and equipment Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Income statement Revenue Cost of sales Gross profit Operating expenses Financial expenses, net Loss for the year after tax COMPANY Investment in subsidiaries 1 January 2005 Additions (Restated) 1 January 2006 (Restated) Additions Loan capitalised 31 December 2006 Investment in associated undertaking, Cell-Time Ltd 2 0 0 6 €’000 2 0 0 5 €’000 1,198 48 1,246 1,212 8 1,220 789 52 841 666 6 672 2 0 0 6 €’000 2 0 0 5 €’000 7,536 (7,198) 338 (476) (1) (139) 3,288 (3,105) 183 (495) (3) (315) Loans to subsidiaries €’000 Investments in subsidiaries €’000 Total €’000 - 14,500 14,500 6,497 (10,000) 10,997 - 6,152 6,152 13 10,000 16,165 - 20,652 20,652 6,510 - 27,162 579 27,741 50 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 15. INVESTMENTS (CONT.) In November 2006, the Company purchased from Dai Telecom Ltd. all of its holdings in Cell-Time Ltd. (29.33% of Cell - Time Ltd's outstanding share capital) for consideration equal to the value of the Cell- Time Holdings in Dai Israel's books. Details of the associated undertakings of the Company are as follows: Name of company Country of incorporation and operation Type of shares Ownership interest and voting rights Principal activity Cell-Time Ltd Israel Ordinary 29.33% Development, marketing and operation of pre-call billing systems of cellular phones Details of the subsidiary undertakings of the Company are as follows: Dai Telecom Holdings (2000) Ltd. ("Dai Holdings") Israel Ordinary 100% Dai Telecom Ltd ("Dai Telecom") Israel Ordinary 100% Telit Laboratories Ltd Israel Ordinary 100% Dai Telecom Far East Pte Ltd Singapore Ordinary 100% Telit Wireless Solutions Srl Sardinia, Italy Ordinary 100% Telit Communications SpA ("Telit Italy") Italy Ordinary 100% Intermediate holding company Selling and marketing cellular phones, accessories and spare parts and after sales support Technical services for cellular products Intermediate holding company Intermediate holding company Development, manufacturing and selling data products and distributing cellular products Telit Communications Spain SL Spain Ordinary 100% Dormant Telit Wireless Solutions Inc. ("Telit USA") United States of America Ordinary 100% Selling and marketing data products Telit Wireless Solutions Co Ltd ("Telit Korea") Republic of Korea Ordinary 75% Development, manufacturing and selling data products 51 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 16. INVENTORY GROUP Finished goods Spare parts Raw materials 2 0 0 6 €’000 6,345 2,216 1,723 10,284 2 0 0 5 €’000 8,128 1,892 2,010 12,030 The Directors consider that there is no significant difference between the net book value and replacement cost of stocks held. Inventories are stated net of provisions for slow moving and obsolete items of €1,033,000 (2005: €331,000). 17. RECEIVABLES Within current assets: Trade debtors Other debtors Due from Group undertakings Within non-current assets: Other long term assets Deferred tax asset (note 10) Group Company 2 0 0 6 €’000 2 0 0 5 €’000 2 0 0 6 €’000 2 0 0 5 €’000 17,452 6,806 - 24,258 33,286 4,357 - 37,643 303 3,696 3,999 73 3,696 3,769 - 268 306 574 - - - - 145 348 493 - - - The Directors consider that the carrying amount of trade and other receivables approximates their fair value. The Group’s trade receivables are stated after allowances for bad and doubtful debts, an analysis of which is as follows: At 1 January Amounts charged to administrative and other expenses At 31 December 2 0 0 6 €’000 2 0 0 5 €’000 180 188 368 130 50 180 52 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 18. CASH The Group’s cash resources are as follows: Deposits – restricted cash Cash and cash equivalents Total Group Company 2 0 0 6 €’000 2 0 0 5 €’000 2 0 0 6 €’000 2 0 0 5 €’000 7,115 3,926 11,041 4,000 13,207 17,207 7,115 1,376 8,491 4,000 11,781 15,781 The carrying amount of the Group’s cash resources are denominated in the following currencies: Sterling Dollar Euro Other Total Group Company 2 0 0 6 €’000 2 0 0 5 €’000 2 0 0 6 €’000 2 0 0 5 €’000 239 3,122 7,318 362 11,041 936 2,067 14,204 - 17,207 239 947 7,305 - 8,491 936 1,269 13,576 - 15,781 The cash and cash equivalents comprise cash held by the Group and short term deposits with an average period at inception until maturity of three months or less. The carrying amount of these assets approximates their fair value. Restricted cash deposits are provided as security for Telit Italy's borrowings. 