ANNUAL REPORT
2007 2
Table of Content
Telit Communication PLC
Financial Highlights
We live m2m
Chairman’s & Chief Executive’s Statement
Telit’s Board of Directors
Corporate Governance
Report on Director’s Remuneration
Directors’ Report
Statement of Directors Responsibilities
Independent Auditor’s Report to the
Members of Telit Communication PLC
Financials
Company Information
3
4
6
8
20
22
24
26
31
32
34
94
Telit Communication PLC
3
Telit is a leading global wireless technology company. It develops,
manufactures and markets GSM/GPRS, UMTS/HSDPA and CDMA/
EVDO communication modules for machine-to-machine (m2m)
applications which streamline business processes by enabling
machines, devices and vehicles to communicate via mobile networks.
As both producer and marketer of advanced cellular technology
and products, Telit is uniquely positioned in the m2m market. Telit
has attained a strong market position and its management believes
it is ranked third in the world. Telit is one of the few companies in
the industry with full control over the underlying technologies in its
products. Telit owns valuable patents and boasts especially strong in-
house technology and development expertise.
Telit is listed on AIM (Ticker: TCM)
The M2M Market
The international market for machine-to-machine (m2m) wireless
communications is widely viewed as enjoying an annual growth rate
of 30% as developments in key vertical market segments such as
electricity and gas meters, motor vehicles, security alarms and point
of sale terminals gather ever increasing speed.
The M2M market is rapidly growing as wireless communications have
become a “must-have” rather than a luxury technology. Businesses
that were not interested in m2m wireless solutions in the past are
now looking to incorporate this technology in their business as their
operations expand and modernize.
What is m2m?
Machine to machine (m2m)
technology establishes
wireless communication
between machines and
the information centre of a
business. The goal of m2m
is to enable applications
that allow businesses
to increase productivity
and competitiveness. At
the heart of each m2m
implementation is a
communication module
which receives, processes
and transmits information.
4
Financial Highlights
FY 2007
H1& H2 2007
2007 revenue increased by 73% to
€52.2 million (2006: €30.1 million)
H2 2007 over H1 2007 revenue up 28%
to €29.3 million (H1 2007: €22.9 million)
2007 gross profit increased by 89% to
€22.0 million (2006: €11.7 million)
H2 2007 over H1 2007 gross profit up 39%
to €12.8 million (H1 2007: €9.2 million)
2007 gross margin increased
to 42.1% (2006: 38.7%)
H2 2007 over H1 2007 gross margin up 9%
to 43.7% (H1 2007: 40.2%)
2007 adjusted operating loss reduced to
€1.1 million (2006: loss of €7.1 million)1
H2 2007 adjusted operating income of
€0.9 million (H1 2007: loss of €2.0 million) 1
2007 adjusted EBITDA of €1.4 million
(2006: loss of €4.9 million) 1
H2 2007 adjusted EBITDA of €2.0 million
(H1 2007: loss of €0.6 million) 1
2007 operating loss of €1.5 million, down
from €7.1 million in 2006.
2007 adjusted loss before tax of €0.9
million (2006: loss of €7.4 million) 1
H2 2007 income before tax of €0.3 million
(H1 2007: loss of €1.2 million) 1
2007 adjusted net loss of €1.5 million from
continuing operations (2006: loss of €7.5
million) 1
H2 2007 adjusted net loss of €0.2 million
from continuing operations (H1 2007: loss
of €1.3 million) 1
2007 net loss from continuing operations
of €1.9 million, down from €7.5 million in
2006.
Cash balances (including restricted cash) of
€11.3 million (2006: €11.0 million)
An initial investment by BAMES of €9.0 million
in cash, out of a total to be received of €16.0
million, was completed in June 2007 with the
remainder to complete in December 2008
1 Excluding certain expenses related to an unsuccessful acquisition bid of €0.4 million. Adjusted EBITDA is defined as earnings
before interest, tax, depreciation and amortization, share based payments from continuing operations and the aborted acquisition
costs mentioned above. For further details please see the Chief Executive’s review and note 5 to the accompanying financial
statements.
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
(cid:39)(cid:46)(cid:35)(cid:40)
(cid:39)(cid:39)(cid:35)(cid:46)
(cid:38)(cid:45)(cid:35)(cid:45)
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
(cid:38)(cid:39)(cid:35)(cid:45)
(cid:38)(cid:38)(cid:35)(cid:41)
(cid:38)(cid:39)(cid:35)(cid:42)
(cid:46)(cid:35)(cid:39)
(cid:45)(cid:35)(cid:38)
(cid:40)(cid:35)(cid:43)
(cid:39)(cid:35)(cid:42)
(cid:40)(cid:35)(cid:45)
H1
2005
2006
H2
2007
(cid:42)(cid:35)(cid:45)
H1
2005
2006
H2
2007
75
30
70
28
65
26
60
24
55
22
50
20
45
18
40
16
35
14
30
12
25
10
20
8
15
6
10
4
5
2
0
0
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
(cid:46)(cid:35)(cid:39)
(cid:38)(cid:39)(cid:35)(cid:45)
(cid:45)(cid:35)(cid:38)
(cid:39)(cid:39)(cid:35)(cid:37)
(cid:38)(cid:38)(cid:35)(cid:44)
(cid:40)(cid:35)(cid:45)
(cid:39)(cid:35)(cid:42)
(cid:39)(cid:35)(cid:40)
2003
H1
2005
(cid:40)(cid:35)(cid:43)
(cid:40)(cid:35)(cid:37)
2004
2006
(cid:43)(cid:35)(cid:40)
2007
2005
H2
2006
2007
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:38)(cid:39)(cid:35)(cid:45)
(cid:46)(cid:35)(cid:39)
(cid:45)(cid:35)(cid:38)
(cid:40)(cid:35)(cid:43)
(cid:39)(cid:35)(cid:42)
(cid:40)(cid:35)(cid:45)
H1
2005
2006
H2
2007
30
75
28
70
26
65
24
60
22
55
20
50
18
45
16
40
14
35
12
30
10
25
8
20
6
15
4
10
2
5
0
0
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:39)(cid:39)(cid:35)(cid:46)
(cid:39)(cid:46)(cid:35)(cid:40)
(cid:42)(cid:39)(cid:35)(cid:39)
(cid:38)(cid:45)(cid:35)(cid:45)
(cid:38)(cid:38)(cid:35)(cid:41)
(cid:38)(cid:39)(cid:35)(cid:42)
(cid:40)(cid:37)(cid:35)(cid:38)
(cid:38)(cid:45)(cid:35)(cid:40)
(cid:42)(cid:35)(cid:45)
(cid:38)(cid:37)(cid:35)(cid:44)
(cid:42)(cid:35)(cid:45)
2003
H1
2005
2004
2006
2005
H2
2006
2007
2007
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:39)(cid:46)(cid:35)(cid:40)
(cid:39)(cid:39)(cid:35)(cid:46)
(cid:38)(cid:45)(cid:35)(cid:45)
(cid:38)(cid:38)(cid:35)(cid:41)
(cid:38)(cid:39)(cid:35)(cid:42)
(cid:42)(cid:35)(cid:45)
H1
2005
2006
H2
2007
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
30
75
28
70
26
65
24
60
22
55
20
50
18
45
16
40
14
35
12
30
10
25
8
20
6
15
4
10
2
5
0
0
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
5
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:42)(cid:39)(cid:35)(cid:39)
(cid:40)(cid:37)(cid:35)(cid:38)
(cid:38)(cid:45)(cid:35)(cid:40)
(cid:38)(cid:37)(cid:35)(cid:44)
(cid:42)(cid:35)(cid:45)
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
(cid:39)(cid:39)(cid:35)(cid:37)
(cid:38)(cid:38)(cid:35)(cid:44)
(cid:43)(cid:35)(cid:40)
(cid:39)(cid:35)(cid:40)
2003
(cid:40)(cid:35)(cid:37)
2004
2005
2006
2007
2003
2004
2005
2006
2007
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:46)(cid:35)(cid:39)
(cid:38)(cid:39)(cid:35)(cid:45)
(cid:45)(cid:35)(cid:38)
(cid:39)(cid:39)(cid:35)(cid:37)
(cid:39)(cid:35)(cid:42)
(cid:39)(cid:35)(cid:40)
2003
H1
2005
(cid:40)(cid:35)(cid:43)
(cid:40)(cid:35)(cid:37)
2004
2006
(cid:38)(cid:38)(cid:35)(cid:44)
(cid:40)(cid:35)(cid:45)
(cid:43)(cid:35)(cid:40)
2005
H2
2006
2007
2007
30
75
28
70
26
65
24
60
22
55
20
50
18
45
16
40
14
35
12
30
10
25
8
20
6
15
4
10
2
5
0
0
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:60)(cid:103)(cid:100)(cid:104)(cid:104)(cid:21)(cid:69)(cid:103)(cid:100)(cid:210)(cid:105)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:71)(cid:90)(cid:107)(cid:90)(cid:99)(cid:106)(cid:90)(cid:104)(cid:21)(cid:29)
(cid:21)(cid:98)(cid:94)(cid:97)(cid:30)
(cid:39)(cid:39)(cid:35)(cid:46)
(cid:39)(cid:46)(cid:35)(cid:40)
(cid:42)(cid:39)(cid:35)(cid:39)
(cid:38)(cid:45)(cid:35)(cid:45)
(cid:38)(cid:38)(cid:35)(cid:41)
(cid:38)(cid:39)(cid:35)(cid:42)
(cid:40)(cid:37)(cid:35)(cid:38)
(cid:38)(cid:45)(cid:35)(cid:40)
(cid:42)(cid:35)(cid:45)
(cid:38)(cid:37)(cid:35)(cid:44)
(cid:42)(cid:35)(cid:45)
2003
H1
2005
2004
2006
2007
2005
H2
2006
2007
(cid:39)(cid:35)(cid:40)
2003
(cid:40)(cid:35)(cid:37)
2004
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
(cid:42)(cid:39)(cid:35)(cid:39)
(cid:39)(cid:39)(cid:35)(cid:37)
(cid:40)(cid:37)(cid:35)(cid:38)
(cid:38)(cid:45)(cid:35)(cid:40)
(cid:38)(cid:38)(cid:35)(cid:44)
(cid:43)(cid:35)(cid:40)
(cid:38)(cid:37)(cid:35)(cid:44)
(cid:42)(cid:35)(cid:45)
2005
2006
2007
2003
2004
2005
2006
2007
6 We live m2m
Telit is growing faster than the m2m market growth rate, capturing significant market
share from the competition. Success with m2m developers is based on technology, support
and quality. Telit’s impressive growth with a CAGR of 73% during 2003-2007 underlines its
technological strength.
At the heart of Telit’s m2m solutions lies a proprietary software platform including a
comprehensive AT-command interface for communication between applications and
modules. Telit’s wireless modules can be easily applied to vertical application areas such as:
• Automatic Meter Reading
• Emergency Communication Systems
• Car Telematics
• Healthcare
• Fleet Management and Tracking/Logistics
• Information Displays
• Point of Sale Terminals/Handhelds
• Industrial Processes
• Security Systems and
Personal Tracking Devices
• Mobile Computing
(Mobile workforce automation)
• Public Transportation and Road Tolling
• Vending Machines
Telit Worldwide
than
added
Telit sells its products
through a network of
resellers
value
to more
2,000
communications solution
providers and systems
integrators in more than
50 countries around the
world. Our customers are
served directly by us or
through a global network
of 31 distributors.
AMERICAS
Telit Wireless Solutions Inc.
(Americas)
•
Regional headquarters for
the Americas region
Center of competency for
Automotive products
Sales and Marketing for
the Americas
•
•
EMEA
Telit Communications
S.p.A (EMEA)
•
•
Global headquarters
Product Development,
Product Management,
Production of GSM/GPRS
products out of the main
locations Trieste and
Cagliari, Italy
Sales and Marketing for
EMEA
•
APAC
Telit Wireless Solutions
Co.Ltd (APAC)
•
Regional headquarters for
the APAC region
Product Development,
Product Management,
Production of CDMA and
UMTS products
Sales and Marketing for the
APAC region
•
•
Telit’s headquarters are in
Rome, Italy, with regional
headquarters
in Raleigh
NC, USA and Seoul, Korea.
Its R&D centers are in Trieste and Cagliari, Italy and Seoul, Korea, with regional sales offices
in China, Denmark, France, Germany, Great Britain, Israel, Italy, Korea, Spain, Taiwan, and
the USA. Telit employs approximately 250 employees worldwide.
Telit provides global support to its international customers covering the entire spectrum of
the m2m market. Its vast experience doing business across the globe has helped the company
establish strong channels and excellent access to key players in all major world markets.
Telit’s diverse worldwide customer base includes cellular operators, cellular distributors,
as well as designers, manufacturers and system integrators of cellular m2m module-based
applications.
7
Telit’s Strategy
Our strategy for 2008 is to continue to leverage our position as a leading player in the m2m
market, offering customers a competitive edge by reducing their total cost of ownership and
optimizing the performance of their products.
We plan on doing this through continued investment in R&D and building on the foundations
laid by our regional operations to date.
Competitive Advantage
Based on its extensive R&D experience, gained hundreds of engineering man-years, Telit
has developed its own protocol stack as the technological basis of its solutions. This enables
the Company to offer customers solutions ranging from complete devices to embedded
products, including fitting its platform into its customers’ products. Underlying its superior
growth rate, Telit has three major advantages:
Flexibility
Telit is the first and only m2m manufacturer that offers customers a form factor and
family concept. All modules in a family have the same form factors and full software
compatibility, but offer different functionality to meet the requirements of different vertical
applications segments. The advantage for users is self-evident: all modules in a family
are interchangeable. Above all, customers can easily replace the modules with successive
products without changing the application. This reduces effort, time and costs associated
with development. As a result, Telit is able to set itself apart from the competition, which
often changes the size and shape of its modules with new models. Customers, however,
need modules that can be used for years in their applications.
Scalability
Telit’s modules are tailored for various applications and different production lot sizes: for
quantities of a few thousand units, the company developed the GM family, which offers
low outlay and costs for integration. For applications that are produced in the tens of
thousands, low production costs are a prime concern. In this case customers can turn
to the GE product range with its Ball Grid Array (BGA) assembly concept. Telit is the first
company to offer BGA modules, which can be assembled like electronic components and
integrated easily into the production line - no connectors or cables are needed.
Innovation
Controlling its own intellectual property enables Telit to remain on the cutting edge of
product innovation. Integrating GSM/GPRS, CDMA and UMTS products into its product
family concept enables customers to choose between various technologies for each
module - depending on the market in which their application is being used. The main
advantage is that no changes are required to the application. Consequently, Telit supplies
modules that can be used worldwide without restriction. As communication technologies,
such as RFID and Zigbee enter the market, Telit will build on them to ensure its customers
are at the cutting edge of m2m solutions.
8
Chairman’s & Chief Executive’s Statement
Chairman’s Statement
Enrico Testa, Chairman of the Board
We are pleased to present Telit Communications PLC’s 2007 Annual
Report. I am happy to be able to state that our continuing focus on the
strategy we outlined in our previous annual reports and our focus on our
global footprint in the m2m market is bearing fruit. 2007 has been the
first year to show a positive adjusted EBITDA from continuing operations
and also marks Telit’s move into positive operating profit, achieved for
the second half of the year. Further information on these and other performance measures
are included in the Chief Executive’s Review.
During 2007 Telit continued its impressive revenue growth (73% CAGR during 2003 - 2007)
while improving its gross margin and profit. This growth rate, which is substantially higher
than the market average growth rate, is due to Telit’s cutting edge technology, its global
presence, the streamlining of its logistics and the dedication, expertise and hard work of
Telit’s global work force.
We expect to leverage on these and other advantages and strengths in 2008 and beyond and I
look forward to present to you Telit’s continued growth and increased profitability in the years
to come.
Enrico Testa
Chairman of the Board
31 March 2008
Chief Executive’s Statement
And Review
Oozi Catz, Chief Executive Officer
I am pleased to present Telit Communications PLC’s Annual Report for
the year ended December 31 2007.
2007 has been a year of strong growth for Telit. We have achieved an
adjusted operating profit of €0.9 million in H2 2007, as well as achieving a positive adjusted
EBITDA of €1.4 million for the full year.
Impressive revenue growth of 73% has been achieved, as we have met the market’s increasing
awareness and demand for our superior m2m technology. Telit’s performance during the
second half of the year has been very positive as we have continued to win new business and
gain market share. Indeed, the impressive second half over first half 2007 improvements
in EBITDA performance demonstrate both the growing market opportunity and Telit’s
strengthening position in the marketplace.
Below are the key financial performance measures for continuing operations for 2007
and 2006:
9
Revenue 1
Gross profit
Gross margin
Other income
H2 2007
€’000
29,307
H1 2007
€’000
22,882
2007
€’000
52,189
2006
€’000
30,140
12,793
9,195
21,988
11,653
43.7%
40.2%
42.1%
38.7%
939
1,518
2,457
729
Research & Development 2
(4,719)
(3,953)
(8,672)
(8,058)
Selling & Marketing 2
(4,720)
(4,072)
(8,792)
(4,948)
General & Administrative 2
(2,990)
(3,962)
(6,952)
(6,106)
Share based compensation
(429)
(709)
(1,138)
(340)
Adjusted operating profit / (loss) 3
874
(1,983)
(1,109)
(7,070)
Other operating expenses
(400)
-
(400)
-
Reported operating profit / (loss)
474
(1,983)
(1,509)
(7,070)
Adjusted EBITDA 2,3
2,024
(626)
1,398
(4,871)
1 Including royalty income (2007: €2.3 million; 2006: €1.7 million)
2 excluding share-based payment charges.
3 excluding certain other expenses related to an unsuccessful acquisition bid of €0.4 million
The success of the Group’s international expansion has been a major feature of the year.
The expansion of the Company’s global footprint has seen over 150 new design wins secured
in our operations in Telit Americas and Telit APAC. The second half of the year has been a
highly successful period in terms of new client wins and this has been translated into the
further operational improvements and operating profitability achieved during the last six
months. Therefore, it is no exaggeration to say that 2007 has seen Telit demonstrate beyond
doubt that it is now a first tier global player in the m2m market. The global m2m market is
gathering momentum and Telit is very much in the ascendancy among its peers, delivering
strong and sustainable growth.
The first installment of the €16 million investment by BAMES into Telit Wireless Solutions,
and the strategic agreement with BAMES’s electronics manufacturing subsidiary, SEM, were
also major developments during the year. The agreement provides confirmation of the value
and potential of Telit’s technology in the m2m market. We are now working very closely with
BAMES and SEM and have already begun to enjoy the fruits of this alliance.
10
Chief Executive’s Statement
Financial Results
The results for the year are in line with market expectations and underline the new course the
Company is taking, supported by the geographical expansion begun in 2006 and strengthened
during 2007.
The results for the twelve month period ended on 31 December 2007 reflect strong like-for-
like growth, strong margins and excellent underlying sales momentum. Telit increased total
revenue by 73% to €52.2 million, compared to €30.1 million for 2006. 2007 revenue includes
royalty income of €1.5 million for the lifetime use of the tradename “Telit” by the Italian
company, Bardi, as detailed in note 2 to the accompanying financial information.
The majority of revenue continues to come from repeat business with existing customers.
In addition to the development of existing customer relationships, Telit has increased the
number of customers to more than 2,000 OEMs, communications solutions providers and
system integrators in more than 50 countries.
The split of revenue on a geographical basis for the years ended 31 December 2007 and 2006
is as follows:
2007 (€M)
% of Total
Revenue
2006 (€M)
% of Total Revenue
EMEA
APAC
AMERICAS
Total Revenue
36.8
13.7
1.7
52.2
71
26
3
100%
24.2
5.8
0.1
30.1
80
20
-
100%
The continued development of Telit’s global outreach can be seen by the geographical division
of revenue for 2007. The weighting of Telit’s revenue is becoming increasingly distributed
across the geographies, with increasingly higher contributions being made to total revenue
from the APAC and Americas regions. While the majority of revenue continues to come from
EMEA, we fully expect that the APAC and Americas regions will continue to increase the
weightings of their contribution to total revenue performance in 2008 and beyond.
