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Wavecom S.A. 6-K 2008

Documents found in this filing:

  1. 6-K
  2. Graphic
  3. Graphic
WAVECOM_2008 H1

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FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

     Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of September 2008

WAVECOM S.A.

3, esplanade du Foncet
F-92442 Issy-Les-Moulineaux Cedex, France
Tel: 00 33 1 46 29 08 00
(Address of principal executive offices)

     [Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.]

 

Form 20-F ý     
     Form 40-F o

[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.]

Yes o     
      No ý

     [If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_____.]


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UNAUDITED CONDENSED CONSOLIDATED      
FINANCIAL STATEMENTS

and

OPERATING AND FINANCIAL REVIEW

For the six months ended June 30, 2008


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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

 
Note
  Year ended   Six months ended June 30,  
      December 31,          
      2007   2007   2008  
     
 
 
 
      Euro   Euro   Euro  
Revenues :                
   Product sales     198 510   103 562   70 309  
   Service revenue     3 827   665   2 693  
     
 
 
 
         Total revenues
1
  202 337   104 227   73 002  
Cost of revenues :                
   Cost of goods sold     104 650   56 152   32 568  
   Cost of services     5 833   3 158   2 478  
     
 
 
 
         Total cost of revenues     110 483   59 310   35 046  
     
 
 
 
Gross profit     91 854   44 917   37 956  
Operating expenses :                
   Research and development     33 562   15 937   19 043  
   Sales and marketing     22 740   11 153   13 008  
   General and administrative     22 855   11 484   9 557  
     
 
 
 
         Total operating expenses     79 157   38 574   41 608  
     
 
 
 
Operating income     12 697   6 343   (3 652)  
     
 
 
 
Interest income and other financial income, net     1 834   836   1 695  
Foreign exchange gain (loss), net     (1 442
)
(98
)
127  
     
 
 
 
      Total financial income     392   738   1 822  
     
 
 
 
Income before income (loss) taxes     13 089   7 081   (1 830)  
Income tax expense (benefit)
11
  (4 310
)
103   (45
)
     
 
 
 
Net income (loss)     17 399   6 978   (1 785
)
     
 
 
 
Basic net income (loss) per share     1.15   0.45   (0,12
)
     
 
 
 
Diluted net income (loss) per share     1.02   0.42   (0,12
)
     
 
 
 
                 
Number of shares used for computing :                
   - basic     15 129 600   15 424 475   15 257 142  
   - diluted     17 470 234   16 515 843   15 257 142  

See notes to unaudited condensed financial statements


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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

      At December 31,   At June 30,  
  Note   2007   2008  
     
 
 
      Euro   Euro  
ASSETS            
Current assets :            
   Cash and cash equivalents     4 677   3 745  
   Marketable securities 1   134 610   127 065  
   Accounts receivable     29 467   23 050  
   Inventory 3   6 032   4 302  
   Value added tax recoverable     1 124   774  
   Prepaid expenses and other current assets 4   3 141   3 648  
   Deferred tax assets     4 514   4 514  
     
 
 
      Total current assets     183 565   167 098  
Long-term investments 1   3 731   5 706  
Other assets and Interests in associates     4 517   4 290  
Research tax credit     2 049   2 758  
Income tax receivable     13 083   13 083  
Intangible and tangible assets, net 5   16 336   19 911  
Goodwill     8 117   16 678  
     
 
 
      Total assets     231 398   229 524  
     
 
 
             
LIABILITIES AND SHAREHOLDERS' EQUITY            
Current liabilities :            
   Accounts payable     27 612   23 386  
   Accrued compensation     8 584   5 879  
   Current portion of other accrued expenses 7   3 572   2 872  
   Current portion of convertible bonds 8   664   701  
   Current portion of capitalized lease obligations     207   275  
   Deferred revenue and advances received from customers     307   1 067  
   Other liabilities     3 652   6 153  
     
 
 
      Total current liabilities     44 598   40 333  
             
Long-term liabilities :            
   Long-term portion of other accrued expenses 7   16 636   15 401  
   Long-term portion of convertible bonds 8   80 500   80 500  
   Long-term portion of capitalized lease obligations     340   304  
   Other long-term liabilities     616   550  
     
 
 
      Total long-term liabilities     98 092   96 755  
             
Shareholders' equity :            
Shares, Euro 1 nominal value, 15,811,381 shares authorized, issued and outstanding at  June 30, 2008 (15,796,591 at December 31, 2007)    
15 797
 
15 811
 
Additional paid-in capital     146 052   151 663  
Treasury stock at cost (391,649 shares at June 30, 2008 and 544,322 at December 31, 2007)     (8 823 ) (7 541 )
Accumulated deficit     (62 548 ) (65 614 )
Accumulated other comprehensive loss     (1 770 ) (1 883 )
     
 
 
      Total shareholders' equity 9   88 708   92 436  
     
 
 
      Total liabilities and shareholders' equity     231 398   229 524  
     
 
 

See notes to unaudited condensed financial statements


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UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share and per share data)

                     
Accumulated
     
(in thousands, except share and per share data)
Ordinary shares
 
Additional
         
Other
 
Total
 
   

 
paid in
 
Treasury
 
Accumulated
 
Comprehensive
 
Shareholders’
 
 
Shares
 
Amount
 
capital
 
Stock
 
Deficit
 
Income (loss)
 
Equity
 
 
 
 
 
 
 
 
 
Balance at December 31, 2007 15,796,591   €15,797   €146,052   € ( 8,823
)
€ ( 62,548 ) € ( 1,770 ) €88,708  
 
 
 
 
 
 
 
 
Cancellation of treasury stock             1,282   (1,282 )     0  
Issuance of shares in connection with the exercise of 11,250 founders’ warrants at an exercise price of €4.19 11,250   11   36               47  
Issuance of shares in connection with the exercise of 3,540 options at an exercise price of €10.62 3,540   3   34               37  
Comprehensive income:                            
      Net income                 (1,785 )     (2 )
      Unrealized gain on financial instruments                     26   26  
      Stock-based employee compensation         5,541               5,541  
      Foreign currency translation                     (138 ) (138 )
Total comprehensive income                         3,644  
 
 
 
 
 
 
 
 
Balance at June 30, 2008 15,811,381   €15,811   €151,663   € ( 7,541
)
€ ( 65,615 ) € ( 1,882 ) €92,436  
 
 
 
 
 
 
 
 

See notes to unaudited condensed financial statements


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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

  Year ended   Six months ended June 30,
  December 31,          
  2007   2007   2008  
 
 
 
