UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
Form 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-30078
WAVECOM S.A.
(Exact name of Registrant as specified in its charter)
Not applicable | Republic of France | ||
(Translation of Registrant’s name into English) | (Jurisdiction of incorporation or organization) | ||
3, esplanade du Foncet 92442 Issy-les-Moulineaux Cedex – France (Address of principal executive offices) Tel. 011 33 1 46 29 08 00 Ronald D. Black CEO ron.black@wavecom.com (Name, telephone number and e-mail of Company contact person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act: See below
Title of each class: | Name of each exchange on which registered: |
Shares, nominal value €1.00 each* American Depositary Shares, evidenced by American Depositary Receipts, each representing one Share | Nasdaq Global Market (for listing purposes only Nasdaq Global Market) |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Ordinary Shares, nominal value €1.00 per share: 15,796,591
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer:
Non-accelerated filer:
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP International Financial Reporting Standards as issued by the international Accounting Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
By bringing wireless connectivity, our solutions help: | |
• | make vehicles safer, |
• | optimize energy consumption, |
• | safeguard homes and offices, |
• | bring communication to rural communities, |
• | make payments easier, and |
… | render almost any machine more efficient. |
Automotive applications: For the automotive market, wireless communication is particularly useful for features such as: stolen vehicle tracking, navigation systems, monitoring driving patters, concierge services as well as remote vehicle diagnostics and maintenance.
Automatic metering: With growing regulatory requirements to vary tariffs based on consumption, automatic meter management is evolving. Meter manufactures and utility companies alike are looking at many new ways to use wireless functionality to optimize consumption.
Alarm and security systems: Alarm systems connected to wireless networks are replacing traditional wire-line technologies and using high bandwidth capabilities for remote video surveillance.
Fixed wireless applications: Desktop phones and mobile public telephones using wireless networks are bringing connectivity to countries or regions where there is limited or no existing wire-line infrastructure.
Sales and payment terminals: Point of sale terminals now use wireless networks to confi rm and authorize payments from retailers with debit and credit cards, oftentimes replacing the traditional wire-line methods.
Control and monitoring: Machines that are wireless-enabled have many industrial and commercial uses from vending machines to photocopiers that can be monitored remotely for inventory levels or the proper functioning of the equipment.
![](https://capedge.com/proxy/20-F/0001208646-08-000099/c98293_2x2.jpg)
Wavecom is a leading provider of smart-device communications technology for innovative M2M (Machine to Machine) business solutions. Built on unparalleled wireless expertise, Wavecom solutions include a range of Wireless CPU®s (microcontrollers with built-in wireless communication capability), backed by the industry-leading OpenAT® Software Suite with its own real-time operating system, an integrated development environment and a wide range of middleware Plug-Ins for greater customization. These complete embedded solutions, that use chipsets tailored to M2M markets, enable makers of all types of machines to develop a new breed of intelligent wireless applications without the need of external processors. Wavecom also provides an industry-leading portfolio of operated services which enable the remote monitoring and upgrade of devices in the field.
6 WAVECOM - Annual Report Form 20-F 2007
PRESENTATION OF INFORMATION
Unless the context otherwise indicates, references to “Wavecom” “we”, “us” or the “Company” include Wavecom S.A. and its subsidiaries. References to “U.S. dollars” or “$” contained herein are to the lawful currency of the United States, and references to “euro” or “€” are to the currency of the European Monetary Union.
FORWARD-LOOKING STATEMENTS |
This annual report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, in particular “Item 4 Information on the Company – Trends”. These forward-looking statements are usually identified by words such as “believe,” “anticipate,” “plan,” “goal,” “target” and similar expressions. These forward-looking statements are not guarantees of Wavecom’s future operational or financial performance and are subject to risks and uncertainties. Actual operational and financial results may differ materially from Wavecom’s expectations contained in the forward-looking statements as a result of various factors. Factors that may cause such differences include, but are not limited to, the factors discussed in “Item 3 Key Information-Risk Factors” and “Item 5 Operating and Financial Review and Prospects”.
WAVECOM - Annual Report Form 20-F 2007 7
Page | ||
Item 1: Identity of Directors, Senior Management and Advisers | 10 | |
Item 2: Offer Statistics and Expected Timetable | 10 | |
Item 3: Key Information | 10 | |
Selected Financial Data | 10 | |
Exchange Rate Data | 12 | |
Risk Factors | 12 | |
Item 4: Information on the Company | 22 | |
Company background | 22 | |
Business overview and recent evolution | 22 | |
The market for wireless communication between machines | 24 | |
Vision & Mission | 24 | |
Currently targeted product applications | 25 | |
Our products and services | 25 | |
Marketing and Sales | 30 | |
Customer base | 31 | |
Research and development | 31 | |
Our contract manufacturing partner and relationship | 32 | |
Quality assurance, ISO certification and our continuous improvement process | 33 | |
Backlog | 33 | |
Competition | 33 | |
Intellectual property | 34 | |
Capital Expenditures | 35 | |
Corporate Information, organizational structure | 35 | |
Property, Plant and Equipment | 36 | |
Environmental Issues | 36 | |
Risk Management and Insurance Coverage | 36 | |
Item 4A: Unresolved Staff Comments | 37 | |
Item 5: Operating and Financial Review and Prospects | 38 | |
Constant currency rates | 38 | |
Critical Accounting Judgments and Estimates | 38 | |
Background | 39 | |
Reporting by Geographic Business Segment | 41 | |
Results of Operations | 42 | |
Selected quarterly operating results | 50 | |
Liquidity and capital resources | 51 | |
Research and development | 51 | |
Off-balance sheet arrangements | 51 | |
Tabular disclosure of contractual obligations | 52 | |
Interest rate risk | 52 | |
Subsequent events | 53 | |
Item 6: Directors, Senior Management and Employees | 54 | |
Board of Directors and Executive Officers | 54 | |
Directors | 55 | |
Executive officers | 57 | |
Committees of the Board of Directors | 59 | |
Corporate Governance Activities | 61 |
8 WAVECOM - Annual Report Form 20-F 2007
Code of Ethics and Business Conduct | 61 | |
Code of Ethics for Senior Financial Management | 61 | |
Internal controls | 61 | |
Compensation of Directors and Officers | 65 | |
Share Ownership and Option and Warrant Information | 67 | |
Employees and independent contractors | 70 | |
Item 7: Major shareholders and Related Party Transactions | 72 | |
Major shareholders | 72 | |
Major changes in ownership | 74 | |
Geographic Distribution of shareholders | 74 | |
Related Party Transactions | 74 | |
Item 8: Financial Information | 75 | |
Financial Statements | 75 | |
Legal Proceedings | 75 | |
Significant Changes | 75 | |
Dividends | 75 | |
Item 9: The Offer and Listing | 76 | |
Price Range of Shares and ADSs | 76 | |
Item 10: Additional Information | 77 | |
Memorandum and articles of association | 77 | |
Objects and purposes | 77 | |
Composition of share capital | 77 | |
Dividend and liquidation rights | 77 | |
Attendance and voting at shareholders’ meetings | 77 | |
Repurchase and redemption of shares | 78 | |
Requirement for holdings exceeding certain percentages | 79 | |
Material Contracts | 79 | |
Exchange Controls | 79 | |
Taxation | 80 | |
Documents on Display | 83 | |
Item 11: Quantitative and Qualitative Disclosures about Market Risk | 84 | |
Item 12: Description of Securities other than Equity Securities | 84 |
WAVECOM - Annual Report Form 20-F 2007 9
Item 1: Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2: Offer Statistics and Expected Timetable
Not applicable.
Selected Financial Data |
The following selected financial data for the five years ended December 31, 2007 are derived from the consolidated financial statements of Wavecom, which have been prepared in accordance with U.S. GAAP and have been audited by Ernst & Young Audit, independent auditors. The data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects,” the consolidated financial statements, related notes and other financial information included in this annual report.
10 WAVECOM - Annual Report Form 20-F 2007
Years ended December 31, | |||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | |||||||
Consolidated statements of operations data: | |||||||||||
Revenues: | |||||||||||
Product sales | € 271,773 | € 149,974 | € 125,952 | €180.393 | € 198.510 | ||||||
Service revenue | 3.855 | 1.580 | 1.827 | 2.542 | 3.827 | ||||||
Licensing revenue | — | — | 1.453 | 5.823 | — | ||||||
Total revenues | 275.628 | 151.554 | 129.232 | 188.758 | 202.337 | ||||||
Cost of revenues: | |||||||||||
Cost of goods sold | 168.465 | 107.134 | 69.094 | 105.775 | 104.650 | ||||||
Cost of services | 4.704 | 8.391 | 842 | 2.723 | 5.833 | ||||||
Total cost of revenues | 173.169 | 115.525 | 69.936 | 108.498 | 110.483 | ||||||
Gross profit | 102.459 | 36.029 | 59.296 | 80.260 | 91.854 | ||||||
Operating expenses: | |||||||||||
Research and development | 62.123 | 47.083 | 24.066 | 31.123 | 33.562 | ||||||
Sales and marketing | 27.766 | 15.685 | 11.725 | 16.853 | 22.740 | ||||||
General and administrative | 39.141 | 30.122 | 17.861 | 25.187 | 22.855 | ||||||
Acquired in process technology | — | — | — | 1.450 | — | ||||||
Amortization and impairment of intangible assets | 4.244 | 1.768 | — | — | — | ||||||
Restructuring costs | — | 22.247 | 1.684 | — | — | ||||||
Deferred compensation amortization | 205 | — | — | — | — | ||||||
Total operating expenses | 133.479 | 116.905 | 55.336 | 74.613 | 79.157 | ||||||
Operating income (loss) | (31.020 | ) | (80.876 | ) | 3.960 | 5.647 | 12.697 | ||||
Gain on sales of long-term investments | — | 1.166 | — | — | — | ||||||
Interest and other financial income (expense), net | 702 | 966 | 5.129 | (819 | ) | 392 | |||||
Income (loss) before minority interests and income taxes | (30.318 | ) | (78.744 | ) | 9.089 | 4.828 | 13.089 | ||||
Minority interest | (38 | ) | — | — | — | — | |||||
Income (loss) before income taxes | (30.280 | ) | (78.744 | ) | 9.089 | 4.828 | 13.089 | ||||
Income tax expense (benefit) | 861 | 13 | 395 | 125 | (4.310 | ) | |||||
Net income (loss) | €(31.141 | ) | €(78.757 | ) | 8.694 | 4.703 | 17.399 | ||||
Basic net income (loss) per share(1) | €(2.06 | ) | €(5.14 | ) | €0.57 | €0.31 | €1.15 | ||||
Diluted net income (loss) per share | €(2.06 | ) | €(5.14 | ) | €0.56 | €0.30 | €1.02 | ||||
Cash dividends declared per share(2) | — | — | — | — | — | ||||||
Number of shares used in computing basic net income (loss) per share | 15,098,795 | 15,317,661 | 15,352,233 | 15,383,883 | 15,129,600 | ||||||
Number of shares used in computing diluted net income (loss) per share | 15,098,795 | 15,317,661 | 15,661,001 | 15,942,182 | 17,470,234 | ||||||
(1) | Net income (loss) per share amounts are computed using the weighted average number of shares outstanding, which excludes options and warrants, and reflects only the actual ordinary shares outstanding. |
(2) | We do not expect to pay any cash dividends on our shares in the foreseeable future. |
WAVECOM - Annual Report Form 20-F 2007 11
2003 | 2004 | 2005 | 2006 | 2007 | |||||||
Consolidated balance sheet data: | |||||||||||
Total current assets | € 211,542 | € 99,174 | € 94.965 | € 93.097 | € 183.467 | ||||||
Total assets | 275.229 | 137.206 | 120.078 | 139.177 | 231.398 | ||||||
Total current liabilities | 131.204 | 78.716 | 37.969 | 50.318 | 44.598 | ||||||
Total long-term liabilities | 6.692 | 2.034 | 17.969 | 17.200 | 98.092 | ||||||
Total shareholders’ equity | 137.333 | 56.456 | 64.140 | 71.659 | 88.708 | ||||||
Exchange Rate Data |
The exchange rate for converting U.S. dollars into euros (using the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York) on March 31, 2008 was $1.58=€1. Fluctuations in the exchange rate between the euro and the dollar will affect the dollar amounts received by owners of ADSs on conversion of dividends, if any, paid in euro on the shares and may affect the dollar price of the ADSs on the Nasdaq Global Market.
Month | High | Low | |||
2008 | |||||
March | $1.5904 | $1.5143 | |||
February | 1.5230 | 1.4439 | |||
January | 1.4922 | 1.4366 | |||
2007 | |||||
December | 1.4784 | 1.4310 | |||
November | 1.4968 | 1.4029 | |||
October | 1.4441 | 1.4015 | |||
(source: www.oanda.com) |
The table below shows the average rates of exchange for one U.S. dollar per euro for the years ended December 31, 2003 to December 31, 2007. Averages are based on daily noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York. (source: www.federalreserve.gov)
Year ended December 31, | Average | ||
2007 | $1.3711 | ||
2006 | 1.2563 | ||
2005 | 1.2449 | ||
2004 | 1.2011 | ||
2003 | 1.1315 | ||
Risk Factors |
In addition to the other information contained in this annual report, the following risk factors should be carefully considered in evaluating us and our business. These statements are intended to highlight the material risk factors that may affect our business results, however these risks are not the only ones we face, and additional risks not presently known to us or that we currently deem immaterial may impair our business operations in the future.
Risks related to our Business |
Our primary source of revenue is the vertical markets, or embedded industrial applications, for wireless communication between machines, which are nascent markets. If these markets do not develop at the rate we anticipate, or if we are unable to successfully penetrate these markets, our financial results will be adversely impacted. |
In September 2004, we announced that we would focus exclusively on the vertical markets, or embedded industrial applications, for wireless communication between machines, targeting wireless applications in three areas: Automotive, industrial Machine-to-Machine (M2M) and mobile professional applications. The applications for which we sell our products are extremely fragmented and no single sub-application shows signs that it will expand more quickly than the others.
12 WAVECOM - Annual Report Form 20-F 2007
Therefore, the timing of the development of these markets, which will be critical for our success in the future, is not, at this time, well defined.
We face various competitors in vertical markets both at the local and the global level. It has been our experience that our competitors exert price pressure to increase their market share. This pressure can be aggravated by the impact of a weak US dollar on prices. If we are unable to maintain or expand our share of the vertical markets in both volume and value our revenues may not grow at the rate we anticipate, or they may decline.
In addition, it is possible that we could eventually face a situation in the vertical markets similar to that which we faced in the mobile handset market when prices for competing solutions decreased significantly and we were unable to continue to offer our products at competitive prices. If this risk, or the other risks described above, were to materialize, both our revenues and earnings could stagnate or suffer declines. As a result, we may not generate sufficient revenues to cover our operating expense base, and we may therefore operate at a loss.
Our long sales cycle may result in substantial fluctuations in revenue from quarter to quarter which makes corporate planning difficult. |
The time between the first contacts with a customer, a design win, and the first sale may be long, in particular in the automotive area, since design times and safety certifications for new models take several years. Our typical sales cycle is generally from six to 18 months and can be as much as two to three years for some customers. In addition, the timing of our sales is often linked with the timing of the launch of our customers’ new products. Any slippage in the launch of a customer’s product, or cancellation of pending orders could delay the timing of our related product sales. Consequently, we face difficulties in predicting the quarter in which expected sales to customers will occur, if at all, and we may incur substantial expenses in relation to expected product sales far in advance of the actual sales and receipt of revenue. In addition, our customers’ ability under certain circumstances to reschedule or cancel orders without significant penalty could adversely affect our liquidity, as we may be unable to adjust our purchasers of components from third-parties to match customer changes in delivery dates or cancellations.
We may be unable to sustain or increase our profitability and once again suffer operating losses which could lead to a decline in our stock price. |
After two years of posting operating losses in 2003 and 2004, the following years 2005, 2006 and 2007 were profitable. In the current economic context, if we are unable to sustain business growth and maintain the gross margin at the present level or if our operating expenses exceed current levels, we may once again suffer operating losses for one or more quarters.
We may experience integration difficulties or encounter unknown liabilities with respect to our recent acquisition of Anyware Technologies. |
On February 1, 2008, we announced the acquisition of Anyware Technologies. We cannot predict the success of the acquired company once under our control, and we may not achieve the expected rate of return from the acquisition, or may fail to successfully integrate the business or employees into our working environment. An acquisition can also result in unanticipated legal risks, legal costs and liabilities. Our failure to successfully integrate the acquired company into our group may adversely affect our financial condition and results of operations, and may hinder our ability to execute on our business strategy.
If the ecosystem for wireless-enabled machines does not develop we may not find adequate markets for our products and thus not achieve our growth targets. |
The ecosystem for wireless-enabled, communicating machines consists of four main types of players. First are the technology providers, like us, who provide the core wireless technology using all major wireless standards. A category of value-added distributors and design houses play a role in conceptualizing, creating and designing end-products. Manufacturers also conceive, create, design and produce a broad range of wireless-enabled devices. Finally, there are the wireless network operators and virtual wireless operators which provide the “air time” to transmit data to end users. If any one of these players does not develop at the same pace as the others, the markets as a whole will have difficulty developing, which may in turn keep us from reaching our growth targets.
The wireless communication market in which we operate is characterized by rapidly changing and increasingly complex technologies and we must constantly balance the need to keep pace with new trends with our interest in not overspending on uncertain and unproven technologies. |
The markets in which we sell our wireless solutions are regularly developing new types of products and new versions of existing products. To be competitive, manufacturers who purchase our solutions for use in their end-products must satisfy market demand at market prices. To meet our customers’ needs, we must continuously update and enhance our products,
WAVECOM - Annual Report Form 20-F 2007 13
shortening their life cycles so that they meet the latest standards and include up-to-date features for a wide variety of applications.
To develop these enhancements, new designs and technologies, we must spend time and significant amounts of money on research and development. These investments are generally made before commercial viability for the resulting products can be sufficiently proven. In addition, some of our technology is forward-looking and offers functionalities which are significantly advanced compared to current market standards and which may not have ready market applications or the ability to achieve market acceptance. There are no assurances that we will achieve net positive earnings from our new products or that they will be commercially successful, particularly if we misjudge a market’s readiness for our products or miss a product life-cycle window. We may lose market share if our competitors are more successful or faster than we are in updating and improving products and technology and timing product releases with market demand.
From a technology standpoint, we face competition from both alternative wireless, and non-wireless technologies. Wireless technologies can be roughly characterized as WAN (Wide Area Network) which includes GSM, CDMA, OFDM, UWB, WiMAX followed by WLAN (Wireless Local Area Network) i.e. WiFi and finally PAN (Personal Area Networks) such as Bluetooth or Zigbee. Non-wireless technologies are those which are used to provide mirroring functionality but via a fixed (wired) network such as the fixed line telephone network (PSTN), LAN Ethernet or a more specific M2M example such as PLC (Power Line Control) which is used in the Automatic Meter Management market. If any of these competing technologies becomes the technology of choice in one or more of our target market segments while we have decided not to adopt those technologies, we could lose significant market share in the applicable segment(s).
We began to perform more services work on a contingent fixed-price basis, which has associated risk that the work-product may not be accepted when finally delivered and therefore we may not be paid for our time, or the cost of our labor may be more than we receive in revenues. |
Customer demand for fixed-price and/or turnkey service engagements is increasing and we are accepting more service work on a fixed-price basis. Typically, we perform the work for fixed-price services at our expense, and receiving payment for the work performed is contingent on the customer’s acceptance of the work-product that we deliver at certain intervals, called milestones, or at the end of the engagement. If the customer does not accept all or part of the work-product that we deliver, we may not receive some or all of the anticipated revenues to offset the costs incurred in performing the engagement, which could have an adverse impact on our revenues, net profit and financial condition. In addition, the risks associated with these engagements include the possibility that we could poorly manage the engagement and not conduct the work in the most cost effective manner. Further, because the fee that is charged for these engagements is determined at the outset, we could underestimate the amount of work that will be required and the engagement could actually result in a loss. Moreover, we could lose other more profitable opportunities because we are required to commit significant resources to fixed-price service engagements which may turn out to be unprofitable.
We have launched new offers of services. The sales generated by these services could grow at a slower level than expected and therefore not generate the profits expected. |
In 2007, we launched several new service offers such as IDS (Intelligent Device Services). These are innovative services and we cannot be sure that customers will quickly adopt them or that we will achieve net positive earnings on these services.
As the vertical markets for wireless communication between machines evolve, current or future market participants, including our customers and ourselves, may seek to consolidate their resources, which could create significant financial and/or competitive stresses for us. |
As the vertical markets for wireless communications between machines evolve, current or future market participants may seek to consolidate their resources to create more competitive or commercially effective units. Such industry consolidation may lead to a bid for the acquisition of our business by another group, in which case our shareholders may not be able to benefit from our future long-term development.
It is also possible that we will be excluded from an industry consolidation, in which case our competitors may grow stronger and gain increased market share. In addition, some of our key customers could be acquired by a company using a different technology than ours, resulting in the loss of sales for future projects with this customer. In light of the nascent nature of the vertical markets, we may be subject to financial and/or competitive stresses resulting from industry consolidation, and we cannot be certain as to our future position in the industry.
Past or future acquisitions could disrupt our business and harm our financial condition. |
As part of our strategy to increase our revenue and expand our product base, we continue to evaluate opportunities to acquire other businesses, assets or technologies that would complement our current business, expand the breadth of our markets or enhance our strategic capabilities. Future acquisitions that we may make or joint ventures that we may enter into with other companies could require us to incur debt or contingent liabilities or require us to issue equity securities that
14 WAVECOM - Annual Report Form 20-F 2007
could cause the trading price of our stock to decline. Other potential acquisitions that we may make, or joint ventures that we may enter into, entail a number of risks that could materially and adversely affect our business and operating results, including:
• | problems integrating the acquired operations, technologies or products with our existing business and products; |
• | diversion of management’s time and attention from our core business; |
• | need for financial resources above our planned investment levels; |
• | difficulties in retaining business relationships with suppliers and customers of the acquired company; |
• | risks associated with entering markets in which we lack prior experience; |
• | risks associated with the transfer of rights and licenses of intellectual property; |
• | potential loss of key employees of the acquired company; and |
• | potential impairment of related goodwill and intangible assets. |
If we fail to vigorously protect our intellectual property, our competitive position may suffer. |
Our future success and competitive position depend in part upon our ability to develop and protect proprietary technology used in our products. We protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements, employee and third party non-disclosure agreements and assignment agreements. Policing the unauthorized use of our intellectual property is difficult and costly, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States or Europe.
We may be subject to intellectual property infringement claims that result in costly litigation and could harm our business and ability to compete. Our industry is characterized by the existence of a large number of patents, as well as frequent claims and related litigation regarding these patents and other intellectual property rights. We may be involved in litigation to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity of property rights of others, or to defend against claims of invalidity. This type of litigation can be expensive, regardless of whether we win or lose. In the event of claims of infringement against our customers with respect to technology used in our products, we may be required to indemnify our customers, which could be very costly. Any claims, even those without merit, could be time consuming to defend, result in costly litigation and diversion of technical and management personnel, or require us to enter into royalty or licensing agreements. A successful claim of infringement against us with respect to our products could harm our business and result in significant cash expense to us to cover litigation costs.
Our products are manufactured by Solectron Corporation, acquired by Flextronics in 2007, and if Flextronics is unable to meet our requirements for any reason, or if our agreement with Flextronics should be terminated, we could experience significant difficulty arranging for a suitable replacement at reasonable cost. |
Following the acquisition of the Sony-Ericsson M2M Communications business in the second quarter of 2006, we were working with three new manufacturing partners in Mexico and Taiwan. We have progressively transferred the production of our products to the Flextronics plant in China and as of the end of 2007 our entire production is done at that factory.
Our reliance on a single manufacturer increases the risks that we could encounter delays related to manufacturing or supply problems at some point in the future. Using one contract manufacturer, we are necessarily dependent on this single primary supplier who assembles and tests our components and our products. Our manufacturer has other customers and may not have sufficient capacity to meet all of our supply, manufacturing, assembly and testing needs during periods of peak demand. They may fail to meet our specified requirements, notably our quality standards. They can experience financial difficulties, or delays or disruption to production or may be unable to produce any product if the plant is destroyed or damaged. In addition, a financial or political crisis in China, or a change in the political climate making China less receptive to foreign businesses, could also disrupt our supply of manufactured products or increase costs.
Our manufacturing agreement with Flextronics provides for termination in a strictly limited and precisely defined number of cases. In case of termination, a six-month exit management plan would be implemented to transition production back to us or to another contract manufacturer. However, the transition to another manufacturing sub-contractor would be complex and would require substantial investment of management, as well as possibly financial, resources.
In the event any of the risks described above materialize and prevent us from delivering our products to our customers on a timely basis, we could lose a portion of our business temporarily or on a long-term basis, be subject to customer contract penalties and incur substantial costs to establish a new contract manufacturing relationship.
WAVECOM - Annual Report Form 20-F 2007 15
Quality issues, such as errors in the software used in our products, could result in significant losses to us or our customers, thus damaging our reputation, or increase the potential for product liability claims against us. |
We may face quality issues affecting either the hardware or the software in our products. Software frequently contains undetected errors or failures, especially when first introduced or when new versions are released. Several of our products utilize unproven or evolving technologies that may contain defects or other quality or performance problems. Some of these defects may be latent, or only triggered by very specific events, and undiscoverable through advance testing and may only surface following widespread use by customers. Accordingly, errors might still be found in our products and product upgrades for some time following release. Should problems occur in the operation or performance of our products, we may experience delays in meeting key launch dates or delivery dates to our customers. Defects may also cause us to incur significant re-engineering costs, and divert the time and attention of our engineering personnel from our new product development efforts. The discovery of these performance problems or defects could result in significant losses to our customers, who may subject us to indemnity or product liability claims in addition to causing customer relationship issues, and reduced market acceptance of our products. Significant defects could require product replacement or recalls or we could be obligated to accept product returns. These developments could have a material adverse effect on our reputation, business, operating results and financial condition.
Our sales agreements with our customers frequently contain provisions designed to limit our exposure to potential product liability and other claims due to unforeseen errors in software. It is possible, however, that the limitation of liability provisions contained in our sales agreements may not be effective under the laws of certain jurisdictions. For example, liability for claims for personal injury (e.g. in the consumer automotive context) cannot be contractually disclaimed or limited in the United States. We currently have limited insurance against product liability risks or errors and omissions coverage, and there can be no assurance that the current levels of insurance coverage are adequate or that additional insurance will be available to us on commercially reasonable terms or at all. A product liability claim or claim for economic loss brought against us could have a material adverse effect upon our business, operating results and financial condition.
A significant portion of our cash is invested in marketable securities. In the event of a market downturn, we may suffer losses on our investments. |
Wavecom has policies that limit cash investments to short-term, low-risk instruments. Cash is mainly held in securities that are invested in short-term money market accounts (in France: Fonds Commun de Placement or “FCP” and Société d’Investissement à Capital Variable or “SICAV”). However, we cannot guarantee that these investments are completely risk-free and we may suffer losses on our investments.
Our sales and operating results could be adversely affected if the third parties on whom we rely for the supply of our components are unable to meet our supply or quality requirements. |
We believe that a number of our suppliers are sole sources for key components. These key components are complex and difficult to manufacture and require long lead times. We work with our suppliers on a twelve-month rolling forecast basis, however these forecasts are subject to change for many reasons frequently outside of our control. In the event of a reduction or interruption of supply, or decline in quality, it could take several months before we could begin receiving adequate supplies from alternative sources. Supply interruptions could delay product shipments, causing our revenues to decline and operating results to suffer.
Our profitability could be negatively impacted if the prices of our key components increase or if they are no longer available. |
Over the past five years, we experienced declining or stable prices for most of the key components we use in our products. It is possible that these trends could reverse and that we could see component prices increase. The hardware platforms that we sell are made up of components that are made by manufacturers other than us. If our suppliers decide to discontinue manufacturing specific components, we may have to redesign our products, thus adding unplanned development costs. If either of these situations occurs, our cost structure could change, thus limiting our ability to maintain competitive pricing and making it more difficult to continue to be profitable.
Fluctuations in the rate of exchange between our reporting currency, the euro, and the U.S. dollar can affect our net sales and costs. |
Although our functional currency is the euro, a significant portion of our revenues and assets are recorded in U.S. dollars. At the same time, most of our components are purchased in U.S. dollars, and a portion of our operating expenses is in U.S. dollars. During 2007, the value of the euro increased against the U.S. dollar, reducing our reported revenues and negatively affecting our reported operating and net results. This situation could continue in the future.
We incurred a net foreign exchange loss for 2007 of €1.4 million compared to a net foreign exchange loss in 2006 (€1.9 million) and a net foreign exchange gain in 2005 (€4.1 million). We may incur foreign exchange losses again in the future.
16 WAVECOM - Annual Report Form 20-F 2007
Beginning in January 2003, we put in place a program to hedge our currency risk through the use of forward contracts and put and call options covering expected net cash flows in U.S. dollars. This program is not able to cover a sudden change in the currency rate or a significant change in our business. The objective of this program is to minimize our risk, but we will never be able to eliminate the risk.
Our costs may increase or we may have to redesign our products if they infringe on other companies’ intellectual property rights. |
Other companies have patents, copyrights, trade secrets and other intellectual property rights covering technology used in the wireless communications industry. Although we have entered into appropriate intellectual property licenses permitting us to use the intellectual property rights of third parties, if any of our products, including products we may acquire, were found to infringe protected technology, we could be required to redesign them, to obtain further intellectual property licenses or to pay royalties or damages to the owner of the technology. The resulting costs would harm our business. If we were unable to obtain these licenses or to redesign our products to make them non-infringing, we could be prohibited from marketing the relevant products.
We need to attract, retain and develop key personnel who are skilled in our business and technology to remain competitive. |
It is important to our success that we retain our highly skilled product development, sales, marketing and other key employees, including senior management, and continue to attract and motivate additional skilled employees. We rely to some extent on independent contractors who work for consulting firms.
If we fail to attract, hire or retain appropriately qualified personnel, we could experience delays in our research and development projects or our product roll-outs, which could affect our ability to bring new products to market successfully or on a timely basis.
Concentrated ownership of shares by two of our founding shareholders could significantly influence shareholder votes or affect the price of our common stock. |
At March 31, 2008, our two founding shareholders, who are also members of our board of directors, own interests of approximately 10% and 11% each, of our outstanding shares as of such date. The influence over shareholder votes of significant shareholders may have the effect of delaying, deferring or preventing a change in control of us, and such shareholders may otherwise have the ability to control shareholder decisions. In addition, any plans by these shareholders to dispose of a substantial amount of their shares in the open market could have an adverse impact on the market for our common shares.
As a result of our global operations, we are exposed to numerous risks, including logistical difficulties, cultural differences, product localization costs, import and tariff restrictions and adverse foreign tax consequences. |
We have principal operational locations in France, the United States and Hong Kong. We do business globally using an extensive distributor network. Directly or indirectly, we are selling in more than a hundred countries on all continents, and our manufacturing is subcontracted in China.
Worldwide operations are subject to a number of risks, including:
• | the need to track and monitor tariffs, duties, export controls and other trade barriers; |
• | the impact of unexpected changes in regulatory requirement and applicable laws; |
• | the burden of monitoring and complying with a wide variety of foreign laws and regulations; |
• | political and economical instability, which tends to be a more significant risk in the countries where we currently outsource manufacturing; |
• | potential adverse tax consequences; |
• | longer payment cycles for sales in certain foreign countries; |
• | difficulties and costs of staffing and managing international operations; |
• | disease and related quarantines; |
• | cultural differences; and |
• | aggressive competition from companies based in countries which do not protect intellectual property rights to as great an extent as those of the United States and France |
WAVECOM - Annual Report Form 20-F 2007 17
Business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. |
A number of factors, including natural disasters, computer viruses or failure to successfully upgrade and improve operational systems to meet evolving business conditions, could disrupt our business, which could seriously harm our revenues or financial conditions and increase our costs and expenses. For example, our headquarters in Paris is located in potential flood zones that could subject these facilities and associated computer systems to disruption.
The requirement to expense stock options in our income statements has had a significant adverse effect on our reported results and we expect this negative impact to continue in the near future. |
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We adopted this new standard on January 1, 2006, using the modified prospective method.
The adoption as of January 1, 2006, on a prospective basis, of SFAS 123R fair value method had an impact of approximately €2.1 million on our operating result reported for fiscal year 2006 due to the compensation charges and of €4.8 million for fiscal year 2007. We expect the effect of SFAS 123R to continue to have a negative impact on our reported operating results for the near future.
Our quarterly revenues fluctuate significantly, which makes forecasting difficult and can significantly impact our planning process. |
Our revenues and operating results fluctuate significantly from quarter to quarter. Factors that could cause our quarterly results to fluctuate include:
• | any delay in our introduction of new products or product enhancements; |
• | size and timing of customer orders and our product shipments; |
• | any delay in shipments caused by component shortages or other manufacturing problems; |
• | loss of a major customer or a reduction in purchases by a major customer; |
• | reduction in the selling price of our products; |
• | size, timing and structure of significant license sales; |
• | customer responses to announcements of new products and product enhancements by our competitors; |
• | foreign exchange rate fluctuations, primarily between the euro and the U.S. dollar; and |
• | booking of one-time, non-recurring expenses such as restructuring or acquisition costs. |
Due to these and other factors, our results of operations have in the past and could fluctuate substantially in the future and quarterly comparisons may not be reliable indicators of future performance. Because many of our expenses for personnel, facilities and equipment are relatively fixed in nature, we may not be able to reduce expenses quickly to balance an extended decline in our revenues and could experience net losses during these periods. In addition, quarterly fluctuations may have a negative effect on the price of our shares and ADSs, and a corresponding negative impact on public perception and customer and investor confidence.
The regulatory environments in which we operate have become increasingly complex, including with respect to accounting standards and internal rules and changes in accounting principles may affect our reported earnings and operating income |
Due to the global reach of our operations and our listings on the French and U.S. stock exchanges, we are subject to complex, overlapping and rapidly evolving laws, regulations and requirements, including with respect to our financial statements, which are prepared according to both International Financial Reporting Standards (IFRS) and U.S. GAAP. The reporting requirements may be contradictory and subject to inconsistent interpretation. We review our compliance with all new and existing accounting rules and pronouncements on an ongoing basis. Depending on the outcome of these ongoing reviews, the evolution of our business model and the potential issuance of further accounting pronouncements, implementation guidelines and interpretations, particularly with respect to revenue recognition or stock-based compensation, we may be required to modify our accounting policies and business practices which could have a material adverse effect on our results of operations or financial reporting. Our current accounting policies are described in Item 18 and note 1 to our consolidated financial statements.
The laws and regulations to which we are subject apply to a wide variety of areas, including corporate governance and internal controls. The implementation of these requirements may require greater investment in and use of resources than have already been anticipated. This could ultimately place significant strains on our organization, increase our cost base and dilute our internal resources currently devoted to general financial and reporting activities.
18 WAVECOM - Annual Report Form 20-F 2007
If, despite our efforts, we are unable to comply with these new laws and standards in the mandated timeframes, or if we encounter deficiencies, or if our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under section 404, we may experience a loss of confidence by the market, or a declining stock price, either of which could harm our reputation and results of operations.
There can be no assurance that additional regulation in any of the jurisdictions in which we now, or in the future may, operate would not significantly increase the cost of regulatory compliance.
If we are considered to be a passive foreign investment company for the United States federal income purposes, U.S. holders of our equity securities could suffer negative consequences. |
Based on the composition of our income and assets, and the valuation of our assets, during 2007, we do not believe that we were a passive foreign investment company (“PFIC”) for United States federal income tax purposes for the taxable year ending December 31, 2007. However, the determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may be a PFIC in the current year or future years due to changes in the composition of our income or assets or the valuation of our assets. The composition of our income and assets will be affected by how we invest the proceeds from our 2007 convertible debt offering. These proceeds could cause us to be a PFIC if they are not timely invested in assets that do not produce passive income for purposes of the PFIC rules. If we become a PFIC, U.S. holders of our equity securities could be subject to adverse U.S. tax consequences, including additional U.S. federal income tax and an interest charge upon certain distributions by us or upon sale or other disposition of our equity securities at a gain, as well as additional reporting requirements. Please see “Taxation – U.S. Taxation of U.S. Holders – Passive Foreign Investment Company” for a more detailed discussion of the consequences if we are a PFIC. You should consult your own tax advisors regarding the application of the PFIC rules to your particular circumstances.
Holders of our shares have limited rights to call shareholders’ meetings or submit shareholder proposals which could adversely affect their ability to participate in the governance of our Company. |
In general, our Board of Directors may call a meeting of our shareholders. A shareholders’ meeting may also be called by a liquidator or a court appointed agent, in limited circumstances, such as at the request of the holders of 5% or more of our outstanding shares held in the form of ordinary shares. In addition, shareholders or groups of shareholders holding a defined number of shares (currently 1.76% i.e 277,732 shares) held in the form of ordinary shares may submit proposed resolutions for meetings of shareholders. As a result, the ability of our shareholders to participate in and influence the governance of our Company will be limited.
Provisions of our articles of association and French law could have anti-takeover effects and could deprive shareholders who do not comply with such provisions of some or all of their voting rights. |
Provisions of our articles of association and French law may impede the accumulation of our shares by third parties seeking to gain a measure of control over our Company. For example, French law provides that any individual or entity (“person”), acting alone or in concert with others, that becomes the owner or ceases to be the owner of more than 5%, 10%, 15%, 20%, 25%, 1/3, 50%, 2/3, 90%, 95% of the share capital or voting rights of our Company is required to notify (i) our Company and (ii) the AMF by registered letter (with return receipt) within five trading days of exceeding or falling below such thresholds. The AMF makes the notice public. Failure to comply with the above stated stipulations will result in the suspension of the voting rights attached to the shares exceeding the thresholds crossed and not declared at the shareholders meetings which could be held up until the expiration of a time limit of two years, inclusive, from the date that a corrective declaration is made. Also a shareholder who does not comply with these notification requirements may have all or part of its voting rights suspended for up to five years by the commercial court at the request of our Chairman, any of our shareholders or the AMF, or may be subject to criminal penalties and fines. Additionally, any person acquiring more than 10% or 20% of the share capital or voting rights of our Company must notify us and the AMF within 10 trading days of crossing any of these thresholds and file a statement of their intentions as to the objective they are pursuing. To permit holders to give the required notice, we are required to publish in the BALO (the official journal for legal notifications in France) no later than 15 calendar days after the annual ordinary general meeting of shareholders information with respect to the total number of voting rights outstanding as of the date of such meeting. In addition, if the number of outstanding voting rights changes by 5% or more between two annual ordinary general meetings, we are required to publish in the BALO, within 15 calendar days of such change, the number of voting rights outstanding and provide the AMF with written notice of such information. The AMF publishes the total number of voting rights so notified by all listed companies in a weekly notice (avis), indicating the date that each such number was last updated. Furthermore, every month we must notify the AMF of, and publish, the total number of voting rights and shares of our share capital if the number of available voting rights and shares so notified has changed compared with the last published information. Under the regulations of the AMF and subject to its limited exemptions, any person or persons acting in concert who comes to own more than 33 1/3% of our share capital or voting rights must initiate a public tender offer for the balance of our share capital and the balance of
WAVECOM - Annual Report Form 20-F 2007 19
the securities giving access to our share capital (including, for these purposes, all securities convertible into or exchangeable for equity securities).
Under the terms of the deposit agreement relating to our ADSs (American Depository Shares), if a holder of ADSs fails to instruct the depositary in a timely and valid manner how to vote such holder’s ADSs with respect to a particular matter, the depositary will deem that such holder has given a proxy to the chairman of the meeting to vote in favor of each proposal recommended by our board of directors and against each proposal opposed by our board of directors and will vote the ordinary shares underlying the ADSs accordingly. This provision of the depositary agreement could deter or delay hostile takeovers, proxy contests and changes in control or management of our Company
Interests of our shareholders will be diluted if they are not able to exercise preferential subscription rights for our shares. |
Under French law, shareholders have preferential subscription rights (droits préférentiels de souscription) to subscribe for issuances of new shares or other securities with preferential subscription rights, on a pro rata basis, such purchases to be paid in cash. Shareholders may waive their right specifically in respect of any offering, either individually or collectively, at an extraordinary general meeting. Preferential subscription rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares and may be quoted on the exchange for such securities on NYSE Euronext Paris. Holders of our ADSs may not be able to exercise preferential subscription rights for these shares unless a registration statement under the U.S. Securities Act of 1933 is effective with respect to such rights or an exemption from the registration requirements is available. If these preferential subscription rights cannot be exercised by holders of ADSs, to the extent possible we will endeavor to make arrangements to have the preferential subscription rights sold and the net proceeds of the sale paid to such holders. If such rights cannot be sold for any reason, we may allow such rights to lapse. In either case, the interest of holders of ADSs in our Company will be diluted, and, if the rights lapse, such holders will not realize any value from the granting of preferential subscription rights.
It may be difficult for holders of our ADSs to exercise some of their rights as shareholders. |
It may be more difficult for holders of our ADSs to exercise their rights as shareholders than it would be if they directly held our ordinary shares. For example, if we offer new ordinary shares, and a holder of our ADSs has the right to subscribe for a portion of them, the Bank of New York, as the depositary, is allowed to sell for such ADS holder’s benefit that right to subscribe for new ordinary shares of our Company instead of making it available to such holder in its own discretion. Also, to exercise their voting rights, holders of our ADSs must instruct the depositary how to vote their shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights will take longer for a holder of our ADSs than it would for holders of our ordinary shares.
Fluctuation in the value of the U.S. dollar relative to the euro may cause the price of our ordinary shares to deviate from the price of our ADSs. |
Our ADSs trade in U.S. dollars and our ordinary shares trade in euros. Fluctuations in the exchange rates between the U.S. dollar and the euro may result in temporary differences between the value of our ADSs and the value of our ordinary shares, which may result in trading by investors seeking to exploit such differences, which could adversely impact the trading opportunities for other shareholders.
We have not distributed dividends to our shareholders in the past nor do we intend to in the near future. |
We currently intend to use all of our operating cash flow to finance the development of our business for the foreseeable future. We have never distributed cash dividends to our shareholders, and we currently have no plan to distribute cash dividends. If we distribute a portion of our earnings as dividends to shareholders in the future, the determination of whether to declare dividends and, if so, the amount of such dividends will be based on facts and circumstances existing at the time of determination.
Our share price is and may continue to be volatile. |
Our share price is volatile due, in part, to generally volatile securities markets, and the volatility in the telecommunications and technology companies’ securities markets in particular. Factors other than our financial results that may affect our share price include, but are not limited to, market expectations of our performance, capital spending plans of our customers, the level perceived growth of the industries in which we participate and any perceived need for us to raise additional capital through the sale of securities. Any future sale of equity or convertible securities we may consider could depress our stock price.
We may have difficulty in accessing capital to grow the business if we are unable to obtain short-term bank loans in the future. |
At some point in the future, we may have need for short-term financing in order to continue to grow our business. If we are unable to obtain a traditional bank loan, due to a decline in our credit rating or due to the unwillingness of a bank to
20 WAVECOM - Annual Report Form 20-F 2007
make a business loan, we may have to seek alternative financing that could be both difficult and expensive. The banking practices in France are different from traditional banking practices in other countries, like the United States for example, and obtaining a traditional bank loan is often difficult and may carry a very high interest rate.
The Company may not be able to repay all of its Bonds |
In July 2007, the Company completed the offering of bonds convertible into and/or exchangeable for new or existing shares (OCEANE) due January 1, 2014 (launched on July 5, 2007) for a total of €80.5 million.
We may be required to repay all of the OCEANE in the event of default. If bondholders were to require the Company to repay the OCEANE following an event of default, we cannot be certain that we will be able to pay the amount required in full. Our ability to repay the OCEANE is subject to its liquidity position at the time of repayment, and may be limited by law, and by indebtedness and agreements that we may have entered into on such date, which may replace, supplement or amend our existing or future debt. Our failure to repay the OCEANE could result in a cross default under other indebtedness.
WAVECOM - Annual Report Form 20-F 2007 21
Item 4: Information on the Company
We were incorporated as a French société anonyme on June 28, 1993, for a period of 99 years under the name of Wavecom, S.A. We are registered in Nanterre, France, registration number 391 838 042. Our headquarters’ offices are located at: 3 Esplanade du Foncet, in Issy-les-Moulineaux, France, where our phone number is +33 (1) 46 29 08 00.
Business overview and recent evolution
Overview
We are a global technology company that develops, markets, and sells wireless platforms that can be embedded into virtually any machine or device, thus enabling it to transmit and receive both data and voice communications via wireless cellular network operators. Our highly sophisticated wireless platforms, are sold as wireless central processing units (Wireless CPU®s – including both smart modems and modules) and integrate all of the necessary software and hardware on miniature circuit board platforms that can be used for a wide variety of applications. We also provide our customers with development tools and engineering support services to facilitate the design and operation of innovative wireless products. Our tag line – “Smart wireless – Smart business” – succinctly describes how our customers benefit from using our products and services. During 2007, we offered, for the first time, a service platform that allows for the monitoring and maintenance of devices equipped with our Wireless CPU®s via a back-end server for the purposes of upgrading our software, the application software or wireless network software. This new service model opens the door to future contracts that we believe will eventually create subscription business providing a recurring income stream.
With over fourteen years in cellular telecommunications experience, we have attracted and developed a talented team of managers and employees who are focused on creating and selling wireless solutions to the enterprise market that includes hardware, software and services. Our engineering teams represent more than half of our employees, who have highly specialized expertise and know-how in the design and integration of radio-frequency-architected circuitry, communications software and base band ASICS (Application Specific Integrated Circuits), specifically designed for machine-to-machine processing and communication. Our products and services get to market by using a combination of our own direct sales force which is augmented by an extensive world-wide network of value-added distributors and manufacturers’ representatives that reach a large number of diverse customers and prospects from around the world. Although we do not operate our own production facilities, our operations teams have acquired substantial skills over the years in producing and manufacturing our Wireless CPU®s by working closely with our contract manufacturing partner located in China.