As we have previously reported, Telit’s position as a global player in the m2m market was
attained by the penetration into the Asia Pacific and Americas markets in 2006. Since its
inception, Telit APAC has successfully established its position as a sales gateway to the
region for the CDMA and GSM/GPRS product lines and as a leading R&D centre for CDMA,
UMTS/HSDPA and other advanced technologies. The new sales offices opened during the
year in China (Shenzhen and Shanghai) and in Taiwan (Taipei) have made excellent progress
during the year and secured more than 70 design wins in the region.
In addition, Telit Americas began making headway in the region and has secured more than
80 design wins with new customers and, as previously announced, an order worth $10 million
over a period of two years. Telit Americas is now well established to meet increasing levels
of demand in the region.
11
The market opportunity for Telit in both these regions is substantial and the level of major
approvals achieved during 2007, combined with the expected new business due to the
numerous design wins during the year, are testament to the success of Telit’s expansion into
these important growth markets.
2007 gross profit increased 89% to €22.0 million, compared to €11.7 million in 2006, resulting
in an overall margin of 42.1% compared to 38.7% for 2006.
During the course of the year Telit continued to benefit from governmental grants related to
our R&D activities in Trieste, Italy and recorded other income amounting to €2.1 million from
such grants, up from €0.7 million in 2006.
Research and development expenses, excluding share-based payments, were €8.7 million,
compared to €8.1 million in 2006. Sales and marketing expenses, excluding share-based
payments, were €8.8 million, compared to €4.9 million in 2006, with a majority of the increase
stemming from the full year impact of Telit APAC and Telit Americas (which were acquired
and incorporated, respectively, towards the end of the first half of 2006).
General and administrative expenses, excluding share-based payments, were €7.0 million,
compared to €6.1 million in 2006. The G&A expenses reflect the expansion of Telit through
the acquisition and introduction of Telit APAC and Telit Americas. Share based compensation
charges were €1.1 million in 2007 and €0.3 million in 2006. Other expenses of €0.4 million
were incurred in the second half of the year, representing professional adviser costs
associated with an unsuccessful acquisition bid, which management consider to be non-
recurring in nature.
This resulted in an operating loss for 2007 of €1.1 million excluding the other expenses and
€1.5 million including these expenses (operating profit during the second half of the year
offsetting, in part, the operating loss in the first half of the year), down from a loss of €7.1
million in 2006. Loss before tax was €0.9 million excluding the other expenses and €1.3
million including these expenses, compared to a loss of €7.4 million in 2006. Net loss for the
period from continuing operations was €1.5 million excluding the other expenses and €1.9
million including these expenses, compared to €7.5 million in 2006.
Basic and diluted loss per share for the period from continuing operations was 3.3 Euro
cents excluding the other expenses and 4.3 Euro cents including these expenses, compared
to a 17.4 Euro cents loss per share in 2006. The total continuing and discontinued basic and
diluted loss per share was 15.3 Euro cents excluding the other expenses and 16.3 Euro cents
including these expenses, compared to a 25.8 Euro cents loss per share in 2006.
12
Chief Executive’s Statement
Financial Position
At 31 December 2007, the Group has total net assets of €16.4 million (2006: €23.7 million),
including non-current assets of €17.2 million (2006: €14.4 million). The increase in non-
current assets reflects the Group’s acquisition of a 19.9% equity interest in Services for
Electronic Manufacturing Srl (SEM), with a carrying value of €1.6 million (2006: €nil), together
with an increase in intangible assets of €2.3 million, largely due to the commencement of
capitalisation of costs associated with new product development.
These increases have been partially offset by a reduction in deferred tax assets of €0.7 million,
principally due to a reduction in the enacted tax rate in Italy, and a €0.4 million net reduction
in property, plant and equipment as depreciation, together with the reclassification of assets
to the held for sale caption, has more than offset additions in the year. The decrease in the
Group’s current assets from €45.5 million to €41.2 million predominantly reflects the current
year reclassification of current assets relating to discontinued operations to the assets
held for sale caption whereas, in accordance with IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations, comparative information has not been similarly reclassified
and which accounted for €13.3 million of 2006 current assets. Excluding this amount for
discontinued operations, comparative current assets would have been €32.2 million. The
current year total of €41.2 million predominantly reflects an increase in trade receivables of
approximately €7.8 million.
Net debt at 31 December 2007 is €6.0 million (2006: €6.3 million excluding discontinued
activities). This movement was principally due to an increase in cash of approximately
€0.3 million, and early repayment of loans of €1.5 million to the Group’s former parent
company, Polar Investments Limited, as a result of which the Group negotiated a reduction
in remaining indebtedness, realising an early settlement gain of €1.0 million, reported in the
discontinued segment. These reductions were offset by an increase of €3.0 million in short-
term borrowings for working capital purposes.
Cash flow from continuing operations
Net cash used in operating activities in 2007 was €1.5 million, compared to a net cash
outflow of €9.6 million in 2006, largely due to reduced operating losses, as increases in trade
receivables were offset by increases in trade payables and other current liabilities.
Net cash from investing activities of €3.6 million (2006: used in investing activities €10.7
million), is principally due to the purchase of property, plant and equipment (€1.3 million),
expenditure on intangible assets (€3.7 million), offset by a reduction in restricted cash of €1.0
million, used as security for the Group’s borrowing facilities in Italy and from net proceeds
from the issue of shares in Telit Wireless Solutions Srl of €7.6 million.
Net cash from financing activities of €1.5 million (2006: €8.7 million), predominantly relates
to an increase in short term loans which were used mainly for financing working capital
needs of €3.0 million, offset by early settlement of other indebtedness of €1.5 million.
13
Liquidity
Details of the Group’s net debt position are set out above. The Group is financed from cash
proceeds arising from the issuance of shares at the time of admission to the AIM market, and
in 2007, a capital injection of €9.0 million (before costs) into the Group’s principal subsidiary,
Telit Wireless Solutions Srl, together with short-term borrowings, made available to finance
working capital, and an €8.0 million bridging loan in advance of funds to be received from a
grant from the Italian government to the Group’s Italian subsidiary. Further details on the
Group’s borrowings are included within note 31 to the financial statements.
Principal risks and uncertainties
There are a number of potential risks and uncertainties which could have a material impact
on the Group’s long-term performance.
Competitor risks
The Group operates in a highly competitive market with significant product innovations.
If competitors introduce new products that employ new technologies, or if new industry
or new government standards and practices emerge, the Group’s existing technology and
systems may become obsolete.
We are subject to competition from domestic and overseas competitors who have greater
capital and other resources and superior brand recognition than the Group. Consolidation
between competitors may take place in the industry, which may further intensify
competition by creating stronger competitors.
Competitors may launch new products in our markets, including the updating of their
existing product lines, and may adopt more aggressive pricing policies. This may manifest
itself in price pressures which create downward pressure on gross margins.
To manage these risks, the Group invests in the development of new products using
different communication technologies in order to expand the Group’s product portfolio
aimed at attracting new customers and increasing revenue from existing customers. The
Group also monitors market prices on an ongoing basis.
Product development
The Group’s future performance depends upon its ability to develop and introduce new
products, services or enhancements which meet the needs of its customers. The Group
incurs substantial product development expenditure designed to meet customers’ evolving
needs and to ensure compatibility with new technology in its target markets. Significant
delays in product development or introduction could have a material adverse effect on the
Group’s business, financial condition and results of operations. Developing the Group’s
technology and product range entails significant technical and business risks.
The Group manages these risks through its investment in research and development
capabilities, including the recruitment of experienced industry professionals. Our R&D
centres are based in Trieste and Cagliari, Italy and in Seoul, South Korea. Our R&D team
is responsible for managing all aspects of product development and progress reports are
routinely provided to our Chief Operating Officer.
14
Chief Executive’s Statement
Commercial relationships
The Group has significant contracts with a limited number of suppliers, distributors and
other business partners some of which may be terminated without cause or on written
notice at the expiry of their term. Damage to or loss of any of these relationships, or
renewal on less favourable terms, could have a direct and detrimental effect on the
Group’s results, the impact of which could be material to the trading position and future
profitability of the Group.
To manage this risk, the Group meets with individual management from such strategic
partners on a regular basis, as well as seeking to diversify, where appropriate, sources of
supply. In addition the Group has a representative on the board of its principal supplier,
SEM, providing insight into that Company’s activities and operations.
Manufacturing
The Group’s products are manufactured by third parties,
including outsourced
manufacturers. The Group’s supply of products could be disrupted for reasons beyond the
Group’s control such as the closure of outsourced facilities, work force actions or other
issues. In addition, the Group’s quality assurance over its products may be negatively
affected by these outsourced relationships.
The Group manages these risks by monitoring quality assurance at outsourced
manufacturers using its own test equipment on production lines, and through its
representation on the board of SEM.
Employees
The number of employees on a geographical basis as at 31 December 2007 and 2006 is as
follows:
31 Dec. 2007
31 Dec. 2006
EMEA
APAC
AMERICAS
Total Employees
Business Performance
184
62
11
257
170
48
9
227
During 2007 the following major developments took place that contributed to the overall
performance of the Company and will contribute to the Company’s future results.
15
Sales and Marketing:
•
Reinforced distribution network by adding Rutronik, the largest independent European
Distributor, CEP AG in Germany & Poland as well as MT System in Russia.
•
Telit signed Symmetry Electronics as a distributor for US and Mexico. Telit signed SPI
Technologies to represent Telit as a manufacturer’s representative in Eastern Canada.
•
Worldwide customers increased to over 2,000 customers compared to 1,500 customers in
2006. APAC and EMEA contributed to this growth by winning 150 designs.
•
Extended global relationship with Arrow, one of the largest distributors of electronic
components by signing distribution agreements with Arrow Asia and Sasco Holz for
Central European and CIS countries.
•
Selected by a major European toll-collect customer for a field trial with 10,000 units in
place.
•
Opened sales offices in Taiwan and China with sales staff and technical support engineers.
•
Signed distribution agreement with Soanar, Singapore for the South Asia market and
Arrow Asia Pac for the whole Asia Pacific market.
•
$10 million deal signed by Telit Wireless Solutions (U.S.) with major North American client.
Product Highlights:
•
In October, Telit’s m2m module, the GE864-PY, received PTCRB certification.
•
In July, Telit introduced a new groundbreaking design in its module range, offering its
customers high-performance at lower cost of ownership. The new GE863-PRO3 GSM/
GPRS module simplifies m2m design for POS terminals, fleet management systems and
AMR applications. Equipped with two powerful microprocessors, this quad-band module
is suited for a wide range of applications requiring high processing power. The GE863-
PRO3 also offers significant cost benefits for the development and production of complex
m2m solutions.
•
Telit introduced a new product GE863-SIM with embedded chip SIM. This product enables a
higher degree of integration and provides increased reliability by eliminating the traditional
SIM card and connector.
•
Telit entered into an agreement with Selex for the joint development of modules according to
the GSM-R standard in order to address railway operators in Europe and China.
•
Signed agreement for, and completed development of, M2M Smart platform for Telefónica.
•
Started process of partnership for M2M card (embedded chip SIM) with Telefónica.
•
Release of new GT864-QUAD and GT864-PY terminal products that complete the Telit
terminal product line.
•
Release of updated low power GPRS/GPS combined products (GM862-GPS and GE863-
GPS) with 35% less power consumption than the previous versions.
•
Completed homologation and certification in several countries and networks including
China & Taiwan (SRRC and DGT), Brazil (ANATEL), Australia (A-Tick), Israel (Cellcom and
Orange), Spain (Telefonica and Vodafone), UK (O2), Ukraine and US/Canada (KORE and
RACO).
16
Chief Executive’s Statement
•
BCM865 was introduced in the Korea and China markets in February, as well as a MSM6025
based CDMA-1X embedded module for general purpose m2m applications.
•
Achieved China type approval (SRRC) and Taiwan approval (DGT) for GM862, GC864 and
GE864.
•
Introduced a WCDMA/HSDPA embedded module product that was launched in Europe in
Q4 2007.
•
Having obtained approval for six products on the Cingular / AT&T network and Annetel
Brazil homologation, Telit Americas is in a position to begin delivering sales to customers
in the US and Latin America. Telit America will shortly achieve homologation in Mexico
and is currently in the process of gaining network approvals in Canada.
Operational Highlights:
•
In November Telit announced a strategic alliance with Infineon Technologies to provide
4 million GSM/GPRS chipsets for its m2m modules, effective as of Q4 2008.
•
During 2007 Telit doubled its outsourced production capacity.
•
During 2007 significant cost reduction was achieved in material prices and production
costs, contributing to the increase in gross margin.
•
Achieved the ISO 9001:2000 Telit corporate certificate for EU, US and Korean facilities.
•
Successfully completed implementation of an Enterprise Resource Planning (ERP) system
from SAP in the Group’s major subsidiary, to be rolled out to other subsidiaries in 2008 and
2009.
•
Successfully transferred production of GSM/GPRS products to SEM, subsidiary of BAMES
in Italy.
EVAR Business developments
In the second half of the year Telit sold its Italian EVAR business to a third party, thus marking
the final disposal of Telit’s European EVAR business unit. The sale of the remaining EVAR
business in Israel, announced during the second half of the year, is expected to complete by
30 June 2008.
The results of operations of this business unit are included in the Company’s financial
statements as “discontinued operations”.
17
Strategy
Our strategy for 2008 is to continue to leverage our position as a leading player in the m2m
market, offering customers a competitive edge by reducing their total cost of ownership
and optimising the performance of their products. We plan on doing this through continued
investment in R&D and building on the foundations laid by our regional operations to date.
This strategy takes advantage of two key trends in the m2m market:
•
•
The performance trajectory offered by many of the m2m module manufacturers overshoots
the needs of the average customer, resulting in feature-rich, expensive products that
deliver inferior returns on investment; and
the inability of many module manufacturers to meet the demands of early adopters due
to the fact that they do not control the protocol stack required for customised product
modifications.
To execute our strategy, Telit relies on three core competencies that differentiate it from the
competition:
•
•
•
Complete Control of the Protocol Stack: Telit owns and develops the Protocol Stack in
its modules. The Protocol Stack controls all connectivity and communication with the
GSM network and is a critical success factor in being able to offer customers the flexibility
required for rolling out cost-effective m2m solutions.
Commitment to Customer-Driven Innovation: Telit’s comprehensive expertise in R&D
enables it to help its customers win new business by working with them to develop the
most innovative, cost-effective m2m applications.
Multinational Organisation Staffed with Industry Experts: Telit’s R&D and Sales and
Marketing units are comprised of a team of dynamic experts with proven industry
experience in the m2m and semiconductor industry.
Change of control
In May 2007 Boostt B.V., a consortium of investors including Oozi Cats, CEO of Telit, and
a group of Italian investors led by Mr. Franco Bernabe, purchased 12,000,000 shares in Telit
from Polar Investments Ltd. At a price of GBP 0.43 per share the purchase represented
27.77% of the Company’s issued voting share capital. Boostt subsequently nominated Mr.
Enrico Testa as Chairman of the Board of Directors of Telit and also nominated an additional
director, Mr. Giovanni Stella, to the Board. These two directors replaced two directors
nominated by Polar, who resigned upon completion of the transaction.
In July 2007, FB Net Holding B.V. (“FB Net”) and Oozi Cats purchased an additional 750,000
shares of the Company and 250,000 shares of the Company, respectively, at a price of GBP
0.53 per share. FB Net effectively controls Franco Bernabe & T S.L. (“FBT”), which is the
corporate entity that holds 50% of Boostt B.V. (50% is held by Mr. Oozi Cats). In September
2007 FBT purchased an additional 500,000 shares of the Company at a price of GBP 0.72 per
share. Following these purchases, FB Net, FBT, Boostt, and Oozi Cats are interested in a
total of 37.84% of the Company’s outstanding shares.
Also in July 2007, Clal Insurance Enterprise Holdings Ltd., one of Israel’s largest insurance
and finance companies, became a substantial shareholder with holdings of approximately
4% of the Company’s issued shares.
18
Chief Executive’s Statement
Board changes
In April 2007, having completed a mandate for two years from the listing of the Company in
2005, Mr. David Hobley, an independent non-executive director, resigned from the Board.
In May 2007, Mr. Enrico Testa and Mr. Giovanni Stella were appointed to the Board of Telit by
Boostt B.V., replacing Mr. Avigdor Kelner and Mrs. Pnina Bitterman-Cohen. Mr. Testa was
nominated Chairman of the Board.
Mr. Testa, aged 56, is currently the Chairman of Roma Metropolitane, the company set up
by the Rome municipality to implement the city’s new underground system, and a board
member of Rothschild Spa and of Lloyd Adriatico. He also served as a board member of
Riello Group as well as on the advisory board of the Carlyle Group.
From 1996 to 2002 Mr. Testa served as Chairman of ENEL, Italy’s largest electricity company.
From 1994 to 1996 he served as Chairman of ACEA, the energy and environment company
of the Rome Municipality. Mr. Testa is a former member of the Italian Parliament, elected in
1987 and in 1994.
Mr. Giovanni Stella, aged 60, began his career as an Internal Auditor at Eni, the Italian oil and
gas giant. During his tenure at Eni, he had an active role in the restructuring of the major
subsidiary companies of the group. Mr. Stella also held a number of positions within the
Eni Group of companies, including Managing Director of Enichem, Chairman of Chemfin,
Chairman & CEO of Enichem Finance SA and of Agip Petroli International, Chairman of
Enichem International Holding and CFO of Agip Petroli.
In 1998, Mr. Stella joined Telecom Italia to become the Assistant to the CEO. He was later
appointed Senior Vice President for Finance and Control and a Member of the Board of TIM
and Sirti.
In 1999 he became Chairman of Stream S.p.A. During his career, Mr. Stella was also a
member of several work groups for Eni and for Consob. From 1989 to 1993 he was visiting
lecturer of the Internal Auditing Course of the La Sapienza University of Rome. Mr. Stella is
currently Managing Director of Rothschild S.p.A. and Vice Chairman of Kelyan S.p.A.
In August 2007, Mr. Amir Scharf was appointed to the Board of Telit, as an independent non-
executive director, as well as the chairman of the audit committee. Mr. Scharf, aged 41, is
a Partner and Head of Securities Law practice at Tadmor & Co., Attorneys at Law, in Tel
Aviv. He is also a Director and Chairman of the audit committee at Analyst I.M.S. Investment
Management Services Ltd., a full service investment house traded on the Tel Aviv Stock
Exchange.
Before joining Tadmor & Co. he was the General Counsel and Corporate Secretary of El Al
Israel Airlines Ltd., and before that he served as Deputy Director of the Legal Department of
the Israeli Securities Authority. Between 2004 - 2006 he served as a member of The “Goshen
Committee”, the public committee for setting an Israeli Corporate Governance code.
Mr. Scharf was also a director of Superstar Holidays Limited in the UK between 2005 and
2006.
19
In September 2007, Mr. Avi Israel resigned from the position of Finance Director of the
Company and took up the position of Chief Executive Officer of Telit’s Wireless Products
division, which the Company has decided to sell. On the same date, Mr. Michael Galai was
appointed Finance Director of the Company.
Mr. Galai, 41, has served as the Company’s Vice President, Legal and General Counsel since
October 2006.
Before joining Telit, Mr. Galai was General Counsel of Lipman Electronic Engineering Ltd.
(Nasdaq, TASE: LPMA), where he took an active part (legal, accounting and finance) in
a secondary offer to the public in 2005 and the company’s sale to VeriFone Holdings, Inc.
(NYSE: PAY) in late 2006 for $1 billion.
