UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 6-K
Report of Foreign issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
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For the Month of November 2003
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(Commission File. No 0-30718).
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SIERRA WIRELESS, INC., A CANADA CORPORATION
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(Translation of registrant's name in English)
13811 Wireless Way
Richmond, British Columbia, Canada V6V 3A4
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(Address of principal executive offices and zip code)
Registrant's Telephone Number, including area code: 604-231-1100
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Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F:
Form 20-F X 40-F
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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
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AIRPRIME, INC.
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001 AND
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
AirPrime, Inc.
We have audited the accompanying balance sheets of AirPrime, Inc. (the
"Company") as of December 31, 2002 and 2001, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2002 and 2001,
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Deloitte & Touche LLP
May 28, 2003
AIRPRIME, INC.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 2,037 $ 9,102
Restricted cash 1,000 3,200
Accounts receivable 1,957 4,362
Inventory 803 669
Other current assets 145 283
-------- -------
Total current assets 5,942 17,616
PROPERTY AND EQUIPMENT--Net 2,548 3,567
RESTRICTED CASH 313
OTHER ASSETS 2,790 175
INTANGIBLE ASSETS--Net 369
-------- -------
TOTAL $ 11,649 $21,671
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,706 $ 4,009
Other current liabilities 2,199 4,194
Deferred revenue 1,185
-------- --------
Total current liabilities 6,090 8,203
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CONVERTIBLE SUBORDINATED NOTES PAYABLE 4,410
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DEFERRED RENT 55
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COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value--
71,564,550 shares authorized in 2001, none in 2002:
Series A, 360,000 shares authorized, issued
and outstanding in 2001, none in 2002 3,738
Series B, 550,000 shares authorized, issued
and outstanding in 2001, none in 2002 17,568
Series C, 60,348,900 shares authorized in 2001,
none in 2002--30,480,746 shares issued and
outstanding in 2001, none in 2002 (aggregate
liquidation value of $87,197,807) 41,239
Series C-1, 10,305,650 shares authorized in
2001, none in 2002; 6,398,998 shares issued and
outstanding in 2001, none in 2002 (aggregate
liquidation value of $18,872,380) 18,872
Common stock, no par value--100,000,000 shares
authorized; 3,561,184 shares issued and outstanding
in 2001, none in 2002 2,184
Junior common, $0.00001 par value--450,000 shares
authorized; 19,759 shares issued and outstanding
in 2002, none in 2001
Additional paid-in capital 89,057
Accumulated deficit (87,908) (70,188)
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Total shareholders' equity 1,149 13,413
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TOTAL $ 11,649 $ 21,671
======== ========
See notes to financial statements.
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AIRPRIME, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS)
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2002 2001
NET REVENUES $ 19,152 $ 6,210
COST OF REVENUES 13,055 8,206
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GROSS PROFIT (LOSS) 6,097 (1,996)
-------- ---------
OPERATING EXPENSES:
Research and development 13,115 15,263
General and administrative 6,776 14,127
Selling and marketing 2,472 3,821
Loss on disposal of assets 2 364
Impairment of license agreements (Note 4) 4,389
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Total operating expenses 22,365 37,964
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OPERATING LOSS (16,268) (39,960)
INTEREST EXPENSE (583) (1,748)
INTEREST INCOME 130 334
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NET LOSS (16,721) (41,374)
DIVIDENDS ON PREFERRED STOCK (999) (3,226)
-------- ---------
NET LOSS ALLOCABLE TO COMMON SHAREHOLDERS $(17,720) $(44,600)
========= =========
See notes to financial statements.
- 3 -
AIRPRIME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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PREFERRED STOCK
---------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES C-1
-------------------- --------------------- --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
BALANCES, JANUARY 1, 2001 360,000 $ 3,570 550,000 $ 16,579 -- $ -- -- $ --
Conversion of notes payable to
Series C-1 preferred stock at
$2.90 per share 6,398,998 18,260
Issuance of Series C preferred
stock--net of issuance costs
of $3,302, in August 2001 at
$1.40 per share 30,480,746 39,782
Dividends on preferred stock 168 989 1,457 612
Exercise of stock options
Exercise of warrants
Common stock and restricted
stock issued for services
Repurchase of common stock
Restricted stock issued to
employees
Adjustment of restricted stock
Remeasurement of stock options
granted to nonemployees for
services
Amortization of deferred stock
compensation
Issuance of warrants to purchase
common stock in connection with
convertible subordinated notes
payable
Issuance of warrants to purchase
common stock for services
Net loss
----------- --------- -------- -------- ----------- -------- ---------- -------
BALANCES, DECEMBER 31, 2001 360,000 3,738 550,000 17,568 30,480,746 41,239 6,398,998 18,872
Issuance of Series C preferred
stock, net of issuance costs of
$169, in January and February 2002
at $1.43 per share 1,674,386 2,226
Restricted stock issued to employees
Exercise of stock options
Dividends on preferred stock 726 273
