SR Telecom Posts $30.7M Loss

SR Telecom reports $30.7M net loss, up from a $23.4M loss in 2Q04; company seeks to reposition itself

August 11, 2005

7 Min Read

MONTREAL -- SR Telecom Inc. (TSX: SRX, NASDAQ: SRXA) today reported its results for thesecond quarter and first six months of fiscal 2005 ended June 30, 2005.

The second quarter of 2005 was challenging for SR Telecom. There was further erosion of its operating results, and theCorporation was forced to seek additional liquidity and negotiate a balance sheet restructuring. Manufacturing anddelivery of finished products was hampered by procurement issues and the resulting effect on revenues, profits andcashflow is evident in the results released today.

Interim President and CEO William E. Aziz said that, “It is obvious that there is a need for change at SR Telecom. Duringthe coming weeks, we will be defining the new business proposition that the company will use as it is re-positioned forfuture success in the wireless infrastructure, equipment and application markets. SR Telecom has a strong history ofsuccessful deployment and significant intellectual properties that will act as catalysts for continued development,commercialization and deployment of our WiMAX and WiMAX-ready products.”

Consolidated Second Quarter Results

Consolidated revenue for the second quarter of fiscal 2005 totalled $17.7 million, compared to $36.6 million in the secondquarter of fiscal 2004. The consolidated operating loss for the second quarter of fiscal 2005 was $27.7 million, comparedto an operating loss of $21.0 million in the same period in 2004. The consolidated net loss for the second quarter of 2005was $30.7 million, compared to a consolidated net loss of $23.4 million in the corresponding period in 2004.

For the six-month period of fiscal 2005, consolidated revenue was $35.6 million, compared to $62.8 million in the first sixmonths of fiscal 2004. The consolidated operating loss for the first half of fiscal 2005 reached $38.4 million, compared to$34.6 million in the same period in fiscal 2004. The consolidated net loss for the first half of fiscal 2005 totalled$44.4 million, compared to a consolidated net loss $40.3 million in the prior period.

The decrease in revenue in the second quarter of 2005 compared to the second quarter of 2004 is primarily a result ofdelays in finalizing the credit facility, announced on May 24, 2005, as well as the effects of reduced supplier credit and aproduction slow-down at the beginning of the quarter, and timing issues related to the delivery of equipment.

As part of its restructuring efforts, during the second quarter of 2005 management undertook a review of certain aspectsof its operations and decided that it would manufacture discontinue certain product lines, no longer support prior versionsof certain products and change its approach to repairs. As a result, inventory comprised mostly of raw materials and repairstock in the amount of $19.8 million, offset by an inventory provision of $3.3 million, was written off or written down to itsestimated net realizable value. The inventory affected was located primarily in Canada and in France.

Core Wireless Solutions SegmentSecond quarter revenue in SR Telecom’s core wireless solutions business was $13.0 million, compared to $31.6 millionreported during the same period in 2004. The net loss for the second quarter of fiscal 2005 totalled $28.4 million,compared to a $21.4 million net loss in the corresponding period last year. For the first six months of fiscal 2005, revenuein the core wireless solutions business was $25.7 million, compared to $53.2 million in the same period in fiscal 2004. Thenet loss for the first half of fiscal 2005 totalled $41.3 million, compared to a net loss of $36.5 million in the prior period.Selling, general and administrative (SG&A) expenses in the core wireless business segment decreased to $9.6 million forthe second quarter of 2005, compared to $12.1 million for the same period in 2004. For the six-month period of fiscal2005, SG&A expenses decreased to $19.5 million, versus $25.3 million in the first six months of fiscal 2004. Thedecreases were primarily due to the effects of the restructuring that was implemented in the second and third quarters of2004.

As previously indicated, the Corporation has consolidated its research and development facilities. Principally as a result ofthis consolidation and lower activity levels, research and development expenses in the core wireless business decreasedfrom $7.5 million in the second quarter of 2004 to $3.0 million in the second quarter of 2005. For the first half of fiscal2005, R&D expenses were reduced to $6.5 million, compared to $14.8 million in the corresponding period in fiscal 2004.The decreases were also attributable to the restructuring initiative that was implemented by the Corporation in 2004.

