11425 zetes annual report 2013 en board report light

ZETES ANNUAL REPORT 2013 | CREATING TOMORROW BY INVESTING TODAY

"INNOVATION IS OUR PASSPORT TO THE FUTURE."

Ladies and Gentlemen, dear Shareholders, The Board of Directors is please to present you with its report for the 2013 financial year. The present report covers both the unconsolidated (parent company) and consolidated financial statements. The Board attests that, to its knowledge, the unconsolidated and consolidated annual financial statements give a true and fair view of the net assets, financial situation and results of Zetes Industries SA and, in the case of the consolidated accounts, of the companies included in the consolidation. It also attests that the management report on the consolidated financial statements includes a true and fair description of the development, operational performance and position of the company, including the companies included in consolidation, and a description of the principal risks and uncertainties with which they are confronted.

The consolidated financial statements are drawn up in euros (EUR), in accordance with the IFRS standards adopted by the European Union Commentary on the development of the company's business and its current situation Given the limited operational activity of the parent company Zetes Industries SA, it is the consolidated financial statements, discussed below, that give an accurate situational view of the Zetes Group (Zetes Industries SA and its subsidiaries). The consolidated financial statements are presented before dividend payment, which will be agreed at the Ordinary General Meeting of 28th May 2014.

After the volatile order-taking and lower profitability of 2012, the Goods ID division significantly improved its performance in 2013, particularly in the second half. This improvement is largely due to good cost control. At the same time, the division

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continued work on implementing its strategy based on developing its six key solutions.

Sales revenue in the People ID division declined slightly compared with 2012, owing to lower activity in short-term projects, which affected second half performance.

The conclusion and preparation in 2013 of several long-term contracts reinforces the company's confidence in the positive development of People ID for years to come.

Balance sheet and cash flow The significant investments in Goods ID (development of solutions, equipment leased to customers) and in People ID (eVisa infrastructure in Senegal and Cote d'Ivoire, production site and backup for the Belgian driving licence, production infrastructure for the Belgian passport and other projects) have significantly impacted the Group's balance sheet.

Besides the increase in fixed assets (up by a net € 7 million compared with December 2012), the company has also devoted a significant portion of its resources to preparing to undertake People ID contracts.

This preparation work also explains the evolution of the deferred charges account (relating to signed contracts) and of the account relating to construction contracts, together up more than € 1.9 million on 2012. By spreading the cost of a project over its lifespan, these two accounts ensure consistent profitability over time.

These efforts have obviously impacted the Group's indebtedness, moving from a positive cash position of € 7.5 million at the end of 2012, to a net debt position of € 3.0 million at the end of 2013. This increase is structural in nature, insofar as the increase in funding is tied to specific investments. At the same time, available cash has decreased slightly to € 10.6 million (against € 12.8 million in 2012).

Total assets increased by € 4.2 million from € 159.0 million to € 163.2 million.

The net working capital requirement has also increased to € 15.9 million against € 12.7 million at the end of 2012, mainly due to the impact of construction contracts.

Inventory is slightly lower at € 14.3 million, which is a good performance given the stability of the Group's sales.

"The solvency ratio remains very high at 47.23%."

With equity of € 77.1 million on total assets of € 163.2 million, the solvency ratio remains very high at 47.23% (48.8% in 2012 and 47.9% in 2011), despite the Company's decision, given management's confidence in the prospects of the Group, to distribute a dividend of € 2.9 million in 2013. Zetes attaches great importance to having a strong balance sheet structure as this allows it to bid for and, where appropriate, absorb very large deals.

The cash flow from operations is € 4.0 million, consisting of € 10.3 million generated in the income statement offset by the € -6.3 million used to increase working capital (a 'cash' variation). This significant increase is linked in particular to: • The increase in construction contracts and prepaid charges for People ID projects (€ 1.9 million) • Equipment leased out (€ 2.1 million of LT receivables, included in working capital) • A non-structural reduction in supplier payables (€ 2.3 million).

