NETGEM ANNUAL FINANCIAL REPORT 2006

Transcription

1 NETGEM ANNUAL FINANCIAL REPORT 2006 Netgem S.A. Limited company with capital of 5,975, euros Registered office: 27 Rue d Orléans, Neuilly sur Seine (France) Tel: Fax: Website: 1

2 CONTENTS CHAPTER 1. STATEMENT ON THE ANNUAL FINANCIAL REPORT BY THE CHAIRMAN AND MANAGING DIRECTOR... 3 CHAPTER 2. ANNUAL REPORT THE GROUP S ACTIVITY AND NOTEWORTHY EVENTS IN COMMENTS ON THE GROUP S 2006 RESULTS COMMENTS ON THE RESULTS OF NETGEM SA THE GROUP S OBJECTIVES, RECENT DEVELOPMENTS AND PROSPECTS FOR SUBSIDIARIES AND OWNERSHIP INTERESTS ALLOCATION OF THE RESULT TRANSACTIONS IN NETGEM S OWN SHARES INFORMATION ON THE COMPANY S OFFICERS INFORMATION ON SECURITIES TRANSACTIONS BY THE DIRECTORS AND THE PEOPLE MENTIONED IN ARTICLE L OF THE MONETARY AND FINANCIAL CODE EMPLOYEES PARTICIPATION IN THE CAPITAL INFORMATION PRESCRIBED BY LAW Nº OF MARCH 31, 2006 ON TAKEOVER BIDS FINANCIAL RISK FACTORS SUSTAINABLE DEVELOPMENT OTHER INFORMATION TABLE OF THE RESULTS OF NETGEM SA FOR THE LAST 5 FINANCIAL YEARS (INDIVIDUAL ACCOUNTS) CHAPTER 3. CONSOLIDATED ACCOUNTS CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET TABLE SHOWING THE VARIATION IN THE CONSOLIDATED SHAREHOLDERS EQUITY TABLE OF CONSOLIDATED CASH FLOWS APPENDICES TO THE CONSOLIDATED ACCOUNTS STATUTORY AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS...52 CHAPTER 4. FINANCIAL STATEMENTS NETGEM SA INCOME STATEMENT NETGEM SA BALANCE SHEET VARIATION TABLE OF NETGEM SA NET SITUATION APPENDICES TO THE ANNUAL ACCOUNTS STATUTORY AUDITORS REPORT ON THE ANNUAL FINANCIAL STATEMENTS SPECIAL STATUTORY AUDITORS REPORT ON THE REGULATED AGREEMENTS AND UNDERTAKINGS CHAPTER 5. TABLE ON THE FEES OF THE COMPANY S AUDITORS.80 2

3 CHAPTER 1. STATEMENT ON THE ANNUAL FINANCIAL REPORT BY THE CHAIRMAN AND MANAGING DIRECTOR I certify that to my knowledge the accounts have been produced in accordance with the applicable accounting standards and give a true picture of the financial situation and result of the company and all the entities included in the consolidation and that the annual report presents a true picture of the development of the business, results and financial situation of the company and all the entities included in the consolidation, as well as a description of the risks and uncertainties confronting them. Joseph Haddad Chairman and CEO Netgem SA 3

4 CHAPTER 2. ANNUAL REPORT 2.1 THE GROUP S ACTIVITY AND NOTEWORTHY EVENTS IN ACTIVITY IN 2006 GENERAL CONTEXT In 2006, the French market will have experienced an increase in the number of IP television subscribers (mainly ADSL and fibre to a lesser extent) and in the supply of highdefinition decoders by telecommunications operators to their clients. In this very favourable context, the Netgem group, which markets highdefinition decoders, achieved an excellent performance, recording a significant growth in its turnover to 52,650,000 (+ 205%), with more than 300,000 IPTV solutions deployed with the main alternative telecommunications operators in France. In this particularly promising market, the group will have demonstrated: its technological expertise and capacity for innovation by adding a highdefinition version of its hybrid terminal (TNT/ADSL) to the its product range which will be available as from the second half of 2006, its capacity to manage the increase in its customer base both from the industrial point of view (more than 400,000 solutions in the last 24 months, of which more than 300,000 solutions were provided in 2006) and in terms of customer satisfaction, its efforts to expand its client portfolio by adapting its offer of terminals and services to Internet access suppliers (agreement with AOL in June 2006, support for Télé2 in the launch of its tripleplay offer in September 2006), broadband operators (contract with Erenis, the fibreoptic network operator, in June 2006) and to distributors (Netbox HDTV: first highdefinition offer distributed to Darty and Fnac) will have enabled the group to improve its profitability, recording a current operating profit of 7,003,000 as compared with a loss of 697,000 over the same period in The group s net income share also showed a very marked increase to 7,934,000 from 2,105,000 in Noteworthy events during the financial year The following events, listed in chronological order rather than in order of importance, were noteworthy in 2006 and were publicly announced owing to their financial, organisational, marketing or commercial effect. Because of their nature, they may not have been included in the appendices to the consolidated sixmonthly accounts. Recruitment of Marc Tessier (January 2006) The group announced the recruitment of Marc Tessier, former chairman of the France Télévision group (June 1999 to July 2005), as managing director of its Media Services centre where he will have particular responsibility for developing new service offers in synergy with the group s Terminals centre. Launch of the HighDefinition Netbox (February 2006) During the IPTV Word Forum exhibition in London, the group presented its new multimedia TNTADSL terminal which is compatible with highdefinition MPEG 4. This terminal will enable free and subscriber TNT services to be received in standard and high definition. Moreover, when connected to the Internet, it will grant access to the packages of services offered by television operators via ADSL (IPTV) and new interactive services such as ondemand video and television. This terminal will be added to the group s netbox range of multimedia terminals and came on to the market in the second quarter of It should be distributed in France and for export under the brand names of telecommunications and/or electronics operators for the general public. Announcement of a new ondemand television service for the British market (April 2006) At the Cannes MIPTV exhibition, the group announced that it had been approached by the companies Red Bee Media and Microsoft to launch an ondemand television service for the British market. By combining Digital Hive, Red Bee Media s technological platform, Netgem s compatible highdefinition terminals and Microsoft s Windows Media technologies, this new service will enable consumers to obtain digital television and a range of ondemand 4

5 downloadable content. The content will be encoded in Windows Media format (VC1) and protected by Windows Media Digital s DRM10. The group reported that this service should be launched in Great Britain in the autumn of Availability of Netbox HDTV from FNAC (June 2006) In June 2006, Netgem announced the availability from FNAC and on its website of the first digital terminal enabling highdefinition TNT services to be received (MPEG4 standard) without subscription. When DTT was launched, MPEG4 was agreed as the standard for new DTT services. At the moment, the DTT terminals sold by retail outlets (or integrated into televisions) use the previous MPEG2 standard to receive the basic freetoair offering, and cannot decode the MPEG4 highdefinition services. Television viewers in Paris, Lyons and Marseilles were the first to be offered the advantages of the highdefinition MPEG4 standard, as, by June 2006, they were able to watch Roland Garros via TNT in high definition without subscription, followed by the football World Cup and other events. All they needed was an HD Ready flatscreen television set. Apart from providing connectivity to an HDReady flatscreen (an HDMI connection), the Netbox HDTV is an advanced digital terminal, with a smartcard reader, an Ethernet port for highspeed Internet access, and a USB connector. The software can be updated remotely so that any customer with a Netbox HDTV can access the free 2 upgrades needed to activate new services. During the period of the launch, people who buy the Netbox HDTV will be able to download the media centre function free of charge. They can then use special features to gain access to their own multimedia content (such as photos, music or videos) stored on a PC, and present it on a TV. Formalisation of an agreement for the supply of HDTV terminals with ERENIS, France s leading fibreoptics operator (June 2006) All the new subscribers to the ErenisTV offer will be equipped with a Netgem remotecontroller. In June 2006, the group announced that it had signed an agreement for the supply of highdefinition TNT multimedia terminals with Erenis, France s leading fibreoptics operator on the residential market. Erenis s fibreoptics network will facilitate the imminent launch of highdefinition (TVHD) television services via the Internet. Requiring 10 to 15 Mbps of useable flow in MPEG4, the HD programmes will appear progressively during the year. Launched in July 2006, Erenis s video service uses one of the market s leading highdefinition decoders, the new Netgem netbox. Once connected to the Internet, this remote controller, which is compatible with the highdefinition MPEG4 format, makes it possible to receive the packages of services offered by the Internet television operators (IPTV) and allows access to new interactive services such as ondemand video or the sharing of digital content stored on a PC. It can also be equipped with a hard disk so as to use the pause services of direct and digital recording. The terminal is also able to receive both free and paid DTT services in either standard quality or highdefinition. Access to all these facilities is facilitated by a video portal containing an interactive guide to programmes and other interactive services. A simple, ergonomically designed remote control device gives direct access to the most useful functions (for example, time shifting, which enables the recording of a broadcast to be launched immediately). Formalisation of an agreement for the supply of Netbox HDTV hard disk terminals with AOL (June 2006) In the context of AOL s launch of its digital television offer via ADSL, in June 2006 Netgem announced that it would be supplying the latest generation of personalised harddisk highdefinition netboxes for AOL. These new hybrid ADSL/DTT terminals include a hard drive, and can receive services in standard and high definition, giving access to a wide range of innovative services. They expand the Group s range of multimedia terminals. The parties have signed a threeyear nonexclusive contract, covering the sale of terminals and the licence to use the software loaded on them. Netgem will also supply specific enhancements, including the integration of some of AOL s feature services (such as AOL Photos and AOL Radio). In August 2006, Neuf Cegetel made the takeover of all AOL s Internet access supply activities in France official, that is, a client portfolio estimated by the AFP at a million subscribers (500,000 in broadband and 500,000 in dialup). 5

6 Médiamétrie partnership (July 2006) In July 2006, Médiamétrie and the Netgem group announced that they were combining to develop a new usermeasurement activity. This business, which is an innovation in the digital television market, will collect information from homes that have digital settop boxes, specifically Netgem terminals. The information gathered via the reverse channel of the decoders will include measurement of target television audiences carried out by Médiamétrie. To that end, a joint subsidiary was created, 50% of which is owned by Médiamétrie and 50% by Netgem Media Services, a 100% subsidiary of Netgem. It will be run by Patrick Ballarin who is currently Project Leader reporting to the Chief Executive Officer of Médiamétrie. In that respect, the new company will market the business activities of Médiamétrie and Netgem in two domains: TVPerformances, the range of Médiamétrie services geared towards producers and sports rights holders who wish to evaluate the performance of their TV programmes. The range of Viewtime software that deals with Médiamétrie s Mediamat audiences and allows for better understanding of audience and performance flows over the course of a programme being aired. After the takeover of AOL France by Neuf Cegetel, Télé2 France was absorbed by SFR. More precisely, the French group acquired the fixed telephone and ADSL activities of Télé2 France. The virtual mobile telephone operator activity was taken over by the Télé2 AB group. Extension of the contract with NEUF CEGETEL (December 2006) Netgem announced that an agreement had been reached with Neuf Cegetel which planned to extend the framework contract for two further years, starting on September 7, It is specified that according to the framework contract Netgem undertook to deliver all the connection equipment to Neuf Cegetel (decoder, software programs and other accessories) for the Neuf TV offer. 2.2 COMMENTS ON THE GROUP S 2006 RESULTS The group s consolidated accounts are now established in accordance with the IASIFRS set of references as adopted in the European Union Consolidated income statement IAS/ IFRS figures (Euros in thousands) Change (%) Turnover % Current operating profit (loss) (697) na Operating profit (loss) % Net income (loss) Group share Minority interests Figures per share (Euros): Group share of net income per share in EUR Net income, group share diluted per share ,25 0, % na not applicable Analysis of the group s operational performance IAS/ IFRS figures (in thousands of euros) Change (%) Turnover % Gross margin % Gross margin as % of turnover 28.7% 30.8% Other business linked income 397 na Operational disbursements (8529) (6011) +42% Current operating profit ("ROC") (697) na ROC as a % of gross margin 46.3% NA Net PV on perimeter variation % Operating profit ("RO") RO as a % of the gross margin % % +255% na: not applicable 6

7 In 2006, the group recorded a marked improvement in its operational profitability with a current operating profit of 7,003,000, compared with a loss of 697,000 over the same period in This performance, in the context of strong growth in the turnover ( 52,650, %), was the result of an appreciable improvement in the gross margin of 15,135,000, a controlled increase in fixed costs which came to 8,529,000 over the period (+42%) and also includes other income in the sum of 397,000. sustained growth of group sales represented by sales of TNT/IP terminals in France (+ 277%) This return to operational profitability is linked to the commercial performance of the group s terminals business which recorded a growth of nearly 277% in its sales over the period to 49,378,000 and thus contributed nearly 94% of consolidated sales. This activity benefited from the success of the triple play offers (TV, Internet, fixed telephone) of the group s clients in France (90% of consolidated sales) and particularly its client Neuf Cegetel which was the main reason for the group s increased activity. The significant growth in sales of terminals reflects an increase in the volumes of terminals delivered by the group and an improvement in the average sale price of terminals. Over the financial year, the group will thus have distributed over 300,000 terminals, compared with 119,000 over the same period in 2005, under the effect of the acceleration of requests from its operator clients in a context of strong competition in innovation and the acquisition of new subscribers between the three main French telecommunications operators (France Telecom, Free, Neuf Cegetel). At the same time, the average sale price of terminals improved appreciably following the introduction of the TNTADSL highdefinition terminal with the MPEG4 compression standard (netbox 7600) whose technological value is greater. In the light of this terminal business which uses all the group s energy, the investments made with a view to developing media services activities have been limited. Nevertheless, the group has succeeded in establishing its constitution in France by creating a joint (50/50) subsidiary, with Médiamétrie, whose objective is the commercial management of the commercial services of Médiamétrie s TVPerformances and Netgem s Viewtime and by using the return of terminals to develop a new system or recording use. During the 2006 financial year, these activities contributed less than 10% of sales, compared with 24% in consolidation of the gross margin derived from the activity The group s gross margin increased markedly in absolute value and stood at 135,000 (+ 185%), but declined in relative value, being established at 28.7% of the turnover, compared with 30.8% in 2005, thus reflecting the effects of increased sales of terminals on the group s turnover. Over the financial year, the group continued its efforts at controlling the development of its gross margin with actions aimed at reducing the cost price of the TNT/ADSL terminals which the group has entrusted to the company Asteel Normandie since October This situation also reflects the effects linked to the marketing of highdefinition terminals in the second quarter of 2006, enabling the average sale price per terminal to be increased. controlled rise in operating expenditure (+ 42%) In order to support its clients and the market, the group increased the level of operating expenditure assigned to its terminals business, in particular by committing the technical and marketing resources necessary for launching its highdefinition terminal. The mixture of operating expenses is developing in that way, and is established as follows: 7

8 Marketing and commercial expenses 56% 46% Research and development expenses (*) 21% 21% General expenses 23% 33% (*) Net expenses after activating part of the development expenses The group s operating expenditure includes principally personnel expenses which came to 4,340,000 in 2006, thus representing nearly 51% of the group s operating expenditure over the period Analysis of the net income IAS/ IFRS figures (Euros in thousands) Change (%) Operating profit (loss) % Financial profit (loss) % Income tax expense (benefit) 592 (108) na Net income (loss) Group share Minority interests Considering an operating profit of 7,003,000 and a financial profit of 339,000, essentially linked to exchange effects and cash placement income, and an income net of tax of 592,000 resulting from the recording of a deferred tax income of 645,000, the group showed a net income of 7,934,000 over the period. This performance should be compared with a net income of 2,105,000 in 2005, mainly consisting of a noncurrent income on perimeter variation recorded at 2,672,000 in Result per share Over the 2006 financial year, the group s net income per share was 0.25, compared with 0.06 in The development of the net income per share from one period to the next is essentially linked to the development of the group s net income, in a context of slow growth in the average weighted number of shares in circulation on December 31, 2006 (31,147,865 shares at December 31, 2006 compared with 30,833,991 at December 31, 2005) The graph below shows how the price of the Netgem SA share has moved over the last 12 months: % Balance sheet and financial structure At December 31, 2006, the consolidated balance sheet totalled 35,565,000, compared with 15,194,000 at December 31, Liquid funds and capital resources At December 31, 2006, the group had cash funds of 10,758,000, 4,504,000 of which were invested in cash SICAVs [cf unit trusts]. Considering its net available cash funds at December 31, 2005 of 6,209,000, over the period the group has thus improved its cash situation by 4,549,000, supporting its selffinancing capacity. 942,000 of that improvement is accounted for by the exercise of subscription warrants for units in creators of companies ( BSPCEs ). During the 2006 financial year, the net cash variation can be analysed as follows: 8

9 IAS/ IFRS figures (thousands of euros) Net cash from (for) operating activities thus cashflow before debt and tax expenses (336) of which variation in working capital (,487) requirement («BFR») and tax paid Net cash for investment activities (1 056) (1 373) Net cash from financing activities Effects of translation 1 2 Net change in cash In 2006, the group s operational activities generated a financing surplus of 4,620,000 compared with a surplus of 1,529,000 in 2005, under the effect of the group s improved operational profitability and the control of its working capital requirement ( BFR ). Over the period, the group achieved a selffinancing capacity of 8,107,000, which was sufficient to cover its financing requirements linked to the variation in the BFR ( 3,487,000) and its investment operations ( 1,056,000). In the context of the strong growth in activity and the concentration of sales in the second half of 2006 over the last three months of the financial year, the negative variation in the BFR noted over the period is reflected particularly in the increase in stocks of components supplied directly by the group and the client/supplier liabilities. Lastly, over the period, the group has maintained a voluntary investment plan, strongly focused on the terminals business and particularly the development and industrialisation of the highdefinition TNTADSL terminal. Financing operations produced a complementary financing resource of 984,000, 242,000 of which came from capital increases linked to the exercise of BSPCEs Consolidated shareholders'equity and liabilities Shareholders'equity and the financial leverage effect The group s financial structure is presented as follows: IAS/ IFRS figures (in thousands of euros) 31/12/ /12/2005 Cash and cash equivalents Debts payable: Positive bank balances Interestbearing loans (linked to withdrawals from leases). Deposits and guarantees received (145) (8) (1) (40) Net resources Shareholder's equity (16 306) (7 144) Total capital used (5 701) (975) Financial leverage effect 65.0% Net resources (indebtedness) / total capital used 86.4% 186.0% 632.7% The group made very limited use of financing via net indebtedness and financed most of its operational activities and investments using its own funds. Shares issued over the financial year During the past financial year, the group issued 521,416 new shares following the exercise of BSPCEs. The exercise value of those warrants was 942,000, 99,000 of which was assigned to increasing the capital and 843,000 to the issue premium. Indebtedness structure (including shareholders current accounts) 9

10 At December 31, 2006, the structure of the group s indebtedness was as follows: IAS/ IFRS figures (Euros in thousands) 31/12/ /12/2005 Current: Lease contract commitments Positive bank balances Current shareholder accounts Reimbursable advances from the Finance and Economics Ministry Deposits and securities received Non current: Lease contract commitments Shareholders current accounts (TrustCapital Partners) Reimbursable advances from the Finance and Economics Ministry Total At December 31, 2006, the group s debt consisted essentially of property leases terminating during 2007 and 2009 and shareholders current accounts. During the last financial year, the only significant developments concerned the agreement in August 2006 of a threeyear leasing contract for 178,000 to finance the network infrastructures constituting the media services platforms installed in France and England. At December 31, 2006, the shareholders current accounts came to 494,000 ( 377,000 at December 31, 2005), 486,000 of which corresponded to contributions made by the group s financial partner in Mediaxim SA which has been financing that entity s principal development projects since March In view of its liquid funds and the nature of its debt, the group does not believe it is subject to a liquidities risk that could jeopardise its continued operation Investment policy The following table summarises the amount of tangible and intangible investments the group has made over the last two financial years and the way they were financed, first pointing out that the development expenses fulfilling the criteria of IAS standard 38 Development expenses are recorded in the assets of the consolidated balance sheet: Figures in thousands of euros 31/12/ /12/2005 Selffinanced investments: Intangible investments Tangible investments Total Investments financed by leasing: Tangible investments Intangible investments Total Total investments of which selffinanced part of which part financed by leasing % 14% % Over the past financial year, intangible investments accounted for 728,000, or nearly 59% of the group s investment effort over the period ( 1,234,000) compared with 55% in Those investments corresponded chiefly to the development costs incurred for the design of a new highdefinition terminal ( 511,000) which went into production in the first half of They also include the licences and the development costs incurred in implementing a new system for measuring advertising pressure in Belgium ( 122,000), a beta version of which has been used commercially since January 1, The latter were financed by the group s joint shareholder. The balance of the acquisitions during the period ( 95,000) corresponds to technological licences for the terminals business. The tangible investments made during the financial year concerned production equipment and tools and technical installations. They correspond particularly to the equipment and tools put in place to manufacture and test highdefinition terminals ( 218,000) and the network infrastructures constituting the media services platforms installed in France and England ( 178,000). 10

