ANNUAL REPORT 2006
Information to Our Shareholders
Annual General Meeting 2007
The Annual General Meeting will be held at 4 p.m. on Tuesday, 24 April 2007 at Gustafs Konferen- scenter, Gustavslundsvägen 151 G in Bromma (underground station: Alvik). An offi cial notifi cation will be published not earlier than six, and not later than four weeks, before the meeting. To be entitled to participate in the Annual General Meeting, shareholders must be registered in the share register maintained by VPC AB (Swedish Central Securities Depository & Clearing Organization) not later than 18 April 2006 and must notify the company of their intention to attend the Annual General Meeting by 4 p.m. on Wednesday, 18 April 2007. To be entitled to participate in the Meeting, shareholders whose shares are held in the name of a trustee must temporarily re-register their shares with VPC in their own name. Such registration must be completed not later than 18 April 2007.
Financial Reporting
January – March 2007: April 24 January – June 2007: July 24
January – September 2007: October 23 Year end report 2007: January 30, 2008
All fi nancial reports and other press communiqués are available on the Company’s web page:
www.effnetholding.se
Contents
Brief Presentation of the Group
Information to Our Shareholders 2
About Effnet Holding 3
Highlights of 2006 4
Five Year Summary 5
The Business
Message from the CEO 6
Mission Statement, Goals and Strategies 8
Personnel and Organization 9
Factum Electronics AB 10
Effnet AB 14
Board, Management and Owners
Board, Management and Auditors 18
The Effnet Share and Shareholders 20
Financial Information
Board of Directors’ report 22
Income Statement 26
Cash Flow Statement 27
Balance Sheet 28
Change in Equity 29
Notes 30
Proposed Distribution of Unappropriated Earnings 36
Audit Report 37
Other Information
Financial Glossary 38
Technical Glossary 38
Addresses 40
About Effnet Holding – developing leading-edge technology for digital communication
The Business
The Effnet Group is active within advanced digital communication and, within its niches, serves customers in market segments characterized by high growth potential. The Group’s products are based on leading technology and its mission is to be the leader in the respective market segments.
The Group has two business areas, Digital Broad- casting and Header Compression.
Digital Broadcasting
Factum Electronics AB is a leader within DMB, digital multimedia broadcasting, which also includes digital radio, DAB. Factum Electronics develops and sells systems and components to radio/television stations and network operators worldwide. Factum Electronics also supplies modular software developed by the
company (middleware) for manufacturers of chipsets for DMB receivers, mobile terminals as well as tradi- tional stationary sets, and components for digital stereo sound for analogue television broadcasts (NICAM) for radio/television stations and network operators.
Header Compression
Effnet AB develops and sells the Effnet Header Compression family of software products. Effnet Header Compression increases the effi ciency, speed and reliability of IP traffi c in mobile, fi xed and satellite based networks. Typical customers are manufacturers of chipsets, protocol stack vendors and manufacturers of infrastructure systems and terminals, mainly within telecom. Effnet is the leading supplier within its fi eld.
EFFNET HOLDING AB (PUBL) Parent company
FACTUM ELECTRONICS AB Digital Broadcasting
EFFNET AB
Header Compression
2006 2005 2004*
Net sales 36.3 53.8 27.3
Operating profi t -3.6 14.6 -7.2
Net profi t 1.2 17.8 -
Number of employees at year-end 27 23 22
EARNINGS TREND, MSEK
* Pro forma fi gures are reported for 2004, see Note 1.4.
NET SALES 2006, MSEK
Rest of World 0,2
Europe 23,3 North America 1,7
NET SALES 2006, MSEK
Digital Broadcasting 33,3 Header Compression 3,0
Asia 11,1
Highlights of 2006
• During the year, Effnet has contributed to Robust Header Compression (ROHC) being included in the standards for WiMAX (mobile broadband) and DMB.
• During 2006, Effnet and Intel jointly conducted testing and validation of Effnet ROHC ™ on Intel’s new Dual-Core architecture. The tests were very successful and resulted in a joint white paper, which was published in the beginning of 2007.
This white paper is available for downloading at www.effnet.com.
Events in the beginning of 2007
• Factum Electronics received a strategically important initial order in conjunction with the continued DMB expansion in South Korea.
• Factum Electronics delivered a complete DMB system to Singapore, which thereby became yet another country that has chosen DMB technology for the digitizing of radio and the broadcasting of mobile television.
• Hitachi converted its test license bought in 2006 into a production license.
• Effnet has entered into a licensing and coope- ration agreement with Infi neon, a manufacturer of chipsets and mobile telephony platforms, and its subsi diary Comneon, a protocol stack vendor. The deal is a breakthrough for Effnet within the WCDMA segment.
• Factum Electronics entered into a strategic alliance with Harris Corporation, giving Factum access to Harris’ global distribution network.
The Group reports a net profi t of MSEK 1.2 (17.8) or SEK 0.01 (0.16) per share.
Increasing activity within the markets of both business areas.
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The Group
• The Group reports a net profi t of MSEK 1.2 (17.8) or SEK 0.01 (0.16) per share.
• The board was reinforced with two independent members, Peter Jacobsson and Lennart Pihl.
Factum Electronics AB
• Factum Electronics maintained its strong market position during the year. Net sales amounted to MSEK 33.3 (35.1).
• Factum Electronics received DMB orders from broadcasting companies and network operators in Germany, Switzerland, Norway and Italy, among other countries.
• DMB was further developed as the strongest inter-
national standard for digital multimedia broadcasting,
including digital radio (DAB) and mobile TV.
• During the year, Factum Electronic launched middle ware, a modular software product for DMB receivers.
• The NICAM business continues to be stable and profi table.
Effnet AB
• Effnet received new orders for test licenses and customization projects during the year. Sales amounted to MSEK 3.0 (18.7).