REPORT FROM THE BOARD OF DIRECTORS

Investments by Goods ID reached € 5.8 million, again up from previous years (€ 4.1 million in 2012). These investments break down into equipment for internal use (€ 2.4 million), assets related to operating leases (€ 0.6 million) and financial acquisitions (€ 0.3 million), plus capitalized development costs of € 2.6 million (against 1.8 million in 2012), linked to the Group's 6 flagship solutions. The investments in People ID are of course related to preparation work on the various longterm contracts. They are up significantly at € 4.8 million, against € 1.2 million in 2012.

In total, investments total a historical high of € 10.7 million. They have been partfunded by bank borrowing, with the balance coming from internally generated funds.

In 2013, the Group acquired € 0.2 million of its own shares. At 31st December 2013 it held 234,322 treasury shares (4.35%).

Income statement Group sales revenue amounted to more than € 211 million, virtually unchanged compared with 2012 (-1.2%). The share of recurring revenues remains very high at over 40% of consolidated revenue.

Recurring revenues consist of income from long-term contracts ("Build and Operate") in People ID and from maintenance and consumables in Goods ID. The contribution made by the two divisions to the 2013 results differs considerably.

Goods ID significantly improved its performance. Although sales and gross margin were very similar to 2012, current EBITDA increased by 22.4% thanks to

"Group sales revenue amounted to more than € 211 million, virtually unchanged compared with 2012."

Board of Directors From top to bottom and from left to right: Floris Vansina, Jean-François Jacques, Paul Jacques, Jean-Marie Laurent Josi, Hiram Claus, Pierre Lambert, José-Charles Zurstrassen, Michel Allé, Alain Wirtz, Olivier Gernay

good cost control (-4.3%). In People ID, the second half of the year was marked by lower "Build and Transfer" income, resulting in a 5.5% contraction in sales and a 22.3% reduction in EBITDA. This was, however, a temporary phenomenon and in 2013, the division also signed major long-term contracts. These are at the development stage and will support good income growth in 2014.

Recurring EBITDA amounted to € 13.5 million in 2013, down slightly by 1.5% from 2012.

Non-recurring charges amounted to a net € 0.8 million. These relate mainly to the restructuring programme in Goods ID, to align the division with its more softwareoriented strategy.

Depreciation on non-current assets of € 5.0 million is very similar to that of 2011 and 2012. Write-downs on inventory (€ 0.6 million) and receivables (€ 0.2 million) are in line with last year's figures. Amortization of R&D amounts to € 1.7 million.

EBIT reached € 5.9 million in 2013, 71% of which was generated in the second half.

The net financial result is composed of bank charges (€ 274,000), cross-border payments and various guarantees such as bid or performance bonds, along with bank charges linked to investment finance, the foreign exchange result (€ - 273,000) and lastly, interest expenses (€ 229,000).

The total tax charge of € 0.94 million represents an effective tax rate of 21.6%.

Group net profit is € 3.4 million, down 3.6% on 2012.

Segment reporting Goods ID division 2013 ended much better than it started.

Order-taking began slowly, but the situation improved from summer time onwards, with contracts awarded for a number of large projects. The increased turnover is clearly reflected in current EBITDA, which nearly doubled between the first and second halves (from € 3.1 million to € 6.0 million).

A major source of orders continues to be the retail sector, because it is constantly

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MCL Mobility Platform receives a warm welcome

First references: Non-food Retail and Transport

looking to increase productivity levels through better supply chain traceability.

Zetes' solutions (ZetesMedea and ZetesChronos) provide an answer to the problem and deliver a rapid return on investment.

Competition between manufacturers is maintaining the strong pressure felt on margins from mobile terminals and other equipment. The sale of services (life cycle management) and software (in the form of services and increasingly, licences) allows Zetes to offset this pressure and maintain its margins. Good cost control linked to productivity gains enabled Zetes to improve its performance, even in the absence of income growth.

In this way the EBITDA/sales ratio increased by 1% from 4.3% in 2012, to 5.3% in 2013.