Prior to Lipman, Mr. Galai was an associate at one of Israel’s leading law firms, where he took
part in numerous cross-border transactions, M&A activity and public offerings. Before that,
Mr. Galai spent six years with the Israel Securities Authority, holding a variety of enforcement
and legal positions.
Mr. Galai holds an MBA (major in finance), an L.L.B from the Tel Aviv University School of Law
and is a member of the Israeli Bar.
Outlook
Telit’s competitive advantage in terms of flexibility, scalability and product innovation is
helping it to now make substantial headway in the market as the main challenger to the top
market players. We will continue to expand and strengthen our position as one of the world’s
premier m2m technology providers during 2008.
Having delivered our forecast for 2007, Telit is now entering a new chapter in its development,
one of profitable growth and positive earnings performance. The year has started well and
the new business book is strong in all of our geographical markets. We are confident that the
growing reputation of Telit in terms of technology, service and support in a growing market,
will result in a strong performance this year.
Delivering maximum returns to our shareholders is a top priority and Telit now has the
operational infrastructure and financial strength to take advantage of the considerable
opportunities arising in this growing global market. We are currently in the midst of a global
wireless-communications revolution and I fully expect that 2008 will see further accelerated
growth both of the m2m market and of Telit. I look forward to providing further news of the
Company’s progress over the coming months.
Oozi Cats
Chief Executive Officer
31 March 2008
20
Telit’s Board of Directors
Enrico Testa, Chairman of the Board , aged 56
Chicco Testa has an important professional background. Among his several
experiences, between 1996 and 2002 Chicco Testa was Chairman of the
Board at ENEL S.p.A. (the Italian provider of power and gas) and founder and
member of the Board of Directors at WIND S.p.A. Chicco Testa is a member
of the Board of Rothschild S.p.A, Executive President at Roma Metropolitane
S.p.A (the company realizing the new Underground lines in Rome), Vice
Chairman of the World Energy Council and Senior Partner at Franco Bernabè Group, which
owns several participations in the IT sector.
Oozi Cats, Chief Executive Officer of Telit Communications, aged 47
An experienced CEO and entrepreneur, Oozi Cats, in 2000, was the founder
of a high level communications engineering and distribution company (Dai
Telecom Ltd) in Israel. In 2002 he was led Dai Telecom to take over Telit in Italy
and turn it from a bankrupt company into a global player in the m2m market.
The complex turnaround program included strategic redefinition, financial
restructuring, and human resource reorganization. Headed by Mr. Cats as
CEO, Telit was listed in the London Stock Exchange in April 2005. Prior to his roll in Telit, Mr.
Cats was the founder and CEO of Auto Depot Ltd, an Israeli Mass Merchandising chain for
vehicle supplies and services.
Michael Galai, Finance Director
& General Counsel Telit Communications PLC,
aged 41
Michael Galai joined Telit Communications PLC in 2006 as VP Legal &
General Counsel. Before that he was General Counsel at Lipman Electronic
Engineering Ltd. (Nasdaq, TASE: LPMA) where he took an active part in a
secondary offer to the public and the company’s sale to VeriFone Holdings,
Inc. (NYSE: PAY). Before joining Lipman, Mr. Galai was an associate with Goldfarb, Levy,
Eran and Co., an Israeli general full-service business practice that serves a wide range of
Israeli and foreign clients, with special emphasis on international transactions, financing,
securities, mergers and acquisitions and related activities. Mr. Galai also spent six year in
the Israel Securities Authority, holding a variety of positions, including spokesperson. He has
an MBA (Major in Finance), and an L.L.B from the Tel Aviv University School of Law and is a
member of the Israeli Bar.
Maurizio Gasparri, Independent Non-Executive Director, aged 50
Maurizio Gasparri, is currently a member of the Italian Parliament, having
been elected to office in 1992. From 2001 to 2005 Mr. Gasparri held the position
of Minister of Communications for Italy. Mr Maurizio Gasparri is currentlynot
a director or partner, nor has been a director or partner within the past 5
years, of any companies or partnerships.
21
Andrea Giorgio Mandel-Martello, Independent Non Executive Director,
aged 48
Andrea Giorgio 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-Martello spent 9 years at SBC
Warburg (“SBCW” now known as UBS) in London in various management
positions including Executive Director of SBC Warburg, member of the
Board of SBC Warburg Italia SIM S.p.A., and Country Head for Israel. Prior to working at
SBCW, Mr. Mandel-Martello spent 2 years at Chemical Bank International Ltd. In London
and 3 years at Banca Nazionale dell’Agricoltura in Rome. Mr. Mandel-Martello is a director
of Coraline S.p.A., a company which has recently acquired the business of Frette S.p.A.
Italy’s leading producer and retailer of 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, a Nasdaq listed Israeli company involved
in VoIP and enterprise solutions. He holds a Bachelor degree in Economics and Political
Science from Yale University.
Giovanni Stella, Non Executive Director, aged 59
Giovanni Stella began his career as an Internal Auditor at Eni. During
his career at Eni, he had an active role in the restructuring of the major
subsidiary companies of the group. Mr. Stella also held a number of
positions within the Eni Group’s companies, including Managing Director
of Enichem, Chairman of Chemfin, Chairman & CEO of Enichem Finance
SA and of Agip Petroli International, Chairman of Enichem International
Holding and CFO of Agip Petroli. In 1998, Mr. Stella joined Telecom Italia to become
the assistant of the CEO. He was later appointed Senior Vice President for Finance and
Control and a Member of the Board of TIM and Sirti. In 1999 he became Chairman of
Stream S.p.A.. During his career, Mr. Stella was also a member of several work groups
for Eni and for Consob. From 1989 to 1993 he was visiting lectures of the Internal Auditing
Course of the La Sapienza University of Rome. Mr. Stella is currently Managing Director of
Rothschild S.p.A., Italy and Vice Chairman of Kelyan S.p.A..
Amir Scharf, Independent Non-Executive Director and Chairman of the
Audit Committee of Telit, aged 41
Amir Scharf, , is a Partner and Head of Securities Law practice at Tadmor
& Co., Attorneys at Law, in Tel Aviv. He is also a Director and Chairman
of the audit committee at Analyst I.M.S. Investment Management Services
Ltd., a full service investment house traded on the Tel Aviv Stock Exchange.
Before joining Tadmor & Co. he was the General Counsel and Corporate
Secretary of El Al Israel Airlines Ltd., and before that he served as Deputy Director of
the Legal Department of the Israeli Securities Authority. In 2004 - 2006 he served as a
member of The “Goshen Committee”, the public committee for setting an Israeli Corporate
Governance code. Mr. Scharf was also a director of Superstar Holidays Limited in the UK
between 2005 and 2006.
22
Corporate Governance
Directors
The Board of Directors comprises three executive directors, three independent non-
executive Directors, and one Non-executive Director.
The Board generally meets a minimum of once every quarter and receives a Board pack
comprising a report from senior management together with any other material deemed
necessary for the Board to discharge its duties. It is the Board’s responsibility for formulating,
reviewing and approving the Group’s strategy, budgets, major items of expenditure and
acquisitions.
Audit Committee
The Audit Committee consists of Amir Scharf, Chairman, and Andrea Mandel-Mantello, two
of the independent non-executive directors, and meets at least once every quarter. Michael
Galai, the Finance Director attends each meeting by invitation. The Audit Committee is
primarily responsible for considering reports from the Finance Director on the half year
and annual financial statements, and for reviewing reports from the auditors on the scope
and outcome of the annual audit. The financial statements are reviewed in the light of these
reports and the results of the review reported to the Board.
Remuneration Committee
The Remuneration Committee consists of Andrea Mandel-Mantello, Chairman, Amir Scharf
and Enrico Testa, and meets at least once a year. The Remuneration Committee has a
primary responsibility to review the performance of the Company’s executive directors and
to set their remuneration and other terms of employment. The Remuneration Committee is
also responsible for administering the employee share option scheme.
Shareholder relations
The Company meets with its institutional shareholders and analysts from time to time and will
use the Annual General Meeting to encourage communication with private shareholders. In
addition, the Company intends to facilitate communication with shareholders via the annual
report and accounts, interim statement, press releases as required during the ordinary course
of business and the Company web site (www.telit.com). During 2007 the Company recruited a
Vice President for investor relations to execute on this strategy and improve its contact with its
investors and other capital market participants.
Financial performance
A 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 at each meeting of the Board.
23
Going concern
After making enquiries at the time of approving the accounts, the directors have satisfied
themselves that there is a reasonable expectation that the Company and Group has adequate
resources to continue in operational existence for the foreseeable future. For this reason, the
financial statements are prepared on a going concern basis.
Directors share dealings
The Company has adopted a code for dealings in its shares by Directors and senior employees
which is appropriate for an AIM-quoted company.
On behalf of the Board
Michael Galai
Finance Director
31 March 2008
24
Report on Directors’
Remuneration
The remuneration committee is chaired by Andrea Mandel-Mantello and also comprises
Enrico Testa and Amir Scharf.
This report has been prepared in accordance with Schedule 6 of the Companies Act 1985. As
required by the Act, a resolution to approve the report will be proposed at the annual general
meeting of the Company, at which the financial statements will be approved.
The Act requires the auditors to report to the Company’s members on certain parts of the
Directors’ Remuneration Report and to state whether in their opinion those parts of the
report have been properly prepared in accordance with the Act. The report has therefore
been divided into separate sections for audited and unaudited information.
Unaudited Information
Remuneration policy
The remuneration packages of directors and senior managers are structured so as to reward
them on the basis of their responsibilities and achievements, and to encourage them to
remain with the Company for the long-term benefit of shareholders. The main components
of these remuneration packages are:
•
Basic salary:
into account his additional incentives and to align their interests within the Group.
An individual’s salary is reviewed and determined by the committee, taking
•
•
•
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:
None of the directors receive any pension benefits, except for
Michael Galai, who is entitled to post employment benefits including pension fund benefits
according to his employment agreements, as is customary in Israel.
The services of the directors are provided to the Group as follows:
Enrico Testa was appointed as a director and Chairman of the Board on 4 May 2007.
Oozi Cats is engaged pursuant to a letter of appointment with the Company dated 29 March
2005, terminable by either the Company or the director on six months’ notice except in certain
specific circumstances where short notice can be given by the Company. In addition, since
1 October 2007 Mr. Cats has been employed by Telit Wireless Solutions Srl, in an executive
position.
Until 30 September 2007, Mr. Cats provided consultancy services to Telit Communications
SpA, a wholly owned subsidiary of the Company, pursuant to the terms of a consultancy
agreement between Telit Communications SpA and Excalibur Consulting Group LLC
(“Excalibur”) dated 5 January 2004, as amended on 26 April 2006. The consultancy agreement
was terminated on 30 September 2007.
Andrea Mandel Mantello was appointed pursuant to a letter of appointment with the Company
dated 29 March 2005, terminable on 6 months rolling notice.
Avi Israel was appointed as a director on 16 September 2005. On 26 July 2006 Mr. Israel was
appointed deputy CEO and Finance Director and resigned from the board on 13 September
2007.
25
Michael Galai was appointed as the Finance Director on 13 September 2007. Mr. Galai is
entitled to post employment benefits, as is customary for executives in Israel. The amount
disclosed below represents his cumulative entitlement earned since his appointment.
Giovanni Stella was appointed as director on 4 May 2007.
Amir Scharf was appointed as a director on 22 August 2007.
Maurizio Gasparri was appointed as a director on 17 July 2006.
Audited Information
Salary and
fees
Benefit
in kind
Annual
bonus
Post
employment
benefits
Total
2007
Total
2006
€’000
€’000
€’000
€’000
€’000
€’000
Executive directors
Avigdor Kelner 1
Enrico Testa 2
Oozi Cats 3
Avi Israel 1
Michael Galai 2
Inbal Barak-Etzion 1
Non-executive
directors
David Hobley 1
Andrea Mandel
Mantello 4
Pnina Bitterman
Cohen 1
Maurizio Gasparri
Giovanni Stella 2
Amir Scharf 2
Total - 2007
Total - 2006
50
58
561
88
29
-
14
46
17
60
47
17
987
792
-
-
124
4
1
-
-
-
-
-
-
-
-
-
240
100
-
-
-
-
-
-
-
129
277
340
-
-
-
-
20
6
-
-
-
-
-
-
-
26
15
50
58
925
212
36
-
14
46
17
60
47
17
144
-
644
101
-
56
44
44
16
35
-
-
1,482
1,084
1 Up to the date of resignation.
2 Since date of appointment.
3 Other than in respect of €295,100 (2006: €92,000), all payments for the services rendered by Mr. Cats to the
Group were paid to Excalibur. Amounts include an annual relocation expense entitlement totalling €105,000
(2006: €195,000) following Mr. Cats’ relocation to Italy in the prior year and a one-time bonus of €240,000 for
Mr. Cats’ role in connection with the equity investment from Bartolini After Market Electronics Services Srl
(BAMES) in TWS. The bonus was paid on receipt by the Group of the €9.0 million equity investment.
4 Amounts in respect of the services of Andrea Mandel-Mantello are paid directly to Advicorp plc, a company
under his joint control.
Andrea Mandel-Mantello
Chairman of the Remuneration Committee
31 March 2008
26
Directors’ Report
The directors present their annual report and the financial statements of the Group for the
year ended 31 December 2007.
Principal Activities
Telit is a leading global company in the field of machine-to-machine (m2m)
communications:
Telit Wireless Solutions (TWS) develops, manufactures and markets communication
modules which enable machines, devices and vehicles to communicate via cellular wireless
networks. TWS is the market leader in CDMA m2m modules in South Korea and the third
largest company in the GSM/GPRS m2m modules’ business in Europe, Middle East and
Africa (EMEA). Following the decision to dispose of a majority stake in the Company’s cellular
phone distribution business (TWP), detailed below, TWS represents the strategic focal point
of the Company moving forward.
Telit’s core strengths are innovative products, complete control over its intellectual property
and its flexible, customised solutions, which enable it to offer customers the lowest cost of
ownership and a future-proof product roadmap.
During the second half of 2007, Telit sold 100% of the Italian unit of Telit Wireless Products
(TWP), which distributes and supports cellular devices from manufacturers worldwide. This
sale marks the final disposal of Telit’s European EVAR business unit. The sale of the Israeli
part of this business unit is expected to complete by 30 June 2008.
Review of Business and Future Developments
A review of business, financial position, liquidity and future developments is given within the
Chief Executive Officer’s statement on pages 8 to 13, together with a review of the Group’s
principal risks and uncertainties.
Share Options
On 30 September 2005 the employees of Dai Telecom Ltd. (“Dai Telecom”) and Telit
Communications SpA (“Telit Italy”), subsidiaries of the Company, were granted 1,976,570
options to purchase shares at an exercise price of £1.40 per share, equal to approximately 4.6
percent of the Company’s issued and outstanding share capital.
On 30 June 2007 the Company bought back 1,682,570 options from their holders, being all
but 4,000 options outstanding at that date, at a price of €0.15 (fifteen Euro cents) per option.
A further 490,117 options, granted in March 2006, lapsed during the year.
On 2 April 2007 executives of the Company were granted 1,300,000 options to purchase
approximately 3 percent of the Company’s issued and outstanding shares at an exercise price
of £0.43 per share. The options vest in two equal instalments on 1 January 2008 and 2009 and
expire five years from the date of grant.
27
On 10 July 2007 employees of Telit Italy, Telit Wireless Solutions Co., Ltd. (“Telit APAC”)
Telit Wireless Solutions Inc. (“Telit Americas”), Telit Wireless Solutions Ltd. and Telit
Communications Spain S.L. were granted options to purchase approximately 3.4 percent
of the Company’s issued and outstanding shares at an exercise price of £0.60 per share.
100,000 options vest in two equal instalments on 9 July 2008 and 2009 and 1,363,000 vest in
three equal instalments on 9 July 2008, 2009 and 2010. All options expire five years from the
date of grant.
On 11 July 2007 non-executive directors of the Company and consultants to Telit Italy were
granted options to purchase approximately 3.0 percent of the Company’s issued and outstanding
shares at an exercise price of £0.60 per share. 1,100,000 options vest in two equal instalments on
10 July 2008 and 2009 and 195,000 options vest in three equal instalments on 10 July 2008, 2009
and 2010. All options expire five years from the date of grant.
The number of outstanding options as of 31 December 2007 was 4,062,000, equal to
approximately 9.4% of the outstanding share capital of the Company.
Research and Development Activities
The Group has made, and expects to continue making in the future, significant investments
in research and development (“R&D”) in order to invest in products aimed at achieving a
steady pipeline of orders from customers in the coming years. R&D costs of €8.9 million
were expensed in the year, compared to €8.1 million in 2006. Internally-generated intangible
assets arising from development costs capitalized amounted to €2.5 million (2006: €nil).
Telit’s R&D centres are based in Trieste and Cagliari, Italy and in Seoul, South Korea. For
additional details please see the Chief Executive Officer’s statement and note 14 to the
financial statements.
Use of financial Instruments
The financial risk management objectives and policies of the Group and the exposure of the
Group to financial risks are disclosed within note 33 to the financial statements.
Donations
The Group made no charitable or political donations during the year ended 31 December
2007 (2006 - €nil).
Dividends
The Company is unable to pay a dividend in respect of the period.
28
Directors’ Report
Directors
The following directors have held office during the year:
Avigdor Kelner
Enrico Testa
Oozi Cats
David Hobley
Amir Scharf
resigned 4 May 2007
appointed 4 May 2007
resigned 16 April 2007
appointed 22 August 2007
Andrea Mandel-Mantello
Giovanni Stella
Avi Israel
appointed 4 May 2007
resigned 13 September 2007
Pnina Bitterman-Cohen
resigned 4 May 2007
Michael Galai
Maurizio Gasparri
appointed 13 September 2007
Directors’ Indemnities
The company has made qualifying third party indemnity provisions for the benefit of its
directors which were made during the year and remain in force at the date of this report.
Directors’ Interests in Shares and Share Options
The directors’ interests in shares in the Company are detailed in the table below.
At 31 December 2007
At 31 December 2006
Directors
Oozi Cats
Enrico Testa
Giovanni Stella
Amir Scharf
Andrea Mandel-
Mantello
Maurizio Gasparri
Michael Galai
Number
of ordinary
shares
16,350,3571
16,350,3572
16,350,3572
nil
nil
nil
nil
Percentage of
ordinary share
capital
37.84
37.84
37.84
-
-
-
-
Number
of ordinary
shares
2,700,357
Percentage of
ordinary share
capital
6.25
nil
nil
nil
nil
nil
nil
-
-
-
-
-
-
1 Mr. Cats directly holds 2,850,357 shares. In addition, Mr. Cats owns 50% of Boostt B.V. (“Boostt”), which holds 12,000,000
shares. Boostt’s corporate parents, FB Net Holding B.V. and Franco Bernabe & T SL (together: “FBT”) hold an additional
1,500,000 shares. Mr. Cats and FBT have subscribed to certain voting understandings. Therefore, Mr. Cats is deemed to be
interested in all of Boostt’s holdings, as well as all of FBT’s holdings.
2 Messers. Testa and Stella are intersted parties in FBT and Boostt (minority sharholders and officers, respectively).
Mr. Cats and FBT have subscribed to certain voting understandings. Therefore, Messers. Testa and Stella are deemed to be
interested in all of Boostt’s and FBT’s holdings, as well as all of Mr. Cats’ holdings.
29
Details of directors’ share options are provided below:
1 Jan
2007*
Granted
Exercised
31 Dec
2007
Exercise
Price
Date from
which
exercisable
Expiry
date
Oozi Cats
nil
925,000
Enrico
Testa
Giovanni
Stella
Michael
Galai
nil
nil
nil
700,000
400,000
100,000
* or date of appointment, if later.
-
-
-
-
925,000
43p
01/01/08
01/04/12
700,000
60p
10/07/08
10/07/12
400,000
60p
10/07/08
10/07/12
100,000
43p
01/01/08
01/04/12
On 2 April 2007 Oozi Cats and Michael Galai (prior to his appointment as a director) were
granted 925,000 and 100,000 options respectively, at an exercise price of £0.43 per share. The
options vest in two equal instalments on 1 January 2008 and 2009 and expire within five years
from the date of grant.