• Effnet strengthened its position as the leading
supplier of Header Compression with the
complete and updated software family Effnet
Header Compression.
Net sales Sales growth Operating income Operating margin Value-added ratio Net profit/loss Cash flow
Total assets Equity
Equity/assets ratio Cash and cash equivalents Return on equity
Return on capital employed
Number of employees Average number of employees Net sales per employee Value added per employee
Number of shares, thousands, at end of year Number of shares, thousands, average Number of shares with maximum dilution, thousands, at end of year
Net sales per share, SEK Net sales per share, SEK Cash flow per share, SEK
Cash and cash equivalents per share, SEK Equity per share, SEK
Share price at year-end, SEK Price/equity
Market value
Dividend per share, SEK
36.3 -32 % -3.6 Neg 49 % 1.2 -4.5
47.4 39.8 84 % 23.4 3 % Neg
27 24 1.5 0.7
108,668 108,668
112,133
0.33 0.01 -0.04 0.22 0.37 1.86 508 % 202.1 0.00*
53.8 97 % 14.6 27 % 64 % 17.8 13.4
46.0 37.9 83 % 29.2 61 % 50 %
23 21 2.6 1.6
108,668 108,668
108,668
0.50 0.16 0.12 0.27 0.35 2.14 613 % 232.5 0.00
27.3 32 % -7.2 Neg 49 % Neg -10.6
26.3 20.1 76 % 16.5 Neg Neg
22 22 1.2 0.6
108,668 108,668
108,668
0.25 Neg -0.10 0.15 0.19 0.49 265 % 53.2 0.00
20.8 109 % -12.6 Neg 24 % Neg -13.6
26 23 0.9 0.2
108,668 108,668
108,668
0.19 Neg -0.12
9.9 -3 % -62.0 Neg Neg Neg -57.2
32 38 03 Neg
108,668 108,668
108,668
0.09 Neg -0.53
Five Year Summary and Key Ratios
Comments
The present number of outstanding sha- res has been used in the calculation of key ratios. At the Annual General Meet- ing on April 26, 2006, it was resolved to issue an option program directed at the employees. As per December 31, 2006, outstanding options could be converted to 3,465,000 shares. The exercise price of SEK 4.92 exceeded the market price at the turn of the year, which is the rea- son the key ratios have not been calcula- ted including any dilution.
Pro forma fi gures are presented for 2004 and prior years, see Note 1.4.
Certain comparative fi gures are, there- fore, not meaningful.
A fi nancial glossary is available on page 38.
MSEK 2006unless stated otherwise 2005 2004 2003 2002 NET SALES, MSEK
10
0 20 30 40 50 60
2002 2003 2004 2005 2006
Message from the CEO – Excellent position on markets with strong growth potential
Leading Products Digital Broadcasting
Factum Electronics AB, our subsidiary active within Digital Broadcasting, reported slightly lower sales than in the previous year but was still operating profi tably.
The decrease in sales was due to a delay in the regional rollout of DMB (Digital Multimedia Broadcasting) in South Korea. When writing this, Factum Electronics has however received its fi rst order in conjunction with this regional expansion. Since year-end, Factum has also received additional orders, amongst them one from Singapore, a new country on the DMB-map.
This illustrates the reality in which we live with major fl uctuations in the markets due to both commercial and political decisions.
Digital radio has existed for over a decade but it is not until recently that it has started to catch on. The growing interest is partly due to the increasing move towards digitization of analogue radio but also due to the improved functionality of DMB compared to DAB (Digital Audio Broadcasting). To date thirty countries have launched DAB/DMB and additional countries are added to the list every year. Compared with competing digital broadcasting standards, DAB/DMB is techni- cally superior and it is also the most cost effective technology. As before, we still see a large potential
for mobile TV, where DMB, unlike other competing technologies is already operational and commercially used in several countries.
During the year Factum launched Middleware, a new product range within the DMB-family. This product range of modular software enables us to reach new customer categories, primarily manufacturers of chipsets for DMB-receivers intended for mobile terminals as well as stationary radio sets.
Factum Electronics is also active within NICAM, digital stereo sound for analogue television. This is a pure component business with mature sales and good margins. For many countries the transition to digital TV is not yet an economically viable alternative and therefore we believe that NICAM will continue to generate profi ts for many years to come.
Header Compression
Effnet AB offers a range of thoroughly tested and well-functioning software products, which offer our customers excellent alternatives to in-house devel- opment, both in terms of time-to-market and cost effectiveness. The single most important market for Effnet Header Compression is the telecom sector, and specifi cally 3G within mobile telephony. Within 3G two different standards dominate, CDMA-2000 and
Effnet is the technology leader in both of its business areas. In fact we are often ahead of the markets in which we operate. Our markets are in the early stage of development and have signifi cant growth potential. We have strong brands supported by high-quality products and we have a very good reputation among our customers and partners who are world-leaders in their respective fi elds.
The Group’s most important assets
Effective organization with skilled staff and quality products.
Market segments with high growth potential
Technical and market leadership
Strong brands: “Effnet – the Experts in IP Header Compression” and
“DMB by Factum”
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WCDMA. Header compression has been recommended within both standards and has proven critical for successful operation of IP-based services. CDMA-2000 is used mainly in the U.S. and Asia, while WCDMA, which has been developed in Europe, is used all around the world. The WCDMA market is growing much faster than CDMA-2000 and the number of WCDMA- terminals in use in 2010 is anticipated to be many times larger than the number of CDMA-2000 terminals.
During 2005 Effnet got a breakthrough order from US-based Qualcomm, the market-leading manufac- turer of chipsets for CDMA-2000 terminals. During 2006, Effnet’s efforts focused on the manufacturers of infrastructure equipment for CDMA-2000 and on manufacturers of infrastructure equipment and terminals within the larger segment, WCDMA. We worked very closely with our customers in their evaluation of our software and during the year we sold test licenses to amongst others the Japanese company Hitachi and to a leading US operator.
