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 April 2004
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(Commission File. No 0-30718).
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SIERRA WIRELESS, INC., A CANADA CORPORATION
(Translation of registrant's name in English)
13811 Wireless Way
RICHMOND, BRITISH COLUMBIA, CANADA V6V 3A4
(Address of principal executive offices and zip code)
Registrant's Telephone Number, including area code: 604-231-1100
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 40-F X
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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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1
SIERRA WIRELESS, INC.
2003 ANNUAL REPORT
UNITED STATES GAAP
2
FINANCIAL HIGHLIGHTS
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(Expressed in thousands of United States dollars, except per share amounts)
YEARS ENDED DECEMBER 31, 2001 2002 2003
--------- --------- -------
Revenue $ 62,348 $ 77,259 $ 101,709
Gross margin 15,313 7,998 41,158
Gross margin percentage 24.6% 10.4% 40.5%
Gross margin percentage,
excluding restructuring costs and inventory writedowns 42.2% 37.3% 40.5%
Total expenses 42,359 46,445 39,670
Net earnings (loss) (24,269) (41,663) 2,255
Diluted earnings (loss) per share (1.50) (2.56) 0.12
Excluding restructuring costs,
integration costs and Metricom recovery
Net earnings (loss) (10,269) (5,764) 4,909
Diluted earnings (loss) per share (0.64) (0.35) 0.26
Revenue by product
AirCard 62% 58% 70%
OEM 15 25 21
Mobile 13 10 6
Other 10 7 3
--------- --------- --------
100% 100% 100%
========= ========= ========
Revenue by geographical region
Americas 97% 87% 73%
Europe - 7 13
Asia-Pacific 3 6 14
--------- --------- --------
100% 100% 100%
========= ========= ========
CONSOLIDATED BALANCE SHEET DATA
(Expressed in thousands of United States dollars, except number of shares)
(Prepared in accordance with United States GAAP)
YEARS ENDED DECEMBER 31, 2002 2003
----------- -----------
Cash, including short-term and long-term investments $ 34,841 $ 109,757
Working capital 36,864 80,363
Long-term debt including obligations under capital lease 6,590 3,735
Total shareholders' equity 48,754 143,547
Number of common shares outstanding 16,345,396 24,822,071
REVENUE BY QUARTER
in thousands of US$ (unaudited)
Q4-03 $34,573 Q3-03 $26,250 Q2-03 $20,736 Q1-03 $20,150
Q4-02 $22,547 Q3-02 $21,083 Q2-02 $16,929 Q1-02 $16,700
3
REPORT TO SHAREHOLDERS
2003 was a year of major milestones and profitable growth. We reached the $100
million revenue mark for the first time in our history, returned to
profitability for the full year, and set the stage for further profitable
growth.
STRONG FINANCIAL RESULTS
Our financial results were driven by growing demand for our expanded line of
Sierra Wireless AirCard(R) PC cards and embedded modules. Introduced in 2002 and
2003 for 2.5G wireless data networks, our new products enjoyed a strong
reception and helped drive revenues and earnings. Our results were further
enhanced by our acquisition of AirPrime.
For the twelve months ended December 31, 2003, our revenues increased 32% to
$101.7 million, up from $77.3 million in 2002. Net earnings were $2.3 million
(diluted earnings per share of $0.12 per share), compared to a loss of $41.7
million (loss per share of $2.56) in 2002. Our gross margin rose to $41.2
million or 40.5% of revenues, from $8.0 million or 10.4% of revenues in 2002.
A WORLD OF WIRELESS DATA
Underpinning our results was the growing worldwide acceptance of wireless data.
As predicted, the 2.5G networks have increased the speed and functionality of
wireless data, making it more attractive to more people. Many of the world's
leading wireless operators promoted wireless data services to customers in 2003,
and adoption rates grew significantly.
We tapped that demand, building our revenues in North America and achieving
approximately 160% revenue growth in our newer Asia-Pacific and European
markets.
Highlights of the year included significantly expanding our European
distribution by connecting mobile professionals to Europe's widely-used O2
network, and partnering with IBM in China to offer a new wireless bundle that
includes the Sierra Wireless AirCard 750 combined with IBM's high-end ThinkPad
T40 notebook series.
In North America, we partnered with Verizon to supply our new PC5220 card for
Verizon's high-speed CDMA 1xEV-DO network. Another key development was Sprint's
decision to launch the Treo 600 Smartphone from PalmOne nationwide. The Treo 600
features the Sierra Wireless EM3420 as its wireless engine.
INVESTING FOR PROFITABLE GROWTH
While our growth has been dramatic, we believe that the wireless data industry
is still early in the adoption cycle.
The advent of commercially available high-speed data services such as CDMA
1xEV-DO and EDGE is about to bring mobile connectivity to an even broader set of
applications and user segments. Significantly faster than existing networks,
these new technologies support data rich applications like streaming audio,
video and the Internet, and will continue to accelerate adoption of wireless
data.
Smartphones are attracting even more users. Born from the convergence of voice
and data technologies, and driven by the increasing demand for anytime, anywhere
access to e-mail and information, Smartphones have emerged as the highest growth
category in the industry.
During 2003, we made a number of moves to ensure we remain a world leader in our
evolving industry:
o In June, we acquired AirPrime, Inc., a privately held, leading supplier of
high-speed CDMA wireless products. The acquisition has enhanced our
position as a market leader with a broad product line, innovative
engineering, blue chip customers, global channels and a strong balance
sheet. It has also brought us a market leading CDMA embedded module
portfolio with important customers in the handheld and notebook PC arenas.
o We announced our entry into the Smartphone market with the introduction of
our new Voq professional phone. Based on Microsoft Windows Mobile software
for Smartphones, our Voq-branded professional phones will feature both a
familiar phone keypad and unique flip-open QWERTY thumbpad. They will also
offer easy information navigation and retrieval, compelling text entry, and
automatically updated e-mail. The initial response has been very
enthusiastic. The combination of a sizable market opportunity, our
background in enterprise wireless data, and our existing channels and
relationships, makes this a logical evolution for Sierra Wireless. We plan
to have our first
4
Voq phone model for GSM/GPRS networks commercially available in Europe and
North America in the second quarter of 2004.
o We developed products for the new and expanding CDMA 1xEV-DO and EDGE
networks. Our PC 5220 PC Card for the Verizon Wireless CDMA 1xEV-DO network
started shipping commercially in the third quarter of 2003. Our second CDMA
1xEV-DO product, the AirCard 580, is expected to begin shipping
commercially in the second quarter of 2004. Our first EDGE product, the
AirCard 775, is expected to start commercial shipping in the third quarter
of 2004.
With these developments, Sierra Wireless has a growing core business which will
be augmented by our entry into a new product segment.
We intend to continue growing and changing in step with the needs of our
wireless operator partners and business customers around the world. During 2003,
we completed a $74.8 million secondary public offering of 4.6 million common
shares in the United States and Canada resulting in net proceeds of $67.4
million. We have over $100 million of cash on hand and we are generating
positive cash flow. This positions us very well to continue investing for
profitable growth.
As we move forward, our steps will be guided by our knowledgeable and
independent board of directors--a board that is stronger than ever following the
2003 appointments of Nadir Mohamed and Charles Levine. Mr. Mohamed is President
and Chief Executive Officer of Rogers Wireless Communications Inc. Mr. Levine is
the former President of Sprint PCS. The industry knowledge, expertise and proven
record of success of these two new directors have already proved invaluable to
Sierra Wireless. We thank all of our board members for their wise counsel in
2003.
I also want to acknowledge the many contributions of our dedicated employees.
Our success reflects the innovation, enthusiasm and hard work of every member of
Team Sierra Wireless.
Finally, I want to thank you, our shareholders, for your confidence in Sierra
Wireless and in our mission. Your capital has made it possible for us to bring
our ideas and our products to the world.
/s/ David B. Sutcliffe
-------------------------
David B. Sutcliffe
Chairman and Chief Executive Officer
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS HAS BEEN PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) AND, EXCEPT WHERE OTHERWISE SPECIFICALLY INDICATED,
ALL AMOUNTS ARE EXPRESSED IN UNITED STATES DOLLARS.
OVERVIEW
We provide highly differentiated wireless solutions worldwide. We develop and
market a broad range of products that include wireless data modems for portable
computers, embedded modules for original equipment manufacturers, or OEMs,
rugged vehicle-mounted modems and mobile phones. Our products permit users to
access wireless data and voice networks using notebook computers, personal
digital assistants, or PDAs, vehicle-based systems and mobile phones.
Wireless data communications is an expanding market positioned at the
convergence of wireless communications, portable computing and the Internet,
each of which we believe represents a growing market. Our products are based on
open standards, including the Internet protocol, and operate on the networks of
major wireless communications service providers.
Our products are primarily used by businesses and government organizations to
enable their employees access to a wide range of wireless data applications
including Internet access, e-mail, messaging, corporate intranet access, remote
database inquiry and computer aided dispatch. We sell our products directly to
end-users and through indirect channels, including wireless operators, resellers
and OEMs.
During 2003, our revenue increased 31.6% to $101.7 million, compared to $77.3
million in 2002, despite the slowdown in enterprise spending and the overall
conditions affecting the wireless communications industry. Our revenue from
customers in the Americas, Europe and the Asia-Pacific region comprised 73%, 13%
and 14%, respectively, in fiscal 2003 and 87%, 7% and 6%, respectively, in
fiscal 2002. Our North American business is shifting from long-term, large
volume commitments by carriers to faster book/ship cycles driven by customer
demand on channels. This shift is a return to our roots, lowers carrier
dependency and is the status quo for our business in Europe and in the
Asia-Pacific region.
In the third quarter of 2003, we closed our acquisition of AirPrime, Inc.
("AirPrime"), a privately-held supplier of high-speed CDMA wireless products
located in Carlsbad, California. In the fourth quarter of 2003, we completed our
public offering of 4.6 million common shares with net proceeds of approximately
$67.4 million. In addition, we announced the introduction of our Voq line of
professional phones and value-added software to deliver a converged mobile
telephony and e-mail solution targeted at business users. The Voq professional
phone is expected to be commercially available in the first half of 2004.
REVENUE
We derive our revenue primarily through sales of our products to wireless
communications service providers, original equipment manufacturers, resellers
and through direct sales to end-users. We recognize revenue from sales of
products and services upon the later of transfer of title or upon shipment of
the product to the customer or rendering of service, so long as collectibility
is reasonably assured. We recognize revenue on the portion of sales to certain
resellers that are subject to provisions allowing various rights of return and
stock rotation when the rights have expired or the products have been reported
as sold by the resellers.
Funding from research and development agreements, other than government funding
arrangements, is recognized as revenue when certain criteria stipulated under
the terms of those funding agreements have been met and when there is reasonable
assurance the funding will be received. Certain research and development funding
will be repayable only on the occurrence of specified future events. If such
events do not occur, no repayment would be required. We will recognize the
liability to repay research and development funding in the period in which
conditions arise that would cause research and development funding to be
repayable.
6
COST OF GOODS SOLD
We outsource most of our manufacturing services to enable us to achieve greater
efficiencies and economies of scale. We were able to achieve savings in costs
and improvements in efficiencies in 2003, and we will focus on further cost
savings and efficiencies going forward. Because we outsource most of our
manufacturing services, our cost of goods sold consists primarily of the direct
costs of finished goods purchased from our outsource manufacturers, third-party
royalties, warranty costs and an allocation of operating costs.
During the second quarter of 2003, we implemented significant changes to our
supply chain. These included the transfer of global fulfillment and certain CDMA
product manufacturing to Flextronics. By using its fully integrated supply chain
services, we have reduced product costs, improved alignment with our
international customer base and achieved increased operating efficiencies and
scalability.
SALES AND MARKETING
Our sales and marketing expenses consist mainly of salaries, commissions, travel
expenses, conferences, marketing materials and market development funding. Our
sales programs rely, in part, on delivering products to end-users identified and
cultivated through our relationships with wireless communications service
providers, original equipment manufacturers and resellers. During 2003, we
continued to expand our distribution channels in Europe and the Asia-Pacific
region as part of our international growth objective. We expect to continue to
make increased investments in these strategic areas during 2004.
RESEARCH AND DEVELOPMENT, NET
Since our incorporation in 1993, we have invested in new generations of
technology. We have funded our investment in research and development from
operating cash flow, supplemented by our initial public offering and follow-on
offerings, together with research and development funding and investment tax
credits. Our research and development expenses consist mainly of salaries,
consulting costs and amortization, net of government research and development
funding and investment tax credits, and are expensed as incurred. We expect our
research and development expenses to continue to increase as we invest in next
generation technology and develop new products.
ADMINISTRATION
Our administration costs consist mainly of salaries, professional fees,
insurance, and general administration. We expect that these costs will increase
as insurance premiums continue to increase and as we continue to build our
information systems infrastructure as part of our international expansion.
INCOME TAXES
Prior to 2000, we recorded no provision for Canadian federal income taxes for
any period since our incorporation. Through the end of fiscal 1997 we recorded
losses and, when we became profitable in 1998, we had sufficient net operating
losses, investment tax credits or scientific research and development expenses
in Canada to offset any federal income taxes that would otherwise be payable. In
2000, our taxable income in Canada was reduced through the utilization of
scientific research and development expenses, and in the United States we had
taxable income for the first time. This resulted in us having current and future
taxes payable. In 2002, we incurred operating losses and recorded a recovery of
income taxes previously paid. In 2003, we had sufficient net operating losses,
investment tax credits or scientific research and development expenses to offset
federal income taxes that would otherwise be payable. The current tax expense in
2003 is comprised primarily of Canadian capital tax.
We believe that it is more likely than not that we will realize our net deferred
tax assets. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences become deductible. We considered projected future taxable income and
tax planning strategies in making our assessment. We have not recognized any
additional deferred tax assets in 2003.
7
RESULTS OF OPERATIONS
The following table sets forth our operating results for the three years ended
December 31, 2003, expressed as a percentage of revenue:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2002 2003
--------- --------- -------
Revenue......................................................... 100.0% 100.0% 100.0%
Cost of goods sold.............................................. 75.4 89.6 59.5
----- ----- -----
Gross margin.................................................... 24.6 10.4 40.5
----- ----- -----
Expenses
Sales and marketing........................................... 20.4 15.0 11.4
Research and development, net................................. 27.1 19.3 15.7
Administration................................................ 17.1 6.2 6.5
Restructuring and other charges............................... - 16.6 1.2
Integration costs............................................. - - 1.9
Amortization.................................................. 3.3 3.0 2.3
-------- -------- --------
67.9 60.1 39.0
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Earnings (loss) from operations................................. (43.3) (49.7) 1.5
Other income.................................................... 4.0 0.3 0.9
----- ----- -----
Net income (loss) before income taxes........................... (39.3) (49.4) 2.4
Income tax expense (recovery)................................... (0.4) 4.5 0.2
------ ----- -----
Net income (loss)............................................... (38.9) (53.9) 2.2
====== ====== =====
Our revenue by product, by distribution channel and by geographical region is as
follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2002 2003
---- ---- ----
Revenue by product
AirCard............................................... 62% 58% 70%
OEM................................................... 15 25 21
Mobile................................................ 13 10 6
Other................................................. 10 7 3
-------- -------- --------
100% 100% 100%
======== ======== ========
Revenue by distribution channel
Wireless carriers..................................... 31% 43% 46%
OEM................................................... 17 25 22
Resellers............................................. 44 25 31
Direct and other...................................... 8 7 1
-------- -------- --------
100% 100% 100%
======== ======== ========
Revenue by geographical region
Americas.............................................. 97% 87% 73%
Europe................................................ - 7 13
Asia-Pacific.......................................... 3 6 14
-------- -------- --------
100% 100% 100%
======== ======== ========
8
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
FOLLOW-ON OFFERING
On November 14, 2003, we completed a new issue and secondary public offering of
4.6 million common shares in the United States and Canada at a price of $16.25
per common share. The offering generated net proceeds of approximately $67.4
million. Of the 4.6 million common shares, 4.4 million common shares were sold
by the Company and 0.2 million common shares were sold by retiring officers of
the Company.
ACQUISITION OF AIRPRIME, INC.
On August 12, 2003, we acquired 100 percent of the outstanding securities of
AirPrime, a privately-held supplier of high-speed CDMA wireless products located
in Carlsbad, California. We subsequently changed the name of AirPrime to Sierra
Wireless America, Inc. The results of AirPrime's operations have been included
in our consolidated financial statements since that date. As a result of the
acquisition, we believe the combined entity to be a well-positioned market
leader with a broad product line, innovative engineering, blue chip customers,
global distribution channels and a strong balance sheet.
The aggregate purchase price was $23.8 million including common shares valued at
$22.4 million with costs related to the acquisition of $1.4 million. The value
of the 3,708,521 common shares issued was determined based on the average market
price of our common shares over the two-day period before and after June 16,
2003, which was the date the terms of the acquisition were agreed to and
announced.
2003 RESTRUCTURING AND INTEGRATION COSTS
In the third quarter of 2003, we incurred restructuring and other charges as a
result of our acquisition of AirPrime. During the year ended December 31, 2003,
we recorded restructuring and other charges of $1.2 million as follows:
Fixed and intangible asset writedowns............................. $ 0.6
Workforce reductions.............................................. 0.3
Facilities restructuring.......................................... 0.3
-----------
Total restructuring and other charges........................ $ 1.2
===========
The writedowns of fixed and intangible assets of $0.6 million were primarily for
research and development equipment, test equipment and research and development
licenses that are no longer required. These assets were written down to nil.
Workforce reduction charges of $0.3 million were related to the cost of
severance and benefits associated with 11 employees notified of termination. Of
the 11 employees, seven were in product development and four were in
manufacturing. As of September 30, 2003, there were no restructuring amounts
remaining to be paid out related to workforce reductions. We also recorded an
additional facilities restructuring charge of $0.3 million as we have made
little progress in 2003 on the facilities restructuring that was originally
announced in 2002.
During 2003, we also incurred integration costs of $1.9 million related to
travel, facilities and costs related to eight existing employees retained for
the transition period. All of these employees have completed their integration
activities and have been terminated as of December 31, 2003.
REVENUE
Revenue amounted to $101.7 million in 2003, compared to $77.3 million in 2002,
an increase of 31.6%. Included in our revenue was research and development
funding of $0.7 million and freight revenue of $0.3 million in 2003, compared to
$3.7 million and $0.1 million, respectively, in 2002. The increase in revenue
was a result of sales of our 2.5G products as well as increasing sales to new
channels in Europe and the Asia-Pacific region. During 2003, we commenced
commercial shipment of the AirCard 575, MP 555 and MP 750 as well as the
products formerly sold by AirPrime.
GROSS MARGIN
Gross margin amounted to $41.2 million in 2003, compared to $8.0 million in
2002. Included in our gross margin was research and development funding of $0.7
million and freight revenue of $0.3 million in 2003, compared to $3.7 million
and $0.1 million, respectively, in 2002. During 2002, our gross margin was
negatively affected by restructuring and other charges of $20.8 million. Our
gross margin percentage was 40.5% of revenue in 2003, compared to 10.4% of
revenue in 2002. Our gross margin, excluding restructuring and other charges,
amounted to $41.2 million, or 40.5% of
9
revenue in 2003, compared to $28.8 million, or 37.3% of revenue in 2002. The
increase in gross margin was a result of a greater mix of 2.5G AirCard products,
which yield a higher margin than OEM products, as well as product cost
reductions. During 2003, we sold $1.4 million of products that had a book value
after writedowns of nil.
SALES AND MARKETING
Sales and marketing expenses were $11.6 million in 2003, unchanged from 2002.
Sales and marketing expenses as a percentage of revenue decreased to 11.4% in
2003, compared to 15.0% in 2002. This decrease was due primarily to an increase
in revenue without a corresponding increase in operating expenses.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $16.0
million in 2003, compared to $14.9 million in 2002, an increase of 7.4%. Gross
research and development expenses, before government research and development
funding and investment tax credits, were $16.5 million or 16.2% of revenue in
2003, compared to $16.8 million or 21.7% of revenue in 2002. Gross research and
development expenses in 2003 decreased due to cost reductions under our
restructuring plan implemented in the second quarter of 2002 and a reduction of
costs related to the development of products based on CDMA and GPRS standards.
These reductions were partially offset by the addition of staff and projects
from the AirPrime acquisition and the development costs of the Voq professional
phone.
ADMINISTRATION
Administration expenses amounted to $6.6 million in 2003, compared to $4.8
million in 2002. Included in administration expenses were recoveries from
Metricom of $0.5 million in 2003 and $1.8 million in 2002. Excluding the
Metricom recoveries, administration expenses were $7.1 million in 2003, compared
to $6.6 million in 2002. This increase of 7.8% is due primarily to an increase
in insurance costs that was partially offset by cost reductions under our
restructuring plan. Administration expenses, excluding the Metricom recoveries,
as a percentage of revenue amounted to 7.0% in 2003, compared to 8.5% in 2002.
OTHER INCOME
Other income increased to $1.0 million in 2003, compared to $0.2 million in
2002. Other income includes interest income, interest expense and foreign
exchange gains and losses. This increase is due to an increase in interest
income from increased cash and investment balances from our secondary public
offering, as well as net foreign exchange gains on our Canadian denominated
currency.
INCOME TAX EXPENSE (RECOVERY)
Income tax expense amounted to $0.2 million in 2003, compared to $3.5 million in
2002. Our 2002 income tax recovery, excluding restructuring and other costs of
$4.0 million, was $0.6 million. The income tax recovery recorded in 2002 is a
recovery of taxes paid in prior periods.
NET EARNINGS (LOSS)
Our net earnings amounted to $2.3 million in 2003, compared to a net loss of
$41.7 million in 2002. Our net earnings amounted to $4.9 million in 2003,
excluding restructuring and integration costs of $3.2 million and the Metricom
recovery of $0.5 million, compared to a net loss of $5.8 million in 2002,
excluding restructuring and other costs of $37.7 million and the Metricom
recovery of $1.8 million. Our diluted earnings per share amounted to $0.12 in
2003, compared to a loss per share of $2.56 in 2002. Our diluted earnings per
share, excluding the items referred to above, was $0.26 in 2003, compared to a
loss per share of $0.35 in 2002. The weighted average number of shares
outstanding increased to 19.0 million in 2003 due to the issuance of shares
related to the AirPrime acquisition and to our secondary public offering, as
compared to 16.3 million in 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
During 2002, we announced and implemented a business restructuring program. We
reduced operating expenses and asset levels as a result of our assessment of
current and visible future demand. We expected sales growth to continue to
10
be constrained by the slowdown in enterprise spending and by overall conditions
affecting the wireless communications industry.
During the second quarter of 2002, we recorded restructuring and other costs of
$36.1 million. We reduced our workforce from 275 to 181 people. In addition, the
restructuring and other costs included a writedown for excess inventory,
impairment of fixed, intangible and other assets, and a provision for facilities
restructuring and other costs related to the restructuring. The provisions
related to our restructuring and other charges reflected many estimates which we
revised during the last half of 2002, based on actual experience, resulting in a
net charge of $1.6 million. Our restructuring and other costs for 2002 were
$37.7 million. We had substantially completed implementation of our
restructuring program at December 31, 2002.
We recorded a writedown of inventory, including purchase commitments, amounting
to $16.7 million. The writedown was related primarily to CDPD and 2G CDMA
products. In the fourth quarter of 2002, we recorded an additional net writedown
of inventory of $1.9 million which was a result of a faster than expected
decline in sales of CDPD products. During 2002, we sold $1.2 million of products
that had a written down net book value of nil.
Fixed assets impairment charges of $4.8 million consisted of writedowns
primarily for research and development equipment, test equipment, and corporate
assets. The fixed assets were written down to the current fair value for this
type of equipment. The net reversal of the second quarter impairment charge was
$0.5 million, of which $0.1 million was included in cost of sales, and related
primarily to adjusting our estimates of equipment to be disposed of.
Intangible assets impairment charges of $3.0 million consisted of writedowns
primarily for research and development licenses. The research and development
licenses that were no longer required, were written down to nil. In addition,
our deferred tax asset valuation allowance was increased by $3.8 million to
record the reduction in the portion of our deferred tax assets that we believed
was more likely than not to be realized.
Workforce reduction charges of $1.6 million, of which $0.1 million was included
in cost of sales, were related to the cost of severance and benefits associated
with 95 employees and contractors notified of termination. Of the 95 employees
and contractors, 63 were involved in product development, seven were involved in
manufacturing, 18 were sales and marketing personnel, and seven were in
administration. At December 31, 2002, the workforce reduction provision of $1.5
million estimated in the second quarter, excluding the portion that was included
in cost of sales, has been drawn down by cash payments of $1.3 million and a
reversal of $0.2 million, resulting in an ending provision balance of $0.05
million. The remaining provision was substantially drawn down by April 30, 2003.
As a result of the above noted workforce reduction and our assessment of current
and visible demand, we have leased facilities that are excess to our current
requirements. We recorded a provision that represents the estimated net present
value of future contractual obligations that are in excess of our estimated
future requirements. Our provision at June 30, 2002 of $4.7 million has been
drawn down by cash payments of $0.5 million and increased by an additional net
charge of $0.3 million, resulting in a provision balance of $4.5 million at
December 31, 2002. During the second half of 2002, real estate market conditions
in our location softened, resulting in very little progress on our facilities
restructuring. The remaining cash outlays of approximately $4.5 million related
to the facilities restructuring are expected to be paid over the remaining term
of the lease and will be funded from available sources of liquidity.
