NEWS RELEASE
Filed by SR Telecom Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Netro Corporation
Commission File No. 000-26963
[SR TELECOM LOGO]
www.srtelecom.com
For more information:
David Adams (Vice-President, Finance and CFO) Paul Goyette (Director, Communications)
(514) 335-4035 (514) 335-2429 x. 4361
david_adams@srtelecom.com paul_goyette@srtelecom.com
Scott Lawrence (Maison Brison)
(514) 731-0000
scott@maisonbrison.com
================================================================================
SR TELECOM REPORTS FIRST QUARTER RESULTS
REVENUES EXPECTED TO INCREASE BEGINNING IN THE SECOND QUARTER
HIGHLIGHTS
o Previously forecast decline in Q1 revenues worsened by Iraq conflict
o Gross margins remain strong at 46% despite lower volume
o Company continues to strengthen its core fixed wireless technology portfolio
through technology investment
o U.S anti-trust waiting period ends for Netro acquisition
MONTREAL, APRIL 23, 2003 - SR Telecom Inc. (TSX: SRX) today reported its results
for the first quarter ended March 31, 2003. Consolidated revenues, which include
its Chilean telecommunications operating subsidiary CTR, totalled $29.6 million,
compared to $45.4 million during the same period last year. The first quarter
operating loss was $7.0 million, compared to a gain of $746 thousand during the
same period in 2002. Consolidated net loss for the quarter was $6.7 million,
compared to a net loss of $2.6 million last year.
Revenues in the quarter were directly affected by the conflict in the Middle
East, through delays in the receipt of letters of credit, suspension of
contracts and the disruption of contracts in progress from the repatriation of
staff in the region. The cumulative effect of these factors reduced revenues by
approximately $10 million in the quarter, which will be realized later in this
fiscal year.
"Although we are disappointed with our first quarter revenues, we are pleased by
the increased level of bidding activity in a number of our traditional markets
which should result in significant bookings in the coming quarters," said Pierre
St-Arnaud, SR Telecom's President and Chief Executive Officer. "We continue to
expect that our revenues in 2003 will
be in line with 2002 levels."
CORE WIRELESS SOLUTIONS SEGMENT
First quarter revenues in SR Telecom's core wireless solutions business were
$26.0 million, compared to $40.6 million during the same period last year. Gross
margins remained strong at 46% in spite of lower volume. The Company reported an
operating loss of $5.1 million in its wireless segment, compared to earnings of
$2.0 million in 2002.
CTR
Revenues at CTR were $3.6 million in the first quarter, compared to $4.9 million
in the same period last year. This decline was due primarily to a decreased
level of network traffic brought on by the weak local economy. Net income from
CTR increased to $1.2 million for the quarter, up from a loss of $2.8 million at
the same time last year.
CTR is devoting its energies to improving its operating performance and
capitalizing on the benefits associated with the acquisition of the
Gilat-to-Home S.A. network in Chile. The integration of the satellite network
with its core network operations has been completed and CTR is focused on
generating increased revenues, in part through its high-speed Internet
offerings.
FINANCIAL POSITION
SR Telecom's cash balance at the end of the first quarter was $26.9 million,
compared to $20.8 million in the corresponding period last year and $41.9
million at December 31, 2002. The decline is primarily due to the Company's
repayment of $5 million of its operating line of credit and $3 million of its
debt related to CTR.
The Company's merger transaction with Netro Corporation, scheduled to close
early in July, is expected to significantly improve SR Telecom's consolidated
liquidity and capital resource position.
BACKLOG
Continued global economic uncertainty and the protracted slowdown in the
telecommunications industry have affected the Company's order book. Backlog at
March 31, 2003 stood at $65 million, down from $82 million at the end of the
prior quarter.
"We are optimistic that our backlog will improve significantly in the coming
quarters through increased activity in a number of our traditional markets and
through the introduction of new solutions," said Mr. St-Arnaud.
RECENT EVENTS
o SR Telecom signed a definitive agreement to acquire Netro Corporation
(NASDAQ: NTRO). The transaction solidifies SR Telecom's position as the
world's leading provider of carrier-class fixed wireless access
solutions by adding two high-capacity, packet data and carrier class
voice products to its existing portfolio. The acquisition also
significantly strengthens the Company's financial position. One of the
benefits of the Netro acquisition is the addition of $20 million to SR
Telecom's cash balance, after transaction expenses, restructuring costs
and provisioning for assumed liabilities. At closing, the Company
expects consolidated cash of approximately $75 million. The transaction
is subject to certain conditions, including the approval of the
transaction by Netro shareholders.
o Subsequent to the close of the quarter, SR Telecom Inc. received
notification from the U.S. Federal Trade Commission that the Hart Scott
Rodino waiting period has ended related to its acquisition of Netro. The
acquisition has been approved by the Board of Directors of both
companies and is now subject to the approval of Netro's shareholders.
