SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 6-K
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, 2003
Commission File No.: 333-107620
SR TELECOM INC.
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(Translation of registrant's name into English)
8150 TRANS-CANADA HIGHWAY
MONTREAL, QUEBEC H4S 1M5
CANADA
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(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:
20-F [x]
40-F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ]
No [x]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
NEWS RELEASE [LOGO SR TELECOM]
www.srtelecom.com
For more information:
David Adams (Vice-President, Finance and CFO) Paul Goyette (Director, Communications)
Tel: (514) 335-4035 Tel.: (514) 335-2429 x. 4361
email: david_adams@srtelecom.com email: paul_goyette@srtelecom.com
Brian Quick (Maison Brison)
Tel.: (514) 731-0000
email: brian@maisonbrison.com
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SR TELECOM REPORTS SECOND QUARTER RESULTS
HIGHLIGHTS
o Q2 revenues slightly above Q1
o Quarter-over-quarter losses reduced
o First half revenue lower than comparable period last year in line with
guidance
o Gross margins in the core wireless segment increase to 50% of revenue
quarter-over-quarter despite lower volume
o SR Telecom and Netro Corporation merger approved by Netro stockholders;
closing scheduled for September 4
o $6 million private placement financing closed following the quarter
o Board of Directors approved one for 10 common share consolidation to meet
NASDAQ listing requirement
MONTREAL, AUGUST 28, 2003 - SR Telecom Inc. (TSX: SRX) today reported its
results for the second quarter and six months ended June 30, 2003. Consolidated
revenues for the second quarter, which include its Chilean telecommunications
operating subsidiary, CTR, totalled $30.6 million compared to $49.0 million in
the second quarter of 2002. For the six-month period ended June 30, 2003,
consolidated revenues reached $60.2 million, compared to $94.5 million during
the same period last year. The second quarter operating loss was $5.6 million,
compared to a loss of $339 thousand during the same quarter in 2002. For the
six-month period ended June 30, 2003, the operating loss totalled $12.6 million
versus operating earnings of $407 thousand in the corresponding period in 2002.
Consolidated net loss was $5.0 million for the quarter and $11.7 million for the
six months ended June 30, 2003, compared to a net loss of $3.4 million and $6.0
million in the corresponding periods last year.
The decrease in revenues in the quarter was largely due to large sales to two
customers in the second quarter of 2002 that were not replicated in the second
quarter of 2003. For the first half of 2003, revenues were also directly
affected by the conflict in Iraq and by delays in closing significant new
orders.
CORE WIRELESS SOLUTIONS SEGMENT
Second quarter revenues in SR Telecom's core wireless solutions business were
$27.0 million, compared to $45.3 million during the same period last year. For
the six-month period, revenues reached $53.0 million, versus the $85.9 million
reported in 2002. Operating losses in SR Telecom's wireless segment totalled
$4.3 million for the second quarter and $9.4 million for the first half,
compared to operating earnings of $1.4 million and $3.4 million in the prior
corresponding periods. Gross profit as a percentage of revenue increased to 50%
for the second quarter, up from 48% in the same quarter in 2002. For the
six-month period ended June 30, 2003, gross profit reached 48%, down marginally
from the 49% reported in the prior year.
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
1
PAGE 2
SR TELECOM REPORTS SECOND QUARTER RESULTS
CTR
Revenues at CTR were $3.6 million in the second quarter, compared to $3.7
million in the same period last year. The slight decline is mainly due to the
drop in value of the Chilean peso relative to the Canadian dollar. In peso
terms, revenue was 1,791 million pesos in the second quarter of 2003 compared to
1,583 million pesos in 2002. Similarly, for the first six months, revenues
reached $7.2 million, compared to the $8.6 million reported in 2002. Net income
from CTR increased to $2.2 million for the quarter and $3.4 million for the
six-month period, a significant improvement compared to the losses of $896
thousand and $3.7 million in the corresponding periods in 2002 due to favourable
currency gains with regard to the US denominated debt and reduced interest
expense.
CTR continues to focus on improving its operating performance and capitalizing
on the benefits associated with the acquisition of the Gilat-to-Home S.A.
network in Chile. With the integration of the satellite network with its core
network operations completed, CTR is working to generate increased revenues, in
part through its high-speed Internet offerings.
FINANCIAL POSITION
SR Telecom's cash position at the end of the second quarter was $6.0 million,
compared to $20.3 million at December 31, 2002. The decline is primarily due to
SR Telecom's repayment of $5 million of its operating line of credit and $4.5
million of its debt related to CTR.
As previously announced, SR Telecom's merger with Netro, expected to close on
September 4, 2003, is expected to significantly improve SR Telecom's
consolidated cash position.
BACKLOG
Continued global economic uncertainty and the protracted slowdown in the
telecommunications industry have affected the Company's order book. Backlog at
June 30, 2003 stood at $52 million, down from $141 million at the end of the
corresponding quarter in 2002.
RECENT EVENTS
o SR Telecom's proposed merger with Netro is approved by the Board of
Directors of both companies and is approved by a majority of Netro's
stockholders. The merger is expected to close on September 4, 2003,
subject to customary closing conditions.
o SR Telecom's registration statement filed with the U.S. Securities and
Exchange Commission is declared effective.
o SR Telecom completed a previously announced private placement of $6
million following the quarter, issuing 7,058,824 units at $0.85 per unit.
On July 21, 2003, 5,280,000 units for aggregate gross proceeds of $4.5
million were issued; while the remaining 1,778,824 units for aggregate
gross proceeds of $1.5 million was issued on August 27, 2003. Each unit
consists of one Common Share and one-half of one Common Share purchase
warrant. Each whole Common Share purchase warrant entitles the holder to
acquire one Common Share of SR Telecom at a price of $1.00 per share until
July 2008.
o Board of Directors approved a one for 10 (1:10) consolidation of its
common shares. SR Telecom expects the shares to be posted for trading on a
consolidated basis at the market opening of September 3, 2003. SR Telecom
shares will continue to be listed on the Toronto Stock Exchange under the
symbol "SRX", and will begin trading on the NASDAQ National Market under
the symbol "SRXA".
o Empresa Publica Municipal de Telecomunicaciones (ETAPA) selected SR
Telecom technology to serve rural areas in Ecuador - first application of
swing technology in Ecuador.
o SR Telecom selected for network expansion in New Caledonia - France
Telecom subsidiary chose SWING solution.
o SR Telecom registered in compliance with ISO 9001 - internationally
recognized standard reflects reliable, value-driven processes and
measurements.
o SR Telecom joins WiMAX forum -standards adoption key to developing the
broadband wireless market.
o SR Telecom receives first commercial orders for STRIDE2400 - Big Bend
Telephone selects 2.4GHZ unlicensed solution after successful field trial.
o SR Telecom selected for Oil and Natural Gas Corporation Limited (ONGC)
network expansion in India - SR500 will provide backbone for ONGC's
Supervisory Control and Data Acquisition (SCADA) network.
o China Unicom selects Netro's AIRSTAR high-capacity broadband fixed
wireless access solution to build high-performance networks in the
capital, Beijing, Shenzhen and five other major cities in Eastern China.
China Unicom will extend existing backbone networks to deliver voice, data
and videoconferencing services to its subscribers in these markets.
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
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PAGE 3
SR TELECOM REPORTS SECOND QUARTER RESULTS
OUTLOOK
"The telecommunications industry continues to experience difficulties which have
impacted our business in the short-term," said Mr. St-Arnaud. "Our actions over
the past year, however, have enabled us to strengthen our position as the market
leader in fixed wireless solutions. We have capitalized on our opportunities to
deepen our product offering and to position SR Telecom for the future. Driven by
expressed market needs, our technology acquisitions have allowed us to assemble
the industry's most comprehensive portfolio of fixed wireless access solutions.
We are convinced that our recent technology acquisitions and the new products
we've developed and introduced will contribute to SR Telecom's growth going
forward. We firmly believe that the expected addition of ANGEL and AIRSTAR (upon
the closing of the merger) will be a significant part of this growth."
"While we expect that our revenue for the third quarter will be sequentially
flat, we also expect that our backlog will improve in light of negotiations
underway with customers in our traditional markets for SR Telecom and Netro
solutions. This should lead to higher revenues in the fourth quarter, although
we do not expect to reach our previously stated goal for the year of meeting
2002 revenue levels," concluded Mr. St-Arnaud.
ABOUT SR TELECOM
SR TELECOM (TSX: SRX) is a world leader and innovator in Fixed Wireless Access
technology, which links end-users to networks using wireless transmissions. SR
Telecom's solutions include equipment, network planning, project management,
installation and maintenance services. SR Telecom offers the industry's broadest
portfolio of fixed wireless products, designed to enable carriers and service
providers to rapidly deploy high-quality voice, high-speed data and broadband
applications. These products, which are used in over 110 countries, are among
the most advanced and reliable available today.
CONFERENCE CALL
SR Telecom will host a conference call Friday, August 29, 2003 at 10:00 AM
Eastern Daylight Saving Time to discuss these results and update investors on
operating progress. SR Telecom President & CEO Pierre St-Arnaud and Chief
Financial Officer David Adams will host the conference call, which will include
a question and answer session. Investors, analysts and media wishing to
participate in this call may dial (514) 807-8791 (Montreal and overseas) or
(800) 814-3911 (elsewhere in North America) fifteen minutes prior to the start
time. For those who are unable to listen to the call live, a replay will be
available from 12:00 PM August 29 until 11:59 PM September 5 at (877) 289-8525
(passcode 21014307#). A live and archived audio webcast of the call will also be
available online at: www.srtelecom.com.
