Wavecom S.A. 20-F 2005
For the fiscal year ended December 31, 2003
Commission file number: 000-30078
3, esplanade du Foncet
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
The number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark which financial statement item the Registrant has elected to follow.
Item 17 Item 18
TABLE OF CONTENTS
2 Wavecom Annual Report Form 20-F/A 2003
This Annual Report on Form 20-F/A (the “Form 20-F/A”) amends Items 3, 5, and 18 of the Annual Report on Form 20-F filed by Wavecom on April 16, 2004, to reflect the restatement of financial information for the year ended and at December 31, 2003. See Note 16 to the consolidated financial statements included elsewhere in this Annual Report on Form 20-F/A.
During the process of closing its financial statements for the year ended December 31, 2004, we identified an error in accounting related to the valuation allowance on our deferred tax assets for fiscal year 2003. The adjustments in our restated financial statements reflect an increase of €5.26 million in income tax expense for fiscal year 2003. The net result for the year ended December 31, 2003 has been restated to a net loss of €31.1 million from the previously published net loss of €25.9 million. The shareholders’ equity has been restated to €137.3 million from the previously published €142.6 million.
Other than the foregoing Items and the conforming changes related thereto, this Form 20-F/A does not amend, update or restate any other Items or sections of the Form 20-F originally filed for the year ended December 31, 2003. This Form 20-F/A does not reflect events occurring after the filing of the Form 20-F on April 16, 2004. The filing of this form 20-F/A should not be understood to mean that any other statements contained in the Form 20-F are true or complete as of any date subsequent to April 16, 2004. Investors should not rely upon this amendment as a reaffirmation or reiteration of forward-looking statements that were made in the original filing and are reprinted in this amendment.
Wavecom Annual Report Form 20-F/A 2003 3
Selected Financial Data
The following selected financial data for the five years ended December 31, 2003 are derived from the consolidated financial statements of Wavecom, which have been prepared in accordance with U.S. GAAP and have been audited by Ernst & Young Audit, independent auditors. The data should be read in conjunction with "Operating and Financial Review and Prospects," the consolidated financial statements, related notes and other financial information included in this annual report.
(1),(2),(3) Note appear on following page
4 Wavecom Annual Report Form 20-F/A 2003
Exchange Rate Data
Since January 1, 1999 our functional currency has been the euro, the currency of the European Monetary Union, of which the Republic of France is a member. The exchange rate for conversion of euros into U.S. dollars (using the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York) on April 13, 2004 was $1.1923 = €1.00. Fluctuations in the exchange rate between the euro and the dollar will affect the dollar amounts received by owners of ADSs on conversion of dividends, if any, paid in euro on the shares and may affect the dollar price of the ADSs on the Nasdaq National Market.
The following table shows the noon buying rates for the number of U.S. dollars per euro for the period since January 1, 1999. The average is computed using the noon buying rate on the last business day of each month during the period indicated.
Wavecom Annual Report Form 20-F/A 2003 5
In addition to the other information contained in this annual report, the following risk factors should be carefully considered in evaluating us and our business. These statements are intended to highlight the material risk factors that may affect our results.
Intense competition from companies in both the wireless device sector and the semiconductor sector could reduce our market share in all of our geographic markets and reduce our revenues
The market for wireless core technology is fragmented but intensely competitive. We currently compete in different segments of the market with different types of suppliers. In the market to supply core technology to telephone handset manufacturers, we compete primarily with major international semiconductor companies. In the vertical applications markets, we compete with a broad array of companies, from manufacturers of integrated wireless modules and modems to specialist designers. We expect competition to intensify, especially in the vertical applications markets, as growth in these markets attracts additional participants.
Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, a larger customer base and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new and emerging technologies and changes in customer requirements, and they may also be able to devote greater resources to the promotion and sale of their products. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. New competitors, or alliances among competitors, could emerge and rapidly acquire significant market share. Existing or new competitors may also develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Competition has forced us to reduce the average selling prices for some of our products, and we expect such price reductions to continue in the future. Competition may also result in reduced gross margins and loss of market share in certain markets. We cannot assure you that we will be able to continue to compete successfully or that competitive pressures will not materially and adversely affect our business, financial condition and results of operations.
Declining sales prices of personal communication devices, such as mobile telephones, and other wireless products could affect our operating results adversely
The prices of mobile telephones decreased rapidly during 2003. We believe that the prices of other wireless communications products will also decrease over time. As a result, prices for our Wismo modules, wireless modems and component solutions have declined and are likely to continue to decline at an accelerated pace in the years to come. More importantly, in order for us to address a larger market, and in order for our customers to introduce attractively priced products, we believe we must continue to reduce our selling prices. We will be unable to return to profitability unless we can offset these price decreases with increases in unit volumes and reductions in per unit costs.
We rely on a small number of major customers. The loss of one or more of these customers, or a reduction of purchases by one or more major customers, may adversely affect our sales, operating results and cash flows
Although the global handset market experienced significant growth worldwide in 2003, we experienced declining revenues during this period as the market for mobile telephones in East Asia, and particularly in China, was flooded with low-end products. Although our customers in the East Asian market have been particularly successful in building market share in that expanding market, many of their product offerings address the lower end of the market and do not incorporate our products or technology. The revenue decline that we experienced in 2003 may continue if the Chinese and other markets in which our customers sell their products should experience a downturn; if our customers are unable to remain competitive and increase their market share in their local markets; if they decrease sales of products based on our offering; if we are unable to win new customers or if we are unable to significantly lower our prices to compete with other suppliers.
In 2003 we were able to achieve a more balanced portfolio among our customers and within our geographic regions, but overall revenues for the year were significantly lower than revenues in 2002. The dynamics of the personal communication device markets and vertical markets in Europe, the Americas and Asia are all very different, and we cannot assure you that the strategies that enabled us to grow quickly in the Asian handset supply market in the past will work in those other markets, or that we will be successful in serving those markets.
6 Wavecom Annual Report Form 20-F/A 2003
The following table sets forth revenues from our largest customers for the past three years:
Significant cancellations or deferrals of orders could adversely affect our business
We sell products pursuant to advance purchase orders that customers may be allowed to cancel or defer on short notice, at our discretion, sometimes without incurring a significant penalty. Significant deferrals have in the past, and may again in the future, result in shortfalls from expected revenues in a fiscal quarter or fiscal year. Significant cancellations could materially and adversely affect our business, financial condition and results of operations. If we experience significant order cancellations or deferrals, or if we overstock products in anticipation of orders that fail to materialize, or if we accept the return of previously sold products, we may end up with excess or obsolete inventory, which could reduce our profit margins and result in inventory write-offs.
We operated at a loss during 2003. As a result, our cash reserves were reduced. If we continue to operate at a loss our cash reserves will continue to decrease which could result in our major suppliers requiring different payment terms or bank guarantees
Our company is "fabless," which means it operates without factories. As a result, our capital expenditures are relatively low and our main cash flows come from, and are used in, operations. During 2003 we experienced negative cash flows from operations. Our cash reserves as of December 31, 2002 were €135 million and as of December 31, 2003 were €111 million. If we continue to operate at a loss, our main suppliers, specifically the contract manufacturers who make our products, may require us to have stricter payment terms or may eventually require us to provide bank guarantees or letters of credit, which would have a negative impact on our cash flows. Based on our current plans, we believe that our available capital resources will be adequate to satisfy our cash requirements for at least 12 months from the date of this report. If our plans change, or if we do not achieve profits or if our profits are significantly lower than anticipated, we may need additional funding to remain in business.
The wireless communication market in which we operate is characterized by rapidly changing and increasingly complex technologies. If we are unable to keep pace with these new technology trends, our product offerings may not remain competitive and we may lose customers
The markets in which we sell our wireless solutions are developing new types of products and new versions of existing products regularly. To be competitive, manufacturers who purchase our Wismo modules and wireless modems for use in their mobile telephones and other applications must offer products that satisfy consumer demand for smaller, less expensive products with more features. To meet our customers' needs, we must continuously update and enhance our products, shortening their life cycles so that they meet the latest standards and include up-to-date features.
To develop these enhancements, new designs and technologies, we must spend time and significant amounts of money on research and development. These investments are generally made before commercial viability for such enhanced products is ensured and we may not receive any significant revenues from these products if we misjudge the market or miss a product life-cycle window. We intend to introduce our own chipset solutions during 2004, to be commercialized under the name WISMO Flex, and cannot assure you that these products will be commercially successful. We may lose market share if our competitors, most of which are larger and have greater resources than we do, are more successful or faster than we are in updating and improving products and technology.
Wavecom Annual Report Form 20-F/A 2003 7
In addition, several of our products rely on unproven or evolving technologies that may contain defects or other quality or performance problems, which may harm our reputation and increase our costs.
Our sales and operating results could be adversely affected if the third parties on whom we rely for the supply, assembly and manufacture of our components and finished products are unable to meet our supply, quality or manufacturing requirements
We rely primarily on third parties to supply components for our products and to assemble and to test our products.