The acquisition is expected to close early in the third quarter of 2003.
SR Telecom also intends to file a registration statement with the U.S.
Securities and Exchange Commission (the "SEC") in order to register its
common shares for sale in the United States and will seek to quote its
securities on Nasdaq, subject to compliance with the regulatory
requirements of the SEC and of Nasdaq.
o SR Telecom appointed Claude Giguere as Senior Vice-President, Sales to
develop and implement the Company's global sales strategy. Prior to
joining the Company, Mr. Giguere was Vice-President, Sales and Marketing
with Nortel Networks' Optical Systems Group in Atlanta.
o SR Telecom was selected by the Communications Authority of Thailand
(CAT) to supply its metroPOL(TM) solution for a nationwide program to
build corporate Virtual Private Networks (VPNs), and to perform certain
network design and installation services.
o SR Telecom acquired certain assets of Mergy Inc., adding CDMA2000
technology to its portfolio. The Company closed the deal on March 19,
2003 and introduced SHIFT(TM), a 1xEV-DO, standards-based broadband
access solution that enables the delivery of fixed broadband services to
business and residential users. The product does not require additional
development prior to its first commercial sale, and will serve
identified opportunities for fixed applications in the Company's
existing customer base.
o SR Telecom introduced STRIDE(TM)2400, a 2.4 GHz unlicensed band access
solution that delivers carrier-grade voice supporting all CLASS features
as well as voice-band modem capabilities and high-speed data for
Internet access. The solution is specifically targeted at the U.S. rural
market. Customer trials of stride2400 have begun and general
availability is scheduled for the third quarter of 2003.
o SR Telecom reached an agreement with CTR's lenders to restructure
principal repayments due in 2003 and to defer a portion of the
originally scheduled payments to 2004. This partial restructuring
enables CTR to focus on completing its network and introducing marketing
initiatives to improve its financial performance.
o SR Telecom signed a two-year agreement with Bell Canada for the supply
of its flagship SR500(TM) point-to-multipoint fixed wireless access
system and its WL500(TM) subsystem. A minimum of 15 SR500 systems will
be installed.
OUTLOOK
"Although we anticipated lower revenues in the first two quarters of this fiscal
year, the decline in the first quarter was worsened by the war in Iraq, which
delayed the shipment of certain large orders to the Middle Eastern region," said
Mr. St-Arnaud. "These shipments should resume in the second quarter, and
combined with existing backlog will generate revenue growth in the second
quarter. We also anticipate significant new orders in the coming quarters which
should enable us to achieve our revenue target for the year.
"While the difficulties within the telecommunications industry present
challenges, SR Telecom has continued to capitalize on this downturn to
strengthen its position as the market leader in fixed wireless solutions. Over
the past several quarters, we have seized the opportunity to deepen our product
offering and to position SR Telecom for the eventual market turnaround. Driven
by expressed market needs, our technology acquisitions have allowed us to
assemble the industry's most comprehensive portfolio of fixed wireless access
solutions.
"Based on our review of opportunities in our existing customer base we believe
that the addition of ANGEL and AIRSTAR will be a significant part of achieving
our target to double the revenues of the company over time. After giving effect
to our acquisition of Netro, we anticipate that we will generate positive
earnings and cash flows starting in the first quarter of 2004," concluded Mr.
St-Arnaud.
ABOUT SR TELECOM
SR Telecom is a world leader and innovator in Point-to-Multipoint Wireless
Access solutions, which include equipment, network planning, project management,
installation and maintenance services. Its products, which are used in over 110
countries, are among the most advanced and reliable PMP wireless
telecommunications systems available today. Serving telecom operators worldwide,
SR Telecom's fixed wireless solutions provide high-quality voice and data for
applications ranging from carrier class telephone service to high-speed Internet
access.
CONFERENCE CALL
SR Telecom will host a conference call today at 4:00 PM 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)
227-8860 (Montreal and overseas) or (800) 814-4890 (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 6:00 PM April 23 until 11:00 PM
April 28 at (877) 289-8525 (passcode 249089#). 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 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 the
Company's 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, SHIFT, METROPOL, SR500 and WL500 are trademarks of SR
Telecom Inc. All rights reserved 2003. All other trademarks are property of
their owners.