Other charges of $1.5 million included provisions for purchase commitments, a
writedown of investments, and professional fees in connection with the
restructuring activities. Our provision at June 30, 2002 of $0.8 million has
been drawn down by non-cash reductions of $0.4 million, cash payments of $0.3
million, and an additional charge of $0.1 million resulting in a provision
balance of $0.2 million at December 31, 2002. The additional charges relate to
revised estimates for professional fees. The remaining provision was
substantially drawn down at December 31, 2003. The remaining cash outlays of
approximately $0.1 million related to other costs will be funded from available
sources of liquidity.
During the second quarter of 2001, one of our customers, Metricom, Inc., refused
shipments and subsequently filed for a Chapter 11 reorganization under the U.S.
bankruptcy laws. In 2002, we negotiated a settlement with the reorganized debtor
and subsequently received $1.8 million. The recovery of $1.8 million was
recorded in the determination of our net loss for 2002.
In 2001, in addition to the financial impact from Metricom's bankruptcy, there
was also an overall economic slowdown that impacted our business. As a result of
these developments, we recorded a writedown of inventory of $11.0 million and a
provision for doubtful accounts of $3.0 million in 2001.
11
REVENUE
Revenue amounted to $77.3 million in 2002, compared to $62.3 million in 2001, an
increase of 23.9%. Included in our revenue was research and development funding
of $3.7 million and freight revenue of $0.1 million in 2002, compared to $2.6
million and nil, respectively, in 2001. The increase in revenue was a result of
sales of our 2.5G products as well as increasing sales to new channels in Europe
and the Asia-Pacific region. We commenced commercial shipment of our AirCard
550, AirCard 555, AirCard 710, and AirCard 750 next generation products during
2002.
GROSS MARGIN
Gross margin amounted to $8.0 million in 2002, compared to $15.3 million in
2001. Included in our gross margin was research and development funding of $3.7
million and freight revenue of $0.1 million in 2002, compared to $2.6 million
and nil, respectively, in 2001. During the year, our gross margin was negatively
affected as we recorded restructuring and other charges of $20.8 million. As a
result of restructuring and other charges, our gross margin percentage decreased
to 10.4% of revenue in 2002, compared to 24.6% of revenue in 2001. Our gross
margin in 2002 was $28.8 million, excluding restructuring and other charges of
$20.8 million, compared to a gross margin in 2001 of $26.3 million, excluding an
inventory writedown of $11.0 million. Our gross margin percentage, excluding the
restructuring and other charges and inventory writedowns, decreased to 37.3% in
2002, compared to 42.2% in 2001. This decrease was a result of changes in our
product mix and new product introduction costs.
SALES AND MARKETING
Sales and marketing expenses amounted to $11.6 million in 2002, compared to
$12.7 million in 2001, a decrease of 9.1%. This decrease was due primarily to
cost reductions under our restructuring plan. In addition, some costs related to
the initial introduction of new products for 2.5G wireless networks and entry
into the Europe and Asia-Pacific regions occurred in the prior year. Sales and
marketing expenses as a percentage of revenue amounted to 15.0% in 2002,
compared to 20.4% in 2001.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $14.9
million in 2002, compared to $16.9 million in 2001, a decrease of 11.9%.
Research and development expenses in 2002 decreased due primarily to cost
reductions under our restructuring plan. Gross research and development
expenses, before government research and development funding and investment tax
credits, were $16.8 million or 21.7% of revenue in 2002, compared to $19.4
million or 31.2% of revenue in 2001.
ADMINISTRATION
Administration expenses amounted to $4.8 million in 2002, compared to $10.6
million in 2001. Administration expenses were $6.6 million in 2002, excluding
the Metricom recovery of $1.8 million, compared to administration expenses of
$7.6 million, excluding the $3.0 million provision for doubtful accounts in
2001. This decrease of 13.8% is due primarily to cost reductions under our
restructuring plan. Administration expenses, excluding the Metricom recovery and
the provision for doubtful accounts, as a percentage of revenue amounted to 8.5%
in 2002, compared to 12.3% in 2001.
OTHER INCOME
Other income decreased to $0.2 million in 2002, compared to $2.5 million in
2001. This decrease is due to a reduction in cash and short-term investment
balances, as well as a reduction in interest rates.
INCOME TAX EXPENSE (RECOVERY)
Income tax expense amounted to $3.5 million in 2002, compared to an income tax
recovery of $0.3 million in 2001. Our income tax recovery, excluding
restructuring and other costs of $4.0 million, was $0.6 million in 2002,
compared to an income tax recovery of $0.3 million in 2001. The income tax
recovery recorded in 2002 is a recovery of taxes paid in prior periods.
12
NET LOSS
Our net loss amounted to $41.7 million in 2002, compared to a net loss of $24.3
million in 2001. Our net loss amounted to $5.8 million in 2002, excluding
restructuring and other costs of $37.7 million and the Metricom recovery of $1.8
million, compared to a net loss of $10.3 million in 2001, excluding the
inventory writedown of $11.0 million and the provision for doubtful accounts of
$3.0 million. Our loss per share amounted to $2.56 in 2002, compared to a loss
per share of $1.50 in 2001. Our loss per share, excluding the restructuring and
other costs and inventory writedowns, was $0.35 in 2002, compared to a loss per
share of $0.64 in 2001. The weighted average number of shares outstanding
increased to 16.3 million in 2002, as compared to 16.1 million in 2001.
CONTINGENT LIABILITIES
In July 2001, we learned that Metricom, one of our customers, had filed a
Chapter 11 reorganization under the U.S. bankruptcy laws. We filed a proof of
claim for amounts due to us totaling $13.7 million. Metricom objected to that
claim asserting that all but $2.3 million should be disallowed. Metricom also
filed an adversary complaint against us in the U.S. bankruptcy court seeking
return of payments totaling $1.9 million made to us within 90 days of the
bankruptcy filing, alleging that the payments are avoidable as "preferences". We
contended that the payments were in the ordinary course of business and that we
supplied additional product to Metricom after receiving the payments, which
would offset any preference liability. During 2002, we executed a global
settlement with the reorganized debtor under which we agreed to reduce our
general unsecured claim to $10.3 million and Metricom agreed to dismiss the
preference claims. We received a settlement of $1.8 million that has been
included in our net loss for 2002. We also received an additional recovery of
$0.5 million that has been included in our net earnings for 2003.
In November 2002, Sierra Wireless, Inc., along with several other defendants,
was served with the second amended complaint of MLR, LLC ("MLR") filed in the
U.S. District Court for the Northern District of Illinois Eastern Division for
alleged patent infringement. We assessed the complaint and believed that there
was no infringement of the patents referred to in this claim and that the claim
was invalid. During 2003, we reached an agreement with MLR. Under the agreement,
we received non-royalty bearing licenses to use all of MLR's present and future
patents for certain of our products and MLR released us from their claim of
alleged patent infringement.
Under license agreements, we are committed to royalty payments based on the
sales of products using certain technologies. We recognize royalty obligations
as determinable in accordance with agreement terms. Where agreements are not
finalized, we have recognized our current best estimate of the obligation. When
the agreements are finalized, the estimate will be revised accordingly.
We are engaged in other legal actions arising in the ordinary course of business
and believe that the ultimate outcome of these actions will not have a material
adverse effect on our operating results, liquidity or financial position.
SIGNIFICANT CONTRACTS
We had entered into significant development and volume purchase contracts with
three wireless carriers, AT&T Wireless, Sprint PCS, and Verizon Wireless in late
1999 and 2000. We have substantially completed volume shipments on all three
contracts during the last quarter of 2003. Going forward, we expect to rely on
purchase orders with these customers, and these customers, like our other
customers, will be under no contractual obligation to purchase our products.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, and we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent liabilities. On an on-going
basis, we evaluate our estimates and judgments, including those related to
revenue recognition, adequacy of allowance for doubtful accounts, adequacy of
inventory reserve, income taxes and adequacy of warranty reserve. We base our
estimates on historical experience and anticipated results and trends and on
various other assumptions that we believe are reasonable under the
circumstances. By their nature, estimates are subject to an inherent degree of
uncertainty. Actual results may differ from our estimates.
13
Senior management has discussed with our audit committee the development,
selection, and disclosure of accounting estimates used in the preparation of our
consolidated financial statements.
During the year ended December 31, 2003, we did not adopt any new accounting
policies that have a material impact on our consolidated financial statements or
make changes to existing accounting policies.
The following critical accounting policies affect our more significant estimates
and assumptions used in preparing our consolidated financial statements:
o We recognize revenue from sales of products and services upon the later
of transfer of title or upon shipment of the product to the customer or
rendering of the service, so long as collectibility is reasonably
assured. Customers include resellers, original equipment manufacturers,
wireless service providers and end-users. We record deferred revenue
when we receive cash in advance of the revenue recognition criteria
being met.
An increasing amount of our revenue is generated from sales to
resellers. We recognize revenue on the portion of sales to certain
resellers that are subject to provisions allowing various rights of
return and stock rotation when the rights have expired or the products
have been reported as sold by the resellers.
Funding from research and development agreements, other than government
research and development arrangements, is recognized as revenue when
certain criteria stipulated under the terms of those funding agreements
have been met, and when there is reasonable assurance the funding will
be received. Certain research and development funding will be repayable
only on the occurrence of specified future events. If such events do
not occur, no repayment would be required. We will recognize the
liability to repay research and development funding in the period in
which conditions arise that would cause research and development
funding to be repayable.
o We maintain an allowance for doubtful accounts for estimated losses
that may arise if any of our customers are unable to make required
payments. We consider the following factors when determining if
collection is reasonably assured: customer credit-worthiness, past
transaction history with the customer, current economic industry trends
and changes in customer payment terms. If we have no previous
experience with the customer, we typically obtain reports from credit
organizations to ensure that the customer has a history of paying its
creditors. We may also request financial information, including
financial statements, to ensure that the customer has the means of
making payment. If these factors indicate collection is not reasonably
assured, revenue is deferred until collection becomes reasonably
assured, which is generally upon receipt of cash. If the financial
condition of any of our customers deteriorates, we may increase our
allowance.
o We value our inventory at the lower of cost, determined on a
first-in-first-out basis, and estimated net realizable value. We assess
the need for an inventory writedown based on our assessment of
estimated market value using assumptions about future demand and market
conditions. Our reserve requirements generally increase as our
projected demand requirements decrease, due to market conditions,
technological and product life cycle changes and longer than previously
expected usage periods. If market conditions are worse than our
projections, we may further writedown the value of our inventory.
o We currently have intangible assets of $34.3 million, including
goodwill of $19.7 million generated from our acquisition of AirPrime in
August 2003. Goodwill is tested for impairment annually, or more often,
if an event or circumstance indicates that an impairment loss has been
incurred.
The initial goodwill impairment test was completed during the fourth
quarter of 2003, which resulted in no impairment loss. We assessed the
realizability of goodwill related to our reporting unit during the
fourth quarter and determined that its fair value did not have to be
re-computed because the components of the reporting unit had not
changed since the fair value computation completed at August 12, 2003,
the date of acquisition, the previous fair value amount exceeded the
carrying amount of the reporting unit by a substantial margin, and no
evidence exists to indicate that the current fair value of the
reporting unit would be less than its current carrying amount.
o We evaluate our deferred income tax assets to assess whether their
realization is more likely than not. If their realization is not
considered more likely than not, we provide for a valuation allowance.
The ultimate realization of our deferred tax assets is dependent upon
the generation of future taxable income during the periods in which
temporary differences become deductible. We consider projected future
taxable income and
14
tax planning strategies in making our assessment. If we determine that
we would not be able to realize our deferred tax assets, we may make an
adjustment to our deferred tax assets which would be charged to income.
o We accrue product warranty costs to provide for the repair or
replacement of defective products. Our accrual is based on an
assessment of historical experience and management's estimates. If we
suffer a decrease in the quality of our products, we may increase our
accrual.
o Under license agreements, we are committed to royalty payments based on
the sales of products using certain technologies. We recognize royalty
obligations as determinable in accordance with agreement terms. Where
agreements are not finalized, we have recognized our current best
estimate of the obligation. When the agreements are finalized, the
estimate will be revised accordingly.
o We recorded a lease provision during 2002 as a result of our
restructuring program by estimating the net present value of the future
cash outflows over the remaining lease period. The estimate was based
on various assumptions including the obtainable sublease rates and the
time it will take to find a suitable tenant. These assumptions are
influenced by market conditions and the availability of similar space
nearby. If market conditions change, we will adjust our provision.
During 2003, we increased our provision by $0.3 million due to changes
in market conditions.
o We are engaged in other legal actions arising in the ordinary course of
business and believe that the ultimate outcome of these actions will
not have a material adverse effect on our operating results, liquidity
or financial position. We estimate the range of liability related to
pending litigation where the amount and range of loss can be reasonably
estimated. We record our best estimate of a loss when the loss is
considered probable. As additional information becomes available, we
assess the potential liability relating to our pending litigation and
revise our estimates.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operating activities amounted to $14.3 million for 2003,
compared to cash used by operating activities of $4.7 million in 2002, an
improvement of $19.0 million. The source of cash in 2003 primarily resulted from
earnings from operations of $9.2 million, adjusted for non-cash items, reduced
inventory levels and changes in other operating assets and liabilities of $5.1
million. The increase in working capital was due to an increase in revenue for
2003. Generally, our working capital requirements will increase or decrease with
quarterly revenue levels. Our working capital requirements have also been
reduced through continued favorable collection efforts and streamlined supply
chain operations.
FINANCING ACTIVITIES
Cash provided by financing activities was $66.5 million in 2003, compared to a
use of cash of $1.1 million in 2002. The source of cash in 2003 was the
completion of a new issue and secondary public offering in the United States and
Canada. Our net proceeds after selling commissions of $3.8 million and expenses
of the offering of approximately $1.0 million amounted to approximately $67.4
million.
As of December 31, 2003, we did not have any off-balance sheet finance or
special purpose entities. During the year ended December 31, 2003, we entered
into a number of capital leases relating to purchases of research and
development equipment and information systems. These leases and commitments are
disclosed in the consolidated financial statements.
INVESTING ACTIVITIES
Cash used by investing activities was $45.3 million in 2003, compared to cash
provided by investing activities of $28.6 million in 2002. The use of cash in
2003 was due primarily to the net investment of cash of $39.3 million in 2003
from the offering compared to net maturities of $31.9 million in 2002.
Expenditures on intangible assets were $4.1 million in 2003, compared to $1.4
million in 2002, and were primarily for license fees and patents. Capital
expenditures were $2.0 million in 2003, compared to $2.2 million in 2002, and
were primarily for research and development equipment.
15
We do not have any trading activities that involve any type of commodity
contracts that are accounted for at fair value but for which a lack of market
price quotations necessitate the use of fair value estimation techniques.
CASH REQUIREMENTS
We expect our operations will generate positive net cash during fiscal 2004. We
also expect that lower cash requirements for restructuring activities and the
effect of previous cost reduction actions, offset by the additional working
capital impact of the AirPrime acquisition will contribute to positive cash flow
from operations for 2004.
Our near-term cash requirements are primarily related to funding our operations,
capital expenditures and other obligations discussed below. We expect to
continue to use cash to meet these requirements during 2004. We believe our cash
and cash equivalents of $70.4 million, short-term investments of $14.8 million
and long-term investments of $24.6 million as of December 31, 2003 will be
sufficient to fund our cash requirements for the next twelve months. However, we
cannot provide assurance that our actual cash requirements will not be greater
than we currently expect.
The following table quantifies our future contractual obligations as of December
31, 2003:
PAYMENTS DUE IN FISCAL
----------------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
----- ---- ---- ---- ---- ---- ----------
Obligations under capital
leases (a).............. 141 141 -- -- -- -- --
Operating leases (a)........ 18,575 2,877 2,551 2,589 2,660 2,674 5,224
--------- --------- --------- --------- ---------- --------- -----------
Total $ 18,716 $ 3,018 $ 2,551 $ 2,589 $ 2,660 $ 2,674 $ 5,224
========= ========= ========= ========= ========== ========= ==========
(a) See notes 11 and 17 to our consolidated financial statements for additional
information.
We believe our current cash and cash equivalents, short and long term
investments and cash generated from operations will satisfy our expected working
and other capital requirements for the foreseeable future based on current
business plans.
We have entered into purchase commitments totaling $28.3 million with certain
contract manufacturers under which we commit to buy a minimum amount of
designated products. In certain of these agreements, we may be required to
acquire and pay for such products up to the prescribed minimum or forecasted
purchases. The terms of the commitment require us to purchase $28.3 million of
product from certain contract manufacturers between January 2004 and August
2004.
SOURCES AND USES OF CASH
In November 2003, we completed a new issue and secondary public offering in the
United States and Canada. Our net proceeds after selling commissions and
expenses of the offering amounted to approximately $67.4 million. The net
proceeds from the offering are to be used for product development, working
capital and general corporate purposes, including acquisitions.
We expect the proceeds from the November 2003 financing and our expected future
operating cash flow will continue to fund our operations. Therefore, we have no
foreseeable requirements to return to the capital markets for additional
funding.
One of our significant sources of funds is expected to be our future operating
cash flow. In the past, our revenue was dependent on us fulfilling our
commitments in accordance with agreements with major customers. We have
substantially completed volume shipments on those contracts. Therefore, in the
future, we will rely on purchase orders with these customers and these
customers, like our other customers, will be under no contractual obligation to
purchase our products. If they do not make such purchases, our revenue will be
negatively impacted. We have a risk of impairment to our liquidity should there
be any interruption to our business operations.
The source of funds for our future capital expenditures and commitments is cash,
short and long-term investments, accounts receivable, research and development
funding, borrowings and cash from operations, as follows:
o Net cash and short-term investments amounted to $85.1 million at
December 31, 2003 compared to $34.8 million at December 31, 2002.
16
o Long-term investments amounted to $24.6 million at December 31, 2003
compared to nil at December 31, 2002.
o Accounts receivable amounted to $21.6 million at December 31, 2003
compared to $13.9 million at December 31, 2002.
o We have a $10.0 million operating line of credit with a Canadian
chartered bank. The credit facility bears interest at prime plus 1.25%
and is secured by a general security agreement providing a first charge
against all assets. At December 31, 2003, there were no borrowings
under this line of credit.
MARKET RISK DISCLOSURE
During the year ended December 31, 2003, 68% of our revenue was earned from
United States-based customers compared to 78% in the year ended December 31,
2002. Our risk from currency fluctuations between the Canadian and U.S. dollar
is reduced by purchasing inventory, other costs of sales and many of our
services in U.S. dollars. We are exposed to foreign currency fluctuations since
the majority of our research and development, sales and marketing, and
administration costs are incurred in Canada. We monitor our exposure to
fluctuations between the Canadian and U.S. dollars. As a result of the adoption
of U.S. dollars as our currency of measurement in the year ended December 31,
1999, our foreign currency risk has changed from U.S. dollar denominated
monetary assets and liabilities to non-U.S. dollar denominated monetary assets
and liabilities and the risk of the impact of exchange rate changes relative to
the U.S. dollar. As we have available funds and very little debt, we have not
been adversely affected by significant interest rate fluctuations.
With our international expansion into Europe and the Asia-Pacific region, we are
transacting business in additional foreign currencies and the potential for
currency fluctuations is increasing. The risk associated with currency
fluctuations between the U.S. dollar and foreign currencies in Europe and the
Asia-Pacific region has been minimal as such transactions have not been material
to date. During 2003, we continued to enter into additional distribution
agreements in Europe and the Asia-Pacific region that are denominated primarily
in US dollars. We expect that, as our business expands in Europe, we will also
continue to be exposed to Euro transactions. To date we have not entered into
any futures contracts. To manage our foreign currency risks, we may enter into
such contracts should we consider it to be advisable to reduce our exposure to
future foreign exchange fluctuations.
Currently, we do not have any hedging activities or derivative instruments,
therefore the impact of FAS No. 133 is not material to our financial results.
RELATED PARTY TRANSACTIONS
During 2003, there were no material related party transactions, except for $1.0
million loaned to AirPrime for working capital purposes prior to closing the
acquisition on August 12, 2003.
FORWARD-LOOKING STATEMENTS
Our annual report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other things,
plans and timing for the introduction or enhancement of our services and
products, statements about future market conditions, supply and demand
conditions, channel inventory and sell through, revenue, gross margin, operating
expenses, profits, and other expectations, intentions and plans contained in
this annual report that are not historical fact. Our expectations regarding
future revenues and earnings depend in part upon our ability to develop,
manufacture, and supply products that we do not produce today and that meet
defined specifications as well as our ability to bring the Voq professional
phone to market. When used in this annual report, the words "plan", "expect",
"believe", and similar expressions generally identify forward-looking
statements. These statements reflect our current expectations. They are subject
to a number of risks and uncertainties, including but not limited to, changes in
technology and changes in the wireless data communications market. In light of
the many risks and uncertainties surrounding the wireless data communications
market, you should understand that we cannot assure you that the forward-looking
statements contained in this annual report will be realized.
17
RISK FACTORS
Our business is subject to significant risks and past performance is no
guarantee of future performance. Some of the risks we face are:
WE HAVE INCURRED NET LOSSES IN THE PAST AND MAY NOT SUSTAIN PROFITABILITY.
While we had earnings from operations for the year ended December 31,
2003, we have incurred a loss from operations in each of the previous
three fiscal years. As of December 31, 2003 our accumulated deficit was
approximately $71.3 million. While we had net earnings of $2.3 million for
the year ended December 31, 2003, our ability to achieve and maintain
profitability will depend on, among other things, the continued sales of
our products and the successful development and commercialization of new
products. We cannot predict if the current profitability will be
sustainable on a quarterly or an annual basis. As a result, our share
price may decline.
If the current profitability does not continue, we may need to raise
additional capital in the future. Additional financing may not be
available, and even if available, may not be on acceptable terms. We may
seek to raise additional capital though an offering of common shares,
preference shares or debt, which may result in dilution, and/or the
issuance of securities with rights senior to the rights, of the holders of
common shares.
IF DEMAND FOR OUR CURRENT PRODUCTS DECLINES AND WE ARE UNABLE TO LAUNCH
SUCCESSFUL NEW PRODUCTS, OUR REVENUES WILL DECREASE.
If the markets in which we compete fail to grow, or grow more slowly than
we currently anticipate, or if we are unable to establish markets for our
new products, it would significantly harm our business, results of
operations and financial condition. In addition, demand for one or all of
our current products could decline as a result of competition,
technological change or other factors.
IF WE ARE UNABLE TO DESIGN AND DEVELOP NEW PRODUCTS THAT GAIN SUFFICIENT
COMMERCIAL ACCEPTANCE, WE MAY BE UNABLE TO MAINTAIN OUR MARKET SHARE OR TO
RECOVER OUR RESEARCH AND DEVELOPMENT EXPENSES AND OUR REVENUES COULD DECLINE.
We depend on designing, developing and marketing new products to achieve
much of our future growth. Our ability to design, develop and market new
products depends on a number of factors, including, but not limited to the
following:
o Our ability to attract and retain skilled technical employees;
o The availability of critical components from third parties;
o Our ability to successfully complete the development of products in a
timely manner; and
o Our ability to manufacture products at an acceptable price and quality.
A failure by us, or our suppliers, in any of these areas, or a failure of
new products, such as Voq, to obtain commercial acceptance, could mean we
receive less revenue than we anticipate and we are unable to recover our
research and development expenses, and could result in a decrease in the
market price for our shares.
THE LOSS OF ANY OF OUR MATERIAL CUSTOMERS COULD ADVERSELY AFFECT OUR REVENUE AND
PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE.
We depend on a small number of customers for a significant portion of our
revenues. In the last two fiscal years, there have been four different
customers that individually accounted for more than 10% of our revenues.
If any of these customers reduce their business with us or suffer from
business failure, our revenues and profitability could decline, perhaps
materially.
WE DO NOT EXPECT TO HAVE SIGNIFICANT LONG TERM CUSTOMER CONTRACTS AND OUR
REVENUES WILL BE NEGATIVELY IMPACTED IF CUSTOMERS DO NOT CONTINUE TO ORDER OUR
PRODUCTS UNDER PURCHASE ORDERS.
In late 1999 and 2000, we entered into significant supply contracts with
AT&T Wireless, Sprint PCS and Verizon Wireless. We have substantially
completed volume shipments on all three contracts during the last quarter
18
of 2003. Thereafter, we will rely on purchase orders with these
customers, and these customers, like our other customers, will be under
no contractual obligation to purchase our products. If they do not make
such purchases, our revenue and our share price may decline.
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT GROSS MARGINS AND, AS A RESULT, OUR
PROFITABILITY MAY DECREASE.
We generally price our products based on our estimate of future production
costs. If actual production costs are higher than we anticipate, our gross
margins will decrease. In addition, competitive pressures may force us to
lower our product prices, which will decrease our gross margins if we are
unable to offset that effect by cost reduction measures. If our gross
margins are reduced with respect to an important product line, or if our
sales of lower margin products exceed our sales of higher margin products,
our profitability may decrease and our business could suffer.
OUR REVENUES AND EARNINGS MAY FLUCTUATE FROM QUARTER TO QUARTER, WHICH COULD
AFFECT THE MARKET PRICE OF OUR COMMON SHARES.
Our revenues and earnings may vary from quarter to quarter as a result of
a number of factors, including:
o The timing of releases of our new products;
o The timing of substantial sales orders;
o Possible seasonal fluctuations in demand;
o Possible delays in the manufacture or shipment of current or new
products; and
o Possible delays or shortages in component supplies.
