FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of September 2008
WAVECOM S.A.
3, esplanade du Foncet
F-92442 Issy-Les-Moulineaux Cedex, France
Tel: 00 33 1 46 29 08 00
(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.]
Form 20-F ý | Form 40-F o |
[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.]
Yes o | No ý |
[If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_____.]
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
and
OPERATING AND FINANCIAL REVIEW
For the six months ended June 30, 2008
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Note | Year ended | Six months ended June 30, | ||||||
December 31, | ||||||||
2007 | 2007 | 2008 | ||||||
Euro | Euro | Euro | ||||||
Revenues : | ||||||||
Product sales | 198 510 | 103 562 | 70 309 | |||||
Service revenue | 3 827 | 665 | 2 693 | |||||
Total revenues | 1 | 202 337 | 104 227 | 73 002 | ||||
Cost of revenues : | ||||||||
Cost of goods sold | 104 650 | 56 152 | 32 568 | |||||
Cost of services | 5 833 | 3 158 | 2 478 | |||||
Total cost of revenues | 110 483 | 59 310 | 35 046 | |||||
Gross profit | 91 854 | 44 917 | 37 956 | |||||
Operating expenses : | ||||||||
Research and development | 33 562 | 15 937 | 19 043 | |||||
Sales and marketing | 22 740 | 11 153 | 13 008 | |||||
General and administrative | 22 855 | 11 484 | 9 557 | |||||
Total operating expenses | 79 157 | 38 574 | 41 608 | |||||
Operating income | 12 697 | 6 343 | (3 652) | |||||
Interest income and other financial income, net | 1 834 | 836 | 1 695 | |||||
Foreign exchange gain (loss), net | (1 442 | ) | (98 | ) | 127 | |||
Total financial income | 392 | 738 | 1 822 | |||||
Income before income (loss) taxes | 13 089 | 7 081 | (1 830) | |||||
Income tax expense (benefit) | 11 | (4 310 | ) | 103 | (45 | ) | ||
Net income (loss) | 17 399 | 6 978 | (1 785 | ) | ||||
Basic net income (loss) per share | 1.15 | 0.45 | (0,12 | ) | ||||
Diluted net income (loss) per share | 1.02 | 0.42 | (0,12 | ) | ||||
Number of shares used for computing : | ||||||||
- basic | 15 129 600 | 15 424 475 | 15 257 142 | |||||
- diluted | 17 470 234 | 16 515 843 | 15 257 142 |
See notes to unaudited condensed financial statements
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
At December 31, | At June 30, | |||||
Note | 2007 | 2008 | ||||
Euro | Euro | |||||
ASSETS | ||||||
Current assets : | ||||||
Cash and cash equivalents | 4 677 | 3 745 | ||||
Marketable securities | 1 | 134 610 | 127 065 | |||
Accounts receivable | 29 467 | 23 050 | ||||
Inventory | 3 | 6 032 | 4 302 | |||
Value added tax recoverable | 1 124 | 774 | ||||
Prepaid expenses and other current assets | 4 | 3 141 | 3 648 | |||
Deferred tax assets | 4 514 | 4 514 | ||||
Total current assets | 183 565 | 167 098 | ||||
Long-term investments | 1 | 3 731 | 5 706 | |||
Other assets and Interests in associates | 4 517 | 4 290 | ||||
Research tax credit | 2 049 | 2 758 | ||||
Income tax receivable | 13 083 | 13 083 | ||||
Intangible and tangible assets, net | 5 | 16 336 | 19 911 | |||
Goodwill | 8 117 | 16 678 | ||||
Total assets | 231 398 | 229 524 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current liabilities : | ||||||
Accounts payable | 27 612 | 23 386 | ||||
Accrued compensation | 8 584 | 5 879 | ||||
Current portion of other accrued expenses | 7 | 3 572 | 2 872 | |||
Current portion of convertible bonds | 8 | 664 | 701 | |||
Current portion of capitalized lease obligations | 207 | 275 | ||||
Deferred revenue and advances received from customers | 307 | 1 067 | ||||
Other liabilities | 3 652 | 6 153 | ||||
Total current liabilities | 44 598 | 40 333 | ||||
Long-term liabilities : | ||||||
Long-term portion of other accrued expenses | 7 | 16 636 | 15 401 | |||
Long-term portion of convertible bonds | 8 | 80 500 | 80 500 | |||
Long-term portion of capitalized lease obligations | 340 | 304 | ||||
Other long-term liabilities | 616 | 550 | ||||
Total long-term liabilities | 98 092 | 96 755 | ||||
Shareholders' equity : | ||||||
Shares, Euro 1 nominal value, 15,811,381 shares authorized, issued and outstanding at June 30, 2008 (15,796,591 at December 31, 2007) | 15 797 | 15 811 | ||||
Additional paid-in capital | 146 052 | 151 663 | ||||
Treasury stock at cost (391,649 shares at June 30, 2008 and 544,322 at December 31, 2007) | (8 823 | ) | (7 541 | ) | ||
Accumulated deficit | (62 548 | ) | (65 614 | ) | ||
Accumulated other comprehensive loss | (1 770 | ) | (1 883 | ) | ||
Total shareholders' equity | 9 | 88 708 | 92 436 | |||
Total liabilities and shareholders' equity | 231 398 | 229 524 | ||||
See notes to unaudited condensed financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share and per share data)
Accumulated | ||||||||||||||
(in thousands, except share and per share data) | Ordinary shares | Additional | Other | Total | ||||||||||
paid in | Treasury | Accumulated | Comprehensive | Shareholders’ | ||||||||||