11 All the latter investments were financed by the threeyear lease set up in August The remaining acquisitions ( 110,000) concern mainly the office and computer equipment necessary for the development of the terminals business in France and the media services in Belgium. While preferring to finance its investments itself, the group does not rule out setting up other financing solutions (leasing, etc.) to support the development of its present activities and increase its presence in certain markets (products, services or territories) Research and development activities The group s development efforts in 2006 accounted for nearly 31% of its operational expenditure, that is to say 1,759,000, to which must be added the development costs capitalised over the financial year in the sum of 634,000, bringing the overall investment in development to 2,393,000, nearly 45% more than in 2005 ( 1,649,000). The principal development projects initiated in 2006 led firstly to the launch of a new highdefinition MPEG4 compatible terminal (netbox 7600) inaugurated at the IPTV World Forum exhibition in London (March 2006) and put into production in the second quarter of 2006, and secondly the marketing in Belgium of a new advertising pressure measurement service (press, radio and TV media) accessible via the Internet. All the development costs incurred in the context of those two projects have been recorded in the balance sheet assets. The other development costs, recorded in the accounts under expenses over the period, were incurred on developing maintenance and the current improvement of the terminals marketed by the group. 2.3 COMMENTS ON THE RESULTS OF NETGEM SA General Midyear accounts of Netgem S.A., the Group s parent company, have been prepared in application of the usual accounting practices admissible in France and the methods and principles regarding corporate accounts (regulation of the Accounting Regulation Committee). The accounting rules and assessment principles applied at December 31, 2006 are identical to those applied to the company accounts closed at December 31, Netgem s principal activity is focused on the development and marketing of digital terminals distributed by television operators, ADSL and the direct or indirect distribution networks. For fuller comments on this activity, please refer to section During the period, the company devoted more than 511,000 to developing the new hardware platforms, software programs and applications constituting much of the framework of the new highdefinition digital terminal that went into production in the second quarter of Moreover, it will have devoted nearly 1,131,000 to maintaining and improving the quality of its terminals Key corporate figures Figures in thousands of euros Turnover 49,786 13,548 Operating loss 7,823 (943) Net income (loss) 8,193 (848) Net cash 10,105 5,098 Total shareholder's equity of which share capital 17,929 5,975 8,794 5,876 Total balance sheet 35,376 14, THE GROUP S STRATEGIES, RECENT DEVELOPMENTS AND PROSPECTS FOR The group s strategies and objectives Netgem now has significant references in the sphere of alternative fixed operators (Neuf Cegetel), virtual operators (Tele2), mobile operators (SFR) and fibre optics (Erenis). Its current priority is the commercial replication of those references in France and internationally. The company expects the first successes in Europe to be achieved in that field in

12 2.4.2 Recent development Implementation of a liquidity contract (January 2007) In January 2007, the company announced the implementation, as from January 15, 2007, of a liquidity contract in compliance with the Charter of Ethics of the AFEI approved by the Financial Markets Authority in a decision of March 22, To implement this contract, agreed until December 31, 2007 and then tacitly renewable for successive periods of 12 months, the company has allocated 100,000 euros in cash and 5,430 of its own shares to the liquidity account. Formalisation of a patents licence agreement with Thomson (February 2007) In February 2007, Netgem announced that it had formalised a patents licence agreement with the Thomson company (Euronext 18453: NYSE: TMS). This nonexclusive licence agreement, with an initial duration of 5 years, includes Thomson s present and future patents in the sphere of digital decoders (Digital SetTop Boxes), especially those covering the DVBT standard. This licence agreement will enable Netgem to guarantee its clients increased protection in the increasingly sensitive sphere of intellectual property in the digital and audiovisual sector. Agreement for the supply of IPTV decoders to SFR (April 2007) In April 2007, Netgem announced that it had reached an agreement with SFR for the supply of the IPTV decoders used by SFR to provide a highdefinition television solution as part of its quadruple play offer combining television, fixed telephone, ADSL access and unlimited mobile telephone use at home. On that occasion, Netgem specified that the fixed mobile continuity offers were a new opportunity which expanded the potential of the triple play market, offering new possibilities of innovatory services to consumers. Consolidated turnover of the first quarter of 2007 (April 2007) The group announced a turnover for the quarter closed on March 31, 2007 of 19.2 million, a 143% increase compared with the first quarter of Regarding the last quarter, the group announced that it had succeeded in setting up the first stages of the commercial development plan announced when it reported its annual results, adapting its offer to the requirements of a frontrank mobile operator in France. Over the period, the group also stated that it had noted an increase in invitations to tender and consultations in France and internationally for solutions using the technologies the group had developed. Figures in M IFRS Standards Q1 Quarter Q1 Var 07/ Total Turnover 19,2 7,9 +11,3 +143% France 18,5 6,2 +12,3 +195% Exports (Benelux, UK, Spain) 1 0,7 1,7 1,0 53% (1) Downward variation reflecting mainly a lag in terminal delivery to Telefonica in Spain (2) Percentage variations calculated from actual figures in thousands of euros Prospects for 2007, a year of diversification France In 2007, the telecommunications operators market should become further consolidated. In this context, by the end of 2008 the group hopes to embark on actions designed to help reduce its dependence on the market of French fixed telecommunications operators. This policy should be assisted by the appearance of new players in that market, both mobile operators and distribution networks. To achieve its aim, the group intends to adapt its offer to the needs of the market and its clients. Over 2007, the group s chief investments should concern two essential spheres: Adapting the architecture of the terminals and developing its industrial model as a response to its clients expressed wish for a reduced acquisition cost. 12

13 Investments in services, so as to expand its client base and achieve the ARPU increase objectives (average receipts per subscriber) which its clients have set themselves. In that respect, the company does not rule out external growth operations. International Great Britain is one of the most mature markets in Europe. In 2007, the group will propose a complete white brand offer there, combining TNT and ondemand video intended for Internet access providers and other services distributors, enabling them to compete rapidly with the similar offer British Telecom has recently successfully launched ( BT Vision ). In the rest of the world, opportunities should develop but may not significantly contribute to the group s results before SUBSIDIARIES AND OWNERSHIP INTERESTS Participations and controlled companies Entities that have joined the perimeter In November 2006, Netgem Media Services, a 100% subsidiary of Netgem SA, and Médiamétrie finalised the constitution of a shared subsidiary called Digitime to develop a new use measurement activity. The activity of that subsidiary, 50% of whose capital and voting rights are held by Netgem Media Services, was consolidated by proportional integration as from October 1, 2006, the date when it started its activity Entities that have left the perimeter In accordance with the participations exchange agreements formalised in March 2005 with the Belgian investment fund Trust Capital Partners ( Trust ), in January 2006 Netgem Media Services transferred an additional 2% of the share capital of the Belgian and Dutch entities to the Koceram company which took over Trust s rights and obligations. On completion of that operation, Netgem Media Services held only 49% of the capital of those two entities. This transaction has no effect on the joint management methods of these two companies, consolidated by proportional integration since July 1, Activity of the subsidiaries During the past financial year, marked by the company s significant development in France, the subsidiaries and subsubsidiaries made a marginal contribution to the group s result, representing in fact less than 10% of sales, compared with 27% in The principal investments made for development continued to focus on media services activities in Belgium and France, particularly by the constitution with Médiamétrie of a shared subsidiary (50/50) for the commercial management of Médiamétrie s TVPerformances services and Netgem Media s Viewtime and the operation of the means of returning terminals for the development of a new system of use observation. The key 2006 figures of the subsidiaries and subsubsidiaries are presented in paragraph below Table of subsidiaries Figures in Capital Noncapital Percentage Book Loans and Amount of Turnov consolidat Dividends thousands of (local shareholder' of capital value of advances bonds and er (excl. ed received euros, unless currencies, s capital (in securities awarded by guarantees tax) in (profit or by the mentioned in local held the granted the last loss of last company otherwise thousands) currency) Gross company year financial during the Net and not yet ended year closed) financial reimbursed year Netgem Iberia 3 (11) 100% 3 94 (11) S.L 1 (1,207) 100% 1 1, (56) Ltd NMS S.A. 2,500 (1,109) 100% 3,228 3, (444) 13

14 2.5.4 Table of subsubsidiaries Figures in thousands of euros, unless mentioned otherwise NMS SA Peaktime UK Ltd (Royaume Uni) Mediaxim S.A. (Belgium) TV Times Netherl. B.V. (Hollande) Digitime SAS (France) Capit al (local currenci es, in thousand s) Noncapital shareholde r's capital (in local currency) Percentage of capital Book value of securities held Gross Net Loans and advances awarded by the company and not yet reimburse d Amount of bonds and guarantees granted Turnover (excl. tax) in the last year ended consolida ted (profit or loss of last financial year closed) Dividends received by the company during the financial year 450 (3,926) 100% (111) 49% ,009 (182) % % (46) 2.6 ALLOCATION OF THE RESULT The Mixed General Meeting of June 15, 2007 approved the allocation of the profit of the financial year ended on December 31, 2006 which came to eight million one hundred and ninetythree thousand and seventyfive euros and fiftyeight centimes ( 8,193,075.58), to the legal reserve and to be carried forward, as follows: Two hundred and two thousand three hundred and fortynine euros and eightythree centimes ( 202,349.83) to the legal reserve which, including the legal reserve already constituted, now comes to five hundred and ninetyseven thousand five hundred and thirtynine euros and fiftyfour centimes ( 597,539.54), or 10% of the company s share capital; The balance of the profit of the financial year, that is seven million nine hundred and ninety thousand seven hundred and twentyfive euros and seventyfive centimes ( 7,990,725.75) to the carried forward account which now comes to seven million nine hundred and ninety thousand seven hundred and twentyfive euros and seventyfive centimes ( 7,990,725.75). Lastly, it is reiterated that the company has not distributed any dividends since its creation in TRANSACTIONS IN NETGEM S OWN SHARES During the financial year ended on December 31, 2006, the company did not acquire any shares as part of the purchase of its own shares authorised by the Mixed General Meeting of June 12, At December 31, 2006, the company held 5,430 of its own shares for a value of 7,000 which it acquired in previous financial years. In January 2007, the company announced that as from January 15, 2007 it would be implementing an AFEI liquidity contract whose management had been entrusted to an investment services provider, allocating 100,000 euros in cash and 430 of its own shares to the liquidity account. The Mixed General Meeting of June 15, 2007 also authorised the board of directors to buy the company s shares as part of a share purchase programme whose principal characteristics are set out below: Concerned securities: shares Maximum capital repurchase percentage: 10% Maximum unit purchase price: 10 euros Maximum amount allocated for the programme: 4 million euros Purposes of the share repurchase programme to hold shares for later use, in exchange or in payment as part of a possible external growth strategy; 14

15 to provide liquidity in Netgem stock under a liquidity contract with an investment services provider, in keeping with the statement of professional ethics accepted by the AMF [French exchange regulatory commission]; to make and honour commitments with respect to stock option programmes or other allocations of stock to Company employees, or associated companies and in particular to allocate stock to Netgem employees especially in terms of (i) profitsharing plans, (ii) all stockpurchase or stockaward plans for employees under the terms prescribed by law, particularly Articles L and ff. of the French Labour Code, or (iii) all stockpurchase or stockaward plans for employees and corporate officers, or for certain of them, and to do so while observing the rules set by market regulators and at such times as the Board of Directors or its delegate shall see fit; to reduce the company s capital, to offer its shares when rights thereto are exercised in connection with securities giving present or future entitlement to Company stock, as well as to perform all hedging operations arising from Netgem's obligations due to those securities, while observing the rules set by market regulators and at such times as the Board of Directors or its delegate shall see fit; and to execute any market transaction found acceptable in law or by the AMF. This authorisation enabled the AFEI liquidity contract implemented in January 2007 to be continued. 2.8 INFORMATION ON THE COMPANY S OFFICERS Composition of the board of directors In December 2006, the company JH2 informed Netgem of the change of its permanent representative on the company s board of directors and the appointment to those duties of Mr Marc Tessier. This appointment became effective as from the board meeting of December 14, Mr Marc Tessier is also the managing director of the company Netgem Media Services. The board meeting of December 14, 2006 also appointed Mr Casey Slamani as deputy managing director of Netgem with effect from January 1, As part of that mandate and under the supervision of the chairman and managing director, Mr Slamani will take part in studying and implementing operations aimed at expanding the group s offer and/or encouraging its commercial, technological and/or financial development. As part of an employment contract with the company, Mr Slamani will also undertake operational responsibilities and particularly will be responsible for commercial management in France. Lastly, the Mixed General Meeting of June 15, , making its decisions as an ordinary general meeting, approved the appointment of Mr Charles Berdugo as a director for four years expiring at the end of the ordinary general meeting called to decide on the accounts for the financial year ending on December 31, As he has thorough knowledge of the telecommunications industry and computer services, is the founder of several computer companies and has taken over others, the company s board of directors considers that Mr Berdugo s experience will be useful to the company in the context of its development projects Remuneration and benefits The following table details the remuneration and benefits of all kinds received by the officers of the company and of all the companies in the group. It shows firstly the remuneration due for the financial year and secondly the remuneration actually paid during the financial year. No arrangements for paying joining or leaving bonuses have been put in place for the group s company officers. They do not have any specific supplementary pension schemes either. (in euros) FIXED VARIABLE ATTENDAN CE FEES Joseph Haddad Due 200,000 40,000 (1) Paid 200,000 20,000 GROSS ANNUAL REMUNERATION 2006 GROSS ANNUAL REMUNERATION 2005 Olivier Guillaumin Due Paid J2H, Due represented by Marc Paid Tessier (2) Raphael Palti Due Paid Casey Slamani Due (3) Paid (1) Remuneration received for the company mandate (no employment contract). 15 TOTAL FIXED VARIABLE ATTENDAN CE FEES 240, ,960 20, , ,960 TOTAL 164, ,960

16 (2) Since January 2007, in addition to his mandate as Managing Director of Netgem Media Services S.A., Mr Tessier has acted as the special adviser to the Chairman of the company J2H and in that capacity has been remunerated under an employment contract with that company. (3) Director of the company between June 2005 and April Mr Slamani had an employment contract with the company J2H, the company s chief shareholder, under which, in 2005, his total annual gross income due (including fixed and variable remuneration and benefits in kind) came to 120,088 euros and his annual gross remuneration paid came to 110,088 euros. In May 2006, Mr Slamani became an employee of the company and was also appointed as its Deputy Managing Director as from January 1, It is reiterated that the remuneration of the company s officers is validated by the company s board of directors. Mr Haddad does not benefit from any complementary retirement plan or parachute clause. During the 2006 financial year, he did not receive any allocation of warrants for shares in creators of companies and has not done so since the company was created (1996) Mandates and duties carried out by the members of the company s board of directors Mandates and duties carried out by members of the company s board of directors Joseph Haddad* Director (from January 2003 to July 2003) then Chairman of the Board of Directors (since December 2005) of Netgem Media Services SA (a French company and subsidiary of Netgem) Chief executive of SGBH SNC (a French company whose object is investment in real estate) Chairman of the board of directors of Netgem Iberia S.L. (Spanish company, subsidiary of Netgem) Sole director of TV Ltd (a UK company and subsidiary of Netgem) Director of Mediaxim SA from January 2003 to February 2007 (a Belgian company and subsidiary of Netgem) Sole director of Peaktime UK Ltd since December 2005 (a UK company and subsidiary of Netgem Media Services S.A.) Director of d Altavia SA (unlisted French company) Chairman and Managing Director of J2H between April 1990 and December 2005 Olivier Guillaumin Director of RS Com SA. (an unquoted French company) Chairman of PC Presse (an unquoted French company) Director of Celticom Sarl (previously KQWZ) (an unquoted French private limited company) Chairman of the oversight committee of Intersec SAS (an unquoted French private company) Various offices outside the group J2H, represented by Chief Executive of Netgem Media Services S.A. Marc Tessier Director of Mediaxim SA since February 2007 Member of the oversight committee of SBDS Active Sarl (an unquoted French private company) Director of Alternative Media Initiative Inc (an unquoted Canadian company) Member of the oversight committee of Gaumont SA (a quoted French company) Director of G7 entreprises SA (an unquoted French company) Raphaël Palti ** Chairman and chief executive of Altavia and holder of various offices within the Altavia group (an unquoted French company) Director of Netgem SA since June 12, 2006 Various offices outside the group * There has been no movement in the appointments, other than group appointments, held by Mr Joseph Haddad in recent years with the notable exception of his resignation from the office of chief executive of J2H to comply with regulations prohibiting holding the function of chief executive in more than one quoted company. ** The company does not know of any sensitive events concerning the mandates undertaken by Mr Raphael Palti in the Altavia group INFORMATION ON SECURITIES TRANSACTIONS BY THE DIRECTORS AND THE PEOPLE MENTIONED IN ARTICLE L OF THE MONETARY AND FINANCIAL CODE In accordance with article of the AMF s general regulations, a summary of the operations mentioned in article L of the Monetary and Financial Code during the 2006 financial year concerning the company s shares is presented below. Category (1) Name Role Nature of operation (2) 16 Month when operation was realised Number of shares Average unit price Value of operation a Olivier Director C February , ,000 Guillaumin a Olivier Director C March , ,930 Guillaumin c Jacques na (3) C March , ,550 Haddad a Casey Slamani Board member S March , ,850 (4) a Casey Slamani Board member C March , ,655 (4) a Olivier Director C May , ,495 Guillaumin a Olivier Director C June , ,831 Guillaumin c Jacques N/A (3) C December 20, ,640 Haddad 2006 na: not applicable

17 (1) Category: a: The members of the board of directors, board of management and the supervisory council, the managing director, sole managing director and deputy managing director. b: Anyone else who, on the conditions defined by the general regulations of the Financial Markets Authority, has, firstly, within the issuing entity, the power to take management decisions regarding its development and strategy and, secondly, regular access to privileged information directly or indirectly concerning that issuing entity. c: People who, on the conditions defined by a decree of the Council of State, have close personal links with the people mentioned in paragraphs (a) and (b). (2) Nature of the operation: To: Acquisition, B: Transfer S: Subscription E: Exchange (3) Family of Mr Joseph Haddad (4) Director of the company between June 2005 and April EMPLOYEES PARTICIPATION IN THE CAPITAL In accordance with article L of the Commercial Code, at December 31, 2006 no share in the company was owned by: the employees of the company and the companies linked to it as part of a company savings plan, the employees and former employees as part of a company joint investment fund, the employees during the periods when shares were not transferable concerning share option subscription plans INFORMATION PRESCRIBED BY LAW Nº OF MARCH 31, 2006 ON TAKEOVER BIDS Capital structure At December 31, 2006, Netgem s share capital was fixed in the sum of 5,975,000, divided into 31,351,733 shares with a face value of euros per share. 1 There are no double voting rights. On December 31, 2006, the Company s share capital broke down as follows: Number of shares at December % of capital and of voting rights Number of shares at December % of capital and of voting rights J2H (*) % % Olivier Guillaumin % % Subtotal, founders % % Founders families % % Other directors and % % company officers Employees % % Own shares held Public % % Total % % (*)A family holding company controlled by Mr Joseph Haddad, whose main activity is to create or take industrial or commercial stakes in French or foreign companies developing particularly in the information sector, their promotion, management and, where applicable, the supply of administrative, legal, accounting, financial or propertyrelated services. The principal significant movements affecting the composition of the capital during the last two financial years concerned an increase in the number of shares owned by the public. During the last financial year, the company did not receive any notifications indicating that the statutory or regulatory thresholds had been exceeded. Thus, the company does not know of any shareholders who individually own more than 2% of the company s capital, other than the founding shareholders (the J2H company and Mr Olivier Guillaumin). (1) The precise face value of each share is euros. 17