Because our operating expenses are determined based on anticipated sales,
are generally fixed and are incurred throughout each fiscal quarter, any
of the factors listed above could cause significant variations in our
revenues and earnings in any given quarter. Thus, our quarterly results
are not necessarily indicative of our overall business, results of
operations and financial condition. However, quarterly fluctuations in our
revenues and earnings may affect the market price of our common shares.
WE DEPEND ON A FEW THIRD PARTIES TO MANUFACTURE OUR PRODUCTS AND SUPPLY KEY
COMPONENTS. IF THEY DO NOT MANUFACTURE OUR PRODUCTS PROPERLY OR CANNOT MEET OUR
NEEDS IN A TIMELY MANNER, WE MAY BE UNABLE TO FULFILL OUR PRODUCT DELIVERY
OBLIGATIONS AND OUR COSTS MAY INCREASE, AND OUR REVENUE AND MARGINS COULD
DECREASE.
We outsource a substantial part of the manufacture of our products to
third parties and depend heavily on the ability of these manufacturers to
meet our needs in a timely and satisfactory manner. Some components used
by us may only be available from a small number of suppliers, in some
cases from only one supplier. We currently rely on three manufacturers,
any of which may terminate the manufacturing contract with us at the end
of any contract year. Our reliance on third party manufacturers and
suppliers subjects us to a number of risks, including the following:
o The absence of guaranteed manufacturing capacity;
o Reduced control over delivery schedules, production yields and costs;
and
o Inability to control the amount of time and resources devoted to the
manufacture of our products.
If we are unable to successfully manage any of these risks or to locate
alternative or additional manufacturers or suppliers in a timely and
cost-effective manner, we may not be able to deliver products in a timely
manner. In addition, our results of operations could be harmed by
increased costs, reduced revenues and reduced margins.
WE DO NOT HAVE FIXED-TERM EMPLOYMENT AGREEMENTS WITH OUR KEY PERSONNEL AND THE
LOSS OF ANY KEY PERSONNEL MAY HARM OUR ABILITY TO COMPETE EFFECTIVELY.
None of our officers or other key employees has entered into a fixed-term
employment agreement. Our success depends in large part on the abilities
and experience of our executive officers and other key employees.
Competition for highly skilled management, technical, research and
development and other key employees is intense in the wireless
communications industry. We may not be able to retain our current key
employees or
19
attract and retain additional key employees as needed. The loss of key
employees could disrupt our operations and impair our ability to compete
effectively.
Our Chief Financial Officer, or CFO, and our Chief Technical Officer, or
CTO, are scheduled to retire in the next several months. We are currently
recruiting a successor to the CFO. We are not seeking a successor for the
CTO, and we expect that his present duties will be assumed by certain of
our existing officers. If we are unable to adequately replace our CFO or
if our other executive officers are unable to adequately undertake our
CTO's duties, our operations may be disrupted or our ability to compete
may be impaired.
WE MAY HAVE DIFFICULTY RESPONDING TO CHANGING TECHNOLOGY, INDUSTRY STANDARDS AND
CUSTOMER PREFERENCES, WHICH COULD CAUSE US TO BE UNABLE TO RECOVER OUR RESEARCH
AND DEVELOPMENT EXPENSES AND LOSE REVENUES.
The wireless industry is characterized by rapid technological change. Our
success will depend in part on our ability to develop products that keep
pace with the continuing changes in technology, evolving industry
standards and changing customer and end-user preferences and requirements.
Our products embody complex technology that may not meet those standards,
changes and preferences. In addition, wireless communications service
providers require that wireless data systems deployed in their networks
comply with their own standards, which may differ from the standards of
other providers. We may be unable to successfully address these
developments in a timely basis or at all. Our failure to respond quickly
and cost-effectively to new developments through the development of new
products or enhancements to existing products could cause us to be unable
to recover significant research and development expenses and reduce our
revenues.
COMPETITION FROM BIGGER MORE ESTABLISHED COMPANIES WITH GREATER RESOURCES MAY
PREVENT US FROM INCREASING OR MAINTAINING OUR MARKET SHARE AND COULD RESULT IN
PRICE REDUCTIONS AND REDUCED REVENUES.
The wireless industry is intensely competitive and subject to rapid
technological change. We expect competition to intensify. More established
and larger companies with greater financial, technical and marketing
resources sell products that compete with ours. We also may introduce new
products that will put us in direct competition with major new
competitors. Existing or future competitors may be able to respond more
quickly to technological developments and changes or may independently
develop and patent technologies and products that are superior to ours or
achieve greater acceptance due to factors such as more favorable pricing
or more efficient sales channels. If we are unable to compete effectively
with our competitors' pricing strategies, technological advances and other
initiatives, our market share and revenues may be reduced.
AS THE ADOPTION OF WIRELESS DATA HAS CONTINUED TO INCREASE, WE HAVE EXPERIENCED
AN INCREASE IN COMPETITION IN OUR MARKET. IF WIRELESS ADOPTION CONTINUES TO
GROW, WE MAY CONTINUE TO EXPERIENCE INCREASED COMPETITION FROM NEW ENTRANTS INTO
THE MARKET, AND FROM BIGGER AND MORE ESTABLISHED COMPANIES WITH GREATER
RESOURCES, WHICH COULD RESULT IN REDUCED REVENUES AND PROFITS.
WE DEPEND ON THIRD PARTIES TO OFFER WIRELESS DATA AND VOICE COMMUNICATIONS
SERVICES FOR OUR PRODUCTS TO OPERATE.
Our products can only be used over wireless data and voice networks
operated by third parties. In addition, our future growth depends, in
part, on the successful deployment of next generation wireless data and
voice networks by third parties for which we are developing products. If
these network operators cease to offer effective and reliable service, or
fail to market their services effectively, sales of our products will
decline and our revenues will decrease.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES, INCLUDING OUR ACQUISITION OF
AIRPRIME, MAY RESULT IN DISRUPTIONS TO OUR BUSINESS OR MAY NOT ACHIEVE THE
ANTICIPATED BENEFITS.
As part of our business strategy, we may acquire additional assets and
businesses principally relating to or complementary to our current
operations. Any other acquisitions and/or mergers by us will be
accompanied by the risks commonly encountered in acquisitions of
companies. These risks include, among other things:
o Exposure to unknown liabilities of acquired companies;
o Higher than anticipated acquisition costs and expenses;
20
o Effects of costs and expenses of acquiring and integrating new
businesses on our operating results and financial condition;
o The difficulty and expense of integrating the operations and
personnel of the companies;
o Disruption of our ongoing business;
o Diversion of management's time and attention away from our remaining
business during the integration process;
o Failure to maximize our financial and strategic position by the
successful incorporation of acquired technology;
o The inability to implement uniform standards, controls, procedures
and policies;
o The loss of key employees and customers as a result of changes in
management;
o The incurrence of amortization expenses; and
o Possible dilution to our shareholders.
In addition, geographic distances may make integration of businesses more
difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions. If realized,
these risks could reduce shareholder value.
On August 12, 2003, we completed our acquisition of AirPrime. The
integration of AirPrime into our business is ongoing and the acquisition
of AirPrime is subject to all of the risks set out above.
OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT ATTENTION
AND HARM TO OUR REPUTATION.
It is possible that other parties may claim that we have violated their
intellectual property rights. Rights to intellectual property can be
difficult to verify. Competitors could assert, for example, that former
employees of theirs whom we have hired have misappropriated their
proprietary information for our benefit. A successful infringement claim
against us could damage us in the following ways:
o We may be liable for damages and litigation costs, including
attorneys' fees;
o We may be prohibited from further use of the intellectual property;
o We may have to license the intellectual property, incurring
licensing fees; and
o We may have to develop a non-infringing alternative, which could be
costly and delay or result in the loss of sales.
Regardless of the outcome, an infringement claim could result in
substantial costs, diversion of resources and management attention and
harm to our reputation.
IF WE ARE SUCCESSFUL IN THE DESIGN AND DEVELOPMENT OF OUR NEW PRODUCTS, AND
THERE IS COMMERCIAL ACCEPTANCE OF OUR PRODUCTS, SUCH AS THE VOQ SMART PHONE,
OTHERS MAY CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT ATTENTION
AND HARM OUR REPUTATION.
MISAPPROPRIATION OF OUR INTELLECTUAL PROPERTY COULD PLACE US AT A COMPETITIVE
DISADVANTAGE.
Our intellectual property is important to our success. We rely on a
combination of patent protection, copyrights, trademarks, trade secrets,
licenses, non-disclosure agreements and other contractual agreements to
protect our intellectual property. Third parties may attempt to copy
aspects of our products and technology or obtain information we regard as
proprietary without our authorization. If we are unable to protect our
intellectual property against unauthorized use by others it could have an
adverse effect on our competitive position.
21
Our strategies to deter misappropriation could be inadequate due to the
following risks:
o Non-recognition of the proprietary nature or inadequate protection
of our methodologies in the United States, Canada or foreign
countries;
o Undetected misappropriation of our intellectual property;
o The substantial legal and other costs of protecting and enforcing
our rights in our intellectual property; and
o Development of similar technologies by our competitors.
In addition, we could be required to spend significant funds and our
managerial resources could be diverted in order to defend our rights,
which could disrupt our operations.
AS OUR BUSINESS EXPANDS INTERNATIONALLY, WE WILL BE EXPOSED TO ADDITIONAL RISKS
RELATING TO INTERNATIONAL OPERATIONS.
Our expansion into international operations exposes us to additional risks
unique to such international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable;
o Unexpected changes in regulatory requirements, wireless
communications standards, exchange rates, trading policies, tariffs
and other barriers;
o Uncertainties of laws and enforcement relating to the protection of
intellectual property;
o Language barriers; and
o Potential adverse tax consequences.
Furthermore, if we are unable to further develop distribution channels in
Europe and the Asia-Pacific region we may not be able to grow our
international operations and our ability to increase our revenue will be
negatively impacted.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL OUR
PRODUCTS.
Our products are subject to certain mandatory regulatory approvals in the
United States, Canada and other countries in which we operate. In the
United States, the Federal Communications Commission regulates many
aspects of communications devices. In Canada, similar regulations are
administered by the Ministry of Industry, through Industry Canada.
Although we have obtained all the necessary Federal Communications
Commission, Industry Canada and other required approvals for the products
we currently sell, we may not obtain approvals for future products on a
timely basis, or at all. In addition, regulatory requirements may change
or we may not be able to obtain regulatory approvals from countries other
than the United States and Canada in which we may desire to sell products
in the future.
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR MAY AFFECT OUR OPERATING RESULTS.
We are exposed to fluctuations in the exchange rate between the United
States dollar and the Canadian dollar through our operations in Canada. To
reduce our risk because of currency fluctuations, we purchase inventory,
other costs of sales items and many of our services in United States
dollars. If the Canadian dollar rises relative to the United States
dollar, our operating results may be impacted. To date, we have not
entered into any foreign currency futures contracts as part of a hedging
policy, but we have purchased Canadian currency to cover our Canadian
currency requirements for the next several fiscal quarters. We have
entered into distribution agreements in Europe and the Asia-Pacific region
that are denominated primarily in U.S. dollars. We expect that as our
business expands in Europe and the Asia-Pacific region, we will also be
exposed to additional foreign currency transactions and to the associated
currency risk. To date, we have not entered into any futures contracts.
22
MANAGEMENT'S STATEMENT OF RESPONSIBILITIES
The management of Sierra Wireless, Inc. is responsible for the preparation of
the accompanying consolidated financial statements and the preparation and
presentation of information in the Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and are considered by management to present fairly
the financial position and operating results of the Company.
The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded and that financial reports are properly maintained to
provide accurate and reliable financial statements.
The Company's audit committee is comprised entirely of non-management directors
and is appointed by the Board of Directors annually. The committee meets
periodically with the Company's management and independent auditors to review
the consolidated financial statements and the independent auditors' report. The
audit committee reported its findings to the Board of Directors who have
approved the consolidated financial statements.
The Company's independent auditors, KPMG LLP, have examined the consolidated
financial statements and their report follows.
/s/ David B. Sutcliffe /s/ Peter W. Roberts
David B. Sutcliffe Peter W. Roberts
Chairman and Chief Executive Officer Chief Financial Officer
January 21, 2004
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Sierra Wireless, Inc. as at
December 31, 2003 and 2002 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 from 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 2003 and 2002 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2003 in
accordance with accounting principles generally accepted in the United States of
America.
On January 21, 2004, we reported separately to the shareholders of the Company
on the consolidated financial statements as at and for the periods presented
above, which consolidated financial statements were prepared in accordance with
Canadian generally accepted accounting principles.
/s/ KMPG LLP
Chartered Accountants
Vancouver, Canada
January 21, 2004
23
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of United States dollars, except per share amounts)
(Prepared in accordance with United States generally accepted
accounting principles (GAAP))
YEARS ENDED DECEMBER 31,
--------------------------------
2001 2002 2003
--------- --------- -------
Revenue...................................................... $62,348 $77,259 $101,709
Cost of goods sold........................................... 47,035 69,261 60,551
-------- -------- --------
Gross margin 15,313 7,998 41,158
-------- -------- --------
Expenses:
Sales and marketing........................................ 12,726 11,564 11,585
Research and development, net (note 15).................... 16,902 14,896 15,994
Administration............................................. 10,647 4,785 6,597
Restructuring and other charges (note 4)................... -- 12,869 1,220
Integration costs (note 5)................................. -- -- 1,947
Amortization............................................... 2,084 2,331 2,327
-------- -------- --------
42,359 46,445 39,670
-------- -------- --------
Earnings (loss) from operations.............................. (27,046) (38,447) 1,488
Other income................................................. 2,504 247 965
--------- --------- ---------
Earnings (loss) before income taxes.......................... (24,542) (38,200) 2,453
Income tax expense (recovery) (note 14)...................... (273) 3,463 198
--------- -------- --------
Net earnings (loss).......................................... $(24,269) $(41,663) $ 2,255
========= ========= ========
Earnings (loss) per share (note 16):
Basic...................................................... $ (1.50) $ (2.56) $ 0.12
Diluted.................................................... $ (1.50) $ (2.56) $ 0.12
========= ========= ========
See accompanying notes to consolidated financial statements.
24
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
DECEMBER 31,
----------------------
2002 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 34,841 $ 70,358
Short-term investments (note 6).................................................. -- 14,760
Accounts receivable, net of allowance for doubtful
accounts of $2,230 (2002 -- $3,068)............................................ 13,865 21,566
Inventories (note 7)............................................................. 6,673 1,511
Prepaid expenses................................................................. 864 2,223
--------- ----------
56,243 110,418
Long-term investments (note 6)..................................................... -- 24,639
Fixed assets (note 8).............................................................. 7,198 5,985
Intangible assets (note 9)......................................................... 6,907 14,620
Goodwill (note 9).................................................................. -- 19,706
Deferred income taxes (note 14).................................................... 500 500
Other.............................................................................. 241 --
--------- ----------
$ 71,089 $ 175,868
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 3,017 $ 5,966
Accrued liabilities.............................................................. 12,431 22,221
Deferred revenue and credits..................................................... 297 399
Current portion of long-term liabilities (note 10)............................... 2,803 1,328
Current portion of obligations under capital lease (note 11)..................... 831 141
---------- ----------
19,379 30,055
Long-term liabilities (note 10).................................................... 2,896 2,266
Obligations under capital lease (note 11).......................................... 60 --
Shareholders' equity:
Share capital (note 12)
Authorized
Unlimited number of common and preference shares with no par value
Common shares, 24,822,071 (2002 - 16,345,396) issued and outstanding ......... 123,047 214,047
Warrants......................................................................... -- 1,538
Deficit.......................................................................... (73,564) (71,309)
Accumulated other comprehensive income
Cumulative translation adjustments............................................ (729) (729)
---------- ----------
48,754 143,547
---------- ----------
$ 71,089 $ 175,868
========== ==========
Commitments and contingencies (note 17)
See accompanying notes to consolidated financial statements.
/s/ David B Sutcliffe /s/ S. Jane Rowe
DAVID B. SUTCLIFFE S. JANE ROWE
Director Director
25
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in thousands of United States dollars, except number of shares)
(Prepared in accordance with United States GAAP)
ACCUMULATED
OTHER
COMMON SHARES WARRANTS COMPREHENSIVE
------------------------ ------------------ INCOME
NUMBER AMOUNT NUMBER AMOUNT DEFICIT (LOSS) TOTAL
------------ ---------- -------- -------- ----------- ----------- ----------
Balance December 31, 2000......... 16,009,575 $ 122,174 -- $ -- $ (7,632) $ (729) $ 113,813
Net and comprehensive loss........ -- -- -- -- (24,269) -- (24,269)
Stock option exercises............ 176,195 499 -- -- -- -- 499
------------ ---------- -------- -------- ----------- ----------- ----------
Balance December 31, 2001......... 16,185,770 122,673 -- -- (31,901) (729) 90,043
Net and comprehensive loss........ -- -- -- -- (41,663) -- (41,663)
Stock option exercises............ 159,626 374 -- -- -- -- 374
------------ ---------- -------- -------- ----------- ----------- ----------
Balance December 31, 2002......... 16,345,396 123,047 -- -- (73,564) (729) 48,754
Net and comprehensive earnings.... -- -- -- -- 2,255 -- 2,255
Issued for acquisitions (note 3) . 3,708,521 22,377 -- -- -- -- 22,377
Issued for cash (note 12)......... 4,442,222 72,186 -- -- -- -- 72,186
Share issue costs................. -- (4,761) -- -- -- -- (4,761)
Stock option exercises............ 325,932 1,198 -- -- -- -- 1,198
Warrants issued................... -- -- 138,696 1,538 -- -- 1,538
------------ ---------- -------- -------- ----------- ----------- ----------
Balance December 31, 2003......... 24,822,071 $ 214,047 138,696 $ 1,538 $ (71,309) $ (729) $ 143,547
============ ========== ======== ======== ============ ============ ==========
See accompanying notes to consolidated financial statements.
26
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2002 2003
--------- --------- -------
Cash flows from operating activities:
Net earnings (loss).............................................. $ (24,269) $ (41,663) $ 2,255
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Amortization.................................................. 6,661 6,788 5,669
Non-cash restructuring and other charges...................... -- 28,593 895
Loss on disposal.............................................. -- 597 2
Deferred income taxes......................................... (15) 3,754 --
Accrued warrants.............................................. 671 481 386
Changes in operating assets and liabilities
Accounts receivable........................................... 12,084 (3,361) (5,360)
Inventories................................................... (13,031) 2,517 5,878
Prepaid expenses.............................................. 59 159 (1,087)
Accounts payable.............................................. (6,945) (1,339) 225
Accrued liabilities........................................... 3,420 (463) 5,296
Deferred revenue and credits.................................. 300 (753) 101
--------- ---------- ---------
Net cash provided by (used in) operating activities.............. (21,065) (4,690) 14,260
Cash flows from investing activities:
Business acquisitions (note 3)................................... -- -- 33
Proceeds on disposal............................................. -- 338 4
Purchase of fixed assets......................................... (10,523) (2,219) (1,972)
Increase in intangible assets.................................... (3,328) (1,431) (4,077)
Increase in other assets......................................... (143) -- --
Purchase of long-term investments................................ -- -- (24,639)
Purchase of short-term investments............................... (69,411) (14,662) (25,103)
Proceeds on maturity of short-term investments................... 109,676 46,541 10,492
--------- --------- ---------
Net cash provided by (used in) investing activities.............. 26,271 28,567 (45,262)
Cash flows from financing activities:
Issue of common shares, net of share issue costs................. 499 374 68,623
Increase in long-term liabilities................................ 255 -- --
Repayment of long-term liabilities............................... (766) (1,495) (2,104)
---------- ---------- ----------
Net cash provided by (used in) financing activities.............. (12) (1,121) 66,519
----------- ----------- ----------
Net increase in cash and cash equivalents.......................... 5,194 22,756 35,517
Cash and cash equivalents, beginning of year....................... 6,891 12,085 34,841
--------- --------- ---------
Cash and cash equivalents, end of year............................. $ 12,085 $ 34,841 $ 70,358
========= ========= =========
See supplementary cash flow information (note 18)
See accompanying notes to consolidated financial statements.
27
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(Expressed in thousands of United States dollars, except
per share amounts and number of shares)
(Prepared in accordance with United States GAAP)
1. NATURE OF OPERATIONS
We were incorporated under the Canada Business Corporations Act on May 31, 1993.
We develop and market a broad range of products that include wireless data
modems for portable computers, embedded modules for original equipment
manufacturers, or OEMs, rugged vehicle-mounted modems and mobile phones. Our
products permit users to access wireless data and voice networks using notebook
computers, personal digital assistants, or PDAs, vehicle-based systems or mobile
phones.
2. SIGNIFICANT ACCOUNTING POLICIES
Management has prepared these consolidated financial statements in accordance
with accounting principles generally accepted in the United States.
(a) PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Sierra Wireless,
Inc. and its wholly-owned subsidiaries Sierra Wireless Data, Inc., Sierra
Wireless America, Inc. (formerly AirPrime, Inc.), Sierra Wireless (UK) Limited,
Sierra Wireless (Asia Pacific) Limited, Sierra Wireless SRL and Sierra Wireless
ULC from their respective dates of formation or acquisition. We have eliminated
all significant intercompany balances and transactions.
(b) USE OF ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets, particularly the recoverability of fixed assets,
intangible assets, goodwill and deferred income taxes, and warranty accruals and
other liabilities, and disclosures of contingent 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 the estimates.
(c) CASH EQUIVALENTS
Cash equivalents include short-term deposits, which are all highly liquid
marketable securities having a term to maturity of three months or less when
acquired. We value our short-term deposits at cost.
(d) SHORT-TERM INVESTMENTS
Short-term investments, all of which we categorize as available-for-sale, are
carried at quoted market value. We reflect unrealized holding gains (losses)
related to available-for-sale investments, after deducting amounts allocable to
income taxes, as part of accumulated other comprehensive income, a separate
component of shareholders' equity. There were no significant unrealized holding
gains or losses on available-for-sale securities during the three-year period
ending December 31, 2003.
(e) INVENTORIES
Inventories consist of electronic components and finished goods and are valued
at the lower of cost, determined on a first-in-first-out basis, and estimated
net realizable value.
(f) RESEARCH AND DEVELOPMENT
We expense research and development costs as they are incurred. To date we have
had no significant software development costs that would be required to be
capitalized pursuant to Financial Accounting Standards ("FAS") No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed".
28
We follow the cost reduction method of accounting for government research and
development funding, whereby the benefit of the funding is recognized as a
reduction in the cost of the related expenditure when certain criteria
stipulated under the terms of those funding agreements have been met, and there
is reasonable assurance the research and development funding will be received.
Certain research and development funding is repayable only on the occurrence of
specified future events. If such events do not occur, no repayment is required.
We recognize the liability to repay research and development funding in the
period in which conditions arise that will cause research and development
funding to be repayable.
(g) LONG-TERM INVESTMENTS
Long-term investments, all of which we categorize as available-for-sale, are
carried at quoted market value. We reflect unrealized holding gains (losses)
related to available-for-sale investments, after deducting amounts allocable to
income taxes, as part of accumulated other comprehensive income, a separate
component of shareholders' equity. There were no significant unrealized holding
gains or losses on available-for-sale securities at December 31, 2003.
(h) FIXED ASSETS
We initially record fixed assets at cost. We subsequently provide amortization
on a straight-line basis over the following periods:
Furniture and fixtures............................................ 5 years
Research and development equipment................................ 3 years
Tooling........................................................... 3 years
Software.......................................................... 3-5 years
Office equipment.................................................. 5 years
We amortize leasehold improvements on a straight-line basis over the lesser of
their useful lives or lease terms.
(i) INTANGIBLE ASSETS
PATENTS AND TRADEMARKS
Consideration paid for patents and trademarks is amortized on a straight-line
basis over three to five years commencing with the date the patents or
trademarks are granted.
LICENSE FEES
Consideration paid for license fees is amortized on a straight-line basis over
the shorter of the term of the license or five years.
INTELLECTUAL PROPERTY, CUSTOMER RELATIONSHIPS AND DATABASES
Consideration paid for intellectual property, customer relationships and
databases is amortized on a straight-line basis over three to five years.
Each of these intangible assets is subject to an impairment test as described
in note 1(k).
(j) GOODWILL
Goodwill represents the excess of the purchase price of an acquired enterprise
over the fair value assigned to assets acquired and liabilities assumed in a
business combination. Goodwill is allocated as of the date of the business
combination to the reporting units that are expected to benefit from the
synergies of the business combination.
Goodwill has an indefinite life, is not amortized and is subject to a two-step
impairment test at least annually. The first step compares the fair value of the
reporting unit to its carrying amount, which includes the goodwill. When the
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not to be impaired and the second step of the
impairment test is unnecessary. If the carrying amount exceeds the fair value,
the second part of the test is performed to measure the amount of the impairment
loss. The second step compares the implied fair value of the reporting unit
goodwill with the carrying amount of the goodwill. If the carrying amount
exceeds the fair value of the goodwill, an impairment loss is recognized equal
to that excess.
29
(k) IMPAIRMENT OF LONG-LIVED ASSETS
We monitor the recoverability of long-lived assets, which includes fixed assets
and intangible assets, other than goodwill, based on factors such as future
asset utilization and the future undiscounted cash flows expected to result from
the use of the related assets. Our policy is to record an impairment loss in the
period when we determine that the carrying amount of the asset will not be
recoverable. At that time the carrying amount is written down to fair value.
(l) INCOME TAXES
We account for income taxes in accordance with FAS No. 109, "Accounting for
Income Taxes", which requires the use of the asset and liability method. Under
this method, deferred income taxes are recognized for the future income tax
consequences attributable to differences between the financial statement
carrying values and their respective income tax bases (temporary differences).
