Telit Communications PLC
Annual Report 2013

Plain-text annual report

Table of Content Introduction Chairman's Statement Chief Executive's Statement Principal Risks and Uncertainties Board of Directors Corporate Governance Report on Directors' Remuneration Strategic Report Directors' Report Statement of Directors' Responsibilities Independent Auditor's Report to the Members of Telit Communications PLC Financial Statements Company Information 2 9 10 13 16 17 19 26 27 29 30 32 89 1 Introduction Telit Communications PLC Telit Communications PLC (hereinafter "the Company" or "Telit") is a global enabler of machine-to-machine (M2M) communications providing cellular, short range and positioning modules via its brand Telit Wireless Solutions. Through its business unit m2mAIR, Telit provides platform as a service (PaaS) including M2M managed and value added services, application enablement and connectivity including mobile network side and cloud backend services. Telit is M2M's top ONE STOP. ONE SHOP offering synergistic hardware and value added services bundles along with low-entry cost PaaS for rapid application development. With over 12 years exclusively in M2M, the company constantly advances technology through seven R&D centers around the globe; marketing products and services in over 80 countries. By supplying scalable products interchangeable across families, technologies and generations, rapid prototyping tools for application development, and m2m tailored connectivity, Telit is able to curb development costs, protect design investments and reduce technical risk. The company provides customer support and design-in assistance through 32 sales and support offices, a global distributor network of experts with over 30 competence centers, and the Telit Technical Support Forum. Telit’s products and services connect organizations to the Internet of Things (IoT) allowing them to wirelessly collect, process and respond to real-world data from connected devices, creating new efficiencies, revenue streams, societal and personal benefits. Telit is listed on AIM (Ticker: TCM). The machine to machine (m2m) and internet of things market 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. The international market for machine to machine (m2m) wireless communications is rapidly growing as wireless communications are now a must have rather than a luxury technology. Companies that were not interested in m2m wireless solutions in the past are now looking to incorporate this technology into their businesses as their operations expand and modernise. The IMS Research (now part of IHS) report on the m2m sector "The World Market for Modules in M2M Communications - 2012 Edition", predicts that this market will enjoy high growth over the coming years. IMS Research believes that the number of units to be shipped will reach 118.5 million by 2016, representing a 2010- 16 CAGR of 24.1%. Beecham Research in its "M2M Cellular Modules Forecast" report issued in July 2012, projects an average selling price decline of 8.9% p.a. resulting in a CAGR of 13.3 % growth in monetary value of the sector from 2010 through 2016 with a total value of m2m module market of $1.96 billion in 2016. 2 Highlights1  Revenues for the full year ended 31 December 2013 increased by 17.3% to $243.2 million (2012: $207.4 million).  Revenues for the 3 months ended 31 December 2013 increased by 25.3% to $72.3 million (3 months ended December 2012: $57.7 million).  Revenues include for the first time significant revenues of $9.8 million from m2mAIR, Telit's Platform as a Service (PaaS), the Company's value added, connectivity, cloud platform and other services (2012: $1.6 million).  Adjusted EBITDA for the year increased by 55.5% to $26.9 million (2012: $17.3 million).  Gross margin increased from 37.1% in 2012 to 38.02% in 2013.  Operating profit increased by 139% to $14.1 million (2012: $5.9 million).  Profit before tax for the year increased by 145% to $12 million (2012: $4.9 million).  Net profit for the year increased by 179% to $10.9 million (2012: $3.9 million).  Adjusted net profit for the year increased by 73% to $15.4 million (2012: $8.9 million)  Cash flow from operating activities increased by 370% to $25.4 million (2012: $5.4 million).  Basic earnings per share increase by 176.3% to 10.5 cents in 2013 compared to 3.8 cents in 2012.  Adjusted basic earnings per share increase by 73.2% to 14.9 cents in 2013 compared to 8.6 cents in 2012.  Net debt2 at 31.12.2013 decreased to $11.7 million in comparison to net debt of $12.7 million at 31.12.2012, although during 2013 the Company invested approximately $11 million of its cash in acquisitions. Without this, net debt would have stood at $0.7 million. Operational highlights  Revenues increased by 17.3% to $243.2 million (2012: $207.4 million). For the fourth year in a row the Company achieved double digit growth with an average CAGR growth of about 30%.  Gross margin increased from 37.1% in 2012 to 38.02% in 2013, due to the Company’s positioning in the M2M industry and the shift in the business model to services with recurring revenues.  Gross profit for the year increased by 20.3% to $92.5 million (2012: $76.9 million).  Research and development expenses increased by $4.0 million to $24.0 million (9.9% of revenues) compared to $20.1 million in 2012 (9.7% of revenues). R&D expenses arose mainly from the development of 4G LTE modules designed for use in the most demanding automotive and industrial m2m applications. Sales and marketing expenses increased by $8.1 million to $38.6 million (15.9% of revenues) compared to $30.5 million in 2012 (14.7% of revenues). The increase is mainly due to investment in m2mAIR, Telit’s Platform as a Service (PaaS), the Company’s value added, connectivity and cloud platform services business unit. This business unit was bolstered during 2013 by the acquisitions of Crossbridge Solutions Inc. and of ILS Technology LLC.   General and administrative expenses increased by $2.6 million to $22.3 million (9.2% of revenues) compared to $19.7 million in 2012 (9.5% of revenues).  Other net income increased by $7.3 million mostly due to: (i) grants and benefits supported by the Italian Ministry of Economic Development, which granted a decree to Telit in the sum of $44 million to develop an innovative platform for the application of M2M technologies; (ii) and the release of the remaining provision for contingent consideration after the earn out on an acquisition was settled in the year.  Net equity at 31.12.2013 increased to $79.4 million (2012: $66.4 million). 1 2 For reconciliation from IFRS financial results to adjusted financial results please refer to the table on page 10. For net debt please refer to the table on page 11. 3 Acquisitions On September 3, 2013 Telit Wireless Solutions Inc., a fully owned subsidiary of Telit Communications PLC, entered into an agreement to purchase US-based ILS Technology LLC (“ILST”), a leading provider of a ready- to-use, off-the-shelf, cloud platform to connect enterprise IT systems to m2m-connected devices and machines for business-critical use. ILST’s solutions are easy to deploy, reaching any m2m device and connected asset without the need for complex programming or development. Critical to business services, ILST delivers secure remote access, monitoring and enterprise application integration which provides customers a faster time to deployment and business value realization through a low cost PaaS services model. Employing best-in-class security practices and standards, customers can easily maintain critical data management and ownership as well as regulatory compliance. Telit paid $8.5 million in cash for the acquisition of ILST from the Company's existing financial resources. ILST expands Telit’s successful ONE STOP. ONE SHOP market approach while continuing to leverage ILST’s broader offering in value added services. Acquisitions in process On December 2013, Telit Wireless Solutions Srl, a fully owned subsidiary of Telit Communications Plc, entered into an agreement with NXP B.V., a fully owned subsidiary of NXP Semiconductors N.V. (Nasdaq: NXPI) to purchase NXP's ATOP business subject to fulfilment of certain closing conditions, which on the date of this report have not yet been fulfilled. ATOP is an automotive grade solution for vehicle manufacturers enabling them, amongst other features, to implement telematics services such as eCall, the European initiative to bring rapid assistance to motorists involved in a collision anywhere in the EU, on a single compact and cost efficient package, whilst reducing complexity and minimizing costs in vehicle designs. The acquisition of ATOP includes sales, engineering and support staff, to be integrated into Telit's automotive organization and will extend the Company's market reach with solutions leveraging the expanded engineering and sales expertise to better address automotive and telematics customers. Telit has agreed, subject to completion of appropriate due diligence and fulfilment of certain closing conditions, to appoint an individual from NXP's automotive business unit as a non-executive director of Telit on closing. Regional Information The split of revenue on a geographical basis for the years ended 31 December 2013 and 2012 is as follows: 2013 ($'000) % of Total Revenue 110,099 105,216 27,909 243,224 45.3% 43.3% 11.4% 100% 2012 ($'000) 107,076 74,966 25,350 207,392 % of Total Revenue 51.6% 36.2% 12.2% 100% EMEA Americas APAC Total Revenue EMEA Although economic conditions in the Eurozone have begun to stabilise, with signs of confidence in investment improving, 2013 was still a difficult year across almost all of our verticals. However, our results demonstrate that we nonetheless achieved moderate growth, meaning that we have again gained market share in EMEA and we have strengthened our leadership position. We achieved this result thanks to our strong position in the telematics market together with ramping up of some new markets that we were already following closely - during 2012. In our telematics business, acceptance of M2M applications increased among different sub-segments, especially by insurance companies, which have continued to create a big push in the market. For new markets, it is worth noting the impact of the “new but old” idea of different governments having a real time view and reporting of all sales done through different kinds of shops, restaurants, etc. to get tighter control of all taxes generated by those sales. Last year this type of project came back- in some significant markets and we have already seen the first such deployments and where we expect very important quantities during 2014, 2015 and 2016. 4 Beyond cellular, we would like to emphasize our progress in GNSS. We finished 2013 a clear second in EMEA and we are headed in the right direction to achieve leadership in this market in a few years' time. The introduction of several new products based on different chipset vendors will enable us to offer state of the art modules to the different segments using GNSS products and it will allow us to more than double the number of units from 2013 to 2015, putting us in a perfect position to take market leadership in 2016. Americas In 2013, we saw significant momentum in the Internet of Things (IoT) trend within the Americas region. Google’s recent acquisition of Nest ($3.2B), GE’s Industrial Internet initiative and announcements by Cisco and Intel to re-align their organizational structure to take advantage of the IoT opportunity, indicate the growing demand for IoT solutions. Continued improvements in price/performance of computing, advances in wireless networks and the pervasiveness of the Cloud are all driving this trend in IoT. Verizon has already covered 95% of the US population and 500 cities in the United States with 4G LTE network connectivity that has a theoretical download speed of 100MB/second and routinely delivers 20MB/second on today’s networks. Developments in RESTful APIs and other Service Oriented Architectures (SOAs) have helped to enable the development of service delivery platforms (SDPs) and application enablement platforms (AEPs) that can help reduce the complexity of developing m2m solutions. To support this trend toward IoT among enterprise customers, Telit recently acquired two companies in North America to support customers that are deploying IoT and m2m solutions- Crossbridge Solutions and ILS Technologies (ILS). Crossbridge provides mobile data connectivity services to developers across a number of network providers, including AT&T, Verizon, Sprint and Rogers. Combined with ILST’s AEP, Telit is now in a position to provide bundled solutions to our customers who are looking for embedded modules (cellular/GNSS/short range), data connectivity and an intelligent backend host system that provides rapid integration into existing enterprise systems. In April 2013, we re-united Telit North America and Latin America to create a single organization that is looking after our customers in the region. The two organizations will allow our North American customers benefit from the strong relationships we have in Brazil and other countries to facilitate their own expansion into the region. In addition, our Latin America customers will benefit from the experience and capabilities of a strong North America operation. In North America, the transition from 2G to 3G technology continued at a very rapid pace. The trend away from GPRS has been dramatic within North America, with Telit sales of GPRS products going from 50% to <20% of sales in one year’s time. Although we don’t advise customers to start new designs on GPRS due to the re-farming of spectrum from 2G to 3G that is going on at AT&T and others, CDMA 1xRTT does remain a viable and affordable solution for most new designs as both Verizon and Sprint have committed to maintaining their CDMA networks until at least 2019. The Company gained new important accounts in the security, metering, telematics and mobile computing verticals supporting significant sales growth in the region. In Latin America, we successfully introduced our new GNSS and short range portfolio and today we leverage the benefits of a state of the art manufacturing facility in Brazil for 3GPP modules with installed capacity of a couple of million units per year for 2G and 3G products resulting in a gross margin increase of 57%. We continue to see solid growth and will continue to monitor the CONTRAN 245 telematics law to see if it will be implemented according to the current schedule. The Company gained new accounts with short-range and GNSS designs wins and expects these areas will contribute to sustained growth in the next few years. Unwelcome security issues, stable economies, large populations and continental distances are a combination of ingredients backing our optimistic view of the growth in Latin America in the future. As we enter 2014, we expect another strong year of growth in the Americas region as we continue to see strong growth in many of the traditional m2m vertical markets as well as opportunity for growth in broader horizontal market applications. 5 APAC In 2013 our business in APAC continued with realignment to higher growth, higher value segments and began to see some of the 2012 investment coming to fruition. The price pressure was especially fierce in the low end application of 2G modules which was compensated by the growth in 3G module demands. In the low end application of 2G modules, the demand for quality and differentiation was low especially in the emerging countries of the APAC region. This low end segment was saturated by alternative low price local solutions. Our focus in 2G modules was concentrated on industrial segments where customer service and quality were valued. We continued to grow in market segment share of the above mentioned industrial segment. In addition to 2G modules, most of the APAC countries are starting to adopt 3G technologies for M2M applications, while a small subset of countries like Japan, Korea, and Australia are moving towards LTE as well. We were able to capture many of these opportunities to significantly grow our 3G module shipments in 2013 versus 2012. We expect this trend to continue in the next few years bringing new growth to the APAC M2M business. Our 2012 investment in Japan and Australia is starting to pay off. In 2013, we secured major local accounts in automotive, remote health and remote monitoring applications. Project development was completed in 2013 and is expected to bring additional sales growth starting in 2014. We will leverage on the early success to continue growing our presence in these new markets. Technology & products Technological innovation is Telit’s core capability. Thanks to its seven R&D centres, the Company was again able in 2013 to provide outstanding module quality ranging from cellular to short-range RF and location technologies. Our modules are currently integrated in a wide range of applications, including asset tracking, remote industrial monitoring, automated utility meter reading, insurance telematics, consumer electronics, mobile health devices and many more. With the acquisition of ILST, ILST management, engineering and support staff will be integrated into the m2mAir services unit, expanding Telit’s successful “ONE STOP. ONE SHOP.” market approach with solutions to boast a broader offering in value added services. With ILST, Telit expands the reach of m2mAIR much deeper into Internet-side services where M2M adopters have been seeking better, more integrated solutions, particularly for on-boarding M2M assets to Cloud enabled IT infrastructures in low entry-cost, PaaS service models. In 2013 we expanded our offering based on the XE910 form factor by introducing CL865 to extend our offering to the CDMA markets. We also introduced the HE910 V2, UE910 V2, UE910 AUTO and UL865 (UMTS, HSPA) variants to complete our xE910 and xL865 families with additional variants. To complete the offering we launched the ultra-compact GE866 (GPRS) product. We’ve also launched the LE910 implementing the LTE technology and completing the xE910 family offering. Looking at the automotive sector we announced and launched the UE910 AUTO, representing the 3G entry- level solution for this sector. Furthermore, during 2013 we launched a series of new GNSS modules. Our offering now includes the SE868- V2 and SL869-V2 (GPS), both of them supporting GPS and GLONASS constellations. As for the Short Range portfolio, we launched the LE70-868 and LT70-868 terminal implementing the Start Network, and the LE51- 868S, which features the SigFox protocol. 6 We live m2m At the heart of Telit 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:             Automated Meter Reading Car Telematics Fleet Management and Tracking/Logistics Point of Sale Terminals/Handhelds Security Systems and Personal Tracking Devices Public Transportation and Road Tolling Vending Machines Mobile Computing (Mobile Workforce Automation) Industrial Processes Information Displays Healthcare Emergency Communication Systems Telit Worldwide Telit sells its products through a network of value added resellers to more than 5,000 direct and indirect customers and systems integrators in more than 80 countries around the world. Our customers are served both directly and through a global distributor network of experts from over 30 competence centres. At the end of 2013, Telit employed 641 employees worldwide, an increase of 23.5% (2012: 519). Telit provides global support to its international customers covering substantially all of the m2m market verticals. Its vast experience doing business across the globe has helped Telit establish strong channels and excellent access to key suppliers, customers and distributors in all major world markets. Telit's diverse worldwide customer base includes cellular operators and cellular distributors, as well as designers, manufacturers and system integrators of cellular m2m module-based applications. 7 Competitive Advantage Based on its extensive R&D experience, gained through hundreds of engineering man-years, Telit has developed its own protocol stack as the technological basis of its GSM/GPRS solutions. This enables the Group to offer customers solutions ranging from complete devices to embedded products, including fitting its platform into its customers’ products. Underpinning its rapid growth rate since it entered the m2m business in 2003, Telit has four major advantages: 1. Flexibility: Telit offers customers a form factor and family concept: all modules in a family have the same form factor and full software compatibility, but offer different functionality to meet the requirements of different vertical application segments. The advantage for users is substantial: all modules in a product 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 its competition, which often changes the size and shape of its modules with new models. Customers, however, need modules that can be used for many years in their applications. 2. Scalability: Telit’s modules are tailored for various applications and different production lot sizes: for quantities of a few thousand units, Telit developed the GC (connectorized) family, which offers low outlay and costs for integration. For applications that are produced in the tens of thousands, low production costs are the prime concern. In this case customers can turn to the GE product range with its BGA/LGA (solderable) assembly concept. Telit was the first company offering BGA modules, which can be assembled like electronic components and integrated easily into the production line - no connectors or cables are needed. 3. Innovation: Controlling its own intellectual property enables Telit to remain on the cutting edge of product innovation. Integrating GSM/GPRS, CDMA/WCDMA, UMTS/HSPA, EVDO, LTE, short range RF and GPS technologies 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. 4. Focus: Telit’s clear focus is on the m2m market. Telit is a pure-play m2m business, allowing it to focus on the needs of its m2m customers and the m2m products which provide such customers with the solutions necessary for them to effectively run and grow their businesses. 8 CHAIRMAN'S STATEMENT Enrico Testa, Chairman of the Board I am pleased to deliver the 2013 results. Our strong competitive position has helped us to achieve significant growth. Outlook The outlook for 2014 looks positive for the m2m industry as a whole and for Telit in particular. Notwithstanding the fact that we are operating in a competitive environment, we believe we are well positioned to take advantage of the opportunities ahead and believe that our acquisitions in 2012 and 2013 enhance our platform as a service (PaaS) including M2M managed and value added services, application enablement and connectivity including mobile network side and cloud backend services. Telit is M2M's top ONE STOP. ONE SHOP offering synergistic hardware and value added services bundles along with low-entry cost PaaS for rapid application development. With our new m2mAIR business unit, this will strengthen our already strong position within our industry. We look forward to continued organic business expansion and are constantly seeking further expansion opportunities through new technologies or by gaining access to new territories and new market segments. We look to 2014 and beyond with excitement, as we continue to gain market share and strive to constantly improve our profitability while continuing to provide the market with first rate products as well as value added services. Board changes3  On August 16, 2013, Mr Steven Sherman resigned from the board.  