Benefon Oyj

location based services
Benefon Oyj: Interim report 1-3/2006

Friday 19 May 2006 17:02 EEST Kauppalehti Online

BENEFON OYJ BULLETIN 19.5.2006 at 17:00hrs



INTERIM REPORT 1-3/2006


HIGHLIGHTS


Strategic financing program successfully completed
New TWIG brand for consumer navigation market launched
TWIG Discovery and TWIG Locator products shown in Barcelona and Hannover
Production preparations for TWIG range started in China
Sales decreased clearly compared with previous year due to lifecycle of old
product line getting closer to its end and delay in getting the new TWIG products
in the markets
IFRS adoption completed



GENERAL


The business of the company is to offer mobile telematics terminals, software and
solutions for securing lives and property, for improving field management and for
tracking and personal navigation applications and location based services.

The first quarter 2006 of the company was characterised by the completion of the
new share issue, the strategic financing program required for completing the new
business plan and the finalisation of the development of the product program,
production set up in China and the market introduction of the first new TWIG
products. With the proceeds received from the January share issue, the financial
position of the company is now appropriate for the needs of the production start
and market introduction of the new TWIG products. The first quarter results were
affected by the reduced demand for the company's current range of products, which
are coming to the end of their current life cycle. The second quarter 2006 will
also see such reduced demand. The financial result for the year 2006 will be
strongly dependent on the timing of the introduction of the new TWIG products in
the various markets and the ultimate success of the sales of the respective
products.

The Company adopted the International Financial Reporting System (IFRS) during
financial year 2005 and the financial statements for the year 2005 and onwards
are prepared in accordance with IFRS standards.

There were no significant changes in the operational environment during the first
quarter.



TWIG product program


The company is focusing on the finalisation of its new TWIG product range and the
continued implementation of its current business plan, the crucial part of which
is the launch of the sales of the TWIG product range in various markets and the
development of the TWIG brand identity.

On February 14, the company launched the new TWIG brand and its new personal
navigation device TWIG Discovery at the 3GSM Conference in Barcelona, Spain.

On March 9, the company launched its next TWIG product, a personal security
device TWIG Locator, at the annual CeBIT trade show in Hannover, Germany.

The deliveries of the first product of this product program, TWIG Discovery, were
originally planned to begin during the first quarter of 2006. Due to
unforeseeable delays in development, testing and the production phase the project
has been delayed and according to latest estimates the sales are targeted to
start at the beginning of the third quarter of 2006.

The company´s TWIG products are mainly manufactured by subcontractors in China.



Directed share issue


The company arranged a directed share issue to shareholders and investors in
January 2006 for implementing the prepared financing solution. The offering and
listing prospectus for the issue was published on January 18, 2006. In the share
issue 53 shareholders and 25 investors subscribed for a total of 78,293,102 new
investment series shares (BNFSV) of the company at the share subscription price
of EUR 0,21. Total subscription price received by the Company was EUR
16,441,551.42, of which EUR 11,676,082.32 was paid in cash and EUR 4,765,469.10
using receivables from the company for set-off.

By virtue of the subscriptions company's share capital was increased by the
decision of extraordinary general meeting of January 31, 2006 by EUR 782,931.02
from EUR 1,312,540.46 to EUR 2,095,471.48 and the number of outstanding shares
from 131,254,046 shares to 209,547,148 shares. Increase in the share capital was
registered in the trade register on February 9, 2006, and the new shares listed
for trading in Helsinki Stock Exchange along with company's existing investment
series shares on February 10, 2006.



Offering and listing prospectus


On January 18, the Company publicised the Offering and Listing Prospectus
prepared for the share issue. The Finnish language prospectus provides a
comprehensive package of useful information about the Company and it is available
as a PDF document on the Company´s web site www.benefon.com



SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD

In total 20,000,000 option rights of series Benefon 2005B issued by the
extraordinary general meeting of September 5, 2005 were by the decision of the
board of directors offered for subscription by Octagon Capital Limited for
holding purposes and accordingly subscribed by Octagon Capital Limited on April
19, 2006.

In the bulletin to call annual general meeting issued on May 5, 2006, the company
informed that the Board of Directors will propose to the annual general meeting
that the company would enter into a management agreement with Octagon Consulting
Limited ("OCOL") and amending the terms of options rights 2004A and article 8 of
the Articles of Association.