FORWARD-LOOKING STATEMENTS
Except for historical information provided herein, this press release may
contain information and statements of a forward-looking nature concerning the
future performance of SR Telecom the Company. These statements are based on
suppositions and uncertainties as well as on management's best possible
evaluation of future events. Such factors may include, without excluding other
considerations, fluctuations in quarterly results, evolution in customer demand
for SR Telecom products and services, the impact of price pressures exerted by
competitors, and general market trends or economic changes. As a result, readers
are advised that actual results may differ from expected results.
SR Telecom, STRIDE, SWING and SR500 are trademarks of SR Telecom Inc. All rights
reserved 2003. AIRSTAR and ANGEL are trademarks of Netro Corporation. All other
trademarks are property of their owners.
- 30 -
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
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SR TELECOM'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis, which follows, is provided to assist
readers in their assessment and understanding of the consolidated results of
operations, the financial position and changes in cash flows of SR Telecom Inc.
("SR Telecom") for the second quarter and six-months ended June 30, 2003. The
discussion contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
projected. The reader is cautioned not to rely on these forward-looking
statements. The Corporation disclaims any obligation to update these
forward-looking statements. The following management discussion and analysis of
financial condition, cash flows and results of operations should be read in
conjunction with SR Telecom's annual audited consolidated financial statements.
OVERVIEW
SR Telecom provides fixed wireless access solutions for voice,
data and Internet access applications. SR Telecom designs, markets and sells
fixed wireless products to telecommunications service providers, who in turn use
the products to provide their subscribers with a full range of
telecommunications services. SR Telecom also provides full turnkey services to
its customers. Most of SR Telecom's sales are international, with its fixed
wireless systems currently being used by telecommunications service providers in
over 110 countries worldwide. These customers include large incumbent local
exchange carriers as well as competitive local exchange carriers and private
operators of telecommunications systems. In addition, through its majority-owned
subsidiary Comunicacion y Telefonia Rural ("CTR"), SR Telecom provides local
telephone service and Internet access to residential, commercial and
institutional customers, and operates a network of payphones in a large,
predominantly rural area of Chile.
RECENT DEVELOPMENTS
o SR Telecom completed a private placement of $6.0 million, issuing
7,058,824 units at $0.85 per unit. Each unit consists of one common share
in the capital of SR Telecom and one-half of one common share purchase
warrant. Each whole share purchase warrant entitles the holder to acquire
one common share in the capital of SR Telecom at a price of $1.00 per
share until July 2008.
o Empresa Publica Municipal de Telecomunicaciones (ETAPA) selects SR Telecom
technology to serve rural areas in Ecuador - first application of SWING
technology in Ecuador.
o SR Telecom selected for network expansion in New Caledonia - France
Telecom subsidiary chooses SWING solution.
o SR Telecom registered in compliance with ISO 9001 certification -
Internationally recognized standard reflects reliable, value-driven
processes and measurements.
o SR Telecom joins WiMAX forum - standards adoption key to developing the
broadband wireless market.
o SR Telecom receives first commercial orders for STRIDE2400. Big Bend
Telephone selects 2.4GHZ unlicensed solution after successful field trial.
o SR Telecom selected for Oil and Natural Gas Corporation Limited (ONGC)
network expansion in India- SR500 provides backbone for ONGC's Supervisory
Control and Data Acquisition (SCADA) network.
o SR Telecom participates in 100th Tour de France - SWING system offers
voice and data services to teams at each stage.
CRITICAL ACCOUNTING POLICIES
SR Telecom's consolidated financial statements are based on the
selection and application of accounting policies, which require SR Telecom's
management to make significant estimates and assumptions. SR Telecom believes
that the following accounting policies may involve a higher degree of judgment
and complexity in their application, and represent SR Telecom's critical
accounting policies.
REVENUE RECOGNITION
Revenue is recognized when persuasive evidence of an agreement
exists, delivery has occurred or the service has been performed, the fee is
fixed and determinable, and collection of the resulting receivable is probable.
SR Telecom recognizes revenue through two primary revenue
streams: revenue from the sale of equipment and service revenue. Service revenue
is comprised of site survey and engineering, prior to installation, as well as
installation of the equipment, training of customer personnel and repair
contracts. Revenue for equipment sold separately is recognized upon delivery and
when all significant contractual obligations have been satisfied and collection
is probable. SR Telecom also enters into contracts involving multiple elements,
or "turnkey" contracts, which include the sale of equipment as well as the sale
of services. Turnkey contracts generally include the sale of equipment as well
as site survey and engineering, which involves the assessment of the locations
to be installed and the requirements of the equipment to be installed, as well
as installation of the equipment at the site. The service elements are not
essential to
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
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the functionality of the delivered equipment. Recognition of revenue in turnkey
contracts on the sale of manufactured equipment is recognized upon shipment.
Recognition of revenue on the performance of site survey and engineering, and
installation of the equipment is recognized when the services are performed. The
establishment of the selling prices of services and equipment in these contracts
is determined by reference to similar contracts whereby these elements are
offered on a stand-alone basis and are incorporated in the contract details. For
contracts involving multiple elements, SR Telecom allocates revenue to each
element based on relative fair values. Telecommunication service revenue is
recognized as the services are rendered.
SR Telecom products and services are generally sold as part of a
contract or purchase order, of which many are for periods extending beyond one
year. Revenue and cost estimates on long-term contracts are revised periodically
based on changes in circumstance; any losses are recognized in the period that
such losses become known.
WARRANTY OBLIGATIONS
Accruals for warranty costs are established at the time of
shipment and are based on contract terms and experience from prior claims. SR
Telecom's usual warranty terms are one year, with two-year warranty periods in
certain limited circumstances. SR Telecom evaluates its obligations related to
product warranty on an ongoing basis. If warranty costs change substantially, SR
Telecom's warranty accrual could change significantly. SR Telecom tracks
historical warranty cost, including labor and replacement parts, and uses this
information as the basis for the establishment of its warranty provision. With
respect to the introduction of new products, warranty accruals are determined
based on SR Telecom's historical experience with similar products.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
SR Telecom performs ongoing credit evaluations of its customers'
financial condition and establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers and on-going
project risks. Wherever practicable, SR Telecom requires accounts receivable to
be insured by an export credit agency, by confirmed irrevocable letters of
credit or by a security interest on the customer's assets. SR Telecom believes
that it has sufficient allowances for doubtful accounts to address the risk
associated with its outstanding accounts receivable.
PROVISION FOR EXCESS OR OBSOLETE INVENTORY
Inventories are valued at the lower of cost and net realizable
value or replacement cost, with cost computed at standard, which approximates
actual cost computed on a first in, first-out basis. SR Telecom maintains a
reserve for estimated obsolescence based upon assumptions regarding future
demand for its products and the conditions of the markets in which its products
are sold. This provision to reduce inventory to net realizable value is
reflected as a reduction to inventory in the consolidated balance sheets.
Significant management judgments and estimates must be made and used in
connection with establishing these reserves. If actual market conditions are
less favorable than SR Telecom's assumptions, additional reserves may be
required.
ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS
SR Telecom evaluates events and circumstances that can have an
effect on the carrying value of its long-lived assets on an ongoing basis. In
order to determine whether an impairment exists, management considers the
undiscounted cash flows estimated to be generated by those assets as well as
other indicators. If the estimated undiscounted cash flows are projected to be
less than the carrying value of the related assets, a permanent impairment in
the carrying value of assets is charged against earnings in the period an
impairment is determined.
FOREIGN CURRENCIES
Monetary assets and liabilities denominated in foreign currencies
are translated at exchange rates in effect at the balance sheet dates.
Non-monetary assets and liabilities are translated at historical rates.
Translation gains and losses are reflected in the statement of operations.
Revenue and expenses are translated at average exchange rates prevailing during
the period.
All of SR Telecom's subsidiaries are financially and/or
operationally dependent on SR Telecom and are accounted for using the temporal
method. Under this method, monetary assets and liabilities are translated at
exchange rates in effect at the balance sheet dates. Non-monetary assets and
liabilities are translated at historical rates. Revenue and expenses are
translated at average rates for the period. Translation exchange gains or losses
of such subsidiaries' accounts are reflected in the statement of operations.
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
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FUTURE INCOME TAXES
Future income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the tax rates which will be in effect when
the differences are expected to reverse. A valuation allowance is provided for
the amount of future income tax assets that are not considered more likely than
not to be realized. SR Telecom intends to use the balance of these assets prior
to expiry either as an offset to future net income or through the use of other
tax planning initiatives.
RESULTS OF OPERATIONS
SR Telecom operates in two business segments. The first is the
Wireless Telecommunications Products ("Wireless") Business Segment and the
second is the Telecommunications Service Provider Business Segment ("CTR").