Our organizational structure is designed to reflect our strategic orientation. This structure includes management by geographic segment: EMEA (Europe Middle-East and Africa), APAC (Asia-Pacific) and the Americas (North and South America). Each of these regions is headed by a Group Vice President who has responsibility for developing customer relations and managing the profitability of the region. The regions are supported from a product standpoint by marketing and technology, research and development, and operations (manufacturing). During 2007 we added a matrix management structure for the automotive business which is headed by a Group Vice President who coordinated our global development efforts in automotive. Given the benefit of this worldwide coordination we saw in 2007, moving forward in 2008 each of the regional Vice Presidents now has, on top of his geographical responsibility, a matrix role of coordination for each of our most promising markets: including: automotive, wireless local loop and broader M2M areas. From an administrative standpoint the overall Company is supported by teams from finance, human resources and quality that are located in the regions and managed from our headquarters in France.
2007 – Operational overview
The year 2007 was one of mixed results. Revenues increased by 7% versus the previous year, growing from 188.8 million to 202.3 million but sales varied greatly from region to region. However, in 2007 net income more than triple to reach €17.4 million compared to €4.7million in 2006.
Operational highlights: |
During 2007 we experienced improved operational performance led by progress in two main areas:
• | Successful completion of the integration of the business we acquired in 2006; and, |
• | Improvement on most key target metrics for operations. |
22 WAVECOM - Annual Report Form 20-F 2007
In 2007 we successfully completed consolidation of our production into one outsource manufacturer located in China for all of our products, including those from the business we acquired in 2006. This manufacturing consolidation played a key role in the on-going enhanced manufacturing efficiency, with measurable improvement in the supply chain management, including the area of component procurement. This consolidation contributed to reduced cost of goods, resulting in an improved product gross margin 5.9 percentage points better on average than the previous year’s performance.
Additionally, we maintained operational excellence and improved on key target metrics including:
• | Lower defect and return rates; |
• | Higher yields for lower costs; |
• | Improved on-time deliveries – on-time deliveries have reached 98% and average order time to delivery are standing at four weeks. |
We also made progress in areas that we believe will accelerate the uptake of our technology including:
• | Complete re-architecture of our firmware; |
• | Deployment of IDS (Intelligent Device Services) service offer; |
• | Introduction of inSIM® (embedded SIM) – which has been recognized by a leading European automobile manufacturer as an innovative concept; and |
• | Introduction and sampling of our low cost HSDPA solution. |
As mentioned earlier, this operational improvement was counterbalanced by mixed revenue performance from our three regions.
Our Americas region reported a 56% year-over-year increase in revenues (at constant foreign exchange rates). The Asia-Pacific region had a slight incremental growth in revenues (also at constant currencies) while the EMEA (Europe, Middle East and Africa) region suffered a slowdown in sales in several markets and experienced a lower contribution from its distributor’s network. The weak US dollar compared to the euro negatively impacted our overall revenues by aproximately €9 million, mostly in the second half of 2007. See Item 5 for more details.
Strategic highlights: |
We made progress in advancing our strategic plans in 2007, underscored by several initiatives.
Service Offer launch: Our services offer became a reality with the launch of StarService, a new offer that eliminates up-front costs by combining a Wireless Microprocessor®) with a subscription to Wavecom’s secure IDS (Intelligent Device Services).
StarService is the first offer in Wavecom’s IDS platform, with more to be launched in 2008.
New module partner: We entered into a partnership with Sunlink Holding in Hong Kong who is producing hardware platforms based on Wavecom technology and designs. Sunlink’s initial products are based on Wavecom’s Q24 family of Wireless CPUs®, and Wireless Microprocessor® technology. They have full OpenAT® capabilities,and Wavecom will supply the baseband component.
Sunlink is now making products based on Wavecom technology that should be suited to certain APAC-region markets. These products are not in direct competition with Wavecom since they have a field of use restriction. This strategic alliance is expected to accelerate wireless M2M development in Asia Pacific region in the future
Strategic acquisition: As of February 1, 2008, we completed a strategic acquisition of Anyware Technologies who are experts in client-server applications. This company is recognized for its open source technology expertise for creating advanced software solutions that optimize enterprise processes. Its M2M-specific solutions perfectly complement Wavecom’s secure and scalable Intelligent Device Services (IDS) platform, with the combination creating the most advanced, and easy to deploy, end-to-end software solution in the industry.
Trends
As described above, 2007 was a year in which we put many building blocks in place that will help us to move the business forward. We once again achieved our main objective in 2007 which was to continue to operate profitably in each quarter, despite mixed sales performances. We continue to work at growing revenues by adding more features and functionality in our products and services. In particular, we intend to continue to improve the functionality of each element of our own Open AT® Software Suite, while adding more features. We also expect to facilitate the addition of the most-requested companion wireless technologies such as Bluetooth, GPS, WiFi and Zigbee. In the coming year we expect to announce the first customers for our complete offer for IDS. Through our internally-developed DOTA (Download-Over-the-Air) capabilities, we can offer customers the ability to remotely upgrade and enhance the operating system, the application layers and the
WAVECOM - Annual Report Form 20-F 2007 23
network software in any customer application. The addition of client, server-based technologies, through our acquisition of Anyware Technologies in 2008 should significantly advance the development of complete solutions that link networks of machines to corporate IT systems, thus enhancing enterprise efficiency.
Technology ownership has allowed us to continuously differentiate our products, simultaneously bringing customers the lowest total cost of ownership and investment protection. We believe we are well-positioned to further expand our customer base and launch even more complete solutions. We intend to continue to seek out strategic acquisitions that will enhance our overall business offer.
The Market for wireless communication between machines
The market for machines with wireless communication capabilities, which we call the “vertical markets”, is a developing business area. Based on our own internal data, we estimated the global size of the vertical markets to be approximately 20 million units (wireless enabling devices) delivered in 2007. This figure represents the total number of units using wireless cellular technology sold in 2007. This does not include wireless PC cards. The market is very fragmented with many sub-segments each having relatively low wireless attach rates. We believe that the global size of these vertical markets should continue to expand in the coming years as the usefulness of wireless-enabled machines is recognized for increasingly diverse applications.
Factors favorable to the growth of the vertical markets |
Wireless operators have started looking beyond consumer voice applications to develop the market for wireless-enabled machine communications. Major wireless network operators in Europe, the Americas and Asia offer specific fee schedules and, in some cases, have set up dedicated entities to serve the vertical markets. In some countries, virtual mobile operators, ‘MVNOs’ are appearing who purchase and re-sell, with added-value, air time from the cellular network operators mainly for data communication.
Other trends we see emerging that could help the expansion of the vertical markets include:
• | The European Union “eCall” (Emergency Call) initiative and the US-based services of “OnStar” are driving the demand for cellular wireless devices to be installed in the cars. eCall will open up a market for embedded communication devices for each new car model to be sold in Europe by 2009-2010 As of March 31, 2008, 16 European countries have signed the MOU for eCall (source: ERTICO); |
• | In Europe some insurance companies have implemented “Pay-As-You-Drive” programs using wireless connectivity to monitor driving patterns and performance in order to customize premiums to consumers; |
• | Some governments are launching road-charging programs (eToll: electronic Toll collect programs) which should push the adoption of wireless devices in all trucks and commercial vehicles; |
• | The utility industry is becoming more and more de-regulated and as a consequence we are seeing a growing interest in projects associated with Automatic Meter Management systems using wireless technology for remote and real-time access to the meters, enabling energy savings, accurate billing and fraud deterrence; and |
• | Sales and payment applications are growing in emerging countries where wireless is replacing fixed-line infrastructure, some governments are also imposing cash register monitoring systems in order to monitor taxes paid on all cash transactions. |
Vision and Mission
Our vision is one of a fully-connected wireless world and in that world, our mission is to accelerate the uptake of smart device connectivity by delivering outstanding expertise and technology that inspires creativity and sparks innovation.
We believe that in order to accomplish this mission we must listen to our customers and provide them with products and services that make their wireless connectivity easy, efficient, reliable and long-lasting.
The market today for industrial and automotive wireless solutions remains relatively small compared to consumer wireless applications such as mobile phones and personal computers. Nevertheless, we believe that the market will experience growth over the next several years, and that we at Wavecom, with our 14 years experience in the area of wireless machine-to-machine communication, are well positioned to be the leader in the space. As a pioneer in creating the technology building blocks that make wireless machine-to-machine communication useful, we will continue to forge a path to market growth.
Our strategic approach, which focuses on delivering a value proposition, is one that was conceived to stimulate growth in wireless communication for industrial applications. This value proposition can be summed up in these four key points:
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• | Lowest cost of ownership |
• | Ease of use |
• | Investment protection |
• | End-to-end connectivity |
On the surface our strategy of offering our customers innovative technology and superior service with overall value is not only straight-forward, but easy for our customers to leverage and use to differentiate their own products.
Currently targeted product applications
We focus on six principal types of product applications in the vertical markets. Each of the vertical markets has numerous sub-applications due to the diversity of potential uses.
• | Automotive applications. We address both the market for “factory installed” wireless capability and “after market” for applications that are installed after automobile production. For the automotive market, wireless communication is particularly useful for a wide variety of features such as: stolen vehicle tracking, navigation systems, monitoring driving patters, concierge services as well as remote vehicle diagnostics and maintenance. |
• | Automatic metering. This market consists of all types of meters – electric, gas and water. There is growing pressure, predominantly regulatory, on utility companies to vary tariffs based on consumption patterns, automatic meter management is a growing market. As a consequence the metering industry is investigating new ways to collect accurate, real-time consumption information. So, meter manufactures are looking at many new ways to use wireless functionality to meet their needs. |
• | Alarm and security systems. Traditionally, alarm systems used wire line connectivity with wireless as a backup. We are now seeing a move to wireless as the primary technology for connectivity. With the emergence of high bandwidth technology, more and more security systems can be equipped with video surveillance using wireless technology. |
• | Fixed wireless applications. These are telephones that are stationery (desktop) phones that use wireless networks instead of wire line connectivity in countries or regions where there is no existing wire line infrastructure. |
• | Sales and payment terminals. These “point of sale” terminals now use wireless networks to confirm and authorize payments from retailers using debit and credit cards oftentimes replacing the traditional wire line methods. |
• | Control and monitoring. This broad category covers the deployment of wireless-enabled devices for managing a variety of industrial and commercial products, from vending machines to photocopiers or industrial equipment for the purposes of verifying inventory levels or monitoring the proper functioning of the equipment. |
Our products and services
Our commercial product offering consists of three central elements:
• | Open AT® Software Suite |
• | Hardware families including: Wireless Microprocessor®, Quik and Plug & Play, |
• | Services (Professional and Operated), |
Everything we do is designed to help our customers reduce their “Total Cost of Ownership” (TCO) by embedding and running their software applications directly on our Wireless CPU® devices. By doing this they are able to reduce overall material costs, accelerate revenue generation by shortening time-to-market and ensure post-sale field maintenance through the use of Download Over-The-Air (DOTA) and MOTA (Monitoring/Maintenance-Over-The-Air)solution upgrade capabilities. Download over-the-air allows our customers to update software which is embedded in their wireless products via remote radio transmission, transmission from many tens, hundreds or thousands of kilometers away, without the need to physically visit their individual applications in the field, which are quite often dispersed over a broad geographical area. MOTA, as the second key element of our Intelligent Device Services (IDS) offer, provides customers with the ability to monitor their network of products and make pre-emptive maintenance, for example, detecting machines that are no longer operating at 100% and dispatching a technician to fix the problem. Our commercial product offerings are designed to be flexible in a way that the mix of these three elements can be adapted to the unique needs of our customers whether they be start-ups, multinational conglomerates or anywhere in between.
With respect to software portability, Open AT® software may be ported from one Wireless CPU® to another as a result of the new Open AT® Software Suite 2.0 release, substantially reducing porting costs for our customers. This is made possible as a direct result of one of our pivotal strategic strengths, namely software creation, ownership and licensing. The software suite allows customers to embed and port their own software into our Wireless CPU®, thus eliminating the need
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for external microprocessors and other analogue and digital semiconductor components. This benefit alone saves a significant amount on the material costs for our customers and the TCO can be further reduced by many other offers such as our Design Services, Professional Education via our Wavecom University, and IDS.
Open AT® Software Suite
The Open AT® Software Suite consists of five elements; Open AT® IDE (Integrated Development Environment), Open AT® Applications, Open AT® Plug-Ins, Open AT® OS and Open AT® Firmware. With this suite of software comes the possibility to unlock and harness the true power of our Wireless CPU® portfolio from real-time, multi-tasking, application design to over-the-air software upgrades, monitoring and maintenance.
• | IDE: Open AT® built on Eclipse™ |
In parallel with the introduction of Open AT® OS V4.10, Wavecom also launched version 1.0 of its Integrated Development Environment (IDE) called Open AT® IDE v 1.0. This development environment is built on the industry standard Eclipse™ framework and allows developers to reduce development and program test times. |
The IDE is the powerful suite of developer tools that bring the entire commercial offer to life. Without comprehensive tools, the developer is prohibited from making the most of the Wireless CPU® in terms of design efficiency. Eclipse™ provides a unified approach to code creation, compilation, Wireless CPU® download, remote monitoring and debugging in a feature-rich easy-to-use graphical user environment. In 2006, we transitioned our IDE to one built on Eclipse™ which is a tried and tested open-source, community-developed framework that is limited only by the developer’s own creativity and imagination. Eclipse™ also allows our customers to develop new, or re-use their own application-specific development tools in the same framework, further enhancing the ease of use and hence speed of creation of applications. |
• | Open AT® Applications |
Believing that getting customers started quickly is beneficial for all participants to the value chain, Wavecom embraces the concept of creating building blocks to avoiding encroaching on our customers’ business. Such building blocks come in the form of sample applications on the Software Development Kit (SDK), free source code in “Application Notes” that can be downloaded from our website, or fully customizable reference designs. In addition, an increasing number of applications are being created within the Wavecom Developer Forum by the growing community of creative thinkers who have embraced Open AT® and the Wireless CPU® families. Of course, our customers are the ultimate creators of products and they benefit from the unique capability provided by the Open AT® Software Suite in that it is the only industrial-grade cellular development environment that facilitates applications to be written in standard C language, pre-compiled and natively executed, on a Wireless CPU®. |
• | Open AT® Plug-Ins |
Plug-Ins contain the middleware that represent the freedom to develop value-added generic or application-specific functionality within the Open AT® Software Suite. We provide TCP/IP and Internet Plug-Ins today, making machine-to-machine (M2M) connectivity to the Internet easy. And, provide access to Bluetooth and other companion wireless technologies for short-range wireless device interconnection. In 2007 we launched the Lua Plug-In as a free and open source offering for developers with rapid application prototyping needs. Our partnership with Airbiquity also resulted in us developing support for the aqLink® Plug-In, developed by Airbiquity within our Open AT® environment, which is a technology used for example by the automotive industry to send location data over a voice connection to reduce the time to contact emergency services following an accident. Many other customers have developed their own Plug-Ins such as memory card readers, M2M-specific data protocols, software wrappers and peripheral device drivers. The flexibility of Open AT® is so extensive that it even allows customers to emulate behaviour of other legacy systems such as fixed-line interfaces where seamless transition can be achieved from a non-wireless installed base to a wireless one. |
• | Open AT® OS |
The Operating System element is responsible for managing the entire embedded software environment on the Wireless CPU®. It manages key functionalities that are unique to us such as the Real-Time operation, VariSpeed, VariPower as well as DOTA. Our OS also executes the embedded customer applications. It provides access to more than 500 programming APIs (Application Programming Interfaces) for both internal and external modes of operation. Our latest version in use by customers since the end of 2007 adds multi-tasking, unique audio features and countless other enhancements to the existing low-latency, multi-level, interruptible RTOS (Real Time Operating |
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System). This new pre-emptive, multi-tasking OS is a major step towards capturing yet more embedded application opportunities and enthusiastic developers. We will continue to add significant enhancements in 2008, further increasing our lead in relation to competition, a fact made possible through our unique ownership of Open AT® Software Suite. |
• | Open AT® Firmware |
Firmware is the underlying lower layers of the embedded software. The direct link to physical interfaces of both wired and wireless applications is managed by the firmware. These interfaces include wired devices such as displays, general purpose inputs/output, ports such as USB (Universal Serial Bus), keypads and numerous others. In addition to these inherent interfaces are the complementary wireless interfaces that do not use controllers such as Bluetooth and GPS. These allow our customers to design architecturally-efficient products, reducing their overall costs. Wavecom owns its own cellular stacks for GSM, GPRS, EDGE and WCDMA which allows Wavecom customers to benefit from increased bandwidth for data transfer via global cellular networks while giving them security that we can continue to supply as we do not rely on 3 party stack vendors NexGen Software SAS. |
NexGen |
During 2006 we made a strategic acquisition of the software company NexGen Software SAS. The company was a privately-held, France-based software company specializing in Internet protocol and client software. This acquisition brought us an internally-developed Open AT® Internet Plug-In which comprises a suite of protocol stacks and internet-client software expertise along with a worldwide customer base of over one hundred. With this acquisition, we eliminate our reliance on external, third-party, Internet software vendors and further strengthen our already extensive software expertise while adding IP (Intellectual Property) developed exclusively by NexGen Software SAS specifically for machine-to-machine communication. This expertise will allow a more aggressive roadmap of software dedicated to Internet and back-end IT (Information Technology) connectivity to be brought to our evolving customer base.
NexGen Software SAS operates as a wholly-owned Wavecom entity and develops and markets its current portfolio of software products. With an installed base of over 50 million devices, NexGen Software SAS serves customers primarily in the European and Asian regions, and from an application standpoint addresses many of our target applications.
Wavecom Developer Forum |
In October 2005, we launched the Wavecom Developers Forum on the Wavecom corporate website (www.wavecom.com/forum) which has seen membership grow exponentially. As of March 31, 2008 it had over of 5,600 developer members, an increase of almost 300% compared to the previous year and is providing an online virtual meeting place for developers to exchange ideas and source code in addition to providing us with an invaluable opportunity to further enhance the channels by which we listen to the needs of our customers. This is truly enabling the developer community to speed up development using our Open AT® Software Suite.
Because the embedded element of our software offer is included in the delivery of our Wireless CPU® portfolio as part of our pre-packaged solutions approach, it does not represent an independent source of revenue.
Wireless CPU®s
In 2005, we began the Wireless CPU® programmable device classification. This change in nomenclature was initiated specifically to denote the stark contrast between our Wireless CPU® range and simple modems. The modem, standing for MOdulator – DEModulator, is a device which receives data in one format and transforms it into another, without adding any value or intelligence to the data. Our products have come a long way since this rudimentary beginning and can now perform all basic modem functions as well as listen to and act on that data, store it in embedded silicon memory, create and send emails based on it, show it on readable displays, use it to trigger external actions such as alarms or monitors and even host complex user interfaces. The Wireless CPU® has become the central brain of many of our customers’ applications due to this increased capability. We believe that we are currently the only market provider that offers Wireless CPU®s with an interchangeable form factor for both GSM and CDMA standards. This interchangeability gives our customers extended flexibility by eliminating the need to significantly redesign the same product for different cellular standards.
Wireless Microprocessor® Family |
We introduced a new Wireless CPU® in April 2006 – the Wireless Microprocessor® family which led to the creation of the first model, the WMP100. The family has the smallest form factor of any of our Wireless CPU®s and is designed to allow our customers to use our combined hardware and software platform for running all of their applications software – not just the wireless portion. This concept is revolutionary because it allows our customers to significantly reduce their overall costs
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by eliminating excess supporting components such as microcontrollers, ASICs (Application Specific Integrated Circuit), connectors and associated cabling while also being the first device that can be implemented in a fully-automated production environment, further reducing costs incurred from manual assembly and testing techniques. Finally, by analyzing the needs of our customers, the new architecture brings flexibility of choice for the memory components as required by our customers. They now have unrivalled access to memory density, environmental specification and package choice according to the specific needs of the product they are developing. For example, an automotive customer may require our product be qualified for extremely low temperatures, while a customer developing an alarm system at the equator is unlikely need or want to pay for this specification. In 2007, we counted more than 100 customers actively designing or in production with WMP100 and commenced the WMP150 version which meets automotive grade requirements. October 2007 saw the launch of an entry level Wireless Microprocessor® known as WMP50. This device was launched in conjunction with a new and unique business model called StarService which allows customers to access the device with no up-front costs, establishing an unprecedented environment to expand the wireless industrial M2M market.
Embedded Wireless CPU®: Quik Family |
A series specially conceived for rapid mounting, hence the name, on printed circuit boards during the production assembly process. In 2005, we broke new ground by introducing an ARM9-based Wireless CPU® which raised the wireless computing capability to a new level and extended the peripheral connectivity. Our line of Quik Wireless CPU®s currently includes:
• | Q2686, the first in the ARM9 based family, it offers a host of new peripheral connectivity possibilities such as cameras for security and digital audio for pre-stored digital voice playback, C-GPS compatibility and works on GSM networks anywhere in the world; |
• | Q2687, with a new parallel bus expansion port used for connecting external memory devices, displays and parallel interface controller peripherals and high speed data capable (EDGE), and soon to be available in an automotive-qualified version; |
• | Q24 series, this best-selling series includes five dual-band GSM versions and a CDMA interchangeable version and is used in every type of application and in every segment we target, from automotive to industrial M2M to mobile professional. In 2006, we announced the extension of the best-selling Quik Q24, long-life Wireless CPU®s to be the first Company to provide security to our customers offering a ten-year product life. This new series includes four versions: Q24 Classic, Q24 Plus, Q24 Extended and Q24 Auto thus allowing it to address a variety of wireless devices. By being hardware and software compatible with the existing Q24 family, this new series allows for the seamless upgrade of customer products and devices thus saving on new design or re-design costs; |
• | GR64 is a continuation of the GM/GR – 47/48 products from the former Sony Ericsson portfolio. It is industrial grade, in particular offering high performance in an extended temperature range -30ºC to +75ºC and supports embedded scripting application execution; |
• | GS64 is the professional and consumer-grade addition from the former Sony Ericsson portfolio; and |
• | CM52 is the automobile-grade CDMA product from the former Sony Ericsson portfolio. It operates within an extended temperature range and has a rugged build for extreme vibrations. |
In 2007 we initiated the new Q64 which is an Open AT capable version of the original GR64 bringing all the benefits of the Open AT® Software Suite to existing customers who previously didn’t have access to those benefits. Also added to the Quik family in 2007 was our first 3G device in this family, Q26 Ultra, which is form-factor compatible with previous Q26 devices to reduce customer integration costs and uniquely meets the tough requirements of the automotive industry. Finally, also in 2007, a new automotive-grade product was added to the portfolio called CM52. Serving the Americas market, this device secured our existing customer base that was previously using the CM42.
External Wireless CPU®: Plug & Play Family – Fastrack and Integra |
As key enablers for rapid deployment, Fastrack and Integra represent the fastest route to learning all about the three elements of our commercial offer. They allow entry-level Open AT®-driven applications to be built and represent a stepping stone to the embedded versions of our Wireless CPU®s:
• | Fastrack is designed both for external retrofits to existing non-wireless enabled applications and for creating new wireless applications without circuit-board development skills. This ready-to-use solution can host the entire customer application when using Open AT® Software which can even monitor and control external sensors and switches, such as a temperature sensor or motion detector via the use of external general-purpose input/outputs. It can also be plugged directly into a personal computer, straight out-of-the-box, for super-fast development initialization. The SIM card (GSM wireless network identification) and power supply regulation are built in. |
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In February 2007, we introduced the new Fastrack Supreme Wireless CPU®. This Plug & Play family product evolution keeps the same versatile form factor as the previous Fastrack but offers new and unique hardware expansible capabilities via Wavecom’s new open IES (Internal Expansion Socket) interface. The specification of this interface is provided freely in order for customers to design their own expansion cards which can be fully inserted inside the Fastrack Supreme, creating an eco-system of 3 party developers and partners This unique concept allows the marriage of cellular plus a host of other wireless and wired network interfaces such as GPS, Ethernet, Bluetooth, WiFi, WiMAX and many others. We will supply a range of expansion cards ourselves, commencing with IO input/output expanders and a C-GPS card and during 2007 the first expansion cards were designed by third parties. |
In October 2007, we announced our first 3.5G HSDPA/HSUPA (High Speed Downlink/Uplink Packet Access) device in the form of the Fastrack Extreme. In addition to providing access to high data speeds, this product series will also utilise the expansion card concept made available first with the Fastrack Supreme and provide embedded application capabilities via the Open AT® Software Suite. |
• | Integra is a ruggedized design for plugging directly onto a circuit board and comes complete with a larger range of interfaces compared to Fastrack, for control and monitoring of larger-complexity applications. It is highly compact, ready-to-use and designed to be easily incorporated on the circuit board, making it ideal for harsh environment applications where small size is critical. The SIM card and power supply are built in. |
Specialized wireless technology |
We announced on March 5, 2007 the demonstration of our prototype embedded SIM, inSIM® (integrated industrial SIM). By integrating the SIM at the chip level, both customers and operators benefit from a simplified and faster cellular subscription. The robust, industrial design ensures proper functioning in harsh climatic conditions such as extremes of temperature, vibration and humidity which reduces the risk of disconnected devices that are often linked to high-value, time-sensitive transactional data. In addition, with the SIM silicon component fully embedded into the Wavecom Wireless CPU®, logistics and management issues associated with the SIM card inventory becomes easier, more cost effective and more secure, thus reducing the risk of potential SIM card theft, especially once it is installed. During 2007, pilots commenced prior to the rollout of the inSIM® technology across all three lines of the Wireless CPU® portfolio in 2008.
Entirely RoHS-compliant product line |
The EU directive, known as RoHS (Restriction of Hazardous Substances), which bans the use of identified hazardous substances in all electronics products came into effect on July 1, 2006. We were the first and only supplier of cellular wireless solutions to upgrade our entire range of Wireless CPU®s to be compliant with this new RoHS directive. This transition ensured that our existing customers did not have to redesign their products for a new form factor.
Professional Services
We believe that the complete, personalized service that we provide to our customers is a critical factor in our customers choosing us as a supplier, and one of our principal competitive advantages. Our assistance and technical support services are intended to allow our customers to complete their product development and manufacturing phases swiftly and to move quickly to volume production. We provide our customers with an evaluation kit with which enables them to carry out technical feasibility studies for their future products.
The direct customer contact that comes from providing these services also helps us to anticipate our customers’ plans for future product development and enables us to better understand the evolution of our product applications.
Our professional services include:
• | Wavecom University, providing professional-grade, externally-hosted training and developer certification; |
• | Extended warranty (up to five years) |
• | “Express” and “Fast” delivery of products; |
• | Design assistance and support; |
• | Development of application-specific software; |
• | Code review for customers’ Open AT® applications; |
• | Field testing and validation, including assistance for obtaining a product’s complete certification in those countries where certification is required; |
• | Supply of test software and tools for monitoring production; |
• | Assistance with the production process; and |
WAVECOM - Annual Report Form 20-F 2007 29
• | Customer training in the optimal use of our solutions, accompanied by instruction manuals. |
Intelligent Device Services
Another key building block was added to our service portfolio in January 2007 when we announced the launch of our complete end-to-end service offer – IDS (Intelligent Device Services). As more and more machines become equipped with wireless transmission capability, it becomes critical for networks of machines to be monitored and maintained remotely via server-based systems. Our IDS allow users to remotely manage their wireless devices securely, over-the-air, via protected user-friendly screens. It can be used to upgrade firmware and application software, configure devices, perform remote diagnostics, and intervene with corrective action if necessary. The IDS service offer is based on a Wavecom-hosted backend server that can easily be integrated into a customers’ existing IT (Information Technology) infrastructure. Having this type of servicing capability is essential for any network of connected devices.
We launched our first packaged service offer – “StarService” in October of 2007. The offer combines a Wireless Microprocessor® and a subscription to Wavecom’s secure Intelligent Device Service (IDS). Since capital investment is sometimes a barrier to integrating wireless capability, this offer eliminates that obstacle by including the Wireless Microprocessor WMP50 as part of the offer.
Anyware Technologies – a strategic acquisition to complement IDS |
On February 1, 2008, we announced the acquisition of Anyware Technologies. Created in 2000 and based in Labège, a high-tech business corridor near Toulouse, France, Anyware Technologies is recognized for its open source technology expertise for creating advanced software solutions that optimize enterprise processes.
Anyware Technologies’ M2M-specific solutions perfectly complement Wavecom’s secure and scalable IDS (Intelligent Device Services) platform, with the combination creating the most advanced end-to-end software solution in the industry. Anyware has been a Wavecom technology partner for several years.
Together, the two businesses have broadened the deployment of combined turn-key solutions which allow customers to develop wireless products that connect any equipment seamlessly to their IT infrastructure. Anyware Technologies has brought to Wavecom a world class-leading Integrated Development Environment (IDE), built on Eclipse™, whose ease-of-use should accelerate broad adoption of wireless M2M applications. Anyware’s Java™-based software can be used with all brands of wireless modules and the Company will continue to supply to the entire wireless M2M space.
Initial response to our IDS platform has been positive and we expect this to be a growing part of our business in the future.
Licensing
We licensed our technology once in 2005 and once in 2006.
Going forward we see software and technology licensing as an important part of our business. As such, we have a team working to develop additional technology licensing opportunities. Given the nature of our licensing business, however, it is not expected to be a consistent contributor to our sales until a critical mass of business develops.
Marketing and Sales
We use both direct and indirect sales channels, as well as strategic commercial partnerships, to sell our various wireless technology solutions.
Over the last several years, we reinforced our direct sales teams to address the largest customers in targeted application segments such as: automotive, home & commercial security, automatic meter management, sales & payment and control and monitoring and finally, mobile professional, primarily fixed-voice (wireless local loop) applications, In 2007, our direct sales and marketing teams, which regroup sales people, field application engineers and marketing staff made up 27% of our total workforce. These teams are based in our three primary geographic regions: EMEA (Europe Middle-East and Africa), APAC (Asia-Pacific), the Americas (North America and South America) and in our corporate offices. In 2007, direct sales represented 51% of the global Wavecom annual revenue compared to 45% in 2006.
Our indirect sales channel of distributors, built over the past nine years, as well as an extensive network of “Sales Representatives” in North America are active in promoting our products and services worldwide. This distributor network has a presence in more than one hundred countries and is made up of specialists in electronic components and system
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design that we train and develop to specifically address our target segments. They allow us to reach a large number of very diverse small and medium sized customers and prospects throughout the world.
In 2007 we established a designation of “Center of Excellence”. The new partnership program emphasizes bridging the technology gaps that many new wireless machine-to-machine projects encounter. By working with qualified and competent Wavecom Centers of Excellence – adopters of connected systems can remain focused on their core businesses and leave the wireless part of equation to experts. Wavecom and its network of partners offer a complete set of services from design to integration to manufacturing.
Customer base
Our current customer base, with whom we have both direct and indirect relationships, is numerous and highly diverse. This diversity contributes stability to our revenue stream.
The table below shows our top 10 customers for 2007.
Rank | Customer type/Region | % of total 2006 revenues | ||
1 | Direct-Automotive/Americas | 9 | % | |
2 | Distributor/EMEA and APAC | 8 | % | |
3 | Distributor/Americas | 8 | % | |
4 | Direct-M2M/Americas | 4 | % | |
5 | Direct-Automotive/Americas | 4 | % | |
6 | Direct-Automotive/EMEA | 4 | % | |
7 | Distributor/APAC | 4 | % | |
8 | Direct-M2M/EMEA | 3 | % | |
9 | Distributor/EMEA | 3 | % | |
10 | Direct-M2M/EMEA | 3 | % | |
Total of top ten customers in 2007 | 50 | % | ||
Our distributor customers purchase our products and re-sell them to their own customers who use them in a diverse range of applications, which we believe are mostly vertical applications.
Notwithstanding the fact that our current customer base is fairly balanced and diverse, we have in the past experienced some customer concentrations. If a particular customer develops a product that meets with substantial success, it is possible that sales to a single customer could rapidly begin to represent a particularly significant portion of our revenues.
Research and development
In order to remain at the forefront of fast-paced technological developments and increasing customer requirements in each of our markets, we make sizeable investments in research and development. The intellectual property developed by our research and development teams is integrated into our proprietary solutions.
(in million of euros) | 2005 | 2006 | 2007 | |||
Expenditures (1) | €24.1 | €30.0 | €31.8 | |||
As % of total revenues | 19% | 16% | 16% | |||
(1) | Excluding costs related to stock-based compensation and amortization of acquired technology. |
As of December 31, 2007 our research and development team included more than 250 staff (salaried employees and independent contractors), representing over half of our worldwide workforce. We have research and development teams based in our three regions: at our Company headquarters in Issy-les-Moulineaux near Paris (France), in Research Triangle Park, Raleigh, NC (USA) and in Hong-Kong (China). By having local teams, we can react to our customers’ specific development needs quickly and efficiently and drive regional customization when and where appropriate.
Our research and development department is organized along four line teams, (hardware, software, performance & validation and customer engineering). R&D teams dedicated to new product development are driven by a program
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management team, through a classical matrix management for lines and projects. Program management is a cross-functional organization in charge of managing the whole product life cycle process which reports directly to the Group CTO (Chief Technical Officer).
This matrix structure allows us to keep core resources permanently allocated to critical hardware and software development specifically addressing issues in all three of our target applications. We believe that this structure is optimal since it 1) ensures consistency of technical solutions, 2) maximizes reuse of research and development for new products and applications, and 3) ensures uniformity of tools and methods. Research and development teams work on developing new products for each target market; expanding the existing product ranges; and integrating all of the latest telecommunications standards required by our customers, including GSM, GPRS, CDMA, EDGE, W-CDMA and HSPA.
Our R&D teams play a critical role in conceptualizing and developing products and solutions in response to customer needs identified by our strategic and product marketing teams. As the Company strategy shifts to greater emphasis on software functionalities, it is the R&D software teams that will lead this initiative. The latest versions of our Open AT® operating systems, the OS 6.63 and Open AT® Software Suite 1.0 were completely developed in-house, by Wavecom engineers who managed all specifications, architecture, development and integration phases. By controlling the software, we can offer an optimal system solution – in terms of system resource consumption and performance – providing the customer with complete flexibility to evolve products and ensuring quick response time, since we do not depend on third party technology providers. This in-house capability makes us different from our competitors who typically outsource development of significant critical software, like the protocol stack for instance.
During 2007 we completed three major projects:
• | Wireless Microprocessor WMP100 based on an ARM9 processor platform with quad-band capabilities in a BGA 576 25x25x3 mm form factor, |
• | Introduction of our new software architecture based on BSP (Board Software Package) that will be ported on Wireless CPU® Q24, Q26 series and WMP100, |
• | Alignment all the three sites in term of tools and development processes & achieve the CMMI level2 Certification (Capability Maturity Model Integration). |
We also began two new major projects in 2007:
• | Wireless CPU® Q26 Extreme, a new 3.5G platform based on the ICERA Livanto® Soft Modem solution; Quad band Edge and 3 bands HSPA capable in a Q26 form factor, that should be commercially available in Q4 2008, |
• | Wireless CPU® Q26 Elite, based on the new QUALCOMM QSC 6055 chipset CDMA 1XRTT in a Q26 form factor, that should be commercially available in Q2 2009. |
Looking forward to 2008 we plan to work on several efficiency and quality-related activities including:
• | Extending the CMMI (Capability Maturity Model Integration) methodology worldwide |
• | Implementing an “Agile” SW development methodology to allow faster software Suite delivery to the market with a target of drop every 4 months. |
We currently use one contract manufacturer, Flextronics in China, for producing our Wireless CPU® products. The establishment of a broad commercial relationship with Flextronics, has enabled us to work closely with them in the development of key industrial processes and in the provision of new customer services, such as logistics, maintenance, technical support, design services and the launch of new products. In early 2007 we completed full consolidation (three out-sourced factories into one) of a competitive business we had acquired in 2006.
Although Flextronics is the main manufacturer of our wireless CPU® products, we believe that we have the ability to add additional suppliers on relatively short notice should they be unable to meet our product or capacity requirements. For a discussion of the risks related to the use of a single contract manufacturer, see “Item 3 Key Information – Risk Factors”.
Component supply |
Under the commercial agreement with Flextronics, the responsibility for component supply lies with the contract manufacturer, although most major component prices are negotiated directly with suppliers by our purchasing department. Should we reduce or discontinue the manufacture of our products or modify their design in terms of components, the contract manufacturer can invoice us for the cost of the components which are no longer of use. Procurement of components by our contract manufacturer is driven by our forecast for finished products. Usually the components are ordered two to four months before they enter into the production process. Through our contract manufacturer we order components for our products from microchip producers, including NXP Semiconductors, Infineon, Numonyx,
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STMicroelectronics, Silicon Labs, Skyworks, Renesas, Triquint, Spansion and Qualcomm. Non-standard semiconductors based on our designs are produced by Atmel and Ricoh.
Quality assurance, ISO certification and our continuous improvement process
In October, 2007, we successfully completed a follow up audit for our ISO9001: 2000 certification that we first received in November 2005. Our certification is a multi-site certificate (reference: FR05/1246QU) covering our four main locations in Europe (France and United Kingdom), the United States (Raleigh) and Asia-Pacific (Hong Kong and Beijing). The certification covers the following scope: development, sales and delivery of pre-packaged wireless solutions for automotive, industrial and mobile professional applications. In 2007, we included our two newest sites: Research Triangle Park, Raleigh, NC (USA) and Camberley (UK) in the ISO audit process and are now part of our ISO certificate.
Our contract manufacturer, Solectron purchased by Flextronics in 2007, located in Suzhou, China is ISO-certified according to the standards ISO/TS16949 and ISO14000. In addition to the fact that our contract manufacturer is certified, we also require, in our technical specifications, that all of our component suppliers be ISO-certified. Using ISO-certified suppliers helps us to ensure the quality of the products we sell. Before our products are shipped they are tested at the contract manufacturer’s site. We own and manage all of the test devices and equipment in order to ensure that our products satisfy our own, pre-established, quality standards.
The ISO9001 certification pushes us toward continued improvement and helps us to focus on one of our major activities: software development using a CMMI (Capability Maturity Model Integration) estimate.
During the second quarter 2007 we reached CMMI level 2 which confirmed the process of internal controls in our software development. In 2008, we expect to continue pursuing CMMI for our main software development, in all entities, using the AGILE principles to ensure continuous improvement and efficiency. At the same time, we will work toward CMMI level 3 status expected to be reached in the 2009/2010 timeframe. This should ensure that procedures are in place to allow for continuous improvement.
This estimate, which studies the processes for creating software, was initiated at the end of 2004. We achieved CMMI level 2 on the second half of 2007 which states our ability to control on our software development. During the year 2008, we will deploy within our different development units the best practises, used in the CMMI project in combining them with the implementation of AGILE Principles, in order to go on with the deployment of our efficiency improvement and achieve CMMI level 3 in 2009/2010. Thus we will have processes that ensure tailoring of our organization and improvement process.
Backlog
At December 31, 2007, our product backlog amounted to approximately €41.7 million. All orders received in a currency other than the euro are valued on the basis of the currency exchange rate euro/dollar at the close of the period. We include in our backlog all accepted product purchase orders for which delivery has been specified within one year. Our backlog may vary significantly from time to time depending upon the effect of seasonality on our customers’ business and their levels of inventory, the availability of necessary components, and the capacity of our suppliers, contract manufacturers and subcontractors to satisfy our orders. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable indicator of sales for any future period. During the past several years, our operations teams have successfully reduced our manufacturing cycle time and therefore we are able to deliver product much more quickly than in the past and to honor orders with short lead times, which can result in a lower backlog at a given date.
Competition
We compete primarily with wireless module and modem makers, the primary one being Siemens. We also compete with local producers in the Chinese market, mainly Simcom, in the U.S. market with Enfora and Sierra Wireless, and in Europe and the U.S. with Telit.
We are exclusively focused on supplying wireless-enabling solutions to the vertical markets. We are unique among most of our competitors since we develop our own software whereas our competitors typically outsource software development. With more than 33 million Wavecom wireless CPU®s already sold, our products are field-proven wireless technology solutions for vertical markets. In addition, our products include full essential intellectual property rights protection, an important element that not all our competitors offer.
Our ability to remain competitive in the long term depends significantly on the price, quality, availability and performance of our own products and services. In addition, we must continue to bring new products to market that respond to our customers’ needs for new hardware platforms, software applications, customer services and technical support.
WAVECOM - Annual Report Form 20-F 2007 33
Intellectual property
Our intellectual property strategy involves two critical dimensions: establishing, defending and exploiting proprietary intellectual property developed by our own engineering and research and development teams, and obtaining licenses to third-party intellectual property essential to the development, sale and operation of our wireless communications devices. We have also established policies to promote the development and pursuit of new patents within Wavecom.
Protection of our proprietary intellectual property |
As of December 31, 2007, we currently hold one hundred and two (102) French patents expiring on various dates, the first of which is in 2015. We have filed three (3) patent requests in the United States, and we have initiated eight (8) “PCT” (Patent Cooperation Treaty) extension of one of our patents in specific jurisdictions.
We apply very strict rules in terms of confidentiality and know how protection. We have a written policy relating to confidentiality and, in addition to the training given to new employees, regular reminders of these policies are issued. Our employment agreements contain provisions intended to protect our trade secrets by forbidding the unauthorized disclosure of confidential information. Our independent contractors are required to enter into confidentiality agreements that also assign us rights to inventions they make during the course of their work while engaged by us. We have also entered into non-disclosure agreements to protect our confidential information delivered to third parties in conjunction with possible collaborations and for other purposes.
Promoting patent development within Wavecom |
In October 1999, we established an employee patent incentive program designed to recognize employee-inventors and to encourage employee-inventors to sponsor patent applications. The patent incentive program provides employees who have developed an invention in the course of their employment with a bonus if and when we file a patent application. A second bonus is paid based on the effective commercial exploitation of the patent within five years after the filing of the patent.
To further promote a “patent spirit” and to encourage and organize the development of patents within the Company we created a patent committee in 2003. This committee is led by our Chief Technology Officer. Its activities include the evaluation of invention proposals, to make recommendations on such issues as technical merit, patentability and commercial potential of an invention, providing support in ensuring an adequate protection of a Wavecom patent or other intellectual property rights, and making the final decision to file a patent.
Mandatory licensing policy of the European Telecommunications Standards Institute |
The European Telecommunications Standards Institute (“ETSI”) has established a policy that requires owners of intellectual property rights to declare to the ETSI those intellectual property rights which they believe are essential to the use or operation of GSM/GPRS/EDGE-based equipment (Clause 4.1 of ETSI’s IPR Policy). This policy has been extended to WCDMA and HSDPA (more commonly referred to as 3G or 3G+). At the time of their declaration, the owners take the commitment to grant irrevocable licenses to third party developers, manufacturers or distributors on terms and conditions that are fair, reasonable and non-discriminatory (Clause 6.1 of ETSI’s IPR Policy).
We believe that most of the patents which are important to us have been declared by their owners to the ETSI and are therefore covered by ETSI’s mandatory licensing policy. These include major historical players who have declared to the ETSI their patents in this field such as Motorola, Philips, Siemens, Alcatel, NEC and also groups such as Ericsson and Nokia. However, it remains possible that some owners of GSM/GPRS/EDGE (or WCDMA or HSDPA)-related patents, including patents which may be required for the development, production, sale or use of our products, may not have declared them to ETSI.
CDMA |
The GSM standard is not the only standard in effect and some geographical markets are covered by a different standard that is CDMA. Qualcomm holds, directly or indirectly, a large part of the rights for this technology.
Our agreements for cross-licensing, patent non-assertion and licensing |
In order to produce and market our GSM/GPRS/EDGE-based Wireless CPU®, we have had to assess whether licenses from third-party patent owners were and are required. Because of the rapid technological evolution and intense competition in our industry, there is a substantial number of patents to consider. Since an exhaustive research to determine all of the relevant patents or to check the validity or “essential” character of each patent would be cost-prohibitive, we chose from the very beginning to rely on the declarations made to the ETSI (currently more than 4,000 patents declared in 2 G i.e. GSM/GPRS/EDGE).
34 WAVECOM - Annual Report Form 20-F 2007
We currently have either unilateral or cross-licenses (or non assertion agreements providing a similar coverage) to use the GSM/GPRS/EDGE-essential patents with Motorola, Siemens, Philips, NEC, Alcatel, Nokia, Ericsson and Mitsubishi.
We review regularly the number of patents and patent families declared as essential at the ETSI, as well as each individual patent holder’s share of the overall ETSI portfolio of declared patents, to evaluate continuously the necessity to enter into additional license agreements. In doing so, we have observed that some patents covered by the GSM standard were registered almost 20 years ago and are reaching the limit of the period of protection of the patents which is 20 years in Europe.
In addition, as new digital transmission standards develop and as our products follow these new evolutions of the standards, we have initiated confidential negotiations to acquire additional licenses for new essential patents. This is actually the case for the new GSM standard evolution called “3G” or “3G+” -WCDMA or HSDPA) which are the third generation of the GSM standard.
In order to produce and market CDMA-based wireless CPU®s, we entered into a cross-license agreement with Qualcomm in May 2002. Under this agreement, Qualcomm has granted us a license to use CDMA essential or “necessary” patents that Qualcomm owns or is entitled to license for the CDMA standard in consideration for our payment to Qualcomm of an up-front fee and a royalty percentage based on each CDMA product we sell. We negotiated and concluded early in 2007 an amendment to this license that improves some of its terms. In addition, under this agreement, we have granted Qualcomm a royalty-free license to use CDMA essential patents that we own or develop for the CDMA standard.
Capital Expenditures
In 2007 and in previous years, we purchased laboratory, testing and computer equipment, principally at our headquarters in France, at our Raleigh Triangle Park office and at our contract manufacturer’s production facility. Total expenditures on property and equipment were €5.0 million in 2007, €5.5 million in 2006 and €1.7 million in 2005. In 2006, our capital expenditures also included the acquisition of certain assets of the Sony Ericsson M2M business unit and the acquisition of NexGen Software SAS Company for a total amount of €29.8 million (purchase price plus acquisition costs minus cash acquired). All capital expenditures were internally financed from reserves.
Corporate Information, organizational structure
Wavecom S.A. is the parent company and 100% owner of the following subsidiaries:
• | Wavecom Inc., RTP, NC – USA |
• | Wavecom Asia Pacific, Limited, Hong Kong – China (99.99 %) |
• | Wavecom Northern Europe, Ltd, Camberley – United Kingdom |
• | NexGen Software SAS – France |
• | Wavecom Deutschland GmbH, Darmstadt – Germany |
Wavecom S.A. is the headquarters and decision-making center and manages the subsidiaries listed above. It also performs an operational role for the distribution of Wavecom products in Europe, Middle-East and Africa. The two main subsidiaries, Wavecom Inc. and Wavecom Asia-Pacific, Ltd. are responsible for sale of products supplied by Wavecom S.A in their respective regions. Wavecom Northern Europe, Ltd. mainly acts primarily as an agent and a service provider, Wavecom Deutschland GmbH was dormant from mid 2006 until end of December 2007 and since the hiring of an employee in December 2007 this subsidiary is acting again as an agent for Germany. NexGen Software SAS is a seller of softwares.