Through the end of 2003, we relied on three separate contract manufacturers to produce our modules and modems. In October of 2003 we made the decision to concentrate all manufacturing with a single contract manufacturer. We chose Solectron, using its plant in Suzhou, China. We will be consolidating the production of all of our modules and modems at this new site during 2004. If this transfer is not done in a timely and successful manner or if the actual costs are higher than anticipated or if this transfer causes disruption to our operations, our revenues and profitability could suffer. Although we believe the use of a single contract manufacturer will help us to reduce costs and improve controls over the manufacture of our products, reliance on a single manufacturer will increase the risk that we could encounter manufacturing or supply problems.
Using third parties to manufacture key components of our products and to assemble and test our products reduces our control over product delivery schedules, quality assurance, manufacturing yields and costs. The third parties who manufacture, assemble and test our components and our products have other customers and may not have sufficient capacity to meet all of our supply, manufacturing, assembly and testing needs during periods of excess demand. They may experience financial difficulties, or delays or disruption to their production, or may fail to meet our specified requirements, notably our quality standards.
We believe that a number of our suppliers are sole sources for key components. These key components are complex and difficult to manufacture and require long lead times. We work with our suppliers on a twelve-month rolling forecast basis and we currently believe that we have secured an adequate supply based on our production forecasts for the next twelve months. To reduce such uncertainty, we have developed a proprietary baseband chipset and intend to continue developing other key components for our products, but we still run a risk in subcontracting the production of these chipsets. In the event of a reduction or interruption of supply, or a degradation in quality, it could take several months before we could begin receiving adequate supplies from alternative sources. Supply interruptions could delay product shipments, causing our revenues to decline and operating results to suffer.
Fluctuations in the rate of exchange between our reporting currency, the euro, and the U.S. dollar can affect our net sales and costs
Although the functional currency of Wavecom S.A. is the euro, a significant portion of our revenues is recorded in U.S. dollars. At the same time, most of our components are purchased in U.S. dollars and a portion of our operating expenses is in U.S. dollars. The value of the euro increased significantly against the dollar throughout 2003. A further strengthening of the euro against the U.S. dollar could reduce our reported revenues and negatively affect our reported operating and net results.
We incurred foreign exchange losses in 2002 and 2003 and we may incur such losses again in the future. Beginning in January 2003, we put in place a program to hedge our currency risk through the use of forward contracts and put and call options, covering expected net cash flows in U.S. dollars. The objective of this program is to minimize our risk, but we will never be able to eliminate the risk.
We need to attract, retain and develop key personnel who are skilled in our business and technology to remain competitive and properly manage our growth
It is important to our success that we retain our highly skilled product development, sales, marketing and other key employees, and continue to attract and motivate additional skilled employees. We rely to a large extent on independent contractors who work for consulting firms.
In January 2004 we announced a plan to restructure our business organization, which is expected to result in significant headcount reductions throughout our company. If we fail to complete the restructuring properly, we may lose personnel, either voluntarily or involuntarily, whose contributions are needed for the development, sales and marketing of our current and future products. This headcount reduction may also make it more difficult for us in the future to attract and retain the personnel needed for growth. If we fail to attract, hire or retain appropriately qualified personnel, we could experience delays in our research and development projects or our product roll-outs which could affect our ability to bring new products to market successfully or on a timely basis.
8 Wavecom Annual Report Form 20-F/A 2003
Changes in our market and in our business organization have placed a significant strain on our management systems and resources. In order to manage these changes, and to successfully restructure our business, we will need to modify our internal systems, controls and procedures, improve coordination among departments and better manage our workforce. If we fail to effectively face changes in our markets and manage our business to address the above concerns, our operating results could suffer and we may be unable to expand our business.
Destabilizing events in Asia, particularly in China, could hurt our revenues
In 2001, 2002 and 2003, sales to Asian customers represented 84%, 82% and 69%, respectively, of revenues, reflecting shipments pursuant to large contracts with customers in China, Taiwan and South Korea. We expect that, for the foreseeable future, a significant portion of our revenues will be generated from Asian customers, and in particular from customers based in China or serving the Chinese market.
The outbreak of the SARS virus in parts of China caused travel and business disruption throughout Asia during much of 2003. In response to the outbreak, we curtailed business travel between our European and Asian offices. Personnel shortages and logistics problems resulting from the outbreak caused delays in deliveries of vital electronic components from Asia to many companies worldwide, and impaired their ability to meet commitments to their own customers. While the SARS outbreak did not directly affect production of our products or delivery of components to our contract manufacturers' facilities, a protracted or more widespread epidemic of the SARS virus, or of "bird flu" or another communicable disease, could affect the production or the distribution of our products, which could materially harm our business.
Similarly, a financial crisis in Asia, particularly in China, could substantially reduce our revenues from Asian customers or customers selling to end users in Asia. Political upheaval in China or a change in the political climate, making China a less favorable environment for foreign businesses, could also substantially reduce our revenues.
Our costs may increase or we may have to redesign our products if they infringe other companies' intellectual property rights
Other companies have patents, copyrights, trade secrets and other intellectual property rights covering technology used in the wireless communications industry. Although we have entered into intellectual property licenses permitting us to use rights of third parties, if any of our products were found to infringe on protected technology, we could be required to redesign them, to obtain further intellectual property licenses or to pay royalties or damages to the owner of the technology. The resulting costs would harm our business. If we were unable to obtain these licenses or to redesign our products to make them non-infringing, we could be prohibited from marketing our products.
Our business could be hurt by the unauthorized use of our technology
We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position. If we were unable to prevent a competitor from using our designs and techniques to produce competing products, our business would be adversely affected.
Our quarterly revenues fluctuate significantly and may affect the price of our shares and ADSs
Our revenues and operating results fluctuate significantly from quarter to quarter. The many factors that could cause our quarterly results to fluctuate include:
Wavecom Annual Report Form 20-F/A 2003 9
Due to these and other factors, our results of operations could fluctuate substantially in the future and quarterly comparisons may not be reliable indicators of future performance. Because many of our expenses for personnel, facilities and equipment are relatively fixed in nature, we may not be able to reduce expenses quickly to balance a decline in our revenues and could experience net losses during extended periods. Quarterly fluctuations may have a negative effect on the price of our shares and ADSs. It is possible that in some future quarter our results of operations will be below the expectations of public market analysts and investors, in which case the price of our shares and ADSs could fall.
Our U.S. shareholders could suffer adverse tax consequences if we are characterized as a passive foreign investment company
If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our shareholders who are subject to U.S. taxation. U.S. persons should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our shares or our ADSs. See "Item 10Additional InformationTaxationUnited States TaxationPassive Foreign Investment Company".
We may not be able to sell our products under the Wavecom name or use the trademark "WISMO" in certain countries
Several companies, some of which are in businesses similar to our own, use the word Wavecom or a similar word as either a trade name or as a brand name for their products, in particular in the United States. This could cause confusion in the marketplace and harm our sales. If one of these other companies were to take effective legal action to prohibit us from continuing to use the name Wavecom, we could be forced to use a different name and, as a result, it would be more difficult for customers to identify us and our sales might suffer. The trademark WISMO may not be protected in some countries where we do business. Use of the trade name WISMO was opposed in certain countries and if these opponents succeed we may be prohibited from using this trade name in certain jurisdictions.
Adherence to technical requirements or legal regulations may increase our cost base
The implementation of new technical requirements or legal or environmental regulations, such as the European Union's recent directive mandating recycling of used electronic components, may adversely affect the timing and costs of introduction of our products. This could ultimately impair the success of our business even though these regulations may not directly apply to us or our industry.
Events anticipated in forward-looking statements in this annual report may not occur
This annual report contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are usually accompanied by words such as "believe,""anticipate,""plan,""expect" and similar expressions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including the risks that we face, described above and elsewhere in this annual report.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes, and the other financial information included elsewhere in this annual report. Our consolidated financial statements and our quarterly financial results included in this discussion have been prepared in accordance with U.S. GAAP. 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.
10 Wavecom Annual Report Form 20-F/A 2003
The wireless communication sector in which we operate is extremely fast-paced and dynamic, with many types of competitors, both large and small. We address two main markets, the personal communication device (PCD) market for mobile telephones, connected personal digital assistants and smartphones, and the highly segmented market for vertical applications which covers a wide variety of end-products that incorporate the wireless communication function, including automobile dashboards, wireless local loop for fixed-wireless telephones, utility meters, vending machines, and payment and security systems.