The main terms of the agreement are:

- Named key resources of OCOL will resource in total 400 monthly working hours to
provide services to Benefon.
- As a compensation for monthly services OCOL will be paid a management fee of
15,000 GBP. The fee is increased to 20,000 GPB/month in the event Benefon makes a
net profit in two successive year quarters. The fee may further be increased to
25,000 GBP in the event Benefon makes an annual audited profit in excess of 7
MEUR.
- As a part of overall compensation and incentives OCOL or a third party
appointed by OCOL will be awarded with 5 million option rights of series 2004A.
Right to exercise these performance options requires Benefon's market
capitalization to increase by more than 300% from February 1, 2006 to January 31,
2009 calculated on fully diluted method.
- OCOL is granted the right to nominate, at its discretion, certain number of
board members such number being the highest whole number below one half of the
number of all members in the board of directors.
- The initial term of the agreement is three (3) years, which will automatically
be extended by three (3) years at a time provided that agreed performance targets
are met.

More detailed information can be found in the bulleting of May 5, 2006 to call
the annual general meeting.

The Board of Directors of Benefon has handled and accepted the management
agreement and the above amendments in the terms of option rights 2004A and
Articles of Association in its meeting of May 5, 2006. However, due to a fact
that the Chairman of the Board Brian Katzen and member of the Board Jeffrey
Crevoiserat are both also beneficial owners of Octagon Consulting Limited the
Board of Directors has deemed it appropriate to disclose the main terms of the
management agreements and bring it to annual general meeting for confirmation.

The board of directors has also proposed to the annual general meeting convening
on May 24, 2006, to resolve to offer a total of 20,000,000 option rights of
series 2004A ("Options") as follows:

Party: Number of Options:

Ning Po Limited 10.750.000
LAIP Limited 7.250.000
Vanguard Limited 2.000.000

The Options are transferred to the above parties from Octagon Capital Limited
that is holding them for the company based on a separate holding agreement
entered into with Benefon. The Options are offered the above parties to motivate
them to act for the company for increasing the value of company shares.

On May 9, 2006 the company announced that it had subcontracted UK based DataArt's
Mobile Research and Development Group for its exclusive use. The agreement
included a team of software development engineers based in St. Petersburg,
Russia.

Benefon will integrate the engineers into its Mobile Navigation business unit
while preserving the team's focus on designing solutions that offer users
complete GPS software and applications.

On May 10, 2006 the company announced that it has commissioned designer Ross
Lovegrove to design its future range of personal navigation devices. The
agreement includes 3 phones with 2 year exclusivity provision and an option for a
further 3 phones and an additional exclusivity period of two years totaling four
years.

On April 24, 2006 the company announced that it has appointed Mr Jeremy Newing to
the position of Chief Marketing Officer reporting to the CEO. Mr Newing has over
10 years of international management experience in the mobile phone and consumer
durables sectors. He was most recently the Regional Marketing Director of BenQ
Mobile responsible for the visualization and implementation of the marketing
strategy throughout Western
Europe. At the same it was announced that Mr Simon Button has been appointed to
the position of Chief Technical Officer reporting to the CEO. Mr Button has spent
the last twelve years with Voxson in Australia where he was Chief Technology
Officer. Voxson, one of the world leaders in the design of GSM mobile devices,
specialized in hardware, mechanical and software development. Simon brings with
him a wealth of experience in GSM technology and also the Asian mobile phone
market.

The company also recently recruited 4 mechanical design engineers to focus on the
mechanical ID designs created by the company´s Designer, Ross Lovegrove.



SALES, MARKETING AND BUSINESS DEVELOPMENT


Mobile telematics sales are directed to about 20 countries and the sales efforts
were focused especially on customer projects in Western Europe and other targeted
markets. The share of mobile telematics sales of all sales in the reported
quarter was nearly 100 %.

The range of mobile telematics products covers personal security and navigation
applications as well as field management applications, vehicular and machine
communications (M2M) applications and asset tracking. New TWIG products will
strengthen company's product offerings also in the consumer navigation market.

During the reported quarter the R&D-activities focused on development and
realization of the new TWIG product generation. The company is receiving strong
demand for its launch product TWIG Discovery, the ultimate success of which will
depend on acceptance within the various sales markets.


Research and Development

The company's main focus currently is the finalization of the TWIG Discovery and
the integration of the company´s personal navigation software, its telematics
server and its operating system into its integrated GPS/GSM personal navigation
device.


RISK MANAGEMENT

Benefon's business risks have been widely explained in the Prospectus published
on January 18, 2006. Overall, the biggest business risks of the company relate to
failure to get the new TWIG product line in the markets on time to keep the
competitive edge given by the innovative design and technological solutions.
Additionally, the new products will be essential since the sales of current
product line is getting closer to end of its life cycle. As intellectual property
rights and innovations are essential to company's success it has commenced
internal projects to improve the management and protection of its key assets.
Besides the above mentioned factors the company does not see any specific risk
factors that would be different to risks of any company within the same line of
business.