Changes in the net deferred tax asset or liability are generally included in
earnings. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is included in income
in the period that includes the enactment date. Deferred income tax assets are
evaluated and if their realization is not considered "more likely than not", a
valuation allowance is provided.
(m) STOCK-BASED COMPENSATION
We have elected under FAS No. 123, "Accounting for Stock-based Compensation", to
account for employee stock options using the intrinsic value method. This method
is described in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As we grant all
stock options with an exercise price equal to the market value of the underlying
common shares on the date of the grant, no compensation expense is required to
be recognized under APB 25. FAS No. 123 uses a fair value method of calculating
the cost of stock option grants. Had compensation cost for our employee stock
option plan been determined by this method, our net loss and loss per share
would have been as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2002 2003
--------- --------- -------
Net earnings (loss):
As reported............................................................ $(24,269) $ (41,663) $ 2,255
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards........... (10,426) (7,817) (14,775)
---------- ----------- -----------
Pro forma.............................................................. $(34,695) $ (49,480) $ (12,520)
========== =========== ===========
Basic and diluted earnings (loss) per share:
As reported............................................................ $ (1.50) $ (2.56) $ 0.12
Pro-forma.............................................................. (2.15) (3.03) (0.68)
We recognize the calculated benefit at the date of granting the stock options on
a straight-line basis over the shorter of the expected service period and the
vesting period.
As a result of our voluntary option surrender initiative, the unrecognized stock
compensation fair value of $5,956 related to the surrendered options was
expensed in the year ended December 31, 2003 in our pro forma disclosure.
We have estimated the fair value of each option on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2002 2003
--------- --------- -------
Expected dividend yield............................................................. 0 0 0
Expected stock price volatility..................................................... 107% 107% 102%
Risk-free interest rate............................................................. 4.88% 4.48% 3.83%
Expected life of options............................................................ 4 years 4 years 4 years
The fair value of stock options granted during the year was $7.56 (2002 - $4.58,
2001 - $15.04).
30
(n) REVENUE RECOGNITION
We recognize revenue from sales of products and services upon the later of
transfer of title or upon shipment of the product to the customer or rendering
of the service, so long as collectibility is reasonably assured. Customers
include resellers, original equipment manufacturers, wireless service providers
and end-users. We record deferred revenue when we receive cash in advance of the
revenue recognition criteria being met.
We recognize revenue on the portion of sales to certain resellers that are
subject to provisions allowing various rights of return and stock rotation when
the rights have expired or the products have been reported as sold by the
resellers.
Funding from research and development agreements, other than government funding
arrangements, is recognized as revenue when certain criteria stipulated under
the terms of those funding agreements have been met, and when there is
reasonable assurance the funding will be received. Certain research and
development funding will be repayable only on the occurrence of specified future
events. If such events do not occur, no repayment would be required. We will
recognize the liability to repay research and development funding in the period
in which conditions arise that would cause research and development funding to
be repayable.
Revenues from contracts with multiple-element arrangements, such as those
including technical support services, are recognized as each element is earned
based on the relative fair value of each element and only when there are no
undelivered elements that are essential to the functionality of the delivered
elements.
(o) WARRANTY COSTS
We accrue warranty costs upon the recognition of related revenue, based on our
best estimates, with reference to past experience.
(p) MARKET DEVELOPMENT COSTS
We accrue for co-op advertising costs upon the later of the recognition date of
the related revenue or date at which the co-op advertising is available. Market
development costs are recorded as marketing expense in accordance with the
criteria in Emerging Issues Task Force 01-9, "Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of Vendor's Products)".
(q) SHARE ISSUE COSTS
We reduce the value of consideration assigned to shares issued by the direct
costs, net of income tax recoveries, of issuing the shares.
(r) EARNINGS (LOSS) PER COMMON SHARE
We calculate basic earnings (loss) per share based on the weighted-average
number of common shares outstanding for the year. If, in a reporting period, we
have had outstanding dilutive stock options and warrants, we calculate diluted
earnings (loss) per share using the treasury stock method.
(s) COMPREHENSIVE INCOME
Under FAS No. 130, "Reporting Comprehensive Income", we are required to report
comprehensive income (loss), which includes our net earnings (loss) as well as
changes in equity from other non-owner sources. In our case, the other changes
in equity included in comprehensive income (loss) comprise the foreign currency
cumulative translation adjustments. Comprehensive income (loss) is presented in
the consolidated statements of shareholders' equity.
(t) INVESTMENT TAX CREDITS
Investment tax credits are accounted for using the cost reduction method whereby
such credits are deducted from the expenses or assets to which they relate in
the period in which their recoverability is reasonably assured.
31
(u) COMPARATIVE FIGURES
We have reclassified certain of the figures presented for comparative purposes
to conform to the financial statement presentation we adopted for the current
year.
(v) RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" ("FAS
No. 150"), which establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. FAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003. We have adopted FAS No. 150, which had no effect on
our consolidated financial statements.
In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("FAS No. 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under FAS No. 133. FAS No.149 is to be applied prospectively
for certain contracts entered into or modified after June 30, 2003. We have
adopted FAS No. 149, which had no effect on our consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires the consolidation of a
variable interest entity by the primary beneficiary. FIN 46 also requires
additional disclosure by both the primary beneficiary and enterprises that hold
a significant variable interest in a variable interest entity. FIN 46 is
applicable to variable interest entities created after January 31, 2003.
Entities created prior to February 1, 2003 must be consolidated effective
December 31, 2003. However, because we do not have any variable interest
entities, there is no impact on our consolidated financial statements.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus
regarding EITF Issue 00-21. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into separate
elements of accounting, but also how the arrangement's consideration should be
allocated among separate units. The pronouncement is effective for revenue
arrangements entered into on or after July 1, 2003. We have adopted EITF Issue
00-21, which had no effect on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands on previously
issued accounting guidance and requires additional disclosure by a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability is applied on a prospective basis to guarantees
issued or modified after December 31, 2002. We have adopted FIN 45, which had no
effect on our consolidated financial statements.
3. ACQUISITION OF AIRPRIME, INC.
On August 12, 2003 we acquired 100 percent of the outstanding securities of
AirPrime, Inc. ("AirPrime"), a privately-held supplier of high-speed CDMA
wireless products located in Carlsbad, California. We subsequently changed the
name of AirPrime to Sierra Wireless America, Inc. The results of AirPrime's
operations have been included in our consolidated financial statements since
that date.
The aggregate purchase price was $23,825, including common shares valued at
$22,377 and costs related to the acquisition of $1,448. The fair value of the
3,708,521 common shares issued was determined based on the average market price
of Sierra Wireless, Inc.'s common shares over the two-day period before and
after June 16, 2003, which was the date the terms of the acquisition were agreed
to and announced.
32
The following table summarizes the fair value of the assets acquired and
liabilities assumed at the date of acquisition.
Current assets................................................................... $ 4,716
Property and equipment........................................................... 1,352
Intangible assets................................................................ 5,270
Goodwill......................................................................... 19,706
----------
Total assets acquired....................................................... 31,044
Current liabilities.............................................................. 7,219
---------
Net assets acquired.............................................................. $ 23,825
=========
The following table presents details of the purchased intangible assets:
ESTIMATED USEFUL
LIFE (IN YEARS) AMOUNT
---------------- ------
Intellectual property................................................... 5 $ 3,780
Customer relationships.................................................. 5 940
Licenses................................................................ 5 400
Databases............................................................... 5 150
----------
Total purchased intangible assets.................................. $ 5,270
==========
If the acquisition of AirPrime had occurred as of January 1, 2002, the pro forma
operating results may have been as follows:
2002 2003
---- ----
Revenue............................................................................. $ 96,282 $ 118,514
Net loss............................................................................ (58,775) (1,166)
Loss per share...................................................................... $ (2.94) $ (0.06)
4. RESTRUCTURING AND OTHER CHARGES
In the third quarter of 2003, we incurred restructuring and other charges as a
result of our acquisition of AirPrime. During the year ended December 31, 2003,
we recorded restructuring and other charges of $1,220 as follows:
Fixed and intangible asset writedowns............................................... $ 605
Workforce reductions................................................................ 325
Facilities restructuring............................................................ 290
------------
Total restructuring and other charges.......................................... $ 1,220
============
The writedowns of fixed and intangible assets of $605 were primarily for
research and development equipment, test equipment and research and development
licenses, which are no longer required. These assets were written down to nil.
Workforce reduction charges of $325 were related to the cost of severance and
benefits associated with 11 employees notified of termination. Of the 11
employees, seven were in product development and four were in manufacturing. As
of December 31, 2003, there were no remaining restructuring amounts to be paid
out related to workforce reductions. We also recorded an additional facilities
restructuring charge of $290 as we have made little progress in 2003 on the
facilities restructuring that was originally announced in 2002.
In the last half of 2003, we also incurred integration costs of $1,947 related
to travel, facilities and costs related to eight existing employees who were
retained for the transition period. These eight employees have completed their
integration activities and have been terminated as of December 31, 2003 (see
note 5).
In the second quarter of 2002, we announced and implemented a business
restructuring program under which we reduced operating expenses and asset levels
as a result of our assessment of current and visible future demand. During 2002,
we recorded restructuring and other charges of $37,707 associated with the
writedown of CDPD and 2G CDMA
33
inventory, fixed and intangible asset impairment charges, workforce reductions,
charges related to excess facilities and other assets, and an increase in our
deferred tax asset valuation allowance. We substantially completed
implementation of our restructuring program at December 31, 2002.
The following table summarizes the provision for the 2002 business restructuring
program and the balance of the provision at December 31, 2003 and December 31,
2002.
FACILITIES WORKFORCE
RESTRUCTURING REDUCTION OTHER TOTAL
------------- --------- ----- -----
Balance at December 31, 2002................................ $ 4,547 $ 54 $ 164 $ 4,765
Additional charges..................................... 290 -- -- 290
Cash payments.......................................... (1,243) (54) (87) (1,384)
----------- --------- ----------- ------------
Balance at December 31, 2003................................ $ 3,594 $ -- $ 77 $ 3,671
=========== ========= =========== ============
5. INTEGRATION COSTS
In the third quarter of 2003, we also incurred integration costs related to the
AirPrime acquisition of $1,947, which included the costs of eight existing
employees retained for the transition period. All of these employees have
completed their integration activities and have been terminated as of December
31, 2003.
6. INVESTMENTS
Investments, all of which are classified as available-for-sale, were comprised
as follows:
SHORT-TERM LONG-TERM
---------- ---------
2002 2003 2002 2003
---- ---- ---- ----
Government treasury bills............................ $ -- $ 11,827 $ -- $ --
Bankers acceptances.................................. -- 1,937 -- --
Commercial paper..................................... -- 996 -- --
Government bonds..................................... -- -- -- 24,639
-------- ---------- --------- ---------
$ -- $ 14,760 $ -- $ 24,639
======== ========== ========= ==========
Our short-term investments of $14,760 all have contractual maturities of less
than one year. Our long-term investments of $24,639 all have contractual
maturities of one to five years.
7. INVENTORIES
2002 2003
--------- --------
Electronic components....................................................... $ 1,430 $ 782
Finished goods.............................................................. 5,243 729
--------- --------
$ 6,673 $ 1,511
========= ========
34
8. FIXED ASSETS
2003
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- --------
Furniture and fixtures................................................. $ 2,478 1,361 $ 1,117
Research and development equipment..................................... 9,047 7,622 1,425
Tooling................................................................ 7,280 6,024 1,256
Software............................................................... 5,450 3,452 1,998
Leasehold improvements................................................. 1,742 1,624 118
Office equipment....................................................... 340 269 71
--------- --------------- ---------
$ 26,337 $ 20,352 $ 5,985
========= =============== =========
2002
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- -----------
Furniture and fixtures............................................... $ 2,262 $ 995 $ 1,267
Research and development equipment................................... 7,791 5,672 2,119
Tooling.............................................................. 6,453 4,952 1,501
Software............................................................. 4,406 2,694 1,712
Leasehold improvements............................................... 1,738 1,257 481
Office equipment..................................................... 337 219 118
--------- -------------- -----------
$ 22,987 $ 15,789 $ 7,198
========= ============== ===========
As at December 31, 2003, assets under a capital lease with a cost of $484 (2002
-- $1,764) and accumulated amortization of $310 (2002 -- $781) are included in
fixed assets.
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill was acquired in 2003 as a result of the acquisition of AirPrime (note
3). An annual impairment test has been performed which resulted in no impairment
loss. We assessed the realizability of goodwill related to our reporting unit
during the fourth quarter and determined that its fair value did not have to be
re-computed because the components of the reporting unit had not changed since
the fair value computation completed at August 12, 2003, the date of
acquisition, the previous fair value amount exceeded the carrying amount of the
reporting unit by a substantial margin, and no evidence exists to indicate that
the current fair value of the reporting unit would be less than its current
carrying amount.
The components of intangible assets at December 31, 2003 and 2002 are as
follows:
2003
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- --------
Patents and trademarks............................................. $ 2,604 $ 241 $ 2,363
License fees....................................................... 15,156 7,404 7,752
Intellectual property.............................................. 4,214 718 3,496
Customer relationships............................................. 940 70 870
Databases.......................................................... 150 11 139
---------- -------------- ---------
$ 23,064 $ 8,444 $ 14,620
========== ============== =========
35
2002
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- -----------
Patents and trademarks............................................... $ 1,569 $ 137 $ 1,432
License fees......................................................... 11,744 6,269 5,475
Intellectual property................................................ 434 434 --
---------- --------------- -----------
$ 13,747 $ 6,840 $ 6,907
========== =============== ===========
The estimated aggregate amortization expense for each of the next five years is
expected to be $2,924 per year.
10. LONG-TERM LIABILITIES
2002 2003
---- ----
Facilities (note 4)..................................................... $ 4,547 $ 3,594
TPC warrants (note 17(b))............................................... 1,152 --
-------- --------
5,699 3,594
Less current portion.................................................... 2,803 1,328
-------- --------
$ 2,896 $ 2,266
======== ========
11. OBLIGATIONS UNDER CAPITAL LEASE
We lease research and development equipment, computer equipment and office
furniture under capital leases, denominated in Cdn. dollars, and expiring at
various dates in 2004. As at December 31, 2003 our future minimum lease payments
under capital leases were as follows:
CDN.$ U.S.$
----- -----
2004............................................................................ $ 190 $ 147
Less amount representing interest at approximately 10.8%......................... 8 6
------ -------
$ 182 $ 141
======= =======
Interest expense on capital lease obligations for the year ended December 31,
2003 is $63 (2002 -- $149).
12. SHARE CAPITAL
PUBLIC OFFERING
On November 14, 2003, we completed a public offering of 4,600,000 common shares
in the United States and Canada at a price of $16.25 per share. Under the
offering, which included the shares issuable upon the exercise by the
underwriters of the over-allotment option, we sold 4,442,222 common shares from
treasury, and two retiring officers sold an aggregate of 157,778 common shares
by way of a secondary offering.
ACQUISITION OF AIRPRIME, INC.
On August 12, 2003, we issued 3,708,521 common shares to acquire AirPrime. The
value of the shares was determined based on the average market price of Sierra
Wireless, Inc.'s common shares over the two-day period before and after June 16,
2003, which was the date the terms of the acquisition were agreed to and
announced.
STOCK OPTION PLAN
Under the terms of our employee stock option plan, our board of directors may
grant options to employees, officers and directors. The plan provides for the
granting of options at the fair market value of our stock at the grant date.
Options generally vest over four years, with the first 25% vesting at the first
anniversary date of the grant and the balance vesting in equal amounts at the
end of each month thereafter. We determine the term of each option at the time
it is granted, with options having a five year or a ten year term. Since
February 1999, options have been granted with a five year term. We have reserved
3,882,233 options for issuance under our employee stock option plan. Stock
options have been granted in Canadian and U.S. dollars.
36
Stock option activity since December 31, 2000 is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
CDN.$ U.S.$
Outstanding, December 31, 2000................................... 2,121,134 39.10 26.07
Granted.......................................................... 594,628 32.37 20.27
Exercised........................................................ (175,571) 4.30 2.69
Forfeited........................................................ (96,742) 48.99 30.68
-----------
Outstanding, December 31, 2001................................... 2,443,449 39.57 24.78
Granted.......................................................... 732,250 9.79 6.20
Exercised........................................................ (159,626) 3.73 2.36
Forfeited........................................................ (465,509) 50.22 31.78
-----------
Outstanding, December 31, 2002................................... 2,550,564 19.83 12.55
Granted.......................................................... 609,300 14.79 11.46
Exercised........................................................ (325,932) 4.90 3.80
Forfeited........................................................ (1,107,572) 54.86 42.53
-----------
Outstanding, December 31, 2003................................... 1,726,360 11.58 8.98
===========
EXERCISABLE,
DECEMBER 31, END OF YEAR
--------------- ------------
2001....................................................................... 1,035,002
2002....................................................................... 1,378,101
2003....................................................................... 714,345
The following table summarizes the stock options outstanding at December 31,
2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------------------ ---------- ---------------- ------------------ ----------- -------------------
IN YEARS CDN.$ U.S.$ CDN.$ U.S.$
$0.70 - $1.16 (Cdn.$0.90 - Cdn.$1.50)..... 55,288 3.6 $ 1.14 $ 0.88 55,288 $ 1.14 $ 0.88
$1.17 - $2.71 (Cdn.$1.51 - Cdn.$3.50)..... 476,473 3.7 3.35 2.59 193,782 3.28 2.54
$2.72 - $9.30 (Cdn.$3.51 - Cdn.$12.00).... 306,209 4.6 9.61 7.45 13,636 5.17 4.00
$9.31 - $15.50 (Cdn.$12.01 - Cdn.$20.00).. 371,691 1.3 15.09 11.70 296,448 15.14 11.73
$15.51 - $23.26 (Cdn.$20.01 - Cdn.$30.00). 440,640 4.2 21.30 16.51 86,719 22.96 17.80
$23.27 - $136.47 (Cdn.$30.01 - Cdn.$176.05).. 76,059 1.4 81.53 63.20 68,472 81.76 63.38
--------- ----------
1,726,360 3.4 11.58 7.25 714,345 17.98 13.94
========= ==========
The options outstanding at December 31, 2003 expire between March 29, 2004 and
December 31, 2008.
37
WARRANTS
There are outstanding warrants to purchase 138,696 of our common shares at Cdn
$20.49 per share. The warrants are exercisable for a term of five years from
December 30, 2003. The warrants were issued under our agreement with the
Government of Canada's Technology Partnerships Canada ("TPC") program (note
17(b)).
13. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of our financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities and current portions of long-term liabilities, approximate
their fair value due to their short maturities. Based on borrowing rates
currently available to us for loans with similar terms, the carrying value of
our obligations under capital lease and long-term liabilities approximates their
fair value.
CONCENTRATIONS OF BUSINESS RISK
We maintain substantially all of our cash and cash equivalents, short-term
investments and long-term investments with major financial institutions or
government instruments. Corporate paper is uninsured. Deposits we hold with
banks may exceed the amount of insurance provided on such deposits.
We outsource our manufacturing of our products to third parties. We are
dependent upon the development and deployment by third parties of their
manufacturing abilities. The inability of any supplier or manufacturer to
fulfill our supply requirements could impact future results. We have supply
commitments to our outsource manufacturers based on our estimates of customer
and market demand. Where actual results vary from our estimates, whether due to
execution on our part or market conditions, we are at risk.
Financial instruments that potentially subject us to concentrations of credit
risk are primarily accounts receivable. We perform on-going credit evaluations
of our customers' financial condition and require letters of credit or other
guarantees whenever deemed appropriate.
Although substantially all of our revenues are received in U.S. dollars, we
incur operating costs and have obligations under capital leases that are
denominated in Cdn. dollars. Fluctuations in the exchange rates between these
currencies could have a material effect on our business, financial condition and
results of operations. We mitigate this risk by denominating many of our payment
obligations in U.S. dollars.
LINE OF CREDIT
During 2002, we expanded our operating line of credit from $949 (Cdn.$1,500) to
$10,000, which bears interest at prime plus 1.25% per annum. This line of credit
is secured by a general security agreement providing a first charge against all
assets. The balance at December 31, 2003 was nil (2002 -- nil).
38
14. INCOME TAXES
The composition of our deferred tax assets at December 31 is as follows:
2002 2003
---- ----
Deferred tax assets
Fixed assets................................................................... $ (1,837) $ (350)
Loss carryforwards............................................................. 3,002 11,995
Scientific research and development expenses................................... 7,521 10,538
Share issue costs.............................................................. 897 1,812
Reserves and other............................................................. 5,218 3,708
--------- --------
Total gross deferred tax assets.................................................. 14,801 27,703
Less valuation allowance......................................................... 14,301 27,203
--------- --------
Net deferred tax assets.......................................................... $ 500 $ 500
========= ========
We believe that realization of our net deferred tax assets is more likely than
not. In assessing the realizability of our deferred tax assets, we considered
whether it is more likely than not that some portion or all of our deferred tax
assets will not be realized. The ultimate realization of our deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. We considered projected future
taxable income and tax planning strategies in making our assessment.
At December 31, 2003, we had net operating losses of $6,968 for Canadian income
tax purposes which expire in 2009, and may be used to offset future taxable
income in Canada. We also have approximately $24,613 of scientific research and
development expenditures available to be deducted against future Canadian
taxable income that may be carried forward indefinitely, and investment tax
credits of approximately $13,945 available to offset future Canadian federal and
provincial income taxes payable. The investment tax credits expire commencing in
2004 until 2013.
In addition, at December 31, 2003, net operating loss carryforwards for our
foreign subsidiaries were $26,396 for United States income tax purposes and
$1,796 for U.K. income tax purposes. These carryforwards expire in various
amounts through 2019. Our foreign subsidiaries may be limited in their ability
to use foreign net operating losses in any single year depending on their
ability to generate significant taxable income.
EFFECTIVE TAX RATE
Our income tax expense for the year ended December 31 differs from that
calculated by applying statutory rates for the following reasons:
2001 2002 2003
---- ---- ----
Combined Canadian federal and provincial income taxes at
expected rate of 37.6% (2002 - 39.6%, 2001 - 44.6%)............................ $ (10,946) $(15,127) $ 923
Permanent and other differences.................................................. 1,076 1,381 (9)
Unrecognized tax assets.......................................................... 2,267 8,826 (635)
Change in enacted tax rates...................................................... 712 - -
Loss subject to tax at rates lower than statutory rate........................... 6,618 4,629 (81)
Writedown of deferred tax asset.................................................. - 3,754 -
---------- ---------- ----------
$ (273) $ 3,463 $ 198
========== ========== ==========
Our provisions for income taxes consist of the following:
2001 2002 2003
---- ---- ----
Current
Canadian............................................................................. $ 95 $ 94 $ 198
Foreign.............................................................................. (353) (385) --
-------- -------- -------
Total current.......................................................................... (258) (291) 198
Deferred
Canadian............................................................................. (15) 3,754 --
Foreign.............................................................................. -- -- --
-------- ------- -------
Total deferred......................................................................... (15) 3,754 --
-------- ------- -------
Income tax expense (recovery).......................................................... $ (273) $ 3,463 $ 198
======== ======= =======
39
15. RESEARCH AND DEVELOPMENT
2001 2002 2003
------- ------- ------
Research and development........................................................... $ 19,429 $16,795 $ 16,471
Less government research and development funding and investment tax credits........ 2,527 1,899 477
-------- ------- --------
$ 16,902 $14,896 $ 15,994
======== ======= ========
16. EARNINGS (LOSS) PER SHARE
The weighted-average number of shares outstanding (in thousands) used in the
computation of earnings (loss) per share were as follows:
2001 2002 2003
------ ------ -----
Weighted-average shares used in computation of basic earnings (loss) per share........... 16,129 16,304 18,442
Weighted-average shares from assumed conversion of dilutive options...................... -- -- 547
------ ------ ------
Weighted-average shares used in computation of diluted earnings (loss) per share......... 16,129 16,304 18,989
====== ====== ======
17. COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
We lease equipment and premises with minimum future lease payments denominated
in Cdn. dollars at December 31, 2003 as follows:
CDN.$ U.S.$
----- -----
2004.......................................................................... $ 3,711 $ 2,877
2005.......................................................................... 3,291 2,551
2006.......................................................................... 3,340 2,589
2007.......................................................................... 3,431 2,660
2008.......................................................................... 3,449 2,674
Thereafter.................................................................... 6,739 5,224
-------- ---------
$ 23,961 $ 18,575
======== =========
(b) CONTINGENT LIABILITY ON SALE OF PRODUCTS
(i) Under license agreements, we are committed to royalty payments based
on the sales of products using certain technologies. We recognize
royalty obligations as determinable in accordance with agreement
terms. Where agreements are not finalized, we have recognized our
current best estimate of the obligation. When the agreements are
finalized, the estimate will be revised accordingly.
(ii) Under certain research and development funding agreements, we are
contingently liable to repay up to $3,242. Repayment for certain of
the research and development funding agreements is contingent upon
reaching certain revenue levels for specified products.
(iii) Under an agreement with the Government of Canada's Technology
Partnerships Canada ("TPC") program, we have received Cdn. $9,999 to
support the development of a range of third generation wireless
technologies. During the year, we claimed $477 (2002 -- $1,899) that
has been recorded as a reduction of research and development
expense. Under the terms of the agreement, an amount up to a maximum
of Cdn. $13,000 is to be repaid based on annual sales, in excess of
certain minimum amounts, of specified products commencing in the
year 2004. In addition, we issued warrants to TPC to purchase
138,696 common shares on December 30, 2003, valued at Cdn. $2,000
based on the Black-Scholes pricing model. The warrants are
exercisable at Cdn $20.49 per share for a term of five years from
December 30, 2003.