In 2001 and 2002, our significant revenue growth was driven primarily by a rapidly expanding market for mobile telephones in China and the success of a small number of key customers. Our technology was adopted by a major Chinese mobile telephone manufacturer as well as a number of other Chinese and Korean companies whose target market was China. At that time, most of these companies had a small number of research and development engineers and therefore found that our solutions, which came in the form of modules, could be quickly and easily designed into mobile telephones. Throughout 2001 and 2002, our solutions enabled these Asian manufacturers to rapidly take market share in the Chinese market, which previously had been dominated by foreign manufacturers. Because our solutions include all the technology necessary for wireless communications in a pre-packaged form, our price points were generally higher than those of our competitors, who were selling reference designs built around a few key components that were mainly used to design low-feature, low-cost telephones. As a consequence, our products were most often designed into our customers' high-end feature-rich phones and not in low-end products. During 2003, the Chinese market for mobile telephones began to expand and reach some of the inland regions where consumers' incomes are generally lower than in the more affluent coastal regions. From these new consumers, there was increasing demand for the low-priced, entry-level products that our solutions did not address. In addition, our customers faced mounting competition from both Chinese and foreign telephone manufacturers, and taking market share became increasingly difficult for them. The cost of our products was too high to be an optimal solution for our main Asian handset customers, who had driven our sales growth during 2001 and 2002. As a result, they turned to other suppliers and our revenues from this market and overall profitability declined sharply compared to 2002.
In response to requests from our Asian handset customers, we developed and introduced a new product line called the WISMO Flex. We believe that this solution, which will be priced in line with our competitors' products, competes more directly with reference design chipset vendors who are the major suppliers to mobile phone manufacturers in both Europe and Asia. A number of our existing customers have already allocated resources, including R&D teams, to design a variety of new phone models around this platform. The WISMO Flex is expected to be available in volume during the second half of 2004 and is intended to address a large scope of handsets, with feature-rich multimedia functions at competitive prices.
We saw our customer portfolio become more balanced, although on a smaller base, in 2003 compared to 2002 and 2001, when our revenues came mainly from a few Asian mobile telephone manufacturers. For the full year 2003 our top ten customers represented 76% of revenues compared to 90% in 2002 and 88% in 2001. In addition, in 2003, no single customer represented more than 20% of revenues while in 2002 one customer represented 67% and in 2001 one customer represented 35% and another represented 33% of total revenues. Our customer portfolio in 2003 was also more balanced in terms of our target markets as sales for use in personal communication devices (PCD) represented 52% of our revenues (with 48% from vertical applications) while in 2002 and 2001 sales for use in PCD applications represented 82% and 79%, respectively.
The number and volume of products equipped with wireless connectivity in the vertical markets continue to grow and we believe we have been keeping pace with this overall market growth, based on our internal estimates. Our revenues generated from the vertical markets totaled €130 million in 2003, marking 33% growth over 2002 when revenues from vertical markets totaled €98 million. Vertical markets revenues totaled €66 million in 2001.
Based on current revenue forecasts as of the publication of this report, we expect vertical applications to contribute more than half of our revenues in 2004.
With the ramp in volumes of our WISMO Flex solution (by mid-2004) we should see our average selling prices for use in PCD applications take a substantial step down as compared to our WISMO Pac and WISMO Quik module solutions (average selling prices for our modules was €47 in the fourth quarter of 2003). However, from a margin perspective, we continue to target an overall product gross margin of around 30%, which is the average of gross margins from our entire range of WISMO products: WISMO Pac, WISMO Quik and, in the future, WISMO Flex.
Wavecom Annual Report Form 20-F/A 2003 11
Our customer base is predominantly international, with the majority of our revenues coming from Asia and from European customers outside of France, including Germany, Italy, Spain and the United Kingdom. Revenues from Asia represented 69% of our sales in 2003, 82% of our sales in 2002 and 84% of sales in 2001. In order to better serve the Asian markets, we established subsidiaries in Hong Kong, and Seoul; a branch office in Tokyo; and representative offices in Taipei, and Beijing. We also have subsidiaries based in San Diego, California; Darmstadt, Germany and Guilford, UK. As Asia, and China specifically, is expected to remain the major manufacturing hub for most consumer electronics goods in the future, we expect that this region will remain the source of the majority of our revenues in the short and long term.
To better address our customers' needs from both a contact and product standpoint, we established a new organization structure in early 2004. The new organization is built around four principal divisions. Two divisions serve as our face to the customer and include sales, business development, marketing, product management, engineering and customer support addressing our two key target markets: PCDs and Verticals. The other two principal divisions are focused on products and technology.
We have identified the most critical accounting principles upon which our financial status depends and that involve the most complex or subjective judgments and estimates. Our judgment used to determine the appropriate assumptions and to make estimates is based on our historical experience, terms of existing contracts, our observation of trends in the industry, information provided by our customers and information available from other outside sources. We believe that our most critical accounting estimates are:
Both of these provisions have an impact on the determination of cost of goods sold. Both are recorded in "other accrued expenses" on the balance sheet and are described more fully in the footnotes to our annual consolidated financial statements.
12 Wavecom Annual Report Form 20-F/A 2003
International Financial Reporting Standards (IFRS)
In July 2002 the European Commission adopted a directive that will require European companies whose stocks are traded on the public market (Euronext, for example) to publish their consolidated financial accounts under IFRS (International Financial Reporting Standards). In compliance with this regulation, which takes effect on January 1, 2005, we will begin publishing our consolidated financial statements in IFRS, rather than in French GAAP. We will continue to publish our financial statements in accordance with U.S. GAAP as well.
Fiscal year 2003 compared to fiscal year 2002
The decrease in product revenues in 2003 compared to 2002 was due to lower volumes (representing 76% of the decrease), lower average selling prices (representing 11% of the decrease), and the decline of the U.S. dollar versus the euro compared to 2002 (representing 13% of the decrease). Nearly all of our sales from Asia-Pacific and the Americas are denominated in U.S. dollars whereas our reporting currency is euros. Therefore movements between these two currencies impact our reported financial results, and accounted for a portion of the revenue decreases in these two regions. As detailed in the preceding "Background" section, revenues in the Asia-Pacific region were adversely impacted by events in the Chinese handset market. The decrease in revenues in the Americas reflected the absence of any single large customer, compared to 2002 when one large customer with a personal digital assistant product contributed significantly to 2002 revenues.
The lower volumes in 2003 resulted primarily from lower sales to handset customers in the Asia-Pacific region, as our customers reduced orders in order to control their inventory levels and as our largest customer began to diversify its sources of supply. The average selling price of Wismo modules continued to decline. It decreased by 20% year on year from the fourth quarter of 2002 to the fourth quarter of 2003, in-line with our management's expectations. Much of this decline is attributed to the weakening of the United States dollar against the euro, with an average exchange rate of $1.1287 for €1.00 in 2003 compared to an average of $0.9552 for € 1.00 in 2002.
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We continued to diversify our customer portfolio in an effort to reduce our reliance on a small number of major customers. For the full year 2003, our top ten customers represented 76% of total revenues, down from 90% for the full year 2002. No single customer represented more than 21% of revenues in 2003. We also diversified our sales by market, substantially increasing the percentage of total sales made to the vertical markets.
Sales by markets:
Sales by geographic regions:
Service revenue is generated from the sale of technical support to our customers to assist them in the integration of our Wismo module into their products. We offer this service in order to promote the sales of Wismo modules. We do not consider it to be a stand-alone business.
Cost of goods sold. Cost of goods sold consists primarily of the cost of components, our manufacturers' charges and provisions for royalty and warranty expense.
Our ability to improve gross margin levels on lower revenues and in the face of declining average selling prices reflects the following factors:
14 Wavecom Annual Report Form 20-F/A 2003
Cost of services. The variability in gross profit or loss on services reflects the fact that we expense all development service costs as incurred, while we recognize service revenue only when the project is complete and the services have been accepted by the customer.
Research and development. Our research and development spending reflects the development efforts related to new Wismo products as we continued to expand our product line and improve software interfaces and development tools. 2003 spending also reflects costs related to the development of our own baseband and related components used in hardware platforms launched in the third quarter of 2003. We held R&D expenses to 3% below 2002 expenses.
Sales and marketing. The increase of sales and marketing expenses in 2003 reflects an increase in our presence in the Asia-Pacific and U.S. markets through our local sales offices, increases in the level of spending at tradeshows and increases in sales commissions to outside agents following a change in the channel structure in Asia in late 2002. Following a decision taken mid-2002 to take steps to increase our visibility in key markets, we launched our first major print advertising campaign in the fourth quarter of 2002, which continued throughout the first half of 2003. These additional expenses were partly compensated by cost reductions in other areas.
General and administrative. The principle reason for the increase in G&A expense in 2003 was the costs associated with consolidating our Paris-based employees into one building, moving from three separate sites. In addition to moving costs, higher rental costs for new facilities and depreciation on new leasehold improvements, G&A expenses in 2003 included €10.3 million to cover double rent for the period before the moves and a provision for loss associated with the former premises. This provision reflects management's estimate of the costs to be incurred in order to release us from these lease commitments, including rental costs until such release is obtained.
In addition, in 2003 we recorded a net increase in the allowance for doubtful accounts of €1.6 million compared to 2002. The increase in the allowance for doubtful accounts was related primarily to two European distributors, who were replaced during 2003 as we expanded our distribution network in the region. We are in litigation with one of these distributors in an attempt to recover a total of €700,000 owed to us.