On 11 July 2007 Enrico Testa and Gianni Stella, cairman and non-executive directors, were granted
700,000 and 400,000 options respectively at an exercise price of £0.60 per share. The options vest
in two equal instalments on 10 July 2008 and 2009 and expire five years from the date of grant.
The aggregate amount of gains made by directors on the exercise of share options in the year
ended 31 December 2007 was €nil (2006: €nil).
Employees
In considering applications for employment from disabled people, the Group seeks to ensure
that full and fair consideration is given to the abilities and aptitudes of the applicant against the
requirements of the job for which he or she has applied. Employees who become temporarily
or permanently disabled are given individual consideration, and where possible equal
opportunities for training, career development and promotions are given to disabled persons.
Within the bounds of commercial confidentiality, information is disseminated to all levels of
staff about matters that affect the progress of the Group and are of interest and concern to
them as employees. The Group also encourages employees, where relevant, to meet on a
regular basis to discuss matters affecting them.
30 Directors’ Report
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 60 days of the date of invoice, except where different arrangements have been
agreed with suppliers. Trade creditor days of the Group at 31 December 2007, calculated in
accordance with the requirements of the Companies Act 1985, were 60 days (2006: 60 days).
This represents the ratio, expressed in days, between the amounts invoiced to the Group in
the year by its suppliers and the amounts due, at the year end, to trade creditors falling due
for payment within one year.
Provision of information to auditors
Each of the directors at the date of approval of this report confirms that:
•
so far as the director is aware, there is no relevant audit information of which the company’s
auditors are unaware.
•
the director has taken all the steps that he ought to have taken as a director to make
himself aware of any relevant audit information and to establish that the company’s
auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with s234ZA of the
Companies Act 1985.
Auditors
Deloitte & Touche LLP have expressed their willingness to continue in office as auditors and
a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.
By order of the Board
Michael Galai
Finance Director
31 March 2008
Statement of Directors
Responsibilities 31
The directors are responsible for preparing the annual report and the financial statements.
The directors are required to prepare financial statements for the group in accordance with
International Financial Reporting Standards as adopted by the EU, (IFRSs) and have also
elected to prepare financial statements for the company in accordance with IFRSs. Company
law requires the directors to prepare such financial statements in accordance with IFRSs,
the Companies Act 1985 and Article 4 of the IAS Regulation.
International Accounting Standard 1 requires that financial statements present fairly for
each financial year the company’s financial position, financial performance and cash flows.
This requires the faithful representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition criteria for assets, liabilities,
income and expenses set out in the International Accounting Standards Board’s ‘Framework
for the preparation and Presentation of Financial Statements’. In virtually all circumstances,
a fair presentation will be achieved by compliance with all applicable International Financial
Reporting Standards. Directors are also required to:
•
properly select and apply accounting policies;
•
present information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information; and
•
provide additional disclosures when compliance with the specific requirements in IFRSs
is insufficient to enable users to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and financial performance.
The directors are responsible for keeping proper accounting records which disclose with
reasonable accuracy at any time the financial position of the company, for safeguarding
the assets, for taking reasonable steps for the prevention and detection of fraud and other
irregularities and for the preparation of a directors’ report and directors’ remuneration report
which comply with the requirements of the Companies Act 1985.
The directors are responsible for the maintenance and integrity of the company website.
Legislation in the United Kingdom governing the preparation and dissemination of financial
statements differs from legislation in other jurisdictions.
32
Independent Auditor’s Report to the
Members of Telit Communications PLC
We have audited the group and parent company financial statements (the “financial
statements”) of Telit Communications PLC for the year ended 31 December 2007 which
comprise the group income statement, the group and company balance sheets, the group
and company cash flow statements, the group and company statements of changes in equity
and the related notes 1 to 35. These financial statements have been prepared under the
accounting policies set out therein.
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 (IFRSs) as adopted by the European Union are set out in the statement of directors’
responsibilities.
Our responsibility is to audit the financial statements in accordance with relevant United
Kingdom 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
whether in our opinion the information given in the directors’ report is consistent with the
financial statements.
In addition we report to you if, in our opinion, 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 the directors’ report and the other information contained in the Annual Report
as described in the contents section. 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 further information outside the Annual
Report.
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 circumstances of the company and the group, consistently applied and
adequately disclosed.
33
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 IFRSs as adopted by
the European Union, of the state of the group’s and the parent company’s affairs as at 31
December 2007 and of the group’s loss for the year then ended;
•
the financial statements have been properly prepared in accordance with the Companies
Act 1985; and
•
the information given in the directors’ report is consistent with the financial statements.
Emphasis of matter – recoverability of deferred tax asset
Without qualifying our opinion, we draw attention to the disclosures made in Notes 1 and 9
of the financial statements concerning the recognition of a deferred tax asset of €3,000,000
in the consolidated balance sheet. The recovery of this asset is dependent upon the future
profitability of the Group’s Italian subsidiary, Telit Communications SpA. Telit Communications
SpA has been loss-making to date, including in the current year. Whilst that Company is
forecasting that this asset will be recovered within the next three years, there is no certainty
that the forecasts of Telit Communications SpA will be achieved sufficient to recover the
deferred tax asset, in full or in part. These conditions, along with other matters as set forth
in Notes 1 and 9, indicate the existence of a material uncertainty which may cast significant
doubt about the carrying value of the deferred tax asset.
Deloitte & Touche LLP
Chartered Accountants
and Registered Auditors
London, United Kingdom
31 March 2008
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 2007
Revenue
Cost of sales
Gross profit
Other income
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Other expenses
2007
Note
€’000
2006
(Restated*)
€’000
2
4
5
52,189
(30,201)
30,140
(18,487)
21,988
11,653
2,457
(8,940)
(8,999)
(7,615)
(400)
729
(8,058)
(4,948)
(6,446)
-
Operating loss
10,11
(1,509)
(7,070)
Investment income
Finance costs
Share of results of associated undertakings
Gain on deemed partial disposal of subsidiary
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 continuing operations
From discontinued operations
Total continuing and discontinued
Diluted loss per share (in euro cents)
From continuing operations
From discontinued operations
Total continuing and discontinued
(*) See Note 1(z).
34
6
7
16
8
9
12
13
13
277
(1,241)
(2)
1,194
190
(492)
(41)
-
(1,281)
(7,413)
(597)
(91)
(1,878)
(7,504)
(5,180)
(3,636)
(7,058)
(11,140)
(7,027)
(31)
(7,058)
(11,136)
(4)
(11,140)
(4.3)
(12.0)
(16.3)
(4.3)
(12.0)
(16.3)
(17.4)
(8.4)
(25.8)
(17.4)
(8.4)
(25.8)
Telit Communications PLC
BALANCE SHEETS
At 31 December 2007
ASSETS
Non-current assets
Intangible assets
Property, plant and equipment
Investments in associated undertakings
Other investments
Investments in subsidiaries
Other long term assets
Deferred tax asset
Assets included in disposal group held for sale
Current assets
Inventories
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 account
Translation reserve
Retained earnings
Total shareholders’ equity
Minority interests
Total equity
Non-current liabilities
Other loans
Post-employment benefits
Deferred tax liabilities
Provisions
Other long-term liabilities
Liabilities included in disposal group held for sale
Current liabilities
Short-term borrowings from banks and other lenders
Trade payables
Provisions
Other current liabilities
Total equity and liabilities
Group
2007
Note
€’000
2006
(Restated*)
€’000
Company
2007
2006
€’000
€’000
14
15
16
17
18
20
9
12
19
20
20
22
22
23
31
24
9
28
29
12
25
25
28
25
9,050
2,612
568
1,570
-
310
3,130
17,240
8,162
8,212
16,591
5,079
6,132
5,212
41,226
66,628
627
(260)
29,651
(1,734)
(12,512)
15,772
605
16,377
500
1,555
329
81
4,430
6,895
6,433
17,336
13,498
63
6,026
36,923
66,628
6,755
3,019
579
-
-
303
3,803
14,459
-
10,284
17,452
6,699
7,115
3,926
45,476
59,935
627
(260)
29,651
(584)
(6,486)
22,948
796
23,744
2,035
1,226
507
69
175
4,012
-
17,375
10,584
280
3,940
32,179
59,935
-
-
579
-
29,637
-
-
30,216
-
-
579
-
27,162
-
-
27,741
-
-
-
71
692
6,132
2,402
9,297
39,513
627
5,894
29,651
-
(1,488)
34,684
-
34,684
500
-
-
-
-
500
-
-
-
574
7,115
1,376
9,065
36,806
627
5,894
29,651
-
(318)
35,854
-
35,854
-
-
-
-
-
-
-
-
-
-
4,329
4,329
39,513
-
16
-
936
952
36,806
(*) See Note 1(z).
The financial statements on pages 34 to 93 were approved by the board and authorised for issue on 31 March
and are signed on its behalf by:
2008
Oozi Cats, Director
35
Telit Communications PLC
CASH-FLOW STATEMENTS
For the year ended 31 December 2007
CASH FLOWS – OPERATING ACTIVITIES
Net cash used in continuing operations
(Note 32)
Net cash (used in) /from discontinued operations (Note
12)
Net cash (used in) / from operating activities
CASH FLOWS - INVESTING ACTIVITIES
Purchase of property, plant and equipment
Purchase of intangible assets
Acquisition of subsidiaries (nil cash acquired)
Investment in subsidiary
Loan to subsidiary
Net proceeds from issuance of share capital in a
subsidiary to third party
Decrease (increase) in restricted cash deposits
Additions to long term receivables
Net cash from / (used in) continuing operations
Net cash used in discontinued operations (Note 12)
Net cash from / (used in) investing activities
CASH FLOWS - FINANCING ACTIVITIES
Short-term borrowings from banks and others
Repayment of other loans
Net cash from continuing operations
Net cash from/(used in) discontinued operations (Note
12)
Net cash from/(used in) financing activities
Group
2007
€’000
2006
(Restated*)
€’000
Company
2007
2006
€’000
€’000
(1,540)
(9,588)
(1,435)
(1,058)
(2,239)
(3,779)
17,634
8,046
-
(1,435)
-
(1,058)
(1,251)
(3,733)
-
-
-
7,604
1,000
-
3,620
(741)
2,879
(1,760)
(513)
(5,396)
-
-
-
(3,000)
(56)
(10,725)
(289)
(11,014)
3,000
(1,500)
1,500
8,660
-
8,660
1,167
2,667
(14,903)
(6,243)
-
-
-
-
(39)
-
1,000
-
961
-
961
3,000
(1,500)
1,500
-
1,500
-
-
-
(13)
(6,461)
-
(3,000)
-
-
(9,474)
-
-
-
Increase/ (decrease) in cash and cash equivalents
Cash and cash equivalents - balance at beginning of
year
Effect of exchange rate differences
1,767
(9,211)
1,026
(10,532)
3,926
(439)
13,207
(70)
1,376
-
11,781
127
Cash and cash equivalents - balance at end of year
5,254
3,926
2,402
1,376
Consisting of:
Cash and cash equivalents from continuing operations
Cash and cash equivalents from discontinued operations
Supplemental disclosure of cash flow information
(included in cash flow from operating activities):
Interest paid
Interest received
Income taxes paid
(*) See Note 1(z).
36
5,212
42
5,254
3,926
-
3,926
2,402
-
2,402
1,376
-
1,376
934
243
139
896
318
739
-
-
128
320
-
-
Telit Communications PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2007
Year ended 31 December 2007
Share
capital
€’000
Share
premium
account
€’000
Other
reserve
€’000
Translation
adjustment
€’000
Retained
earnings
€’000
Total
€’000
Minority
interest
€’000
Total
€’000
627
29,651
(260)
(584)
(6,486)
22,948
796
23,744
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,150)
-
-
-
-
-
-
-
-
(318)
(318)
275
275
(1,150)
(129)
(1,279)
(29)
(29)
-
(29)
1,030
(7,027)
1,030
(7,027)
12
(31)
1,042
(7,058)
627
29,651
(260)
(1,734)
(12,512)
15,772
605
16,377
1 January 2007
(restated)
Reduction in minority
interest in Telit
APAC
Arising on deemed
disposal -minority in
Telit Wireless
Solutions Srl
Translation
adjustments
Repurchase of share
options
Share-based payment
charge
Loss for the year
31 December 2007
Year ended 31 December 2006 (Restated*)
Share
capital
€’000
Share
premium
account
€’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-
as previously reported
Arising on acquisition-
adjustment arising on
provisional price
allocation of Telit
APAC (note 26)
Translation adjustments
Share-based payment
charge
Loss for the year – as
previously reported
Loss for the year –
adjustment arising on
provisional price
allocation of Telit
APAC (note 26)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(300)
-
-
-
-
-
-
-
1,317
1,317
-
(300)
(513)
(4)
(513)
(304)
1,218
1,218
-
1,218
(11,319)
(11,319)
(65)
(11,384)
183
183
61
244
31 December 2006
(restated)
(*) See Note 1(z).
The other reserve arose on the transfer of the subsidiaries under common control and represents the nominal
value of shares issued in this transaction.
29,651
22,948
(6,486)
23,744
(260)
(584)
796
627
37
Telit Communications PLC
COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2007
Year ended 31 December 2007
Share
capital
€’000
Share
premium
account
€’000
Other
reserve
€’000
Retained
earnings
€’000
Total
€’000
1 January 2007
Loss for the year
31 December 2007
627
29,651
5,894
(318)
35,854
-
-
-
(1,170)
(1,170)
627
29,651
5,894
(1,488)
34,684
Year ended 31 December 2006
Share
capital
€’000
Share
premium
account
€’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
The other reserve arose on the issue of 1,790,785 shares to Polar Investments Ltd. (“Polar”) in consideration
for the transfer to the Company of Polar’s investment in Dai Telecom Holdings (2000) Ltd. and Dai Telecom
Ltd. ("Dai Telecom"), the assets and liabilities of which were recorded at their previous carrying value.
38
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
1.
ACCOUNTING POLICIES
(a) General information
The consolidated financial statements for the years ended 31 December 2007 and 31 December 2006
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 ("the Company") is a public limited company registered in England and
Wales. The registered office is given on page 94. 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 8
to 19.
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.
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.
(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.
39
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(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
recognized at their fair values at the acquisition date.
Goodwill arising on acquisition is recognized 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 recognized.
For increases in stake in existing subsidiaries, the Company accounts for such transactions based on
the book values of the net assets of at the date of the injection. Where the cost of acquisition is less
than the net book value of the recognized net assets of the acquiree, the excess, representing negative
goodwill, is recognized immediately in profit or loss.
(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.
40
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(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 recognized.
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 recognized as goodwill.
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 recognizes an impairment loss.
(j)
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any recognized
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 recognized in the income statement.
41
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(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.
On full or partial disposal of a subsidiary, the attributable amount of goodwill is included in the
determination of the profit or loss recognised in the income statement on disposal.
(l)
Internally developed intangible assets – development costs
The cost of research activities is recognised 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
recognised only if all of the following conditions are met:
(cid:120)
(cid:120)
(cid:120)
an asset is created that can be identified (such as hardware, 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,
typically 5 years, from the date at which such assets are available for use. Where the internally
generated intangible asset is not yet available for use, it is tested for impairment annually by
comparing its carrying amount with its recoverable amount.
Where no internally-generated intangible asset can be recognised, development costs are recognised as
an expense in the period in which they are incurred.
(m) 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.
Amortisation rates are as follows:
Software and license
Customer relationships
Acquired technology
%
15-33
15
40
42
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(n)
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
recognized as an expense immediately.
(o)
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.
(p) Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
43
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(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,
except where future service by current employees no longer qualifies for benefits in which case a
Traditional Unit Credit Method is applied. Actuarial gains and losses are recognized in full in the income
statement in the period in which they occur. Gains or losses on the curtailment of a defined benefit plan
are recognized in the income statement when the curtailment or settlement occurs.
The retirement benefit obligation recognized in the balance sheet represents the present value of the
defined benefit obligation as adjusted for unrecognized 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 recognized when goods are delivered and title has passed.
Revenues from services are recognized as the services are provided.
Royalty income is recognized in accordance with the terms of the relevant royalty agreement unless,
there has been an assignment of rights for a fixed fee or non-refundable guarantee under a
non-cancellable contract which permits the licensee to exploit such rights freely and the Company has no
remaining obligations to perform.
(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 recognized in profit or loss in the period in which they are incurred. Finance
charges, including any premiums to be paid on settlement or redemption and direct issue costs and
discounts relating to borrowings, are accounted for on an accruals basis and charged to the income
statement using the effective interest method.
44
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(u) Government grants
Government grants are recognized 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 recognized as income over the periods necessary to
match them with the related cost and are recognized in other income.
(v) Non-current assets held for sale
Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying
amount and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be
recovered through the sale transaction rather than through continued use. This condition is regarded as
met only when the sale is highly probable and the asset (or disposal group) is available for immediate
sale in its present condition and the Company is committed to the sale which is expected to qualify for
recognition as a completed sale within one year from the date of classification.
(w) Financial instruments
Financial assets and financial liabilities are recognized on the Group's balance sheet when the Group
becomes a party to the contractual provisions of the instrument.
Financial assets
Financial assets are initially recorded at fair value, net of transaction costs. Subsequent to initial
recognition, investments in subsidiaries are measured at cost. Subsequent to initial recognition,
investments in associates are accounted for under the equity method in the consolidated financial
statements and the cost method in the company financial statements. The Group classifies its other
financial assets as either available for sale financial assets or loans and receivables; no financial assets at
fair value through profit or loss are held. The classification depends on the nature and purpose of the
financial assets and is determined at the time of initial recognition.
Available for sale financial assets
Certain shares held by the Group are classified as being available-for-sale since they are not held for
trading, have not been designated as at fair value through profit or loss and do not meet the accounting
requirements for classification as loans and receivables or held-to-maturity investments. Such assets are
stated at fair value or, where there is insufficient information to reliably determine fair value at the
measurement date, at deemed cost, less impairment. The determination of fair values is described in note
17. Gains and losses arising from changes in fair value are recognized directly in reserves. Where the
investment is disposed of or is determined to be impaired, the cumulative gain or loss previously
recognized in reserves is included in profit or loss for the period.
Loans and receivables
Trade receivables, loans and other receivables that have fixed or determinable payments that are not
quoted in an active market are classified as “loans and receivables”. Loans and receivables are measured
at amortized cost using the effective interest method less impairment.
Interest is recognized by applying the effective rate, except for short-term receivables when the
recognition of interest would be immaterial.
45
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(w) Financial instruments (continued)
Impairment of financial assets
Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are
impaired where there is objective evidence that as a result of one or more events that occurred after the
initial recognition of the financial asset the estimated future cash flows have been impacted.
For loans and receivables the amount of the impairment is the difference between the asset’s carrying
amount and the present value of estimated future cash flows, discounted at the original effective interest
rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial
assets with the exception of trade receivables where the carrying amount is reduced through the use of an
allowance account. When a trade receivable is uncollectible, it is written off against the allowance
account. Subsequent recoveries of amounts previously written off are credited against the allowance
account. Changes in the carrying amount of the allowance account are recognized in profit or loss.
Any subsequent increase in fair value of an available for sale equity security after an impairment loss is
recognized directly in equity.
Derecognition of financial assets
The Group derecognizes a financial asset only when the contractual rights to the cash flows from the
asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of
the asset to another entity. If the Group neither transfers nor retains substantially all the risks and
rewards of ownership and continues to control the transferred asset, the Group recognizes its retained
interest in the asset and an associated liability for amounts it may have to pay. If the Group retains
substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues
to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual
agreements.
An equity instrument is any contract that evidences a residual interest in the assets of the group after
deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds
received, net of direct issue costs.
All the Group’s financial liabilities are classified as other financial liabilities. It holds no financial
liabilities ‘at fair value through profit or loss’.