53 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 19. ALLOTTED SHARE CAPITAL COMPANY AND GROUP 2 0 0 6 €’000 2 0 0 5 €’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 627 627 Share options On 30 September 2005 the employees of Dai Telecom and Telit Italy, both wholly owned subsidiaries of the Company, were granted options to purchase approximately 5 percent of the Company's issued and outstanding shares at an exercise price of £1.40. The options vest in four equal installments starting from the date of grant, through to 30 September 2009. The options expire within five years. On 1 March 2006, an employee of Dai Telecom was granted options to purchase approximately 1.1 percent of the Company's issued and outstanding shares at an exercise price of £0.705. The options vest in four equal installments starting from the date of grant, through to 28 February 2010. The options expire within five years. The number of outstanding options as of 31 December 2006 and the date of this report is 2,216,687, equal to 5.1% of the outstanding share capital of the Company (4.9% of the outstanding share capital of the Company, on a fully diluted basis). 20. POST-EMPLOYMENT BENEFITS A. B. 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 an unfunded 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. 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) as a recognised pension fund. 54 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 20. POST-EMPLOYMENT BENEFITS (CONT.) C. The amount included in the balance sheet arising from the obligations in respect of the defined scheme of Telit Italy and the accrued severance pay of Dai Telecom, Telit Korea and Telit USA are as follows: Movement in post employment benefit obligations 1 January 2006 Expense/(income) recognised in the income statement Contributions 31 December 2006 2 0 0 6 €’000 2 0 0 5 €’000 856 1,591 620 (250) 1,226 (191) (544) 856 The liability in respect of accrued severance pay for Dai Telecom, Telit Korea and Telit USA is €151,000 and the charge to the income statement in the year is €115,000. The IAS 19 disclosures in respect of the Group’s unfunded defined benefit obligations in Italy are detailed further in D and E below: D. Amounts recognised in income statement in respect of the defined benefit scheme are as follows: Current service cost Interest cost Actuarial loss/(gain) Total (expense)/income included in income statement 2 0 0 6 €’000 2 0 0 5 €’000 351 32 122 505 281 78 (550) (191) E. The amount included in the balance sheet arising from changes in the present value of the defined benefit scheme obligation for Telit Italy are set out below: Present value of defined benefit scheme obligation 1 January 2006 Actuarial loss/(gain) Employer cash contributions Benefits paid Interest cost 31 December 2006 F. Financial assumptions Discount rate Expected salary increase rate Inflation 55 2 0 0 6 €’000 2 0 0 5 €’000 820 122 351 (250) 32 1,075 2 0 0 6 % 4.40% 3.50% 2.00% 1,577 (550) 259 (544) 78 820 2 0 0 5 % 4.15% 3.50% 2.00% Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 21. CURRENT LIABILITIES Short-term bank loans and other borrowings Advances on receivables factoring Current maturities of long term loans Total short-term borrowing from banks and other lenders Trade creditors Due to Group undertakings Other creditors and accruals Group 2 0 0 6 €’000 15,429 927 1,019 17,375 10,584 - 4,220 2 0 0 5 €’000 19,534 2,270 1,019 22,823 8,955 - 4,368 Total current liabilities 32,179 36,146 Further information on the Group’s borrowings is presented in notes 23 and 25. Company 2 0 0 6 €’000 2 0 0 5 €’000 - - - - 16 761 175 952 - - - - 65 - 621 686 The directors consider that the carrying amount of trade payables approximates to their fair value. 22. ACQUISITIONS On 26 May 2006 Telit Communications SpA acquired 75% of the issued ordinary share capital of, and voting rights in, Bellwave M2M Co., Ltd. (“Bellwave”) a company incorporated and located in Korea, engaged in the production and sale of cellular communication products for the machine to machine (“m2m”) market. The cost of the business combination was €5,396,000 in cash, including directly attributable costs of €526,000. The revenues and net profit for Bellwave from the date of acquisition are €5,833,000 and €196,000 respectively. The transaction has been accounted for by the purchase method of accounting. The fair value of the assets and liabilities of Bellwave recognised at the acquisition date is as follows: Assets: Trade and other receivables Inventory Tangible assets Intangible assets: Customer list Development cost Other Deferred tax liabilities Minority interests Goodwill Total purchase consideration Net cash outflow arising on acquisition Book value (€’000) Fair value adjustments (€’000) Fair value (€’000) 457 840 331 - - 19 - 1,647 - - - 4,306 689 - (1,374) 3,621 457 840 331 4,306 689 19 (1,374) 5,268 (1,317) 1,445 5,396 5,396 56 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 22. ACQUISITIONS (CONT.) Goodwill has been determined on a provisional basis. The goodwill recognised is attributed to the anticipated profitability of the distribution of products in new markets and to new customers. It is not practicable to determine the revenue and loss of the Group as if the acquisition of Bellwave had been completed on the first day of the financial year, as Bellwave was only incorporated immediately prior to acquisition by the Group to receive the trade and assets of the machine to machine business unit of Bellwave Company Limited for which separate financial information from the start of the financial year is not readily available. 