The overall increase in personnel and in the volume of business over the course of 2002 led us to reinforce the finance and support teams. The increase in G&A spending, therefore, reflects the strengthening of the finance and administrative team at headquarters and in the Asia-Pacific region, reinforcement of the information systems group and related capital expenditures. The increase in administrative and financial costs occurred over the course of 2002 and we incurred the related salary and employee expenses and other costs for all of 2003.
Wavecom Annual Report Form 20-F/A 2003 15
Goodwill impairment. In 2000, we purchased a majority interest in a San Diego-based software development company, Arguin, Inc., and in 2001 purchased the tangible and intangible assets of Iconn Wireless, a San Diego-based CDMA-technology company. Based on our management's estimate of probable future cash flows related to these activities, which were used for the required annual impairment test under SFAS 142, we determined that it was necessary to write off the remaining goodwill associated with these acquisitions.
Deferred compensation amortization. We recorded deferred compensation expense in connection with the issuance of founders' warrants and stock options in September 1998 and February 1999. This deferred expense was amortized on a straight-line basis over the four-year vesting periods of the warrants and options. Deferred compensation expense related to the September 1998 grants was completely amortized at the end of September 2002 and deferred compensation expense related to the February 1999 grants was completely amortized in February 2003.
Other income (expense)
Interest income, net. We recorded net interest income of € 2.8 million for 2003, compared to €3.2 million in 2002. Although interest rates paid on our deposits were lower in 2003 compared to 2002, our average cash balances were roughly the same during the two comparable periods.
Foreign exchange gain (loss). We had a net foreign exchange loss of €2,065,000 for 2003 compared a net loss of €10,857,000 in 2002. In January 2003, we implemented a hedging program in order to reduce our exposure to movements in the value of the U.S. dollar against the euro. The hedging program involves the use of forward contracts as well as put and call options to hedge estimated future cash flows.
Income tax expense (benefit). Our €861,000 net tax expense in 2003 (versus a net tax expense of €6,556,000 in 2002), represented principally a deferred tax expense for €10,872,000 and French current taxes for €20,000 which were partly offset by French research and development tax credits for €1,355,000, French tax carry back for €8,558,000 and the income tax benefit of €118,000 of our Asian subsidiary.
Fiscal year 2002 compared to fiscal year 2001
The increase in product revenues in 2002 was due principally to increased sales of Wismo modules for personal communication device applications, but in absolute terms sales in all our target markets (automotive, machine to machine as well as personal communication devices) increased.
16 Wavecom Annual Report Form 20-F/A 2003
The decrease of revenues from services reflects the Company's ongoing efforts to ease the process of integrating the Wismo module into customers' products and therefore reduce the amount of services needed from Wavecom. We recognize service revenues for development work once all work is completed.
The sales in term of markets and geographic regions are as follow:
Sales by markets:
Sales by geographic regions:
Cost of goods sold. In 2002, our product gross margin increased in each of the four quarters continuing the trend of sequential quarterly improvements realized throughout 2001. The improvements in gross margin resulted principally from these factors:
Cost of services. The variability in gross profit or loss on services reflects the fact that we expense all development service costs as incurred, while we recognize service revenue only when the project is complete and the services have been accepted by the customer.
Wavecom Annual Report Form 20-F/A 2003 17
Research and development. The increase in our research and development spending reflects, in particular, the development efforts related to new Wismo modules as we expanded our product line with new modules based on CDMA as well as GSM/GPRS. Research and development expenses also reflect the significant resources being used to adapt our existing products for new digital wireless standards, including GPRS and W-CDMA.
Sales and marketing. The increase of sales and marketing expenses in 2002 reflects an increase in headcount from 47 people in 2001 to 79 by the end of 2002, as well as increased promotional and advertising spending, particularly in the fourth quarter of 2002. As part of an effort to increase the visibility of Wavecom to prospective customers, we sponsored a golf tournament in China and ran print advertising in major publications in our main target markets for the first time We also increased the amount of sales commissions to sales personnel and to sales agents, reflecting the increased level of revenues.
General and administrative. We increased the number of personnel in our general and administrative services (including finance, legal, corporate communications, human resources, and information systems departments) from 89 at December 31, 2001 to 130 at December 31, 2002. Rent expense increased following the signing of a new office lease in Issy-les-Moulineaux in July 2002, with the objective of regrouping in 2003 personnel previously spread over three locations. Insurance and information technology expenses also increased significantly. These increases reflect the growth of our business and the development of our subsidiaries in Asia and in the United States. In addition, legal and patent attorney fees increased as we continued to negotiate licensing agreements with an increasing number of GSM, GPRS, CDMA and other patent and technology holders, as well as increasing the number of registrations of our own patents.
Interest income, net. We recorded net interest income of € 3,159,000 in 2002, compared to €3,827,000 in 2001. The decrease in net interest income results from the decline in interest rates over the course of the year, partially offset by higher average cash balances invested.
Foreign exchange gain (loss). We had a net foreign exchange loss of €10,857,000 in 2002 compared to a net gain of €142,000 in 2001, due primarily to changes in the value of the U.S. dollar (the primary currency other than the euro in which we invoice sales and make purchases) compared to the euro. Of the total 2002 loss, €8,415,000 was recognized during the second quarter of the year when the U.S. dollar declined significantly against the euro at the same time as we began generating significant amounts of U.S. dollar-denominated cash. Foreign exchange losses were incurred on cash balances and accounts receivable denominated in dollars, offset partly by gains on accounts payable in dollars.
Income tax expense (benefit). With the increased profitability of the group in 2002, we used all tax loss carryforwards remaining in France during 2002 and recorded a net tax expense of €6,556,000 for the year. The net expense reflects tax expense recognized in all jurisdictions, except the United States, net of French research tax credits totaling €449,000 in 2002. Our €2,299,000 net tax benefit in 2001 represents principally French research tax credits, offset slightly by tax expense in certain jurisdictions. Research tax credits are received in cash in the fourth year after the period in which they are recorded, if they are not used to offset income taxes payable in France prior to that time.
18 Wavecom Annual Report Form 20-F/A 2003
Selected quarterly operating results
The following table sets forth a summary of Wavecom's unaudited quarterly operating results for each of the eight fiscal quarters in the period ended December 31, 2003. We have derived this information from our unaudited interim consolidated financial statements which have been prepared on a basis consistent with our audited consolidated financial statements. The results of operations for any quarter are not necessarily indicative of results for any future period.
Wavecom Annual Report Form 20-F/A 2003 19
We believe that period-to-period comparisons of our operating results are not necessarily meaningful. Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future. You should not rely on them to predict future performance. Our revenue may fluctuate due to the amount of new customer orders and the timing in beginning production and delivery of these new orders. The amount and timing of our operating expenses may fluctuate significantly in the future as a result of the timing of these orders and our development of new products and technologies. For a discussion of factors which may affect our quarterly and annual operating results, see "Item 3Key InformationRisk FactorsOur quarterly revenues fluctuate significantly and may affect the price of our shares and ADSs."
In October 2003 we announced a plan to consolidate all production with one contract manufacturer located in China as well as to reorganize our customer care unit. Under the restructuring plan, we will terminate a number of employees resulting in an accounting impact which will be reflected in the 2004 financial statements because benefit arrangements were not defined and announced to employees until January 2004.
On January 23, 2004, we announced an additional plan to reduce headcount linked to the implementation of a new organizational structure based on our two primary sales markets and on wireless silicon development. Once the plans are fully implemented, our worldwide headcount is expected to be reduced by about 300 positions. The restructuring will affect employees primarily in France and in the United States. This plan is expected to cost approximately €10 to €15 million related primarily to headcount reduction and associated charges, including severance and outplacement packages.
On February 20, 2004, we signed a memorandum of understanding with the minority shareholders of Arguin Communications, Inc. for the purchase of their remaining minority interest in Arguin for a total of $2,135,625. As part of this agreement, certain of the former Arguin shareholders will enter into non-compete agreements for a period of two years.
On March 23, 2004, our board of directors granted 38,000 founders' warrants to employees of Wavecom S.A. and 3,000 stock options to an employee of Wavecom Asia Pacific, Ltd. The exercise price is €9.62.
Liquidity and capital resources
We had negative cash flow from operating activities of €5,875,0001 for the year ended December 31, 2003 compared to a positive cash flow from operating activities of €41,867,000 in 2002.
We had working capital (defined as current assets less current liabilities) of €80,339,000 at December 31, 2003, down from € 105,418,000 at December 31, 2002.
At December 31, 2003, our capital lease obligations (including the current portion) amounted to €1,280,000, compared to capital lease obligations of €501,000 at the end of 2002.
We had €110,705,000 in cash, cash equivalents and short-term investments at December 31, 2003 compared to €134,528,000 at December 31, 2002. The decrease reflects primarily the impact of the operating loss and capital expenditures during the year.
At December 31, 2003, we had bank guarantees for €15,978,000 to secure lease payments under office leases signed in December 2000 and July 2002. These lines were secured by pledged certificates recorded as long-term assets, rather than as cash or short-term investments, because the guarantee has a term greater than one year.