THREE-MONTHS ENDED JUNE 30, 2003 VERSUS THREE-MONTHS ENDED JUNE 30, 2002
WIRELESS TELECOMMUNICATIONS PRODUCTS BUSINESS SEGMENT
Percent of Revenue
----------------------
2003 2002
---- ----
Revenue 100% 100%
Cost of revenue 50% 52%
---- ----
Gross profit 50% 48%
Agents commissions 4% 9%
Selling, general and administrative expenses 39% 24%
Research and development expenses, net 23% 12%
---- ----
Total operating expenses 66% 45%
---- ----
Operating (loss) income (16%) 3%
Interest expense, net 6% 3%
Loss on foreign exchange 14% 7%
Income tax recovery (9%) (2%)
---- ----
Net loss (27%) (5%)
---- ----
Revenue
Revenue by geographic area based on the location of SR Telecom's original
customers is as follows:
For the three-months ended June 30, 2003 and 2002:
Revenue Percent of
(In thousands) Wireless Revenue
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
Europe, Africa and Middle East 15,689 15,508 58% 34%
Asia 7,003 26,587 26% 59%
Latin America 2,665 2,242 10% 5%
Other 1,682 954 6% 2%
------ ------ ------ ------
27,039 45,291 100% 100%
====== ====== ====== ======
Revenue in Latin America increased slightly, in dollar terms, in
the second quarter of 2003 as compared to the second quarter of 2002. Overall
declining revenues over the period resulted in this amount doubling in
percentage terms. Revenue in the Middle East increased in the second quarter of
2003 compared to the second quarter of 2002 as shipments to the region that were
delayed in the first quarter of 2003, as a result of the Iraq conflict, were
shipped in the second quarter. Sales to Asia declined in the second quarter as
compared to the second quarter of the previous year due to the result of large
sales to two customers, Telstra Corporation and Rural Telephone Services in the
second quarter of 2002 that were not replicated in the second quarter of 2003.
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
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Revenue from customers that comprised more than 10% of wireless revenue for the
three months ended June 30, 2003, is as follows:
Revenue Percent of
(In thousands) Wireless Revenue
-------------- ----------------
2003 2003
------ ------
Sudan Telecom Company 7,905 29%
Telstra Corporation Limited 3,763 14%
------ ------
Aggregate amount 11,668 43%
====== ======
Revenue from customers that comprised more than 10% of wireless revenue for the
three-months ended June 30, 2002, is as follows:
Revenue Percent of
(In thousands) Wireless Revenue
-------------- ----------------
2002 2002
------ ------
Telstra Corporation Limited 12,172 27%
Rural Telephone Services
Company Limited of Thailand 12,027 26%
Saudi Telecom Company 7,602 17%
------ ------
Aggregate amount 31,801 70%
====== ======
Revenue
For the quarter ended June 30, 2003, revenue decreased to $27.0
million from $45.3 million in the second quarter of 2002. The decrease in
revenue in the second quarter as compared to the second quarter of the previous
year is due to large sales to two customers, Telstra Corporation and Rural
Telephone Services , in the second quarter of 2002 that were not replicated in
the second quarter of 2003. The Corporation expects that revenue for the second
half of the year will increase relative to the revenue generated in the first
six months of 2003, however, due to delays in closing significant new orders,
2003 revenue will not reach the levels experienced in 2002.
Gross Profit
Gross profit represents total revenue less the cost of revenue.
Cost of revenue with respect to equipment revenue consists of manufacturing
costs, material costs, labor costs, manufacturing overhead, warranty reserves
and other direct product costs. Cost of revenue with respect to service revenue
consists of labor costs, travel, telephone, vehicles and other costs that are
directly attributable to the revenue recognized. Gross profit as a percentage of
revenue increased to 50% for the quarter ended June 30, 2003, from 48% for the
quarter ended June 30, 2002. This increase resulted from slight variations in
sales mix resulting in sales of higher margin products. The Corporation expects
gross margin as a percentage of revenue to decrease throughout the second half
of the year due to the lower gross profits that will be generated from the
revenues of Netro's products.
Agent Commissions
Agent commissions consist of payments to third parties who act as
an extension of SR Telecom's international sales and marketing organization. SR
Telecom has agents and representatives in 47 countries globally and uses this
network in many cases in lieu of having to maintain a permanent presence in
countries where the level, uncertainty and timing of orders do not justify a
permanent presence or where the local custom and practice requires the use of
local partners.
Agent commissions as a percentage of revenue decreased to 4% or
$1.0 million in the second quarter of 2003 from 8.5% or $3.8 million in the
second quarter of 2002. Commissions correlate directly with the level and type
of equipment sales and vary in amount by local jurisdiction.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses consist
primarily of compensation costs, travel and related expenses for marketing,
sales, human resources, finance, executive and management and professional
services fees and expenses. SG&A expenses declined by $0.4 million on a quarter
over quarter basis as declines in general and
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
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administrative expenses were offset by an increase in selling expenses. The
lower overall revenue base resulted in a higher SG&A expense to revenue ratio.
SG&A expenses as a percentage of revenue increased to 39% in the second quarter
of 2003, compared to 24% in the same period in the prior year. It is expected
that SG&A expenses in the second half of 2003 will increase in light of the
Netro acquisition.
Research and Development Expenses
Research and development expenses consist of compensation costs,
the cost of software development tools, consultant fees and prototype expenses
related to the design, development and testing of SR Telecom's products, net of
government investment tax credits associated with these activities. Research and
development expenses on a comparable basis showed a slight increase over 2002
levels. Research and development increased to $6.2 million for the quarter ended
June 30, 2003, as compared to $5.4 million for the quarter ended June 30, 2002.
The increase is mainly due to additional research being performed on newly
acquired product lines. SR Telecom expects research and development expenses to
increase in the near term in light of the Netro acquisition.
Interest Expense
Interest expense was relatively unchanged in the second quarter
of 2003 from the second quarter of 2002 at $1.5 million.
Foreign Exchange
SR Telecom's trade receivables are almost exclusively in U.S.
dollars and Euros. The unrealized foreign exchange loss of $3.8 million or 14%
of revenue in the second quarter of 2003, compared to $3.2 million or 7% in the
second quarter of 2002, resulted from the increase in the value of the Canadian
dollar compared to the U.S. dollar and the Euro. Gains or losses on foreign
exchange relate primarily to fluctuations between the U.S. dollar and Euro
compared to the Canadian dollar.
Operating (Loss) Earnings
As provided in the guidance with SR Telecom's third quarter 2002
results, revenue for the second quarter of 2003 was less than revenue in
comparable periods of 2002. The operating loss of $4.3 million or 16% of sales,
incurred in the current quarter, as compared to operating earnings of $1.4
million or 3% of sales, in the second quarter of 2002, is a result of decreased
revenue, partially offset by lower expenses. SR Telecom expects operating
earnings in the latter half of the year to decrease in light of the Netro
acquisition.
Income Taxes
SR Telecom's change in effective tax rates primarily reflects the
changes in geographic distribution of earnings mix. The income tax provision
includes tax loss carry forward benefits and other future income tax assets
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the tax rates which will be in effect when
the differences are expected to reverse.
Backlog
Continued global economic uncertainty and the protracted slowdown
in the telecommunications industry have affected SR Telecom's order book.
Backlog at the end of the second quarter in 2003 stood at $52 million, the
majority of which is expected to be delivered in 2003, down from $141 million at
the end of the second quarter of 2002. However, significant orders are expected
to be generated from increased activity in a number of SR Telecom's traditional
markets and from the introduction of stride2400, a new product stemming from SR
Telecom's recent asset purchase from Nera Communications, which should result in
growth in the second half of 2003.
TELECOMMUNICATION SERVICE PROVIDER BUSINESS SEGMENT
CTR is a rural telephone service provider in Chile. CTR provides
local telephone services to residential, commercial and institutional customers
and operates a network of payphones throughout Chile.
CTR's management is currently focused on reducing costs and
increasing revenues with the objective of generating enough cash to start
deleveraging the balance sheet. SR Telecom believes that increased revenue from
CTR's satellite operations and the v-sat based network assets will also aid in
this objective.
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SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
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Revenue
CTR showed a marginal decline in revenue to $3.6 million in the
second quarter of 2003, from $3.7 million in the second quarter of 2002. This
decrease is a result of the decline in the value of the Chilean peso relative to
the Canadian dollar. In peso terms, net revenue was $1,791 million pesos in the
second quarter of 2003 as compared to $1,583 million pesos in the second quarter
of 2002 reflecting an increase in the sales of satellite services. The
Corporation expects declines in revenue if the Canadian dollar continues to
strengthen with respect to the Chilean peso.
Operating Expenses
Operating expenses consist of compensation costs, travel and
related expenses, as well as wire support and maintenance, and professional
services fees and expenses. Operating expenses decreased to $4.9 million in the
second quarter of 2003 from $5.5 million in the same quarter last year,
reflecting the decline in value of the Chilean peso relative to the Canadian
dollar and CTR's cost reduction efforts.
Operating Loss
Operating loss decreased to $1.4 million for the quarter ended
June 30, 2003, compared to $1.8 million in the second quarter of 2002. The
decrease in operating loss is a reflection of a stabilization of the declines in
Chilean revenue coupled with cost cutting measures to bring CTR's costs in line
with revenues. The Corporation expects further operating losses in the second
half of the year.
Interest Expense
Interest expense for the quarter ended June 30, 2003, has
decreased to $0.8 million from $1.5 million for the same period in 2002. The
decline is due to a reduction in the amount of long-term debt outstanding as
well as a general decrease in interest rates.
Foreign Exchange
The unrealized foreign exchange gain of $4.4 million in the
second quarter of 2003, compared to $2.0 million in the second quarter of 2002,
is a function of the effect of fluctuations in the Canadian dollar, U.S. dollar
and Chilean Peso on the assets and liabilities of CTR, especially the U.S.
dollar denominated debt.