Shares | Amount | capital | Stock | Deficit | Income (loss) | Equity | ||||||||
Balance at December 31, 2007 | 15,796,591 | €15,797 | €146,052 | € ( 8,823 | ) | € ( 62,548 | ) | € ( 1,770 | ) | €88,708 | ||||
Cancellation of treasury stock | 1,282 | (1,282 | ) | 0 | ||||||||||
Issuance of shares in connection with the exercise of 11,250 founders’ warrants at an exercise price of €4.19 | 11,250 | 11 | 36 | 47 | ||||||||||
Issuance of shares in connection with the exercise of 3,540 options at an exercise price of €10.62 | 3,540 | 3 | 34 | 37 | ||||||||||
Comprehensive income: | ||||||||||||||
Net income | (1,785 | ) | (2 | ) | ||||||||||
Unrealized gain on financial instruments | 26 | 26 | ||||||||||||
Stock-based employee compensation | 5,541 | 5,541 | ||||||||||||
Foreign currency translation | (138 | ) | (138 | ) | ||||||||||
Total comprehensive income | 3,644 | |||||||||||||
Balance at June 30, 2008 | 15,811,381 | €15,811 | €151,663 | € ( 7,541 | ) | € ( 65,615 | ) | € ( 1,882 | ) | €92,436 | ||||
See notes to unaudited condensed financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended | Six months ended June 30, | ||||||
December 31, | |||||||
2007 | 2007 | 2008 | |||||
Euro | Euro | Euro | |||||
Cash flows from operating activities : | |||||||
Net income (loss) | 17 399 | 6 978 | (1 785 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided from operating activities : | |||||||
Amortization and impairment of intangible and tangible assets | 8 409 | 4 257 | 4 311 | ||||
Amortization of debt issue costs | 257 | - | 280 | ||||
Share-based compensation | 4 810 | 1 348 | 5 541 | ||||
Loss (gain) on sales and retirement of tangible assets | 38 | 4 | (14 | ) | |||
Disposal (acquisition) of marketable securities, net | (134 610 | ) | - | 7 545 | |||
Deferred tax assets | (4 514 | ) | - | (95 | ) | ||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (3 022 | ) | (5 894 | ) | 7 039 | ||
Inventory | 501 | (2 589 | ) | 1 698 | |||
Value added tax recoverable | (523 | ) | (143 | ) | 397 | ||
Prepaid expenses and other current assets | (662 | ) | (1 011 | ) | (273 | ) | |
Recoverable taxes | (3 467 | ) | - | 4 | |||
Accounts payable and other accrued expenses | (4 766 | ) | 1 385 | (5 218 | ) | ||
Accrued compensation | (642 | ) | (2 395 | ) | (3 064 | ) | |
Interets on loan | 664 | - | 37 | ||||
Deferred revenue and advances received from customers | 232 | 932 | 789 | ||||
Other payables | 2 754 | (154 | ) | (367 | ) | ||
Other | 606 | 290 | (264 | ) | |||
Net cash provided (used) by operating activities | (116 536 | ) | 3 008 | 16 561 | |||
Cash flows from investing activities : | |||||||
Acquisition of long term investments | (93 | ) | (18 | ) | (1 974 | ) | |
Purchases of intangible and tangible assets | (5 025 | ) | (2 652 | ) | (4 284 | ) | |
Acquisition of certain assets, net of cash acquired.(1) (2) | - | - | (10 704 | ) | |||
Proceeds from sale of intangible and tangible assets | 2 | - | 57 | ||||
Purchase of interets in associates | (15 | ) | - | - | |||
Net cash used by investing activities | (5 131 | ) | (2 670 | ) | (16 905 | ) | |
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 | (261 | ) | (147 | ) | (151 | ) | |
Purchase of treasury stock | (7 510 | ) | - | - | |||
Proceeds from exercise of stock options and founders' warrants | 2 091 | 1 327 | 85 | ||||
Net cash provided (used) by financing activities | 72 319 | 1 180 | (66 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (751 | ) | (240 | ) | (522 | ) | |
Net increase (decrease) in cash and cash equivalents | (50 099 | ) | 1 278 | (932 | ) | ||
Cash and cash equivalents, beginning of period | 54 776 | 54 776 | 4 677 | ||||
Cash and cash equivalents, end of period | 4 677 | 56 054 | 3 745 | ||||
See notes to unaudited condensed financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These condensed consolidated financial statements should be read in conjunction with Wavecom’s audited consolidated financial statements and footnotes thereto included in Company’s annual report on Form 20-F for the year ended December 31, 2007.
The consolidated financial statements as of June 30, 2008 include the accounts of the following entities:
Voting right percentage | Interest percentage | |||
Parent company: Wavecom S.A. | ||||
Subsidiaries: | ||||
Wavecom Inc. | 100 | % | 100 | % |
Wavecom Deutschland GmbH | 100 | % | 100 | % |
Wavecom Korea Co, Ltd. | 100 | % | 100 | % |
Wavecom Northern Europe Ltd. | 100 | % | 100 | % |
�� NexGen Software S.A.S. | 100 | % | 100 | % |
Anyware Technologies | 100 | % | 100 | % |
Wavecom Asia Pacific Ltd. | 99,99 | % | 99,99 | % |
Anyware Technologies is consolidated from its acquisition date, on January 31, 2008. Wavecom Korea was still a dormant company as at June 2008 end.
Revenue recognition
The Company’s revenue is derived from two primary sources: sales of products composed of wireless standard modules and wireless modems and revenue from technical support and other services.