Based on our current plans, and despite the cost of the restructuring plan in 2004, we believe that our available capital resources will be adequate to satisfy our cash requirements at least for 12 months from the date of this report. If our plans change, or if we do not achieve profits or if our profits are significantly lower than anticipated, we may need additional funding to remain in business.
20 Wavecom Annual Report Form 20-F/A 2003
Our contractual obligations consist principally of obligations under capital leases, operating leases, and other short-term obligations.
Our contractual obligations under operating leasing as of December 31, 2003 include approximately €13 million related to leases, expiring in March 2005, June 2006 and May 2008, for office space which we vacated in mid-2003 following the consolidation of all personnel in Issy-les-Moulineaux in one building. A €5.8 million provision was recorded at December 31, 2003.
At December 31, 2003, we had commitments outstanding to purchase approximately €1.2 million in fixed assets, which are expected to be placed in service during the next two quarters. Our future capital requirements, the timing and amount of expenditures, and the adequacy of funds available to us will depend on our success in developing and selling new and existing products, as well as technological and market developments in the wireless communications industry and on other factors, such as headcount growth.
At December 31, 2003, we had purchase commitments with our third-party manufacturers for future deliveries of products, principally during the first half of 2004. These purchase commitments totaled approximately €32.5 million.
At December 31, 2003, we had €101,441,000 in cash and cash equivalents invested in short-term money-market accounts bearing variable rates of interest. We had an additional €16 million of pledged securities invested in short-term money market accounts. We had no variable rate debt at December 31, 2003.
We publish our consolidated financial statements in euro and the functional currency of Wavecom S.A. is the euro. In 2003, we recorded 72% of our total revenues in U.S. dollars, with virtually all the rest in euro. We purchase many of our components for U.S. dollars and the operating expenses of our U.S. subsidiaries are in U.S. dollars. The operating expenses of our Hong Kong subsidiary are primarily in Hong Kong dollars, which are closely tied to the U.S. dollar. Most of our other operating expenses are in euros. Dollar purchases and expenses represented approximately 55% of our cost of revenues and operating expenses in 2003. A strengthening of the euro against the U.S. dollar and other currencies in which we receive revenues could reduce our reported revenues and our reported operating and net results. We incurred a net foreign exchange loss of €2,065,000 in 2003, a net foreign exchange loss of €10,857,000 in 2002 and a net foreign exchange gain of € 142,000 in 2001.
If the euro had appreciated by 10% compared to the U.S. Dollar during the year ended December 31, 2003, our revenues would have been €17.9 million lower and our expenses would have been €15.1 million lower, resulting in an operating loss of €2.8 million greater than the published result. Our net foreign exchange position is described in Note 5 to our consolidated financial statements.
In January 2003, we began to use a combination of options and forward exchange contracts in order to minimize the risk to our estimated net dollar cash flows over the coming months. Because these financial instruments do not always hedge specific transactions, they may be accounted for as speculative transactions, with the fair market value of the instruments being recorded on our balance sheet and their change in market value recognized in our profit and loss accounts at the end of each accounting period.
22 Wavecom Annual Report Form 20-F/A 2003
Wavecom Annual Report Form 20-F/A 2003 F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of Wavecom S.A. as of December 31, 2001, 2002 and 2003 (as restated), and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of Wavecom's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wavecom, S.A. at December 31, 2001, 2002 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
As described in Note 16, the 2003 financial statements have been restated to correct an error in the application of U.S. generally accepted accounting principles.
ERNST & YOUNG Audit
Paris-La Défense, France
F-2 Wavecom Annual Report Form 20-F/A 2003
See notes to financial statements
Wavecom Annual Report Form 20-F/A 2003 F-3
F-4 Wavecom Annual Report Form 20-F/A 2003
Wavecom Annual Report Form 20-F/A 2003 F-5
F-6 Wavecom Annual Report Form 20-F/A 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Wavecom is organized as a société anonyme, or limited liability company, under the laws of the Republic of France. Wavecom was founded in 1993 and is publicly traded on Euronext Paris (Nouveau Marché) in France and on the Nasdaq (National Market) exchange in the U.S. It provides the wireless market with complete technology solutions for vertical applications (including machine-to-machine, automobiles and wireless local loop) and personal communications devices (PCDs, including telephone handsets and smartphones). Wavecom's complete solutions are based on GSM, GPRS and CDMA mobile communications standards and include products called the Wismo (Wireless Standard Module) which are compact standardized devices that contains substantially all of the software, hardware and other technology (including memory) needed to enable wireless communications targeting vertical applications. Wavecom also manufactures a line of wireless modems which also addresses vertical applications. Wavecom's complete wireless solutions are sold via its direct sales force and a network of value added distributors and manufacturers representatives.
The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Wavecom S.A., its wholly-owned subsidiaries Wavecom, Inc. (a Delaware corporation) and Wavecom Asia Pacific Ltd. (a Hong Kong corporation), both of which commenced operations in 1998; Wavecom Korea Co. Ltd and Wavecom Deutschland GmbH, branches transformed into subsidiaries in 2002; Wavecom Northern Europe Ltd (an English company) created in 2003 and Arguin Communications Inc. (61.88% controlling interest purchased in October 2000). Inter-company accounts and transactions have been eliminated in consolidation. Certain prior year amounts may have been reclassified to conform to current year presentation.
The reporting currency of Wavecom, for all years presented, is the euro (€).
The functional currency of each subsidiary is its local currency. In accordance with Statement of Financial Accounting Standards No. 52, all accounts in the financial statements are translated into euro from the functional currency at exchange rates as follows: (1) asset and liability accounts at year-end rates, (2) income statement accounts at weighted average exchange rates for the year, and (3) shareholders' equity accounts at historical exchange rates. Translation differences are recorded in shareholders' equity.
Realized and unrealized foreign currency transaction gains and losses are reflected in net income.
Wavecom operates internationally, giving rise to exposure to changes in foreign currency exchanges rates, the U.S. dollar in particular.
Wavecom uses financial instruments, including derivatives such as foreign currency forward and options contracts, to reduce the foreign exchange risk on cash flows from transactions with subsidiaries denominated in U.S. dollar. The Company complies with the Financial Accounting Standards Board issued Statement No 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended by SFAS 137 and 138. SFAS 133 requires the recognition of all derivatives at fair value. Changes in fair value are recorded in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedging transaction and the type of hedge transaction. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Fair value is determined by reference to published exchange rates.
Wavecom Annual Report Form 20-F/A 2003 F-7
Revenue is recognized when all of the following circumstances are satisfied: persuasive evidence of an agreement exists, the price is fixed or determinable, collection is reasonably assured and delivery has occurred.
Revenue from product sales is recognized at the time the units are shipped and the risk of ownership is transferred.
Revenue from technical support and product development services and other service revenue is recognized when the service is performed, there is no material continuing performance obligation and collection is probable. 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.
Shipping and handling costs incurred by the Company are reflected in cost of goods sold.
Research and development
Wavecom charges all research and development costs to expense as incurred.
The Company expenses advertising costs as incurred. Advertising expenses totaled €6,699,000 and €1,715,000 for the years ended 2003 and 2002, respectively. Amounts in 2003 are linked to Wavecom's first press campaign, started at the end of 2002 and finished during the first half of 2003. Amounts in 2001 were not significant.
Net income (loss) per share amounts are computed using the weighted average number of shares outstanding.
In accordance with SFAS 128 Earnings per Share, basic and diluted earnings per share are presented. Basic earnings per share excludes the dilutive effects of options and warrants, and reflects only the actual ordinary shares outstanding. The effect of options and warrants outstanding in 2003 have been excluded from the 2003 calculation of diluted earnings per share as Wavecom reported a net loss in the year ended December 31, 2003, and their effect is anti-dilutive. In 2001 and 2002, diluted earnings per share includes the effects of dilutive options and warrants as if they had been exercised.
Financial instruments that potentially subject Wavecom to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables.
Wavecom has cash investment policies that limit investments to short-term low-risk instruments. Wavecom's cash is held principally in euros and United States dollars and concentrated primarily in five major banks and financial institutes in Paris and three major banks in Hong Kong.
As of December 31, 2003, Wavecom sub-contracts the manufacturing and assembly of its products to three suppliers located in France, Romania and China. Wavecom believes that alternate sub-contractors can be identified if the current manufacturers are unable to meet Wavecom's requirements. During the fourth quarter of 2003, Wavecom decided to consolidate all production with one sub-contractor located in China. The transfer should be effective during the course of2004.
Wavecom sells its products to customers in a variety of industries principally in Asia/Pacific, Europe, 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 December 2001, 2002 and 2003 totaled €46,547,000, €86,164,000 and €46,488,000, respectively.