23. COMMITMENTS AND CONTINGENCIES Commitments Legal proceedings A. Ixfin Magneti Marelli Eletronica Ltda ("Ixfin") 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 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 23 December 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. C. On 17 March 2005, Dai Telecom filed a law suit against Sony Ericsson Mobile Communication International Ltd. (“Sony Ericsson”) and L.M. Ericsson Israel Ltd. (“Sony Israel”) in the Tel Aviv District Court in order to obtain compensation for damages suffered as a consequence of the termination of their engagement with Dai Telecom in connection with an exclusive distribution agreement for the sale and after sale support of Sony Ericsson cellular phones. Dai Telecom claims damages and loss of future profits as a result of the termination of the agreements amounting to approximately €1.6 million. On 5 September 2005, Sony Ericsson and Sony Israel each filed separate lawsuits against Dai Telecom in the Tel Aviv Magistrates Court. Sony Ericsson claimed for €252,000 for spare parts and accessories supplied to Dai Telecom during the years 2002 and 2003. Sony Israel claimed for €55,000 for cellular phones and accessories supplied to Dai telecom during years 2001 and 2002. On 17 January 2006, following Dai Telecom’s application, the Tel Aviv Magistrates Court postponed all legal proceedings related to these two lawsuits until the Tel-Aviv District Court rules in the lawsuit Dai Telecom filed against Sony Ericsson and Sony Israel. The parties have agreed to mediation, which is ongoing. As the legal proceedings had been postponed, the Group cannot estimate the outcome of those legal proceedings and consequently no provision has been recorded in respect of those claims. 57 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 23. COMMITMENTS AND CONTINGENCIES (CONT.) D. On 19 January 2004, Finmek Access S.p.A., in its capacity as assignee of the going business formerly owned by Finmek Manufacturing S.p.A, served on Telit Italy a Court order of payment issued by the Court of Padua for € 465,000, plus legal expenses. Telit Italy opposed the court order of payment, claiming that no amounts were due to Finmek Access since the requested amount has already been paid by Telit Italy in favor of Finmek S.p.A., and summoned the latter in the legal proceedings. On 16 February 2007, the Company and Finmek Access entered into an agreement, according to which Telit Italy has purchased from Finmek Access equipment for €235,000 and Finmek Access has waived its debt and has withdraw the claim from court. The Group has recorded a gain of €456,000 as other income relating to this settlement. E. In March 2006, Telit Italy received an invitation for arbitration proceedings from one of its suppliers, according to which the supplier claims the enforcement of an agreement with Telit Italy to the amount of €506,000. Telit Italy rejects such claims due to the supplier’s failure to deliver the agreed products and services to Telit Italy. According to Telit Italy’s management, based on the advice of its legal consultants, Telit Italy has grounded claims against the supplier and the expected outcome of such claim is to be deemed immaterial. Operating lease commitments F. The Group had total outstanding commitments for future minimum lease payments under non- cancellable operating leases as set out below: Operating leases which expire: Within one year In the second to fifth years inclusive Land and buildings 2 0 0 5 2 0 0 6 €’000 €’000 Other 2 0 0 6 €’000 2 0 0 5 €’000 746 1,206 1,952 350 830 1,180 165 165 330 114 330 444 Minimum lease payments under operating leases charged to the income statement for the year 746 350 165 165 Operating lease payments represent rentals payable by the Group for certain of its office properties. 58 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 23. COMMITMENTS AND CONTINGENCIES (CONT.) Guarantees and liens G. 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 favor of a bank. Moreover, liens were registered on all the funds due to Dai Telecom Ltd from its major customer in connection with specific orders received from the latter. The following table outlines the composition of the secured liabilities: Short-term credit Trade accounts payable 2 0 0 6 €’000 1,123 - 1,123 2 0 0 5 €’000 17,663 14 17,677 H. The Company provided guarantees to certain suppliers of Telit Communications SpA, to sustain credit lines to be granted by the suppliers in respect of purchases made. The guarantees shall not exceed the amount of € 12.5 million. In addition the Company provides guarantees to certain banks in Italy and Korea, to sustain credit lines granted by those banks to the Group's subsidiaries. The guarantees shall not exceed the amount of € 14.6 million. At the balance sheet date the Company had deposited € 7.1 million in Italian bank accounts, to act as security in relation to the credit facility granted by those banks (see note 25). 