Ladies and Gentlemen, dear Shareholders,

The Board of Directors is pleased to present you with its report for the 2016 financial year. The present report covers both the statutory (parent company) and consolidated (group) financial statements. The Board attests that, to its knowledge, the statutory and the consolidated annual financial statements present a true and fair view of the net assets, financial situation and results of Zetes Industries SA and, in the case of the consolidated accounts, the companies included in the consolidation. It also attests that the management report on the consolidated financial statements includes a true and fair description of the development, operational performance and position of the company, including the companies included in the consolidation, and a description of the principal risks and uncertainties with which they are confronted.

Commentary on the development of the company's business and its current situation

Given the limited operational activity of the parent company Zetes Industries SA, it is the consolidated financial statements discussed below, that permit an assessment of the situation of the Zetes Group (Zetes Industries SA and its subsidiaries). The consolidated financial statements are presented before payment of the dividend, which will be decided by the Ordinary General Meeting. The financial statements as of 31 December 2016 do, however, reflect the interim dividend paid on 21 December 2016. The Goods ID Division experienced a year of consolidation in sales, with improved operating results. Management continues its effort to implement its strategy based on the sale of the key solutions, clearly positioning its offering, with its added value to the customer, which is also expressed in a higher gross margin for the company. At People ID too, operating results were good, supported by long-term, high added value projects. The decline in sales from 2015 reflects the decrease in short-term contracts. The division's business development efforts remained significant but did not translate into sales in 2016. The major event of 2016 remains the acquisition of Zetes by Panasonic Corporation (‘Panasonic’) which is still being finalized. As it announced on 22 December 2016, Panasonic wants, by merging with Zetes, to become a world leader in logistics solutions and to extend the range and quality of services it is able to offer its customers. As of the date of this publication, this operation has not yet received the green light from all relevant competition authorities.

Balance Sheet and Cash Flow

Balance sheet

Compared with 2015, non-current assets are very stable, with the limited increase in tangible and intangible assets offset by the decrease in deferred tax assets.

Investments in development, capitalized in intangible assets, rose in 2016 to € 3.2 million (€ 2.6 million in 2015). After amortization for the year, this results in a € 0.5 million increase in R&D assets.

The € 0.6 million decrease in deferred tax assets reflects the good performance of subsidiaries, especially in the UK.

Inventory has grown significantly, as have receivables (customers and other current receivables). The increase in inventories reflects the built-up of equipment ready for deployment by customers at two subsidiaries (€ +4.3 million, Goods ID division). The increase in customer receivables at 31/12/2016 is offset by the higher payables to suppliers, reflecting the high levels of activity at year end. Zetes expects working capital to improve in 2017.

Cash and equivalents has evolved favourably, with a balance at 31/12/2016 of € 19.9 million. The impact of the 2016 performance on the Group's debt structure is limited because of the distribution, for the first time, of an interim dividend (December 2016). In total, € 8.4 million was distributed to shareholders in 2016. The net cash position remains strong at € 9.4 million (€ 9.6 million at the end 2015).

The total balance sheet is larger: at € 199.1 million against € 188.7 million in 2015 (+ 10.4 million). Net working capital needs followed the same trend, rising from € 14.1 million in 2015 to € 17.5 million.

With a very strong equity of € 93.3 million, up € 3.7 million on 2015, and a balance sheet total of € 199.1 million, the solvency ratio was 46.9% (47.5% in 2015). The increase in equity remains substantial given the distribution in 2016 of both the regular dividend and the interim dividend mentioned above. Equity is presented net of treasury shares (€ 3.9 million), held primarily to cover the exercise of options by Zetes executives.

LT debts decreased significantly (- € 3.3 million). These are for financing the building carried on the balance sheet of the companies acquired in July 2015 (Ruisbroek Sprl). These balance of these debts matures in H2 2017.

Zetes is committed to maintaining a strong balance sheet structure. This allows it to bid for and, where successful, to manage very large deals, where the income streams can follow long after the capital outlay (People ID concessions) and to inspire confidence among its potential customers like governments, with which it signs multi-year contracts.

Cash flow

Operating activities generated a cash flow of € 16.5 million over the year. This breaks down into cash flow from P&L of € 21.4 million and a higher working capital requirement (€ -4.9 million). Zetes expects working capital to improve at least partially in 2017.

