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 October 2006
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 Form 40-F
[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 No
[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, 2006
1
WAVECOM S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
Prepared in accordance with U.S. generally accepted accounting principles.
|
| Year ended |
| Six months ended June 30, | ||
|
| December 31, |
|
|
|
|
|
| 2005 |
| 2005 |
| 2006 |
|
|
|
| Euro |
| Euro |
Revenues : |
|
|
|
|
|
|
Product sales |
| 125,952 |
| 65,174 |
| 76,648 |
Service revenue |
| 1,827 |
| 530 |
| 486 |
Licensing revenue |
| 1,453 |
| 484 |
| 969 |
|
| 129,232 |
| 66,188 |
| 78,103 |
Cost of revenues : |
|
|
|
|
|
|
Cost of goods sold |
| 69,094 |
| 37,087 |
| 41,828 |
Cost of services |
| 842 |
| 394 |
| 873 |
|
| 69,936 |
| 37,481 |
| 42,701 |
Gross profit |
| 59,296 |
| 28,707 |
| 35,402 |
Operating expenses : |
|
|
|
|
|
|
Research and development |
| 24,066 |
| 11,903 |
| 13,803 |
Sales and marketing |
| 11,725 |
| 5,958 |
| 6,734 |
General and administrative |
| 17,861 |
| 9,027 |
| 11,414 |
Acquired in process technology |
| - |
| - |
| 1,400 |
Amortization of acquired intangible assets |
| - |
| - |
| 775 |
Restructuring costs |
| 1,684 |
| 1,375 |
| - |
Total operating expenses |
| 55,336 |
| 28,263 |
| 34,126 |
Operating income |
| 3,960 |
| 444 |
| 1,276 |
Interest income and other financial income, net |
| 1,011 |
| 489 |
| 496 |
Foreign exchange gain (loss), net |
| 4,118 |
| 3,428 |
| (1,329) |
Total financial income (loss) |
| 5,129 |
| 3,917 |
| (833) |
Income before income taxes |
| 9,089 |
| 4,361 |
| 443 |
Income tax expense |
| 395 |
| 399 |
| 72 |
Net income |
| 8,694 |
| 3,962 |
| 371 |
Basic net income per share |
| 0.57 |
| 0.26 |
| 0.02 |
Diluted net income per share |
| 0.56 |
| 0.26 |
| 0.02 |
Number of shares used for computing : |
|
|
|
|
|
|
- basic |
| 15,352,233 |
| 15,349,945 |
| 15,379,790 |
- diluted |
| 15,661,001 |
| 15,446,100 |
| 15,781,745 |
See notes to unaudited condensed financial statements
2
WAVECOM S.A.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Prepared in accordance with U.S. generally accepted accounting principles.
|
|
|
| At December 31, |
| At June 30, |
|
| Note |
| 2005 |
| 2006 |
|
|
|
| Euro |
| Euro |
ASSETS |
|
|
|
|
|
|
Current assets : |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
| 60,663 |
| 37,206 |
Accounts receivable, net |
|
|
| 24,271 |
| 36,513 |
Inventory, net |
| 3 |
| 6,448 |
| 6,701 |
Value added tax recoverable |
|
|
| 842 |
| 452 |
Prepaid expenses and other current assets |
| 4 |
| 2,741 |
| 3,168 |
Total current assets |
|
|
| 94,965 |
| 84,040 |
Other assets : |
|
|
|
|
|
|
Long-term investments |
|
|
| 3,585 |
| 3,581 |
Other assets |
|
|
| 4,146 |
| 3,512 |
Research tax credit |
|
|
| 1,529 |
| 1,612 |
Deferred tax assets |
|
|
| 9,617 |
| 9,617 |
Acquired intangible assets, net |
| 6 |
| - |
| 13,020 |
Intangible and tangible assets, net |
| 5 |
| 6,236 |
| 7,199 |
Goodwill |
| 6 |
| - |
| 10,828 |
Total assets |
|
|
| 120,078 |
| 133,409 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
Current liabilities : |
|
|
|
|
|
|
Accounts payable |
| 7 |
| 24,314 |
| 31,124 |
Accrued compensation |
|
|
| 6,732 |
| 6,694 |
Current portion of other accrued expenses |
| 8 |
| 3,831 |
| 8,303 |
Current portion of capitalized lease obligations |
|
|
| 303 |
| 264 |
Deferred revenue and advances received from customers |
|
|
| 2,564 |
| 1,671 |
Other liabilities |
|
|
| 225 |
| 8,075 |
Total current liabilities |
|
|
| 37,969 |
| 56,131 |
Long-term liabilities : |
|
|
|
|
|
|
Long-term portion of other accrued expenses |
| 8 |
| 16,775 |
| 10,502 |
Long-term portion of capitalized lease obligations |
|
|
| 94 |
| 182 |
Other long-term liabilities |
|
|
| 1,100 |
| 943 |
Total long-term liabilities |
|
|
| 17,969 |
| 11,627 |
Shareholders’ equity : |
|
|
|
|
|
|
Shares, Euro 1 nominal value, 15,541,422 shares authorized, issued and outstanding at June 30, 2006 (15,531,813 at December 31, 2005) |
|
|
| 15,532 |
| 15,541 |
Additional paid-in capital |
|
|
| 137,180 |
| 137,232 |
Treasury stock at cost (156,345 shares at June 30, 2006 and December 31, 2005) |
|
|
| (1,312) |
| (1,312) |
Accumulated deficit |
|
|
| (84,650) |
| (84,279) |
Accumulated other comprehensive loss |
|
|
| (2,610) |
| (1,531) |
Total shareholders’ equity |
| 9 |
| 64,140 |
| 65,651 |
Total liabilities and shareholders’ equity |
|
|
| 120,078 |
| 133,409 |
See notes to unaudited condensed financial statements
3
WAVECOM S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Prepared in accordance with U.S. generally accepted accounting principles.