In the beginning of 2007 we began to see the results of our efforts in 2006. In February, Hitachi converted their test license for Effnet Header Compression into a production license intended for their infrastructure products within CDMA-2000. In March we got a break- through order within the WCDMA-segment when Infi neon, a manufacturer of chipsets, licensed Effnet’s software for integration into the protocol stacks of its subsidiary Comneon and into its own 3G platform.
Additional evidence that Effnet is on the right track came in February of 2007 when our co-operation with Intel, the US chipset manufacturer, was documented in a joint “white paper”. The tests verify how Effnet’s software effi ciently integrates with Intel’s latest dual core chipsets and confi rm the signifi cant performance gains that can be achieved by operators using Effnet Header
Compression to balance the large increase in network traffi c, which is expected as a result of increased data traffi c.
With these important milestones behind us we are convinced that our focus and patience lead to long-term results.
Financial strength
Effnet has an equity/asset ratio of 84 percent, MSEK 23 in liquid assets, no borrowings and the Effnet share, which is traded on the First North list of the Stockholm Stock Exchange, has very deep liquidity. Our fi nancial strength provides us with room to manoeuvre whether we want to grow organically or acquire complementary operations.
Outlook for 2007
In recent years, both Factum and Effnet have succeeded with their strategy of selling their products to leading companies within market segments with high growth potential. The natural next step for both of our product areas, would, therefore, be strong growth with high profi tability i. e. a continuation of the outcome for 2005.
I hope that the fl uctuations in sales we have experienced over time shall be overcome. This may be achieved as markets mature and by continuing building a license portfolio with recurrent and increasing revenue streams.
Finally, I would like to thank all staff members for their excellent efforts during the past year.
Stockholm in March 2007 Hans Runesten
President and Chief Executive Offi cer, Effnet Holding AB
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Excellent reference customers, BBC, Hitachi, Infineon, KDDI, Kyocera, Qual- comm, etc
Strong fi nancial position, no borrowings and deep liquidity in the share
License portfolio with recurrent and growing revenue streams
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Mission Statement, Goals and Strategies
– Shareholder value through long term profi table growth
Mission statement
The Group’s mission is to deliver leading-edge products and services within digital communication to customers in market segments with high growth potential.
Overall goals
The Group’s overall goal is increased shareholder value created primarily through long-term profi tability and growth.
Financial goals
A number of fi nancial goals have been established.
The aim of these goals is to strengthen the focus of the operations on the Group’s overall goal, and to limit risk.
The fi nancial goals apply to the present Group structure and risk level, which is the reason they may be adjusted due to changes, such as an acquisition.
Cash fl ow and result
Each business area should show a positive cash fl ow and make an operating profi t.
Equity/assets ratio
Considering that the business has a relatively high risk level, the equity/assets ratio should be at least 40 percent.
Earnings per share
Earnings per share should continuously improve. The Group may issue new shares in conjunction with an acquisition, or for other reasons. The guideline when doing so is that earnings per share should always be improved.
Dividend
Currently, the Board prioritizes the Company’s capital requirements for expansion, as well as investment in product development and in new or complementary businesses.
Strategies
The Group’s main strategy is to further develop its
businesses on the basis of organic growth. In addition,
the Group can be expanded with new or complementary
businesses through acquisition, provided that they create
added value for the shareholders.
Personnel and Organization – competent employees
Organization structure
The organization of the Effnet Group is strongly customer oriented, with marketing and sales staff closely tied to the respective business areas. Both business areas have strong research and development departments. The business of Factum Electronics is conducted in Linköping, whereas Effnet is located in Bromma and Luleå. Group functions are located at the headquarters in Bromma.
The sales organizations for the business areas consist partly of own personnel based in Sweden, with a global fi eld of operation, and partly of an expanding network of agents in the key markets. Development engineers are increasingly being used in the sales process, which is very technology intensive.
Recruitments
The average number of employees during the year amounted to 24 (21). At the turn of the year, there were 27 (23) employees, of whom 2 (3) women. The increased number of employees is a result of long-term investments in product development, including the recruitment of new development engineers. Furthermore, production and logistics capacity has been strengthened.
Options program
At the 2006 General Meeting, it was resolved to launch an option program for employees. The reason behind the program was the desire to increase the employees’
interest in the Group’s business and to foster a tangible connection between the earnings trend and benefi ts, enabling the Group to recruit and retain competent personnel.
Equal opportunities
The Group is active in a traditionally male-dominated fi eld. The Effnet Group offers its employees equal opportunities regardless of gender, race, religion or other background or affi liation. Competence and achievements are the only criteria in employment or promotion.
Flexibility
The Group strives for a great deal of mutual fl exibility vis-à-vis its employees. This fl exibility means that the Group is positively inclined to parental leave and, for instance, leave for studies. In return, the employees are expected to be fl exible regarding working hours, vacation and the like. Three individuals were employed part-time at the turn of the year.
Competent personnel/High level of education The Group’s personnel generally have a high level of education. The development engineers have long experience and sound knowledge within their respective fi elds.
Jörgen Scott, CTO Factum Electronics
“Working within the Effnet Group entails many interesting challenges. Here, you can develop both in your field of work and as a person. The key words are freedom with responsibility.”