AVAILABILITY OF PROXY STATEMENT / PROSPECTUS
SR Telecom and Netro plan to file a registration statement on Form F-4,
including a proxy statement/prospectus, and other relevant documents with the
United States Securities and Exchange Commission concerning the acquisition, and
Netro expects to mail the proxy statement/prospectus to its stockholders in
connection with the acquisition. Investors and security holders are urged to
read the proxy statement/prospectus carefully when it becomes available, because
it will contain important information about SR Telecom, Netro and the
acquisition. Investors and security holders will be able to obtain free copies
of these documents, when they are available, through the website maintained by
the United States Securities and Exchange Commission at www.sec.gov. In
addition, investors and security holders may obtain free copies of the documents
filed with the Securities and Exchange Commission by SR Telecom by contacting SR
Telecom Investor Relations, 8150 Trans-Canada Highway, Montreal, Quebec, H4S
1M5, (514) 335-1210. Investors and security holders may obtain free copies of
the documents filed with the United States Securities and Exchange Commission by
Netro Corporation by contacting Netro Corporation Investor Relations, 3860 North
First Street, San Jose, California 95134, (408) 216-1500.
SR Telecom and Netro, and their respective directors, executive officers,
certain members of management and employees, may be deemed to be participants in
the solicitation of proxies from Netro's stockholders in connection with the
merger. A description of the interests of Gideon Ben-Efraim, Netro Corporation's
Chairman of the Board and Chief Executive Officer, and certain of Netro's other
executive officers, employees and directors who may be deemed to be participants
in the solicitation of proxies, and any additional benefit they may receive in
connection with the merger, will be described in the proxy statement/prospectus.
Investors are urged to read the proxy statement/prospectus and other relevant
materials when they become available before making any voting or investment
decision with respect to the acquisition.
MANAGEMENT DISCUSSION AND ANALYSIS
SR Telecom is a world leader and innovator in Point-to-Multipoint (PMP) Fixed
Wireless Access solutions, which include equipment, network planning, project
management, installation and maintenance services. Its solutions, which are used
in over 110 countries, are among the most advanced and reliable PMP wireless
telecommunication systems available today. Servicing telecom operators
worldwide, SR Telecom's fixed wireless solutions provide high-quality voice and
data for applications ranging from everyday telephone service to high-speed
Internet access.
The detailed discussion and analysis, which follows, is provided to assist
readers in their assessment and understanding of the consolidated results of
operations and the financial position of SR Telecom for the first quarter ended
March 31, 2003. It combines an analysis of trends and quarter-over-quarter
changes with an outlook to the future. This discussion and analysis should be
read in conjunction with the audited consolidated financial statements and
supporting notes for the year ended December 31, 2002.
IMPORTANT EVENTS:
o SR Telecom signs an agreement to acquire Netro Corporation ("Netro"). The
acquisition solidifies SR Telecom's position as the world's leading
provider of fixed wireless access solutions by adding the AirStar and next
generation Angel product lines to its portfolio. SR Telecom will strengthen
its balance sheet by adding incremental net cash of approximately $20
million after transaction expenses, restructuring costs and provisioning
for accrued liabilities.
o SR Telecom signs a two year supply agreement with Bell Canada to deliver a
minimum of 15 SR500 systems to remote residential communities.
o SR Telecom acquires the assets of Mergy Inc. in March 2003, adding CDMA2000
technology to its portfolio. The Company introduced SHIFT, a 1xEV-DO,
standards-based broadband access solution that enables the delivery of
fixed broadband services to business and residential users.
o SR Telecom formally launched STRIDE2400, a 2.4GHz unlicensed band access
solution that delivers carrier-grade voice supporting all CLASS features as
well as voice-band modem capabilities and high-speed data for Internet
access for the United States rural market. The technology and related
assets were acquired from Nera Telecommunications.
o SR Telecom is selected by the Communications Authority of Thailand to
deploy virtual private networks totaling approximately $4 million.
o SR Telecom completes successful field trial with Telefonica, setting the
stage for metroFLEX deployment throughout Latin America.
o Former head of Nortel Optical Systems sales and marketing group to lead SR
Telecom global sales. Industry veteran Claude Giguere joins SR Telecom as
Senior Vice-President, Sales.
RESULTS OF OPERATIONS
The consolidated statement of earnings includes the results of CTR but does not
include the results of Netro. SR Telecom has entered into a plan of merger
pursuant to which it will acquire Netro. SR Telecom expects to complete the
acquisition in the third quarter of 2003.
Effective January 1, 2002, the Company has adopted the new CICA recommendations
relating to the reporting of stock option-based compensation.