(iv) We accrue product warranty costs, when we sell the related products,
to provide for the repair or replacement of defective products. Our
accrual is based on an assessment of historical experience and
estimates are made by management. An analysis of changes in the
liability for product warranties follows:
40
Balance, January 1, 2002....................................................... $ 1,251
Provisions.................................................................... 819
Expenditures.................................................................. (907)
------------
Balance, December 31, 2002.................................................... 1,163
Provisions.................................................................... 1,939
Increase due to acquisition (note 3).......................................... 418
Expenditures.................................................................. (1,179)
------------
Balance, December 31, 2003.................................................... $ 2,341
============
(c) OTHER COMMITMENTS
We have entered into purchase commitments totaling $28,287 with certain
contract manufacturers under which we commit to buy a minimum amount of
designated products between January 2004 and August 2004. In certain of these
agreements, we may be required to acquire and pay for such products up to the
prescribed minimum or forecasted purchases.
(d) LEGAL PROCEEDINGS
(i) In July 2001, we learned that Metricom, Inc. ("Metricom"), one of
our customers, had filed a Chapter 11 reorganization under the U.S.
bankruptcy laws. We filed a proof of claim for amounts due to us
totaling $13,745. Metricom objected to that claim asserting that all
but $2,254 should be disallowed. Metricom also filed an adversary
complaint against us in the U.S. bankruptcy court seeking return of
payments totaling $1,900 made to us within 90 days of the bankruptcy
filing, alleging that the payments are avoidable as "preferences".
We contended that the payments were in the ordinary course of
business and that we supplied additional product to Metricom after
receiving the payments, which would offset any preference liability.
During 2002, we executed a global settlement with the reorganized
debtor under which we agreed to reduce our general unsecured claim
to $10,250, and Metricom agreed to dismiss the preference claims. We
received a settlement of $2,321 in 2003, of which $513 was included
in the determination of our net income for 2003 (2002 -- $1,808).
(ii) In November 2002, Sierra Wireless, Inc., along with several other
defendants, was served with the second amended complaint of MLR, LLC
("MLR") filed in the U.S. District Court for the Northern District
of Illinois Eastern Division for alleged patent infringement. We
assessed the complaint and believed that there was no infringement
of the patents referred to in this claim and that the claim was
invalid. During the second quarter of 2003, we reached an agreement
with MLR. Under the agreement, we received non-royalty bearing
licenses to use all of MLR's present and future patents for certain
of our products and MLR released us from their claim of alleged
patent infringement.
(iii) We are engaged in other legal actions arising in the ordinary course
of business and believe that the ultimate outcome of these actions
will not have a material adverse effect on our operating results,
liquidity or financial position.
41
18. SUPPLEMENTARY INFORMATION
2001 2002 2003
------ ------ ------
(a) CASH FLOW INFORMATION:
Cash received
Interest............................................................................ $ 2,782 $ 912 $ 500
Income taxes........................................................................ -- 905 24
Cash paid for
Interest............................................................................ 48 323 62
Income taxes........................................................................ 958 57 62
Non-cash financing activities
Purchase of fixed assets funded by obligations under
capital lease.................................................................... 1,759 328 113
Issuance of common shares on acquisition (note 3)................................... -- -- 22,377
(b) ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Opening balance........................................................................ $ 1,320 $ 5,169 $ 3,068
Acquisitions........................................................................... -- -- 62
Bad debt expense....................................................................... 4,040 623 375
Write offs and settlements............................................................. (191) (2,724) (1,275)
--------- ---------- ----------
Closing balance........................................................................ $ 5,169 $ 3,068 $ 2,230
========== ========== ==========
(c) OTHER:
Rent expense........................................................................... $ 1,334 $ 1,599 $ 1,603
Foreign exchange loss (gain)........................................................... (187) (77) 439
19. SEGMENTED INFORMATION
We operate in the wireless communications solutions industry and all sales of
our products and services are made in this segment. Management makes decisions
about allocating resources based on the one operating segment.
Revenues by product were as follows:
2001 2002 2003
---- ---- ----
MP modems........................................................... $ 8,039 $ 7,781 $ 6,183
AirCard modems...................................................... 38,627 44,616 71,060
OEM modems.......................................................... 9,319 19,025 20,961
Other............................................................... 3,718 2,113 2,845
Research and development funding.................................... 2,645 3,724 660
--------- --------- ---------
$ 62,348 $ 77,259 $ 101,709
========= ========= =========
65% (2002 -- 85%) of our fixed assets are in Canada. Product sales in North
America were 73% (2002 -- 87%; 2001 -- 97%).
We sell certain products through resellers, original equipment manufacturers,
and wireless service providers who sell these products to end-users. The
approximate sales to the significant channels are as follows:
2001 2002 2003
-------------- -------------- ----------
Reseller A...................................................... less than 10% $ 17,808 $ 18,044
Reseller B...................................................... less than 10% $ 15,605 less than 10%
Reseller C...................................................... $ 8,228 less than 10% less than 10%
Reseller D...................................................... $ 6,098 less than 10% less than 10%
42
SIERRA WIRELESS, INC.
EXECUTIVE OFFICERS OFFICERS DIRECTORS
David B. Sutcliffe Steve Blaine Gregory D. Aasen(3)
Chairman and Chief Executive Officer Vice President, Engineering Chief Operating Officer, PMC-Sierra Ltd.
Jason W. Cohenour Derek Evans Paul G. Cataford(1)(2)
Senior Vice President, Worldwide Sales Vice President and Managing Director, Managing Director HorizonOne Asset
Europe Management
Bill G. Dodson Evan Jones Peter Ciceri(2)
Vice President, Manufacturing and Supply Vice President, Engineering Executive in Residence, Faculty of
Commerce and Business Administration,
Andrew S.G. Harries Jin Pak University of British Columbia
Senior Vice President, Marketing Vice President, Asia-Pacific
James B. Kirkpatrick Dan Schieler Charles E. Levine(3)
Senior Vice President, Engineering Vice President, Sales, Americas and OEM Retired
David G. McLennan Nadir Mohamed(1)
Chief Financial Officer and Secretary President, Chief Executive Officer and
Director, Rogers Wireless
Communications Ltd.
S. Jane Rowe(1)
Senior Vice President, Global Risk
Management Division, Scotiabank
David B. Sutcliffe
Chairman and Chief Executive Officer,
Sierra Wireless, Inc.
(1) Audit Committee
(2) Governance Committee
(3) Human Resources Committee
------------------------------------------------------------------------------------------------------------------------------------
GENERAL COUNSEL TRANSFER AGENT [SIERRA WIRELESS LOGO]
Blake, Cassels & Graydon LLP Computershare Trust Company of Canada
Vancouver, BC Vancouver, BC HEAD OFFICE
US COUNSEL SHARE INFORMATION Sierra Wireless, Inc.
The common shares of Sierra Wireless, 13811 Wireless Way
Davis Wright Tremaine LLP Inc. are listed for trading under the Richmond, British Columbia
Portland, Oregon symbol SW on The Toronto Stock Canada V6V 3A4
Exchange and under SWIR on The Nasdaq
INTELLECTUAL PROPERTY LAWYERS National Market System. Telephone
604 231 1100
Thelen Reid & Priest LLP ANNUAL GENERAL INFORMATION
San Jose, California The Annual General Meeting for the Facisimile
shareholders of Sierra Wireless, Inc. 604 231 1109
AUDITORS will be held on April 26th, 2004 at
2:00 p.m. at the office of Sierra Website
KPMG LLP Wireless, Inc., Richmond, BC. www.sierrawireless.com
Vancouver, BC
43
SIERRA WIRELESS, INC.
2003 ANNUAL REPORT
CANADIAN GAAP
44
REPORT TO SHAREHOLDERS
2003 was a year of major milestones and profitable growth. We reached the $100
million revenue mark for the first time in our history, returned to
profitability for the full year, and set the stage for further profitable
growth.
STRONG FINANCIAL RESULTS
Our financial results were driven by growing demand for our expanded line of
Sierra Wireless AirCard(R) PC cards and embedded modules. Introduced in 2002 and
2003 for 2.5G wireless data networks, our new products enjoyed a strong
reception and helped drive revenues and earnings. Our results were further
enhanced by our acquisition of AirPrime.
For the twelve months ended December 31, 2003, our revenues increased 32% to
$101.7 million, up from $77.3 million in 2002. Net earnings were $2.3 million
(diluted earnings per share of $0.12 per share), compared to a loss of $41.9
million (loss per share of $2.57) in 2002. Our gross margin rose to $41.2
million or 40.5% of revenues, from $8.0 million or 10.4% of revenues in 2002.
A WORLD OF WIRELESS DATA
Underpinning our results was the growing worldwide acceptance of wireless data.
As predicted, the 2.5G networks have increased the speed and functionality of
wireless data, making it more attractive to more people. Many of the world's
leading wireless operators promoted wireless data services to customers in 2003,
and adoption rates grew significantly.
We tapped that demand, building our revenues in North America and achieving
approximately 160% revenue growth in our newer Asia-Pacific and European
markets.
Highlights of the year included significantly expanding our European
distribution by connecting mobile professionals to Europe's widely-used O2
network, and partnering with IBM in China to offer a new wireless bundle that
includes the Sierra Wireless AirCard 750 combined with IBM's high-end ThinkPad
T40 notebook series.
In North America, we partnered with Verizon to supply our new PC5220 card for
Verizon's high-speed CDMA 1xEV-DO network. Another key development was Sprint's
decision to launch the Treo 600 Smartphone from PalmOne nationwide. The Treo 600
features the Sierra Wireless EM3420 as its wireless engine.
INVESTING FOR PROFITABLE GROWTH
While our growth has been dramatic, we believe that the wireless data industry
is still early in the adoption cycle.
The advent of commercially available high-speed data services such as CDMA
1xEV-DO and EDGE is about to bring mobile connectivity to an even broader set of
applications and user segments. Significantly faster than existing networks,
these new technologies support data rich applications like streaming audio,
video and the Internet, and will continue to accelerate adoption of wireless
data.
Smartphones are attracting even more users. Born from the convergence of voice
and data technologies, and driven by the increasing demand for anytime, anywhere
access to e-mail and information, Smartphones have emerged as the highest growth
category in the industry.
During 2003, we made a number of moves to ensure we remain a world leader in our
evolving industry:
o In June, we acquired AirPrime, Inc., a privately held, leading
supplier of high-speed CDMA wireless products. The acquisition has
enhanced our position as a market leader with a broad product line,
innovative engineering, blue chip customers, global channels and a
strong balance sheet. It has also brought us a market leading CDMA
embedded module portfolio with important customers in the handheld and
notebook PC arenas.
o We announced our entry into the Smartphone market with the
introduction of our new Voq professional phone. Based on Microsoft
Windows Mobile software for Smartphones, our Voq-branded professional
phones will feature both a familiar phone keypad and unique flip-open
QWERTY thumbpad. They will also offer easy information navigation and
retrieval, compelling text entry, and automatically updated e-mail.
The initial response has been very enthusiastic. The combination of a
sizable market opportunity, our background in enterprise wireless
data, and our existing channels and relationships, makes this a
logical evolution for Sierra Wireless. We plan to have our first
45
Voq phone model for GSM/GPRS networks commercially available in Europe
and North America in the second quarter of 2004.
o We developed products for the new and expanding CDMA 1xEV-DO and EDGE
networks. Our PC 5220 PC Card for the Verizon Wireless CDMA 1xEV-DO
network started shipping commercially in the third quarter of 2003.
Our second CDMA 1xEV-DO product, the AirCard 580, is expected to begin
shipping commercially in the second quarter of 2004. Our first EDGE
product, the AirCard 775, is expected to start commercial shipping in
the third quarter of 2004.
With these developments, Sierra Wireless has a growing core business which will
be augmented by our entry into a new product segment.
We intend to continue growing and changing in step with the needs of our
wireless operator partners and business customers around the world. During 2003,
we completed a $74.8 million secondary public offering of 4.6 million common
shares in the United States and Canada resulting in net proceeds of $67.4
million. We have over $100 million of cash on hand and we are generating
positive cash flow. This positions us very well to continue investing for
profitable growth.
As we move forward, our steps will be guided by our knowledgeable and
independent board of directors--a board that is stronger than ever following the
2003 appointments of Nadir Mohamed and Charles Levine. Mr. Mohamed is President
and Chief Executive Officer of Rogers Wireless Communications Inc. Mr. Levine is
the former President of Sprint PCS. The industry knowledge, expertise and proven
record of success of these two new directors have already proved invaluable to
Sierra Wireless. We thank all of our board members for their wise counsel in
2003.
I also want to acknowledge the many contributions of our dedicated employees.
Our success reflects the innovation, enthusiasm and hard work of every member of
Team Sierra Wireless.
Finally, I want to thank you, our shareholders, for your confidence in Sierra
Wireless and in our mission. Your capital has made it possible for us to bring
our ideas and our products to the world.
/s/ David B. Sutcliffe
-------------------------
David B. Sutcliffe
Chairman and Chief Executive Officer
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS HAS BEEN PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP), WITH A RECONCILIATION TO CANADIAN GAAP. EXCEPT
WHERE OTHERWISE SPECIFICALLY INDICATED, ALL AMOUNTS ARE EXPRESSED IN UNITED
STATES DOLLARS.
OVERVIEW
We provide highly differentiated wireless solutions worldwide. We develop and
market a broad range of products that include wireless data modems for portable
computers, embedded modules for original equipment manufacturers, or OEMs,
rugged vehicle-mounted modems and mobile phones. Our products permit users to
access wireless data and voice networks using notebook computers, personal
digital assistants, or PDAs, vehicle-based systems and mobile phones.
Wireless data communications is an expanding market positioned at the
convergence of wireless communications, portable computing and the Internet,
each of which we believe represents a growing market. Our products are based on
open standards, including the Internet protocol, and operate on the networks of
major wireless communications service providers.
Our products are primarily used by businesses and government organizations to
enable their employees access to a wide range of wireless data applications
including Internet access, e-mail, messaging, corporate intranet access, remote
database inquiry and computer aided dispatch. We sell our products directly to
end-users and through indirect channels, including wireless operators, resellers
and OEMs.
During 2003, our revenue increased 31.6% to $101.7 million, compared to $77.3
million in 2002, despite the slowdown in enterprise spending and the overall
conditions affecting the wireless communications industry. Our revenue from
customers in the Americas, Europe and the Asia-Pacific region comprised 73%, 13%
and 14%, respectively, in fiscal 2003 and 87%, 7% and 6%, respectively, in
fiscal 2002. Our North American business is shifting from long-term, large
volume commitments by carriers to faster book/ship cycles driven by customer
demand on channels. This shift is a return to our roots, lowers carrier
dependency and is the status quo for our business in Europe and in the
Asia-Pacific region.
In the third quarter of 2003, we closed our acquisition of AirPrime, Inc.
("AirPrime"), a privately-held supplier of high-speed CDMA wireless products
located in Carlsbad, California. In the fourth quarter of 2003, we completed our
public offering of 4.6 million common shares with net proceeds of approximately
$67.4 million. In addition, we announced the introduction of our Voq line of
professional phones and value-added software to deliver a converged mobile
telephony and e-mail solution targeted at business users. The Voq professional
phone is expected to be commercially available in the first half of 2004.
REVENUE
We derive our revenue primarily through sales of our products to wireless
communications service providers, original equipment manufacturers, resellers
and through direct sales to end-users. We recognize revenue from sales of
products and services upon the later of transfer of title or upon shipment of
the product to the customer or rendering of service, so long as collectibility
is reasonably assured. We recognize revenue on the portion of sales to certain
resellers that are subject to provisions allowing various rights of return and
stock rotation when the rights have expired or the products have been reported
as sold by the resellers.
Funding from research and development agreements, other than government funding
arrangements, is recognized as revenue when certain criteria stipulated under
the terms of those funding agreements have been met and when there is reasonable
assurance the funding will be received. Certain research and development funding
will be repayable only on the occurrence of specified future events. If such
events do not occur, no repayment would be required. We will recognize the
liability to repay research and development funding in the period in which
conditions arise that would cause research and development funding to be
repayable.
47
COST OF GOODS SOLD
We outsource most of our manufacturing services to enable us to achieve greater
efficiencies and economies of scale. We were able to achieve savings in costs
and improvements in efficiencies in 2003, and we will focus on further cost
savings and efficiencies going forward. Because we outsource most of our
manufacturing services, our cost of goods sold consists primarily of the direct
costs of finished goods purchased from our outsource manufacturers, third-party
royalties, warranty costs and an allocation of operating costs.
During the second quarter of 2003, we implemented significant changes to our
supply chain. These included the transfer of global fulfillment and certain CDMA
product manufacturing to Flextronics. By using its fully integrated supply chain
services, we have reduced product costs, improved alignment with our
international customer base and achieved increased operating efficiencies and
scalability.
SALES AND MARKETING
Our sales and marketing expenses consist mainly of salaries, commissions, travel
expenses, conferences, marketing materials and market development funding. Our
sales programs rely, in part, on delivering products to end-users identified and
cultivated through our relationships with wireless communications service
providers, original equipment manufacturers and resellers. During 2003, we
continued to expand our distribution channels in Europe and the Asia-Pacific
region as part of our international growth objective. We expect to continue to
make increased investments in these strategic areas during 2004.
RESEARCH AND DEVELOPMENT, NET
Since our incorporation in 1993, we have invested in new generations of
technology. We have funded our investment in research and development from
operating cash flow, supplemented by our initial public offering and follow-on
offerings, together with research and development funding and investment tax
credits. Our research and development expenses consist mainly of salaries,
consulting costs and amortization, net of government research and development
funding and investment tax credits, and are expensed as incurred. We expect our
research and development expenses to continue to increase as we invest in next
generation technology and develop new products.
ADMINISTRATION
Our administration costs consist mainly of salaries, professional fees,
insurance, and general administration. We expect that these costs will increase
as insurance premiums continue to increase and as we continue to build our
information systems infrastructure as part of our international expansion.
INCOME TAXES
Prior to 2000, we recorded no provision for Canadian federal income taxes for
any period since our incorporation. Through the end of fiscal 1997 we recorded
losses and, when we became profitable in 1998, we had sufficient net operating
losses, investment tax credits or scientific research and development expenses
in Canada to offset any federal income taxes that would otherwise be payable. In
2000, our taxable income in Canada was reduced through the utilization of
scientific research and development expenses, and in the United States we had
taxable income for the first time. This resulted in us having current and future
taxes payable. In 2002, we incurred operating losses and recorded a recovery of
income taxes previously paid. In 2003, we had sufficient net operating losses,
investment tax credits or scientific research and development expenses to offset
federal income taxes that would otherwise be payable. The current tax expense in
2003 is comprised primarily of Canadian capital tax.
We believe that it is more likely than not that we will realize our net deferred
tax assets. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences become deductible. We considered projected future taxable income and
tax planning strategies in making our assessment. We have not recognized any
additional deferred tax assets in 2003.
48
RESULTS OF OPERATIONS
The following table sets forth our operating results for the three years ended
December 31, 2003, expressed as a percentage of revenue:
YEARS ENDED DECEMBER 31,
-------------------------
2001 2002 2003
--------- --------- --------
Revenue.................................................................. 100.0% 100.0% 100.0%
Cost of goods sold....................................................... 75.4 89.6 59.5
----- ----- -----
Gross margin............................................................. 24.6 10.4 40.5
----- ----- -----
Expenses
Sales and marketing.................................................... 20.4 15.0 11.4
Research and development, net.......................................... 27.1 19.3 15.7
Administration......................................................... 17.1 6.2 6.5
Restructuring and other charges........................................ - 16.6 1.2
Integration costs...................................................... - - 1.9
Amortization........................................................... 3.3 3.0 2.3
-------- -------- --------
67.9 60.1 39.0
-------- -------- --------
Earnings (loss) from operations.......................................... (43.3) (49.7) 1.5
Other income............................................................. 4.0 0.3 0.9
----- ----- -----
Net income (loss) before income taxes.................................... (39.3) (49.4) 2.4
Income tax expense (recovery)............................................ (0.4) 4.5 0.2
------ ----- -----
Net income (loss)........................................................ (38.9) (53.9) 2.2
====== ====== =====
Our revenue by product, by distribution channel and by geographical region is as
follows:
YEARS ENDED DECEMBER 31,
-------------------------
2001 2002 2003
---- ---- ----
Revenue by product
AirCard................................................ 62% 58% 70%
OEM.................................................... 15 25 21
Mobile................................................. 13 10 6
Other.................................................. 10 7 3
---------- --------- --------
100% 100% 100%
========== ========= ========
Revenue by distribution channel
Wireless carriers...................................... 31% 43% 46%
OEM.................................................... 17 25 22
Resellers.............................................. 44 25 31
Direct and other....................................... 8 7 1
---------- --------- --------
100% 100% 100%
========== ========= ========
Revenue by geographical region
Americas............................................... 97% 87% 73%
Europe................................................. - 7 13
Asia-Pacific........................................... 3 6 14
---------- --------- --------
100% 100% 100%
========== ========= ========
49
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
FOLLOW-ON OFFERING
On November 14, 2003, we completed a new issue and secondary public offering of
4.6 million common shares in the United States and Canada at a price of $16.25
per common share. The offering generated net proceeds of approximately $67.4
million. Of the 4.6 million common shares, 4.4 million common shares were sold
by the Company and 0.2 million common shares were sold by retiring officers of
the Company.
ACQUISITION OF AIRPRIME, INC.
On August 12, 2003, we acquired 100 percent of the outstanding securities of
AirPrime, a privately-held supplier of high-speed CDMA wireless products located
in Carlsbad, California. We subsequently changed the name of AirPrime to Sierra
Wireless America, Inc. The results of AirPrime's operations have been included
in our consolidated financial statements since that date. As a result of the
acquisition, we believe the combined entity to be a well-positioned market
leader with a broad product line, innovative engineering, blue chip customers,
global distribution channels and a strong balance sheet.
The aggregate purchase price was $23.8 million including common shares valued at
$22.4 million with costs related to the acquisition of $1.4 million. The value
of the 3,708,521 common shares issued was determined based on the average market
price of our common shares over the two-day period before and after June 16,
2003, which was the date the terms of the acquisition were agreed to and
announced.
2003 RESTRUCTURING AND INTEGRATION COSTS
In the third quarter of 2003, we incurred restructuring and other charges as a
result of our acquisition of AirPrime. During the year ended December 31, 2003,
we recorded restructuring and other charges of $1.2 million as follows:
Fixed and intangible asset writedowns........................... $ 0.6
Workforce reductions............................................ 0.3
Facilities restructuring........................................ 0.3
------------
Total restructuring and other charges...................... $ 1.2
============
The writedowns of fixed and intangible assets of $0.6 million were primarily for
research and development equipment, test equipment and research and development
licenses that are no longer required. These assets were written down to nil.
Workforce reduction charges of $0.3 million were related to the cost of
severance and benefits associated with 11 employees notified of termination. Of
the 11 employees, seven were in product development and four were in
manufacturing. As of September 30, 2003, there were no restructuring amounts
remaining to be paid out related to workforce reductions. We also recorded an
additional facilities restructuring charge of $0.3 million as we have made
little progress in 2003 on the facilities restructuring that was originally
announced in 2002.
During 2003, we also incurred integration costs of $1.9 million related to
travel, facilities and costs related to eight existing employees retained for
the transition period. All of these employees have completed their integration
activities and have been terminated as of December 31, 2003.
REVENUE
Revenue amounted to $101.7 million in 2003, compared to $77.3 million in 2002,
an increase of 31.6%. Included in our revenue was research and development
funding of $0.7 million and freight revenue of $0.3 million in 2003, compared to
$3.7 million and $0.1 million, respectively, in 2002. The increase in revenue
was a result of sales of our 2.5G products as well as increasing sales to new
channels in Europe and the Asia-Pacific region. During 2003, we commenced
commercial shipment of the AirCard 575, MP 555 and MP 750 as well as the
products formerly sold by AirPrime.
GROSS MARGIN
Gross margin amounted to $41.2 million in 2003, compared to $8.0 million in
2002. Included in our gross margin was research and development funding of $0.7
million and freight revenue of $0.3 million in 2003, compared to $3.7 million
and $0.1 million, respectively, in 2002. During 2002, our gross margin was
negatively affected by restructuring and other charges of $20.8 million. Our
gross margin percentage was 40.5% of revenue in 2003, compared to 10.4% of
revenue in 2002. Our gross margin, excluding restructuring and other charges,
amounted to $41.2 million, or 40.5% of
50
revenue, in 2003, compared to $28.8 million, or 37.3% of revenue in 2002. The
increase in gross margin was a result of a greater mix of 2.5G AirCard products,
which yield a higher margin than OEM products, as well as product cost
reductions. During 2003, we sold $1.4 million of products that had a book value
after writedowns of nil.
SALES AND MARKETING
Sales and marketing expenses were $11.6 million in 2003, unchanged from 2002.
Sales and marketing expenses as a percentage of revenue decreased to 11.4% in
2003, compared to 15.0% in 2002. This decrease was due primarily to an increase
in revenue without a corresponding increase in operating expenses.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $16.0
million in 2003, compared to $14.9 million in 2002, an increase of 7.4%. Gross
research and development expenses, before government research and development
funding and investment tax credits, were $16.5 million or 16.2% of revenue in
2003, compared to $16.8 million or 21.7% of revenue in 2002. Gross research and
development expenses in 2003 decreased due to cost reductions under our
restructuring plan implemented in the second quarter of 2002 and a reduction of
costs related to the development of products based on CDMA and GPRS standards.