EMPLOYEES PER FUNCTION 2006 Management and administration 11%
Sales and marketing 27%
Research, development and production 62%
EDUCATIONAL LEVELS WITHIN THE GROUP 2006
Others with academic degrees 15%
Institute (university) of technology/equivalent 67%
Senior high school 18%
AGE STRUCTURE 2006 -29 years 8%
30-39 years 59%
40-49 years 22%
50- years 11%
Employee turnover, percent Average number of employees
Average number %
2006 2005 2004 2003 2002 0 10 20 30 40
0 10 20 30 40
Factum Electronics AB – continued strong position
Customers are radio and TV stations worldwide and their network operators. Middleware was developed during 2006, a product group aimed at new customer groups and with a new business model, in which modular software is licensed to manufacturers of chipsets and receivers.
Digital Multimedia Broadcasting (DMB) Customer value
DMB is a worldwide standard for digital broadcasts of radio, data and TV to mobile receivers. The DMB technology offers customers the possibility of providing a broader offering in combination with lower operating costs and better quality. Additionally, capacity utilization can be adjusted over time.
DMB is the technically and economically most effi cient method of broadcasting TV to mobile handsets (mobile TV).
Products and technical advances
Factum Electronics is a world leading supplier of complete systems solutions within DMB. ”DMB by Factum” is now an established and strong brand. ”DMB by Factum”
stands for user friendly, fl exible and high-quality systems and components. The product range comprises, among others items, audio encoders, multiplexers, equipment for IP and video broadcasting, control and monitoring systems, testing systems, and solutions for complete
system redundancy. Customers use the equipment in the interface between the studio and the broadcasting mast.
Requirements for the availability of services and reliable systems solutions are increasing in line with the rise in the number of regularly scheduled digital broadcasts, which implies signifi cant market advantages for Factum Electronics’ solutions for redundancy, that is, back-up systems for assured operation.
In addition, Factum Electronics engages in continuous development and refi nement of its product range in close collaboration with its customers. During 2006, Factum Electronics developed the DMB system with, for instance, functions for conditional access (CA) and electronic program guide (EPG).
During the year, Factum Electronics, together with WorldDMB, participated in the development of a supple- mentary audio encoding algorithm for digital radio in the DMB standard, DAB+ (advanced audio coding). During 2007, this function will be added to Factum Electronics’
DMB system, which means that the operator can offer more audio services within available capacity.
Market
The market for DMB is expected to expand considerably during the coming years. The available frequencies for digital broadcasting will increase gradually as analogue TV and radio broadcasts are switched off. The European frequency conference RRC06 determined that the Maria Hedqvist, accounting manager, Factum
Electronics
“In my work with finances at Factum, I have many international contacts, which is both exciting and educational.”
Factum Electronics AB develops and sells components, software and systems for digital
radio (DAB) and digital multimedia broadcasting (DMB), as well as components for digital
stereo sound for analogue TV broadcasts (NICAM).
frequencies on which analogue TV and radio are currently broadcasted will be used for digital broadcasting in the future. However, such an extensive technology shift can take several years and is often dependent on other, political decisions.
Today, more than 500 million people have access to more than 1,000 different DMB services. The number of consumers and the number of services are quickly increasing as more licenses are handed out and more countries introduce the DMB standard.
Denmark, Norway, Switzerland, Great Britain and South Korea are among the leaders within DMB, with reception in the majority of the respective countries.
In South Korea, the development of DMB has been rapid. During the fi rst year of regular broadcasts, over two million receivers were sold. During 2007, South Korea plans to expand with regional broadcasts outside Seoul.
Development has also started in Belgium, Italy and Germany. Germany began sending TV to mobile handsets in connection with the soccer world champi- onship in 2006. This is the fi rst European commercial license for mobile TV based on co-operation between the broadcasting and telecom industries. For Germany, too, Factum Electronics was entrusted with the task of delivering the DMB systems.
DMB tests are now being conducted in several other countries, such as China, in preparation for the 2008
Olympics. Mobile TV is a driving force in the expansion of DMB. During the year, WorldDAB has changed name to WorldDMB, to underscore the fact that the technology carries all types of multimedia services with which DAB is associated, not just radio.
At present, broadcasts in Sweden cover the metro- politan areas, representing approximately 35 percent of the population. However, the broadcasting network is already covering 85 percent of the population. The Swedish Radio and TV Authority has been commis- sioned by the government to investigate broadcasting technology for radio in Sweden. A fi nal report will be completed no later than the summer of 2008.
Customers
Factum Electronics is currently the leading supplier within DMB. Factum Electronics has sold complete DMB systems and components to public and private network operators and to broadcasting companies in a large number of countries. Examples of customers are Swedish Radio and Teracom in Sweden, NRK and Norkring in Norway, Danish Broadcasting Corporation in Denmark, T-Systems in Germany, SRG SSR idée Suisse in Switzerland, VRT in Belgium and the BBC in Great Britain. In South Korea, Factum Electronics is the leading supplier of DMB systems, with all larger broadcasting companies as customers.
Mobile TV via DMB will bring new customers, such as mobile operators.
Product group Standard Market segments Target groups DMB-systems ETS 300
401
Digital broadcasting networks, digital mobile phone networks
Broadcasters, system suppliers and network operators Middleware ETSI TS
802 818 /102 371
Mobile phones and digital radio receivers
Chip manufacturers, manufacturers of mobile phones and digital radio receivers NICAM
encoders/
modulators
EN 300 163 Analog broad- casting networks, cable TV
TV stations, system suppliers and network and cable TV operators FACTUM ELECTRONICS’ PRODUCTS AND MARKETS
An in-depth technical description of Factum Electronics’ products is available at http://www.factum.se.
More information on DMB is available at http://www.worlddab.org.
Competitors
There are a handful of competitors within the DMB market today. Measured in new sales of DMB multi- plexer systems, Factum Electronics is the market leader, followed by the competitors RadioScape (UK), VDL (F) and Rohde & Schwarz (D).