SUMMARY OF FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31
-------------------------------------------------------------------------
2003 2002
--------------------------------- --------------------------------
Wireless CTR Total Wireless CTR Total
--------- -------- -------- -------- -------- --------
Revenues 25,964 3,637 29,601 40,559 4,905 45,464
Cost of Sales 13,987 - 13,987 20,350 - 20,350
Gross Margin 11,977 3,637 15,614 20,209 4,905 25,114
Operating (loss) earnings (5,122) (1,878) (7,000) 2,020 (1,274) 746
Net (loss) earnings (7,869) 1,188 (6,681) 176 (2,784) (2,608)
Net (loss) earnings per share (0.14) 0.02 (0.12) - (0.05) (0.05)
WIRELESS TELECOMMUNICATIONS PRODUCTS BUSINESS SEGMENT
REVENUES
For the quarter ended March 31, 2003, revenues decreased by 36% from the same
period last year. Although a decrease in first quarter sales was anticipated, a
large portion of this decrease can be attributed to a slowdown precipitated by
the war in Iraq, delaying the shipment of certain large orders to the
mid-eastern region until the second quarter. The Company expects that the
shipment of these orders will improve second quarter revenues and believes that
third and fourth quarter sales will show a substantial increase.
GROSS MARGIN
Gross margin as a percentage of sales decreased by 4% from 50% to 46% in 2003.
Lower overall volume coupled with an increase in service revenue over equipment
sales accounted for the decrease.
AGENT COMMISSIONS
Agent commissions as a percentage of sales decreased slightly from 7.5% in the
first quarter of 2002 to 6.2% in the first quarter of 2003. Commissions
correlate directly with the level and type of equipment sales and vary in amount
by local jurisdiction.
OPERATING EXPENSES
Operating expenses as a percentage of sales increased compared to the same
period in the prior year. The lower overall sales base, caused in part by
shipment delays in the first quarter of 2003, resulted in a lower operating
expense to sales ratio. It is expected that operating expenses as a percentage
of sales will decrease in the second quarter of 2003, resulting in a level of
operating expenses commensurate with the expected lower sales in the first half
of 2003.
RESEARCH AND DEVELOPMENT EXPENSES
Gross research and development expenses on a comparable basis showed a slight
increase over 2002 levels. SR Telecom expects research and development expenses
to remain stable in the near term as the research expenditures related to the
addition of the new product lines acquired through asset purchases and
acquisitions continue.
FOREIGN EXCHANGE
The Company's trade receivables are almost exclusively in U.S. dollars and
Euros. 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 forecast in the Company's third quarter 2002 results, revenues for the first
quarter of 2003 were less than revenues in prior periods. The operating loss of
$5.1 million incurred in the current quarter is a direct result of decreased
revenues. The Company expects an improvement in operating earnings in the latter
half of the year and continues to focus on keeping costs in line with expected
revenues.
INCOME TAXES
SR Telecom's change in effective tax rates primarily reflects the changes in
geographic distribution of earnings mix.
BACKLOG
Continued global economic uncertainty and the protracted slowdown in the
telecommunications industry have affected the Company's order book. Backlog at
the end of the first quarter in 2003 stood at $65 million, all of which is
expected to be delivered in 2003, down from $82 million at the end of fiscal
2002. However, significant orders are expected to be generated from increased
activity in a number of the Company's traditional markets and from the
introduction of STRIDE2400, which should result in growth in the second half of
the year and annual revenues commensurate with 2002's levels.
TELECOM SERVICE PROVIDER BUSINESS SEGMENT (CTR)
The weakness in the global telecommunications industry and the financial
uncertainty surrounding the South American capital markets were largely
responsible for the Company not having received a reasonable offer for CTR. The
first quarter of 2003 has shown little improvement, and the Company believes it
unlikely that the sale of CTR will be accomplished in the short term.
REVENUES
The comparative yearly declines in revenue are due to a weak local economy,
resulting in a decrease in network traffic. Revenues have also been affected by
the decline in the value of the Chilean peso compared to the Canadian dollar.
OPERATING EXPENSES
Operating expenses excluding depreciation decreased by 12% over the same quarter
last year, reflecting the Company's efforts to increase EBITDA (earnings before
interest, taxes, depreciation and amortization) by reducing expenses at CTR, and
to maximize CTR's debt repayment contributions. The Company believes that
increased revenues from CTR's satellite operations and the v-sat based network
assets will aid in increasing this contribution.
OPERATING LOSS
Operating loss increased to $1.9 million for the quarter ended March 31, 2003,
compared to $1.3 million in 2002. The increased loss was due to the weakness in
revenues associated in part with the continued effects of the economic
instability on the Chilean economy.