|
| Year ended |
| Six months ended June 30, | ||
2005 |
| 2006 | ||||
|
|
|
| Euro |
| Euro |
Cash flows from operating activities : |
|
|
|
|
|
|
Net income |
| 8,694 |
| 3,962 |
| 371 |
Adjustments to reconcile net income (loss) to net cash provided from operating activities : |
|
|
|
|
|
|
Amortization of intangible and tangible assets |
| 6,136 |
| 3,935 |
| 2,754 |
Share-based compensation |
| - |
| - |
| 663 |
Loss on sales and retirement of tangible assets |
| 1,204 |
| 1,117 |
| 6 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
| 1,186 |
| 2,393 |
| (13,693) |
Inventory |
| 10,284 |
| 7,278 |
| (387) |
Value added tax recoverable |
| 261 |
| 604 |
| 391 |
Prepaid expenses and other current assets |
| 2,948 |
| 1,528 |
| (466) |
Recoverable taxes |
| (79) |
| (30) |
| (83) |
Accounts payable and other accrued expenses |
| (28,237) |
| (23,281) |
| 7,104 |
Accrued compensation |
| (1,232) |
| (1,669) |
| 38 |
Deferred revenue and advances received from customers |
| 1,651 |
| 2,646 |
| (867) |
Income tax payable |
| - |
| - |
| - |
Other payables |
| 23 |
| 6 |
| 7,716 |
Other |
| 61 |
| 31 |
| 593 |
Net cash used by operating activities |
| 2,900 |
| (1,480) |
| 4,140 |
Cash flows from investing activities : |
|
|
|
|
|
|
Disposal of long term investments |
| 5,432 |
| 5,421 |
| 4 |
Purchases of intangible and tangible assets |
| (1,688) |
| (839) |
| (2,929) |
Acquisition of certain assets, net of cash acquired |
| - |
| - |
| (24,628) |
Proceeds from sale of intangible and tangible assets |
| 959 |
| 753 |
| 155 |
Net cash provided by (used in) investing activities |
| 4,703 |
| 5,335 |
| (27,398) |
Cash flows from financing activities : |
|
|
|
|
|
|
Principal payments on capital lease obligations |
| (447) |
| (260) |
| (184) |
Proceeds from exercise of stock options and founders’ warrants |
| 167 |
| - |
| 62 |
Net cash provided by (used in) financing activities |
| (280) |
| (260) |
| (122) |
Effect of exchange rate changes on cash and cash equivalents |
| 22 |
| 490 |
| (77) |
Net increase (decrease) in cash and cash equivalents |
| 7,345 |
| 4,085 |
| (23,458) |
Cash and cash equivalents, beginning of period |
| 53,318 |
| 53,318 |
| 60,663 |
Cash and cash equivalents, end of period |
| 60,663 |
| 57,403 |
| 37,206 |
See notes to unaudited condensed financial statements
4
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands of euro, except share data)
Prepared in accordance with U.S. generally accepted accounting principles
|
| Shares |
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Number |
| Amount |
| Additional |
| Treasury |
| Retained |
| Accumulated |
| Total | ||||||
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 2,943 options at an exercise price of €8.07 |
|
2,943 |
|
3 |
|
21 |
|
|
|
|
|
|
|
24 | ||||||
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 |
|
6 |
|
31 |
|
|
|
|
|
|
|
37 | ||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
| 371 |
|
|
| 371 | ||||||
Unrealized loss on financial instrument |
|
|
|
|
|
|
|
|
|
|
|
(27) |
|
(27) | ||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
| 443 |
| 443 | ||||||
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
| 663 |
| 663 | ||||||
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
| 371 |
| 1,079 |
| 1,450 | ||||||
Balance at June 30, 2006 |
| 15,541,422 |
| € | 15,541 |
| € | 137,232 |
| € | (1,312) |
| € | (84,279) |
| € | (1,531) |
| € | 65,651 |
See notes to unaudited condensed financial statements
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 three-month and six-month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. 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, 2005.
The consolidated financial statements as of June 30, 2006 include the accounts of the following entities:
|
| Voting right |
| Interest |
Parent company: Wavecom S.A. |
|
|
|
|
Subsidiaries: |
|
|
|
|
Wavecom Inc. |
| 100 % |
| 100 % |
Wavecom Korea Co, Ltd. |
| 100 % |
| 100 % |
Wavecom Deutschland GmbH |
| 100 % |
| 100 % |
Wavecom Northern Europe Ltd. |
| 100 % |
| 100 % |
NexGen Software S.A. |
| 100 % |
| 100 % |
Wavecom Asia Pacific Ltd. |
| 99,99 % |
| 99,99 % |
NexGen Software S.A. was consolidated from its acquisition date, on June 2, 2006.
Concentration of risk
Financial instruments that potentially subject Wavecom to concentrations of credit risk consist principally of cash and cash equivalents, 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 five major banks and financials institutes in Paris and three major banks in Hong Kong.
6
For the historical business of Wavecom , Wavecom decided in 2003 to consolidate all production with one sub-contractor in China. The production of the acquired business is currently done with 3 sub-contactors located in Mexico and Korea. Wavecom believes that alternate sub-contractors can be identified if the current manufacturer in Chinan 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.
Accounts receivable (before allowance for doubtful accounts) at June 30, 2006 and December 31, 2005 totaled €41,434,000 and €27,898,000 respectively. The total as of June 30, 2006 included €11,854,000 from the acquired activities.
A summary of the activity in the allowance for doubtful accounts is as follows (amounts in thousands) :
|
| Beginning |
| Additions |
| Recovered receivables |
| Exchange rate |
| Ending balance |
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
| € 3,233 |
| € 731 |
| € (605) |
| € 269 |
| € 3,628 |
Six months ended June 30, 2006 |
| 3,628 |
| 1,465 |
|
|
| (172) |
| 4,921 |
Sales to customers by geographic region are summarized as follows (in thousands):
|
| Year ended |
| Six months ended June 30, | ||
|
| 2005 |
| 2005 |
| 2006 |
|
|
|
|
|
|
|
China |
| € 23,205 |
| € 11,910 |
| € 11,310 |
Rest of Asia |
| 26,257 |
| 15,979 |
| 8,710 |
Europe |
| 65,700 |
| 31,719 |
| 38,660 |
Americas |
| 11,599 |
| 5,473 |
| 16,060 |
Rest of world |
| 2,471 |
| 1,107 |
| 3,363 |
|
| € 129,232 |
| €66,188 |
| €78,103 |
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, 2005 and June 30, 2006 Wavecom has no amounts invested in money market accounts.