F-8 Wavecom Annual Report Form 20-F/A 2003
A summary of the activity in the allowance for doubtful accounts is as follows (amounts in thousands):
The increase in the allowance for doubtful accounts was related primarily to two European distributors, who were replaced during 2003 as Wavecom expanded it distribution network in the region. Wavecom is in litigation with one of these distributors in an attempt to recover a total of €700,000 owed to Wavecom.
For the years ended December 31, 2001, 2002 and 2003, certain customers represented revenues in excess of 10% of Wavecom's total consolidated revenues. The amounts of annual revenues, and corresponding outstanding accounts receivable at December 31, from these customers were as follows (in thousands):
Sales to customers by geographic region are summarized as follows (in thousands):
Geographic region is determined by the customer's invoice address and may not indicate the final destination of product usage.
Substantially all of the Company's long-lived assets are located in France.
Wavecom considers all highly liquid investments with insignificant interest risk, and purchased with an original maturity of three months or less, to be cash equivalents. At December 31, 2001, 2002 and 2003, Wavecom had amounts of €83,680,000 (of which €12,794,000 was denominated in U.S. dollars), €92,826,000 and €101,441,000 respectively, invested in money market accounts with no fixed maturity, earning interest at short-term variable rates. At December 31, 2001, 2002 and 2003, the book value of these cash equivalents approximated their market value.
Wavecom Annual Report Form 20-F/A 2003 F-9
As of December 31, 2001 and 2002, the Company held deposit certificates of €2,994,000 and €15,112,000, respectively. These investments were classified as available-for-sale and were carried at cost which approximated market value at December 31, 2001 and 2002. These certificates matured during 2003.
Inventories are valued at the lower of cost or market.
Value added tax recoverable consists of value added tax paid by Wavecom to vendors and suppliers located in the European Union and recoverable from the tax authorities. Value added tax recoverable is collected on a monthly basis. As of December 2001, 2002 and 2003, the Company had value added tax credits, immediately recoverable, of €20,600,000, €2,350,000 and €750,000, respectively.
Property and equipment is stated at cost. 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:
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 long-lived 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 in measuring whether the carrying value is recoverable. An impairment loss would be measured by reducing the carrying value to fair value, based on a discounted cash flow analysis.
Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair value. In accordance with Financial Accounting Standards Board statement No 142, Goodwill and Other Intangible Assets (SFAS 142), the Company ceased amortizing goodwill on a straight-line basis as of January 1, 2002. Goodwill is tested for impairment on an annual basis and whenever indicators of impairment arise. During 2002, the Company performed the first of the required impairment tests of goodwill, as well as the annual test in the fourth quarter, which resulted in a finding that no impairment to goodwill existed. Impairment of goodwill recorded during 2003 is described in note 6.
In October 2000, the Company purchased convertible preferred shares representing less than 1% of the capital of Cambridge Silicon Radio (C.S.R.), a British company, for €1,197,000. The cost method is used to account for this investment because the Company does not have the ability to exercise significant influence over the investee's operating and financial policies. During 2001 the Company recorded a provision for €716,000 to reflect the estimated decline in value of the investment. The estimated loss was determined based on a valuation used in recent financing rounds for C.S.R. No additional impairment charges were considered necessary during the years ended December 31, 2002 and 2003.
F-10 Wavecom Annual Report Form 20-F/A 2003
Bank guarantees of €2,868,000 and €13,110,000 were issued in December 2000 and in July 2002 in favor of the owners of leased office space, in order to secure annual lease payments. At December 31, 2001, 2002 and 2003, these guarantees were secured by the pledge of certificates of deposit and mutual funds for €2,994,000, €13,671,000 and €16,021,000 respectively. These pledged investments have been classified as long-term assets in the balance sheet.
Other assets included primarily security deposits.
Wavecom's products are designed to conform to certain wireless industry standards. Certain essential technologies are patented and Wavecom uses these essential technologies under licensing agreements for which Wavecom pays royalties. Wavecom has concluded licensing agreements with six patent holders for technologies deemed to be essential for Wavecom's products. Two contracts were signed in 2003 and Wavecom is in the process of negotiating 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.
The estimated cost of royalties, which may be due to other patent holders in connection with their technologies as well as yet unasserted claims, have been accrued in the financial statements, based on a percentage of consolidated product revenues. The ultimate royalty paid by the company may differ from the amounts accrued.
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 product is shipped and the sale recorded. The provision is calculated based on a statistical rate which is continually revised for specific warranty issues and actual experience. This provision is reversed according to the following calculation: 20% after 3 months, an additional 30% after 6 months, another 30% after 8 months and 100% after 18 months. An additional accrual is recorded to cover known repair risks not included in the statistical provision.
Factors that affect Wavecom's 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.
Deferred revenue includes amounts invoiced to customers in accordance with the terms of technology development contracts, but deferred by the Company as the corresponding work has not yet been completed. Advances include cash received in advance of product shipments.
At December 31, 2001, 2002 and 2003, the carrying values of current financial instruments such as cash equivalents, accounts receivable, accounts payable, other receivables and accrued liabilities approximated their market values, based on the short-term maturities of these instruments. There was no long-term debt at December 31, 2001, 2002 or 2003.
As of December 31, 2003, other long term liabilities include a lease incentive payment received from one office landlord which is being amortized over the lease term.
Other long-term liabilities at December 31, 2001 and 2002 are not material.
In accordance with Statement of Financial Accounting Standards No. 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Wavecom Annual Report Form 20-F/A 2003 F-11
Wavecom accounts for stock options and warrants granted to employees in accordance with the provisions of Accounting Principles Board Statement No. 25, Accounting for Stock Issued to Employees. Under APB 25, no compensation expense is recognized for stock options and warrants issued to employees with an exercise price equal to the fair value of the underlying shares on the grant date Options and warrants issued with an exercise price less than the fair value result in deferred compensation which is amortized to expense over the vesting period.
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, provides an alternative to APB 25 in accounting for stock-based compensation issued to employees. SFAS 123 provides for a fair-value-based method of accounting for employee stock options and similar equity instruments. Companies that elect to continue to account for stock-based compensation arrangements under APB 25 are required by SFAS 123 to disclose the pro forma effect on net income and net income per share as if the fair-value-based method proposed by SFAS 123 had been adopted. The table below illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
The fair value for these options and founders' warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for the years ended December 31, 2001, 2002 and 2003: risk-free interest rates of 4.94% for 2001, 4.00% for 2002 and 3.00% for 2003, no expected dividends, volatility factors of 1.17 for 2002, 0.74 for 2002 and 0.97 for 2003, and a weighted average expected life of the options and founders' warrants of 5 years.
Wavecom reports comprehensive income and its components in accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. SFAS 130 requires foreign currency translation adjustments, to be included in other comprehensive income (€(2,383,000) at December 31, 2003).
Other comprehensive income also includes realized and unrealized gains and losses on financial instruments deferred in accumulated other comprehensive income until the underlying transaction is recognized in earnings in accordance with SFAS 133 (€4,135,000 at December 31, 2003).
F-12 Wavecom Annual Report Form 20-F/A 2003
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information, which established standards for the way public companies report information about operating segments in annual financial statements and required that those companies report selected information about operating segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas and major customers. Management has determined that Wavecom operates as a single segment, as management internally evaluates the performance of the enterprise as a whole and not on the basis of separate business units.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"(FIN 46). In December 2003, the FASB modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN 46 addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. FIN 46 requires consolidation of a variable interest entity if the reporting entity is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the variable interest entity's residual returns or both. FIN 46 was effective immediately for variable interest entities created after January 31, 2003. The Company will apply FIN 46, as revised, to variable interest entities created before February 1, 2003 as follows: (i) beginning January 1, 2004 for structures commonly referred to as special purpose entities as a cumulative effect of the accounting change as of that date; and (ii) at the end of the first reporting period in 2004 for other than special-purpose entities.
The adoption of FIN 46 is not expected to have a significant impact on the Company's earnings or financial position.
On May 15, 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Statement 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. We do not use such instruments. Statement 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. The adoption of Statement 150 on June 1, 2003 did not have any material impact on our financial position, results of operations or cash flows.
In December 2001, the subsidiary Wavecom Inc acquired Iconn Wireless, a company based in San Diego, California, enabling Wavecom to acquire technology and know-how for Code Division Multiple Access (CDMA) technology. Wavecom purchased Iconn Wireless for €5,270,000 including €625,000 in tangible and intangible assets. The difference between the purchase price and the amount of identifiable assets (€4,645,000) was allocated to goodwill but was not amortized, in accordance with SFAS 142. In connection with the acquisition, €1,339,000 in cash was placed in escrow by Wavecom. The cash was paid to the employees as certain technology milestones were achieved in 2002, and the company recognized the related charges as research and development expenses.
Arguin Communications Inc.
In October 2000, Wavecom purchased a majority interest of 51% of the voting rights in Arguin Communications Inc., headquartered in San Diego, California, increased to 61.88% in January 2001, which enabled Wavecom to have strategic control over the future technology to be developed by Arguin Communications Inc.