Wavecom S.A. owns 100 % of Wavecom Korea Co, Ltd, Seoul, South Korea which is a dormant Company as of 31 December 2007.
Since February 1 2008, Wavecom owns 100% of Anyware Technologies S.A. located in France. This company provides a value-added products and services offer in various complementary business areas: web applications, Eclipse technology, Web Content Management (CMS and open source collaborative tools), Machine-to-Machine applications (allowing connection, control and management of remote machines through a Web interface) or scalable systems.
Wavecom active subsidiaries: |
• | Wavecom Inc. |
As of December 31, 2007 this entity produced revenues of global €70.8 million versus €49.6 million in 2006. This company is responsible for the sale of our products in the North and South American markets. It has continued to see strong growth after a long period of development primarily linked to the long sales cycles in this region as well as the need to obtain operator certification in order for our customer’s products to work on the wireless networks. Wavecom, Inc.
WAVECOM - Annual Report Form 20-F 2007 35
benefited significantly from the acquisition in 2006 of the former Sony Ericsson M2M business. This subsidiary produced a net profit of €775,000 in 2007 compared to €173,000 in 2006.
• | Wavecom Asia Pacific, Limited |
This entity is responsible for the sale of our products and services in the Asia-Pacific geography
As of December 31, 2007 this entity generated revenues of €35.2 million, similar to 2006 level, led by a positive sell-through of point of sale and automatic metering, although the wireless local loop sector decreased by approximate €5 million year-on-year as the market contracted.
This subsidiary posted a net profit of €931,000 versus €651,000 in 2006.
• | Wavecom Northern Europe, Limited |
This subsidiary was dormant from mid-2004 until April 2006, when we acquired the M2M business that was based in England and transferred certain acquired assets into this subsidiary. Wavecom Northern Europe provides certain services to Wavecom S.A. and acts as its agent in some regions. It produced a net profit of €69,000 in 2006 and a loss of €21,000 in 2007.
• | Wavecom Deutschland GmbH |
2007 sales amounted to €16,000 with a profit of €8,000
• | NexGen Software SAS |
This company develops and markets software suites for TCP/IP communication. It generated sales of €390,000 in 2007 (€439,000 in 2006) and the net result was €10,000 (€18,000 in 2006).
Property, Plant and Equipment
Our headquarters are located in Issy-les-Moulineaux, a suburb of Paris, France, where we occupied approximately 7,000 square meters of leased office facilities as of December 31, 2007. We also currently lease office space in Research Triangle Park (North Carolina, USA), Camberley (UK), Hong Kong (China), and Beijing (China).
Environmental Issues
Since we do not operate any factories or production facilities, the environmental impact directly related to our activity is essentially limited to consumption of resources and disposal of waste at our administrative and commercial offices, where we are in compliance with local laws and regulations relative to environmental protection. We therefore do not believe that, at this time, we have any significant environmental risk related to activities directly managed by us.
As of July 1, 2006, we migrated all of Wavecom’s legacy products to have lead-free certification according to the European RoHS (Restriction of Hazardous Substances) lead-free content standards. All new products launched as of July 1, 2006 meet the European RoHS standards.
Risk Management and Insurance Coverage
Risk Management |
The Risk Management function is allocated to the Risk Committee. The Risk Committee provides assistance to the CEO, the Audit Committee, and the Board in fulfilling their overall responsibility to monitor the risks the Company may face.
Sub-contracting related risks |
Although we outsource our production, we encourage our contract manufacturer to put in place practices that safeguard the manufacturing processes. These practices include measures designed both to prevent the occurrence of loss and to minimize the losses should an adverse event occur. Our objective is to transfer to our contract manufacturer, to the greatest extent possible, all exposure to loss in connection with the manufacturing activity they perform for us. The level of risk transferred to our contract manufacturer is based upon a number of factors, including the following:
• | the general business practices of our industrial field; and |
• | a financial balance between our contract manufacturer and us in the assumption of the risks. |
• | When we made our decision to work with one contract manufacturer in China, for example, we worked with the manufacturer to prepare a joint Business Continuity Plan (or “Disaster Recovery Plan”) that allocated certain risk management obligations and risks to our Company and others to the contract manufacturer. |
36 WAVECOM - Annual Report Form 20-F 2007
Contractual Risks |
When major contracts are being negotiated, our Group Legal Director is involved with the operational team in order to evaluate and limit the contractual risks to our Company and to confirm that the appropriate type and amount of insurance is in place.
Insurance coverage program |
In collaboration with one of the main French insurance brokers, we have maintained an insurance program substantially identical in scope from 2006 to 2007. The level of insurance coverage and deductibles has remained identical to the previous program, with some enhancements as was already the case in 2006 due to both a favorable insurance market as well as our improved overall situation. We pay particular attention to the reputation and rating of our insurers and we only rely on insurers having a rating between A and AAA. Our annual insurance budget is around €1 million.
We determine the level of insurance coverage required by evaluating the major risks, coverage availability and cost. Our insurance policies include the following coverage levels, subject to specified limitations such as deductibles that vary from case to case from €10,000 to €150,000 (up to €200,000 in particular cases):
• | property damage and related loss of income; |
• | general commercial and product liability; and |
• | directors’ and officers’ liability. |
Because of our size, we have not established nor do we consider it necessary to establish an internal insurance entity to act as a re-issuer (a captive).
Item 4A: Unresolved Staff Comments
None.
WAVECOM - Annual Report Form 20-F 2007 37
Item 5: Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes, and the other financial information included elsewhere in this annual report. Our consolidated financial statements and our quarterly financial results included in this discussion have been prepared in accordance with U.S. GAAP. In compliance with applicable European regulations, we also publish our consolidated financial statements under IFRS (International Financial Reporting Standards).This discussion includes forward-looking statements based on assumptions about our future business. Our actual results could differ materially from those contained in the forward-looking statements.
Constant Currency Rates
In certain instances we compare revenues and expenses from one period to another period in this Annual Report on Form 20-F using constant currency rates. To present that information, current period results for entities reporting in currencies other than euros are converted into euros at the prior year’s exchange rates, rather than the exchange rates for fiscal year 2007. For example, if a U.S. entity reporting in U.S. dollars sold $1 million dollar of products in each of fiscal year 2007 and fiscal year 2006, our financial statements would report €730,000 of revenues in fiscal year 2007 (based on an exchange rate of €1 = $1.37 which was the average exchange rate in fiscal year 2007) and €787,000 in revenues in fiscal year 2006 (based on an exchange rate of €1 = $1.27 which was the average exchange rate in fiscal year 2006). The constant currency presentation would translate the fiscal year 2007 results using the fiscal year 2006 exchange rates and indicate that underlying revenues were flat rather than decreasing by €57,000 as would be reported in the financial statements under U.S. GAAP. We present this constant currency information for fiscal year 2007 in order to assess how our underlying business performed before taking into account currency exchange fluctuations. We use figures prepared on a constant currency basis both for our internal analysis and for our external communications, as we believe they provide suitable means by which to analyze and explain variations from one period to another. However, these figures provided on a constant currency basis are unaudited and are not measurements of performance under U.S. GAAP.
Critical Accounting Judgments and Estimates
We have identified the most critical accounting principles upon which our financial situation depends and that involve the most complex or subjective judgments and estimates. Our judgment used to determine the appropriate assumptions and to make estimates is based on our historical experience, terms of existing contracts, and our observation of trends in the industry, information provided by our customers and information available from other outside sources. We believe that our most critical accounting estimates are:
• | Provision for royalty payment for intellectual property rights: Our products are designed to conform to wireless industry standards which are based on certain patented technologies that we use. We have concluded license agreements with a number of GSM/GPRS patent holders, under which we pay royalties. We record a provision for royalty payments that we estimate will be due to these patent holders once we conclude license agreements with them. The provision is based on a percentage of consolidated product revenues and is recorded at the time revenue is recognized. Should the actual royalties to be paid under license agreements differ from our estimates, the royalty provision would have to be revised. |
• | Provision for obsolete inventories: We provide for the estimated loss of value of obsolete inventories at the time that such inventories are identified as being at risk of obsolescence. Changes in this provision have an impact on the determination of cost of goods sold. In determining the risk of obsolescence for components, we review the estimated need for the components based on current sales and production forecasts and take into consideration any planned changes in the architecture of our products which would cause components on hand to become obsolete. The risk of obsolescence of finished goods is analyzed based on current sales forecasts, as well as announced “end-of-life” decisions, which could accelerate the obsolescence of such products. Should actual sales or production patterns differ from our forecasts, revisions to the provision for obsolete inventories would be required. |
• | Provision for warranty services: We provide for the estimated cost of product warranty service at the time the revenue is recognized. While we have put in place extensive product quality programs and processes, our warranty obligation is affected by product failure rates, our ability to repair defective products and service delivery costs incurred in correcting a product failure. Should actual product failure rates, repair rates or service delivery costs differ from our estimates, revisions to the estimated warranty accrual would be required. |
38 WAVECOM - Annual Report Form 20-F 2007
The three provisions described above have an impact on the determination of cost of goods sold. They are recorded in “other accrued expenses” on the balance sheet and are described more fully in the footnotes to our annual consolidated financial statements.
• | Other accruals: Under U.S. GAAP, loss contingencies are recognized in accordance with SFAS 5, Accounting for Contingencies. Liabilities are accrued when a loss contingency is considered to exist and when a loss is considered probable and can be reasonably estimated. Management makes these estimates primarily with the analyses of internal specialists, if available, or with the support of outside specialists, such as actuaries or legal counsel. Revision of management’s estimates of these loss contingencies may significantly affect future operating results. |
• | Allowance for deferred tax assets: We estimate our actual current tax exposure, together with our temporary differences resulting from differing treatment of items, for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, increase or decrease, this allowance during an accounting period, we must include and expense or reverse the allowance within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. |
• | Product revenue recognition: Revenue from product sales is recognized when (i) persuasive evidence of an arrangement exists, (ii) the product is delivered (at the time the products are shipped and risk of loss has been passed to the buyer), (iii) the price is fixed or determinable and (iv) collection of the price is reasonably assured. If any of these criteria are not met, recognition of revenues is deferred until such time as all of the criteria are met. The Company’s product sales are not sold with a right of return unless our product is defective and covered by warranty. The Company’s sales typically do not include multiple product and/or service elements. Although the products sold have embedded software, Wavecom believes that software is incidental to the products they provide. In addition, the Company does not provide post-contract customer support or maintenance for the software (either free of charge or for a fee) embedded in the products. The contracts do not provide for upgrading or updating any Wavecom embedded software. For instance, the functionality DOTA (Download-Over-the-Air), included in the products provides the customers the capability to remotely upgrade and enhance their own operating systems, application layers and network software. |
• | Software revenue recognition: The Company recognizes revenue from licensing fees when the delivery has occurred, the fee is fixed or determinable, evidence of an arrangement has been received, all significant contractual obligations have been satisfied and the resulting receivable is deemed collectible by management, in accordance with Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”,) as amended by Statement of Position 98-4, “Deferral of the Effective Date of a Provision of SOP 97-2” and Statement of Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions”. If any of these criteria are not met, recognition of revenues is deferred until such time as all of the criteria are met. If the contract for a licensing agreement includes a clause allowing for free updates if and when available and if vendor specific objective evidence of fair value for this post-contract customer support can not be determined at the time the contract is signed, the revenue must be spread over life of the contract. Revenue recognition is complex and certain judgments and estimates affect the application of this policy. |
• | Share based payment: Wavecom has various types of share based compensation plans for employees. The fair value of stock options, employee share issues and share grants without consideration is determined at the grant date. The fair value of stock options is estimated by using the binomial model on the date of grant based on certain assumptions. Those assumptions include, among others expected volatility, the expected option term and the expected dividend payout rate. The assumption of volatility has been set by reference to the implied volatility of options available on Wavecom shares in the open market and in light of historical patterns of volatility, whereas the expected option term is estimated by observing general option holder behavior and actual historical terms of Wavecom option programs. Changes in valuation assumptions may significantly affect the expense recorded in the income statement. |
We are a global technology company that develops, markets, and sells wireless platforms that can be embedded into virtually any machine or device, thus enabling it to transmit and receive both data and voice communications via wireless cellular network operators. Our highly sophisticated wireless platforms, are sold as wireless central processing units (Wireless CPU®s – including both smart modems and modules) and integrate all of the necessary software and hardware on miniature circuit board platforms that can be used for a wide variety of applications. We also provide our customers with development tools and engineering support services to facilitate the design and operation of innovative wireless
WAVECOM - Annual Report Form 20-F 2007 39
products. Our tag line – “Smart wireless. Smart business” – succinctly describes how our customers benefit from using our products and services. During 2007 we offered for the first time, a service platform that allows for the monitoring and maintenance of devices equipped with our Wireless CPU®s via a back-end server for the purposes of upgrading our software, the application software or wireless network software. This new service model opens the door to future contracts that we believe will eventually create subscription business providing a recurring income stream.
With over fourteen years in cellular telecommunications experience, we have attracted and developed a talented team of managers and employees who are focused on creating and selling wireless solutions to the enterprise market that includes hardware, software and services. Our engineering teams represent more than half of our employees who have highly specialized expertise and know-how in the design and integration of radio-frequency-architected circuitry, communications software and base band ASICS (Application Specific Integrated Circuits), specifically designed for machine-to-machine processing and communication. Our products and services get to market by using a combination of our own direct sales force which is augmented by an extensive world-wide network of value-added distributors and manufacturers’ representatives that reach a large number of diverse customers and prospects from around the world. Although we do not operate our own production facilities, our operations teams have acquired substantial skills over the years in producing and manufacturing our Wireless CPU®s by working closely with our contract manufacturing partner located in China.
Our organizational structure is designed to reflect our strategic orientation. This structure includes management by geographic segment: EMEA (Europe Middle-East and Africa), APAC (Asia-Pacific) and the Americas (North and South America). Each of these regions is headed by a Group Vice President who has responsibility for developing customer relations and managing the profitability of the region. The regions are supported from a product standpoint by marketing and technology, research and development, and operations (manufacturing). During 2007, we added a matrix management structure for the automotive business which is headed by a Group Vice President who coordinated our global development efforts in automotive. Given the benefit of this worldwide coordination we saw in 2007, moving forward in 2008 each of the regional Vice Presidents now has, on top of his geographical responsibility, a matrix role of coordination for each of our most promising markets: including: automotive, wireless local loop and broader M2M areas. The regions are supported by teams from finance, human resources and quality that are located in the regions and managed from our headquarters in France.
2007 – Operational overview
The year 2007 was one of mixed results. Revenues increased by 7% versus the previous year, growing from 188.8 million to 202.3 million but sales varied greatly from region to region. However, in 2007 net income more than triple to reach €17.4 million compared to €4.7million in 2006.
Operational highlights: |
During 2007 we experienced improved operational performance led by progress in two main areas:
• | Successful completion of the integration of the business we acquired in 2006; and, |
• | Improvement on most key target metrics for operations. |
In 2007 we successfully completed consolidation of our production into one outsource manufacturer located in China for all of our products, including those from the business we acquired in 2006. This manufacturing consolidation played a key role in the on-going enhanced manufacturing efficiency, with measurable improvement in the supply chain management, including the area of component procurement. This consolidation contributed to reduced cost of goods, resulting in an improved product gross margin compared to the previous year.
Additionally, we maintained operational excellence and improved on key target metrics including:
• | Lower defect and return rates; |
• | Higher yields for lower costs; |
• | Improved on-time deliveries – on-time deliveries have reached 98% and average order time to delivery are standing at four weeks. |
We also made progress in areas that we believe will accelerate the uptake of our technology including:
• | Complete re-architecture of our firmware; |
• | Deployment of IDS (Intelligent Device Services) service offer; |
• | Introduction of inSIM® (embedded SIM) – which has been recognized by a leading European automobile manufacturer as an innovative concept; and |
• | Introduction and sampling of our low cost HSDPA solution |
40 WAVECOM - Annual Report Form 20-F 2007
As mentioned earlier, this operational improvement was counterbalanced by mixed revenue performance from our three regions.
Our Americas region reported a 56% year-over-year increase in revenues (at constant foreign exchange rates). The Asia-Pacific region had a slight incremental growth in revenues (also at constant currencies) while the EMEA (Europe, Middle East and Africa) region suffered a slowdown in sales in several markets and experienced a lower contribution from its distributor’s network. The weak US dollar compared to the euro negatively impacted our overall revenues by about €9 million, mostly in the second half of 2007.
Strategic highlights: |
We made progress in advancing along our strategic plan in 2007, underscored by several initiatives.
Service Offer launch: Our services offer became a reality with the launch of StarService, a new offer that eliminates up-front costs by combining a Wireless Microprocessor® (free of charge) with a paid subscription to Wavecom’s secure IDS (Intelligent Device Services).
StarService is the first offer in Wavecom’s IDS platform, with more to be launched in 2008.
New module partner: We entered into a partnership with Sunlink Holding in Hong Kong who is producing hardware platforms based on Wavecom technology and designs. Sunlink’s initial products are based on Wavecom’s Q24 family of Wireless CPUs®, and Wireless Microprocessor® technology. They have full OpenAT® capabilities, and Wavecom will supply the baseband component.
Sunlink is now making products based on Wavecom technology that should be suited to certain APAC-region markets. These products are not in direct competition with Wavecom since they have a field of use restriction. This strategic alliance is expected to accelerate wireless M2M development in Asia Pacific region in the future
Strategic acquisition: As of February 1, 2008, we completed a strategic acquisition of Anyware Technologies who are experts in client-server applications. This Company is recognized for its open source technology expertise for creating advanced software solutions that optimize enterprise processes. Its M2M-specific solutions perfectly complement Wavecom’s secure and scalable IDS (Intelligent Device Services) platform, with the combination creating the most advanced, and easy to deploy, end-to-end software solution in the industry.
Reporting by Geographic Business Segment
The Company has determined that the risks and the profitability are predominantly driven by the geographic areas. In addition, the Company’s Chief Executive Officer uses now such segment reporting to allocate resources.
Management is aligned by geographic segment: EMEA (Europe Middle-East and Africa), APAC (Asia-Pacific) and the Americas (North and South America).
The table below sets forth revenues and operating losses for each of our segments for the year ended December 31, 2005, December 31, 2006 and December 31, 2007.
Fiscal year 2005 (amounts in € thousands) | EMEA | Americas | Asia-Pacific | Corporate Headquarters | Total | ||||||
Revenues | 74,840 | 12,473 | 40,466 | 1,453 | 129,232 | ||||||
Operating (loss)/income | 7,588 | 403 | 1,008 | (5,039 | ) | 3,960 | |||||
Fiscal year 2006 (amounts in € thousands) | EMEA | Americas | Asia-Pacific | Corporate Headquarters | Total | ||||||
Revenues | 99,389 | 48,422 | 34,931 | 6,015 | 188,758 | ||||||
Operating (loss)/income | 9,730 | (1,680 | ) | 453 | (2,854 | ) | 5,647 | ||||
Fiscal year 2007 (amounts in € thousands) | EMEA | Americas | Asia-Pacific | Corporate Headquarters | Total | ||||||
Revenues | 96,576 | 70,526 | 35,081 | 154 | 202,337 | ||||||
Operating (loss)/income | 21,666 | 8,825 | 1,395 | (19,189 | ) | 12,697 | |||||
WAVECOM - Annual Report Form 20-F 2007 41
EMEA (Europe, Middle-East and Africa) |
The EMEA region, whose sales decreased by 3% year on year suffered from lower sales mainly in automotive and fixed cellular or wireless local loop applications, and also in indirect sales through distribution. For the automotive segment, sales decreased year-on-year as fewer cellular products were shipped by our key automotive customers. This sluggish product sell-through was also the case for fixed cellular which we believe experienced a decrease globally. Some of the other direct customer sectors, such as metering and alarms did grow, but their growth was not enough to make up for the other declines.
EMEA represents 48% of total revenues.
Operating income increased significantly between 2006 and 2007 as this region benefits from improved gross margin in percentage of sales and from a decrease in allocated expenses compared to the prior year due to a lower gross profit contribution relative to the total Company.
APAC (Asia-Pacific) |
The sales of APAC region were stable between 2006 and 2007 but grew by 9% at constant currencies led by a positive sell-through of point of sale and automatic metering and increased service revenues, although the wireless local loop sector decreased by approximate €5 million year-on-year as the market contracted.
APAC presently represents 17% of total revenues.
Operating income for the region increased from 2006 to 2007 primarily due to higher gross margins
Americas |
The sales of Americas region grew by 46% and by 56% at constant currencies. This growth was fueled by the home and security market as well as vehicle remote management. In addition, revenue was positively impacted in 2007 by one particular customer which completed delivery of a large program.
The Americas presently represents 35% of total revenues.
Operating income for the region increased from 2006 to 2007 due in part to higher sales and improvement in gross margin partly compensated by an increase in allocated expenses compared to the prior year due to a higher gross profit contribution of Americas relative to the total Company.
Corporate Headquarters |
Licenses revenues are allocated to corporate headquarters. The increase in operating loss is mainly due to the absence of license revenues in 2007 and to an increase of expenses recorded at corporate, in particular long term research and development projects.
Results of Operations
Fiscal Year 2007 compared to Fiscal Year 2006 |
Revenues |
Year ended December 31, (amounts in € thousands) | 2005 | 2006 | % change 2006/2007 | ||||
Product sales | 180,393 | 198,510 | 10.0% | ||||
Percentage of total revenues | 97.6% | 98.1% | |||||
Services revenue | 2,542 | 3,827 | 50.6% | ||||
Percentage of total revenues | 1.3% | 1.9% | |||||
Licensing revenue | 5,823 | — | — | ||||
Percentage of total revenues | 3.1% | ||||||
Total revenues | 188,758 | 202,337 | 7.2% | ||||
42 WAVECOM - Annual Report Form 20-F 2007
Sales by geographic region |
As % of total revenues: | 2006 | 2007 | |||
European, Middle East and Africa: | 53 | % | 48 | % | |
Asia-Pacific: | 22 | % | 17 | % | |
Americas: | 26 | % | 35 | % | |
100 | % | 100 | % | ||
Sales by application and distribution channel |
(amounts in € 000s) | 2006 | 2007 | % in 2007 | ||||
Direct customers: | |||||||
Automotive | 35,180 | 40,341 | 19.9 | % | |||
Industrial (Machine-to-Machine) | 37,677 | 57,682 | 28.6 | % | |||
Mobile Professional | 4,347 | 1,185 | 0.6 | % | |||
Personal Communication Devices | 0,023 | -0.1 | % | ||||
Indirect customers: | |||||||
Distributors(1) | 103,165 | 99,302 | 49.1 | % | |||
Total Products | 180,392 | 198,510 | 98.1 | % | |||
Total Services & licencing | 8,366 | 3,827 | 1.9 | % | |||
Total | 188,758 | 202,337 | 100.0 | % | |||
(1) | Our “distributor” customers purchase our products and re-sell them to their own customers who use them in a diverse range of applications, which we believe are mostly industrial and mobile professional applications. |
Revenues for the full year 2007 increased 7% year-on-year reaching €202.3 million, or 12% at constant currencies, as the weak U.S. dollar had a negative impact of approximately €9 million on 2007 sales as compared with 2006 exchange rates.
Products: |
In 2007, product sales increased by 10% at actual exchange rates (15% at constant currency exchange rates) year-on-year. |
The positive year-over-year revenue trend was driven by the significant progress in the Americas region which grew by 46% at actual exchange rates or 56% at constant currency exchange rates. This growth was fueled by the home and security market as well as vehicle remote management. In addition, one particular customer completed delivery of a large program in 2007.
The APAC region decreased by 3% (at actual exchange rates) but grew by 5% (at constant currency exchange rates) led by a positive sell-through of point-of-sale and automatic metering, although the wireless local loop sector decreased by approximate €5 million year-on-year as the market contracted.
The EMEA region, which decreased by 3% year on year suffered from lower sales mainly in automotive and fixed cellular or wireless local loop applications, which saw greater competition than in the previous year, and also in indirect sales through distribution. For the automotive segment sales decreased year-on-year, as fewer cellular products were shipped by our key automotive customers. This sluggish product sell-through was also the case for fixed cellular which we believe globally decreased. Some of the other direct customer sectors, such as metering and alarms did grow, but their growth was not enough to make up for the other declines.
Services: |
Technology development and other service revenues were generated from the sale of technical support to customers in order to assist them in the integration of our products into their end-products but also from service offerings that Wavecom develops. In 2006 and 2007, service revenues mainly resulted from a specific long-term project to develop a customized product in the automotive industry.
WAVECOM - Annual Report Form 20-F 2007 43
Licensing: |
We had no licensing revenue in 2007.
In 2006, total revenues from licensing amounted to €5.8 million with the following breakdown:
• | €1.9 million generated by a licensing contract signed in 2005 which revenue was spread over the last three quarters of 2005 and the four quarters of 2006, |
• | €3.9 million generated by a licensing contract signed in 2006 which revenue was all recognized in 2006. |
Customer Concentration: |
Revenues from the top ten customers represented 50% of the total and no customer represented more than 9% of sales where six were direct customers and four were value-added distributors.
Backlog: We include in our backlog all accepted product purchase orders for which delivery has been specified within one year. The 12-month backlog on December 31, 2007 was €41.7 million compared to €51.5 million at December 31, 2006.
Cost of revenues |
Year ended December 31 | |||||||||||
(amounts in € thousands) | 2006 | % sales | 2007 | % sales | % change 2006/2007 | ||||||
Cost of revenues | |||||||||||
Cost of good sold | 105,775 | 58.6 | % | 104,650 | 52.7 | % | -1.1 | % | |||
Cost of services and licensing | 2,723 | 32.6 | % | 5,833 | 152.4 | % | 114.2 | % | |||
Total cost of revenues | 108,498 | 57.5 | % | 110,483 | 54.6 | % | 1.8 | % | |||
Gross Profit | |||||||||||
On good sold | 74,618 | 41.4 | % | 93,860 | 47.3 | % | 25.8 | % | |||
On services and licensing | 5,642 | 67.4 | % | (2,006 | ) | -52.4 | % | -135.6 | % | ||
Total gross profit | 80,260 | 42.5 | % | 91,854 | 45.4 | % | 14.4 | % | |||
Cost of goods sold: Total cost of goods sold consists primarily of the cost of components, our contract manufacturer’s charges, essential intellectual property royalties, warranty expenses, and depreciation.
The total cost of goods sold decreased by 1.1% from €105.8 million for 2006 to €104.7 million for 2007, despite an increase of 10% of the product sales mainly driven by the continuation of the reduction of the costs on the business acquired in 2006.
Cost of services and licensing: Total costs of services and licensing increased from 2006 to 2007 mostly due to significant costs recorded by the Company to support one of its development agreements.
Gross profit: Gross profit increased by 14.4% from €80.3 million for 2006 to €91.9 million for 2007. As a percentage of sales, 2007 gross profit amounted to 45.4% versus 42.5% in 2006. This year-on-year increase is explained by a better product margin, in particular for the activity acquired in 2006 partly offset by no license revenues, which is a business with higher margins, and by higher development costs for services revenues.
44 WAVECOM - Annual Report Form 20-F 2007
Operating expenses |
Year ended December 31 | |||||||||||
(amounts in € thousands) | 2006 | % of revenues | 2007 | % of revenues | % change 2006/2007 | ||||||
Research and development | 29,982 | 15.9 | % | 31,818 | 15.7 | % | 6.1 | % | |||
Sales and Marketing | 14,196 | 7.5 | % | 18,246 | 9.0 | % | 28.5 | % | |||
General and Administrative | 23,875 | 12.6 | % | 20,735 | 10.2 | % | -13.2 | ||||
Acquired in process technology | 1,450 | 0.8 | % | — | |||||||
Amortization of acquired intangible assets | 3,020 | 1.6 | % | 3,548 | 1.8 | % | 17.5 | % | |||
Stock based related expenses | 2,090 | 1.1 | % | 4,810 | 2.4 | % | 130.1 | % | |||
Total | 74,613 | 39.5 | % | 79,157 | 39.1 | % | 6.1 | % | |||
In the table above, amounts for amortization of acquired intangible assets and stock-based related expenses have been excluded from Research and Development, Sales and Marketing, and General and Administrative and presented in separate lines for purposes of comparability.
Total operating expenses were €79.2 million in 2007, compared to €74.6 million in 2006, increasing by 6%.
Operating expenses for Research and Development, and Sales and Marketing, have increased as compared to 2006 by 6% and 28% respectively. Both lines increased due to two main factors:
• | four additional months of costs related to the acquired activity in 2006 (90 people largely in R&D and sales and marketing joined Wavecom in May 2006), and |
• | increases in headcount during 2007. |
In addition, some engineers’ time allocated to Research and Development in 2006 were allocated to Sales and Marketing in 2007 based on the nature of their work performed in 2007. Finally, a larger amount of engineers time has been allocated to Cost of Service in 2007 as opposed to Research and Development line to support the service contracts. General and Administrative decreased by 13% mainly due to bad debt expenses primarily in Asia and in Europe and expenses associated with the M2M business acquisition completed in 2006.
Total headcount including subcontractors was 483 at the end of 2007 versus 440 at the end of 2006.
Operating expenses also included a non-cash expense of €2.1 million in 2006 and €4.8 million in 2007, related to stock-based compensation as required by implementation of SFAS 123R. The increase is explained by the granting in June 2007 of 155,650 free shares, 40,000 BSA (warrants) and of 372,650 stock options.
In addition, in 2006 and 2007, there were a number of accounting charges related to the 2006 acquisition that adversely impacted our operating result. In accordance with SFAS 141, certain intangible assets and in-process technology were identified within the former M2M business. As of December 31, 2006, in-process technology was valued at €1.5 million which was expensed in the second quarter 2006, the projects included in the in-process technology were completed in 2006 and 2007 and the related products are now on the market. The acquired intangible assets were valued at €13.3 million, and are depreciated over a period of one to four years, resulting in a depreciation charge of €3.0 million in 2006 and €3.5 million in 2007.
Other income (expense) |
Interest and other financial income, net: On July 13, 2007, Wavecom issued €80,5 million principal amount of bonds convertible into and/or exchangeable for new or existing shares (OCEANE) at a rate of 1.75% and mature on January 1, 2014. The OCEANE bear interest at a rate of 1.75% per annum. On a full year basis, interest expenses amount to €1.4 million and we recorded €664,000 for the year ended December 31, 2007.
We recorded net interest and other financial income of €1.8 million in 2007, compared to €1.1 million in 2006. Net interest and other financial income represent the net of €3.4 million of interest income (€1.3 million in 2006) and €1.5 million of interest expenses (€0.2 million in 2006). This increase is due to a higher cash level mainly driven by the OCEANE generating more financial income offset by interest expense mainly on the OCEANE.
Wavecom has policies that limit cash investments to short-term, low-risk instruments. Cash is mainly held in securities that are invested in short-term money market accounts ( Fonds Communs de Placement or “FCP” and Société d’Investissement à Capital Variable or “SICAV”).
WAVECOM - Annual Report Form 20-F 2007 45
Foreign exchange gain (loss): We had a net foreign exchange loss of €1.4 million in 2007 compared with a net loss of €1.9 million in 2006, reflecting mainly the foreign exchange loss on US dollar-denominated transactions and balance sheet items only partly compensated by the impact of our hedging program. The purpose of this hedging program is to limit our exposure to foreign currencies and not for speculative purposes.
In 2007, we recorded 56% of our total revenues in U.S. dollars, with virtually all the rest in euros. We purchase many of our components for U.S. dollars and the operating expenses of our U.S. subsidiaries are in U.S. dollars. The operating expenses of our Hong Kong subsidiary are primarily in Hong Kong dollars. Most of our other operating expenses are in euros. Dollar purchases and expenses represented approximately 62% of our cost of revenues and operating expenses in 2007.
Income tax expense (benefit): Our €4.3 million net tax benefit in 2007 (€125,000 net tax expense in 2006) was the result of the recognition of a deferred tax asset amounting to €4.5 million and to income tax expense of the Wavecom subsidiaries (€214,000) and other taxes resulting in a net credit of €9,500.
Until December 31, 2006, due to its history of tax losses in foreign tax jurisdictions which account for Wavecom’s deferred tax assets, the Company does not believe that sufficient objective, positive evidence exists to conclude that recoverability of its deferred tax assets is more likely than not. Consequently, the Company has provided valuation allowances covering 100% of its net deferred tax assets in these respective tax jurisdictions.
At December 31, 2007, based on the good performance the years before, in particular in 2007, and the perspective for the near future, Management has decided to reverse a part of the valuation allowance. The minimum amount of future taxable income that would have to be generated to realized the deferred tax asset is €13.5 million.
As of December 31, 2007, expiration dates of net operating loss carry forwards were as follows:
Expiration date: | (in € thousands | ) | |
2008 | — | ||
2009 | — | ||
2010 | — | ||
2011 | — | ||
Between 2013 and 2022 | 1,650 | ||
No expiration date | 44,433 | ||
Total net operating loss carry forwards | 46,083 | ||
Wavecom S.A. (France) had total loss carry forwards of €36,140,000 at December 31, 2007 (€60,249,000 in 2006) with no expiration date.
Net operating loss carry forwards in the United States totaled approximately €1,650,000 at December 31, 2007 (€2,320,000 in 2006) and will expire from 2013 to 2022 if not utilized.
Net operating loss carry forwards in the APAC region totaled approximately €8,293,000 at December 31, 2007 (€9,938,000 in 2006) with no expiry date.
For more information, refer to Note 15 of the notes to the consolidated financial statements.
46 WAVECOM - Annual Report Form 20-F 2007
Fiscal Year 2006 compared to Fiscal Year 2005 |
Revenues |
Year ended December 31, (amounts in € thousands) | 2005 | 2006 | % change 2005/2006 | ||||
Product sales | 125,952 | 180,393 | 43.2 | % | |||
Percentage of total revenues | 97.5 | % | 95.6 | % | |||
Services revenue | 1,827 | 2,542 | 39.1 | % | |||
Percentage of total revenues | 1.4 | % | 1.3 | % | |||
Licensing revenue | 1,453 | 5,823 | 300.8 | % | |||
Percentage of total revenues | 1.1 | % | 3.1 | % | |||
Total revenues | 129,232 | 188,758 | 46.1 | % | |||
Sales by market |
As % of total revenues: | 2005 | 2006 | |||
Vertical applications: | 91 | % | 100 | % | |
PCD (handset) business: | 9 | % | 0 | % | |
100 | % | 100 | % | ||
Sales by geographic region |
As % of total revenues: | 2005 | 2006 | |||
Europe, Middle East and Africa: | 58 | % | 53 | % | |
Asia-Pacific: | 32 | % | 22 | % | |
Americas: | 10 | % | 26 | % | |
100 | % | 100 | % | ||
Sales by product |
(amounts in €000s) | 2005 | 2006 | % in 2006 | ||||
– Embedded wireless CPU | 103,327 | 162,853 | 86.3 | ||||
– External wireless CPU | 18,051 | 17,515 | 9.3 | ||||
– Flex (chipset solution) | 4,574 | 0,023 | 0.0 | ||||
– Services | 1,827 | 2,543 | 1.3 | ||||
– License | 1,453 | 5,823 | 3.1 | ||||
Total | 129,232 | 188,758 | 100.0 | ||||
WAVECOM - Annual Report Form 20-F 2007 47
Sales by application and distribution channel |
(amounts in €000s) | 2005 | 2006 | % in 2006 | ||||
Direct Customers: | |||||||
Automotive | 16,378 | 35,180 | 18.6 | ||||
Industrial (Machine-to-Machine) | 22,698 | 37,677 | 20.0 | ||||
Mobile Professional | 7,586 | 4,347 | 2.3 | ||||
Personal Communication Devices | 10,535 | 0,023 | 0.0 | ||||
Indirect Customers: | |||||||
Distributors(1) | 68,755 | 103,165 | 54.7 | ||||
Total Products | 125,952 | 180,392 | 95.6 | ||||
Total Services & licensing | 3,280 | 8,366 | 4.4 | ||||
Total | 129,232 | 188,758 | 100.0 | ||||
(1) | Our “distributor” customers purchase our products and re-sell them to their own customers who use them in a diverse range of applications, which we believe are mostly industrial and mobile professional applications. |
Total revenues increased 46% year-on-year from €129.2 million in 2005 to €188.7 million in 2006.
Products: |
Products sales increase due mainly to the increase in product revenues from €126.0 million to €180.4 million. We had no sales in the PCD (Personal Communication Device or handset business) in 2006, while it represented 9% of total sales in 2005. Sales in the Vertical Applications increased by 56% from €115.4 million in 2005 to €180.4 million in 2006. This is explained largely by the eight months of revenues contributed by the acquired M2M business but also by an increase of around 13% for sales of historical Wavecom products.
From a geographic standpoint, product sales in the Americas region increased the most, representing 26% of total sales in 2006 versus 10% in 2005. This can be explained not only by the additional business generated by the acquired M2M business which was particularly strong in the Americas region but also by a strong increase from the historical activity.
By application, the greatest increase was in the automotive area, mainly due to the contribution of the acquired business. On the other hand, sales to Mobile Professional applications (PDA – Personal Digital Assistant – and WLL – Wireless Local Loop) decreased from 2005 to 2006 due to the fact that one customer that represented a significant portion of revenues in the first quarter of 2005 encountered technical difficulties that were unrelated to Wavecom and no longer contributed to sales in the last three quarters of 2005 nor for any of 2006. This decline was partly compensated by sales in 2006 for Wireless Local loop applications. Sales in Machine-to-Machine applications and to distributors were strong marking an increase from 2005 to 2006 of 66% and 50%, respectively.
Services: |
Technology development and other service revenues are generated from the sale of technical support to customers in order to assist them in the integration of our products into their end-products but also from service offerings that Wavecom develops.
Licensing: |
In 2005, Wavecom signed a licensing contract for its software and silicon technology. Out of the €3.4 million revenue from this contract, €1.5 million was recognized over the last three quarters of 2005 and €1.9 million was recognized in 2006.
In 2006, Wavecom signed and completed another licensing contract for its software and silicon technology for a license fee of €3.9 million. All the revenues associated with this license were recognized in 2006.
Customer Concentration: |
No single customer represented more than 9% of total revenues on an annual basis in 2006. The top ten customers combined represented 46% of 2006 total revenues.
Backlog: 12 months backlog as of December 31, 2006 stood at €51.5 million.
48 WAVECOM - Annual Report Form 20-F 2007
Cost of revenues |
Year ended December 31 | |||||||||||
(amounts in € thousands) | 2005 | % sales | 2006 | % sales | % change 2005/2006 | ||||||
Cost of revenues | |||||||||||
Cost of goods sold | 69,094 | 54.9 | % | 105,775 | 58.6 | % | 53.1 | % | |||
Cost of services and licensing | 842 | 25.7 | % | 2,723 | 32.6 | % | 223.4 | % | |||
Total cost of revenues | 69,936 | 54.1 | % | 108,498 | 57.5 | % | 55.1 | % | |||
Gross Profit | |||||||||||
On goods sold | 56,858 | 45.1 | % | 74,618 | 41.4 | % | 31.2 | % | |||
On services and licensing | 2,438 | 74.3 | % | 5,642 | 67.4 | % | 131.4 | % | |||
Total Gross profit | 59,296 | 45.9 | % | 80,260 | 42.5 | % | 35.4 | % | |||
Cost of goods sold: Total cost of goods sold consists primarily of the cost of components, our contract manufacturer’s charges, essential intellectual property royalties, warranty expenses, and depreciation.
The total cost of goods sold increased by 53.1% from €69.1 million for 2005 to €105.8 million for 2006, principally due to higher levels of product sales.
Cost of services and licensing: |
Total costs of services and licensing increased from 2005 to 2006 as a result of the development of these activities as well as to significant costs recorded by the Company to support one of its development agreements.
Gross profit: Gross profit increased by 35.4% from €59.3 million for 2005 to €80.3 million for 2006. As a percentage of sales, 2006 gross profit amounted to 42.5% versus 45.9% in 2005. This year-on-year decline was largely related to the low-margin products from the acquired M2M business, partly offset by an increase in licenses revenues with higher margins.
Operating expenses |
Year ended December 31 | |||||||||||
(amounts in € thousands) | 2005 | % of revenues | 2006 | % of revenues | % change 2005/2006 | ||||||
Research and development | 24,066 | 18.6 | % | 30,250 | 16.0 | % | 25.7 | % | |||
Sales and Marketing | 11,725 | 9.1 | % | 14,706 | 7.8 | % | 25.4 | % | |||
General and Administrative | 17,861 | 13.8 | % | 25,187 | 13.3 | % | 41.0 | % | |||
Acquired in process technology | — | — | 1,450 | 0.8 | % | — | |||||
Amortization of acquired intangible assets | — | — | 3,020 | 1.6 | % | — | |||||
Restructuring costs | 1,684 | 1.3 | % | — | — | — | |||||
Total | 55,336 | 42.8 | % | 74,613 | 39.5 | % | 34.8 | % | |||
Total operating expenses were €74.6 million in 2006, compared to €55.3 million in 2005, increasing by 35%. The main explanation of this increase is linked to the eight months of additional expenses for the acquired M2M business. Following this acquisition, around 90 people joined the group, representing an increase of 27% of the headcount versus end of 2005.
2006 expenses also include a non-cash expense of €2.1 million, related to stock-based compensation as required by implementation of SFAS 123R. Stock-based compensation was not required to be expensed under US GAAP for the year 2005. These expenses were recorded in the lines Research and Development, Sales and Marketing, and General and Administrative.
Operating expenses for Research and Development, Sales and Marketing, and General and Administrative all increased as compared to 2005 by 26%, 25% and 41% respectively. Excluding the stock-based compensation, the increase would have
WAVECOM - Annual Report Form 20-F 2007 49
been 25%, 21% and 34%, respectively. The higher increase in General and Administrative is due to higher bad debt expenses mainly in Asia and expenses associated with the M2M business acquisition. The increase in Research and Development and Sales and Marketing is mainly related to the acquired activity.
In addition, in 2006 there were a number of accounting charges related to our recent acquisition that adversely impacted our operating result. In accordance with SFAS 141, certain intangible assets and in-process technology were identified within the former M2M business. As of December 31, 2006, in-process technology has been valuated at €1.5 million which was expensed in the second quarter 2006, and the acquired intangible assets have been valuated at €13.3 million, and will be depreciated over a period of 1 to 4 years, resulting in a depreciation charge of € 3.0 million in 2006.
No significant restructuring costs were recorded in 2006. The restructuring costs recorded in 2005 were the remaining costs related to the 2004 restructuring plan as a result of the Company decision to exit the handset market.
Other income (expense) |
Interest and other financial income, net: We recorded net interest and other financial income of €1.1 million in 2006, compared to €1.0 million in 2005, reflecting principally higher interest rates.
Foreign exchange gain (loss): We had a net foreign exchange loss of €1.9 million in 2006 compared with a net gain of €4.1 million in 2005, reflecting the foreign exchange loss on US dollar-denominated transactions and balance sheet items only partly compensated by the impact of our hedging program.
Income tax expense (benefit): Our €125,000 net tax expense in 2006 (€395,000 net tax expense in 2005) was the result of the income tax expense of the parent Company (€32,000) and of its subsidiaries (€98,000) and other taxes resulting in a net credit of €5,000.
Selected quarterly operating results
The following table sets forth selected unaudited quarterly operating results for each of the eight fiscal quarters in the two-year period ended December 31, 2007. We have derived this information from our unaudited interim consolidated financial statements which have been prepared on a basis consistent with our audited consolidated financial statements. The results of operations for any quarter are not necessarily indicative of the results that might be expected for any future period.
50 WAVECOM - Annual Report Form 20-F 2007
Selected quarterly operating results |
March 31, | June 30, | Sept. 30 | Dec. 31, | March 31, | June 30, | Sept. 30 | Dec. 31, | ||||||||||
2006 | 2006 | 2006 | 2006 | 2007 | 2007 | 2007 | 2007 | ||||||||||
(unaudited) (in thousands, except share and per share amounts) | |||||||||||||||||
Revenues: | |||||||||||||||||
Product sales | €27.462 | €49.187 | €54.992 | €48.753 | €47.785 | €55.776 | €50.405 | €44.543 | |||||||||
Technology development and other services | 270 | 216 | 408 | 1.647 | 332 | 334 | 1.958 | 1.205 | |||||||||
Licensing revenue | 484 | 484 | 485 | 4.369 | — | — | — | — | |||||||||
Total revenues | 28.216 | 49.887 | 55.885 | 54.769 | 48.117 | 56.110 | 52.363 | 45.748 | |||||||||
Cost of revenues: | |||||||||||||||||
Cost of goods sold | 13.066 | 28.762 | 35.206 | 28.741 | 26.012 | 30.139 | 26.956 | 21.543 | |||||||||
Cost of services | 176 | 697 | 802 | 1.048 | 1.559 | 1.600 | 1.666 | 1.009 | |||||||||
Total cost of revenues | 13.242 | 29.459 | 36.008 | 29.789 | 27.571 | 31.739 | 28.622 | 22.552 | |||||||||
Gross profit | 14.974 | 20.428 | 19.877 | 24.980 | 20.546 | 24.371 | 23.741 | 23.196 | |||||||||
Operating expenses: | |||||||||||||||||
Research and development | 5.901 | 8.119 | 8.467 | 8.634 | 7.758 | 8.179 | 8.493 | 9.132 | |||||||||
Sales and marketing | 2.886 | 4.405 | 4.464 | 5.098 | 5.413 | 5.740 | 5.689 | 5.896 | |||||||||
General and administrative | 5.568 | 5.847 | 6.325 | 7.448 | 5.784 | 5.700 | 5.461 | 5.911 | |||||||||
Acquired in process technology | — | 1.400 | — | 50 | — | — | — | — | |||||||||
Restructuring costs | — | — | — | — | — | — | — | — | |||||||||
Total operating expenses | 14.355 | 19.771 | 19.256 | 21.230 | 18.955 | 19.619 | 19.643 | 20.939 | |||||||||
Operating income (loss) | 619 | 657 | 621 | 3.750 | 1.591 | 4.752 | 4.098 | 2.257 | |||||||||
Interest and other financial income (expense), net | (361 | ) | (471 | ) | 618 | (604 | ) | 369 | 369 | (705 | ) | 359 | |||||
Income (loss) before minority interests and income taxes | 258 | 186 | 1.239 | 3.146 | 1.960 | 5.121 | 3.393 | 2.616 | |||||||||
Minority interests | — | — | — | — | — | — | — | — | |||||||||
Income (loss) before income taxes | 258 | 186 | 1.239 | 3.146 | 1.960 | 5.121 | 3.393 | 2.616 | |||||||||
Income tax expense (benefit) | 54 | 19 | 20 | 34 | 12 | 91 | 49 | (4.461 | ) | ||||||||
Net income (loss) | €204 | €167 | €1.219 | €3.112 | €1.948 | €5.030 | €3.344 | €7.077 | |||||||||
Basic net income (loss) per share | €0.01 | €0.01 | €0.08 | €0.20 | €0.13 | €0.33 | €0.22 | €0.46 | |||||||||
Diluted net income (loss) per share1 | €0.01 | €0.01 | €0.08 | €0.19 | €0.12 | €0.30 | €0.19 | €0.39 | |||||||||
Shares used in computing basic net income (loss) per share | 15,375,468 | 15,384,077 | 15,385,077 | 15,390,765 | 15,401,390 | 15,447,796 | 15,199,624 | 15,221,619 | |||||||||
Shares used in computing diluted net income (loss) per share | 15,782,195 | 15,946,575 | 15,905,833 | 16,008,840 | 16,230,460 | 16,645,446 | 18,785,143 | 18,916,763 |
(1) | For quarters ended September 30, 2007 and December 31, 2007, diluted earnings per share also includes the effect, net of income tax, of the dilutive bonds (OCEANE issued on July 13, 2007) if they had been converted using the if-converted method. |
We believe that period-to-period comparisons of our operating results are not necessarily meaningful. Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future. You should not rely on them to predict future performance. Our revenue may fluctuate due to the amount of new customer orders and the timing of production and delivery of these new orders. The amount and timing of our operating expenses may fluctuate significantly in the future as a result of the timing of these orders and our development of new products and technologies. For a discussion of factors which may affect our quarterly and annual operating results, see Item 3. Key Information – Risk Factors. Our quarterly revenues fluctuate significantly and may affect the price of our ordinary shares and ADSs.