SIX-MONTHS ENDED JUNE 30, 2003 VERSUS SIX-MONTHS ENDED JUNE 30, 2002 WIRELESS
TELECOMMUNICATIONS PRODUCTS BUSINESS SEGMENT
Percent of Revenue
--------------------
2003 2002
------ ------
Revenue 100% 100%
Cost of revenue 52% 51%
------ ------
Gross profit 48% 49%
Agents commissions 5% 8%
Selling, general and administrative
expenses 39% 25%
Research and development expenses,
net 22% 12%
------ ------
Total operating expenses 66% 45%
------ ------
Operating (loss) income (18%) 4%
Interest expense, net 5% 3%
Loss on foreign exchange 16% 4%
Income tax recovery (10%) (1%)
------ ------
Net loss (29%) (3%)
------ ------
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
9
Revenue
Revenue by geographic area based on the location of SR Telecom's original
customers is as follows:
For the six-months ended June 30, 2003 and 2002:
Revenue Percent of
(In thousands) Wireless Revenue
-------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
Europe, Africa and Middle East 26,217 33,091 50% 39%
Asia 18,697 46,726 35% 54%
Latin America 5,360 4,278 10% 5%
Other 2,730 1,755 5% 2%
------ ------ ------ ------
53,004 85,850 100% 100%
====== ====== ====== ======
Revenue in Latin America increased slightly, in dollar terms, in
the first half of 2003 as compared to the second half of 2002. Overall declining
revenues over the period resulted in this amount doubling in percentage terms.
Revenue in Europe, Africa and the Middle East increased in percentage terms in
the first half of 2003 compared to the second half of 2002, but decreased in
dollar terms in the same period. This was due to a decline in shipments to the
region and a delay in the installation of a large project that occurred in the
first quarter of 2003 as a result of the Iraq conflict. Sales to Asia declined
in the first six months of 2003 as compared to the first six months of 2002, due
to the result of large sales to two customers, Telstra Corporation and Rural
Telephone Services in the second quarter of 2002 that were not replicated in
2003.
Revenue from customers that comprised more than 10% of wireless revenue for the
six months ended June 30, 2003, is as follows:
Revenue Percent of
(In thousands) Wireless Revenue
-------------- ----------------
2003 2003
------ ------
Telstra Corporation Limited 9,982 19%
Sudan Telecom Company 9,272 18%
Municipal Telephone Projects
Office of Philippines 6,557 12%
Saudi Telecom Company 5,510 10%
------ ------
Aggregate amount 31,321 59%
====== ======
Revenue from customers that comprised more than 10% of wireless revenue for the
six-months ended June 30, 2002, is as follows:
Revenue Percent of
(In thousands) Wireless Revenue
-------------- ----------------
2002 2002
------ ------
Telstra Corporation Limited 20,658 24%
Rural Telephone Services
Company Limited of Thailand 15,440 18%
Saudi Telecom Company 11,081 13%
------ ------
Aggregate amount 47,179 55%
====== ======
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
10
Revenue
For the six-months ended June 30, 2003, revenue decreased to
$53.0 million from $85.9 million for the six-months ended June 30, 2002. The
decrease in sales in the first half of the year as compared to the first half of
the previous year is predominantly a result of large sales to two customers,
Telstra Corporation and Rural Telephone Services in the second quarter of 2002
that were not replicated in the second quarter of 2003.
Gross Profit
Gross profit as a percentage of revenue decreased to 48% for
the six-months ended June 30, 2003, from 49% for the six-months ended June 30,
2002. This decrease resulted from slight variations in sales mix resulting in
sales of lower margin products.
Agent Commissions
Agent commissions as a percentage of revenue decreased to 5% or
$2.6 million in the six-months ended June 30, 2003 from 8% or $6.9 million in
the six-months ended June 30, 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
revenue increased to 39% or $20.7 million in the first half of 2003, compared to
25% or $21.1 million in the same period in the prior year. The lower overall
revenue base resulted in a higher operating expense to revenue ratio. Selling
general and administrative expenses declined by $0.4 million on a comparative
basis as declines in general and administrative expenses were offset by an
increase in selling expenses.
Research and Development Expenses
Research and development expenses on a comparable basis showed a
slight increase over 2002 levels. Research and development increased to $11.5
million for the six-months ended June 30, 2003, as compared to $10.4 million for
the six-months ended June 30, 2002. The increase in research and development
expenses is in large part related to the M/ergy asset purchase in the first
quarter of 2003.
Interest Expense
Interest expense was relatively unchanged at $2.8 million in the
six-months ended June 30, 2003, from $2.7 million in the six-months ended June
30, 2002.
Foreign Exchange
The unrealized foreign exchange loss of $8.2 million or 16% of
revenue in the six-months ended June 30, 2003, compared to $3.6 million or 4% in
the six-months ended June 30, 2002, resulted from the increase in the value of
the Canadian dollar compared to the U.S. dollar and the Euro. Gains or losses on
foreign exchange relate primarily to fluctuations between the U.S. dollar and
Euro compared to the Canadian dollar.
Operating (Loss) Earnings
The operating loss of $9.4 million or 18% of revenue, incurred in
the first six months of 2003, as compared to operating earnings of $3.4 million
or 4% of revenue, in the first six months of 2002, is a direct result of
decreased revenue.
Income Taxes
SR Telecom's change in effective tax rates primarily reflects the
changes in geographic distribution of earnings mix. The income tax provision
includes tax loss carry forward benefits and other future income tax assets
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the tax rates which will be in effect when
the differences are expected to reverse.
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
11
TELECOMMUNICATION SERVICE PROVIDER BUSINESS SEGMENT
Revenue
CTR experienced a decline in revenue to $7.2 million in the six
months ended June 30, 2003 from $8.6 million in the six months ended June 30,
2002. Revenue has been affected by the decline in the value of the Chilean peso
compared to the Canadian dollar. Net revenue in peso terms in the first six
months of 2003 was $3,556 million pesos compared to $3,643 million pesos in the
first six months of 2002, showing only a 2% decline in revenues in peso terms.
Operating Expenses
Operating expenses decreased to $10.4 million in the first six
months of 2003 from $11.7 million in the first six months of 2002. Although
operating expenses remained relatively stable in peso terms, the decline in the
value of the Chilean peso relative to the Canadian dollar affected this
decrease.
Operating Loss
Operating loss increased to $3.2 million for the six months ended
June 30, 2003, compared to $3.0 million in the six months ended June 30, 2002.
Interest Expense
Interest expense for the six months ended June 30, 2003, has
decreased to $1.7 million from $2.9 million for the same period in 2002. The
decline is due to a reduction in the amount of long-term debt outstanding as
well as a general decrease in interest rates.
Foreign Exchange
The unrealized foreign exchange gain of $8.4 million in the first
half of 2003, compared to $2.2 million in the first half of 2002, is a function
of the effect of fluctuations in the Canadian dollar, U.S. dollar and Chilean
Peso on the assets and liabilities of CTR, especially the U.S. dollar
denominated debt.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Working Capital
SR Telecom's working capital at June 30, 2003 of $53 million, reflects the
repayment of $5.0 million of SR Telecom's operating line of credit, $4.5 million
in principal repayments at CTR and a reduction in accounts payable. Working
capital further decreased as a result of the reduction in the overall revenue
levels. The Corporation is striving to improve its' working capital position as
well as reduce the amount of working capital employed relative to revenue.
Cash and Short-Term Investments
The consolidated cash and short-term investment position
decreased to $8.0 million at June 30, 2003, compared to $41.9 million at
December 31, 2002, as a result of debt repayments as well as a reduction in SR
Telecom's accounts payable balance. Unanticipated delays in collecting
receivables from customers in the Middle Eastern region contributed
significantly to the decrease. The Corporation expects that its cash and
short-term investment balance will increase in the latter half of the year as
receivables are collected and revenue levels increase.
Accounts Receivable
The trade receivables decrease of $17.3 million over the
six-month period ended June 30, 2003, results from a decline in value of the US
dollar receivables due to the strengthening of the Canadian dollar. Also
contributing to the decrease is a decline in sales during the period.
In December 2001, SR Telecom filed a statement of claim in New
York for US$4.86 million against MCI International and Telecommunications
d'Haiti, S.A.M., or Teleco de Haiti. The claim was filed pursuant to a clause
mandating three party arbitration before the International Court of Arbitration
in respect of funds that ceased flowing to
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
12
SR Telecom under a Tripartite Agreement between Teleco de Haiti, MCI
International and SR Telecom. The agreement provides for the financing of a
contract between SR Telecom and Teleco de Haiti pursuant to which SR Telecom was
to supply and install certain telecommunications equipment for Teleco de Haiti
for approximately US$12.88 million. In July 2002, MCI International filed for
bankruptcy and the United States Bankruptcy Court issued an order staying all
collateral litigation against MCI International, including this arbitration. As
a result, MCI International continued in the proceeding as an observer. In
February 2002, Teleco de Haiti filed a counter-claim for US$1.2 million in
respect of funds transferred to SR Telecom since the execution of a termination
agreement between SR Telecom and Teleco de Haiti, alleging that such termination
agreement ended their obligations under the Tripartite Agreement. The
arbitration proceeded with MCI as an observer.