7
Acquired intangible assets
The fair values of intangible assets acquired through the business combinations disclosed in Note 6, were determined with the assistance of independent valuers on the basis of the situations available at the acquisition dates. However, they represent provisional assessments that may be adjusted with respect to additional information obtained upon the definitive allocation of the purchase price.
Goodwill
Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair value. Goodwill is tested for impairment on an annual basis and whenever indicators of impairment arise.
Long-term investments
A 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 two floors of current offices in 2004 and one floor in the first half of 2005, this guarantee was reduced. This guarantee was secured by pledge of investments only composed of monetary Société d’Investissement à Capital Variable (“SICAV”). The outstanding guarantee expires on July 2006 but will be renewed annually until the end of the lease in July 2011. These investments have been classified as long-term assets in the consolidated balance sheet and amounted to €3,585,000 and €3,581,000 at December 31, 2005 and June 30, 2006, respectively.
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 and some negotiations are on-going and 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
8
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, based on the number of essential patents declared at ETSI for which Wavecom has no license agreement
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
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 calculated based on a statistical rate revised 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.
Employee stock options and warrants
Until the year ended December 31, 2005, the company accounted for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. From January 1, 2006, Wavecom applies the fair-value-based method of accounting for employee stock options and similar equity instruments according to the SFAS 123R.
The assumptions of the option pricing model and the impacts on our result of operations are disclosed in Note 9.
Modification of 2005 quarterly financials
In the first quarter of 2005 the company recognized revenues of €3.4 million from a licensing agreement. Upon further review of this new business, we, along with our auditors, have concluded that this revenue should not have been recognized in the first quarter, but spread over 21 months to be fully compliant with SOP 98-4 (Software revenue recognition rules under US GAAP). The contract for this licensing agreement includes a clause allowing for free updates if and when available. Although no updates have been, nor will be provided, SOP 98-4 requires that revenue recognition be spread over the life of the license. From a technical accounting standpoint, since vendor specific objective evidence of fair value for this post-contract customer support could not be determined at the time the contract was signed, the revenue must be spread over 21 months. Out of the €3.4 million revenue from this contract, €1.9 million will be deferred in 2006, and the remaining amount (€1.5 million) has been recognized over the last three quarters of 2005 as delivery occurred at the end of March 2005.
9
The impact of this correction on the financials statement of the first six-month of 2005 is as follows :
|
| Six months ended June 30, 2005 | ||
|
| published |
| adjusted |
|
| Euro |
| Euro |
Revenues: |
|
| ||
Product sales |
| 65,174 |
| 65,174 |
Service revenue. |
| 530 |
| 530 |
Licensing revenue |
| 3,391 |
| 484 |
|
| 69,095 |
| 66 188 |
Cost of revenues: |
|
| ||
Cost of goods sold |
| 37,087 |
| 37,087 |
Cost of services. |
| 394 |
| 394 |
|
| 37 481 |
| 37 481 |
Gross profit. |
| 31 614 |
| 28 707 |
Operating income |
| 3,351 |
| 444 |
Income before income taxes |
| 7 268 |
| 4 361 |
Net income |
| 6 869 |
| 3 962 |
Basic net income per share |
| 0.45 |
| 0.26 |
Diluted net income per share |
| 0.44 |
| 0.26 |
2. Key events of the first six-months of 2006
Wavecom announced on April 26, 2006 the signing of an agreement wherein Wavecom acquires certain assets of Sony Ericsson’s M2M Communications Business Unit in a cash transaction that will be valued up to a maximum of €32.5 million.
According to this agreement, Sony Ericsson has sold its M2M Communications Business Unit, which specializes in automotive and industrial wireless solutions, to Wavecom. The business unit includes the company’s global assets and activities in M2M research & development, marketing, and sales. The transaction does not include, however, any assets or activities related to Sony Ericsson’s mobile phones, accessories, or PC card business, which will remain a part of Sony Ericsson.
3. Inventory
Components of inventory are:
10
|
| December 31, |
| June 30, | ||
|
| (in thousands) | ||||
Finished goods |
|
| €3,672 |
|
| €3,550 |
Components and finished goods held by contract manufacturers |
|
| 2,776 |
|
| 3,151 |
|
|
| €6,448 |
|
| €6,701 |
For the historical business of the company, 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.
For the acquired activity, the products are still manufactured by the Sony Ericsson sub-contractors. The manufacturing strategy and the supplier relationships for these products is currently under review. Therefore, as of June 30, 2006, Wavecom did not report in inventory a part of components and finished goods held by these contract manufacturers.
Inventories as of June 30, 2006 including €1,595,000 of finished products from the acquired activity.
4. Prepaid expenses and other current assets
Prepaid expenses and other current assets include :
|
| December 31, |
| June 30, | ||
|
| (in thousands) | ||||
Suppliers’ credit note accruals |
|
| €6 |
|
| €61 |
Prepaid expenses |
|
| 2,589 |
|
| 1,979 |
Other current assets |
|
| 146 |
|
| 1.128 |
Total prepaid expenses and other current assets |
|
| €2,741 |
|
| €3,168 |
Other current assets including €1,009,000 due by Sony Ericsson linked to the transfer of its activities.