These reductions were partially offset by the addition of staff and projects
from the AirPrime acquisition and the development costs of the Voq professional
phone.
ADMINISTRATION
Administration expenses amounted to $6.6 million in 2003, compared to $4.8
million in 2002. Included in administration expenses were recoveries from
Metricom of $0.5 million in 2003 and $1.8 million in 2002. Excluding the
Metricom recoveries, administration expenses were $7.1 million in 2003, compared
to $6.6 million in 2002. This increase of 7.8% is due primarily to an increase
in insurance costs that was partially offset by cost reductions under our
restructuring plan. Administration expenses, excluding the Metricom recoveries,
as a percentage of revenue amounted to 7.0% in 2003, compared to 8.5% in 2002.
OTHER INCOME
Other income increased to $1.0 million in 2003, compared to $0.2 million in
2002. Other income includes interest income, interest expense and foreign
exchange gains and losses. This increase is due to an increase in interest
income from increased cash and investment balances from our secondary public
offering, as well as net foreign exchange gains on our Canadian denominated
currency.
INCOME TAX EXPENSE (RECOVERY)
Income tax expense amounted to $0.2 million in 2003, compared to $3.5 million in
2002. Our 2002 income tax recovery, excluding restructuring and other costs of
$4.0 million, was $0.6 million. The income tax recovery recorded in 2002 is a
recovery of taxes paid in prior periods.
NET EARNINGS (LOSS)
Our net earnings amounted to $2.3 million in 2003, compared to a net loss of
$41.7 million in 2002. Our net earnings amounted to $4.9 million in 2003,
excluding restructuring and integration costs of $3.2 million and the Metricom
recovery of $0.5 million, compared to a net loss of $5.8 million in 2002,
excluding restructuring and other costs of $37.7 million and the Metricom
recovery of $1.8 million. Our diluted earnings per share amounted to $0.12 in
2003, compared to a loss per share of $2.56 in 2002. Our diluted earnings per
share, excluding the items referred to above, was $0.26 in 2003, compared to a
loss per share of $0.35 in 2002. The weighted average number of shares
outstanding increased to 19.0 million in 2003 due to the issuance of shares
related to the AirPrime acquisition and to our secondary public offering, as
compared to 16.3 million in 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
During 2002, we announced and implemented a business restructuring program. We
reduced operating expenses and asset levels as a result of our assessment of
current and visible future demand. We expected sales growth to continue to
51
be constrained by the slowdown in enterprise spending and by overall conditions
affecting the wireless communications industry.
During the second quarter of 2002, we recorded restructuring and other costs of
$36.1 million. We reduced our workforce from 275 to 181 people. In addition, the
restructuring and other costs included a writedown for excess inventory,
impairment of fixed, intangible and other assets, and a provision for facilities
restructuring and other costs related to the restructuring. The provisions
related to our restructuring and other charges reflected many estimates which we
revised during the last half of 2002, based on actual experience, resulting in a
net charge of $1.6 million. Our restructuring and other costs for 2002 were
$37.7 million. We had substantially completed implementation of our
restructuring program at December 31, 2002.
We recorded a writedown of inventory, including purchase commitments, amounting
to $16.7 million. The writedown was related primarily to CDPD and 2G CDMA
products. In the fourth quarter of 2002, we recorded an additional net writedown
of inventory of $1.9 million which was a result of a faster than expected
decline in sales of CDPD products. During 2002, we sold $1.2 million of products
that had a written down net book value of nil.
Fixed assets impairment charges of $4.8 million consisted of writedowns
primarily for research and development equipment, test equipment, and corporate
assets. The fixed assets were written down to the current fair value for this
type of equipment. The net reversal of the second quarter impairment charge was
$0.5 million, of which $0.1 million was included in cost of sales, and related
primarily to adjusting our estimates of equipment to be disposed of.
Intangible assets impairment charges of $3.0 million consisted of writedowns
primarily for research and development licenses. The research and development
licenses that were no longer required, were written down to nil. In addition,
our deferred tax asset valuation allowance was increased by $3.8 million to
record the reduction in the portion of our deferred tax assets that we believed
was more likely than not to be realized.
Workforce reduction charges of $1.6 million, of which $0.1 million was included
in cost of sales, were related to the cost of severance and benefits associated
with 95 employees and contractors notified of termination. Of the 95 employees
and contractors, 63 were involved in product development, seven were involved in
manufacturing, 18 were sales and marketing personnel, and seven were in
administration. At December 31, 2002, the workforce reduction provision of $1.5
million estimated in the second quarter, excluding the portion that was included
in cost of sales, has been drawn down by cash payments of $1.3 million and a
reversal of $0.2 million, resulting in an ending provision balance of $0.05
million. The remaining provision was substantially drawn down by April 30, 2003.
As a result of the above noted workforce reduction and our assessment of current
and visible demand, we have leased facilities that are excess to our current
requirements. We recorded a provision that represents the estimated net present
value of future contractual obligations that are in excess of our estimated
future requirements. Our provision at June 30, 2002 of $4.7 million has been
drawn down by cash payments of $0.5 million and increased by an additional net
charge of $0.3 million, resulting in a provision balance of $4.5 million at
December 31, 2002. During the second half of 2002, real estate market conditions
in our location softened, resulting in very little progress on our facilities
restructuring. The remaining cash outlays of approximately $4.5 million related
to the facilities restructuring are expected to be paid over the remaining term
of the lease and will be funded from available sources of liquidity.
Other charges of $1.5 million included provisions for purchase commitments, a
writedown of investments, and professional fees in connection with the
restructuring activities. Our provision at June 30, 2002 of $0.8 million has
been drawn down by non-cash reductions of $0.4 million, cash payments of $0.3
million, and an additional charge of $0.1 million resulting in a provision
balance of $0.2 million at December 31, 2002. The additional charges relate to
revised estimates for professional fees. The remaining provision was
substantially drawn down at December 31, 2003. The remaining cash outlays of
approximately $0.1 million related to other costs will be funded from available
sources of liquidity.
During the second quarter of 2001, one of our customers, Metricom, Inc., refused
shipments and subsequently filed for a Chapter 11 reorganization under the U.S.
bankruptcy laws. In 2002, we negotiated a settlement with the reorganized debtor
and subsequently received $1.8 million. The recovery of $1.8 million was
recorded in the determination of our net loss for 2002.
In 2001, in addition to the financial impact from Metricom's bankruptcy, there
was also an overall economic slowdown that impacted our business. As a result of
these developments, we recorded a writedown of inventory of $11.0 million and a
provision for doubtful accounts of $3.0 million in 2001.
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REVENUE
Revenue amounted to $77.3 million in 2002, compared to $62.3 million in 2001, an
increase of 23.9%. Included in our revenue was research and development funding
of $3.7 million and freight revenue of $0.1 million in 2002, compared to $2.6
million and nil, respectively, in 2001. The increase in revenue was a result of
sales of our 2.5G products as well as increasing sales to new channels in Europe
and the Asia-Pacific region. We commenced commercial shipment of our AirCard
550, AirCard 555, AirCard 710, and AirCard 750 next generation products during
2002.
GROSS MARGIN
Gross margin amounted to $8.0 million in 2002, compared to $15.3 million in
2001. Included in our gross margin was research and development funding of $3.7
million and freight revenue of $0.1 million in 2002, compared to $2.6 million
and nil, respectively, in 2001. During the year, our gross margin was negatively
affected as we recorded restructuring and other charges of $20.8 million. As a
result of restructuring and other charges, our gross margin percentage decreased
to 10.4% of revenue in 2002, compared to 24.6% of revenue in 2001. Our gross
margin in 2002 was $28.8 million, excluding restructuring and other charges of
$20.8 million, compared to a gross margin in 2001 of $26.3 million, excluding an
inventory writedown of $11.0 million. Our gross margin percentage, excluding the
restructuring and other charges and inventory writedowns, decreased to 37.3% in
2002, compared to 42.2% in 2001. This decrease was a result of changes in our
product mix and new product introduction costs.
SALES AND MARKETING
Sales and marketing expenses amounted to $11.6 million in 2002, compared to
$12.7 million in 2001, a decrease of 9.1%. This decrease was due primarily to
cost reductions under our restructuring plan. In addition, some costs related to
the initial introduction of new products for 2.5G wireless networks and entry
into the Europe and Asia-Pacific regions occurred in the prior year. Sales and
marketing expenses as a percentage of revenue amounted to 15.0% in 2002,
compared to 20.4% in 2001.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $14.9
million in 2002, compared to $16.9 million in 2001, a decrease of 11.9%.
Research and development expenses in 2002 decreased due primarily to cost
reductions under our restructuring plan. Gross research and development
expenses, before government research and development funding and investment tax
credits, were $16.8 million or 21.7% of revenue in 2002, compared to $19.4
million or 31.2% of revenue in 2001.
ADMINISTRATION
Administration expenses amounted to $4.8 million in 2002, compared to $10.6
million in 2001. Administration expenses were $6.6 million in 2002, excluding
the Metricom recovery of $1.8 million, compared to administration expenses of
$7.6 million, excluding the $3.0 million provision for doubtful accounts in
2001. This decrease of 13.8% is due primarily to cost reductions under our
restructuring plan. Administration expenses, excluding the Metricom recovery and
the provision for doubtful accounts, as a percentage of revenue amounted to 8.5%
in 2002, compared to 12.3% in 2001.
OTHER INCOME
Other income decreased to $0.2 million in 2002, compared to $2.5 million in
2001. This decrease is due to a reduction in cash and short-term investment
balances, as well as a reduction in interest rates.
INCOME TAX EXPENSE (RECOVERY)
Income tax expense amounted to $3.5 million in 2002, compared to an income tax
recovery of $0.3 million in 2001. Our income tax recovery, excluding
restructuring and other costs of $4.0 million, was $0.6 million in 2002,
compared to an income tax recovery of $0.3 million in 2001. The income tax
recovery recorded in 2002 is a recovery of taxes paid in prior periods.
53
NET LOSS
Our net loss amounted to $41.7 million in 2002, compared to a net loss of $24.3
million in 2001. Our net loss amounted to $5.8 million in 2002, excluding
restructuring and other costs of $37.7 million and the Metricom recovery of $1.8
million, compared to a net loss of $10.3 million in 2001, excluding the
inventory writedown of $11.0 million and the provision for doubtful accounts of
$3.0 million. Our loss per share amounted to $2.56 in 2002, compared to a loss
per share of $1.50 in 2001. Our loss per share, excluding the restructuring and
other costs and inventory writedowns, was $0.35 in 2002, compared to a loss per
share of $0.64 in 2001. The weighted average number of shares outstanding
increased to 16.3 million in 2002, as compared to 16.1 million in 2001.
CONTINGENT LIABILITIES
In July 2001, we learned that Metricom, one of our customers, had filed a
Chapter 11 reorganization under the U.S. bankruptcy laws. We filed a proof of
claim for amounts due to us totaling $13.7 million. Metricom objected to that
claim asserting that all but $2.3 million should be disallowed. Metricom also
filed an adversary complaint against us in the U.S. bankruptcy court seeking
return of payments totaling $1.9 million made to us within 90 days of the
bankruptcy filing, alleging that the payments are avoidable as "preferences". We
contended that the payments were in the ordinary course of business and that we
supplied additional product to Metricom after receiving the payments, which
would offset any preference liability. During 2002, we executed a global
settlement with the reorganized debtor under which we agreed to reduce our
general unsecured claim to $10.3 million and Metricom agreed to dismiss the
preference claims. We received a settlement of $1.8 million that has been
included in our net loss for 2002. We also received an additional recovery of
$0.5 million that has been included in our net earnings for 2003.
In November 2002, Sierra Wireless, Inc., along with several other defendants,
was served with the second amended complaint of MLR, LLC ("MLR") filed in the
U.S. District Court for the Northern District of Illinois Eastern Division for
alleged patent infringement. We assessed the complaint and believed that there
was no infringement of the patents referred to in this claim and that the claim
was invalid. During 2003, we reached an agreement with MLR. Under the agreement,
we received non-royalty bearing licenses to use all of MLR's present and future
patents for certain of our products and MLR released us from their claim of
alleged patent infringement.
Under license agreements, we are committed to royalty payments based on the
sales of products using certain technologies. We recognize royalty obligations
as determinable in accordance with agreement terms. Where agreements are not
finalized, we have recognized our current best estimate of the obligation. When
the agreements are finalized, the estimate will be revised accordingly.
We are engaged in other legal actions arising in the ordinary course of business
and believe that the ultimate outcome of these actions will not have a material
adverse effect on our operating results, liquidity or financial position.
SIGNIFICANT CONTRACTS
We had entered into significant development and volume purchase contracts with
three wireless carriers, AT&T Wireless, Sprint PCS, and Verizon Wireless in late
1999 and 2000. We have substantially completed volume shipments on all three
contracts during the last quarter of 2003. Going forward, we expect to rely on
purchase orders with these customers, and these customers, like our other
customers, will be under no contractual obligation to purchase our products.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, and we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent liabilities. On an on-going
basis, we evaluate our estimates and judgments, including those related to
revenue recognition, adequacy of allowance for doubtful accounts, adequacy of
inventory reserve, income taxes and adequacy of warranty reserve. We base our
estimates on historical experience and anticipated results and trends and on
various other assumptions that we believe are reasonable under the
circumstances. By their nature, estimates are subject to an inherent degree of
uncertainty. Actual results may differ from our estimates.
54
Senior management has discussed with our audit committee the development,
selection, and disclosure of accounting estimates used in the preparation of our
consolidated financial statements.
During the year ended December 31, 2003, we did not adopt any new accounting
policies that have a material impact on our consolidated financial statements or
make changes to existing accounting policies.
The following critical accounting policies affect our more significant estimates
and assumptions used in preparing our consolidated financial statements:
o We recognize revenue from sales of products and services upon the
later of transfer of title or upon shipment of the product to the
customer or rendering of the service, so long as collectibility is
reasonably assured. Customers include resellers, original equipment
manufacturers, wireless service providers and end-users. We record
deferred revenue when we receive cash in advance of the revenue
recognition criteria being met.
An increasing amount of our revenue is generated from sales to
resellers. We recognize revenue on the portion of sales to certain
resellers that are subject to provisions allowing various rights of
return and stock rotation when the rights have expired or the products
have been reported as sold by the resellers.
Funding from research and development agreements, other than government
research and development arrangements, is recognized as revenue when
certain criteria stipulated under the terms of those funding agreements
have been met, and when there is reasonable assurance the funding will
be received. Certain research and development funding will be repayable
only on the occurrence of specified future events. If such events do
not occur, no repayment would be required. We will recognize the
liability to repay research and development funding in the period in
which conditions arise that would cause research and development
funding to be repayable.
o We maintain an allowance for doubtful accounts for estimated losses
that may arise if any of our customers are unable to make required
payments. We consider the following factors when determining if
collection is reasonably assured: customer credit-worthiness, past
transaction history with the customer, current economic industry trends
and changes in customer payment terms. If we have no previous
experience with the customer, we typically obtain reports from credit
organizations to ensure that the customer has a history of paying its
creditors. We may also request financial information, including
financial statements, to ensure that the customer has the means of
making payment. If these factors indicate collection is not reasonably
assured, revenue is deferred until collection becomes reasonably
assured, which is generally upon receipt of cash. If the financial
condition of any of our customers deteriorates, we may increase our
allowance.
o We value our inventory at the lower of cost, determined on a
first-in-first-out basis, and estimated net realizable value. We
assess the need for an inventory writedown based on our assessment of
estimated market value using assumptions about future demand and
market conditions. Our reserve requirements generally increase as our
projected demand requirements decrease, due to market conditions,
technological and product life cycle changes and longer than
previously expected usage periods. If market conditions are worse than
our projections, we may further writedown the value of our inventory.
o We currently have intangible assets of $34.3 million, including
goodwill of $19.7 million generated from our acquisition of AirPrime
in August 2003. Goodwill is tested for impairment annually, or more
often, if an event or circumstance indicates that an impairment loss
has been incurred.
The initial goodwill impairment test was completed during the fourth
quarter of 2003, which resulted in no impairment loss. We assessed the
realizability of goodwill related to our reporting unit during the
fourth quarter and determined that its fair value did not have to be
re-computed because the components of the reporting unit had not
changed since the fair value computation completed at August 12, 2003,
the date of acquisition, the previous fair value amount exceeded the
carrying amount of the reporting unit by a substantial margin, and no
evidence exists to indicate that the current fair value of the
reporting unit would be less than its current carrying amount.
o We evaluate our deferred income tax assets to assess whether their
realization is more likely than not. If their realization is not
considered more likely than not, we provide for a valuation allowance.
The ultimate realization of our deferred tax assets is dependent upon
the generation of future taxable income during the periods in which
temporary differences become deductible. We consider projected future
taxable income and
55
tax planning strategies in making our assessment. If we determine that
we would not be able to realize our deferred tax assets, we may make
an adjustment to our deferred tax assets which would be charged to
income.
o We accrue product warranty costs to provide for the repair or
replacement of defective products. Our accrual is based on an
assessment of historical experience and management's estimates. If we
suffer a decrease in the quality of our products, we may increase our
accrual.
o Under license agreements, we are committed to royalty payments based on
the sales of products using certain technologies. We recognize royalty
obligations as determinable in accordance with agreement terms. Where
agreements are not finalized, we have recognized our current best
estimate of the obligation. When the agreements are finalized, the
estimate will be revised accordingly.
o We recorded a lease provision during 2002 as a result of our
restructuring program by estimating the net present value of the future
cash outflows over the remaining lease period. The estimate was based
on various assumptions including the obtainable sublease rates and the
time it will take to find a suitable tenant. These assumptions are
influenced by market conditions and the availability of similar space
nearby. If market conditions change, we will adjust our provision.
During 2003, we increased our provision by $0.3 million due to changes
in market conditions.
o We are engaged in other legal actions arising in the ordinary course of
business and believe that the ultimate outcome of these actions will
not have a material adverse effect on our operating results, liquidity
or financial position. We estimate the range of liability related to
pending litigation where the amount and range of loss can be reasonably
estimated. We record our best estimate of a loss when the loss is
considered probable. As additional information becomes available, we
assess the potential liability relating to our pending litigation and
revise our estimates.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operating activities amounted to $14.3 million for 2003,
compared to cash used by operating activities of $4.7 million in 2002, an
improvement of $19.0 million. The source of cash in 2003 primarily resulted from
earnings from operations of $9.2 million, adjusted for non-cash items, reduced
inventory levels and changes in other operating assets and liabilities of $5.1
million. The increase in working capital was due to an increase in revenue for
2003. Generally, our working capital requirements will increase or decrease with
quarterly revenue levels. Our working capital requirements have also been
reduced through continued favorable collection efforts and streamlined supply
chain operations.
FINANCING ACTIVITIES
Cash provided by financing activities was $66.5 million in 2003, compared to a
use of cash of $1.1 million in 2002. The source of cash in 2003 was the
completion of a new issue and secondary public offering in the United States and
Canada. Our net proceeds after selling commissions of $3.8 million and expenses
of the offering of approximately $1.0 million amounted to approximately $67.4
million.
As of December 31, 2003, we did not have any off-balance sheet finance or
special purpose entities. During the year ended December 31, 2003, we entered
into a number of capital leases relating to purchases of research and
development equipment and information systems. These leases and commitments are
disclosed in the consolidated financial statements.
INVESTING ACTIVITIES
Cash used by investing activities was $45.3 million in 2003, compared to cash
provided by investing activities of $28.6 million in 2002. The use of cash in
2003 was due primarily to the net investment of cash of $39.3 million in 2003
from the offering compared to net maturities of $31.9 million in 2002.
Expenditures on intangible assets were $4.1 million in 2003, compared to $1.4
million in 2002, and were primarily for license fees and patents. Capital
expenditures were $2.0 million in 2003, compared to $2.2 million in 2002 and
were primarily for research and development equipment.
56
We do not have any trading activities that involve any type of commodity
contracts that are accounted for at fair value but for which a lack of market
price quotations necessitate the use of fair value estimation techniques.
CASH REQUIREMENTS
We expect our operations will generate positive net cash during fiscal 2004. We
also expect that lower cash requirements for restructuring activities and the
effect of previous cost reduction actions, offset by the additional working
capital impact of the AirPrime acquisition will contribute to positive cash flow
from operations for 2004.
Our near-term cash requirements are primarily related to funding our operations,
capital expenditures and other obligations discussed below. We expect to
continue to use cash to meet these requirements during 2004. We believe our cash
and cash equivalents of $70.4 million, short-term investments of $14.8 million
and long-term investments of $24.6 million as of December 31, 2003 will be
sufficient to fund our cash requirements for the next twelve months. However, we
cannot provide assurance that our actual cash requirements will not be greater
than we currently expect.
The following table quantifies our future contractual obligations as of December
31, 2003:
PAYMENTS DUE IN FISCAL
----------------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
----- ---- ---- ---- ---- ---- ----------
Obligations under capital
leases (a).............. 141 141 -- -- -- -- --
Operating leases (a)........ 18,575 2,877 2,551 2,589 2,660 2,674 5,224
--------- --------- --------- ---------- ---------- --------- ---------
Total $ 18,716 $ 3,018 $ 2,551 $ 2,589 $ 2,660 $ 2,674 $ 5,224
========= ========= ========= ========= ========== ========= =========
(a) See notes 11 and 17 to our consolidated financial statements for additional
information.
We believe our current cash and cash equivalents, short and long term
investments and cash generated from operations will satisfy our expected working
and other capital requirements for the foreseeable future based on current
business plans.
We have entered into purchase commitments totaling $28.3 million with certain
contract manufacturers under which we commit to buy a minimum amount of
designated products. In certain of these agreements, we may be required to
acquire and pay for such products up to the prescribed minimum or forecasted
purchases. The terms of the commitment require us to purchase $28.3 million of
product from certain contract manufacturers between January 2004 and August
2004.
SOURCES AND USES OF CASH
In November 2003, we completed a new issue and secondary public offering in the
United States and Canada. Our net proceeds after selling commissions and
expenses of the offering amounted to approximately $67.4 million. The net
proceeds from the offering are to be used for product development, working
capital and general corporate purposes, including acquisitions.
We expect the proceeds from the November 2003 financing and our expected future
operating cash flow will continue to fund our operations. Therefore, we have no
foreseeable requirements to return to the capital markets for additional
funding.
One of our significant sources of funds is expected to be our future operating
cash flow. In the past, our revenue was dependent on us fulfilling our
commitments in accordance with agreements with major customers. We have
substantially completed volume shipments on those contracts. Therefore, in the
future, we will rely on purchase orders with these customers and these
customers, like our other customers, will be under no contractual obligation to
purchase our products. If they do not make such purchases, our revenue will be
negatively impacted. We have a risk of impairment to our liquidity should there
be any interruption to our business operations.
The source of funds for our future capital expenditures and commitments is cash,
short and long-term investments, accounts receivable, research and development
funding, borrowings and cash from operations, as follows:
o Net cash and short-term investments amounted to $85.1 million at
December 31, 2003 compared to $34.8 million at December 31, 2002.
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o Long-term investments amounted to $24.6 million at December 31, 2003
compared to nil at December 31, 2002.
o Accounts receivable amounted to $21.6 million at December 31, 2003
compared to $13.9 million at December 31, 2002.
o We have a $10.0 million operating line of credit with a Canadian
chartered bank. The credit facility bears interest at prime plus 1.25%
and is secured by a general security agreement providing a first
charge against all assets. At December 31, 2003, there were no
borrowings under this line of credit.
MARKET RISK DISCLOSURE
During the year ended December 31, 2003, 68% of our revenue was earned from
United States-based customers compared to 78% in the year ended December 31,
2002. Our risk from currency fluctuations between the Canadian and U.S. dollar
is reduced by purchasing inventory, other costs of sales and many of our
services in U.S. dollars. We are exposed to foreign currency fluctuations since
the majority of our research and development, sales and marketing, and
administration costs are incurred in Canada. We monitor our exposure to
fluctuations between the Canadian and U.S. dollars. As a result of the adoption
of U.S. dollars as our currency of measurement in the year ended December 31,
1999, our foreign currency risk has changed from U.S. dollar denominated
monetary assets and liabilities to non-U.S. dollar denominated monetary assets
and liabilities and the risk of the impact of exchange rate changes relative to
the U.S. dollar. As we have available funds and very little debt, we have not
been adversely affected by significant interest rate fluctuations.
With our international expansion into Europe and the Asia-Pacific region, we are
transacting business in additional foreign currencies and the potential for
currency fluctuations is increasing. The risk associated with currency
fluctuations between the U.S. dollar and foreign currencies in Europe and the
Asia-Pacific region has been minimal as such transactions have not been material
to date. During 2003, we continued to enter into additional distribution
agreements in Europe and the Asia-Pacific region that are denominated primarily
in US dollars. We expect that, as our business expands in Europe, we will also
continue to be exposed to Euro transactions. To date we have not entered into
any futures contracts. To manage our foreign currency risks, we may enter into
such contracts should we consider it to be advisable to reduce our exposure to
future foreign exchange fluctuations.
Currently, we do not have any hedging activities or derivative instruments,
therefore the impact of FAS No. 133 is not material to our financial results.
RELATED PARTY TRANSACTIONS
During 2003, there were no material related party transactions, except for $1.0
million loaned to AirPrime for working capital purposes prior to closing the
acquisition on August 12, 2003.