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 using the percentage-of-completion method when the outcome of the contract can be estimated reliably. This occurs when total contract revenue and the costs to complete the contract can be estimated reliably, it is probable that the economic benefits associated with the contract will flow to the Company and the stage of contract completion can be measured. The costs associated with these arrangements are recognized as incurred. When the Company is not able to meet those conditions, in particular under certain technology development agreements, where significant technological risk factors exist, costs are expensed as incurred and revenues are recognized when all obligations under the agreement have been met.
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 June 30, 2008, 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 €127.1 million (€134.6 million at December 31, 2007). Net interests income generated by the marketable securities for the six months ended June 30, 2008 amounted to €2,803,000 (€3,035,000 for the year ended December 31, 2007).
In addition, at June 30, 2008, Wavecom had €5.7 million of pledged securities invested in short term money market funds (monetary SICAV) classified as long-term investments in the accompanying Consolidated Balance Sheets (€3.7 million as of December 31 2007).
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, Dexia, BFT and BNP Paribas.The criteria for selection of such marketable securities are, by order of importance:
• | Safety of capital | |
• | Liquidity | |
• | Yield | |
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 June 30, 2008.
Accounts receivable (before allowance for doubtful accounts) at June 30, 2008 and December 31, 2007 totaled €23,961,000 and €32,098,000, respectively.
A summary of the activity in the allowance for doubtful accounts is as follows :
(in € thousands) | Beginning balance | Additions charged to expenses | Write-offs | Recovered receivables | Exchange rate difference | Ending balance | |||||||
Year ended December 31, 2007 | €3,346 | €231 | € (208 | ) | € (627 | ) | € (111 | ) | €2,631 | ||||
Six months ended June 30, 2008 | 2,631 | 50 | (863 | ) | (872 | ) | (35 | ) | 911 |
Sales to customers by geographic region are summarized as follows (in thousands):
Year ended | Six months ended June 30, | ||||||
December 31, 2007 | 2007 | 2008 | |||||
China | €18,811 | €7,222 | €9,051 | ||||
Rest of Asia | 13,248 | 6,280 | 4,476 | ||||
Europe | 90,058 | 51,079 | 31,054 | ||||
Americas | 70,446 | 35,666 | 18,532 | ||||
Rest of world | 9,774 | 3,980 | 9,889 | ||||
€202,337 | €104,227 | €73,002 | |||||
Geographic region is determined by the customer's invoice address and may not indicate the final destination of product usage.
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 and June 30, 2008, Wavecom had €134,610,000 and €127,065,000, respectively, invested in money market accounts, including SICAV and FCPs, with no fixed maturity, earnings interest at short-term variable rates. Such accounts did not meet the Cash equivalents criteria and were recorded as Marketable Securities.
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.. An other bank guarantee, secured by pledges of investments, was issued in the first half of 2008 in favor of the French Tax authorities and
related a tax adjustment currently under discussion.. These investments have been classified as long-term investments in the consolidated balance sheet and amounted to €3,731,000 and €5,706,000 at December 31, 2007 and June 30, 2008, respectively.
Intangible and tangible asset, 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 8 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.
The fair values of intangible assets acquired through the business combinations were determined using an independent appraisal using facts available at the acquisition date. However, for the acquisition of Anyware technologies done on January 31, 2008, they represent preliminary assessments that may be adjusted with respect to additional information obtained upon the definitive allocation of the purchase price. Wavecom does not anticipate significant adjustments to occur.
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 Operations. 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.
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).
Employee stock options, 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) 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. |
The cancellation of an award shall be accounted for as a repurchase for no consideration. Accordingly, any previously unrecognized compensation costs shall be recognized at the cancellation date.
Wavecom recorded €5,541,000 and €2,090,000 of stock compensation expense in its Consolidated Statement of Income for the six months ended June 30, 2008 and for the year ended December 31, 2007, respectively. Stock compensation expense is further described in Note 10.
Note 2. Key events of the first six-months of 2008
On February 1, 2008, Wavecom S.A. acquired Anyware Technologies, an industry leader in machine-to-machine (M2M) client-server software solutions located in Toulouse, France. Anyware Technologies is a recognized leader in developing M2M software solutions for customers who use wireless technology to enhance business processes. The transaction was finalized for a cash payment to Anyware 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.
On March 18, 2008, the Board of Directors decided to propose to the beneficiaries of the stock option plan granted on June 7, 2007 to cancel the grants. 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 has resulted in an expense of €3.8 million in the first half of 2008.
Note 3. Inventory
Components of net inventory are:
December 31, 2007 | June 30, 2008 | ||||
(in thousands) | |||||
Finished goods | €1,334 | €790 | |||
Components and finished goods held by contract manufacturers | 4,698 | 3,512 | |||
€6,032 | €4,302 | ||||
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 the contract manufacturer.
Note 4. Prepaid expenses and other current assets
Prepaid expenses and other current assets include :
December 31, 2007 | June 30, 2008 | ||||
(in thousands) | |||||
Suppliers’ credit note accruals | €242 | €102 | |||
Prepaid expenses | 2,758 | 3,264 | |||
Other current assets | 141 | 282 | |||
Total prepaid expenses and other current assets | €3,141 | €3,648 | |||
Prepaid expenses consist primarily of prepaid rent and other operating expenses.