The Company purchased Arguin Communications Inc. for €3,454,000 in cash including €691,000 for the purchase of existing shares (€ 229,000 paid in October 2000 and €462,000 paid in January 2001) and €2,763,000 to subscribe to a share capital increase. The total amount of this share capital increase, including minority interests, was €3,109,000. The net assets purchased included €270,000 in cash. The purchase price exceeded the fair value of the net tangible assets by € 1,323,000, which was allocated to goodwill and previously was being amortized over 5 years. In accordance with the provisions of SFAS 142, amortization of goodwill ceased as of December 31, 2001. Deferred compensation of €1,862,000, €190,000 and €199,000 was recognized in 2001, 2002 and 2003, respectively, in connection with the issuance of shares of Arguin Communications to the majority shareholders and adjusted with the employee resignation. Amortization related to these shares amounted to €667,000, €613,000 and €648,000 in the years ended December 31, 2001, 2002 and 2003, respectively.
Wavecom Annual Report Form 20-F/A 2003 F-13
Results of operations of Arguin Communications Inc. and Iconn Wireless are included in Wavecom's operating results from their respective dates of acquisition. Pro Forma results of operations reflecting these acquisitions have not been presented because the results of operations of the acquired companies, either individually or collectively, are not material to Wavecom's results of operations.
Components of inventory are:
In June 2002, Wavecom amended contracts with two of its contract manufacturer to reflect its increased role in negotiating terms and conditions directly with component suppliers, as well as the overall evolution of Wavecom' s industrial and purchasing organization. As a result of the changes in the contract terms, Wavecom believes that it bears the risk of ownership of the components to be used for the products, although these components continue to be legally owned by the contract manufacturer. Therefore, at December 31, 2002 and 2003, inventory includes these components, with a corresponding liability due to the contract manufacturer.
At December 31, 2002 and 2003, the inventory of finished goods also includes €4,440,000 and €3,335,000, respectively, held by contract manufacturers for which Wavecom bears the risk of ownership.
Property and equipment includes:
Depreciation expense in the years ended December 2001, 2002 and 2003 totaled €5,068,000, €13,365,000 and €13,769,000, respectively.
Equipment purchased under capital leases in the years ended December 31, 2001, 2002 and 2003 totaled €291,000, €321,000 and €1,597,000, respectively. The cost of such equipment included in property and equipment at December 31, 2001, 2002 and 2003 totaled €4,755,000, €4,937,000 and €6,325,000, respectively. Accumulated amortization of this equipment totaled €4,343,000, €4,433,000 and €5,079,000 at December 31, 2001, 2002 and 2003, respectively.
F-14 Wavecom Annual Report Form 20-F/A 2003
Prepaid expenses and other current assets include:
Credit notes from suppliers are accrued at the end of each period, based on amounts which have been negotiated and accepted by Wavecom's contract manufacturers. These amounts are recorded as reductions of cost of goods sold.
Prepaid expenses consist primarily of prepaid rent and other operating expenses. At December 31, 2002, the amount also included €2,009,000 in prepaid advertising expenses.
The following table presents the fair value of financial instruments at December 31, 2003:
The net foreign currency exposure, presented in the table below, relates to Group transactions as of December 31, 2003. The assets and liabilities are the sum of all items denominated in foreign currencies within the Group converted into euros. The only significant amounts which have been hedged are those denominated in U.S. dollars.
The company enters into foreign exchange derivative financial instruments to reduce the foreign exchange rate risk of anticipated cash flows from transactions denominated in US dollars. The fair value of foreign currency related derivatives are included in the balance sheet in other assets. The earnings impact of cash flow hedges relating to forecasted transactions is reported in foreign exchange gain or loss. Realized and unrealized gains and losses on these instruments are deferred in accumulated other comprehensive income until the underlying transaction is recognized in earnings.
Wavecom Annual Report Form 20-F/A 2003 F-15
During the year ended December 31, 2003, the Company recorded €4,135,000 in other comprehensive income related to the effective portion of its cash flow hedges.
During the year ended December 31, 2003, the Company recognized a net loss of €56,000 related to the portion of the hedging instrument the Company excluded from its assessment of hedge effectiveness.
The financial instruments have maturity dates of less than 12 months. Management believes counter-party risk on financial instruments is minimal since the Company deals with major banks and financial institutions.
Goodwill was €5,716,000 and €4,807,000 as of December 31, 2001 and 2002 respectively, net of accumulated amortization of €326,000 and €274,000 at December 31, 2001 and 2002, respectively.
All goodwill is denominated in U.S. dollars and translated into euros at the exchange rate at each balance sheet date.
During the fourth quarter of 2003 the Company performed the required annual impairment test of goodwill, which resulted in a determination that impairment of goodwill existed related to the Iconn and Arguin acquisitions. This resulting charge of €4,244,000 is included in "amortization and impairment of goodwill" in the Company's statement of operations. The resulting impairment is primarily attributable to changes in the Company's strategy and evolution of its target markets. This test consisted of a comparison of the fair value of the reporting unit with its carrying amount, including the goodwill. The fair value of the reporting unit was determined based on the income approach, which estimates the fair value based on the future discounted cash flows.
The changes in the carrying amount of goodwill from December 31, 2001 through December 31, 2003, are as follows (in thousands):
The following table sets forth net income per share and ADS adjusted to exclude goodwill amortization recognized prior to the adoption of FAS 142 on January 1, 2002 (in thousands, except for per share and ADS amounts):
Other intangible assets are not material to the financial statements.
F-16 Wavecom Annual Report Form 20-F/A 2003
The following table presents a summary of indebtedness as of:
Wavecom received an interest-free loan from Coface (€294,000 at December 31, 1999, increased by €340,000 in 2000), an export credit agency of the French government. Timing of repayment of the loan was based upon the actual sales generated by Wavecom's United States subsidiary. Wavecom repaid €146,000 of the loan in the year ended December 31, 2001 and the remaining €488,000 during the year ended December 31, 2002.
Future minimum lease payments under capitalized lease obligations for the years ending December 31 are as follows (in thousands):
Interest paid during the years ended December 31, 2001, 2002 and 2003 totaled approximately €447,000, €515,000 and €668,000 respectively.
Wavecom Annual Report Form 20-F/A 2003 F-17
Other accrued expenses consist principally of accruals for royalties, warranty costs and various other tax and general expense.
Changes of accrued royalties, warranty accrual and other accrued expenses during the period are as follows (in thousands):
Changes in accrued royalties during the year ended December 31, 2003 included primarily accruals related to patent holders with whom Wavecom concluded licensing agreement with during the year. The terms of the agreements signed resulted in an adjustment of estimates.
Other accrued expenses include a provision of €5,834,000 for costs associated with an anticipated exiting from leases on three properties. This provision is based on the Company's estimates for all potential costs, including rent payments. This line item also includes a provision for €2,900,000 of production expenses. See note 11 "Retirement Accrual".
At December 31, 2003, 15,342,789 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, 15,186,444 shares are outstanding at December 31, 2003.
On February 12, 2003, Wavecom initiated a share buyback program covering a maximum of 1,400,000 ordinary shares, representing 9.45% of the capital. At December 31, 2003, Wavecom held 156,345 shares pursuant to this program purchased for a total amount of €1,312,215.
Shareholders have preemptive rights to subscribe on a pro rata basis for additional shares issued by Wavecom for cash. Shareholders may waive such preemptive subscription rights at an extraordinary general meeting under certain circumstances. Preemptive subscription rights, if not previously waived, are transferable during the subscription period relating to a particular offering of shares.
F-18 Wavecom Annual Report Form 20-F/A 2003
Dividends may be distributed from the statutory retained earnings and additional paid in capital, subject to the requirements of French law and Wavecom's by-laws. There were no distributable retained earnings at December 31, 2003. Dividend distributions by Wavecom, if any, will be made in euro.
Stock option and warrant plans
The shareholders of Wavecom authorized the board of directors to grant founders' warrants to employees of the French parent company, stock options to employees of subsidiaries and warrants to members of the board of directors. Under the terms of the plans, the options and warrants give the right to purchase one share per option or warrant at an exercise price to be based on the stock market price of Wavecom shares on the grant date.
Options and founders' warrants granted in 2001, 2002 and 2003 vest 25% per year over 4 years. The rights to exercise the warrants granted to Board members vest 331/3% per year over 3 years.
Options expire 10 years after the grant date. Founders' warrants, which were issued to employees of the French parent company, expire after five years, as required by law. Any founders' warrants remaining unexercised at the expiration date automatically convert to stock options with a five-year term remaining. Founders' warrants were issued to French employees due to the existence of certain tax advantages (for both the employee and Wavecom) available in connection with the issuance of founders' warrants which are not available for stock option holders in France. Other than the expiration dates, the terms of the founders' warrants are identical to the stock options. Warrants granted to Board members expire after five years. Any unvested or unexercised options and founders' warrants are cancelled upon termination of employment.