Liquidity and capital resources
We had negative cash flow from operations of €116.5 million in 2007 compared to positive cash flow of €30.0 million in 2006. This negative cash flow is due to the acquisition of marketable securities at the end of 2007, all cash being in cash or cash equivalents at the end of 2006. Excluding these purchases, the cash flow from operations is positive at €18.1 million.
The negative cash flow from investing activities of €5.1 million in 2007 is related to the purchase of tangible assets. The amount in 2006 was significantly higher at €35.1 million mainly due to the acquisition of the M2M division of Sony Ericsson.
We had working capital (defined as current assets less current liabilities) of €138.9 million at December 31, 2007, an increase from €42.8 million at December 31, 2006.
At December 31, 2007, our capital lease obligations (including the current portion), amounted to €547,000, compared to debt and capital lease obligations of €618,000 at the end of 2006.
At December 31, 2007, following the issuance of the OCEANE, our debt (including the current portion) amounted to €81.2 million. We had no debt at the end of 2006.
WAVECOM - Annual Report Form 20-F 2007 51
We had €4.7 million in cash and cash equivalents at December 31, 2007 compared to €54.8 million at December 31, 2006, as we had, at year end, marketable securities for a total of €134.6 million.
Therefore, the net cash was equal to €58.1 million at December 31, 2007 compared to €54.8 million at December 31, 2006 and was detailed as follows:
(amounts in € thousands) | December 31, 2006 | December 31, 2007 | |||
Cash or cash equivalents | €54,776 | €4,677 | |||
Marketable securities | — | 134,610 | |||
Current portion of convertible bonds | — | (664 | ) | ||
Long term portion of convertible bonds | — | (80,500 | ) | ||
Net cash | €54,776 | €58,123 | |||
Based on our current plans, and including pending and/or recent transactions, we believe that our available capital resources will be adequate to satisfy our cash requirements at least for 12 months from the date of this report. If our plans change, or if we do not achieve profits or if our profitability is significantly lower than anticipated, we may need additional financing.
Research and development
For information regarding our research and development programs and expenses, see Item 4. Company Information – Business Overview.
Off-balance sheet arrangements
At December 31, 2007, we had no off-balance-sheet arrangements (as defined in Item 5E of Form 20-F) that had or are reasonably likely to have a current or future effect that would be material to investors.
Tabular disclosure of contractual obligations
Our contractual obligations as of December 31, 2007 consist principally of obligations under capital leases, operating leases, and other short-term obligations (commitments with third-party manufacturers and bank guarantees).
Payments due by period (amounts in million) | |||||||||||
Contractual obligations | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||
Convertible bonds | 80.5 | 80.5 | |||||||||
Capital lease obligations | €0.5 | €0.2 | €0.3 | — | — | ||||||
Operating leases | 18.0 | 4.7 | 9.2 | €3.3 | €0.8 | ||||||
Other long term liabilities | 22.3 | 18.6 | — | 3.7 | |||||||
Total contractual cash obligations | €121.3 | €23.5 | €9.5 | €7.0 | €81.3 | ||||||
At December 31, 2007, we had purchase commitments with our third-party manufacturers for future deliveries of products, principally during the first half of 2008. These purchase commitments totalled approximately €18.6 million.
In October 2005, Wavecom signed a commitment with some of its executive committee members for the payment of a retention bonus, on condition they were still employed as of March 31, 2007 the amount was been paid in April 2007. The total amount of these bonuses was €2,421,000 (including benefits) and was being recognized ratably as an expense from October 1, 2005 to March 31, 2007 (over the 18 months service period). Accordingly, Wavecom recorded a compensation expense for this retention bonus in the years ended December 31, 2005, 2006 and 2007 in a respective amount of €428,000, €1,835,000 and €158,000.
On July 13, 2007, Wavecom issued on €80,499,969 principal amount of bonds convertible into and/or exchangeable for new or existing shares (OCEANE) due January 1, 2014.
52 WAVECOM - Annual Report Form 20-F 2007
At issuance each bond had a nominal value of €31.30. The bonds bear interest at a rate of 1.75% per annum. Interest will be payable annually in arrears on January 1 of each year beginning January 1, 2008.
Holders may exercise their right to convert or exchange their bonds at their option at any time from July 13, 2007, the issue date of the bonds, until the seventh business day preceding their redemption date. The initial conversion/exchange ratio will be one share of the Company for one bond.
At maturity, the Company will redeem the bonds then outstanding at their nominal value (i.e. €31.30 per bond). The Company may redeem the bonds at its sole option at any time from January 1, 2012, subject to 30 calendar days’ notice, so long as the product of (i) the applicable conversion/exchange ratio in effect on such date and (ii) the arithmetic average opening price of the Company’s shares on Eurolist by Euronext Paris calculated over a period of 20 consecutive trading days during which the shares are traded, as selected by the Company from among the 45 consecutive trading days immediately preceding the date of publication of the notice relating to such early redemption, determined in the manner described herein, exceeds 130% of the nominal value of the bonds.
Interest rate risk
At December 31, 2007, Wavecom had €134,610,000 invested in money market accounts, including SICAV and FCPs, with no fixed maturity, earning interest at short-term variable rates. Such accounts did not meet the criteria for cash equivalents criteria and were therefore recorded as Marketable Securities.
At December 31, 2006 and 2005, we did not have amounts invested in short-term money-market accounts. At December 31, 2007, we had €3.7 million of pledged securities invested in short-term money market accounts. We had no variable rate debt at December 31, 2007.
Currency rate risk |
We publish our consolidated financial statements in euro and the functional currency of Wavecom S.A. is the euro. In 2007, we recorded 56% of our total revenues in U.S. dollars, with virtually all the rest in euro. We purchase many of our components in U.S. dollars and the operating expenses of our U.S. subsidiaries are in U.S. dollars. The operating expenses of our Hong Kong subsidiary are primarily in Hong Kong dollars. Most of our other operating expenses are in euros. Dollar purchases and expenses represented approximately 62% of our cost of revenues and operating expenses in 2007. A strengthening of the euro against the U.S. dollar and other currencies in which we receive revenues could reduce our reported revenues and our reported operating and net results. With regard to our assets denominated in non-euro currencies, we incurred a net foreign exchange loss of €1.4 million in 2007, a net foreign exchange loss of €1.9 million in 2006 and a net foreign exchange gain of €4.1 million in 2005.
If the euro had appreciated by 10% compared to the U.S. dollar during the year ended December 31, 2007, our revenues would have been €10.3 million lower and our expenses would have been €10.5 million lower, resulting in an operating gain of €200,000 greater than the published result. Our net foreign exchange position is described in Note 4 to our consolidated financial statements.
We use a combination of options and forward exchange contracts in order to minimize the risk to our estimated net dollar cash flows. Because these financial instruments do not always hedge specific transactions, they may be accounted for as speculative transactions; with the fair market value of the instruments being recorded on our balance sheet and their change in market value recognized in our profit and loss accounts at the end of each accounting period. See Note 4 to our consolidated financial statements.
Subsequent events
Wavecom announced on February 1, 2008 that it signed a definitive agreement to acquire 100% of Anyware Technologies. The transaction was finalized for a cash payment to Anyware Technologies shareholders of €9.1 million plus €1.5 million placed in an escrow account for customary warranty provisions. An additional payment for earn-out of up to €2 million upon reaching certain milestones is to be made in 2009.
At its March 18, 2008 meeting, the Board of Directors decided to propose to the beneficiaries of the June 7, 2007 stock option plan to cancel the grant. This stock option plan included 38 beneficiaries including the CEO who were together granted a total of 372,650 stock options at an exercise price of €24.21. The cancellation was agreed to by a large majority of the grantees, representing 96% of the total number of outstanding stock options. Consequently, under SFAS123R, this cancellation will result in an expense of €3.8 million in the first quarter of 2008.
WAVECOM - Annual Report Form 20-F 2007 53
Item 6: Directors, Senior Management and Employees
Board of Directors and Executive Officers
Our business is managed by our Board of Directors (Conseil d’Administration) and by our Chief Executive Officer (Directeur Général). French law governing a société anonyme and our By-Laws provide that the general management of the Company is performed either by the chairman of the Board of Directors or by another individual, elected by the Board of Directors and bearing the title of Chief Executive Officer. At its meeting held on October 21, 2002, the Board of Directors opted for a dual management structure and appointed Mr. Michel Alard as Chairman of the Board of Directors and Mr. Aram Hékimian, as Chief Executive Officer. At its meeting held on July 22, 2004, the Board of Directors appointed Ronald D. Black as our new Chief Executive Officer, in replacement of Mr. Aram Hékimian, who was appointed during the same meeting as Deputy Chief Executive Officer. Mr. Aram Hékimian resigned as Deputy Chief Executive Officer at the Board meeting held October 22, 2007, but he remains a director sitting on the Board of Directors.
Dr. Ronald D. Black is vested with extensive powers to act on behalf of the Company, within the limits set out by French law and our corporate By-Laws. As the Chief Executive Officer, subject to the prior authorization of the Board of Directors for certain decisions, he therefore has full authority to manage Wavecom’s affairs. The Chief Executive Officer may be removed by the Board of Directors at any time. However, in case of improper removal, he may be entitled to damages.The Chairman of the Board of Directors organizes and manages the activities of the Board of Directors. In addition, the chairman is responsible for the proper functioning of the Company’s management bodies and, in particular, must verify the ability of the board members to perform their mission.
Under our By-Laws, each director is elected by the shareholders at an ordinary general meeting for a maximum three-year term. Each director must own at least one Wavecom share. Under French law, a director may be an individual or a corporation. Throughout most of 2005 our Board consisted of ten directors, one director resigned in September 2005, a second director resigned in February 2006 and, at his request, a third director was not renewed in his directorship at the May 17 2006 shareholder meeting. As of March 31, 2008 our Board consists of 7 directors. Directors may resign at any time and their functions as members of the Board of Directors may be terminated at any time by the shareholders at a general meeting. Directors must resign at the age of 65. A director does not need to be a French national and there is no limitation on the number of terms that a director may serve. In case of removal without cause, members of the Board of Directors are not entitled to damages, except in certain very specific circumstances.
Under French law, our Board of Directors sets the guidelines of the Company’s activity and supervises their implementation. Within the limits set out by the corporate By-Laws, and the powers expressly granted by law to the general shareholders meetings, the Board of Directors may make any decision with respect to the business of the Company. In addition, the Board of Directors is responsible, among other things, for presenting financial statements to our shareholders and convening shareholders’ meetings.
Directors are required to comply with applicable law and with our By-Laws. Our directors may be jointly and severally responsible for actions that they take contrary to Wavecom’s interests.
Under French commercial law and our By-Laws, any transaction we enter into (either directly or indirectly or through an intermediary) in which a member of our Board of Directors, or our Chief Executive Officer, or one of our shareholders holding more than 10% of the voting rights (or, if it is a company, the company controlling it) has a direct or indirect interest and that is not in the ordinary course of business and/or is not at arm’s length is subject to the prior consent of our Board of Directors. The same applies for transactions between the Company and another company, whenever one of our directors or our Chief Executive Officer is the owner, a partner, a manager, director, Chief Executive Officer, member of the directorate (directoire) or supervisory board (conseil de surveillance) of such company. Such transactions have to be reported to the chairman by the concerned person when, due to their subject matter or their financial impact, they are significant for neither party. Furthermore, the types and the purposes of these transactions must be communicated by the chairman to the Board of Directors and to the statutory auditors. The interested director is not taken into account for the quorum calculation and his or her vote is not taken into consideration for the calculation of whether the transaction has been approved by the Board of Directors. Any such transaction concluded without the prior consent of our Board of Directors can be nullified if it causes prejudice to us. The interested director, or Chief Executive Officer, can be held liable on this basis. Our statutory auditor must be informed of the transaction within one month following its conclusion and must prepare a special report to be submitted to our shareholders for approval at their next meeting. In the event that the transaction is not ratified by our shareholders at a shareholders’ meeting, it will remain enforceable by third parties against us, but we may in turn hold the interested director or Chief Executive Officer, as the case may be, and, in some circumstances, the other members of the Board of Directors, liable for any damages we may suffer as a result. In addition, the transaction may be cancelled if it is fraudulent. Moreover, certain transactions between a corporation and a member of its Board of Directors who is a natural person and/or its managing directors, Chief Executive Officer or Deputy
54 WAVECOM - Annual Report Form 20-F 2007
Chief Executive Officer, if any, are prohibited under French commercial law. Such prohibition also applies to natural persons representing a company acting as a board member.
The following table sets forth the names of the directors of Wavecom who served on the Board in 2007, their current positions with Wavecom, the dates of their initial appointment as directors and the expiration dates of their current term. Each director’s term expires on the date of the annual general meeting of shareholders as indicated in the table below that approves our accounts for the previous year. Cumulative voting is not permitted.
Name | Age | Current position | Initially appointed | Term expires | |||||
Michel Alard | 53 | Chairman of the Board | 1993 | 2010 | |||||
Ronald D. Black | 44 | Director & Chief Executive Officer | 2004 | 2010 | |||||
Aram Hékimian | 52 | Director | 1993 | 2010 | |||||
Jean-François Heitz* | 58 | Director | 2005 | 2008 | |||||
Bernard Gilly* | 51 | Director | 1999 | 2008 | |||||
Stephen Imbler* | 56 | Director | 2000 | 2008 | |||||
Anthony Maher* | 62 | Director | 2003 | 2009 | |||||
* | Indicates Directors who are considered “independent” under applicable rules and regulations |
Nine board meetings were held in 2007 (compared to seven board meetings in 2006) with an average attendance rate of 87% (which is stable compared to the 89% of 2006).
The day-to-day operations of Wavecom are managed by our team of executive officers, managed by our Chief Executive Officer. The following table sets forth the name and current position of each of our executive officers as of the date of this report:
Name | Age | Current position | Current position since | Year joined Wavecom | |||||
Ronald D. Black | 44 | Chief Executive Officer | 2004 | 2004 | |||||
Olivier Beaujard | 39 | Group VP, Business Development | 2005 | 1999 | |||||
Chantal Bourgeat | 43 | Group VP, Finance & Administration and Chief Financial Officer | 2004 | 2002 | |||||
Didier Dutronc | 48 | Group VP, Asia-Pacific Region and Managing Director Wavecom | 2004 | 2003 | |||||
Philippe Guillemette | 42 | Group VP, Marketing and Chief Technology Officer | 2005 | 1993 | |||||
Etienne Menut | 58 | Group VP, Human Resources | 2003 | 2002 | |||||
Claire Oliver | 46 | Group Director of Quality | 2005 | 1999 | |||||
Pierre Piver | 48 | Group VP, Sales EMEA region. | 2006 | 2003 | |||||
Pierre Teyssier | 43 | Group VP, Operations | 2004 | 2001 | |||||
Hugues Waldburger | 44 | Director Performances and Validation | 2006 | 2003 | |||||
Anders Franzén | 47 | Group VP, and Chief Operating Officer | 2006 | 2006 | |||||
Stefan Lindvall | 44 | Group VP, Head of Americas Region | 2006 | 2006 | |||||
Dominique Cyne | 50 | Group VP for Research and Development | 2006 | 2002 | |||||
There are no family relationships between any of the directors or executive officers of Wavecom. |
Directors
Michel Alard, 53, has served as Chairman of the Board since he co-founded Wavecom in 1993. From 1988 to 1993, Mr. Alard was GSM project manager for Matra Communications, a telecommunications equipment Company. Before joining Matra, Mr. Alard was joint head of research and development for CCETT, a joint telecommunication research center of France Telecom and TéléDiffusion de France (TDF). From 1979 to 1982, Mr. Alard was a research engineer at SFP (Société Française de Production) and TDF, and was involved in television broadcasting. Mr. Alard has engineering degrees from the École polytechnique and the École nationale supérieure des télécommunications. Mr. Alard also serves on the Board of Directors of ILOG, S.A., a French software Company listed on Nasdaq and the Euronext (Eurolist), Paris. Other
WAVECOM - Annual Report Form 20-F 2007 55
Wavecom Group directorships: Wavecom Inc. (U.S.); Wavecom Asia Pacific Ltd. (Hong Kong); and Wavecom Korea Co. Ltd. (South Korea).
Ronald D. Black, 44, Chief Executive Officer, joined Wavecom on August 16, 2004. He is also Director of Wavecom, Inc. Before Wavecom, Dr. Black served as Executive Vice President, Client Systems Group at Agere Systems, a leading provider of advanced integrated circuit solutions for consumer applications, including wireless. Previously, Dr. Black was Vice President at Gemplus, based near Marseilles, France, serving as General Manager of the Next-Generation networks Business unit which specialized in wireless network software and smart cards for 3G networks. Prior to that, he was General Manager for the Networking and Communications Systems Division of Motorola’s Semiconductor Products Sector. In that position, he oversaw several product areas, including microprocessors, memories and transceivers. Before joining Motorola, Dr. Black held a number of positions at IBM Microelectronics in its Power PC Microprocessors group and in the electronic packaging applications and development areas. Dr. Black holds a Bachelor of Science, a Master of Science and a Ph.D. in Materials Science and Engineering from Cornell University in Ithaca, N.Y. Dr. Black also serves as director on the board of Inside Contactless. As of 2007, Dr. Black served as director at Wavecom Deutschland GmbH (Germany).
Bernard Gilly, 51, has served as a Director of Wavecom since April 1999. Since November 2005, Bernard Gilly is President and General Manager of Fovéa Pharmaceuticals, a biopharmaceutical company specialized in the development and commercialization of the retina medical treatments. From December 2000 to October 2005 Mr. Gilly has been a partner in the Life Sciences team of Sofinnova Partners, a European venture capital fund, having joined them in December 2000. From 1992 to 2000, he served as Chief Executive Officer of Transgene, a French biotechnology company listed on Nasdaq and the Euronext (Eurolist), Paris. From 1994 to June 1997, Dr. Gilly also served as Research Director of bioMérieux. Prior to that, he served in various capacities at Pasteur Mérieux, including that of Vice President, Research and Development, from 1990 to 1994. He received his doctoral degree in bioeconomics from the University of Rennes, and holds an AMP from INSEAD. Other outside directorships include: High Deal, a privately-held French company; Faust Pharmaceuticals, a privately-held French company; CNRS, a French public institute.
Jean-François Heitz, 58, has been a board member of Wavecom since May 26, 2005. He was formerly Deputy Chief Financial Officer, from 2000 to 2003, for Microsoft Corporation U.S.A. He originally joined Microsoft France in 1989 where he served as Deputy General Manager from 1989 to 1991, then as General Manager, Business Operations from 1991 to 1994 and as Director F&A, Southern Europe from 1993 to 1994. In 1994, he joined the group headquarters in the USA as an Assistant Treasurer then later was promoted to Corporate Treasurer for the group in 1998. Before Microsoft, he held several positions in the Matra group (currently part of the Lagardère Group) from 1980 to 1989. He served as assistant to the CEO (Civilian Activities), as Group controller for the Automation Division, as VP Finance & Legal for Matra Datavision Inc, President of Matra Technology Inc and as CFO of the Systems Division. From 1978 to 1980 he worked as head of sales and marketing for Unitec Wemco Europe. He began his career in 1974 with the group Air Liquide as an Operations Research Engineer. Mr. Heitz is a graduate of the École nationale supérieure des Mines de Paris graduating Magna Cum Laude. He holds a Master of Science in Industrial Engineering from Stanford University, where he graduated Magna Cum Laude. He completed a program of Corporate Financial Management at Harvard University. Mr. Heitz is also a member of the Board of Directors of Business Objects, Arc International, Bull, and Total Immersion. He is also member of the”Advisory Board” of the Stanford Management Science & Engineering School and of the Seattle Symphony Orchestra.
Aram Hékimian, 52, a co-founder of Wavecom, has served as a Director since 1993 and Deputy Chief Executive Officer (Directeur Général Délégué). He resigned from this function during the last Board Meeting in October 22, 2007 but remains director of the Board. In this role he has direct responsibility for strategic projects as defined by the C.E.O. and Board of Directors. He was head of the software department for Matra Communications from 1984 until 1993. Prior to joining Matra, he was a software engineer at Marben, a software engineering company, and CS Telecom, a Company active in the field of telecommunications and railway signaling systems. Mr. Hékimian has a master’s degree in science and technology from the University of Paris XII. Other Wavecom group directorships: Wavecom Inc. (U.S.); Wavecom Asia Pacific Ltd. (Hong Kong); Wavecom Korea Co. Ltd (South Korea); Wavecom Northern Europe Ltd (U.K.); and Wavecom Deutschland GmbH (Germany). He has been director of Kapsys, in France, since February, 2007.
Stephen Imbler, 56, has served as a director of Wavecom since March 2000. He has been CFO for Nextag, a U.S. consumer internet company, since April 2004. Stephen Imbler was President and Chief Operating Officer of Liquid Audio and served on the Board of Directors until April 2003. He previously served as President and Chief Operating Officer of Hyperion Solutions through the end of 2001, and as Advisor to the company through August 2002. Prior to the 1998 merger between Arbor Software and Hyperion Software that created Hyperion Solutions, Mr. Imbler held the position of Senior Vice President and Chief Financial Officer at Arbor Software for three years. Mr. Imbler previously served as Vice President and Chief Financial Officer of Quick Response Services, Inc. during 1994 through 1995; Vice President, Finance at Oracle Corporation 1987 through 1993; and various positions at Peat Marwick Mitchell (now KPMG) from 1978 to 1987. Mr. Imbler received a master’s degree in public accounting from the University of Texas and a bachelor’s degree in piano performance from Wichita State University.
56 WAVECOM - Annual Report Form 20-F 2007
Anthony Maher, 62, joined the Wavecom Board of Directors in May of 2003. Mr. Maher had a long professional career at Siemens, having joined them in 1978. Throughout his career at Siemens, he held various positions in software development and integration, system engineering, architecture and processor design both in Germany and the U.S. From October 1997 until February 2002, Mr. Maher served as a member of the Managing Board for Siemens Information and Communication Networks Group. In this role he was first responsible for all ICN European business, then later the U.S. operations. He was the founding chairman of Mustang Ventures, a venture capital unit at Siemens for wireless and wireline business. He also served as Chairman of the board of Unisphere Networks, Inc. (a Siemens-owned company), which was later acquired by Juniper Networks. He currently is a director of Xtellus and Broadlight both privately-held companies), Alvarion Ltd. (a publicly-held company) and serves on the supervisory Board of Adva Optical A.G. (a publicly-held company). He began his professional career with Bell Telephone Laboratories in Naperville, Illinois, contributing to hardware and software design as well as system engineering on 4ESS. He graduated cum laude with a Masters degree in Electrical Engineering and Physics from the University of Illinois in 1969.
Executive officers
Ronald D. Black, 44, Chief Executive Officer, joined Wavecom on August 16, 2004. He is also Director of Wavecom, Inc. Before Wavecom, Dr. Black served as Executive Vice President, Client Systems Group at Agere Systems, a leading provider of advanced integrated circuit solutions for consumer applications, including wireless. Previously, Dr. Black was Vice President at Gemplus, based near Marseilles, France, serving as General Manager of the Next-Generation networks Business unit which specialized in wireless network software and smart cards for 3G networks. Prior to that, he was General Manager for the Networking and Communications Systems Division of Motorola’s Semiconductor Products Sector. In that position, he oversaw several product areas, including microprocessors, memories and transceivers. Before joining Motorola, Dr. Black held a number of positions at IBM Microelectronics in its Power PC Microprocessors group and in the electronic packaging applications and development areas. Dr. Black holds a Bachelor of Science, a Master of Science and a Ph.D. in Materials Science and Engineering from Cornell University in Ithaca, N.Y.
Olivier Beaujard, 39, Group Vice President, Business Development joined Wavecom in 1999 to head up Product Marketing where he set up the Company’s marketing activity. In 2000 he was promoted to Director of Corporate Business Development. In January 2004 he served as Marketing Director for the Vertical Applications Business Units and became Group VP of Business Development in 2005. He is a member of the Executive Committee of Wavecom group. Previously Mr. Beaujard had international Sales experience in the value added services platforms for telecommunications networks at FERMA. Mr. Beaujard also worked in the smart card industry for GEMPLUS were he was responsible for the GSM standardization at ETSI. Mr. Beaujard graduated from the Institut national polytechique of Grenoble (INPG-ENSERG) with an electronics and telecommunications engineer diploma. He also holds an MBA with honors of ESSEC business school.
Chantal Bourgeat, 43, Chief Financial Officer and Group Vice President for Finance and Administration, joined Wavecom in October 2002 as Director of Finance and Administration and she was named Chief Financial Officer and Group VP, Finance and Administration in September 2004. She is in charge of accounting, business analysis, Investor Relations, legal and administrative departments for the group. Prior to joining Wavecom, from 1991 to 2000 Ms. Bourgeat held a number of positions in the finance structure of Monsanto. Her long career at Monsanto included responsibility in business analysis, consolidation, treasury, tax planning and the acquisition or sale of business. She was then Finance Director for Europe and Africa for Merisant (Former Canderel division of Monsanto). Ms. Bourgeat has a background in audit and served as an external auditor at KPMG Audit from 1987 to 1991. She holds a degree in Business Analysis from the École supérieure de commerce de Paris (1987) and a DECF.
Dominique Cyne, 50, Group Vice President for Research and Development, joined Wavecom in September of 2002 as APAC Engineering Director. He took on responsibility of Wavecom’s Hardware Development in September 2005. Immediately prior to joining Wavecom, he served as Hardware and Radio Frequency Division head of Research and Development for Mitsubishi Electric France. From 1992 to 1998 he worked for France Telecom LET (Laboratoire d’Essais des Télécommunications) as “Digital Radio Communication” Department manager. Mr. Cyne has a degree from INSA, Rennes.
Didier Dutronc, 48, Group Vice President and Head of Asia-Pacific Region and Managing Director of Wavecom Asia Pacific Ltd. Prior to taking this position in September of 2004 he was Group V.P. of the Personal Communications Device Business Division. Mr. Dutronc joined Wavecom in March 2003. He is a member of the Executive Committee of the Wavecom group. Prior to joining Wavecom, he served as Worldwide VP Sales and Marketing for Alcatel Optronics (1997 – June 2000) and served as President and CEO of Alcatel Optronics, Inc., in Dallas, Texas (from June 2000 to February 2003 as President and CEO). Prior to joining Alcatel he also worked for Analog Devices and Texas Instruments. Mr. Dutronc has a degree in electrical engineering from ESME in Paris and received an MBA from IAE in Paris. Wavecom Group directorships: Wavecom Asia Pacific Ltd. (Hong Kong) and Wavecom Korea Co. Ltd (South Korea).
WAVECOM - Annual Report Form 20-F 2007 57
Anders Franzén, 47, Group Vice President, Chief Operating Officer and President of Wavecom, Inc. since April, 2006. He joined Wavecom following the acquisition of Sony Ericsson’s Product Business Unit M2M Com which he headed. Prior to his tenure as head of the Sony Ericsson M2M unit, Mr. Franzén was Sony Ericsson’s Corporate Vice President, Head of Global Sourcing. Mr. Franzén joined Sony Ericsson when the joint-venture was formed in October 2001, leaving his position of Vice President, Head of Sourcing, Ericsson Consumer Products. Mr. Franzén came into the Wireless Telecom segment from the automotive industry, where his most recent position was Director of Product & Technical Planning at Ford’s Premier Automotive Group in London, U.K. Prior to that, Mr. Franzén held a number of positions at Volvo in Sweden, including Senior Vice President, Business Development and Vice President, Strategic Sourcing & Purchasing.
Philippe Guillemette, 42, Group Vice President of Marketing and Chief Technology Officer, has been in charge of group marketing since October 2005 and has been Chief Technology Officer since 2003. Prior to assuming his current position, he had served as Group VP of Technology and Chief Technology Officer. From December 2000 to December 2002, Mr. Guillemette was Group VP of Research and Development. Mr. Guillemette was Assistant Director of Research and Development during 2000, and from June 1995 until December 1999 he was Director of Software Development. He is a member of the Executive Committee of the Wavecom Group. Prior to joining Wavecom in 1993, Mr. Guillemette was a software engineer at Nortel Networks. He has an engineering degree from the École d’ingénieurs en électronique et électrotechnique.
Stefan Lindvall, 44, Group Vice President, Head of Americas Region since April 2006, following the acquisition of Sony Ericsson’s Product Business Unit M2M where he served as the Vice President of Sales and Marketing – Americas, also accumulating global responsibility for the development of the business segment automotive and fleet management. Before joining Sony Ericsson in this capacity in early 2005, Lindvall held several senior management positions in Ericsson’s United States operations, notably that of general manager for Ericsson’s Wireless Office Services Unit.
Etienne Menut, 58, Group Vice President for Human Resources, joined Wavecom in July 2002 as a consultant and was appointed to his current position in January 2003. He is a member of the Executive Committee of Wavecom Group. Prior to joining Wavecom, Mr. Menut worked was an independent human resources consultant in France from 1999 to 2002. From 1992 to 1999, he was Human Resources Director of Microsoft France. Mr. Menut also has worked with companies such as Cogema and Matra from 1977 to 1990. He has a French University master’s degree in Business Law.
Claire Oliver, 46, Group Director of Quality, joined Wavecom in October 1999. She holds this position since January 2005 and is also a member of the Compliance Committee. Prior to joining Wavecom from 1992 to 1999 Ms. Oliver worked for Valeo Electronique in a number of functions in the quality department including Quality Director of the Security Division. Previously she worked as an engineer at Northern Telecom where she was responsible for helping to set up a PABX electronic board production facility. Earlier in her career she was a development engineer at Honeywell SA, specialized in industrial control equipment. She received her degree in 1985 from the École centrale de Lyon in General Engineering, minor in Electronics.
Pierre Piver, 48, Group Vice President, for the EMEA Region and Automotive. He held his position in the automotive sector since October 2006 and has been responsible for the EMEA region since February 2008. Previously, he was Head of the Americas Region, and President of Wavecom, Inc., a position which he has held since September of 2004, moving from his previous position as Group V.P. for the Vertical Applications Business Unit. Mr. Piver joined Wavecom in January 2003 as Group V.P. Europe, Middle East and Africa Region. Before joining Wavecom, Mr. Piver was the Managing Director of Infineon Technologies France, which he joined in September 1996 when it was the Semiconductor division of Siemens in France. Previously, Pierre Piver had occupied various positions in sales and in product marketing from 1985 to 1989 at RTC Compelec (Philips Semiconductors) in Caen (France) and from 1989 to 1996, at Texas Instruments in Vélizy (France) and in Freising (Germany). Mr. Piver holds a degree in Electronic Engineering from ESME in Paris and a Master in Business Administration from EM Lyon. Wavecom Group directorships: Wavecom Northern Europe Ltd, (UK).
Pierre Teyssier, 43, Group Vice President of Operation, has been in this position reporting to the CEO since September of 2004. Prior to joining Wavecom in 2001, he worked for Axiohm, where he was Director of Manufacturing, holding numerous positions from 1989 to 2000 including: manufacturing manager, plant manager, and director of purchasing and logistics. From 1988 to 1989 he worked at Enerdis as a software engineer. Mr. Teyssier holds a degree in Engineering from ENSI, Caen, France.
Hugues Waldburger, 44, was appointed Director of Performances and Validation and has held this position since March 2006. He had responsibility for Wavecom’s Programme Management from September 2004 to March 2006. He joined Wavecom in 2003 as engineering manager for France for mobile phones. Prior to joining Wavecom he participated in the start-up of Pacific Broadband Communications (now Juniper Networks) where he created the product integration activity for cable networks. Prior to that he held a number of technical management positions for embedded systems in France with the electronics group, Thales. Hugues Waldburger holds a degree from the École nationale des télécommunications of Paris (ENST).
One executive officer left Wavecom in 2007.
58 WAVECOM - Annual Report Form 20-F 2007
Committees of the Board of Directors
The Board of Directors has established the following committees with a view to assisting the directors in their duties and ensuring that the Company acts at all times in accordance with the highest standards of corporate governance, proper conduct and transparency:
Audit Committee
The Audit Committee provides assistance to the Board of Directors in fulfilling its oversight responsibility to our Company’s shareholders relating to: the integrity of Wavecom’s financial statements, financial reporting process, internal accounting and financial controls, selection and evaluation of the performance of the independent auditors, independent auditors’ qualifications and independence, and the Company’s compliance with ethics policies, legal and regulatory requirements.
The Audit Committee is directly responsible for the appointment (subject to shareholder ratification) and termination (subject to the limitations of French law regarding the six-year mandates of statutory auditors), compensation and oversight of the work of the independent auditors, including resolution of disagreements between management and the auditors regarding financial reporting. The Committee must pre-approve all audit and permitted non-audit services provided by the independent auditors. The Committee is also responsible for reviewing the audit firms’ internal quality control procedures and for assuring, in consultation with management and the Company’s independent auditors, the adequacy and effectiveness of the Company’s accounting and financial controls. The Committee shall report any deficiency in the internal control procedures to the Company’s statutory auditors.
The Audit Committee consists only of independent directors and is chaired by an Independent Director who is also a financial expert as defined under Nasdaq listing standards. The Chairman was Jean-François Heitz until July 24, 2007 when he was replaced by Stephen Imbler. The members are appointed by (and may be removed, with or without cause, by) the Board of Directors. The current members of the Audit Committee are: Jean-François Heitz, Bernard Gilly and Stephen Imbler appointed chairman of the Committee by the Board of Directors on July 24, 2007. Therefore the whole committee consists of independent Directors. In 2007 the Audit Committee met four times with 83% average attendance. Since December 31, 2007 the Audit Committee has met once and all members attended the meeting.
Nomination and Compensation Committee
The Nomination and Compensation Committee proposes the appointment of independent directors, determines the compensation of the chairman of the board, the Chief Executive Officer, the Deputy Chief Executive Officer and advises on managers’ and senior officers’ compensation. This Committee consists entirely of independent directors. The Committee is also responsible for proposing the level of directors’ fees. The directors’ fees are distributed to the directors who are not otherwise payed a salary by the Company. Until July 31, 2007, the CEO, Deputy CEO and Chairman were paid a salary. Since August 1, 2007, only the CEO is paid a salary and, therefore, the Chairman and the Deputy CEO are compensated by directors’ fees. The directors’ fees are distributed in accordance with the effective attendance and implication in the board and committees’ activity. The current members of the Nomination and Compensation Committee are: Bernard Gilly (Chairman) and Anthony Maher. In 2007, the Nomination and Compensation committee met four times with an attendance of 100 %. Since December 31, 2007, the Nomination and Compensation Committee has met once and all members attended the meeting.
Strategic Studies Committee
The Strategic Studies Committee was established in April 2002. This Committee, which includes all members of the board as well as external experts or the Company’s senior executive as and if required has the task of sharing information and exchanging strategic evaluations on Wavecom’s business and activities. It is chaired by Ronald Black, the Company’s CEO. This Committee is also expected to propose new strategic initiatives and serve as a think tank concerning the strategy of Wavecom, its competitors, its market positioning, and critical decisions for its medium and long term future. This Committee is convened at the request of the Committee Chairman. During 2007 as was already the case in 2006, the Strategic Studies Committee was particularly active in studying external growth opportunities, the issuing of convertible bonds (OCEANE) and the acquisition of Anyware Technologies S.A.
Members of the Strategic Studies Committee include: Michel Alard, Aram Hékimian, Jean-François Heitz, Bernard Gilly, Stephen Imbler, Anthony Maher. In 2007 the Strategic Studies Committee met fourteen times with an average attendance of 83%.
At its November 22, 2006 meeting, the Strategic Studies Committee created a sub-committee called the “M&A sub-committee” made up exclusively of Wavecom independent board members with an objective of independently and
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objectively reviewing the Company’s strategic projects. This sub-committee established it own charter and elected a chairman, currently Anthony Maher. The M&A sub-committee met six times in 2007 and its Chairman, Anthony Maher, was particularly active, independently from the meetings themselves.
Corporate Governance Committee
The mission of the corporate governance committee is to assist the Board with the development and implementation of the Company’s corporate governance principles, to determine the composition of Board committees, and to monitor a process to assess Board effectiveness. The Committee is instructed to:
• | review and recommend corporate governance principles to the Board for adoption; |
• | review the Company’s management succession plans and make recommendations to the Board regarding the plans; |
• | review the Board’s committee structure and recommend to the Board for its approval directors to serve as members of each committee; |
• | develop and recommend to the Board for its approval an annual self-evaluation process of the Board and its committees, which is overseen by the Committee; |
• | periodically review the adequacy of the Company’s ethics compliance programs, in conjunction with the Compliance Committee; |
• | review and reassess the adequacy of the Committee’s charter annually and recommend any proposed changes to the Board for approval. |
The Company’s Corporate Governance Committee was created by the Board of Directors on December 19, 2003 and also has a mandate of evaluating the effectiveness of the Board of Directors as well as intervening in the functioning of the composition of committees. It formulated an update of the Company’s Corporate Governance Code during 2006. The current members of the Corporate Governance Committee are Michel Alard and Stephen Imbler. In 2007, the Corporate Governance Committee met once with both members being present. It also held a meeting on February 4, 2008 to proceed with the evaluation of the activity of the board and committees in 2007 and, more generally, the proper corporate governance at Wavecom.
Compliance Committee
The Compliance Committee assists the Chairman of the Board and the Chief Executive Officer in ensuring that the Company complies with all applicable laws and with all provisions of its internal Code of Ethics and Business Conduct. The members of the Compliance Committee, who are appointed by the Board of Directors, comprise the following members of the management: Chantal Bourgeat (Group VP, Finance and Administration, Chief Financial Officer), Claire Oliver (Group Quality Assurance Director) and Etienne Menut (Group VP, Human Resources). In 2005, the Board of Directors added to the committee a representative of the Company’s Workers’ Council. Jérome Thuillier was appointed in this capacity and is the Worker’s Council’s secretary. Pierre Cosnier (Legal Director) is the Chairman of the Compliance Committee. In 2007, the Compliance Committee met twice with an average attendance of 100%.
Risk Committee
The Risk Committee was established by the Board of Directors in December 2003 at which time a committee charter was put in place including objectives, rules governing the functioning of the committee and its mission. This charter was reviewed and updated in April 2006.
The Risk Committee provides assistance to the CEO and the Board of Directors in fulfilling their overall responsibility to assess and monitor risk applicable to the Company. During 2007, the Risk Committee identified the risks facing Wavecom in a detailed description of risks ranked by priority. In its meeting on September 7, 2005, the Board of Directors named Chantal Bourgeat chairman of the Risk Committee and also decided to enlarge the Committee in order to bring together a representative panel from all functions within the Company. The Board also decided that the Risk Committee should report to the Audit committee.
Members of the Risk Committee include: Chantal Bourgeat (Chairman), Pierre Cosnier, (Legal Director), Vincent Laurentin (HR Manager), Gil Groisille (Quality Assurance Manager), Emmanuel Maçon-Dauxerre (M2M Sales Director) Frédéric Farago (Business Development manager). The Risk Committee met four times in 2007 with an average attendance rate of 75%.
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Corporate Governance Activities
The internal rules of the Board of Directors, also called the Corporate Governance Code (the “Code”), set out the mission and objectives of the Board of Directors as well as its functioning rules. The Code also incorporates guidelines relating to the duties of directors with respect to the shares they own in the Company. The Code requires that one half of the Board of Directors be independent, and sets out the rules for determining independence. Among the criteria for independence, a director would not be considered independent if: he or she is, or has been during the past five years, a salaried employee or a corporate officer (“mandataire social”) of the Company or of a Company’s subsidiary; he or she is related to any corporate officer (“mandataire social”) of the Company; he or she is a client, supplier, or a bank of the Company; he or she is, or has been during the past five years a statutory auditor or non-statutory auditor of the Company; or he or she holds 5% or more of the Company share capital or he or she has been a director of the Company for more than 12 years.
We currently (as of March 31, 2008) have four independent directors meeting these requirements out of the seven directors composing the Board.
In November 2006, Wavecom received the “Trophée Midcaps 2007” for its corporate governanceFor the second consecutive year Wavecom was awarded the “Trophées Midcaps” on November 29, 2006 for best corporate governance.
Code of Ethics and Business Conduct
The Wavecom Group Code of Ethics and Business Conduct (the “Code of Ethics”) applies to all Company directors, officers and employees. The aim of the Code of Ethics is to enable the Company employees and officers to decide how to proceed when faced with concrete – sometimes complex – business situations by reference to clear and precise principles. It applies to conduct both within the group and with clients, suppliers and intermediaries. This code is communicated to employees at all levels within Wavecom. As of December 31, 2006, all salaried employees have been asked to sign an acknowledgement that they are aware of the Company’s Code of Ethics. This code can be changed or updated by us at any time.
Code of Ethics for Senior Financial Management
The Wavecom Group Code of Ethics for Senior Financial Management (the “Code of Ethics”) sets forth the basic principles by which Wavecom financial management must fulfil its responsibilities for accurate, complete and timely financial reporting while at the same time safeguarding Wavecom’s assets. The Code of Ethics applies to all members of “senior financial management,” defined as all those with responsibility for financial statement presentation, or for decisions on key accounting policies or judgments, as well as those managers with overall responsibility for a legal or reporting entity. Senior financial management also includes those with responsibility for communicating financial information to the investment community. The Code of Ethics incorporates compliance monitoring procedures and provides for the application of sanctions in the event of any violation of its provisions. The Code of Ethics is available on our website: www.wavecom.com/investors/corporategovernance.
Internal controls
Internal controls (unofficial translation into English of an excerpt from the Chairman’s report to the Board of Directors on Internal Controls, as required by French law).
The normative reference document adopted by the Company is the COSO (Committee of Sponsoring Organizations of the Treadway Commission).
Hence the definition adopted of internal controls is the one provided with reference to that document, namely, the set of processes, procedures and checks, accounting or otherwise, applied by the Board of Directors, the general management and the staff aimed at providing a reasonable assurance that objectives are met falling within the following categories:
• | implementation and optimization of operations (efficiency of the organization and of the processes aimed at making sure that these procedures are respected, protection of the assets and respect for the decisions and guidelines of the decision-making organs); |
• | reliability of the financial information (quality of the information and reporting systems making it possible to guarantee the reliability of the financial information); |
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• | conformity (observance by the Company of the laws, rules and regulations in effect); and |
• | internal controls make it possible to obtain a “reasonable assurance”-but not a certainty-that the risks will be controlled and that the set objectives will be reached. |
General organization of internal control |
Organization of internal control is centralized. The internal control structure and procedures are defined for the group by the central departments and the departments of the various operational functions. The subsidiaries, which manage the operating activities in the various countries in which the group works, are integrated into the working groups at the time of development of the most operational procedures and are responsible for the implementation of procedures in their regions. The internal control system of our subsidiaries is not very different from that of our headquarters, it is simply adapted to the size and function of the subsidiary.
An “internal control” project was undertaken by the finance department in 2003. A group was set up specifically to work on this project. This group defined the major project phases, established a time schedule and managed the implementation of some of the phases in 2003. This project was actively continued in 2007 as part of our quality goal of continuous improvement, including update of description of procedures, review of key controls and the annual evaluation of the primary processes that significantly impact the Company’s accounting and financial reporting.
To reach each of the internal control objectives, management has identified and gradually implemented the following general internal control principles:
Control environment |
This principle refers to the level of awareness of the staff and to the need for internal checks in the Company’s entire organization. It constitutes the basis of all other internal control elements of the Company (example: codes of ethics).
The Company has made efforts for some years to establish an adequate control environment by intensifying its actions on behalf of better implementation of the principles of corporate governance in its management. Thus, several codes of conduct including: Code of Corporate Governance, Code of Ethics, Code of Business Conduct and Code of Ethics for Financial Officers, have been in effect since 2002 or 2003 in compliance with the new obligations instituted by the U.S. law known as the “Sarbanes-Oxley Act”.