On June 28, 2013, Mr Yuval Cohen was appointed to the board as a director. Mr Cohen resigned from the board on October 2, 2013. People At the end of 2013, Telit employed 641 employees worldwide, an increase of 23.5% (2012: 519). During 2013 we made significant progress and this is a reflection of the excellent team we are proud to have at Telit. The Board believes that our skilled staff is, and will continue to be, the cornerstone of Telit’s success. I would like personally to thank all of the Company’s employees for their hard work and to welcome all the new employees that have joined the Telit family, including those joining us from the most recent acquisitions. Dividend The Company is not proposing to pay a dividend in respect of the period (2012: $ nil). Enrico Testa Chairman of the Board 14 March 2014 3 Mr Sergio Buonanno resigned from the board on March 11 2014 9 CHIEF EXECUTIVE'S STATEMENT Oozi Cats, Chief Executive 2013 was the fourth consecutive year of double digit growth for Telit and improvements in absolute profitability. In 2013 we implemented one more major step within our strategic roadmap - the acquisition of ILS Technology LLC that augmented our location product portfolio and enhances our ability to service the needs of our customers by providing a platform as a service (PaaS) offering including M2M managed and value added services, application enablement and connectivity including mobile network side and cloud backend services. Financial Results 2013 $'000 2012 $'000 Revenue Gross profit Gross margin Research and development Selling and marketing General and administrative Other operating income / (expenses)1, net Operating profit Adjusted EBIT Adjusted EBITDA Profit before tax Adjusted profit before tax Profit for the year Adjusted profit for the year2 243,224 92,482 38.02% (24,049) (38,617) (22,348) 6,668 14,136 18,795 26,901 11,951 16,610 10,886 15,466 207,392 76,884 37.1% (20,085) (30,472) (19,707) (683) 5,937 10,573 17,335 4,915 9,551 3,880 8,888 Reconciliation of operating profit and profit before tax to the adjusted figures: Operating profit Share-based payments Non-recurring expenses Amortization - intangibles acquired Adjusted EBIT Depreciation & amortization3 Adjusted EBITDA Profit before tax Share-based payments Non-recurring expenses Amortization - intangibles acquired Adjusted profit before tax 2013 $'000 2012 $'000 14,136 742 1,229 2,688 18,795 8,106 26,901 11,951 742 1,229 2,688 16,610 5,937 1,008 1,769 1,859 10,573 6,762 17,335 4,915 1,008 1,769 1,859 9,551 1 See note 5 to the attached Financial Statements. 2See note 11 to the attached Financial Statements for reconciliation of profit for the year to adjusted profit for the year. 3 Excluding intangibles acquired. 10 Basic and diluted earnings per share for 2013 were 10.5 cents and 9.8 cents respectively for the period compared to 3.8 and 3.6 cents per share in 2012. The consolidated financial statements are prepared in accordance with IFRS on a basis consistent for all periods presented. In addition we use adjusted financial measures as supplemental indicators of our operating performance. We disclose adjusted amounts as we believe that these measures provide better information on actual operating results and assist in comparisons from one period to another. Net debt position The table below presents the net debt position at the year-end: Cash and cash equivalents Restricted cash deposits Working capital borrowing (1) Long term loans (2) Governmental loans (3) Mortgage loan (4) Net Debt 2013 $'000 23,886 291 (10,962) (7,482) (13,780) (3,700) (11,747) 2012 $'000 21,044 365 (23,189) - (6,924) (4,019) (12,723) (1) Short term borrowing, for less than one year, arising from invoice advances used for working capital financing. (2) Representing two long term loans from banks in Italy- (i) $6.2 million with interest at a rate of Euribor 3 months plus 3.25%, repayable in 20 quarterly instalments that commenced in September 2013, and (ii) $1.3 million with an interest rate of Euribor 6 months plus + 5.5%, repayable in 6 semi-annual instalments that will commence in December 2020. (3) Representing preferential two long term loans (i) $7.7 million with fixed-rate of 0.5%, repayable in 14 semi-annual instalments that will commence in December 2016, supported by the Italian MISE (Ministry of Economic Development) to develop an innovative platform for the application of M2M technologies and, (ii) $6.1 million with a fixed-rate of 0.75%, repayable in 10 annual instalments that commenced in March 2009, supported by the Ministry of Trade and Commerce in Italy, provided in connection with the Group’s business development program in Sardinia. (4) Representing a preferential rate loan from a regional fund in Italy provided in connection with the Group’s acquisition of the campus used for the Company's main R&D facility in Trieste, Italy. The mortgage loan is denominated in Euro, attracts interest at a rate of Euribor 6 months less 20% and is repayable in 15 semi- annual instalments that commenced in June 2012. Employees The number of employees of the Group on a geographical basis at the end of 2013 and 2012 is as follows: EMEA Americas APAC Total Employees 2013 2012 373 122 146 641 356 52 111 519 Effects of Foreign Exchange 15.4% of Telit's revenue in the period was generated in Euro (2012: 26.8%). Part of the Euro exposure is covered by Telit's operating expenses in Euro. A substantial part of the Group's materials purchase cost was denominated in US dollar during the period. 11 Acquisition of ILS Technology LLC On September 3, 2013 Telit Wireless Solutions Inc., a fully owned subsidiary of Telit Communications PLC, entered into an agreement to purchase US-based ILS Technology LLC (“ILST”), a leading provider of a ready- to-use, off-the-shelf, cloud platform to connect enterprise IT systems to m2m-connected devices and machines for business-critical use. ILST’s solutions are easy to deploy, reaching any m2m device and connected asset without the need for complex programming or development. Critical to business services, ILST delivers secure remote access, monitoring and enterprise application integration which provides customers a faster time to deployment and business value realization through a low cost PaaS services model. Employing best-in-class security practices and standards, customers can easily maintain critical data management and ownership as well as regulatory compliance. Telit paid $8.5 million in cash for the acquisition of ILST from the Company's existing financial resources. ILST expands Telit’s successful ONE STOP. ONE SHOP market approach while continuing to leverage ILST’s broader offering in value added services. Strategy Having successfully integrated the most recent businesses acquired by Telit into the Company’s global organization, and with our significant market share, Telit is confident in its position as a leading global company in the strong IoT and m2m industry. Telit looks forward to continuing to implement its strategy which is to grow through a four-pronged approach: - Organically alongside general growth in the m2m industry; - Recurring income through our valued added services unit which will leverage the long-standing relationships with our customers and cloud platform services business unit, a leading provider of a ready-to-use, off-the-shelf, cloud platform to connect enterprise IT systems to m2m-connected devices and machines for business-critical use; - The acquisition of NXP’s Automotive Telematics On-board unit Platform (“ATOP”) which will be the cornerstone of Telit’s automotive division; and - Appropriate acquisition opportunities to the extent that these become available. Outlook The outlook for the rest of 2014 and the future looks positive for the m2m industry and promising for Telit. Our strong position in the m2m market together with our m2mAIR business unit is expected to lead Telit to further growth and further improvement in our financial results. The hard work and dedication of Telit's staff across the globe is and will continue to be crucial to Telit's success. I would like to thank the Company's management team and all employees for their continued commitment to the Company and its success. Their dedication is an invaluable asset, indeed the core asset of the Company. Telit intends to continue to take advantage of the considerable opportunities arising in this growing global market. 2014 has started well, and I look forward to providing further news of the Group’s progress over the coming months. _______________________ Oozi Cats Chief Executive 14 March 2014 12 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. Market growth Telit's future success is dependent in a large part on the continued growth in the overall size of the m2m market which is, in turn, a product of the number of m2m modules sold and the average selling price of an m2m module. A decline in either the average selling price or the number of units sold which is not matched by a proportionate increase in the other, or a decline in both the average selling price and the number of units sold, would decrease Telit's addressable market and its growth opportunities. Competition Telit has experienced and expects to continue to experience strong competition from a number of companies. Telit's competitors may announce or develop new products, services or enhancements that better meet the needs of customers or changing industry standards. In addition, new competitors or alliances among competitors could emerge. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on Telit's business, financial condition and results of operations. Some of Telit's competitors and potential competitors have significantly greater financial resources than Telit. Telit's competitors may be able to respond more quickly than Telit to changes in customer requirements and devote greater resources to the enhancement, promotion and sale of its products. Key management Telit depends on the services of its key technical, sales, marketing and management personnel. The loss of the services of any of these persons could have a material adverse effect on Telit's business, results of operations and financial condition. Telit's success is also highly dependent on its continuing ability to identify, hire, train, motivate and retain highly qualified technical, sales, marketing and management personnel in its various geographical locations. Competition for such personnel can be intense, and Telit cannot give assurances that it will be able to attract or retain highly qualified technical, sales, marketing and management personnel in the future. In order to retain its key staff and to attract new personnel, Telit works to ensure that its staff is sufficiently incentivised and offers key potential personnel sufficiently attractive terms of employment. Financing Telit relies on credit lines mainly in the form of trade receivable financing to finance its working capital needs. There is a risk that this financing will cease to be available to the Group in the future, potentially at short notice. Should such finance cease to be available there is a risk that the Group may not be able to secure alternative financing. The lack of availability of such financing, without having alternative financing source, could have a material adverse effect on Telit's business, financial condition or results of operations. The management maintains close relationship with several banks and has obtained secured credit lines beyond the current needs of the business to address this risk. 13 Product lifespan, changes in standards and technology and product and service development The Group is in a market that sees continuous technological development and therefore the future success of the Company depends, among other things, on Telit's ability to:  Enhance its existing products and services.  Address the increasingly sophisticated and varied needs of its customers.  Respond to technological advances and emerging industry standards or government regulations and practices on a cost-effective and timely basis. Developing Telit's technology, product and service range entails significant technical and business risks. The Group may use or procure new technologies ineffectively or fail to adapt its systems to customer requirements or emerging industry standards. If Telit faces material delays in introducing new products, services or enhancements, it may be at a significant competitive disadvantage. Additionally, Telit may face regulatory hurdles with respect to its products and services which could affect Telit's ability to supply such products and services or which could expose Telit to liability which could have a material adverse effect on Telit's business, financial condition or results of operations. The markets for Telit's products and services are characterised by rapidly changing technology, evolving industry standards and increasingly sophisticated customer requirements. Changing customer requirements and the introduction of products embodying new technology and the emergence of new industry standards can render Telit's existing products obsolete and unmarketable and can exert downward pressure on the pricing of existing products. Telit's success depends on its ability to anticipate changes in technology and in industry standards and to successfully develop and introduce new, enhanced and competitive products and services on a timely basis. Telit cannot give assurances that it will successfully develop new products or enhance and improve its existing products and services, that new products and services and enhanced and improved existing products and services will achieve market acceptance or that the introduction of new products and services or enhancing existing products and services by others will not render Telit's products obsolete. Telit's inability to develop products and services that are competitive in technology and price and meet customer needs could have a material adverse effect on Telit's business, financial condition or results of operations. In order to address the concerns above, Telit is constantly monitoring the market, its customers' current and potential needs and technological advances and changes in standards in the m2m field. As well, Telit continuously invests in R&D in order to remain an m2m market leader. Dependence upon key intellectual property and risk of infringement Telit's success depends in part on its ability to protect its rights in its intellectual property. Telit relies upon various intellectual property protections, including patents, copyright, trade-marks, trade secrets and contractual provisions to preserve its intellectual property rights. Despite these precautions, it may be possible for third parties to obtain and use Telit's intellectual property without its authorisation. The industry in which Telit operates has many participants that own, or claim to own, proprietary intellectual property. In the past Telit has received, and in the future may receive assertions or claims from third parties alleging that Telit's products or services violate or infringe their intellectual property rights. Telit may be subject to these claims directly or through indemnities against these claims which Telit has provided to certain customers. Rights to intellectual property can be difficult to verify and litigation may be necessary to establish whether or not we have infringed the intellectual property rights of others. Telit is currently involved in certain intellectual property litigation (see note 21 of the Financial Statements attached hereto). In many cases, third party claimants may be companies with substantially greater resources than Telit and they may be able to, and may choose to, pursue complex litigation to a greater degree than Telit could. In the event of an unfavourable outcome in such a claim and Telit's inability to either obtain a license from the third party or develop a non-infringing alternative, then Telit's business, operating results and financial condition may be materially adversely affected and Telit may have to restructure its business. 14 Strategic partnerships Part of Telit's strategy is to leverage its relationships with strategic and manufacturing partners. There can be no guarantee that Telit will be able to enter into further strategic alliances or partnership arrangements, or that existing and potential partners will not enter into relationships with competitors. Telit's failure to establish further strategic alliances or the loss of relationships with existing or future material partners could have a material adverse effect on its business and financial condition. In order to mitigate this risk, in certain cases Telit maintains relationships with secondary manufacturing partners to provide backup manufacturing in the event of inability to manufacture via Telit's primary partner. Dependency on suppliers Our products include components some of which are purchased from single source suppliers. From time to time, certain components used in our products have been, and may continue to be, in short supply and shortages in allocation of components may result in a delay in filling orders from our customers, which may adversely affect our business and our reputation. We depend on a limited number of manufacturer partners that purchase components and manufacture our products. If these manufacturers do not manufacture our products properly or cannot meet our needs in a timely manner, we may be unable to fulfil orders received from our customers and our revenues may decrease accordingly. We may encounter the following risks due to our reliance on such manufacturer partners - the absence of guaranteed or adequate manufacturing capacity; potential violations of laws and regulations by our manufacturers that may subject us to additional costs for duties, monetary penalties, and damage to our reputation; potential business interruption due to unexpected events such as natural disasters, labour unrest or geopolitical events; reduced control over delivery schedules, production levels, manufacturing yields, costs and product quality; the inability of our contract manufacturers to secure adequate volumes of components in a timely manner at a reasonable cost; and unexpected increases in manufacturing costs. System failures and breaches of security The successful operation of Telit's business depends upon maintaining the integrity of Telit's computer, communication and information technology systems. However, these systems and operations are vulnerable to damage, breakdown or interruption from events which are beyond Telit's control. Any such damage or interruption could cause significant disruption to the operations of Telit. This could be harmful to Telit's business, financial condition and reputation and could deter current or potential customers from using its services. There can be no guarantee that Telit's security measures in relation to its computer, communication and information systems will protect it from all potential breaches of security, and any such breach of security could have an adverse effect on Telit's business, results of operations or financial condition. In order to mitigate this risk Telit continuously invests in the improvement and strengthening of the relevant systems in order to minimize the risk of system failures. 15 Board of Directors Enrico Testa, Executive Chairman of the Board, aged 62 Between 1996 and 2002 Enrico 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. Between 2004 and 2009 Mr. Testa was Executive President at Roma Metropolitane S.p.A, Chairman of the Organizing Committee of the 20th World Energy Congress and Senior Partner at Franco Bernabè Group, which owns several companies in the IT sector. In addition, between 2004 and August 2012, Mr. Testa was Managing Director of Rothschild S.p.A. Oozi Cats, Founder, Member of the Board and Chief Executive Officer, aged 53 An experienced CEO and entrepreneur, Oozi Cats, in 2000, was the founder of a communications engineering and distribution company (Dai Telecom Ltd) in Israel. In 2002 he led the takeover of Telit in Italy and its subsequent transformation 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 on the London Stock Exchange in April 2005. In 2011 Mr. Cats led Telit to a quantum leap with the acquisition of Motorola's m2m division, making Telit the largest industrial m2m provider in the world. In 2012, Mr. Cats laid the foundation for its Platform as a Service (PaaS) division by acquiring Global Connect, and Chicago based CrossBridge Communications Inc. In 2013, the last piece in the PaaS puzzle was put in place by acquiring Florida based ILS Technology, a unique Cloud based back-end service, making Telit a true global leader in m2m ONE STOP. ONE SHOP. Yosi Fait, Deputy CEO, Finance Director and Member of the Audit Committee of the Board, aged 53 Mr. Fait is a Certified Public Accountant and has held a number of executive positions with private and public companies. Mr. Fait's previous roles with listed companies have included CEO of both Alony Group and H&O. Mr. Fait also served as CFO of Pelephone Communications Ltd, the first cellular operator in Israel. Mr. Fait began his professional career as an accountant with Ernst & Young Israel. Davidi Gilo, Independent Non-Executive Director and Chairman of the Remuneration Committee of the Board and Member of the Audit Committee of the Board, aged 57 Davidi Gilo has more than 25 years of technology and business expertise and a proven track record of innovation and execution in identifying and fostering the growth of emerging trends and technologies including DSP chips, cell phones, medical information technology and broadband networks. Mr. Gilo was the founder of DSP Group and DSP Communication (which was sold to Intel for $1.6 billion), Ceva, Nogatech and Zen Research, among others. He is currently the Managing Partner of GiloVentures II LP and the CEO of INVeSHARE Inc. Nicola Miglietta, Independent Non-Executive Director, Chairman of the Audit Committee of the Board and Member of the Remuneration Committee of the Board, aged 46 Mr. Miglietta is a Professor of Capital Markets and Corporate Finance (Advanced Degree) at the University of Torino. Between 1992 and 1994 he was auditor in PriceWaterhouseCoopers. Mr. Miglietta sits on the board of several companies and currently is a member of the Board of statutory auditors at Impregilo S.p.A. (Italy's leading General Contractor and one of the world's top-ranking construction groups) and First Capital S.p.A., both listed on the Italian Stock Exchange. Ram Zeevi, Independent Non-Executive Director and Member of the Remuneration Committee and Audit Committee of the Board, aged 51 For the past five years, Mr. Zeevi has been a private investor successfully investing in a number of high growth companies, largely in the technology sector. From 2001 to 2008, Mr. Zeevi was managing director of Caribbean Petroleum Corporation. From 1998 to 2001, Mr. Zeevi was CEO of Zeevi Computers and Technology Ltd., a technology investment company which was listed on the Tel Aviv Stock Exchange and during this period Mr. Zeevi held a number of chairmanships, largely in high growth technology businesses. From 1992 to 1998, Mr. Zeevi was CEO of Oil Investment Consolidated, Inc. and prior to this he was CEO of Property Investment Inc., a real estate company. Mr. Zeevi is also a Director of Rinc. Green, Crowdit Ltd., Profility Inc., WizeDSP and Gnrgy Ltd. 16 Corporate Governance Directors The Board of Directors comprises three executive directors and three independent non-executive directors. The Company's Articles of Association require that at each Annual General Meeting ("AGM"): (i) any directors who have been appointed by the Board since the last AGM shall offer themselves for re-election; and (ii) any director who was elected or last re-elected as a director at or before the AGM held in the third calendar year before that AGM shall retire by rotation and, if required, such further directors shall retire by rotation as would bring the number retiring by rotation up to one-third of the number of directors in office at the date of the notice of AGM. Any directors retiring by rotation at an AGM may offer themselves for re- election. 