Dividends converted to Junior
Common Stock 1,526,447 295,574
Cancelled shares for legal
settlement (413,340)
Conversion to Junior Common
Stock (Note 7) (360,000) (3,738) (550,000) (17,568) (33,681,579) (44,191) (6,281,232) (19,145)
Issuance of warrants
Net loss
----------- --------- -------- -------- ----------- -------- ---------- -------
BALANCES, DECEMBER 31, 2002 -- $ -- -- $ -- -- $ -- -- $ --
=========== ========= ======== ======== =========== ======== ========== =======
(Continued)
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AIRPRIME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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DEFERRED
COMMON STOCK JUNIOR COMMON STOCK ADDITIONAL STOCK
------------------- ------------------- PAID-IN COMPEN- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT TOTAL
BALANCES, JANUARY 1, 2001 425,223 $ 1,933 -- $ -- $ -- $(599) $(25,588) $ (4,105)
Conversion of notes payable to
Series C-1 preferred stock at
$2.90 per share 18,260
Issuance of Series C preferred stock--
net of issuance costs of $3,302 in
August 2001 at $1.40 per share 39,782
Dividends on preferred stock (3,226)
Exercise of stock options 8,613 44 44
Exercise of warrants 3,228,142 23 23
Common stock and restricted stock issued
for services 500 6 6
Repurchase of common stock (1,694) (21) (21)
Restricted stock issued to employees 1,400 13 13
Adjustment of restricted stock (101,000) (642) 519 (123)
Remeasurement of stock options granted to
nonemployees for services (100) 100
Amortization of deferred stock
compensation (20) (20)
Issuance of warrants to purchase common
stock in connection with convertible
subordinated notes payable 832 832
Issuance of warrants to purchase common
stock for services 96 96
Net loss (41,374) (41,374)
----------- -------- ------ ------ ------- ---- -------- --------
BALANCES, DECEMBER 31, 2001 3,561,184 2,184 -- -- -- -- (70,188) 13,413
Issuance of Series C preferred stock,
net of issuance costs of $169, in
January and February 2002 at
$1.43 per share 2,226
Restricted stock issued to
employees 74,656 15 15
Exercise of stock options 4,890 1 1
Dividends on preferred stock (999)
Dividends converted to Junior
Common Stock
Cancelled shares for legal
settlement
Conversion to Junior Common
Stock (Note 7) (3,640,730) (2,200) 19,759 $86,842
Issuance of warrants 2,215 2,215
Net loss (16,721) (16,721)
----------- -------- ------ ------ ------- ---- -------- --------
BALANCES, DECEMBER 31, 2002 -- $ -- 19,759 $ -- $89,057 $-- $(87,908) $ 1,149
=========== ======== ====== ====== ======= ==== ======== ========
(Concluded)
See notes to financial statements.
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AIRPRIME, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,721) $(41,374)
Reconciliation of net loss to net cash used in
operating activities:
Impairment of license agreement 4,389
Depreciation and amortization 2,125 2,216
Loss on disposal of assets 2 364
Series C preferred stock issued for services 20 2,085
Common stock warrants issued for services 96
Common stock issued for services 15 19
Adjustment of restricted stock (123)
Noncash interest expense 456 680
Amortization of deferred stock compensation (20)
Change in assets and liabilities:
Accounts receivable 2,405 (4,362)
Inventory (134) (669)
Other current assets 138 115
Other assets (523) 1,451
Accounts payable (1,303) (786)
Other liabilities (959) 2,865
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Net cash used in operating activities (14,479) (33,054)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases (1,082) (2,593)
Purchase of intangible asset (395)
Restricted cash 2,513 (1,800)
Sale of short-term investments 3,684
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Net cash provided by (used in) investing
activities 1,036 (709)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock--net 2,206 28,038
Proceeds from issuance of common stock 1 44
Proceeds from exercise of warrants 23
Repurchase of common stock (21)
Proceeds from borrowings 4,171 9,000
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Net cash provided by financing activities 6,378 37,084
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INCREASE IN CASH AND CASH EQUIVALENTS (7,065) 3,321
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,102 5,781
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,037 $ 9,102
======== ========
(Continued)
- 6 -
AIRPRIME, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
2002 2001
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--Cash paid for interest $ $
========== =========
SUPPLEMENTAL DISCLOSURES OF INVESTMENT AND
FINANCING ACTIVITIES:
Preferred stock dividends $ 999 $ 3,226
========== =========
Common stock warrants issued to non-employees
in connection with notes payable $ 2,215 $ 832
========== =========
Notes payable issued to pay financing costs $ 239 $
========== =========
Notes payable and accrued interest converted
to Series C -1 preferred stock, net of
warrants cancelled $ $ 18,261
========== =========
Notes payable and accrued interest converted
to Series C preferred stock, net of warrants
cancelled $ $ 4,583
========== =========
License payable converted to Series C
preferred stock $ $ 5,075
========== =========
(Concluded)
See notes to financial statements.
- 7 -
AIRPRIME, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AirPrime, Inc. (the "Company") develops high-speed CDMA wireless voice and
data access solutions for the OEM marketplace. The Company's focus is on
the development of wireless CDMA modules and software for OEMs that enable
faster wireless transmission of data and voice across worldwide cellular
and PCS networks. The Company's products deliver content and services to
devices such as handheld computers, notebook computers and Internet
appliances. The Company was incorporated in California on May 24, 1999
(inception) and later reincorporated as a Delaware Corporation on August
30, 2002 (see Note 7).