The Board of Directors and the various committees set up by that Board have significant roles in supervising internal controls. Their role is detailed in Item 6 of the report; however, we would like to specifically point out that:
• | The code of corporate governance specifies that “the Board of Directors’ objective is, by regular evaluation of its rules and of its operation, calling if appropriate on third parties from outside the Company, to optimize and perfect, insofar as possible, the development of the Company with respect to: the clarity and transparency of the information communicated by the Company, the clarity and transparency of strategic decision-making, of control and installation of tools adapted to correct information concerning the Company’s cash position and its commitments.” |
• | The audit committee’s assignment is to assist the Board of Directors in its supervisory assignment with respect to the integrity of the Wavecom accounts, the financial reporting system, the internal control system as regards accounting and finance, the services rendered by the independent auditors, the competence and the independence of those auditors, and as concerns observance by the Company of the ethical principles and of the legal and regulatory obligations. Commencing in 2006 this committee will conduct an annual self-evaluation of its function. |
• | The compliance committee’s assignment is to assist the Chief Executive Officer and the Chairman of the Board in connection with all responsibilities relating to Wavecom’s compliance with applicable rules and regulations in effect, as well as to the Wavecom code of ethics and to ensure that the internal control procedures are evaluated, tested and audited by selected internal auditors. The committee relies on the internal auditors, who are trained for the overall audit process function, to ensure that the necessary audits and controls are integrated into the Company’s management system. |
The executive committee, consisting of the Chief Executive Officer and his “direct reports”, representing key functions in the Company (including the heads of all three geographic regions – Europe, Middle-East and Africa (EMEA), Asia-Pacific (APAC) and the Americas, representatives from Finance, Human Resources, Marketing and Strategy, Research and Development, Operations and Quality, meet regularly in order to:
• | handle management of the Company; |
• | define the Company’s global strategy; |
• | review financial results, budget and earnings estimates |
• | review measurement and performance indicators that have been established; |
• | monitor progress on key projects, including the “internal control” project. |
62 WAVECOM - Annual Report Form 20-F 2007
Moreover the Company received its ISO 9001-2000 certification in November 2005 and its follow up audits in October 2006 and 2007. Wavecom’s ISO project studied the overall process flows within the Company and identified specific points to address in the additional internal control project covering all aspects of control and monitoring. We consider it essential to have coordination between these two projects in order to guarantee proper understanding by all employees of the processes and the consistency between their function and various Company activities. This approach facilitates process flows and ensures an overall understanding of our processes while identifying the key control points. In order to achieve this objective, Wavecom has trained a team of internal auditors who will carry out both system and internal control audits throughout the year.
A quality policy was put in place and widely communicated throughout the entire Company This policy encompasses three major points:
• | listen to our customers and secure their loyalty by meeting their needs for quality, value and response time through innovative products and services; |
• | maintain a culture of continuous improvement that values creativity and teamwork while respecting ethical and environmental policies; and |
• | collaborate with industry partners in expanding the market. |
Risk assessment |
This point focuses on identification and analysis of the risk factors that might affect attainment of objectives. Risk assessment makes it possible to define the control activities and subsequently develop action plans to reduce risks.
Risk assessment is carried out at all levels of the Company and by the various committees, but more particularly by the Risk Committee, which assists the Chief Executive Officer and the Board of Directors in analyzing and identifying management proposals concerning risks the Company faces.
The procedures for risk management have as its objectives:
• | to identify potential risks and evaluate their potential impact on the Company’s activity; |
• | to define and put in place action plans to regularly monitor and measure those risks that have been identified including those identified in Item 3, “Risk Factors” section of this report. |
The above-mentioned procedures include the following steps:
• | identification of all potential risks that can impact the activity of the Company; |
• | define a priority ranking of these risks as related to the probability that a risk could happen and the level of impact that such an event could have on the Company or its profitability; and |
• | identification of the main ways to prevent the risks identified as high-probability to happen by establishing key indicators to be monitored. |
This descriptive analysis in an ongoing process and will allow us to, over time, evaluate the efficiency and effectiveness of our internal controls.
Control activities |
This point concerns the application of the norms and procedures to ensure as much as possible appropriate implementation of the guidelines laid down by management.
Within the framework of the internal control project we pursued in parallel with our ISO certification, a substantial effort has been made since 2004 to ensure that all key processes are governed by procedures and policies common to the group. These procedures where documented as appropriate on an overall outline defined below:
• | Resource management procedures |
– | Human resources |
– | Information technology and infrastructure (including all financial and accounting procedures, policies and processes) |
– | Partnership management (suppliers, vendors, contract manufacturers and commercial partners) |
• | Operational procedures |
– | Customer account management |
– | Contracts (orders, production, shipment, invoicing and after-sales) |
– | Product management (feasibility, development, maintenance and end-of-life) |
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• | Management procedures |
– | Quality system process management |
– | Strategic processes (strategic plan, long range plan, marketing plan and budget) |
Information and communication |
This refers to a general process aimed at making sure that the relevant information is identified, gathered and disseminated within suitable periods so that the entire Company staff can meet its responsibilities. This principle relates to the information flows underlying effective internal control procedures, from the management guidelines to the action plan.
Management ensures that relevant information is shared promptly within the Company using communication tools and regular staff meetings.
Since January 1, 2004, the head office and the main subsidiaries have been using an integrated information system based on an SAP architecture.
Processes have been implemented to ensure that information system programs are developed and are maintained properly, in accordance with users’ requirements and in taking into account the necessary safety and security controls.
The Company has established a usage charter for the information system. This charter describes the rights and rules applicable to all employees which regulates the operation and usage of the Company Information system.
Monitoring |
This term refers to verification and periodic evaluation of the quality of internal controls by way of the supervisory activities carried out by management.
This monitoring takes place by way of the various committees set up by the Board of Directors. Within this framework, the powers of the compliance committee have been widened to include internal controls.
Since 2004 a group of people from various departments and regions of the Company have been trained in internal auditing, both within the framework of ISO certification and in connection with internal controls. At the current time, this group numbers approximately twenty. An audit conducted in 2007 covered all of the processes in the Wavecom organization including controls established in the context of implementation of Sarbanes-Oxley legislation in order to test the relevance and integration of the different controls. All the processes were covered in each region. Having conducted these audits allowed us to check the suitability of the processes throughout the entire Company, gauge employees’ understanding and to maintain our ISO 9001-2000 certification.
Points for improvement that are identified in audits are monitored for progress routinely by the Director of the Quality Systems and the follow-up is reviewed by internal auditors during subsequent audits.
Internal controls over financial statements closing process |
Organization of the financial function within the group |
The Group carries on its activity in an international environment, divided between the parent Company in France, which performs the functions of a head office and of the operating entity for the Europe-Middle East-Africa region, and the two main operational entities, in China (Hong Kong) and in the United States (North Carolina). Three smaller subsidiaries are located in Europe, and there is one dormant subsidiary in Asia.
Each of the three major legal entities has its own financial organization, under the responsibility of the group’s Chief Financial Officer.
Preparation of accounting and financial information |
The financial reports are developed on the basis of the information provided by the subsidiaries’ financial departments and the accounting firms for the foreign subsidiaries and on the basis of data internally gathered and processed through our systems for the parent Company. The subsidiaries’ data are transmitted monthly using a single group format and based on a schedule prepared by the head office finance departments.
All of the group entities are responsible for the information that they forward and for following common group procedures. In addition to monthly reporting of information, each entity prepares a detailed presentation of our accounts that are submitted to the CFO.
The “corporate accounting” department in France is responsible for preparing the financial statements. It ensures of the consistency of the information forwarded by the subsidiaries before aggregation and consolidation entries are made.
Two committees were established to coordinate preparation, review and communication of the published financial information and of the annual report in particular. The first (our Disclosure Committee) is charged with the preparation and
64 WAVECOM - Annual Report Form 20-F 2007
the coordination of documents that ensures that information that will be made public is relevant, correct and materially complete. It is made up of the Group CFO, the financial reporting director, the director of legal affairs and director of communication and investor relations. The second committee (our Review Committee) is made up of representatives of the finance area, the executive committee of the Company and the members of the Board of Directors. Each representative ensures the correctness of our information provided from their respective areas.
Monthly reporting |
We implemented a procedure to follow results centered on our monthly reporting processes. The Group financial controller is responsible for ensuring that the procedures are correctly followed. A detailed budget is created by the operational units in conjunction with the Group financial controller and is completed during the last quarter for the year to come. Each month a new forecast is developed for the 12 months to come.
A monthly meeting of the Group’s executive committee and the Group financial controller is held with the goal being to study the various reporting indicators and analyzing the differences between actual and budget or forecast figures in order to refine future forecasts. Action is taken, if necessary, in order to allow us to reach our stated goals.
Key processes |
Within the framework of the analysis of the risks connected with the reliability of financial information, the first stage in the internal control project consisted of making a formalized analysis of risks, aimed at identifying the processes having an effect on the financial information as well as the key risks and control relating thereto.
The most important key procedures and controls relate to the following processes:
• | entity level controls |
• | financial statement closing process; |
• | sales process; |
• | process for purchasing components; |
• | process concerning control and security of computer systems; |
• | process of the other operating purchases; |
• | payroll process. |
At the end of 2007, all key processes had been described and were implemented at the three principle subsidiaries. The key control points were identified for all selected cycles. An internal audit was conducted that included performing tests that evaluated the application of the key control points. The most important items to be improved that were identified in the internal audit are now being worked on and action plans have been expanded to include further improvements.
Compensation of Directors and Officers
General Policy |
It is the responsibility of our Nomination and Compensation Committee to review our general policy in terms of compensation of our directors and executive officers and issue proposals for our Board to decide. The objectives of this policy are to maintain proper incentives and recognition of the individual and collective performance of the key contributors to the success of Wavecom. In doing so, the Nomination and Compensation Committee evaluates objectively and subjectively the effective level of compensation and advantages in kind in Wavecom. This evaluation relies as much on Wavecom’s performance as on each individual’s performance in itself and in as much as it contributed to Wavecom’s performance. This evaluation is also made by a benchmarking with the comparable market levels of compensation. The Nomination and Compensation Committee review the salaries (split in fixed and variable parts, particularly for the CEO but also for the whole Steering Committee), compensation in kind (company cars, specific advantages such as scholarship allowance and housing), and also equity compensation (free shares and stock options).
We paid a total of €4,885,000 in compensation to our ten highest-paid directors and executive officers during the year ended December 31, 2007 (including €1,624,000 related to the payment of the retention bonus). Non-salaried board members earn fees based on their attendance at board and committee meetings; €250,000 in such directors’ fees were earned by non-salaried board members during 2007. Under French law, the aggregate amount of directors’ fees to be paid to our board members must be approved by our shareholders at a general meeting and such aggregate amount is allocated among board members by decision of the board.
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The table below sets forth the compensations paid to each of the Directors during the years 2005, 2006 and 2007:
(in euros) | Type of Compensation | 2005 | 2006 | 2007 | |||||
Michel Alard, Chairman of the Board of Directors | Fixed | 108,000 | 39,996 | 33,331 | |||||
Benefits in kind | (5,165 | ) | — | — | |||||
Variable | — | 30,000 | — | ||||||
Sign-on or departure bonus | — | — | — | ||||||
Directors’ Fees | — | — | 16,500 | ||||||
Aram Hékimian, Chief Executive Officer then Deputy Chief Executive Officer | Fixed | 108,000 | 39,996 | 33,331 | |||||
Benefits in kind | 701 | 3,475 | 2,027 | ||||||
Variable | — | 35,000 | — | ||||||
Sign-on or departure bonus | — | — | — | ||||||
Directors’ Fees | — | — | 14,000 | ||||||
Ronald D. Black, Chief Executive Officer | Fixed | 438,277 | 421,500 | 421,500 | |||||
Benefits in kind | 102,600 | 41,220 | 126,329 | ||||||
Variable | 274,000 | 302,000 | 381,000 | ||||||
Sign-on or departure bonus (see below | ) | 96,000 | — | — | |||||
André Chieng*, Board Member | Directors’ Fees | 6,548 | — | — | |||||
Delphis SA (Marc Fourrier)*, Board Member | Directors’ Fees | 26,193 | 24,828 | — | |||||
Bernard Gilly, Board Member | Directors’ Fees | 26,193 | 33,104 | 48,500 | |||||
Jean-François Heitz, Board Member | Director’s Fees | 13,096 | 35,918 | 44,000 | |||||
Stephen Imbler, Board Member | Directors’ Fees | 26,193 | 38,566 | 51,000 | |||||
Anthony Maher, Board Member | Directors’ Fees | 26,193 | 33,104 | 76,000 | |||||
* | These Board members have resigned from their position |
In addition to cash compensation, 38 of our employees including Dr. Black have received stock options, and four independent directors have received stock warrants. During 2007, we granted stock warrants to independent directors to purchase a total of 40,000 shares with an exercise price of €21.90 per share and an expiration date of May 16, 2011. During 2007, we granted stock options to executive officers to purchase a total of 372,650 shares, with an exercise price of €24.21 per share and an expiration date of June 7, 2017.
In addition, during 2007, 55 of our employees and Dr. Black were granted free shares. A total of 155,650 free shares were granted. Under French Law, the shares vest after a two-year period which means that they are only effectively acquired and owned by the beneficiaries after two years. This two year period shall expire on June 8, 2009. In addition, for a further two years, the beneficiary cannot transfer or sell the shares. This two-year period expires on June 8, 2011.
Ronald D. Black, Chief Executive Officer, joined Wavecom in August of 2004 and received total compensation €808,277 in 2005 including a sign-on bonus of €96,000, €723,500 in 2006 and 802,500 in 2007. In addition, Dr. Black has received to date, a total of 333,494 stock options, 302,700 founders warrants and 155,823 free shares (information regarding exercise prices of these awards is provided in this report). Dr. Black is also entitled to the use of a Company car and an expatriate package including a housing and school allowance of approximately €126,000 per year.
Michel Alard, Chairman of the Board, received in base salary €108,000 in 2005, €39,996 in 2006 and €33,331 in 2007. He received a performance award of €30,000 in 2006 but none in 2007. Aram Hékimian, Deputy Chief Executive Officer, received in base salary €108,000 in 2005, €39,996 in 2006 and €33,331 in 2007. He received a €35,000 performance award bonus in 2006 but none in 2007. Both Mr. Alard and Mr. Hékimian are entitled to the use of Company cars or the maintenance of one vehicle in lieu of a Company car.
Compensation paid to our Chief Executive Officer is monitored by the Compensation and Nomination Committee and is set by our Board of Directors. Dr. Black does not participate in nor vote on such decisions. The performance-based bonus of Dr. Black is decided by the Board of Directors based on the personal achievement and Company objectives.
Until July 31, 2007 and due to the fact that they were paid a salary, neither Mr. Alard nor Mr. Hékimian received any fees related to their positions as members of the Board of Directors, nor were they granted warrants, stock options or
66 WAVECOM - Annual Report Form 20-F 2007
founders’ warrants. From August 1, 2007 onwards, Mr. Alard and Mr. Hékimian no longer receive a salary and therefore receive directors’ fees as members of the Board.
In the event of a negotiated merger, acquisition of the Company, or hostile takeover bid on the shares of the Company, that results in Dr. Black being terminated within six months following this event and if Dr. Black is not offered an opportunity to perform functions of an equivalent level, Wavecom has undertaken to pay to Dr. Black a severance payment (except in case of gross or wrongful misconduct). The gross amount of this severance payment is equal to three times the annual fixed salary (i.e. three times €421,500), including the severance payment provided by the applicable collective bargaining agreement.
Dr. Black shall be entitled to participate in all employee’s benefit plans of the Company including, but not limited to pension, profit sharing, medical coverage, education, or other retirement or welfare benefits that the Company has adopted or may adopt, maintain or contribute to for the benefit of its senior executives at a level commensurate with his positions subject to satisfying the applicable eligibility requirements.
For the year 2007, the Board of Directors decided to grant a bonus of €281,000 to Ronald Black. The Board of Directors also fixed compensation for 2008 at €421,500 base compensation and €281,000 target performance bonus for Ronald Black.
Wavecom accrued for all its employees, for the years ended December 31, 2005, 2006 and 2007, €451,000, €507,000 and €710,000, respectively to provide pension, retirement or similar benefits.
Share Ownership and Option and Warrant Information
Except as described in Item 7 below, as of March 31, 2008, each of our directors and executive officers beneficially owns less than 1% of the share capital of Wavecom S.A. (and none of such share capital has voting rights which are different from those of our other shareholders).
On September 21, 1998, our shareholders authorized the creation of a stock option plan and a founders’ warrant plan for employees. This plan was modified at a shareholders’ meeting on December 19, 2001. As of December 31, 2007, there were outstanding options, founders warrants (BCEs), free shares and warrants (BSAs) to purchase a total of 2,538,064 shares, of which options, founders warrants, free shares and warrants to purchase 1,778,735 shares were held by our current directors and executive officers and of these a total of 883,256 shares were available for exercise pursuant to the stock option plan and the founder’s warrant plan.
During 2007, the following ten employees were granted the largest number of stock options or founders’ warrants:
Name | Position | Number of stock options or warrants granted | Exercise price per share | Final expiration date | |||||
Ronald Black* | Chief Executive Officer | 77,650 | €24.21 | June 7, 2017 | |||||
77,650 | Free shares | June 7, 2009 | |||||||
Philippe Guillemette* | Group Vice President of Marketing and Chief Technology Officer | 30,000 | €24.21 | June 7, 2017 | |||||
35,000 | Free shares | June 7, 2009 | |||||||
Anders Franzen* | Group VP, Chief Operating Officer and President of Wavecom Inc | 20,000 | €24.21 | June 7, 2017 | |||||
Emmanuel Walckenaer | Wavecom VP, Head of IDS Services | 20,000 | €24.21 | June 7, 2017 | |||||
Chantal Bourgeat* | Group VP for Finance & Administration and Chief Financial Officer | 15,000 | €24.21 | June 7, 2017 | |||||
Didier Dutronc* | Group VP and Head of Asia Pacific Region | 15,000 | €24.21 | June 7, 2017 | |||||
Dominique Cyne* | Group VP, Head of Research and Development | 15,000 | €24.21 | June 7, 2017 | |||||
Stefan Lindvall* | Group VP, Head of Americas Region | 15,000 | €24.21 | June 7, 2017 | |||||
Frank Souguir* | Group VP | 15,000 | €24.21 | June 7, 2017 | |||||
Pierre Teyssier* | Group VP of Operations | 15,000 | €24.21 | June 7, 2017 | |||||
* | Included in the group “executive officers” |
WAVECOM - Annual Report Form 20-F 2007 67
During 2007, the following ten employees exercised the largest number of stock options or founders’ warrants:
Name | Position | Number of stock options or founders’ warrants exercised in 2007 | Exercise price per stock option or founders’ warrant | ||||
Pierre Piver* | Group VP, head of Europe, Middle-East and Africa region | 20,000 | 8.07 | ||||
5,000 | 11.18 | ||||||
Luc Degaudenzi | Group VP, Program | 6,248 | 4.19 | ||||
7,916 | 9.62 | ||||||
3,332 | 10.62 | ||||||
Etienne Menut* | Group VP, Human Resources | 10,000 | 8.07 | ||||
Lisa-Ann Sanders | Investor Relations Director | 10,000 | 8.07 | ||||
Dominique Cyne* | Group Vice President for Research and Development | 2,394 | 4.19 | ||||
9,788 | 8.07 | ||||||
Didier Dutronc* | Group VP and Head of Asia Pacific Region | 5,000 | 10.62 | ||||
4,500 | 11.40 | ||||||
Franck Souguir* | Group VP | 6,000 | 9.62 | ||||
Olivier Beaujard* | Group VP, Business development | 5,000 | 4.19 | ||||
Chantal Bourgeat* | Group VP for Finance & Administration and Chief Financial Officer | 5,000 | 8.07 | ||||
Jamie Garroch | Product marketing Director | 2,700 | 4.19 | ||||
2,000 | 8.07 | ||||||
* | included in the group “executive officers”. |
68 WAVECOM - Annual Report Form 20-F 2007
The table below indicates the number of stock options, founders’ warrants, free shares or warrants granted to members of the Board of Directors or Executive Officers that have not been exercised:
Beneficiary | Title | Number of founders’ warrants, options, free shares or warrants granted and not exercised as of March 31, 2008 | Exercised average price, weighted by volume | Number of founders’ warrants, options or warrants eligible to be exercised as of December 31, 2007* | Exercised average price, weighted by volume | Price range in Euros | |||||||
Ronald Black | Chief Executive Officer | 792,017 | 6.50 | 468,410 | 5.32 | 3.29 – 10.62 | |||||||
Olivier Beaujard | Group VP, Business development | 33,530 | 42.57 | 25,402 | 54.85 | 4.19 – 139.52 | |||||||
Chantal Bourgeat | Chief Financial Officer & Group VP for Finance & Administration | 60,000 | 12.05 | 26,242 | 7.76 | 4.19 – 11.40 | |||||||
Dominique Cyne | Group Vice President for Research and Development | 57,000 | 12.88 | 14,166 | 10.38 | 4.19 – 11.40 | |||||||
Didier Dutronc | Group VP and Head of Asia-Pacific region | 70,000 | 14.50 | 36,284 | 7.68 | 4.19 – 11.40 | |||||||
Anders Franzén | Group VP, Chief Operating Officer | 76,000 | 11.68 | 19,787 | 10.62 | 10.62 | |||||||
Bernard Gilly | Board Member | 40,000 | 11.53 | 3,334 | 6.55 | 6.55 | |||||||
Philippe Guillemette | Group VP of Marketing and Chief Technology Officer | 157,750 | 17.88 | 65,347 | 28.22 | 4.19 – 103.23 | |||||||
Stephen Imbler | Board Member | 40,000 | 11.53 | 10,000 | 7.91 | 6.55 – 10.62 | |||||||
Jean-François Heitz | Board Member | 40,000 | 11.41 | 6,667 | 8.58 | 6.55 -10.62 | |||||||
Stefan Lindvall | Group Vice President, Head of Americas Region | 35,000 | 16.44 | 7,912 | 10.62 | 10.62 | |||||||
Anthony Maher | Board Member | 40,000 | 11.53 | 26,666 | 7.24 | 6.55 – 10.62 | |||||||
Etienne Menut | Group VP, Human Resources | 56,000 | 11.70 | 28,392 | 9.21 | 4.19 – 11.40 | |||||||
Claire Oliver | Group Director of Quality | 62,438 | 70.43 | 55,874 | 76.42 | 4.19 – 139.52 | |||||||
Pierre Piver | Group VP and Head of Europe, Middle-East and Africa region | 76,000 | 10.14 | 25,678 | 7.36 | 4.19 – 11.40 | |||||||
Frank Souguir | Group VP | 58,000 | 12.33 | 19,714 | 7.18 | 4.19 – 10.62 | |||||||
Pierre Teyssier | Group VP of Operations | 66,000 | 16.52 | 34,220 | 16.92 | 4.19 – 39.18 | |||||||
Hugues Waldburger | Director of Performances and Validation | 19,000 | 12.29 | 9,161 | 7.80 | 4.19 – 10.62 | |||||||
* | Founders’ warrants, options and warrants eligible to be exercised as of December 31, 2007, are included in the column dated March 31, 2008. |
The table below indicates the number of exercised options granted and exercised by the ten highest paid non-board-member employees:
Total number of options or free shares granted | Weighted average price in euros | Plan of options from June 7, 2007 | Plan of free shares from June 7, 2007 | ||||||
Options or free shares granted, during 2007 to the ten highest paid employees. | 187,000 | 19.42 | 150,000 | 37,000 | |||||
Options or founders’ warrants exercised, during 2007 by the ten highest paid employees. | 67,682 | 8.71 | — | — | |||||
Options, founders’ warrants or free shares granted to the top ten salaried beneficiaries | 739,188 | ||||||||
WAVECOM - Annual Report Form 20-F 2007 69
The table below sets forth the options and founders’ warrants granted to each director in 2007:
Options, free shares or founders’ warrants granted during 2007 to Board Members | Number of total options, founders’ warrants or free shares granted | Exercise Price in euros | Last Possible Exercise Date | Plan from June 7, 2007 (options) | Plan from June 7, 2007 (free shares) | Plan from May 16, 2007 (BSA | ) | ||||||
Ronald Black | 155,300 | 24.21 | 07/06/2012 | 77,650 | 77,650 | ||||||||
Bernard Gilly | 10,000 | 21.90 | 16/05/2011 | 10,000 | |||||||||
Jean-François Heitz | 10,000 | 21.90 | 16/05/2011 | 10,000 | |||||||||
Stephen Imbler | 10,000 | 21.90 | 16/05/2011 | 10,000 | |||||||||
Anthony Maher | 10,000 | 21.90 | 16/05/2011 | 10,000 | |||||||||
Three Board Members exercised 69,999 options during 2007.
Options expire ten years after the grant date (except options granted to Board members that expire four or five years after grant date). Founders’ warrants, which were issued to our French tax resident employees, expire after five years, as is required by French law. Any founders’ warrants remaining unexercised at the expiration date automatically convert to stock options with a five-year term remaining. Employees leaving the Company have up to three months following their date of termination of employment to exercise eligible founders’ warrants or options; any remaining unvested or unexercised founders’ warrants or options are then forfeited. Founders’ warrants were issued to French employees to take advantage of favourable tax treatment for both employees and Wavecom. These tax benefits are not available for stock options in France. Other than the expiration dates, the terms of the founders’ warrants are identical to the stock options.
Employees and independent contractors
The table below sets forth our total number of employees and independent contractors at the end of each of the past three years:
At | Employees | Independent contractors and temporary employees | Total | ||||
December 31, 2007 | 420 | 63 | 483 | ||||
December 31, 2006 | 384 | 56 | 440 | ||||
December 31, 2005 | 290 | 40 | 330 | ||||
Headcount increased by 43 during 2007.
Over the years, as is common practice for French companies operating in technology sectors, a fairly significant number of the staff at our Company has consisted of independent contractors and temporary employees. We have, however, reduced our dependence on independent contractors, over the last three years this number, as a percentage of total employees, has remained relatively stable – approximately 12% at year-end 2005 and 12.5% at December 31, 2006 and 13% at December 31, 2007.
The employee turnover rate for Wavecom S.A. in France (as measured by attrition, excluding headcount reduction resulting from restructurings) for the last three years was: 10.8% in 2005, 5% in 2006 and 2.5% in 2007.
70 WAVECOM - Annual Report Form 20-F 2007
We employ a large number of engineers (both as salaried employees and independent contractors) most of whom are based in France and in the United States. As of December 31, 2006 the breakdown of staff (salaried and independent contractors) by functional areas and geography was as follows:
Function | % of total | ||
Research and Development | 53 | % | |
Production, logistics and quality | 6 | % | |
Sales and Marketing | 27 | % | |
Finance and Administration | 14 | % | |
Geography | % of total | ||
Europe, Middle East, Africa | 64 | % | |
Asia Pacific | 14 | % | |
Americas | 22 | % | |
Employment contracts with all French employees are subject to the provisions of the convention collective SYNTEC, the French collective bargaining agreement applicable to employees in our industry. In addition, as is required by French law, the Company management holds periodic meetings with employee representatives of the workers’ council (comité d’entreprise), employees’ representatives (délégués du personnel) and security and safety committee (comité d’hygiène et de sécurité). There is no union representative inside the Company.
WAVECOM - Annual Report Form 20-F 2007 71
Item 7: Major shareholders and Related Party Transactions
Major shareholders
The following table sets forth certain information regarding beneficial ownership of our shares (including ADSs) by each person known by us to own beneficially more than 5% of our outstanding shares (none of whom has voting rights which are different from our other shareholders) as of March 31, 2008, based on our legal share capital of 15,800,131 shares as of that date. To our knowledge, we are not directly or indirectly owned or controlled by any corporation or by any foreign government.
Stock options, founders warrants and free shares awarded to employees represent a potential increase of 16.1% of our current outstanding shares.
Shares beneficially owned | |||||
Name of beneficial owner | Number | % | |||
Michel Alard(1) | 1,588,533 | 10.0 | |||
Aram Hékimian(2) | 1,800,381 | 11.4 | |||
Jo Hambro Capital | 903,641 | 5.7 | |||
Lansdowne Partners | 831,455 | 5.3 | |||
Sloane Robinson | 898,654 | 5.7 | |||
Total | 6,022,664 | 38.1 | |||
% Based on total number of shares outstanding, as of March 31, 2008 | 15,800,131 | ||||
(1) | Michel Alard’s share total includes shares owned by his immediate family. |
(2) | Aram Hékimian’s share total includes shares owned by his immediate family. |
72 WAVECOM - Annual Report Form 20-F 2007
The following table presents the shares owned by major shareholders, Wavecom directors and the dilution potential related to options held by Wavecom employees and directors. French law requires all directors to hold at least one share of the Company’s stock.
As of March 31, 2008 | Dilution potential(2) | ||||||||||||
Shares | % | Voting rights | % | Shares | % | ||||||||
Major shareholders | |||||||||||||
Aram Hékimian, Director(1) | 1,800,381 | 11.4 | 1,800,381 | 11.8 | 1,800,381 | 9.8 | |||||||
Michel Alard, Director(1) | 1,588,533 | 10.0 | 1,588,533 | 10.4 | 1,588,533 | 8.7 | |||||||
Jo Hambro Capital | 903,641 | 5.7 | 903,641 | 5.9 | 903,641 | 4.9 | |||||||
Sloane Robinson | 898,654 | 5.7 | 898,654 | 5.9 | 898,654 | 4.9 | |||||||
Lansdowne Partners | 831,455 | 5.3 | 831,455 | 5.5 | 831,455 | 4.5 | |||||||
Directors | |||||||||||||
Ronald Black, Director | 1 | N/S | 1 | N/S | 1 | N/S | |||||||
Bernard Gilly, Director | 1 | N/S | 1 | N/S | 1 | N/S | |||||||
Jean-François Heitz, Director | 100 | N/S | 100 | N/S | 100 | N/S | |||||||
Stephen Imbler, Director | 10,000 | N/S | 10,000 | N/S | 10,000 | N/S | |||||||
Anthony Maher, Director | 1 | N/S | 1 | N/S | 1 | N/S | |||||||
Other | |||||||||||||
Shares held in treasury stock(3) | 544,322 | 3.4 | — | — | 544,322 | 3.0 | |||||||
Shares held by non-director employees | 1,586,047 | 8.7 | |||||||||||
Shares held by directors | 952,017 | 5.2 | |||||||||||
Public | 9,223,042 | 58.4 | 9,223,042 | 60.5 | 9,223,042 | 50.3 | |||||||
TOTAL | 15,800,131 | 100.0 | 15,255,809 | 100.00 | 18,338,195 | 100.0 | |||||||
(1) | Figures include shares and/or voting rights held directly or indirectly (both registered and non-registered) by members of their families. |
(2) | Figures and percentages take into account 2,538,064 shares that could be issued if all options and founders warrants were exercised. |
(3) | As of December 31, 2007 the Company held 544,322 shares that were part of 2 repurchase programs with a purchase price of the shares going from € 7,94 to € 20,21. |
Major shareholders have the same voting rights as all shareholders: one share equals one vote.
The Company has no knowledge of any other significant shareholders than those mentioned above.
WAVECOM - Annual Report Form 20-F 2007 73
Major changes in ownership
Several of our directors and executive officers sold shares in our initial public offering in June 1999, in our follow-on public offering in June 2000 and during the course of 2003 and 2004. Mr. Michel Alard, Chairman of the Board of Directors sold a total of 57,000 Wavecom shares in November 2005 at an average selling price of €11.79. In 2007, M. Michel Alard (and his immediate family) sold 119,000 Wavecom shares at prices ranging between €19.39 and €21.29. In 2007, M. Aram Hékimian (and his immediate family), Deputy CEO until October 22 2007, sold 250,000 Wavecom shares at prices ranging between €21 and €27.11.
The following table sets forth the related historic changes in these holdings as a percentage of our legal capital as of the given date:
Name | Percentage as of March 31, 2006 | Percentage as of March 31, 2007 | Percentage as of March 31, 2008 | * | ||||
Michel Alard | 11.9 | 11.0 | 10.0 | |||||
Aram Hékimian | 14.2 | 13.2 | 11.4 | |||||
Delphis S.A. | 6.8 | 4.9 | — | |||||
David J. Greene | 3.2 | 4.6 | 2.9(1) | |||||
Jo Hambro Capital | — | — | 5.7(2) | |||||
Lansdowne Partners | — | — | 5.3(3) | |||||
Sloane Robinson | — | — | 5.7(4) | |||||
Total number of shares outstanding | 15,531,813 | 15,554,153 | 15,800,131 | |||||
* according to declarations given below : |
(1) | as of December 31, 2007, percentage declared to the S.E.C. |
(2) | as of July 31, 2007, percentage of our legal capital held by Jo Hambro Capital |
(3) | as of October 25, 2007, percentage of our legal capital held by Lansdowne Partners |
(4) | as of June 13, 2007, percentage of our legal capital held by Sloane Robinson |
Geographic Distribution of shareholders
There were nine holders of record of our ADSs and approximately 1,400 beneficial holders as of March 31, 2008. ADSs (1,718,330) represented approximately 10.6% of our issued and outstanding shares as of March 31, 2008. Our ADSs are issued by The Bank of New York, as depositary. Each ADS represents one share.
Related Party Transactions
None.
74 WAVECOM - Annual Report Form 20-F 2007
Financial Statements
See Item 18 and the financial statements beginning on page F-1 of this annual report.
Legal Proceedings
The Claims Committee meets regularly (seven meetings in 2007) to evaluate current or potential claims or proceedings and their future developments. This Committee is chaired by the Group Legal Director and has members from finance, quality and sales. One of the objectives of these monthly reviews is to consider any changes in the information relating to claims, to consider any changes in their status and to determine if and when provisions should be established. This committee also advises as to the management of current cases and proposes action plans.
Provisions have been made for each of the main proceedings. In compliance with AMF (Autorité des Marchés Financiers – the French stockmarket authority) recommendations, the committee implements a global provisioning methodology based on the following criteria:
• | litigation matters that are provisioned are either those involving disputes which have been brought before a judge or court, or those which have been precisely and clearly expressed by a claimant (on the legal grounds of the claim and the damage evaluation) ; |
• | the amount of the provision corresponds to a specific identified risk, analyzed case-by-case and after deliberation of the committee. |
We are not aware of any other threatened or potential material claim, demand or lawsuit involving Wavecom except as described in Note 13, page F-28 of notes to consolidated financial statements.
Except as disclosed elsewhere in this annual report, no significant change has occurred in our overall business or financial situation since the date of our most recent annual financial statements.
Wavecom has never paid dividends on its shares. We intend to retain any future earnings for investment in the development and expansion of our business and do not expect to pay any cash dividends on our shares in the foreseeable future.
WAVECOM - Annual Report Form 20-F 2007 75
Our shares are currently listed on NYSE Euronext (Eurolist compartment B) Paris (7306), and have been since June 14, 1999. Our ADSs are currently listed on the Nasdaq Global Market under the symbol “WVCM” and have been since June 9, 1999. The following table sets forth the range of high and low closing sale prices of our shares and ADSs for the periods indicated:
Per Share (€) | Per ADS ($) | ||||||||
High | Low | High | Low | ||||||
Year ended December 31, 2003 | €18.66 | €6.59 | $21.65 | $7.42 | |||||
Year ended December 31, 2004 | €6.46 | €6.17 | $7.98 | $7.72 | |||||
Year ended December 31, 2005 | €13.28 | €3.50 | $16.00 | $4.64 | |||||
Year ended December 31, 2006 | €12.69 | €7.17 | $15.50 | $9.33 | |||||
Year ended December 31, 2007 | € 29.00 | € 10.92 | $39.19 | $14.50 | |||||
Year ended December 31, 2006 | |||||||||
First Quarter 2006 | €12.12 | €8.31 | $13.90 | $10.39 | |||||
Second Quarter 2006 | €12.69 | €7.38 | $15.50 | $10.00 | |||||
Third Quarter 2006 | €11.69 | €9.99 | $13.01 | $0.00 | |||||
Fourth Quarter 2006 | €10.95 | €7.17 | $14.70 | $13.35 | |||||
Year ended December 31, 2007 | |||||||||
First Quarter 2007 | €17.48. | €10.92 | $22.90 | $14.50 | |||||
Second Quarter 2007 | €29.00 | €16.26 | $37.92 | $22.01 | |||||
Third Quarter 2007 | €28.50 | €15.65 | $39.19 | $22.44 | |||||
Fourth Quarter 2007 | €20.32 | €11.01 | $28.31 | $16.16 | |||||
Most recent six months | |||||||||
October 2007 | €20.32 | €16.38 | $28.31 | $22.96 | |||||
November 2007 | €16.83 | €11.64 | $24.14 | $17.60 | |||||
December 2007 | €14.24 | €11.01 | $20.62 | $16.16 | |||||
January 2008 | €12.43 | €7.35 | $18.18 | $11.59 | |||||
February 2008 | €11.81 | €7.83 | $16.96 | $11.82 | |||||
March 31, 2008 | €7.95 | €6.58 | $12.50 | $10.33 | |||||
(Source: http://club.euronext.com, and www.nasdaq-online.com) |
There were nine holders of record our ADSs and approximately 1,400 beneficial holders as of March 12, 2008. ADSs (1,672,144) represented approximately 10.6% of our issued and out0standing shares as of March 2, 2008. ADSs are issued by The Bank of New York, as depositary. Each ADS represents one share.
On March 31, 2008 the closing price for our ADSs on the Nasdaq Global Exchange was $11.66 and the closing price for our shares on the NYSE Euronext (Eurolist Compartment B) was €7.40.
76 WAVECOM - Annual Report Form 20-F 2007
Item 10: Additional Information
The description of our organizational documents filed with the Securities and Exchange Commission on Form F-1, registration number 333-11764, on June 6, 2000, and set forth therein under the section “Description of Share Capital” is incorporated by reference in this Annual Report, except to the extent that it has been updated by the information set forth below. An English translation of our By-Laws is attached as Exhibit 1 to this Annual Report.
Our objects and purposes, as specified in Article 3 of our By-Laws, are, in France and abroad: fundamental and applied research, and the development of systems and products in the areas of radio-transmission, radio-communication, telecommunications, electronics and data processing markets; and, within these sectors: the design, manufacturing and commercialization of components, products and software; any provision of services; the registration and exploitation of patterns, patents, trademarks, and manufacturing processes; the establishment, organization, and delivery of lectures, seminars, debates, conferences and more generally of any activity relating to training schemes; the publishing of books, newspapers, information bulletins, articles and the distribution of any audio-visual aids; the direct or indirect holding of shares within any existing companies or companies to be set up, the business purposes of which is linked, related or similar to that of the Company; and more generally, any industrial, commercial, financial, civil, personal property or real estate operations directly or indirectly linked to the business purposes stated above or related or similar to business purposes or likely to facilitate the performance or development thereof.
Composition of share capital
We have only one class of shares. As of December 31, 2007, this class consisted of 15,796,591 authorized ordinary shares all of which were outstanding as of such date, with a nominal value of €1 per share, resulting in a share capital of €15,796,591 in nominal value, as approved by the Board of Directors on January 29, 2008. This number includes 544,322 shares that are held in treasury and are deemed to be outstanding under French law but have no voting or dividend rights. All of our outstanding shares are fully paid. Each share is entitled to one vote on all matters submitted to our shareholders.
Dividend and liquidation rights
Upon recommendation of our Board of Directors, our shareholders may decide to allocate all or a part of any distributable profits among special or general reserves, to carry them forward to the next fiscal year as retained earnings, or to allocate them to the shareholders as dividends. shareholders holding a certain percentage (according to a formula relating to the Company’s share capital) of our shares or a duly authorized association of shareholders holding their shares in registered form for at least two years and holding a certain percentage (1%) of our voting rights may require our Board of Directors to propose the declaration of a dividend at an ordinary general meeting of shareholders. If shareholders at this meeting approve the proposal, dividends are declared.
Attendance and voting at shareholders’ meetings
Our Board of Directors is required to convene an annual general meeting of shareholders for approval of the annual accounts. This meeting must be held within six months of the end of our fiscal year. However, the president of the French Commercial court (or “tribunal de commerce”), may order an extension of this six-month period. We may convene other ordinary and extraordinary meetings at any time during the year. Meetings of shareholders may be convened by our Board of Directors or, if it fails to call a meeting, by our statutory auditors or by a court-appointed agent. A Shareholder or shareholders holding at least 5% of our share capital, a duly authorized association of shareholders holding their shares in registered form for at least two years and holding a certain percentage (1%) of our voting rights, or the Workers Council or another interested party under certain circumstances, may request that the court appoint an agent. The notice of a meeting must state the agenda for the meeting.
French law requires that a preliminary notice of a listed Company’s general shareholders’ meeting be published in the Bulletin des annonces légales obligatoires (“BALO”) at least 35 days prior to the meeting. The preliminary notice must first be sent to the French securities authority, the Autorité des marchés financiers (“AMF”) with an indication of the date it is to
WAVECOM - Annual Report Form 20-F 2007 77
be published in the BALO. The AMF also recommends that such preliminary notice be published in a newspaper of national circulation in France. The preliminary notice must include the agenda of the meeting and a draft of the resolutions that will be submitted to a shareholders’ vote. Up to 25 days before the date of the corresponding shareholder meeting, one or more shareholders holding a certain percentage, (currently 1.76% (according to a formula relating to the Company’s share capital) of our share capital, a duly authorized association of shareholders holding their shares in registered form for at least two years and holding a certain percentage of our voting rights (1%), or the Employee Committee may propose additional resolutions.
Under French law, a quorum requires the presence, in person or by proxy (including those voting by mail) of shareholders having at least (1) 20% of the shares entitled to vote in the case of an ordinary general shareholders’ meeting or (2) 25% of the shares entitled to vote in the case of any other extraordinary general shareholders’ meeting. If a quorum is not present at any meeting, the meeting is adjourned. There is no quorum requirement when an ordinary general meeting is reconvened, but the reconvened meeting may consider only questions which were on the agenda of the adjourned meeting. When an extraordinary general meeting is reconvened, the quorum required is 20% of the shares entitled to vote. If a quorum is not present at a reconvened meeting requiring a quorum, then the meeting may be adjourned for a maximum of two months. French law regarding quorum requirements as described above do not meet Nasdaq’s quorum requirement of Rule 4350(f) of the rules of the Nasdaq stock market which requires a quorum to be the presence of at least one third of the outstanding shares of the Company’s voting stock. While Wavecom has received an exemption to this rule from Nasdaq, it makes every effort to encourage Shareholder participation at shareholders’ meetings, including holding the meetings at easily accessible sites in central Paris.
Repurchase and redemption of shares
Under French law, we may not acquire our shares except:
• | to reduce our share capital under certain circumstances with the approval of our shareholders at an extraordinary general meeting; |
• | to provide shares for distribution to employees under a profit-sharing or share option plan; and |
• | for a specific purpose (including stabilization of quotations on a French regulated stock exchange) approved by our shareholders at an ordinary general meeting, such shareholders’ authorization being given for a period to be decided by the shareholders’ resolution and which may not exceed 18 months. |
The amounts repurchased under (2) and (3) may not, in either case, result in us holding more than 10% of our issued shares. In the event that such repurchases result in us holding more than 10% of our issued shares, we are required to transfer any shares in excess of the 10% threshold within one year. French law requires that we cancel any shares in excess of this 10% limit that have not been transferred within the one-year period. Shares repurchased under (3) may be cancelled by an extraordinary general shareholders’ meeting, although no more than 10% of our registered capital may be cancelled in any 24-month period.
On May 16, 2007, our shareholders approved a new share repurchase program to replace the existing one. Under the share repurchase program, the Company currently holds 3.44% of its shares in treasury stock (544,322 shares). A resolution will be put forth at the general shareholders meeting of May 14, 2008 to approve a new share repurchase program to replace the current one. We are required to notify the AMF (French stock market authority) on a monthly basis of our trading program in our own shares.
When we purchase our own shares, they must be held in registered form and be fully paid. These shares are deemed to be outstanding under French law, but are not entitled to any dividends or voting rights, and we may not exercise preferential subscription rights. Our shareholders, at an extraordinary general meeting, may decide not to take such shares into account in determining the preferential subscription rights attached to the other shares. In the absence of such a decision, the rights attached to any shares held by us must either be sold on the market before the end of the subscription period or distributed to other shareholders on a pro rata basis.
As of December 31, 2007, we held:
• | 156,345 shares purchased in March 2003 at prices ranging from €7.94 to €8.69, |
• | 387,977 shares purchased in July and August 2007 at prices ranging from €18.80 to €20.21. |
At the extraordinary meeting of shareholders of December 22, 2005, the shareholders authorized the board to grant 156,345 free shares to the employees or the CEO of the Company. Under this authorization, 155,673 free shares were granted by the board on May 17, 2006. At the extraordinary meeting of shareholders of February 9, 2007, the shareholders authorized the board to grant 155,300 free shares to the employees or the CEO of the Company. At the extraordinary meeting of shareholders of May 16, 2007, the shareholders authorized the board to grant 233,000 free
78 WAVECOM - Annual Report Form 20-F 2007
shares to the employees or the CEO of the Company. Under these authorizations, 155,650 free shares were granted by the board on June 7, 2007.
Requirement for holdings exceeding certain percentages
French law provides that any individual or entity, acting alone or in concert with others, that comes or ceases to hold, directly or indirectly, more than 5%, 10%, 15%, 20%, 25%, 1/3, 50%, 2/3, 90%, 95% of our outstanding voting shares (including a holder of ADS) or the voting rights attached to our shares, must notify us by registered letter (with return receipt) within five trading days, inclusive, from the date that the threshold is crossed by virtue of the total number of shares held. Such individual or entity must also notify the AMF by registered letter (with return receipt) within five trading days of exceeding or falling below such thresholds, either above or below. A filing fee, determined by the AMF, may be assessed at the time a declaration is made. Information regarding the passing of thresholds of ownership is made public by the AMF. Failure to comply with the above stated stipulations will result in the suspension of the voting rights attached to at the shares exceeding the thresholds crossed and not declared at all shareholders meetings which could be held up until the expiration of a time limit of two years, inclusive, from the date that a corrective declaration is made. Also, a shareholder who does not comply with the notification requirements may have all or part of its voting rights suspended for up to 5 years by the commercial court at the request of our Chairman, any of our shareholders or the AMF, or may be subject to criminal penalties and fines.In case of the crossing of the 10% and 20% thresholds, the individual acting alone or in concert with others, must notify us and the AMF by registered letter (with return receipt) within ten trading days of his intentions as to the objectives he is pursuing. To permit holders to give the required notice, we are required to publish in the BALO (the official journal for legal notifications in France) no later than 15 calendar days after the annual ordinary general meeting of shareholders information with respect to the total number of voting rights outstanding as of the date of such meeting. In addition, if the number of outstanding voting rights changes by 5% or more between two annual ordinary general meetings, we are required to publish in the BALO, within 15 calendar days of such change, the number of voting rights outstanding and provide the AMF with written notice of such information. The AMF publishes the total number of voting rights so notified by all listed companies in a weekly notice (avis), indicating the date that each such number was last updated. Furthermore, every month, we must notify the AMF of, and publish, the total number of voting rights and shares of our share capital if the number of available voting rights and shares so notified has changed compared with the last published information. Under the regulations of the AMF and subject to its limited exemptions, any person or persons acting in concert who comes to own more than 33 1/3% of our share capital or voting rights must initiate a public tender offer for the balance of our share capital and the balance of the securities giving access to our share capital (including, for these purposes, all securities convertible into or exchangeable for equity securities).