 
  Euro   Euro   Euro  
Cash flows from operating activities :            
Net income (loss) 17 399   6 978   (1 785
)
Adjustments to reconcile net income (loss) to net cash provided from operating activities :            
Amortization and impairment of intangible and tangible assets 8 409   4 257   4 311  
Amortization of debt issue costs 257   -   280  
Share-based compensation 4 810   1 348   5 541  
Loss (gain) on sales and retirement of tangible assets 38   4   (14
)
Disposal (acquisition) of marketable securities, net (134 610
)
-   7 545  
Deferred tax assets (4 514
)
-   (95
)
Changes in operating assets and liabilities:            
   Accounts receivable (3 022
)
(5 894
)
7 039  
   Inventory 501   (2 589
)
1 698  
   Value added tax recoverable (523
)
(143
)
397  
   Prepaid expenses and other current assets (662
)
(1 011
)
(273
)
   Recoverable taxes (3 467
)
-   4  
   Accounts payable and other accrued expenses (4 766
)
1 385   (5 218
)
   Accrued compensation (642
)
(2 395
)
(3 064
)
   Interets on loan 664   -   37  
   Deferred revenue and advances received from customers 232   932   789  
   Other payables 2 754   (154
)
(367
)
   Other 606   290   (264
)
 
 
 
 
      Net cash provided (used) by operating activities (116 536
)
3 008   16 561  
 
 
 
 
Cash flows from investing activities :            
Acquisition of long term investments (93
)
(18
)
(1 974
)
Purchases of intangible and tangible assets (5 025
)
(2 652
)
(4 284
)
Acquisition of certain assets, net of cash acquired.(1) (2) -   -   (10 704
)
Proceeds from sale of intangible and tangible assets 2   -   57  
Purchase of interets in associates (15
)
-   -  
 
 
 
 
      Net cash used by investing activities (5 131
)
(2 670
)
(16 905
)
 
 
 
 
Cash flows from financing activities :            
Proceeds from convertible bonds (net of debt issue costs of €2,501) 77 999   -   -  
Principal payments on capital lease obligations (261
)
(147
)
(151
)
Purchase of treasury stock (7 510
)
-   -  
Proceeds from exercise of stock options and founders' warrants 2 091   1 327   85  
 
 
 
 
      Net cash provided (used) by financing activities 72 319   1 180   (66
)
Effect of exchange rate changes on cash and cash equivalents (751
)
(240
)
(522
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents (50 099
)
1 278   (932
)
Cash and cash equivalents, beginning of period 54 776   54 776   4 677  
 
 
 
 
Cash and cash equivalents, end of period 4 677   56 054   3 745  
 
 
 
 

See notes to unaudited condensed financial statements


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These condensed consolidated financial statements should be read in conjunction with Wavecom’s audited consolidated financial statements and footnotes thereto included in Company’s annual report on Form 20-F for the year ended December 31, 2007.

The consolidated financial statements as of June 30, 2008 include the accounts of the following entities:

  Voting right
percentage
  Interest
percentage
 
 
 
 
Parent company: Wavecom S.A.        
Subsidiaries:        
   Wavecom Inc. 100 % 100 %
   Wavecom Deutschland GmbH 100 % 100 %
   Wavecom Korea Co, Ltd. 100 % 100 %
   Wavecom Northern Europe Ltd. 100 % 100 %
   NexGen Software S.A.S. 100 % 100 %
   Anyware Technologies 100 % 100 %
   Wavecom Asia Pacific Ltd. 99,99 % 99,99 %
 
 
 

Anyware Technologies is consolidated from its acquisition date, on January 31, 2008. Wavecom Korea was still a dormant company as at June 2008 end.

Revenue recognition

The Company’s revenue is derived from two primary sources: sales of products composed of wireless standard modules and wireless modems and revenue from technical support and other services.

Product sales - Revenue from product sales is recognized when (i) persuasive evidence of an arrangement exists, (ii) the product is delivered (at the time the products are shipped and risk of loss has been passed to the buyer), (iii) the price is fixed or determinable and (iv) collection of the price is reasonably assured. If any of these criteria are not met, recognition of revenues is deferred until such time as all of the criteria are met. The Company’s product sales are not sold with a right of return unless our product is defective and covered by warranty. The Company’s


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sales typically do not include multiple product and/or service elements. Although the products sold have embedded software, Wavecom believes that software is incidental to the products they provide. In addition, the Company does not provide post-contract customer support or maintenance for the software (either free of charge or for a fee) embedded in the products. The contracts do not provide for upgrading or updating any Wavecom embedded software.

Service revenue - Revenue from services is recognized using the percentage-of-completion method when the outcome of the contract can be estimated reliably. This occurs when total contract revenue and the costs to complete the contract can be estimated reliably, it is probable that the economic benefits associated with the contract will flow to the Company and the stage of contract completion can be measured. The costs associated with these arrangements are recognized as incurred. When the Company is not able to meet those conditions, in particular under certain technology development agreements, where significant technological risk factors exist, costs are expensed as incurred and revenues are recognized when all obligations under the agreement have been met.

Concentration of risk

Financial instruments that potentially subject Wavecom to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, trade receivables and financial instruments (i.e. derivatives).

Wavecom has cash investment policies that limit investments to short-term low-risk instruments. Wavecom’s cash is held principally in euros and U.S. dollars and concentrated primarily in seven major banks and financial institutes in Paris and one major bank in Hong Kong. At June 30, 2008, Wavecom had marketable securities composed of short term money market funds (monetary Société d’Investissement à Capital Variable or “SICAV” and Fonds Commun de Placements or "FCP" ) totaling €127.1 million (€134.6 million at December 31, 2007). Net interests income generated by the marketable securities for the six months ended June 30, 2008 amounted to €2,803,000 (€3,035,000 for the year ended December 31, 2007).

In addition, at June 30, 2008, Wavecom had €5.7 million of pledged securities invested in short term money market funds (monetary SICAV) classified as long-term investments in the accompanying Consolidated Balance Sheets (€3.7 million as of December 31 2007).

The underlying investments of monetary SICAV and monetary FCP are comprised of low risk investments with a short-term fixed maturity date such as government bonds, certificates of deposit and Euro commercial paper. The Company’s marketable securities are held principally in euros and primarily among reputable financial institution such as Natixis, HSBC, Groupama, UBS, Dexia, BFT and BNP Paribas.The criteria for selection of such marketable securities are, by order of importance:

  Safety of capital
  Liquidity
  Yield
 
Wavecom is ensuring the safety and preservation of its invested funds by:
  Investing in only the lowest risk type of securities
  Pre-qualifying all financial institutions with whom Wavecom will do business
  Diversifying the portfolio to minimize the adverse effects of the failure of any one issuer or banker.

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  Routinely monitoring the portfolio to anticipate and respond appropriately to a significant reduction in credit rating, and to follow-up the anticipation on interest rate (i.e. using appropriate benchmark in case of change on yield curve).

Wavecom had no variable rate debt at June 30, 2008.

Accounts receivable (before allowance for doubtful accounts) at June 30, 2008 and December 31, 2007 totaled €23,961,000 and €32,098,000, respectively.

A summary of the activity in the allowance for doubtful accounts is as follows :

(in € thousands)  
Beginning
balance
 
Additions
charged
to expenses
 
Write-offs
 

Recovered
receivables
 
Exchange rate
difference
 
Ending
balance
 
Year ended December 31, 2007  
€3,346
 
€231
 
€ (208
)
€ (627
)
€ (111
)
€2,631
 
Six months ended June 30, 2008  
2,631
 
50
 
(863
)
(872
)
(35
)
911
 

Sales to customers by geographic region are summarized as follows (in thousands):

    Year ended   Six months ended June 30,  
    December 31,
2007
  2007   2008  
   
 
 
 
China   €18,811   €7,222   €9,051  
Rest of Asia   13,248   6,280   4,476  
Europe   90,058   51,079   31,054  
Americas   70,446   35,666   18,532  
Rest of world   9,774   3,980   9,889  
   
 
 
 
    €202,337   €104,227   €73,002  
   
 
 
 

Geographic region is determined by the customer's invoice address and may not indicate the final destination of product usage.