From inception to August 2001, the Company was in the development stage
and its efforts were directed toward the research and development of its
products. In September 2001, the Company commenced its planned principal
operations.
The Company participates in a dynamic high technology industry and
believes that its ability to commence its planned principal operations
and, ultimately, to obtain profitability, could be affected by, among
other items: its ability to obtain additional financing, advances and
trends in new technologies and industry standards; competitive pressures
in the form of new products or services; customer acceptance and overall
demand for products or services offered by the Company; changes in key
suppliers; changes in certain strategic relationships or customer
relationships; litigation or claims against the Company based on
intellectual property, patent, product, regulatory or other factors; and
the Company's ability to attract and retain employees necessary to support
its growth.
GOING CONCERN--The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As shown
in the financial statements, the Company has incurred recurring net
losses, including $16,721 and $41,374 in the years ended December 31, 2002
and 2001, respectively. This, among other factors, may indicate that the
Company will be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to obtain
additional financing or refinancing as may be required to sustain it until
it generates adequate revenues and cash flows through its operations.
Management is currently in the process of seeking sources of such
financing.
SIGNIFICANT ESTIMATES--The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
- 8 -
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months or less to
be cash equivalents. The Company's cash equivalents are maintained with
high quality credit institutions and their recorded cost approximates
their fair market value.
RESTRICTED CASH--Restricted cash consists of a certificate of deposit that
is collateral for a letter of credit required by the company's contract
manufacturer.
INVENTORY--Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. During 2001 the Company
recorded a write-down of inventory of $2,488 and a loss on purchase
commitments of $889, respectively, which are included in cost of revenues.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost and are
depreciated over their estimated useful lives of two to seven years using
the straight-line method. Leasehold improvements are depreciated over the
lesser of the useful life or the lease term.
INTANGIBLE ASSETS--Intangible assets consists of software license
agreements that are stated at cost and are amortized over their estimated
useful life of five years using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company assesses potential
impairments to its long-lived assets when there is evidence that events or
changes in circumstances have made recovery of the asset's carrying value
unlikely and the carrying amount of the asset exceeds the estimated future
undiscounted cash flows. When the carrying amount of the asset exceeds the
estimated future undiscounted cash flows, an impairment loss is recognized
to reduce the asset's carrying amount to its estimated fair value based on
the present value of the estimated future cash flows.
INCOME TAXES--The Company accounts for income taxes using an asset and
liability approach. Deferred tax assets are recognized for future
deductions and operating loss carryforwards, net of a valuation allowance
to reduce net deferred tax assets to amounts that are more likely than not
to be realized.
REVENUE RECOGNITION-- The Company generates revenue from product sales and
product development arrangements. Revenue from product sales are
recognized upon shipment. Payments received for product development may
include non-refundable fees at the inception of the contract and
non-refundable milestone payments for specific achievements designated in
the product development phase. Revenue from performance milestones is
recognized upon the achievement of the milestones as specified in the
respective agreement provided payment is proportionate to the effort
expended. Payments received in advance of performance of any services are
recorded as deferred revenue and subsequently recognized over the period
of performance.
RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred.
STOCK-BASED COMPENSATION--The Company accounts for employee stock-based
compensation using the intrinsic value method for each period presented
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
No compensation cost is reflected in net income for options granted to
employees, as all options granted under those plans had an exercise price
equal to the fair market value of the underlying common stock
- 9 -
on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123:
YEAR ENDED DECEMBER 31,
2002 2001
------------------------
(IN THOUSANDS)
Net loss, as reported $(16,721) $(41,374)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effect (504) (378)
------- --------
Pro forma net loss $(17,225) $(41,752)
======== =========
The Company accounts for equity instruments issued to nonemployees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task
Force Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED
TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING,
GOODS OR SERVICES, which requires that the fair value of such instruments
be recognized as an expense over the period in which the related services
are received.
COMPREHENSIVE LOSS--Financial Accounting Standards Board ("FASB")
Statement No. 130, REPORTING COMPREHENSIVE INCOME, requires that an
enterprise report, by major components and as a single total, the change
in its net assets from nonowner sources. For all periods presented,
comprehensive loss was equal to the Company's net loss.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
cash and cash equivalents and accounts receivable. Cash and cash
equivalents consist of cash in bank accounts, money market accounts and
certificates of deposit maintained with high-credit quality financial
institutions. The Company generally does not require its customers to
provide collateral to support accounts receivable. To reduce credit risk,
management performs ongoing credit evaluations of its customers' financial
condition.
For the year ended December 31, 2002, one customer represented over 85% of
net revenues and over 87% of accounts receivable. For the year ended
December 31, 2001, one customer represented 99% of net revenues and 96% of
accounts receivable.
STOCK SPLIT--During January 2002, the Company effected a 10-for-1 reverse
stock split. The accompanying financial statements are presented to
reflect the split for all periods presented.
RECLASSIFICATIONS--Certain 2001 amounts have been reclassified to conform
to the 2002 financial statement presentation.