Other financial liabilities
Other financial liabilities are initially measured at fair value, net of transaction costs and are subsequently
measured at amortized cost using the effective interest method, with interest expense recognized on an
effective yield basis.
The effective interest method is a method of calculating the amortized cost of a financial liability and of
allocating interest expense over the relevant period. The effective interest rate is the rate that exactly
discounts estimated future cash payments through the expected life of the financial liability, or, where
appropriate, a shorter period.
46
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(x) 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 and directors. 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.
Where the Group has settled a grant of equity instruments during the vesting period, the Group accounts
for the settlement as an acceleration of vesting, and recognizes immediately in the income statement the
amount that otherwise would have been recognized for services received over the remainder of the
vesting period. Payments made to the employee on settlement of the grant are accounted for as the
repurchase of an equity interest and deducted from equity, except to the extent that the payment exceeds
the fair value of the equity instruments granted, measured at the repurchase date. Any such excess is
recognized as an expense in the income statement.
(y)
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.
(z) Restatement
On 26 May 2006 Telit acquired 75% of the issued ordinary share capital of, and voting rights in,
Bellwave M2M Co., Ltd. (since renamed Telit Wireless Solutions Co. Ltd (“Telit APAC”)), 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 provisional purchase price allocation has been finalised in the year ended 31 December 2007. This
has resulted in a reduction in the amount allocated to customer lists from €4,306,000 to €1,500,000 and
development costs from €689,000 to €645,000 with a consequential reduction in the related deferred tax
liability from €1,374,000 to €590,000. As a result of the overall reduction in the fair value of intangible
assets, the fair value of assets acquired attributable to minority interests was reduced from €1,317,000 to
€804,000. Goodwill has increased from €1,445,000 to €2,998,000.
(aa) Provisions
A provision for warranty costs is recognized at the date of sale of the relevant products, at the best
estimate of the expenditure required to settle the Group's liability.
47
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(ab) Critical accounting judgments and key sources of estimation uncertainty
Critical accounting judgments
In the process of applying the Group’s accounting policies, management consider the following
judgments, apart from those involving estimates on future uncertain events, which are discussed further
below, to have the most significant effect on the amounts recognized in the financial statements.
Grant income
Income relating to government grants is recognized when there is reasonable assurance that the
Company has complied with the conditions attaching to it and the grant will be received. Management is
required to exercise judgment 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 2007 was €2,139,000 (2006: €686,000). As at 31 December 2007 an amount of
€3,143,000 (2006: €1,044,000) is recorded in other current assets.
Non-current assets held for sale
As noted above, non-current assets and disposal groups are classified as held for sale if their carrying
amount will be recovered through the sale transaction rather than through continued use. This requires
the exercise of judgment as to whether the sale is highly probable and will qualify for recognition as a
completed sale within one year from the date of classification.
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 2007, the carrying value of intangible assets other than the goodwill acquired in
business combinations was €1,162,000 (2006: €1,835,000). For applicable amortization rates, see note
1(m) above.
Investments in unlisted entities
The Group holds equity instruments in certain unlisted entities for which no active market exists and
hence which do not have a quoted market price. These are accounted for as available-for-sale
investments by the Group, requiring them to be measured at fair value at inception and at each balance
sheet date, unless such fair values cannot be reliably determined at the measurement date, in which case
they are recorded at deemed cost less any impairment.
Determination of fair value requires the use of valuation techniques which make use of certain
assumptions including historic and forecast revenues and earnings, debt levels, multiples observed for
comparator companies and discounts to such multiples to take account of factors such as illiquidity.
Changes in these assumptions would impact on the amount recorded in the balance sheet. As at 31
December 2007, the total value of such investments was €1,570,000.
48
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(ab) Critical accounting judgments and key sources of estimation uncertainty (continued)
Share-based payments
The Group has granted equity-settled share-based payments to certain directors and employees. Such
options are required to be fair valued in accordance with the requirements of IFRS 2 Share-based
payment. Determination of fair value requires the exercise of judgment regarding the applicable
assumptions to be used as inputs into the fair value model, including the expected volatility, risk-free rate
and expected option life. Changes in these assumptions would affect the fair value of options and hence
the amount recorded in the income statement. For the year ended 31 December 2007, the total amount
recorded in the income statement for continuing operations was €859,000 (31 December 2006:
€340,000).
Accounting for transactions with Bartolini After Market Electronic Services Srl (“BAMES”)
As disclosed further in note 8, on 20 June 2007, the Group entered into a series of related transactions
with BAMES in which BAMES subscribed for 5.625 per cent of the share capital of Telit Wireless
Solutions Srl for €9.0 million, and the Group acquired a 19.9 per cent interest in BAMES’s subsidiary,
Services for Electronic Manufacturing Srl (“SEM”) for €1. Additionally, the Group entered into a
manufacturing agreement for the manufacture by SEM of machine-to-machine modules, with certain
exceptions, for a period of at least five years, together with minimum purchase quantities.
Accounting for these transactions has required the Group to determine the fair value of the acquired
interest in SEM and the fair value of the interest in Telit Wireless Solutions Srl disposed, in order to
determine the gain on deemed disposal of the interest in Telit Wireless Solutions Srl after attributable
costs. The Group has recognized the premium received in excess of the fair value of Telit Wireless
Solutions Srl given up as deferred income, representing the premium received for minimum purchase
commitments given by the Group. This is being amortized to the income statement within cost of sales
in accordance with the minimum purchase commitments made by the Group. The total amount amortised
to the income statement for the year ended 31 December 2007 was €466,000 (2006: €nil). At 31
December 2007, the total deferred income recorded in the balance sheet from this transaction was
€7,227,000 (31 December 2006: €nil).
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:
(cid:120)
(cid:120)
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:
(cid:120)
(cid:120)
(cid:120)
management’s expectations of growth in revenue;
changes in operating margins; and
uncertainty of future technological developments.
49
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(ab) Critical accounting judgments and key sources of estimation uncertainty (continued)
Changing the assumptions selected by management could significantly affect the Group’s results.
As at 31 December 2007, the Group had recognized a deferred tax asset of €3,130,000
(2006: €3,803,000). See note 9 for further information.
Recoverability of internally developed intangible assets
Capitalization of development costs requires the exercise of management judgment in determining
whether it is probable that future economic benefits to the Company arising will exceed the amount
capitalized. This requires management to estimate anticipated revenues and profits from the related
products to which such development costs relate. As at 31 December 2007, the amount of development
costs capitalized (net of amortization) included in the Group balance sheet was €2,917,000.
Recoverability 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
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 2007, the amount of goodwill included in the consolidated balance sheet was €2,655,000
(2006: €2,992,000).
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 2007, the book value of the investment in
associated undertakings was €568,000 (2006: €579,000).
50
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
(ab) Critical accounting judgments and key sources of estimation uncertainty (continued)
Recoverability of investments in unlisted entities
The Group’s balance sheet includes an investment in unlisted securities which is carried at deemed cost
of €1,570,000. The Directors have undertaken an evaluation of whether there are any indicators of
impairment associated with this investment. In doing so, the Directors have considered observable data
about the investee and the outlook for the market in which it operates. This requires the Directors to form
an assessment of the expected future economic benefit that may be realized from its investment holding,
either through disposal or dividend income.
(ac) Adoption of new and revised standards
In the current year, the Group has adopted IFRS 7 Financial Instruments: Disclosures which is effective
for annual reporting periods beginning on or after 1 January 2007, and the related amendment to IAS 1
Presentation of Financial Statements. The impact of the adoption of IFRS 7 and the changes to IAS 1 has
been to expand the disclosures provided in these financial statements regarding the Group’s financial
instruments and management of capital (see note 33).
Four Interpretations issued by the International Financial Reporting Interpretations Committee are
effective for the current period. These are:
IFRIC 7 Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary
Economies;
IFRIC 8 Scope of IFRS 2;
IFRIC 9 Reassessment of Embedded Derivatives; and
IFRIC 10 Interim Financial Reporting and Impairment.
The adoption of these Interpretations has not led to any changes in the Group’s accounting policies.
(ad) 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:
Operating Segments
IFRS 8
IAS 23 (Revised) Borrowing Costs
IFRIC 11
IFRIC 12
IFRIC 13
IFRIC 14
IFRS 2—Group and Treasury Share Transactions
Service Concession Arrangements
Customer Loyalty Programmes
IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements
and their Interaction
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 when the relevant
standards come into effect, except for additional segment disclosures when IFRS 8 comes into effect for
periods commencing on or after 1 January 2009.
51
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
2.
REVENUE
Sales of goods
Royalties
Revenue
Investment income
Continuing operations
Discontinued operations
Group
2007
€’000
2006
€’000
49,842
2,347
52,189
277
52,466
23,331
75,797
28,412
1,728
30,140
190
30,330
56,640
86,970
In November 2007 Telit entered into a lifetime license agreement with the Italian company Bardi, granting
Bardi the right to use the Telit tradename in the marketing and sale in Europe of cellular phones and
accessories and other electronic equipment excluding, specifically, the m2m arena, for consideration of
€1.5 million. These royalties were recorded in the income statement as revenue.
3.
SEGMENTAL ANALYSIS
The Group was previously organized into two operating divisions, Wireless Solutions and Wireless
Products, the principal activities of which are as follows:
- Wireless Solutions business unit (“TWS”) – designs, develops, manufactures and sells cellular
GSM/GPRS/CDMA/UMTS modules and solutions mainly to the machine-to-machine (m2m) application
markets. The division also earns royalty income from the licensing of the Telit tradename to the TWP
division and to third parties.
- Wireless Products business unit (“TWP”) – 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.
As reported in note 12, on 17 May 2007 Telit’s board of directors resolved to sell TWP and to focus solely
on the Wireless Solutions division. Following the decision to sell the Group’s TWP business, the
remaining continuing operations of Telit comprise a single business segment, TWS.
In accordance with IAS 14 Segmental Reporting, comparative segmental disclosures have been restated to
reflect all operations that have been classified as discontinued at the balance sheet date.
52
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
3.
SEGMENTAL ANALYSIS (continued)
Segmental information for each geographical region in which Telit operates is presented below.
2007
Revenue
External sales
Inter-segment
sales (1)
Total revenue
Result
Segment result
EMEA APAC AMERICAS
€’000
€’000
€’000
Discontinued
ISRAEL
€’000
operations Eliminations Consolidated
€’000
€’000
€’000
47,016
13,714
1,676
13,114
(23,331)
-
52,189
3,285
50,301
-
13,714
-
1,676
-
13,114
-
(23,331)
(3,285)
(3,285)
-
52,189
(576)
145
(2,296)
(901)
4,480
-
852
Unallocated corporate expenses
Operating loss
Investment income
Finance costs
Share of results of associated undertakings
Gain on deemed partial disposal of subsidiary
Loss before income taxes
Income taxes
Loss for the year from discontinued operations
Loss for the year
(2,361)
(1,509)
277
(1,241)
(2)
1,194
(1,281)
(597)
(5,180)
(7,058)
(1) Transactions between geographic segments are charged at prevailing market prices.
53
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
3.
SEGMENTAL ANALYSIS (continued)
2006 (Restated (2))
Discontinued
EMEA APAC AMERICAS
€’000
€’000
€’000
ISRAEL
€’000
operations Eliminations Consolidated
€’000
€’000
€’000
Revenue
External sales
Inter-segment
sales (1)
Total revenue
Result
Segment result
49,316
5,833
40
31,591
(56,640)
-
30,140
1,325
50,641
-
5,833
-
40
-
31,591
-
(56,640)
(1,325)
(1,325)
-
30,140
(8,399)
(21)
(1,697)
1,250
2,947
-
(5,920)
Unallocated corporate expenses
Operating loss
Investment income
Finance costs
Share of results of associated undertakings
Loss before income taxes
Income taxes
Loss for the year from discontinued operations
Loss for the year
(1,150)
(7,070)
190
(492)
(41)
(7,413)
(91)
(3,636)
(11,140)
(1) Transactions between geographic segments are charged at prevailing market prices.
(2) Included within revenue from continuing operations are revenues of €556,000 charged to
discontinued operations (2006: €1,525,000) for royalties for the use of the Telit tradename based on
the number of units sold to third parties by TWP; such revenues have been realized as revenue from
third parties to the Group by TWP. In the 2006 published financial statements this amount was
classified within the TWP division rather than shown as income relating to the Telit corporate name
and hence the amount shown in the segment analysis above has been restated to revenue as part of
continuing operations as the revenue is attributable to the retained Telit brand name. Additionally,
also in the analysis above, an amount of €921,000 has been reclassified from TWP discontinued
operations to continuing operations in the TWS division due to an incorrect product, and hence
segment classification.
Unallocated corporate expenses principally comprise salary, professional fees and other expenses which
cannot be directly allocated to one of the segments.
The segment result for discontinued operations is reported in note 12.
54
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
3.
SEGMENTAL ANALYSIS (continued)
Total assets:
Wireless Products – discontinued operation
EMEA
APAC
AMERICAS
Investment in associated undertaking
Unallocated assets
Total assets
Total liabilities:
Wireless Products – discontinued operation
EMEA
APAC
AMERICAS
Unallocated liabilities
Total liabilities
Unallocated assets comprise:
Other long term assets
Deferred tax asset
Other debtors in respect of general entity and head office purposes
Deposits - restricted cash
Cash and cash equivalents
Unallocated assets
Unallocated liabilities comprise:
Other loans
Short-term borrowings from banks and other lenders
Other current liabilities in respect of general entity and head office
purposes
Deferred tax liabilities
Unallocated liabilities
55
2007
€’000
2006
(Restated)
€’000
8,162
27,428
10,601
1,580
2,138
16,719
66,628
6,433
22,729
1,033
85
19,971
50,251
2007
€’000
310
3,130
1,935
6,132
5,212
16,719
2007
€’000
500
17,336
1,806
329
19,971
14,327
15,268
8,556
356
579
20,849
59,935
3,147
7,116
758
250
24,920
36,191
2006
€’000
303
3,803
5,702
7,115
3,926
20,849
2006
€’000
2,035
17,375
5,003
507
24,920
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
3.
SEGMENTAL ANALYSIS (continued)
2007
Other segment items:
Capitalized tangible and
intangible asset additions
Non-cash items:
Depreciation and
amortization
Bad debt expense
Share-based payments
2006
Other segment items:
Capitalized tangible and
intangible asset additions
Non-cash items:
Depreciation and
amortization
Bad debt expense
Share-based payments
EMEA APAC
€’000
€’000
AMERICAS
€’000
ISRAEL
€’000
operations Consolidated
€’000
€’000
Discontinued
4,043
900
41
723
(723)
4,984
1,065
-
893
729
45
14
33
31
15
158
-
154
(158)
-
(154)
1,827
76
922
EMEA APAC
€’000
€’000
AMERICAS
€’000
ISRAEL
€’000
operations Consolidated
€’000
€’000
Discontinued
2,932
6,010
168
317
-
9,427
618
188
340
393
-
-
12
-
-
110
-
878
(110)
(150)
(878)
1,023
38
340
4.
OTHER INCOME
Government grants
Other
2007
€’000
2,139
318
2,457
2006
€’000
686
43
729
The Group’s Italian subsidiary has been declared eligible to receive grants totalling €2.1 million under
annual research and development programmes sponsored by the FVG region in Italy.
The Group’s eligibility for the annual programmes for 2006 and 2007 was approved by the relevant
grant making body during the year. The Group only recognizes such income from the regional grant-
making body once it has received confirmation of eligibility and once the qualifying conditions have
been satisfied and the Group is reasonably assured of receipt. The Group has recognized amounts
expected to be received in respect of both grants within other income in the year ended 31 December
2007 as all the conditions for qualification, which relate to the level of eligible expenditure incurred,
have been satisfied. Of the total recognized of €2,139,000, €1,093,000 relates to the 2006 grant for
which eligibility was only confirmed in 2007. As at 31 December 2007, the total amount receivable
from the grant body was €3,143,000 (31 December 2006 - €1,044,000).
€318,000 other income in the year represents negative goodwill arising following an increase in the
Group’s shareholding of Telit APAC during the year, see note 26.
56
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
5.
OTHER EXPENSES
Other expenses relate to professional adviser costs associated with an unsuccessful acquisition bid. The
Company's expenses in connection with this bid process were €400,000.
6.
INVESTMENT INCOME
Interest income from bank deposits
Exchange rate losses
7.
FINANCE COSTS
Interest expense on factoring arrangements
Interest expense on bank loans and overdrafts
Other
2007
€’000
2006
€’000
277
-
277
318
(128)
190
2007
€’000
112
1,012
117
1,241
2006
€’000
120
279
93
492
8.
GAIN ON DEEMED PARTIAL DISPOSAL OF SUBSIDIARY UNDERTAKING
The Group’s subsidiary, Telit Wireless Solutions Srl (“TWS”), received a capital injection of
€9.0 million (before costs of €1.4 million) in exchange for new shares issued equal to 5.625% of its
enlarged share capital. The Group has accounted for this transaction as a deemed disposal. As part of the
same transaction, the Group acquired a 19.9 per cent interest in BAMES’s subsidiary, Services for
Electronic Manufacturing Srl (“SEM”) for €1. As set out in note 17, the fair value of this investment at
the date of acquisition was determined to be €1,570,000. Additionally, the Group entered into a
manufacturing agreement for the manufacture by SEM of machine-to-machine modules, with certain
exceptions, for a period of at least five years, together with minimum purchase quantities.
The gain on deemed disposal has been calculated as the difference between the estimated fair value of
the 5.625% stake in TWS, net of costs, and the book value as at the date of deemed disposal. Minority
interests of €275,000 were recognized on this transaction.
Fair value of net assets disposed, net of costs of €1.4 million
Book value of net assets disposed to minorities
Gain on deemed partial disposal of subsidiary undertaking
2007
€’000
1,469
(275)
1,194
TWS holds all of the Group’s investments in its Telit Wireless Solutions division. In estimating the fair
value of net assets disposed, the Directors had regard to the market value of the Telit Communications
PLC group as at the date of the transaction, less the estimated fair value of the Telit Wireless Products
division, based on the expected disposal proceeds as this division is held for sale.
57
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
8.
GAIN ON DEEMED PARTIAL DISPOSAL OF SUBSIDIARY UNDERTAKING (continued)
The Group has recognized the net premium received in excess of the fair value of the stake in TWS
given up, amounting to €7,693,000 as deferred income, representing the premium received for minimum
purchase commitments given by the Group. This is being amortized to the income statement within cost
of sales in accordance with the minimum purchase commitments made by the Group. A total of
€466,000 was recorded in the income statement for the year ended 31 December 2007. The minimum
purchase commitment for 2007 was fulfilled and management currently assesses that, given current
market conditions and the expected growth of the Company, the minimum purchase commitments for
2008 and 2009 are attainable.
An additional €7.0 million will be invested in December 2008, providing Telit meets certain m2m module
minimum purchase commitments. Upon completion of the second investment BAMES will receive an
additional 4.375% of TWS's share capital. Neither this additional investment nor the right to subscribe for
such shares has been accounted for at 31 December 2007 as such subscription rights qualify as an equity
instrument.
In the event of termination of the manufacturing agreement, Telit has the right, but not the obligation, to
repurchase from BAMES its entire investment in TWS for €9.0 million if only the first tranche of 5.625%
has been invested or €16.0 million if the second tranche has been invested and BAMES has the right, but
not obligation to repurchase from Telit Italy its entire investment in SEM for a total of €1. Save for breach
of contract, the manufacturing agreement may only be terminated by either party within six months of the
end of the initial term or the subsequent periods of automatic renewal (yearly). No premium was paid or
received in respect of such options. The Directors have determined that the fair value of such options
cannot be reasonably determined.
9.
INCOME TAXES
A.
Overseas corporate tax:
Current year taxes
Deferred taxes:
Overseas deferred taxes
2007
€’000
2006
€’000
158
439
597
211
(120)
91
Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
58
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
9.