USA and Japan have chosen other standards for digital radio, HD-Radio and ISDB, respectively. Furthermore, there are other standards regarding digital long-wave radio and satellite radio. Within TV to mobile, there is also competition from the standards DVB-H and MediaFLO.
Middleware Customer benefi ts
DMB technology is now suffi ciently mature for more advanced data services, and interest in such services has increased among both broadcasters and consumers.
This means that digital radio receivers and mobile phones must be able to handle the decoding of these new services. Such program modules, which functionally are between the receiver hardware and the applications, are called middleware.
Low development costs and time-to-market are important for chip and receiver manufacturers, and thus the access to ready-made program modules for decoding of advanced services is also important.
Products and technological development
As the leading developer of DMB systems, Factum Electronics has unique knowledge as regards the manner in which the different services are coded before broadcasting. Based on this knowledge, Factum Electronics has, during 2006, developed the fi rst middleware program module, Factum EPG MW, for the decoding of electronic program guide (EPG).
Through the capacity to develop and test the entire chain, the compatibility of Factum EPG MW with the DMB standard is guaranteed.
Parallel with Factum EPG MW, an EPG client and simulator have also been developed. The client is a tool, which can be used by broadcasters to begin sending electronic program information. The simulator is used by chipset and receiver manufacturers in the devel- opment of applications based on Factum EPG MW.
Factum Electronics can also offer the chipset and receiver manufacturers a DMB test system, which is a system with limited functionality to locally broadcast DMB signals and thus enables the testing of chipsets and receivers.
In forthcoming years, Factum Electronics will cooperate closely with its customers to develop additional program modules for the decoding of other services. Some examples of potential future program modules are: traffi c information (TPEG), slide show (SLS) and broadcasting of web pages (BWS).
Markets
The market for DMB receivers is expanding rapidly. For instance, Eureka Research estimates that 145 million digital radio receivers will have been sold by the year 2012. To this should be added mobile phones with built- in DMB reception and other types of DMB receivers.
This, together with the need for advanced data services, makes middleware a strong growth market.
The ability to offer program modules such as Factum EPG MW raised a great deal of interest among chipset manufacturers and their customers when the product was launched at the international broadcasting conference IBC in September 2006.
Customers
The customers can be divided into three groups; chipset manufacturers, module manufacturers (provide the base chip with processor capacity and certain software) and receiver manufacturers. The chipset manufacturers deliver to several module manufacturers who, in turn, Complete DMB system from Factum Electronics,
with audio encoder, video encoder, server, multip-
lexers and redundancy switch.
deliver to many receiver manufacturers. By chiefl y focusing on the chipset manufacturers, a huge number of end users can be reached effi ciently.
Discussions are ongoing with a number of chipsets manufacturers who have shown interest in jointly creating a reference installation of Factum EPG MW on their respective chipsets.
The largest concentration of chipset manufacturers is in India, China, Great Britain, South Korea and Taiwan, markets in which Factum Electronics is already active with DMB systems.
Competitors
Competition consists of the larger receiver manufac- turers developing their own middleware modules.
Examples of such customers, which could conceivably sell their program modules separately, are Imagination Technologies/Pure, Great Britain, and NDS, Israel.
Digital stereo sound in TV broadcasts (NICAM) Customer benefi ts
The transition to digital TV will take time. In the interim, NICAM (Near Instantaneous Companded Audio Multiplex) is a cost-effective solution for the network operator when upgrading current analogue TV broad- casts with digital stereo sound. The network operator also gains the possibility of sending two languages simultaneously via their analogue system. NICAM, like teletext, is a supplementary service. NICAM receivers are integrated in all modern TV sets.
Products and technological development
Factum Electronics offers well-tested NICAM compo- nents for installation in a TV studio or in a TV transmitter.
Factum Electronics also sells NICAM modules to suppliers of complete main centrals for cable TV. The main product is a component for NICAM encoding developed by the
company. The products are continuously being adapted for customers and modernized.
Markets
Today, NICAM is used in approximately 35 countries.
The largest part of the NICAM market at present consists of reconditioning and complementary additions to existing networks. For an additional number of countries, NICAM could be an interesting solution for upgrading of the analogue TV networks.
Customers
Factum Electronics has NICAM customers among TV stations, network operators, system integrators and transmitter manufacturers around the world.
Competitors
Factum Electronics meets insignifi cant competition within NICAM as regards broadcasting. Within the cable TV sector, there are some smaller competitors.
Business Model
Factum Electronics’ revenues refer to delivered systems and components. Added to this are fees for customi- zation projects and training, as well as revenues from maintenance. Factum Electronics sells a large number of systems and components every year, where a component can be priced at a few thousand Swedish kronor, while a system can cost anywhere from a hundred thousand to several million Swedish kronor.
Establishment of the new business area middleware has generated sales based on license revenues and royalties from new customer categories such as chipset and receiver manufacturers, for instance mobile phone manufacturers.
During 2006, Factum Electronics had net sales of MSEK 33.3 (35.1).
In 2006 Factum Electronics entered into a strategic alliance with Frontier Silicon, the leading manufacturer of chipsets for DMB/mobile TV.
Factum Electronics entered into a strate-
gic alliance with Harris Corporation in the
beginning of 2007, which gives Factum
access to Harris Corporation’s global
distribution network.
Effnet AB – en route to the next milestone
Effnet AB develops and sells the software family Effnet Header Compression and related support services to manufacturers of chipsets, protocol stacks, infrastructure equipment and terminals, mainly within telecom. Effnet Header Compression saves bandwidth and improves the effi ciency, speed and reliability for IP traffi c in mobile, fi xed and satellite based networks.
Effnet Header Compression (HC) Customer benefi ts
In IP traffi c, information is sent in data packets consisting of a header and a message. The header, which can be the largest portion of the data packet, is essentially an address label containing information regarding the packet’s contents, origin and destination. Effnet’s Header Compression products compress the header of the data packet so that space is freed in the data link and more data packets can be sent, increasing the transfer speed. The reduced packet size also improves reliability and quality, as the risk of interference decreases.