5. Intangible and tangible assets, net
Intangible and tangible assets, net include:
11
|
| December 31, |
| June 30, | ||||
|
| (in € thousands) | ||||||
|
| Net book value |
| Gross carrying amounts |
| Accumulated depreciation and impairment |
| Net book value |
|
|
|
|
|
|
|
|
|
Laboratory and testing equipment |
| € 2,240 |
| € 23,670 |
| € 21,881 |
| € 1,789 |
Computer equipment and software |
| 1,112 |
| 20,448 |
| 18,983 |
| 1,465 |
Furniture and office equipment |
| 345 |
| 1,481 |
| 1,247 |
| 234 |
Leasehold improvements |
| 1,555 |
| 2,540 |
| 922 |
| 1,618 |
Other |
| 984 |
| 3,131 |
| 1,038 |
| 2,093 |
Total |
| € 6,236 |
| € 51,270 |
| € 44,071 |
| € 7,199 |
Change in the net book value of intangible and tangible assets are as follows:
| December 31, |
| June 30, | |
|
| (in € thousands) | ||
Beginning of year balance, net of depreciation & amortization |
| € 12,617 |
| € 6,236 |
Acquisitions |
| 1,776 |
| 2,017 |
Effect of acquired activities |
| - |
| 1,040 |
Sales and retirements |
| (11,646) |
| (4,771) |
Depreciation and impairment expenses |
| (6,136) |
| (2,070) |
Accumulated depreciation on sales and retirements |
| 9,500 |
| 4,808 |
Translation adjustment |
| 125 |
| ( 61) |
End of year balance, net of depreciation & amortization |
| € 6,236 |
| € 7,199 |
6. Business combinations
Sony Ericsson’s M2M Communications business unit
Assets and liabilities from acquired M2M division of Sony Ericsson Mobile Communications AB were measured initially in application of the purchase method at their fair values at the acquisition date. However, because of acquisition arose during the last quarter, 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 of Sony Ericsson’s business unit amounted to €33.706.000 at the closing date and breaks down as follows:
| - | cash paid (€25.000.000) |
- | deferred payment (€7.500.000) | |
- | acquisition costs (€1.206.000) |
12
The €7.500.000 deferred payment should be paid before December 31, 2006 upon achievement of the following criteria :
| - | achievement of commercial targets |
- | completion of transition services |
The net assets and liabilities acquired, on the basis of the situation as of April 30, 2006, have been temporarily estimated as follow:
(in € thousands) |
| Fair value |
| Carrying |
Current assets: |
|
|
|
|
Inventory |
| 1 103 |
| 1 103 |
Accounts receivable |
| 9 835 |
| 9 835 |
Cash and cash equivalents |
| 1 852 |
| 1 852 |
Total current assets |
| 12 790 |
| 12 790 |
Intangible assets, net |
| 13 700 |
|
|
Tangible assets, net |
| 1 126 |
| 1 126 |
Total assets |
| 27 616 |
| 13 916 |
Current liabilities: |
|
|
|
|
Accounts payable |
| 6 053 |
| 6 053 |
Total current liabilities |
| 6 053 |
| 6 053 |
Total liabilities |
| 6 053 |
| 6 053 |
Net assets acquired |
| 21 563 |
| 9 263 |
In-process research and development: |
| 1 400 |
| 1 400 |
Goodwill |
| 10 743 |
|
|
Total consideration |
| 33 706 |
|
|
Intangible assets identified and valued in connection with the acquisition consist of:
|
| Valuation |
| Useful life |
|
| (in euro thousands) | ||
Customer relationships |
| 9,900 |
| 4 years |
Non-compete agreement |
| 2,600 |
| 3 years |
Technology |
| 1,200 |
| 1 year |
The existing technology was measured using the relief from royalty method, on the basis of a royalty rate of 4% and a discount rate of 11%.
The customer relationships were measured using the excess earning method on the basis of fluctuation revenue assumptions (including probability of renewals at the expiration of contracts), new customer recruitment costs and a discount rate of 14%.
13
The non-compete agreement, conclude for a period of three years, was valued by modeling the impacts on the present value (discount rate of 12% used) of future free cash flows of acquired activity if Sony Ericsson were to compete.
The amount of the purchase price allocated to purchased in process research and development was expensed upon acquisition, because the technological feasibility of products under development had not been established and no alternative future uses existed.
The goodwill recognized above is attributed to the expected benefits of this acquisition in terms of synergies and geographic exposure.
As of June 30, 2006 total profit and loss of the acquired activity recorded in Wavecom’s consolidated statements of operations since the date of acquisition have been as follow:
(in € thousands) |
| Six months ended |
|
|
|
Revenues: |
|
|
Product sales |
| 14 774 |
Service revenue |
| 6 |
Licensing revenue |
| - |
|
| 14 780 |
Cost of revenues: |
|
|
Cost of goods sold |
| 11 638 |
Cost of services |
| - |
|
| 11 638 |
Gross profit |
| 3 142 |
|
|
|
Research and development |
| 1 549 |
Sales and marketing |
| 774 |
General and administrative |
| 985 |
Dépréciation of acquired assets |
| 775 |
|
| 4 083 |
|
|
|
Operating loss |
| (941) |
Interest expense |
| - |
Interest income |
| - |
Foreign exchange loss |
| (60) |
Other expense |
| (60) |
Loss before income tax |
| (1 001) |
Income tax expense |
| - |
Net loss |
| (1 001) |
Wavecom could not produce the pro-forma data requested by the SFAS 141 “Business combinations” because the acquisition was finalized during the second quarter. These data are in progress and will be reported in the next annual report on Form 20-F.
14
NexGen Software
On June 15, 2006, Wavecom announced the acquisition of NexGen Software, S.A, a France-based software company specializing in TCP/IP internet software. Assets and liabilities were measured in application of the purchase method at their fair values at the acquisition date.
The acquisition cost of NexGen Software shares amounted to € 400000. The acquisition is a cash transaction.
The net assets and liabilities acquired, on the basis of the situation as of May 31, 2006, have been estimated as follow:
(in € thousands) |
| Fair value |
| Carrying |
|
|
|
|
|
Current assets: |
|
|
|
|
Accounts receivable |
| 148 |
| 148 |
Other current assets |
| 93 |
| 93 |
Cash and cash equivalents |
| 61 |
| 61 |
Total current assets |
| 302 |
| 302 |
Intangible assets, net |
| 100 |
|
|
Tangible assets, net |
| 4 |
| 4 |
Other assets |
| 3 |
| 3 |
Total assets |
| 409 |
| 309 |
|
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
| 7 |
| 7 |
Other liabilities |
| 87 |
| 87 |
Total current liabilities |
| 94 |
| 94 |
Total liabilities |
| 94 |
| 94 |
|
|
|
|
|
Net assets acquired |
| 315 |
| 215 |
|
|
|
|
|
Goodwill |
| 85 |
|
|
|
|
|
|
|
Total consideration |
| 400 |
|
|
Intangible assets identified and valued in connection with the acquisition consist of an internally-developed TCP/IP (internet) suite of protocol stacks. This asset is depreciated on its estimated useful life of 2 years from June 1, 2006.