€ 5.2 million was invested in non-current assets, which is more than in 2015 (€ 4.6 million), breaking down into € 3.2 million for the Goods ID division and € 2.0 million for the People ID division. Specific investments were made in IT and in improving company buildings and security.

Capitalized R&D expenses rose to € 3.2 million. These costs relate principally to the Goods ID division, and are divided as before between the development of the MCL software and that of the application solutions, which form the basis of the new strategy. The R&D effort in People ID focused on the development and certification of a certificate issuance infrastructure that enables Zetes to access issuer status.

In terms of financing, the year has enabled a net repayment to banks (financing / leasing / overdrafts) of € 2.2 million. Zetes also paid a dividend of € 4.2 million in June 2016 and an interim dividend of the same amount of € 4.2 million in December 2016.

Together these movements reduce cash and equivalents by € 2.5 million.

Income statement

After the strong sales growth in 2015, associated with a major project in the Goods ID division, the challenge for 2016 was to repeat the 2015 performance without relying on a similar major contract. Finally, sales for the year amounted to € 253.4 million, down just 1.9% from 2015, with current EBITDA stabilizing at € 26.5 million (€ 26.7 million in 2015).

This decline in sales reflects the decreased turnover of the People ID division (-10.3%), buoyed by long-term contracts, while turnover of the Goods ID Division was stable (+ 0.4% on 2015), despite a negative exchange rate impact.

The gross margin ended up at € 114.8 million, close to the 2015 record (-0.6%). In relative terms it represented 45.3% of sales, which is higher than 2015 (44.8%), influenced essentially by the product mix of the People ID division and the constantly improving margins in Goods ID.

Current Group EBITDA remains stable at € 26.5 million, supported by a good performance in both divisions: € 15.9 million in Goods ID (+8.7%) and € 114.2 million in People ID (-8.4%).

The Goods ID division succeeded in maintaining its sales at the 2015 level without any one major contract equivalent to the one executed in the first half 2015. The division is benefiting from the 6 key solutions-based commercial strategy introduced in 2012, particularly in the retail, postal services and transport sectors. Its serialization solution (ZetesAtlas) for production units is also growing strongly, even if its impact on the Division's sales figure remains right now more limited.

In People ID, sales are down 10.3% on 2015. This is linked to the reduction in short-term contracts. The division's business development efforts remained significant but did not translate into sales in 2016. The execution of the various long term contracts enabled the division to maintain a good profitability, with a current EBITDA of € 14.2 million (-8.4% on 2015).

Non-recurring expenses are up, mainly as a result of the costs involved in the - not yet completed - purchase of Zetes Industries SA by Panasonic. In 2016 the costs related to this transaction amounted to € 0.5 million.

Provisions, depreciation, amortization and impairment losses were down at € 8.9 million.

Financial charges were down significantly, while financial income was stable. Foreign exchange losses amounted to € 1.0 million in 2016, vs. € 1.4 million in 2015. In this way the net financial result for the year is slightly better than in 2015: € -0.5 million vs. € -0.8 million. This relatively low level reflects both the macro-economic environment with low interest rates and the good solvency of the Group (net cash). Finally, taxes are € 4.9 million, or 29.8% of the result before taxes. This is in line with the rate applicable in Belgium, the Group's operations centre.

The net result of the Group is € 11.5 million, up 6.9% on 2015.

Segment reporting

Goods ID activity

For the fourth consecutive year, the Goods ID Division improved its performance: sales stabilized at a record € 205.0 million, a slight increase of 0.4% compared to 2015. This evolution, entirely internally generated, is the result of the 6 key solutions strategy introduced in 2012. It was negatively impacted by changes in exchange rates, as explained below. The macroeconomic environment remained good in the various countries where the Zetes Group operates, and almost all local entities contributed positively to Group earnings.

The contribution of the 6 key solutions to the results, and particularly to the gross margin, of the division is significant: it is this that has increased the gross margin as a percentage of sales (40.1% against 39.4% in 2015 and 39.2% in 2014). With the limited increase in sales, gross margin increased by € 1.7 million to € 82.3 million.

The impact is felt particularly at the level of operating profitability: with operating expenses under control (+ 0.7% on 2015), the Division achieved an 8.7% rise in recurring EBITDA, up for the fourth consecutive year.