INCOME TAXES (continued)
B.
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 2007 and 2006, and the Group’s total tax expense for the year:
2007
€’000
2006
€’000
Loss before income tax from continuing operations
(1,281)
(7,413)
Tax credit computed at 30%
(384)
(2,224)
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
Decrease in deferred tax asset due to reduction in tax rate
Tax charge for continuing operations
(1,007)
(158)
1,470
676
(597)
184
(151)
2,100
-
(91)
C.
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 2007
Prior year adjustment (note 26)
At 1 January 2007 as restated
Discontinued operation
Translation adjustments
(Charge) / credit to the income statement
At 31 December 2007
Net
operating
loss
€’000
Other
timing
differences
€’000
3,715
-
3,715
(48)
-
(667)
3,000
(1,105)
686
(419)
(53)
45
228
(199)
Total
€’000
2,610
686
3,296
(101)
45
(439)
2,801
The following is the analysis of the deferred tax balances, as restated for the finalization of the
purchase price accounting for Telit APAC (see note 26) for financial reporting purposes:
Deferred tax assets
Deferred tax liabilities
2007
€’000
3,130
(329)
2,801
2006
€’000
3,803
(507)
3,296
59
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
9.
INCOME TAXES (continued)
At 31 December 2006, the Group had recorded a deferred tax asset of €3.8 million relating to
losses incurred in its Italian subsidiary, Telit EMEA. 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 EMEA has incurred losses since formation in 2003 up to and including 2007.
During 2007, the taxable losses that arose principally related to the TWP activities in Italy which
have now been discontinued. During the year the applicable tax rate in Italy at which the asset is
expected to be recovered has been reduced from 33% to 27.5%. As a result the deferred tax asset
has been reduced to €3.0 million at 31 December 2007.
In 2006, the Directors approved a four year business plan for Telit EMEA, based on which
management expected to begin to recover the deferred tax asset during the year ending
31 December 2008, with full recovery forecast in the year ending 31 December 2010. The trading
performance of the continuing operations of Telit EMEA for 2007 has been in line with the
forecast for 2007 in the four year business plan. The Directors have approved an updated business
plan for 2008-2010 which continues to support the beginning of recovery of the deferred tax asset
during the year ending 31 December 2008, with full recovery forecast in the year ending
31 December 2010. However, as this assessment is a judgment about future events, there is no
certainty as to this matter.
The Directors assessed whether to recognise an additional deferred tax asset for further losses
incurred during 2007 by Telit EMEA. Having had regard to the fact that full recovery of the
existing asset is not expected until the year ending 31 December 2010, the final year for which
Board-approved forecasts have been prepared by the Company, and the inherent uncertainty
attached to any forecast, the Directors concluded that there was insufficient evidence to warrant
recognition of additional deferred tax assets. This judgment is kept under review by the Directors
at each reporting period.
D.
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.
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
2007
€’000
10,909
28,766
39,675
2006
€’000
11,266
18,706
29,972
60
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
10. LOSS FOR THE YEAR FROM CONTINUING OPERATIONS AND GROUP AUDIT FEE
Loss for the year from continuing operations is stated after charging / (crediting)
2007
€’000
2006
€’000
Net foreign exchange losses
Depreciation of owned fixed assets (note 15)
Amortisation of intangible assets (note 14):
Amortisation of purchased customer list – included in selling
and marketing expenses
Amortisation of acquired technology – included in research and
development expenses
Amortisation of software – included in research and
development expenses
Research and development expenditure
Loss on disposal of property, plant and equipment
Costs of inventories recognised as an expense
Write-downs of inventories recognized as an expense
Impairment loss recognized on trade receivables
Pension curtailment losses (see note 24)
Settlement costs on repurchase of share options (see note 30)
Non-recurring credit relating to negative goodwill (see note 26)
Net loss on loans and receivables (including interest received)
Net loss on financial liabilities measured at amortised cost
(including finance charges)
Audit fee
115
934
216
261
416
8,940
-
29,534
249
76
464
271
(318)
133
1,241
216
653
176
127
67
8,058
7
18,060
11
38
-
-
-
38
492
Group
Company
2007
€’000
2006
€’000
2007
€’000
2006
€’000
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
99
-
133
232
31
263
136
41
-
177
9
186
99
-
-
99
-
99
136
41
161
338
13
351
61
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
11. 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
2007
€’000
2006
€’000
47
131
22
47
50
297
10,678
1,587
595
12,860
41
109
19
42
32
243
9,242
1,865
658
11,765
Directors’ remuneration disclosures described within the Directors’ Remuneration Report as audited
form part of these financial statements on page 25.
The cost incurred in respect of employees (including executive directors) from discontinued operations is
set out below:
Discontinued operations:
Wages and salaries
Social security costs
Other pension costs
12. DISCONTINUED OPERATIONS
2007
€’000
1,696
110
11
1,817
2006
€’000
1,620
81
292
1,993
On 17 May 2007 the Company’s board of directors resolved to sell the Wireless Products division
(“TWP”) and to focus solely on the Wireless Solutions business unit.
On 28 June 2007 the Company executed a term sheet for the sale of 80.01% of TWP, to a group of third
party investors. The consideration receivable was to be calculated according to TWP's equity as at the
date of the transaction. Under the terms of the transaction, it is proposed that the Group will retain 19.9%
of TWP, with no representation on its board of directors.
In conjunction with the sale of TWP, it is proposed that Telit EMEA will enter into a license agreement
with TWP for the use of the Telit trade name by TWP for marketing of cellular phones and other
electronic products in Israel but excluding its use in the m2m arena. Under the license agreement, it is
proposed that the Group will receive royalties over a period of 5.5 years, calculated as a percentage of
applicable turnover, up to a maximum of €6 million and subject to such royalties not exceeding a
specified percentage of the EBITDA of TWP.
62
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
12. DISCONTINUED OPERATIONS (continued)
As at the date of the approval of the financial statement, this transaction has not completed. Negotiations
with the group of third party investors continue and a transaction substantially similar to the one
contemplated by the term sheet is expected to complete in the first half of 2008.
The results of the discontinued operations which have been included in the consolidated statements of
operations for the year ended 31 December 2007 and 2006 are as follows:
Revenue
Cost of sales
Gross profit
Other income
Operating expenses
Net finance costs
Loss before income taxes
Income taxes
Net loss attributable to discontinued operations
2007
€’000
23,331
(22,134)
1,197
1,518
(7,195)
(640)
(5,120)
(60)
(5,180)
2006
€’000
56,640
(52,087)
4,553
709
(8,209)
(677)
(3,624)
(12)
(3,636)
During the year, net cash generated from operations in the Wireless Products Division was €2,239,000
(2006: €17,634,000), used €741,000 in respect of investing activities (2006: €289,000) and provided
€ 1,167,000 in respect of financing activities (2006: €14,903,000).
The balance sheet of the discontinued operations which have been included in the consolidated
statements as at 31 December 2007 are as follows:
Current assets:
Inventories
Trade receivables
Other receivables
Cash and cash equivalents
Non-current assets:
Intangible assets
Property, plant and equipment
Other
Total assets classified as held for sale
Current liabilities:
Short-term borrowings
Trade payables
Other current liabilities
Non-current liabilities:
Post-employment benefits
Total liabilities classified as held for sale
63
2007
€’000
1,661
4,219
927
42
523
664
126
8,162
4,207
790
1,343
93
6,433
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
12. DISCONTINUED OPERATIONS (continued)
At 31 December 2007 €3.1 million of the trade receivables balance was due from one major customer
(2006: approximately €4.0 million). No provision has been made in either year for irrecoverable
amounts, since historical experience has indicated that all amounts billed have been paid. The balance is
due in New Israeli Shekels and bears no interest. The average credit period taken on sales is 75 days
(2006: 75 days). Management considers that the carrying amount of the trade receivables approximates
their fair value.
Disclosures relating to short term borrowings relating to discontinued operations are provided in note 31.
Inventories are stated net of a provision of €353,000 (2006: €200,000) for slow moving items.
Loss for the year from discontinued operations is stated after charging / (crediting):
Net foreign exchange losses (gains)
Depreciation of owned fixed assets (note 15)
Research and development expenditure
Costs of inventories recognised as an expense
Write-downs of inventories recognized as an expense
Impairment loss recognized on trade receivables
Settlement costs on repurchase of share options (see note 30)
Net loss on financial liabilities measured at amortised cost
(including finance charges)
13. LOSS PER SHARE
2007
€’000
2006
€’000
43
158
-
20,844
153
900
46
656
2007
€’000
(12)
110
91
48,030
691
130
-
677
2006
€’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
7,027
11,136
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
43,214,281
(4.3)
(12.0)
(16.3)
(17.4)
(8.4)
(25.8)
Number of options that are anti-dilutive:
4,062,000
2,216,687
64
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
14.
INTANGIBLE FIXED ASSETS
Finite lived intangible assets
Exclusivity
rights
€’000
Software
and
licenses
€’000
Internally
generated
development
costs
€’000
Customer
relationships
€’000
Acquired
development
costs
€’000
500
-
-
-
500
422
1,481
19
19
1,922
-
379
-
-
379
-
-
1,500
(6)
1,494
-
1,195
2,538
-
-
500
(18)
3,099
-
2,917
(170)
1,324
-
(500)
-
(500)
-
-
(500)
-
-
(306)
-
(67)
(373)
(416)
6
(783)
-
-
-
-
-
-
-
-
-
(176)
(176)
(216)
23
(369)
2,316
2,917
955
1,549
379
1,318
-
-
645
(1)
644
-
(73)
571
-
-
(127)
(127)
(261)
24
(364)
207
517
Goodwill
€’000
Total
€’000
-
-
2,998
(6)
2,992
922
1,860
5,162
(13)
7,931
-
3,733
(337)
2,655
(598)
11,066
-
-
-
-
-
-
-
(306)
(500)
(370)
(1,176)
(893)
53
(2,016)
2,655
9,050
2,992
6,755
GROUP
COST
1 January 2006
Additions
Arising on acquisition
Translation adjustments
31 December 2006
Additions
Translation
adjustments
31 December 2007
ACCUMULATED
AMORTIZATION
1 January 2006
Impairment losses
Charge for the year
31 December 2006
Charge for the year
Translation
adjustments
31 December 2007
Net book value
31 December 2007
31 December 2006
Goodwill, customer relationships and acquired development costs relate to the acquisition of Telit APAC
which is included within the Asia Pacific geographical segment.
The impact of the finalization of the purchase price allocation in the current year on the prior year
acquisition of Bellwave M2M Co. Ltd. is disclosed in note 26.
The Group tests goodwill and intangible assets not yet ready for use for impairment annually, or more
frequently if there are indications that they might be impaired.
Telit APAC is determined as the cash generating unit for impairment testing purposes, being the lowest
level within the Group at which goodwill is monitored for internal management purposes.
The recoverable amount of Telit APAC has been determined based on a value in use calculation using
cash flow projections based on financial budgets for a period of five years. The Group’s five year cash
flow forecast has been derived from the most recent financial budget approved by management adjusted
for expected growth for the following 4 years, based on an average estimated growth rate of 22% per
year.
65
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
14.
INTANGIBLE FIXED ASSETS (continued)
The discount rate applied of 17% is based on the risk free rate for 30 year bonds, issued by the
government in Korea, adjusted for a risk premium to reflect both the increased risk of investing in
equities and the systematic risk of Telit APAC.
In developing its projections, management has had regard to its past experience and external forecasts of
growth in the M2M industry. The key assumptions used in determining value in use are:
(cid:120)
Revenue
Management has forecast revenue mainly based on external forecasts of growth in the M2M industry for
the APAC region. A declining growth rate has been applied, decreasing from 25% per year to 20% per
year over the four year period beyond the most recent financial budget.
Management has forecast changes in the average sales price based on past experience and external
forecasts of changes in the selling price in the M2M industry for the APAC region.
(cid:120)
Expected changes in operating costs
Management has forecast changes in operating costs based on the current and expected future
infrastructure required to execute the assumed revenues.
(cid:120)
EBITDA margins
EBITDA margins are expected to be in the range of 21-23% over the five year period covered by the
forecasts.
The Directors do not consider there to be any reasonably possible changes in key assumptions that would
lead to an impairment loss and consequently no sensitivity analysis has been presented.
66
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
15. PROPERTY, PLANT AND EQUIPMENT
Computers
€’000
Office
equipment
€’000
Vehicles
€’000
Leasehold
Improvements
€’000
Total
€’000
GROUP
COST
As at 1 January 2006
Additions for the year
Disposals
Arising on acquisition
Translation adjustments
As at 31 December 2006
Additions for the year
Reclassified as held for
sale
Translation adjustments
347
503
(6)
20
(3)
861
225
(240)
-
2,328
1,369
-
311
(3)
4,005
947
(256)
(85)
209
9
(58)
-
(4)
156
-
(156)
-
266
193
-
-
(5)
454
79
(418)
-
As at 31 December 2007
846
4,611
-
115
DEPRECIATION
1 January 2006
Charge for the year
Disposals
Translation adjustments
31 December 2006
Charge for the year
Reclassified as held for
sale
Translation adjustments
(192)
(96)
-
5
(283)
(124)
168
-
(1,367)
(608)
-
-
(1,975)
(804)
45
25
31 December 2007
(239)
(2,709)
Net book value
31 December 2007
31 December 2006
607
578
1,902
2,030
(111)
(23)
32
3
(99)
-
99
-
-
-
57
-
(66)
(36)
2
(100)
(6)
94
-
(12)
103
354
3,150
2,074
(64)
331
(15)
5,476
1,251
(1,070)
(85)
5,572
(1,736)
(763)
32
10
(2,457)
(934)
406
25
(2,960)
2,612
3,019
16.
INVESTMENT IN ASSOCIATED UNDERTAKING
GROUP
Investment in associated undertaking, Cell-Time Ltd
Cost
Translation adjustments
Losses accumulated since acquisition
2007
€’000
2006
€’000
1,135
(79)
(488)
568
1,135
(70)
(486)
579
67
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
16.
INVESTMENT IN ASSOCIATED UNDERTAKING (continued)
The accounts of Cell-Time Ltd are drawn up to 31 December 2007 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
17. OTHER INVESTMENTS
GROUP
Available for sale investments carried at deemed cost:
Unlisted equity securities
2007
€’000
2006
€’000
1,454
51
1,505
1,475
9
1,484
2007
€’000
10,915
(10,420)
495
(499)
(1)
(5)
1,198
48
1,246
1,212
8
1,220
2006
€’000
7,536
(7,198)
338
(476)
(1)
(139)
2 0 0 7
€’000
2006
€’000
1,570
-
The Group holds 19.9% of the ordinary share capital of SEM, a company providing integrated
technological and logistical services for the high-tech electronics manufacturing market. The Group has a
single representative on the board of SEM, with the remaining 5 directors appointed by the other
shareholder. The Group does not have any voting rights beyond those conveyed by its shareholding.
Fair value at the date of acquisition of €1,570,000 was estimated based on historic and projected
multiples in earnings, revenues and net assets by reference to a basket of comparable companies for
which information is publicly available. In doing so, assumptions were made that are not supported by
prices from observable prices or rates. Financial information on which such a fair value determination
was made is not available to the Group as at 31 December 2007 and consequently the Directors do not
consider there is sufficient information available to reliably determine the fair value at that date. The
investment has therefore been recorded at deemed cost at 31 December 2007. In doing so, the Directors
have considered whether there have been any factors which may indicate that an impairment has arisen,
and are satisfied that no such factors exist.
68
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
18.
INVESTMENTS IN SUBSIDIARIES
COMPANY
Investment in subsidiaries
1 January 2006
Additions
Loan capitalised
31 December 2006
Additions
31 December 2007
Investment in associated
undertaking, Cell-Time Ltd
Loans to
subsidiaries
€’000
Investments in
subsidiaries
€’000
Total
€’000
14,500
6,497
(10,000)
10,997
2,475
13,472
6,152
13
10,000
16,165
-
16,165
20,652
6,510
-
27,162
2,475
29,637
579
30,216
Details of the associated undertakings of the Company are as follows:
Name of company
Country of
incorporation
and
operation
Ownership
interest and
voting
rights
Type of
shares
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:
•Telit Wireless Solutions Srl
("TWS")
••Telit Communications SpA
("Telit EMEA")
Sardinia, Italy Ordinary
94.375%
Italy
Ordinary
100%
•••Telit Communications Spain SL Spain
Ordinary
100%
•Telit Wireless Solutions Inc.
("Telit Americas")
United States
of America
Ordinary
100%
•Telit Wireless Solutions Co Ltd
("Telit APAC")
Republic of
Korea
Ordinary
90%
•••Telit Wireless Solutions Ltd.
("Telit IL")
Israel
Ordinary
100%
69
Intermediate holding
company
Development,
manufacturing and
selling data products
and distributing
cellular products
Selling and marketing
data products
Selling and marketing
data products
Development,
manufacturing and
selling data products
Selling and marketing
data products
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
19.
INVENTORIES
GROUP
Finished goods
Spare parts
Raw materials
2007
€’000
6,589
-
1,623
8,212
2006
€’000
6,345
2,216
1,723
10,284
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
€260,000 (2006: €1,033,000, of which €1,022,000 related to activities discontinued in 2007 for which
inventories of €4,418,000 was held).
20. RECEIVABLES
Within current assets:
Trade debtors (*)
Other debtors
Due from Group undertakings
Within non-current assets:
Other long term assets
Deferred tax asset (note 9)
Group
2007
€’000
16,591
5,079
-
21,670
310
3,130
3,440
2006
€’000
17,452
6,699
-
24,151
303
3,803
4,106
(*) Included trade debtors classified as held for
sale
-
8,502
Company
2007
€’000
2006
€’000
71
104
588
763
-
-
-
-
-
268
306
574
-
-
-
-
The average credit period on trade receivables that are neither past due nor impaired is 60 days (2006: 55
days). No interest is charged on trade receivables. The Group has provided against receivables based on
estimates of irrecoverable amounts from the sale of goods, determined by reference to past default
experience.
Included in the Group’s trade debtors balance for the Wireless Solutions Business are debtors with a
carrying amount of €3,391,000 (2006: €942,000) which are past due at the reporting date against which
the Group has not made a loss provision as there has not been a significant change in credit quality and
the Group believes that the amounts are still considered recoverable. The Group does not hold any
collateral over these balances. The average age of these receivables is 93 days (2006: 80 days).
Ageing of past due but not impaired trade debtors
0-30 days
30-60 days
60-90 days
90-120 days
2007
€’000
2006
€’000
1,510
1,706
150
25
3,391
765
103
16
58
942
The Directors consider that the carrying amount of trade and other receivables approximates their fair
value.
70
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
20. RECEIVABLES (continued)
The Group’s trade receivables are stated after allowances for bad and doubtful debts, an analysis of
which is as follows:
At 1 January
Increase in allowance recognised in profit or loss
At 31 December
2007
€’000
2006
€’000
218
76
294
180
38
218
In determining the recoverability of trade receivables, the Group considers any change in the credit
quality of the trade receivable from the date credit was initially granted up to the reporting date. The
concentration of credit risk in the Group’s continuing activities is limited due to the customer base being
large and unrelated. Accordingly, the directors believe that there is no further credit provision required in
excess of the allowance for doubtful debts. Credit risk in the Group’s discontinued activities is disclosed
in note 12.
There are no allowances for credit losses recorded against other financial assets.
21. OTHER FINANCIAL ASSETS
Loans and receivables:
Due from group undertakings
Other long term assets
Other debtors
Assets outside the scope of IFRS 7:
Current assets
Other debtors
Non-current assets
Investments in subsidiaries (note 18)
Investments in associates (note 16) (*)
investments
Available-for-sale
deemed cost:
Non-current
Shares in unlisted entities (note 17)
carried
at
Group
Company
2007
€’000
2006
€’000
2007
€’000
2006
€’000
-
310
3,683
3,958
-
303
1,460
1,763
588
-
-
588
306
-
-
306
1,396
5,239
104
268
-
568
568
-
579
579
29,637
579
30,216
27,162
579
27,741
1,570
-
-
-
Total
3,534
5,818
30,320
28,009
(*) In 2006 the investment in Cell-time was purchased by The Company from another group company
for a total consideration of €579,000.