The goodwill recognized above is attributed to the strategic interest of this acquisition as eliminating its dependence from external suppliers of equivalent solutions.
As of June 30, 2006 total profit and loss of the acquired activity recorded in Wavecom’s consolidated statements of operations since the date of acquisition have been as follow:
15
(in € thousands) |
| Six months ended |
|
|
|
Revenues: |
|
|
Product sales |
| - |
Service revenue |
| 13 |
Licensing revenue |
| - |
|
| 13 |
Cost of revenues: |
|
|
Cost of goods sold |
| - |
Cost of services |
| - |
|
| 0 |
Gross profit |
| 13 |
|
|
|
Research and development |
| 19 |
Sales and marketing |
| 13 |
General and administrative |
| 6 |
|
| 38 |
Operating loss |
| ( 25) |
Interest expense |
| - |
Interest income |
| 1 |
Foreign exchange gain (loss) |
| - |
Other income |
| 1 |
Loss before income tax |
| ( 24) |
Income tax expense |
| - |
Net loss |
| ( 24) |
7. Accounts payable
As of June 30, 2006, accounts payable included €7.427.000 from the acquired activities
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, |
| June 30, |
|
| (in thousands) | ||
Accrued royalties |
| €16,230 |
| €9,905 |
Warranty accrual |
| 94 |
| 81 |
Other accruals |
| 451 |
| 516 |
Total |
| €16,775 |
| €10,502 |
16
Current portion:
|
| December 31, |
| June 30, |
|
| (in thousands) | ||
Accrued royalties |
| €- |
| €5,266 |
Warranty accrual |
| 1,457 |
| 1,172 |
Headcount restructuring cost accrual |
| 357 |
| 145 |
Other accruals |
| 2,017 |
| 1,720 |
Total |
| €3,831 |
| €8,303 |
Other accrued expenses changes during the period are as follows (in thousands):
|
| Balance at |
| Accruals made |
| Cash |
| Changes in estimate |
| Balance at |
Accrued royalties |
| € 16,230 |
| € 2,740 |
| € - |
| € (3,799) |
| € 15,171 |
Warranty accrual |
| 1,551 |
| 916 |
| (1,214) |
|
|
| 1,253 |
Headcount restructuring cos cost accrual |
| 357 |
| 150 |
| (362) |
|
|
| 145 |
Other accruals: |
|
|
|
|
|
|
|
|
|
|
Exiting of leases |
| 41 |
|
|
| (21) |
|
|
| 20 |
Customers claims |
| 703 |
| 320 |
| (48) |
|
|
| 975 |
Third-party litigations |
| 590 |
|
|
| (116) |
|
|
| 474 |
Other |
| 1,134 |
| 316 |
| (683) |
|
|
| 767 |
Subtotal other accruals: |
| 2,468 |
| 636 |
| (868) |
|
|
| 2,236 |
Total |
| € 20,606 |
| € 4,442 |
| € (2,444) |
| € (3,799) |
| € 18,805 |
9. Shareholders’ Equity
At June 30, 2006, 15,541,422 shares were issued, each with a nominal value of €1 per share. After taking into consideration the 156,345 shares repurchased during 2003 and held in treasury, 15,385,077 shares are outstanding at June 30, 2006.
A summary of the activity in outstanding warrants and stock options is as follows:
|
| Number of |
| Weighted average |
| Price range € |
Balance at December 31, 2005 |
| 1,868,434 |
| 26.18 |
| 3.29 – 139.52 |
Granted |
| 463.544 |
| 10,62 |
| 10.62 |
Exercised |
| 12.504 |
| 6,38 |
| 4.19 – 8.07 |
Expired |
| 50.000 |
| 37,78 |
| 34.66 – 42.46 |
Cancelled |
| 83.149 |
| 42,73 |
| 4.19 – 139.52 |
Balance at June 30, 2006 |
| 2.186.325 |
| 22,10 |
| 3.29 – 139.52 |
17
At June 30, 2006, 1.183.725 founders’ warrants, stock options and warrants were exercisable at an average price of €34,13.
155,673 free shares have been granted to employees and members of the board. As of June 30, 2006 these shares could not be exercised.