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 to formulate, review and approve the Telit group's strategy, budgets, major items of expenditure and acquisitions. Audit Committee The Audit Committee consists of Nicola Miglietta (Chairman), Davidi Gilo and Ram Zeevi, who are independent non-executive directors and Yosi Fait, the Finance Director, and meets periodically. The CFO and General Counsel attend each meeting by invitation. The Audit Committee is primarily responsible for considering reports from the CFO 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 light of these reports and the results of the review reported to the Board. Remuneration Committee The Remuneration Committee consists4 of Davidi Gilo (Chairman), Nicola Miglietta and Ram Zeevi, the independent non-executive directors, 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 uses the Annual General Meeting to encourage communication with private shareholders. In addition, the Company facilitates communication with its shareholders via the annual report and accounts, interim statement, press releases as required during the ordinary course of business and the Company website (www.telit.com). Financial performance A budgeting process is completed once a year and is reviewed and approved by the Board. The results of the Group, as compared against budget, are reported to the Board on a quarterly basis and discussed at meetings of the Board. 4 Mr Sergio Buonanno, who resigned from the board on March 11 2014, was a member of the remuneration committee during part of 2013. 17 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. Applicability of the City Code on Takeovers and Mergers ("the Code") Starting 30 September, 2013, the Company became subject to the Code, due to certain revisions that were made in the Code. The Code had not previously applied to the Company as its place of central management and control was outside of the UK. By order of the Board, _________________ Yosi Fait Finance Director 14 March 2014 18 Report on Directors' Remuneration Chairman's Statement The aim of the Company's Remuneration Committee (the "Committee") is to reward and encourage excellent performance as well as to promote the interests and business of the Company. As the Company grows, both in its performance levels and in its global reach, the Committee's aim is to ensure that the Company's remuneration packages are appropriate in attracting, incentivising and retaining high calibre individuals, yet remain in line with the industry. During the financial year ending December 31 2013, the Committee enacted two important revisions to the Company's remuneration framework. First, the Committee implemented a new long-term option-based incentive plan, following consultation with certain of its major institutional shareholders, designed to reward senior management and key employees (other than the Executive Directors, who are not eligible to participate), reflecting the Company's growth nature. Further, in response to discussions with shareholders, the Committee undertook a review, in conjunction with an independent consultancy firm, of the remuneration package for its CEO, Mr. Oozi Cats, and, as a result of this evaluation, has implemented certain changes to Mr. Cats' remuneration package. Further details of the results of both of these activities are set out below. Both of these actions reflect the Committee's intent to monitor closely and guide the levels and structure of remuneration for the Executive Directors and senior management as well as the Company's wider employee base. I am pleased to present the Directors' Remuneration Report for the year ended December 31 2013. _______________ Davidi Gilo Chairman of the Remuneration Committee 14 March 2014 19 The Remuneration Committee Responsibilities The Committee's main responsibilities are to determine the Company's overall remuneration policy, to determine the remuneration of Executive Directors and other senior executives, to monitor and review the levels and structure of remuneration for senior management, and the on-going effectiveness of the overall remuneration policy, to review the targets for any performance-related bonus or pay schemes operated for senior executives and to review any material termination payment. Remuneration Committee Members The Remuneration Committee comprises three independent Non-Executive Directors: Davidi Gilo (Chairman), Nicola Miglietta and Ram Zeevi5. Committee Member Davidi Gilo (Chairman) Nicola Miglietta Ram Zeevi 6 Sergio Buonanno Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Non-Executive Director Attendance Record 10 out of 10 meetings 9 out of 10 meetings 9 out of 10 meetings 10 out of 10 meetings The Remuneration Committee may invite members of management to attend meetings as appropriate, unless they have a conflict of interest, in order to assist the committee to discharge its duties. This Report has been approved by the Board together with the financial statements for the year ended December 31 2013. Remuneration Policy The Committee aims to set levels of remuneration for Executive Directors and senior management that are sufficient to attract, retain and motivate workforce of the calibre required to deliver the Company's business strategy. Individual remuneration packages are structured to align rewards with the performance of the Company and to be appropriate for the size and complexity of the Group. The main principles are: to ensure that salaries are set at a market competitive level relative to external comparators; support a high performance culture with commensurate rewards appropriately linked to performance; maintain an appropriate balance of fixed and performance-related pay; and ensure that the overall package reflects market practice, reward individuals, over both the short and the long term, for their contributions to the success of the Group in a fair, consistent and reasonable manner, and reward high performance with high rewards. The main components of these remuneration packages are:      Basic salary: Executive Directors and senior managers' salaries are reviewed and determined by the committee, taking into account their additional incentives, in order to align their interests within the Telit Group. Service contracts: No service contracts have notice periods of more than six months7. Bonus arrangements: The Company operates a discretionary bonus scheme which provides a link between remuneration and both personal and Company achievement. The Remuneration Committee determines bonuses for Executive Directors. Pension arrangements: None of the directors receive any pension benefits, except for Mr. Cats, who is entitled to post-employment benefits including pension fund benefits according to his employment agreements, as is customary in Italy. Share options: The Executive Directors have been granted share options as described below. The share options are subject to time-based (and in certain cases other) vesting conditions to incentivise medium- term performance and assist in retention. None of the Group's share option schemes are subject to performance-based vesting conditions. 5 Mr Steven Sherman, who resigned from the board on August 16 2013, was a member of the remuneration committee during part of 2013. 6 Mr Sergio Buonanno, who resigned from the board on March 11 2014, was a member of the remuneration committee during part of 2013. 7 Apart from the CEO's service agreement which includes a 12 month notice period. 20 The services of the Executive Directors are provided to the Group as follows: Enrico Testa was appointed as a director and Chairman of the Board on 4 May 2007. Mr. Testa was also appointed as CEO of Telit Italy on 21 April 2013. Oozi Cats has been employed by Telit Italy in an executive position since 1 October 2007. For further details about Mr. Cats' new remuneration package see below. Mr. Cats has been appointed as a director of a number of the Company's subsidiaries. Yosi Fait was appointed as the Finance Director on 21 June 2011 and as the Deputy CEO as of 1 July 2012, subject to such terms as provided in an agreement between him and the Company. Pursuant to such agreement, Mr. Fait was also appointed as a director of a number of the Company's subsidiaries, and Mr. Fait agreed to provide up to 160 hours per month to the business of the Company and its subsidiaries. Mr. Fait's engagement is terminable by either Mr. Fait or Telit on three months' notice, except in certain special circumstances where shorter notice can be given by the Company. The Remuneration Committee: main activities in 2013 New Employee and Non-Employee Share Option Plans In order to incentivize the Company's key employees and consultants, and in light of the lack of headroom for further option grants under the existing share options plans, the Committee initiated in 2013 a new share option plan that would include shares made available due to the exercise of options by Executive Directors under the 2009 and 2010 grants of the existing plans. The Committee recommended to the Board that the executive directors be specifically excluded from grants under the new plan. The new plan was adopted by the Board following consultation with the Company's main institutional shareholders. The terms of the new plan are substantially the same as existing plans, and individual vesting criteria (e.g., exercise price, period, quantity) are to be determined by the Committee upon grant. Evaluation of CEO's Remuneration Package The Remuneration Committee, acting upon the Board's instructions and following discussions with shareholders, engaged in a process to evaluate Mr. Cats' remuneration package. The Committee's guidelines for the process were to agree on a remuneration package that would reflect Mr. Cats' continuing contribution to the Company and incentivise Mr. Cats to continue his efforts. In order to establish an impartial and fair assessment of the CEO's remuneration as compared to market practice, the Committee contacted four reputable, independent8, international executive search firms, asking each to provide a proposal for a report that would set out the compensation package appropriate for the Company's CEO, such report being based on an analysis of the compensation packages of CEOs from similar companies to the Company. The Committee ultimately engaged Spencer Stuart, a leading consulting group, as an independent firm, to provide the report. After consultation with the Committee, Spencer Stuart produced a draft report which included a review of 17 companies comparable to the Company9. While Spencer Stuart reviewed Mr Cats’ overall remuneration package, a major part of the report dealt with the bonus portion of Mr. Cats' proposed remuneration package. Spencer Stuart took the following into account in deciding the appropriate bonus calculation: (i) the Company's progress to date, (ii) the Company's performance, and (iii) Mr. Cats' existing options. 8 One of the firms disclosed to the Remuneration Committee that it had personal knowledge of one of the Board members and the committee decided not to receive a proposal from that firm. 9 Among other identifiers, listed companies on LSE and NASDAQ having a presence in Italy and the UK and with revenues of between $250 million to $400 million. 21 The Committee then considered the remuneration package to be offered to Mr. Cats and in doing so it took into account Spencer Stuart's report, Mr. Cats' contribution to the Company and the absence of long-term compensation for Mr. Cats, due to the fact that the Company's option pool for Executive Directors had been exhausted and no further grants of options were currently available for Mr. Cats. The Committee deliberated on the proposed remuneration package for Mr. Cats at nine Committee meetings between July 2013 and December 2013 and held frequent consultations with Spencer Stuart. The Committee also resolved to continue to consult as it would deem appropriate with Spencer Stuart with regards to the CEO's remuneration package. Mr. Cats' new remuneration package comprises the following – Salary Mr. Cats will receive a gross salary of US$1,437,480 per year for 2014-16. The Company covers certain of Mr. Cats' expenses, including his accommodation in Italy and the use of a company car. Bonus Scheme Mr. Cats' variable compensation plan provides a link between Mr. Cats' remuneration and the Company's performance. This link is achieved by making his variable annual award conditional upon the achievement of targets and aggressive stretch performance thresholds which are set by reference to agreed Company financial performance measures, calculated according to the Company's audited annual financial statements, which include - adjusted EBITDA margin growth, cash flow from operations, revenue growth, gross margin, and a discretionary element decided by the Board. The variable compensation is capped at a maximum of 150% of Mr. Cats' gross annual pay. The terms of the scheme will be reviewed at the end of 2016. The business results of any new acquisitions made by the Telit Group will not be taken into account for the bonus scheme for the calendar year of the acquisition. In the year following an acquisition, the base year for the bonus calculation (meaning the acquisition year), will not include the acquisition results. Mr. Cats shall be paid an advance payment on account of the yearly variable compensation ("Advance Payment"), based on the half-year results. Mr. Cats shall return to the Company any amount received as Advance Payment that exceeds the annual bonus based on the audited annual financial statements. The audited emoluments in respect of the year ended 31 December 2013 for the directors who held office during the year were as follows: Executive directors Enrico Testa2 Oozi Cats Yosi Fait3 Salary and fees $'000 Benefit in kind $'000 268 1,357 500 - 195 - Bonus $'000 265 1,960 127 Non-executive directors Alexander P. Sator1 Nicola Miglietta Davidi Gilo Ram Zeevi4 Sergio Buonanno5 Steven Sherman1 Total - 2013 - 66 53 53 53 33 2,383 - - - - - - 195 - - - - - - 2,352 Post- employment benefits Total 2013 Total 2012 $'000 $'000 $'000 - 87 - - - - - - - 87 533 3,599 627 - 66 53 53 53 33 5,017 515 2,979 363 52 51 51 51 25 26 Total - 2012 2,017 184 1,781 131 - 4,113 1 Up to the date of resignation. 2 Amounts in respect of the services of Mr. Testa are paid directly to Testa Sallusto & Partners, a partnership of which he is the general partner. 3 Amounts in respect of the services of Mr. Fait are paid directly to Jeopal Ltd., a company under his control. 4 Amounts in respect of the services of Mr. Zeevi are paid directly to Zuri Inc, a company under his control. 5 Amounts in respect of the services of Mr. Buonanno are paid directly to IDEA Capital Funds S.G.R. S.P.A. Mr. Buonanno resigned from the board as of March 11, 2014. 22 Directors' Interests in Shares The directors' interests in shares in the Company are detailed in the table below: Directors Oozi Cats10 Enrico Testa11 Yosi Fait Nicola Miglietta Davidi Gilo Ram Zeevi Steven Sherman12 Sergio Buonanno13 Yuval Cohen14 At 31 December 2013 At 31 December 2012 Number of ordinary shares Percentage of ordinary share capital Number of ordinary shares Percentage of ordinary share capital 19,580,357 20,330,357 165,000 20,000 - - 5,128,578 9,375,000 14,612,500 18.72 19.44 0.16 0.02 - - 4.9 8.96 13.97 20,330,357 20,330,357 165,000 20,000 - - 4,128,578 - - 19.68 19.68 0.16 0.02 - - 4.00 - - 10 Mr Cats directly holds 3,480,357 shares. In addition, Mr Cats - through VAG Holding Limited ("VAG") - beneficially owns 50% of Boostt B.V. ("Boostt") which, in turn, holds 15,600,000 shares. Moreover, Wireless Solutions Management S.r.l. ("WSM"), which holds 50% of Boostt, owns additional 500,000 shares. VAG and WSM 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 WSM's holdings. 11 Mr Enrico Testa is an interested party in WSM and Boostt by virtue of his holding office therein. Moreover, Mr Testa is the Chairman of GT S.r.l. ("GT"), which owns 750,000 shares. Therefore, Mr Testa is deemed to be interested in all of Boostt’s, WSM’s and GT’s holdings, as well as in all of Mr Cats’ holdings. 12 Resigned as director on August 16 2013. 13 Mr. Buonanno is considered as having an interest in these shares due to his being an interested party in Idea Capital. Mr. Buonanno resigned from the board as of March 11, 2014. 14 On June 28 2013, Mr Yuval Cohen was appointed to the board as a director. Mr Cohen resigned from the board as of October 2 2013. During Mr Yuval Cohen’s time as director of the Company, he was deemed interested in all holdings of Fortissimo Capital Management, by virtue of his holding office therein. As of the date of the report Fortissimo Capital decreased its holding in shares, to 2,095,026 shares, representing only 1.9% of ordinary share capital. 23 Details of directors' share options are provided below: Grant date Number Exercise price (pence) Vested Unvested Executive directors Enrico Testa Total Oozi Cats Total Yosi Fait Total 29 January 2009* 30 June 2010* 1 April 2011 29 January 2009** 30 June 2010** 1 April 2011 29 January 200915*** 25 May 201016*** 19 September 201117 26 March 201218 19 March 201319 1,000,000 500,000 520,000 2,020,000 2,000,000 1,100,000 1,952,000 5,052,000 50,000 50,000 150,000 150,000 600,000 1,000,000 0.20 0.32 0.81 0.20 0.32 0.81 0.20 0.25 0.80 0.80 0.80 1,000,000 500,000 346,666 1,846,666 2,000,000 1,100,000 1,301,334 4,401,334 50,000 50,000 100,000 100,000 400,000 700,000 - - 173,334 173,334 - - 650,666 650,666 - - 50,000 50,000 200,000 300,000 Options typically vest in 3 equal instalments beginning one year following the date of grant and expiring 5 years from the date of grant. No options have been exercised or expired in respect of all grants. The compensation attributable to the directors in 2013 is $568,158 (2012: $564,000). The highest and lowest closing prices of the Company's shares on AIM during 2013 were 186p (27 November 2013) and 55p (11 January 2013).The Company's share price as of 31 December 2013 was 179p. 15 Mr Fait was not a director on this date. 16 Mr Fait was not a director on this date. 17 On September 19 2011 Mr Fait was granted 150,000 options to purchase approximately 0.15 percent of the Company's issued and outstanding shares at the time, at an exercise price of 80p per share. The options vest in three equal annual instalments starting from September 19 2012 and expire five years from the date of grant. In addition, since the Company had nearly reached the overall limit on the granting of options over newly issued shares contained in the rules of its unapproved option scheme, the remuneration committee resolved that, as the overall limit under the scheme increases, Mr Fait will, from time to time, be formally granted additional options (either in one tranche or in a series of separate grants) at the same exercise price, vesting from the same date, and on the same terms as the options set out above, in the total amount of 150,000 further options being granted within this framework. Mr Fait received such additional 150,000 options on March 26 2012. 18 See Footnote 16 above. 19 On March 19 2013, Mr Fait was granted 600,000 options, at an exercise price equal to 80p with a three year vesting schedule starting on September 19 2011, such that vesting occurs in three equal instalments on each of September 19 2012, 2013 and 2014 and shall expire on September 19 2016. Such options were related to an earlier resolution by the Company, dated September 19 2011 (the "Original Resolution") that approved the future grant of 600,000 options, conditional upon the Company successfully completing a public fundraising on a major stock exchange, at an exercise price equal to 80p (the "Exercise Price"), with a vesting schedule of 3 years, starting on September 19 2011. The Company decided to amend the Original Resolution, so that the grant of options not be contingent upon the Company completing its listing on a major stock exchange. Since at the time of the grant of the options (March 19 2013) the Company had nearly reached the overall limit on the granting of options under the Company's share options plan, Mr Fait received 200,000 options, and the remuneration committee resolved that, as the overall limit under the plan increases, Mr Fait would be granted additional options (either in one tranche or in a series of separate grants) at the same exercise price and on the same terms as aforesaid. Mr Fait received the remaining 400,000 options on 13 January 2014. * On January 13 2014 Mr Testa exercised options into Company shares as follows - 1,000,000 options at an exercise price of 20p and 500,000 options at an exercise price of 32p. ** On January 14 2014 Mr. Cats exercised options into Company shares as follows - 2,000,000 options at an exercise price of 20p and 1,100,000 options at an exercise price of 32p. *** On December 27 2013 Mr Fait exercised options into Company shares as follows - 50,000 options at an exercise price of 20p and 50,000 options at an exercise price of 25p. 24 Arrangements relating to shares held by Boostt B.V. Boostt is interested in 19,580,357 Ordinary shares in the Company, representing approximately 18.72% of the Company's issued share capital as of 31 December 2013. With respect to certain liens held over ordinary shares ("Shares") of the Company owned by Boostt the Company has been informed as follows:       On 15 February 2011, Boostt completed the payment to Polar of the remaining consideration under the 16 April 2007 agreement pursuant to which it purchased 12 million ordinary shares in the Company from Polar (the "Share Purchase Agreement"). The payments were made as a result of funds lent to Boostt (the "Loan") by Mr. Enrico Testa (Chairman of Telit's Board of Directors and a Director of Boostt). As a result of such payment, the charges in favour of Polar on Shares purchased under the Share Purchase Agreement were released and such Shares were released from escrow and provided to Boostt. On 9 March 2011, those 6 million Shares held by Boostt against which the shareholders of Boostt had registered a charge were released from the charge by Boostt's shareholders, for no consideration. On 10 March 2011, following receipt of the Loan, Boostt charged 6 million Shares in favour of Mr. Enrico Testa. As of February 25, 2013 all 6 million of such charges have been eliminated from the Shares. On 27 April 2011, 1,500,000 Shares that had been placed in escrow as a result of a loan granted to Boostt by related parties (the "Related Party Loan") for the repayment by Boostt of a loan by a third party lender (the "Third Party Lender"), were released from such escrow, following partial repayment of the Related Party Loan. The Third Party Lender had a charge on 9.6 million Shares held by Boost which has subsequently been released in relation to 3 million Shares. On 3 June 2011, the remaining 1,500,000 Shares that had been placed in escrow as a result of the Related Party Loan were released from escrow following the additional repayment of the Related Party Loan. On 31 December 2013, Boostt deposited with the Third Party Lender further 9,000,000 Shares, which were automatically charged by the Third Party Lender. As at December 31, 2013 and as a consequence of the actions described above, of the 19,580,357 Shares in which Boostt is interested, 15,600,000 million Shares are charged in favour of the Third Party Lender (the "Charged Shares"). Under the terms of the charge, title to the Charged Shares can be transferred to the Third Party Lender following the occurrence of certain events including but not limited to a default event on the financing provided by the Third Party Lender. The Charged Shares represent approximately 14.91% of the Company's issued share capital as at December 31, 2013. By order of the Remuneration Committee _______________ Davidi Gilo Chairman of the Remuneration Committee 14 March 2014 25 Strategic Report The directors present their annual report and the financial statements of the Group for the year ended 31 December 2013. Principal Activities Telit is a leading global company in the field of m2m communications. Telit develops, manufactures and markets communication modules which enable machines, devices and vehicles to communicate via cellular wireless networks. It is a market leader and one of the three largest companies in the m2m module business worldwide in terms of market share. Through its m2mAIR service portfolio, Telit provides its customers with managed services, including remote SIM and module management, security, location based services, software update over the air and connectivity. Telit's core strengths are innovative products, complete control over its core intellectual property and its flexible, customised solutions, which enable it to offer customers the lowest cost of ownership and a future- proof product roadmap. Review of Business and Future Developments A review of business, financial position, and liquidity and future developments is given within the Chief Executive's statement on pages 10 to 12, the regional information on pages 5 to 7, together with a review of the Group's principal risks and uncertainties on pages 13 to 15. 