24. SHARE-BASED PAYMENTS A. Number Weighted average exercise price (pence) 2 0 0 6 2 0 0 5 2 0 0 6 2 0 0 5 Outstanding at beginning of year Granted during the year Lapsed during the year Outstanding at year end 1,976,570 490,117 (250,000) 2,216,687 - 1,976,570 - 1,976,570 1.40 0.70 (1.40) 1.25 - 1.40 - 1.40 Exercisable at year end 431,643 - 1.40 - The options outstanding at 31 December 2006 had a weighted average exercise price of 1.25 pence, and a weighted average remaining contractual life of 2.84 years. In 2005, options were granted on 30 September. The aggregate of the estimated fair values of the options granted on that date was €443,000. In 2006, options were granted on 1 March. The aggregate of the estimated fair values of the options granted on that date was € 188,000. 59 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 24. SHARE-BASED PAYMENTS (CONT.) B. The Company authorised an equity-settled share option plan with effect from 30 December 2004. Under the plan, the Group’s senior employees were granted 3,883,925 options exercisable into 3,883,925 ordinary shares at a nil exercise price. The options were exercised immediately prior to the Company's IPO in April 2005. 2,455,355 options granted vested at the date of grant and 1,428,570 options vest over 4 consecutive years with the first vesting period completing 24 months after the date of grant. The options expire within 5 years from the date of grant. The 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 used to determine the fair value of the option grant at the grant date were as follows: Share price Exercise price Expected share price volatility Expected life of options Risk free rate € 1.792 Par Value (1 pence) 40% 2.5-4.5 years 3.63 % C. On 30 September 2005 the employees of Dai Telecom and Telit Italy were granted 1,976,570 equity-settled share 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 fair value of the options granted that according to management estimates will satisfy the vesting conditions is €434,000, to be expensed over the period of vesting. The inputs into the Black-Scholes model used to determine the fair value of the option grant at the grant date were as follows: Share price Exercise price Expected share price volatility Expected life of options Risk free rate € 1.4065 € 1.792 40% 3-4.5 years 3.31% D. On 1 March 2006 an employee of Dai Telecom was granted 490,711 equity-settled share options exercisable into 490,711 ordinary shares at an exercise price of ₤0.705. The options vest in four equal instalments starting from the date of grant, through to 1 March 2010. The options expire within five years. The fair value of the options granted that according to management estimates will satisfy the vesting conditions is €188,000, to be expensed over the period of vesting. The inputs into the Black-Scholes model used to determine the fair value of the option grant at the grant date were as follows: Share price Exercise price Expected share price volatility Expected life of options Risk free rate € 0.705 € 0.705 40% 3-4.5 years 3.31% 60 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 24. SHARE-BASED PAYMENTS (CONT.) E. 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 a similar entity. The expected life of options 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 €1,218,000 in respect of equity settled share based payment transactions for the year ended 31 December 2006 (2005: €532,000). 25. BORROWINGS Short-term bank loans and other borrowings Factoring companies Current maturities of long term loans Total short-term borrowing from banks and other lenders Long-term loan from parent company Total borrowings Group 2 0 0 6 €’000 15,429 927 1,019 2 0 0 5 €’000 19,534 2,270 1,019 17,375 22,823 2,035 19,410 3,054 25,877 Included within short-term bank loans and other financing are: - A drawn amount of €8.0 million on a loan with a maturity date of 6 July 2007. A further €3.0 million is available to the Group under this facility up to this date, subject to satisfaction of the lending bank that the Group has met certain qualifying expenditure targets with regard to its research and development project in Sardinia. The interest rate on this short-term bank loan is Euribor plus 1.7% per annum. The short-term bank loan is a bridging loan in advance of funds to be received from a grant from the Italian government to the Group’s Italian subsidiary, which has been declared eligible to receive from the government a €11.4 million grant, and a €14.1 million loan facility to support a development project in Sardinia. The Company has provided a letter