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COMROD COMMUNICATION ASA – LISTING ON THE OSLO STOCK EXCHANGE 7.6.5 Working capital statement It is the opinion of the Company that the working capital is sufficient for the issuer’s present requirements. 7.7 Discussion of financial condition and results of operations In the following is a description of the financial condition of Comrod AS for the years 2003 to 2005, and for the 3 rd quarter of 2005 and 2006. Comrod AS has experienced a significant growth in activity and revenues over the last years. Revenues for 2003 was 91,648 and the increase from 2002 was 86% from 49,182. The reason was several large new contracts in the defence market, in particular the Bowman contract signed in 2002 and with start-up in 2003. The contract period run from 2003 to 2006. Also, the deliveries of the Visby system started in 2003. The growth continued into 2004 and 2005 with revenues of 106,737 and 109,559 respectively. Additional contracts won in the defence market included the Switzerland contract with deliveries in 2004 and 2005, and the Kuwait contract with deliveries in 2005. In addition, Comrod AS signed an OEM agreement with Harris Corporation in 2005. The cost of materials in the above mentioned periods were: In 2003 the amount was 38,444, equal to 42 % of the total revenues. In 2004 the amount was 31,156, equal to 29.1 % of the total revenues. In 2005 the amount was 28,918 equal to 26.4 % of the total revenues. The portion of material cost in 2003 was relatively high due to the Visby development project. This project was run with an agreement of co-operation with an external partner. Depreciation costs increased from 1,464 in 2003 to 1,857 in 2004 and to 2,522 in 2005. Comrod AS has over the past years put high priority to efficiency improvements and as a result made several important investments in the production area. Some investments made during these years were: - Packing machine - Cellofan removal - Winder - Grinder - Core pull machine - Robot - Building improvements In addition to investments in the production area, Comrod AS implemented a new ERP system (Axapta) in 2006. This has given the company some challenges in the production planning/detail planning during the year and has had a negative impact on the company’s variable salary costs. The operating profit for the years 2003 – 2005 were: 2003: NOK 11,793 with a margin of 13% of total revenues 2004: NOK 26,710 with a margin of 25% of total revenues 2005: NOK 24,342 with a margin of 22% of total revenues The margin for 2003 was lower than in 2004 and 2005, mainly due to higher material costs related to the Visby project. Comrod AS achieved good margins on the defence contracts with deliveries in both 2004 and 2005. 83
COMROD COMMUNICATION ASA – LISTING ON THE OSLO STOCK EXCHANGE Due to a high financial income from currency gains the profit before tax in 2005 exceeded the profit before tax for 2004 despite a lower operating profit. This is mostly related to a currency hedge contract in GBP related to the Bowman deliveries. The turnover for 2006 is expected to be in line with 2004 and 2005, but included the Power operations. The drop in revenue for the communication products in 2006 was mainly due to postponements in Saudi Arabia (the SANG project) and the spare part deliveries to the Bowman contract. These delays combined with delays in deliveries to Kuwait and Switzerland has made a negative impact of the operation result for 2006. The Kuwait delivery has very high gross margins (because of delivery directly to end-user) as has the spare part programme for Bowman. The cost of materials as per Q3 2006 was NOK 28,837 (34.4 % of revenues), compared to Q3 2005 with NOK 22,313 (28.8 % of revenues). The increase is due to Power sales with a higher material cost, and the product mix in general. Since manufacturing of the Power products has been outsourced, the Company has a higher material cost related to these products. Payroll and social security expenses, depreciation and other operating expenses were higher in Q3 2006 than Q3 2005 due to the acquisition of the Power operations in March 2006. Net financial income/expense in Q3 2006 was -4,389 compared to –1,210 in Q3 2005. The main explanation were the acquisitions made of the Power operations and Lerc in 2006, which increased the Company’s interest-bearing debt to Hexagon. The ongoing and future trends are not expected to cause any significant changes on any level. However, with Comrod AS’ strategy of always supporting the company’s customers with superior quality with deliveries and product management quality must be top of mind in the Company’s development combined with market needs and an effective production. Despite the very positive net income for Comrod AS in the last years, the equity ratio has not increased. This is due to group contribution dispositions to Hexagon. 7.8 Investments As per the date of this Prospectus, Comrod Communication ASA, has not made any investments, has no investments in progress nor has the Company decided on any future investments. Investments presented in this section relates to the investments in Comrod AS. Planned investments in Lerc SA are included in section 7.8.4, “Future investments”. Except for acquisitions, investments will primarily be related to extension or improvements in production (premises, machinery, etc.) and on developing products. 7.8.1 Historical investments The table below shows the Comrod AS’ principal investments during the periods for which financial statements are provided in the Prospectus. In 2006 the Company has made two major acquisitions, the acquisition of the Power operations and the acquisition of Fidulerc SA. On 28 February 2006 the Company acquired what is now the the Company’s Power operations from Eltek Energy AS. The purchase consideration for the Power operations was MNOK 25, and the acquisition was financed through an inter company loan. On 15 September 2006 the acquisition of the French company Fidulerc SA with its subsidiary Lerc SA was finalized. The purchase price for Fidulerc SA was MNOK 93.6 (EUR 11.4 million), and the acquisition was settled by an inter company loan from Hexagon Composites ASA. The interest is 6.23% according to a long-term bond loan in Hexagon Composites related to the acquisition. See 84
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