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 $24 million were expensed in the year, compared to $20.1 million in 2012. Internally-generated intangible assets arising from development costs capitalized amounted to 9.9$ million compared to $7.7 million in 2012. Telit has been granted by decree a US$44 million facility supported by the Italian MISE (Ministry of Economic Development) to develop an innovative platform for the application of M2M technologies. Of the US$44 million, 10% is to be provided as a grant by the Italian government, 81% is to be made available as a loan by Cassa Depositi e Prestiti, a joint stock company under public control in Italy, with a preferred interest rate of 0.5% per annum, and 9% is a loan issued directly by a financial institution. The company received about $13 million from this facility in H2 2013. By order of the Board ___________________ Yosi Fait Financial Director 14 March 2014 26 Directors' Report The directors present their annual report and the financial statements of the Group for the year ended 31 December 2013. Going concern After making enquiries at the time of approving the accounts, the directors are confident that the Company and the Telit Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the financial statements are prepared on a going concern basis. Further information in respect of the directors' consideration of going concern is included in note 1(b) 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 27 to the financial statements. Donations The Group gave away $137,000 in charitable donations during the year ended 31 December 2013 (2012: $39,000). Dividends The Company is not proposing to pay a dividend in respect of the period (2012: $ nil). Significant shareholders At 31 December 2013 At 31 December 2012 Number of ordinary shares 15,600,000 14,612,500 9,375,000 6,725,401 5,128,578 5,081,250 4,375,000 4,308,855 3,480,357 Percentage of ordinary share capital 14.92 13.97 8.96 6.43 4.90 4.86 4.18 4.12 3.33 Number of ordinary shares 15,600,000 - 9,375,000 8,725,000 4,128,578 5,381,250 4,375,000 - 3,480,357 Percentage of ordinary share capital 15.10 - 9.08 8.45 4.00 5.21 4.24 - 3.37 Boostt20 Fortissimo Capital Management21 Idea Capital Funds Morgan Stanley (Switzerland) Sherman Capital Group22 Herald Investment Management Greylock Partners BlackRock Investment Mgt (UK) Oozi Cats23 Directors The directors who held office during the year were as follows: Enrico Testa Oozi Cats Yosi Fait Ram Zeevi Davidi Gilo Nicola Miglietta Steven Sherman (resigned on August 16, 2013) Sergio Luciano Buonanno (resigned on March 11, 2014) Yuval Cohen (appointed June 28, 2013 and resigned on October 2, 2013) 20 Mr Cats and Mr Testa are deemed to be interested in all holdings of Boostt. 21 Mr Yuval Cohen was deemed interested in all holdings of Fortissimo Capital Management, while serving as director of the Company from his appointment on June 28, 2013 until her resigned on October 2, 2013. As of the date of the report Fortissimo Capital decreased its holding in shares, to 2,095,026 shares, representing only 1.9% of the Company’s ordinary share capital. 22 Until he resigned from the board in August 16 2013, Mr Sherman was interested in all holdings of this company. 23 Mr Testa is deemed to be interested in all holdings of Mr Cats. See footnote 19 above to this chart for additional holdings in which Mr Cats is deemed to be interested. 27 Directors' Indemnities The Company has made qualifying third party indemnity provisions for the benefit of its directors in respect of their roles as directors of the Company and, where applicable, as directors or senior employees of subsidiary undertakings, which were made during 2007 and which were replaced with an updated version in 2012 and remain in force at the date of this report. 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. 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 90 days of the date of invoice, except where different arrangements have been agreed with suppliers. Trade creditor days of the Group at 31 December 2013, calculated in accordance with the requirements of the Companies Act 2006, were 92 days (2012: 75 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 auditor The directors who held office at the date of approval of this directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the company's auditor is unaware; and each 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 auditor is aware of that information. In accordance with Section 489 of the Companies Act 2006, a resolution for the appointment of Ernst & Young LLP as auditor of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the Board ___________________ Yosi Fait Financial Director 14 March 2014 28 STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 29 Independent auditor's report to the members of Telit Communications PLC We have audited the financial statements of Telit Communications plc for the year ended 31 December 2013 which comprise the Consolidated Statement of Comprehensive Income, the Statements of Financial Position,the Statement of Cash Flows, the Consolidated Statement of Changes in equity, the Company Statement of Changes in Equity and the related Notes 1 to 29 The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 auditor's 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 auditor As explained more fully in the Directors' Statement of Responsibilities set out on page 29 the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the Parent Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion:  the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2013 and of the Group's profit for the year then ended; the Consolidated financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.    Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 30 Independent auditor's report to the members of Telit Communications PLC (continued) Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:    adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent Company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors' remuneration specified by law are not made; or  we have not received all the information and explanations we require for our audit. Philip Young (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 14 March 2014 31 Telit Communications PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2013 Revenue Cost of sales Gross profit Research and development expenses Selling and marketing expenses General and administrative expenses Other operating income / (expenses) Operating profit Investment income Finance costs Profit before income taxes Tax expense Profit for the year Other comprehensive income Items which will be reclassified in subsequent periods to profit and loss: Foreign currency translation differences Total comprehensive income/ (loss) for the year Profit/(loss) attributable to: Owners of the Company Non-controlling interest Profit for the year Total comprehensive income/ (loss) attributable to: Owners of the Company Non-controlling interest Total comprehensive income/ (loss) for the year Basic earnings per share (in USD cents) Diluted earnings per share (in USD cents) Basic weighted average number of equity shares Diluted weighted average number of equity shares Note 3,4 5 10 6 7 8 2013 $'000 2012 $'000 243,224 (150,742) 207,392 (130,508) 92,482 76,884 (24,049) (38,617) (22,348) 6,668 14,136 25 (2,210) 11,951 (1,065) 10,886 1,092 11,978 10,933 (47) 10,886 12,033 (55) 11,978 (20,085) (30,472) (19,707) (683) 5,937 250 (1,272) 4,915 (1,035) 3,880 479 4,359 3,914 (34) 3,880 4,424 (65) 4,359 11 11 11 11 10.5 9.8 103,826,885 111,067,069 3.8 3.6 102,968,936 108,272,974 32 Telit Communications PLC STATEMENT OF FINANCIAL POSITION At 31 December 2013 Group Company Note 2013 $'000 2012 $'000 2013 $'000 2012 $'000 ASSETS Non-current assets Intangible assets Property, plant and equipment Investments in subsidiaries Other long term assets Deferred tax asset Current assets Inventories Trade receivables Other current assets Deposits – restricted cash Cash and cash equivalents Total assets 12 13 14 16 8 15 16 16 17 17 18 18 18 18 18 LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity Share capital Share premium account Other reserve Merger reserve Translation reserve Retained earnings Equity attributable owners of the Company Non- controlling interest Total equity Non-current liabilities Other loans Post-employment benefits Deferred tax liabilities Provisions Other long-term liabilities 26 19 8 23 24 to Current liabilities Short-term borrowings from banks and other lenders Trade payables Provisions Accruals and Other current liabilities Total equity and liabilities 26 20 23 20 49,459 16,182 - 807 3,954 70,402 18,520 63,118 14,338 291 23,886 120,153 190,555 1,791 78,678 (2,993) 1,235 (3,867) 4,181 79,025 367 79,392 22,134 3,780 21 2,236 369 28,540 13,790 51,860 1,217 15,756 82,623 190,555 35,659 13,588 - 568 3,840 53,655 21,659 56,502 8,845 365 21,044 108,415 162,070 1,781 78,429 (2,993) 1,235 (4,967) (7,494) 65,991 422 66,413 9,839 3,671 33 1,728 3,372 18,643 24,293 38,883 2,254 11,584 77,014 162,070 6,599 64 84,793 232 - 91,688 46 696 13,972 88 3,068 17,870 109,558 1,791 78,678 8,692 1,235 2,048 (24,360) 68,084 - 68,084 - - - - - - - 1,112 - 40,362 41,474 109,558 6,891 13 83,976 18 - 90,898 29 1,109 9,616 296 4,418 15,468 106,366 1,781 78,429 8,606 1,235 2,107 (20,744) 71,414 - 71,414 - - - - 2,864 2,864 - 569 - 31,519 32,088 106,366 The financial statements on pages 32 to 88 were approved by the board and authorized for issuance on 14 March 1024 and are signed on its behalf by: Oozi Cats, Director Company number: 05300693 33 Telit Communications PLC STATEMENT OF CASH FLOWS For the year ended 31 December 2013 CASH FLOWS - OPERATING ACTIVITIES Profit/(loss) for the year Adjustments for: Depreciation of property, plant and equipment Amortization of intangible assets Change in fair value of earn-out Loss /(gain) on sale of property, plant and equipment Impairment of investments in subsidiaries Increase / (decrease) in provision for post-employment benefits Finance costs, net Tax expenses Fair value of preferential rate loan Share-based payment charge Operating cash flows before movements in working capital: (Increase)/decrease in trade and other receivables Increase in other current assets (Increase) /decrease in inventories Increase/(decrease) in trade payables Increase/(decrease) in other current liabilities increase /(decrease) in provisions and other long term liabilities Cash from/(used in) operations Income tax paid Interest received Interest paid Net cash from/(used in) operating activities CASH FLOWS - INVESTING ACTIVITIES Acquisition of property, plant and equipment Acquisition of intangible assets Proceeds from disposal of property, plant and equipment Capitalized development expenditure Acquisition of subsidiaries, net of cash acquired Settlement of earn out Additional investment in subsidiary Additional loans made to subsidiaries Repayment of loans from subsidiaries (Increase)/ decrease in restricted cash deposits Net cash (used in)/from investing activities Group Company 2013 $'000 2012 $'000 2013 $'000 2012 $'000 10,886 3,880 (4,274) (6,202) 2,800 7,994 (1,667) (37) - (50) 2,185 1,065 (3,754) 742 20,164 (3,807) (3,678) 3,776 11,487 (273) 320 27,989 (741) 25 (1,901) 25,372 (4,847) (4,588) 51 (9,909) (9,509) (1,149) - - - 56 (29,895) 2,315 6,306 (85) 312 - 722 1,022 1,035 - 1,008 16,515 (14,361) (1,368) (7,222) 12,061 1,624 (751) 6,498 (374) 72 (801) 5,395 (3,411) (3,064) 68 (7,664) (5,303) - - - - (218) (19,592) 17 1,623 (1,714) - - - (1,078) 271 - 658 (4,497) 447 (2,133) (16) 531 8,920 - 3,252 - - - 3,252 (66) (1,231) - - - (1,149) - (4,860) 2,356 - (4,950) 9 1,375 - - 1,500 - (823) - - 789 (3,352) (429) (2,885) (29) 388 5,420 (94) (981) - 6 (12) (987) - (1,212) - - (2,600) (16) (856) 5,000 - 316 34 Telit Communications PLC STATEMENT OF CASH FLOWS (continued) For the year ended 31 December 2013 CASH FLOWS - FINANCING ACTIVITIES Proceeds from exercise of options Short-term borrowings from banks and others Proceeds from other loans Repayment of other loans Net cash from/(used in) financing activities Group 2013 $'000 259 (10,870) 19,301 (2,361) 6,329 2012 $'000 240 15,696 1,258 (1,753) 15,441 Company 2013 $'000 2012 $'000 259 - - - 259 240 - - (619) (379) Increase/(decrease) in cash and cash equivalents Cash and cash equivalents - balance at beginning of year Effect of exchange rate differences Cash and cash equivalents - balance at end of year 1,806 1,244 (1,439) (1,050) 21,044 1,036 23,886 19,781 19 21,044 4,418 89 3,068 5,646 (178) 4,418 Non – cash transactions: a. b. During 2013 a loan to subsidiary in the amount of $210,000 was converted to equity (2012: $250,000). See note 14(4). In January, 2012 the Company purchased all of the shares in Telit SPA from the Company's subsidiary Telit SRL for the book value amount of $20.5 million which remains on the books of the Company. 35 Telit Communications PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2013 Year ended 31 December 2013 Share capital $'000 Share premium Account $'000 Merger reserve $'000 Other reserve $'000 Translation reserve $'000 Retained earnings $'000 Total $'000 Non- controlling interest $'000 Total $'000 1,781 78,429 1,235 (2,993) (4,967) (7,494) 65,991 422 66,413 - - - 10 - 10 - - - 249 - 249 - - - - - - - - - - - - - 10,933 10,933 (47) 10,886 1,100 - 1,100 (8) 1,092 1,100 10,933 12,033 (55) 11,978 - - - - 742 259 742 742 1,001 - - - 259 742 1,001 1,791 78,678 1,235 (2,993) (3,867) 4,181 79,025 367 79,392 Balance at 1 January 2013 Total comprehensive income/(loss) for the year Profit /(loss) for the year Foreign currency translation differences Total comprehensive income/(loss) Transactions with owners: Exercise of options Share-based payment charge Total transactions with owners Balance at 31 December 2013 Year ended 31 December 2012 Share capital $'000 Share premium Account $'000 Merger reserve $'000 Other reserve $'000 Translation reserve $'000 Retained earnings $'000 Total $'000 Non- controlling interest $'000 Total $'000 1,772 78,198 1,235 (2,993) (5,477) (12,416) 60,319 487 60,806 - - - 9 - 9 - - - 231 - 231 - - - - - - - - - - - - - 3,914 3,914 510 - 510 (34) (31) 3,880 479 510 3,914 4,424 (65) 4,359 - - - - 240 1,008 1,008 1,008 1,248 - - - 240 1,008 1,248 1,781 78,429 1,235 (2,993) (4,967) (7,494) 65,991 422 66,413 Balance at 1 January 2012 Total comprehensive income (loss) for the year Profit/(loss) for the year Foreign currency translation differences Total comprehensive (Loss) / income Transactions with owners: Exercise of options Share-based payment charge Total transactions with owners Balance at 31 December 2012 36 Telit Communications PLC COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2013 Year ended 31 December 2013 Share capital $'000 Share premium account $'000 Merger reserve $'000 Other reserve $'000 Translation reserve $'000 Retained earnings $'000 Total $'000 Balance at 1 January 2013 1,781 78,429 1,235 8,606 2,107 (20,744) 71,414 Total comprehensive income /(loss) for the year Loss for the year Foreign currency translation differences Total comprehensive income/ (loss) Transactions with owners Exercise of options Share-based payment charge Capital contribution Total transactions with owners - - - 10 - - 10 - - - 249 - - 249 - - - - - - - - - - - - 86 86 - (4,274) (4,274) (59) - (59) (59) (4,274) (4,333) - - - - - 658 - 658 259 658 86 1,003 Balance at 31 December 2013 1,791 78,678 1,235 8,692 2,048 (24,360) 68,084 Year ended 31 December 2012 Share capital $'000 Share premium account $'000 Merger reserve $'000 Other reserve $'000 Translation reserve $'000 Retained earnings $'000 Total $'000 Balance at 1 January 2012 1,772 78,198 1,235 8,388 1,830 (15,332) 76,091 Total comprehensive loss for the year Loss for the year Foreign currency translation differences Total comprehensive income/ (loss) Transactions with owners Exercise of options Share-based payment charge Capital contribution Total transactions with owners - - - 9 - - 9 - - - 231 - - 231 - - - - - - - - - - - - 218 218 - (6,202) (6,202) 277 277 - - - - - 277 (6,202) (5,925) - 790 - 790 240 790 218 1,248 Balance at 31 December 2012 1,781 78,429 1,235 8,606 2,107 (20,744) 71,414 37 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (a) General information Telit Communications PLC (the "Company") is a company incorporated and domiciled in the UK. The Company is a global enabler of machine-to-machine (M2M) communications providing cellular, short range and positioning modules via its brand Telit Wireless Solutions. Through its business unit m2mAIR, Telit provides platform as a service (PaaS) including M2M managed and value added services, application enablement and connectivity including mobile network side and cloud backend services. Telit is M2M's top ONE STOP. ONE SHOP offering synergistic hardware and value added services bundles along with low-entry cost PaaS for rapid application development. With over 12 years exclusively in M2M, the company constantly advances technology through seven R&D centers around the globe, marketing products and services in over 80 countries. By supplying scalable products interchangeable across families, technologies and generations, rapid prototyping tools for application development, and m2m tailored connectivity, Telit is able to curb development costs, protect design investments and reduce technical risk. The company provides customer support and design-in assistance through 32 sales and support offices, a global distributor network of experts with over 30 competence centers, and the Telit Technical Support Forum. The company financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group") and equity account the Group's interest in associates and jointly controlled entities. The parent company financial statements present information about the Company as a separate entity and not about its Group. On publishing the parent company financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual statement of comprehensive income and related notes that form a part of these approved financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these group financial statements. (b) Basis of presentation of the financial statements: Both the parent company financial statements and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU ("Adopted IFRSs"). The Company's financial statements have been prepared on a historical cost basis, except for: investment property; financial assets and liabilities (including derivatives) which are presented at fair value through profit or loss. The Company has elected to present profit or loss items using the function of expense method. Basis of preparation - Going Concern The Group's business activities, together with the factors likely to affect its future development, performance and position as well as the financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out in the Chief Executive's Statement on pages 10 to 12. In addition notes 16, 24, 26 and 27 to the financial statements include the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk. 38 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) The Group meets its day to day working capital requirements through overdraft facilities, invoice advance facilities and factoring. Some of these facilities are cancellable on demand or have renewal dates within one year of the date of approval of the financial statements. In addition, the Group has received long-term preferential rate loans supported by the Ministry of Trade and Commerce in Italy. Further information is provided within note 26. The management considers the uncertainty over (a) the level of demand for the Group's products which may also affect the possibility of utilizing some of these facilities since they depend upon the level of sales in specific markets and in some instances to specific customers; (b) the exchange rate between Euro and US dollars and thus the consequence for the cost of the Group's raw materials; (c) the availability of bank finance in the foreseeable future; (d) the continuity of supply from key suppliers; and (e) the forecasts in current market environments. The Group's forecasts and projections taking into account the Group's history of successfully renewing its facilities in the past and the fact that there are actions available to the Group to address these risks, show that the Group should be able to operate within the level of its current facilities. The Group maintains constant negotiations with the banks for renewing and increasing the credit facilities to meet the required working capital for the Group's future growth. After making enquiries, the directors are confident that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. (c) Functional and presentational currency The consolidated financial statements are presented in US dollars, which differs from the functional currency of the Company and those subsidiaries that are not located in the dollar zone. The Company functional currency is the GBP. The Group and Company report in US dollars to fully reflect the Group's global operations as a result of the following: 1) the production of its products in China resulting in manufacturing costs denominated in US dollars; and 2) revenues in US dollars, or linked to the US dollar, comprise the biggest share of the Group's overall revenues. The assets and liabilities of the Company's subsidiaries that have a functional currency other than the US dollar are translated at the closing exchange rates prevailing at 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 in other comprehensive income as a separate component called "translation differences". 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 at the balance sheet date. (d) 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. 39 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) The results of subsidiaries acquired during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition. All intra-group transactions and balances between the Group's companies are eliminated on consolidation. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling's share of changes in equity since the date of the combination. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. (e) Business combination Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control transferred to the Group. For acquisitions the Group measures goodwill at the acquisition date as:     the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus the fair value of the existing equity interest in the acquiree; less When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. On a transaction-by-transaction basis, the Group elects to measure non-controlling interests either at its fair value or at its proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date. (f) Acquisition of non - controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interest are based on the proportionate amount of the net assets of the subsidiary. Any difference between the price paid or received and the amount by which non-controlling interests are adjusted is recognised directly in equity and attributed to the owners of the parent. (g) Trade receivables Trade receivables classified as current assets 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. Trade receivables classified as non-current assets are recognised at the original invoice amount, discounted to present value where the effect is material. 