On April 24, 2003, the arbitration tribunal rendered a decision,
received by SR Telecom on May 1, 2003, denying both the claim by SR Telecom
against Teleco de Haiti and the counterclaim by Teleco de Haiti against SR
Telecom. However, the arbitration tribunal also held that the termination
agreement preserved and did not extinguish SR Telecom's right to continue to
receive payments from MCI under the tripartite Agreement. Prior to the decision,
SR Telecom filed a claim for US$4.8 million against MCI International with the
United States Bankruptcy Court and SR Telecom cannot determine what amount, if
any it may recover from MCI International. If MCI accepts the Tripartite
Agreement then SR Telecom would have claims on both pre-petition amounts (paid
based on the consolidation motion) and post-petition amounts up to the full
amount still due. Such post-petition and future flows of funds would be paid
from the MCI/Teleco Voice Settlement Account. To date, MCI has not objected to
the Proof of Claim, nor has it rejected the Tripartite Agreement. If SR Telecom
cannot recover a substantial amount from MCI International, it could have a
material impact on SR Telecom's results of operations.
Inventory
The inventory balance increased by $3.5 million to $37.9 million
at June 30, 2003, from $34.4 million at December 31, 2002. This increase was a
function of strategic last time purchases of equipment as well as purchases
related to the stride2400 and M/ergy products. SR Telecom has had considerable
success in decreasing manufacturing cycle time and the adoption of more
conservative policies towards the advance procurement of components and the use
of pull-through manufacturing is expected to aid in reducing the inventory
balance.
Investment Tax Credits and Future Income Tax Assets
Investment tax credits are created from eligible research and
development expenditures. Future income tax assets are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the substantially enacted tax rates which
will be in effect when the differences are expected to reverse. SR Telecom
intends to use the balance of these assets prior to expiry either as an offset
to future net income or through the use of other tax planning initiatives.
To use the investment tax credits existing of $18.1 million at June
30, 2003, future taxable income of approximately $91 million is required. The
investment tax credits have an initial expiration period of 10 years. SR
Telecom's existing credits have an average remaining life of approximately 7
years.
Although SR Telecom has had losses in the past few years, SR
Telecom had a history of profit prior thereto. Profitability for the past few
years has been adversely impacted by the market conditions in the
telecommunications industry and other political, economic and social events that
affected our customers. SR Telecom believes these issues are temporary and that
the industry will return to profitability. SR Telecom is working to
strategically position itself and return to profitability when the industry
conditions improve.
Capital Expenditures
Capital expenditures are being kept to the minimum level required
to execute SR Telecom's business plan. CTR property, plant and equipment
additions were $0.3 million in the first half of 2003, compared to $0.4 million
in the first half of 2002, and relate principally to existing network upgrades
and enhancements. Wireless Products additions were $2.9 million, related
predominantly to the M/ergy asset purchase in the first quarter of 2003. SR
Telecom presently has no material commitments for capital expenditures.
Bank Indebtedness
During the six-month period ended June 30, 2003, SR Telecom's
operating line of credit was renewed on more favorable terms and conditions but
at a reduced amount of $5 million.
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
13
Liabilities
Trade payables and accrued liabilities of $50.8 million are in
line with SR Telecom's current level of operations.
Long-Term Debt and Shareholders' Equity
(in thousands) JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
Debentures $ 75,000 $ 75,000
Long-term project financing $ 51,363 $ 64,760
Shareholders' equity $ 91,016 $102,326
Long-Term Debt
SR Telecom's debentures are unsecured and bear interest at 8.15%,
payable semi-annually.
The balance of the debentures is due in a bullet payment at
maturity in April 2005. SR Telecom intends to partially refinance this debt and
expects to generate sufficient cash flow by that time to repay a portion of the
balance.
The long-term project financing relates to outstanding notes with
Export Development Canada and the Inter-American Development Bank that are
obligations of CTR. As of June 30, 2003, a principal amount of US$38 million was
outstanding. Payments of principal and interest are due in semi-annual
installments until maturity in 2007 and 2008. Currently, the lenders would have
full recourse against SR Telecom for the full amount of the loans, if
performance, financial performance and financial position covenants are not met.
While CTR and SR Telecom have not met all of these covenants, default of the
covenants has been waived by the lenders. These covenants were waived in
previous years and SR Telecom believes that these covenants will continue to be
waived on an annual basis until the balance of the amounts outstanding are
repaid or the debt is refinanced. If the lenders decline to waive the defaults,
all amounts due under the loans, including principal and interest and other
fees, could be declared due and immediately payable. In addition, if Export
Development Corporation and Inter-American Development Bank accelerated the
loans, a default would be triggered under SR Telecom's public debentures and its
bank indebtedness, which means that all amounts due and payable under the
debentures could also be declared due and payable.
Counterparts for both long-term project financing facilities are
governmental export or development financing organizations. Both tranches rank
pari passu and are secured by a pledge of all of the assets of CTR and a pledge
of the shares in the share capital of CTR and intermediate holding companies. SR
Telecom has also agreed to provide CTR with the necessary funds and resources to
complete the network as well as maintain its initial equity investment in CTR.
Shareholder's Equity
SR Telecom has an employee share participation plan, a directors'
compensation plan and a stock option plan that provides stock options to key
employees, the options vesting over a period of four to five years. For the
six-month period ended June 30, 2003, stock issued under the first two programs
totaled 438,433 for cash consideration of $0.4 million. For the six-month period
ended June 30, 2002, stock issued under the first two programs totaled 192,008
for cash consideration of $0.3 million.
The Corporation recently closed a private placement whereby
7,058,824 units were issued at $0.85 per share for gross proceeds of $6.0
million. Each unit consists of one common share and one half of one common share
purchase warrant. Each whole warrant will entitle the holder to acquire one
common share in the capital of SR Telecom at a price of $1.00 per share until
July 2008. The securities are subject to a four month hold period under
applicable securities law. The private placement was offered in order to obtain
funds to be used in working capital.
Forward Contracts
The corporation has currency exposures arising from significant
operations and contracts in multiple jurisdictions. The Company also has
currency exposure to freely tradable and liquid currencies of first world
countries and communities. As a result, the Corporation recently entered into
two forward contracts as a partial economic hedge against fluctuations in the US
dollar with respect to its US dollar receivables. The forward contracts sell
US$2.0 million each at rates of 1.4119 and 1.4203 in December 2003 and March
2004, respectively. The Corporation does not use hedge accounting for these
contracts. These contracts are recorded on the balance sheet of the Corporation
at fair market value. The change in market value of the contracts resulted in a
foreign exchange gain of $0.2 million that was
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
14
recorded in the income statement in the second quarter. Future fluctuations in
the US dollar compared to the Canadian dollar over the term of the contracts
will result in further charges to the Corporation's income statement.
Cash Flows
Cash flows used in operations totaled $15.3 million in the second quarter
of 2003, compared to $3.9 million in the second quarter of 2002, primarily as a
result of lower revenues. For the six-months ended June 30, 2003, cash flows
used in operations totaled $20.1 million as compared to $0.4 million for the six
months ended June 30, 2002.
Cash outflows from financing activities were $1.2 million for the quarter
ended June 30, 2003, as compared to $3.0 million for the quarter ended June 30,
2002. For the six-months ended June 30, 2003, cash flows used in financing
activities totaled $9.2 million as compared to $5.4 million for the six months
ended June 30, 2002. The increase in outflows over the prior year is a function
of the repayment of $5 million of the operating line of credit offset by
decreased debt repayments during the period.
Cash inflows from investing activities were $13.2 million in the quarter
ended June 30, 2003, compared to cash outflows of $2.7 million in the second
quarter of 2002. For the six-months ended June 30, 2003, cash inflows from
investing activities totaled $14.9 million as compared to an outflow of $3.4
million for the six months ended June 30, 2002. The reason for this difference
is mainly due to the sale of short-term investments during the period.
SR Telecom believes that its cash and cash equivalents balance, short-term
investments, equity issue in July, cash available from the Netro transaction and
improved cash from operations going forward will be sufficient to satisfy its
cash requirements for at least the next twelve months. SR Telecom intends to
invest its cash in excess of current operating requirements in interest-bearing,
investment-grade marketable securities.
ACCOUNTING PRONOUNCEMENTS
The Canadian Institute of Chartered Accountants ("CICA") has recently
issued the following new accounting recommendations:
Disclosure of Guarantees
Accounting Guideline 14, "Disclosure of Guarantees": This guideline applies
to interim and annual financial statements beginning January 1, 2003. SR Telecom
has determined that no additional disclosures are necessary with respect to this
guideline.
Impairment of Long-Lived Assets
CICA Handbook Section 3063, "Impairment of Long-Lived Assets": These
recommendations establish the standards for the recognition, measurement and
disclosure of the impairment of long-lived assets held for use, which include
property, plant and equipment, intangible assets with finite useful life and
deferred start-up costs. In accordance with these recommendations, an impairment
loss is recognized when the carrying amount of the long-lived asset is not
recoverable and exceeds its fair value, and is measured as the amount by which
the carrying amount of the long-lived asset exceeds its fair value. These
recommendations are to be applied prospectively for years beginning on or after
April 1, 2003, however earlier adoption is permitted. SR Telecom has not yet
assessed the impact these recommendations will have on its results of
operations, and financial position.
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5 15
T (514) 335.1210 F (514) 334.7783
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED JUNE 30TH
--------------------------------------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
------------------------------ ------------------------------
WIRELESS CONS. WIRELESS CONS.