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GAAP
The MD&A has been prepared in accordance with U.S. GAAP. Differences between our
consolidated financial statements under U.S. GAAP and our consolidated financial
statements under Canadian GAAP reflect differences in exchange rates used to
translate prior years' assets, liabilities, revenue, and expenses on adopting
the U.S. dollar as our primary currency for measurement and display during the
year ended December 31, 1999.
Research and development expense for the year ended December 31, 2002 was
different under Canadian GAAP due to the difference in the accounting treatment
applied to in-process research and development ("IPR&D"), related to the
acquisition of the QUALCOMM CDMA modules business, which resulted in an
additional loss of $0.2 million. In accordance with U.S. GAAP, purchased IPR&D
is expensed on acquisition, whereas under Canadian GAAP, purchased IPR&D is
treated as an intangible asset and amortized. At December 31, 2002, the IPR&D
was fully amortized.
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FORWARD-LOOKING STATEMENTS
Our annual report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other things,
plans and timing for the introduction or enhancement of our services and
products, statements about future market conditions, supply and demand
conditions, channel inventory and sell through, revenue, gross margin, operating
expenses, profits, and other expectations, intentions and plans contained in
this annual report that are not historical fact. Our expectations regarding
future revenues and earnings depend in part upon our ability to develop,
manufacture, and supply products that we do not produce today and that meet
defined specifications as well as our ability to bring the Voq professional
phone to market. When used in this annual report, the words "plan", "expect",
"believe", and similar expressions generally identify forward-looking
statements. These statements reflect our current expectations. They are subject
to a number of risks and uncertainties, including but not limited to, changes in
technology and changes in the wireless data communications market. In light of
the many risks and uncertainties surrounding the wireless data communications
market, you should understand that we cannot assure you that the forward-looking
statements contained in this annual report will be realized.
RISK FACTORS
Our business is subject to significant risks and past performance is no
guarantee of future performance. Some of the risks we face are:
WE HAVE INCURRED NET LOSSES IN THE PAST AND MAY NOT SUSTAIN PROFITABILITY.
While we had earnings from operations for the year ended December 31,
2003, we have incurred a loss from operations in each of the previous
three fiscal years. As of December 31, 2003 our accumulated deficit was
approximately $71.3 million. While we had net earnings of $2.3 million for
the year ended December 31, 2003, our ability to achieve and maintain
profitability will depend on, among other things, the continued sales of
our products and the successful development and commercialization of new
products. We cannot predict if the current profitability will be
sustainable on a quarterly or an annual basis. As a result, our share
price may decline.
If the current profitability does not continue, we may need to raise
additional capital in the future. Additional financing may not be
available, and even if available, may not be on acceptable terms. We may
seek to raise additional capital though an offering of common shares,
preference shares or debt, which may result in dilution, and/or the
issuance of securities with rights senior to the rights, of the holders of
common shares.
IF DEMAND FOR OUR CURRENT PRODUCTS DECLINES AND WE ARE UNABLE TO LAUNCH
SUCCESSFUL NEW PRODUCTS, OUR REVENUES WILL DECREASE.
If the markets in which we compete fail to grow, or grow more slowly than
we currently anticipate, or if we are unable to establish markets for our
new products, it would significantly harm our business, results of
operations and financial condition. In addition, demand for one or all of
our current products could decline as a result of competition,
technological change or other factors.
IF WE ARE UNABLE TO DESIGN AND DEVELOP NEW PRODUCTS THAT GAIN SUFFICIENT
COMMERCIAL ACCEPTANCE, WE MAY BE UNABLE TO MAINTAIN OUR MARKET SHARE OR TO
RECOVER OUR RESEARCH AND DEVELOPMENT EXPENSES AND OUR REVENUES COULD DECLINE.
We depend on designing, developing and marketing new products to achieve
much of our future growth. Our ability to design, develop and market new
products depends on a number of factors, including, but not limited to the
following:
o Our ability to attract and retain skilled technical employees;
o The availability of critical components from third parties;
o Our ability to successfully complete the development of products in a
timely manner; and
o Our ability to manufacture products at an acceptable price and quality.
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A failure by us, or our suppliers, in any of these areas, or a failure of
new products, such as Voq, to obtain commercial acceptance, could mean we
receive less revenue than we anticipate and we are unable to recover our
research and development expenses, and could result in a decrease in the
market price for our shares.
THE LOSS OF ANY OF OUR MATERIAL CUSTOMERS COULD ADVERSELY AFFECT OUR REVENUE AND
PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE.
We depend on a small number of customers for a significant portion of our
revenues. In the last two fiscal years, there have been four different
customers that individually accounted for more than 10% of our revenues.
If any of these customers reduce their business with us or suffer from
business failure, our revenues and profitability could decline, perhaps
materially.
WE DO NOT EXPECT TO HAVE SIGNIFICANT LONG TERM CUSTOMER CONTRACTS AND OUR
REVENUES WILL BE NEGATIVELY IMPACTED IF CUSTOMERS DO NOT CONTINUE TO ORDER OUR
PRODUCTS UNDER PURCHASE ORDERS.
In late 1999 and 2000, we entered into significant supply contracts with
AT&T Wireless, Sprint PCS and Verizon Wireless. We have substantially
completed volume shipments on all three contracts during the last quarter
of 2003. Thereafter, we will rely on purchase orders with these customers,
and these customers, like our other customers, will be under no
contractual obligation to purchase our products. If they do not make such
purchases, our revenue and our share price may decline.
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT GROSS MARGINS AND, AS A RESULT, OUR
PROFITABILITY MAY DECREASE.
We generally price our products based on our estimate of future production
costs. If actual production costs are higher than we anticipate, our gross
margins will decrease. In addition, competitive pressures may force us to
lower our product prices, which will decrease our gross margins if we are
unable to offset that effect by cost reduction measures. If our gross
margins are reduced with respect to an important product line, or if our
sales of lower margin products exceed our sales of higher margin products,
our profitability may decrease and our business could suffer.
OUR REVENUES AND EARNINGS MAY FLUCTUATE FROM QUARTER TO QUARTER, WHICH COULD
AFFECT THE MARKET PRICE OF OUR COMMON SHARES.
Our revenues and earnings may vary from quarter to quarter as a result of
a number of factors, including:
o The timing of releases of our new products;
o The timing of substantial sales orders;
o Possible seasonal fluctuations in demand;
o Possible delays in the manufacture or shipment of current or new
products; and
o Possible delays or shortages in component supplies.
Because our operating expenses are determined based on anticipated sales,
are generally fixed and are incurred throughout each fiscal quarter, any
of the factors listed above could cause significant variations in our
revenues and earnings in any given quarter. Thus, our quarterly results
are not necessarily indicative of our overall business, results of
operations and financial condition. However, quarterly fluctuations in our
revenues and earnings may affect the market price of our common shares.
WE DEPEND ON A FEW THIRD PARTIES TO MANUFACTURE OUR PRODUCTS AND SUPPLY KEY
COMPONENTS. IF THEY DO NOT MANUFACTURE OUR PRODUCTS PROPERLY OR CANNOT MEET OUR
NEEDS IN A TIMELY MANNER, WE MAY BE UNABLE TO FULFILL OUR PRODUCT DELIVERY
OBLIGATIONS AND OUR COSTS MAY INCREASE, AND OUR REVENUE AND MARGINS COULD
DECREASE.
We outsource a substantial part of the manufacture of our products to
third parties and depend heavily on the ability of these manufacturers to
meet our needs in a timely and satisfactory manner. Some components used
by us may only be available from a small number of suppliers, in some
cases from only one supplier. We currently rely on three manufacturers,
any of which may terminate the manufacturing contract with us at the end
of any contract year. Our reliance on third party manufacturers and
suppliers subjects us to a number of risks, including the following:
60
o The absence of guaranteed manufacturing capacity;
o Reduced control over delivery schedules, production yields and costs;
and
o Inability to control the amount of time and resources devoted to the
manufacture of our products.
If we are unable to successfully manage any of these risks or to locate
alternative or additional manufacturers or suppliers in a timely and
cost-effective manner, we may not be able to deliver products in a timely
manner. In addition, our results of operations could be harmed by
increased costs, reduced revenues and reduced margins.
WE DO NOT HAVE FIXED-TERM EMPLOYMENT AGREEMENTS WITH OUR KEY PERSONNEL AND THE
LOSS OF ANY KEY PERSONNEL MAY HARM OUR ABILITY TO COMPETE EFFECTIVELY.
None of our officers or other key employees has entered into a fixed-term
employment agreement. Our success depends in large part on the abilities
and experience of our executive officers and other key employees.
Competition for highly skilled management, technical, research and
development and other key employees is intense in the wireless
communications industry. We may not be able to retain our current key
employees or attract and retain additional key employees as needed. The
loss of key employees could disrupt our operations and impair our ability
to compete effectively.
Our Chief Financial Officer, or CFO, and our Chief Technical Officer, or
CTO, are scheduled to retire in the next several months. We are currently
recruiting a successor to the CFO. We are not seeking a successor for the
CTO, and we expect that his present duties will be assumed by certain of
our existing officers. If we are unable to adequately replace our CFO or
if our other executive officers are unable to adequately undertake our
CTO's duties, our operations may be disrupted or our ability to compete
may be impaired.
WE MAY HAVE DIFFICULTY RESPONDING TO CHANGING TECHNOLOGY, INDUSTRY STANDARDS AND
CUSTOMER PREFERENCES, WHICH COULD CAUSE US TO BE UNABLE TO RECOVER OUR RESEARCH
AND DEVELOPMENT EXPENSES AND LOSE REVENUES.
The wireless industry is characterized by rapid technological change. Our
success will depend in part on our ability to develop products that keep
pace with the continuing changes in technology, evolving industry
standards and changing customer and end-user preferences and requirements.
Our products embody complex technology that may not meet those standards,
changes and preferences. In addition, wireless communications service
providers require that wireless data systems deployed in their networks
comply with their own standards, which may differ from the standards of
other providers. We may be unable to successfully address these
developments in a timely basis or at all. Our failure to respond quickly
and cost-effectively to new developments through the development of new
products or enhancements to existing products could cause us to be unable
to recover significant research and development expenses and reduce our
revenues.
COMPETITION FROM BIGGER MORE ESTABLISHED COMPANIES WITH GREATER RESOURCES MAY
PREVENT US FROM INCREASING OR MAINTAINING OUR MARKET SHARE AND COULD RESULT IN
PRICE REDUCTIONS AND REDUCED REVENUES.
The wireless industry is intensely competitive and subject to rapid
technological change. We expect competition to intensify. More established
and larger companies with greater financial, technical and marketing
resources sell products that compete with ours. We also may introduce new
products that will put us in direct competition with major new
competitors. Existing or future competitors may be able to respond more
quickly to technological developments and changes or may independently
develop and patent technologies and products that are superior to ours or
achieve greater acceptance due to factors such as more favorable pricing
or more efficient sales channels. If we are unable to compete effectively
with our competitors' pricing strategies, technological advances and other
initiatives, our market share and revenues may be reduced.
AS THE ADOPTION OF WIRELESS DATA HAS CONTINUED TO INCREASE, WE HAVE EXPERIENCED
AN INCREASE IN COMPETITION IN OUR MARKET. IF WIRELESS ADOPTION CONTINUES TO
GROW, WE MAY CONTINUE TO EXPERIENCE INCREASED COMPETITION FROM NEW ENTRANTS INTO
THE MARKET, AND FROM BIGGER AND MORE ESTABLISHED COMPANIES WITH GREATER
RESOURCES, WHICH COULD RESULT IN REDUCED REVENUES AND PROFITS.
WE DEPEND ON THIRD PARTIES TO OFFER WIRELESS DATA AND VOICE COMMUNICATIONS
SERVICES FOR OUR PRODUCTS TO OPERATE.
Our products can only be used over wireless data and voice networks
operated by third parties. In addition, our future growth depends, in
part, on the successful deployment of next generation wireless data and
voice networks by third parties for which we are developing products. If
these network operators cease to offer effective and
61
reliable service, or fail to market their services effectively, sales of
our products will decline and our revenues will decrease.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES, INCLUDING OUR ACQUISITION OF
AIRPRIME, MAY RESULT IN DISRUPTIONS TO OUR BUSINESS OR MAY NOT ACHIEVE THE
ANTICIPATED BENEFITS.
As part of our business strategy, we may acquire additional assets and
businesses principally relating to or complementary to our current
operations. Any other acquisitions and/or mergers by us will be
accompanied by the risks commonly encountered in acquisitions of
companies. These risks include, among other things:
o Exposure to unknown liabilities of acquired companies;
o Higher than anticipated acquisition costs and expenses;
o Effects of costs and expenses of acquiring and integrating new
businesses on our operating results and financial condition;
o The difficulty and expense of integrating the operations and
personnel of the companies;
o Disruption of our ongoing business;
o Diversion of management's time and attention away from our remaining
business during the integration process;
o Failure to maximize our financial and strategic position by the
successful incorporation of acquired technology;
o The inability to implement uniform standards, controls, procedures
and policies;
o The loss of key employees and customers as a result of changes in
management;
o The incurrence of amortization expenses; and
o Possible dilution to our shareholders.
In addition, geographic distances may make integration of businesses more
difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions. If realized,
these risks could reduce shareholder value.
On August 12, 2003, we completed our acquisition of AirPrime. The
integration of AirPrime into our business is ongoing and the acquisition
of AirPrime is subject to all of the risks set out above.
OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT ATTENTION
AND HARM TO OUR REPUTATION.
It is possible that other parties may claim that we have violated their
intellectual property rights. Rights to intellectual property can be
difficult to verify. Competitors could assert, for example, that former
employees of theirs whom we have hired have misappropriated their
proprietary information for our benefit. A successful infringement claim
against us could damage us in the following ways:
o We may be liable for damages and litigation costs, including
attorneys' fees;
o We may be prohibited from further use of the intellectual property;
o We may have to license the intellectual property, incurring licensing
fees; and
o We may have to develop a non-infringing alternative, which could be
costly and delay or result in the loss of sales.
62
Regardless of the outcome, an infringement claim could result in
substantial costs, diversion of resources and management attention and
harm to our reputation.
IF WE ARE SUCCESSFUL IN THE DESIGN AND DEVELOPMENT OF OUR NEW PRODUCTS, AND
THERE IS COMMERCIAL ACCEPTANCE OF OUR PRODUCTS, SUCH AS THE VOQ SMART PHONE,
OTHERS MAY CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT ATTENTION
AND HARM OUR REPUTATION.
MISAPPROPRIATION OF OUR INTELLECTUAL PROPERTY COULD PLACE US AT A COMPETITIVE
DISADVANTAGE.
Our intellectual property is important to our success. We rely on a
combination of patent protection, copyrights, trademarks, trade secrets,
licenses, non-disclosure agreements and other contractual agreements to
protect our intellectual property. Third parties may attempt to copy
aspects of our products and technology or obtain information we regard as
proprietary without our authorization. If we are unable to protect our
intellectual property against unauthorized use by others it could have an
adverse effect on our competitive position.
Our strategies to deter misappropriation could be inadequate due to the
following risks:
o Non-recognition of the proprietary nature or inadequate protection of
our methodologies in the United States, Canada or foreign countries;
o Undetected misappropriation of our intellectual property;
o The substantial legal and other costs of protecting and enforcing our
rights in our intellectual property; and
o Development of similar technologies by our competitors.
In addition, we could be required to spend significant funds and our
managerial resources could be diverted in order to defend our rights,
which could disrupt our operations.
AS OUR BUSINESS EXPANDS INTERNATIONALLY, WE WILL BE EXPOSED TO ADDITIONAL RISKS
RELATING TO INTERNATIONAL OPERATIONS.
Our expansion into international operations exposes us to additional risks
unique to such international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable;
o Unexpected changes in regulatory requirements, wireless
communications standards, exchange rates, trading policies, tariffs
and other barriers;
o Uncertainties of laws and enforcement relating to the protection of
intellectual property;
o Language barriers; and
o Potential adverse tax consequences.
Furthermore, if we are unable to further develop distribution channels in
Europe and the Asia-Pacific region we may not be able to grow our
international operations and our ability to increase our revenue will be
negatively impacted.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL OUR
PRODUCTS.
Our products are subject to certain mandatory regulatory approvals in the
United States, Canada and other countries in which we operate. In the
United States, the Federal Communications Commission regulates many
aspects of communications devices. In Canada, similar regulations are
administered by the Ministry of Industry, through Industry Canada.
Although we have obtained all the necessary Federal Communications
Commission, Industry Canada and other required approvals for the products
we currently sell, we may not obtain approvals for future products on a
timely basis, or at all. In addition, regulatory requirements may change
or we may not be able to obtain regulatory approvals from countries other
than the United States and Canada in which we may desire to sell products
in the future.
63
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR MAY AFFECT OUR OPERATING RESULTS.
We are exposed to fluctuations in the exchange rate between the United
States dollar and the Canadian dollar through our operations in Canada. To
reduce our risk because of currency fluctuations, we purchase inventory,
other costs of sales items and many of our services in United States
dollars. If the Canadian dollar rises relative to the United States
dollar, our operating results may be impacted. To date, we have not
entered into any foreign currency futures contracts as part of a hedging
policy, but we have purchased Canadian currency to cover our Canadian
currency requirements for the next several fiscal quarters. We have
entered into distribution agreements in Europe and the Asia-Pacific region
that are denominated primarily in U.S. dollars. We expect that as our
business expands in Europe and the Asia-Pacific region, we will also be
exposed to additional foreign currency transactions and to the associated
currency risk. To date, we have not entered into any futures contracts.
64
MANAGEMENT'S STATEMENT OF RESPONSIBILITIES
The management of Sierra Wireless, Inc. is responsible for the preparation of
the accompanying consolidated financial statements and the preparation and
presentation of information in the Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada and are considered by management to present fairly the
financial position and operating results of the Company.
The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded and that financial reports are properly maintained to
provide accurate and reliable financial statements.
The Company's audit committee is comprised entirely of non-management directors
and is appointed by the Board of Directors annually. The committee meets
periodically with the Company's management and independent auditors to review
the consolidated financial statements and the independent auditors' report. The
audit committee reported its findings to the Board of Directors who have
approved the consolidated financial statements.
The Company's independent auditors, KPMG LLP, have examined the consolidated
financial statements and their report follows.
/s/ David B. Sutcliffe /s/ Peter W. Roberts
David B. Sutcliffe Peter W. Roberts
Chairman and Chief Executive Officer Chief Financial Officer
January 21, 2004
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Sierra Wireless, Inc. as at
December 31, 2003 and 2002 and the consolidated statements of operations and
deficit, and cash flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free from 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
On January 21, 2004, we reported separately to the shareholders of the Company
on the consolidated financial statements as at and for the periods presented
above, which consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
January 21, 2004
65
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in thousands of United States dollars, except per share amounts)
(Prepared in accordance with Canadian generally accepted accounting principles (GAAP))
YEARS ENDED DECEMBER 31,
----------------------------------
2001 2002 2003
--------- --------- --------
Revenue......................................................................... $62,348 $77,259 $101,709
Cost of goods sold.............................................................. 47,035 69,261 60,551
-------- -------- ---------
Gross margin 15,313 7,998 41,158
-------- -------- ---------
Expenses:
Sales and marketing........................................................... 12,726 11,564 11,585
Research and development, net (note 14)....................................... 17,402 15,146 15,994
Administration................................................................ 10,647 4,785 6,597
Restructuring and other charges (note 4)...................................... -- 12,869 1,220
Integration costs (note 5).................................................... -- -- 1,947
Amortization.................................................................. 2,084 2,331 2,327
-------- -------- ---------
42,859 46,695 39,670
-------- -------- ---------
Earnings (loss) from operations................................................. (27,546) (38,697) 1,488
Other income.................................................................... 2,504 247 965
-------- -------- ---------
Earnings (loss) before income taxes............................................. (25,042) (38,450) 2,453
Income tax expense (recovery) (note 13)......................................... (273) 3,463 198
-------- -------- ---------
Net earnings (loss)............................................................. (24,769) (41,913) 2,255
Deficit, beginning of year...................................................... (5,904) (30,673) (72,586)
-------- -------- ---------
Deficit, end of year............................................................ $(30,673) $(72,586) $(70,331)
======== ======== =========
Earnings (loss) per share (note 15):
Basic......................................................................... $ (1.54) $ (2.57) $ 0.12
Diluted....................................................................... $ (1.54) $ (2.57) $ 0.12
========= ========= ========
See accompanying notes to consolidated financial statements.
66
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
DECEMBER 31,
------------
2002 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 34,841 $ 70,358
Short-term investments...................................................... -- 14,760
Accounts receivable, net of allowance for doubtful
accounts of $2,230 (2002 -- $3,068)....................................... 13,865 21,566
Inventories (note 6)........................................................ 6,673 1,511
Prepaid expenses............................................................ 864 2,223
--------- ----------
56,243 110,418
Long-term investments......................................................... -- 24,639
Capital assets (note 7)....................................................... 7,198 5,985
Intangible assets (note 8).................................................... 6,907 14,620
Goodwill (note 8)............................................................. -- 19,706
Future income taxes (note 13)................................................. 500 500
Other......................................................................... 241 --
--------- ----------
$ 71,089 $ 175,868
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 3,017 $ 5,966
Accrued liabilities......................................................... 12,431 22,221
Deferred revenue and credits................................................ 297 399
Current portion of long-term liabilities (note 9)........................... 2,803 1,328
Current portion of obligations under capital lease (note 10)................ 831 141
---------- ----------
19,379 30,055
Long-term liabilities (note 9)................................................ 2,896 2,266
Obligations under capital lease (note 10)..................................... 60 --
Shareholders' equity:
Share capital (note 11)
Authorized
Unlimited number of common and preference shares with no par value
Common shares, 24,822,071 (2002 - 16,345,396) issued and outstanding .... 121,824 212,824
Warrants.................................................................... -- 1,538
Deficit..................................................................... (72,586) (70,331)
Cumulative translation adjustments.......................................... (484) (484)
----------- -----------
48,754 143,547
---------- ----------
$ 71,089 $ 175,868
========== ==========
Commitments and contingencies (note 16)
See accompanying notes to consolidated financial statements.
/s/ David B. Sutcliffe /s/ S. Jane Rowe
DAVID B. SUTCLIFFE S. JANE ROWE
Director Director
67
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
YEARS ENDED DECEMBER 31,
------------------------
2001 2002 2003
--------- --------- --------
Cash flows from operating activities:
Net earnings (loss)........................................................ $ (24,769) $ (41,913) $ 2,255
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Amortization............................................................ 7,161 7,038 5,669
Non-cash restructuring and other charges................................ -- 28,593 895
Loss on disposal........................................................ -- 597 2
Deferred income taxes................................................... (15) 3,754 --
Accrued warrants........................................................ 671 481 386
Changes in operating assets and liabilities
Accounts receivable..................................................... 12,084 (3,361) (5,360)
Inventories............................................................. (13,031) 2,517 5,878
Prepaid expenses........................................................ 59 159 (1,087)
Accounts payable........................................................ (6,945) (1,339) 225
Accrued liabilities..................................................... 3,420 (463) 5,296
Deferred revenue and credits............................................ 300 (753) 101
--------- --------- ----------
Net cash provided by (used in) operating activities........................ (21,065) (4,690) 14,260
Cash flows from investing activities:
Business acquisitions (note 3)............................................. -- -- 33
Proceeds on disposal....................................................... -- 338 4
Purchase of fixed assets................................................... (10,523) (2,219) (1,972)
Increase in intangible assets.............................................. (3,328) (1,431) (4,077)
Increase in other assets................................................... (143) -- --
Purchase of long-term investments.......................................... -- -- (24,639)
Purchase of short-term investments......................................... (69,411) (14,662) (25,103)
Proceeds on maturity of short-term investments............................. 109,676 46,541 10,492
--------- --------- ----------
Net cash provided by (used in) investing activities........................ 26,271 28,567 (45,262)
Cash flows from financing activities:
Issue of common shares, net of share issue costs........................... 499 374 68,623
Increase in long-term liabilities.......................................... 255 -- --
Repayment of long-term liabilities......................................... (766) (1,495) (2,104)
--------- --------- ----------
Net cash provided by (used in) financing activities........................ (12) (1,121) 66,519
--------- --------- ----------
Net increase in cash and cash equivalents.................................... 5,194 22,756 35,517
Cash and cash equivalents, beginning of year................................. 6,891 12,085 34,841
--------- --------- ----------
Cash and cash equivalents, end of year....................................... $ 12,085 $ 34,841 $ 70,358
========== ========= ==========
See supplementary cash flow information (note 17)
See accompanying notes to consolidated financial statements.
68
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(Expressed in thousands of United States dollars,
except per share amounts and number of shares)
(Prepared in accordance with Canadian GAAP)
1. NATURE OF OPERATIONS
We were incorporated under the Canada Business Corporations Act on May 31, 1993.
We develop and market a broad range of products that include wireless data
modems for portable computers, embedded modules for original equipment
manufacturers, or OEMs, rugged vehicle-mounted modems and mobile phones. Our
products permit users to access wireless data and voice networks using notebook
computers, personal digital assistants, or PDAs, vehicle-based systems or mobile
phones.
2. SIGNIFICANT ACCOUNTING POLICIES
Management has prepared these consolidated financial statements in accordance
with accounting principles generally accepted in Canada.
(a) PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Sierra Wireless,
Inc. and its wholly-owned subsidiaries Sierra Wireless Data, Inc., Sierra
Wireless America, Inc. (formerly AirPrime, Inc.), Sierra Wireless (UK) Limited,
Sierra Wireless (Asia Pacific) Limited, Sierra Wireless SRL and Sierra Wireless
ULC from their respective dates of formation or acquisition. We have eliminated
all significant intercompany balances and transactions.