Cash and cash equivalents

Wavecom considers all highly liquid investments with an original maturity of three months or less, and money market mutual funds to be cash equivalents. At December 31, 2007 and June 30, 2008, Wavecom had €134,610,000 and €127,065,000, respectively, invested in money market accounts, including SICAV and FCPs, with no fixed maturity, earnings interest at short-term variable rates. Such accounts did not meet the Cash equivalents criteria and were recorded as Marketable Securities.

Long-term investments

A bank guarantee was issued in favor of the owners of leased office space, in order to secure annual lease payments. This guarantee was secured by pledges of investments composed only of monetary SICAVs. The outstanding guarantee expires on July 15, 2008 but will be renewed annually until the end of the lease in July 2011.. An other bank guarantee, secured by pledges of investments, was issued in the first half of 2008 in favor of the French Tax authorities and


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related a tax adjustment currently under discussion.. These investments have been classified as long-term investments in the consolidated balance sheet and amounted to €3,731,000 and €5,706,000 at December 31, 2007 and June 30, 2008, respectively.

Intangible and tangible asset, net

Intangible and tangible assets are stated at cost less accumulated amortization or depreciation. Leases are capitalized in accordance with Financial Accounting Standards Board Statement No

13 Accounting for leases (SFAS 13). Depreciation and amortization is computed using the straight-line method over the following estimated useful lives:

Acquired intangible assets
11 months to 8 years
Laboratory equipment
1-5 years
Computer equipment and purchased software
1-5 years or contractual term
Furniture and office equipment
3-5 years
Leasehold improvements
10 years, or lease term if less

Amortization of capitalized leased equipment is included in depreciation expense.

Wavecom reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If factors indicate that a long-lived asset, or group of assets should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flow over the remaining life of the long-lived assets, or group of assets in measuring whether the carrying value is recoverable. If an asset, or group of assets are not recoverable, an impairment loss would be measured by reducing the carrying value to fair value, absent quoted market prices, based on a discounted cash flow analysis.

The fair values of intangible assets acquired through the business combinations were determined using an independent appraisal using facts available at the acquisition date. However, for the acquisition of Anyware technologies done on January 31, 2008, they represent preliminary assessments that may be adjusted with respect to additional information obtained upon the definitive allocation of the purchase price. Wavecom does not anticipate significant adjustments to occur.

Goodwill

Goodwill represents the excess of purchase price over the fair value of identifiable net assets of business acquired. Goodwill is not amortized but instead tested at least annually for impairment or more frequently when events or changes in circumstances indicate that the asset might be impaired by comparing the carrying value to the fair value of the reporting unit to which it is assigned.

Under Statement of Financial Accounting Standards No 142, “goodwill and other intangible assets”, the impairment test is performed in two steps. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, a second step is performed to measure the amount of impairment loss. The second step allocates the fair value of the reporting unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to that excess. For the purpose of any impairment test, the Company relies upon projections of future undiscounted cash flows


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and takes into account assumptions regarding the evolution of the market and its ability to successfully develop and commercialize its products.

Changes in market conditions could have a major impact on the valuation of these assets and could result in additional impairment losses.

Accrued royalties

Wavecom's products are designed to conform to certain wireless industry standards. Certain essential technologies are patented by third-parties and Wavecom uses these essential technologies. Some of the patents Wavecom uses are under licensing agreements for which Wavecom pays royalties. Other technologies Wavecom uses are not with license rights. Wavecom has concluded licensing agreements with eight patent holders for technologies deemed to be essential for Wavecom's products. The last two contracts were signed in 2004. Wavecom may enter into license arrangements with other patent holders. Wavecom's management considers that it is probable that these other patent holders may claim that the technology covered by their patents is essential to Wavecom's products and, as such, may request royalty payments for the use of such technology.

Wavecom negotiates individual license agreements with each GSM/GPRS essential patent holder declared at ETSI (the European Telecommunications Standards Institute). The negotiations are based on the number of families of patents declared at ETSI by each individual essential patent holder compared to the total number of essential patents declared and listed at ETSI. Royalties calculated by Wavecom correspond to a certain percentage of the net selling price of Wavecom’s products.

The total percentage of royalties related to essential patents as a part of net selling price has been evaluated using the history of the essential patents license agreements the Company has already signed (8 agreements have been signed since early 1999) and external analyses. Because Wavecom does not currently have licensing agreements for all of the essential patents declared and listed at ETSI, the Company accrues royalties based on its estimate of the amounts or percentages which it believes will probably be due under future essential patents licensing agreements they will enter into. Such estimates are based on terms which are not materially different from already signed agreements.

The ultimate royalty paid by the Company may differ from the amounts accrued.

Royalty costs are recorded as cost of goods sold in the Company’s Statement of Operations. Accrued royalties are included in Other accrued expenses in the Company’s consolidated balance sheet.

Warranty accrual

The Company offers a warranty for all its products. The specific terms and conditions of those warranties vary depending upon the product sold and the customer. Wavecom accrues for the costs of providing warranty service at the time the warranty period begins which is typically when title passes. The provision is computed based on a statistical rate for specific warranty issues and actual experience.

Factors that affect Wavecom’s estimate of warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. Wavecom periodically


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assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The warranty accrual is included in Other accrued expenses in the Company’s consolidated balance sheet.

Convertible bonds

The Company’s convertible bonds which are convertible into a fixed number of shares (subject to certain adjustments) of common stock of the Company at a specified price at the option of the holder and which were sold at a price or have a value at issuance not in excess of the face amount are accounted for as one unit and recorded as a liability at it’s carrying value in its entirety in accordance with Accounting Principles Board Opinion (“APB”) 14: Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, Emerging Issues Task Force (“EITF”) 00-19: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, and SFAS 133: Accounting for Derivative Instruments and Hedging Activities. Borrowing costs are capitalized (classified as “other assets”) and are amortized using a straight-line method over the period from the date of issuance until the date of possible early redemption date at option of the company.

The fair value of bonds is estimated using the listed market value of the bonds (NYSE Euronext convertible code FR0010497131).

Employee stock options, warrants and free shares

Under U.S. GAAP, effective January 1, 2006, the Group adopted SFAS No. 123 (Revised 2004) “Accounting for Share – Based Payment” (“SFAS 123(R)”), which superseded Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to its Employees” (“APB 25”). SFAS 123(R) requires the recognition of stock-based compensation expenses for all share-based payment awards based on their fair value. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Group applied the provisions of SAB 107, which relate to share-based payments, in its adoption of SFAS 123(R).

Prior to the adoption of SFAS 123(R), the Group accounted for share-based payment arrangements under APB 25 which requires that compensation expense be recorded only when the market price of the stock at the measurement date exceeds the amount the employee is required to pay upon exercise of the option.