INTEREST EXPENSE
Interest expense for the quarter ended March 31, 2003, has decreased from the
same period in 2002. The decline is due to a decrease in the general level of
interest rates and to the reduction in the amount of long-term debt outstanding.
FOREIGN EXCHANGE
The foreign exchange gain is a function of the effect of fluctuations in the
Canadian dollar, U.S. dollar and Chilean Peso on the assets and liabilities of
the company, especially the U.S. dollar denominated debt.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
($000's)
MARCH 31, 2003 DECEMBER 31, 2002
---------------- -----------------
Cash and short-term investments 26,869 41,933
Short-term accounts receivable 64,717 86,742
Inventory 38,813 34,445
Bank indebtedness 5,000 10,000
Accounts payable 50,337 58,125
Working capital 69,996 82,486
The Company's recent merger agreement with Netro is expected to significantly
improve its consolidated liquidity and capital resource position. Incremental
net cash resources in excess of $20 million from the acquisition will be used to
provide additional liquidity.
WORKING CAPITAL
The Company's working capital decreased by $12.5 million as a result of
increased collection efforts, the repayment of $5 million of the Company's
operating line of credit, $3 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 sales levels.
CASH AND SHORT-TERM INVESTMENTS
The consolidated cash and short-term investment position of $27 million compared
to $42 million as at December 31, 2002 is a result of debt repayments as well as
a reduction in the Company's accounts payable balance.
ACCOUNTS RECEIVABLE
The trade receivables decrease of $23 million over the quarter results from the
Company's constant collection efforts as well as decreased sales during the
quarter. The Company is currently in the process of completing arbitration
regarding the non-payment of a longstanding receivable. A ruling is expected in
2003. The results of the arbitration cannot be determined at this time.
INVENTORY
The increase in inventory of $4 million over the quarter was a function of the
delay in shipments to the middle eastern region until the second quarter. It is
anticipated that the inventory balance will be further reduced compared to the
year-end balance as these shipments are delivered in the second quarter of 2003.
This is a reflection of the Company's 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.
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. The Company intends to use the balance
of these assets prior to expiry either as an offset to future net income or
through other tax planning initiatives.
CAPITAL EXPENDITURES
Capital expenditures are being kept to the minimum level required to execute the
Company's business plan. CTR property, plant and equipment additions were $100
thousand, compared to $200 thousand in 2002 and relate principally to existing
network upgrades and enhancements. Wireless Products additions were $2 million,
related to the Mergy asset purchase in the first quarter of 2003 and the Nera
transaction in the first quarter of 2002 made up substantially all of that
quarter's capital expenditures.
BANK INDEBTEDNESS
During the quarter the Company's operating line of credit was renewed on more
favorable terms and conditions but at a reduced amount of $5,000,000.
LIABILITIES
Trade payables of $50.3 million are in line with the Company's current level of
operations.
LONG-TERM DEBT AND SHAREHOLDERS' EQUITY
($000's)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Debentures $ 75,000 $ 75,000
Long-term project financing $ 57,384 $ 64,760
Shareholders' equity $ 95,802 $102,326
The Company's debentures are unsecured and bear interest at 8.15%, payable
semi-annually.
The balance of the debentures are due in a bullet payment at maturity in April
2005. The Company intends to partially refinance this debt and expects to
generate sufficient cash flow by that time to repay a substantial portion of the
balance. The long-term project financing relates to outstanding notes with EDC
and IADB that are obligations of CTR. These notes are subject to a number of
performance, financial performance and financial position covenants, essentially
all of which have been waived until February 13, 2004. These covenants were
waived in previous years and the Company 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. The repayment terms of the
notes have been renegotiated as disclosed in note 8 to the annual audited
financial statements.
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. The Company has
also agreed to support CTR until the completion of the network and has agreed to
maintain the Company's initial equity investment in CTR. These lenders have been
provided with certain recourses against the Company which, in certain
circumstances, are limited to an aggregate amount of US $12 million. Additional
credit enhancements by the Company may be required, subject to approval by the
lenders. In certain limited circumstances, such as non-completion of the project
and failure by the Company to complete the project, full recourse to the Company
may be available.
The Company 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. Stock issued under the
first two programs totaled 244,398 (2002- 72,277) for cash consideration of
$157,000 (2002 - $141,000).
CASH FLOWS
Cash flows used in operations totaled $4.7 million in the first quarter of 2003,
compared to an inflow of $2.4 million in the first quarter of 2002. Projected
increases in sales levels in subsequent quarters should generate operating
income as well as positive operating cash flow.
Cash outflows from financing activities were $7.9 million for the quarter ended
March 31, 2003. The increase over the corresponding quarter in the prior year is
a function of the repayment of $5 million in the operating line of credit as
well as increased debt repayments during the period.