of guarantee of €11.0 million against this facility. - A bank overdraft of €2,634,000. The overdraft facility, which is available up to €3.0 million, is cancellable on demand but is without a fixed renewal date. - Drawn letters of credit and borrowings arising from invoice discounting totalling €3,701,000 in the Group’s Italian subsidiary. These borrowings, including the bank overdraft, are secured against purchased inventory or receivables, plus cash deposits made of €7.1 million and a letter of guarantee issued by the Company of €3 million. The total available lines of credit and invoice discounting at 31 December 2006 was €16.0 million, of which €5.0 million has a maturity date of 30 April 2007, with the remainder cancellable on demand, but without a fixed maturity date. - Drawn lines of credit against invoices totalling €3,040,000 which are cancellable on demand but without a fixed maturity date. These borrowings are denominated in New Israeli Shekels and secured against purchased inventory and receivables from customers. 61 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 25. BORROWINGS (CONT.) - Factoring facilities against qualifying receivables totalling €927,000. These borrowings are secured against the factored receivables and are with recourse. The total available factoring facilities in the Group’s Italian subsidiary are €4.5 million, provided there exists a satisfactory level of qualifying debtors, which are cancellable on demand but are without a fixed maturity date. The Group’s long-term loan to its parent company does not attract interest and will be repaid in three yearly equal installments starting December 2007. 26. RECONCILIATION OF NET CASH FLOWS TO OPERATING ACTIVITIES Group Company 2 0 0 6 €’000 2 0 0 5 (Restated) €’000 2 0 0 6 €’000 2 0 0 5 (Restated) €’000 Loss for the period from continuing operations Loss for the period from discontinued operations Loss for the period (11,384) - (11,384) (2,861) (1,306) (4,167) Adjustment for: Depreciation and amortization Impairment of intangible assets Income tax expense Investment income Finance costs Increase (decrease) in provision for post employment benefits Share-based payment charge Loss on disposal of fixed assets Share in result of associated undertaking Operating cash flows before movements in working capital: Decrease in trade receivables (Increase) decrease in other current assets Decrease (increase) in inventory Increase (decrease) in trade payables (Decrease) in other current liabilities Increase in other long term liabilities Cash generated by (used in) the operations Income tax paid Interest received Interest paid 1,469 500 11 (190) 1,169 371 1,218 7 41 15,874 (2,458) 2,513 1,667 (1,583) 138 9,363 (739) 318 (896) 661 - 1,338 (656) 938 (735) 532 - 164 3,808 4,039 (5,952) 2,681 (5,743) - (3,092) (1,240) 336 (1,029) (386) - (386) - - - (670) - - - - - - 27 - (49) (300) - (1,378) - 320 - 68 - 68 - - 30 (894) - - - - - - (238) - 65 621 - (348) - 307 - Net cash provided by (used in) operating activities 8,046 (5,025) (1,058) (41) 62 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 27. 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 these policies. It is the Group's policy that no trading in financial instruments is undertaken. 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 the 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 at variable rates of interest. Cash at bank earns interest at floating rates based on daily bank deposit rates. 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 its subsidiaries to concentration of credit risk consist principally of trade receivables. The Group’s trade receivables are mainly derived from sales to a major customer in Israel and other customers in Italy and Korea. 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. As at 31 December 2006, the Group had significant concentration risk in Dai Telecom Ltd, with a balance of approximately €4 million due from one major customer (2005 – approximately €19 million). The balance is due in New Israeli Shekels and bears no interest. The average credit period taken in 2006 and 2005 was 75 days. 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 including 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. 