Note 5. Intangible and tangible assets, net
Intangible and tangible assets, net include:
December 31, | June 30, | ||||||||
(in € thousands) | 2007 | 2008 | |||||||
Net book value | Gross carrying amounts | Accumulated depreciation and impairment | Net book value | ||||||
Intangible assets : | |||||||||
Customer relationships | €5,689 | €10,831 | €5,371 | €5,460 | |||||
Non-compete agreement | 1,044 | 2,350 | 1,697 | 653 | |||||
Technology | — | 3,348 | 1,379 | 1,969 | |||||
Brand | — | 288 | 15 | 273 | |||||
NexGen protocol stack | 21 | 100 | 100 | 0 | |||||
Subtotal acquired intangible assets | 6,753 | 16,917 | 8,562 | 8,355 | |||||
Tangible assets : | |||||||||
Laboratory and testing equipment | 3,744 | 28,852 | 24,449 | 4,403 | |||||
Computer equipment and software | 2,830 | 25,634 | 21,456 | 4,178 | |||||
Furniture and office equipment | 198 | 1,640 | 1,410 | 230 | |||||
Leasehold improvements | 1,380 | 3,038 | 1,603 | 1,435 | |||||
Other | 1,430 | 2,687 | 1,377 | 1,310 | |||||
Total | €16,336 | €78,768 | €58,857 | €19,911 | |||||
Change in the net book value of intangible and tangible assets are as follows:
(in € thousands) | December 31, 2007 | June 30, 2008 | |||
Beginning of year balance, net of depreciation & amortization | €19,770 | €16,336 | |||
Acquisitions | 5,216 | 4,335 | |||
Tangible and intangible assets acquired (1) | — | 3,722 | |||
Sales and retirements | ( 1,244 | ) | (402 | ) | |
Depreciation and impairment expenses | (8,452 | ) | (4,311 | ) | |
Accumulated depreciation on sales and retirements | 1,257 | 243 | |||
Translation adjustment | ( 201 | ) | (12 | ) | |
End of year balance, net of depreciation & amortization | €16,336 | €19,911 | |||
(1) assets related to Anyware Technologies acquisition |
Note 6. Business combinations
On February 1, 2008, Wavecom S.A. acquired Anyware Technologies, an industry leader in machine-to-machine (M2M) client-server software solutions.
Assets and liabilities from Anyware were measured initially in application of the purchase method at their fair values at the acquisition date. However, because of acquisition arose during the first quarter 2008, the fair values of every assets and liabilities could not have been valuated definitely at the closing date. The final purchase price allocation will be settled at the latest in the next twelve month following the acquisition date.
The acquisition cost amounted to €13,560,000 at the closing date and breaks down as follows:
- cash paid (€11,410,000)
- deferred payment (€2,000,000)
- acquisition costs (€150,000)
The €2,000,000 deferred payment should be paid before March 31, 2009 upon achievement of the following criteria :
- achievement of commercial targets
- retention of some key employees
The net assets and liabilities acquired, on the basis of the situation as of February 1, 2008, have been temporarily estimated as follow:
(in € thousands) | Fair value | |
Acquired assets : | ||
Accounts receivable | 1 700 | |
Cash and cash equivalents | 856 | |
Other current assets | 280 | |
Total current assets | 2 836 | |
Intangible assets, net | 3 517 | |
Tangible assets, net | 206 | |
Other Assets | 15 | |
Deferred tax asset | 866 | |
Research Tax credit | 478 | |
Total assets | 7 918 | |
Assumed liabilities : | ||
Accounts payable | 509 | |
Other current liabilities | 887 | |
Total current liabilities | 1 396 | |
Non current liabilities | 351 | |
Deferred tax liabilities | 1 172 | |
Total liabilities | 2 919 | |
Net assets acquired | 4 999 | |
Residual Goodwill | 8 561 | |
Total consideration | 13 560 |
Intangible assets identified and valued in connection with the acquisition consist of:
Valuation | Useful life | ||
(in € thousands) | |||
Customer relationships | 1 081 | 5 years | |
Brand | 288 | 8 years | |
Technology | 2 148 | 5 years |
The customer relationships and the technology were measured using the excess earning method This method consists in calculating the residual cash flows attributable to the intangible asset. The residual cash flow is defined as the difference between the after-tax operating cash flow and the required cost of invested capital on all the other assets (tangible, intangible and current ) used to carry out the intangible asset. The discount rate used was 12%
The brand was measured using the relief from royalty method, derived from the economic theory of deprival value, it is assumed that when a business does not own a brand, , it has to pay royalties to the owners. The value of the brand is then calculated by capitalizing the value of the after tax royalties that the company is "relieved" from paying as a result of the ownership of the software/brand, after deducting the costs associated with maintaining the licensing arrangements.
It was calculated on the basis of a royalty rate of 5% and a discount rate of 12%.
The goodwill recognized above is attributed to the expected benefits of this acquisition in terms of synergies and product portfolio development.