OUTLOOK
Pent up demand in the Company's traditional rural market, which forms the
majority of the Company's customer base, continues to build. These opportunities
tend to be less dependent on commercial financing and to be funded either by the
customer's internal cash flow or by export, development or multi-lateral
government financing institutions. Many multi-lateral agencies have been largely
absent from providing financing for telecommunications infrastructure programs
for several years but are now returning to the market. Governments are also
addressing universal service needs and requirements by means of re-regulation
and the introduction of direct and indirect subsidies. As a result, the Company
expects that many projects that were delayed or deferred will be restarted.
Some of the Company's traditional competitors are not as active or have exited
the rural market segment entirely. THE SWING product line was a major
competitive offering until its purchase by SR Telecom. The SWING brand will
continue to make a significant bottom line contribution and the addition of
Lucent's extensive customer base has dramatically increased SR Telecom's market
share for its more traditional product offerings.
The commercial release of STRIDE2400 in the first quarter of 2003 will allow the
Company to capitalize on the need for higher speed, bandwidth and enhanced
features in the US rural market. The Company expects to generate orders for this
product in the second half of 2003.
A key part of the Company's strategy for 2003 involves the continued
strengthening of its product portfolio through the acquisition of complementary
wireless access solutions or 'in progress' R&D development programs. The Company
believes that the weak state of the high technology industry presents certain
product acquisition opportunities. Where such opportunities are cost-effective
and represent a strategic fit they will be actively pursued. During the quarter,
the Company announced that it had reached an agreement to acquire certain assets
of Mergy Inc. This acquisition adds standards-based, high performance broadband
capabilities to the Company's portfolio of fixed wireless solutions. Further,
the acquisition of Netro will add the AirStar and next generation Angel product
lines to its portfolio.
There is still a great deal of uncertainty as to when the telecommunications
industry will begin its next phase of expansion. The Company anticipates that
revenues in the first half of 2003 will be lower than those realized in 2002.
However, significant orders are expected to be generated from increased activity
in a number of the Company's traditional markets and from the introduction of
new products, which should result in growth in the latter half of 2003.
At CTR, the integration of the satellite network with its core network
operations has been completed and the Company is focused on improving its
operational performance and in generating increased revenues, in part through
its high-speed Internet offerings.
RISKS AND UNCERTAINTIES
The majority of products are exported outside of North America to developing
countries. In these areas, governments have exercised and continue to exercise
influence over many aspects of the private sector. Political, economic or social
instability could materially adversely affect the provision and installation of
equipment. Although the Company currently carries political risk insurance
covering a limited number of the foregoing events for certain projects, there
can be no assurance that insurance proceeds received thereunder will cover all
losses or that such insurance will continue to be available on commercially
reasonable terms. Accordingly, the Company may have little or no recourse upon
the occurrence of any of these developments. In addition, some of the Company's
customers may be adversely affected by any severe currency fluctuations or
reductions in available credit due to international financial market
constraints.
The communications networks of the future are expected to combine packet,
circuit and other technologies in a unified manner. The Company's ability to
develop products and services or acquire technology to meet these new market
opportunities and customer needs is critical to its future success. The
development or acquisition of new technologically advanced products is a complex
and uncertain process requiring high levels of innovation, as well as the
accurate anticipation of technological and market trends.
It cannot be foreseen what technological changes will be introduced that may
impact CTR's infrastructure or the competitiveness of SR Telecom's current and
future product lines.
The Company has a substantial amount of indebtedness outstanding. The Company's
public indentures limit, but do not prohibit, the amount of indebtedness that
may be incurred. Since January 1 2001, the Company has been limited under its
trust indenture to the borrowing facilities it has currently outstanding.
Furthermore, these indentures limit, but do not prohibit, the incurrence of
certain other actions by the Company and its subsidiaries or its operating
companies.
The Company's operations are by nature capital intensive. The Company will
require continuing access to external financing to fund additional development
and acquisition opportunities, the retirement of maturing debt, working capital
needs, capital expenditures and other cash requirements. The failure to obtain
such additional financing could have a material adverse effect on the Company.
The Company's significant financial exposures relate to foreign currency
transactions, credit risk, and interest rate risk. The financial risk management
strategy is based on conservatism and reflects the Company's focus as an
equipment manufacturer and turnkey systems provider.
All foreign operations are classified as integrated with those of SR Telecom for
consolidation purposes so that any gains and losses on foreign exchange
translation are charged to income in the current year.