- 10 -
2. PROPERTY AND EQUIPMENT
Property and equipment consists of at December 31:
2002 2001
Equipment $ 4,707 $ 3,743
Computer equipment and software 1,869 1,774
Furniture and fixtures 11 11
Leasehold improvements 55 36
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6,642 5,564
Accumulated depreciation (4,094) (1,997)
------- -------
Property and equipment--net $ 2,548 $ 3,567
======= =======
3. OTHER CURRENT LIABILITIES
Other current liabilities consist of at December 31:
2002 2001
Accrued compensation and related benefits $ 827 $ 1,529
Inventory purchase commitment accrual 954
Legal accrual 600
Other current liabilities 1,372 1,111
------- -------
Total other current liabilities $ 2,199 $ 4,194
======= =======
4. LICENSE AGREEMENTS
During fiscal year 2001, the Company identified certain conditions,
including a continued decrease in average selling prices, an increase in
competition and continued volatility in the OEM industry as indicators of
asset impairment related to the license agreements. These conditions led
to operating results and forecasted future results that were substantially
less favorable than had been previously anticipated. In accordance with
the Company's policy, management assessed the recoverability of its
intangible assets using undiscounted cash flow projections. Based on these
projections, the Company concluded that an impairment existed, which
resulted in a write-off of all license agreements of $4,389.
On August 31, 2001, a license fee payable of $5,000 and a related late fee
of $75 were converted into 3,548,020 shares of Series C convertible
preferred stock.
5. CONVERTIBLE NOTES PAYABLE
BRIDGE I AND II--During 2000, the Company entered into a convertible
subordinated note payable agreement to borrow up to $15,000. These notes
bore interest at 9% per annum and accrued and unpaid interest was
approximately $249 at December 31, 2000. During 2001, the Company borrowed
an additional $4,000 under this agreement. On August 31, 2001, all
principal and accrued interest of $17,086 and $1,220, respectively,
converted to Series C-1 convertible preferred stock.
On November 28, 2001, five non-consenting holders of Bridge I notes filed
suit against the Company alleging breach of contract, securities fraud and
conversion (the "Bridge I lawsuit"). The plaintiffs allege that as part of
the Bridge I financing, the five plaintiffs invested a total of $1,096 in
the Company,
- 11 -
which in turn issued convertible notes entitling them to Series C
preferred stock upon the completion of the Company's Series C preferred
stock financing. They further allege that on or about July 2001, the
Company sought their consent to modify the terms of the Bridge I notes to
provide that Bridge I noteholders would convert their notes into Series
C-1 preferred stock, instead of Series C preferred stock, to which the
plaintiffs were allegedly entitled under the terms of their Bridge I
notes. The plaintiffs allege they have not consented to modify the terms
of their notes. The Company issued notices to the plaintiffs that, as of
August 31, 2001, the principal and accrued interest of their notes
automatically converted into that number of Series C-1 preferred stock
equal to the sum of the principal and accrued interest divided by the
price per share of that stock. The plaintiffs sought damages in the amount
of $1,096 plus interest at a rate of 9% per annum, or, in the alternative
rescission of their notes, punitive damages, costs, and attorneys' fees.
On July 24, 2002, the Company reached a settlement on the Bridge I lawsuit
under which the Company's insurance carrier paid the plaintiffs $1,274,
representing the unpaid principal balance and accrued interest on the
Bridge I notes. The settlement also specified that the plaintiffs will
have no further rights under the Bridge I financing agreement to acquire
Series C or C-1 preferred stocks; the related C-1 shares were canceled.
In connection with the above financing agreement, the Company issued
warrants to purchase common stock of the Company at $30.00 per share. The
total number of shares of the Company's common stock eligible for purchase
under these warrants is equal to 25% of the total principal borrowed
divided by the Series C preferred stock issuance price. The warrants are
exercisable for a period of five years unless there is a change in
control, as defined in the agreement, or an initial public offering by the
Company with gross proceeds received in excess of $50,000. In the event of
a change in control or an initial public offering, the holders will have
15 days to exercise their warrants.
The Company has estimated the value of these warrants to be $545 using the
Black-Scholes pricing method and the following assumptions: risk-free
interest rate of 7%; no dividends during the term; volatility of 70%;
218,100 shares of common stock and a contractual life of five years.
The value of the warrants was amortized over the one-year term of the
notes as additional interest expense through August 31, 2001. Related
interest expense for 2001 was $364. On August 31, 2001, in connection with
the Series C purchase agreement, the warrants were canceled and the
unamortized discount of $45 was recorded as a cost of issuance of the
Series C-1 convertible preferred stock.
BRIDGE III--On May 25, 2001, the Company entered into a convertible
subordinated note payable agreement to borrow up to $3,500. On June 28,
2001, the Company amended the Agreement to borrow up to $5,000. On August
31, 2001, all principal and accrued interest of $5,000 and $99,
respectively, converted to Series C convertible preferred stock.
In connection with the above financing agreement, the Company issued
warrants to purchase 4,159,748 shares of common stock at $0.001 per share.
The warrants are exercisable for a period of seven years. The Company has
estimated the value of these warrants to be $832 using the Black-Scholes
pricing model and the following assumptions: risk-free interest rate of
5%; no dividends during the term; volatility of 70% and a contractual life
of seven years. The value of the warrant was amortized based on the
December 31, 2001 due date as additional interest expense through August
31, 2001. Related interest expense for 2001 was $316. On August 31, 2001,
in connection with the Series C purchase agreement, the warrants were
canceled and the unamortized discount of $516 was recorded as a cost of
issuance of the Series C convertible preferred stock.