As of June 30, 2008 total profit and loss of the acquired company recorded in Wavecom’s consolidated statements of operations since the date of acquisition have been as follow:
Six months ended June 30, 2008 | ||
Euro | ||
Revenues : | ||
Product sales | 131 | |
Service revenue | 1 871 | |
Total revenues | 2 002 | |
Cost of revenues : | ||
Cost of goods sold | 136 | |
Cost of services | 1 371 | |
Total cost of revenues | 1 507 | |
Gross profit | 495 | |
Operating expenses : | ||
Research and development | 230 | |
Sales and marketing | 582 | |
General and administrative | 474 | |
Total operating expenses | 1 286 | |
Operating loss | (791) | |
Interest expenses and other financial income, net | (3) | |
Foreign exchange gain, net | 7 | |
Total financial income | 4 | |
Income before loss taxes | (787) | |
Income tax benefit | (95) | |
Net loss | (692) | |
Note 7. 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, 2007 | June 30, 2008 | |||
Accrued royalties | € 15,844 | €14,543 | ||
Warranty accrual | 82 | 65 | ||
Other accruals | 710 | 793 | ||
Total | €16,636 | €15,401 | ||
Current portion:
December 31, 2007 | June 30, 2008 | |||
(in € thousands) | ||||
Warranty accrual | €963 | €817 | ||
Headcount restructuring cost accrual | 150 | 150 | ||
Other accruals | 2,459 | 1,905 | ||
Total | €3,572 | €2,872 | ||
Other accrued expenses changes during the period are as follows (in thousands):
Balance at January 1, 2008 | Accruals made during the period | Cash settlements made during the period | Changes in estimate for pre-existing accruals during the period, including expirations | Balance at June 30, 2008 | ||||||
(in € thousands) | ||||||||||
Accrued royalties | €15,844 | €1,060 | - | € ( 2,362 | ) | €14,542 | ||||
Warranty accrual | 1,046 | 699 | (863 | ) | - | 882 | ||||
Headcount restructuring cost accrual | 150 | - | - | - | 150 | |||||
Other accruals : | ||||||||||
Customers claims | 1,034 | 171 | (413 | ) | (32 | ) | 760 | |||
Tax audit | 260 | - | - | - | 260 | |||||
Third-party litigations | 269 | 58 | (235 | ) | - | 92 | ||||
Other | 1,605 | 878 | (896 | ) | - | 1,587 | ||||
Subtotal other accruals | 3,168 | 1,107 | (1,544 | ) | ( 32 | ) | 2,699 | |||
Total | €20,208 | €2,866 | € ( 2,407 | ) | € ( 2,394 | ) | €18,273 | |||
Note 8. 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 June 30, 2008, the fair value of each bond was €19,31. Consequently, the fair value of convertible bonds amounted to €.49,663,000.
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 €538,000 at June 30, 2008 (€257,000 at ended December 31, 2007) and are recorded as interest expense in the consolidated statements of income.
Total interest expenses for the first six-months of 2008, related to the OCEANE amounted to €981,000 (€701,000 for interest at 1.75% and €280,000 for the amortization of the borrowing costs). For the year ended December 31, 2007 the total interest expenses amounted to €921,000 (€664,000 for interest at 1.75% and €257,000 for the amortization of the borrowing costs).
Note 9. Shareholders’ Equity
At June 30, 2008, 15,811,381 shares were issued, each with a nominal value of €1 per share. After taking into consideration the 391,649 shares repurchased and held in treasury, 15,419,732 shares are outstanding at June 30, 2008.
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 December 31, 2007 | 2,538,064 | 20.54 | 0 – 139.52 | |||
Granted | 110,000 | 6.64 | 6.64 | |||
Exercised | (172,462 | ) | 0.61 | 0 – 10.62 | ||
Expired | (10,000 | ) | 7,04 | 7.04 | ||
Cancelled | (455,588 | ) | 30.5 | 4.19 – 139.52 | ||
Balance at June 30, 2008 | 2,010,014 | 19.29 | 0 – 139.52 | |||
At June 30, 2008, 1,505,542 founders' warrants, stock options and warrants were exercisable at an average price of €23.55 (€26.88 at December 31, 2007).
155,650 free shares have been granted to employees and members of the board in 2007. The final acquisition of the shares is subject to the completion of a two year service period by the employees.
Note 10. Stock-based compensation
Stock-bases 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 | Compensation for the six months ended June, 30 | Initial pricing at the date of grant | |||||||||||||
2007 | 2008 | ||||||||||||||||||||||
(in € thousands) | |||||||||||||||||||||||
Stock options | 25.03.2003 | 155 200 | 8.14 | 8.07 | 82.56 | % | 10 years | 4.29 | % | 7 | 7 | - | 897 | ||||||||||
27.08.2003 | 99 000 | 11.25 | 11.40 | 79.51 | % | 10 years | 4.21 | % | 4 | 4 | - | 775 | |||||||||||
18.08.2004 | 147 300 | 2.95 | �� | 3.29 | 69.07 | % | 10 years | 4.1 | % | 24 | 15 | 4 | 262 | ||||||||||
15.03.2005 | 49 000 | 4.23 | 4.19 | 63.08 | % | 10 years | 3.75 | % | 14 | 6 | 4 | 123 | |||||||||||
07.09.2005 | 3 500 | 11.25 | 10.18 | 67.17 | % | 10 years | 3.1 | % | 5 | 3 | 2 | 25 | |||||||||||
17.05.2006 | 423 544 | 10.00 | 10.62 | 65.78 | % | 10 years | 4.08 | % | 972 | 692 | 186 | 2 598 | |||||||||||
07.06.2007 | 372 650 | 24.06 | 24.21 | 66,86 | % | 10 years | 4.59 | % | 1 642 | 3 842 | 5 576 | ||||||||||||
14.05.2008 | 80 000 | 7 | 6,64 | 66,26 | % | 10 years | 4,03 | % | - | - | 16 | 332 | |||||||||||
Founder's warrants | 25.03.2003 | 193 000 | 8.14 | 8.07 | 82.56 | % | 10 years | 4.29 | % | 1 | 1 | - | 1 059 | ||||||||||
22.05.2003 | 11 000 | 10.78 | 11.18 | 81.39 | % | 10 years | 3.77 | % | 1 | 1 | - | 79 | |||||||||||
27.08.2003 | 241 000 | 11.25 | 11.40 | 79.51 | % | 10 years | 4.21 | % | 11 | 10 | - | 1 791 | |||||||||||
23.03.2004 | 38 000 | 8.30 | 9.62 | 70.12 | % | 10 years | 3.97 | % | 4 | 6 | 2 | 180 | |||||||||||