Zetes continues of course to refine its solutions along with its mobility platform that allows sector-specific applications to be developed and implemented for mobile devices and communication protocols of every type. These development efforts translate into an increase in R&D investment to € 2.9 million for Goods ID (€ 2.5 million in 2015), and also higher depreciation (€ 2.6 million vis. € 2.3 million in 2015. Depreciation of other non-current assets amounted to € 2.4 million, which is significantly lower than in 2015. Other provisions, depreciation, amortization and impairment losses remained stable at € 0.9 million. In all, non-cash expenses were € 5.9 million, down 8.0% on 2015.

As a result, the division generated a current EBIT of € 10.0 million, up 21.8% on 2015 (€ 8.2 million).

Half-yearly analysis GOODS ID

Sales seasonality reverted to the normal pattern in 2016, with much higher sales in the second half. Gross margin as a percentage of sales moved in the right direction, with 41.6% in H1 2016 and 38.8% in H2 2016, vs. 40.5% in H1 2015 and 38.4% in H2 2015.

The increase in sales is small, but, without the benefit of a major rollout like in H1 2015, the division had set itself the objective of stabilizing its revenues in 2016. The efforts to develop the recurrent part of revenues made it possible to increase visibility on margins. Zetes also continues to increase its recurring revenues and to win major contracts, especially in growth sectors like postal services.

Evolving exchange rates impacted sales figures, but with a less marked effect on EBITDA. The change relates to the depreciation of the pound sterling, partially offset by the appreciation of the South African rand. At constant exchange rates, sales revenue and gross profit would have been 2.8% and 4.5% higher respectively. The impact of exchange rate changes on current EBITDA is € 0.4 million.

All growth is internally generated, with the Goods ID division remaining focused on implementing its 6 key solutions strategy, which is generating internal growth.

People ID division

In People ID, sales revenues dropped back by 10.3%, but with margins buoyed up by the product mix. Most of the revenues come either from long-term contracts with high added value, or from small services-only contracts. The added value of the software solutions lies in data security, flow management and traceability. It is these that differentiate the Division from its competitors and are the main driver of improved margins.

In 2016, Zetes further developed its authentication solutions: in addition to specific investments in equipment, capitalized development to the tune of € 0.3 million enabled Zetes to acquire the status of digital identity certificate issuer. This investment complements the Zetes' portfolio of electronic identity solutions.

Despite a drop in revenues, the Division's performance remains very satisfactory.

In 2016, Build and Operate contracts contributed significantly to revenues and results. These are long-term concessions by which States entrust Zetes with the development, customization and distribution of identity documents. For this work, Zetes incurs large upfront investments (software development, deployment of a secure IT infrastructure, ...) at its own expense.

Identity and travel documents are central to all States' security systems. These documents must be secure and non-forgeable. Also, in today's era of connectivity and mobile computing, they need to be electronic to permit secure interconnection with authorities' computer systems.

The Zetes People ID solutions provide strong authentication of a country's citizens, both in the individual's relationship with his document and in the linkage with the country's databases.

Zetes provides its customers with the capture of citizens' biographic and biometric data, a sound population database, transmission and distribution of identity documents, and fixed or mobile control equipment.

The Build and Operate model, whereby a State entrusts Zetes with every stage of the process, is particularly attractive in allowing customers to provide their citizens with leading-edge security documents without upfront investment or risk of poor choice of supplier. It is also attractive for Zetes, as once the solution is deployed, the company has good visibility on the business for several years on out.

The same software architecture can be deployed for various types of government applications. This limits the risk to clients since the solution is has been put through its paces and developed to the most advanced standards, including ISO 27001. This provides good synergies for Zetes.

The very high added value of these solutions explains the division's current EBITDA performance of € 14.2 million (down 8.7%).

Half-yearly analysis PEOPLE ID

The Division's revenues and results are very stable, with any income volatility coming mainly from the short-term contracts with large hardware deliveries. There was no significant contract of this type in 2016.

Corporate Division

The costs of the Corporate Division amounted to € 3.6 million, in line with the figure for 2015 (+3.7%). The Corporate Division's missions continue to be strategy definition, financial control, marketing and acquisitions.

All divisions together (Goods ID and People ID and Corporate), the company generated a current EBITDA of € 26.5 million. This is in line with the performance of 2015 which was the best ever recorded by Zetes (€ 26.7 million).