PRODUCTS CTR PRODUCTS CTR
-------- ----- ------ -------- ----- ------
REVENUE
Equipment 22,016 -- 22,016 37,702 -- 37,702
Services 5,023 -- 5,023 7,589 -- 7,589
Telecommunications -- 3,567 3,567 -- 3,736 3,736
------ ----- ------ ------ ---- ------
TOTAL REVENUE 27,039 3,567 30,606 45,291 3,736 49,027
COST OF REVENUE
Equipment 10,884 -- 10,884 17,010 -- 17,010
Services 2,689 -- 2,689 6,725 -- 6,725
------ ----- ------ ------ ---- ------
TOTAL COST OF REVENUE 13,573 -- 13,573 23,735 -- 23,735
GROSS MARGIN 13,466 3,567 17,033 21,556 3,736 25,292
Agent commissions 1,050 -- 1,050 3,828 -- 3,828
Operating expenses 10,518 4,927 15,445 10,936 5,498 16,434
Research and development expenses, net 6,157 -- 6,157 5,369 -- 5,369
------ ----- ------ ------ ---- ------
OPERATING (LOSS) EARNINGS (4,259) (1,360) (5,619) 1,423 (1,762) (339)
Interest expense, net (1,478) (781) (2,259) (1,491) (1,509) (3,000)
(Loss) gain on foreign exchange (3,843) 4,390 547 (3,196) 1,964 (1,232)
------ ----- ------ ------ ---- ------
(Loss) gain before income taxes (9,580) 2,249 (7,331) (3,264) (1,307) (4,571)
Income tax recovery 2,351 -- 2,351 770 411 1,181
NET (LOSS) INCOME (7,229) 2,249 (4,980) (2,494) (896) (3,390)
====== ===== ====== ====== ==== ======
Weighted average number of common
shares outstanding 55,478 54,625
------ ------
NET (LOSS) INCOME PER SHARE
BASIC AND DILUTED (0.13) 0.04 (0.09) (0.04) (0.02) (0.06)
------ ------
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5 16
T (514) 335.1210 F (514) 334.7783
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED JUNE 30TH
--------------------------------------------------------------
2003 2002
(UNAUDITED) (UNAUDITED)
------------------------------ ------------------------------
WIRELESS CONS. WIRELESS CONS.
PRODUCTS CTR PRODUCTS CTR
-------- ----- ------ -------- ----- ------
REVENUE
Equipment 38,565 -- 38,565 70,447 70,447
Services 14,438 -- 14,438 15,403 15,403
Telecommunications -- 7,204 7,204 -- 8,641 8,641
------- ----- ------- ------ ------ ------
TOTAL REVENUE 53,003 7,204 60,207 85,850 8,641 94,491
COST OF REVENUE
Equipment 19,062 -- 19,062 30,890 -- 30,890
Services 8,498 -- 8,498 13,195 -- 13,195
------- ----- ------- ------ ------ ------
TOTAL COST OF REVENUE 27,560 -- 27,560 44,085 -- 44,085
GROSS MARGIN 25,443 7,204 32,647 41,765 8,641 50,406
Agent commissions 2,647 -- 2,647 6,860 -- 6,860
Operating expenses 20,641 10,442 31,083 21,077 11,677 32,754
Research and development expenses, net 11,536 -- 11,536 10,385 -- 10,385
------- ----- ------- ------ ------ ------
OPERATING (LOSS) EARNINGS (9,381) (3,238) (12,619) 3,443 (3,036) 407
Interest expense, net (2,801) (1,741) (4,542) (2,692) (2,888) (5,580)
(Loss) gain on foreign exchange (8,226) 8,416 190 (3,569) 2,244 (1,325)
------- ----- ------- ------ ------ ------
(Loss) gain before income taxes (20,408) 3,437 (16,971) (2,818) (3,680) (6,498)
Income tax recovery 5,310 -- 5,310 500 -- 500
------- ----- ------- ------ ------ ------
NET (LOSS) INCOME (15,098) 3,437 (11,661) (2,318) (3,680) (5,998)
======= ===== ======= ====== ====== ======
Weighted average number of
common shares outstanding 55,353 54,589
NET (LOSS) INCOME PER SHARE BASIC AND DILUTED (0.27) 0.06 (0.21) (0.04) (0.07) (0.11)
------ ------
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30TH, 2003 AND 2002
(IN THOUSANDS OF DOLLARS)
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
DEFICIT, BEGINNING OF PERIOD AS PREVIOUSLY REPORTED (45,659) (21,668)
Cumulative effect of adoption of new accounting policy (note 2) -- (3,106)
------- -------
BALANCE, BEGINNING OF PERIOD AS RESTATED (45,659) (24,774)
Net loss (11,661) (5,998)
------- -------
DEFICIT , END OF PERIOD (57,320) (30,772)
-------
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5 17
T (514) 335.1210 F (514) 334.7783
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30TH, 2003 AND DECEMBER 31ST, 2002
(IN THOUSANDS OF DOLLARS)
2003 2002
(UNAUDITED) (AUDITED)
----------- ---------
ASSETS
Cash and cash equivalents 5,991 20,309
Short-term investments 2,002 21,624
Accounts receivable, net 64,487 79,352
Current portion of long-term accounts receivable, net (note 3) 6,442 7,390
Income taxes receivable 2,770 1,645
Inventories 37,928 34,445
Prepaid expenses and deposits 3,146 3,126
Investment tax credits -- 2,400
-------- --------
122,766 170,291
Investment tax credits long-term 18,145 15,908
Long-term portion accounts receivable, net 21,919 23,403
Property plant and equipment, net 89,202 91,268
Future income taxes 23,610 16,088
Other assets 4,324 3,847
-------- --------
157,200 150,514
279,966 320,805
======== ========
LIABILITIES
Bank indebtedness 5,000 10,000
Accounts payable and accrued liabilities 50,796 58,125
Customer advances 6,431 10,054
Current portion of long-term debt 7,521 9,626
-------- --------
69,748 87,805
Long-term debt 119,202 130,674
-------- --------
188,950 218,479
SHAREHOLDERS' EQUITY
Capital stock (note 4) 148,336 147,985
Deficit (57,320) (45,659)
-------- --------
91,016 102,326
-------- --------
279,966 320,805
======== ========
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5 18
T (514) 335.1210 F (514) 334.7783
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30TH, 2003 AND 2002
(IN THOUSANDS OF DOLLARS)
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss (4,980) (3,390)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,182 3,603
Loss on disposal of property plant and equipment -- 388
Future income taxes (4,851) (1,112)
Change in operating assets and liabilities:
Decrease in long-term portion accounts receivable 715 2,386
Increase in non-cash working capital items (4,749) (2,106)
Unrealized foreign exchange (4,639) (3,671)
------- -------
Net cash used in operating activities (15,322) (3,902)
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayment of long-term debt (1,417) (3,139)
Proceeds from issue of shares 194 174
------- -------
Net cash used in financing activities (1,223) (2,965)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property, plant and equipment (854) (2,269)
Sale of short-term investments 15,500 --
Purchase of other assets (1,477) (433)
------- -------
Net cash from (used in) investing activities 13,169 (2,702)
Decrease in cash and cash equivalents (3,376) (9,569)
Cash position, beginning of period 9,367 20,844
CASH POSITION, END OF PERIOD 5,991 11,275
======= =======
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5 19
T (514) 335.1210 F (514) 334.7783
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30TH, 2003 AND 2002
(IN THOUSANDS OF DOLLARS)
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss (11,661) (5,998)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,319 7,412
Loss on disposal of property, plant and equipment -- 417
Future income taxes (7,522) (190)
Change in operating assets and liabilities:
Decrease in long-term portion accounts receivable 1,484 2,709
Decrease (increase) in non-cash working capital items 396 (2,183)
Unrealized foreign exchange (9,067) (2,529)
------- -------
Net cash used in operating activities (20,051) (362)
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayment of bank indebtedness (5,000) --
Repayment of long-term debt (4,510) (5,693)
Proceeds from issue of shares 351 315
------- -------
Net cash used in financing activities (9,159) (5,378)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property, plant and equipment (3,253) (2,934)
Sale of short-term investments 19,622 --
Purchase of other assets (1,477) (427)
------- -------
Net cash from (used in) investing activities 14,892 (3,361)
Decrease in cash and cash equivalents (14,318) (9,101)
Cash position, beginning of period 20,309 20,376
CASH POSITION, END OF PERIOD 5,991 11,275
======= =======
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5 20
T (514) 335.1210 F (514) 334.7783
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTERS ENDED JUNE 30TH, 2003 AND 2002
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and disclosure of contingent liabilities in these financial
statements. Actual results could differ from those estimates. The accounting
policies used in the preparation of the accompanying unaudited interim
consolidated financial statements are the same as those described in the annual
audited consolidated financial statements prepared in accordance with Canadian
GAAP for the year ended December 31, 2002. In the opinion of management, the
unaudited interim consolidated financial statements contain all adjustments of a
normal recurring nature necessary to present fairly the financial position,
results of operations and cash flows for the periods presented. Operating
results for the 6 months ended June 30, 2003 and 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. The accompanying unaudited interim consolidated financial statements
should be read in conjunction with SR Telecom's annual audited consolidated
financial statements for the years ended December 31, 2002 and 2001.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In December 2001, the Canadian Institute of Chartered Accountants amended
Section 1650, Foreign Currency Translation. The amended recommendation requires
that, effective January 1, 2002, unrealized translation gains and losses on
foreign currency denominated monetary items that have a fixed or ascertainable
life, that were previously deferred and amortized over the life of the related
items, be included in earnings of the year. This amendment was applied
retroactively, with restatement of prior periods. As a result, opening deficit
increased by and other assets were reduced by $3,106,000 at January 1, 2002.