Effnet Header Compression provides the greatest user value for applications sending many small infor- mation packets in which the ”header” is relatively large, such as Voice over IP, Video over IP, WiMAX and multimedia services, as well as for mobile IP via links with limited and costly bandwidth. This makes the products attractive to, for instance, manufacturers of infrastructure systems and terminals for fi xed and mobile networks and their subcontractors, as well as to manufacturers of equipment for satellite networks.
Telecom: Mobile networks
Effnet Header Compression enables a more effi cient usage of expensive network capacity. Through reduced bandwidth requirements and the decreased packet losses, the capacity in the networks is increased while response times are simultaneously shortened. The increased speed of information transmission also results in increased quality and interactivity during multimedia transmission. Studies have shown that Robust Header Compression can improve capacity by In IP traffic, information is sent in data packets consisting
of a header and a message. Effnet’s Header Compression products compress the header of the data packet so that space is freed in the data link and more data packets can be sent, increasing the transfer speed.
HEADER COMPRESSION
Uncompressed header 40 bytes Compressed
header 2-4 bytes
IP UDP RTP DATA DATA
50 to 100 percent, depending on the network type, and reduce costs. The operators can also take advantage of Effnet Header Compression in IP based radio access networks where the cost of bandwidth is high.
Telecom: Fixed networks
Traditional fi xed networks are also moving towards IP based technology to achieve cost advantages and be able to handle both standard telephony and data traffi c. The telecom operators are shifting their entire offerings to IP based networks in order to compete with the Internet service providers’ telephony services.
Effnet Header Compression enables the operators to economize on bandwidth, while still allowing a large number of users at a lower cost. The advantages of more even and secure IP traffi c are obvious.
Satellite networks
Routing IP traffi c via satellite results in access anywhere, but this technology has hitherto been expensive, and suffered from delays and low bandwidth. The satellite
networks are, however, moving towards IP traffi c at a rapidly increasing pace. Effnet Header Compression functions effi ciently in this environment and contributes to an increased utilization of the bandwidth. In this manner, carriers with satellite networks can offer all types of IP based services.
Military networks
Military networks are often early adopters of new and advanced technology such as IPv6, multicasting/
broadcasting and mesh/adhoc. Furthermore, they must function under challenging circumstances. Effnet is monitoring the development within military networks where Effnet Header Compression is deemed to be able to enhance the communication, providing it with a very high degree of effi ciency.
In the beginning of 2007, Hitachi converted the test
license it bought in 2006 to a production license.
Products and technological development
Effnet offers a complete range of proprietary software under a strong brand: ”Effnet - the Experts in IP Header Compression”. Effnet also offers effective software for integration, testing and validation.
Header compression is an open standard, which means that the basic principals are commonly known. Effnet develops implementations of header compression that entail a very high quality, something which has been proven in interoperability testing conducted by IETF (Internet Engineering Task Force), as well as by testing with customers. Development also takes place in close cooperation with research and standardization organi- zations such as IETF, 3GPP, 3GPP/2, WiMAX and WorldDMB. Effnet’s Header Compression products are fully developed and can quickly and easily be integrated into the customer’s products. At present, development of new products and further technical development of existing products is in progress, as are certain customer adaptations. During the year, Effnet introduced new versions of all of its products.
Effnet is in the process of trying to establish Effnet Header Compression as a de facto standard within telecom- munications and mobile broadband, for example WiMAX and LTE.
Markets
Convergence and ”All-IP” are no longer just buzz words. During 2006, many concrete steps were taken toward obtaining convergence between different IP- based networks. Mobile networks using the standards CDMA2000 EV-DO Rev A and UMTS/HSPA can handle all types of information, including Voice over IP.
During 2006, Effnet and Intel conducted joint testing and validation of Effnet ROHC™ on Intel’s new dual-core architecture. The tests were very successful, and resulted in a joint white paper which was published in the beginning of 2007.
This white paper is available for download at www.effnet.com.
Product group IETF- standard
Market segment
Target groups
Effnet IPHC™
(Internet Protocol Header Compression)
RFC 2507 Satellite networks and mobile net- works, such as 2.5G and 3G
Manufacturers of infrastruc- ture systems and terminals and their sub-suppliers Effnet CRTP™/
ECRTP™
(Compressed Realtime Transport Protocol)
RFC 2508/
RFC 3545
Satellite networks and fi xed networks, especially for VoIP and multimedia
Manufacturers of network equipment and their sub- suppliers
Effnet ROHC™
(RObust Header Compression)
RFC 3095 Satel- lite networks and mobile networks, for instance 2.5G and 3G. VPN
Manufacturers of infrastructure and terminals and their sub-suppliers
Effnet HC-Sim™
(Header Compression Simulator)
All of the above
All of the above THE EFFNET HEADER COMPRESSION PRODUCT FAMILY AND ITS MARKETS
An in-depth technical description of the Effnet Header Compres- sion products is available at http://www.effnet.com
For more information on header compression and the telecom business, see http://www.ietf.org, http://www.3gpp.org and http://www.3gpp2.org.
Effnet has entered into a licensing and coope- ration agreement with Infineon, a manufacturer of chipsets and mobile telephony platforms, and its subsidiary Comneon, a protocol stack vendor.
The deal is a breakthrough for Effnet within the WCDMA segment.
WiMAX is also becoming accepted by increasing numbers of carriers the world over. Fixed network carriers, regardless of whether they have fi ber or copper cables or wireless networks, are eager to supply their customers with triple-play, or even Quadruple-play, which is made possible through IP based networks.