18 Please refer to note 17 of the appendices to the consolidated accounts for a statement of the activity recorded during the last financial year regarding the plans for warrants to subscribe to shares in company creators and options for the subscription to or purchase of shares Voting rights There are no double voting rights in the company. Moreover, the company s articles of association do not impose any particular limitation on the voting rights of shareholders, subject to the statutory provisions applicable if the statutory declaration that thresholds have been exceeded is not made Shareholders pacts and agreements Provisions concerning shareholders None. To the company s knowledge, there are no shareholders pacts or agreements between shareholders that are likely to affect the company s assets and liabilities, business, financial situation, results and prospects Provisions concerning issuing entities As part of the agreement reached in March 2005 between the company and the investment fund Trust Capital Partners ( Trust ), the shareholders pact agreed between Netgem and Trust following the takeover of Netgem Media Services S.A. (January 2003), formerly called Peaktime SA, was annulled. A new shareholders pact between Peaktime and Trust was set up for a period expiring on December 31, 2014 which envisaged in particular that between January 1, 2007 and December 31, 2008, Netgem Media Services would have an option to sell all the shares it would then hold in its Belgian and Dutch subsidiaries to Trust, and viceversa. Trust also has an option to buy these same shares but may not exercise its option until January 1, The price set for these promises was mutually agreed upon by the parties. Netgem is currently unable to estimate the value of this commitment. To the company s knowledge, there are no other shareholders pacts/clauses that could affect the company s assets and liabilities, business, financial situation, results and prospects. Lastly, at December 31, 2006, the company s principal shareholders and founders were not bound by any undertaking to retain their shares Capital authorised but not issued, capital increase undertaking The following table summarises the share issue authorisation situation and the securities in existence today, as they result from the last extraordinary general shareholders meeting of Netgem on June 12, 2006: 18

19 In euros Increase maintaining the shareholders preferential subscription right (1) (5) Increase eliminating the shareholders preferential subscription right (1) (5) Authorisation to issue shares and securities to remunerate contributions in kind consisting of capital rights or securities (1) Authorisation to issue shares and securities in favour of investors who are qualified or belong to a restricted circle of investors (1) (5) Increase by incorporating premiums and other reserves (1)) Authorisation date. Maturity date 12/06/ /08/ /06/ /08/ /06/ /08/ /06/2006 Next ordinary annual general meeting 12/06/ /08/2008 Authorised amount (in euros) (2) Will be determined according to the regulation by the board (4) (2) At least equal to the amount envisaged in the regulations (3) (4) 10% of the company's capital Issue price Increase realised Residual authorisation to dater Will be determined in the context of the contribution evaluation operations In previous financial years In the financial year closed December 31, % of the company's capital (2) At least equal to the weighted average of the former share price recorded in the Eurolist of Euronext Paris SA during the 3 stock market days preceding the start of the issue, possibly reduced by a maximum discount of 15% (7) (1) These authorisations were approved by the general shareholders meeting of June 12, (2) These amounts are assigned to the maximum ceiling of capital increase of 5,000,000 approved by the mixed general meeting of June 12, 2006 (21st resolution). (3) The regulations envisage that the price must be at least equal to the weighted average of the prices of the last three stock exchange sessions preceding its fixing, possibly reduced by a maximum discount of 5%. (4) The mixed general meeting of June 12, 2006 authorised (16th resolution) the board of directors to determine the issue price according to the terms fixed by the meeting within the limit of 10% of the share capital per year. Its limits are as follows: issue price at least equal to the closing price of the Netgem share on the Eurolist market of Euronext Paris at the last stock exchange session preceding its fixing, possibly reduced by a maximum discount of 15%. (5) The mixed general meeting of June 12, 2006 authorised (17th resolution) the board of directors to increase the issues up to the limit set out in article L of the Commercial Code which envisages the possibility of increasing the issue by a maximum of 15%. (6) Qualified investors are loan institutions, investment companies, venture capital companies, innovatory financial companies and large commercial companies (+ 150m). (7) This amount is not assigned to the ceiling of 5,000,000 referred to in the 21st resolution. The Mixed General Meeting of June 15, 2007 approved the introduction of a new plan for warrants to subscribe to shares in company creators with a duration of 12 months, reserved for the company s employees and directors who are subject to the employees taxation system, and authorised the board of directors to issue 500,000 warrants enabling a maximum of 500,000 new shares to be subscribed to. The price of the warrants was fixed at 3.80 euros, but that price could not be lower (i) if, within the six months before the allocation of the warrants, the company had made a capital increase, than the issue price of the securities as part of that capital increase, or (ii) than the minimum amount envisaged by the laws and regulations in force when that delegation was used, after any correction of that amount, where applicable, in order to take account of the difference in the ownership date. It is specified that this programme replaces the one approved by the Mixed General Meeting of June 12,

20 2.12 FINANCIAL RISK FACTORS The preamble points out that in October 2006 and January 2007 the company published revised versions of its 2005 reference document in which the item on risk factors was updated. These updates are available on the company s website ( and on the AMF s website ( Liquidity risks According to the definition given by the AMF (French financial market authority), the liquidity risk is characterised by the existence an asset with a longer term than the liability, concretely by the inability to repay shortterm debts if it is possible to use assets or new lines of bank cash. The group deems that it is not exposed to this risk given its general financial structure, the level and structure of its current assets, its lack of significant financial debt and its ability to use new financing if necessary. The following table shows net consolidated debt broken down by term, at December 31, 2006: (Euros in thousands) Moins de 1 an 1 to 5 years Plus de 5 years TOTAL Borrowings for the restatement of equipment leases Current shareholder accounts Reimbursable advances from the Finance and Economics Ministry Deposits and securities received 8 8 Borrowings and financial debt (including current shareholder accounts Investment securities (4 504) (4 504) Available assets (6 254) (6 254) Consolidated net debt (Source) (10 687) 626 (10 061) Market risks Exchange rate risks Given the international nature of its business, the group is exposed to an exchange rate risk (Euro/US dollar and Euro/pound sterling) with regard to both its customers and its suppliers. At December 31, 2006, the net exchange position for these currencies was as follows: Assets 661 1,256 Liabilities (444) (1 888) Net currency position excl. management 217 (632) Offbalance sheet Net currency position incl. management 217 (632) Impact on the net position of the 1% currency exchange (3) (5) Since July 2006, the group has implemented an exchange risk coverage policy which provides that any significant individual currency operation requires the use of special coverage (generally forward purchases). However, there can be no guarantee that the group will have the necessary resources to efficiently manage its exchange risk in the future and that the policies it follows will prevent it from experiencing losses related to exchange risks. GBP USD Over the 2006 financial year, the group made a net exchange profit of 248, Rate risks At December 31, 2006, the breakdown of assets and financial debts, including current shareholder accounts, depending on whether the rates are fixed or variable, is as follows: 20

21 (Euros in thousands) 31/12/2006 Rate Borrowings for the restatement of equipment leases 145 Fixed Current shareholder accounts 494 Variable Reimbursable advances from the Finance and Economics Ministry 50 na Deposits and securities received 8 na Borrowings and financial debt (including current shareholder accounts 697 Investment securities (4 504) Variable Available assets (6 254) Consolidated net debt (Source) (10 061) Therefore, the group s exposure to interest rate variations only concerns liquidities invested in monetary funds, which are in turn mainly invested in variablerate money markets, and current shareholder accounts are generally paid based on the Euribor. At December 31, 2006, the net variable interest financial assets and liabilities position therefore came to 4,010,000. The effect of a rate variation of +/ 1 point applied to the whole variable rate net resource and over a full year would be +/ 34,000 in the absence of any rate cover. At December 31, 2006 the group had no covered positions Equity risks The Company could be exposed to an equity risk due to the equity is owns outright. This risk, however, is not significant in that, at December 31, 2006, the group only held 5,430 equity shares, representing less than 0.02% of its capital Credit risks The financial instruments for which the group has a credit risk are mainly trade receivables. The group markets its products and services to a European customer base. The group periodically evaluates its customers credit risk and financial situation, supplying potential losses on irrecoverable debts. The total of these losses remained within Management forecasts. The Company generally requests guarantees from customers who pose a credit risk. The table below shows a summary of the percentage of turnover from the group s top three, five and ten customers, from the financial years ending December 31, 2006 and 2005, in comparison with total turnover achieved in these financial years: % of turnover achieved from the top three customers in comparison with total turnover 81.7% 60.8% % of turnover achieved from the top five customers in comparison with total turnover 87.5% 73.4% % of turnover achieved from the top ten customers in comparison with total turnover 93.2% 84.3% The Company's cash management policy aims to limit investments to lowrisk shortterm financial instruments. The group s cash and cash equivalents are mainly in euros, and are mostly held in two major French banks. In addition, the group subcontracts the manufacture of all its digital terminals to two industrial manufacturers with production units in France. The group periodically evaluates its subcontractors capacity to manufacture products that comply with the requested specifications, to respect product delivery times and to uphold acceptable price conditions. The group also benefits from a guarantee for the replacement of products that do not comply with specifications SUSTAINABLE DEVELOPMENT The group considers that its activity is not likely to create an environmental risk. In fact, the manufacture of its terminals is subcontracted to manufacturers on who bear most of the environmental risk. The group also considers that its products are not likely to cause a serious risk of contamination ADDITIONAL INFORMATION Corporate consequences of the activity The group s average staff in 2006, excluding temporarily assigned staff, was 81, compared with 73 in These employees continued to be concentrated mainly outside France (54 workers), particularly in the media services activities in Belgium, England and the Netherlands where most of the recruitment took place during the period. 21

22 To support the development of its terminals business in particular, in the second half of 2006 the group implemented a recruitment plan aimed at filling eight new posts in the technical, industrial, logistics and sales departments. These recruitments, whose objective is to help support existing clients by increasing the quality of the service provided, were mostly made in the first quarter of In the context of the continuation of its existing business and the design, production and marketing of new services and products, the group may make more important recruitments. In accordance with the applicable regulations (new articles L , L and L of the Labour Code), a collective agreement defining the changeover to 35 working hours and the terms and conditions applicable to that new system is being applied in the group s French entities (June 22, 1999 for Netgem Media Services and November 28, 2000 for Netgem). During the 2006 financial year, the group s companies focused particularly on containing within reasonable limits the levels and movements of its employees remunerations. They sometimes had to agree to individual salary increases so as to retain or reward some of its employees. These increases were made in the context of individual discussions, case by case, and not as part of collective bargaining. The group believes that the quality of the professional relations it has succeeded in setting up has enabled it to establish a climate of mutual trust and understanding, and that it has set up an organisation that takes a responsible attitude to health and safety conditions. Considering the profiles of its employees, who are selfmotivated and highly qualified managers, the group believes there is no need to set up a specific training programme. Occasional training courses are generally conducted by the group s companies for the benefit of those employees who have requested them. The group s companies do not employ any handicapped workers and have not taken part in any significant social works. Apart from the industrial subcontract for the manufacture of its terminals and the realisation of technical and commercial services, the group has not to any significant extent subcontracted the contracts or orders it has received from its clients Statutory Auditors It is reiterated that the firm Laudignon S.A. automatically took over as the company s titular auditor following the resignation of the firm C.E.C.C. on August 22, 2006, because that firm was unable to fulfil the requirements of the Financial Security Law on the rotation of signatories. As envisaged by law, the Mixed General Meeting of June 15, 2007 approved the appointment of the firm AEG Finances as deputy auditor for six years, to expire at the end of the ordinary general meeting called to decide on the accounts for the financial year ending on December 31, Offbalancesheet commitments at June 30, 2005 Please refer to note 23 in the appendices to the consolidated accounts Deductible disbursements During the 2006 financial year, Netgem SA and its subsidiary Netgem Media Services SA did not incur any charge that was not tax deductible according to articles 395, 54 quater and 223 quinquies of the General Tax Code Internal control In accordance with the regulations, the internal control system and internal control procedures will be presented in a report by the Chairman of the Board of Directors devoted to those matters TABLE SHOWING THE RESULTS OF NETGEM SA IN THE LAST FIVE FINANCIAL YEARS (INDIVIDUAL ACCOUNTS) 1. Capital at year end Share capitall (K ) 5,419 5,539 5, Number of ordinary shares in existence Number of shares with priority dividends in existence Maximum number of future shares to be created at December 31 by the exercise of subscription rights (1)

23 2. Operations and results during the financial year (K ) Pretax revenue 3,750 4,639 4,659 13, Pretax result, participation and employees incentive (14 756) (9 375) (4 497) scheme and contributions to amortisations and provisio9ns Corporate income tax (1 240) (39) (4) (3) 207 Participation and employees incentive scheme due for the financial year Result after taxes, participation, employees incentive ( (7 121) (4 861) (847) scheme and contribution to amortisations and provisions Distributed earnings 3. Result per share (euros) Result after taxes, participation and employees incentive (0,57) (0,32) (0,15) scheme but before contributions to amortisations and provisions Result after taxes, participation, employees incentive (0.63) (0.24) (0.16) (0.03) 0.26 scheme and contributions to amortisations and provisions Dividend per share 4. Headcount Average number of employees during the financial year Amount of the company wage bill during the financial year (K euros) (2) Amount paid in company benefits (1) Of which maximum number of shares to be created at December 31: by exercising BCEs/options and subscriptions to free shares 3,353,581 3,491,090 3,344,773 2,240,585 1,933,003 by exercising BSA PACEO 10,000,000 9,870,000 8,443,360 (2) This amount corresponds to the combined salaries and social charges recorded during the financial year. 23

24 CHAPTER 3. CONSOLIDATED ACCOUNTS CONSOLIDATED INCOMR STATEMENT Information in thousands of euros, except number of shares and result Notes per share. Turnover 4 5,250 17,265 Sales costs (37,515) (11,951) Gross margin ,314 Other business income Marketing and commercial costs (4,788) (2,748) Research and development expenses 6 (1,759) (1,277) General expenses (1,982) (1,986) Current operating profit (loss) 7003 (697) Other operating income and expenses 7 2,672 Operating profit (loss) 7,003 1,975 Income on cash and cash equivalents Gross financial cost (26) (14) Net financial cost Other financial income and expenses Income tax expense (benefit) (108) Net income (loss) 7,934 2,105 Group share 7,934 1,925 Minority interests 180 Earnings per share: Net income (loss), group share per share Net income (loss), diluted group share per share Number of shares used to calculate earnings per share: Weighted average number of shares outstanding 31,147,865 30,833,991 Maximum number of shares resulting from the exercise of all the 570, ,175 warrants and options assigned Adjusted average number of shares and exercised warrants 31,718,465 31,577,166 24

25 3.2 CONSOLIDATED BALANCE SHEETS ASSETS in thousands of euros Notes 31/12/06 31/12/05 Goodwill Intangible assets 11 1, Plant, property and equipment Financial assets Deferred tax assets Total noncurrent assets 3,605 2,437 Inventories 13 1, Trade receivables and related accounts (net) 14 18,176 5,100 Other receivables and restatement accounts 15 1,469 1,125 Cash and cash equivalents 16 10,758 6,210 Total current assets 31,960 12,757 TOTAL ASSETS 35,565 15,194 SHAREHOLDERS'EQUITY AND LIABILITIES in thousands of Notes 31/12/06 31/12/05 euros Capital 5,975 5,876 Capital reserves 4,024 53,859 Reserves and consolidated earnings (*) 6,353 (52,694) Other (46) 103 Shareholders'equity, group share 16,306 7,144 Minority interests Total shareholders'equity 17 16,306 7,144 Borrowings and financial debt, greater than one year Retirement commitments Other noncurrent liabilities Total noncurrent liabilities Borrowings and financial debt, less than one year Provisions Trade payables and related accounts (net) 21 15,493 5,601 Other current liabilities 22 2,811 1,938 Total current liabilities 18,600 7,695 TOTAL SHAREHOLDERS'EQUITY AND LIABILITIES 35,565 15,194 ( (*) including net consolidated result Group Share 7,934 1,925 25

26 3.3 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS'EQUITY Information in thousands of euros, except number of shares Capital Reserves linked to capital Reserves and consolidated earnings Other Total Equity Propres (part du Groupe) Number of Amount Translation Treasury Total Others shares differences shares At December 31, ,825,900 5,874 53,742 (54,619) 282 (7) 275 5,272 (1,256) 4,016 Capital increase related to 9, wbcs financial years (1) Sharebased payment Net income (loss) for the period 1,925 1, ,105 Translation differences (172) (172) (172) (172) Changes in scope 1,076 1,076 At December 31, ,835,817 5,876 53,859 (52,694) 110 (7) 103 7,144 7,144 Capital increase related to 521, wbcs financial years (1) Allocation of the carried forward (51,117) 51,117 account to the issue premium (2) Sharebased payment Net income (loss) for the period 7,934 7,934 7,934 Translation differences (149) (149) (149) (149) Other (4) (4) (4) At December 31, ,357,233 5,975 4,024 6,353 (39) (7) (46) 16,306 16,306 Minority interests Total (1) Bspce = warrants for shares in creators of companies (2) Resolution of the Mixed General Meeting of June 12,

27 3.4 CONSOLIDATED CASHFLOW STATEMENTS Figures in thousands of euros Consolidated net income (loss), inclusive of minority interests 7, Elimination of amortisations and provisions (excluding depreciation of current assets) Elimination of calculated income and expenses linked to subscription warrants and options Elimination of capital income or expenses on transfers and exchange operations 21 1,671 Elimination of income linked to agreements reached with Trust without any monetary effect (4,325) Elimination of other calculated income and expenses (386) Cashflow, after net financial cost and taxes 8,807 (215) Elimination of cost of net financial indebtedness (108) (121) Elimination of tax charge (income) (592) Cashflow, before net financial cost and taxes (A) 8,107 (336) Tax paid (B) (79) Change in WCR of operations (inclusive of staff benefits liabilities) (C) (3,408) 1,865) Net cash from (for) operating activities (D) = (A+B+C) 4,620 1,529 Acquisitions of tangible and intangible assets (1,056) (854) Transfers of tangible and intangible fixed assets 2 Acquisitions of securities (380) Acquisitions of other financial fixed assets (13) (19) Transfers of financial fixed assets Effect of changes in scope (224) Net cash from (for) investment activities (E) (1,056) (1,373) Amounts received from the exercise of warrants and options Reimbursement of loans and financial debts payable (of which lease financing contracts) (74) (36) Loans and financial debts issued 8 Financial interest paid (inclusive of leasefinancing agreements) Net cash from (for) financing activities (F) Effects of currency translation (G) 1 2 Net change in cash (D+E+F+G) 4, Cash at opening 6,209 5,956 Cash at closing (*) 10,758 6,209 (*) The credit balances of which are shown in the balance sheet liabilities under Borrowings and Debt Borrowings and debt 1 27