We have only one class of shares. As of December 31, 2007, this class consisted of 15,796,591 authorized ordinary shares all of which shares were outstanding as of such date, with a nominal value €1 per share, resulting in a share capital of €15,796,591 in nominal value, as approved by the Board of Directors on January 29, 2008. This number includes 544,322 shares that are held in treasury and are deemed to be outstanding under French law but have no voting or dividend rights. All of our outstanding shares are fully paid. Each share is entitled to one vote on all matters submitted to our shareholders.
Material Contracts
In 2007, we entered into an entirely renegotiated definitive manufacturing agreement with Solectron, now part of the Flextronics group. A preliminary agreement had been negotiated and signed on August 16, 2005. This definitive agreement is in fact composed of three different agreements: a Cooperation Agreement, a Global Manufacturing Agreement and a Supply Chain Agreement. All three agreements were finalized and executed on November 29, 2007. The agreements are non transferable without the prior consent of the other party. Our relationship with Solectron is further described in Item 3 Key Information – Risk Factors.
A Share Purchase Agreement was signed with the shareholders of Anyware Technologies on January 31, 2008, relating to the acquisition by Wavecom of 100% of the shares of Anyware Technologies.
We have an important customer, distributor and supplier base, with whom we have either signed contracts or we operate under our general terms and conditions. It is not unusual in our industry that these contracts be non transferable without the prior consent of the other party, and moreover could be terminated in case of change of control.
Exchange Controls
Under current French exchange control regulations, there are no limitations on the amount of payments that may be remitted by us to non-residents of France. Laws and regulations concerning foreign exchange controls do require, however,
WAVECOM - Annual Report Form 20-F 2007 79
that all payments or transfers of funds made by a French resident to a non-resident be handled by an authorized intermediary bank. All credit establishments in France, including all registered banks, are accredited intermediaries.
Neither French law nor our by-laws presently impose any restrictions on the ability of non-French holders to hold or vote the Shares.
Taxation
General |
The following discussion generally summarizes the material French tax consequences and the material U.S. federal income tax consequences of the purchase, ownership and disposition of shares or ADSs by U.S. holders. U.S. holders are holders who are for United States federal income tax purposes:
• | individuals who are citizens or residents of the United States; |
• | corporations, or other entities, taxable as corporations, created or organized under the laws of the United States or of any political subdivision thereof or the District of Columbia; |
• | estates, the income of which is subject to U.S. federal income taxation regardless of its source; or |
• | trusts, the administration of which are subject to the primary supervision of U.S. courts and one or more U.S. persons have the authority to control all substantial decisions of the trusts; |
• | and, solely for purposes of the discussion of French tax consequences below, only the above-described holders: |
• | whose ownership of shares or ADSs is not effectively connected with a permanent establishment or fixed base in France; |
• | who, in the case of individuals or other non-corporate holders, other than partnerships or trusts, are residents of the United States; |
• | that, in the case of United States corporations other than regulated investment companies, do not own, directly or indirectly, 10% or more of our outstanding voting share capital; |
• | that, in the case of United States corporations that are regulated investment companies, do not own, directly or indirectly, 10% or more of our outstanding voting share capital if less than 20% of such corporation’s shares are owned by persons who are not citizens or residents of the United States; |
• | that in the case of partnerships or trusts that are treated as residents of the United States as defined by the income tax convention between the United States and France dated August 31, 1994 (referred to herein as the U.S.-France Income Tax Convention), to the extent that its partners, beneficiaries or grantors are themselves individuals or other non-corporate entities that are residents of the United States, or United States corporations, other than regulated investment companies, that do not own, directly or indirectly, 10% or more of our outstanding voting share capital. |
This discussion may not describe all of the tax considerations related to the purchase, ownership and disposition of shares or ADSs that may be relevant to a holder in light of that holder’s particular tax situation. In particular, this discussion deals only with holders that hold shares or ADSs as capital assets, as that term is defined in the U.S. Internal Revenue Code, and does not address special tax rules applicable to special classes of taxpayers, such as U.S. expatriates, regulated investment companies, financial institutions, insurance companies, holders that own, directly, indirectly or by attribution, 10% or more of our outstanding voting share capital, tax-exempt organizations, securities dealers, persons subject to the U.S. alternative minimum tax, persons who are owners of an interest in a partnership or other pass-through entity that is a holder of shares or ADSs, persons that will hold shares or ADSs as part of an integrated investment, including a straddle, hedging or conversion transaction, comprised of shares or ADSs and one or more other positions for tax purposes and persons that have a functional currency other than the U.S. dollar. The discussion also does not include the tax consequences of the exchange or other disposition of foreign currency in connection with the purchase or disposition of shares or ADSs.
The statements on United States tax law are based on the tax laws of the United States, and the statements on French tax law are based upon the tax laws and practice of France, in effect on the date of this annual report, as well as on the U.S.-France Income Tax Convention, as in effect on such date, all of which are subject to change, possibly with retroactive effect. In addition, the statements are based, in part, upon the representations of the Bank of New York and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
This discussion is intended to be a general summary and does not constitute a complete and in depth analysis of all potential tax effects that may affect ownership or disposition of the shares or ADSs and does not encompass all individual circumstances. Owners and prospective purchasers of shares or ADSs are urged to consult their own advisors as to the tax consequences of the purchase, ownership and disposition of shares or
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ADSs in light of their particular circumstances, including the effect of any state or local and other foreign tax laws.
French taxation of U.S. holders |
The following discussion generally summarizes the material French tax consequences to U.S. holders of the acquisition, ownership and disposition of shares or ADSs.
Holders of ADSs deemed to be owners of shares: For purposes of the U.S.-France Income Tax Convention, owners of ADSs will be treated as the owners of the shares represented by such ADSs. Exchanges, deposits and withdrawals of shares for ADSs or ADSs for shares by a holder will not result in the imposition of a French tax.
As of January 1, 2005, the “avoir fiscal” or tax credit system has, with certain exceptions, been terminated and replaced by a rule where, generally speaking, 50% of the dividend is subjected to French income tax. This rule applies to individuals who are non-residents of France as well as residents, to the extent the non-resident individual is resident in a treaty country.
The U.S.-France Income Tax Convention generally provides that an individual shareholder who is resident of the United States and fulfils specific conditions may generally apply to the French tax authorities for the following:
• | a lower rate of withholding tax, generally 15%; and |
• | for dividends declared in 2004 but actually distributed in 2005, a refund of the “avoir fiscal”, after deduction of withholding tax payable on the “avoir fiscal” providing the application is made prior to January 1, 2006. |
We do not expect to pay dividends in the foreseeable future. If we do pay a dividend, U.S. holders are urged to consult their own tax advisors as to the application of the U.S.-France Income Tax Convention and the internal tax law of France to their particular circumstances
Sale, exchange or other disposition of shares or ADSs: |
Under the U.S.-France income tax convention, no French tax is levied on any capital gain derived from the sale, exchange or other disposition of shares or ADSs by a U.S. holder.
Estate and Gift Tax |
Under the U.S.-France Estate and Gift Tax Convention, dated November 24, 1978, a transfer of shares or ADSs by gift or by reason of the death of a U.S. holder entitled to benefits under that convention will not be subject to French gift or inheritance tax, unless the donor or the decedent was domiciled in France at the time of making the gift, or of his or her death, or the shares or ADSs were used or held for use in the conduct of a business or profession through a permanent establishment or fixed base in France.
The new Estate and Gift Tax Protocol, signed on December 8, 2004, but not yet ratified, will not affect the above but will remedy some of the negative estate planning consequences for French nationals, and will treat them generally in the same manner as U.S. citizens.
Wealth Tax |
You will not be subject to French wealth tax for your shares or ADSs if both of the following apply to you:
• | you are not a French resident for purposes of French taxation; and |
• | you own less than 10% of Wavecom’s share capital or ADSs, either directly or indirectly, provided your shares do not enable you to exercise influence over Wavecom. |
Transfer taxes |
Transfers of a listed company’s shares will not be subject to French registration or transfer taxes, unless the transfer is affected by means of a written agreement that is executed within France. Should such written agreement be executed within France, it would be subject to transfer taxes at the rate of 1.1% to a maximum of €4,000 per transaction. A stock exchange stamp may be due in some cases.
U.S. Taxation of U.S. Holders |
The following discussion generally summarizes the material U.S. federal income tax consequences to U.S. holders of the purchase, ownership and disposition of shares or ADSs.
Holders of ADSs deemed to be owners of shares: For purposes of the U.S. Internal Revenue Code, a U.S. holder of ADSs will be treated as the owner of the underlying shares represented by such ADSs. Exchanges, deposits and withdrawals of shares for ADSs or ADSs for shares by a U.S. holder will not result in recognition of gain or loss for U.S. federal income tax purposes.
WAVECOM - Annual Report Form 20-F 2007 81
Dividends: Subject to the discussion below under the heading Passive Foreign Investment Company, the gross amount of a cash distribution (including the amount of foreign taxes, if any, withheld therefrom) paid on a share or ADS will be a dividend for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). “avoir fiscal” and “précompte” payments will be considered dividends to the same extent. To the extent that a distribution exceeds our earnings and profits, it will be treated as a non-taxable return of capital to the extent of the U.S. holder’s adjusted tax basis in such share or ADS and thereafter as capital gain. Dividends paid by us generally will be treated as foreign source income and will not be eligible for the dividends-received deduction generally allowed to corporate shareholders under the U.S. federal income tax law.
Dividends paid in euros will be includable in income in a U.S. dollar amount based on the prevailing U.S. dollar-euro exchange rate on the date of receipt by the depositary, in the case of ADSs, or the date of receipt by the U.S. holder of shares, whether or not the payment is converted into U.S. dollars at that time. A U.S. holder will have a tax basis in any euros distributed equal to such U.S. dollar amount. Any gain or loss recognized upon a subsequent sale or conversion of the euros generally will be U.S. source ordinary income or loss. A U.S. holder may also recognize foreign currency gain or loss, which will be U.S. source ordinary income or loss, on a subsequent conversion or other disposition of any refund of the excess withholding tax initially withheld from a dividend payment if the refund is converted into U.S. dollars at an exchange rate different than the rate used to translate the U.S. holder’s dividend income.
Dividend income is generally taxed as ordinary income. However, a maximum U.S. federal income tax rate of 15% will apply to “qualified dividend income” received by individuals (as well as certain trusts and estates) in taxable years beginning before January 1, 2011, provided that certain holding period requirements are met. “Qualified dividend income” includes dividends paid on shares of U.S. corporations as well as dividends paid on shares of “qualified foreign corporations” if, among other things: (i) the shares of the foreign corporation are readily tradable on an established securities market in the U.S. or (ii) the foreign corporation is eligible with respect to substantially all of its income for the benefits of a comprehensive income tax treaty with the U.S. which contains an exchange of information program (a “qualifying treaty”). ADRs backed by our shares are readily tradable on the Nasdaq National Market. In addition, the U.S.-France income tax convention is a qualifying treaty. Accordingly, we believe that dividends paid by us with respect to our shares or ADSs should constitute “qualified dividend income” for U.S. federal income tax purposes, provided that the holding period requirements are satisfied and none of the other special exceptions apply.
The amount of foreign income taxes that may be claimed as a credit against U.S. federal income tax in any year is subject to certain complex limitations and restrictions, which must be determined on an individual basis by each U.S. holder. The limitations include, among others, rules that may limit foreign tax credits allowable with respect to specific classes of income to the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends paid by us generally will be foreign source “passive income” for U.S. foreign tax credit purposes.
We do not expect to pay dividends in the foreseeable future. If we do pay a dividend, U.S. holders are urged to consult their own tax advisors as to the application of the U.S.-France Income Tax Convention and the U.S. federal income tax rules applicable to dividends.
Sale, exchange or other disposition of shares or ADSs: Unless a non-recognition provision applies, upon a sale, exchange or other disposition of shares or ADSs, a U.S. holder will recognize gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized (determined in U.S. dollars) upon the disposition and such U.S. holder’s adjusted tax basis in the shares or ADSs. Subject to the discussion below under the heading “Passive Foreign Investment Company”, such gain or loss generally will be a capital gain or loss. Such capital gain or loss will be long-term capital gain or loss if the U.S. holder has held the share or ADS for more than one year at the time of the disposition. If the U.S. holder is an individual, trust or estate, long-term capital gain realized upon a disposition of a share or ADS and before the end of a taxable year which begins before January 1, 2011 generally will be subject to a maximum U.S. federal income tax rate of 15%. Gains on the sale of shares or ADSs held for one year or less will be treated as short-term capital gain and taxed as ordinary income at the U.S. holder’s marginal income tax rate. Capital losses may only be used to offset capital gains, except that U.S. individuals may deduct up to $3,000 of net capital losses against ordinary income. U.S. holders should consult their own tax advisors regarding the availability of this offset.
No French tax is imposed on the capital gains of a U.S. holder arising from the sale, exchange or other disposition of shares or ADSs provided that certain requirements of the U.S.-France Income Tax Convention are satisfied. See “French Taxation of U.S. Holders-Sale, Exchange or Other Disposition of Shares or ADSs”. In the event that French tax is imposed on capital gains from the sale, exchange or other disposition of shares or ADSs, U.S. holders should consult their own tax advisors with respect to their ability based on their particular circumstances to claim a credit for such tax against their U.S. federal income tax.
The surrender of ADSs in exchange for shares and the surrender of shares in exchange for ADSs will not be a taxable event for U.S. federal income tax purposes. Accordingly, a U.S. holder will not recognize any gain or loss upon such surrender.
82 WAVECOM - Annual Report Form 20-F 2007
Passive Foreign Investment Company: We believe that we will not be treated as a Passive Foreign Investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2007. However, a company’s status as a PFIC is a factual determination that is made annually and depends on, among other things, a valuation of the company’s assets, including goodwill and other intangible assets. We cannot guarantee that we will not be treated as a PFIC for the current year or some future years.
We will be classified as a PFIC in a particular taxable year if either:
• | 75% or more of our gross income for the taxable year is “passive income,” which includes dividends, interest, royalties, rents, annuities, and some types of gains; or |
• | the average percentage of the value of our assets that produce or are held for the production of passive income is at least 50%. The U.S. Internal Revenue Service has indicated that cash balances, even if held as working capital, are considered to be assets that produce passive income. |
The proceeds of our 2007 convertible debt offering, if not timely invested in assets that do not produce passive income, could cause us to be treated as a PFIC in 2008 or late years. If we are classified as a PFIC, generally any gain recognized by a U.S. holder upon the sale or disposition of our shares or ADSs, or the receipt of certain distributions, would be treated as ordinary income. In this case, this income would be allocated over the U.S. holder’s holding period for the holder’s shares or ADSs, would be taxed at the highest applicable tax rate in effect for the year to which it is allocated, and an interest charge would be imposed on the amount of deferred tax attributable to the income allocated to prior taxable years.
If we were determined to be a PFIC, however, a U.S. holder could elect to treat the shares or ADSs as an interest in a Qualified Electing Fund, by making a “QEF Election,” in which case the holder would be required to include in income the holder’s proportionate share of our income and net capital gain in years in which we were a PFIC, but any gain subsequently recognized upon the sale by the holder of the shares or ADSs would generally be taxed as a capital gain. Alternatively, if our stock were treated as marketable stock for PFIC purposes, a U.S. holder could make a “Mark-to-Market Election”, pursuant to which the holder would be required to include as ordinary income annually the excess of the fair market value of the shares or ADSs over the holder’s tax basis therein. Any gain subsequently recognized upon the disposition by the holder of the shares or ADSs would also be taxed as ordinary income in the year of the disposition. The holder’s basis in the shares or ADSs would be adjusted to reflect any such income amounts.
U.S. holders are urged to consult their own tax advisors concerning the potential application of the PFIC rules to their ownership and disposition of shares or ADSs. U.S. holders also should consult with their own tax advisors regarding the eligibility, manner and advisability of making the QEF Election or Mark-to-Market Election if we are treated as a PFIC.
Information reporting and backup withholding: Dividend payments with respect to shares or ADSs and proceeds from the sale, exchange or other disposition of shares or ADSs may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding (currently at a 28% rate). Backup withholding will not apply to a U.S. holder, however, if the holder furnishes a correct taxpayer identification number and makes any other required certification or if the holder is otherwise exempt from backup withholding. If the U.S. holder is required to establish the holder’s exempt status or provide other certifications, the holder generally must provide such certifications on U.S. Internal Revenue Service Form W-9.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s U.S. federal income tax liability, and the holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required supporting information.
Documents on Display
We are subject to the reporting requirements of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) applicable to foreign private issuers. In connection with the Exchange Act, we file reports, including this annual report on Form 20-F, and other information with the Securities and Exchange Commission. Such reports and other information are available on the SEC’s website at www.sec.gov, and may also be inspected and copied at prescribed rates at the public reference facilities maintained by the SEC at its Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549: information on the SEC’s public reference. Access to the Public Reference Room may be obtained by calling the SEC at 800-SEC-0330. Such reports and other information may be obtained, upon written request, from The Bank of New York, as depositary, at its office located at 101 Barclay Street, New York, NY 10286.
WAVECOM - Annual Report Form 20-F 2007 83
Item 11: Quantitative and Qualitative Disclosures about Market Risk
The following discusses our exposure to market risk related to changes in equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors, including those set forth in the Risk Factors section.
We publish our consolidated financial statements in euros and the functional currency of Wavecom S.A. is the euro. In 2007, we recorded 56% of our total revenues in U.S. dollars, with virtually all the rest in euros. We purchase many of our components for U.S. dollars and the operating expenses of our U.S. subsidiaries are in U.S. dollars. The operating expenses of our Hong Kong subsidiary are primarily in Hong Kong dollars. Most of our other operating expenses are in euros. U.S. dollar purchases and expenses represented approximately 62% of our cost of revenues and operating expenses in 2007. A strengthening of the euro against the U.S. dollar and other currencies in which we receive revenues could reduce our reported revenues and our reported operating and net results. We incurred a net foreign exchange loss for 2007 of €1.4 million compared to a net foreign exchange loss in 2006 (€1.9 million) and a net foreign exchange gain in 2005 (€4.1 million). We began to use a combination of options and forward exchange contracts in order to minimize the risk to our estimated net dollar cash flows. Because these financial instruments do not always hedge specific transactions, they may be accounted for as speculative transactions; with the fair market value of the instruments being recorded on our balance sheet and their changes in market value recognized in our profit and loss accounts at the end of each accounting period.
See also Item 5: “Operating and Financial Review and Prospects-Impact of currency fluctuations” and Note 5 to our consolidated financial statements.
Item 12: Description of Securities other than Equity Securities
Not applicable
84 WAVECOM - Annual Report Form 20-F 2007
Page | ||
Item 13: Defaults, Dividend Arrearages and Delinquencies | 86 | |
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds | 86 | |
Item 15: Controls and Procedures | 86 | |
Item 16A: Audit Committee Financial Expert | 88 | |
Item 16B: Code of Ethics for Financial Officers | 88 | |
Item 16C: Principal Accountant Fees and Services | 88 | |
Pre-Approval Policies for Audit and Non-Audit Services | 88 | |
Item 16D: Exemption from the Listing Standards for Audit Committees | 89 | |
Item 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 89 |
WAVECOM - Annual Report Form 20-F 2007 85
Item 13: Defaults, Dividend Arrearages and Delinquencies
Not applicable
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable
Item 15: Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2007, our disclosure controls and procedures are effective to provide reasonable assurance that material information relating to Wavecom, including its consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities, on a timely basis.
Management’s Annual Report on Internal Control over Financial Reporting |
Our management is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the U.S. Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our chief executive and chief financial officers and effected by our board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:
• | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of our Company; |
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and board of our Company; and |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our Company’s assets that could have a material effect on our financial statements. |
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework”. Based on our assessment, management concluded that, as of December 31, 2007, our internal control over financial reporting is effective based on those criteria.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal year ended December 31, 2007, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We may in the ordinary course make changes in our internal control processes from time to time.
Ernst & Young Audit, the independent registered public accounting firm that audited the consolidated financial statement in this annual have issued an attestation report, as stated in their report beginning on page 87 of this report.
April 7, 2008
/s/ Ronald D. Black | /s/ Chantal Bourgeat |
Ronald D. Black | Chantal Bourgeat |
Chief Executive Officer | Chief Financial Officer |
86 WAVECOM - Annual Report Form 20-F 2007
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Shareholders of Wavecom S.A. |
We have audited Wavecom S.A.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Wavecom’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Wavecom S.A. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Wavecom as of December 31, 2007, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 of Wavecom S.A. and our report dated April 7, 2008 expressed an unqualified opinion thereon.
/S/ Ernst & Young Audit
Represented by Jean-Yves Jégourel
Paris-La Défense, France
April 7, 2008
WAVECOM - Annual Report Form 20-F 2007 87
Item 16A: Audit Committee Financial Expert
Our Board of Directors has determined that we have at least one independant audit committee financial expert, independant director Stephen Imbler, serving on our Audit Committee.
Item 16B: Code of Ethics for Financial Officers
We have adopted a written code of ethics that applies to senior members of our financial management team, including our principal executive officer, principal financial officer and principal accounting officer. We have posted this code of ethics on our website at www.wavecom.com.
You may request a copy of our code of ethics, at no cost, by writing to or telephoning us as follows:
WAVECOM S.A.
3, esplanade du Foncet
92442 Issy-les-Moulineaux Cedex
France
Attention: Investor Relations
Tel. 011 33 1 46 29 08 00
Item 16C: Principal Accountant Fees and Services
During each of the last two fiscal years, Ernst & Young Audit has acted as our independent auditors and MBV & Associés has acted as our French statutory auditor.
The detail of fees paid for Ernst & Young Audit fees and NBV and associés for fiscal years 2006 and 2007 are set forth below:
(amounts in € thousands) | Ernst & Young Audit | MBV & Associes | |||||||||||||||||||
Amounts | % | Amounts | % | ||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||
Audit fees | 617 | 565 | 90 | 98 | 113 | 108 | 95 | 95 | |||||||||||||
Audit-related fees | 60 | 8 | 9 | 1 | 6 | 7 | 5 | 5 | |||||||||||||
Tax fees | 5 | 8 | 1 | 1 | – | – | |||||||||||||||
Total | 682 | 581 | 100 | 100 | 119 | 115 | 100 | 100 | |||||||||||||
Audit fees include fees associated with the annual audits (financial statements and internal control) and reviews of our quarterly financial results submitted on Form 6-K.
Audit-related fees principally include reports required to be issued for French statutory purposes, and related to French regulated offerings.
Tax fees include principally fees associated with tax compliance services at foreign subsidiaries.
Pre-Approval Policies for Audit and Non-Audit Services
Prior to the engagement of Ernst & Young Audit and MBV & Associés each year, the engagements are approved by our Board of Directors and by vote of our shareholders at our annual general meeting. Our audit committee has also adopted its own rules of procedure. The audit committee’s rules of procedure provide for a process with respect to the prior approval of all non-audit services to be performed by our independent auditors or our statutory auditors. Our Board of Directors also reviews the internal control, disclosure and audit processes.
For the fiscal year 2007, our audit committee approved all of the audit services provided by Ernst & Young Audit and MBV & Associés, and all of the audit-related services or tax consulting services provided by Ernst & Young Audit and MBV & Associés and all of the other services provided by Ernst & Young Audit and MBV & Associés
88 WAVECOM - Annual Report Form 20-F 2007
Item 16D: Exemption from the Listing Standards for Audit Committees
Not applicable.
Item 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On May 16, 2007, our shareholders approved a new share repurchase program to replace the existing one.
Under the share repurchase program, the Company currently holds 3.44% of its shares in treasury stock (544,322 shares). A resolution will be put forth at the general shareholders meeting of May 14, 2008 to approve a new share repurchase program to replace the current one. We are required to notify the AMF (French stock market authority) on a monthly basis of our trading program in our own shares.
As of December 31, 2007, we held:
• | 156,345 shares purchased in March 2003 at prices ranging from €7.94 to €8.69, |
• | 387,977 shares purchased in July and August 2007 at prices ranging from €18.80 to €20.21. |
Issuer Purchases of Shares in 2007 |
Period | Total number of shares purchased | Average Price Paid per Share | Total number of shares purchased as part of publicly announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
From July 30 to July 31 2007 | 97,179 | €19.6956 | 97,179 | ||||||
From August 1 to August 8 2007 | 290,798 | €19.2451 | 290,798 | 0 | |||||
WAVECOM - Annual Report Form 20-F 2007 89
3G: Wireless network standards for 3rd generation. These networks will allow access to a large array of new services, including fast internet access made possible because of the introduction of “packet radio” technology to the wireless communication networks.
ASIC: An application-specific integrated circuit (ASIC) is an integrated circuit (IC) customized for a particular use, rather than intended for general-purpose use. For example, a chip designed solely to run a cell phone is an ASIC.
Analog standard: Transmission standard traditionally used as an alternative to the digital standard with which information (sound, text or images) are codified and transformed into series of numbers.
Bandwidth: The amount of data that can be transmitted in a fixed amount of time. For digital devices, the bandwidth is usually expressed in bits per second (bps) or bytes per second. For analog devices, the bandwidth is expressed in cycles per second, or Hertz (Hz). Generally a communications channel is defined by its lowest and highest frequency.
Bluetooth: A short-range radio technology aimed at simplifying communications making it possible to transmit signals among internet devices and between devices and the internet.
CDMA: Code Division Multiple Access A wireless network standard which is competitive with the GSM standard and used primarily in the United Sates and some Asian countries, including Korea.
Cellular Network: A radio network made up of several radio cells each served by a fixed transmitter, known as a cell site or base station that cover different areas in an effort to provide radio coverage over a wider area than the area of one cell.
EDGE: Enhanced Data GSM Environment A faster version of the GSM standard. It represents an interim step between GSM and 3G (Wideband-CDMA).
EMS: Electronic Manufacturing Services Production outsourcing specialists for the electronics industry.
Firmware: In computing, firmware is software that is embedded in a hardware device. It is often provided on flash ROMs or as a binary image file that can be uploaded onto existing hardware by a user.
Wireless terminals: Any device used to transmit and receive voice and data via wireless networks including (mobile telephones, fax machines, modems, etc.).
GPRS: General Packet Radio Services A system for transmitting data via packets with improved data flow on GSM networks.
GSM: Global System for Mobile communications Digital transmission standard used by wireless networks. GSM is the main wireless network standard in Europe.
HSDPA: High-Speed Downlink Packet Access – An upgrade to UMTS supporting speeds in the 10 megabytes-per-second class.
Interconnectivity: The mechanism for establishing a connection between networks using different standards where the goal is to give all subscribers of one operator network the possibility to communicate with subscribers of other operators’ networks.
ISO: International Standard Organization International organisation charged with establishing worldwide standards in a variety of areas.
I/O: Input/Output devices – Inputs are the signals received by the unit, and outputs are the signals sent from it. In many cases, it is the collection of interfaces that information processing systems use to communicate with each other.
MMS: Multi-media Messaging System Electronic messaging system including electronic mail or e-mail.
Open AT®: Open AT® Software Suite is Wavecom-owned and consists of five elements; Open AT® IDE (Integrated Development Environment), Open AT® Applications, Open AT® Plug-Ins, Open AT® OS and Open AT® Firmware. With this suite of software comes fully develop the power of Wavecom’s Wireless CPU® portfolio from real-time application design to over-the-air software upgrades and maintenance.
PCD: Personal communication device Any number of wireless terminals used by individuals to communicate via wireless networks including: mobile telephones, connected personal digital assistants and “smartphones”;
Protocol Stack: A protocol stack (sometimes communications stack) is a particular software implementation of a computer networking protocol suite. The terms are often used interchangeably. Strictly speaking, the suite is the definition of the protocols, and the stack is the software implementation of them.
WAVECOM - Annual Report Form 20-F 2007 G-1
SIM: Subscriber Identity Module Subscriber identification card allowing access to services on the GSM network. In order to function, the card is inserted into a mobile telephone or other wireless terminal.
SMS: Short Message Service Short written messages which are transmitted via data channels on the GSM mobile network. The maximum length of any message is 160 characters. Transmission on the GSM network is standardized. A short message server which is integrated into the mobile network ensures an interface between the mobile and fixed environments.
Quad-band: Ability to operate on four different frequency bands.
TCP/IP: Transmission Control Protocol and Internet Protocol – Together define the basic rules for how information is transmitted across the Internet as well as on many local area networks in packet form.
Telematics – A generic term for a wireless network supporting the collection and dissemination of data in vehicle tracking and positioning, online navigation, and other emergency assistance. Also, used in the power utility industry for meter reading and load control.
W-CDMA: Wideband Code Division Multiple Access The first standard of the third generation which was commercially available in Japan in a specific limited geographic area in 2001 and should be available in Europe and the rest of Asia by 2005, also known as 3G and UMTS.
WLL: Wireless Local Loop A communication network covering a narrowly defined physical area using radio transmission for voice and data communication. These networks can functionally substitute fixed-line networks in areas where no infrastructure currently exists.
Wireless CPU®: A term that refers to Wavecom’s main products as Wireless (Central Processing Unit), it is a protected name in France.
Wireless Microprocessor®: A term referring to Wavecom’s newest line of Wireless CPU® product that is the smallest yet most powerful of Wavecom’s line taking the shape and design of a microprocessor. This is a protected name in France.
WISMO: Wavecom trademark abbreviation standing for “Wireless Standard Module”. These highly integrated modules contain all of the hardware and software required to make wireless devices that work on the GSM/GPRS and CDMA standards.
G-2 WAVECOM - Annual Report Form 20-F 2007
Page | ||
Item 17: Financial Statements | 91 | |
Item 18: Financial Statements | 91 | |
Item 19: Exhibits | 92 | |
Exhibit Index | 92 |
90 WAVECOM - Annual Report Form 20-F 2007
Not applicable.
The following financial statements are filed as part of this annual report:
Report of Independent Registered Public Accounting Firm | F-2 | |
Consolidated Statements of Operations for the years ended December 31, 2005, 2006 and 2007 | F-3 | |
Consolidated Balance Sheets at December 31, 2005, 2006 and 2007 | F-4 | |
Consolidated Statement of Changes in shareholders’ Equity for the years ended December 31, 2005, 2006 and 2007 | F-5 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007 | F-6 | |
Notes to Consolidated Financial Statements | F-7 |
WAVECOM - Annual Report Form 20-F 2007 91
1.1 | Memorandum and articles of association (incorporated by reference of the Exhibits – to the Registrants Registration Statement on Form F1, File No. 333-11764). |
1.2* | Statuts (By-Laws) of the Registrant, updated as of February 7, 2006 (English Translation). |
2.1 | Form of Deposit Agreement among the Registrant, The Bank of New York, as Depositary, and the Holders of American Depositary Shares issued hereunder (incorporated by reference to Exhibit 4.1 to the Registrants Registration Statement on Form F1, File No. 333-10372). |
2.2 | Form of American Depositary Receipt (incorporated by reference to Exhibit 4.2 to the Registrants Registration Statement on Form F1, File No. 333-10372). |
4.1** | GSM Essential Properties Cross License Agreement, dated January 6, 1999, between the Registrant and Motorola, Inc. (incorporated by reference to Exhibit 10.3 to the Registrants Registration Statement on Form F1, File No. 333-10372). |
4.2** | GSM/DCS 1800/1900 Patent License Agreement between Wavecom S.A. and Koninklijke Philips Electronics N.V., dated October 9, 2001 (incorporated by reference to Exhibit 4.6 to the Registrants Annual Report on Form 20F, filed with the Commission on June 28, 2002). |
4.3** | Agreement relating to a cross-license of essential GSM patents between Wavecom S.A. and Siemens Aktiengesellschaft, effective as of October 31, 2001 (incorporated by reference to Exhibit 4.7 to the Registrants Annual Report on Form 20F, filed with the Commission on June 28, 2002). |
4.4** | GSM patent non assertion agreement with NEC Corporation, effective November 19, 2002 (incorporated by reference to Exhibit 4.8 to the Registrants Annual Report on Form 20F, filed with the Commission on May 21, 2003). |
4.5** | Patent License Agreement with Thomson Licensing S.A. and Alcatel S.A., effective January 1, 2003 (incorporated by reference to Exhibit 4.9 to the Registrants Annual Report on Form 20F, filed with the Commission on May 21, 2003). |
4.6** | Agreement relating to a cross-license of essential GSM patents between Wavecom S.A. and Nokia Corporation, effective as of December 31, 2003. (incorporated by reference to Exhibit 4.8 to the Registrants Annual Report on Form 20-F, filed with the Commission on April 16, 2003). |
4.7** | GSM patent non-assertion agreement with Mitsubishi Electronics Corporation, effective June 30, 2004 (incorporated by reference to Exhibit 4.10 to the Registrant’s Annual Report on Form 20-F, filed with the Commission April 7, 2005). |
4.8** | Global patent cross-license agreement for GSM, GPRS and EDGE with Telefonaktiebolaget LM Ericsson effective July 1, 2004 (incorporated by reference to Exhibit 4.10 to the Registrant’s Annual Report on Form 20-F, filed with the Commission April 7, 2005). |
4.9+ | Asset Purchase Agreement dated as of March 17, 2006 between Sony Ericsson Mobile Communications A.B. and Wavecom S.A. (incorporated by reference to Exhibit 4.11 to the Registrant’s Annual Report on Form 20-F, filed with the Commission April 11, 2007). |
4.10*+ | Cooperation Agreement dated as of November 29, 2007 between Wavecom S.A. and Solectron. |
4.11*+ | Supply Chain Agreement dated as of November 29, 2007 between Wavecom S.A. and Solectron. |
4.12*+ | Global manufacturing agreement dated as of November 29, 2007 between Wavecom S.A. and Solectron. |
8* | List of subsidiaries of the Registrant. |
10* | Consent of Ernst & Young Audit. |
12.1* | Certification of the Chief Executive Officer. |
12.2* | Certification of Chief Financial Officer. |
13.1* | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
13.2* | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
* | Filed herewith. |
** | The Registrant has received confidential treatment of portions of this agreement. |
+ | The Registrant has requested confidential treatment of portions of this agreement, which portions have been filed separately with the Commission. |
92 WAVECOM - Annual Report Form 20-F 2007
SIGNATURE
Wavecom S.A. hereby confirms that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
WAVECOM S.A. | ||
Date: April 8, 2008 WAVECOM S.A. | By: /s/ CHANTAL BOURGEAT Chantal Bourgeat Chief Financial Officer |
WAVECOM - Annual Report Form 20-F 2007 93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |||
Report of Independent Registered Public Accounting Firm | F-2 | ||
Consolidated Statements of Income for the years ended December 31, 2005, 2006 and 2007 | F-3 | ||
Consolidated Balance Sheets at December 31, 2005, 2006 and 2007 | F-4 | ||
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2005, 2006 and 2007 | F-5 | ||
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007 | F-6 | ||
Notes to Consolidated Financial Statements | F-7 | ||
Note 1: | Nature of business and summary of significant accounting policies | F-7 | ||
Note 2: | Inventory | F-14 | ||
Note 3: | Prepaid expenses and other current assets | F-14 | ||
Note 4: | Financial instruments and Derivatives | F-15 | ||
Note 5: | Intangible and tangible assets, net | F-17 | ||
Note 6: | Business combinations | F-18 | ||
Note 7: | Capital lease obligations | F-20 | ||
Note 8: | Other accrued expenses | F-20 | ||
Note 9: | Convertible bonds | F-23 | ||
Note 10: | Other liabilities | F-24 | ||
Note 11: | Shareholders’ equity | F-24 | ||
Note 12: | Stock-based compensation | F-28 | ||
Note 13: | Impairment of intangible assets | F-29 | ||
Note 14: | Interest income (expenses) | F-29 | ||
Note 15: | Income taxes | F-29 | ||
Note 16: | Net income per share | F-32 | ||
Note 17: | Commitments and contingencies | F-32 | ||
Note 18: | Employees | F-33 | ||
Note 19: | Compensation of executive officers | F-33 | ||
Note 20: | Segments | F-33 | ||
Note 21: | Subsequent events (unaudited) | F-35 |
WAVECOM - Annual Report Form 20-F 2007 F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Wavecom S.A. |
We have audited the accompanying consolidated balance sheets of Wavecom S.A. as of December 31, 2005, 2006 and 2007, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These consolidated financial statements are the responsibility of Wavecom’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wavecom, S.A. at December 31, 2005, 2006 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Wavecom S.A. adopted, as of January 1, 2006 the provisions of Statement of Financial Accounting Standards No 123(R), “Share-Based Payment”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Wavecom’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 7, 2008 expressed an unqualified opinion thereon.
ERNST & YOUNG Audit
Represented by Jean-Yves Jégourel
Paris-La Défense, France
April 7, 2008
F-2 WAVECOM - Annual Report Form 20-F 2007
Consolidated statements of income
Years ended December 31, | |||||||||
(in thousands, except share and per share data) | Note | 2005 | 2006 | 2007 | |||||
Revenues: | |||||||||
Product sales | €125,952 | €180,393 | €198,510 | ||||||
Service revenue | 1,827 | 2,542 | 3,827 | ||||||
Licensing revenue | 1,453 | 5,823 | — | ||||||
Total revenues | 1 | 129,232 | 188,758 | 202,337 | |||||
Cost of revenues: | |||||||||
Cost of goods sold | 69,094 | 105,775 | 104,650 | ||||||
Cost of services | 842 | 2,723 | 5,833 | ||||||
Total cost of revenues | 69,936 | 108,498 | 110,483 | ||||||
Gross profit | 59,296 | 80,260 | 91,854 | ||||||
Operating expenses: | |||||||||
Research and development | 24,066 | 31,123 | 33,562 | ||||||
Sales and marketing | 11,725 | 16,853 | 22,740 | ||||||
General and administrative | 17,861 | 25,187 | 22,855 | ||||||
Acquired in process technology | 6 | — | 1,450 | — | |||||
Restructuring costs | 1,684 | — | — | ||||||
Total operating expenses | 55,336 | 74,613 | 79,157 | ||||||
Operating income | 3,960 | 5,647 | 12,697 | ||||||
Other income (expenses): | |||||||||
Interest expense | 14 | (214 | ) | (218 | ) | (1,541 | ) | ||
Interest income | 14 | 1,225 | 1,338 | 3,375 | |||||
Foreign exchange gain (loss) | 4,118 | (1,939 | ) | (1,442 | ) | ||||
Income before income taxes | 9,089 | 4,828 | 13,089 | ||||||
Income tax expense (benefit) | 15 | 395 | 125 | (4,310 | ) | ||||
Net income | €8,694 | €4,703 | €17,399 | ||||||
Basic net income per share | 16 | €0.57 | €0.31 | €1.15 | |||||
Diluted net income per share | 16 | €0.56 | €0.30 | €1.02 | |||||
Number of shares used for computing: | |||||||||
– basic | 15,352,233 | 15,383,883 | 15,129,600 | ||||||
– diluted | 15,661,001 | 15,942,182 | 17,470,234 | ||||||
See notes to financial statements
WAVECOM - Annual Report Form 20-F 2007 F-3
Consolidated balance sheets
December 31, | |||||||||
(in thousands, except share data) | Note | 2005 | 2006 | 2007 | |||||
ASSETS | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | €60,663 | €54,776 | €4,677 | ||||||
Marketable securities | 1 | — | — | 134,610 | |||||
Accounts receivable (less allowance for doubtful accounts of €3,628, €3,346 and €2,631 at December 31, 2005, 2006 and 2007, respectively) | 24,271 | 28,727 | 29,467 | ||||||
Inventory | 2 | 6,448 | 6,631 | 6,032 | |||||
Value added tax recoverable | 842 | 602 | 1,124 | ||||||
Prepaid expenses and other current assets | 3 | 2,741 | 2,361 | 3,141 | |||||
Deferred tax assets | 14 | — | — | 4,514 | |||||
Total current assets | 94,965 | 93,097 | 183,467 | ||||||
Long-term investments | 3,585 | 3,639 | 3,731 | ||||||
Other assets and Interests in associates | 4,146 | 3,166 | 4,517 | ||||||
Research tax credit | 1,529 | 1,771 | 2,049 | ||||||
Income tax receivable | 14 | 9,617 | 9,617 | 13,083 | |||||
Intangible and tangible assets, net | 5 | 6,236 | 19,770 | 16,336 | |||||
Goodwill | 5,6 | — | 8,117 | 8,117 | |||||
Total assets | €120,078 | €139,177 | €231,398 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||
Current liabilities: | |||||||||
Accounts payable | €24,314 | €36,254 | €27,612 | ||||||
Accrued compensation | 6,732 | 9,367 | 8,584 | ||||||
Current portion of other accrued expenses | 8 | 3,831 | 3,713 | 3,572 | |||||
Current portion of convertible bonds | 9 | — | — | 664 | |||||
Current portion of capitalized lease obligations | 7 | 303 | 233 | 207 | |||||
Deferred revenue and advances received from customers | 2,564 | 98 | 307 | ||||||
Other liabilities | 10 | 225 | 653 | 3,652 | |||||
Total current liabilities | 37,969 | 50,318 | 44,598 | ||||||
Long-term liabilities: | |||||||||
Long-term portion of other accrued expenses | 8 | 16,775 | 15,957 | 16,636 | |||||
Long-term portion of convertible bonds | 9 | — | — | 80,500 | |||||
Long-term portion of capitalized lease obligations | 7 | 94 | 385 | 340 | |||||
Other long-term liabilities | 1,100 | 858 | 616 | ||||||
Total long-term liabilities | 17,969 | 17,200 | 98,092 | ||||||
Shareholders’ equity: | |||||||||
Shares, €1 nominal value, 15,796,591 shares authorized, issued and outstanding at december 31, 2007 (15,554,153 at December 21, 2006 and 15,531,813 at December 21, 2005) | 15,532 | 15,554 | 15,797 | ||||||
Additional paid in capital | 137,180 | 139,393 | 146,052 | ||||||
Treasury stock at cost (544,322 shares at December 31, 2007 and 156,345 shares at December 31, 2006 and 2005) | (1,312 | ) | (1,312 | ) | (8,823 | ) | |||
Accumulated deficit | (84,650 | ) | (79,947 | ) | (62,548 | ) | |||
Accumulated other comprehensive loss | 1 | (2,610 | ) | (2,029 | ) | (1,770 | ) | ||
Total shareholders’ equity | 11 | 64,140 | 71,659 | 88,708 | |||||
Total liabilities and shareholders’ equity | €120,078 | €139,177 | €231,398 | ||||||
See notes to financial statements
F-4 WAVECOM - Annual Report Form 20-F 2007
Consolidated statement of changes in shareholders’ equity
Accumulated | |||||||||||||||
(in thousands, except share and per share data) | Additional | Other | Total | ||||||||||||
Ordinary shares | paid in | Treasury | Accumulated | Comprehensive | Shareholders’ | ||||||||||
Shares | Amount | capital | Stock | Deficit | Income (loss) | Equity | |||||||||
Balance at January 1, 2005 | 15,506,290 | 15,506 | 137,039 | (1,312 | ) | (93,344 | ) | (1,433 | ) | 56,456 | |||||
Issuance of shares in connection with the exercise of 9,128 founders’ warrants at an exercise price of €4.57 | 9,128 | 9 | 32 | 41 | |||||||||||
Issuance of shares in connection with the exercise of 9,729 options at an exercise price of €8.07 | 9,729 | 10 | 69 | 79 | |||||||||||
Issuance of shares in connection with the exercise of 6,666 warrants to members of the board of directors at an exercise price of €7.04 | 6,666 | 7 | 40 | 47 | |||||||||||
Comprehensive income: | |||||||||||||||
Net income | 8,694 | 8,694 | |||||||||||||
Unrealized gain on financial instruments | 179 | 179 | |||||||||||||
Foreign currency translation | (1,356 | ) | (1,356 | ) | |||||||||||
Total comprehensive income | 7,517 | ||||||||||||||
Balance at December 31, 2005 | 15,531,813 | 15,532 | 137,180 | (1,312 | ) | (84,650 | ) | (2,610 | ) | 64,140 | |||||
Issuance of shares in connection with the exercise of 3,436 founders’ warrants and 1,523 options at an exercise price of €4.19 | 4,959 | 5 | 16 | 21 | |||||||||||
Issuance of shares in connection with the exercise of 6,929 founders’ warrants and 3,786 options at an exercise price of €8.07 | 10,715 | 10 | 76 | 86 | |||||||||||
Issuance of shares in connection with the exercise of 6,666 warrants to members of the board of directors at an exercise price of €5.68 | 6,666 | 7 | 31 | 38 | |||||||||||
Comprehensive income: | |||||||||||||||
Net income | 4,703 | 4,703 | |||||||||||||
Unrealized gain on financial instruments | (113 | ) | (113 | ) | |||||||||||
Stock-based employee compensation | 2,090 | 2,090 | |||||||||||||
Foreign currency translation | 694 | 694 | |||||||||||||
Total comprehensive income | 7,374 | ||||||||||||||
Balance at December 31, 2006 | 15,554,153 | €15,554 | €139,393 | €(1,312 | ) | €(79,947 | ) | €(2,029 | ) | €71,659 | |||||
Purchase of treasury stock | (7,511 | ) | (7,511 | ) | |||||||||||
Issuance of shares in connection with the exercise of 22,054 founders’ warrants and 4,061 options at an exercise price of €4.19 | 26,115 | 26 | 83 | 109 | |||||||||||
Issuance of shares in connection with the exercise of 4,300 options at an exercise price of €4.57 | 4,300 | 4 | 16 | 20 | |||||||||||
Issuance of shares in connection with the exercise of 6,666 warrants to members of the board of directors at an exercise price of €6.55 | 6,666 | 7 | 37 | 44 | |||||||||||
Issuance of shares in connection with the exercise of 20,000 warrants to members of the board of directors at an exercise price of €7,04 | 20,000 | 20 | 121 | 141 | |||||||||||
Issuance of shares in connection with the exercise of 56,225 founders’ warrants and 30,966 options at an exercise price of €8.07 | 87,191 | 87 | 616 | 703 | |||||||||||
Issuance of shares in connection with the exercise of 13,916 founders’ warrants at an exercise price of €9.62 | 13,916 | 14 | 120 | 134 | |||||||||||
Issuance of shares in connection with the exercise of 8,957 options and 3,333 warrants to members of the board of directors at an exercise price of €10.62 | 12,290 | 12 | 118 | 130 | |||||||||||
Issuance of shares in connection with the exercise of 6,500 options and 40,000 warrants to members of the board of directors at an exercise price of €11.18 | 46,500 | 47 | 473 | 520 | |||||||||||
Issuance of shares in connection with the exercise of 15,914 founders’ warrants and 9,546 options at an exercise price of €11.40 | 25,460 | 26 | 265 | 291 | |||||||||||
Comprehensive income: | |||||||||||||||
Net income | 17,399 | 17,399 | |||||||||||||
Unrealized gain on financial instruments | 85 | 85 | |||||||||||||
Stock-based employee compensation | 4,810 | 4,810 | |||||||||||||
Foreign currency translation | 174 | 174 | |||||||||||||
Total comprehensive income | 22,468 | ||||||||||||||
Balance at December 31, 2007 | 15,796,591 | €15,797 | €146,052 | €(8,823 | ) | €(62,548 | ) | €(1,770 | ) | €88,708 | |||||
See notes to financial statements
WAVECOM - Annual Report Form 20-F 2007 F-5
Consolidated statements of cash flows
Years ended December 31, | |||||||
(in thousands) | 2005 | 2006 | 2007 | ||||
Cash flows from operating activities: | |||||||
Net income | €8,694 | €4,703 | €17,399 | ||||
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | |||||||
Amortization and impairment of intangible and tangible assets | 6,136 | 8,699 | 8,409 | ||||
Amortization of debt issue costs | — | — | 257 | ||||
Share-based compensation | — | 2,090 | 4,810 | ||||
Loss (gain) on sales and retirement of tangible assets | 1,204 | (9 | ) | 38 | |||
Acquisition of marketable securities, net | — | — | (134,610 | ) | |||
Deferred tax assets | — | — | (4,514 | ) | |||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | 1,186 | 3,762 | (3,022 | ) | |||
Inventory | 10,284 | 537 | 501 | ||||
Value added tax recoverable | 261 | 256 | (523 | ) | |||
Prepaid expenses and other current assets | 2,948 | 881 | (662 | ) | |||
Recoverable taxes | (79 | ) | — | (3,467 | ) | ||
Accounts payable and other accrued expenses | (28,237 | ) | 8,942 | (4,766 | ) | ||
Accrued compensation | (1,232 | ) | 2,661 | (642 | ) | ||
Interets on loan | — | — | 664 | ||||
Deferred revenue and advances received from customers | 1,651 | (2,457 | ) | 232 | |||
Other payables | 23 | 132 | 2,754 | ||||
Other | 61 | (189 | ) | 606 | |||
Net cash provided (used) by operating activities | 2,900 | 30,008 | (116,536 | ) | |||
Cash flows from investing activities: | |||||||
Disposal (acquisition) of long-term investments | 5,432 | (53 | ) | (93 | ) | ||
Purchases of intangible and tangible assets | (1,688 | ) | (5,504 | ) | (5,025 | ) | |
Acquisition of certain assets, net of cash acquired(1)(2) | — | (29,755 | ) | — | |||
Proceeds from sale of intangible and tangible assets | 959 | 206 | 2 | ||||
Purchase of interets in associates | — | — | (15 | ) | |||
Net cash provided (used) by investing activities | 4,703 | (35,106 | ) | (5,131 | ) | ||
Cash flows from financing activities: | |||||||
Proceeds from convertible bonds (net of debt issue costs of €2,501) | — | — | 77,999 | ||||
Principal payments on capital lease obligations | (447 | ) | (378 | ) | (261 | ) | |
Purchase of treasury stock | — | — | (7,510 | ) | |||
Proceeds from exercise of stock options and founders’ warrants | 167 | 145 | 2,091 | ||||
Net cash used in financing activities | (280 | ) | (233 | ) | 72,319 | ||
Effect of exchange rate changes on cash and cash equivalents | 22 | (556 | ) | (751 | ) | ||
Net increase (decrease) in cash and cash equivalents | 7,345 | (5,887 | ) | (50,099 | ) | ||
Cash and cash equivalents, beginning of year | 53,318 | 60,663 | 54,776 | ||||
Cash and cash equivalents, end of year | €60,663 | €54,776 | €4,677 | ||||
Supplemental disclosures of cash flow information: | |||||||
Cash paid during the year for: | |||||||
Interest | 207 | 207 | 951 | ||||
Income tax | 452 | 110 | 265 | ||||
Cash received during the year for: | |||||||
Interest | 1,226 | 1,339 | 3,375 | ||||
(1) | Including €1,852 of cash included in the acquired assets from M2M division of Sony Ericsson and €61 from assets acquired from Nexgen. |
(2) | Including €16,454 of intangible and tangible assets. |
See notes to financial statements
F-6 WAVECOM - Annual Report Form 20-F 2007
Notes to Consolidated Financial Statements
(actual amounts in euros unless otherwise stated)
Note 1. | Nature of business and summary of significant accounting policies |
Nature of business |
Wavecom S.A. (“Wavecom” or “the Company”) is organized as a société anonyme, or limited liability company, under the laws of the Republic of France. Wavecom was founded in 1993 and is publicly traded on NYSE Euronext (Eurolist), Paris in France and on the Nasdaq National Market in the U.S. Wavecom is a global technology company that develops, markets and sells wireless platforms that can be embedded into virtually any machine or device, thus enabling it to transmit and receive both data and voice communications via wireless cellular network operators. Its highly sophisticated wireless platforms, are sold as wireless central processing units (Wireless CPU®s - including both smart modems and modules) and integrate all of the necessary software and hardware on miniature circuit board platforms that can be used for a wide variety of applications. Wavecom also provide its customers with development tools and engineering support services to facilitate the design and operation of innovative wireless products.