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 first half of 2006 |
| Initial pricing at the date of grant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in € thousands) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
| 25.03.2003 |
| 155,200 |
| 8.14 |
| 8.07 |
| 82.56% |
| 10 years |
| 4.29% |
| 11 |
| 897 |
| 22.05.2003 |
| 10,500 |
| 10.78 |
| 11.18 |
| 81.39% |
| 10 years |
| 3.77% |
| 1 |
| 78 | |
| 27.08.2003 |
| 99,000 |
| 11.25 |
| 11.4 |
| 79.51% |
| 10 years |
| 4.21% |
| 16 |
| 775 | |
| 18.08.2004 |
| 147,300 |
| 2.95 |
| 3.29 |
| 69.07% |
| 10 years |
| 4.10% |
| 31 |
| 262 | |
| 15.03.2005 |
| 49,000 |
| 4.23 |
| 4.19 |
| 63.08% |
| 10 years |
| 3.75% |
| 28 |
| 123 | |
| 07.09.2005 |
| 3,500 |
| 11.25 |
| 10.18 |
| 67.17% |
| 10 years |
| 3.10% |
| 7 |
| 25 | |
| 17.05.2006 |
| 423,544 |
| 10 |
| 10.62 |
| 65.78% |
| 10 years |
| 4.08% |
| 128 |
| 2,598 | |
Founder’s warrants |
| 25.03.2003 |
| 193,000 |
| 8.14 |
| 8.07 |
| 82.56% |
| 10 years |
| 4.29% |
| 11 |
| 1,059 |
| 22.05.2003 |
| 11,000 |
| 10.78 |
| 11.18 |
| 81.39% |
| 10 years |
| 3.77% |
| 3 |
| 79 | |
| 27.08.2003 |
| 241,000 |
| 11.25 |
| 11.4 |
| 79.51% |
| 10 years |
| 4.21% |
| 26 |
| 1,791 | |
| 23.03.2004 |
| 38,000 |
| 8.3 |
| 9.62 |
| 70.12% |
| 10 years |
| 3.97% |
| -1 |
| 180 | |
| 19.01.2005 |
| 302,700 |
| 5.4 |
| 5.39 |
| 66.94% |
| 10 years |
| 3.52% |
| 165 |
| 942 | |
| 15.03.2005 |
| 154,500 |
| 4.23 |
| 4.19 |
| 63.08% |
| 10 years |
| 3.75% |
| 77 |
| 366 | |
Warrants to members of the board of directors |
| 22.05.2003 |
| 40,000 |
| 10.78 |
| 11.18 |
| 81.39% |
| 5 years |
| 2.88% |
| 12 |
| 261 |
| 26.05.2004 |
| 50,000 |
| 5.9 |
| 7.04 |
| 70.11% |
| 4 years |
| 3.37% |
| 13 |
| 141 | |
| 16.11.2004 |
| 20,000 |
| 5.68 |
| 5.68 |
| 66.95% |
| 4 years |
| 2.82% |
| 2 |
| 57 | |
| 26.05.2005 |
| 70,000 |
| 6.78 |
| 6.55 |
| 67.43% |
| 4 years |
| 2.58% |
| 58 |
| 242 | |
| 17.05.2006 |
| 40,000 |
| 10 |
| 10.62 |
| 65.78% |
| 4 years |
| 4.08% |
| 10 |
| 196 | |
Free shares |
| 17.05.2006 |
| 155,673 |
| 10 |
| N/A |
| N/A |
| 4 years |
| N/A |
| 65 |
| 1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 663 |
|
|
The exercise price is 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.
The estimate of expected volatility is based on mean reversion method applied to the series of historical daily profitabilities of the four years before the grant date.
The risk-free interest rate is given in reference to the rate of French treasury bonds corresponding to the expected life of each equity instrument.
18
11. Commitments and contingencies
Contingencies
The French tax authorities have proposed revising research tax credits “Crédit Impôt Recherche” granted to Wavecom for the years 1999, 2000 and 2001, for a total amount of €3.6 million. This amount has not been provisioned at December 31, 2005 and June 30, 2006 as Management believes that the Company has strong arguments to oppose this revision. Wavecom filed for a counter examination by the Ministry of Industry in December 2004.
Operating leases
Wavecom leases its facilities under operating leases that expire through June 2014 at the latest for the site of Raleigh in North Carolina. Future minimum lease payments under operating leases which were not terminated at June 30, 2006, due for the years ending December 31, are as follows (in thousands) :
2006 (from July 1 to December 31) |
| € 2,140 |
2007 |
| 4,380 |
2008 |
| 4,534 |
2009 |
| 4,398 |
2010 |
| 4,408 |
Thereafter |
| 4,055 |
Total |
| € 23,915 |
Other commitments
At June 30, 2006, Wavecom had purchase commitments with its third-party manufacturers for future deliveries of products, principally during the second half of 2005. These purchase commitments totaled €25.0 million.
In October 2005, Wavecom signed a commitment with some of its executive committee members for the payment on April 2007 of a special bonus, with the condition of still being in the headcount as of March 31, 2007. The total amount of these bonuses is €2,565,813 and will be recognized as expense from October 1, 2005 to March 31, 2007 (over the 18 months service period). The retention bonus recorded as accrued compensation at June 30, 2006 totaled €1,282,907.
12. Employees
Wavecom’s salaried personnel totaled 372 at June 30, 2006, compared with 290 at December 31, 2005. Total headcount at June 30, 2006, includes 80 employees from the acquired activities.
13. Segment
Segment allocations have been determined as follows :
19
| - | 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 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 first half of the years ended June 30, 2005 and 2006 and the year ended December 31, 2005.
Six months ended June 30, 2006 |
| EMEA |
| Americas |
| Asia-Pacific |
| Corporate |
| Consolidated |
|
| (amounts in €000s) | ||||||||
Revenues |
| €46,251 |
| €16,158 |
| 14,712 |
| €982 |
| €78,103 |
Operating income (loss) |
| 5,429 |
| (1,667) |
| (163) |
| (2,323) |
| 1,276 |
Long-lived assets |
| 14,797 |
| 12,587 |
| 6,419 |
| 756 |
| 34,559 |
Interest income |
|
|
|
|
| 17 |
| 585 |
| 602 |
Interest expense |
|
|
| (11) |
| (3) |
| (91) |
| (105) |
Capital expenditures |
| 1,089 |
| 1,242 |
| 518 |
| 80 |
| 2,929 |
Fiscal year 2005 |
| EMEA |
| Americas |
| Asia-Pacific |
| Corporate |
| Consolidated |
|
| (amounts in €000s) | ||||||||
Revenues |
| €74,840 |
| €12,473 |
| €40,466 |
| €1,453 |
| €129,232 |
Operating income (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 |
20
Six months ended June 30, 2005 |
| EMEA |
| Americas |
| Asia-Pacific |
| Corporate |
| Consolidated |
|
| (amounts in €000s) | ||||||||
Revenues |
| €36,495 |
| €5,960 |
| €23,247 |
| €486 |
| €66,188 |
Operating income (loss) |
| 5,248 |
| (1) |
| (271) |
| (4,532) |
| 444 |
Long-lived assets |
| 5,288 |
| 619 |
| 2,849 |
| 1,121 |
| 9,876 |
Interest income |
| — |
| — |
| 5 |
| 596 |
| 601 |
Interest expense |
| — |
| (12) |
| (6) |
| (94) |
| (112) |
Capital expenditures |
| 372 |
| 48 |
| 250 |
| 169 |
| 839 |
14. Subsequent events
On September 28, 2006, Wavecom announced internally its decision to consolidate all of North American product development activities in Research Triangle Park (RTP), NC. In order to enhance collaboration, flexibility and operational efficiency. This will result in the closing of the San Diego ( California) office. Wavecom has offered positions in RTP and relocation support to the San Diego-based team. People who will decline this offer will be made redundant during the fourth quarter of 2006. In addition, the Company will book some impairments of assets related to the closing of the site. The calculation of the restructuring costs is still underway.