- 12 -
CONVERTIBLE NOTES PAYABLE--On August 30, 2002 the Company entered into a
convertible note payable agreement to borrow up to $6,204 (the Debt
Financing) (the Convertible Notes), which was to be funded in three
separate issuances and mature on December 31, 2004. These notes bear
interest at 8% per annum and accrued and unpaid interest was approximately
$98 at December 31, 2002. As of December 31, 2002, two of the 3 issuances
totaling $4,171 were funded. The Convertible Notes are mandatorily
convertible into Series B Preferred stock for $19.226 per share in the
event of an initial public offering (IPO) with aggregate gross cash
proceeds of at least $25,000 and a preoffering market capitalization of
$50,000 (a Qualified IPO) or at the election of the holders of at least
66-1/3% of the principal amount of the then outstanding Convertible Notes.
In connection with the Debt Financing, the Company issued warrants to
purchase 199,959 shares of Series A Preferred Stock (Series A Stock) stock
at $0.0001 per share which were issued as part of the first two Debt
Financing tranches in 2002. Warrants for 25,170 shares of Series A Stock
were also granted to certain holders of the Company's Series C Preferred
Stock in consideration for their consent to the Debt Financing (the
Warrants).
WARRANTS--The Warrants expire at the earlier of a Qualified IPO or
December 31, 2004. The Company has estimated the value of these warrants
to be $2,133 using the Black-Scholes pricing model and the following
assumptions: risk-free interest rate of 3.4%; no dividends during the
term; volatility of 70% and a contractual life of 2.34 years.
In connection with the first two tranches of the Debt Financing, the
Company issued $239 in Convertible Notes with a warrant to purchase 1,616
shares of Series A Stock, with the same terms as the Warrants described
above, for services performed in facilitating the Debt Financing. The
Company has estimated the value of these warrants to be $82 using the same
variables as for the Warrants described above.
The fair value of the warrants is a financing cost of the Debt Financing,
is included in other assets in the accompanying balance sheet and will be
amortized to interest expense over the life of the Convertible Notes.
6. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases its facility under a noncancelable operating
lease, which expires on July 31, 2003. In August 2002, the Company
terminated a facility lease resulting in an agreement to pay $652. As of
December 31, 2002, $150 of this obligation remained outstanding. The
Company also leases certain equipment under noncancelable operating
leases, which expire through December 2004. Future minimum rental payments
required under these leases (net of sublease income) at December 31, 2002
are $977 and $185 for fiscal years 2003 and 2004, respectively.
Rent expense (net of sublease income) was $2,280 and $3,273 for the years
ended December 31, 2002 and 2001, respectively. Rent expense is calculated
using the straight-line method over the term of the lease and deferred
rent is recorded.
In May 2000, the Company entered into a lease for a new facility. Under
the provisions of the lease agreement, the Company was required to provide
a $1,000 deposit plus the first month's rent upon signing of the
agreement. The Company later determined that this facility would not be
needed and the Company assigned the lease to a third party in January
2001. Under the provisions of the assignment agreement, the Company was
obligated to make monthly rental payments of $173 plus service charges of
approximately $18 through April 2001. In addition, the Company will be
liable for future lease payments of the third party in the event that the
third party defaults on its obligations under the assignment agreement.
The Company has not included the future minimum lease payments that it may
- 13 -
be liable for in its disclosure of future minimum lease payments above.
Additionally, the Company will not have its deposit returned until January
2006.
In April 2001, the Company entered into an amendment to the assignment
agreement. Under the provisions of the amended assignment agreement,
payment of $197 of lease commission and expenses was deferred until August
1, 2001. In addition, the security deposit was reduced from $1,000 to
$600.
In connection with the above-mentioned amendment to the assignment
agreement, the Company issued an exercisable warrant to purchase 5,000
shares of common stock at an exercise price of $30.00 per share. The
warrant expires in December 2009. The estimated fair value of the warrant,
$39, has been recorded as expense in the accompanying statement of
operations.
In June 2001, the Company entered into a second amendment to the
assignment agreement. Under the provisions of the second amended
assignment agreement, the Company released and wrote-off its interest in
the $600 security deposit and agreed to pay the $197 within three days of
the first closing of Series C preferred stock. In consideration, the
Company was released from all of its obligations under the lease and the
assignment agreement.
EMPLOYMENT AGREEMENT--In June 2000, the Company entered into an employment
agreement whereby the employee had the option to accept a grant of 7,500
fully vested shares of the Company's common stock at any time between the
employment date and December 31, 2001 or elect to receive $1,500 between
the one-year anniversary date and December 31, 2001. Under this agreement,
the Company was required to place $1,500 into certificates of deposit
until the election period expired. This amount is recorded as restricted
cash and is included in current assets at December 31, 2001. During 2001,
the Company recorded the final $750 of compensation expense associated
with this agreement. In June 2001, the employee elected to receive $1,500
in cash, which was paid during 2002.
CONTINGENCIES--The Company is involved in litigation in the normal course
of business and has accrued amounts it believes will be sufficient for
such matters. Accordingly, management does not believe the ultimate
outcome of any such matters will have a material adverse effect on the
Company's financial statements.