28 3.5 APPENDICES TO THE CONSOLIDATED ACCOUNTS GENERAL INFORMATION Information relating to the company Netgem ( the company ), the group s parent, is a public limited company domiciled in France and governed by the provisions of French law. It was formed in June 1996 and is listed as a Cclass share on the Eurolist of Euronext Paris (ISIN: FR ). The company and its subsidiaries develop, promote and market hardware and software solutions and services for digital television in France and abroad, supporting the switch of television broadcasting to the high definition system, ondemand consumption and mobile uses. The consolidated financial statements of the Netgem Group at June 30, 2006, include the Company and its subsidiaries (jointly referred to as "the Group"). They were agreed by the meetings of the company s board of directors on March 5 and April 3, 2007, but will not be definitive until they have been approved by the General Shareholders Meeting called for June 15, Accounts references Declaration of compliance Netgem complies with European Regulation Nº 1606/2002 of July 19, 2002 which requires companies that are listed on a regulated market of one of the member states to present their consolidated accounts using the reference system of the IFRS (International Financial Reporting Standard) for financial years that start on or after January 1, The preparation of financial statements based on IFRS standards at December 31, 2006 is based on the regulations and interpretations published on that date and as adopted by the European Union. It is compulsory that the following new standards, amendments to existing standards and interpretations be applied for the financial year ended on December 31, 2006, but they do not have any significant effect on the financial information presented: Amendment to IAD 19 Staff benefits on the actuarial differences, group systems and information to be supplied, as the Netgem group has not opted for acknowledgement of actuarial differences in shareholders'equity, amendments to IAS 39 on the fair value option and cashflow hedging for intragroup transactions, amendments to IAS 21 on the effects of variations of foreign currency rates, The amendment to IAS 39 and IFRS 4 Financial Guarantees on the financial guarantees issued other than those already designated by the group as insurance contracts, has no effect on the accounts closed at December 31, 2006, Interpretation IFRIC 4 Conditions enabling it to be determined whether an agreement contains a lease has no effect on the accounts closed at December 31, 2006, Interpretation IFRIC 6 Liabilities resulting from participation in a specific market: waste electrical and electronic equipment, The Netgem group has not applied any standard or interpretation in advance, particularly not any of the following standards and interpretations that have already been published but whose application is not compulsory until after December 31, 2006; Standard IFRS 7 Financial instruments information to be supplied, applicable as from January 1, 2007, Amendment to IAS 1 on the information to be supplied concerning the capital, applicable as from January 1, Interpretation IFRIC 8 Sphere of application of IFRS 2 Payment based on shares, applicable in financial years that start on or after May 1, 2006, Interpretation IFRIC 9 Revaluation of incorporated derivatives, applicable for financial years that start on or after June 1, 2006, Interpretation IFRIC 10 Interim financial statements and loss of value, whose adoption by the European Union is envisaged in May/June This interpretation is applicable as from April 1, 2007, Interpretation IFRIC 11 IFRS 2 Own shares and intragroup translations whose adoption by the European Union is envisaged in May/June This interpretation is applicable as from April 1, The Netgem Group is not expecting the adoption of these standards and interpretations to have any significant impact on the financial statements. 28

29 NOTE 1 Accounting principles and methods General consolidation principles 1.1. Basis of preparation The financial statements are prepared on the basis of historical cost to the exclusion of cash equivalents which are recognised at fair value and employeerelated liabilities which are recognised at present value. The financial statements are presented in thousands of Euros, rounded to the nearest Euro (unless indicated otherwise). Also, they have been prepared using the general principles of the IFRS standards: fairness, going concern, accrual accounting method, consistency of presentation from one year to the next, materiality and grouping. Preparing the financial statements using IFRS standards requires that Netgem make certain estimations and assumptions that may have an impact on the amounts of assets and liabilities as well as the amounts of income and expenses. These estimations and underlying assumptions are based on past events and other factors deemed reasonable under the circumstances. They thus provide a basis for the year in terms of defining the book values of assets and liabilities that can not be directly provided by other sources. The final amounts recognised in Netgem's financial statements may differ from currently estimated values. These estimations and assumptions are reviewed regularly. Estimations upheld for 2006 are described in note The accounting methods presented below have been consistently applied by all entities of the Group Consolidation methods (i) Subsidiaries Subsidiaries are entities that are controlled by the Company and are fully consolidated. An entity is considered to be controlled when the Company directly or indirectly manages the entity s financial and operational policies in the aim of deriving an advantage from its activities. The financial statements of subsidiaries are included in the consolidated financial statements as of the date on which control commences up until the date control ceases to be effective. (ii) Joint ventures Joint ventures are entities of which the Company shares control. Joint ventures are consolidated using the proportionate consolidation method. The financial statements of joint ventures are included in the consolidated financial statements as of the date on which control commences up until the date control ceases to be effective. (i) Transactions eliminated from the financial statements Balance sheet amounts, unrealised gains and losses, income and expenses resulting from intragroup transactions are eliminated when preparing the consolidated financial statements. Unrealised losses are eliminated in the same manner as unrealised gains provided they do not result in any depreciation Closing date All companies of the Group close their accounts at December 31 of each year Translation principles The Euro is the operating currency and the currency in which the financial statements are presented for both Netgem and its subsidiaries to the exclusion of those established outside the Euro zone. 29

30 (i) Transactions in foreign currencies Transactions in foreign currencies are recognised at the exchange rate in effect on the date of the transaction. Assets and liabilities in foreign currencies at closing are translated to Euros at the exchange rate in effect on that date. Any exchanges income or expenses are recorded under income or expenses. Nonmonetary assets and liabilities in foreign currencies are valued at historical cost and translated at the exchange rate in effect on the date of the transaction. (ii) Financial statements and foreign assets Assets and liabilities from a foreign activity, including goodwill and changes in fair value resulting from their consolidation, are translated to Euros at the exchange rate in effect at closing. Income and expenses derived from a foreign activity are translated to Euros at the average exchange rate for the period based on the exchanges rates in effect on the transactions dates. Exchange income or expenses resulting from any such translation are recognised as exchange income or expenses, in a distinct item under shareholders equity, and, where applicable, under minority interests. The exchange rates applied are as follows: 1 = x currency Opening rate Average rate Closing rate GBP United Kingdom Presentation of the financial statements In application of standard IAS 1, Presentation of financial statements, the Group presents the income statement function by function. Current operating income equals operating income before recognition of other operating income and expenses. These items include expenses or income that are very limited in number, unusual or fairly infrequent whose amounts are fairly insignificant and whose overall presentation among other items of the activity would tend to offset the results of the Group s actual performance. In the context of a consolidated balance sheet, assets related to the Group s normal business cycle, assets held for sale within twelve months of closing along with cash at hand and investment securities are all current assets. All other assets are considered noncurrent. Debt that matures during the Group s normal business cycle or within twelve months of closing are considered current liabilities. 30

31 Valuation method 1.6. Goodwill All groupings of companies are recognised using the acquisition method. Goodwill results from the acquisition of subsidiaries. For acquisitions of companies made after 1 January 2004, goodwill represents the variance between the acquisition cost and the fair value of any identifiable assets and liabilities acquired. For any acquisitions made before this date, goodwill maintains its presumed value which is the amount recorded in application of the previous accounting regulations applicable, regulation no of France s Comité de la Réglementation Comptable. The classification and processing of groupings of companies having taken place before 1 January 2004 were not modified when preparing the Group s opening balance sheet using IFRS standards on the transition date (see the document concerning the transition to IAS/IFRS standards available from the Company or at the website Goodwill is calculated at cost less any accumulated depreciation. <}0{>Goodwill is allocated to Cash Generating Units (CGU). It is not amortised but is subjected to an annual impairment test (see Dépréciation). Depreciation) Intangible assets (i) Assets Intangible assets acquired by the Group are recognised at cost less any accumulated amortisation (see below) and any accumulated depreciation (see Depreciation). Such assets mainly include software and licences. (ii) Research and development Research and development costs incurred in view of acquiring new knowledge and technical skills are recognised as expenses at the time they are incurred. Development costs incurred in relation to the production of new or substantially improved equipment are recognised as fixed assets if the Group is able to, in particular, technically and commercially justify the equipment and sufficient resources exist to complete the development in question. These conditions are considered met when the six criteria outlined under the standard IAS 38 are fulfilled. All other development cost, particularly those incurred in relation to the ongoing maintenance and optimisation of equipment, are recognised as expenses at the time they are incurred. (iii) Subsequent expenses Subsequent expenses related to intangible assets are recognised if they increase the future economic benefits of the particular asset in question and their costs can be accurately valued. All other expenses are recognised as expenses at the time they are incurred. (iv) Amortisation Amortisation is recognised under expenses using the straightline method over the estimated useful life of the intangible assets, provided it is known. For intangible assets whose useful life is not known, an impairment test is carried out at December 31 each year. All other intangible assets are amortised as of the time they are ready for use. The estimated useful life of each item is as follows: Development costs Software 3 to 5 years 1 to 3 years 31

32 1.8. Property, plant & equipment (i) Assets owned by the Group Property, plant & equipment is valued at acquisition cost (purchase price plus any incidental expenses) or production cost (direct or indirect expenses incurred to bring the property concerned to the production stage), less any accumulated amortisation (see below) and accumulated depreciation (see Depreciation). When the useful life of Property, plant & equipment items varies, each item is recognised as a distinct Property, plant & equipment item. (ii) Leased assets Assets financed through a leasefinancing agreement and representing a significant amount are recognised as fee simple ownership acquisitions. Such assets are amortised using the method described below and the corresponding debt is recognised as a liability under "financial debt" and broken down into the portion to mature within the next year and the portion to mature in more than year. (iii) Subsequent expenses The Group recognises the book value of an property, plant & equipment as the replacement cost of the item in question at the time the expense is incurred if it is likely that the related future economic advantages of the asset will benefit the Group and if its cost can be accurately determined. All general maintenance costs are recognised as expenses at the time they are incurred. (iv) Amortisation Amortisation is recognised under expenses using the straightline method over the estimated useful life of the property, plant & equipment. Land is not amortised. The estimated useful life of each item is as follows: Equipment and machinery Office and computer equipment Fixtures and fittings Office furniture 3 or 5 years 3 years or duration of the contract is less (see concerning leasfinancing agreements) 10 years or duration of the contract is less (see concerning leasfinancing agreements) 10 years 1.9. Financial assets Financial assets mainly include security deposits and guarantees paid by the Group to the lessors of their offices located in Neuilly sur Seine, London and Brussels Turnover and guarantees Turnover is recognised once it is likely that the Group will benefit from the future economic advantages and that the related income can be accurately determined. With regard to the terminal activity, turnover is mainly comprised of revenues derived from the sale of digital and analogue solutions. The Company recognises income derived from the sale of solutions at the time the products are delivered provided there is no significant obligation existing in behalf of the Company. Software used for Internet access embedded in the above solutions is considered an integral part of the terminal. Netgem recognises income derived from the sale of maintenance and 1st and 2nd level support services (technical and commercial help line) on a straightline basis over the duration of the contract. Netgem also offers its customers a 12 to 24month guarantee on defective equipment which is fully covered by the commercial guarantee from which it benefits in relation to its industrial subcontracting agreements. With regard to the sale of media services, turnover is comprised of software user licence fees and income derived from software installation and maintenance and database access services. Income related to the sale of licences is recognised once the following criteria are met: the existence of an agreement can be proven, access to the service is activated, the sale price can be accurately determined and the receivable is likely to be recovered. Income derived from software maintenance and 32

33 database access services is allocated in proportion to the duration of the contract Inventory Inventory is mainly comprised of electronic components used for the production of terminals marketed by the Company, accessories used in relation to aftersales service and finished products. Inventory is valued at purchase cost, calculated using the FIFO method (components, accessories), and production cost (finished products). A provision for inventory depreciation is made based on the evolution of products sold and their market value Receivables Trade and other receivables are valued at fair value when they are initially recognised then at amortised cost less ant depreciation (see Depreciation) Cash and cash equivalents Cash and cash equivalents include cash, shortterm investments that mature in less than three months of their acquisition. These investments mainly include money market funds and marketable midterm bonds. Bank overdrafts and negative bank balances are recognised under current liabilities (borrowings and financial debt, less than one year) Depreciation The book values of the Group s assets, other than deferred tax assets (see paragraph concerning Income tax), are reviewed at each closing if there is any indication of depreciation (internal or external). If there is any such indication, the asset s recoverable value is determined (see below). For goodwill and intangible assets whose useful life is not known, the recoverable value is estimated at each closing. Depreciation is recognised if the book value of an asset or its CGU is greater than its recoverable value. Depreciation is recognised in the income statement. Depreciation recognised in relation to a CGU is firstly allocated to any depreciation of the book value of goodwill appropriated to the CGU then to the depreciation of the book value of the CGU s other assets in proportion to the book value of each asset. (i) Calculation of the recoverable value The recoverable value of receivables recognised at amortised cost equals the fair value of estimated future, discounted cash flows. Receivables to mature shortly are not discounted. The recoverable value of other assets is the highest of either the fair value less any sales costs or the value in use. To appraise the value in use, the estimated future cash flows are discounted, before tax, at a rate that accounts for the market s current appreciation as well as the time value of money and any risks specifically related to the asset. For an asset that does not generate any significantly independent cash amounts, the recoverable value is determined for the CGU to which the asset is appropriated. (ii) Depreciation writeoffs The depreciation of loans and receivables recognised at amortised cost is written off if the increase in recoverable value can objectively be attributed to an event having taken place after the depreciation was recognised. The depreciation of an asset s recognised value (to the exclusion of goodwill) is written off if the estimations used to determine the recoverable value are amended. The book value of an asset increased following a depreciation writeoff must not exceed the book value that would have been determined, net of any amortisation, if no depreciation had been recognised. Goodwill depreciation recognised can not be written off. 33

34 1.15. Provisions A provision is recognised in the balance sheet if the Group has an existing legal or implied obligation resulting from a past event and that an outflow of resources corresponding to an economic advantage will likely be required to discharge the obligation. When the impact of time value of money is significant, the amount of such provisions is determined by discounting the estimated future cash flows, before tax, at a rate that accounts for the market s current appreciation of time value of money and where applicable, any risks specifically related to the asset. If it is not possible to accurately determine the amount of the obligation, no provision is recognised and a note is added to the appendix Trade payables and other current liabilities Trade payables and other current liabilities are valued at fair value when they are initially recognised, then at amortised cost Staff benefits (i) Longterm benefits Retirement obligations are the only longterm staff benefits. For definedcontribution plans, payments made by the Group are recognised under expenses for the related period. For definedbenefit plans concerning retirement benefits, retirement obligations are estimated using the projected unit credit method. According to this method, rights to benefits are allocated for each period of service using the applicable formula of the plan in question taking into account a linearistion effect when the rate at which rights are acquired is not consistent from one period of service to the next. The amount of future payments corresponding to the benefits awarded to employees is determined on the basis of assumptions such as the evolution of staff numbers, retirement age and death rate and are discounted using the interest rates of longterm bonds issued by firstclass issuers. When calculation assumptions are reviewed, actuarial variances are recognised in the income statement for the period. The Group does not apply the corridor method. The charge for the period, which is the sum of services rendered, is recognised in full under "Personnel expenses". (ii) Sharebased payments The standard IFRS 2 Sharebased payments, published in February 2004, deals with transactions concluded with employees or third parties for which payment is share based. Its application within the Group only concerns share subscription options awarded to employees (stock options and bspce ) provided the award of bonus shares is not involved. Under the option offered by standard IFRS 1, only stock options awarded since November 7, 2002 whose exercise date falls after December 31, 2004 have been accounted for. The cost of stock option plans is determined according to the fair value of shareholders'equity instruments awarded, appreciated at the date on which they are awarded. The fair value of these options is determined using a Black & Scholes type model. This value is intangible for the duration of the plan. The cost of transactions settled in the form of shares is recognised under personnel expenses and offset by the corresponding increase in shareholders'equity (capital reserves) over a duration ending at the date on which the employee beneficiary acquires the options awarded. There is no charge recognised for benefits of which the holders do not meet the conditions required for final acquisition. 34

35 (iii) Individual training right (DIF) Based on the directive issued by the Comité d Urgence of France s CNC on October 13, 2004 and given current discussions which consider DIF obligations to be somewhat distinct from other employee benefits as they offer the company a future advantage, the Group, awaiting further directives, has decided that no provision will be made at December 31, Also, there are no individual cases justifying a provision such as past agreements for training actions that do not offer the company any future advantage, disputes of more than 2 years in duration or training programs not in relation to the position held Income tax Income tax (charge or income) includes the income tax charge or income for the particular period and any deferred income tax. Income tax is recognised in the income statement unless it is related to items that are directly recognised under shareholders equity in which case, it is recognised under shareholders equity. Income tax payable is the estimated amount of income tax payable in relation to the taxable profit of a given period and is calculated using the income tax rate either adopted, or almost adopted, at closing along with the amount of any income tax payable in relation to previous periods. Deferred taxes are calculated by applying the variable carry forward method to any temporary differences between the book value of assets and liabilities and their tax bases. The following items are not affected by the recognition of deferred taxes: non taxdeductible goodwill, the initial recognition of an asset or liability during a transaction that is not related to a grouping of companies and which does not affect the book profit or the taxable profit, temporary differences related to interests in subsidiaries provided they are not likely to be reversed in the near future. The valuation of deferred tax assets and liabilities depends on the manner in which the Group expects to recover or settle the book value of assets and liabilities, using the income tax rate adopted, or almost adopted, at closing. A deferred tax asset is not recognised unless the Group is likely to experience future taxable profits to which the asset can be allocated. Deferred tax assets are reduced when it is not likely that sufficient future taxable profits will be available. Additional income tax resulting from the distribution of dividends is recognised when the dividends payable are recognised under liabilities Profit (loss) per share The base profit (loss) per share is determined by dividing the net income (loss), Group share, by the weighted average number of common shares outstanding during the year, calculated on the basis of the dates on which funds derived from capital increases completed are received. When calculating the diluted profit (loss) per share, the net income (loss), Group share, and the weighted average number of shares outstanding are adjusted according to the impact of any potentially dilutive ordinary shares outstanding. Ordinary shares are considered dilutive if, and only if, their conversion to ordinary shares would mean a reduction in the net income per share. The method used is the buyback of shares at market price on the basis of the average share price for the period Sectoral information A sector is a distinct component of the Group that is involved in either the supply of related products or services (sector of activity) or the supply of products or services within a specific economic environment (geographical sector) and is exposed to certain risks and a profitability rate that differs from those of the other sectors Shares in the parent company 35

36 Treasury shares are deducted from shareholders equity on the basis of their acquisition cost. The gains and losses resulting from the disposal of treasury shares are recognised in a consolidated reserves account Use of estimations made by management in application of the Group s accounting principles The main estimations made by Netgem concern the following items: notes 1.6, 1.14 and 10 concern goodwill and impairment tests. The Group s management carries out tests based on the best possible scenario of future evolution of the activity of the units in question and a reasonable discounting of future cash flows from operations, notes 1.15, 1.17 and 19 concerning provisions for risks describe the main provisions made by Netgem. When making these provisions, Netgem considered the best possible estimation of the obligations in question, notes 1.18 and 9 concerning income tax refer to the Group s tax situation, mainly in France, on the basis of the best possible estimation of the Group's future evolution in terms of income tax, notes 1.17 and 17 concern the estimation of the fair value of shareholders'equity instruments awarded (plans for the award of warrants and options). 36