40 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (h) Inventories Produced finished goods are stated at the lower of cost or net realisable value. Cost comprises direct materials and, where applicable, directs 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 realizable 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. (i) Investments Investments in subsidiaries are stated at cost less impairment. A gain or losses on partial disposal of investments in subsidiary that do not result in a loss of control are recognised in the statement of comprehensive income. (j) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost over the estimated useful life of the assets, using the straight - line method. Land is not depreciated. Depreciation rates are as follows: Buildings Office furniture and equipment Computers and software Vehicles Leasehold improvements Machines and equipment % 3 6-15 33 15-25 10-14 10-25 The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income. (k) Intangible assets Other intangible assets with finite lives are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the statement of comprehensive income 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 licenses Customer relationships Acquired technology Trademark % 15-33 20-22 20-40 12.5 41 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (l) Goodwill Goodwill arising on the acquisition of an entity represents the excess of the cost of acquisition and the amount recognised for the non-controlling interest over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity or business recognised at the date of acquisition. Goodwill is initially recognised as an asset held at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is held in the currency of the acquired entity and re-valued to the closing rate at each balance sheet date. Goodwill is not subject to amortisation, but is subject to testing for impairment. 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 attributable amount of goodwill is included in the determination of the profit or loss recognised in the statement of comprehensive income on disposal. (m) 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: an asset is created that can be identified (such as hardware, software or a new process); 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 3-5 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. (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 (excluding goodwill) 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. 42 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (n) Impairment of tangible and intangible assets excluding goodwill (continued) If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. (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 statement of comprehensive income 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 utilized. 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 enacted or substantially enacted by the reporting date. Deferred tax is charged or credited in the statement of comprehensive income, 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 non-interest bearing and are stated at their fair value. (q) Retirement benefit costs For defined benefit retirement 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 Projected Unit Credit Method is applied. Actuarial gains and losses which for the company are immaterial are recognised in full in the statement of comprehensive income in the period in which they occur. Gains or losses on the curtailment of a defined benefit plan are recognised in the statement of comprehensive income when the curtailment or settlement occurs. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. 43 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (q) Retirement benefit costs (continued) 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. Revenue from the sales of goods is recognised when the significant risks and rewards of ownership have been passed to the buyer, which is usually on delivery of the goods. Revenues from services are recognised by reference to stage of completion of the transaction when the amount of revenue can be measured reliably, it is probable that economic benefits will be received and the costs incurred and costs to complete the transaction can be measured reliably. Services or royalty income is recognised in accordance with the terms of the relevant agreement unless there has been an assignment of rights for a fixed or non-refundable fee and the Company has no remaining obligations to perform; in such circumstances, revenue is recognised when collection of the income is reasonably assured. (s) Leases Rentals payable under operating leases are charged to statement of comprehensive income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the lease term. (t) Borrowing costs Borrowing costs are recognised in profit or loss in the period in which they are incurred. 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 statement of comprehensive income using the effective interest method. The Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset according to IAS 23 Borrowing Costs (2007). (u) Government grants Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met. Government grants received in respect of costs which have been capitalized as development costs are deducted from the carrying amount of the asset. 44 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (u) Government grants (continued) Government grants relating to income are recognized in other operating income over the periods necessary to match them with the related costs. In accordance with IAS 20, government loans that have a below-market rate of interest are recognised and measured in accordance with IAS 39 at their fair value. The difference between the initial carrying value of the loan (its fair value) and the proceeds received is treated as a government grant (v) Financial instruments Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets Financial assets are initially recorded at fair value. Subsequent to initial recognition, investments in subsidiaries are accounted for under cost method in the Company’s financial statements less provision for impairment. The Group classifies its other financial assets as loans and receivables; no financial assets at fair value through profit or loss are held, except for derivative financial instruments, which are set out below. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. 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 recognised by applying the effective rate, except for short-term receivables when the recognition of interest would be immaterial. 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 of the investment have been impacted. Objective evidence of impairment could include: significant financial difficulty of the issuer or counterparty; or   default or delinquency in interest or principal payments; or  it becoming probable that the borrower will enter bankruptcy or financial re-organization. For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 90 days, as well as observable changes in national or local economic conditions that correlate with default on receivables. 45 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (v) Financial instruments (continued) 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 considered 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 recognised in profit or loss. With the exception of available for sale equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognised. De-recognition of financial assets The Group derecognises 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 recognises 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 recognise the financial asset and also recognises collateralized borrowings 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', except for derivative financial instruments, which are set out below. 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 recognised 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. De-recognition of financial liabilities The Group de-recognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or expired. 46 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (v) Financial instruments (continued) Derivative financial instruments The Group has entered into an interest rate swap to manage its exposure to interest rate risk. Further details of derivative financial instruments are disclosed in note 27 to the financial statements. Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently re-measured to their fair value at each balance sheet date. A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. The resulting gain or loss is recognised in profit or loss immediately as the Group has not designated the derivative as a hedging instrument. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realized or settled within 12 months. Other derivatives are presented as current assets or current liabilities. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value through profit or loss. (w) Share-based payments The Group has applied the requirements of IFRS 2 Share-based payment. 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 an appropriate valuation model, for example the Black-Scholes model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non- transferability, exercise restrictions, and behavioural 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 recognises immediately in the statement of comprehensive income the amount that otherwise would have been recognised 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 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 recognised as an expense in the statement of comprehensive income. (x) Earnings per share Basic and diluted earnings per share is computed on the basis of the weighted average of paid up capital shares during the year in accordance with IAS 33 (Revised) Earnings per share. 47 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (y) Provisions A provision for warranty costs is recognised at the date of sale of the relevant products, at the best estimate of the expenditure required to settle the Group's liability. Other provisions recognise in accordance with IAS 37 at the best estimate of the expenditure required to settle the Group's liability. (z) 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 recognised in the financial statements. Grant receivable Income relating to government grants is recognised when there is reasonable assurance that the Company has complied with the conditions attaching to them 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. Allocating fair values in a business combination Acquisitions of shares in subsidiaries are accounted for using the acquisition 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. 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 statement of comprehensive income. Fair value of government grants and loans The Group have received grants and loans and judgement is made on the criteria regarding how and over which period the grant should be recorded and the estimated fair value of the loan element. 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. Provisions The Group is involved in various legal or other proceedings incidental to the ordinary course of its business. The process of determining the appropriate provision for such uncertainties requires judgment. The final resolution of some of these items may give rise to material profit and loss and/or cash flow variances. 48 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (z) Critical accounting judgments and key sources of estimation uncertainty (continued) Recoverability of deferred tax assets Under IFRS, a deferred tax asset arising on trading losses or deductible temporary differences is only recognised where it is probable that future taxable profits will be available to utilize the losses. The key judgments in assessing the recognition of a deferred tax asset are:   the probability of taxable profits being available in the future; and the quantum of taxable profits that are forecast to arise. This requires management to exercise judgment in forecasting future results. There are a number of assumptions and estimates involved in estimating the future results of the relevant entity in which the trading losses arose, including:     management's expectations of growth in revenue; changes in operating margins; uncertainty of future technological developments; and Uncertainty over global and regional economic conditions and demand for the Group's services. Changing the assumptions selected by management could significantly affect the Group's results. 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. Impairment of goodwill Determining whether goodwill is impaired, requires an estimation of the value in use of the cash-generating unit to which goodwill has been allocated. The value in use calculation requires estimating the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. There are a number of assumptions and estimates involved in calculating the net present value of future cash flows from the Group's cash-generating units, including:       management's expectations of growth in revenue; changes in operating margins; uncertainty of future technological developments; uncertainty over global and regional economic conditions and demand for the Group's products; long-term growth rates; and 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. 49 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (aa) New standards and interpretations adopted this year Commencing January 1, 2013, the Company applied IFRS 13 and IAS 19 (Revised). As a result of the application of IFRS 13, there is no impact on the financial statements other than same enhanced disclosure in the notes to the financial statements. These measurement provisions are applied prospectively as from January 1, 2013. Also, the Group included the required fair value disclosures for assets and liabilities. The application of IAS 19R, didn't have material impact on the company's financial statement (ab)New standards and interpretations not yet applied During the year, the IASB and IFRIC have issued a number of new standards, interpretations and amendments to existing standards which will be effective for the Group in future accounting periods but are not expected to have a material impact on the Group. (i) IFRS 9 Financial Instruments IFRS 9, as issued, reflects the first phase of the IASB's work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39, The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to 1 January 2015. In subsequent phases, the IASB is addressing hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the group's financial assets, but will not have an impact on classification and measurements of the Group's financial liabilities. The group will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued. (ii) IFRS 10, IFRS 11, IFRS 12 - Consolidated Financial Statements, Joint Arrangements, Disclosure of Interests in Other Entities: The IASB issued: IFRS 10, "Consolidated Financial Statements", IFRS 11, "Joint Arrangements", IFRS 12, "Disclosure of Interests in Other Entities" ("the new Standards"), and amended two existing Standards, IAS 27R (Revised 2011), "Separate Financial Statements", and IAS 28R (Revised 2011), "Investments in Associates and Joint Ventures". The new Standards are to be applied retrospectively in financial statements for annual periods commencing on January 1, 2014 or thereafter. Earlier application is permitted. However, if the Company chooses earlier application, it must adopt all the new Standards as a package (excluding the disclosure requirements of IFRS 12 which may be adopted separately). The Standards prescribe transition provisions with certain modifications upon initial adoption. 50 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (ab) New standards and interpretations not yet applied (continued) The main provisions of the Standards and their expected effects on the Company are as follows: IFRS 10 - Consolidated Financial Statements: IFRS 10 supersedes IAS 27 regarding the accounting treatment in respect of consolidated financial statements and includes the accounting treatment for the consolidation of structured entities previously accounted for under SIC 12, "Consolidation - Special Purpose Entities" According to IFRS 10, in order for an investor to control an investee, the investor must have power over the investee and exposure, or rights, to variable returns from the investee. Power is defined as the ability to influence and direct the investee's activities that significantly affect the investor's return. According to IFRS 10, when assessing the existence of control, potential voting rights should be considered only if they are substantive. IFRS 10 also prescribes that an investor may have control even if it holds less than a majority of the investee's voting rights (de facto control), as opposed to the provisions of the existing IAS 27 which permits a choice between two consolidation models - the de facto control model and the legal control model. IFRS 10 is to be applied retrospectively in financial statements for annual periods commencing on January 1, 2014, or thereafter. The Company believes that the adoption of IFRS 10 is not expected to have a material effect on the financial statements. IFRS 11 - Joint Arrangements: IFRS 11 supersedes IAS 31 regarding the accounting treatment of interests in joint ventures and SIC 13 regarding the interpretation of the accounting treatment of non-monetary contributions by venturers. IFRS 11 distinguishes between two types of joint arrangements: joint ventures, in which the parties that have joint control of the arrangement have rights to the net assets of the arrangement and are only accounted for at equity, and joint operations, in which the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement and are therefore accounted for in proportion to their relative share of the joint operation as determined in the joint arrangement, similar to the current accounting treatment for proportionate consolidation. IFRS 11 is to be applied retrospectively in financial statements for annual periods commencing on January 1, 2014, or thereafter. The Company believes that the adoption of IFRS 11 is not expected to have a material effect on the financial statements. IFRS 12 - Disclosure of Interests in Other Entities: IFRS 12 prescribes disclosure requirements for the Company's investees, including subsidiaries, joint arrangements, associates and structured entities. IFRS 12 expands the disclosure requirements to include the judgments and assumptions used by management in determining the existence of control, joint control or significant influence over investees, and in determining the type of joint arrangement. IFRS 12 also provides disclosure requirements for material investees. The required disclosures will be included in the Company's financial statements upon initial adoption of IFRS 12. 51 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (ab) New standards and interpretations not yet applied (continued) (iii) Investment Entities (Amendment to IFRS 10, IFRS 12 and IAS 27) These amendments are effective for annual periods beginning on or after 1 January 2014 provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment would be relevant to the Group, since none of the entities in the Group would qualify to be an investment entity under IFRS 10. (iv) IFRS 12 Disclosure of interests in other Entities IFRS 12 sets out the requirements for disclosures relating to an entity's interests in subsidiaries, joint arrangements, associates and structured entities. The requirements in IFRS 12 are more comprehensive than the previously existing disclosure requirements for subsidiaries. For example, where a subsidiary is controlled with less than a majority of voting rights. While the Group has subsidiaries with material non- controlling interests, there are no unconsolidated structured entities. (v) IAS 32 Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 These amendments clarify the meaning of "currently has a legally enforceable right to set-off" and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. These are effective for annual periods beginning on or after 1 January 2014. These amendments are not expected to be relevant to the Group. (vi) IFRIC interpretation 21 Levies (IFRIC 21) IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached, IFRIC 21 is effective for annual periods beginning on or after 1 January 2014. The Group does not expect that IFRIC 21 Will have material financial impact in future financial statement. (vii) IAS 39 Noviation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39 These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after 1 January 2014. The group has not novates its derivatives during the current period. However, these amendments would be considered for future novations. (viii) IAS 36 'Recoverable Amounts Disclosures for Non-Current Assets' The amendments clarify the disclosure requirements in respect of fair value less costs of disposal. When IAS 36 Impairment of Assets was originally changed as a consequence of IFRS 13, the amendment required entities to disclose the recoverable amount for each cash-generating unit for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit was significant in comparison with the entity's total carrying amount of goodwill or intangible assets with indefinite useful lives. This requirement has been deleted by the amendment. In addition, the IASB added two disclosure requirements: Additional information about the fair value measurement of impaired assets when the recoverable amount is based on fair value less costs of disposal. Information about the discount rates that have been used when the recoverable amount is based on fair value less costs of disposal using a present value technique. 52 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 1. ACCOUNTING POLICIES (continued) (ab) New standards and interpretations not yet applied (continued) The amendment harmonises disclosure requirements between value in use and fair value less costs of disposal. The effective date is 1 January 2014. The Group will normally adopt new standards at the effective date. The Group considered the effect of the above standards and revisions and it has been concluded that there will be no significant impact apart from the additional disclosures. NOTE 2:- BUSINESS COMBINATIONS A. At September 3, 2013 – Telit Wireless Solutions Inc. a fully owned subsidiary of Telit Communications PLC, has entered into and consummated an agreement to purchase 011% of the membership interest of US-based ILS Technology LLC ("ILST"), a leading provider of a ready-to-use, off-the-shelf, cloud platform to connect enterprise IT systems to m2m-connected devices and machines for business-critical use. The acquisition's consideration is $8.5 million in cash. The assessment of the fair values of the assets and liabilities acquired has been completed: Accounts Receivables Prepaid Expenses Tangible assets, net Technology Customer relationships Accounts Payables Other Payables Total identifiable assets Consideration paid Excess of cost - goodwill Fair value $'000 1,705 190 371 1,808 3,170 (202) (394) 6,648 8,500 1,852 There are no material adjustments from book value to fair value. The goodwill is attributable mainly to the synergies expected to be achieved from expending the m2mair business to include also cloud based services, and to the skills and experience of the workforce. The goodwill recognised is deductible for income tax purposes From the acquisition date to 31 December 2013 the activity that was purchased, ILST attributed to the consolidated revenues turnover of $3,062,000 and net loss of $170,000. If the business combination had taken place at the beginning of the year, the consolidated net loss would have been $1,489,000 and the consolidated revenue turnover would have been $8,261,000, without pro forma assumptions. 