At the same time, the Division continued to invest in its six key solutions, which capitalize on its core fields of expertise. The first commercial successes validate Zetes’ choice of strategy. The MCL Mobility Platform is proving popular with customers, to whom it offers much more effective management of mobile devices. The first references are now installed in the non-food retail and transport sectors. The six key marketing solutions have already served to offset the constant pressure on hardware prices and margins in the 2013 financial results and Zetes expects to demonstrate this to full effect in the 2014

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"Order-taking began slowly, but the situation improved from summer time onwards, with contracts awarded for a number of large projects."

results. Indeed, advance indicators, such as sales cycle tracking, show a clear increase in customer enquiry levels for these solutions.

Besides their impact on business in the countries concerned, changes in exchange rates, particularly between the South African rand and the euro, were unfavorable to the Goods ID division. At constant exchange rates, revenue would have increased by 1.9% and gross margin by 0.6%.

People ID division Sales revenues amounted to € 40.3 million, down 5.5% on 2012.

2013 was marked by impressive order taking for long-term contracts (i.e. Belgian passport, biometric visa in Senegal, Gambian passport). But with the exception of Senegal, where the system is in place and has been generating revenue since July 2013, other contracts have tied up large amounts of resources for development and

preparation and will only begin generating revenue during the course of 2014.

Similarly, the 2013 sales figure lacks a major "Build and Transfer" project with a high hardware component. These are generally contracts linked to the preparation of election cycles, for which electoral lists are prepared based on a biometric enrolment of the population. Both the conclusion and execution phases of the contract take place rapidly. Only two "Build and Transfer" projects were completed in 2013, one for Togo and the other for Guinea-Conakry.

Both consisted primarily of services, with limited income but high margins.

Overall in 2013, 80% of revenue came from "Build and Operate" contracts, giving a gross margin of 57.4%, reflecting the division's value-added strategy.

These long-term contracts are often concluded between governments that entrust Zetes with creating a population database and issuing the related identity documents or travel documents. Zetes looks after electronic ID card systems in Belgium, Israel and Portugal, as well as driving licences in Belgium. For a number of years now, Zetes has also managed the comprehensive biographical and biometric registration of Côte d’Ivoire citizens and the issuance (personalization) of their electronic passports.

REPORT FROM THE BOARD OF DIRECTORS

In 2013, the Gambian government awarded Zetes the concession for a similar passport system in Gambia ("Build and Operate" model). Then in August 2013, the Belgian Government tasked Zetes with issuing passports for Belgian citizens. The past months have been spent preparing for these contracts. Document issuance under both contracts will begin in the second quarter of 2014.

"2013 was marked by impressive order taking for long-term contracts."

The breakdown of sales by half year clearly reflects the lack of "Build and Transfer" income in the second half. In addition, from July 2013, the division has internalized the secure distribution of identity documents to the Belgian municipalities. Until then, distribution was undertaken by an independent transportation company, the costs of which were reflected in purchases. This has had the effect of increasing gross margin in the second half, with a corresponding increase in operating expenses.

With current EBITDA down 22.3% compared with 2012 at € 7.7 million, the current EBITDA to sales ratio remained at a high at 19.1% (23.2% in 2012). This sales

400,000

ratio is explained by the very high services component in the "Build and Transfer" contract sales and the capital-intensive nature of the "Build and Operate" contracts. The difference between EBITDA and EBIT (amounting € 6.0 million) is primarily due to the depreciation on these investments.

Goodwill In the first half, Zetes completed a new asset deal, acquiring a team of 10 specialists in e-commerce logistics processes, along with the intellectual property and customer base of the company L4 Epsilon in France (€ 0.2 million).

This acquisition generated a small additional goodwill of € 45,725. In this way goodwill is virtually unchanged from 2012, at € 39.9 million.

The goodwill validation test (review of the recoverable amount) did not reveal a need to record impairment losses.

Belgian passports a year

"The organizational structure introduced in 2012 makes it possible to better utilize the highly professional knowledge and skills available across the Group."

Zetes also purchased 15% of the shares of Zetes Industries Israel for € 0.2 million.

This did not generate additional goodwill.