3. ACCOUNTS RECEIVABLE
The current portion of accounts receivable long-term is comprised of an amount
receivable from Teleco de Haiti. The Corporation is currently involved in
proceedings to collect the funds. The results of the legal proceedings are not
determinable at this time. Details of the proceedings follow.
In December 2001, SR Telecom filed a statement of claim in New York for US$4.86
million against MCI International and Telecommunications d'Haiti, S.A.M., or
Teleco de Haiti. The claim was filed pursuant to a clause mandating three party
arbitration before the International Court of Arbitration in respect of funds
which ceased flowing to SR Telecom under a Tripartite Agreement between Teleco
de Haiti, MCI International and SR Telecom. The agreement provides for the
financing of a contract between SR Telecom and Teleco de Haiti pursuant to which
SR Telecom was to supply and install certain telecommunications equipment for
Teleco de Haiti for approximately US$12.88 million. In July, 2002, MCI
International filed for bankruptcy and the United States Bankruptcy Court issued
an order staying all collateral litigation against MCI International, including
this arbitration. As a result, MCI International continued in the proceeding as
an observer. In February 2002, Teleco de Haiti filed a counter-claim for US$1.2
million in respect of funds transferred to SR Telecom since the execution of a
termination agreement between SR Telecom and Teleco de Haiti, alleging that such
termination agreement ended their obligations under the Tripartite Agreement.
On April 24, 2003, the arbitration tribunal rendered a decision, received by SR
Telecom on May 1, 2003, denying both the claim by SR Telecom against Teleco de
Haiti and the counterclaim by Teleco de Haiti against SR Telecom. However, the
arbitration tribunal also held that the termination agreement preserved and did
not extinguish SR Telecom's right to continue to receive payments from MCI under
the tripartite Agreement. Prior to the decision, SR Telecom filed a claim for
US$4.86 million against MCI International with the United States Bankruptcy
Court and SR Telecom cannot determine what amount, if any it may recover from
MCI International. If MCI accepts the Tripartite Agreement then SR Telecom would
have claims on both pre-petition amounts (paid based on the consolidation
motion) and post-petition amounts up to the full amount still due. Such
post-petition and future flows of funds would be paid from the MCI/Teleco Voice
Settlement Account. To date, MCI has not objected to the Proof of Claim, nor has
it rejected the Tripartite Agreement. If SR Telecom cannot recover a substantial
amount from MCI International, it could have a material impact on SR Telecom's
results of operations. No provision for loss has been recorded with respect to
this amount receivable.
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
21
4. CAPITAL STOCK
An unlimited number of common shares and preferred shares issuable in series are
authorized.
Issued and outstanding
June 30, 2003 December 31, 2002
------------- -----------------
(000's) (000's)
55,666,415 (55,227,982 - December 31, 2002) common shares $148,336 $ 147,985
Common shares totaling 194,035 were issued during the quarter ended June 30,
2003 under the Employee Stock Purchase Plan and the Directors' Share
Compensation Plan for cash consideration of $194,000. In the six-month period
ended June 30, 2003, 438,433 common shares were issued for cash consideration of
$351,000.
Common shares issued and outstanding includes 80,000 shares issued in July 2001
to senior officers of the corporation. These common shares were purchased
through company loans amounting to $128,000 due in July 2006, bearing interest
at 5% per annum.
The amount is included in accounts receivable. The following table summarizes
information about the Corporation's outstanding stock options at June 30, 2003:
Weighted
Weighted average
Range of average remaining
exercise exercise contractual
prices Options outstanding prices life
-------------- ------------------- --------- -----------
$0.64 - $0.98 430,000 $0.87 9.5 years
$1.63 - $2.45 1,622,500 $1.84 8.3 years
$3.53 - $5.30 663,300 $4.75 6.8 years
$5.66 - $8.53 472,800 $6.73 6.6 years
$8.97 - $13.08 102,000 $10.86 3.5 years
--------- ------ ---------
3,290,600 $3.28 7.8 years
--------- ------ ---------
The following table summarizes information about the Corporation's exercisable
stock options at June 30, 2003:
Weighted
Range of average
exercise exercise
prices Options currently exercisable prices
-------------- ----------------------------- ---------
$1.63 - $2.45 491,000 $1.79
$3.53 - $5.30 315,300 $4.72
$5.66 - $8.53 283,200 $6.53
$8.97 - $13.08 102,000 $10.86
--------- ------
1,191,500 $4.47
--------- ------
The following table summarizes activity in the employee stock option plan:
SIX MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2002
--------------------------------- --------------------------------
Weighted-average Weighted-average
Number of exercise Number of exercise
options prices options prices
--------- ---------------- --------- ----------------
Outstanding, beginning of period 3,287,300 $ 3.31 2,709,300 $ 4.70
Granted 35,000 $ 0.64 595,000 $ 1.99
Exercised -- $ -- -- $ --
Forfeited / expired (31,700) $ 4.13 (213,500) $ 4.27
--------- -------- --------- --------
Outstanding, end of period 3,290,600 $ 3.28 3,090,800 $ 3.70
--------- -------- --------- --------
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
22
Stock Based Compensation Plans
Effective January 1, 2002, the Corporation adopted the new CICA recommendations
relating to stock-based compensation and other stock-based payments. The
Corporation has applied this change prospectively for new awards granted on or
after January 1, 2002. The Corporation has chosen to recognize no compensation
when stock options are granted to employees and directors under stock option
plans with no cash settlement features. However, direct awards of stock to
employees and stock or stock option awards granted to non-employees will be
accounted for in accordance with the fair value method of accounting for stock
based compensation.
The fair value of direct awards of stock are to be determined based on the
quoted market price of the Corporation's stock and the fair value of stock
options is to be determined using the Black-Scholes option pricing model. In
periods prior to January 1, 2002, the Corporation recognized no compensation
when stock or stock options were issued to employees. Pro forma information
regarding net income is required to be determined as if the Corporation had
accounted for its employee stock options granted after December 31, 2001 under
the fair value method. The fair value of these options is estimated at the date
of grant using a Black-Scholes Option Pricing Model with assumptions for the
weighted-average risk-free interest rates, dividend yields, weighted-average
volatility factors of the expected market price of the Corporation's common
shares and a weighted-average expected life of the options in years. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the option vesting periods.
Had compensation cost been determined using the fair value based method at the
date of grant for awards granted in 2002, the Corporation's pro forma net loss
and net loss per share would have increased by $96,000 to $11,757,000 (2002 -
$6,048,500) and be unchanged at $0.21 (2002 - $0.11) respectively for the
six-month period ended June 30, 2003. For the three months ended June 30, 2003,
the pro forma net loss and net loss per share would have increased by $48,000 to
$5,028,000 (2002 - $3,415,000) and be unchanged at $0.09 (2002 - $0.06)
respectively. These pro forma amounts include a compensation cost based on
weighted-average grant date fair value of $0.91 per stock option for the
1,065,000 stock options granted during 2002 and 2003, as calculated using the
Black-Scholes option pricing model, assuming a weighted-average risk-free rate
of 4.7%, a dividend yield of 0%, an expected volatility of 65% and expected
lives of the stock options of 5 years. The pro forma disclosure omits the effect
of awards granted before January 1, 2002.
5. BUSINESS SEGMENTS AND CONCENTRATIONS
The Corporation operates in two business segments. The first is the engineering,
marketing and manufacturing of wireless telecommunication products and the
installation of related turnkey systems. These products are used to provide and
upgrade internet, data and voice telecommunication systems for carriers in
urban, rural and remote areas. The products are also used to provide data, voice
and telecommunication systems for industrial use.
The second business segment, carried out by Comunicacion y Telefonia Rural S.A.
(CTR), provides telecommunication services to end-users.