Basis of presentation |
The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Wavecom S.A., its wholly-owned subsidiaries Wavecom, Inc. (a Delaware corporation) and Wavecom Asia Pacific Ltd. (a Hong Kong corporation), both of which commenced operations in 1998; Wavecom Korea Co. Ltd and Wavecom Deutschland GmbH, branches transformed into subsidiaries in 2002; Wavecom Northern Europe Ltd (an English company) created in 2003; NexGen Software S.A.S., consolidated from its acquisition date, on June 2, 2006. Arguin Communications Inc. (wholly-owned at year-ended December 31, 2004) was dissolved for a loss of €12,000 in December 2005 and is no longer included in the consolidation scope since that date. Since July 9, 2007, Wavecom has an investment of 9.5% in Sunlink Wavecom Limited, representing an investment of €13,000 as of December 31, 2007, which is accounted for using the equity method as Wavecom exercises significant influence. Wavecom Korea Co. Ltd was still a dormant company in 2007.
Inter-company accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current year presentation.
Foreign currency |
The reporting currency of Wavecom, for all years presented, is the euro (€).
The functional currency of each subsidiary is its local currency. In accordance with Statement of Financial Accounting Standards No. 52, all accounts in the financial statements are translated into euro from the functional currency at exchange rates as follows: (1) asset and liability accounts at year-end rates, (2) income statement accounts at average exchange rates for the year, and (3) shareholders’ equity accounts at historical exchange rates. Foreign currency translation gains and losses are recorded as a separate component of shareholders’ equity.
Realized and unrealized foreign currency transaction gains and losses are reflected in net income (loss).
Revenue recognition |
The Company’s revenue is derived from three primary sources (by order of importance): sales of products composed of wireless standard modules and wireless modems, revenue from technical support and other services, and license fees.
Product sales - Revenue from product sales is recognized when (i) persuasive evidence of an arrangement exists, (ii) the product is delivered (at the time the products are shipped and risk of loss has been passed to the buyer), (iii) the price is fixed or determinable and (iv) collection of the price is reasonably assured. If any of these criteria are not met, recognition of revenues is deferred until such time as all of the criteria are met. The Company’s product sales are not sold with a right of return unless our product is defective and covered by warranty. The Company’s sales typically do not include multiple product and/or service elements. Although the products sold have embedded software, Wavecom believes that software is incidental to the products they provide. In addition, the Company does not provide post-contract customer support or maintenance for the software (either free of charge or for a fee) embedded in the products. The contracts do not provide for upgrading or updating any Wavecom embedded software.
Service revenue - Revenue from services is recognized when the services are performed, there is no material continuing performance and collection is reasonably assured. Revenue on service arrangements contingent on final customer
WAVECOM - Annual Report Form 20-F 2007 F-7
acceptance is deferred until such acceptance has been received, and all other criteria for revenue recognition have been met. The costs associated with these arrangements are recognized as incurred.
Licensing revenue - Revenue from licensing fees is recognized pursuant to the requirement of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended. Revenue from sales of licenses to customers is recognized when (i) the Company enters into a legally binding arrangement with customers, (ii) when the Company delivers the software (assuming no significant obligations exist), (iii) collection of the resulting is probable and (iv) the amount of fees is fixed and determinable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. If the contract for a licensing agreement includes a clause allowing for free updates if and when available and if vendor specific objective evidence of fair value for this post-contract customer support can not be determined at the time the contract is signed, the revenue must be recognized over of life of the contract.
Costs of goods sold |
Costs of goods/services sold include all direct and indirect cost incurred with the sale including shipping and handling cost.
Shipping and handling costs |
Shipping and handling costs incurred by the Company are reflected in cost of goods sold.
Shipping costs billed to customers are immaterial.
Research and development |
Wavecom charges all research and development costs to expense as incurred.
Advertising costs |
The Company expenses advertising costs as incurred. Advertising expenses totaled €282,000, €462,000 and €229,000 in the years ended 2007, 2006 and 2005, respectively.
Net income per share |
Net income per share amounts are computed using the weighted average number of shares outstanding.
Basic earnings per share excludes the dilutive effects of options and warrants, and reflects only the actual ordinary shares outstanding. In 2007, 2006 and 2005, diluted earnings per share includes the effects of dilutive options, warrants, free shares and convertible bonds as if they had been exercised. Diluted earnings per share also includes the effects of the dilutive bonds if they had been converted using the if-converted method.
Concentration of risk |
Financial instruments that potentially subject Wavecom to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, trade receivables and financial instruments (i.e. derivatives).
Wavecom has cash investment policies that limit investments to short-term low-risk instruments. Wavecom’s cash is held principally in euros and U.S. dollars and concentrated primarily in seven major banks and financial institutes in Paris and one major bank in Hong Kong. At December 31, 2007, Wavecom had marketable securities composed of short term money market funds (monetary Société d’Investissement à Capital Variable or “SICAV” and Fonds Commun de Placements or “FCP” ) totaling €134.6 million. At December 31, 2006 and 2005, Wavecom had no cash or cash equivalents invested in short-term money-market accounts bearing variable rates of interest. Net interests income generated by the marketable securities for the years ended December 31, 2007, 2006 and 2005 amounted to €3,035,000, €1,338,000 and €1,225,000, respectively.
In addition, at December 31, 2007, Wavecom had €3.7 million of pledged securities invested in short term money market funds (monetary SICAV) classified as long-term investments in the accompanying Consolidated Balance Sheets (€3.6 million as of December 31 2006 and 2005).
The underlying investments of monetary SICAV and monetary FCP are comprised of low risk investments with a short-term fixed maturity date such as government bonds, certificates of deposit and Euro commercial paper. The Company’s marketable securities are held principally in euros and primarily among reputable financial institution such as Natixis, HSBC, Groupama, UBS, and BNP Paribas.
The criteria for selection of such marketable securities are, by order of importance:
• | Safety of capital |
• | Liquidity |
• | Yield |
F-8 WAVECOM - Annual Report Form 20-F 2007
Wavecom is ensuring the safety and preservation of its invested funds by: |
• | Investing in only the lowest risk type of securities |
• | Pre-qualifying all financial institutions with whom Wavecom will do business |
• | Diversifying the portfolio to minimize the adverse effects of the failure of any one issuer or banker. |
• | Routinely monitoring the portfolio to anticipate and respond appropriately to a significant reduction in credit rating, and to follow-up the anticipation on interest rate (i.e. using appropriate benchmark in case of change on yield curve). |
Wavecom had no variable rate debt at December 31, 2007.
By December 31, 2006, most of the production of the business acquired in 2006 was being transferred to Wavecom’s historical sub contractor, but certain products of the acquired activity were still being produced by two sub-contactors located in Mexico. The total transfer was finalized by December 31, 2007. As a result, all the production of Wavecom is now sub contracted to one plant located in China. Wavecom believes that alternate sub-contractors can be identified if the current manufacturer is unable to meet Wavecom’s requirements.
Wavecom sells its products to customers in a variety of industries principally in Europe, Asia/Pacific, North America and Africa. Wavecom performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. To date, such losses have been within management’s expectations. Wavecom generally requires no collateral, but does request advance payments or letters of credit in order to secure payment in certain circumstances.
A summary of the activity in the allowance for doubtful accounts is as follows:
Year ended December 31, | |||||||||||||
(in € thousands) | Beginning balance | Additions charged to expenses | Write-offs | Recovered receivable | Exchange rate difference | Ending balance | |||||||
2005 | 3,233 | 731 | (186 | ) | (419 | ) | 269 | 3,628 | |||||
2006 | 3,628 | 1,935 | (2,037 | ) | — | (180 | ) | 3,346 | |||||
2007 | 3,346 | 231 | (208 | ) | (627 | ) | (111 | ) | 2,631 | ||||
For the year ended December 31, 2005, certain customers represented revenues in excess of 10% of Wavecom’s total consolidated revenues. For the years ended December 31, 2006 and 2007, no customer exceeded 10% of consolidated revenues. The amounts of annual revenues, and corresponding outstanding accounts receivable at December 31, from these customers were as follows:
2005 | 2006 | 2007 | |||||||||||||
(in € thousands) | Revenues | Receivable | Revenues | Receivable | Revenues | Receivable | |||||||||
Customer A (EMEA and Asia-Pacific regions) | €14,115 | €3,005 | €17,097 | €2,711 | €16,540 | €2,245 | |||||||||
Customer B (Asia-Pacific region) | 7,350 | 2,039 | 2,874 | 267 | 1,106 | 99 | |||||||||
Customer C (Asia-Pacific region) | 2,250 | 40 | — | — | — | — | |||||||||
Sales to customers by geographic region are summarized as follows:
Years ended December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
China | €23,205 | €19,526 | €18,811 | ||||
South Korea | 3,097 | 2,736 | 227 | ||||
Rest of Asia | 23,160 | 16,804 | 13,021 | ||||
France | 22,134 | 25,694 | 24,192 | ||||
Rest of Europe | 43,566 | 62,840 | 65,866 | ||||
United States of America | 11,319 | 46,600 | 68,363 | ||||
Rest of Americas | 280 | 1,638 | 2,083 | ||||
Rest of world | 2,471 | 12,920 | 9,774 | ||||
€129,232 | €188,758 | €202,337 | |||||
WAVECOM - Annual Report Form 20-F 2007 F-9
Geographic region is determined by the customer’s invoice address and may not indicate the final destination of product usage.
Substantially most of the Company’s long-lived assets are located in France and at our main contract manufacturer’s production facilities in China.
Cash and Cash equivalents |
Wavecom considers all highly liquid investments with an original maturity of three months or less and money market mutual funds, to be cash equivalents. At December 31, 2007, Wavecom had €134,610,000 invested in money market accounts, including SICAV and FCPs, with no fixed maturity, earning interest at short-term variable rates. Such accounts did not meet the Cash equivalents criteria and were recorded as Marketable Securities.
At December 31, 2005 and 2006, Wavecom did not have amounts invested in money market accounts.
Inventory |
Inventories are valued at the lower of actual cost or market. Costs include:
• | latest costs of purchase (including taxes, transport, and handling) net of trade discounts received, |
• | costs of manufacturing (including fixed and variable manufacturing overheads) updated at each reporting date. |
Value added tax recoverable |
Value added tax recoverable consists of value added tax paid by Wavecom to vendors and suppliers located in the European Union and recoverable from the tax authorities. Value added tax recoverable is collected on a monthly basis. As of December 31, 2005 and 2007, the Company had value added tax credits, immediately recoverable, of €120,000 and €89,000, respectively. As of December 31, 2006, the Company had no value added tax credits recoverable.
Long-term investments |
A bank guarantee was issued in favor of the owners of leased office space, in order to secure annual lease payments. This guarantee was secured by pledges of investments composed only of monetary SICAVs. The outstanding guarantee expires on July 15, 2008 but will be renewed annually until the end of the lease in July 2011. These investments have been classified as long-term investments in the consolidated balance sheet and amounted to €3,585,000, €3,639,000 and €3,731,000 at December 31, 2005, 2006 and 2007, respectively.
Other assets and Interests in associates |
Other assets primarily include security deposits for leased properties and borrowing costs which are amortized using a straight-line method over the period from the date of issuance until the date of possible early redemption date at option of the Company.
Interests in associates represent the share of the results of the company Sunlink Wavecom, amounted to €15,000 as of December 31, 2007.
Intangible and tangible assets, net |
Intangible and tangible assets are stated at cost less accumulated amortization or depreciation. Leases are capitalized in accordance with Financial Accounting Standards Board Statement No 13 Accounting for leases (SFAS 13). Depreciation and amortization is computed using the straight-line method over the following estimated useful lives:
Acquired intangible assets | 11 months to 4 years | ||
Laboratory equipment | 1-5 years | ||
Computer equipment and purchased software | 1-5 years or contractual term | ||
Furniture and office equipment | 3-5 years | ||
Leasehold improvements | 10 years, or lease term if less | ||
Amortization of capitalized leased equipment is included in depreciation expense.
Wavecom reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If factors indicate that a long-lived asset, or group of assets should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flow over the remaining life of the long-lived assets, or group of assets in measuring whether the carrying value is recoverable. If an asset, or group of assets are not recoverable, an impairment loss would be measured by reducing the carrying value to fair value, absent quoted market prices, based on a discounted cash flow analysis.
F-10 WAVECOM - Annual Report Form 20-F 2007
The fair values of intangible assets acquired through the business combinations as disclosed in Note 6, were determined using an independent appraisal using facts available at the acquisition date. The preliminary allocation of the assets acquired and liabilities assumed were included in the consolidated financial statements as of December 31, 2006. The purchase price allocation was finalized during the year ended December 31, 2007. No subsequent revisions have modified the preliminary purchase price allocation presented in the consolidated financial statements as of December 31, 2006.
Goodwill |
Goodwill represents the excess of purchase price over the fair value of identifiable net assets of business acquired. Goodwill is not amortized but instead tested at least annually for impairment or more frequently when events or changes in circumstances indicate that the asset might be impaired by comparing the carrying value to the fair value of the reporting unit to which it is assigned.
Under Statement of Financial Accounting Standards No 142, “goodwill and other intangible assets”, the impairment test is performed in two steps. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, a second step is performed to measure the amount of impairment loss. The second step allocates the fair value of the reporting unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to that excess. For the purpose of any impairment test, the Company relies upon projections of future undiscounted cash flows and takes into account assumptions regarding the evolution of the market and its ability to successfully develop and commercialize its products.
Changes in market conditions could have a major impact on the valuation of these assets and could result in additional impairment losses.
Accrued royalties |
Wavecom’s products are designed to conform to certain wireless industry standards. Certain essential technologies are patented by third-parties and Wavecom uses these essential technologies. Some of the patents Wavecom uses are under licensing agreements for which Wavecom pays royalties. Other technologies Wavecom uses are not with license rights. Wavecom has concluded licensing agreements with eight patent holders for technologies deemed to be essential for Wavecom’s products. The last two contracts were signed in 2004. Wavecom may enter into license arrangements with other patent holders. Wavecom’s management considers that it is probable that these other patent holders may claim that the technology covered by their patents is essential to Wavecom’s products and, as such, may request royalty payments for the use of such technology.
Wavecom negotiates individual license agreements with each GSM/GPRS essential patent holder declared at ETSI (the European Telecommunications Standards Institute). The negotiations are based on the number of families of patents declared at ETSI by each individual essential patent holder compared to the total number of essential patents declared and listed at ETSI. Royalties calculated by Wavecom correspond to a certain percentage of the net selling price of Wavecom’s products.
The total percentage of royalties related to essential patents as a part of net selling price has been evaluated using the history of the essential patents license agreements the Company has already signed (8 agreements have been signed since early 1999) and external analyses. Because Wavecom does not currently have licensing agreements for all of the essential patents declared and listed at ETSI, the Company accrues royalties based on its estimate of the amounts or percentages which it believes will probably be due under future essential patents licensing agreements they will enter into. Such estimates are based on terms which are not materially different from already signed agreements.
The ultimate royalty paid by the Company may differ from the amounts accrued.
Royalty costs are recorded as cost of goods sold in the Company’s Statement of Income. Accrued royalties are included in Other accrued expenses in the Company’s consolidated balance sheet.
Warranty accrual |
The Company offers a warranty for all its products. The specific terms and conditions of those warranties vary depending upon the product sold and the customer. Wavecom accrues for the costs of providing warranty service at the time the warranty period begins which is typically when title passes. The provision is computed based on a statistical rate for specific warranty issues and actual experience.
Factors that affect Wavecom’s estimate of warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. Wavecom periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The warranty accrual is included in Other accrued expenses in the Company’s consolidated balance sheet.
WAVECOM - Annual Report Form 20-F 2007 F-11
Convertible bonds |
The Company’s convertible bonds which are convertible into a fixed number of shares (subject to certain adjustments) of common stock of the Company at a specified price at the option of the holder and which were sold at a price or have a value at issuance not in excess of the face amount are accounted for as one unit and recorded as a liability at it’s carrying value in its entirety in accordance with Accounting Principles Board Opinion (“APB”) 14: Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, Emerging Issues Task Force (“EITF”) 00-19: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and SFAS 133: Accounting for Derivative Instruments and Hedging Activities. Borrowing costs are capitalized (classified as “other assets”) and are amortized using a straight-line method over the period from the date of issuance until the date of possible early redemption date at option of the company.
The fair value of bonds is estimated using the listed market value of the bonds (NYSE Euronext convertible code FR0010497131).
Other long-term liabilities |
As of December 31, 2005, 2006 and 2007, other long term liabilities include the long term portion of a lease incentive payment received from an office landlord which is being amortized over the lease term, expiring July, 2011, as a reduction to operating expense. Amortization of the lease incentive payment for the years ended December 31 2005, 2006 and 2007 was €637,000 €242,000 and €242,000 respectively. The decrease from the year ended December 31, 2005 to the year ended December 31, 2006 was the result of vacating several floors in 2005.
Income taxes |
In accordance with Statement of Financial Accounting Standards No. 109 Accounting for Income Tax (“SFAS 109”), the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between financial reported amount and the related tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant Management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future tax planning strategies. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.
On January 1, 2007 the Company adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income tax positions. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
There were no unrecognized tax benefits as of the date of adoption January 1, 2007. As a result of the implementation of FIN 48, the Company did not recognize an increase in the liability for unrecognized tax benefits. There are no unrecognized tax benefits included in the balance sheet that would, if recognized, affect the effective tax rate. The Company’s practice is to recognize interest and/or penalties related to income tax matters in general and administration expense. The Company had an accrual for interest or penalties on the Company’s balance sheets at December 31, 2007 for an amount of €260,000 and has recognized this amount in the consolidated statement of income for the year ended December 31, 2007.
Employee stock options and warrants and free shares |
Under U.S. GAAP, effective January 1, 2006, the Group adopted SFAS No. 123 (Revised 2004) “Accounting for Share - Based Payment” (“SFAS 123(R)”), which superseded Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to its Employees” (“APB 25”). SFAS 123(R) requires the recognition of stock-based compensation expenses for all share-based payment awards based on their fair value. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Group applied the provisions of SAB 107, which relate to share-based payments, in its adoption of SFAS 123(R).
Prior to the adoption of SFAS 123(R), the Group accounted for share-based payment arrangements under APB 25 which requires that compensation expense be recorded only when the market price of the stock at the measurement date exceeds the amount the employee is required to pay upon exercise of the option.
Under SFAS 123(R), the Group elected the “Modified Prospective Application” transition method. Under this method, stock-based compensation expense recognized in the year ended December 31, 2006 included (1) compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values estimated in accordance with the original provisions of SFAS 123 and determined using a binomial valuation model and (2)
F-12 WAVECOM - Annual Report Form 20-F 2007
compensation expense for all share-based payments granted subsequently to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and determined with the same valuation model.
The main assumptions of this model are the following:
• | stock prices, at the grant date; |
• | exercise price, established the day when the equity instrument is granted by the Board of directors or the shareholder’s general meeting and is at least equal to highest of the two following values: (i) the average of the twenty closing prices on Eurolist preceding the date of grant and (ii) the closing price on Eurolist of the day before the date of grant; |
• | risk-free interest rate, given in reference to the rate of French treasury bonds corresponding to the expected life of each equity instrument; |
• | expected volatility, based on mean reversion method applied to the series of historical daily profitabilities of the four years before the grant date, to be consistent with the four year vesting period; |
• | expected dividend yield of zero, based on the fact that the Company has never paid dividends and has no present intention to pay dividends. |
Wavecom recorded €2,090,000 and €4,810,000 of stock compensation expense in its Consolidated Statement of Income for the years ended December 31, 2006 and 2007, respectively. Stock compensation expense is further described in Note 12.
SFAS 123R requires the presentation of pro forma information for the comparative period prior to the adoption as if Wavecom had accounted for all our employee stock options under the fair value method of the original SFAS 123. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation for the year ended December 31, 2005.
Year ended December 31 | |||
(In € thousands, except per share data) | 2005 | ||
Net income, as reported | €8,694 | ||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | — | ||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (4,649 | ) | |
Pro forma net income | €4,045 | ||
Earnings per share: | |||
Basic — as reported | €0.57 | ||
Basic — pro forma | €0.26 | ||
Diluted — as reported | €0.56 | ||
Diluted — pro forma | €0.26 | ||
Weighted average assumptions: | |||
Expected holding period (years) | 5 | ||
Risk-free interest rate | 3.34 | % | |
Volatility | 66 | % | |
Expected dividend yield | N/A | ||
The pro forma information compensation cost may not be representative of that to be expected in future years.
Accumulated other comprehensive loss |
Accumulated other comprehensive loss consists of (i) foreign currency translation adjustments for €(1,770,000), €(1,944,000), and €(1,247,000) at December 31, 2007, 2006 and 2005, respectively and (ii) unrealized gains and (losses) on cash flow hedges under SFAS 133 of €(113,000), and €29,000 at December 31, 2006 and 2005, respectively. Wavecom had no outstanding cash flow hedges at December 31, 2007.
WAVECOM - Annual Report Form 20-F 2007 F-13
Recent accounting pronouncements |
On September 15, 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. The Company does not anticipate that the adoption of this statement will have a material effect on the Company’s financial condition and results of operations.
On February 15, 2007, the FASB issued Statement of Financial Accounting Standards No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities: Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS No. 159 permits all entities to elect to measure many financial instruments and certain other items at fair value with changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted. The Company does not anticipate that the adoption of this statement will have a material effect on the Company’s financial condition and results of operations.
In December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business Combinations” (“SFAS 141(R)”), which requires the Company to record fair value estimates of contingent consideration and certain other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed under Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of purchase accounting. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company will adopt this standard at the beginning of the Company’s fiscal year ending November 30, 2009 for all prospective business acquisitions. The Company has not determined the effect that the adoption of SFAS No. 141(R) will have on the financial results of the Company.
In December 2007, the FASB issued FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”), which causes noncontrolling interests in subsidiaries to be included in the equity section of the balance sheet. SFAS 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company will adopt this standard at the beginning of the Company’s fiscal year ending November 30, 2009 for all prospective business acquisitions. The Company has not determined the effect that the adoption of SFAS 160 will have on the financial results of the Company.
Note 2. | Inventory |
Components of net inventory are:
December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Finished goods | €3,672 | €887 | €1,334 | ||||
Components and finished goods held by contract manufacturers | 2,776 | 5,744 | 4,698 | ||||
€6,448 | €6,631 | €6,032 | |||||
Wavecom bears the risk of ownership of inventory components held by its contract manufacturers to be used for its products, although these components continue to be legally owned by its contract manufacturers.
Note 3. | Prepaid expenses and other current assets |
Prepaid expenses and other current assets include:
December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Suppliers’ credit note accruals | €6 | €486 | €242 | ||||
Prepaid expenses | 2,589 | 1,807 | 2,758 | ||||
Other current assets | 146 | 68 | 141 | ||||
Total prepaid expenses and other current assets | €2,741 | €2,361 | €3,141 | ||||
F-14 WAVECOM - Annual Report Form 20-F 2007
Credit notes from suppliers are accrued at the end of each period, based on amounts which have been negotiated and accepted by Wavecom’s contract manufacturers.
Prepaid expenses consist primarily of prepaid rent and other operating expenses.
Note 4. | Financial instruments and Derivatives |
Wavecom uses financial instruments, including derivatives such as foreign currency forward and options contracts, to reduce the foreign exchange risk on cash flows from firm and highly probable commitments denominated in U.S. dollar. The Company complies with the Financial Accounting Standards Board issued Statement No 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”). SFAS 133 requires the recognition of all financial instruments including derivatives at fair value. Changes in fair value are recorded in current earnings or other comprehensive income, depending on whether the derivative is designated as a hedge, its effectiveness as a hedge, and the type of hedge transaction. Any change in the fair value of the derivatives deemed ineffective as a hedge is immediately recognized in earnings.
The following tables present fair values of derivative financial instruments at December 31, 2005, 2006 and 2007:
At December 31, 2005 | |||||
Notional Amount | Fair value | ||||
(in $ thousands) | (in € thousands) | ||||
Fair Value hedges of payables invoiced in U.S. dollars and to be paid within 2 months: | |||||
Forward and option contracts buying U.S. dollars against euros | 1,000 | 15 | |||
Cash Flow hedges of net receivables transactions to be invoiced and paid within 1 year: | |||||
Forward and option contracts buying U.S. dollars against euros | 4,500 | 34 | |||
Total | $5,500 | €49 | |||
Fair Value hedges of net receivables invoiced in U.S. dollars and to be collected within 2 months: | |||||
Forward and option contracts selling U.S. dollars against euros | $2,100 | €(5 | ) | ||
Total | $2,100 | €(5 | ) | ||
At December 31, 2006 | |||||
Notional Amount | Fair value | ||||
(in $ thousands) | (in € thousands) | ||||
Cash Flow hedges of net receivables transactions to be invoiced and paid within 1 year: | |||||
Forward and option contracts buying U.S. dollars against euros | 2,500 | 9 | |||
Total | $2,500 | €9 | |||
Fair Value hedges of net receivables invoiced in U.S. dollars and to be collected within 2 months: | |||||
Forward and option contracts selling U.S. dollars against euros | 2,000 | (15 | ) | ||
Total | $2,000 | €(15 | ) | ||
At December 31, 2007 | |||||
Notional Amount | Fair value | ||||
(in $ thousands) | (in € thousands) | ||||
Fair Value hedges of net receivables invoiced in U.S. dollars and to be collected within 2 months: | |||||
Forward and option contracts selling U.S. dollars against euros | 8,600 | 79 | |||
Total | $8,600 | €79 | |||
WAVECOM - Annual Report Form 20-F 2007 F-15
At December 31, 2007, the Company had no outstanding cash flow hedges.
The net foreign currency exposure, presented in the table below, relates to Company’s assets and liabilities as of December 31, 2005, 2006 and 2007, which are denominated in foreign currencies and then converted into euros.
At December 31, 2005 | At December 31, 2006 | At December 31, 2007 | |||||||||||||
(in € thousands) | USD | Other Currencies | USD | Other Currencies | USD | Other Currencies | |||||||||
Assets | €17,164 | €453 | €30,309 | €459 | €21,152 | €61 | |||||||||
Hedging of assets in foreign currencies (balance sheet) | 1,780 | — | 1,519 | — | 5,807 | — | |||||||||
Net assets after hedging | €15,384 | €453 | €28,790 | €459 | €15,345 | €61 | |||||||||
Liabilities | €7,364 | €2,079 | €16,371 | €1,553 | €9,659 | €121 | |||||||||
Hedging of liabilities in foreign currencies (balance sheet) | 848 | — | — | — | — | — | |||||||||
Net liabilities after hedging | €6,516 | €2,079 | €16,371 | €1,553 | €9,659 | €121 | |||||||||
The fair value of foreign currency related derivatives are included in the balance sheet in “other assets” and “other liabilities”. The earnings impact of cash flow hedges relating to forecasted transactions is reported in foreign exchange gain or loss. Realized and unrealized gains and losses on these instruments deemed effective for hedge accounting are deferred in accumulated other comprehensive income until the underlying transaction is recognized in earnings or the instruments are designated as hedges.
During the year ended December 31, 2007, the Company recorded a gain of €85,000 (loss of €(113,000) for the year ended December 31, 2006) in other comprehensive income related to the effective portion of the change in fair value of its cash flow hedges.
During the year ended December 31, 2006, the Company recognized a net loss of €15,000 for the year ended December 31, 2006 (net gain of €6,000 for the year ended December 31, 2005) related to the ineffective portion of its hedging instruments and a net loss of €26,000 for the year ended December 31, 2006 (net gain of €8,000 for the year ended December 31, 2005) related to the portion of the hedging instrument the Company excluded from its assessment of hedging effectiveness. During the year ended December 31, 2007, the Company has no ineffective portion of its hedging instruments and no portion of the hedging instrument the Company excluded from its assessment of hedging effectiveness.
The derivatives have maturity dates of less than 12 months. Management believes counterparty risk on financial instruments is minimal since the Company deals with major banks and financial institutions.
The use of different estimations, methodologies and assumptions could have a material effect on the estimated fair value amounts. The methodologies are as follows:
– | Cash, Cash equivalents, marketable securities, accounts receivable, accounts payable, other receivable and accrued liabilities: due to the short-term nature of these balances, carrying amounts approximate fair value. Due to the sale and repurchase of marketable securities on December 31, 2007 , their fair value equals the market value |
– | Long-term investments: such investments are composed of monetary SICAV with traded market prices. Due to the sale and repurchase of these SICAV on December 31, 2007, 2006 and 2005, their fair value equals the market value. Their fair values amounted to €3,731,000, €3,639,000, and €3,585,000 at December 31, 2007, 2006 and 2005, respectively. |
– | Foreign exchange forward and option contracts: the fair values of foreign exchange forward and option contracts were calculated using the market price that Wavecom would pay or receive to settle the related agreements, by reference to published exchange rates. |
– | Convertible bonds : the fair value of bonds is estimated using the lasted market value at balance date. See Note 9 |
F-16 WAVECOM - Annual Report Form 20-F 2007
Note 5. | Intangible and tangible assets, net |
Intangible and tangible assets, net include:
December 31, | |||||||||||
2005 | 2006 | 2007 | |||||||||
(in € thousands) | Net book value | Net book value | Gross carrying amounts | Accumulated depreciation and impairment | Net book value | ||||||
Intangible assets : | |||||||||||
Customer relationships | €— | €8,125 | €9,750 | €4,061 | €5,689 | ||||||
Non-compete agreement | — | 1,828 | 2,350 | 1,306 | 1,044 | ||||||
Technology | — | 327 | 1,200 | 1,200 | — | ||||||
NexGen protocol stack | — | 71 | 100 | 79 | 21 | ||||||
Subtotal acquired intangible assets | — | 10,351 | 13,400 | 6,646 | 6,753 | ||||||
Tangible assets : | |||||||||||
Laboratory and testing equipment | 2,240 | 3,429 | 27,441 | 23,697 | 3,744 | ||||||
Computer equipment and software | 1,112 | 2,606 | 23,517 | 20,687 | 2,830 | ||||||
Furniture and office equipment | 345 | 334 | 1,577 | 1,379 | 198 | ||||||
Leasehold improvements | 1,555 | 1,650 | 2,807 | 1,427 | 1,380 | ||||||
Other | 984 | 1,400 | 2,598 | 1,168 | 1,430 | ||||||
Total | €6,236 | €19,770 | €71,340 | €55,004 | €16,336 | ||||||
Change in the net book value of intangible and tangible assets are as follows :
December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Beginning of year balance, net of depreciation & amortization | €12,617 | €6,236 | €19,770 | ||||
Acquisitions | 1,776 | 6,102 | 5,216 | ||||
Tangible and intangible assets acquired(1) | — | 16,454 | — | ||||
Sales and retirements | (11,646 | ) | (5,848 | ) | (1,244 | ) | |
Depreciation and impairment expenses | (6,136 | ) | (8,699 | ) | (8,452 | ) | |
Accumulated depreciation on sales and retirements | 9,500 | 5,641 | 1,257 | ||||
Translation adjustment | 125 | (116 | ) | (201 | ) | ||
End of year balance, net of depreciation & amortization | €6,236 | €19,770 | €16,336 | ||||
(1) | assets related to Sony Ericsson and NexGen acquisitions |
Based on the current amount of intangible assets, the estimated amortization expense for each of the succeeding 5 years is as follows:
– | 2008: €3,221,000 |
– | 2009: €2,699,000 |
– | 2010: €813,000 |
– | 2011: €0 |
– | 2012: €0. |
In 2005, an amount of €372,000 was recorded as impairment expenses related to certain production equipment used for making products whose production was shut down earlier than initially planned. The impairment charge was based on the expected future cash flows to be generated from these assets and the related residual values on disposal. (See Note 13). The related expenses were recorded as cost of goods sold in the consolidated statements of income. No further impairment expenses were recorded in 2006 and 2007.
WAVECOM - Annual Report Form 20-F 2007 F-17
The cost of equipment purchased under capital leases included in intangible and tangible assets at December 31, 2005, 2006 and 2007 totaled €6,531,000, €5,719,000 and €5,529,000, respectively. Accumulated amortization of this equipment totaled €6,164,000, €5,131,000 and €5,028,000 at December 31, 2005, 2006 and 2007, respectively.
As of December 31, 2007, Wavecom identified no other events or changes in circumstances which indicate that the carrying amount of an asset may not be recoverable.
Note 6. | Business combinations |
Sony Ericsson M2M Communications |
On April 26, 2006, Wavecom acquired certain assets of Sony Ericsson’s M2M Communications business unit which specializes in automotive and industrial wireless solutions, in a cash transaction.
The preliminary allocation of the assets acquired and liabilities assumed were included in the consolidated financial statements as of December 31, 2006. At April 26, 2007, no subsequent revisions were required that have modified the preliminary purchase price allocation presented in the consolidated financial statements as of December 31, 2006.
The final purchase price for Sony Ericsson’s M2M Communications business unit was €31,206,000.
The Sony Ericsson’s M2M Communications business unit acquisition is accounted for under the purchase method of accounting. Accordingly, the results of Sony Ericsson’s M2M Communications business unit are included in the consolidated financial statements from the acquisition date, April 30, 2006.
The Company has allocated the purchase price to the Sony Ericsson assets acquired and liabilities assumed at fair value, using of an independent appraisal. The excess of fair value of the net tangible and intangible assets acquired compared to the amount paid has been reflected as goodwill in accordance with SFAS. 141. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
(in € thousands) | Fair value | ||
Acquired assets: | |||
Inventory | 872 | ||
Accounts receivable | 10,055 | ||
Cash and cash equivalents | 1,852 | ||
Total current assets | 12,779 | ||
Intangible assets, net | 13,300 | ||
Tangible assets, net | 1,604 | ||
Total assets | 27,683 | ||
Assumed liabilities: | |||
Accounts payable | 5,959 | ||
Total current liabilities | 5,959 | ||
Total liabilities | 5,959 | ||
Net assets acquired | 21,724 | ||
In-process research and development | 1,450 | ||
Residual Goodwill | 8 032 | ||
Total consideration | 31,206 | ||
F-18 WAVECOM - Annual Report Form 20-F 2007
The components of the intangible assets listed in the above table and valued in connection with the acquisition consisted of:
(in € thousands) | Valuation | Useful life | |||||
Customer relationships | (a | ) | 9,750 | 4 years | |||
Non-compete agreement | (b | ) | 2,350 | 3 years | |||
Technology | (c | ) | 1,200 | 1 year | |||
(a) | The customer relationships were measured using the excess earnings method on the basis of varying revenue assumptions (including probability of renewals at the expiration of contracts), new customer recruitment costs and a discount rate of 14%. |
(b) | The non-compete agreement, conclude for a period of three years, was valued by modeling the impact on the present value (discount rate of 12% used) of future free cash flows of the acquired activity if Sony Ericsson were to compete. |
(c) | The acquiring technology was measured using the relief from royalty method, on the basis of a royalty rate of 4% and a discount rate of 11%. |
€1,450,000 of the purchase price represents the estimated fair value of projects that, as of acquisition date, had not reached technology feasibility and had no alternative use. Accordingly, this amount was immediately expensed in the consolidated statement of income during the second quarter of 2006 and is included as Acquired in process technology in the consolidated statement of income for the year ended December 31, 2006.
The Company believes that the goodwill recognized above is attributed to the expected benefits of this acquisition in terms of synergies and geographic exposure.
The following unaudited pro forma financial information assumes that the acquisition of Sony Ericsson’s M2M Communications business unit was completed as of January 1, 2005.
Year end December 31 | |||||
(in euros thousands except for share data) | 2005 | 2006 | |||
Revenues | 196,204 | 212,733 | |||
Gross profit | 73,643 | 84,482 | |||
Income before income taxes | (4,841 | ) | 3,808 | ||
Net income | (5,236 | ) | 3,683 | ||
Net income per share Basis | (0.34 | ) | 0.24 | ||
Net income per share Diluted | (0.33 | ) | 0.23 | ||
These financials data have been prepared using Wavecom historical financials statements for the years ended December 31, 2006 and 2005 and available unaudited financial information on the Sony Ericsson’s M2M Communications business unit for the year ended December 31, 2005 and for the four month period ended April 30, 2006. These historical financial statements have been adjusted to reflect Wavecom specific costs structure in term of cost of good sold and operating expenses. In addition, amortization of acquired intangible assets has been computed as if the acquisition took place on January 1st, 2005. Interest income has also been adjusted to reflect a cash payment on January 1st, 2005.
The unaudited pro forma information is presented for information purposes and does not purport to be indicative of results that would have been achieved if the acquisition had taken place at the beginning of the year ended December 31, 2005 presented nor does it purport to be indicative of the results that will be achieved in the future.
The acquired business has been fully integrated into the historical business of Wavecom subsequent to the acquisition and is not considered as a separate business or activity. It is therefore not possible to present separately the results generated by this acquired business for the period after the acquisition date.
NexGen Software |
On June 15, 2006, Wavecom acquired 100% of the outstanding stock of NexGen Software S.A.S for cash consideration of €400,000. This acquisition brought to Wavecom its internally-developed TCP/IP (internet) suite of protocol stacks and internet software expertise along with a worldwide customer base of over 100 clients. The Company believes that this acquisition eliminated its reliance on external, third-party, TCP/IP vendors and further strengthened its already extensive software expertise while adding IPs (Internet Protocols) developed exclusively by NexGen Software specifically for machine-to-machine communication.
The transaction has been accounted for under the purchase method of accounting. Accordingly, assets acquired and liabilities assumed were measured at fair value on the acquisition date in application of the purchase method.
The net assets and liabilities acquired, on the basis of the situation as of May 31, 2006, amounted to €215,000. The intangible asset identified in connection with the acquisition and valued at €100,000 consists of an internally-developed
WAVECOM - Annual Report Form 20-F 2007 F-19
TCP/IP (internet) suite of protocol stacks, which is depreciated on its estimated useful life of 2 years from June 1, 2006. The excess of purchase price over the fair value of net assets acquired and identifiable intangibles, or residual goodwill, amounted to €85,000.
Note 7. | Capital lease obligations |
Future minimum lease payments under capitalized lease obligations for the years ending December 31 were as follows (in € thousands):
2008 | €229 | ||
2009 | 202 | ||
2010 | 124 | ||
2011 | 25 | ||
2012 | 8 | ||
Total minimum lease payments | 588 | ||
Less amount representing interest | (41 | ) | |
Present value of net minimum lease payments | 547 | ||
Less current portion | 207 | ||
Long-term portion | €340 | ||
Note 8. | Other accrued expenses |
Other accrued expenses consist principally of accruals for royalties, warranty costs and various other tax and general expense.