21
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 second quarter and 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.
Key events of the first six-months of 2006
Wavecom announced on April 26, 2006 the signing of an agreement wherein Wavecom acquires certain assets of Sony Ericsson’s M2M Communications Business Unit in a cash transaction that will be valued up to a maximum of €32.5 million.
According to this agreement, Sony Ericsson has sold its M2M Communications Business Unit, which specializes in automotive and industrial wireless solutions, to Wavecom. The business unit includes the company’s global assets and activities in M2M research & development, marketing, and sales. The transaction does not include, however, any assets or activities related to Sony Ericsson’s mobile phones, accessories, or PC card business, which will remain a part of Sony Ericsson.
Results of Operations for the six-month periods ended June 30, 2006 compared to the six-month periods ended June 30, 2005
Revenues
| Six months ended | ||||
| June 2005 | June 2006 | |||
|
| Historical | Acquired | Consolidated | % change |
| (amounts in € 000s) | ||||
Product sales | 65,174 | 61,874 | 14,774 | 76,648 | 17.6% |
Percentage of total revenues | 98.5% | 97.7% | 100.0% | 98.1% |
|
Service revenue | 530 | 480 | 6 | 486 | -8.3% |
Percentage of total revenues | 0.8% | 0.8% | 0.0% | 0.6% |
|
Licensing revenue | 484 | 969 | 0 | 969 | 100.2% |
Percentage of total revenues | 0.7% | 1.5% | 0.0% | 1.2% |
|
Total revenues | 66,188 | 63,323 | 14,780 | 78,103 | 18.0% |
*Note: The acquired activity (Sony Ericsson M2M business) represents two months of results, May and June for H1 2006
22
Sales by market
| June 2005 | June 2006 | |||
|
| Historical | Acquired | Consolidated | % change |
Vertical applications: | 58,445 | 62,342 | 14,780 | 77,122 | 32.0% |
PCD (handset) business: | 7,259 | 12 | 0 | 12 | -99.8% |
Licensing | 484 | 969 | 0 | 969 | 100.2% |
| 66,188 | 63,323 | 14,780 | 78,103 | 18.0% |
*Note: The acquired activity (Sony Ericsson M2M business) represents two months of results, May and June for H1 2006
Total first half year revenues increased 18% year-on-year. There has been basically no sales in the PCD business due to our exit of this business but performance of the vertical application was high versus last year with a growth of 32% with the acquired activity or 7% organically. The organic growth was largely the result of new customer programs ramping in the Americas and Asia Pacific and robust add-on orders from existing customers in the EMEA region.
Sales for the first half of the year by region were as follows: EMEA (Europe, Middle-east and Africa): 59%, APAC (Asia-Pacific): 20% and The Americas: 21%.
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 51% of revenues as compared to 59% during the first half of 2005.
Business news for the first half of 2006:
| • | Wavecom acquired certain assets of Sony Ericsson’s M2M business unit. Wavecom management believes that the acquisition of one of its major competitors positions it positively for future growth by establishing the largest R&D team in the industry, giving it the premiere position as provider of wireless solutions to the automotive industry worldwide and finally paving the way to greater technology standards for wireless machine-to-machine communication. This acquisition was financed by Wavecom’s cash reserves and will cost up to €32.5 million. The transaction closed on April 26, 2006. |
| • | Wavecom announced the introduction of the Wireless Microprocessor, combining high performance embedded processing and wireless connectivity in a single surface-mount component. In combination with Wavecom’s Open AT® software suite, it provides the lowest total cost of ownership for any industrial wireless machine by reducing the overall number of components and shortening the time to market. |
| • | Wavecom announced acquisition of NexGen Software S.A. : This acquisition brings to us an internally-developed TCP/IP (internet) suite of protocol stacks and internet software expertise along with a worldwide customer base of over 100. It represents a strategic acquisition for Wavecom. With it, we eliminate our reliance on external, third-party, TCP/IP vendors and further strengthen our already extensive software expertise. |
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• | Wavecom announced design win with Peiker Acoustic: Peiker Acoustic is a tier one supplier to leading German car manufacturers. In a new design win, Peiker will use Wavecom technology to equip hands-free embedded phones in German luxury models. |
• | Wavecom announced a line extension of it most popular wireless CPU (Central Processing Unit): This line extension includes four versions -- Q24 Classic, Q24 Plus, Q24 Extended and Q24 Auto; targeting a variety of wireless devices. By being hardware and software compatible with our 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. |
Cost of revenues
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| Six months ended | ||||||||||||||||
| June 2005 |
| June 2006 | |||||||||||||||
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| % of sales |
| Historical | % of sales |
| Acquired | % of sales |
| Consolidated | % of sales |
| % change | |||
(amounts in € 000s) | ||||||||||||||||||
Cost of revenues |
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Cost of products |
| 37,087 |
| 56.9% |
| 30,190 | 48.8% |
| 11,638 | 78.8% |
| 41,828 | 54.6% |
| 12.8% | |||
Cost of services and licensing |
| 394 |
| 38.9% |
| 873 | 60.2% |
| 0 | 0.0% |
| 873 | 60.0% |
| 121.6% | |||
Total cost of revenues |
| 37,481 |
| 56.6% |
| 31,063 | 49.1% |
| 11,638 | 78.7% |
| 42,701 | 54.7% |
| 13.9% | |||
Gross Profit |
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On Products |
| 28,087 |
| 43.1% |
| 31,684 | 51.2% |
| 3,136 | 21.2% |
| 34,820 | 45.4% |
| 24.0% | |||
On services and licensing |
| 620 |
| 61.1% |
| 576 | 39.8% |
| 6 | 100.0% |
| 582 | 40.0% |
| -6.1% | |||
Total gross profit |
| 28,707 |
| 43.4% |
| 32,260 | 50.9% |
| 3,142 | 21.3% |
| 35,402 | 45.3% |
| 23.3% |
*Note: The acquired activity (Sony Ericsson M2M business) represents two months of results, May and June for H1 2006
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 45.3% of revenues. The gross margin from the acquired activity, at 21.3% of sales, was significantly lower than the historical Wavecom business at 50.9% of sales. The gross margin for the historical business increased versus last year due to the on-going actions to reduce costs and to an intellectual property accounting adjustment made since the first quarter of 2006.