The Company has currency exposures arising from significant operations and
contracts in multiple jurisdictions. The Company has limited currency exposure
to freely tradable and liquid currencies of first world countries and
communities. Foreign currency exposures are evaluated regularly and, where
warranted, hedge mechanisms are placed to minimize the impact of market
fluctuations.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31ST
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
2003 2002
(UNAUDITED) (UNAUDITED)
---------------------------------- -----------------------------------
WIRELESS CONS. WIRELESS CONS.
PRODUCTS CTR PRODUCTS CTR
-------- ----- ------ -------- ----- ------
REVENUE 25,964 3,637 29,601 40,559 4,905 45,464
Cost of revenue 13,987 - 13,987 20,350 - 20,350
------- ------ ------ ------ ----- ------
GROSS MARGIN 11,977 3,637 15,614 20,209 4,905 25,114
Agent commissions 1,597 - 1,597 3,032 - 3,032
Operating expenses 10,123 5,515 15,638 10,141 6,179 16,320
Research and development expenses, net 5,379 - 5,379 5,016 - 5,016
-------- ------ ------ ------ ----- ------
OPERATING (LOSS) EARNINGS (5,122) (1,878) (7,000) 2,020 (1,274) 746
Interest expense 1,323 960 2,283 1,201 1,379 2,580
Loss (gain) on foreign exchange 4,383 (4,026) 357 373 (280) 93
-------- ------ ------ ------ ----- ------
(Loss) earnings before income taxes (10,828) 1,188 (9,640) 446 (2,373) (1,927)
Income tax (recovery) expense (2,959) - (2,959) 270 411 681
-------- ------ ------ ------ ----- ------
NET (LOSS) EARNINGS (7,869) 1,188 (6,681) 176 (2,784) (2,608)
======== ====== ====== ====== ====== ======
Weighted average number of common shares
outstanding 55,228 54,553
BASIC AND DILUTED NET (LOSS) EARNINGS PER SHARE (0.14) 0.02 (0.12) - (0.05) (0.05)
------ -----
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31ST,
(IN THOUSANDS OF DOLLARS)
2003 2002
(UNAUDITED) (UNAUDITED)
---------- -----------
BALANCE, 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 (6,681) (2,608)
------- -------
DEFICIT, END OF PERIOD (52,340) (27,382)
-------
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31ST, 2003 AND DECEMBER 31ST, 2002
(IN THOUSANDS OF DOLLARS)
2003 2002
--------- ---------
(UNAUDITED) (AUDITED)
ASSETS
Cash and cash equivalents 9,367 20,309
Short-term investments 17,502 21,624
Accounts receivable 57,850 79,352
Current portion of long-term accounts receivable 6,867 7,390
Income taxes receivable 2,156 1,645
Inventories 38,813 34,445
Prepaid expenses and deposits 3,393 3,126
Investment tax credits 2,400 2,400
------- -------
138,348 170,291
Investment tax credits long-term 16,803 15,908
Long-term accounts receivable 22,634 23,403
Property plant and equipment, net 90,989 91,268
Future income taxes 18,759 16,088
Other assets 3,388 3,847
------- -------
152,573 150,514
290,921 320,805
======= =======
LIABILITIES
Bank indebtedness 5,000 10,000
Accounts payable and accrued liabilities 50,337 58,125
Customer advances 7,003 10,054
Current portion of long-term debt 6,012 9,626
------- -------
68,352 87,805
Long-term debt 126,767 130,674
------- -------
195,119 218,479
SHAREHOLDERS' EQUITY
Capital stock 148,142 147,985
Deficit (52,340) (45,659)
------- -------
95,802 102,326
------- -------
290,921 320,805
======= ========
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS OF DOLLARS)
2003 2002
---------- ----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss (6,681) (2,608)
Items not affecting cash and cash equivalents
Depreciation and amortization 3,137 3,809
Loss on disposal of property plant and equipment - 29
Future income taxes (2,671) 922
Unrealized foreign exchange (4,428) 37
------- -------
(10,643) 2,189
Decrease in long-term accounts receivable 769 323
Decrease (increase) in non-cash working capital items 5,145 (77)
------ -------
(4,729) 2,435
FINANCING ACTIVITIES
Repayment of bank indebtedness (5,000) -
Increase in long term debt - 1,105
Repayment of long-term debt (3,093) (2,554)
Proceeds from issue of shares 157 141
------ -------
(7,936) (1,308)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,399) (665)
Sale of short-term investments 4,122 -
Other assets - 6
------ ------
1,723 (659)
(Decrease) increase in cash and cash equivalents (10,942) 468
Cash and cash equivalents, beginning of period 20,309 20,376
CASH AND CASH EQUIVALENTS, END OF PERIOD 9,367 20,844
======= =======
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTERS ENDED MARCH 31ST, 2003 AND 2002
1. SIGNIFICANT ACCOUNTING POLICIES
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.