Long term portion |
December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Accrued royalties | €16,230 | €15,378 | €15,844 | ||||
Warranty accrual | 94 | 72 | 82 | ||||
Other accruals | 451 | 507 | 710 | ||||
Total | €16,775 | €15,957 | €16,636 | ||||
Short term portion |
December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Warranty accrual | €1,457 | €1,091 | €963 | ||||
Headcount restructuring cost accrual | 357 | 150 | 150 | ||||
Other accruals | 2,017 | 2,472 | 2,459 | ||||
Total | €3,831 | €3,713 | €3,572 | ||||
F-20 WAVECOM - Annual Report Form 20-F 2007
Other accrued expenses changes for the years ended December 31, 2005, 2006 and 2007 were the following:
(in € thousands) | Balance at January 1, 2005 | Accruals made during the period | Cash settlements made during the period | Unused and expired during the period | Changes in estimate for pre-existing accruals during the period | Balance at December 31, 2005 | |||||||
Accrued royalties | €14,831 | €1,399 | €— | €— | €16,230 | ||||||||
Warranty accrual | 2,014 | 2,691 | (3,154 | ) | — | 1,551 | |||||||
Headcount restructuring cost accrual | 8,132 | — | (7,555 | ) | (220 | ) | 357 | ||||||
Other accruals : | |||||||||||||
Costs associated with an anticipated exiting of leases | 151 | — | (110 | ) | — | 41 | |||||||
Customers claims | 1,915 | 475 | (719 | ) | (968 | ) | 703 | ||||||
Tax audit | 2,583 | — | (2,583 | ) | — | — | |||||||
Third-party litigations | 590 | 119 | (57 | ) | (62 | ) | 590 | ||||||
Other | 2,001 | 806 | (1,673 | ) | — | 1,134 | |||||||
Subtotal other accruals | 7,240 | 1,400 | (5,142 | ) | (1,030 | ) | — | 2,468 | |||||
Total | €32,217 | €5,490 | €(15,851 | ) | €(1,250 | ) | — | €20,606 | |||||
(in € thousands) | Balance at January 1, 2006 | Accruals made during the period | Cash settlements made during the period | Unused and expired during the period | Changes in estimate for pre-existing accruals during the period | Balance at December 31, 2006 | |||||||
Accrued royalties | €16,230 | €5,513 | €— | €(6,365 | ) | €15,378 | |||||||
Warranty accrual | 1,551 | 1,775 | (2,163 | ) | 1,163 | ||||||||
Headcount restructuring cost accrual | 357 | 150 | (357 | ) | 150 | ||||||||
Other accruals : | |||||||||||||
Costs associated with an anticipated exiting of leases | 41 | — | (41 | ) | — | ||||||||
Customers claims | 703 | 633 | (110 | ) | (17 | ) | 1,209 | ||||||
Third-party litigations | 590 | 50 | (116 | ) | 524 | ||||||||
Other | 1,134 | 971 | (859 | ) | 1,246 | ||||||||
Subtotal other accruals | 2,468 | 1,654 | (1,126 | ) | (17 | ) | — | 2,979 | |||||
Total | €20,606 | €9,092 | €(3,646 | ) | €17 | €(6,365 | ) | €19,670 | |||||
WAVECOM - Annual Report Form 20-F 2007 F-21
(in € thousands) | Balance at January 1, 2007 | Accruals made during the period | Cash settlements made during the period | Unused and expired during the period | Changes in estimate for pre-existing accruals during the period | Balance at December 31, 2007 | |||||||
Accrued royalties | €15,378 | €5,738 | €— | €(5,271 | ) | €15,844 | |||||||
Warranty accrual | 1,163 | 1,935 | (2,052 | ) | 1,046 | ||||||||
Headcount restructuring cost accrual | 150 | — | — | 150 | |||||||||
Other accruals : | |||||||||||||
Customers claims | 1,209 | 314 | (273 | ) | (216 | ) | 1,034 | ||||||
Tax audit | — | 260 | — | 260 | |||||||||
Third-party litigations | 524 | 95 | (400 | ) | 50 | 269 | |||||||
Other | 1,246 | 1,098 | (739 | ) | 1,605 | ||||||||
Subtotal other accruals | 2,979 | 1,767 | (1,412 | ) | (216 | ) | 50 | 3,168 | |||||
Total | €19,670 | €9,440 | €(3,464 | ) | €(5,487 | ) | €50 | €20,208 | |||||
Accrued royalties represents an accrual for amounts due to patents holders for technology used in the Company’s products. Following an in-depth analysis in 2005, the Company changed in 2006 its estimation of the amounts that may be due to patent holders with which no formal arrangement exists. This change resulted in a positive impact to both operating results and net income of €2,900,000 and to net earnings per share of €0.13 in 2006, which is the net effect of a reversal for prior estimates no longer deemed necessary having expired under the new methodology offset by changes in the accrual rate on current revenues that may be subject to future royalties for future agreements not yet entered into. Actual royalties paid for use of technology for which the Company has no formal agreement could differ from the estimates.
Headcount restructuring costs accruals are related to the restructuring plans in 2004 following our decision to exit the handset business and include headcount reduction costs and associated charges, severance and outplacement.
Cost associated with an anticipated exit of leases are linked to expenses related to offices that we vacated in 2003 before the end of the lease.
Customer claims represent accruals other then warranty that might be required, on a case by case basis, to cover the impact of specific technical issues which are not covered in our standard warranty. Such issues, mainly include defects in a specific hardware component and software corruption. These defects may lead to a decision by Wavecom to offer a customer compensation for part of the customer’s costs arising from these issues, following a specific, documented and justified claim.
In July 2004, Wavecom received a notification from the Tax authorities related to fiscal years 1999 to 2001. This provision mainly covers amounts claimed by the Tax authorities for business taxes for fiscal years 2001 and 2002. These expenses were settled during the year 2005.
During 2007, Wavecom received a notification from the Tax authorities related to fiscal years 2004 and 2005. A provision of €78,000 covering business tax for fiscal year 2005 has been recorded. The tax authorities contested also a portion of Wavecom’s research and development tax credits for the years 2004 and 2005 for a total of €95,000, no provision was recorded for this later claim as this tax adjustment was based on the same conclusion of the previous tax audit that the Company are currently contesting. The amount of tax audit also included penalty costs notified in 2007 related the Research tax credit adjustment (see Note 10).
Other accruals are mainly related to business tax and social taxes, and to retirement accruals associated with French statutory pension plans.
Wavecom contributes to a defined benefit pension plan for personnel in France in accordance with French law by contributing amounts based on salaries to the relevant government agencies. There exists no actuarial liability in connection with these plans. French law also requires payment of a lump sum retirement indemnity to employees based upon years of service and compensation at retirement. Benefits do not vest prior to retirement. Wavecom’s obligation, for the years ended December 31, 2005, 2006 and 2007, amounted to €451,000, €507,000 and €710,000, respectively, and is calculated as the present value of estimated future benefits to be paid. No employee retired during the last three years.
F-22 WAVECOM - Annual Report Form 20-F 2007
The main assumptions used in the calculation are the following:
2005 | 2006 | 2007 | |||||
Rate of discount | 4 | % | 4.3 | % | 5.25 | % | |
Salary increase | 2.5 | % | 3 | % | From 3% to 2 | % | |
Retirement age | 60 and 65 years | 62 and 65 years | 62 and 65 years | ||||
Weighted average turnover | 5.83 | % | 5.19 | % | 4.4 | % | |
In the United Stated, eligible employees can participate in Wavecom, Inc’s 401(k) retirement plan. This plan has been converted to a Safe harbor Plan beginning of January 2006, thereby providing 100% employer matching funds on the first 3% of employee contributions and 50% matching funds on an additional 2% of employee contributions. Stemming from the Sony Ericsson M2M acquisition in April 2006, the 401K retirement plan was amended to include an additional employer contribution plan. Contributions range from 3.5% to 10% of salary, based on employee age. This plan is a defined contribution plan, therefore the Company’s only obligation is to pay a fixed amount to a separate entity and will have no obligation to pay further contributions if the fund does not hold sufficient asset to pay all employees benefits. The related actuarial and investment risk fall on the employee. All contributions were provided for in the relevant reporting period and the final contributions from the last fiscal years 2006 and 2007 payroll was made in December of each fiscal year. Such expenses were recorded as operating expenses.
Wavecom Northern Europe Ltd harmonized all employees on a single defined contribution scheme over 2007. With the support of external experts (actuaries and insurance brokers) a unique defined contribution scheme was designed under a Group Personal Pension status. As part of the implementation of this new scheme, all employees waived their rights to previous defined benefit schemes. Therefore, there is no pension liability to be accrued in the United Kingdom.
The only employee of Wavecom GmbH in Germany is provided with a defined monthly allowance in order to help him contribute to an individual Direktversicherung pension plan.
In Hong Kong, the Company operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all its employees. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the Scheme. The assets of the Scheme are held separately from those of the Company in an independently administered fund. The Company’s employer contributions vest fully with the employees when contributed into the Scheme. Such expenses were recorded as operating expenses.
Note 9. | Convertible bonds |
On July 13, 2007, Wavecom issued on €80,499,969 principal amount of bonds convertible into and/or exchangeable for new or existing shares (OCEANE) due January 1, 2014, represented by 2,571,884 bonds.
At issuance each bond had a nominal value of €31.30. The bonds will bear interest at a rate of 1.75% per annum. Interest will be payable annually in arrears on January 1 of each year beginning January 1, 2008.
Holders may exercise their right to convert or exchange their bonds at their option at any time from July 13, 2007, the issue date of the bonds, until the seventh business day preceding their redemption date. The initial conversion/exchange ratio will be one share of the Company for one bond.
The bonds will mature on January 1, 2014. At maturity, the Company will redeem the bonds then outstanding at their nominal value (i.e.,€31.30 per bond). The Company may redeem the bonds at its sole option at any time from January 1, 2012, subject to 30 calendar days’ notice, so long as the product of (i) the applicable conversion/exchange ratio in effect on such date and (ii) the arithmetic average opening price of the Company’s shares on Eurolist by Euronext Paris calculated over a period of 20 consecutive trading days during which the shares are traded, as selected by the Company from among the 45 consecutive trading days immediately preceding the date of publication of the notice relating to such early redemption, determined in the manner described herein, exceeds 130% of the nominal value of the bonds.
Based on the listed price at December 31, 2007, the fair value of each bond was €24. Consequently, the fair value of convertible bonds amounted to €61,725,216.
Borrowing costs amounted to €2,500,790 and have been recorded as Other assets and Interest in Associates. They have been capitalized and are being amortized using the straight-line method over the period from July 13, 2007 until January 1, 2012. Accumulated amortization of these borrowing costs totaled €257,000 for the year ended December 31, 2007 and are recorded as interest expense in the consolidated statements of income.
Total interest expenses for the year ended December 31, 2007, related to the OCEANE amounted to €921,000 (€664,000 for interest at 1.75% and €257,000 for the amortization of the borrowing costs).
WAVECOM - Annual Report Form 20-F 2007 F-23
Note 10. | Other liabilities |
In July 2004, Wavecom received a notification from the Tax authorities related to fiscal years 1999 to 2001. The tax authorities contested a portion of Wavecom’s research and development tax credits for the years 1999 to 2001 for a total of €3.6 million. At December 31, 2005 and 2006, no provisions were recorded for this later claim as Wavecom believes that the Company has strong support for its position and it is probable that it will not impact the net income The Company requested in December 2004 the opinion of another expert appointed by the French ministry of industry. The request for revaluation was granted and is still underway. However, in December 2007, the tax authorities requested the Company to pay beginning of 2008 the tax adjustment, therefore a tax liability of €3,5 million was recorded at December 31, 2007. The Company will however continue to contest this tax adjustment. At December 31, 2007, the carry back receivable was revised accordingly and increased by €3,5 million compared to December 31, 2006 (see Note 15).
Note 11. | Shareholders’ equity |
At December 31, 2007, 15,796,591 shares were issued, each with a nominal value of €1 per share. After taking into consideration the 544,322 shares repurchased during 2003 and 2007, and held in treasury, 15,252,269 shares were outstanding at December 31, 2007.
General |
On February 12, 2003, Wavecom initiated a share buyback program covering a maximum of 1,400,000 ordinary shares, representing 9.45% of the capital. At December 31, 2004, 2005 and 2006, Wavecom held 156,345 shares pursuant to this program purchased for a total amount of €1,312,215.
On July 27, 2007, Wavecom initiated a new share buyback program, limited to 10% of the capital (i.e 1,555,415 ordinary shares) which is the maximum that a company can hold of its own shares under French Law. Under this program, Wavecom purchased 387,977 shares for a total purchase price of €7,510,444.
Therefore, at December 31, 2007, Wavecom held 544,322 of its own shares pursuant to these two programs.
Preemptive subscription rights |
Shareholders have preemptive rights to subscribe on a pro rata basis for additional shares issued by Wavecom for cash. Shareholders may waive such preemptive subscription rights at an extraordinary general meeting under certain circumstances. Preemptive subscription rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares.
Dividend rights |
Dividends may be distributed from the statutory retained earnings and additional paid in capital, subject to the requirements of French law and Wavecom’s by-laws. There were no distributable retained earnings at December 31, 2007. Dividend distributions by Wavecom, if any, will be made in euro.
Stock option, warrant plans and free shares |
The shareholders of Wavecom authorized the board of directors to grant founders’ warrants to employees of the French parent company, stock options to employees of subsidiaries, warrants to members of the board of directors and free shares to employees of the French parent company and its subsidiaries. Under the terms of the plans, the options and warrants give the right to purchase one share per option or warrant at an exercise price to be based on the stock market price of Wavecom shares on the grant date.
Options and founders’ warrants granted in 2005, 2006 and 2007 vest 25% per year over 4 years. The rights to exercise the warrants granted to Board members vest 331/3% per year over 3 years. Options expire 10 years after the grant date. Founders’ warrants, which were issued to employees of the French parent company, expire after five years, as required by law. Any founders’ warrants remaining unexercised at the expiration date automatically convert to stock options with a five-year term remaining. Founders’ warrants were issued to French employees due to the existence of certain tax advantages (for both the employee and Wavecom) available in connection with the issuance of founders’ warrants which are not available for stock option holders in France. Other than the expiration dates, the terms of the founders’ warrants are identical to the stock options. Warrants granted to Board members expire after five years. Any unvested or unexercised options and founders’ warrants are cancelled upon termination of employment.
During 2007, 56 employees were granted free shares. The total number of free shares so granted was 155,650. Under French Law, the shares vest after a two year period which means that they are only effectively acquired and owned by the beneficiaries after two years. This two year period shall expire on June 7, 2009. In addition, for a further two years, the beneficiary cannot transfer or sell the shares. This two year period expires on June 7, 2011.
F-24 WAVECOM - Annual Report Form 20-F 2007
A summary of the founders’ warrants, warrants to Board members and free shares is as follows :
Founders’ warrants to employees of the French parent company | Warrants to members of the board of directors | Free shares | |||||||||||||||||||||||||||||||||||||
Shareholders’ meeting date | 06/17/02 | 05/22/03 | 11/16/04 | 05/22/03 | 05/26/04 | 11/16/04 | 05/26/05 | 05/17/06 | 05/16/07 | 12/22/05 | 02/09/07 | ||||||||||||||||||||||||||||
Total of warrants authorized | 590,000 | 290,000 | 462,700 | 40,000 | 50,000 | 20,000 | 70,000 | 40,000 | 40,000 | 156,345 | 155,300 | ||||||||||||||||||||||||||||
Board of directors date | 03/25/03 | 05/22/03 | 08/27/03 | 03/23/04 | 01/19/05 | 03/15/05 | N/A | N/A | N/A | N/A | N/A | N/A | 05/17/06 | 06/07/07 | |||||||||||||||||||||||||
Total of warrants granted | 193,000 | 11,000 | 241,000 | 38,000 | 302,700 | 154,500 | 40,000 | 50,000 | 20,000 | 70,000 | 40,000 | 40,000 | 155,673 | 155,650 | |||||||||||||||||||||||||
Exercice price | €8,07 | €11,18 | €11,40 | €9,62 | €5,39 | €4,19 | €11,18 | €7,04 | €5,68 | €6,55 | €10,62 | €21,90 | €0 | €0 | |||||||||||||||||||||||||
Total of warrants exercised | 71,678 | 5,000 | 15,914 | 13,916 | — | 25,490 | 40,000 | 26,666 | 6,666 | 6,666 | 3,333 | — | — | — | |||||||||||||||||||||||||
Accumulated warrants cancelled at December 31, 2007(2) | 88,872 | — | 150,000 | 18,084 | — | 7,398 | — | 13,334 | 13,334 | 20,000 | — | — | 3,000 | — | |||||||||||||||||||||||||
Total of warrants cancelled during the year ended Dec 31, 2007(2) | 25 | — | — | 2,084 | — | 3,752 | — | — | — | 10,000 | — | — | 1,500 | — | |||||||||||||||||||||||||
Total of warrants granted and not exercised at December 31, 2007(2) | 32,450 | 6,000 | 75,086 | 6,000 | 302,700 | 121,612 | — | 10,000 | — | 43,334 | 36,667 | 40,000 | 152,673 | 155,650 | |||||||||||||||||||||||||
Total of warrants exercisable at December 31, 2007(2) | 32,450 | 6,000 | 75,086 | 5,241 | 302,700 | 77,926 | — | 10,000 | — | 26,668 | 9,999 | — | — | — | |||||||||||||||||||||||||
Expiration date(1) | 03/24/08 | 05/21/08 | 08/26/08 | 03/22/09 | 11/15/09 | 03/14/10 | 05/21/08 | 05/25/08 | 11/15/08 | 05/25/09 | 05/16/10 | 05/15/11 | 05/17/08 | 06/07/09 | |||||||||||||||||||||||||
(1) | Founders’ warrants not exercised at the expiration date will be converted into stock options. Warrants expire in terms of five or four years. Free shares convert ownership after two years. |
(2) | For the respective grant date. |
WAVECOM - Annual Report Form 20-F 2007 F-25
A summary of the stock options is as follows
STOCK OPTIONS | |||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ meeting date | 02/25/99 | 03/15/00 | 06/27/00 | 12/20/00 | 06/29/01 | 12/19/01 | |||||||||||||||||||||||||||||||||||||||
Total of stock options authorized | 600,000 | 300,000 | 100,000 | 800,000 | 1,200,000 | 450,000 | |||||||||||||||||||||||||||||||||||||||
Board of directors date | 02/09/99 | 04/27/99 | 03/30/00 | 06/27/00 | 06/27/00 | 07/24/00 | 12/20/00 | 03/14/01 | 06/29/01 | 12/19/01 | |||||||||||||||||||||||||||||||||||
Total of stock options granted | 530,800(1) | 1,500 | 157,200(1) | 5,700 | 101,300(1) | 24,710 | 50,860(1) | 41,000(1) | 400,000(1) | 90,590 | 61,000 | 467,151(1) | 97,395 | 233,500(1) | 193,500 | ||||||||||||||||||||||||||||||
Exercice price | €4,57 | €4,57 | €139,52 | €139,52 | €103,23 | €103,23 | €103,23 | €136,62 | €69,86 | €69,86 | €26,68 | €34,66 | €34,66 | €41,09 | €41,09 | ||||||||||||||||||||||||||||||
Total of stock options exercised | 18,925 | — | — | — | — | — | — | — | — | — | 4,684 | — | — | — | — | ||||||||||||||||||||||||||||||
Accumulated stock options cancelled at December 31, 2007(2) (3) | 510,183 | — | 111,500 | 1,200 | 78,000 | 20,860 | 39,950 | 25,600 | 315,931 | 72,190 | 53,316 | 344,099 | 82,695 | 181,000 | 173,500 | ||||||||||||||||||||||||||||||
Total of stock options granted and not exercised at December 31, 2007(3) | 1,692 | 1,500 | 45,700 | 4,500 | 23,300 | 3,850 | 10,910 | 15,400 | 84,069 | 18,400 | 3,000 | 123,052 | 14,700 | 52,500 | 20,000 | ||||||||||||||||||||||||||||||
Total of stock options exercisable at December 31, 2007(3) | 1,692 | 1,500 | 45,700 | 4,500 | 23,300 | 3,850 | 10,910 | 15,400 | 84,069 | 18,400 | 3,000 | 123,052 | 14,700 | 52,500 | 20,000 | ||||||||||||||||||||||||||||||
Expiration date(1) | 02/08/09 | 04/26/09 | 03/29/10 | 06/26/10 | 06/26/10 | 07/23/10 | 12/19/10 | 03/13/11 | 06/28/11 | 12/18/11 | |||||||||||||||||||||||||||||||||||
STOCK OPTIONS | |||||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ meeting date | 06/17/02 | 05/22/03 | 11/16/04 | 12/22/05 | 02/09/07 05/16/07 | ||||||||||||||||||||||||||||||||||||||||||
Total of stock options authorized | 840,000 | 440,000 | 542,700 | 427,500 | 543,600 | ||||||||||||||||||||||||||||||||||||||||||
Board of directors date | 07/09/02 | 03/25/03 | 05/22/03 | 08/27/03 | 03/23/04 | 08/18/04 | 01/19/05 | 03/15/05 | 09/07/05 | 05/17/06 | 06/07/07 | ||||||||||||||||||||||||||||||||||||
Total of stock options granted | 395,360(1) | 174,095 | 193,000(1) | 155,200 | 11,000(1) | 10,500 | 241,000(1) | 99,000 | 38,000(1) | 147,300 | 302,700(1) | 154,500(1) | 49,000 | 3,500 | 423,544 | 372,650 | |||||||||||||||||||||||||||||||
Exercice price | €39,18 | €39,18 | €8,07 | €8,07 | €11,18 | €11,18 | €11,40 | €11,40 | €9,62 | €3,29 | €5,39 | €4,19 | €4,19 | €10,18 | €10,62 | €24,21 | |||||||||||||||||||||||||||||||
Total of stock options exercised | — | 35,957 | — | 9,546 | — | — | 5,584 | — | 8,957 | — | |||||||||||||||||||||||||||||||||||||
Accumulated stock options cancelled at December 31, 2007(2) (3) | 296,105 | 155,045 | 160,550 | 89,031 | 5,000 | 10,500 | 165,914 | 66,000 | 32,000 | — | — | 32,888 | 1,977 | — | 18,128 | — | |||||||||||||||||||||||||||||||
Total of stock options granted and not exercised at December 31, 2007(3) | 99,255 | 19,050 | 32,450 | 30,212 | 6,000 | — | 75,086 | 23,454 | 6,000 | 147,300 | 302,700 | 121,612 | 41,439 | 3,500 | 396,459 | 372,650 | |||||||||||||||||||||||||||||||
Total of stock options exercisable at December 31, 2007(3) | 99,255 | 19,050 | — | 30,212 | — | — | — | 23,454 | — | 122,747 | — | — | 27,185 | 1,966 | 155,616 | — | |||||||||||||||||||||||||||||||
Expiration date(1) | 07/08/12 | 03/24/13 | 05/21/13 | 08/26/13 | 03/22/14 | 08/17/14 | 01/18/15 | 03/14/15 | 09/06/15 | 05/16/16 | 06/06/17 | ||||||||||||||||||||||||||||||||||||
(1) | Options which will become exercisable after 5 years to the extent which the related founders’ warrants expire unexercisable |
(2) | Stock options cancelled, to be granted by future board of directors |
(3) | For the respective grant date |
F-26 WAVECOM - Annual Report Form 20-F 2007
A summary of the activity in the warrants stock options and free shares is as follows:
Number of shares | Weighted average exercise price per share € | Price range € | |||||
Balance at January 1, 2005 | 2,115,663 | 39.21 | 4.57 – 150.72 | ||||
Granted | 579,700 | 5.14 | 4.19 – 10.18 | ||||
Exercised | (25,523 | ) | 6.55 | 4.57 – 8.07 | |||
Expired | (30,000 | ) | 126.98 | 103.23 – 150.72 | |||
Cancelled | (771,406 | ) | 42.85 | 4.57 – 139.52 | |||
Balance at December 31, 2005 | 1,868,434 | 26.18 | 3.29 – 139.52 | ||||
Granted | 619,217 | 7.95 | 0 – 10.62 | ||||
Exercised | (22,340 | ) | 6.5 | 4.19 – 8.07 | |||
Expired | (50,000 | ) | 37.78 | 34.66 – 42.46 | |||
Cancelled | (139,273 | ) | 40.84 | 0 – 139.52 | |||
Balance at December 31, 2006 | 2,276,038 | 20.26 | 0 – 139.52 | ||||
Granted | 568,300 | 17.42 | 0 – 24.21 | ||||
Exercised | (242,438 | ) | 6.78 | 4.19 – 11.40 | |||
Cancelled | (63,836 | ) | 28.15 | 0 – 139.52 | |||
Balance at December 31, 2007 | 2,538,064 | 20.54 | 0 – 139.52 | ||||
Cancellations related to the year ended December 31, 2005 were mainly due to the headcount reductions following the restructuring plans.
At December 31, 2007, 1,448,128, founders’ warrants, stock options and warrants were exercisable (1,293,533 and 1,137,361 at December 31, 2006 and 2005, respectively) at a weighted average exercise price of €26.88 (€30.32 and €39.29 at December 31, 2006 and 2005, respectively).
The weighted-average remaining contractual life of the warrants and stock options outstanding at December 31, 2007 was approximately 6 years.
311,323 free shares have been granted to employees and members of the board. The final acquisition of the shares is subject to the completion of a two year service period by the employees.
The weighted-average fair value of options, warrants and free shares granted during 2005, 2006 and 2007 was as follows:
2005 | 2006 | 2007 | |||||
Options whose price equaled market price of the underlying shares on the grant date | — | €10.00 | €24.06 | ||||
Options whose price was less than the market price of the underlying shares on the grant date | €2.93 | €6.03 | €14.66 | ||||
Options whose price was greater than the market price of the underlying shares on the grant date | — | — | — | ||||
WAVECOM - Annual Report Form 20-F 2007 F-27
Note 12. | Stock-based compensation |
Stock-based compensation includes stock options, warrants and free shares and were estimated as follow:
Equity instruments | Grant date | Number of stock options, warrants and shares granted | Stock price on date of grant | Exercise price | Expected volatility | Expected life | Risk-free interest rate | Compensation for the year ended 2007 | Initial fair value at date of grant | |||||||||
(in € thousands) | ||||||||||||||||||
Stock options | 25.03.2003 | 155,200 | 8.14 | 8.07 | 82.56 | % | 10 years | 4.29 | % | 7 | 897 | |||||||
22.05.2003 | 10,500 | 10.78 | 11.18 | 81.39 | % | 10 years | 3.77 | % | — | 78 | ||||||||
27.08.2003 | 99,000 | 11.25 | 11.4 | 79.51 | % | 10 years | 4.21 | % | 4 | 775 | ||||||||
18.08.2004 | 147,300 | 2.95 | 3.29 | 69.07 | % | 10 years | 4.10 | % | 24 | 262 | ||||||||
15.03.2005 | 49,000 | 4.23 | 4.19 | 63.08 | % | 10 years | 3.75 | % | 14 | 123 | ||||||||
07.09.2005 | 3,500 | 11.25 | 10.18 | 67.17 | % | 10 years | 3.10 | % | 5 | 25 | ||||||||
17.05.2006 | 423,544 | 10 | 10.62 | 65.78 | % | 10 years | 4.08 | % | 972 | 2,598 | ||||||||
07.06.2007 | 372,650 | 24.06 | 24.21 | 66.86 | % | 10 years | 4.59 | % | 1,642 | 5,576 | ||||||||
Founder’s | 25.03.2003 | 193,000 | 8.14 | 8.07 | 82.56 | % | 10 years | 4.29 | % | 1 | 1,059 | |||||||
warrants | 22.05.2003 | 11,000 | 10.78 | 11.18 | 81.39 | % | 10 years | 3.77 | % | 1 | 79 | |||||||
27.08.2003 | 241,000 | 11.25 | 11.4 | 79.51 | % | 10 years | 4.21 | % | 11 | 1,791 | ||||||||
23.03.2004 | 38,000 | 8.3 | 9.62 | 70.12 | % | 10 years | 3.97 | % | 4 | 180 | ||||||||
19.01.2005 | 302,700 | 5.4 | 5.39 | 66.94 | % | 10 years | 3.52 | % | 123 | 942 | ||||||||
15.03.2005 | 154,500 | 4.23 | 4.19 | 63.08 | % | 10 years | 3.75 | % | 45 | 366 | ||||||||
Warrants to | 26.05.2004 | 50,000 | 5.9 | 7.04 | 70.11 | % | 4 years | 3.37 | % | 5 | 141 | |||||||
members of the | 16.11.2004 | 20,000 | 5.68 | 5.68 | 66.95 | % | 4 years | 2.82 | % | 2 | 57 | |||||||
board of directors | 26.05.2005 | 70,000 | 6.78 | 6.55 | 67.43 | % | 4 years | 2.58 | % | 4 | 242 | |||||||
17.05.2006 | 40,000 | 10 | 10.62 | 65.78 | % | 4 years | 4.08 | % | 82 | 196 | ||||||||
16.05.2007 | 40,000 | 22.68 | 21.90 | 67.31 | % | 4 years | 4.29 | % | 169 | 474 | ||||||||
Free shares | 17.05.2006 | 155,673 | 10 | N/A | N/A | 4 years | N/A | 759 | 1,557 | |||||||||
07.06.2007 | 155,650 | 24.06 | N/A | N/A | 4 years | N/A | 936 | 3,745 | ||||||||||
Total | 4,810 | 21,163 | ||||||||||||||||
The total amount of €4,810,000 was recording in the following line items of the Consolidated Statement of income:
(in € thousands) | Year ended December 31, 2006 | Year ended December 31, 2007 | |||
Research and development | 0,268 | 1,418 | |||
Sales and marketing | 0,510 | 1,274 | |||
General and administrative | 1,312 | 2,118 | |||
2,090 | 4,810 | ||||
As of December 31, 2007, the total compensation cost related to non-vested awards not yet recognized, but issued was €8,126,000, which is expected to be amortized over the 4 years ending December 31, 2011 (end of the vesting periods).
F-28 WAVECOM - Annual Report Form 20-F 2007
Note 13. | Impairment of intangible assets |
In accordance with SFAS 142 “Goodwill and Other intangible Assets”, the Company completed the annual impairment tests of the goodwill generated both by the acquisition of NexGen and the M2M activity from Sony Ericsson. These tests were performed at the reporting unit level using a two step, fair value based approach. The Company has determined that it has three reporting units, which are the three geographic segments. The goodwill has been allocated to these segments as follows:
EMEA: | €3,004,000 | ||
Americas: | €3,459,000 | ||
APAC: | €1,569,000 | ||
Total | €8,032,000 | ||
The Company concluded that no impairment existed at December 31, 2006 and 2007.
Note 14. | Interest income (expenses) |
Interest expense and interest income include:
Year ended December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Interest expenses : | |||||||
Interest on convertible bonds | — | — | 664 | ||||
Issue costs of convertible bonds | — | — | 257 | ||||
Loss from sales of securities | — | — | 340 | ||||
Other interets | 214 | 218 | 280 | ||||
Total | €214 | €218 | €1,541 | ||||
Interest income : | |||||||
Gain from sales of securities | 1,225 | 1,338 | 3,375 | ||||
Total | €1,225 | €1,338 | €3,375 | ||||
Note 15. | Income taxes |
Income before income taxes is as follows :
Year ended December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
France | €7,781 | €4,323 | €10,701 | ||||
Others | 1,308 | 505 | 2,388 | ||||
Total | €9,089 | €4,828 | €13,089 | ||||
The provision for income taxes consists of the following :
Year ended December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Local current income tax expense (benefit) | €303 | €27 | €(10 | ) | |||
Foreign current income tax expense | 92 | 98 | 214 | ||||
Local deferred income tax expense (benefit) | — | — | (4,514 | ) | |||
Total income tax expense (benefit) | €395 | €125 | €(4,310 | ) | |||
WAVECOM - Annual Report Form 20-F 2007 F-29
Taxes paid totaled approximately €452,000, €110,000 and €265,000 in the years ended December 31, 2005, 2006 and 2007, respectively.
The current tax expense in 2005 is the net of research tax credit (€42,000), other tax credits (€36,000), French current tax expense (€381,000) and income tax expense of Wavecom’s Asian subsidiary (€92,000).
The current tax expense in 2006 is the net of tax credits (€5,000), French current tax expense (€33,000) and income tax expense of Wavecom’s subsidiaries (€97,000).
The current tax expense in 2007 is the net of tax credits (€10,000), income tax expense of Wavecom’s subsidiaries (€214,000) and deferred income tax benefit (€4,514,000).
In France, the system of carry back allows the allocation of tax losses of the year N on the previous taxable income of the 3 prior years (N-1, N-2 and N-3). This creates a tax asset which can be used to either offset future tax profit (carry forward) or be reimbursed by the tax administration at the end of a five-year period if not used (carry back). In 2002, we were tax profitable but in 2003 and 2004 we incurred tax losses. Therefore, applying the French carry back rules, we were eligible to a carry back amounted to €9,617,000. Consequently, an income tax receivable of €9,617,000 was recorded at December 31, 2004 and following years. As of December 2005 and 2006, this income tax asset was not used to offset tax profit due to the amount of remaining net loss carry forwards. An additional amount of €3,467,000 was added in 2007 as the Company filed a provisional election to carry back for fiscal year 2004 tax losses against any Research & Development credits that may ultimately fall due related to fiscal year 2002. This filing took place in December 2007 following the request to pay the tax adjustment related to Credit Impot Recherche of 1999 to 2001.
The amount of the carry back is subject to further revision upon final outcome of the Research tax Credit audit and ongoing independent expertise (see Note 10).
Effective tax rate |
A reconciliation of income taxes computed at the French statutory rate (33.83% in 2005 and 33.33% in 2006 and 2007) to the income tax expense (benefit) is as follows :
Years ended December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Income tax expense computed at the French statutory rate | €3,075 | €1,609 | €4,363 | ||||
Miscellaneous tax credits and tax expenses | (120 | ) | (247 | ) | (257 | ) | |
Change in valuation allowance on deferred tax assets | (4,589 | ) | (96 | ) | (2,506 | ) | |
Effect of previously unrecognized deferred tax assets | (211 | ) | (1,509 | ) | (4,806 | ) | |
Other permanent differences | 193 | (185 | ) | (1,367 | ) | ||
Adjustment on tax loss carry-forwards | — | — | 402 | ||||
Non deductible tax penalties | 237 | — | 61 | ||||
Impact of differences in foreign income tax rates | (238 | ) | (22 | ) | (200 | ) | |
Variation impact of income tax rates on deferred tax assets | 1,575 | 444 | — | ||||
Withholding & annual minimum income taxes | 473 | 131 | — | ||||
Total income tax expense (benefit) | €395 | €125 | €(4,310 | ) | |||
F-30 WAVECOM - Annual Report Form 20-F 2007
Deferred taxes and valuation allowance |
Significant components of the Company’s deferred tax assets and liabilities are as follows:
Years ended December 31, | |||||||
(in € thousands) | 2005 | 2006 | 2007 | ||||
Deferred tax assets: | |||||||
Royalty accruals not currently deductible | €4,838 | €4,483 | €4,640 | ||||
Other provisions and accruals not currently deductible | (531 | ) | 813 | 1,747 | |||
Accruals not currently deductible | 2,636 | 3,460 | 4,015 | ||||
Research tax credit | 1,529 | 1,771 | 2,049 | ||||
Net operating loss carry forwards from Parent Company | 23,242 | 20,320 | 12,045 | ||||
Net operating loss carry forwards from subsidiaries | 4,962 | 5,000 | 4,643 | ||||
Total deferred tax assets | 36,676 | 35,847 | 29,139 | ||||
Valuation allowance | (36,676 | ) | (35,847 | ) | (24,625 | ) | |
Net deferred tax asset | €— | €— | €4,514 | ||||
Deferred tax liabilities : | €— | €— | €— |
Change in valuation allowance for the year ended December 31, 2007 is essentially explained by the effect of the reversal of previously unrecognized net operating loss for an amount of €4,514,000 and the use of previously unrecognized deferred tax assets for an amount of €4,806,000.
Until December 31, 2006, due to its history of tax losses in foreign tax jurisdictions which account for Wavecom’s deferred tax assets, the Company does not believe that sufficient objective, positive evidence exists to conclude that recoverability of its deferred tax assets is more likely than not. Consequently, the Company has provided valuation allowances covering 100% of its net deferred tax assets in these respective tax jurisdictions.
At December 31, 2007, based on the good performance the years before, in particular in 2007, and the perspective for the near future, Management has decided to reverse a part of the valuation allowance.
Net operating loss carry forwards |
As of December 31, 2007, expiration dates of net operating loss carry forwards were as follows:
(in € thousands) | |||
Expiration date: | |||
2008 | — | ||
2009 | — | ||
2010 | — | ||
2011 | — | ||
Between 2013 and 2022 | 1,650 | ||
No expiration date | 44,433 | ||
Total net operating loss carry forwards | 46,083 | ||
Wavecom S.A. (France) had total loss carry forwards of €36,140,000 at December 31, 2007 (€60,249,000 in 2006) with no expiration date.
Net operating loss carry forwards in the United States totaled approximately €1,650,000 at December 31, 2007 (€2,320,000 in 2006) and will expire from 2013 to 2022 if not utilized.
Net operating loss carry forwards in Asian Pacific totaled approximately €8,293,000 at December 31, 2007 (€9,938,000 in 2006) with no expiry date.
Uncertainty in Income Taxes |
Through the adoption of FIN No. 48, the Company reviewed the tax positions of each subsidiary. On December 31, 2007 there is no uncertainty in the company’s tax positions.
WAVECOM - Annual Report Form 20-F 2007 F-31
For Wavecom S.A., fiscal years 2006 and 2007 remain subject to tax examination.
Note 16. | Net income per share |
The following table sets forth the computation of basic and diluted net income per share:
Year ended December 31, | |||||||
(in € thousands, except per share amounts) | 2005 | 2006 | 2007 | ||||
Net income | €8,694 | €4,703 | €17,399 | ||||
Weighted average number of shares outstanding for basic EPS | 15,352,233 | 15,383,883 | 15,129,600 | ||||
Net effect of dilutive stock options, warrants awards and convertible bonds | 308,768 | 558,299 | 2,340,634 | ||||
Weighted average number of shares outstanding for diluted EPS | 15,661,001 | 15,942,182 | 17,470,234 | ||||
Net income per basic share | €0.57 | €0.31 | €1,15 | ||||
Net income per diluted share | €0.56 | €0.30 | €1,02 | ||||
For the year ended December 31, 2007, net income use to compute the diluted EPS was increased by the interest expense, amounting to €443,000, net of income tax effect, which related to the convertible debt issued on July 2007 (See Note 9 ).
Note 17. | Commitments and contingencies |
Contingencies |
Wavecom is currently involved in several legal proceedings. The Company believes that these legal and tax proceedings should not have a significant impact on our financial position or results of operations.
A law suit was launched at the European Patent Office by Wavecom against a French Company seeking to nullify their French and European Patents. This company filed a counterclaim based on alleged infringement of the same patents.
In addition, the French tax authorities have proposed revising research tax credits («Credit Impôt Recherche») granted to Wavecom for the years 2004 and 2005, for a total amount of €95,000. This amount has not been provided for at December 31, 2007, as this tax adjustment was based on the same conclusion of the previous tax audit that we are currently contesting (see Note 10).
On 6 February 2008, Wavecom filed a civil proceeding in the Supreme Court of the State of New York (USA) against Siemens AG and two of its US subsidiaries. Wavecom alleges that the defendants improperly took Wavecom’s confidential internal product information, distributed it internally and to customers of Wavecom, and utilized it to unfairly compete with Wavecom. The lawsuit claims the torts of conversion, unfair competition and misappropriation of trade secrets, and seeks damages in an amount to be proved at trial and a court order requiring the defendants to return the information.
Bank guarantees |
Bank guarantee of €13,110,000 was issued in July 2002 in favor of the owners of leased office space, in order to secure annual lease payments. Following the release of three floors of current offices, the guarantee was reduced at the end of 2004 and during the first half of 2005. This guarantee was secured by the pledge of certificates of deposit and mutual funds. The total value of investments secured to cover these bank guarantees was €3,585,000, €3,639,000 and €3,731,000 at December 31, 2005, 2006 and 2007, respectively.
Operating leases |
Wavecom leases its facilities under operating leases that expire through June 2014.
F-32 WAVECOM - Annual Report Form 20-F 2007
Future minimum lease payments under operating leases at December 31, 2007, due for the years ending December 31, are as follows (in thousands):
2008 | €4,745 | ||
2009 | 4,584 | ||
2010 | 4,568 | ||
2011 | 2,732 | ||
2012 | 539 | ||
Thereafter | 798 | ||
Total | €17,966 | ||
Rental expense for the years ended December 31, 2005, 2006, and 2007, was approximately €5,213,000, €4,288,000 and €4,700,000, respectively.
Other commitments |
At December 31, 2007, Wavecom had purchase commitments with its third-party manufacturers for future deliveries of products, principally during the first half of 2008. These non-cancelable purchase commitments totaled €18,605,000.
Note 18. | Employees |
Information related to Wavecom’s employees is as follows:
December 31, | |||||||
(in € thousands, except for employee data) | 2005 | 2006 | 2007 | ||||
Salaries paid | €25,659 | €25,782 | €30,378 | ||||
Benefits | €8,891 | €9,836 | €10,744 | ||||
Headcount (excluding subcontractors) at year end (unaudited) | 290 | 384 | 420 | ||||
Headcount’s increase in 2006 is due to Sony Ericsson’s employees integrated with the 2006 acquisition. Salaries paid in 2005 included amounts such as termination and notice costs paid to employees who left the Company in 2005, following the 2004 restructuring plans. These amounts (approximately €6,700,000) were accrued as of December 31, 2004.
In 2007, the salaries paid included an amount of €1,911,000 related to a retention bonus allocated to some of Wavecom executive committee members.
Note 19. | Compensation of executive officers |
The compensation to executive officers for the years ended December 31, 2005, 2006 and 2007, was €3,845,000, €5,424,000 and €4,523,000, respectively. The Company has not entered into any retirement commitments with its executive officers.
In the event of a negotiated merger, acquisition of the Company, or hostile takeover bid on the shares of the Company, that results in Dr. Black being terminated within six months following this event and if Dr. Black is not offered an opportunity to perform functions of an equivalent level, Wavecom has undertaken to pay to Dr. Black a severance payment (except in case of gross or wrongful misconduct). The gross amount of this severance payment is equal to three times the annual fixed salary (i.e. three times €421,500), including the severance payment provided by the applicable collective bargaining agreement.
In October 2005, Wavecom signed a commitment with some of its executive committee members for the payment of a retention bonus, on condition they were still employed as of March 31, 2007, the amount has been paid in April 2007. The total amount of these bonuses was €2,421,000 (including benefits) and was being recognized ratably as an expense from October 1, 2005 to March 31, 2007 (over the 18 months service period). Accordingly, Wavecom recorded compensation expense for this retention bonus in the years ended December 31, 2005, 2006 and 2007 in a respective amount of €428,000, €1,835,000 and €158,000.
Note 20. | Segments |
The Company has determined that the risks and the profitability are predominantly driven by the geographic areas. In addition, the Company’s Chief Executive Officer is using such segment reporting to allocate resources.
WAVECOM - Annual Report Form 20-F 2007 F-33
This structure included the establishment of management by geographic segment: EMEA (Europe Middle-East and Africa), APAC (Asia-Pacific) and the Americas (North and South America). The regions are supported from a product standpoint by marketing, research and development, operations (manufacturing), strategy and planning departments. From an administrative standpoint, the Company is supported by finance, human resources and quality departments.
Each of these regions has responsibility for developing customer relations, for supporting the customer on the technical subjects, for applying locally the marketing strategy and for preparing sales forecasts.
Support functions are mainly based in the headquarters in France but some people are located in the APAC and Americas regions, in particular in the finance, information technology, human resources areas and a part of research and development teams. Management tools have been implemented to follow the performance and costs of the regions and of the support functions.
Sales and related balance sheet items (account receivables) are allocated to regions (EMEA, APAC and Americas) based on the client’s address. Cost of goods sold and related balance sheet items (inventory, fixed assets, account payable, warranty and royalty accruals) are calculated based on the actual cost of products sold in each region.
The allocation of the operating expenses and related balance sheet items is performed as follows:
– | some functions has been defined as being corporate functions and therefore their costs have not been allocated to regions, these functions are including corporate management, quality departments, strategic marketing and long term research and development projects, |
– | local marketing and sales costs are allocated to the regions based on the location of the headcount, |
– | other operating costs, including mainly maintenance and the validation part of research and development, general and administrative costs, are allocated to the regions based on their respective contribution to the sales performance, |
– | restructuring costs are not allocated to the regions and remain at corporate level, |
– | the goodwill and the fixed assets related to the acquisition of Sony Ericsson activity have been allocated based on the sales per region forecasted for 2006 in the acquisition plan. |
The table below sets forth revenues, operating losses and other financial information for each of our segments for the years ended December 31, 2005, 2006 and 2007.
Fiscal year 2005 | EMEA | Americas | Asia Pacific | Corporate | Consolidated | ||||||
(in € thousands) | |||||||||||
Revenues | €74,840 | €12,473 | €40,466 | €1,453 | €129,232 | ||||||
Operating loss | 7,588 | 403 | 1,008 | (5,039 | ) | 3,960 | |||||
Long-lived assets | 5,001 | 551 | 2,134 | 863 | 8,549 | ||||||
Interest income | — | — | 13 | 1,213 | 1,226 | ||||||
Interest expense | — | — | (10 | ) | (204 | ) | (214 | ) | |||
Capital expenditures | 808 | 163 | 404 | 313 | 1,688 | ||||||
Fiscal year 2006 | EMEA | Americas | Asia Pacific | Corporate | Consolidated | ||||||
(in € thousands) | |||||||||||
Revenues | 99,389 | 48,422 | 34,932 | 6,015 | 188,758 | ||||||
Operating income (loss) | 9,730 | (1,680) | 452 | (2,855 | ) | 5,647 | |||||
Long-lived assets | 13,467 | 11,053 | 5,530 | 1,003 | 31,053 | ||||||
Interest income | — | — | 38 | 1,300 | 1,338 | ||||||
Interest expense | — | — | (15 | ) | (203 | ) | (218 | ) | |||
Capital expenditures(1) | 2,349 | 3,039 | 913 | 1,405 | 7,706 | ||||||
F-34 WAVECOM - Annual Report Form 20-F 2007
Fiscal year 2007 | EMEA | Americas | Asia Pacific | Corporate | Consolidated | ||||||
(in € thousands) | |||||||||||
Revenues | 96,576 | 70,526 | 35,081 | 154 | 202,337 | ||||||
Operating income (loss) | 21,666 | 8,825 | 1,395 | (19,189 | ) | 12,697 | |||||
Long-lived assets | 10,842 | 9,981 | 4,374 | 4,657 | 29,854 | ||||||
Interest income | 5 | — | 32 | 3,338 | 3,375 | ||||||
Interest expense | (1 | ) | — | (37 | ) | (1,503 | ) | (1,541 | ) | ||
Capital expenditures | 1,631 | 1,542 | 398 | 1,645 | 5,216 | ||||||
(1) | Including 1,604,000 related to acquired tangible assets from Sony Ericsson |
Note 21. | Subsequent events (unaudited) |
Wavecom announced on February 1, 2008 that it signed a definitive agreement to acquire 100% of Anyware Technologies. The transaction was finalized for a cash payment to Anyware Technologies shareholders of €9.1 million plus €1.5 million placed in an escrow account for customary warranty provisions. An additional payment for earn-out of up to €2 million upon reaching certain milestones is to be made in 2009.
At its March 18, 2008 meeting, the board of directors decided to propose to the beneficiaries of the June 7, 2007 stock option plan to cancel the grant. This stock option plan included 38 beneficiaries including the CEO who were together granted a total of 372,650 stock options at an exercise price of €24.21. The cancellation was agreed to by a large majority of the grantees, representing 96% of the total number of outstanding stock options.
Consequently, under SFAS123R, this cancellation will result in an expense of €3.8 million in the first quarter of 2008.
WAVECOM - Annual Report Form 20-F 2007 F-35
Wavecom S.A.
3, esplanade du Foncet
92442 Issy-les-Moulineaux (France)
Tel: +33 1 46 29 08 00
Fax: +33 1 46 29 08 08
Wavecom, Inc.
430 Davis Drive, Suite 300
P.O. Box 13920
Research Triangle Part, North Carolina (USA)
Tel: +1 919 237 4000
Fax: +1 919 237 4140
Wavecom Asia-Pacific
Unit 201-207, Second Floor, Bio-Informatics Centre
No. 2 Science Park West Avenue
Hong Kong Science Part, Shatin - New Territories, Hong Kong (China)
Tel: +852 2824 0254
Fax: +852 2824 0255