Human resource management and environmental actions

Border control

In 2013, the Group's workforce grew by 4.5%. In addition to the French acquisition within Goods ID (see above), the People ID Division has handled the distribution

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ZETES ANNUAL REPORT 2013 | CREATING TOMORROW BY INVESTING TODAY

of identity documents to the Belgian municipalities using internal resources.

With Zetes also increasing its presence in West Africa, the People ID division has grown by 37 employees. In total, the Group's workforce expanded from 1,070 employees at the end of 2012, to 1,118 at the end of 2013.

As with intellectual property, human resources constitute a key asset of the Group.

The organizational structure introduced in 2012 makes it possible to better utilize the highly professional knowledge and skills available across the Group, particularly in the field areas of the six key solutions.

The company and its employees are aware of their civic responsibility in environmental matters and strive daily to

implement responsible practices in this area, including limiting travel, energy saving, waste management and the like.

Principal risks and uncertainties The Board of Directors presents its assessment of the risks facing the Company in the 'Financial information and corporate governance' section of the annual report.

These risks relate to pending litigation, human resources, the environment, exceptional events, acquisitions, new products, technologies and fraud. The same notes also describe the Group’s exposure to prices, credit, liquidity and cash availability, foreign exchange and interest rate risks. To cover these risks, the Company has recourse to traditional financial instruments. It avoids overly complex instruments, which could have questionable transparency.

The instruments currently used are also described in the 'Financial information and corporate governance' part of the annual report.

Events after the closing date To date, there has been no specific postclosing event that influences the annual accounts submitted to the General Assembly.

Prospects for 2014 and description of events that could significantly influence the company's developments.

ZetesAtlas - BMS - France

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Goods ID Division has started 2014 with a stronger first quarter than in the previous two years. Macroeconomic indicators are improving and customers seem more willing to invest. All sectors are involved, even though the retail sector continues to drive investment. The Group's strategy is in place across all countries and Zetes is looking to harvest the first fruits, as planned, this year. Market interest in the various solutions remains substantial and Zetes will continue to invest in new features and functionality, to ensure its solutions remain as attractive as possible.

Zetes can also rely on its recurring business (25 to 30% of income depending on the subsidiaries’ degree of maturity). Until now, this has been based on maintenance and repair, as well as the sale of consumables (labels, ribbons, etc) and in some countries, it has also been reinforced by the rental income from solutions (managed services).

In People ID, visibility remains very good on all long-term contracts ("Build and Operate"). The Gambian and Belgian passports are scheduled to go into production in the second quarter of 2014.

All the other contracts are expected to contribute positively to the division’s performance.

Zetes started 2014 with a contract to deliver biometric kits ("Build and Transfer") for the Republic of Uganda. Other smaller projects are also running. Together, they will contribute to the achievement of budget targets for 2014.

In summary, the good performance of Goods ID, combined with short and longterm contracts in People ID, should produce significantly better results in 2014 than in 2013.

Research and development Development expenses in 2013 were € 2.8 million compared with € 1.8 million in 2012. These relate mainly to software development. The effort of converting the six key products into standardized products - and improving their functionality - will continue in 2013. This should lead to development costs of the same order as in 2013.

Branches The group’s activity is organized via local companies which are direct or indirect subsidiaries of Zetes Industries SA. Zetes Industries SA does, however, have a dormant branch in Ireland.

REPORT FROM THE BOARD OF DIRECTORS

€ 2.8 million

Corporate Governance Statement

of development costs

The Corporate Governance Statement is included in the 'Corporate Governance' section of the 2013 Annual Report. This Declaration includes, among other things, a description of the composition and modus operandi of the Board of Directors, the main features of the internal control and risk management systems, the composition and modus operandi of the Executive Committee, the composition and modus operandi of the Committees within the Board of Directors, the remuneration policy and most recent remuneration report of Zetes Industries SA with its social capital policy, the measures taken by Zetes Industries SA to comply with Belgian rules on market abuse, the Group Code of Conduct and dividend policy.