On August 16, 2002, the Company signed and executed a settlement agreement
resolving all disputes with its former legal counsel, Stradling Yocca
Carlson & Rauth ("Stradling"), and paid Stradling $200 in unpaid legal
fees. The Company and Stradling dismissed a pending arbitration and the
Company dismissed its complaint, then pending in Santa Clara County
Superior Court against Stradling and one of its partners, Nick E. Yocca,
Jr., for professional negligence and breach of fiduciary duty.
7. SHAREHOLDERS' EQUITY
During January and February 2002, the Company issued 1,674,386 shares of
Series C for net proceeds of $2,206.
The initial conversion prices of the Series C and C-1 Preferred Stock as
set forth in the Amended Articles were $0.143 and $0.286, respectively.
After the 10 for 1 reverse stock split of January 30, 2002, these
conversion prices were adjusted to $1.43 and $2.86, respectively.
The conversion prices for the Series C and C-1 Preferred Stock were $0.30
and $0.60, respectively as of January 1, 2002.
- 14 -
DIVIDENDS--The Amended Articles provide that the holders of Series C
Preferred Stock and Series C-1 Preferred Stock would, prior and in
preference to any declaration of payment of any dividends to the holders
of any other stock of the Corporation, receive cumulative annual dividends
of ten percent (10%) of the applicable Conversion Price (as defined below)
in shares of Series C Preferred Stock or Series C-1 Preferred Stock,
respectively, at the applicable original issuance prices.
CONVERTIBLE PREFERRED STOCK--Significant terms of the Series A, B, C, and
C-1 redeemable convertible preferred stock prior to the August 30, 2002
recapitalization described below are as follows:
o Each share of Series A, B, C and C-1 preferred stock would be
convertible, at the option of the holder, into one share of common
stock (subject to adjustment for antidilution).
o Prior to the issuance of Series C, each share of Series A and B
preferred stock was redeemable at the option of the holders, upon
written request of at least two-thirds of the Series A and B
preferred stockholders, requesting as separate classes, on or after
the fifth anniversary of the original issuance date. The redemption
price was the original issuance price plus all accrued but unpaid
dividends. Concurrent with the Series C issuance, Series A and B
redemption rights were terminated.
o Each share of Series A, B, C and C-1 would have automatically
converted into shares of common stock at the conversion price in
effect for such shares upon (i) the sale of common stock in a firm
commitment underwritten public offering pursuant to a registration
statement under the Securities Act of 1933, as amended, the offering
price of which is not less than $50,000 in the aggregate, or (ii)
the closing of a merger or sale of the Company prior to December 31,
2004, provided that the holders of Series C and C-1 received minimum
cash proceeds equal to or in excess of the Series C conversion price
then in effect multiplied by the number of common shares into which
the Series C and C-1 are convertible at that time.
o The conversion prices of Series C and C-1 preferred stock would have
been subject to adjustment on January 1, 2002 and January 1, 2003
based upon the Company's ability to achieve certain financial
covenants. Effective January 1, 2002, the conversion prices were
adjusted from $1.43 to $0.30 and from $2.86 to $0.60 for Series C
and C-1 preferred stock, respectively.
o Each share of Series A, B, C and C-1 preferred stock had voting
rights equivalent to the number of shares of common stock into which
it is convertible.
o Prior and in preference to any declaration and payment of dividends
on any other stock of the Company, the holders of Series C and C-1
preferred stock were entitled to receive an annual dividend equal to
their respective conversion prices as described above. Such
dividends were cumulative.
o If and when declared by the Board of Directors, each share of Series
A and B preferred stock was entitled to dividends at a rate of $0.70
and $2.70 per share per annum, respectively. Such dividends were
cumulative through August 31, 2001. Beginning September 1, 2002, the
dividends would be noncumulative.
- 15 -
o In the event of liquidation, dissolution, sale of substantially all
of the Company's assets or a change in control of the Company, the
holders of Series C and C-1 preferred stock would have received an
amount equal to $2.86 per share. Series C and C-1 preferred
stockholders would also be entitled to an amount equal to unpaid
dividends on each share. If available funds and assets were
insufficient to pay the preferential amounts, then the available
funds and assets would be distributed ratably first among the Series
C preferred shareholders in proportion to their preference amount,
then to holders of Series C-1. If there were any available funds and
assets remaining after the payment or distribution to the holders of
Series C and C-1 preferred stock, then all remaining available funds
and assets would be distributed to holders of series A, B, C and C-1
preferred stock, on an as-converted basis, and the holders of common
stock in proportion to the number of common shares owned.
RECAPITALIZATION--On August 30, 2002, the Company recapitalized (the
"Recapitalization") its equity structure in conjunction with a merger with
and into a Delaware corporation (AirPrime - Delaware) originally created
as a wholly-owned subsidiary of the existing California corporation
(AirPrime - California) pursuant to an agreement and plan of merger (the
"Merger Agreement"). Pursuant to the Merger Agreement, all outstanding
shares of AirPrime-California's Preferred Stock, Common Stock and those
shares of Common Stock subject to outstanding options and warrants were
exchanged for shares of AirPrime-Delaware's Junior Common Stock.