53 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 2:- BUSINESS COMBINATIONS (continued) B. In August 2013, Telit wireless solutions Co. ,Ltd., a subsidiary of Telit communication PLC, acquired substantially all of the assets and business of a small technology company that provided GPS products in the Korean market Total consideration was approximately $1 million settled in cash. Goodwill arising from this acquisition is in the amount of $292,000. C. In December, 2012, the Company completed the acquisition of 100% of the shares of CrossBridge Solutions Inc., a premier US based m2m data and value added services provider located in Lincolnshire, Illinois, U.S.A, for approximately $3 million in cash, with a possible earn-out of up to $6 million based on the amount of gross profit achieved by CrossBridge during the earn out period. The earn-out is payable in shares or in cash, at the Company's discretion, provided that no less than 25% is paid in cash. As of 31 December 2012 $400,000 was not yet paid. The acquisition of CrossBridge and its U.S. based engineering and sale staff will allow Telit to expand m2mAIR business unit offerings in m2m value added services and connectivity to the USA. The provisional assessment of the fair values of the assets and liabilities acquired is as follows: Cash Accounts Receivables Other current assets Tangible assets, net Technology Customer relationships Long term deposit Accounts Payables Other current liabilities Other non-current liabilities Total identifiable assets Consideration paid Consideration to be paid Contingent consideration Excess of cost - goodwill Fair value $'000 333 469 57 100 750 2,381 11 (91) (410) (90) 3,510 2,600 400 2,749 2,239 There are no material adjustments from book value to fair value. The contingent consideration represents the fair value of the earn-out of $2,749,000 at the acquisition date. In July 2013 the Company signed an agreement with the shareholders of CrossBridge according to which it paid the shareholders an earn out in the amount of $1.15 million. The profit from the settlement of the earn out includes in the statement of comprehensive income, under other operating income. See also note 5. The goodwill is attributable mainly to the skills and experience in the connectivity market of CrossBridge's workforce, and to the synergies expected to be achieved from expending the value added services business, in North America. 54 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 2:- BUSINESS COMBINATIONS (continued) D. On 3 January 2012 the Company consummated, by subsidiary in the US, the binding agreement it entered into on 20 December 2011 to purchase 100% of the interests of Navman Wireless OEM Solutions LP, a designer and manufacturer of world-class GPS modules and solutions, for approximately $3.038 million in cash. The amount is subject to an additional earn-out amount of up to $750,000 subject to certain conditions. The acquisition of Navman's technology and its US based executive engineering and sales staff will make Telit a major contender in the GPS market while providing an enhanced product portfolio for its m2m customers. The assessment of the fair values of the assets and liabilities acquired has been completed: Cash Accounts Receivables Inventory, net Prepaid Expenses Tangible assets, net Technology Customer relationships Accounts Payables Other Payables Total identifiable assets Consideration paid Contingent consideration Excess of cost - goodwill Fair value $'000 3 1,141 485 13 72 1,127 474 (671) (283) (2,361) 3,038 418 1,095 There are no material adjustments from book value to fair value. The contingent consideration represents the fair value of an earn-out of $418,000 at the acquisition date. Adjustment to the earn-out are included in the statement of comprehensive income. During 2012 and 2013, the adjustments were immaterial amounts. The goodwill is attributable mainly to the skills and experience in the GNSS market of Navman's workforce, and the synergies expected to be achieved from developing the value added services business. The goodwill recognised is deductible for income tax purposes In the year from the acquisition date to 31 December 2012 the activity that was purchased from Navman was integrated into the Group and therefore the Company cannot estimate the impact of Navman, by itself, on the consolidated results. 55 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 3:- REVENUE Sales of goods Services income NOTE 4:- SEGMENTAL ANALYSIS Group 2013 $'000 233,455 9,769 243,224 2012 $'000 205,827 1,565 207,392 Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker in the Group. The chief operation decision-maker, who is responsible for allocating resources and assessing performance of the operating segments and makes strategic decisions, has been identified as the Chief Executive. Segment performance is evaluated based on operating profit or loss. The Group is organized on a worldwide basis into three geographical segments: EMEA, APAC and Americas. There are no other segments. All segments offer similar product lines. In the year ended 31 December 2013 and 31 December 2012 no single customer accounted for more than 10% of the Group's revenue. Segmental information for each geographical region in which Telit operates is presented below: 2013 EMEA $'000 APAC $'000 Americas $'000 Total $'000 Eliminations Consolidated $'000 $'000 Revenue External sales Inter-segment sales (1) Total revenue 110,099 81,547 191,646 27,909 14,758 42,667 105,216 40 105,256 243,224 96,345 339,569 - (96,345) (96,345) 243,224 - 243,224 16,203 Result Segment result Unallocated corporate expenses (2) Operating profit Investment income Finance costs Profit before income taxes Income taxes Profit for the year 890 2,346 19,439 - 19,439 (5,303) 14,136 25 (2,210) 11,951 (1,065) 10,886 During the year, the Group recognised grant income which was recorded in EMEA. See note 5 for further detail. 56 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 4:- SEGMENTAL ANALYSIS (continued) 2012 EMEA $'000 APAC $'000 Americas $'000 Total $'000 Eliminations Consolidated $'000 $'000 Revenue External sales Inter-segment sales (1) Total revenue 107,076 62,977 170,053 25,350 7,848 33,198 74,966 1,085 76,051 207,392 71,910 279,302 - (71,910) (71,910) 207,392 - 207,392 4,739 Result Segment result Unallocated corporate expenses (2) Operating profit Investment income Finance costs Profit before income taxes Income taxes Profit for the year 4,093 2,138 10,970 - 10,970 (5,033) 5,937 250 (1,272) 4,915 (1,035) 3,880 (1) Transactions between geographic segments are charged at market prices. (2) Unallocated corporate expenses principally comprise expenses arising from corporate activity on the Company level, including directors compensation (other than such compensation specifically allocated to one of the traded companies) salaries of certain senior executives, professional fees (e.g. audit fees) and other expenses which cannot be directly allocated to one of the segments. Total assets: EMEA APAC Americas Unallocated assets Total assets Total liabilities: EMEA APAC Americas Unallocated liabilities Total liabilities Unallocated assets comprise: Other debtors in respect of general entity and head office purposes Deposits - restricted cash Cash and cash equivalents Unallocated assets 57 2013 $'000 2012 $'000 95,070 15,228 55,284 24,973 190,555 58,519 9,366 6,111 37,167 111,163 100,370 12,596 26,986 22,118 162,070 51,028 6,258 3,392 34,979 95,567 2013 $'000 2012 $'000 796 291 23,886 24,973 709 365 21,044 22,118 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 4:- SEGMENTAL ANALYSIS (continued) Unallocated liabilities comprise: 2013 $'000 2012 $'000 Other loans Short-term borrowings from banks and other lenders Other current liabilities in respect of general entity and head office purposes Unallocated liabilities 22,134 13,790 1,243 37,167 9,839 24,293 847 34,979 2013 Non-cash items: Depreciation and amortization Bad debt expense Share-based payments 2012 EMEA $'000 APAC $'000 Americas $'000 Consolidated $'000 8,209 160 709 1,322 26 11 1,263 48 22 10,794 234 742 EMEA $'000 APAC $'000 Americas $'000 Consolidated $'000 Non-cash items: Depreciation and amortization Bad debt expense Share-based payments 6,967 197 935 888 49 27 766 32 46 8,621 278 1,008 NOTE 5:- OTHER OPERATING INCOME/ (EXPENSES) Change in fair value of earn out (a) Governmental grants and benefits (b) Provision in the year Gain (loss) on sale of assets Integration and transaction costs Other 2013 $'000 2012 $'000 1,667 6,120 - 37 (814) (342) 6,668 85 960 (726) (312) (486) (204) (683) (a) In 2013, represents the change in the fair value of the contingent consideration related to the acquisition of Cross Bridge and Navman in 2012 and GlobalConect LTD in 2011 (see note 24). In 2012, represents the change in the fair value of the contingent consideration related to the acquisition of GlobalConect LTD in 2011 (see note 24). 58 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 5:- OTHER OPERATING INCOME/ (EXPENSES) (b) The Group's eligibility for the annual programs for 2013, 2012 and 2011 was approved by the relevant grant making body during the year. The Group only recognises 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 recognised amounts expected to be received in respect of the regional grant within other income in the year ended 31 December 2013 as all the conditions for qualification, which relate to the level of eligible expenditure incurred, have been satisfied. NOTE 6:- INVESTMENT INCOME Exchange rate differences, net Interest income from bank deposits NOTE 7:- FINANCE COSTS Interest expense on bank loans and overdrafts Exchange rate differences, net Other bank expenses NOTE 8:- INCOME TAXES A. Tax recognised in statement of comprehensive income Current year taxes Prior year taxes Deferred taxes Tax expense 2013 $'000 2012 $'000 - 25 25 178 72 250 2013 $'000 2012 $'000 1,170 298 742 2,210 842 - 430 1,272 2013 $'000 2012 $'000 1,020 121 (76) 1,065 781 (182) 436 1,035 59 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 8:- INCOME TAXES (continued) B. Factors affecting the tax expense for the year The table below explains the differences between the expected tax charge, at the UK statutory rate of 23.25% for 2013 and 24.5% for 2012, and the Group's total tax expense for the year: Profit before income tax from continuing operations Tax charge computed at 23.25% (2012: 24.5%) Tax adjustments arising from: Non-deductible expenses Deferred tax assets recognized and other timing differences, net Recognition of previously unrecognised tax losses Effect of tax rates in foreign jurisdictions Utilization of carry forward losses for which no deferred tax was recorded Tax for previous years Tax expense 2013 $'000 2012 $'000 11,951 (2,779) (237) (896) 3,416 (1,345) 898 (121) (1,065) 4,915 (1,204) (535) (1,196) - (347) 2,065 182 (1,035) Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The UK statutory tax rate used is not materially differing from the average tax rates applicable in the Group's main foreign jurisdictions in which it operates. 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 2012 Translation adjustments Credit to the statement of comprehensive income At 1 January 2013 Translation adjustments Credit to the statement of comprehensive income At 31 December 2013 Net operating loss $'000 Other timing differences $'000 Total $'000 3,785 60 (524) 3,321 31 (268) 3,084 360 34 92 486 19 344 849 4,145 94 (432) 3,807 50 76 3,933 In the year ended 31 December 2013, the Group has recognised deferred tax assets of $171,000, $654,000, $529,000 and $2,578,000 in respect of Telit EMEA, Telit APAC, Telit Inc. and Telit Israel, respectively. 60 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 8:- INCOME TAXES (continued) 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, the resolution of inquiries from 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 amounts 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 2013 $'000 2012 $'000 11,195 34,748 45,943 11,680 40,457 52,137 The losses for which no deferred tax asset has been recognized primarily relates to our UK entity. The Group has recognised deferred tax assets to the extent that it is probable that these will be utilised in future periods. The Finance Act 2013 enacted on 17 July 2013, 21% effective from 1 April 2014 and 20% effective from 1 April 2015 This will reduce the company's future current tax charge accordingly. The deferred tax asset at 31 December 2013 has been calculated based on the rate of 20% enacted at the balance sheet date. NOTE 9:- EMPLOYEES AND DIRECTORS’ EMOLUMENTS Employees emoluments: The average number of persons (not including executive directors) during the year was: Research and development Sales, marketing and operation General and administration Their aggregate remuneration comprised: Wages and salaries Social security costs Other pension costs 2013 2012 297 190 86 573 251 142 81 474 2013 $'000 2012 $'000 35,111 5,378 2,562 43,051 32,978 4,664 2,346 39,988 61 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 9:- EMPLOYEES AND DIRECTORS’ EMOLUMENTS (continued) Director's emoluments The directors, deemed to be key management personnel, received the following remuneration in respect of services rendered to the Group: Remuneration Post-employment benefits Total emoluments The emoluments in relation to the highest paid director are as follows: Total emoluments Post-employment benefits Year ended 31 December 2013 $'000 Year ended 31 December 2012 $'000 4,930 87 5,017 3,982 131 4,113 Year ended 31 December 2013 $'000 Year ended 31 December 2012 $'000 3,512 87 3,599 2,848 131 2,979 NOTE 10:- PROFIT FOR THE YEAR, ADJUSTED MEASURES AND GROUP AUDIT FEE (i) Operating profit for the year is stated after charging / (crediting) Net foreign exchange (gain) / loss Depreciation of owned fixed assets (note 13) Amortization of intangible assets (note 12): Amortization of purchased customer list – included in selling and marketing expenses Amortization of acquired technology – included in R&D expenses Amortization of software – included mainly in R&D expenses Amortization of Internally generated development costs – included mainly in R&D expenses Research and development expenditure Costs of inventories recognised as an expense Write-downs of inventories recognised as an expense 2013 $'000 2012 $'000 298 2,800 1,078 899 3,129 2,888 24,049 144,337 808 (178) 2,315 627 899 1,892 2,888 20,085 127,577 270 62 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 10. PROFIT FOR THE YEAR AND GROUP AUDIT FEE (continued) (ii) EBIT, Adjusted EBITDA and Adjusted Profit for the Year Operating profit Share-based payments Non-recurring expenses Amortization - intangibles acquired Adjusted EBIT Depreciation & amortization3 Adjusted EBITDA Profit before tax Share-based payments Non-recurring expenses Amortization - intangibles acquired Adjusted profit before tax 2013 $'000 2012 $'000 14,136 742 1,229 2,688 18,795 8,106 26,901 11,951 742 1,229 2,688 16,610 5,937 1,008 1,769 1,859 10,573 6,762 17,335 4,915 1,008 1,769 1,859 9,551 EBITDA is not a financial measure defined by IFRS as a measurement of financial performance and may not be comparable to other similarly-titled indicators used by other companies. Adjusted EBIT, adjusted EBITDA and adjusted profit before tax are provided as additional information only and should not be considered as a substitute for operating profit or net cash provided by operating activities. The Group's management believes that Adjusted EBIT (Earnings before Interest, Tax, share based payments expenses, amortisation of acquired intangibles and non recurring expenses), Adjusted EBITDA (Adjusted EBIT plus depreciation and other amortisation) and Adjusted Profit before tax (Profit before tax plus share based payments expenses, amortisation of acquired intangibles and non recurring expenses) are meaningful for investors because they provide an analysis of operating results and profitability using the same measures used by management. As a consequence, Adjusted EBIT, Adjusted EBITDA and Adjusted profit before tax are presented in addition to operating profit. (iii) Audit fee Fees payable to the Company's auditor for the audit of the Company's annual accounts Fees payable to the Company's auditor and their associates for other services to the Group: The audit of the Company's subsidiaries pursuant to legislation: Total audit fees Other services relating to taxation Total fees (1) Group Company 2013 $'000 2012 $'000 2013 $'000 2012 $'000 179 16 264 459 95 554 200 33 173 406 19 425 179 10 - 189 36 225 200 5 - 205 - 205 (1) The 2013 fees relating to Ernst & Young are $391K. The rest of the 2013 fees and all 2012 fees were paid to KPMG Audit plc. 3 Excluding intangibles acquired. 63 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 11:- EARNINGS PER SHARE Basic earnings per share The calculations of basic and diluted earnings per ordinary share are based on the following results and numbers of shares: Profit for the year attributable to the owners of the Company 10,933 3,914 2013 $'000 2012 $'000 Basic weighted average number of equity shares(1) Diluted weighted average number of equity shares (2) Basic earnings per share (in US dollar cents) Diluted earnings per share (in US dollar cents) Adjusted basic earnings per share (in USD cents) Adjusted diluted earnings per share (in USD cents) (1) Basic weighted average number of equity shares: No. of Shares No. of Shares 103,826,885 111,067,069 10.5 9.8 14.9 13.9 102,968,936 108,272,974 3.8 3.6 8.6 8.2 2013 No. of Shares 2012 No. of Shares Issued ordinary shares at 1 January Effect of share options exercised Basic weighted average number of equity shares at 31 December 103,304,206 522,679 103,826,885 102,678,769 290,167 102,968,936 (2) Diluted weighted average number of equity shares: 2013 No. of Shares 2012 No. of Shares Basic weighted average number of equity shares Effect of share options on issue Diluted weighted average number of equity shares at 31 December 103,826,885 7,240,184 111,067,069 102,968,936 5,304,038 108,272,974 The average market value of the Company's shares for purposes of calculating the dilutive effect of shares was based on quoted market prices for the period during which the options were outstanding. 64 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 11:- EARNINGS PER SHARE (continued) Adjusted earnings per share A reconciliation of the profit attributable to the equity shareholders for the year to the adjusted profit for the year attributable to the equity shareholders is presented below. The Group's management believes that Adjusted profit for the year and other adjusted measures such as Adjusted EBITDA are meaningful for investors because they provide an analysis of operating results and profitability using the same measures used by management. Profit for the year Loss attributable to non-controlling interest Profit for the year attributable to the owners of the Company Share-based payments Amortization of intangibles acquired Other non-recurring expenses Change in deferred taxes, net Adjusted profit for the year attributable to the equity shareholders 2013 $'000 2012 $'000 10,886 47 10,933 742 2,688 1,229 (126) 15,466 3,880 34 3,914 1,008 1,859 1,769 338 8,888 65 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 12:- INTANGIBLE FIXED ASSETS Intangible assets with finite life Internally generated development costs $'000 Software and licenses $'000 Customer relationships $'000 Acquired technology $'000 Goodwill $'000 Total $'000 8,454 3,064 - 750 226 12,494 3,333 1,808 465 18,100 (5,742) (1,559) - (333) (173) (7,807) (2,418) (711) (364) (11,300) 6,800 4,687 13,374 7,644 - - 526 21,564 9,909 - 1,005 32,478 (5,788) (2,888) - - (258) (8,934) (2,888) - (363) (12,185) 20,293 12,630 4,487 - 1,178 2,347 - 8,012 - 3,830 25 11,867 (2,071) - (670) (627) 5 (3,363) - (1,078) (2) (4,443) 7,424 4,649 2,499 - 627 1,037 57 4,220 - - (3) 4,217 (1,289) - (537) (899) (49) (2,774) - (899) 3 (3,670) 547 1,446 8,644 - - 3,333 250 12,247 - 2,144 4 14,395 - - - - - - - - - 14,395 12,247 37,478 10,728 1,805 7,467 1,059 58,537 13,242 7,782 1,496 81,057 (14,890) (4,447) (1,207) (1,859) (475) (22,878) (5,306) (2,688) (726) (31,598) 49,459 35,659 through GROUP COST 1 January 2012 Additions Acquisitions business combinations Arising from acquisitions Translation adjustments 31 December 2012 Additions Arising from acquisitions Translation adjustments 31 December 2013 AMORTIZATION 1 January 2012 Charge for the year Acquisitions business combinations Arising from Acquisitions Translation adjustments 31 December 2012 Charge for the year Arising from acquisitions Translation adjustments 31 December 2013 Net book value 31 December 2013 31 December 2012 through A. Goodwill, customer relationships and acquired technology relate to the acquisition of Telit APAC in 2006, the acquisition of MAT in 2013 (included within the APAC geographical segment); the acquisition of One RF Technologies (subsequently renamed Telit RF) in 2008; the acquisition of Motorola m2m and of GlobalConect Ltd. in 2011 (included within the EMEA geographical segment); the acquisition of Navman and CrossBridge in 2012; the acquisition of ILST in 2013 (included within the Americas geographical segment) B. Capitalized development costs related mainly to the HSPA, CDMA, WCDMA, EVDO and LTE product lines and are being amortized over a three to five year period. C. As of 31 December 2013 there are no borrowing costs capitalized. D. The Group tests goodwill for impairment annually or more frequently if there are indications that they might be impaired. Management has not identified any indications for impairment of goodwill recognised in the current year in respect of the acquisition of Navman and CrossBridge. 66 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 12:- INTANGIBLE FIXED ASSETS (continued) Other than the goodwill arising on acquisitions made during the year, management considers the product line developed by Telit APAC and Telit RF, the customer base that was purchased from "Motorola" and the m2mAIR business unit (collectively, "business units") to be the cash generating units (CGU) for goodwill allocated to them. The cash generating units have been identified based on the lowest levels at which goodwill is monitored for internal management purposes. The recoverable amount of the business units has been determined based on a value in use calculation using discounted 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 10% per year. The carrying value of goodwill by CGU at 31 December is as follows: APAC Telit RF Motorola m2m GlobalConnect Navman CrossBridge ILST Total 2013 2012 $'000 3,696 332 3,255 1,926 1,095 2,239 1,852 3,404 328 3,255 1,926 1,095 2,239 - 14,395 12,247 The main assumption for each CGU is sales growth which is based on recent history and expectations of future changes in the market. The discount rate applied to the cash flow forecasts for each CGU is based on the long term bond yields adjusted for a country and risk premium. The discount pre tax rate applied was 14% for Telit APAC, 20% for CrossBridge and 15% for all other CGUs. In developing its projections, management has taken into account its past experience as well as external forecasts of growth in the m2m industry. The key assumptions used in determining value in use are: Revenue Management has forecast revenue mainly considering external forecasts of growth in the m2m industry. An average conservative growth rate of 10% per year over the next four years has been assumed for the entire m2m market. Management has also forecast changes in the average sales price based on past experience and external forecasts of changes in the selling price in the m2m industry. 