19.01.2005 | 302 700 | 5.40 | 5.39 | 66.94 | % | 10 years | 3.52 | % | 123 | 74 | 29 | 942 | |||||||||||
15.03.2005 | 154 500 | 4.23 | 4.19 | 63.08 | % | 10 years | 3.75 | % | 45 | 32 | 2 | 366 | |||||||||||
Warrants to | 26.05.2004 | 50 000 | 5.90 | 7.04 | 70.11 | % | 4 years | 3.37 | % | 5 | 5 | - | 141 | ||||||||||
members of | 16.11.2004 | 20 000 | 5.68 | 5.68 | 66.95 | % | 4 years | 2.82 | % | 2 | 2 | - | 57 | ||||||||||
the board of | 26.05.2005 | 70 000 | 6.78 | 6.55 | 67.43 | % | 4 years | 2.58 | % | 4 | 26 | 8 | 242 | ||||||||||
directors | 17.05.2006 | 40 000 | 10.00 | 10.62 | 65.78 | % | 4 years | 4.08 | % | 82 | 54 | 25 | 196 | ||||||||||
16.05.2007 | 40 000 | 22.68 | 21.90 | 67.31 | % | 4 years | 4.29 | % | 169 | 24 | 132 | 474 | |||||||||||
14.05.2008 | 30 000 | 7 | 6,64 | 66,26 | % | 10 years | 4,03 | % | - | - | 5 | 102 | |||||||||||
Free shares | 17.05.2006 | 155 673 | 10.00 | N/A | N/A | 4 years | N/A | 759 | 386 | 348 | 1 557 | ||||||||||||
07.06.2007 | 155 650 | 24.06 | N/A | N/A | 4 years | N/A | 936 | - | 936 | 3 745 | |||||||||||||
Total | 4 810 | 1 348 | 5 541 | ||||||||||||||||||||
The cancellation of the stock option plan granted on June 7,th 2007 has resulted in an additional expense of €3.8 million in the first half of 2008.
Note 11. Income taxes
The current tax benefit for the six months ended June 30, 2008 (€45,000) is related to income tax expense of Wavecom’Asian and Wavecom’Americas subsidiaries and a current tax benefit .
The company anticipates to use during the year part of the loss carry forwards. The effective annual tax rate after using the loss carry forwards is estimated to be close to 0% and therefore no income tax expense has been recorded in the consolidated accounts for the six months ended June 30, 2008.
For the parent company, due to the estimation for next years profit, the Company has decided to keep unchanged the amount of deferred tax asset recorded as of December 31, 2007.
Anyware Technologies acquired on February 1, 2008 had a total loss carry forwards of €2,599,000 at the date of the acquisition. Based on the estimation for next years profits, it is probable that the low carry forward will be used within the next three years and therefore, we have decided to record in the opening balance of Anyware Technologies a deferred tax asset amounting to €866,000. In addition, intangible assets were identified and valued in connection with the acquisition for a total amount of €3,517,000, generating a deferred tax liabilities of €1,172,000, at the acquisition date, reduced by €95,000 in the consolidated accounts for the six months ended June 30, 2008 due to the depreciation expense of the period related to the assets. As a result, as of June 30, 2008, we have recorded a net deferred tax liability of €211,000.
Note 12. 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.
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.
Operating leases
Wavecom leases its facilities under operating leases that expire through June 2014.
Future minimum lease payments under operating leases which were not terminated at June 30, 2008, due for the years ending December 31, are as follows (in thousands) :
2008 (from July 1 to December 31) | €2,326 | |
2009 | 4,512 | |
2010 | 4,499 | |
2011 | 2,661 | |
2012 | 468 | |
Thereafter | 692 | |
Total | €15,158 | |
Other commitments
At June 30, 2008, Wavecom had purchase commitments with its third-party manufacturers for future deliveries of products, principally during the second half of 2008. These non-cancellable purchase commitments totaled €10,192,000.
Note 13. 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 is using such segment reporting to allocate resources.
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 businesses or companies have been allocated based on the sales per region forecasted for 2006 in the acquisition plan. |
The table below sets forth revenues, operating income or losses and other financial information for each of our segments for the first half of the years ended June 30, 2008 and June 30, 2007, and the year ended December 31, 2007.
Six months ended June 30, 2008 | EMEA | Americas | Asia- Pacific | Corporate | Consolidated | |||||
(in € thousands) | ||||||||||
Revenues | €39,858 | €18,454 | €14,599 | €91 | €73,002 | |||||
Operating income (loss) | 5,776 | 285 | 541 | (10,254 | ) | (3,652 | ) | |||
Long-lived assets | 22,383 | 9,003 | 4,207 | 3,324 | 38,917 | |||||
Interest income | 12 | 3 | 2,803 | 2,818 | ||||||
Interest expense | (3 | ) | (17 | ) | (1,102 | ) | (1,122 | ) | ||
Capital expenditures | 5,062 | 1,386 | 461 | 1,149 | 8,058 |
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 | ||||||
Six months ended June 30, 2007 | EMEA | Americas | Asia- Pacific | Corporate | Consolidated | ||||||
(in € thousands) | |||||||||||
Revenues | €53,619 | €35,747 | €14,794 | €67 | €104,227 | ||||||
Operating income (loss) | 11,243 | 3,124 | (1,530 | ) | (6,495 | ) | 6,342 | ||||
Long-lived assets | 11,953 | 11,099 | 4,700 | 2,149 | 29,901 | ||||||
Interest income | 21 | 955 | 976 | ||||||||
Interest expense | (15 | ) | (124 | ) | (139 | ) | |||||
Capital expenditures | 963 | 832 | 219 | 725 | 2,739 |
Note 14. Subsequent event
On July 23, 2008, Wavecom announced its intention to activate the share repurchase program under the authorization granted to the board of directors at its annual shareholders’ meeting held on May 14, 2008. From August 31, 2008 to the date of these financials accounts, Wavecom has repurchased 425,891 shares at an average price of 4.54 euros.