Under SFAS 123(R), the Group elected the “Modified Prospective Application” transition method. Under this method, stock-based compensation expense recognized in the year ended December 31, 2006 included (1) compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values estimated in accordance with the original provisions of SFAS 123 and determined using a binomial valuation model and (2) compensation expense for all share-based payments granted subsequently to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and determined with the same valuation model.

The main assumptions of this model are the following:

stock prices, at the grant date;
exercise price, established the day when the equity instrument is granted by the Board of directors or the shareholder’s general meeting and is at least equal to highest of the two

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  following values: (i) the average of the twenty closing prices on Eurolist preceding the date of grant and (ii) the closing price on Eurolist of the day before the date of grant;
risk-free interest rate, given in reference to the rate of French treasury bonds corresponding to the expected life of each equity instrument;
expected volatility, based on mean reversion method applied to the series of historical daily profitabilities of the four years before the grant date, to be consistent with the four year vesting period;
expected dividend yield of zero, based on the fact that the Company has never paid dividends and has no present intention to pay dividends.

The cancellation of an award shall be accounted for as a repurchase for no consideration. Accordingly, any previously unrecognized compensation costs shall be recognized at the cancellation date.

Wavecom recorded €5,541,000 and €2,090,000 of stock compensation expense in its Consolidated Statement of Income for the six months ended June 30, 2008 and for the year ended December 31, 2007, respectively. Stock compensation expense is further described in Note 10.

Note 2. Key events of the first six-months of 2008

On February 1, 2008, Wavecom S.A. acquired Anyware Technologies, an industry leader in machine-to-machine (M2M) client-server software solutions located in Toulouse, France. Anyware Technologies is a recognized leader in developing M2M software solutions for customers who use wireless technology to enhance business processes. The transaction was finalized for a cash payment to Anyware shareholders of €9.1 million plus €1.5 million placed in an escrow account for customary warranty provisions. An additional payment for earn-out of up to €2 million upon reaching certain milestones is to be made in 2009.

On March 18, 2008, the Board of Directors decided to propose to the beneficiaries of the stock option plan granted on June 7, 2007 to cancel the grants. This stock option plan included 38 beneficiaries including the CEO who were together granted a total of 372,650 stock options at an exercise price of €24.21. The cancellation was agreed to by a large majority of the grantees, representing 96% of the total number of outstanding stock options.Consequently, under SFAS123R, this cancellation has resulted in an expense of €3.8 million in the first half of 2008.

Note 3. Inventory

Components of net inventory are:

    December 31,
2007
  June 30,
2008
 
   
 
 
    (in thousands)  
Finished goods   €1,334   €790  
Components and finished goods held by contract manufacturers   4,698   3,512  
   
 
 
    €6,032   €4,302  
   


 

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Wavecom bears the risk of ownership of inventory components held by its contract manufacturers to be used for its products, although these components continue to be legally owned by the contract manufacturer.

Note 4. Prepaid expenses and other current assets

Prepaid expenses and other current assets include :

    December 31,
2007
  June 30,
2008
 
   
 
 
    (in thousands)  
Suppliers’ credit note accruals   €242   €102  
Prepaid expenses   2,758   3,264  
Other current assets   141   282  
   
 
 
Total prepaid expenses and other current assets   €3,141   €3,648  
   
 
 
 

Prepaid expenses consist primarily of prepaid rent and other operating expenses.

Note 5. Intangible and tangible assets, net

Intangible and tangible assets, net include:

    December 31,   June 30,  
(in € thousands)   2007   2008  
   
 
 
    Net book
value
  Gross carrying
amounts
  Accumulated
depreciation and
impairment
  Net book
value
 
   
 
 
 
 
Intangible assets :                  
Customer relationships   €5,689   €10,831   €5,371   €5,460  
Non-compete agreement   1,044   2,350   1,697   653  
Technology     3,348   1,379   1,969  
Brand     288   15   273  
NexGen protocol stack   21   100   100   0  
   
 
 
 
 
Subtotal acquired intangible assets   6,753   16,917   8,562   8,355  
Tangible assets :                  
Laboratory and testing equipment   3,744   28,852   24,449   4,403  
Computer equipment and software   2,830   25,634   21,456   4,178  
Furniture and office equipment   198   1,640   1,410   230  
Leasehold improvements   1,380   3,038   1,603   1,435  
Other   1,430   2,687   1,377   1,310  
   
 
 
 
 
Total   €16,336   €78,768   €58,857   €19,911  
   
 
 
 
 

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Change in the net book value of intangible and tangible assets are as follows:

(in € thousands)   December 31,
2007
  June 30,
2008
 
   
 
 
Beginning of year balance, net of depreciation & amortization   €19,770   €16,336  
Acquisitions   5,216   4,335  
Tangible and intangible assets acquired (1)     3,722  
Sales and retirements   ( 1,244 ) (402 )
Depreciation and impairment expenses   (8,452 ) (4,311 )
Accumulated depreciation on sales and retirements   1,257   243  
Translation adjustment   ( 201 ) (12 )
   
 
 
End of year balance, net of depreciation & amortization   €16,336   €19,911  
   
 
 
(1) assets related to Anyware Technologies acquisition          

Note 6. Business combinations

On February 1, 2008, Wavecom S.A. acquired Anyware Technologies, an industry leader in machine-to-machine (M2M) client-server software solutions.

Assets and liabilities from Anyware were measured initially in application of the purchase method at their fair values at the acquisition date. However, because of acquisition arose during the first quarter 2008, the fair values of every assets and liabilities could not have been valuated definitely at the closing date. The final purchase price allocation will be settled at the latest in the next twelve month following the acquisition date.

The acquisition cost amounted to €13,560,000 at the closing date and breaks down as follows:
- cash paid (€11,410,000)
-
deferred payment (€2,000,000)
-
acquisition costs (€150,000)

The €2,000,000 deferred payment should be paid before March 31, 2009 upon achievement of the following criteria :
-
achievement of commercial targets
-
retention of some key employees

The net assets and liabilities acquired, on the basis of the situation as of February 1, 2008, have been temporarily estimated as follow:


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(in € thousands) Fair value  
 
 
Acquired assets :    
   Accounts receivable 1 700  
   Cash and cash equivalents 856  
   Other current assets 280  
 
 
         Total current assets 2 836  
 
 
Intangible assets, net 3 517  
Tangible assets, net 206  
Other Assets 15  
Deferred tax asset 866  
Research Tax credit 478  
 
 
Total assets 7 918  
 
 
Assumed liabilities :    
   Accounts payable 509  
   Other current liabilities 887  
 
 
      Total current liabilities 1 396  
 
 
Non current liabilities 351  
Deferred tax liabilities 1 172  
 
 
Total liabilities 2 919  
 
 
Net assets acquired 4 999  
Residual Goodwill 8 561  
Total consideration 13 560  

Intangible assets identified and valued in connection with the acquisition consist of:

  Valuation   Useful life
  (in € thousands)    
       
Customer relationships 1 081  
5 years
Brand 288  
8 years
Technology 2 148  
5 years

The customer relationships and the technology were measured using the excess earning method This method consists in calculating the residual cash flows attributable to the intangible asset. The residual cash flow is defined as the difference between the after-tax operating cash flow and the required cost of invested capital on all the other assets (tangible, intangible and current ) used to carry out the intangible asset. The discount rate used was 12%

The brand was measured using the relief from royalty method, derived from the economic theory of deprival value, it is assumed that when a business does not own a brand, , it has to pay royalties to the owners. The value of the brand is then calculated by capitalizing the value of the after tax royalties that the company is "relieved" from paying as a result of the ownership of the software/brand, after deducting the costs associated with maintaining the licensing arrangements.