This development is driving the satellite networks to support All-IP, and the military segment is adapting to, and in some cases leading, this development. Combined with the increasing number of users and traffi c, this constitutes Effnet’s future market.
Customers
After the breakthrough within the CDMA2000 segment with the Qualcomm deal in 2005, Effnet sold test licenses to Hitachi during 2006, which was followed by a production license in 2007, as well as selling test licenses to a leading CDMA2000 operator.
In the beginning of 2007, Effnet got a breakthrough order within the WCDMA segment from Infi neon and Comneon. Effnet has good relationships with its customers, and all customers with maintenance agree- ments have extended their contracts.
A list of reference customers can be found on www.effnet.com.
Competitors
Effnet is the only independent supplier with a compre- hensive product family within Header Compression.
The company’s competition mainly consists of the internal research and development units of potentital customers. Even in such cases, Effnet has managed to convince customers of the advantages of Effnet Header Compression which offers well-tested, well-functioning Header Compression products with access to support and updates.
Business model
Effnet’s revenues derive from license fees and royalty for test and production licenses and fees for maintenance, support, training, and customization projects. The number of licenses sold each year is relatively small, but each individual license can generate revenues of many millions of Swedish kronor. Effnet is building a contracts portfolio with recurring revenue.
During 2006, Effnet had net sales of MSEK 3.0 (18.7).
Board, Management and Auditors
Board of Directors
GÖRAN E LARSSON
Chairman of the Board since Novem- ber 2006, elected to the Board in August 2002.
Born in 1943. M.Sc. in Engineering from the Royal Institute of Technolo- gy, Stockholm, and M.Sc. in Economics from the Stockholm School of Econo- mics.
Göran is the chairman of the Board of AB Sagax (publ), PCQT Personal Computer Quality Technology AB (publ) and ReadSoft AB (publ), deputy chairman of TA Teleadress Information AB as well as a member of the Board of Duroc AB (publ) and Habia Cable AB.
Göran has previously been President of Micronic Laser Systems AB, Standard Radio AB, Tidningarnas Telegrambyrå AB, Norstedts Tryckeri AB, and Inter- forward AB, among other companies.
Not independent.
SHAREHOLDING : 12,872,163 shares*
PETER JACOBSSON
Board Member, Elected to the Board in November 2006.
Born in 1955. M.Sc. in Engineering from Chalmers University of Techno- logy in Gothenburg.
Peter is the CEO of Floatel Interna- tional AB, a marine service company within the oil and gas industry based in Gothenburg. Peter has extensive ex- perience in international marketing and sales, amongst others, as the CEO of the previously listed company, Consafe Offshore AB. Previous positions include Commercial Manager for the underwa- ter companies, Rockwater/Subsea 7 in Stavanger, and he served previously as Marketing Manager for Safe Service Ltd in London.
Independent in relation to the company and its principal owners.
SHAREHOLDING : 0 shares
LENNART PIHL
Member of the Board, elected to the Board in November 2006.
Born in 1950. B.Sc. in Economics from Lund University.
Self employed management consultant since 2003. Works with interim ma- nagement and general fi nancial con- sultancy, among other assignments as Senior Advisor to the investment bank EVLI.
Lennart is the chairman of the Board of MultiQ International AB (publ) and a member of the Board of ReadSoft AB (publ) and Duroc AB (publ), all of which are listed companies.
Lennart has previously been President of the listed companies Bong-Ljundahl AB and Acrima/Metallhyttan.
Independent in relation to the company and its principal owners.
SHAREHOLDING : 0 shares
HANS RUNESTEN
Member of the Board, elected to the Board of Directors in August 2002.
Chief Executive Offi cer of the Effnet Group since May 2003.
Born in 1956. B.Sc. in Economics from Stockholm University.
Hans is the chairman of the Board of Scan Baltic Limited, London, and a member of the Board of AB Sagax (publ).
Hans has extensive international expe- rience from the fi nancial industry and has also worked within the EU Com- mission in Brussels. Hans was previous- ly active within the EuroNordic Group and Mellon Bank in London and in the USA, where he held a number of mana- gement positions at various levels. Prior to that he worked for Deutsche Bank in Germany.
Not independent.
SHAREHOLDING : 12,872,163 shares*, 375,000 employee options
AUDITORS
Öhrlings PricewaterhouseCoopers AB with authorized public accountant Lars Wennberg, born 1957, as auditor-in- charge.
Shareholdings are reported according to VPC’s shareholder register as of 29 December 2006.
Shareholdings include shares held by close family members or through companies.
* Göran E Larsson and Hans Runesten own their shares through a jointly owned company, Four Invest AB, whose holdings in Effnet Holding AB have been individually allocated in the reporting above.
HANS RUNESTEN
Chief Executive Offi cer of the Effnet Group since May 2003. CEO of Effnet Holding AB since July 2004, and Presi- dent of Effnet AB since March 2005.
See Board of Directors.
KRISTER MOBERGER
Chief Financial Offi cer of the Effnet Group since December 2002.
Born in 1963. B.Sc. in Economics from Uppsala University.
Krister has run his own consulting bu- siness, which focused on fi nancial infor- mation and business control. Prior to this, Krister was Financial Manager at Mandamus Fastigheter AB (publ).
SHAREHOLDING : 100,000 shares, 112,500 employee options
KENNETH LUNDGREN
President of Factum Electronics AB since January 2004.
Born in 1953. M.Sc. in Engineering from Linköping University.
Kenneth has 20 years experience from international business operations. Ken- neth has been President of several tech- nology companies and has held senior marketing and sales positions at such companies as Imtec, Teragon Systems, Innovativ Vision and Powerit PS. Most recently, Kenneth was Executive Vice President in charge of marketing at Po- werit PS AB (publ).