There was no change in consolidation scope in 2016. Goodwill is therefore unchanged from 2015, at € 40.6 million.

The Goodwill write-down test (review of recoverable value) did not reveal any insufficiency requiring the recording of an impairment.

Human resource management and environmental actions

In 2016, the Group's workforce grew by 2.4% (+47 FTE). In Goods ID (+20 FTE), this growth again represents the strengthening of the Software Factory, the key solutions development entity operating out of Barcelona. In People ID, numbers are also rising (+7 FTE), while in the Corporate division they remain stable (+1 FTE). In total, the Group's workforce has moved from 1,166 FTE at end-2015 to 1,194 FTE at end-2016.

Just like its intellectual property, human resources constitute a key asset of the Group. Zetes takes care to make maximum use of the specific knowledge and skills available throughout the Group, both in the Goods ID Division (key solutions) and in People ID.

The company and its employees are aware of their civic responsibility in environmental matters and strive daily to implement responsible practices in this area, including limitations on travel, energy saving, waste sorting and the like.

Principal risks and uncertainties The Board of Directors presents its assessment of the risks of the Company in the 'Financial information and corporate governance' section of the annual report. This section forms an integral part of its Management Report. These risks relate to pending litigation, human resources, the environment, exceptional events, acquisitions, new products, technologies and fraud. The same section also describes the Group’s exposure to prices, credit, liquidity and cash availability, foreign exchange and interest rate risks. To cover these risks, the Company has recourse to traditional financial instruments. It avoids instruments, the complexity of which could compromise their transparency. The instruments currently used are also described in the 'Financial Information and Corporate Governance' part of the annual report.

Events after the closing date

To date, there has been no specific post-closing event that influences the annual accounts submitted to the General Meeting.

Prospects for 2017 and description of the events that could significantly influence the company's developments.

In Goods ID, the 6 solutions-related strategy continues to attract more and more customers, while the recurring income component linked to it increases the division's visibility into the future.

The postal and parcel delivery sector is continuing to invest, with Zetes offering a range of products that is winning more and more customers. These represent huge investments for customers who are equipping all their employees with mobile devices, thereby enhancing the efficiency and quality of services. Unique ID (serialization of products) also remains a very promising area, under the pressure of increasingly demanding regulations. The ZetesAtlas solution has been implemented in various fields like pharmaceuticals, luxury goods and explosives. The generalization of this obligation of per unit traceability opens up prospects for the coming years.

In People ID, the current Build and Operate contracts are making a very significant contribution to sales and profitability. In 2017, the concessions will all contribute to the good performance of the Division. The business development efforts should allow Zetes to renew these contracts and add more short-term contracts. This team continues to grow and expand so as to be ever closer, both geographically and technically, to its potential customers.

Zetes' strategy of value-added solutions in its two divisions has attracted the attention of Panasonic.

As it announced on 22 December 2016, Panasonic wants, by merging with Zetes, to become a world leader in logistics solutions and to extend the range and quality of services it is able to offer its customers. As of the date of this publication, this operation has not yet received the green light from all relevant competition authorities.

In conclusion, the objective for 2016 of repeating the 2015 performance (supported in that year by a single major contract) has been achieved. The Group is now turning to the future with a strategy that confirms its pertinence and which, under the umbrella of a global group, will probably give it significant new prospects for growth.

Research and development

Capitalized R&D expenses rose to € 3.2 million. As in 2015, the developments relate mainly to software development. Development work on the MCL software and application solutions will continue in 2017. The R&D effort in People ID is also significant, but with the cost included in most cases in the investment in the new concession projects (construction contracts) or else charged directly. In 2016, Zetes started specific development work towards gaining certification of a certificate issuance infrastructure that will enable Zetes to access issuer status. These efforts will also continue in 2017.


The Group operates via local companies which are direct or indirect subsidiaries of Zetes Industries SA. Zetes Industries SA does, however, have a dormant branch in Ireland.

Statement on Corporate Governance

The Statement on Corporate Governance is included in the 'Corporate Governance' section of the 2016 Annual Report, as an integral part of the Management Report This Declaration includes, among other things, a description of the composition and modus operandi of the Board of Directors, the main features of the internal control and risk management systems, the composition and modus operandi of the Executive Management, the composition and modus operandi of the Committees within the Board of Directors, the remuneration policy, and the most recent remuneration report, and a description of the shareholder base of Zetes Industries SA and its policy in terms of company capital, the measures taken by Zetes Industries SA to comply with Belgian rules on market abuse, the Group Code of Conduct and, lastly, dividend policy.