The number of shares of AirPrime-Delaware Common Stock received in
exchange for AirPrime-California Common Stock and Preferred Stock was
determined as follows:
o Each 10,000 shares of AirPrime-California Common Stock were
exchanged for 1 share of AirPrime-Delaware Junior Common Stock, any
fractional shares resulting from the exchange were rounded up to the
nearest whole share.
o Each 10,000 shares of AirPrime-California Series A and B Preferred
Stock were exchanged for 1 share of AirPrime-Delaware Junior Common
Stock, any fractional shares resulting from the exchange were
rounded up to the nearest whole share.
o Each 10,000 shares of AirPrime-California Series C and C-1 Preferred
Stock were exchanged for 1 share of AirPrime-Delaware Junior Common
Stock subsequent to: (i) conversion of the AirPrime-California
Series C Preferred Stock and Series C-1 Preferred Stock into
AirPrime-California Common Stock at the then-applicable conversion
price, (ii) the dividends payable to the holders of
AirPrime-California Series C Preferred Stock and Series C-1
Preferred Stock.
STOCK OPTION PLANS--In 2002, the Company adopted the 2002 Stock Option
Plan (the "2002 Plan"), which includes both incentive and nonstatutory
stock options. Under the Plan, the Company may grant options to purchase
up to 65,000 shares of common stock to employees, directors and service
providers at prices not less than the fair market value at the date of
grant for incentive stock options and not less than 85% of fair market
value for nonstatutory options and not less that 110% of fair market value
for a shareholder owning 10% or more of the outstanding stock of the
Company at the date of grant. These options generally expire ten years,
five years for 10% shareholders, from the date of grant and are
exercisable when the shares are vested. Incentive stock options and
nonstatutory options generally vest 1/16 at the date of grant and 1/16 per
quarter thereafter. Restricted shares issued, if any, upon exercise prior
to vesting are subject to a right of repurchase, which lapses according to
the original option vesting schedule.
- 16 -
In 2000, the Company adopted the 2000 Stock Option Plan (the "Plan"),
which includes both incentive and nonstatutory stock options. Under the
Plan, the Company may grant options to purchase up to 600 shares of common
stock to employees, directors and service providers at prices not less
than the fair market value at the date of grant for incentive stock
options and not less than 85% of fair market value for nonstatutory
options and not less that 110% of fair market value for a shareholder
owning 10% or more of the outstanding stock of the Company at the date of
grant. These options generally expire ten years, five years for 10%
shareholders, from the date of grant and are exercisable when the shares
are vested. Incentive stock options and nonstatutory options generally
vest 1/16 at the date of grant and 1/16 per quarter thereafter. Restricted
shares issued, if any, upon exercise prior to vesting are subject to a
right of repurchase, which lapses according to the original option vesting
schedule. No further options will be granted under the 2000 Stock Option
Plan.
In 2000, the Company adopted the Non-Employee Stock Option Plan (the
"Non-Employee Plan"), which includes only nonstatutory stock options.
Under the Plan, the Company may grant options to purchase up to 60 shares
of common stock to directors or consultants at prices not less than 100%
of fair market value of the Company's common stock at the date of grant.
These options generally expire ten years from the date of grant and
generally vest 1/16 at the date of grant and 1/16 per quarter thereafter.
Shares issued upon exercise prior to vesting are subject to a right of
repurchase, which lapses according to the original option vesting
schedule.
Option activity under the 2002 plan is as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
Balances, January 1, 2002 --
Granted (weighted average fair
value of $2.50 per share) 42,250 $9.61
Exercised --
Canceled (568) $9.61
--------
Outstanding, December 31, 2002 41,682 $9.61
========
Additional information regarding options outstanding as of December 31,
2002 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
$9.61 41,682 7.85 $9.61 20,474 $9.61
====== ========
At December 31, 2002, 23,318 shares were available for future grants under
the option plans.
- 17 -
Option activity under the 2000 plans is as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
Balances, January 1, 2001 326,412 $6.00
Granted (weighted average fair
value of $1.50 per share) 193,218 $1.85
Exercised (8,616) $5.07
Canceled (105,045) $6.06
----------
Outstanding, December 31, 2001 405,969 $4.01
Granted (weighted average fair
value of $0.20 per share) 4,861,250 $2.00
Exercised (16,228) $2.26
Canceled (1,281,917) $0.40
Canceled (124) $3,924
Conversion to Junior Common in
connection with the Recapitalization (3,968,680)
----------
Outstanding, December 31, 2002 270 $5,914
==========
Additional information regarding options outstanding as of December 31,
2002 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
$2,000 242 9.75 $2,000 242 $2,000
$15,000 15 8.27 $15,000 15 $15,000
$40,000 7 7.36 $40,000 7 $40,000
$75,000 4 7.69 $75,000 4 $75,000
$125,000 2 7.91 $125,000 2 $125,000
----- -----
270 $5,914 270 $5,914
===== =====
At December 31, 2002, no shares were available for future grants under the
2000 option plans.
In June 2001, the Company repriced approximately 16 options issued from
January through May of 2001 to $1.50 per share ($15,000 per share after
taking into account the Recapitalization). These options are accounted for
using variable method accounting, however as the fair market value has
remained below the repriced exercise price, no amounts have been recorded
to the statement of operations.