Telecommunications Service Provider Segment (CTR)

The Corporation’s Chilean service provider, CTR, experienced a decrease in revenue to $4.7 million for the three monthsended June 30, 2005, from $5.0 million for the three months ended June 30, 2004. Net revenue in Chilean peso termswas 2,212 million pesos for the second quarter of 2005 and 2,339 million pesos for the second quarter of 2004, adecrease of 127 million pesos or 5%. The decrease is attributable to lower traffic than anticipated due to poor weatherconditions in comparison to the same period in 2004 and an unfavourable change in the mix of access charges relating tohigher-cost prepaid and long-distance traffic.

For the first six months of fiscal 2005, CTR revenue increased to $9.9 million, up from the $9.6 million reported for the sixmonths of 2004. Net revenue in Chilean peso terms was 4,620 million pesos for the first half of 2005 and 4,415 millionpesos for the first half of 2004, an increase of 205 million pesos or 5%. The increase is attributable to the new accesstariffs approved by the Chilean regulator, Subtel, which took effect March 1, 2004 as well as the roll out of the new urbaninitiative, net of the changes for the quarter ended June 30, 2005 described above.

The CTR operating loss totalled $1.3 million in the second quarter of fiscal 2005, compared to operating earnings of$279,000 in the same period last year. The loss is the result of an increase to $6.0 million in operating expenses for thequarter, from $4.8 million for the three months ended June 30, 2004. The increase is primarily due to professional andlegal fees of approximately $1.0 million related to the renegotiation of the CTR loans, which were extended for a period ofthree years. The net loss for the second quarter of 2005 was $2.2 million, compared to a net loss of $2.0 million in thecorresponding period in 2004.

For the first half of fiscal 2005, the CTR operating loss totalled $910,000, compared to operating earnings of $20,000 inthe corresponding period in 2004. The CTR net loss for the first half of fiscal 2005 decreased to $3.1 million, compared toa net loss of $3.7 million in the same period in 2004.

Financial Position

The Corporation’s consolidated cash, including short-term and long-term restricted cash, increased to $7.7 million atJune 30, 2005, compared to $6.4 million at December 31, 2004. On May 19, 2005, an agreement was reached with thedebenture holders to provide up to $50.0 million (US$39.6 million) five-year secured credit facility. An amount of up to$20.0 million (US$15.85 million) was made available to the Corporation upon closing of the Agreement, of which$12.1 million (US$9.85 million) was drawn as at June 30, 2005. The remainder of the facility will be provided over the nextthree quarters, subject to approval of budgets and financial covenants when finalized with the lenders.

Further, the Corporation and the debenture holders have also agreed to exchange $71.0 million of the outstandingdebentures and approximately $3.5 million of accrued interest into new 10% Convertible Redeemable SecuredDebentures due October 15, 2011, convertible into common shares at a conversion price of $0.21 per common share.

Following the debenture exchange, the Corporation intends to file a preliminary prospectus relating to a rights offering toexisting shareholders to subscribe for new common shares, subject to market conditions.

Pursuant to the refinancing arrangements in place in relation to the credit facility, the debenture exchange and thepotential rights offering, SR Telecom should have sufficient cash and cash equivalents, short-term investments, and cashfrom operations going forward to satisfy its working capital requirements and continue operations as a going concern forthe next twelve months. There can, however, be no assurance that such plans as described above will result in sufficientfunds.

Outlook

“At this time, it would be inappropriate to provide detailed guidance on the business plans for the changes needed to turnaround the results of operations,” Mr. Aziz said. “However, it is my expectation that all of our resources will be focused onbecoming self-sustaining and bringing products to market that will be best in class for performance and scalability. Thiswill enable our customers to continue to make large scale deployments in many diverse markets. We expect that revenuein the third quarter will increase significantly in comparison to the current quarter of 2005, as our supplier issues havebeen resolved and production of our order backlog is underway.”

SR Telecom Inc.

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