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. EBITDA margins EBITDA margins are expected to be in the range of 4% - 19% over the five year period covered by the forecasts. Sensitivity analysis on the carrying value of goodwill The management has performed sensitivity analyses which assumes lower growth rate applied to the revenue forecasts of the CGUs and different discount rates. Based on such the Group would still not recognise any impairment charge. The directors consider it unlikely that there will be any changes in key assumptions that would lead to an impairment loss. 67 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 12:- INTANGIBLE FIXED ASSETS (continued) COMPANY COST 1 January 2012 Additions Translation adjustments 31 December 2012 Additions Translation adjustments 31 December 2013 AMORTIZATION 1 January 2012 Charge for the year Translation adjustments 31 December 2012 Charge for the year Translation adjustments 31 December 2013 Net book value 31 December 2013 31 December 2012 Trademark $'000 Software $'000 Total $'000 9,147 - 400 9,547 - 221 9,768 (2,502) (1,170) (132) (3,804) (1,143) (166) (5,113) 4,655 5,743 115 1,212 30 1,357 1,231 79 2,667 - (205) (4) (209) (480) (34) (723) 1,944 1,148 9,262 1,212 430 10,904 1,231 300 12,435 (2,502) (1,375) (136) (4,013) (1,623) (200) (5,836) 6,599 6,891 68 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 13:- PROPERTY, PLANT AND EQUIPMENT Land and Buildings(1) $'000 Computers $'000 Office equipment $'000 Vehicles $'000 Leasehold Improvements $'000 Total $'000 GROUP COST 1 January 2012 Additions Acquisitions through business combinations Disposals Translation adjustments 31 December 2012 Additions Acquisitions through business combinations Disposals Translation adjustments 31 December 2013 DEPRECIATION 1 January 2012 Charge for the year Acquisitions through business combinations Disposals Translation adjustments 31 December 2012 Charge for the year Acquisitions through business combinations Disposals Translation adjustments 31 December 2013 Net book value 6,878 - - - 136 7,014 3,376 748 35 (18) 6 4,147 12,244 1,945 235 (431) 272 14,265 - 1,085 3,281 - - 317 7,331 (30) (175) - - (5) (210) (182) - - - (17) (409) 2,021 (223) 4 7,034 (1,727) (659) (15) 16 (31) (2,416) 182 (141) 576 18,163 (8,744) (1,362) (83) 252 (240) (10,177) (899) (1,546) (1,744) 150 (55) (4,963) - 200 (410) (11,934) 170 315 - - - 485 32 - - 2 519 (24) (47) - - - (71) (81) - - 1 (152) 367 414 878 403 - (613) 13 681 139 - - 3 823 (464) (72) - 414 (8) (130) (92) - - (9) (231) 592 551 23,546 3,411 270 (1,062) 427 26,592 4,537 2,203 (364) 902 33,870 (10,989) (2,315) (98) 682 (284) (13,004) (2,800) (1,744) 350 (490) (17,688) 16,182 13,588 31 December 2013 6,922 2,071 31 December 2012 6,804 1,731 6,229 4,088 (1) In October 2011 Telit Communications S.p.A., the Company's Italian subsidiary completed the acquisition of the premises where its business is located, for a total purchase price of $7.9 million. The building acquisition presented at 31 December 2012 and 2013 is net of the fair value measurement impact of the preferential loan obtained to fund the acquisition. The Company has pledged the buildings as collateral for the mortgage loan received to fund the acquisition. See also note 26. At 31 December 2013 properties and equipment with a carrying amount of $2,579,000 (2012: $3,156,000) are subject to a floating charge to secure credit lines provided to subsidiaries. 69 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 14:- INVESTMENTS IN SUBSIDIARIES COMPANY Investment in subsidiaries 1 January 2012 Additions (1,2) Additions - subsidiaries share-based payment charge (1) Repayments (3) Loan converted to equity (4) Translation adjustments Provision for impairment (5) 1 January 2013 Additions (1,2) Additions - subsidiaries share-based payment charge (1) Repayments (3) Loan converted to equity (4) Translation adjustments Move to current liability 31 December 2013 Loans to subsidiaries $'000 Investments in subsidiaries $'000 23,976 856 - (5,000) (250) 79 - 19,661 4,860 - (2,356) (210) 227 (2,000) 20,182 39,076 26,271 218 - 250 - (1,500) 64,315 - 86 - 210 - - 64,611 Total $'000 63,052 27,127 218 (5,000) - 79 (1,500) 83,976 4,860 86 (2,356) - 227 (2,000) 84,793 (1) In January, 2012 the Company purchased all the shares in Telit Communications S.p.A from the Company's subsidiary Telit Wireless Solutions S.r.L. for the book value amount of $20.5 million which amount remains on the books of the Company. At the end of 2012 the Company acquired 100% of the shares of CrossBridge Solutions Inc., a premier US-based m2m data and value added services provider located in Lincolnshire, Illinois, U.S.A, for $3million in cash. The amount is subject to an additional earn-out amount of up to $6 million subject to certain conditions (fair value – $2.7 million). See also note 2(C). In addition, in 2012 the Company established two additional subsidiaries as follows: Telit Wireless Solutions Hong Kong Limited for $3,000 and Telit Communications Cyprus Ltd. for $13,000. For further information in respect of share-based payment see note 25. (2) During 2013, a $4,250,000 loan was made available to Telit Wireless Solutions Inc., a $400,000 loan was made available to Telit Wireless Solutions Hong Kong Limited and a $210,000 loan was made available to Telit RF Technologies Sarl. During 2012, a $856,000 loan was made available to Telit Wireless Solutions Hong Kong Limited. (3) The repayment in 2013 is due to loan balance repayments made by Telit Wireless Solutions Ltd, Telit Hong Kong and Global connect. The repayments in 2012 is all due to loan balance repayments made by Telit Wireless Solutions Ltd. (4) During 2013 and 2012 the Company converted the loan to Telit RF Technologies Sarl to equity. 70 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 14:- INVESTMENTS IN SUBSIDIARIES (continued) (5) At 31 December 2012 and 31 December, 2011 the Company's investments in subsidiaries were assessed for indicators of impairment using the discounted future cash flow method. Due to the continued decline in the performance of Dai Telecom Holdings (2000) Ltd the recoverable amount of this subsidiary was estimated based on its value in use. Based on this assessment in 2011, the carrying amount of the investment was determined to be higher than its recoverable amount and an impairment loss of $1,821,000 was recognised in the Company's accounts for 2011. In 2012, the Company reassessed its estimates and recorded an additional impairment loss of $1,500,000. The impairment loss is included in other operating expenses in the Company's accounts and had no impact on the consolidated accounts. The estimate of value in use in 2012 was determined using a pre-tax discount rate of 12%. The discount rate reflects management's assumptions regarding each unit's specific risk. This discount rate forms a standard basis used by management to estimate its operations and assess prospective investments. Details of the subsidiary undertakings of the Company at 31 December 2013 are as follows: Name of company Telit RF Technologies SARL (previously named Telit RF S.A.S) .1 of Country incorporation and operation France Type of shares Ordinary Telit Wireless Solutions Srl1 ("TWS") Telit Communications SpA1 ("Telit EMEA") Sardinia, Italy Italy Ordinary Ordinary Telit Wireless Solutions GmbH (previously named m2mapps GmbH)1 Telit Wireless Solutions Inc. 1 ("Telit Americas") United States of Germany Telit Communications Spain SL1 America Spain Telit Wireless Solutions Tecnologia E Servicos Ltda2 Telit Wireless Solutions Co Ltd1 ("Telit APAC") Republic Brazil Dai Telecom Holdings (2000) Ltd.1 Telit Wireless Solutions Ltd. ("Telit Israel")1 Korea Israel Israel Telit Wireless Services Ltd. (previously named Dai Telecom Ltd.)2 GlobalConect Ltd1 Israel Israel Ordinary Ordinary Ordinary Ordinary of Ordinary Ordinary Ordinary Ordinary Ordinary Telit Wireless Solutions (Pty) Ltd. 2 ("Telit RSA") Republic of Ordinary Telit Wireless Solutions Hong Kong Limited1 South Africa Hong Kong Telit Communications Cyprus Ltd. 1 Telit Location Solutions LP2 Cyprus United States Of America United States of America Telit Wireless Solutions (Australia) Pty Limited2 Australia CrossBridge Solutions, Inc1 Ordinary Ordinary Partnership Units Ordinary Ordinary Telit GPS Solutions GP LLC2 United States Of America Membership Interests Effective ownership interest and voting rights Principal activity 100% 200% 100% 100% 100% 100% 100% 92% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Development, manufacturing and selling short-range data products Non-trading Company Development, manufacturing and selling data products and distributing cellular products Selling and marketing data products Selling and marketing data products Selling and marketing data products Selling and marketing data products Development, manufacturing and selling data products Intermediate holding company Selling and marketing data products Selling and marketing data products Provides cellular connectivity services Selling and marketing data products Selling and marketing data products Non-trading Company Selling and marketing data products Selling managed services. Selling data products Holding Company marketing and and marketing ILS Technology LLC2 United States of America 1 indicates that the entity is held directly by the Company. 2 indicates that the entity is indirectly held by the Company. Ordinary 100% Selling managed services. and marketing 71 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 15:- INVENTORIES Finished goods Raw materials and work in progress Group 2013 $'000 2012 $'000 10,233 8,287 18,520 13,169 8,490 21,659 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 $445,000 (2012: $1,027,000). NOTE 16:- TRADE RECEIVABLES AND OTHER ASSETS Within current assets: Trade receivables Other current assets Due from Group undertakings Within non-current assets: Long term receivables Group 2013 $'000 2012 $'000 Company 2013 $'000 2012 $'000 63,118 14,338 - 77,456 56,502 8,845 - 65,347 696 468 13,504 14,668 1,109 709 8,907 10,725 807 568 232 18 The average credit period on trade receivables is 76 days (2012: 85 days). No interest is charged on trade receivables unless previously agreed with the customer. 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 are debtors with a carrying amount of $14,596,000 (2012: $8,253,000) 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 recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 111 days (2012: 104 days). Ageing of past due but not impaired trade debtors 1-30 days 30-60 days 60-90 days Above 90 days 2013 $'000 2012 $'000 5,736 4,844 810 3,206 14,596 4,856 914 543 1,940 8,253 The directors consider that the carrying amount of trade and other receivables approximates their fair value. 72 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 16:- TRADE RECEIVABLES AND OTHER CURRENT ASSETS (continued) The Group's trade receivables are stated after allowances for doubtful debts, an analysis of which is as follows: At 1 January Increase in allowance for the year Amounts written off Translation adjustments At 31 December 2013 $'000 663 234 (262) 26 661 2012 $'000 421 278 (43) 7 663 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, but the management reviews carefully every past due amount in light of the global economic situation. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. There are no allowances for credit losses recorded against other financial assets. NOTE 17:- CASH The Group's cash resources are as follows: Group Company 2013 $'000 2012 $'000 2013 $'000 2012 $'000 Deposits – restricted cash Cash and cash equivalents Total 291 23,886 24,177 365 21,044 21,409 88 3,068 3,156 296 4,418 4,714 Restricted cash deposits are provided as security for borrowings and bank guarantees provided by banks in EMEA. 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. 73 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 17:- CASH (continued) The Group's cash resources are denominated in the following currencies: Sterling US dollar Euro KRW Brazilian Real HKD ILS Other Total Group Company 2013 $'000 2012 $'000 2013 $'000 2012 $'000 39 10,069 10,616 634 297 1,760 517 245 24,177 613 14,386 4,304 723 426 102 579 276 21,409 38 2,481 637 - - - - - 3,156 604 3,584 526 - - - - - 4,714 NOTE 18:- ALLOTTED SHARE CAPITAL COMPANY AND GROUP Allotted, issued and fully paid: 104,592,690 ordinary shares of 1 penny each (2012: 103,304,206 ordinary shares of 1 penny each). 2013 $'000 2012 $'000 1,791 ,2 781 The Company has one class of ordinary shares which carry no rights to fixed income. During 2013, 1,288,486 options were exercised by employees into ordinary shares. (2012: 625,438) Share options The number of outstanding options as at 31 December 2013 and at the date of this report was 12,710,387 and 7,305,452 equal to 11.77% and 6.6% respectively, of the outstanding share capital of the Company (11.44% and 6.2%, respectively of the outstanding share capital of the Company, on a fully diluted basis). Share premium account The share premium account is used to record the premium on shares issued. Merger and other reserve The reserves arose from the acquisition of one of the group trading entities, Telit Wireless Solutions Srl and a subsequent stake in another entity, SEM. This transaction resulted in changes in ownership interests while retaining control and is accounted for as a transaction with equity holders in their capacity as equity holders. As a result, the difference in the consideration which made up of combination of the fair value of the shares issued and the contingent consideration plus the elimination of the fair value of the investment held in SEM was included in other reserve as a component of equity. The fair value of the shares issued determined based on the share price at the date of the transaction and was included in merger reserve. Translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of financial statements of overseas subsidiaries. 74 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 19:- POST-EMPLOYMENT BENEFITS A. Until 1 January 2007, employees of Telit's Italian subsidiaries received defined benefit pension arrangements under which employees were entitled to retirement benefits 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 as 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 as at 1 January 2007 is unfunded. The actuarial present value of this frozen defined benefit obligation, were measured using the unit credit method. The majority of the employees are still paid under the Italian government defined contribution plan and the Company only accrues for the future termination indemnity. 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 mostly 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 the Group bears no material actuarial risk. 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. The liability in respect of accrued severance pay for the Israeli resident employees is $39,000 (2012: $16,000) and the charge to the statement of comprehensive income in the year is $26,000 (2012: $27,000). C. The Group's liability for severance pay for APAC resident employees is calculated pursuant to the local severance pay law, based on the most recent salaries and term of employment. The actuarial present value of the related current service cost and curtailment loss was measured using the traditional unit credit method. D. The IAS 19 disclosures in respect of the Group's unfunded defined benefit obligations in Italy and APAC are detailed further below. Expense recognised in the statement of comprehensive income Interest cost Current service costs 2013 $'000 2012 $'000 116 429 545 131 358 489 The amount included in the balance sheet arising from changes in the present value of the defined benefit scheme obligation for Telit EMEA and Telit APAC are set out below: Present value of defined benefit scheme obligation 1 January Current service costs and interest Contributions paid by the Company Actuarial gains Translation adjustments 31 December 2013 $'000 2012 $'000 3,656 545 (144) (466) 113 3,704 2,785 489 (288) 521 149 3,656 75 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 19. POST-EMPLOYMENT BENEFITS (continued) The financial assumptions used to determine the present value of the defined benefit scheme were as follows: Discount rate Expected salary increase rate Inflation 2013 3.17% /4.50% 3.00% /5.00% 0.00% /2.00% 2012 2.70% /3.93% 3.00% /5.00% 0.00% /2.00% The experience adjustments arising on the plan liabilities at the balance sheet date, totalled $19,318 (2012: $377,419) and the expected contributions to be paid in 2014 total $132,204. Historical information Present value of the defined benefit scheme obligation Experience adjustments arising on the plan liabilities 3,704 19 3,656 377 2,785 163 2,869 241 2,014 206 2013 $'000 2012 $'000 2011 $'000 2010 $'000 2009 $'000 NOTE 20:- CURRENT LIABILITIES Short-term bank loans and other borrowings Current maturities of long term loans Total short-term borrowing from banks and other lenders Trade creditors (i) Due to Group undertakings Provisions Accruals and other current liabilities Group 2013 $'000 10,802 2,988 2012 $'000 22,904 1,389 13,790 24,293 51,860 - 1,217 15,756 38,883 - 2,254 11,584 Company 2013 $'000 2012 $'000 - - - 1,112 39,163 - 1,199 - - - 569 30,672 - 847 Total current liabilities 82,623 77,014 41,474 32,088 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 in 2013 was 92 days (2012: 75 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. 76 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 21:- CONTINGENT LIABILITIES Legal proceedings A. In October 2009, the Israeli customs authority began assessment proceedings regarding the value of products imported into Israel by Dai Telecom for the purpose of customs duties for the period from 2005 to 2008. On April 21, 2010, an assessment was served on Dai Telecom demanding additional import taxes relating to (1) the declared value of the imported products equal to the royalties paid by Dai Telecom to Telit Italy in connection with the use, by Dai Telecom, of the trademark and the trade name "Telit" (the "Royalties Issue") and (2) the declared value of the imported products equal to development fees paid to the Korean manufacturer of the products imported by Dai Telecom, while some of the development was carried out outside of Israel (the "Development Fees Issue"). In total, the assessment was for approximately $3.2 million excluding $1.5 million deductible VAT, with the Royalties Issue being the major part of the assessments. On July 24, 2012 Dai Telecom signed a settlement agreement with the customs authority pursuant to which Dai paid $90,000 and the customs authority dropped all claims under the Development Fees Issue. Thereafter, the customs authority issued a new assessment with respect to the Royalties Issue only in the total amount of $3.9 million excluding $1.4 million deductible VAT. On March 14, 2013 Dai filed an appeal to the assessment in the Tel Aviv District Court. On July 19 2013, following an agreement between the Company and the Israeli Customs Authority, the court dismissed all proceedings in this matter, without any payment required to be made by the Company. B. On 13 January 2012, M2M Solutions LLC, a company allegedly incorporated under the laws of the State of Delaware, USA ("M2M"), filed a complaint in the United States District Court for the District of Delaware (the "Court") against Motorola Solutions Inc. ("Motorola"), the Company and Telit Wireless Solutions, Inc. ("Wireless" and together with the Company "Telit"), asserting that Motorola allegedly infringed one patent and the Telit defendants allegedly infringed two patents allegedly owned by M2M (the "Complaint"). M2M asserted that the products of the Company and Wireless allegedly infringed, and continue to infringe, one or more of the claims covered by the asserted patents and asked the Court to award damages as well as to issue an injunction prohibiting the Company and Wireless from selling any allegedly infringing products in the future. Both Telit and Motorola answered M2M's complaint denying the allegations of patent infringement and also asserted affirmative defences including non-infringement, patent invalidity, improper inventor and lack of patent ownership. In connection with the Complaint, on 2 February 2012, the Company received a letter from Motorola asserting that the Company is allegedly required to indemnify Motorola pursuant to provisions of an asset purchase agreement pursuant to which Wireless purchased the assets of Motorola Israel Ltd. On 14 February 2012, the Company, together with Wireless, signed a Tolling Agreement with Motorola and Motorola Israel Ltd. agreeing, among other things, that while the lawsuit was pending, none of the parties would make claims against each other arising from the causes of action asserted by M2M or seek any cost recovery or indemnity. During 2013, the parties were engaged in pre-trial motions. On September 12 2013, the Markman hearing was held and the parties’ positions were presented to the Court, following which, on November 12 2013, the Court entered its claim construction order, which invalidated one of the asserted patents as indefinite. On January 24 2014, the Court upheld its earlier construction of one claim term, and immaterially amended the second claim term. 77 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 21:- CONTINGENT LIABILITIES (continued) In the opinion of the Company’s management based, among other things, on the opinion of its professional advisers, and as M2M’s expert has not disclosed the amount of damages it seeks, no provision is considered necessary C. On December 11, 2012 the Company and its subsidiary, Telit Communications S.p.A (collectively, "Telit") filed a complaint in the United States District Court for the Eastern District of New York against Mentor Graphics Corporation ("Mentor Graphics"), an Oregon corporation, asserting that Mentor Graphics had sought unjustified license fees from Telit in breach of a license agreement entered into between Telit Communications S.p.A and Mentor Graphics Ireland Ltd. on or about May 3, 2003. Telit seeks declaratory judgment and preliminary and permanent injunctions against Mentor Graphics. On or about February 11, 2013, Mentor Graphics Corporation interposed defenses and counterclaims against Telit, including for copyright infringement, breach of contract, and equitable claims for relief in connection with the license agreement and based on Mentor Graphics software related to Telit’s purchase of certain assets of Motorola Israel Ltd. The counterclaims seek unspecified compensatory, actual, and statutory damages, as well as injunctive and declaratory relief. During 2013, the parties were engaged in pre-trial motions. Telit intends to continue to contest the counterclaims vigorously and to seek the remedies included in its complaint. D. The Group is currently the subject of on-going tax audits in respect of tax returns made in certain jurisdictions. The calculation of the Group’s charges to taxation, including income tax, employment tax, sales taxes and other taxes involves the exercise of judgment in respect of certain items whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a formal legal process. The probable outcome of the tax audits has been considered in determining the appropriate level of provision for such taxes. NOTE 22:- COMMITMENTS AND GUARANTEES Operating lease commitments 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 Above five years Minimum lease payments under operating leases charged to the statement of comprehensive income for the year Land and buildings 2012 2013 $'000 $'000 Other 2013 $'000 2012 $'000 2,045 5,557 - 7,602 1,791 3,085 89 4,965 607 433 - 1,040 687 883 - 1,570 1,794 924 1,059 869 Operating lease payments represent rentals payable by the Group for certain of its office properties. 