Company has paid special attention to improve its risk management by recruiting
experienced resources and strengthening its management team. Benefon has also
commenced an internal improvement plan, which also as a part of the plan includes
improving risk management and implementing stringent improved corporate
governance programs.

The company´s overall financial performance is affected by exchange rate
fluctuations. Exchange rate risks arise from exports and imports. The main
account currency is the euro. The company also has invoicing in US dollars. The
company imports its products from China and pays in US Dollars. However such
purchases are affected by the Chinese RNB which at present is facing extreme
volatility. Benefon Oyj doesn't have any long-term foreign exchange commitments



FINANCIAL PERFORMANCE IN THE PERIOD


The Company has adopted the International Financial Reporting Standards (IFRS)
and the financial information provided in this interim report has been prepared
according to IFRS.

The net sales of the Company decreased by 36% from the prior quarter and 28% from
the same quarter of the prior year.

The net sales of the company in quarter 1-3/2006 were 1124 teuros, as compared to
1753 teuros in the preceeding quarter 10-12/2005. The net sales in the same
quarter 1-3/2005 a year before were 1564 teuros.

The operating profit in quarter 1-3/2006 was -1207 teuros. The comparable figure
in the previous quarter 10-12/2005 was -1073 teuros and the same in the same
quarter 1-3/2005 a year before was -376 teuros.

The total of the balance sheet at the end of quarter 1-3/2006 was 14321 teuros.
The total of the balance sheet at the end of the previous quarter 10-12/2005 was
4974 teuros and at the end of the same period 1-3/2005 a year before it was 4514
teuros.

The shareholders´ equity in the balance sheet at the end of 1-3/2006 was 12003
teuros, or about 84%, when at the end of the prior quarter 10-12/2005 it was
-2331 teuros, or about -47%. At the end of the same period 1-3/2005 a year before
it was -689 teuros, or about -15%.

The book value of interest-carrying net debt at the end of 1-3/2006, including
the capital loans, was 985 teuros. The total liabilities at the end of 1-3/2006
were 2318 teuros, whereas they were 7305 teuros at the end of the prior quarter
10-12/2005 and 5203 teuros at the end of the same quarter 1-3/2005 a year before.
Cash at hand and in the banks at the end of the period was 10051 teuros of which
357 teuros was pledged.




REPORT ON SUFFICIENT LIQUIDITY IN PERIOD 04/2006-06/2007


The below cashflow statement assumes that sales targets set in financial
projections for financial years 2006 and 2007 are met. As stated in section
"Future Outlook" hereinafter, the projections are highly dependent on timely
launch and sales success of company's new TWIG product line.


Cash Flow Statement 04/2006-06/2007 million euros

Cash flow from operations
Profit for the period 19,3
Adjustments 0,9
Changes in working capital:
Change in receivables -16,4
Change in inventories -3,0
Change in current liabilities 2,8
Paid and received interests -0,1
Cash flow from operations 3,5

Cash flow from investments -7,4

Cash flow from financing 0,0

Change in cash -3,9

Cash in the beginning of the period 10,1
Cash at the end of the period 6,2


Should the future development deviate from current information or estimates, it
may significantly affect the construed cashflow account.




INVESTMENTS


Gross investments in fixed assets in the reporting period were 871 teuros.




PERSONNEL


The number of employed personnel at Benefon in the quarter 1-3/2006 averaged 76.
Alternate forced leaves affected 29 people of the employed personnel.




FUTURE OUTLOOK


After closing the sufficient financing in February 2006, the company will
concentrate on finishing its new product range and implementing its published
business plan, the crucial part of which is to start the sales of the TWIG
product range in chosen markets and to strengthen the brand identity. The
financial result of year 2006 will be strongly dependent on getting the new TWIG
products in markets and success in their sales. The deliveries of the first
product of this product program, TWIG Discovery, were originally planned to begin
during the first year quarter 2006. Due to unforeseeable delays in production
phase the project has been delayed and according to latest estimates the sales
are targeted to start at the beginning of the third quarter 2006. The company has
also plans to launch a second TWIG product late in Q4 of 2006.

The introduction of TWIG Discovery was delayed due to the integration of the
various complex software requirements. Benefon's technology encompasses amongst
others the following: Benefon telematics server, which includes tracking,
emergency button functionality and location based software, Benefon personal
navigation software and mobile phone operating software solution.
Ensuring all the above function in the required manner along with the ensurance
of the conformity with the standards and integrating such software into a mobile
device has stringent testing requirements. In order to ensure a successful launch
of TWIG Discovery Benefon have taken the decision to make sure the device is
fully compliant in all circumstances and this has caused additional test time
along with additional compliance time and has resulted in a delayed launch of the
product.