SHAREHOLDING : 20,000 shares, 262,500 employee options
Senior Executives
Share trading Share capital
Effnet’s share capital at year-end amounted to SEK 1,086,682.16, represented by 108,668,216 shares with a quota value of SEK 0.01. Each share carries one (1) vote.
Listing
Effnet Holding AB’s share has been listed on First North (previously New Market) of the Stockholm Stock Exchange since July 2004. The trading ticket size at year-end was 2,000 shares.
Certified adviser
Companies traded on First North are required to have a Certifi ed Adviser, who is to perform certain supervisory duties. Remium AB is Effnet’s Certifi ed Adviser.
Share performance and turnover
Compared with the end of 2005, the share price fell by 13 percent from SEK 2.14 to SEK 1.86, while the Stockholm Stock Exchange as a whole (OMXS index) rose by 24 percent, and the IT/Telecom sector (SX45 index) increased by 1.5 percent. Effnet’s market capitali- zation as per 31 December 2006 was MSEK 202.1 (MSEK 232.5).
A total of approximately 272 million (439) Effnet shares were traded during 2006, which implies that the total number of outstanding shares turned over 2.5 times during the year. An average of approximately 1.1 million shares changed hands per day. The highest number of shares traded on a single day was 18.8 million (30 January). The share was the object of transactions on all of the trading days in 2006. The lowest closing price during the year was SEK 1.52 (28 November) and the highest was SEK 5.30 (21 February).
Shareholders Effnet’s shareholders
There were 8,135 shareholders at the end of the fi nancial year. The company’s largest shareholder per 29 December 2006 was Four Invest AB, representing 23.7 percent of the capital and votes.
Shareholder agreements
There is a shareholder agreement between the owners of Four Invest AB, which is controlled by two Board members. This agreement states that the parties shall act in a concerted manner in conjunction with signifi cant resolutions to be adopted by General Meetings of Effnet Holding AB shareholders. The Board of Directors is not aware of any other shareholder agreements involving Effnet Holding AB.
DISTRIBUTION OF SHARE- HOLDINGS BY COUNTRY, 29 DECEMBER 2006
NUMBER OF SHARE- HOLDERS
SHARE OF VOTES / CAPITAL , %
Sweden 7,600 68.7
Great Britain 31 15.2
Luxembourg 28 5.7
Denmark 312 4.7
Switzerland 18 1.3
Cyprus 3 1.1
Other countries 143 3.3
Total 8,135 100.0
EFFNET’S LARGEST SHARE- HOLDERS, 29 DECEMBER 2006
NUMBER OF SHARES
SHARE OF VOTES / CAPITAL, %
Four Invest AB 25,744,326 23.7
JP Morgan Bank 15,860,800 14.6
UBS SA 1,940,000 1.8
Wermlandsinvest KB 1,866,000 1.7
Olsson, Björn 1,416,000 1.3
Nordnet Pensionsförsäkring AB 1,299,164 1.2
Nordnet SA 1,280,125 1.2
Akelius Insurance Public Ltd 1,121,170 1.0
ETrade DK A./S 1,088,450 1.0
Credit Acricole Indosuez 1,088,050 1.0 Total the 10 largest shareholders 52,704,085 48.5
Other shareholders 55,964,131 51.5
Total 108,668,216 100
The Effnet Share and Shareholders
Dividend
The Annual General Meeting has at its disposal unrestricted funds in the Parent Company amounting to MSEK 23.8. The Board of Directors proposes that no dividends be paid.
Other information Options program
At the Annual General Meeting on 26 April 2006, an options program directed towards employees was approved corresponding to 4,000,000 shares. During the year, 535,000 options were forfeited, due either to terminated employment or to the options being condi- tional. Per 31 December 2006, there were outstanding options equivalent to 3,465,000 shares, including 435,000 reserved for future recruitments, which is equivalent to a maximum dilution of 3.2 percent of the capital. Aside from this options program, there are no other share- based remuneration programs or similar instruments.
Authorization
At the Annual General Meeting in 2006, the Board of Directors was granted the authority to resolve upon the issuance of new share or other fi nancial instruments equivalent to a total of 37,000,000 shares in connection with business combinations and acquisitions. The authorization is valid until the next Annual General Meeting. The authorization had not been exercised as per the end of the year.
NUMBER OF SHARES PER SHAREHOLDER
NUMBER OF SHAREHOLDERS
SHARE OF VOTES / CAPITAL , %
1 - 1,999 5,175 2.2
2,000 - 9,999 1,882 6.3
10,000 - 99,999 946 20.9
100,000 - 999,999 122 22.1
1,000,000 - 10 48.5
Total 8,135 100
DISTRIBUTION OF SHAREHOLDERS BY SIZE OF HOLDING, 29 DECEMBER 2006
For key fi gures per share, see the Five-year summary on page 5.
Insider reporting
The shares in Effnet Holding AB are traded on First North which is an unoffi cial trading market on the Stockholm Stock Exchange. Trading of the Effnet share by insiders is published on the company’s website, but not reported to the Financial Supervisory Authority.
The company has defi ned the Members of the Board and senior management as insiders. All of the company’s insiders have signed an agreement for individuals having insider positions. All employees are subject to current insider legislation and to an internal insider policy aimed at preventing the purchase or sale of Effnet shares based on undisclosed information.
Analysts
Effnet Holding is analyzed by Christian Wahlberg, Remium Securities, and Martin Lagerholm, Smallcap.
Taxation of shares (applicable to residents in Sweden only)
As Effnet shares are listed on First North, they are not subject to wealth tax.
PRICE DEVELOPMENT OF THE EFFNET SHARE
40000 80000 120000 160000 200000
0 1 2 3 4 5
04 05 06 07
Share SIX Allshare Index
SIX Telecommunication Number of shares traded, thousands (incl. late entries)
(c) FINDATA