37 NOTE 2 Scope of consolidation 2.1. Transactions concluded in 2006 Disposals In compliance with agreements concerning the exchange of equity interests concluded in March 2005 with the Belgian investment fund, TrustCapital Partners ( Trust ), in January 2006, the Group sold a further 2% of equity interests in its Belgian and Dutch companies to Koceram, the rights and obligations of which were assumed by Trust. Given the symbolic sale price, this transaction resulted in a loss of 21,000. Following the transaction, the Group held merely 49% of the share capital of the two entities This transaction has no impact on the terms of the joint management of the two companies, consolidated using the proportionate consolidation method as of July 1, Entities having entered the scope November 2006, Netgem and Médiamétrie completed the creation of a subsidiary named Digitime in view of developing a new activity of audience metering. The activity of this subsidiary, of which the Group owns 50% of the share capital and voting rights, was fully consolidated as of October 1, 2006, date on which the company commenced its activity Scope of consolidation At December 31, 2006, the scope of consolidation, comprised of fullyconsolidated companies and jointventures consolidated under the proportionate consolidation method, is as follows: Company Head office SIREN no. Country Consolidation % method (1) Control Netgem S.A. 27, rue d Orléans Neuilly sur Seine France Parent Interest Subsidiaries : Netgem Iberia S.L Velazquez Madrid B Spain FC 100% 100% Ltd 25, Grosvernor Street W1K4QN London UK FC 100% 100% NMS S.A. (2) 27, rue d Orléans Neuilly sur Seine France FC 100% 100% Peaktime UK Ltd 25, Grosvernor Street W1K4QN London UK FC 100% 100% Mediaxim S.A. 191, Blvd du Souverain 1160 Brussels Belgium PC 49% 49% TV Times Netherl. B.V GA Amsterdam Weerdestein Holland PC 49% 49% Digitime SAS 27, rue d Orléans Neuilly sur Seine France PC 50% 50% (1) IG: Full consolidation, IP: Proportional consolidation (2) Netgem Media Services SA NOTE 3 Sectoral information With regard to the transition to IFRS standards, the Group defined a sector of activity as the first level of sectoral information, the second being the geographical sector. In this context, the Group s activities have been broken down into two main branches of activity: the Terminals branch which groups the development and marketing activities in both France and overseas of massmarket multimedia terminals and professional terminals and the Media Services branch which groups activities involving the analysis and metering of TV audiences. Furthermore, the Group has determined three geographical sectors: the France division which includes the parent company and subsidiaries located in France and in Spain, the UK division which comprises the two subsidiaries located in England and the Benelux division which includes subsidiaries located in Belgium and Holland, that the Group controls. For the past year ended, the Terminals branch represented 94% of consolidated sales versus 76% for Given that this activity is expected to continue making a significant contribution to the Group s turnover over the next few years, the presentation of information for each sector of activity is no longer pertinent as the Group is only evolving in one sector of activity which represents its main level. This position may change over time depending on the evolution of the Group's activities and operational criteria. The following tables show, for each of the Group s geographical sectors, information concerning turnover, 37

38 consolidated assets and investments for the years ended December 31, 2006 and December 31, Year ended December 31, 2006 Euros, in thousands France UK Benelux Eliminations Consolidation External turnover 49,848 1,138 1,664 52,650 Inter and intra turnover (980) Total turnover 50,488 1,204 1,938 (980) 52,650 Goodwill Other noncurrent assets 2, ,788 Current assets 30, ,960 Total consolidated assets 32,810 1,211 1,544 35,565 Total investments (825) (19) (212) (1056) Year ended December 31, 2005 Euros, in thousands France UK Benelux Eliminations Consolidated External turnover 13,473 1,487 2,305 17,265 Inter and intra turnover (746) Total turnover 13,972 1,491 2,548 (746) 17,265 Goodwill Other noncurrent assets 1, ,601 Current assets 11, ,757 Total consolidated assets 12, ,397 15,194 Total investments Inter and intra eliminations mainly concern the Company's sale of terminals to its English subsidiary Netgem@TV and technical services supplied by Mediaxim to other entities of the Group. Concerning the supply of terminals to Netgem@TV, the transfer prices negotiated between the two parties are determined according to the cost price of the terminals and accessories, the cost of services provided by Netgem SA for embedded software, the supply of components and the production of terminals and finally, the cost of the risk of a lack of turnover of the components inventory. Services provided by Mediaxim are billed on the basis of the transfer price agreed to at the time the budgets for the entities in question are approved and materialised in the form of service contracts. INCOME STATEMENT NOTE 4 Turnover Information concerning turover figures for each geographical sector is provided in note3. NOTE 5 Headcount and personnel expenses Headcount At December 31, 2006, the Group s average headcount, to the exclusion of any leased personnel, was 81 as compared to 73 at December 31, At that date, the Group s total headcount, to the exclusion of any leased personnel and including the headcount of all jointventures, was 90 as compared to 73 at December 31, 2005, and breaks down as follows: Management executives 4 4 Executives Employees Total headcount The Group s headcount at December 31, 2006 is mainly comprised of employees based outside France (61 employees), particularly within the Media services branch based in England, Belgium and Holland. Personnel expenses 38

39 For 2006, personnel expenses represent 5,328,000 as compared to 4,482,000 for 2005, and break down as follows: (Euros, in thousands) Remunerations 3,478 3,054 Social security charges 1,410 1,289 Impact of sharebased payments Total 5,328 4,482 Directors'remuneration The total amount of remunerations and benefits in kind awarded to members of the Company s management and administrative bodies (including sharebased payments) stands at 1,096,000 for 2006 versus 408,000 in The Group has not established any plans concerning the payment of bonuses to new and departing social representatives. Also, there is no specific supplementary retirement plan for company representatives. NOTE 6 Research and development costs (Euros, in thousands) Research and development costs (2,255) (1,630) Capitalised development costs Amortisation of fixed development costs (138) (19) Total development costs recognised in the income statement (1,759) (1,277) Capitalised development costs correspond to development costs incurred in view of the production of new or substantially improved equipment. They mainly include the cost of prototypes, external services billed and employees dispatched to development projects. NOTE 7 Other operating income and expenses In 2005, other operating income and expenses represented transactions concluded for the exchange of equity interests in March 2005 (the Group s buyback of 40% of NMS SA and disposal of 49% of its Belgian and Dutch subsidiaries). NOTE 8 Financial results The main items included in the financial results are as follows: (in thousands of euros) Income on cash and cash equivalents Interest on receivables and other income 5 64 Gross financial cost (26) (14) Cost of net debt Net foreign exchange gains (losses) Financial provision expenses Other financial expenses (17) (41) Other financial income and expenses Financial income The increase in cash and cash equivalent income last year is primarily a reflection of the improvement in the Group cash flow situation and an incidental increase in moneymarket returns at the end of the financial year. For 2005, interests on receivables and other income referred to interests on receivables linked to fixed asset disposals, fully recovered during the first half of

40 Finally, the net currency exchange gain of 248,000 recorded for the period resulted primarily from the considerable increase in the pound sterling against the Euro, which had the effect of reducing the amount of liabilities recorded in euros in the Group's UK subsidiaries. NOTE 9 Income tax The income tax expense breaks down as follows: (in thousands of euros) (Expense) Current tax benefit (53) (108) (Expense) Deferred taxes benefit 645 Total 592 (108) Assets and liabilities deferred taxes are derived primarily from the existence of significant carryforwards at the Group's French sites and can be expressed as follows: (in thousands of euros) Deferred tax assets: Capitalizable deferred taxes 24,189 27,108 of which not recognised (23,544) (27,108) Recognised deferred tax assets 645 Deferred tax liability Net deferred taxes 645 At December 31, 2006, the amount of recognised deferred tax assets was 645,000. The assessment of the Group's ability to use its carryforward tax losses relies on a significant amount of judgement. The Group is carrying out an analysis of the positive and negative factors so it can decide or not on the probability of using carryforward tax losses in the future. This analysis is performed regularly in each tax jurisdiction where significant deferred tax assets are likely to be recorded. If it were the case that future tax income were appreciably different from that taken into account in this analysis, the Group would then be forced to revise the deferred tax asset amount downwards or upwards accordingly. This could have a significant influence on the Group's balance sheet and income statement. The difference between corporation tax calculated against the statutory rate in each respective country and the tax income or expense in the income statement is expressed as follows: (in thousands of euros) Earnings before tax 7,342 2,213 Statutory tax rate 33.33% 33.54% (Expense) Theoretical tax income calculated based on the statutory rate (2 431) (742) Impact on (expense) tax income of: Tax loss carryforwards used not activated previously 2,575 1,657 Capitalisation of losses previously carried forward 645 Tax on income or expenses on disposals and exchange operations (1,179) Tax on the expense calculated for IFRS 2 (146) (37) Other differences (51) 193 (Expense) Income tax benefit recorded in the income statement 592 (108) At December 31, 2006, the Group had large nonactivated tax losses that could be used against future earnings: (in thousands of euros) 31/12/ /12/2005 Netgem S.A. 48,764 58,862 Netgem Media Services S.A. 13,657 13,213 Peaktime UK 6,308 3,406 Netgem UK 1,826 1,769 Netgem Iberia Digitime SAS 23 Total 70,640 80,301 40

41 BALANCE SHEET NOTE 10 Goodwill Goodwill recorded under assets in the consolidated balance sheet at December 31, 2006, resulted from the buyout of NMS SA and its subsidiaries in January The net change in goodwill breaks down as follows: (in thousands of euros) 31/12/ /12/2005 Net value, start of the year Acquisition Disposal (19) (107) Reevaluation differences Amortisation allowance Net value, end of the period The outflow recorded during the 2006 financial year, totalling 19,000, is the result of the Group s disposal of 2% of its holding in its Belgian and Dutch subsidiaries (see note 2). At December 31, 2006, the Company carried out an impairment test on this intangible assent which it makes use of, at each of the sites affected, to adjust forecasted operational cash flow derived from the 2year forecast database, established by the managers of these subsidiaries and reviewed by the Group general management. These calculations were performed using an actualisation rate and a longterm growth rate of 12% and 2% respectively. This test did not lead to any impairment being recorded. NOTE 11 Intangible assets (in thousands of euros) Software and licences Research and Total development expenses GROSS MARGIN At January 1, Translation differences Acquisitions Exit flows (307) (307) Change in scope (19) (99) (118) On 31st December Translation differences Acquisitions Exit flows (18) (99) (117) Change in scope (4) (12) (16) At December 31, DEPRECIATIONS At January 1, 2005 (599) (121) (720) Translation differences (10) (10) Allocations (5) (63) (68) Exit flows Change in scope On 31st December 2005 (295) (85) (380) Allocations (29) (159) (188) Exit flows Change in scope At December 31, 2006 (302) (144) (446) NET VALUE At January 1, At December 31, ,013 The period's acquisitions correspond mainly to the development expenses incurred as part of the design of a new highdefinition terminal ( 511,000), production of which was launched during the first quarter of In addition, they include the licences and development costs incurred for the implementation of a new advertising pressure measurement system in Belgium ( 122,000), the first version of which has been marketed since January 1, These investments, associated with the renewal of the main agreement of this joint venture (CIM agreement), are partially financed by Trust. The balance of acquisitions for the period ( 95,000) corresponds to technological licences for the terminals branch. 41

42 NOTE 12 Tangible assets (in thousands of euros) Plant and machinery Other property, plant, Total Technical installations and equipment GROSS MARGIN At January 1, ,357 4,140 6,497 Translation differences Acquisitions Exit flows (942) (493) (1,435) Change in scope (95) (536) (631) On 31st December ,572 3,277 4,849 Translation differences 9 9 Acquisitions Exit flows (527) (75) (602) Change in scope (26) (26) At December 31, ,441 3,295 4,736 DEPRECIATIONS At January 1, 2005 (1,630) (3,615) (5,245) Translation differences (25) (10) (35) Allocations (307) (244) (551) Exit flows ,435 Change in scope On 31st December 2005 (982) (2 924) (3 906) Translation differences (8) (8) Allocations (538) 52 (486) Exit flows Change in scope At December 31, 2006 (993) (2,787) (3,780) NET VALUE At January 1, At December 31, The main acquisitions for the period pertain to the production plant and machinery and the technical installations. They mainly correspond to plant and machinery installed for manufacturing and testing highdefinition terminals ( 218,000), and to network infrastructure that makes up the media service platforms set up in France and in England ( 178,000). The latter investment were fully financed by leasing implemented in August 2006 for a period of three years. The balance of acquisitions ( 110,000) mainly cover office and computer equipment required for the development of terminal activities in France and media services in Belgium. 42

43 NOTE 13 Stocks (in thousands of euros) 31/12/ /12/2005 Gross value ,109 Provisions accrued (2,577) (10,787) Net value 1, (in thousands of euros) 31/12/ /12/2005 Electronic components 1, Finished analogue and digital terminals Accessories (keyboard, etc.) 8 Total net value 1, Last year, the decrease in gross value of inventories and provision is mainly due to the electronic components which had been fully provisioned for several financial years being scrapped ( 7, 916,000). At December 31, 2006, the gross value of inventories fully provisioned and kept in the balance sheet amounted to 2,575,000, which corresponds to components to be withdrawn within 12 months. The net value of inventories at December 31, 2006 was 1,557,000, up sharply in comparison with December 31, 2005 considering the increase in the group s sale of terminals during the financial year. This value is mainly composed of an electronic component used in the manufacture of highdefinition terminals, which are supplied directly by the group ( 1, ) and finished terminals ( 174,000). The Management estimates that these inventories will be sold off within the next twelve months. NOTE 14 Trade accounts receivable (in thousands of euros) 31/12/ /12/2005 Gross value 18,191 5,443 Provisions accrued (15) (343) Net value 18,176 5,100 Net receivables, less than one year 18,176 5,100 The increase in the gross value of receivables last year can be attributed to the Group's strong sales growth. At December 31, 2006, gross receivables in foreign currencies, Sterling Pounds for the most part, amounted to 493,000. NOTE 15 Other receivables and adjustment accounts (in thousands of euros) 31/12/ /12/2005 State income tax Receivables on asset disposals 283 Tax claims Social security receivables 2 Prepaid expenses Other shortterm assets Total other receivables and restatement accounts 1,469 1,125 Other shortterm assets 1,469 1,125 At December 31, 2006, the "State income tax" account corresponds to the Group's Treasury receivables resulting from the carryback of tax losses generated during the 2001 fiscal year. This receivable will become payable in 2007 in the context of the liquidation of the 2006 financial year tax. Receivables from the disposal of assets recorded on December 31, 2005 correspond to the sale of mediaplanning activities, to be collected from the US company Telmar. These receivables were recovered in full last year. At December 31, 2006, the Other shortterm assets item mainly included supplier receivables and reimbursements receivable from Company insurers following the occurrence and correction of a quality defect reported on some terminals (see note 19). 43

44 NOTE 16 Cash and cash equivalents (in thousands of euros) 31/12/ /12/2005 Cash and cash equivalents 6,254 3,042 Marketable securities 4,504 3,168 Total available assets 10,758 6,210 Available assets held at the bank are mainly denominated in Euros and Sterling Pounds. At December 31, 2006, investment securities were mainly comprised of openend treasury funds entered at their fair value. The net capital gains on disposals of marketable securities during the financial year amounted to 123,000. NOTE 17 Shareholders equity Share capital On December 31, 2006, the Company s share capital totalled 5,975,000 and is fully paid up. It is comprised of 31,357,233 singlecategory shares of a nominal value of During the past fiscal year, the Company issued 521,416 new shares following the exercise of 521,416 warrants for business creation shares ("warrants"). The exercise price of these warrants was 942,000, 99,000 being the increase in capital and 843,000, the issue premium. At December 31, 2006, 50.7% of capital was held by the Company's founding managers and their family. The remaining shares are held in the form of bearer securities (49%) and by Company employees (0.3%) Warrants for business creation shares and options for subscription and/or purchase of shares In June 2006, the shareholders authorised a new issue of 500,000 warrants, each conferring a right to subscribe to one share in the Company at a price of 4 Euros per share. This program replaces that approved by the shareholders in June Over the financial year ended December 31, 2006, 100,000 warrants were allocated by the Company as part of the plan authorised by the shareholders in June This allocation was performed in April 2006 at an exercise price of 1.28 per warrant. A summary of warrant issuance transactions is presented below: Number of shares corresponding to Average option price per share the allocated and outstanding warrants Balance at December 31, , Allocated 520, Exercised (9,917) 1.00 Cancelled (139,371) Balance at December 31, ,260, Allocated 100, Exercised (521,416) 1.81 Cancelled (106,167) 1.31 Balance at December 31, , At December 31, 2006, of this total, 234,501 shares can be subscribed following the exercise of warrants at a weighted average price of 1.52 per share. To avoid becoming null and void, these subscriptions must occur no later than the following maturity dates: February 18, 2007, for 18,000 shares; July 2, 2007, for 6,833 shares; October 29, 2007, for 15,000 shares; January 15, 2008, for 27,000 shares; and March 22, 2009 for 119,333 shares and September 26, 2010 for 48,333 shares. 44

45 Shareholders have renounced their privileged subscription rights for the issue of warrants for shares Options for subscription and/or purchase of shares In April 2003, the shareholders authorised the issue of 500,000 subscription and purchase options reserved for employees of Company subsidiaries, for a duration of 38 months, ending June According to the terms of this plan, the subscription option exercise price must equal at least 80% of the average share prices over the twenty days preceding the allocation, and the Company s purchase option exercise price must equal at least 80% of the average purchase price for shares held by the Company. In January 2006, the Company granted 200,000 share subscription options under this plan, at an exercise price of 1.10 per warrant. At December 31, 2006, no allocated options could be subscribed Bonus share program In June 2006, the shareholders authorised the implementation of a bonus share program for salaried employees of the Company or related companies as well as its mandated management for a period 38 months and up to the limit of 1.6% of its capital (representing around 500,000 shares). The minimum acquisition period set by the shareholders is two years, and the minimum retention period was set to two years. As of December 31, 2006, no allocation has been made under this plan Share buyback program June 2006, the shareholders authorised the launch of a share buyback program, limited to the maximum number of shares representing 10% of the Company s capital. This program replaces the one approved by the shareholders in June 2005, which expired in June At December 31, 2006, the Company held 5,430 equity shares for an amount of 7,000. Over the past year, the share buyback programs authorised by the shareholders in June 2005 and June 2006 were not implemented by the Company s Board of Directors Staff benefits in the form of shareholders'equity instruments For the past year, the value of warrants and options, deemed the cost of services rendered by employees compensated for by the warrants and options received, absorbed by personnel expenses, amounted to 439,000. The effect of this entry, compensated for under shareholders'equity (issue premiums), is null. The main assumptions of the evaluation model were the following: Plan opening date 22/06/2002 April /06/2005 Warrant/option January /03/2004 January Sept. 26, /12/2005 Apr. 26, 2006 allocation date Quantities 67, , , , , ,000 Exercise price per share (in Euros) Volatility. 70% 70% 65% 65% 65% 65% Maturity until the term 4.5 years 4 years 5 years 5 years 5 years 5 years Cost for financial year 2006 (in K)

46 NOTE 18 Other noncurrent liabilities (in thousands of euros) 31/12/ /12/2005 Shareholder advances Advances from the Finance and Economics Ministry Total At December 31, 2006, shareholder advances correspond to the positive current account of Trust, minority shareholder of the Belgian and Dutch subsidiaries of the group, for 991,000 in principal, including 530,000 contributed to the Belgian subsidiary in 2005 as part of agreements entered into with the Group in late March 2005, and 461,000 paid during the 2006 financial year. These advances, integrated at 49% in the consolidated balance sheet liabilities at December 31, 2006, are consented for a term of three years as of the date funds are made available with anticipated reimbursement possible if the subsidiaries situation fulfils certain criteria as defined in the agreement. Advances were received from the Finance and Economics Ministry in 2003 for the purpose of innovative development projects undertaken by the Company. At December 31, 2006, the balance of these advances, with principal of 50,000, is fully reimbursable in March NOTE 19 Provisions (in thousands of euros) 31/12/2005 Allocations Reversal used Unused provisions 31/12/2006 Provisions for corporate purposes 93 (43) 50 Provisions for quality risk Other provisions 27 (27) Total (70) 233 Operating (*) 183 (70) Financing (*) Nonrecurring (*) (*) Provisions writeoffs net of incurred expenses Provisions for corporate purposes were estimated on a casepercase basis. Provision writeoffs of a corporate nature recorded for the period are due to the conclusion of certain cases, with no significant effect on the results as duly funded. The provisions for quality risk cover any costs related to the malfunction of terminals sold by the Group. Since the Group provides a global hardwaresoftware solution it is responsible for industrial and software matters and for final product quality. As a consequence, and in case of hardware or software malfunction, the Group must take the necessary remedial actions by covering the industrial and logistic costs incurred. The provisions for quality risk are evaluated using an analysis of the type and severity of identified flaws and an estimation of the cost of corrective actions to be taken. Since Netgem is covered by a liability insurance policy, which includes epidemic defects, provisions are calculated net of a reasonable estimation of expected reimbursements from the Group s insurers. In November 2006, the Group identified a hardware malfunction that affected some of its terminals, taking industrial and logistic actions to both correct this malfunction in production underway and terminals returned to customer service and to replace certain terminals already installed with end users. The Group posted the cost of its actions, which were confirmed on December 31, 2006 as financial year expenses, being posted under current liabilities on December 31, 2006 (see note 21). It also recorded the insurance benefits to be recovered after its liability policy was posted under income for the period and under other receivables and restatement accounts (see note 15). In addition, the residual risk analysis related to this claim led the Group to post a provision of 183,000. The Group considers that its quality improvement actions and its bolstered supplier and industrial partner selection process should enable it to reduce the possible risks related to the malfunction of its solutions and their components, not making it necessary to eliminate them. Management considers that this claim will be discharged within the next twelve months. NOTE 20 Employee retirement provisions These provisions mainly concern nonfinanced, defined benefit plans in France. Last year, the Group recorded an additional expense of 11,000 in the income statement relating to retirement commitments amounting to 33,000 at December 31, 2006 compared to 22,000 at December 31, In France, the defined benefit plan refers to the payment of pension plans. The Group supplies its commitments to employees pursuant to the provisions of retail, office and IT collective agreements (Netgem SA employees) and the Syntec collective agreement (Netgem Media Services SA employees), relating to voluntary and compulsory retirement, said provisions having been modified in 2004 as per the law of 21 August 2003 on pension reform. The pension plan provision is valued according to actuarial principles according to the terms described in note