Wavecom Annual Report Form 20-F/A 2003 F-19
A summary of the founders' warrants and warrants to Board members is as follows:
F-20 Wavecom Annual Report Form 20-F/A 2003
A summary of the stock options is as follows:
Wavecom Annual Report Form 20-F/A 2003 F-21
In connection with the issuance of the founders' warrants and options granted in September 1998 and February 1999, Wavecom recorded deferred compensation of €2,022,000 and €5,344,000, respectively. Deferred compensation was amortized on a straight line basis over the four-year vesting periods of the warrants and options. For the years ended December 31, 2001, 2002 and 2003, Wavecom recorded compensation expense of €1,711,000, €1,587,000 and €205,000 respectively, resulting from amortization of deferred compensation.
A summary of the activity in the warrants and stock options is as follows:
At December 31, 2003, 1,371,650, founders' warrants, stock options and warrants were exercisable (1,146,564 and 486,497 at December 31, 2002 and 2001, respectively).
The weighted-average remaining contractual life of the warrants and stock options outstanding at December 31, 2003 was approximately 8 years.
The weighted-average fair value of options and warrants granted during 2001, 2002 and 2003 was as follows:
F-22 Wavecom Annual Report Form 20-F/A 2003
10. Income taxes
Income tax expense comprises:
Taxes paid totaled approximately €19,000, €462,000 and €21,296,000 (including €7,670,000 in estimated income tax payments for 2003 which are expected to be reimbursed in 2004) in the years ended December 31, 2001, 2002 and 2003, respectively.
The income tax benefit in 2001 is the net of a research tax credit (€2,535,000), French current tax expense (€19,000) and income tax expense of Wavecom's Asian subsidiary (€217,000).
The current tax expense in 2002 is the net of research tax credit (€449,000), French current tax expense (€15,790,000) and income tax expense of Wavecom's Asian (€3,139,000) and Wavecom's German (€7,000) subsidiaries.
The current tax expense in 2003 is the net of research tax credit (€1,355,000), French current tax expense (€21,000), tax loss carrybacks (€10,872,000) and income tax benefit of Wavecom's Asian subsidiary (€119,000). Research tax credit and tax loss carrybacks are recorded as recoverable taxes to the balance sheet.
A reconciliation of income taxes computed at the French statutory rate (35.3% in 2001, 35.4% in 2002 and 33.33% in 2003) to the income tax expense (benefit) is as follows:
Wavecom Annual Report Form 20-F/A 2003 F-23
Significant components of Wavecom's deferred tax assets and liabilities consist of the following:
Because of the significant losses in 1999 and 2000, Wavecom recorded a valuation allowance against deferred tax assets in 2001. The valuation allowance was reversed in 2002 due to the use of all previous net operating losses in the company's primary tax jurisdictions, 2002 taxable income, and because the company believed it was more likely than not that the deferred taxes were recoverable. At December 31, 2003, a deferred tax of € 11,871,000 was recognized for the French parent company. A valuation allowance of €10,812,000 was recorded to reduce the net asset to the amount of available tax loss carrybacks in France.
After the option to carry back €25,674,000 of 2003 tax losses, a receivable of €8,558,000 was recorded at December 31, 2003. Net operating loss carryforwards in the United States totaled approximately €8,476,000 at December 31, 2003 (€3,647,000 in 2002) and will expire from 2013 to 2018 if not utilized. Net operating loss carryforwards in Asia Pacific totaled approximately €3,581,000 at December 31, 2003 with no expiry date. The related deferred tax asset of €4,019,000 was recognized in 2003 (€1,291,000 in 2002), and was fully provided for in the valuation allowance.
At December 31, 2003, Wavecom had two bank guarantees (€2,868,000 issued in 2000 and €13,110,000 issued in 2002) in favor of the owners of leased office space, in order to secure annual lease payments. These credit lines were secured by the pledge of certificates of deposit and mutual funds. The total value of these pledged investments was €2,994,000, €13,671,000 and €16,021,000 at December 31, 2001, 2002 and 2003, respectively.
Wavecom leases its facilities under operating leases that expire through July 2011. Future minimum lease payments under operating leases, excluding common area maintenance charges and inflation escalation, due for the years ending December 31, are as follows (in thousands):
F-24 Wavecom Annual Report Form 20-F/A 2003
In 2003, Wavecom decided to vacate certain of its premises and is actively pursuing subletting certain facilities. These operating lease commitments include a total of approximately €13 million in rent payments beginning January 2004 under the three leases related to office space that Wavecom vacated. A provision of €5.8 million for the estimated cost to terminate these lease commitments was recorded at December 31, 2003.
Rental expense, excluding common area maintenance charges, for the years ended December 31, 2001, 2002 and 2003 was approximately €3,913,000, €8,350,000 and €11,238,000 respectively.
Wavecom contributes to pensions for personnel in France in accordance with French law by contributing amounts based on salaries to the relevant government agencies. There exists no actuarial liability in connection with these plans. French law also requires payment of a lump sum retirement indemnity to employees based upon years of service and compensation at retirement. Benefits do not vest prior to retirement. Wavecom's obligation, for the years ended December 31, 2001, 2002 and 2003, amounted to €86,000, €159,000 and €247,000, respectively, and is calculated as the present value of estimated future benefits to be paid.
The main assumptions used in the calculation are the following:
There are no retirement plans in Hong Kong, Germany, Great Britain, South Korea and the United States.
At December 31, 2003, Wavecom had commitments outstanding to purchase €1,162,000 in fixed assets, which are expected to be placed in service during the first half of 2004.
At December 31, 2003, Wavecom had purchase commitments with its third-party manufacturers for future deliveries of products, principally during the first half of 2004. These purchase commitments totaled €32,538,000.
Information related to Wavecom's employees is as follows:
Wavecom paid €1,475,000, €2,277,000 and €2,359,000 in compensation to executive officers for the years ended December 31, 2001, 2002 and 2003, respectively.
Wavecom Annual Report Form 20-F/A 2003 F-25
In December 2000, Wavecom entered into a consulting agreement with Delphis. Delphis, represented by Marc Fourrier, is a major shareholder and member of the board of directors. The agreement calls for Mr. Fourrier to provide consulting services in the areas of corporate organization, information systems and general management from time to time, up to a maximum of two days per week. Such services are compensated at the rate of €1,448 per day. During the year ended December 31, 2003, Delphis invoiced €20,031 (€26,157 in 2002 and €17,303 in 2001).
In November 2001, Wavecom loaned $200,000 to a senior employee of the group. The loan bore a market rate of interest, was repayable in three years and was secured by a lien on the employee's residence. The loan and accrued interest were repaid in full in February 2003.
Wavecom announced in October 2003 a plan to consolidate all production with one contract manufacturer located in China as well as to reorganize its customer care unit. Under the restructuring plan the Company will terminate a number of employees resulting in an accounting impact which will be reflected in the 2004 financial statements because benefit arrangements were not defined and announced to employees until January 2004.
On January 23, 2004, Wavecom announced an additional plan to reduce headcount linked to the implementation of a new organizational structure based on the two primary Wavecom sales markets and on wireless silicon development. Once the plans are fully implemented, the worldwide headcount is expected to be reduced by about 300 positions. Primarily the entities in France and in the United States are concerned. This plan is expected to cost approximately €10 to €15 million related primarily to headcount reduction and associated charges, including severance and outplacement packages.
On February 20, 2004, Wavecom signed a memorandum of understanding with the minority shareholders of Arguin Communications, Inc. for the purchase of the remaining minority interest in Arguin for a total of $2.135.625. As part of this agreement, certain shareholders will enter into non-compete agreements for a period of two years.
On March 23, 2004, the board of directors granted 38,000 founders' warrants to employees to the French parent company and 3,000 stock options to an employee of Wavecom Asia Pacific, Ltd. The exercise price of these plans was €9.62.
In February 2005, the Company identified an error in the application of its 2003 tax loss carryback to the 2002 French tax return declaration. After the correction of this error, the 2003 tax loss carryback to 2002 was limited by the amount of research and development tax credits actually applied to the Company's 2002 French income tax due. As it was unlikely that the Company would realize deferred tax assets resulting from its 2003 income tax losses in excess of the amount carried back to 2002, it was required to record a full valuation allowance on any remaining deferred tax assets resulting from unused net operating tax losses. Accordingly, the Company has restated the valuation allowance on its deferred tax assets for fiscal year 2003 to € 14.831 million (€9.570 million as previously reported) reflecting an increase of €5.261 million. See Note 10 to the Company’s financial statements above, which has been amended to reflect the restatement. The Company believes that the error which led to the decision to restate its financial statements for the year ended December 31, 2003, was the result of a material weakness in internal control over income tax preparation and related financial reporting.
F-26 Wavecom Annual Report Form 20-F/A 2003
The effect of the restatement on the consolidated statements of operations for the year ended December 31, 2003 and for the three months ended June, 30 2003 is as follows:
The effect of the restatement on the selected balance sheets items at December 31, 2003 is as follows:
Wavecom Annual Report Form 20-F/A 2003 F-27
Wavecom S.A. hereby confirms that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: February 28, 2005