OPERATING AND FINANCIAL REVIEW
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, all of which are available on the Wavecom corporate website (www.wavecom.com). Our half year financial results included in this discussion have been prepared in accordance with U.S. GAAP. 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.
Results of Operations for the six-month periods ended June 30, 2008 compared to the six-month periods ended June 30, 2007
Revenues
(amounts in € 000s) | Six months ended | |||||
June 30, 2007 | June 30, 2008 | % change 2007/2008 | ||||
Product sales | 103 562 | 70 308 | -32,1 | % | ||
Percentage of total revenues | 99.4 | % | 99.4 | % | ||
Services revenue | 665 | 2 694 | 305,1 | % | ||
Percentage of total revenues | 0.6 | % | 0.6 | % | ||
Total revenues | 104 227 | 73 002 | -30,0 | % |
Revenues for the first half of 2008 were at €73.0 million, declining 30% year-on-year (25% at constant currencies, i.e. using the first half 2007 exchange rate for the U.S. dollar to the euro).
Wavecom business is confronted by an uncertain economy, particularly in the US where some markets, such as the alarm business, slowed considerably last two quarters. In the economical context, some customers have pushed out new product development plans and are taking a conservative position on placing orders In addition, the US region experienced the end of two projects from two U.S. customers which represented a significant portion of H1 2007 sales: one projected ended in the third quarter of 2007 and the second one in the second quarter of 2008. At the same time, while our volumes were strong, the product-mix is transitioning from high-priced/low-margin to low-priced/high-margin products that further impacted revenue quarter-on-quarter.
Sales for the first half of the year by region were as follows: EMEA (Europe, Middle-east and Africa): 54%, APAC (Asia-Pacific): 20% and The Americas: 26%.
The customer portfolio remained balanced with no single customer representing more than 12% of total revenues in the first half of the year. The top ten customers combined represented 53% of revenues as compared to 46% during the first half of 2007.
Business news for the first half of 2008:
H1 2008 Customer announcements:
Sunlink International Holdings Limited selected Wavecom’s Wireless CPU® Q24 Plus for their intelligent dispatch system for the taxi industry This solution called TAXI4U combines GPS and advanced database processing technologies to be integrated into the taxi operating system.
Ingenico and Wavecom signed a MOU for co-development of future wireless payment electronics terminals. As industry demand for cost effective and innovative payment systems grows, two leaders are combining forces to establish a platform for a new generation of wireless electronic payment system architecture.
Tattletale Portable Alarm Systems, Inc. announced it has chosen Wavecom as the single source for cellular wireless technology to enable their pioneering portable alarm systems designed to protect any asset, anywhere in the U.S. or Canada.
Wavecom announced a collaboration with EDMI Limited (Singapore Exchange: EDMI) and Wavecom. The two companies have worked together to help establish the Advanced Metering Infrastructure (AMI) in Australia and New Zealand markets.
H1 2008 Product announcements:
Wavecom introduced its Q64 Wireless CPU®, an enhanced version of the GR64 that is powered by Wavecom’s Wireless Microprocessor® WMP100.. The Q64 will have a host of new features like IDS (Intelligent Device Services) in the same popular, robust form factor as the GR64 thus facilitating integration into existing customer product designs. Customers appreciating the benefits of the GR64 will be able to continue using the form factor while taking advantage of the Open AT® Software Suite, without discarding existing design efforts."
ORBCOMM announced that it signed a joint marketing agreement with Wavecom whereby the two companies will work together to address the growing demand for devices that combine both satellite and terrestrial wireless communications
Wavecom announced the commercial availability of its Open AT® Software Suite 2.0. The next generation software architecture represents continuing improvement and innovation that allows developers to write application code in two popular programming languages: C and Lua - C for efficiency and code compactness and Lua for ease of development and code security.
Wavecom announced complete certification of twelve Wireless CPU® products from the Fastrack Supreme, Wireless Microprocessor and Q2687 families for use in the U.S.
Wavecom announced a groundbreaking combination of cellular, satellite and GPS technology (select models) on a single device: the Wavecom Q52 Omni Wireless CPU®. Based on
Wavecom Wireless Microprocessor® technology, the Q52 Omni embodies unprecedented integration by embedding control of all three technologies on a single processor, enabling significant cost savings over existing multiprocessor solutions.
Machine-to-Machine anti-jamming wireless security Plug-In introduced by Wavecom. As wireless M2M (machine-to-machine) products become more and more sophisticated, the data that they generate are increasingly valuable to the enterprises using it. With the Open AT® Security Plug-In, Wavecom launched a software solution which addresses all these concerns. The Open AT® Security Plug-In enables developers of all categories of wireless M2M systems to make sure that important data are securely stored and safely transmitted between a field device and a back-end server, and that illegal jammers are detected as quickly as possible.
Cost of revenues
(amounts in € 000s) | Six months ended | |||||||||||
June 30, 2007 | % of sales | June 30, 2008 | % of sales | % change 2007/2008 | ||||||||
Cost of revenues | ||||||||||||
Cost of good sold | 56 152 | 54.2 | % | 32 568 | 46,3 | % | -42,0 | % | ||||
Cost of services and licensing | 3 158 | 474.9 | % | 2 478 | 92,0 | % | -21,5 | % | ||||
Total cost of revenues | 59 310 | 56.9 | % | 35 046 | 48,0 | % | -40,9 | % | ||||
Gross Profit | ||||||||||||
On goods sold | 47 410 | 45.8 | % | 37 740 | 53,7 | % | -20,4 | % | ||||
On services and licensing | -2 493 | -374.9 | % | 216 | 8,0 | % | ||||||
Total gross profit | 44 917 | 43.1 | % | 37 956 | 52,0 | % | -15,5 | % | ||||
Cost of goods sold. Cost of goods sold consists primarily of the cost of components, our manufacturers' charges and provisions for royalties, obsolete and slow-moving inventories and warranty expense.