47 The main actuarial assumptions chosen for these plans were identical during 2005 and 2006 and are described below: application of an annual salary reevaluation rate of 2.5%; application of an actualisation rate (net of inflation) of 4%, which corresponds to a 10year OAT rate posted at the end of the year, it was considered that the retirements would occur at the legal retirement age, the employee turnover hypothesis was updated according to the retirement history for the past five years; the mortality table is the TPRV 93 table (base table for annuity contracts). NOTE 21 Trade payables and related accounts At December 31, 2006, this item included debts whose value is likely based on the corrective actions taken by the Group in reaction to a quality defect which occurred in some of its terminals in November 2006 (see note 19). At this date, the Group planned to reimburse part of its debts using its liability insurance policy. These reimbursements were recorded at close with the other debts (see note 15). At December 31, 2006, debt in foreign currencies, Sterling Pounds for the most part, amounted to 103,000. NOTE 22 Other current liabilities (in thousands of euros) 31/12/ /12/2005 Tax and employee related payables 2, Deferred income Shareholder advances 8 99 Other debt Total 2,811 1,938 At December 31, 2006, the increase in the Tax and employeerelated payables item is mainly linked to the increase in group sales in the fourth quarter, and the subsequent increase in VAT collected. The deferred income is derived mainly from payments received in advance on licence fees and services for the media services branch. At December , the Group fully appropriated deferred earnings of 386,000 linked to a sale of source code agreed between NMS SA and a German advertising authority during the 2000 financial year which expired on December In the absence of the provision of services under this contract, the income linked to the appropriation of these deferred earnings was recorded on the income statement under "other activity income". ADDITIONAL INFORMATION NOTE 23 Offbalance sheet commitments As part of its activities, the Group takes on a certain number of commitments. Provisions are made for certain commitments (commitments related to retirement and other benefits granted to employees, litigation, etc.). Off balance sheet commitments and possible liabilities are listed below Current transactions The Group has made commitments for the following amounts: (in thousands of euros) 31/12/ /12/2005 Guarantees given (1) 1, Rental commitments given (2) 1,353 2,004 Lease commitments (3) Secured, pledged, or mortgaged assets (4) 480 Total 3,026 2,219 47

48 (1) In May 2006, the Company issued a financing company a joint guarantee commitment of a maximum of 290,000 including tax, designed to guarantee the undertakings of its subsidiary Netgem Media Services SA in an investment project. Moreover, in June 2006, the Company established a payment guarantee of 1 million dollars (around 758,000) for one of its suppliers. (2) In December 2005, the Company and the lessor of the premises in NeuillysurSeine (Company's registered office) agreed to renew the lease for a duration of three, six, or nine years from April 1, Over fiscal year 2006, the annual rent excluding taxes charged, annually indexed, will reach 519,000. As part of this renewal, the Company has a rentfree period of three months ( 130,000). (3) In August 2006, the Group contracted a new lease contract with financing of 178,000 and for a 3year duration. At December , the group's minimal future fees for property lease contracts capitalised at December 31 of each year are detailed as follows: Total of minimum payments 150 Deductions to be made: Financial interest (5) Current value of net minimal payments 145 Deductions to be made: Deductions to be made: (55) short term long term 90 (4) As part of the establishment of the guarantee cited in (1), the Company pledged three mediumterm negotiable warrants for an overall value of 480,000 for one of its banks Shareholder pact between Netgem and Trust For the purpose of the agreement signed late March 2005, all provisions of the shareholders pact concluded between Netgem and Trust have been cancelled. A new shareholders pact has been concluded between NMS SA and Trust, effective until December 31, The agreement especially stipulates that from January 1, 2007 to December 31, 2008, NMS SA shall have the option to sell all shares held in the Belgian and Dutch subsidiaries to Trust. Viceversa, Trust also has an option for purchase of these very same shares but may not exercise its option until January 1, The price set for these promises was mutually agreed upon by the parties. Netgem is currently unable to estimate the value of this commitment. None Financial commitments received 23.4 Individual right to training During the 2006 financial year, 370 hours of DIF (Individual right to training) were acquired and 158 hours were consumed. The total balance of unconsumed training hours amounted to 627 at December 31, The Company s management considers that to the best of its knowledge, other than those commitments listed below, there are no other existing commitments that could significantly affect its current or future financial position: NOTE 24 Transactions with related parties (in thousands of euros) 31/12/ /12/2005 Customer receivables Other receivables 33 Assets 33 Trade payables Other debt 91 Liabilities 91 48

49 (in thousands of euros) 31/12/ /12/2005 Other purchases and external expenses Personnel expenses Expenses Turnover Income The balances of the above transactions are mainly due to the execution of agreements signed with J2H in July 2004 for the occupation of premises in Neuilly sur Seine and in June 2005, effective as of January 1, 2005, for the provision of legal and fiscal assistance and advisory services. NOTE 25 Interests in joint ventures At December 31, 2006, the contribution of joint ventures (Mediaxim and TV Times Netherlands) to the main operating performance indicators of the consolidated earning statement and balance sheet is detailed below: (in thousands of euros) Joint ventures Subsidiaries Eliminations Consolidated Turnover 1,938 51,692 (980) 52,650 Current operating profit (loss) 10 6,993 7,003 Other operating income and expenses Operating profit (loss) 10 6,993 7,003 Financial income (26) Tax expenses (44) Net earnings (60) 7,994 7,934 Joint ventures Subsidiaries Eliminations Consolidated Goodwill Other noncurrent assets 514 2,274 2,788 Current assets ,385 31,960 Consolidated total assets 1,544 34,021 35,565 Noncurrent liabilities Current liabilities 1,162 17,438 18,600 Consolidated total liabilities (excluding shareholders' equity) 1,647 17,612 19,259 NOTE 26 Financial risk factors 26.1 Liquidity risks According to the definition given by the AMF (French financial market authority), the liquidity risk is characterised by the existence an asset with a longer term than the liability, concretely by the inability to repay shortterm debts if it is possible to use assets or new lines of bank cash. The group deems that it is not exposed to this risk given its general financial structure, the level and structure of its current assets, its lack of significant financial debt and its ability to use new financing if necessary. The following table shows net consolidated debt broken down by term, at December 31, 2006: (in thousands of euros) Less than 1 year 1 to 5 years More than 5 years TOTAL Borrowings for the restatement of equipment leases Current shareholder accounts Reimbursable advances from the Finance and Economics Ministry Deposits and securities received 8 8 Borrowings and financial debt (including current shareholder accounts Marketable securities (4,504) (4,504) Cash and cash equivalents (6,254) (6,254) Consolidated net debt (Source) (10,687) 626 (10,061) 49

50 26.2 Market risks Foreign exchange risks Given the international nature of its business, the group is exposed to an exchange rate risk (Euro/US dollar and Euro/pound sterling) with regard to both its customers and its suppliers. At December 31, 2006, the net exchange position for these currencies was as follows: GBP USD Assets 661 1,256 Liabilities (444) (1,888) Net currency position excl. management 217 (632) Offbalance sheet Net currency position incl. management 217 (632) Impact on the net position of the 1% currency exchange (3) (5) Since July 2006, the group has implemented an exchange risk coverage policy which provides that any significant individual currency operations requires the use of special coverage (generally forward purchases). However, there can be no guarantee that the group will have the necessary resources to efficiently manage its exchange risk in the future and that the policies it follows will prevent it from experiencing losses related to exchange risks. Over the 2006 financial year, the Group showed a net currency exchange gain of 248,000 (see note 8) Interest rate risks At December 31, 2006, the breakdown of assets and financial debts, including current shareholder accounts, depending on whether the rates are fixed or variable, is as follows: (in thousands of euros) 31/12/2006 Rate Borrowings for the restatement of equipment leases 145 Fixed Current shareholder accounts 494 Variable Reimbursable advances from the Finance and Economics Ministry 50 na Deposits and securities received 8 Na Borrowings and financial debt (including current shareholder accounts 697 Marketable securities (4,504) Variable Cash and cash equivalents (6,254) Consolidated net debt (Source) (10,061) Therefore, the group s exposition to interest rate variations only concerns liquidities invested in monetary funds, which are in turn mainly invested in variablerate money markets, and current shareholder accounts are generally paid based on the Euribor. At December 31, 2006, the net position of variablerate financial assets and liabilities amounted therefore to 4,010,000. The impact of a +/ 1 point rate change applied to all variablerate net source of funds and over a full year would amount to +/ 34,000 in the absence of rate hedging. At December 31, 2006, the group had no covered positions. 50

51 Equity risks The Company could be exposed to an equity risk due to the equity is owns outright. This risk, however, is not significant in that, at December 31, 2006, the group only held 5,430 equity shares, representing less than 0.02% of its capital Credit risks The financial instruments for which the group has a credit risk are mainly trade receivables. The group markets its products and services to European customer base. The group periodically evaluates its customers credit risk and financial situation, supplying potential losses on irrecoverable debts. The total of these losses remained within Management forecasts. The Company generally requests guarantees from customers who pose a credit risk. The table below shows a summary of the percentage of turnover from the group s top three, five and ten customers, from the financial years ending December 31, 2006 and 2005, in comparison with total turnover achieved in these financial years: % of turnover achieved from the top three customers in comparison with total turnover 81.7% 60.8% % of turnover achieved from the top five customers in comparison with total turnover 87.5% 73.4% % of turnover achieved from the top ten customers in comparison with total turnover 93.2% 84.3% The Company's cash management policy aims to limit investments to lowrisk shortterm financial instruments. The group s cash and cash equivalents are mainly in euros, and are mostly held in two major French banks. In addition, the group subcontracts the manufacture of all its digital terminals to two industrial manufacturers with production units located in France. The group periodically evaluates its subcontractors capacity to manufacture products that comply with the requested specifications, to respect product delivery times and to uphold acceptable price conditions. The group also benefits from a guarantee for the replacement of products that do not comply with specifications. NOTE 27 Postclosing events Implementation of a liquidity contract In January 2007, the Company announced that from January 15, 2007, it would implement a liquidity contract in line with an ethics charter drawn up by the French AFEI approved by the AMF s decision of March 22, The Company allocated 100,000 euros in cash and 5,430 in treasury shares to the liquidity account for the application of the contract, concluded until December 31, 2007 then automatically renewable for successive 12month periods. 3.6 STATUTORY AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS In compliance with the assignment entrusted to us by your shareholders'annual general meeting, we have audited the accompanying consolidated financial statements of Netgem for the year ended December 31, These consolidated financial statements have been approved by your board of directors. Our role is to express an opinion on these financial statements based on our audit. I. Opinion on the consolidated financial statements We conducted our audit in accordance with the professional standards applicable in France. These standards require that we plan and perform the audit to obtain reasonable assurance as to whether the consolidated financial statements are free from material misstatement. An audit consists of examining, on a test basis, the evidence supporting the data contained in these financial statements. It also included an assessment of the accounting principles applied and the significant estimates made in preparing the financial statements and evaluating their overall presentation. Our tests provide a reasonable basis for the opinion expressed below. We certify that, with regard to the IFRS reference system such as adopted in the European Union, the consolidated financial statements for the year give a true and fair view of the company's assetbase, financial situation, and also the overall performance constituted by the people and entities included within the consolidation. 51

52 II. Justification of assessments Pursuant to Article L.8239 of the French Commercial Code concerning the justification of our opinion, we bring to your attention the following items: As described in note 1.14 of the appendix, the book value of Group assets are examined at each closing date of accounts in order to assess whether there is any indication of impairment. If such an indication exists, the asset's recoverable value is estimated. For goodwill, the recoverable value is estimated at each yearend. An impairment is recorded if the book value of an asset or cashgenerating unit is higher than its recoverable value, as determined by the discounted cash flow method or according to the fair value less sales costs. We have examined the methods implemented in this examination, in particular forecasted cash flows and the assumptions used in this context. In the context of our assessments, we can attest that these estimates are reasonable. The appraisals made in this manner enter into the context of our approach to auditing the consolidated financial statements, taken as a whole, and have therefore contributed to the formulation of our opinion, expressed in the first part of this report. III. Specific verification In accordance with professional standards applicable in France, we have also verified the information given in the group management report. We have no matters to report with regard to its fairness and consistency with the consolidated financial statements Paris La Défense and Paris, 31 May 2007 The Statutory Auditors: CABINET LAUDIGNON ERNST & YOUNG JeanLuc Laudignon Isabelle Agniel 52

53 CHAPTER 4 FINANCIAL STATEMENTS NETGEM SA INCOME STATMENT Fiscal year ended December 31, France Export Total Total Sales of goods 43,330 5,271 48,601 12,704 Cost of goods sold (43,879) (10,167) Writeback of provision on cost of goods sold 8,195 Commercial margin 12,917 2,537 Services sold production 1, Capitalised production costs Other purchases and external expenses (2,592)² (2,824) Added Value 12, Taxes, dues and similar payments (277) (148) Personnel expenses (2,503) (2,216) EBITDA 9,241 (1,616) Provision writeoffs and transferred expenses 931 1,789 Other income 14 Allocations to depreciations and provisions (640) (570) Other expenses (1,723) (546) OPERATING EARNINGS 7,823 (943) FINANCIAL INCOME 114 (921) PRETAX EARNINGS 7,937 (1,864) EXCEPTIONAL INCOME 49 1,020 Corporate income tax 207 (4) NET INCOME 8,193 (848) 53

54 4.2 NETGEM SA BALANCE SHEET Notes Gross Amortizations and Provisions Net Net 31/12/2005 Assets Intangible assets 9 1,190 (539) Tangible assets 10 1,986 (1,426) LongTerm Investments 11 5,245 (1,788) 3,457 3,449 Total fixed assets 8,421 (3,753) 4,668 4,202 Stocks and liabilities 12 3,953 (2,575) 1, Trade debtors and associated 13 17,799 (6) 17,793 4,791 accounts Other receivables 14 1,236 (30) 1, Marketable securities in cash and 15 10,105 10,105 5,098 equivalents Prepaid expenses Total current assets 33,319 (2,611) 30,708 10,736 Translation adjustments Total Assets 41,740 (6,364) 35,376 14,938 Liabilities Net Net 31/12/2005 Shareholders'equity: Share capital 5,975 5,876 Issue Premiums 3,366 53,640 Legal reserve Retained earnings (50,269) Regulated provisions 8,193 (848) Total shareholders equity 16 17,929 8,794 Nonrefundable equivalents funds and Provisions for risks and expenses Trade payables 19 15,453 5,106 Tax and employee related payables 20 1, Deferred income 66 Other debt Total current liabilities 17,346 6,137 Translation gain liability Total equity and liabilities 35,376 14,938 54

55 4.3 VARIATION TABLE OF NETGEM SA NET SITUATION Numbe r of shares at December ,825,9 00 Capital related to the exercise of entrepreneurs share subscription warrants Allocation of income from the previous financial year Capital Amount Issue Premiums Legal reserve Retained earnings Regulated provisions Total Shareholders' equity 5,874 53, (45,408) (4,861) 9,632 9, (4,861) 4,861 Net loss (848) (848) on 31st December ,835,8 5,876 53, (50,269) (848) 8, Capital related to the exercise 521, of entrepreneurs share subscription warrants Allocation of income from the (848) 848 previous financial year Appropriation of the carried (51,117) 51,117 forward account to the issue premiums account Net earnings 8,193 8,193 At December 31, ,357, 233 5,975 3, ,193 17,929 55

56 4.4 APPENDICES TO THE ANNUAL ACCOUNTS GENERAL COMMENTS Information relating to the company Netgem S.A. ("the Company" or "Netgem") is a limited liability company, domiciled in France, organised under the provisions of French law. The Company was formed in June 1996 and is listed as a Cclass share on Euronext Paris Eurolist (ISIN: FR ). The Company and its subsidiaries develop, promote and sell, in France and overseas, equipment and software solutions and digital television solutions & services. More specifically, the Company's main activity revolves around the development and marketing of digital terminals distributed by equipment manufacturers, telecommunications operators or sales networks. General rules for the establishment and presentation of financial statements. The Company's annual accounts have been presented in line with the principles of prudence, independence of financial years and on a going concern basis, and have been prepared in application of the usual accounting practices admissible in France and the rules and methods regarding annual accounts (regulation 9903 of the Accounting Regulation Committee). The basic method chosen for the assessment of goods entered in the accounts is the historical cost method. The assessment methods chosen for this financial year have not been changed in comparison to the previous year. Regulation CRC 0006, with effect from January 1, 2002, defines the liabilities and outlines the accounting and assessment conditions for provisions. NOTE 1 Accounting principles and methods 1.1. Currency transactions Monetary assets and liabilities in foreign currencies are translated at the end of period exchange rate. The differences compared to the original values are recorded in the asset and liability conversion difference accounts. The asset conversion differences on assets and liabilities in foreign currencies not subject to hedging are fully provisioned at yearend Turnover and guarantees Company turnover is mainly derived from earnings resulting from the sale of equipment and software solutions. The Company records the revenues from the sale of solutions upon delivery of the product notwithstanding any other existing obligations. Internetaccess software embedded in solutions has been considered an integral part of the terminal. Netgem records turnover from the sale of maintenance and 1st and 2nd level support services (technical and commercial helpline ) on a straightline basis over the duration of the contract. Netgem offers its clients a 12 to 24month guarantee on faulty equipment, fully covered by the commercial guarantee granted to the Company by its industrial subcontracting agreements Intangible assets Intangible fixed assets are recorded at acquisition cost. These fixed assets mainly relate to licences and software and to development costs undertaken by the Company for the manufacture of new or substantially improved terminals. Development expenses are recorded under assets in the balance sheet as soon as the Company can demonstrate the technical and commercial feasibility of the development project, as well as the availability of sufficient resources to complete the development. Other research and development expenses, which are mainly undertaken to facilitate ongoing maintenance and standard terminal optimisation, are recorded under expenses when they are incurred. Research and development spending recorded under expenses grants entitlement, under certain conditions, to a tax credit recognised in the financial year during which the expenses were recorded. Where it could not be used by deduction on a tax expense, the tax credit may be subject to a reimbursement counting from the fourth year after it is noticed. Since it was founded, the Company has benefited from a research tax credit to the amount of 1,774,