WIRELESS TELECOMMUNICATIONS
TELECOMMUNICATIONS SERVICE INTER-SEGMENT
PRODUCTS PROVIDER ELIMINATIONS CONSOLIDATED
------------------- ------------------- -------------------- ------------------
2003 2002 2003 2002 2003 2002 2003 2002
$ $ $ $ $ $ $ $
As at June 30, 2003 and
December 31, 2002:
BALANCE SHEETS
Property, plant and equipment 19,568 18,721 88,662 92,052 (19,028) (19,505) 89,202 91,268
Other assets 3,017 1,830 6,242 6,542 (4,935) (4,525) 4,324 3,847
Total assets 261,422 291,401 223,105 227,830 (204,561) (198,426) 279,966 320,805
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
23
WIRELESS TELECOMMUNICATIONS
TELECOMMUNICATIONS SERVICE INTER-SEGMENT
PRODUCTS PROVIDER ELIMINATIONS CONSOLIDATED
------------------- ------------------- -------------------- ------------------
2003 2002 2003 2002 2003 2002 2003 2002
$ $ $ $ $ $ $ $
For the three-months ended,
June 30, 2003 and 2002:
STATEMENTS OF EARNINGS
External revenues 27,039 45,291 3,567 3,736 -- -- 30,606 49,027
Gross Margin 13,466 21,556 3,567 3,736 -- -- 17,033 25,292
Interest expense, net 1,478 1,491 781 1,509 -- -- 2,259 3,000
Depreciation of property, 1,133 1,169 1,747 2,106 (239) (239) 2,641 3,036
plant and equipment
Amortization of other assets 193 152 143 179 205 236 541 567
Income tax recovery (2,351) (770) -- (411) -- -- (2,351) (1,181)
NET (LOSS) INCOME (7,229) (2,494) 2,249 (896) -- -- (4,980) (3,390)
For the six-months ended
June 30, 2003 and 2002:
STATEMENTS OF EARNINGS
External revenues 53,003 85,850 7,204 8,641 -- -- 60,207 94,491
Gross Margin 25,443 41,765 7,204 8,641 -- -- 32,647 50,406
Interest expense, net 2,801 2,692 1,741 2,888 -- -- 4,542 5,580
Depreciation of property, 2,098 2,300 3,698 4,500 (477) (477) 5,319 6,323
plant and equipment
Amortization of other assets 290 277 300 340 410 472 1,000 1,089
Income tax recovery (5,310) (500) -- -- -- -- (5,310) (500)
NET (LOSS) INCOME (15,098) (2,318) 3,437 (3,680) -- -- (11,661) (5,998)
PURCHASE OF PROPERTY, PLANT
AND EQUIPMENT AND OTHER ASSETS
FOR THE SIX MONTHS ENDED JUNE 30 4,422 2,964 308 397 -- -- 4,730 3,361
GEOGRAPHIC INFORMATION
The Corporation's basis for attributing revenue from external customers is based
on the location of the customer. Sales to customers located outside of Canada
were 96% of revenue or $29,382,000 for the three-month period ended June 30,
2003 and 97% of revenue or $58,401,000 for the six-month period ended June 30,
2003. Sales to customers outside of Canada were approximately 100% of revenue
respectively or $49,027,000 and $94,491,000 respectively, for the three-month
and six-month periods ended June 30, 2002.
THE FOLLOWING SETS FORTH EXTERNAL REVENUE BY INDIVIDUAL FOREIGN COUNTRY WHERE
THE REVENUE EXCEEDS 10% OF TOTAL CONSOLIDATED REVENUE FOR THE PERIOD INDICATED:
For the three-month period ended June 30, 2003 For the three-month period ended June 30, 2002
% of Revenue Revenue (000's) % of Revenue Revenue (000's)
------------ --------------- ------------ ---------------
Canada 4.0% $ 1,224 Canada -- $ --
Australia 12.3% $ 3,763 Australia 24.8% $ 12,172
Chile 11.7% $ 3,567 Saudi Arabia 18.1% $ 8,887
Sudan 25.8% $ 7,905 Thailand 24.5% $ 12,027
Other 46.2% $ 14,147 Other 32.5% $ 15,941
------ --------- ------ --------
Total 100.0% $ 30,606 Total 100.0% $ 49,027
------ --------- ------ --------
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
24
For the six-month period ended June 30, 2003 For the six-month period ended June 30, 2002
% of Revenue Revenue (000's) % of Revenue Revenue (000's)
------------ --------------- ------------ ---------------
Canada 4.0% $ 1,224 Canada -- $ --
Canada 3.0% $ 1,806 Canada -- $ --
Australia 16.6% $ 9,982 Australia 21.9% $ 20,658
Chile 12.0% $ 7,204 Saudi Arabia 21.9% $ 20,731
Philippines 10.9% $ 6,557 Thailand 16.3% $ 15,440
Saudi Arabia 11.0% $ 6,646 Other 39.9% $ 37,662
Sudan 15.4% $ 9,272 ------ ---------
Total 100.0% $ 94,491
------ ---------
Other 31.1% $ 18,740
------ ---------
Total 100.0% $ 60,207
------ ---------
THE FOLLOWING SETS FORTH EXTERNAL REVENUE BY INDIVIDUAL CUSTOMER WHERE THE
REVENUE EXCEEDS 10% OF TOTAL CONSOLIDATED REVENUE FOR THE PERIOD INDICATED. ALL
THESE CUSTOMERS ARE PART OF THE WIRELESS TELECOMMUNICATIONS PRODUCTS BUSINESS
SEGMENT.
For the three-month period ended June 30, 2003 For the three-month period ended June 30, 2002
% of Revenue Revenue (000's) % of Revenue Revenue (000's)
------------ --------------- ------------ ---------------
Telstra Corporation Telstra Corporation
Limited 12.3% $ 3,763 Limited 24.8% $ 12,172
Sudan Telecom Company 25.8% $ 7,905 Saudi Telecom Company 15.5% $ 7,602
Rural Telephone Services
Company Limited of Thailand 24.5% $ 12,027
For the six-month period ended June 30, 2003 For the six-month period ended June 30, 2002
% of Revenue Revenue (000's) % of Revenue Revenue (000's)
------------ --------------- ------------ ---------------
Telstra Corporation Telstra Corporation
Limited 16.6% $ 9,982 Limited 21.9% $ 20,658
Municipal Telephone Saudi Telecom Company 11.7% $ 11,081
Projects Office of Rural Telephone Services
Philippines 10.9% $ 6,557 Company Limited of Thailand 16.3% $ 15,440
Sudan Telecom Company 15.4% $ 9,272
THE FOLLOWING SETS FORTH THE PROPERTY, PLANT AND EQUIPMENT BY LOCATION:
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
(000's) (000's)
Canada $15,000 $13,500
Chile $69,600 $72,600
Other $ 4,600 $ 5,200
------- -------
Total $89,200 $91,300
------- -------
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
25
6. ACQUISITION OF NETRO CORPORATION
On March 27, 2003, the Corporation announced that it entered into a definitive
agreement and plan of merger, as amended to date, with Netro Corporation
("Netro") pursuant to which it will acquire Netro. Pursuant to the merger, the
Corporation will issue an aggregate of 41.5 million Common Shares, to be
adjusted to reflect the reverse stock split of the SR Telecom Common Shares, in
exchange for all the issued and outstanding common stock of Netro. As part of
the merger and immediately prior to the closing of the merger, Netro will issue
a cash dividend of US$100 million to its stockholders.
The transaction will be accounted for using the purchase method and the expected
excess of estimated fair value of the net assets acquired over the total
purchase consideration will be accounted for as negative goodwill, which will
reduce the fair value of the acquired fixed, other and intangible assets.
The transaction is subject to certain conditions, including regulatory and Netro
stockholders' approval.
7. EQUITY ISSUANCE
On June 23, 2003, the Corporation entered into an agreement with an agent for a
private placement of common share units on a best effort basis. Each unit is
comprised of one common share and one-half of one common share purchase warrant.
Each whole warrant entitles the holder to acquire one common share at a price of
$1.00 per share until July 2008. On July 21, 2003, the Corporation issued
5,280,000 units for gross proceeds of $4,488,000. On August 27, 2003, an
additional 1,778,824 units were issued for gross proceeds of $1,512,000,
resulting in a total issuance of 7,058,824 units for gross proceeds of
$6,000,000.
8. COMMITMENTS AND GUARANTEES
SR Telecom has entered into bid and performance related bonds associated with
various customer contracts. Performance bonds generally have a term of twelve
months. Bid bonds generally have a much shorter term. Potential payments due
under these bonds are related to SR Telecom's performance under the applicable
customer contracts. The total amount of bid and performance related bonds that
were available and undrawn at June 30, 2003 is $3,804,507.
In the normal course of business, the Corporation is involved in various claims.
Though the outcome of these various pending claims as at June 30, 2003 cannot be
determined precisely, the Corporation believes that their outcome will have no
adverse impact on its financial position nor on its operating results. Any
losses arising from the outcome of the claims would be charged to earnings in
the period in which the amount would be known.
9. EMPLOYEE BENEFIT PLAN
SR Telecom maintains a defined contribution retirement program covering the
majority of its employees. For the three-month period ended June 30, 2003, the
Corporation contributed approximately $336,000 to the plan and $612,000 for the
six-month period ended June 30, 2003.
10. HEDGING ACTIVITIES
During the quarter, the Corporation entered into two forward contracts as a
partial economic hedge against fluctuations in the US dollar with respect to its
US dollar receivables. These forward contracts sell US$2.0 million each at rates
of 1.4119 and 1.4203 in December 2003 and March 2004, respectively. The
Corporation does not use hedge accounting for these contracts. These contracts
are recorded on the balance sheet at their fair market value of $5,460,000. The
change in market value of the contracts from the date of purchase to the balance
sheet date resulted in a foreign exchange gain of $0.2 million recorded in the
statement of earnings.
11. RESTRUCTURING CHARGES, ASSET IMPAIRMENT AND OTHER CHARGES
The remaining liability stemming from the fourth quarter 2002 restructuring
charges is $75,000 at June 30, 2003 and is expected to be settled by the end of
the third quarter of 2003.
12. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the basis of
presentation adopted in the current period.
--------------------------------------------------------------------------------
SR TELECOM INC. 8150 Trans-Canada Hwy. Montreal QC H4S 1M5
T(514) 335.1210 F(514) 334.7783
26
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.
SR TELECOM INC.
By: /s/ David L. Adams
---------------------------------------------
Name: David L. Adams
Title: Senior Vice President, Finance and
Chief Financial Officer
Date: September 2, 2003