It was calculated on the basis of a royalty rate of 5% and a discount rate of 12%.


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The goodwill recognized above is attributed to the expected benefits of this acquisition in terms of synergies and product portfolio development.

As of June 30, 2008 total profit and loss of the acquired company recorded in Wavecom’s consolidated statements of operations since the date of acquisition have been as follow:

  Six months
ended June
30, 2008
 
 
 
  Euro  
Revenues :    
   Product sales 131  
   Service revenue 1 871  
 
 
         Total revenues 2 002  
Cost of revenues :    
   Cost of goods sold 136  
   Cost of services 1 371  
 
 
         Total cost of revenues 1 507  
 
 
Gross profit 495  
Operating expenses :    
   Research and development 230  
   Sales and marketing 582  
   General and administrative 474  
 
 
         Total operating expenses 1 286  
 
 
Operating loss (791)  
 
 
Interest expenses and other financial income, net (3)  
Foreign exchange gain, net 7  
 
 
      Total financial income 4  
 
 
Income before loss taxes (787)  
Income tax benefit (95)  
 
 
Net loss (692)  
 
 

Note 7. Other accrued expenses

Other accrued expenses consist principally of accruals for royalties, warranty costs and various other tax and general expense.

Long term portion:

  December 31,
2007
  June 30,
2008
 
 
 
 
Accrued royalties € 15,844   €14,543  
Warranty accrual 82   65  
Other accruals 710   793  
Total €16,636   €15,401  
 
 
 

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Current portion:

  December 31,
2007
  June 30,
2008
 
 
 
 
 
(in € thousands)
 
         
Warranty accrual €963   €817  
Headcount restructuring cost accrual 150   150  
Other accruals 2,459   1,905  
 
 
 
Total €3,572   €2,872  
 
 
 

Other accrued expenses changes during the period are as follows (in thousands):

 
Balance at
January 1,
2008
 
Accruals made
during the
period
 
Cash
settlements
made during
the period
 
Changes in estimate
for pre-existing
accruals during the
period, including
expirations
 
Balance at
June 30, 2008
 
(in € thousands)                    
 
 
 
 
 
 
Accrued royalties €15,844   €1,060   -   € ( 2,362 ) €14,542  
Warranty accrual 1,046   699   (863 ) -   882  
Headcount restructuring cost accrual 150   -   -   -   150  
Other accruals :                    
Customers claims 1,034   171   (413 ) (32 ) 760  
Tax audit 260   -   -   -   260  
Third-party litigations 269   58   (235 ) -   92  
Other 1,605   878   (896 ) -   1,587  
 
 
 
 
 
 
Subtotal other accruals 3,168   1,107   (1,544 ) ( 32 ) 2,699  
 
 
 
 
 
 
Total €20,208   €2,866   € ( 2,407 ) € ( 2,394 ) €18,273  
 
 
 
 
 
 

Note 8. Convertible bonds

On July 13, 2007, Wavecom issued on €80,499,969 principal amount of bonds convertible into and/or exchangeable for new or existing shares (OCEANE) due January 1, 2014, represented by 2,571,884 bonds.

At issuance each bond had a nominal value of €31.30. The bonds will bear interest at a rate of 1.75% per annum. Interest will be payable annually in arrears on January 1 of each year beginning January 1, 2008.

Holders may exercise their right to convert or exchange their bonds at their option at any time from July 13, 2007, the issue date of the bonds, until the seventh business day preceding their redemption date. The initial conversion/exchange ratio will be one share of the Company for one bond.

The bonds will mature on January 1, 2014. At maturity, the Company will redeem the bonds then outstanding at their nominal value (i.e.,€31.30 per bond). The Company may redeem the bonds at its sole option at any time from January 1, 2012, subject to 30 calendar days’ notice, so long as the product of (i) the applicable conversion/exchange ratio in effect on such date and (ii) the arithmetic average opening price of the Company’s shares on Eurolist by Euronext Paris calculated over a period of 20 consecutive trading days during which the shares are traded, as selected by the Company from among the 45 consecutive trading days immediately preceding


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the date of publication of the notice relating to such early redemption, determined in the manner described herein, exceeds 130% of the nominal value of the bonds.

Based on the listed price at June 30, 2008, the fair value of each bond was €19,31. Consequently, the fair value of convertible bonds amounted to €.49,663,000.

Borrowing costs amounted to €2,500,790 and have been recorded as Other assets and Interest in Associates. They have been capitalized and are being amortized using the straight-line method over the period from July 13, 2007 until January 1, 2012. Accumulated amortization of these borrowing costs totaled €538,000 at June 30, 2008 (€257,000 at ended December 31, 2007) and are recorded as interest expense in the consolidated statements of income.

Total interest expenses for the first six-months of 2008, related to the OCEANE amounted to €981,000 (€701,000 for interest at 1.75% and €280,000 for the amortization of the borrowing costs). For the year ended December 31, 2007 the total interest expenses amounted to €921,000 (€664,000 for interest at 1.75% and €257,000 for the amortization of the borrowing costs).

Note 9. Shareholders’ Equity

At June 30, 2008, 15,811,381 shares were issued, each with a nominal value of €1 per share. After taking into consideration the 391,649 shares repurchased and held in treasury, 15,419,732 shares are outstanding at June 30, 2008.

A summary of the activity in the warrants, stock options and free shares is as follows:

  Number of
shares
  Weighted average
exercise price per share
  Price range  
     
 
 
 
 
 
 
Balance at December 31, 2007
2,538,064
 
20.54
 
0 – 139.52
 
Granted
110,000
 
6.64
 
6.64
 
Exercised
(172,462
)
0.61
 
0 – 10.62
 
Expired
(10,000
)
7,04
 
7.04
 
Cancelled
(455,588
)
30.5
 
4.19 – 139.52
 
 
         
Balance at June 30, 2008
2,010,014
 
19.29
 
0 – 139.52
 
 
         

At June 30, 2008, 1,505,542 founders' warrants, stock options and warrants were exercisable at an average price of €23.55 (€26.88 at December 31, 2007).

155,650 free shares have been granted to employees and members of the board in 2007. The final acquisition of the shares is subject to the completion of a two year service period by the employees.