Conflicts of interest between directors and the company

ZetesMedea - CERP Rouen - France

No decision has come to the knowledge of the Board of Directors which has given rise to the application of articles 523 or 524 of the Companies Code.

the 'Financial information and corporate governance' section of the annual report.

Related party transactions

Article 74 of the law of 1 April 2007

Related party transactions during the period under review consist essentially of the remuneration of the Executive Committee (3 persons) in an amount of € 966,900 (compared with € 875,981 in 2012).

Transactions with companies linked to directors have been undertaken according to arm’s length principles. Details of related party transactions are included in

The information relating to article 74 of the law of 1 April 2007 on public takeover bids is given in the Corporate Governance Declaration section (Shareholding Structure sub-section) of the annual report.

"Goods ID Division has started 2014 with a stronger first quarter than in the previous two years."

Issue of subscription rights In 2013, the Company did not issue any subscription rights. The powers of the Board of Directors to issue or repurchase shares are set out in Articles 6 and 7 of the company by-laws.

Purchase of own shares In 2013, Zetes Industries SA acquired 18,553 of its own shares at an average price of € 15.61. At 31st December 2013 it held 234,322 own shares, representing 4.35% of the capital for a par value of €

2.2 million. These shares are retained for employee incentive schemes or business transactions involving exchanges of shares.

Audit Committee At 31st December 2013, the Audit Committee consisted of four non-executive directors, two of whom have independent status: • Gema SPRL, represented by Mr Michel Allé (Chairman of the Audit Committee, independent, non-executive director) • Mr Paul Jacques (independent, nonexecutive director) • Mr Hiram Claus (non-independent, non-executive director) • Floris Vansina BVBA, represented by Mr Floris Vansina (non-independent, non-executive Director).

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ZETES ANNUAL REPORT 2013 | CREATING TOMORROW BY INVESTING TODAY

The independence of Mr. Paul Jacques (who is unrelated to Jean-François Jacques) and Mr Michel Allé is guaranteed by the fact that none of them (or anyone with whom they are related) holds more than 10% of the voting rights of Zetes Industries SA. Their competence derives from their education and professional experience in the financial sector.

Statutory auditor’s report The consolidated financial statements of the company have been audited

by RSM Réviseurs d’Entreprises Bedrijfsrevisoren, represented by Mr. Laurent Van der Linden and Mr. Thierry Dupont. The statutory auditor has informed us that he will express an unqualified opinion.

Proposed appropriation of the results of the Group parent company, Zetes Industries SA The statutory (unconsolidated) income statement of Zetes Industries SA shows sales of € 5.7 million (€ 5.7 million in 2012) and a net profit of € 1.5 million (€ 1.1 million in 2012). With equity of € 60.9 million (before allocation of dividends), the company presents a very high solvency ratio of 92.8%. An abbreviated version of Zetes Industries SA’s statutory accounts is provided in the Annual Report (Financial

1,118

employees

ZetesChronos - An Post - Ireland

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ZetesChronos - Jerónimo Martins - Portugal

REPORT FROM THE BOARD OF DIRECTORS

Information section). The Board of Directors will be proposing that the company pays an ordinary dividend of € 0.55 gross per share (giving a payout ratio of 83.8% of the consolidated net profit), payable after the Annual General Meeting. Given the 234,322 treasury shares held on 31/12/2013, for which an unavailable reserve of € 3.6 million has been established, the Board proposes to allocate the results of Zetes Industries SA, as detailed in the statutory annual accounts of the Company, as follows:

Discharge of directors and auditors It is proposed to grant discharge to the directors and the statutory auditor.

Brussels, 31 March 2014 For the Board of Directors.

Alain Wirtz SA Represented by Mr Alain Wirtz Chief Executive Officer

Pierre Lambert Chief Financial Officer

In € Profit for appropriation

1 534 994

Profit for the year available for appropriation

1 465 753

Profit brought forward Withdrawal from equity

69 241 1 400 000

From capital and share premium account From reserves

1 400 000

Appropriation Transfer to legal reserve Gross dividend Profit to be carried forward

73 288 2 835 466 26 240

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