57 Intangible assets are amortised in a straightline method over the following durations: Licenses and software Development costs 1 to 3 years 3 to 4 years Tangible assets Tangible assets are recorded at acquisition cost. Their amortisation is calculated using the straightline method over the probable usage duration of the item, as follows: Plant and machinery Office and computer equipment Office equipment Fixtures and fittings 3 or 5 years 3 years 10years 10 years 1.5. LongTerm Investments Longterm investments correspond mainly to investment securities, receivables linked to these securities, and to deposits and guarantees paid by the Company. Investment securities are recorded at their acquisition cost. Depreciation of securities is recorded if this value is permanently less than their useful value. The useful value is determined based on the mediumterm security growth outlook and on return on investment, assessed on the basis of the discounting of the concerned companies forecast operating cash flow or on the share transaction value. Securitylinked receivables are valued at their nominal value. A depreciation is established on a casepercase basis when the inventory value is less than the book value, on the basis of a risk assessment of the noncollection of receivables Stocks Inventories are mainly comprised of electronic components used for the manufacture of terminals marketed by the Company, accessories used mainly for aftersales service and finished products. Inventories are valued at purchase price, calculated using the first in first out method (components and accessories) and at manufacture price (finished price). An inventory depreciation is made depending on the change in product sales and their market value Customer receivables Receivables are recorded at their nominal value. A depreciation is established on a casepercase basis when the inventory value is less than the book value, on the basis of a risk assessment of the noncollection of trade receivables Prestated income and expenses Prestated income and expenses are derived from the invoicing of products and services that were not consumed (expenses) or rendered (income) during the year Available assets and investment securities The Company defines investment securities as those shares with a maturity date of three months or less at the outset and no significant interest rate risks. Marketable securities are stated at acquisition cost or at their current value if this is lower. Capital gains on disposals are calculated using the first in, first out method Provisions for risks and expenses Provisions are recorded for those risks and expenses whose purpose is clearly specified but whose maturity or amount can not be accurately determined, where an obligation toward a third party exists (of a legal nature or related to the Group's practices or public commitments) and it s likely or certain that the said obligation will ultimately mean the expenditure of resources with no equal compensation in return Retirement commitments As per the provisions stipulated by French law, the Company fulfils its obligations of financing employee retirements in France by paying salarybased contributions to those organisations responsible for the management of retirement programs. Under this scheme, the amount of retirement contributions paid by the Company for the 2006 financial year amounted to 257,000. There is no other commitment linked to these contributions. 57

58 Since 2004, the Company has also fully provisioned it commitments in the area of retirement benefits pursuant to the provisions of the retail, office and IT Collective Agreement relating to voluntary and compulsory retirement. Netgem's obligation to its employees is determined on an actuarial basis using the projected credit unit method. Under this method, the employer's discounted obligation is prorata recorded against the employees'probable years of service, and taking into account actuarial assumptions such as future pay level, life expectancy and employee turnover. The actuarial gains and losses resulting from the revision of calculation hypotheses are fully recorded as income. The Company does not actually apply the corridor method. The financial year benefit, which corresponds to the sum of the cost of services provided, is fully posted under "Payroll". The main actuarial assumptions used by the Company are the following: application of an annual salary reevaluation rate of 2.5%; application of an actualisation rate (net of inflation) of 4%, which corresponds to a 10year OAT rate posted at the end of the year, it was considered that the retirements would occur at the legal retirement age, the employee turnover hypothesis was updated according to the retirement history for the past five years; the mortality table is the TPRV 93 table (base table for annuity contracts) Individual right to training Based on the opinion given by the French National Accounting Council s Emergency Committee meeting of October 13, 2004, and under current marketplace discussions which consider that DIF (individual training rights) commitments are of a specific nature in comparison with other personnel advantages because they present future benefit for the company, the Group considered that, pending further precisions, no provisions should be noted in the December 31, 2006 accounts. Moreover, there are no specific cases justifying the constitution of a provision such as the agreements already concluded on training actions that could not provide future benefit for the company, disputes lasting over two years, or training with no relation to the job occupied Market value of operating assets and liabilities and of debt At December 31, 2005 and 2006, the inventory value of assets and liabilities, such as cash and cash equivalents, trade receivables, other receivables and other operating debts were close to their market value, in consequence of their shortterm maturity Credit risk and concentration risks The financial instruments for which the Company has a credit risk are mainly trade receivables. The Company markets its products and services to a customer base concentrated in Europe. The Company periodically evaluates its customers credit risk and financial situation, supplying potential losses on irrecoverable debts. The total of these losses remained within Management forecasts. The Company generally requests guarantees from customers who pose a credit risk. The table below shows a summary of the percentage of turnover from the Company's top three, five and ten nongroup customers, from the financial years ending December 31, 2006 and 2005, in comparison with total turnover achieved in these financial years: % of turnover achieved from the top three customers in comparison with total turnover 86.4% 77.5% % of turnover achieved from the top five customers in comparison with total turnover 92.5% 88.9% % of turnover achieved from the top ten customers in comparison with total turnover 92.5% 92.7% The Company's has implemented a cash management policy to limit investments to lowrisk, shortterm financial instruments. The Company's cash and cash equivalents are mainly in euros, and are mostly held in two major French banks. In addition, the Company subcontracts the manufacture of all its digital terminals to two industrial manufacturers with production units located in France. The Company periodically evaluates its subcontractors capacity to manufacture products that comply with the requested specifications, to respect product delivery times and to uphold acceptable price conditions. The Company also benefits from a guarantee for the replacement of products that do not comply with specifications. 58

59 1.15. Stock option plans and share subscription warrants Shares issued for the purpose of exercising stock options or warrants are recorded as an increase in capital on the date of exercise and at the price of the exercised options or warrants. In accordance with French accounting principles, the expense relating to the advantage allocated to the beneficiaries of stock option plans, i.e. the difference between the exercise price and the share value on the allocation date is not recorded Treasury shares Given the numerous purposes of the share buyback program and the lack of any precise appropriation, equity shares are recorded as longterm investments Recourse to management estimates in the application of accounting standards The preparation of financial statements requires that certain estimations and assumptions be made by Management, such as provisions for example, which may affect the amounts shown in financial statements. The actual costs borne by the Company may very well differ from those estimations. The main estimates made by Netgem apply to notes 1.10 and 18 which describe the risk and expense provisions set aside by Netgem. When determining these provisions, Netgem took into account the best estimation for these commitments, NOTE 2 Information by business and geographical sectors The Company operates in a single area of activity, namely the development and marketing, both in France and internationally, of massmarket multimedia terminals and professional terminals. Almost 89% of turnover recorded in 2006 was made in France against 73% in Export sales last year ( 5,469,000) are derived in part from the sale of professional terminals in Spain ( 2,032,000), and also from massmarket terminal sales in Luxembourg ( 2,596,000), Australia ( 325,000) and to the English Netgem Ltd ( 261,000). INCOME STATEMENT NOTE 3 Turnover The information relating to the presentation of turnover by geographical area is provided in note 2. NOTE 4 Staff and personnel expenses Workforce The breakdown of the Company's average headcount for each of the categories defined in the agreement on reduced and managed working hours agreed with the social partners on November 28, 2000 is as follows: Executive officers 4 13 Autonomous managers Nonautonomous managers (*). Nonmanagerial staff (*) 1 1 Total average workforce (*) including staff supplied to the company At December 31, 2006, the total workforce excluding staff supplied to the Company was 20 compared to 23 at December 31, In July 2006, given the significant growth of its business, the Company benefited from the provision of technical, marketing and sales staff from its French subsidiary Netgem Media Service SA ("NMS") while at the same time launching a recruitment plan to employ new staff. Personnel expenses and retirement commitments During the financial year ending December 31, 2006, personnel expenses amounted to 2,503,000 compared to 2,216,000 for year ending December 31, The total amount of payments and benefits in kind allocated to members of the Company management and senior management amounted to 616,000 in 2006 compared to 408,000 in

60 No arrangements for paying joining or leaving bonuses have been put in place for the group s company officers. They do not have any specific supplementary pension schemes either. The amount of retirement commitments at December 31, 2006, totalled 33,000, compared to 22,000 at December 31, NOTE 5 Research and development expenses (in thousands of euros) Research and development expenses 1, Capitalised development costs (511) (191) Amortisation of fixed development costs 90 3 Total development costs recorded in the results Capitalised development expenses correspond to the expenditures committed for the production of new or substantially improved materials. They include mainly the costs of prototypes, billed external services, and personnel assigned to development projects. These development activities allowed the Company to benefit, in 2006, from a research tax credit to the amount of 211,000 (see notes 8 and 14). NOTE 6 Financial income (in thousands of euros) Other interest and related income Realised profit on exchange Net gain on the sale of marketable securities Reversals on financial provisions 35 Financial Income Amortisation, depreciation, and provisions (34) (1,034) Interest and related expenses (11) (31) Realised losses on exchange (99) (20) Financial expenses (144) (1,085) Expenses and Investment income 114 (921) The net currency exchange gain of 34,000 recorded for the period resulted primarily from the considerable increase in the Euro against the dollar, which had the effect of reducing the amount of liabilities recorded in dollars. The increase in the net gain on the sale of marketable securities last year is primarily a reflection of the improvement in the Company cash flow situation and an incidental increase in moneymarket returns at the end of the financial year. Allocations during the year mainly covered the provision established for receivables linked to the Company's stake in its Spanish subsidiary ( 30,000). NOTE 7 Nonrecurring profit Exceptional income and expenses includes unusual, infrequent operations, breaking down as follows: Gains (losses) on asset transfers (14) Gains linked to reimbursements to current shareholders accounts (see note 11). 49 1,034 Total 49 1,020 NOTE 8 Taxes Tax provisions had the following impact on income: (Euros in thousands) Annual lump sum income tax (4) (4) Research tax credit 211 Total 207 (4) 60

61 For the past financial year, the Company declared a research tax credit of 211,000, bringing the total research tax credit since it was founded to 1,774,000. At December 31, 2006, the Company had major tax losses ( 48,166,000) which could be used for future profits. According to the 2004 Loi des finances, these losses can now be deferred indefinitely. BALANCE SHEET NOTE 9 Intangible assets (Euros in thousands) Software and licences Research and developmen t expenses GROSS MARGIN At January 1, Acquisitions Exit flows At December 31, ,190 DEPRECIATIONS At January 1, 2006 (441) (2) (443) Allocations (6) (90) (96) Exit flows At December 31, 2006 (447) (92) (539) NET VALUE At January 1, At December 31, Total Acquisitions for the period mainly correspond to development costs incurred in designing a new highdefinition terminal ( 511,000) whose manufacture kicked off in the first half The balance of acquisitions for the period ( 48,000) corresponds mainly to technological licences. Last year, the Company scrapped unused, fully amortised software. This scrapping concerned a gross value of 18,000, with no impact on the Company s income. NOTE 10 Tangible assets (Euros thousands) in GROSS MARGIN At January 1, 2006 Plant and machinery Installations and fixtures 61 Office and computer equipment Office furniture Total 1, ,127 Acquisitions Exit flows (393) (393) At December 31, , ,986 DEPRECIATIO NS At January 1, (609) (60) (827) (84) (1 580) 2006 Allocations (195) (12) (17) (15) (239) Exit flows (393) (393) At December 31, 2006 (804) (72) (451) (99) (1 426) NET VALUE At January 1,

62 At December 31, The main acquisitions for the period concern plant and machinery installed for manufacturing and testing highdefinition terminals ( 218,000), due to the renewal of computing equipment ( 34,000). During the period, the Company scrapped unused, fully amortised computing equipment. This scrapping concerned a gross value of 393,000, with no impact on the Company s income. NOTE 11 LongTerm Investments Longterm investments break down as follows: (Euros in thousands) 31/12/ /12/ 2005 Equity interests and related receivables: Netgem Media Services S.A. 3,241 3,289 Ltd 1,854 1,792 Netgem Iberia S.L. 3 3 Deposits and securities paid Other financial assets 7 7 Gross value subtotal 5,245 5,233 Minus provisions (1,788) (1,784) Longterm investments net 3,457 3,449 At December 31, 2006, the value of equity interests and related receivables held for NMS was 3,228,000 and 13,000 respectively. The following main changes noted in this equity item over the financial year: (i) NMS s reimbursement of 61,000 in interest (ii) the invoicing of 13,000 in current account interest due during the 2006 financial year. Upon closing, the useful value of equity interests and related held for NMS was determined according to NMS s and its subsidiaries mediumterm growth outlook and return on investment, in particular by updating forecast operational cash flow based on 2year projections established by these subsidiaries managers. These calculations were performed using an actualisation rate and a longterm growth rate of 12% and 2% respectively. These calculations did not lead to posting loss in value. Upon closing, the longterm investments related to Netgem@TV Ltd, a full subsidiary, were composed of equity interests and related receivables for a total of 1,854,000. At December 31, 2006, the Company brought the provision from the previous financial year ( 1,784,000) to 1,785,000 by provisioning 100% of equity after consideration of this subsidiary s total historical losses and short and mediumterm outlook. At this date, the net value of Netgem@TV s longterm investments mainly included new advances awarded to the company in December 2006, the Company plans to recover in the 2007 financial year. Finally, as there is no commercial visibility on the Spanish market, subsidiary Netgem Iberia s equity was fully provisioned ( 3,000). At December 31, 2006, deposits and guarantees mainly included guarantee deposits paid to the lessor of the premises in NeuillysurSeine. At this date, the other longterm investments correspond to 5,430 treasury shares acquired by the Company for a value of 7,000 under a share buyback programme approved by the shareholders in April NOTE 12 Stocks (Euros in thousands) 31/12/ /12/ 2005 Gross value 3,953 10,971 Provisions accrued (2 575) (10 680) Net value (Euros in thousands) 31/12/ /12/ 2005 Electronic components 1, Finished analogue and digital terminals 134 Accessories (keyboard, etc.) Net value 1, Last year, the decrease in gross value of inventories and provision is mainly due to the electronic components which 62

63 had been fully provisioned for several financial years being scrapped ( 7,916,000). At December 31, 2006, the gross value of inventories fully provisioned and kept in the balance sheet amounted to 2,575,000, which corresponds to components to be withdrawn within 12 months. The net value of inventories at December 31, 2006 was 1,378,000, up sharply in comparison with December 31, 2005 considering the increase in the group s sale of terminals during the financial year. This value is composed of an electronic component used in the manufacture of highdefinition terminals, which are supplied directly by the group. The Management predicts that these inventories will be sold off within the next twelve months. NOTE 13 Trade accounts receivable Trade receivables and related accounts have a term of less than one year, analysed as follows: (Euros in thousands) 12/ / 2005 Gross value 17,799 5,119 Provisions accrued (6) (328) Net value 17,793 4,791 Last year, the change in gross value of trade receivables was a result of faster terminal sales during the 2006 financial year. At December 31, 2006, foreign currency receivables were not significant. NOTE 14 Other receivables The term for other receivables is under one year, breaking down as follows: (Euros in thousands) 31/12/ /12/2005 State income tax State Research tax credit 211 Current net debtor accounts 33 State Deductible VAT Various debtors Total other receivables 1, At December 31, 2006, the "State income tax" item corresponded to the Group's Treasury receivables resulting from the carryback of tax losses generated in fiscal year This receivable will become payable in 2007 in the context of the liquidation of the 2006 financial year tax. Upon closing, the State Research tax credit item corresponded to the tax administration receivable related to the development activities undertaken in If it cannot be carried forward on a tax expense, this receivable could be reimbursed starting from the fourth year after it is noticed. At December 31, 2006, the Various debtors item mainly included supplier receivables and reimbursements receivable from Company insurers following the occurrence and correction of a quality defect noted on some terminals (see note 18).. NOTE 15 Available assets and investment securities Cash and cash equivalents and marketable securities, both considered to be available for sale, include: (in thousands of euros) 31/12/ /12/ 2005 Marketable securities 4,332 2,335 Cash and cash equivalents 5,773 2,763 Total liquid assets and marketable investment securities 10,105 5,098 The cash and cash equivalents held at the bank are mostly denominated in euros, dollars and sterling pounds. At December 31, 2006, the marketable securities were comprised of openend treasury fund instruments and midterm negotiable bonds. The net capital gains on disposals of marketable securities in the financial year ended December 31, 2006 amounted to 112,000 compared with 58,000 in the previous financial year. At December 31, 2006, unrealised gains on the openend fund portfolio amounted to 5,000. NOTE 16 Shareholders equity 63

64 16.1. Share capital On December 31, 2006, the Company s share capital totalled 5,975,000 and is fully paid up. It is comprised of 31,357,233 singlecategory shares of a nominal value of During the past financial year, the Company issued 521,416 new shares following the exercise of 521,416 warrants for business creation shares ("warrants"). The exercise price of these warrants was 942,000, 99,000 being the increase in capital and 843,000, the issue premium. At December 31, 2006, 50.7% of capital was held by the Company's founding managers and their family. The remaining shares are held in the form of bearer securities (49%) and by Company employees (0.3%) Warrants for business creation shares and options for subscription and/or purchase of shares In June 2006, the shareholders authorised a new issue of 500,000 warrants, each conferring a right to subscribe to one share in the Company at a price of 4 Euros per share. This program replaces that approved by the shareholders in June Over the financial year ended December 31, 2006, 100,000 warrants were allocated by the Company as part of the plan authorised by the shareholders in June This allocation was performed in April 2006 at an exercise price of 1.28 per warrant. A summary of warrant issuance transactions is presented below: Number of shares corresponding to Average option price per share the allocated and outstanding warrants Balance at December 31, , Allocated 520, Exercised (9 917) 1.00 Cancelled ( ) Balance at December 31, , Allocated 100, Exercised ( ) 1.81 Cancelled ( ) 1.31 Balance at December 31, , At December 31, 2006, of this total, 234,501 shares can be subscribed following the exercise of warrants at a weighted average price of 1.52 per share. At the risk of becoming null and void, these subscriptions must occur no later than the following maturity dates: February 18, 2007, for 18,000 shares; July 2, 2007, for 6,833 shares; October 29, 2007, for 15,000 shares; January 15, 2008, for 27,000 shares; and March 22, 2009 for 119,333 shares and September 26, 2010 for 48,333 shares. Shareholders have renounced their privileged subscription rights for the issue of warrants for shares Options for subscription and/or purchase of shares In April 2003, the shareholders authorised the issue of 500,000 subscription and purchase options reserved for employees of Company subsidiaries, for a duration of 38 months, ending June According to the terms of this plan, the subscription option exercise price must equal at least 80% of the average share prices over the twenty days preceding the allocation, and the Company s purchase option exercise price must equal at least 80% of the average purchase price for shares held by the Company. In January 2006, the Company granted 200,000 share subscription options under this plan, at an exercise price of 1.10 per warrant. At December 31, 2006, no allocated options could be subscribed Bonus share program In June 2006, the shareholders authorised the implementation of a bonus share program for salaried employees of the Company or related companies as well as its mandated management for a period 38 months and up to the limit of 1.6% of its capital (representing around 500,000 shares). The minimum acquisition period set by the shareholders is two years, and the minimum retention period was set to two years. As of December 31, 2006, no 64

65 allocation has been made under this plan. 16.5Share buyback program June 2006, the shareholders authorised the launch of a share buyback program, limited to the maximum number of shares representing 10% of the Company s capital. This program replaces the one approved by the shareholders in June 2005, which expired in June At December 31, 2006, the Company held 5,430 equity shares for an amount of 7,000. Over the past halfyear, the share buyback programs authorised by the shareholders in June 2005 and June 2006 were not implemented by the Company s Board of Directors. NOTE 17 Nonrefundable funds and equivalents Other equity corresponds to advances received in 2003 from the Finance and Economics Ministry under the terms of the innovative development projects undertaken by the Company. In June 2006, 25,000 of these advances were reimbursed. The rest will be reimbursed in full in March NOTE 18 Provisions for risks and expenses Provisions break down as follows: (in thousands of euros) 31/12/2005 Allocations Reversals Reversals 31/12/200 used not used 6 Provisions for quality risk Retirement provision Other provisions 4 (4) Total provisions (4) 216 Operating 194 (4) Financing Nonrecurring The provisions for quality risk cover any costs related to the malfunction of terminals sold by the Company. Since the Company provides a global hardwaresoftware solution, it is responsible for industrial and software matters and for final product quality. As a consequence, and in case of hardware or software malfunction, the Company must take the necessary remedial actions by covering the industrial and logistic costs incurred. The provisions for quality risk are evaluated using an analysis of the type and severity of identified flaws and an estimation of the cost of corrective actions to be taken. Since Netgem is covered by a liability insurance policy, which includes epidemic defects, provisions are calculated net of a reasonable estimation of expected reimbursements from the Company s insurers. In November 2006, the Company identified a hardware malfunction that affected some of its terminals, taking industrial and logistic actions to both correct this malfunction in production underway and terminals to customer service and to replace certain terminals already installed with end users. The Company posted the cost of its actions, which were confirmed on December 31, 2006 as financial year expenses, being posted under trade payables on December 31, 2006 (see note 19). It also recorded the insurance benefits to be recovered after its liability policy was posted under income for the period and under other receivables and restatement accounts (see note 14). In addition, the analysis of the residual risk related to this claim led the Company to post a provision of 183,000. The Company considers that its quality improvement actions and its bolstered supplier and industrial partner selection process should enable it to reduce the possible risks related to the malfunction of its solutions and their components, not making it necessary to eliminate them. The Management considers that this claim will be discharged within the next twelve months. NOTE 19 Trade payables The term for trade payables is under one year, breaking down as follows: (in thousands of euros) 31/12/ /12/2005 Trade payables 12,318 4,497 Invoices not received 3, Trade payables 15,453 5,106 Last year, the increase in trade payables was related to the development of terminal sales over the financial year. Moreover, at December 31, 2006, this item included debts whose value is likely based on the corrective actions 65