Note 10. Stock-based compensation

Stock-bases compensation includes stock options, warrants and free shares and were estimated as follow:


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Equity
instruments
Grant date
Number of stock
options, warrants
and shares
granted
 
Stock
price on
date of
grant
 
Exercise
price
 
Expected
volatility
 
Expected
life
Risk-free
interest
rate
 
Compensation
for the year
ended 2007
 
Compensation for
the six months
ended June, 30
 
Initial
pricing at
the date of
grant
 
                             
2007
       
2008
     
                             
(in € thousands)
     
Stock options 25.03.2003 155 200   8.14   8.07   82.56 % 10 years 4.29 % 7  
7
      -   897  
  27.08.2003 99 000   11.25   11.40   79.51 % 10 years 4.21 % 4  
4
      -   775  
  18.08.2004 147 300   2.95   3.29   69.07 % 10 years 4.1 % 24  
15
      4   262  
  15.03.2005 49 000   4.23   4.19   63.08 % 10 years 3.75 % 14  
6
      4   123  
  07.09.2005 3 500   11.25   10.18   67.17 % 10 years 3.1 % 5  
3
      2   25  
  17.05.2006 423 544   10.00   10.62   65.78 % 10 years 4.08 % 972  
692
      186   2 598  
  07.06.2007 372 650   24.06   24.21   66,86 % 10 years 4.59 % 1 642           3 842 5 576  
  14.05.2008 80 000   7   6,64   66,26 % 10 years 4,03 % -  
-
      16   332  
 

 
 
 
   
 
 
     
 
 
Founder's warrants 25.03.2003 193 000   8.14   8.07   82.56 % 10 years 4.29 % 1  
1
      -   1 059  
          22.05.2003 11 000   10.78   11.18   81.39 % 10 years 3.77 % 1  
1
      -   79  
  27.08.2003 241 000   11.25   11.40   79.51 % 10 years 4.21 % 11  
10
      -   1 791  
  23.03.2004 38 000   8.30   9.62   70.12 % 10 years 3.97 % 4  
6
      2   180  
  19.01.2005 302 700   5.40   5.39   66.94 % 10 years 3.52 % 123  
74
      29   942  
  15.03.2005 154 500   4.23   4.19   63.08 % 10 years 3.75 % 45  
32
      2   366  



 
 
 
 

 
         
 
 
Warrants to 26.05.2004 50 000   5.90   7.04   70.11 %
4 years
3.37 % 5  
5
      -   141  
 members of 16.11.2004 20 000   5.68   5.68   66.95 %
4 years
2.82 % 2  
2
      -   57  
the board of 26.05.2005 70 000   6.78   6.55   67.43 %
4 years
2.58 % 4  
26
      8   242  
directors 17.05.2006 40 000   10.00   10.62   65.78 %
4 years
4.08 % 82  
54
      25   196  
  16.05.2007 40 000   22.68   21.90   67.31 %
4 years
4.29 % 169  
24
      132   474  
  14.05.2008 30 000   7   6,64   66,26 %
10 years
4,03 % -  
-
      5   102  



 
 
 
 

 
 
     
 
 
   Free shares 17.05.2006 155 673   10.00   N/A   N/A   4 years N/A   759  
386
      348   1 557  
  07.06.2007 155 650   24.06   N/A   N/A   4 years N/A   936  
-
      936   3 745  
                                             
Total                         4 810  
1 348
    5 541      
                         
 
     
     
 

The cancellation of the stock option plan granted on June 7,th 2007 has resulted in an additional expense of €3.8 million in the first half of 2008.

Note 11. Income taxes

The current tax benefit for the six months ended June 30, 2008 (€45,000) is related to income tax expense of Wavecom’Asian and Wavecom’Americas subsidiaries and a current tax benefit .

The company anticipates to use during the year part of the loss carry forwards. The effective annual tax rate after using the loss carry forwards is estimated to be close to 0% and therefore no income tax expense has been recorded in the consolidated accounts for the six months ended June 30, 2008.

For the parent company, due to the estimation for next years profit, the Company has decided to keep unchanged the amount of deferred tax asset recorded as of December 31, 2007.

Anyware Technologies acquired on February 1, 2008 had a total loss carry forwards of €2,599,000 at the date of the acquisition. Based on the estimation for next years profits, it is probable that the low carry forward will be used within the next three years and therefore, we have decided to record in the opening balance of Anyware Technologies a deferred tax asset amounting to €866,000. In addition, intangible assets were identified and valued in connection with the acquisition for a total amount of €3,517,000, generating a deferred tax liabilities of €1,172,000, at the acquisition date, reduced by €95,000 in the consolidated accounts for the six months ended June 30, 2008 due to the depreciation expense of the period related to the assets. As a result, as of June 30, 2008, we have recorded a net deferred tax liability of €211,000.


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Note 12. Commitments and contingencies

Contingencies

Wavecom is currently involved in several legal proceedings. The Company believes that these legal and tax proceedings should not have a significant impact on our financial position or results of operations.

A law suit was launched at the European Patent Office by Wavecom against a French Company seeking to nullify their French and European Patents. This company filed a counterclaim based on alleged infringement of the same patents.

On 6 February 2008, Wavecom filed a civil proceeding in the Supreme Court of the State of New York (USA) against Siemens AG and two of its US subsidiaries. Wavecom alleges that the defendants improperly took Wavecom's confidential internal product information, distributed it internally and to customers of Wavecom, and utilized it to unfairly compete with Wavecom. The lawsuit claims the torts of conversion, unfair competition and misappropriation of trade secrets, and seeks damages in an amount to be proved at trial and a court order requiring the defendants to return the information.

Operating leases

Wavecom leases its facilities under operating leases that expire through June 2014.

Future minimum lease payments under operating leases which were not terminated at June 30, 2008, due for the years ending December 31, are as follows (in thousands) :

2008 (from July 1 to December 31) €2,326  
2009 4,512  
2010 4,499  
2011 2,661  
2012 468  
Thereafter 692  
 
 
Total €15,158  
 
 

Other commitments

At June 30, 2008, Wavecom had purchase commitments with its third-party manufacturers for future deliveries of products, principally during the second half of 2008. These non-cancellable purchase commitments totaled €10,192,000.

Note 13. Segment

The Company has determined that the risks and the profitability are predominantly driven by the geographic areas. In addition, the Company’s Chief Executive Officer is using such segment reporting to allocate resources.


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This structure included the establishment of management by geographic segment: EMEA (Europe Middle-East and Africa), APAC (Asia-Pacific) and the Americas (North and South America). The regions are supported from a product standpoint by marketing, research and development, operations (manufacturing), strategy and planning departments. From an administrative standpoint, the Company is supported by finance, human resources and quality departments.

Each of these regions has responsibility for developing customer relations, for supporting the customer on the technical subjects, for applying locally the marketing strategy and for preparing sales forecasts.

Support functions are mainly based in the headquarters in France but some people are located in the APAC and Americas regions, in particular in the finance, information technology, human resources areas and a part of research and development teams. Management tools have been implemented to follow the performance and costs of the regions and of the support functions.

Sales and related balance sheet items (account receivables) are allocated to regions (EMEA, APAC and Americas) based on the client’s address. Cost of goods sold and related balance sheet items (inventory, fixed assets, account payable, warranty and royalty accruals) are calculated based on the actual cost of products sold in each region.