Gross margin for the consolidated business was 52% of revenues, an increase versus the 43% of the first half of 2007. This is explained by an improved product margin, in particular for the products coming from the acquired activity in 2006, due to a product mix with a higher percentage of high margin products and a decrease of the royalty accrual.
Operating expenses
(amounts in € 000s) | Six months ended | |||||
June 30, 2007 | June 30, 2008 | % change 2006/2007 | ||||
Operating expenses | ||||||
Research and development | 15 417 | 17 280 | 12,1 | % | ||
Sales and Marketing | 9 211 | 9 475 | 2,9 | % | ||
General and Administrative | 10 662 | 7 418 | -30,4 | % | ||
Stock based related expenses | 1 348 | 5 541 | 311,1 | % | ||
Amortization expense related to acquisitions | 1 937 | 1 894 | -2,2 | % | ||
Acquired in process technology | ||||||
Total | 38 575 | 41 608 | 7,9 | % | ||
Operating expenses increased by 8% versus first half of 2007. This increase is mainly coming from the Stock related expenses. Excluding these expenses, operating expenses would have decreased by 3%. Research and development expenses increased versus last year mainly due to assignment of part of the headcount allocated to a service contract back to research and development projects resulting in the recording of their expenses in operating expenses versus cost of service last year. Sales and marketing expenses increased due to higher activities in these departments. General and Administrative expenses decreased due to cost control and reversal of provision of doubtful account recorded during previous years which were paid by customers in 2008.
The stock based related expenses increase significantly due to the cancellation of the stock option plan granted on June 7, 2007. 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 has resulted in an expense of €3.8 million in the first half of 2008.
Headcount
Our global headcount was approximately 576 at June 30, 2008, including 83 independent contractors (483 at December 31, 2007, including 63 independent contractors)
Other income (expense)
Interest and other financial income, net. We recorded net interest and other financial income of €1,695,000 in the first half of 2008, compared to €836,000 in the same period in 2007. Net interest and other financial income represent the net of €2,818,000 of interest income (€978,000 in the first half of 2007) and €1,122,000 of interest expenses (€139,000 in the first half of 2007). 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. The OCEANE bear interest at a rate of 1.75% per annum. We recorded €701,000 for the six-months ended June 30, 2008.
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”).
Foreign exchange gain (loss). We had a net foreign exchange gain of €127,000 in the six months ended June 30, 2008 compared with a net loss of €98,000 in the same period in the prior year.
Income tax expense (benefit). Our €45,000 net tax benefit in the first half of 2008 (expense of €102,000 in the first half of 2007), represents principally, income taxes in the American subsidiary and in an Asian subsidiary, netted with income tax benefits.
Liquidity and capital resources
We had positive cash flow from operating activities of €16,561,000 in the six-month period ended June 30, 2008 compared to positive cash flow of €3,008,000 in the first six months of 2007.
The negative cash flow from investing activities of €16,905,000 in the six-month period ended June 30, 2008 is mainly due to the acquisition of Anyware Technologies in February 2008 (€10.7 million) and a decrease of purchase of fixed assets.
We had working capital (defined as current assets less current liabilities) of €126,765,000 at June 30, 2008, compared to €138,967,000 at December 31, 2007.
At June 30, 2008, our capital lease obligations (including the current portion), amounted to €579,000, compared to capital lease obligations of €547,000 at the end of 2007. We had €3.7 million in cash and cash equivalents and €127.1 million in marketable securities at June 30, 2008 compared to €4.7 million in cash and cash equivalents and €134.6 million in marketable securities at December 31, 2007
At June 30, 2008, we had purchase commitments with our third-party manufacturers for future deliveries of products, principally during the third and fourth quarters of 2008. These purchase commitments totaled approximately €10.2 million.
Based on our current plans, we believe that our available capital resources will be adequate to satisfy our cash requirements at least for the next 12 months.
Results of Wavecom SA
For the first half of 2008, the parent company, Wavecom SA, reported total revenues of €67.0 million including €28.8 million of intercompany revenues) compared to €99.6 million for the first half of 2007 (including €45.6 million of intercompany revenues).
The operating results for the first half of 2008 amounted to a profit of €2.3 million compared to a profit of €7.1 million for the same period in 2007. The result before tax was a profit of €2.5 million compared a profit of €8.0 million for the first half of 2007. The net profit for the first six month of 2006 amounted to €2.8 million versus a profit of €8.5 million for the same period in 2007.
Subsequent event
On July 23, 2008, Wavecom announced its intention to activate the share repurchase program under the authorization granted to the board of directors at its annual shareholders’ meeting held on May 14, 2008. From August 31, 2008 to the date of these financials accounts, Wavecom has repurchased 425,891 shares at an average price of 4.54 euros.
Trends:
12-month product backlog, on June 30, 2008 stood at €30.2 million, an increase compared the €41.7 millions at December 31, 2007. This increase is mainly explained by the Americas region due to the economical situation and the end of a specific project. The EMEA region is decreasing also, largely due to one major customer transitioned away from distribution while new direct orders have not yet been placed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WAVECOM S.A. | ||
Date: September 23, 2008 | By: /s/ Chantal Bourgeat | |
Chantal Bourgeat | ||
Chief Financial Officer |