71
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
21. OTHER FINANCIAL ASSETS (continued)
Included within other debtors are amounts receivable in respect of the Group's grant claims amounting to
€3,143,000 (2006: €1,044,000). These debtors do not have a specified date by which payment is due to
the company and hence no ageing information is provided. The directors have assessed the credit quality
of such receivables and are satisfied that as such amounts are receivable from regional government
bodies, no provision for losses is required.
22. CASH
The Group’s cash resources are as follows:
Group
Company
2007
€’000
2006
€’000
2007
€’000
2006
€’000
Deposits – restricted cash
Cash and cash equivalents
Total
The Group’s cash resources are denominated in the following currencies:
6,132
5,212
11,344
7,115
3,926
11,041
6,132
2,402
8,534
7,115
1,376
8,491
Group
Company
2007
€’000
2006
€’000
2007
€’000
2006
€’000
Sterling
Dollar
Euro
Other
Total
Analyzed as:
Cash and cash equivalents from continuing
operations
Cash and cash equivalents from discontinued
operations
Total
166
861
9,470
931
11,428
239
3,122
7,318
362
11,041
166
-
8,368
-
8,534
11,344
11,041
8,534
42
11,428
-
11,041
-
8,534
239
947
7,305
-
8,491
8,491
-
8,491
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 EMEA's borrowings. These deposits attract
interest at 2% per annum, which accrues to the benefit of the Group. The deposits would only become
available to the Group on cancellation of the Group’s borrowing facilities (see note 31).
72
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
23. ALLOTTED SHARE CAPITAL
COMPANY AND GROUP
2007
€’000
2006
€’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
The Company has one class of ordinary shares which carry no rights to fixed income.
Share options
The number of outstanding options as of 31 December 2007 and the date of this report is 4,062,000,
equal to 9.4% of the outstanding share capital of the Company (8.6% of the outstanding share capital of
the Company, on a fully diluted basis).
24. POST-EMPLOYMENT BENEFITS
A. Until 1 January 2007, employees of Telit EMEA received defined benefit pension arrangements
under which employees were entitled to retirement benefit based on the accumulated contributions
upon attainment of the retirement age or when leaving the company. Due to changes in applicable
retirement and severance benefit legislation in Italy, existing entitlements at 1 January 2007 were
frozen. For all new entitlements, employees can elect to have their entitlements paid into a group
defined contribution plan or alternatively, into an Italian government defined contribution plan for
private sector employees. The accrued benefit at 1 January 2007 is unfunded. The actuarial present
value of this frozen defined benefit obligation, the related current service cost and curtailment loss
were measured using the traditional 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 term 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.
C.
The amount included in the balance sheet arising from the obligations in respect of the defined
benefit scheme of Telit EMEA and the accrued severance pay of Dai Telecom, Telit APAC and
Telit Americas are as follows:
Movement in post employment benefit obligations
1 January 2007
Discontinued operation
Expense/(income) recognised in the income
statement
Contributions
31 December 2007
73
2007
€’000
2006
€’000
1,226
(63)
713
(321)
1,555
856
620
(250)
1,226
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
24. POST-EMPLOYMENT BENEFITS (continued)
The liability in respect of accrued severance pay for Telit APAC and Telit Americas is
€226,000 (2006: €88,000) and the charge to the income statement in the year is €138,000 (2006:
€88,000). 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 the income statement in respect of the defined benefit scheme are as
follows:
Current service cost
Curtailment loss
Interest cost
Actuarial loss/(gain)
Total (expense)/income included in income statement
2007
€’000
2006
€’000
46
464
65
(101)
474
351
-
32
122
505
E.
The amount included in the balance sheet arising from changes in the present value of the defined
benefit scheme obligation for Telit EMEA are set out below:
Present value of defined benefit scheme obligation
1 January 2007
Actuarial loss/(gain)
Service cost
Curtailment loss
Interest cost
Benefits paid
Disposal
31 December 2007
F.
Financial assumptions
Discount rate
Expected salary increase rate
Inflation
2007
€’000
2006
€’000
1,075
(101)
46
464
65
(112)
(108)
1,329
2007
%
4.40%
3.50%
2.00%
820
122
351
-
32
(250)
-
1,075
2006
%
4.40%
3.50%
2.00%
G.
The experience adjustments arising on the plan liabilities at the balance sheet date, totalled
€10,000 in 2007 (2006: €151,000).
74
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
25. 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 (i)
Due to Group undertakings
Provisions
Deferred income
Other current liabilities
Total current liabilities
Group
2007
€’000
15,626
1,710
-
17,336
13,498
-
63
2,797
3,229
2006
€’000
15,429
927
1,019
17,375
10,584
-
280
-
3,940
Company
2007
€’000
2006
€’000
-
-
-
-
-
3,725
-
-
604
-
-
-
-
16
761
-
-
175
952
36,923
32,179
4,329
The directors consider that the carrying amount of short-term borrowings, trade payables and other
current financial liabilities approximates to their fair value.
(i)
The average credit period on purchases of certain goods is 60 days. No interest is charged on the trade
payables. The Group has financial risk management policies in place to ensure that all payables are paid
within the credit timeframe.
26. ACQUISITIONS
On 26 May 2007 Telit acquired 75% of the issued ordinary share capital of, and voting rights in, Telit
APAC. The cost of the business combination was €5,396,000 in cash, including directly attributable
costs of €526,000.
At the time of preparation of the financial statements for the year ended 31 December 2006, the purchase
accounting was provisionally determined and has since been finalised. This has resulted in a reduction in
the amount allocated to customer lists from €4,306,000 to €1,500,000 and development costs from
€689,000 to €645,000 with a consequential reduction in the related deferred tax liability from €1,374,000
to €590,000. As a result of the overall reduction in the fair value of intangible assets, the fair value of
assets acquired attributable to minority interests reduced from €1,317,000 to €804,000. Goodwill has
increased from €1,445,000 to €2,998,000.
The fair value allocated to customer lists has decreased due to a change in the basis of fair value
determination. A relief from royalty type approach was used to determine provisional fair values in 2006.
However, in finalising the purchase price allocation, the directors consider it more appropriate to use a
discounted cashflow approach which entailed forecasting cash flows to be generated by existing
customers net of a fair return on the all contributory assets of the business.
75
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
26. ACQUISITIONS (continued)
The final fair value of the assets and liabilities of Bellwave recognised at the acquisition date is as
follows:
Assets:
Trade and other receivables
Inventories
Tangible assets
Intangible assets:
Customer list
Development cost
Other
Deferred tax liabilities
Minority interests
Goodwill
Total purchase consideration (including directly
attributable costs of €526,000)
Net cash outflow arising on acquisition
Book value
(€’000)
Fair value
adjustments
(€’000)
Fair value
(€’000)
457
840
331
-
-
19
-
1,647
-
-
-
1,500
645
-
(590)
1,555
457
840
331
1,500
645
19
(590)
3,202
(804)
2,998
5,396
5,396
The consolidated balance sheet and income statement as at and for the year ended 31 December 2006 have
been restated as a result of the final purchase price allocation in accordance with the provisions of IFRS 3.
The impact of the restatement is presented below:
Intangible assets
Deferred tax liabilities
Total shareholders’ equity
Minority interests
Operating loss
Loss for the period
Balance as at 31
December 2006
€’000
7,710
(1,193)
(22,765)
(1,248)
Restatement
€’000
(955)
686
(183)
452
(7,406)
(7,748)
336
244
Restated
Balance
€’000
6,755
(507)
(22,948)
(796)
(7,070)
(7,504)
The impact of the restatement has been to reduce the basic and diluted loss per share by 0.42 euro cents
for the year ended 31 December 2006 from that previously reported.
The impact of the finalisation of the purchase price allocation on segmental results and assets of the
APAC region is summarised below:
(cid:120) As a result of a reduction in the fair value of identified intangible assets and consequent
reduction in amortization, the operating loss of the APAC region for the year ended 31
December 2006 reduced from €357,000 to €21,000; and
(cid:120) Total assets for the APAC region at 31 December 2006 have decreased from €9,511,000 to
€8,556,000.
76
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
26. ACQUISITIONS (continued)
During May and June 2007 Telit increased its interest in Telit APAC from 75% to 90% of the issued
ordinary share capital by way of a further share subscription for cash amounting to €2,403,000. The
Company has accounted for this deemed acquisition based on the book values of the net assets of Telit
APAC at the date of the injection. As a result of this transaction, minority interests have been reduced by
€318,000. The negative goodwill of €318,000 arising has been recorded as a credit to the income
statement.
Assets:
Cash
Trade and other receivables
Inventories
Long term assets
Tangible assets
Intangible assets:
Customer list
Development cost
Other
Current and long term liabilities
Deferred tax liabilities
Net assets at date of deemed acquisition
Minority interests:
Prior to share subscription at 25%
Subsequent to subscription at 10%
Negative goodwill arising
Book values
prior to
subscription
(€’000)
(1,047)
3,260
1,595
253
668
1,192
377
466
(2,603)
(431)
3,730
Subscription
(€’000)
2,403
2,403
Book values
after
subscription
(€’000)
1,356
3,260
1,595
253
668
1,192
377
466
(2,603)
(431)
6,133
931
613
318
27. COMMITMENTS AND CONTINGENCIES
Legal proceedings affecting continuing operations
A.
Ixfin Magneti Marelli Eletronica Ltda ("Magneti Marelli ") summoned Telit EMEA before the
Court of Sumaré, San Paolo (Brazil) in order to obtain compensation for purported damages
suffered as a consequence of Finmek Telit SpA’s alleged breaches of obligations provided by two
contracts executed between the parties on 28 October 2002 and assigned to Telit Italy by Finmek
Telit EMEA by a lease of going concern agreement entered into on 23 December 2002.
The lawsuit was filed by Magneti Marelli on November 2004, seeking the sum of €3,260,000.
Telit EMEA filed a defence brief. Telit EMEA 's lawyer has advised that it is probable that Telit
EMEA will make no payment. Having had regard to the available evidence and having taken
advice from internal counsel and external legal advisors, the Group has determined that it is not
probable that there will be an outflow of economic benefits required to settle this legal claim and
consequently no provision has been recognized.
77
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
27. COMMITMENTS AND CONTINGENCIES (continued)
B. Euroinvest S.r.l. ("Euroinvest") has made a claim for payment of a total amount of
€0.5 million (VAT excluded) from Telit EMEA for a success fee in connection with assistance
allegedly provided to Telit EMEA in connection with the filing of two grant applications from the
Italian Ministero delle Attività Produttive.
The Group has not rejected the fact that Euroinvest was requested to provide such assistance.
However, none of the sums (from which Euroinvest alleged success fee is to be calculated) have
been received by the Group. Further, in the opinion of the Directors, Euroinvest has made some
false representations concerning the application process and the applications finally approved by
the Italian Ministero delle Attività Produttive are considered to be materially different from those
with which Euroinvest are asserting that they provided assistance.
In July 2007 Euroinvest obtained from the Montepulciano Court an injunctive decree for the sum of
€611,945 against Telit EMEA who served a summons in opposition to the injunction, based on the
arguments mentioned above.
The first hearing had been scheduled for 26 February 2008 but has been postponed to 25 November
2008.
Having had regard to the available evidence and having taken advice from internal counsel and
external legal advisors, the Group has determined that it is not probable that there will be an
outflow of economic benefits required to settle this legal claim and consequently no provision has
been recognized.
Legal proceedings affecting discontinued operations
C. On 17 March 2006, 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
claimed damages and loss of future profits as a result of the termination of the agreements
amounting to approximately €1.6 million. On 5 September 2006, 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 2001 and 2002.
During 2007 the parties reached an agreement according to which Dai Telecom received from
Sony Ericsson $300,000 and a waiver of any monies due to it. This matter is now closed.
D.
In March 2006, Telit EMEA received a summons for arbitration proceedings from one of its past
suppliers, according to which the supplier claimed the enforcement of an agreement with Telit
EMEA to the amount of €506,000. Telit EMEA rejected such claims due to the supplier’s failure to
deliver the agreed products and services to Telit EMEA.
In August 2007 the arbitration panel ruled in favors of the supplier and as a consequence Telit
EMEA is to pay approximately €700,000 including interest and expenses. This amount has been
fully provided for within discontinued operations.
78
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
27. COMMITMENTS AND CONTINGENCIES (continued)
E.
In 2006 Telit EMEA acquired the full right to pursue the collection of an outstanding amount of
approximately US$ 1,572,000 against Nextel Operations for a consideration of US$125,000.
Previously, the claim against Nextel operations had been brought by two parties under a joint claim.
The outstanding receivable derived from the allegedly wrongful termination by Nextel of an
agreement entered into in September 2002, pursuant to which Finmek Telit had agreed to develop
certain products in the interest of Nextel, through the operations of its affiliated company, Telital
Denmark. Telital Denmark subsequently went into voluntarily liquidation.
In November 2007 the Company entered into a settlement agreement with Nextel according to
which the latter paid to the Company an amount of $1.0 million following which the Company's
claim against Nextel was dropped. Net income of €373,000, after offsetting the receivables
recognised in prior periods, related to this case has been recorded as an income within discontinued
operations.
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
Minimum lease payments under operating
leases charged to the income statement for
the year
Land and buildings
Other
2007
€’000
970
2,504
3,474
2006
€’000
746
1,206
1,952
2007
€’000
2006
€’000
385
561
946
165
165
330
732
746
353
165
Operating lease payments represent rentals payable by the Group for certain of its office
properties.
Guarantees and liens
G.
The Company provided guarantees to certain suppliers of Telit EMEA, to sustain credit lines to be
granted by the suppliers in respect of purchases made. The guarantees shall not exceed the amount
of €7.0 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 €20.7 million.
At the balance sheet date the Company had deposited €6.1 million in Italian bank accounts, to act
as security in relation to the credit facility granted by those banks (see note 31).
H.
The Group has pledged in favour of BAMES, and to maintain such pledge in force until
termination of the Strategic Alliance with BAMES, simultaneously with the first capital
injections: on a quota equal to 2% of TWS’ corporate capital; simultaneously with the payment
made by BAMES of the second capital injection: on a quota equal to 1% of TWS’ corporate
capital, it being understood that the rights to votes, dividends and/or other distributions will
remain with Telit Communications PLC in respect of such quotas.
79
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
27. COMMITMENTS AND CONTINGENCIES (continued)
Sardinia Grant
I.
Telit EMEA was previously declared eligible to receive an €11.4 million grant, and a €14.1
million preferential rate loan facility, under a business development program sponsored by the
Ministry of Trade and Commerce in Italy. This programme was awarded to Telit EMEA to invest
in research and development in a new R&D centre in preferred areas in Italy. Since the original
grant approval, the Group has reduced the scale of its planned R&D programme and has
resubmitted a revised plan to the Ministry of Trade and Commerce in Italy. The Group has
received confirmed of acceptance of this revised plan, which will, subject to satisfaction of certain
conditions, provide the Group with a grant of €6.3 million and a preferential rate loan of €7.8
million. As of 31 December 2007 Telit Italy invested approximately €3.6 million (2006: €2.5
million) in this grant project, and has received a bank loan of €8.0 million (2006: €8.0 million) as
an advance against the expected cash inflow from the Ministry of Trade and Commerce (see note
31). The bank loan has a maturity date of 1 July 2008.
During the year, the Company achieved an extension in the repayment date of the bank loan it has
received a bank as an advance against the expected cash inflow from the Ministry of Trade and
Commerce (see note 31).
As of 31 December 2007 no income has been recognized from the grant from this project as the
qualifying conditions had not been met.
28. PROVISIONS
Warranty provision
1 January
Utilised in the year
Reclassified as held for sale
31 December
Classified as:
Current liabilities
Non-current liabilities
31 December
2007
€’000
2006
€’000
349
144
(349)
144
63
81
144
672
(323)
-
349
280
69
349
The Group provides warranty on the sale of its m2m products for a period of 15 months. The Group has
provided for the estimated cost of replacement or repair of those products on which it expects to receive
warranty claims during that period. The actual cost of warranty repair is dependent on the number of
returns during the warranty period and the nature of the repairs to be undertaken or the product
replacement cost.
29. OTHER LONG-TERM LIABILITIES
As at 31 December 2007, other long-term liabilities of €4,430,000 mainly represent deferred income
expected to be recognized after more than one year on the transactions with BAMES. This amount,
together with an amount of €2,797,000 included in current liabilities, represents the premium received
from entering into the manufacturing agreement and is being amortised over the minimum purchase
commitments given by the Group. See note 8 for further information.
80
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
30.
SHARE-BASED PAYMENTS
Number
Weighted average exercise
price
(pence)
2007
2006
2007
2006
Outstanding at beginning of year
Settled during the year
Granted during the year
Lapsed during the year
Outstanding at year end
2,216,687
(1,682,570)
4,062,000
(534,117)
4,062,000
1,976,570
-
490,117
(250,000)
2,216,687
1.25
1.40
0.55
(0.70)
0.55
Exercisable at year end
-
431,643
-
1.40
-
0.70
(1.40)
1.25
1.40
A.
B.
The options outstanding at 31 December 2007 had an exercise price of between £0.43 to
£0.60, and a weighted average remaining contractual life of 4 years and 5 months. In 2007, options
were granted on 2 April, 10 and 11 July. The aggregate estimated fair values of the options
granted on those dates was € 1,212,000, equal to a fair value of £0.30 per share.
On 2 April 2007 certain senior employees and executive directors were granted 1,300,000 equity-
settled share options exercisable into 1,300,000 ordinary shares at an exercise price of (cid:487)0.43. The
options vest in two equal instalments on 1 January 2008 and 1 January 2009. The options expire
five years from the date of grant.
The fair value of the options granted that according to management estimates will vest is
€302,000, 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
Fair value of option grant
£ 0.385
£ 0.43
60%
3 years
4%
15.7 pence
C.
On 10 and 11 July 2007 certain senior employees, non-executive directors and consultants to the
Group were granted 2,762,000 equity-settled share options exercisable into 2,762,000 ordinary
shares at an exercise price of (cid:487)0.60. 1,200,000 options vest in two equal instalments on 10 July
2008 and 10 July 2009 and 1,562,000 options vest in three equal instalments on 10 July 2008,
2009 and 2010. The options expire five years from the date of grant.
The fair value of the options granted that according to management estimates will vest is
€910,000, 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
Fair value of option grant
£ 0.575
£ 0.60
60%
3-4 years
4%
25.5 pence
81
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
30. SHARE-BASED PAYMENTS (continued)
D. Option repurchases
On June 2007, the Company repurchased 1,682,570 outstanding options which were granted on
30 September 2005 under to the Company's share option scheme. The options were settled at
€0.15 per option for a total of employer cost of €299,970.
The fair value of the repurchased options at the grant date was €516,000. A total of €258,000 had
been charged to the income statement as at 31 December 2006. The remaining amount of
€258,000 was expensed at the date of settlement.
The fair value of the options settled on the repurchase date was €29,000. Therefore an incremental
fair value charge of €271,000 was charged to the income statement in the current year, representing
the difference between the consideration paid on settlement and the fair value of the repurchased
options, measured at the date of repurchase.
The inputs into the Black Scholes model used to determine the fair value of options at the date of
repurchase were as follows:
Share price
Exercise price
Expected share price volatility
Expected life of options
Risk free rate
Fair value of option grant at settlement date
(cid:487) 0.52
(cid:487)1.40
40%
1-3 years
3.31%
0.01 pence
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 Group recognised a total expense of €
payment transactions for the year ended 31 December 2007 (2006: €1,218,000).