The allocation of the operating expenses and related balance sheet items is performed as follows:

   some functions has been defined as being corporate functions and therefore their costs have not been allocated to regions, these functions are including corporate management, quality departments, strategic marketing and long term research and development projects,
   local marketing and sales costs are allocated to the regions based on the location of the headcount,
   other operating costs, including mainly maintenance and the validation part of research and development, general and administrative costs, are allocated to the regions based on their respective contribution to the sales performance,
   restructuring costs are not allocated to the regions and remain at corporate level,
   the goodwill and the fixed assets related to the acquisition of businesses or companies have been allocated based on the sales per region forecasted for 2006 in the acquisition plan.

The table below sets forth revenues, operating income or losses and other financial information for each of our segments for the first half of the years ended June 30, 2008 and June 30, 2007, and the year ended December 31, 2007.

Six months ended June 30, 2008
EMEA
 
Americas
 
Asia-
Pacific
 
Corporate
 
Consolidated
 
(in € thousands)
 
 
 
 
 
Revenues €39,858   €18,454   €14,599   €91   €73,002  
Operating income (loss) 5,776   285   541   (10,254 ) (3,652 )
Long-lived assets 22,383   9,003   4,207   3,324   38,917  
Interest income 12       3   2,803   2,818  
Interest expense (3 )     (17 ) (1,102 ) (1,122 )
Capital expenditures 5,062   1,386   461   1,149   8,058  

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Fiscal year 2007  
EMEA
 
Americas
 
Asia-
Pacific
 
Corporate
 
Consolidated
 
(in € thousands)  
 
 
 
 
 
Revenues   €96,576   €70,526   €35,081   €154   €202,337  
Operating income (loss)   21,666   8,825   1,395   (19,189 ) 12,697  
Long-lived assets   10,842   9,981   4,374   4,657   29,854  
Interest income   5     32   3,338   3,375  
Interest expense   (1 )   (37 ) (1,503 ) (1,541 )
Capital expenditures   1,631   1,542   398   1,645   5,216  
                       
                       
Six months ended June 30, 2007   EMEA   Americas  
Asia-
Pacific
  Corporate   Consolidated  
(in € thousands)  
 
 
 
 
 
Revenues   €53,619   €35,747   €14,794   €67   €104,227  
Operating income (loss)   11,243   3,124   (1,530 ) (6,495 ) 6,342  
Long-lived assets   11,953   11,099   4,700   2,149   29,901  
Interest income           21   955   976  
Interest expense           (15 ) (124 ) (139 )
Capital expenditures   963   832   219   725   2,739  

Note 14. Subsequent event

On July 23, 2008, Wavecom announced its intention to activate the share repurchase program under the authorization granted to the board of directors at its annual shareholders’ meeting held on May 14, 2008. From August 31, 2008 to the date of these financials accounts, Wavecom has repurchased 425,891 shares at an average price of 4.54 euros.


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OPERATING AND FINANCIAL REVIEW

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes, all of which are available on the Wavecom corporate website (www.wavecom.com). Our half year financial results included in this discussion have been prepared in accordance with U.S. GAAP. This discussion includes forward-looking statements based on assumptions about our future business. Our actual results could differ materially from those contained in the forward-looking statements.

Results of Operations for the six-month periods ended June 30, 2008 compared to the six-month periods ended June 30, 2007

Revenues

(amounts in € 000s) Six months ended  
 
June 30,
2007
 
June 30,
2008
 
% change
2007/2008
 
 
 
 
 
Product sales 103 562   70 308   -32,1 %
   Percentage of total revenues 99.4 % 99.4 %    
Services revenue 665   2 694   305,1 %
   Percentage of total revenues 0.6 % 0.6 %    
 
 
 
 
Total revenues 104 227   73 002   -30,0 %

Revenues for the first half of 2008 were at €73.0 million, declining 30% year-on-year (25% at constant currencies, i.e. using the first half 2007 exchange rate for the U.S. dollar to the euro).

Wavecom business is confronted by an uncertain economy, particularly in the US where some markets, such as the alarm business, slowed considerably last two quarters. In the economical context, some customers have pushed out new product development plans and are taking a conservative position on placing orders In addition, the US region experienced the end of two projects from two U.S. customers which represented a significant portion of H1 2007 sales: one projected ended in the third quarter of 2007 and the second one in the second quarter of 2008. At the same time, while our volumes were strong, the product-mix is transitioning from high-priced/low-margin to low-priced/high-margin products that further impacted revenue quarter-on-quarter.

Sales for the first half of the year by region were as follows: EMEA (Europe, Middle-east and Africa): 54%, APAC (Asia-Pacific): 20% and The Americas: 26%.


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The customer portfolio remained balanced with no single customer representing more than 12% of total revenues in the first half of the year. The top ten customers combined represented 53% of revenues as compared to 46% during the first half of 2007.

Business news for the first half of 2008:

H1 2008 Customer announcements:

Sunlink International Holdings Limited selected Wavecom’s Wireless CPU® Q24 Plus for their intelligent dispatch system for the taxi industry This solution called TAXI4U combines GPS and advanced database processing technologies to be integrated into the taxi operating system.

Ingenico and Wavecom signed a MOU for co-development of future wireless payment electronics terminals. As industry demand for cost effective and innovative payment systems grows, two leaders are combining forces to establish a platform for a new generation of wireless electronic payment system architecture.

Tattletale Portable Alarm Systems, Inc. announced it has chosen Wavecom as the single source for cellular wireless technology to enable their pioneering portable alarm systems designed to protect any asset, anywhere in the U.S. or Canada.

Wavecom announced a collaboration with EDMI Limited (Singapore Exchange: EDMI) and Wavecom. The two companies have worked together to help establish the Advanced Metering Infrastructure (AMI) in Australia and New Zealand markets.

H1 2008 Product announcements:

Wavecom introduced its Q64 Wireless CPU®, an enhanced version of the GR64 that is powered by Wavecom’s Wireless Microprocessor® WMP100.. The Q64 will have a host of new features like IDS (Intelligent Device Services) in the same popular, robust form factor as the GR64 thus facilitating integration into existing customer product designs. Customers appreciating the benefits of the GR64 will be able to continue using the form factor while taking advantage of the Open AT® Software Suite, without discarding existing design efforts."

ORBCOMM announced that it signed a joint marketing agreement with Wavecom whereby the two companies will work together to address the growing demand for devices that combine both satellite and terrestrial wireless communications

Wavecom announced the commercial availability of its Open AT® Software Suite 2.0. The next generation software architecture represents continuing improvement and innovation that allows developers to write application code in two popular programming languages: C and Lua - C for efficiency and code compactness and Lua for ease of development and code security.

Wavecom announced complete certification of twelve Wireless CPU® products from the Fastrack Supreme, Wireless Microprocessor and Q2687 families for use in the U.S.

Wavecom announced a groundbreaking combination of cellular, satellite and GPS technology (select models) on a single device: the Wavecom Q52 Omni Wireless CPU®. Based on


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Wavecom Wireless Microprocessor® technology, the Q52 Omni embodies unprecedented integration by embedding control of all three technologies on a single processor, enabling significant cost savings over existing multiprocessor solutions.