66 taken by the Company in reaction to a quality defect which occurred in some of its terminals in November 2006 (see note 18). At this date, the Company planned to reimburse part of its debts using its liability insurance policy. These reimbursements were recorded at close with the other debts (see note 15). At December 31, 2006, foreign currency debts amounted to 1,465,000, including 1,431,000 in US dollars and 34,000 in sterling pounds. After converting these debts at the closing rate, the Company observed 55,000 in conversion gain liability. NOTE 20 Tax and employee related payables The term for tax and employeerelated payables is under one year, breaking down as follows: (in thousands of euros) 31/12/ /12/2005 Employeerelated payables Tax payables 1, Tax and employee related payables 1, At December 31, 2006, the increase in the Tax payables item is mainly linked to the increase in group sales in the fourth quarter, and the subsequent increase in VAT collected. NOTE 21 Other debt The term for other debt is under one year, breaking down as follows at December 31: (in thousands of euros) 31/12/ /12/2005 Shareholder advances Advance payments received on orders 162 Other debt 9 Other debt ADDITIONAL INFORMATION NOTE 22 Offbalance sheet commitments 22.1 Obligations under property leases The property lease contracts mainly concern office property and fittings at the Company s head office in Neuilly. Two contracts were entered into in October 1999 and in February 2000, each with a 7year term, with total financing, excluding tax, of 234,000. Leased fixed assets (in thousands of euros) Installations fixtures and Original value Depreciation allowance Net value of the year accrued Capital lease commitments (in thousands of euros) Installations and fittings Instalments paid Instalments to be paid Total to be paid Residual purchase price of the year accrued less than one year 15 years Rental commitments The Company rents its offices in Neuilly sur Seine under a lease which took effect on July 15, 1999 for three, six, or 66

67 nine years, and comes to term in July In February 2005, under the threeyear renewal, the lessor accepted to postpone the threeyear cancellation date to 31 March In December 2005, the Company and the lessor agreed to renew this lease for another three, six or nineyear term beginning on April 1, In the 2006 financial year, the annual rent excluding tax, indexed annually, amounted to 591,000, plus a rentfree period of 32,000 granted by the lessor. Total rent recorded as expenses in the financial years ending December 31, 2006 and 2005 was 572,000 and 587,000, respectively. At December 31, 2006, Minimum future rental payments, exclusive of maintenance expenses, for this lease amounted to 1,353, Industrial commitments The Company provides its industrial subcontractor with a bimonthly estimation of deliveries and orders according to a production plan. At December 31, 2006, all the quantities indicated on the production plan for 2007 deliveries corresponded to firm customer orders Shareholder pact between Netgem and Trust For the purpose of the agreement signed late March 2005, all provisions of the shareholders pact concluded between Netgem and Trust have been cancelled. A new shareholders pact has been concluded between NMS SA and Trust, effective until December 31, The agreement especially stipulates that from January 1, 2007 to December 31, 2008, NMS SA shall have the option to sell all shares held in the Belgian and Dutch subsidiaries to Trust. Viceversa, Trust also has an option for purchase of these very same shares but may not exercise its option until January 1, The price set for these promises was mutually agreed upon by the parties. Netgem is currently unable to estimate the value of this commitment Commitments made or received (in thousands of euros) 31/12/2006 Guarantees given (1) 1,048 Secured, pledged, or mortgaged assets (2) 480 Total 1,528 (1) In May 2006, the Company issued a financing company a joint guarantee commitment of a maximum of 290,000 including tax, designed to guarantee the undertakings of its subsidiary Netgem Media Services SA in an investment project. Moreover, in June 2006, the Company established a payment guarantee of 1 million dollars (around 758,000) for one of its suppliers. (2) As part of the establishment of the guarantee cited in (1), the Company pledged three mediumterm negotiable warrants for an overall value of 480,000 for one of its banks. At December 31, 2006, the Company did not benefit from any significant undertakings. At December 31, 2006, the Company did not benefit from any significant undertakings Individual right to training During the 2006 financial year, 370 hours of DIF (Individual right to training) were acquired and 158 hours were consumed. The total balance of unconsumed training hours amounted to 627 at December 31, The Company s management considers that to the best of its knowledge, other than those commitments listed below, there are no other existing commitments that could significantly affect its current or future financial position: NOTE 23 Balances and transactions with related parties (in thousands of euros) 12/ /2005 Customer receivables Other receivables 33 0 Equity interests & related receivables (see note 6) 3,310 3,300 Assets 3,564 3,711 Trade payables

68 Other debt 241 Liabilities Other purchases and external expenses Personnel expenses Expenses Turnover Income The balances of the above transactions are mainly due to the execution of the following contracts: (i) Terminal and accessory supply agreement signed in July 2003 between the Company and its UK subsidiary Ltd. Under the terms of this agreement, sales invoiced in the financial year by the Company to its subsidiary amounted to 261,000, (ii) Agreements concluded between the Company and J2H SA, Netgem s main shareholder, the occupation of premises in Neuilly sur Seine, J2H s provision of assistance and advisory services and Netgem s provision of administrative and legal services. The rental fees and related expenses invoiced by the Company in the financial year amounted to 154,000, the assistance services invoiced to the Company amounted to 56,000 and the administrative & legal services invoiced by the Company amounted to 12,000. (iii) Human resources and terminal supply agreement signed in December 2005 with subsidiary NMS, under which the services invoiced in the financial year amounted to 24,000, reinvoicing of rental fees to NMS for 53,000 and NMS s reinvoicing of personnel expenses for 163,000. NOTE 24 Subsequent event Implementation of a liquidity contract In January 2007, the Company announced that from January 15, 2007, it would implement a liquidity contract in line with an ethics charter drawn up by the French AFEI approved by the AMF s decision of March 22, The Company allocated 100,000 euros in cash and 5,430 in treasury shares to the liquidity account for the application of the contract, concluded until December 31, 2007 then automatically renewable for successive 12 month periods. 68

69 NOTE 25 List of subsidiaries and shareholdings 1 Subsidiaries (more than 50% of the capital held) NMS S.A. (France Siren no.: Netgem Iberia S.L. (Spain Siren Equivalent: B ) Ltd (UK Siren Equivalent: ) Capital (in local currency) Noncapital shareholders' equity before allocation of income (in local currency) Share of capital owned Book value of securities held ( 000s) Gross Net Loans and advances granted and not yet reimbursed ( 000s) Sums of guarantees made by the company Turnover excl. tax in the last financial year ( 000s) Income in the last financial year ( 000s) Dividends received by the company during the financial year 2,500 (1,109) 100% 3,228 3, (444) 3 (11) 100% 3 94 (11) Observations 1 (1,207) 100% 1 1, (56) At December 31, 2006, provisions on loans and advances amounted to 1,784, Shareholdings (10% to 50% ownership) 69

70 4.5 STATUTORY AUDITORS REPORT ON THE ANNUAL FINANCIAL STATEMENTS In carrying out the assignment entrusted to us by your General Shareholders Meetings, we present you with our report for the financial year ended 31 December 2006 on: our audit of the accompanying financial statements for Netgem, the justification of our opinion; and the specific audits and information required by law. The financial statements have been approved by the Board of Directors. Our role is to express an opinion on these financial statements based on our audit. I. Opinion on the financial statement We conducted our audit in accordance with professional accounting standards. These standards require the application of procedures to provide reasonable assurance that the financial statements do not contain any material misstatements. An audit consists of examining, on a test basis, the evidence supporting the data contained in these financial statements. It also included an assessment of the accounting principles applied and the significant estimates made in preparing the financial statements and evaluating their overall presentation. Our tests provide a reasonable basis for the opinion expressed below. In our opinion, the financial statements give a true and fair view of the company s financial position and of its assets and liabilities at the end of this financial year, and of the results of its operations for the year then ended in accordance with rules and accounting principles generally accepted in France. II. Justification of assessments Pursuant to Article L.8239 of the French Commercial Code concerning the justification of our opinion, we bring to your attention the following items: As described in note 1.5 of the appendix on the accounting principles and methods used for assigning value to equity investments and related receivables, your company may be required to constitute provisions for the depreciation of equity investments when their value in use, evaluated in particular according to mediumterm growth outlook and return on investment, to the actualisation of the concerned companies forecast operating cash flow or to the share transaction value, is lower than the acquisition cost, and for the depreciation of related receivables, based on an evaluation of the noncollection risk. Our work consisted of evaluating the data and assumptions these estimations are based on. In the context of our assessments, we can attest that these estimates are reasonable. The assessments we conducted in this regard are consistent with our general audit findings with respect to the consolidated financial statements and were consequently incorporated into our opinion as expressed in the first part of this report. III. Specific procedures and information In accordance with professional accounting standards, we have also examined the specific information required by law. We have no matters to report regarding: the fair presentation and consistency of the information given in the Board of Director s Management Report and the documents addressed to shareholders with the financial statements and the Company s financial position. the fair presentation of the information given in the Management Report on the remunerations and advantages granted to the concerned corporate officers and the undertakings granted in their favour upon appointment to, termination of or change in these duties, or following such duties. 70

71 In accordance with the law, we have assured ourselves that the various information regarding the identification of the holders of capital is included in the Management Report. Paris La Défense and Paris, May 31, 2007 The Statutory Auditors CABINET LAUDIGNON ERNST & YOUNG JeanLuc Laudignon Isabelle Agniel 4.6 SPECIAL STATUTORY AUDITORS REPORT ON THE REGULATED AGREEMENTS AND UNDERTAKINGS In our capacity as statutory auditors of your Company, we present you with our report on regulated agreements and undertakings. In application of article L of the French Commercial Code, we have been advised of the agreements and undertakings which received prior authorisation from your Board of Directors. Our assignment does not involve seeking out the potential existence of any other such agreements and undertakings but consists of informing you, on the basis of the information provided to us, of the main characteristics and terms and conditions of those agreements brought to our attention, without having to express an opinion on their usefulness or appropriateness. It is your responsibility, in accordance with the terms of article R of the French Commercial Code, to appraise the interest attached to the conclusion of such agreements and undertakings in view of their approval. We conducted our audit in accordance with professional accounting standards. These standards require the application of procedures to provide reasonable assurance that the information provided to us is consistent with the source documents on which it is based. 1. With J2H, your company s shareholder Board Members Concerned Messrs Joseph Haddad and Casey Slamani. a. Nature and purpose: Administrative and financial assistance Terms The Company s board of directors in its March 27, 2006 meeting, authorised the signature of an administrative and financial assistance contract with J2H. In particular, this contract covers the provision of accounting, fiscal, financial and human resources management services. Given J2H s activity and the low volume of transactions recorded by this company, this support service, which took effect on January 1, 2006, was granted in exchange for an annual remuneration of 5,000 excluding tax. The services invoiced to J2H under these terms for the financial year ending on December 31, 2006, amounted to 5,000 excluding tax. b. Nature and purpose: Assistance and advisory services in the legal and fiscal areas and for managing your company s permanent balance sheet operations for J2H. 71

72 Terms On July 4, 2006, your company s board of directors authorised the signature of an assistance and advisory agreement with J2H, which aimed to provide J2H skilled services in the legal and fiscal area and for managing permanent balance sheet operations, starting from July 1, According to the terms of this agreement, these services are evaluated by applying a 10% markup to the average remuneration of the concerned executive, determined using the prorata of actual time spent on the mission. These services invoiced by your company to J2H for the financial year ending December 31, 2006 amounted to 7,431 excluding tax. 2. With Netgem Media Services Board Members Concerned Messrs Joseph Haddad and Marc Tessier. a. Nature and purpose: Joint guarantee commitment. Terms Your company s board of directors, in its April 26, 2006 meeting, authorised issuing a joint guarantee commitment for the undertakings subscribed by its subsidiary Netgem Media Services to Sogelease, the Société Générale group s leasing company, for an investment project for the acquisition of servers and software necessary for its activity. The total amount of these acquisitions stands at 212, including all taxes. They were financed under the terms of a 36month property lease contract signed with Sogelease. The joint guarantee commitment was given by the Company for a maximum of 290, b. Nature and purpose: Subleasing of the premises in NeuillysurSeine (HautsdeSeine). Terms Your company s board of directors, in its July 4, 2006 meeting, authorised the signature of an agreement concerning subleasing part of the office space in the building located at 27, rue d Orléans in NeuillysurSeine (approximately 205 m2) from June 1, This agreement sets the total annual rental fees, excluding tax, at 100,000. The total fees and ancillary expenses invoiced by the Company to Netgem Media Services during the 2006 financial year amounted to 61,833. c. Nature and purpose: Provision of human resources. Terms Your company s board of directors, in its September 7, 2006 meeting, authorised the signature of an agreement concerning Netgem Media Services provision of specialised skills in the technical, marketing and commercial areas to your company, effective from July 1, Under the remuneration conditions for these services, a 10% mark up is applied to the concerned personnel s average remuneration, determined using the prorata of actual time spent on the mission. The total services invoiced by Netgem Media Services to your company during the 2006 financial year amounted to 163,

73 3. With Digitime Board Members Concerned Messrs Joseph Haddad and Marc Tessier. a. Nature and purpose: Subleasing of the premises in NeuillysurSeine. Terms Your company s board of directors, in its July 4 and December 14, 2006 meetings, authorised the negotiation and signature of a subleasing agreement with Digitime, a company in course of incorporation which is 50% held by Netgem Media Services, a full subsidiary of your company, concerning part of the office space in the building located at 27, rue d Orléans in NeuillysurSeine (approximately 55 m2). This agreement, signed on November 16, 2006 for three years starting on November 1, 2006, sets the total annual rental fees, excluding tax, at 26,000, to which 350 in reinvoicing of monthly rental expenses should be added. The total fees and ancillary expenses invoiced by the Company to Digitime during the 2006 financial year amounted to 5,033. b. Nature and purpose: Administrative and accounting assistance Terms The Company s board of directors in its March 27, 2006 meeting, authorised the signature of an administrative and accounting assistance contract with Digitime. In particular, this contract covers the provision of accounting, fiscal, financial and human resources management services. According to the terms of this agreement, signed for one year and effective from October 1, 2006, these services are paid 6,000 excluding tax per year, an amount that can be readjusted in June 2007 according to actual time spent on the services. These services invoiced by your company to Digitime for the financial year ending December 31, 2006 amounted to 1,500 excluding tax. 4. With Netgem@TV Ltd. Concerned board member Mr. Joseph Haddad. Nature and purpose: Financing by current account advances. Terms Your company s board of directors, in its December 14, 2006 meeting, authorised making a maximum financing of GBP 50,000 to Ltd. to cover the subsidiary s shortterm liabilities. This financing, fully paid as current account advances, bears variable interest determined on the basis of 3month EURIBOR rates plus a 2% margin. During the financial year ending December 31, 2006, the advances paid by your company applied to a principal of GBP 15,

74 5. With Mr. Olivier Guillaumin, board member Nature and purpose: Technical audit. Terms Your company s board of directors, in its December 14, 2006 meeting, entrusted Mr. Olivier Guillaumin, cofounder of the Company and codeveloper of its middleware, with a technical auditing mission concerning software solutions developed by an external service provider, with a total budget of 10,000 excluding tax (all fees included). Mr. Olivier Guillaumin did not invoice any services for this mission for the financial year ending December 31, In compliance with the French Commercial Code, we have been advised of the following agreements and undertakings that were approved during prior financial years and whose execution continued during this financial year. 1. With Netgem Media Services Nature and purpose: Provision of human resources and terminal supply. Terms On December 15, 2005, the board of directors authorised the provision of human resources for the completion of a commercial project and the provision of specific terminals sold under the terms of this project to Netgem Media Services. Your company s total invoices for the financial year ending December 31, 2006 for this agreement amounted to 23,668 excluding tax. 2. With J2H a. Nature and purpose: Unstable occupancy of the premises in NeuillysurSeine. Terms Under an agreement signed on August 1, 2004, amended on January 25, 2005, your company granted unstable occupancy rights to J2H, allowing it to occupy part of the office space at 27 rue d Orléans in NeuillysurSeine and giving it shared access various meeting rooms and parking spaces until December 31, In its March 27, 2006 meeting, your company s board of directors authorised the extension of this agreement for an additional three months, until March 31, 2006, on the grounds that this extension would lead to stable occupancy due to its continuation and that it would not alter the financial conditions governing the agreement. The total fees and ancillary expenses invoiced by the Company to J2H during the 2006 financial year amounted to 154,000. b. Nature and purpose: Assistance and advisory services from J2H to your company. 74

75 Terms In its June 1, 2005 meeting, the board of directors authorised the signature of an administrative and accounting assistance contract with J2H in the legal and fiscal area and for managing permanent balance sheet operations. In its March 27, 2006 meeting, your company s board of directors confirmed the extension of these services to the 2006 financial year, with a revision of the remuneration conditions for the services provided by J2H, and for the 2006 financial year, providing for the application of a 10% markup to the average remuneration of the concerned executive, determined using the prorata of actual time spent on the mission. These services invoiced by J2H to your company for the financial year ending December 31, 2006 amounted to 56,250 excluding tax. 3. With Netgem@TV Ltd. Nature and purpose: Supply of digital terminals and related accessories and services. Terms The agreement signed between the two companies concerns terminal and accessory transfer price levels. These prices were determined by taking into account the resale cost of terminals, the purchase cost of accessories, the cost of integration, production and logistic services provided by the Company and finally the market s opportunities for soon obsolete terminals (mainly connect to a telephone network by modem). The total for terminal and accessory sales invoiced by your company to Netgem@TV Ltd. during the 2006 financial year amounted to 260,737. In parallel, during the past financial year, your company bought terminal inventories from Netgem@TV Ltd. for a value of 62,075 to sell them off on the French market. Paris La Défense and Paris, 31 May 2007 The Statutory Auditors CABINET LAUDIGNON ERNST & YOUNG Jean Luc Laudignon Isabelle Agniel 75

76 CHAPTER 5 TABLE SHOWING THE COMPANY S STATUTORY AUDITORS FEES The table below resumes the fees, excluding tax, charged by the Company s Statutory Auditors and the members of their networks for the services performed in the financial year ending December 31, 2006 for the Company and its French and foreign subsidiaries consolidated by the full consolidation method: (in euros) ERNST & YOUNG AUDIT CECC/ CABINET TOTAL LAUDIGNON (1) Audit Statutory auditing, certification, review of individual and consolidated accounts Issuer 91,450 81,642 35,000 30, , ,642 Fully consolidated subsidiaries Other audit assignments Issuer Fully consolidated subsidiaries Subtotal 91,450 81,642 35,500 30, , ,642 Other services (legal/fiscal/social consulting) Subtotal OVERALL TOTAL 91,450 81,642 35, , ,642 (1) Note: Cabinet Laudignon S.A. fully took on the function of the Company s titular statutory auditor following the August 22, 2006, resignation of Cabinet C.E.C.C, which was justified by the firm s inability to meet the Financial Security Law s requirements on rotation of signatories. 76