Benefon expects to receive during June confirmation that the device fully
conforms to the requirements of the standards. Network testing and approval by
market will then follow based on the needs of customer requirements

The company will estimate the need to update the financial forecast for 2006
published on January 12, 2006 as soon as the start date for deliveries of TWIG
Discovery can be confirmed.

Due to above delays with new TWIG products the financial result of the first six
months of 2006 seems to fall under the level budgeted in company's managerial
accounting. The most important reasons for this are that company's current
product line is getting closer to end of its life cycle and the sales are
decreasing a bit faster than originally expected. At the same Benefon has
invested heavily in the development of its new TWIG product line, which due to
above-mentioned reasons has been delayed. This has had a clear negative impact on
company's financial performance during the first six months. The launch of new
product line is expected to turn sales and profitability in clear growth.




EQUITY ISSUE AUTHORITY OF THE BOARD


The annual general meeting of May 26, 2005, decided to cancel the authorization
granted on May 28, 2004, and authorized the Board of Directors within one year
from the meeting to decide on the increase of share capital by rights issue or
issue of options or convertible bonds in one or more installments, such that
maximum number of new investment series shares is 25,630,809. Therefore, the
share capital may based on the authorization be increased by a maximum of EUR
256,308.09. The authorization includes the right to deviate from the pre-emptive
right of the shareholders and right to decide that the shares can be subscribed
for in kind, using the right of set-off or on other specific terms.

The authorisation has been used in November 2005 when the board of directors
decided to increase the share capital of the company by a maximum of EUR
23,809.52 by issuing a convertible bond loan with a loan capital of EUR 500,000.
By virtue of the authorization the share capital can still be increased at
maximum by EUR 232,498.57.




ADOPTING IFRS REPORTING


The company adopted the International Financial Reporting System (IFRS) during
financial year 2005. The financial statements for year 2005 and this interim
report 1-3/2005 have been prepared and presented according to the IFRS standards.
In the market bulletin issued by the company on January 12, 2006, about adoption
of IFRS reporting the company has detailed the most essential changes in
preparing and presenting the group financial statements caused by the adoption of
IFRS reporting.




BENEFON OYJ


Jonathan Bate
CEO








INTERIM REPORT 1-3/2006, IFRS
1-3/06 1-3/05 1-12/05
1000 EUR 1000 EUR 1000 EUR

Net sales 1124 1564 7562
Other operating income 1 17 85
Costs of operations -2309 -1891 -10860
Depreciation and value adjustments -23 -66 -185
Operating profit -1207 -376 -3398
Financial income and expenses -66 -123 207
Profit before taxes -1273 -499 -3191
Income taxes 0 0 0
Profit for the period -1273 -499 -3191

Fixed assets
Tangible assets 126 209 132
Intangible assets 881 25 27
Investments 61 60 61
Current assets
Inventories 1136 2129 1282
Receivables 1497 1114 1566
Prepaid expenses 569 64 569
Cash in hand and at banks 10051 913 1337

Share capital 2138 1282 1313
Other shareholders´ equity 9865 -1971 -3644
Long-term liabilities 937 2983 985
Current liabilities 1381 2220 6320

Balance sheet total 14321 4514 4974

Gross investments in fixed assets 871 0 40

Average number of personnel 76 78 76

Pledged assets and contingencies
Contingent liabilities relating to
chattel mortgage 1655 1484 1633
Chattel mortgage nominal value 12068 12068 12068
Pledged assets 399 325 403

Earnings/share, EUR -0,01 -0,00 -0,03
Shareholders´ equity/share, EUR 0,06 -0,01 -0,02
Shareholders´ equity/share, diluted 0,04

The key ratios have been computed undiluted as the dilution effectwould improve
them. In computing the result per share, neither the debt cuts nor the additional
payments due to reorganisation have been included.

The interim financial statements have not been audited.









CASH FLOW STATEMENT
1-3/06 1-3/05 1-12/05
1000 EUR 1000 EUR 1000 EUR

Cash flow from operations
Profit for the period -1273 -499 -3191
Adjustments 212 72 -764
Changes in working capital:
Change in receivables -69 -254 -1211
Change in inventories 146 177 1024
Change in current liabilities -804 55 1158
Paid and received interests -7 -11 -30
Cash flow from operations -1795 -460 -3014

Cash flow from investments -871 0 -40

Cash flow from financing
Share subscription payments 11676 0 434
Transaction expenses of share issues -296 0 -9
Raised loans, equity 0 0 313
Raised loans, liability 0 0 2637
Payments of reorganization debt 0 0 -357
Cash flow from financing 11380 0 3018

Change in cash 8714 -460 -36

Cash in the beginning of the period 1337 1373 1373
Cash at the end of the period 10051 913 1337