In the opinion of the Company, the unaudited quarterly consolidated financial
statements have been prepared on a basis consistent with the audited annual
consolidated financial statements, and contain all adjustments necessary for a
fair presentation of the financial position as at March 31, 2003, and the
results of operations and cash flows for the periods ended March 31, 2003 and
2002.
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. CAPITAL STOCK
An unlimited number of common shares and preferred shares issuable in series are
authorized.
March 31, 2003
--------------
(000's)
Issued and outstanding
55,472,380 common shares $148,142
Common shares totaling 244,398 were issued during the period under the Employee
Stock Purchase Plan and the Directors' Share Compensation Plan for cash
consideration of $157,000. In the first quarter of 2002, 72,277 shares were
issued for cash consideration of $141,000.
The following table summarizes information about the Company's outstanding stock
options at March 31, 2003:
Weighted
Weighted average
Range of average remaining
exercise Options exercise contractual
prices outstanding prices life
------------- ---------------- -------- ----------------
$ 1 to 3
2,062,500 $1.68 8.8 years
$ 4 to 6 938,600 $5.11 6.9 years
$ 7 and over 283,000 $9.30 6.3 years
------------ --------- ----- ---------
3,284,100 $3.32 8.0 years
--------- ----- ---------
Options exercisable at March 31, 2003, amount to 921,220 at a weighted average
exercise price of $5.16.
4. STOCK BASED COMPENSATION PLANS
Effective January 1, 2002, the Company adopted the new CICA recommendations
relating to stock-based compensation and other stock-based payments. The Company
has applied this change prospectively for new awards granted on or after January
1, 2002. The Company 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 are 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 Company's stock and the fair value of stock options
are to be determined using the Black-Scholes option pricing model. In periods
prior to January 1, 2002, the Company 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 Company had accounted for its
employee stock options granted after December 31, 2001 under the fair value
method. The fair value of these options is to be 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 Company'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, and for the three months ended March
31, 2003, the Company's pro forma net loss and net loss per share would have
increased by $48,000 to $6,729,000 and be unchanged at $0.12 respectively for
the three-month period ended March 31, 2003. For the three months ended March
31, 2002, the effect would have been immaterial. These pro forma amounts include
a compensation cost based on weighted-average grant date fair value of $0.91 per
stock option for the 1,030,000 stock options granted during 2002, 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 Company 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
BALANCE SHEETS $ $ $ $ $ $ $ $
Property, plant and
equipment 20,010 20,128 90,246 98,094 (19,267) (16,246) 90,989 101,976
Other assets 1,733 1,840 6,385 7,091 (4,730) (3,818) 3,388 5,113
Total assets 267,664 290,414 225,230 236,902 (201,973) (194,156) 290,921 333,160
STATEMENTS OF EARNINGS
External revenues 25,964 40,559 3,637 4,905 - - 29,601 45,464
Gross Margin 11,977 20,209 3,637 4,905 - - 15,614 25,114
Interest expense, net 1,323 1,201 960 1,379 - - 2,283 2,580
Depreciation of property,
plant and equipment 965 1,131 1,951 2,394 (238) (238) 2,678 3,287
Amortization of other assets 97 125 157 161 205 236 459 522
Income tax recovery (expense) 2,959 (270) - (411) - - 2,959 (681)
NET (LOSS) EARNINGS (7,869) 176 1,188 (2,784) - - (6,681) (2,608)
14
Export sales were 98% of revenues for the period ended March 31, 2003, and
approximately 100% for the period ended March 31, 2002.
Substantially all of the Company's capital assets are located in Canada and
Chile. Telecommunication service revenues are generated entirely in Chile.
As at March 31, 2003, two customers of the Company represented approximately
32.1% of revenue. At March 31, 2002, two customers represented 32.5% of revenue.
6. ACQUISITION OF NETRO CORPORATION
On March 27, 2003, the Company announced that it entered into a definitive
agreement and plan of merger with Netro Corporation ("Netro") pursuant to which
it will acquire Netro. Pursuant to the merger, the Company will issue, directly
or indirectly, 41,500,000 common shares, in exchange for all the issued and
outstanding common shares 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 shareholders.
The transaction is subject to certain conditions, including regulatory and Netro
shareholders' approval.
7. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted the new CICA accounting guideline
14, "Disclosure of Guarantees": The Company has determined that no additional
disclosures are necessary with respect to this guideline.
8. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the basis of
presentation adopted in the current period.