Machine-to-Machine anti-jamming wireless security Plug-In introduced by Wavecom. As wireless M2M (machine-to-machine) products become more and more sophisticated, the data that they generate are increasingly valuable to the enterprises using it. With the Open AT® Security Plug-In, Wavecom launched a software solution which addresses all these concerns. The Open AT® Security Plug-In enables developers of all categories of wireless M2M systems to make sure that important data are securely stored and safely transmitted between a field device and a back-end server, and that illegal jammers are detected as quickly as possible.

Cost of revenues

(amounts in € 000s)     Six months ended          
     
         
 
June 30,
2007
 
% of
sales
 
June 30,
2008
 
% of
sales
 
% change
2007/2008
 
 
 
 
 
 
 
Cost of revenues                    
   Cost of good sold 56 152   54.2 % 32 568   46,3 % -42,0 %
   Cost of services and licensing 3 158   474.9 % 2 478   92,0 % -21,5 %
 
 
 
 
 
 
   Total cost of revenues 59 310   56.9 % 35 046   48,0 % -40,9 %
                     
Gross Profit                    
   On goods sold 47 410   45.8 % 37 740   53,7 % -20,4 %
   On services and licensing -2 493   -374.9 % 216   8,0 %    
 
 
 
 
     
   Total gross profit 44 917   43.1 % 37 956   52,0 % -15,5 %
 

Cost of goods sold. Cost of goods sold consists primarily of the cost of components, our manufacturers' charges and provisions for royalties, obsolete and slow-moving inventories and warranty expense.

Gross margin for the consolidated business was 52% of revenues, an increase versus the 43% of the first half of 2007. This is explained by an improved product margin, in particular for the products coming from the acquired activity in 2006, due to a product mix with a higher percentage of high margin products and a decrease of the royalty accrual.


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Operating expenses

(amounts in € 000s) Six months ended  
 
 
 
June 30,
2007
 
June 30,
2008
 
% change
2006/2007
 
 
 
 
 
             
Operating expenses            
   Research and development 15 417   17 280   12,1 %
   Sales and Marketing 9 211   9 475   2,9 %
   General and Administrative 10 662   7 418   -30,4 %
   Stock based related expenses 1 348   5 541   311,1 %
   Amortization expense related to acquisitions 1 937   1 894   -2,2 %
   Acquired in process technology            
   Total 38 575   41 608   7,9 %
 

Operating expenses increased by 8% versus first half of 2007. This increase is mainly coming from the Stock related expenses. Excluding these expenses, operating expenses would have decreased by 3%. Research and development expenses increased versus last year mainly due to assignment of part of the headcount allocated to a service contract back to research and development projects resulting in the recording of their expenses in operating expenses versus cost of service last year. Sales and marketing expenses increased due to higher activities in these departments. General and Administrative expenses decreased due to cost control and reversal of provision of doubtful account recorded during previous years which were paid by customers in 2008.

The stock based related expenses increase significantly due to the cancellation of the stock option plan granted on June 7, 2007. This stock option plan included 38 beneficiaries including the CEO who were together granted a total of 372,650 stock options at an exercise price of €24.21. The cancellation was agreed to by a large majority of the grantees, representing 96% of the total number of outstanding stock options.

Consequently, under SFAS123R, this cancellation has resulted in an expense of €3.8 million in the first half of 2008.

Headcount

Our global headcount was approximately 576 at June 30, 2008, including 83 independent contractors (483 at December 31, 2007, including 63 independent contractors)

Other income (expense)

Interest and other financial income, net. We recorded net interest and other financial income of €1,695,000 in the first half of 2008, compared to €836,000 in the same period in 2007. Net interest and other financial income represent the net of €2,818,000 of interest income (€978,000 in the first half of 2007) and €1,122,000 of interest expenses (€139,000 in the first half of 2007). This increase is due to a higher cash level mainly driven by the OCEANE generating more financial income offset by interest expense mainly on the OCEANE. The OCEANE bear interest at a rate of 1.75% per annum. We recorded €701,000 for the six-months ended June 30, 2008.


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Wavecom has policies that limit cash investments to short-term, low-risk instruments. Cash is mainly held in securities that are invested in short-term money market accounts ( Fonds Communs de Placement or “FCP” and Société d'Investissement à Capital Variable or “SICAV”).

Foreign exchange gain (loss). We had a net foreign exchange gain of €127,000 in the six months ended June 30, 2008 compared with a net loss of €98,000 in the same period in the prior year.

Income tax expense (benefit). Our €45,000 net tax benefit in the first half of 2008 (expense of €102,000 in the first half of 2007), represents principally, income taxes in the American subsidiary and in an Asian subsidiary, netted with income tax benefits.

Liquidity and capital resources

We had positive cash flow from operating activities of €16,561,000 in the six-month period ended June 30, 2008 compared to positive cash flow of €3,008,000 in the first six months of 2007.

The negative cash flow from investing activities of €16,905,000 in the six-month period ended June 30, 2008 is mainly due to the acquisition of Anyware Technologies in February 2008 (€10.7 million) and a decrease of purchase of fixed assets.

We had working capital (defined as current assets less current liabilities) of €126,765,000 at June 30, 2008, compared to €138,967,000 at December 31, 2007.

At June 30, 2008, our capital lease obligations (including the current portion), amounted to €579,000, compared to capital lease obligations of €547,000 at the end of 2007. We had €3.7 million in cash and cash equivalents and €127.1 million in marketable securities at June 30, 2008 compared to €4.7 million in cash and cash equivalents and €134.6 million in marketable securities at December 31, 2007

At June 30, 2008, we had purchase commitments with our third-party manufacturers for future deliveries of products, principally during the third and fourth quarters of 2008. These purchase commitments totaled approximately €10.2 million.

Based on our current plans, we believe that our available capital resources will be adequate to satisfy our cash requirements at least for the next 12 months.

Results of Wavecom SA

For the first half of 2008, the parent company, Wavecom SA, reported total revenues of €67.0 million including €28.8 million of intercompany revenues) compared to €99.6 million for the first half of 2007 (including €45.6 million of intercompany revenues).

The operating results for the first half of 2008 amounted to a profit of €2.3 million compared to a profit of €7.1 million for the same period in 2007. The result before tax was a profit of €2.5 million compared a profit of €8.0 million for the first half of 2007. The net profit for the first six month of 2006 amounted to €2.8 million versus a profit of €8.5 million for the same period in 2007.


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Subsequent event

On July 23, 2008, Wavecom announced its intention to activate the share repurchase program under the authorization granted to the board of directors at its annual shareholders’ meeting held on May 14, 2008. From August 31, 2008 to the date of these financials accounts, Wavecom has repurchased 425,891 shares at an average price of 4.54 euros.

Trends:

12-month product backlog, on June 30, 2008 stood at €30.2 million, an increase compared the €41.7 millions at December 31, 2007. This increase is mainly explained by the Americas region due to the economical situation and the end of a specific project. The EMEA region is decreasing also, largely due to one major customer transitioned away from distribution while new direct orders have not yet been placed.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  WAVECOM S.A.
   
Date: September 23, 2008 By: /s/ Chantal Bourgeat
   
    Chantal Bourgeat
    Chief Financial Officer

 


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