1,138,000 in respect of equity settled share based
82
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
31. BORROWINGS
Group
2007
€ ’000
2006
€’000
Company
2007
€’000
2006
€’000
Unsecured – at amortised cost
Short-term bank loans and other borrowings
Current maturities of long term loans
Total short-term borrowing from banks and other
lenders
Other long-term loans
Total
Secured – at amortised cost
Factoring companies
Short-term bank loans and other borrowings
Total
Disclosed in the financial statements as:
Current borrowings (continuing operations)
Non-current borrowings (continuing operations)
Current borrowings (discontinued operations – see
note 12)
Total
655
-
655
500
1,155
-
1,019
1,019
2,035
3,054
1,710
19,178
20,888
927
15,429
16,356
17,336
500
4,207
22,043
17,375
2,035
-
19,410
-
-
-
500
500
-
-
-
-
500
-
500
-
-
-
-
-
-
-
-
-
The other long-term loan of €500,000 in the Group and Company balance sheets does not attract interest.
The fair value of the loan at the balance sheet date was €430,000.
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 1 July 2008. Management
believes the availability of this facility will be extended beyond 1 July 2008, 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 Telit EMEA to support a development project
in Sardinia. The Company has provided a letter of guarantee of €8 million in favour of the lending
bank, under which it has guaranteed the prompt payment to the lending bank of all sums which may
become due in connection with the loan.
- A bank overdraft of €4.0 million. The overdraft facility, which is available up to €6.0 million, is
cancellable on demand but is without a fixed renewal date.
- Drawn letters of credit and borrowings arising from invoice advances totalling €3.6 million in Telit
EMEA. These borrowings, including the bank overdraft, are secured by cash deposits provided to the
lending banks of €6.1 million and a letter of guarantee issued by the Company of €3 million, under
which the Company has guaranteed the prompt payment to the lending bank of all sums which may
become due. As part of this guarantee, the Company has guaranteed not to dispose of any interest in
subsidiaries without the prior consent of the lending bank. The total available lines of credit and
invoice advance facilities at 31 December 2007 was €9.4 million, with the remainder cancellable on
demand, but without a fixed maturity date.
83
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
31. BORROWINGS (continued)
-
-
Short-term bank loan of €4.2 million secured by liens on all the funds due from Telit Wireless
Products’ major customer in connection with specific orders received from that customer.
Factoring facilities against qualifying receivables totalling €1.7 million. These borrowings are
secured against the factored receivables and are with recourse to the company in the event that the
receivables are not collected. The total available factoring facilities in the Group’s Italian subsidiary
are €2.5 million, provided there exists a satisfactory level of qualifying debtors, which are
cancellable on demand but are without a fixed maturity date.
32. RECONCILIATION OF NET CASH FLOWS TO OPERATING ACTIVITIES
Group
2007
€’000
2006
(Restated)
€’000
Company
2007
2006
€’000
€’000
Loss for the period from continuing operations
(1,878)
(7,504)
(1,170)
(386)
Adjustment for:
Depreciation and amortization
Impairment of intangible assets
Income tax expense
Investment income
Finance costs
Increase in provision for post
employment benefits
Share-based payment charge
Non-recurring credit relating to negative
goodwill
Gain on deemed partial disposal of subsidiary
Loss on disposal of fixed assets
Share in result of associated undertaking
Operating cash flows before movements in
working capital:
(Increase) decrease in trade receivables
Decrease (increase) in other current assets
Increase in inventories
Increase (decrease) in trade payables
Increase (decrease) in other current liabilities
(Decrease) increase in other long term
liabilities
Cash used in operations
Income tax paid
Interest received
Interest paid
1,854
-
597
(277)
1,241
402
1,013
(318)
(1,194)
-
2
(7,780)
683
(2,228)
5,155
2,647
(629)
(710)
(139)
243
(934)
1,023
500
91
(190)
492
343
408
-
-
7
41
1,462
(2,824)
(600)
(109)
(1,549)
138
(8,271)
(739)
318
(896)
-
-
-
(733)
-
-
-
-
-
-
-
-
(71)
34
-
(16)
393
-
-
-
(670)
-
-
-
-
-
-
-
-
-
27
-
(49)
(300)
-
(1,563)
-
(1,378)
-
128
-
-
320
-
Net cash used in continuing operations
(1,540)
(9,588)
(1,435)
(1,058)
84
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
33. 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 and
movements in the value of equity in unlisted securities held by the Group.
Foreign currency risk
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.
Foreign exchange exposure arises where the Group’s companies transact in a currency different from
their functional currency. .
The carrying amount of the Group’s monetary assets and liabilities at the reporting date, denominated in
currency different to the functional currency of the entity in which such monetary assets and liabilities
are held is as follows:
Sterling
US Dollar
Assets
Liabilities
2007
€’000
166
953
2006
€’000
239
4,710
2007
€’000
-
541
2006
€’000
-
1,154
The following table details the Group’s sensitivity to a 10 per cent change in euro against the respective
foreign currencies. 10 per cent represents management’s assessment of the possible change in foreign
exchange rates. The sensitivity analyses of the Group’s exposure to foreign currency risk at the reporting
date has been determined based on the change taking place at the beginning of the financial year and
held constant throughout the reporting period. A positive number indicates an increase in profit or loss
and where euro strengthens against the respective currency.
Impact on profit or loss
Group
2007
€’000
(6)
2006
€’000
380
There would be no impact on equity arising from foreign exchange transaction exposures.
85
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
33. FINANCIAL RISK MANAGEMENT (continued)
Interest rate risk
Interest rate risk comprises the interest cash flow risk resulting from short-term borrowings at variable
rates. As disclosed in note 31, 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.
The sensitivity analyses below have been determined based on the exposure to interest rates at the
reporting date and the stipulated change taking place at the beginning of the financial year and held
constant throughout the reporting period. A 1 per cent change is used when reporting interest rate risk
internally to key management personnel and represents management’s assessment of the possible change
in interest rates.
At the reporting date, if interest rates had been 1% higher/lower and all other variables were held
constant, the Group’s net loss would increase/decrease by € 155,000 (2006: decrease/increase by
€ 131,000), there is no material impact upon equity. This is mainly attributable to the Group’s exposure
to interest rates on its variable rate borrowings.
The Group’s sensitivity to interest rates has increased during the current period due to the increase in
loan balances.
Other price risks – equity price sensitivity
For 2007, the Group is for the first time exposed to equity price risks arising from the holding of equity
investments in unlisted securities. The equity investment in SEM is held for strategic rather than trading
purposes. The Group does not actively trade this investment which at 31 December 2007, is held at
deemed cost of €1,570,000. It is not practicable to provide sensitivity analysis since it is not possible to
reasonably determine fair value since this investment is an unquoted equity investment.
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in
financial loss to the Group.
Financial assets that potentially subject the Company and its subsidiaries to concentration of credit risk
consist principally of trade receivables. The Group’s trade receivables are derived from sales to
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.
Credit risk associated with the Groups cash and cash equivalents and restricted cash deposits is managed
by only placing funds on deposit with internationally recognised banks with suitable credit ratings.
86
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
33. FINANCIAL RISK MANAGEMENT (continued)
Except as detailed in the following table, the carrying amount of financial assets recorded in the financial
statements, net of any allowances for losses, represents the Group’s maximum exposure to credit risk:
Maximum credit risk:
Group
Cash and cash equivalents
Deposits – restricted cash
Trade receivables
Guarantee provided to banks on subsidiary’s
borrowings
Guarantees provided to suppliers
Group
Company
2007
€’000
5,212
6,132
16,591
20,700
7,000
2006
€’000
3,926
7,115
17,452
21,600
12,500
2007
€’000
2,402
6,132
71
2006
€’000
1,376
7,115
-
20,700
7,000
21,600
12,500
Activities that give rise to credit risk and the associated maximum exposure include, but are not limited
to:
(cid:120)
(cid:120) making sales and extending credit terms to customers and placing cash deposits with other entities. In
these cases, the maximum exposure to credit risk is the carrying amount of the related financial
assets;
granting financial guarantees to lending banks which may be called in the event of failure by a
subsidiary to repay amounts due to the lending bank when due. In this case, the maximum exposure
to credit risk is the maximum amount the entity could have to pay if the guarantee is called on, which
may be greater than the amount recognised as a liability as at 31 December 2007 where such
guaranteed borrowings were not fully drawn at that date; and
granting financial guarantees to suppliers which may be called in the event of failure by a subsidiary
to repay amounts due to the supplier when due. In this case, the maximum exposure to credit risk is
the maximum amount the entity could have to pay if the guarantee is called in, which may be greater
than the amount recognised as a payable at 31 December 2007.
(cid:120)
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the board of directors. The Group
manages liquidity risk by maintaining adequate reserves and banking facilities by monitoring forecast
and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in
note 31 are details of additional undrawn facilities that the Group has at its disposal to further reduce
liquidity risk.
The following table details the Company’s and the Group’s remaining contractual maturity for its non-
derivative financial liabilities. The tables below have been drawn up based on the undiscounted
contractual maturities of the financial liabilities including interest that will accrue to those liabilities.
87
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
33. FINANCIAL RISK MANAGEMENT (continued)
Group
2007
2006
Weighted
average
effective
interest rate
%
Less than
1 year
€’000
1 to 3 years
€’000
Weighted
average
effective
interest rate
%
Less than
1 year
€’000
1 to 3 years
€’000
Fixed rate
Variable rate debt
Non- interest
bearing debt
Guarantees
5.25%
5.65%
-
-
1,862
15,474
-
20,700
5.64%
5.25%
-
-
3,225
13,145
1,005
21,600
-
-
2,035
-
500
-
Company
Non- interest
bearing debt
Guarantees
2007
Weighted
average
effective
interest rate
%
Less than
1 year
€’000
1 to 3 years
€’000
Weighted
average
effective
interest rate
%
2006
Less
than
1 year
€’000
1 to 3 years
€’000
-
-
-
20,700
500
-
-
- 21,600
-
-
-
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.
88
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
33. FINANCIAL RISK MANAGEMENT (continued)
Categories of financial instruments
Group
Company
2007
€’000
2006
€’000
2007
€’000
2006
€’000
Current financial assets:
Cash and restricted cash
Trade receivables
Loans and receivables – other debtors
Loans and receivables – due from group
undertakings
Assets not meeting the definition of a financial
asset
Inventories
Other debtors
11,344
16,591
3,683
11,041
17,452
1,460
8,534
71
-
8,491
-
-
-
-
588
306
8,212
1,396
10,284
5,239
-
104
-
268
Current assets
41,226
45,476
9,297
9,065
Non-current financial assets:
Available-for-sale investments
Loans and receivables
Assets not meeting the definition of a financial
asset / outside the scope of IFRS 7
Intangible assets
Property, plant and equipment
Investments in associated undertakings
Investments in subsidiaries
Deferred tax asset
1,570
310
9,050
2,612
568
-
3,130
-
303
6,755
3,019
579
-
3,803
-
-
-
-
-
-
579
29,637
-
-
-
579
27,162
-
17,240
14,459
30,216
27,741
Investments in associated undertakings and investments in subsidiaries are accounted for in accordance
with IAS 27 Consolidated and Separate Financial Statements and hence are outside the scope of IFRS 7
Financial instruments: Disclosure.
89
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
33. FINANCIAL RISK MANAGEMENT (continued)
Group
Company
2007
€’000
2006
€’000
2007
€’000
2006
€’000
Financial liabilities at amortised cost
Short-term borrowings from banks and other lenders
Trade payables
Other current liabilities –
Due to group undertakings
Others
Liabilities not meeting the definition of a
financial liability:
Provisions
Other current liabilities
17,336
13,498
17,375
10,584
-
-
-
599
-
565
3,725
-
63
5,427
280
3,375
-
604
Total current liabilities
36,923
32,179
4,329
Non-current financial liabilities:
Other loans
500
2,035
500
Assets not meeting the definition of a financial
liabilities / outside the scope of IFRS 7
Post-employment benefits
Deferred tax liabilities
Provisions
Other long-term liabilities
1,555
1,226
329
81
4,430
507
69
175
-
-
-
-
6,895
4,012
500
-
16
761
-
-
175
952
-
-
-
-
-
-
None of the Group’s long-term liabilities meet the definition of a financial liability set out in IAS 32
Financial instruments: Presentation or in the case of post-employment benefits, are outside the scope of
IFRS 7 Financial instruments: Disclosure and hence are excluded from the table set out above.
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going
concerns while maximising the return to stakeholders through the optimisation of the debt and equity
balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in
note 31, cash and cash equivalents and equity attributable to equity holders of the parent, comprising
issued capital, reserves and retained earnings as disclosed in the statement of changes in equity on page
37.
90
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
33. FINANCIAL RISK MANAGEMENT (continued)
Gearing Ratio
The Group defines debt as both long and short term borrowings as detailed in note 31. Equity includes
all capital and reserves of the Group attributable to the equity holders of the parent. The Group’s gearing
ratio at the year-end is as follows:
Debt
Cash and cash equivalents, including restricted
cash
Net debt
Shareholders’ equity
Net debt to equity ratio
Group
2007
€’000
2006
€’000
17,836
17,375
11,344
6,492
11,041
6,334
15,772
41%
22,948
28%
The Group is not subject to any externally imposed capital requirement.
34. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
GROUP
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 entered into a management agreement with Polar (the former parent company) according
to which Polar provided management services in consideration for an annual payment in the amount
of US $100,000 (2006 - $100,000).This agreement was terminated in May 2007 and a prorated
management fee of $35,000 was paid to Polar.
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. Dai Telecom
had an option to extend 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 2007
was €89,000 (2006 – €54,000).
Effective as from 1 October 2006 the lease agreement period was extended by 3 years, and the
monthly rental was increased to €9,000 .
91
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
34. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (continued)
C. On April and July 2007 the Company granted the following key personnel options exercisable into
ordinary shares.
Chairman of the Board
Director
CEO
CFO
Number of
options
granted
unvested
700,000
400,000
925,000
100,000
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 €582,000.
D. Remuneration of key management personnel:
Share based payments
Short-term employee benefits
Post employment benefits
Total
Group
2007
€’000
582
1,147
26
1,778
2006
€’000
-
1,742
73
1,815
E. The Company's CEO, Oozi Cats and, in 2006 only, a member of key management personnel and
others provided consulting services to Telit EMEA pursuant to an agreement dated 5 January 2004,
as amended on 26 April 2006, between Excalibur Consulting Group LLC (“Excalibur”) and Telit
EMEA. Excalibur charged services amounting to €688,500 for the year ended 31 December 2007, of
which €629,900 related to consulting services provided by Oozi Cats, and €30,000 related to other
consultants (31 December 2006 - €921,000 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 2007 and 2006.
F. Mr. Cats directly holds 2,850,357 Ordinary Shares, representing 6.60% of the issued share capital of
the Company. Mr. Cats also holds 50% of the issued share capital of Boostt B.V. (“Boostt”). Boostt,
along with its parent companies Franco Bernabe & T SL (“FBT”) and FB Net Holding B.V. (“FB
Net”), holds 13,500,000 Ordinary Shares, representing 31.24% of the issued share capital of the
Company.
Mr. Cats has certain voting understandings with certain members of the FB Net group of companies.
Therefore, the FB Net group of companies and Mr. Cats are, in aggregate, interested in 16,350,357
Ordinary Shares, representing 37.84% of the issued share capital of the Company.
92
Telit Communications PLC
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2007
34. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (continued)
COMPANY
Related party transactions between the Company and its subsidiaries and associates are summarized
below:
(a) Accounts receivable - See note 20.
(b) Accounts payable - See note 25.
(c) Trading transactions
Revenue from services provided to
subsidiary
2007
€’000
152
2006
€’000
157
Cost of sale - purchases from subsidiary
55
-
(d) Loans receivable – See note 18.
(e) Financing transactions
The Company provided guarantees to certain suppliers of Telit EMEA amounting to €7.0 million
(2006: €12.5 million).
In addition the Company provides guarantees to certain banks in Italy and Korea, amounting to
€20.7 million (2006: €14.6 million).
At the balance sheet date the Company had deposited €6.1 million (2006: €7.1 million) in Italian bank
accounts, to act as security in relation to the credit facilities granted by those banks to Telit EMEA.
35.
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 €1,170,000 (2006: loss of
€386,000).
93
Company Information
Directors, Secretary and Advisers
Company Registration No. 05300693
Directors
Enrico Testa, Chairman
Oozi Cats, Chief Executive Officer
Michael Galai, Finance Director
Giovanni Stella, Non-Executive Director
Amir Scharf, Non-Executive Director
Andrea Mandel-Mantello, Non-Executive Director
Maurizio Gasparri, Non-Executive Director
Company Secretary
Michael Galai
Registered Office
7th Floor, 90 High Holborn, London WC1V 6XX
Nominated Adviser and Broker
Seymour Pierce Limited
20 Old Bailey London EC4M 7 EN
Solicitors
Olswang
7th Floor, 90 High Holborn, London WC1V 6XX
Independent Auditors
Deloitte & Touche LLP
Chartered Accountants, London
Registrar
Capita Registrars Limited
The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU
94
Telit Offices World Wide
CORPORATE HEADQUARTERS:
SPAIN
Via San Nicola da Tolentino, 1/5
00187 Rome – Italy
Phone: +39 06 420 46 000
Fax: +39 06 420 10 930
ITALY
Via Stazione di Prosecco 5/B
34010 Sgonico, Trieste - Italy
Phone: +39 040 4192 491
Fax: +39 040 4192 383
Telit Communications S.p.A.
Via Guido D’Arezzo, 4
20145 Milano - Italy
Phone: +39 02 485 5925
UNITED KINGDOM
7th Floor, 90 High Holborn,
LONDON, WC1V 6XX, United Kingdom
Phone: +44 (0)87 0351 7290
Fax: +44 (0)87 0351 7291
ISRAEL
3 Nirim St.
Tel Aviv 67060, Israel
Phone: +972 3 791 4000
Fax: +972 3 791 4008
TURKEY
Turkiye Irtibat Ofisi
Armada Alisveris ve Is Merkezi
Eskisehir Yolu No:6 Kat:12
06520, Sogutozu, Ankara, Turkey
Phone: +90 312 295 6319
Fax: +90 312 295 6200
GERMANY
Joseph Wild Str. 20
81829 München, Germany
Phone: +49 (0)89 43737902
Fax: +49 (0)89 4373 7902
NORDICS
Walgerholm 3, 3500 Vaerloese, Denmark
Phone: +45 2345 7112
Telit Communications Spain S.L.
Paseo della Castellana 141
Planta 20
28046 Madrid, Spain
Phone: +34 91 789 3491
Fax: +34 91 570 7199
AMERICAS
3131 RDU Center Drive
Suite 135
Morrisville, NC 27560
USA
Phone: +1 888 846 9773 or +1 919 439 7977
Fax: +1 888 846 9774 or +1 919 840 0337
ASIA PACIFIC
23rd Floor Construction Finance Center
Building
395-70 Shindaebang-dong, Dongjak-gu,
Seoul, Korea
Phone: +82 2 829 8088
Fax: +82 2 829 8090
TAIWAN
Telit Wireless Solutions Co., Ltd.
Room 621, 6F, No.6, Sec.4, Kinyi Road
Taipei, Taiwan
Phone: +886 2 2703 6336
CHINA
Telit Wireless Solutions Co., Ltd.
Rm.1315, East Bld. Of Coastal City
No.3, Hai De Avenue
Nanshan-Shenzhen, 518059 China
Phone: +86 755 8627 1622
Fax: +86 755 8627 0217
Telit Wireless Solutions Co., Ltd.
Room 1407, 14F,
Cimic Tower, 1090, Shiji Avenue
Shanghai, 200120 China
Phone: +86 21 5835 6895
Fax: +86 21 58352998
Company & Share Information:
Listing London AIM, Ticker: TCM
Core Business Machine-to-Machine Wireless Solutions
Number of Employees worldwide 257
Number of Shares Outstanding 43.2M
Financial Year End December 31
Accounting Standards IFRS