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Operating expenses
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| June 2005 |
| June 2006 | |||||||
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| Historical |
| Acquired |
| Consolidated |
| % change |
(amounts in € 000s) | ||||||||||
Operating expenses |
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Research and development |
| 11,903 |
| 12,254 |
| 1,549 |
| 13,803 |
| 16.0% |
Sales and Marketing |
| 5,958 |
| 5,960 |
| 774 |
| 6,734 |
| 13.0% |
General and Administrative |
| 9,027 |
| 10,429 |
| 985 |
| 11,414 |
| 26.4% |
Acquired in process technology |
| 0 |
| 0 |
| 1,400 |
| 1,400 |
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Amortization of acquired intangible assets |
| 0 |
| 0 |
| 775 |
| 775 |
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Restructuring costs |
| 1,375 |
| 0 |
| 0 |
| 0 |
| -100.0% |
Total |
| 28,263 |
| 28,643 |
| 5,483 |
| 34,126 |
| 20.7% |
Operating expenses have increased during the first half of 2006 versus previous year mainly due to the expenses related to the acquired activity.
Operating expenses related to the historical Wavecom are stable versus last year : the increase of the general and administrative expenses due to higher bad debt reserve in the first half of 2006 than in the first half of 2005 and one-off reversal of accruals linked with an old litigation in the first quarter of 2005 is off setting the decrease in restructuring costs.
The first half of 2006 expenses includes a non-cash expense of €663 thousand related to stock-based compensation as required by implementation of SFAS 123. Stock-based compensation was not required to be expensed under US GAAP for the year 2005.
During the second quarter 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 are being identified within the former Sony Ericsson M2M activity. A complete identification should be finalized during the second half of 2006. At the current time, in-process technology has been estimated at €1.4 million which was expensed in the second quarter 2006, and the acquired intangible assets have been estimated at € 13.7 million, and will be depreciated over a period of 1 to 4 years, resulting in a depreciation charge of €775 thousand for the second quarter of 2006.
Headcount
Our global headcount was approximately 427 at June 30, 2006, including 80 people from the acquired activity and 55 independent contractors .
Other income (expense)
Interest and other financial income, net. We recorded net interest and other financial income of €496,000 in the first half of 2006, compared to €489,000 in the same period in 2005.
Foreign exchange gain (loss). We had a net foreign exchange loss of €1,329,000 in the six months ended June 30, 2006 compared with a net gain of €3,428,000 in the same period in the prior year.
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Income tax expense (benefit). Our €72,000 net tax expense in the first half of 2006 (expense of €399,000 in the first half of 2005), represents principally, income tax in France and in an Asian subsidiary.
Liquidity and capital resources
We had positive cash flow from operating activities of €4,140,000 in the six-month period ended June 30, 2006 compared to negative cash flow of €1,480,000 in the first six months of 2005. This positive cash flow is linked with our operating profit in the first half 2006 which included €3,417,000 of non cash expenses.
During the first six month of 2006, we had negative cash flow from investing activity of €27,398,000 mainly due to the acquisition of the activity from Sony-Ericsson.
We had working capital (defined as current assets less current liabilities) of €27,909,000 at June 30, 2006, compared to €56,996,000 at December 31, 2005.
At June 30, 2006, our capital lease obligations (including the current portion), amounted to €446,000, compared to capital lease obligations of €397,000 at the end of 2005. We had €37,206,000 in cash and cash equivalents at June 30, 2006 compared to €60,663,000 at December 31, 2005 due to the acquisitions we made during the second quarter of 2006.
At June 30, 2006, we had purchase commitments with our third-party manufacturers for future deliveries of products, principally during the third and fourth quarters of 2006. These purchase commitments totaled approximately €25.0 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 2006, the parent company, Wavecom SA, reported total revenues of €75.1 million including €26.7 million of intercompany revenues) compared to €67.2 million for the first half of 2005 (including €25.8 million of intercompany revenues).
The operating results for the first half of 2006 amounted to a profit of €5.0 million compared to a profit of €7.1 million for the same period in 2005. The result before tax was a profit of €7.8 million compared a profit of €7.8 million for the first half of 2005. The net profit for the first six month of 2006 amounted to €5.8 million versus a profit of €8.1 million for the same period in 2005.
Subsequent event
On September 28, 2006, Wavecom announced internally its decision to consolidate all of North American product development activities in Research Triangle Park (RTP), NC. In order to enhance collaboration, flexibility and operational efficiency. This will result in the closing of the San Diego (California) office. Wavecom has offered positions in RTP and relocation support to the San Diego-based team. People who will decline this offer will be made redundant during the fourth quarter of 2006. In addition, the Company will book some
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impairments of assets related to the closing of the site. The calculation of the restructuring costs is still underway.
Trends
12-month backlog, on June 30, 2006 stood at €51.6 million, 32% of which comes from the acquired business. The backlog from the historical Wavecom business at June 30, 2006 was €35.2 million, compared to €38.3 million at the end of the previous quarter. This reduction was totally associated with our handset business, for which we have no recognized backlog this quarter. As such, the core industrial and automotive business backlog was flat sequentially.
Additionally, integration of the acquired Sony Ericsson M2M business is ahead of plan, further positioning Wavecom as a leader in automotive and industrial wireless solutions.
Strong results for the second quarter make the company optimistic about the second half of 2006, although we remain cautious that the traditional summer slowdown may temper sales somewhat despite our strong backlog.”
The combination of the organic growth and the smooth integration of a substantial acquisition are proof points that demonstrate Wavecom ability to deliver on its previously-stated priorities, including, profitabilty, market-leading growth and superior customer service.”
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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.
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| WAVECOM S.A. | |
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| By: |
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| Chantal Bourgeat |