Conflicts of interest between directors and the Company

As part of the above-mentioned purchase of Zetes Industries SA by Panasonic, which is currently in process, the Board has taken various decisions giving rise to the application of Article 523 of the Companies Code. The minutes of the Board meetings at which these decisions were made are attached to this management report (Financial Information Part) and are therefore part of it.

Related party transactions

Related party transactions during the period under review consist essentially of the remuneration of the Executive Management (3 persons) in an amount of € 1,316,426. Transactions with the companies linked to the directors have been undertaken on an arm’s length basis. Details of related party transactions are included in the 'Financial Information and Corporate Governance' section of the annual report (note 11).

Article 74 of the law of 1 April 2007

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

Issue of subscription rights,

The powers of the Board of Directors to issue or repurchase shares are set out in Articles 6 and 7 of the company by-laws.

In 2016, 54,534 options were issued, of which 40% were at 31/12/2016 definitively acquired by the beneficiaries (staff benefit scheme). The exercise price was set at € 38.53.

Pursuant to the decision of the Extraordinary General Meeting of 28 May 2014, the Board of Directors decided, on 18 March 2015, to assign treasury shares in the event of exercise of the options. In 2016, it made use of this authorization (see below).

Own shares

In 2016, the Company acquired 69,216 own shares. Zetes Industries also sold 84,497 shares upon exercise of options (2005 and 2007 plans) and 34,017 shares under a staff benefit scheme. At 31 December 2016, Zetes held 124,944 own shares (174,242 at end of 2015), representing 2.32% of the issued shares. These are intended primarily to respond to the exercise of options by Company executives.

Audit Committee

At 31 December 2016, the Audit Committee consisted of four non-executive directors, two of whom having independent status:

Gema SPRL, represented par Mr Michel Allé (Chairman of the Audit Committee, independent, non-executive director)
Ms Sophie de Roux (independent, non-executive director)
Mr. Hiram Claus (non-independent, non-executive director)
Floris Vansina BVBA, represented by Mr Floris Vansina (non-independent, non-executive director)

The independence of Ms Sophie de Roux and of Mr. Michel Allé is guaranteed by the fact that neither of them (or anyone with whom they are linked) holds more than 10% of the voting rights of Zetes Industries SA. Their competence derives from their education and their professional experience in the financial sector.

Statutory Auditor’s report

The consolidated financial statements of the company have been audited by RSM Réviseurs d’Entreprises - Bedrijfsrevisoren, represented by Mr. Gert Van Leemput and Mr. Thierry Dupont. The statutory auditor has informed us that he intends to give an unqualified opinion.

Proposed appropriation of the results of the Group parent company, Zetes Industries SA

The statutory (unconsolidated) income statement of Zetes Industries SA shows sales of € 7.7 million and a net profit of € 8.2 million (€ 4.8 million in 2015). The increase reflects the size of the dividends received from subsidiaries. With equity of € 68.1 million (pre-dividend), the company presents a very high solvency ratio. An abridged version of the statutory accounts of Zetes Industries SA is provided in the Annual Report (Financial Information Section). The Board of Directors decided to pay, on 21 December 2016, an interim gross dividend of € 0.80 per share (a payout ratio of 36.90% of the consolidated net profit, Group share). It is not proposed to the General Meeting of 31 May 2017 to proceed to an additional payment to the interim dividend. Taking into account the 124,944 own shares held on 31/12/2016, for which an unavailable reserve of € 3.9 million has been established, the Board proposes to allocate the results of Zetes Industries SA, as detailed in the statutory annual accounts of the Company, as follows:

Profit for appropriation 8,680,875
Profit for the year available for appropriation 8,164,338
Profit brought forward 516,537
Withdrawal from equity 0
Transfer to legal reserve 408,217
Appropriation to other reserves 3,544,304
Profit to be carried forward 516,537
Gross dividend 2016 4,211,816

Brussels, 31 March 2017
For the Board of Directors.

Alain Wirtz SA
Represented by:

Alain Wirtz
Chief Executive Officer
Pierre Lambert
Chief Financial Officer

Jean-François Jacques
Chairman of the Board