78 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 22:- COMMITMENTS AND GUARANTEES (continued) Guarantees and liens A. B. The Company provided guarantees of up to $29.9 million to certain suppliers of the Group to sustain credit lines to be granted by the suppliers in respect of purchases made. The Company provides guarantees to certain banks in Italy, Israel and Korea, to sustain credit lines granted by those banks to the Group's subsidiaries. The guarantees are for a total amount of $99.2 million but shall not exceed the amount of current borrowing from these banks. C. The Company has provided unlimited guarantees to suppliers of Telit Brazil and Dai Telecom covering all of their undertaking to said supplier according to the agreement between these parties. NOTE 23:- PROVISIONS A provision is recognised when the Group has a legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made. The Company's management does not expect that certain legal matters for which provision was recognised will be settled within 12 months and therefore the provision for such legal matters was included in non-current liabilities. Balance at 1 January 2013 Utilized in the year Provided in the year Exchange differences Balance at 31 December 2013 Classified as: Current liabilities Non-current liabilities Tax (A) $'000 Warranties (B) $'000 Other (C) $'000 1,260 (308) - 4 956 956 - 956 249 - - 12 261 261 - 261 2,473 (745) 468 40 2,236 - 2,236 2,236 Total $'000 3,982 (1,053) 468 56 3,453 1,217 2,236 3,453 A. The Group has been subject to tax audits and is currently involved in tax litigation in Italy. In addition, in 2011, Telit Communications S.p.A. received assessments and/or penalty notices for the years 2004, 2005 and 2006 in the approximate aggregate amount of $2.0 million. The Company is in various stages of appealing such assessments and penalty notices. In 2012 Telit received assessments, and/or penalty notices and/or R&D recovery deeds for the years 2007 and 2009 in the approximate aggregate amount of $1.7 million. The Company is in various stages of appealing such assessments and penalty notices. In 2013 Telit received a Vat assessment for the year 2004, and two assessments for the years 2008 and 2009 in the approximate aggregate amount of $1.8 million. The Company is in various stages of attempting to settle or otherwise to appeal such assessments. Telit Wireless Solutions S.r.l received tax assessments from the Italian Tax Authority for the years 2006 and 2007 in the approximate aggregate amount of $0.85 million (€0.62 million). The Company paid a nominal amount in settlement of the 2006 tax assessment and settled the 2007 tax assessment in February 2012 based on the opinion of its legal and tax advisors by payment of $0.3 million (€0.24 million). In 2013 Telit Wireless Solutions S.r.l received tax assessments for the years 2008 and 2009 in the approximate aggregate of $1.5 million. The Company is in various stages of attempting to settle or otherwise to appeal such assessment. 79 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 23:- PROVISIONS (continued) B. The Group provides warranties on the sale of its m2m products for a period of 12 to 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. C. The Group is involved in various legal or other proceedings incidental to the ordinary course of its business. Management believes, based on the opinions of the legal advisers handling the different claims, that the provisions recorded in the financial statements in connection with said claims are sufficient under the circumstances, and that none of these proceedings, individually or in the aggregate, will have a material adverse effect on the Group's business, financial position or operating results. NOTE 24:- OTHER LONG-TERM LIABILITIES Earn out from acquisitions (a) (b) Other (C) Group 2013 $'000 303 66 369 2012 $'000 3,282 90 3,372 a. During 2012, the Company reassessed the fair value of the contingent consideration related to the acquisition of GlobalConect Ltd in 2011 and therefore decreased the liability in the amount of $85,000 to $115,000. During 2013, the Company reassessed the fair value of the contingent consideration related to the acquisition of GlobalConect Ltd in 2011 and therefore decreased the liability in the amount of $115,000 to zero. b. c. For contingent consideration included in other long-term liabilities related to the Navman acquisition, see note 2(D). For contingent consideration included in other long-term liabilities related to the acquisition of CrossBridge Solutions Inc., see note 2(C). In July 2013, the Company signed an agreement with the shareholders of CrossBridge Solutions Inc. according to which it paid the shareholders an earn out in the amount of $1.15 million, instead of the earn out amount of $2.75 million which was due to be paid according to the share purchase agreement signed on December 2012. As at 31 December 2012 the Group had outstanding a €3.0 million interest rate swaps that started on 10 January 2008 and has an end date of 12 January 2013. The Group pays a fixed rate of interest and receives floating. The fair value of the derivative has been determined to be $46,904. The fixed interest rate payable by the Group is Euribor + 1%. As of 31 December 2013 the balance is zero. 80 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 25:- SHARE-BASED PAYMENTS The Group and Company operate a share-based option plan for executive directors, senior managers and employees. On 4 January, 2012, executives and employees of the Company and its subsidiaries were granted 150,000 options to purchase approximately 0.15 per cent of the Company's issued and outstanding shares at the time, at an exercise price of £0.80 per share. The options vest in three equal annual instalments starting from 4 January 2013 and expire five years from the date of grant. On March 26, 2012 a director of the Company was granted 150,000 options (the "Additional Options"). Such options were related to an earlier grant by the Company to such director on 19 September 2011 of 150,000 options to purchase approximately 0.15 per cent of the Company's issued and outstanding shares at the time, at an exercise price of £0.80 per share, such options vesting in three equal annual instalments starting from 19 September 2012 and expiring five years from the date of grant. (the "Original Options"). Since at the time of the grant of the Original Options the Company had nearly reached the overall limit on the granting of options over newly issued shares contained in the rules of its unapproved option scheme, the Remuneration Committee resolved that, as the overall limit under the scheme increases, the director would from time to time be formally granted the Additional Options (either in one tranche or in a series of separate grants) at the same exercise price and on the same terms as the Original Options with the result that the Additional Options at the time of grant representing approximately 0.15 per cent of the Company's issued and outstanding shares, are exercisable at £0.80 per share, such options vesting in three equal annual instalments starting from 19 September 2012 and expiring five years from 19 September 2011. On March 19 2013, a director of the Company was granted 600,000 options, at an exercise price equal to 80p with a three year vesting schedule starting on 19 September 2011, such that vesting occurs in three equal instalments on each of 19 September 2012, 2013 and 2014 and shall expire on 19 September 2016. Such options were related to an earlier resolution by the Company, dated September 19 2011 (the "Original Resolution"), that approved the future grant of 600,000 options, conditional upon the Company successfully completing a public fundraising on a major stock exchange, at an exercise price equal to 80p (the "Exercise Price"), with a vesting schedule of 3 years, starting on 19 September 2011. The Company decided to amend the Original Resolution, so that the grant of options not be contingent upon the Company completing its listing on a major stock exchange. Since at the time of the grant of the options (March 19 2013) the Company had nearly reached the overall limit on the granting of options under the Company's share options plan, the remuneration committee resolved that, as the overall limit under the plan increases, the director would from time to time be formally granted additional options (either in one tranche or in a series of separate grants) at the same exercise price and on the same terms as aforesaid. The number of outstanding options as at 31 December 2013 was 12,710,387, equal to approximately 12.15% of the issued share capital of the Company. 81 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 25:- SHARE-BASED PAYMENTS (continued) The number and weighted average exercise prices of share options are as follows: Number Weighted average exercise price (pence) 2013 2012 2013 2012 Outstanding at beginning of year Granted during the year Exercised during the year Lapsed during the year Outstanding at year end 13,529,905 600,000 (1,288,486) (131,032) 12,710,387 13,913,508 300,000 (625,438) (58,166) 13,529,905 Exercisable at year end 11,011,547 8,968,567 0.43 0.80 0.27 0.63 0.45 0.40 0.42 0.80 0.23 0.32 0.43 0.33 The weighted average share price at the date of exercise for share options exercised in 2013 was £1.17 (2012: £ 0.56). The options outstanding at 31 December 2013 have an exercise price in the range of £0.20 to £0.905 (2012: £0.20 to £0.905) and a weighted average contractual life of 1.3 years (2012: 2.3 years). The Group recognised a total expense of $742,000 in respect of equity settled share based payment transactions for the year ended 31 December 2013 (2012: $1,008,000). The Company charge for the year was $658,000 (2012: $790,000). The fair value of services received in return for share-based options is measured by reference to the fair value of the share-based option granted. The estimate of the fair value of the services received is measured using the Black- Scholes pricing model. The assumptions used in the measurement of the fair values at the grant date of the options are as follows: Grant date 29 January 2009 25 May 2010 30 June 2010 1 April 2011 1 April 2011 6 April 2011 27 July 2011 19 September 2011 4 January 2012 26 March 2012 19 March 2013 Share price (pence) Exercise price (pence) Expected volatility (%) Option life (years) Risk free rate (%) Dividen d yield (%) 0.185 0.29 0.33 0.845 0.845 0.90 0.905 0.735 0.465 0.526 0.835 0.20 0.25 0.32 0.81 0.845 0.81 0.905 0.80 0.80 0.80 0.80 60 60 60 60 60 60 60 60 60 60 60 5 5 5 5 5 5 5 5 5 5 5 2.04 2.01 1.79 2.24 2.24 2.24 1.56 0.85 0.85 0.85 0.85 0 0 0 0 0 0 0 0 0 0 0 Expected volatility is estimated by considering historic average share price volatility. Employee turnover before vesting/non- vesting condition (%) Fair value per option (pence) 25% 20% 20% 20% 20% 20% 20% 0% 20% 0% 0% 0.05 0.11 0.12 0.31 0.30 0.31 0.32 0.24 0.11 0.24 0.37 82 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 26:- BORROWINGS Group 2013 $ '000 2012 $'000 Company 2013 $'000 2012 $'000 Unsecured – at amortized cost Current maturities of long term loans Other long-term loans Total Secured – at amortized cost Short-term bank loans and other borrowings Total Disclosed in the financial statements as: Current borrowings Non-current borrowings Total 2,988 22,134 25,122 10,802 10,802 13,790 22,134 35,924 1,389 9,839 11,228 22,904 22,904 24,293 9,839 34,132 - - - - - - - - Borrowings breakdown Working capital borrowing (1) Long term loan (2) Governmental loan (3) Mortgage loan (4) Total Group 2013 $ '000 2012 $'000 Company 2013 $'000 2012 $'000 10,962 7,482 13,780 3,700 35,924 23,189 - 6,924 4,019 34,132 - - - - - - - - - - - - - - - - (1) Short term borrowings, for less than one year, arising from invoice advances used for working capital financing. (2) Representing two long term loans from banks in Italy- (i) $6.2 million with interest at a rate of Euribor 3 months plus 3.25%, repayable in 20 quarterly instalments that commenced in September 2013, and (ii) $1.3 million with an interest rate of Euribor 6 months plus + 5.5%, repayable in 6 semi-annual instalments that will commence in December 2020. (3) Representing preferential two long term loans (i) $7.7 million with fixed-rate of 0.5%, repayable in 14 semi-annual instalments that will commence in December 2016, supported by the Italian MISE (Ministry of Economic Development) to develop an innovative platform for the application of M2M technologies and, (ii) $6.1 million with a fixed-rate of 0.75%, repayable in 10 annual instalments that commenced in March 2009, supported by the Ministry of Trade and Commerce in Italy, provided in connection with the Group’s business development program in Sardinia. (4) Representing a preferential rate loan from a regional fund in Italy provided in connection with the Group’s acquisition of the campus used for the Company's main R&D facility in Trieste, Italy. The mortgage loan is denominated in Euro, attracts interest at a rate of Euribor 6 months less 20% and is repayable in 15 semi-annual instalments that commenced in June 2012. The directors believe, based on the past performance of the relevant subsidiaries and the history of the relationships with the lending banks, that the credit facilities will remain available to the Group in the foreseeable future and that therefore the Group will be able to continue to fund its operations from these credit facilities. 83 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 27:- FINANCIAL RISK MANAGEMENT Financial risk management is an integral part of the way the Group is managed. The Board establishes the Group's financial policies and the Chief Executive establishes objectives in line with these policies. It is the Group's policy that no trading in financial instruments is undertaken. In the course of its business the Group is exposed mainly to financial market risks and credit risks. Financial market risks are essentially caused by exposure to foreign currencies and interest rates. Foreign currency risk The Group operates in a wide number of geographic areas. While change in currency might affect our revenue and gross profit, we estimate the impact on our operating profits not material. Foreign exchange exposure arises where the Group's companies transact in a currency different from their functional currency. 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. 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: US Dollar Euro ILS Other Assets 2013 $'000 2012 $'000 Liabilities 2013 $'000 2012 $'000 27,305 3,248 4,531 39 23,031 1,920 2,910 172 36,615 687 801 405 27,828 341 369 - The following table details the Group's sensitivity to a 10% change in US dollar against the respective foreign currencies. 10% represents management's assessment of the possible change in foreign exchange rates. The sensitivity analysis 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 US dollar strengthens against the respective currency. Impact on profit or loss of a 10% change Group 2013 $'000 2012 $'000 338 50 The impact on equity would be equal and opposite of the impact on the profit or loss. Interest rate risk Interest rate risk comprises the interest cash flow risk resulting from short-term borrowings at variable rates. The Group's working capital is funded through short-term borrowings at variable rates of interest. Cash at bank earns interest at floating rates based on daily bank deposit rates. As a result, material fluctuations in the market interest rate can have an impact on the Group's financial results. 84 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 27:- FINANCIAL RISK MANAGEMENT (continued) 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% 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 $240,000 (2012: $119,000); there is no material impact upon equity. This is mainly attributable to the Group's exposure to interest rates on its variable rate borrowings. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group, and arises principally from the Group's trade receivables. The Group's trade receivables are principally derived from sales to customers in Israel, Italy, the USA and Korea. The Group performs ongoing credit evaluations of its customers and until 2010 did not experience any material losses. Following recognition of material bad debt during 2011, the Group began insuring part of its trade receivables balance. Allowance for doubtful accounts is determined with respect to those amounts that the Group has determined to be doubtful from collection. Credit risk associated with the Group's cash and cash equivalents and restricted cash deposits is managed by placing funds on deposit with internationally recognised banks with suitable credit ratings. 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 Due from Group undertakings Other long term asset Loan (or investment in) to subsidiaries Guarantee provided subsidiary's borrowings to banks on Group 2013 $'000 2012 $'000 Company 2013 $'000 2012 $'000 23,886 291 63,118 - 807 - - 21,044 365 56,502 - 568 - - 3,068 88 696 13,504 232 20,182 99,241 4,418 296 1,109 8,907 18 19,661 32,148 Activities that give rise to credit risk and the associated maximum exposure include, but not limited to:  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 would have to pay if the guarantee is called on, which may be greater than the amount recognised as a liability as at 31 December 2012 where such guaranteed borrowings were not fully drawn at that date. 85 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 27:- FINANCIAL RISK MANAGEMENT (continued) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. 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. 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 excluding interest that will accrue to those liabilities. Group Weighted average effective interest rate % 2013 Less than 1 year $'000 Fixed rate Variable rate 0.61% 3.14% 1,193 12,597 Company 2012 Weighted average effective interest rate % Less than 1 year $'000 More than 1 year $'000 2.93% 2.13% 5,696 18,597 5,791 4,048 More than 1 year $'000 16,345 5,789 Weighted average effective interest rate % 2013 Less than 1 year $'000 More than 1 year $'000 Weighted average effective interest rate % 2012 Less than 1 year $'000 More than 1 year $'000 Guarantees - 99,241 - - 32,148 - Fair value of financial instruments The financial instruments held by the Group are primarily comprised of non-derivative assets and liabilities (non- derivative assets include cash and cash equivalents, trade accounts receivable and other receivables; non-derivative liabilities include bank loans, trade accounts payable, other payables and other current liabilities). Due to the nature of these financial instruments, there is no material differences between the fair value of the financial instruments and their carrying amount included in the financial statements. 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 26, 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. 86 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 27:- FINANCIAL RISK MANAGEMENT (continued) Gearing Ratio The Group defines debt as both long and short term borrowings as detailed in note 26. 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: Cash and cash equivalent Restricted cash deposits Total cash Current borrowings Non-current borrowing Total borrowings Net debt Shareholders' equity Net debt to equity ratio Group 2013 $'000 2012 $'000 23,886 291 24,177 (13,790) (22,134) (35,924) (11,747) 79,025 14.86% 21,044 365 21,409 (24,293) (9,839) (34,132) (12,723) 65,991 19.28% The Company is not subject to any externally imposed capital requirement. Fair value hierarchy All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:  Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities  Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable  Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable As of December 31, 2013 the Company does not have any financial instruments at the Level 1 and Level 2 categories. Level 3 instruments included liabilities related to contingent consideration in business combination. During the year ended December 31 2013 the change in the fair value of such liabilities was immaterial (see also note 24) The management assessed that cash and short-term deposits, trade receivables, trade payables, bank overdrafts and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. Long-term fixed-rate and variable-rate borrowings are evaluated by the company based on current interest rates. As at 31 December 2013, the carrying amounts of loans were not materially different from their calculated fair values. 87 Telit Communications PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2013 NOTE 28:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES Transactions with subsidiaries Transactions between the Company and its subsidiaries represent related party transactions. Transactions with subsidiaries have been eliminated on consolidation. Outstanding balances at the year-end are unsecured and settlement occurs in cash. Related party transactions between the Company and its subsidiaries are summarized below: (a) Accounts receivable - See note 16. (b) Accounts payable - See note 20. (c) Trading transactions: Royalties * Cost of sale Interest income 2013 $'000 2012 $'000 4,809 1,651 1,882 3,923 1,081 806 * The Company signed a license agreement with some of its subsidiaries according to which the subsidiaries shall pay royalties of a certain percentage of their revenues in consideration of their use of the Company's trade name and trademarks. In addition, the Company signed an agreement with certain of its subsidiaries for allocation of some shared costs. Transactions with key management personnel A. Key management personnel are determined as the directors of Telit Communications PLC. Details of transactions with the directors and their compensation are detailed in the Report on Directors' Remuneration on pages 19 to 25. There are no outstanding balances as at the year end. B. On August 1, 2011, the Company waived any and all claims it then had or in the future may have against the Company's Chief Executive, Oozi Cats in relation to certain indemnification letters provided to the Company by Mr. Cats and to any other tax related claims in connection with Mr. Cats' service and employment agreements. Pursuant to the indemnification letters, Mr. Cats had personally undertaken to satisfy in full certain potential tax liabilities if applicable. The underlying potential liability stems from possible tax exposures relating to Mr. Cats' past and current employment and service arrangements. After due and careful consideration of the matters, our Board of Directors authorized the release of Mr. Cats from any liability under those indemnification letters. NOTE 29:- INFORMATION ON THE COMPANY As permitted by the Companies Act 2006, the profit and loss account of the Company is not presented in this Annual Report. The loss for the year amounted to $4,274,000 (2012: loss of $6,202,000). 88 Company Information Directors, Secretary and Advisers Company Registration No. 05300693 Directors Enrico Testa, Chairman Oozi Cats, Chief Executive Yosi Fait, Finance director Davidi Gilo, Independent Non-executive director Ram Zeevi, Independent Non-executive director Nicola Miglietta, Independent Non-executive director Company Secretary Ron Belkine Registered Office 7th Floor, 90 High Holborn, London WC1V 6XX Nominated Adviser And Broker London EC2V 7QR Canaccord Genuity Limited 88 Wood Street Solicitors Olswang 7th Floor, 90 High Holborn London WC1V 6XX Independent Auditor Ernst & Young LLP 1 More London Place, London SE1 2AF Registrar Capita Asset Services 40 Dukes Place London EC3A 7NH 89 Telit Main Offices Worldwide Telit Wireless Solutions EMEA Telit Communications S.p.A. Via Stazione di Prosecco 5/B 34010 Sgonico, Trieste - Italy Phone: +39 040 4192 491 Fax: +39 040 4192 383 Via San Nicola da Tolentino n.1/5 , Rome Phone: + 39 06 4204601 Fax: +39 06 42010930 Telit Wireless Solutions United Kingdom Regus Building, Lakeside House 1 Furzeground Way Stockley Park East Uxbridge UB11 1BD United Kingdom Phone: +44 870351 7290 Fax: +44 870351 7291 Telit Wireless Solutions Israel 10 Habarzel Street Tel Aviv 69710, Israel Phone: +972 3 7914000 Fax: +972 3 791 4008 Telit Wireless Solutions North America 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 90 Telit Wireless Solutions Latin America Rua Cunha Gago, 700 - cj 81 Pinheiros São Paulo - SP, 05421001 Brazil Phone: +55 11 2679 4654 Fax: +55 11 2679 4654 Telit Wireless Solutions APAC Telit Wireless Solutions Co., Ltd. 12th Floor, Shinyoung Securities Bld., 34-12, Yeouido-dong, Yeongdeungpo-gu, Seoul, Korea Phone: +82 2 368 4600 Fax: +82 2 368 4606 Telit Wireless Solutions (Hong Kong) Limited Unit 3, 25/F, Greenfield Tower, Concordia Plaza, 1 Science Museum Road, Kowloon Hong Kong. Phone: +852-2620 5818 Fax: +852-2620 5686 Telit Wireless Solutions for China Rm. 2106, East Bld. Of Coastal City No.3, Hai De Avenue Nanshan, Shenzhen, 518059, China Phone: +86 755 8627 1598 Fax: +86 755 8627 0217 91 

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