63 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 28. BALANCES AND TRANSACTIONS WITH RELATED PARTIES Transactions between the Company and its subsidiaries and associates represent related party transactions. Transactions with subsidiaries have been eliminated on consolidation. Except as disclosed below, no material related party transactions have been entered into, during the year, which might reasonably affect any decisions made by the users of these Consolidated Financial Statements. A. The Group has entered into management agreement with Polar (the parent company) to provide management services during year ended 31 December 2006 in consideration for an annual payment in the amount of US $100,000 (2005 - $100,000). The amount outstanding at 31 December 2006 was €80,000 (2005 – €82,000). B. On 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 approximately €8,000. The amount outstanding at 31 December 2006 was €54,000 (2005 – €47,000). On 1 October 2006 the lease agreement period was lengthen by 3 years. C. On 1 March 2006 the Company granted the following key personnel options exercisable into ordinary shares with no exercise price. Number of options granted Vested at date of grant Unvested at date of grant Chief Executive Officer of Dai Telecom 490,711 - 490,711 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 €188,000. D. Remuneration of key management personnel: Short-term employee benefits Post employment benefits Total Group 2 0 0 6 €’000 2 0 0 5 €’000 1,742 73 1,815 1,830 56 1,886 E. Oozi Cats and, in 2006 only, a member of key management personnel and others provided consulting services to Telit Communications SpA, the Group’s Italian subsidiary pursuant to a contract dated 5 January 2004, as amended on 26 April 2006, between Excalibur Consulting Group LLC (“Excalibur”) and Telit Communications Spa. Excalibur charged services amounting to €921,000 for the year ended 31 December 2006 (31 December 2005 - €694,000 for Mr. Cats' services only) of which €552,000 related to consulting services provided by Oozi Cats, €159,000 related to a member of key management and €210,000 related to other consultants. No amounts were outstanding to Excalibur at 31 December 2006 and 2005. 64 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 28. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (CONT.) F. In the opinion of the directors, the Company's ultimate parent company and ultimate controlling party is Polar, a company incorporated in Israel. The parent undertaking of the smallest and largest group, which includes the Company and for which group accounts are prepared, is Polar, a company incorporated in Israel. Copies of the group financial statements of Polar Investments Limited are available from 21 Ha’arbaa Street, Tel Aviv, 64739 Israel. The Company is party to an agreement dated 29 March 2005 with its parent company Polar, pursuant to which Polar agrees that as long as it remains a controlling shareholder the Company will be capable of carrying on its business independently of Polar and that all future transactions with it will be at arm’s length. The agreement further provides that Polar as a controlling shareholder shall procure that any director of the Company who is a director of Polar shall not be counted in the quorum on any matter, at board meetings, where in the opinion of the independent Directors there is a conflict of interests. 29. INFORMATION ON THE COMPANY As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Company is not presented in this Annual Report. The loss for the year amounted to €386,000 (2005: profit of €68,000). 30. SUBSEQUENT EVENTS Telit has entered into an agreement according to which a capital injection of €16 million into the Company’s m2m subsidiary, Telit Wireless Solutions Srl, will be made by Bartolini After Market Electronic Services Srl ("BAMES"), within the structure of a business alliance between the two companies. Under the terms of transaction, BAMES will provide Telit Wireless Solutions Srl with €9 million in equity and an additional €7 million investment in December 2008, providing Telit meets certain m2m module minimum purchase commitments. BAMES will receive up to 10% of the share capital of Telit Wireless Solutions Srl. Managment currently assesses that, given current market conditions and the expected growth of the Company, these minimum purchase commitments are attainable. In addition to the investment agreement, Telit Wireless Solutions Srl entered into a strategic manufacturing agreement with Services for Electronic Manufacturing s.r.l ("SEM"), BAMES' electronics manufacturing subsidiary, for all present and future production of Telit’s m2m modules, with certain exceptions, at competitive market prices for a term of not less than five years. This will enable Telit to consolidate its European manufacturing into one geographical location, and will streamline operations while keeping control of the Company’s intellectual property and increasing its control over its supply chain. This is achieved by the Telit taking a 19.9% equity stake in SEM and the right to nominate one director to SEM's board of directors. SEM will also provide Telit with a €7 million line of credit for finished goods, which will defer payment until the second equity injection referred to above. The proceeds from the investment will enable Telit to continue execution of its strategy of focusing on the rapidly growing m2m market, consolidate its international expansion, and develop its next generation m2m modules. 65 

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