ADDITIONAL STOCK PLAN INFORMATION--During 2000, the Company issued options
to purchase 14,000 shares of the Company's common stock to nonemployees,
which vest ratably over 48 months as services are performed. The fair
value of the unvested portion of these options is subject to adjustment
based on the future value of the Company's common stock. Deferred stock
compensation related to these options was $100 in 2001. In 2002, these
options were canceled.
- 18 -
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and its related interpretations.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net loss had the Company adopted the fair value
method. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum
value method with the following weighted average assumptions: expected
life, 5 years; risk-free interest rate of 5% (2001) and 7% (2000) and no
dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as
they occur.
WARRANTS--During 2002 and 2001, the Company issued the following fully
vested and immediately exercisable warrants in connection with its
preferred stock issuances, lease arrangements, convertible subordinated
notes payable (see Note 5), recruiting services and to one of its
customers:
FAIR
EXERCISE VALUE
PRICE (DATE OF
2002 SHARES PER SHARE GRANT)
Convertible notes payable
(Participating) 199,959 $ 19.2260 $ 1,544
Convertible notes payable
(Non-Participating) 25,170 $ 0.0001 $ 589
Consulting services 1,616 $ 19.2260 $ 82
2001
Leases 1 $ 300,000 $ 39
Convertible subordinated
notes payable 416 $ 10 $ 832
Contra-revenue 24 $ 1,000 $ 49
Consulting services 1 $ 1,000 $ 7
The fair value of the warrants is estimated using the Black-Scholes option
pricing model with the following weighted average assumptions: no dividend
yield; volatility of 70%; risk-free interest rate of 3.4% (2002) and 5%
(2001) and a contractual life of two to ten years. The fair value of the
warrants for recruiting and consulting services has been recorded as
expense in the accompanying statement of operations as these services have
been completed as of December 31, 2000. The fair value of the warrants for
leases has been recorded as expense in the accompanying statement of
operations as the Company has determined that it will not occupy the
facilities to which the warrants relate (see Note 6).
COMMON STOCK--Common stock issued to the founders and certain employees is
subject to repurchase agreements whereby the Company has the option to
repurchase the unvested shares upon termination of employment at the
original issue price. The Company's repurchase right generally lapses over
four years.
- 19 -
At December 31, 2002, the Company has reserved the following shares of
authorized but unissued common stock:
Junior common stock reserved for the conversion of
outstanding preferred stock 350
Senior common stock reserved for the stock option plans 65
-----
Total 415
=====
RESTRICTED STOCK--During 2002 and 2001, the Company issued 11,538 and
1,400 shares of restricted stock, respectively, to specific employees. The
restricted common stock contains repurchase provisions that lapse over
periods ranging from 22 to 41 months. The restricted stock is subject to
the Company's right of repurchase upon the employee's termination from
continued service with the Company. The Company has a 60-day right to
repurchase (i) the unvested shares at the original purchase price, and
(ii) the shares released from the repurchase option at the fair market
value of the shares. The Purchaser's sale of the shares is subject to the
Company's right of first refusal. The shares are registered in the
Purchaser's name, and although the restricted stock purchase agreements
generally provide that stock certificates are held in escrow by the
Company until the full release of shares from the Company's repurchase
option, the Company considers the shares to be issued and outstanding upon
the issuance thereof. During 2001, the Company repurchased 1,694 shares of
unvested common stock for $21.
8. INCOME TAXES
Due to the Company's current loss position and cumulative deficit, there
was no provision/benefit for federal income taxes for the years ended
December 31, 2002 and December 31, 2001.
At December 31, 2002, the Company has federal and state net operating loss
carryforwards of approximately $70,363 and $54,942, respectively, expiring
beginning 2020 and 2009, respectively.
At December 31, 2002, the Company also has federal and state research and
development credit carryforwards of approximately $2,472 and $1,785,
respectively, available to offset future federal and state income taxes.
The federal tax credit carryforward expires beginning in 2020. The state
tax credit carryforward has no expiration.
The Company has a net deferred tax asset of approximately $37,603 at
December 31, 2002, including the benefits of the above net operating loss
carryforwards and research and development credits. However, because
realization of these benefits depends on the generation of future taxable
income, which is subject to uncertainty, the Company has placed a full
valuation allowance against the net deferred tax asset.
Current federal and California tax law includes provisions limiting the
annual use of net operating loss and credit carryforwards in the event of
certain defined changes in stock ownership. The Company's capitalization
described herein may have resulted in such a change. Accordingly, the
annual use of the Company's net operating loss and credit carryforwards
may be limited pursuant to these provisions. Management has not yet
determined the extent of such limitation. Such limitation may result in
the loss of carryforward benefits due to their expiration.
- 20 -
9. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan (the
"Plan") which permits participants to make contributions by salary
deduction pursuant to Section 401(k) of the Internal Revenue Code. The
Company may, at its discretion, make matching contributions to the Plan.
Furthermore, the Company is responsible for administrative costs of the
Plan. The Company has made no contributions to the Plan since its
inception.
10. SUBSEQUENT EVENTS
On January 16, 2003, the Company raised $1,635 through the issuance and
sale of convertible notes and warrants to purchase 113,732 shares of
Series A Preferred Stock.
- 21 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sierra Wireless, Inc.
By: /S/ Peter W. Roberts
-----------------------------------------
Peter W. Roberts, Chief Financial Officer
Date: November 4, 2003
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