(b) USE OF ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets, particularly the recoverability of capital
assets, intangible assets, goodwill and future income taxes, and warranty
accruals and other liabilities, and disclosures of contingent 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 the
estimates.
(c) CASH EQUIVALENTS
Cash equivalents include short-term deposits, which are all highly liquid
marketable securities having a term to maturity of three months or less when
acquired. We value our short-term deposits at cost.
(d) SHORT-TERM INVESTMENTS
Short-term investments are carried at the lower of cost and quoted market value.
(e) INVENTORIES
Inventories consist of electronic components and finished goods and are valued
at the lower of cost, determined on a first-in-first-out basis, and estimated
net realizable value.
(f) RESEARCH AND DEVELOPMENT
We expense research costs as they are incurred. Development costs are expensed
unless they meet certain specified criteria for deferral and amortization. No
development costs have been deferred in the current period as the criteria for
deferral were not met.
We follow the cost reduction method of accounting for government research and
development funding, whereby the benefit of the funding is recognized as a
reduction in the cost of the related expenditure when certain criteria
stipulated under the terms of those funding agreements have been met, and there
is reasonable assurance the research and
69
development funding will be received. Certain research and development funding
is repayable only on the occurrence of specified future events. If such events
do not occur, no repayment is required. We recognize the liability to repay
research and development funding in the period in which conditions arise that
will cause research and development funding to be repayable.
(g) LONG-TERM INVESTMENTS
Long-term investments are carried at cost.
(h) CAPITAL ASSETS
We initially record capital assets at cost. We subsequently provide amortization
on a straight-line basis over the following periods:
Furniture and fixtures................................................ 5 years
Research and development equipment.................................... 3 years
Tooling............................................................... 3 years
Software.............................................................. 3-5 years
Office equipment...................................................... 5 years
We amortize leasehold improvements on a straight-line basis over the lesser of
their useful lives or lease terms.
(i) INTANGIBLE ASSETS
PATENTS AND TRADEMARKS
Consideration paid for patents and trademarks is amortized on a straight-line
basis over three to five years commencing with the date the patents or
trademarks are granted.
LICENSE FEES
Consideration paid for license fees is amortized on a straight-line basis over
the shorter of the term of the license or five years.
INTELLECTUAL PROPERTY, CUSTOMER RELATIONSHIPS AND DATABASES
Consideration paid for intellectual property, customer relationships and
databases is amortized on a straight-line basis over three to five years. Each
of these intangible assets is subject to an impairment test as described in note
1(k). Consideration paid for in-process research and development is amortized on
a straight-line basis over the economic life of the asset.
(j) GOODWILL
Goodwill represents the excess of the purchase price of an acquired enterprise
over the fair value assigned to assets acquired and liabilities assumed in a
business combination. Goodwill is allocated as of the date of the business
combination to the reporting units that are expected to benefit from the
synergies of the business combination.
Goodwill has an indefinite life, is not amortized and is subject to a two-step
impairment test at least annually. The first step compares the fair value of the
reporting unit to its carrying amount, which includes the goodwill. When the
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not to be impaired and the second step of the
impairment test is unnecessary. If the carrying amount exceeds the fair value,
the second part of the test is performed to measure the amount of the impairment
loss. The second step compares the implied fair value of the reporting unit
goodwill with the carrying amount of the goodwill. If the carrying amount
exceeds the fair value of the goodwill, an impairment loss is recognized equal
to that excess.
70
(k) IMPAIRMENT OF LONG-LIVED ASSETS
We monitor the recoverability of long-lived assets, which includes capital
assets and intangible assets, other than goodwill, based on factors such as
future asset utilization and the future undiscounted cash flows expected to
result from the use of the related assets. Our policy is to record an impairment
loss in the period when we determine that the carrying amount of the asset will
not be recoverable. At that time the carrying amount is written down to fair
value.
(l) INCOME TAXES
We follow the asset and liability method of accounting for income taxes. Under
this method, future income taxes are recognized for the future income tax
consequences attributable to differences between the financial statement
carrying values and their respective income tax bases (temporary differences).
Changes in the net future tax asset or liability are generally included in
earnings. Future tax assets and liabilities are measured using substantively
enacted or enacted tax rates expected to apply to taxable income in the years in
which temporary differences are expected to be recovered or settled. The effect
on future income tax assets and liabilities of a change in tax rates is included
in income in the period that includes the substantive enactment date. Future
income tax assets are evaluated and if their realization is not considered "more
likely than not", a valuation allowance is provided.
(m) STOCK-BASED COMPENSATION
We account for employee stock options using the intrinsic value method. As we
grant all stock options with an exercise price equal to the market value of the
underlying common shares on the date of the grant, no compensation expense is
required to be recognized under the intrinsic value method. Had compensation
cost for our employee stock option plan been determined by the fair value
method, our net earnings (loss) and earnings (loss) per share would have been as
follows:
YEARS ENDED DECEMBER 31,
------------------------
2001 2002 2003
--------- --------- -------
Net earnings (loss):
As reported................................................................... $ (24,769) $ (41,913) $ 2,255
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards.................. (10,426) (7,817) (14,775)
----------- ----------- -----------
Pro forma..................................................................... $(35,195) $ (49,730) $ (12,520)
=========== =========== ===========
Basic and diluted earnings (loss) per share:
As reported................................................................... $ (1.54) $ (2.57) $ 0.12
Pro-forma..................................................................... (2.18) (3.05) (0.68)
We recognize the calculated benefit at the date of granting the stock options on
a straight-line basis over the shorter of the expected service period and the
vesting period.
As a result of our voluntary option surrender initiative, the unrecognized stock
compensation fair value of $5,956 related to the surrendered options was
expensed in the year ended December 31, 2003 in our pro forma disclosure.
We have estimated the fair value of each option on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
YEARS ENDED DECEMBER 31,
------------------------
2001 2002 2003
--------- --------- ---------
Expected dividend yield............................................................. 0 0 0
Expected stock price volatility..................................................... 107% 107% 102%
Risk-free interest rate............................................................. 4.88% 4.48% 3.83%
Expected life of options............................................................ 4 years 4 years 4 years
The fair value of stock options granted during the year was $7.56 (2002 - $4.58,
2001 - $15.04).
71
(n) REVENUE RECOGNITION
We recognize revenue from sales of products and services upon the later of
transfer of title or upon shipment of the product to the customer or rendering
of the service, so long as collectibility is reasonably assured. Customers
include resellers, original equipment manufacturers, wireless service providers
and end-users. We record deferred revenue when we receive cash in advance of the
revenue recognition criteria being met.
We recognize revenue on the portion of sales to certain resellers that are
subject to provisions allowing various rights of return and stock rotation when
the rights have expired or the products have been reported as sold by the
resellers.
Funding from research and development agreements, other than government funding
arrangements, is recognized as revenue when certain criteria stipulated under
the terms of those funding agreements have been met, and when there is
reasonable assurance the funding will be received. Certain research and
development funding will be repayable only on the occurrence of specified future
events. If such events do not occur, no repayment would be required. We will
recognize the liability to repay research and development funding in the period
in which conditions arise that would cause research and development funding to
be repayable.
Revenues from contracts with multiple-element arrangements, such as those
including technical support services, are recognized as each element is earned
based on the relative fair value of each element and only when there are no
undelivered elements that are essential to the functionality of the delivered
elements.
(o) WARRANTY COSTS
We accrue warranty costs upon the recognition of related revenue, based on our
best estimates, with reference to past experience.
(p) MARKET DEVELOPMENT COSTS
We accrue for co-op advertising costs upon the later of the recognition date of
the related revenue or date at which the co-op advertising is available. Co-op
advertising costs are recorded as a component of sales and marketing expense.
(q) SHARE ISSUE COSTS
We reduce the value of consideration assigned to shares issued by the direct
costs, net of income tax recoveries, of issuing the shares.
(r) EARNINGS (LOSS) PER COMMON SHARE
We calculate basic earnings (loss) per share based on the weighted-average
number of common shares outstanding for the year. If, in a reporting period, we
have had outstanding dilutive stock options and warrants, we calculate diluted
earnings (loss) per share using the treasury stock method.
(s) INVESTMENT TAX CREDITS
Investment tax credits are accounted for using the cost reduction method whereby
such credits are deducted from the expenses or assets to which they relate in
the period in which their recoverability is reasonably assured.
(t) COMPARATIVE FIGURES
We have reclassified certain of the figures presented for comparative purposes
to conform to the financial statement presentation we adopted for the current
year.
(u) RECENT ACCOUNTING PRONOUNCEMENTS
In November 2003, the Accounting Standards Board revised Handbook ("HB") 3870,
"Accounting for Stock-based Compensation and Other Stock-based Payments", to
require the fair value based method of accounting for all transactions whereby
goods and services are received in exchange for stock-based compensation and
other stock-based payments. This change effectively requires companies to
expense the cost of stock options provided to employees. The revision to HB 3870
is applicable for fiscal years beginning on or after January 1, 2004, with
earlier adoption
72
encouraged. Transitional provisions permit either retroactive (either with or
without restatement) or prospective application of the recognition provisions to
awards not previously accounted for at fair value. Prospective application is
available only to enterprises that elect to apply the fair value based method of
accounting to that type of award for fiscal years beginning before January 1,
2004. We will adopt the revised HB 3870 in our consolidated financial statements
beginning January 1, 2004.
In July 2003, the Canadian Institute of Chartered Accountants ("CICA") issued HB
1100, "Generally Accepted Accounting Principles" together with HB 1400, "General
Standards of Financial Statement Presentation". HB 1100 establishes standards
for financial reporting in accordance with GAAP as it clarifies the relative
authority of various accounting pronouncements and other sources of guidance
within GAAP. HB 1400 supersedes HB 1500 and clarifies what constitutes fair
presentation in accordance with GAAP. The new standards are effective for fiscal
years beginning on or after October 31, 2003, however earlier adoption is
encouraged. We have adopted HB 1100 and HB 1400, which had no effect on our
consolidated financial statements.
In June 2003, the Accounting Standards Board issued Accounting Guideline AcG-15,
"Consolidation of Variable Interest Entities" ("AcG-15"), which requires the
consolidation of a variable interest entity by the primary beneficiary. AcG-15
also requires additional disclosure by both the primary beneficiary and
enterprises that hold a significant variable interest in a variable interest
entity. AcG-15 is applicable to annual and interim periods beginning on or after
January 1, 2004. Earlier adoption is encouraged. However, because we do not have
any variable interest entities, there is no impact on our consolidated financial
statements.
In February 2003, the Accounting Standards Board issued Accounting Guideline
AcG-14, "Disclosure of Guarantees" ("AcG-14"). AcG-14 expands on previously
issued accounting guidance and requires additional disclosure by a guarantor to
disclose information about each guarantee, or each group of similar guarantees,
even when the likelihood of the guarantor having to make any payments under the
guarantee is slight. AcG-14 does not address the recognition or measurement of a
guarantor's liability for obligations under a guarantee. The Guideline is to be
applied to the financial statements of interim and annual periods beginning on
or after January 1, 2003. We have adopted AcG-14 in our consolidated financial
statements.
Effective January 1, 2003, we adopted the new standards contained in HB 3063,
"Impairment or Disposal of Long-Lived Assets" and revised HB 3475, "Disposal of
Long-Lived Assets and Discontinued Operations". There was no impact on our
consolidated financial statements.
3. ACQUISITION OF AIRPRIME, INC.
On August 12, 2003 we acquired 100 percent of the outstanding securities of
AirPrime, Inc. ("AirPrime"), a privately-held supplier of high-speed CDMA
wireless products located in Carlsbad, California. We subsequently changed the
name of AirPrime to Sierra Wireless America, Inc. The results of AirPrime's
operations have been included in our consolidated financial statements since
that date.
The aggregate purchase price was $23,825, including common shares valued at
$22,377 and costs related to the acquisition of $1,448. The fair value of the
3,708,521 common shares issued was determined based on the average market price
of Sierra Wireless, Inc.'s common shares over the two-day period before and
after June 16, 2003, which was the date the terms of the acquisition were agreed
to and announced.
73
The following table summarizes the fair value of the assets acquired and
liabilities assumed at the date of acquisition.
Current assets.................................................................. $ 4,716
Property and equipment.......................................................... 1,352
Intangible assets............................................................... 5,270
Goodwill........................................................................ 19,706
----------
Total assets acquired...................................................... 31,044
Current liabilities............................................................. 7,219
----------
Net assets acquired............................................................. $ 23,825
==========
The following table presents details of the purchased intangible assets:
ESTIMATED USEFUL
LIFE (IN YEARS) AMOUNT
---------------- ------
Intellectual property........................................................... 5 $ 3,780
Customer relationships.......................................................... 5 940
Licenses........................................................................ 5 400
Databases....................................................................... 5 150
----------
Total purchased intangible assets.......................................... $ 5,270
==========
If the acquisition of AirPrime had occurred as of January 1, 2002, the pro forma
operating results may have been as follows:
2002 2003
---- ----
Revenue......................................................................... $ 96,282 $ 118,514
Net loss........................................................................ (59,025) (1,166)
Loss per share.................................................................. $ (2.95) $ (0.06)
4. RESTRUCTURING AND OTHER CHARGES
In the third quarter of 2003, we incurred restructuring and other charges as a
result of our acquisition of AirPrime. During the year ended December 31, 2003,
we recorded restructuring and other charges of $1,220 as follows:
Capital and intangible asset writedowns....................................................... $ 605
Workforce reductions.......................................................................... 325
Facilities restructuring...................................................................... 290
-----------
Total restructuring and other charges.................................................... $ 1,220
============
The writedowns of capital and intangible assets of $605 were primarily for
research and development equipment, test equipment and research and development
licenses, which are no longer required. These assets were written down to nil.
Workforce reduction charges of $325 were related to the cost of severance and
benefits associated with 11 employees notified of termination. Of the 11
employees, seven were in product development and four were in manufacturing. As
of December 31, 2003, there were no remaining restructuring amounts to be paid
out related to workforce reductions. We also recorded an additional facilities
restructuring charge of $290 as we have made little progress in 2003 on the
facilities restructuring that was originally announced in 2002.
In the last half of 2003, we also incurred integration costs of $1,947 related
to travel, facilities and costs related to eight existing employees who were
retained for the transition period. These eight employees have completed their
integration activities and have been terminated as of December 31, 2003 (see
note 5).
In the second quarter of 2002, we announced and implemented a business
restructuring program under which we reduced operating expenses and asset levels
as a result of our assessment of current and visible future demand. During,
2002, we recorded restructuring and other charges of $37,707 associated with the
writedown of CDPD and 2G CDMA inventory, capital and intangible asset impairment
charges, workforce reductions, charges related to excess facilities and
74
other assets, and an increase in our deferred tax asset valuation allowance. We
substantially completed implementation of our restructuring program at December
31, 2002.
The following table summarizes the provision for the 2002 business restructuring
program and the balance of the provision at December 31, 2003 and December 31,
2002.
FACILITIES WORKFORCE
RESTRUCTURING REDUCTION OTHER TOTAL
------------- --------- ----- -----
Balance at December 31, 2002................................... $ 4,547 $ 54 $ 164 $ 4,765
Additional charges........................................ 290 -- -- 290
Cash payments............................................. (1,243) (54) (87) (1,384)
------------ ----------- ------------ ------------
Balance at December 31, 2003................................... $ 3,594 $ -- $ 77 $ 3,671
============ =========== =========== =============
5. INTEGRATION COSTS
In the third quarter of 2003, we also incurred integration costs related to the
AirPrime acquisition of $1,947, which included the costs of eight existing
employees retained for the transition period. All of these employees have
completed their integration activities and have been terminated as of December
31, 2003.
6. INVENTORIES
2002 2003
---- ----
Electronic components............................................................ $ 1,430 $ 782
Finished goods................................................................... 5,243 729
--------- --------
$ 6,673 $ 1,511
========= ========
7. CAPITAL ASSETS
2003
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- --------
Furniture and fixtures.......................................................... $ 2,478 $ 1,361 $ 1,117
Research and development equipment.............................................. 9,047 7,622 1,425
Tooling......................................................................... 7,280 6,024 1,256
Software........................................................................ 5,450 3,452 1,998
Leasehold improvements.......................................................... 1,742 1,624 118
Office equipment................................................................ 340 269 71
--------- ------------- -----------
$ 26,337 $ 20,352 $ 5,985
========= ============== ===========
2002
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- --------
Furniture and fixtures......................................................... $ 2,262 $ 995 $ 1,267
Research and development equipment............................................. 7,791 5,672 2,119
Tooling........................................................................ 6,453 4,952 1,501
Software....................................................................... 4,406 2,694 1,712
Leasehold improvements......................................................... 1,738 1,257 481
Office equipment............................................................... 337 219 118
---------- ------------- ---------
$ 22,987 $ 15,789 $ 7,198
========= ============= =========
75
As at December 31, 2003, assets under a capital lease with a cost of $484 (2002
-- $1,764) and accumulated amortization of $310 (2002 -- $781) are included in
capital assets.
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill was acquired in 2003 as a result of the acquisition of AirPrime (note
3). An annual impairment test has been performed which resulted in no impairment
loss. We assessed the realizability of goodwill related to our reporting unit
during the fourth quarter and determined that its fair value did not have to be
re-computed because the components of the reporting unit had not changed since
the fair value computation completed at August 12, 2003, the date of
acquisition, the previous fair value amount exceeded the carrying amount of the
reporting unit by a substantial margin, and no evidence exists to indicate that
the current fair value of the reporting unit would be less than its current
carrying amount.
The components of intangible assets at December 31, 2003 and 2002 are as
follows:
2003
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- --------
Patents and trademarks........................................................ $ 2,604 $ 241 $ 2,363
License fees.................................................................. 15,156 7,404 7,752
Intellectual property......................................................... 4,214 718 3,496
Customer relationships........................................................ 940 70 870
Databases..................................................................... 150 11 139
---------- ------------- ---------
$ 23,064 $ 8,444 $ 14,620
========== ============= =========
2002
--------------------------------------
ACCUMULATED
AMORTIZATION AND NET BOOK
COST WRITEDOWN VALUE
---- ---------------- --------
Patents and trademarks.......................................................... $ 1,569 $ 137 $ 1,432
License fees.................................................................... 11,744 6,269 5,475
Intellectual property........................................................... 1,434 1,434 --
---------- ------------- ---------
$ 14,747 $ 7,840 $ 6,907
========== ============= =========
The estimated aggregate amortization expense for each of the next five years is
expected to be $2,924 per year.
9. LONG-TERM LIABILITIES
2002 2003
-------- --------
Facilities (note 4)................................................................... $ 4,547 $ 3,594
TPC warrants (note 16(b))............................................................. 1,152 --
-------- --------
5,699 3,594
Less current portion.................................................................. 2,803 1,328
-------- --------
$ 2,896 $ 2,266
======== ========
10. OBLIGATIONS UNDER CAPITAL LEASE
We lease research and development equipment, computer equipment and office
furniture under capital leases, denominated in Cdn. dollars, and expiring at
various dates in 2004. As at December 31, 2003 our future minimum lease payments
under capital leases were as follows:
CDN.$ U.S.$
------- -------
2004............................................................................. $ 190 $ 147
Less amount representing interest at approximately 10.8%......................... 8 6
------- -------
$ 182 $ 141
======= =======
Interest expense on capital lease obligations for the year ended December 31,
2003 is $63 (2002 -- $149).
76
11. SHARE CAPITAL
PUBLIC OFFERING
On November 14, 2003, we completed a public offering of 4,600,000 common shares
in the United States and Canada at a price of $16.25 per share. Under the
offering, which included the shares issuable upon the exercise by the
underwriters of the over-allotment option, we sold 4,442,222 common shares from
treasury, and two retiring officers sold an aggregate of 157,778 common shares
by way of a secondary offering.
ACQUISITION OF AIRPRIME, INC.
On August 12, 2003, we issued 3,708,521 common shares to acquire AirPrime. The
value of the shares was determined based on the average market price of Sierra
Wireless, Inc.'s common shares over the two-day period before and after June 16,
2003, which was the date the terms of the acquisition were agreed to and
announced.
Changes in the issued and outstanding common shares are as follows:
NUMBER OF
SHARES AMOUNT
---------- -----------
Balance at December 31, 2000................................................... 16,009,575 $ 120,951
Stock option exercises......................................................... 176,195 499
---------- -----------
Balance at December 31, 2001................................................... 16,185,770 121,450
Stock option exercises......................................................... 159,626 374
---------- -----------
Balance at December 31, 2002................................................... 16,345,396 121,824
Issued for acquisition (note 3)................................................ 3,708,521 22,377
Issued for cash................................................................ 4,442,222 72,186
Share issue costs.............................................................. -- (4,761)
Stock option exercises......................................................... 325,932 1,198
---------- -----------
Balance at December 31, 2003................................................... 24,822,071 $ 212,824
========== ===========
STOCK OPTION PLAN
Under the terms of our employee stock option plan, our board of directors may
grant options to employees, officers and directors. The plan provides for the
granting of options at the fair market value of our stock at the grant date.
Options generally vest over four years, with the first 25% vesting at the first
anniversary date of the grant and the balance vesting in equal amounts at the
end of each month thereafter. We determine the term of each option at the time
it is granted, with options having a five year or a ten year term. Since
February 1999, options have been granted with a five year term. We have reserved
3,882,233 options for issuance under our employee stock option plan. Stock
options have been granted in Canadian and U.S. dollars.
77
Stock option activity since December 31, 2000 is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
CDN.$ U.S.$
Outstanding, December 31, 2000............................................. 2,121,134 39.10 26.07
Granted.................................................................... 594,628 32.37 20.27
Exercised.................................................................. (175,571) 4.30 2.69
Forfeited.................................................................. (96,742) 48.99 30.68
----------
Outstanding, December 31, 2001............................................. 2,443,449 39.57 24.78
Granted.................................................................... 732,250 9.79 6.20
Exercised.................................................................. (159,626) 3.73 2.36
Forfeited.................................................................. (465,509) 50.22 31.78
----------
Outstanding, December 31, 2002............................................. 2,550,564 19.83 12.55
Granted.................................................................... 609,300 14.79 11.46
Exercised.................................................................. (325,932) 4.90 3.80
Forfeited.................................................................. (1,107,572) 54.86 42.53
----------
Outstanding, December 31, 2003............................................. 1,726,360 11.58 8.98
==========
EXERCISABLE,
DECEMBER 31, END OF YEAR
-------------- -----------
2001...................................................................................... 1,035,002
2002...................................................................................... 1,378,101
2003...................................................................................... 714,345
The following table summarizes the stock options outstanding at December 31,
2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------------------ ---------- ---------------- ------------------ ----------- ------------------
IN YEARS CDN.$ U.S.$ CDN.$ U.S.$
$0.70 - $1.16 (Cdn.$0.90 - Cdn.$1.50)..... 55,288 3.6 $ 1.14 $ 0.88 55,288 $ 1.14 $ 0.88
$1.17 - $2.71 (Cdn.$1.51 - Cdn.$3.50)..... 476,473 3.7 3.35 2.59 193,782 3.28 2.54
$2.72 - $9.30 (Cdn.$3.51 - Cdn.$12.00).... 306,209 4.6 9.61 7.45 13,636 5.17 4.00
$9.31 - $15.50 (Cdn.$12.01 - Cdn.$20.00).. 371,691 1.3 15.09 11.70 296,448 15.14 11.73
$15.51 - $23.26 (Cdn.$20.01 - Cdn.$30.00). 440,640 4.2 21.30 16.51 86,719 22.96 17.80
$23.27 - $136.47 (Cdn.$30.01 - Cdn.$176.05) 76,059 1.4 81.53 63.20 68,472 81.76 63.38
--------- --------
1,726,360 3.4 11.58 7.25 714,345 17.98 13.94
========= ========
The options outstanding at December 31, 2003 expire between March 29, 2004 and
December 31, 2008.
WARRANTS
There are outstanding warrants to purchase 138,696 of our common shares at Cdn
$20.49 per share. The warrants are exercisable for a term of five years from
December 30, 2003. The warrants were issued under our agreement with the
Government of Canada's Technology Partnerships Canada ("TPC") program (note
16(b)).
78
12. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of our financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities and current portions of long-term liabilities, approximate
their fair value due to their short maturities. Based on borrowing rates
currently available to us for loans with similar terms, the carrying value of
our obligations under capital lease and long-term liabilities approximates their
fair value.
CONCENTRATIONS OF BUSINESS RISK
We maintain substantially all of our cash and cash equivalents, short-term
investments and long-term investments with major financial institutions or
government instruments. Corporate paper is uninsured. Deposits we hold with
banks may exceed the amount of insurance provided on such deposits.
We outsource our manufacturing of our products to third parties. We are
dependent upon the development and deployment by third parties of their
manufacturing abilities. The inability of any supplier or manufacturer to
fulfill our supply requirements could impact future results. We have supply
commitments to our outsource manufacturers based on our estimates of customer
and market demand. Where actual results vary from our estimates, whether due to
execution on our part or market conditions, we are at risk.
Financial instruments that potentially subject us to concentrations of credit
risk are primarily accounts receivable. We perform on-going credit evaluations
of our customers' financial condition and require letters of credit or other
guarantees whenever deemed appropriate.
Although substantially all of our revenues are received in U.S. dollars, we
incur operating costs and have obligations under capital leases that are
denominated in Cdn. dollars. Fluctuations in the exchange rates between these
currencies could have a material effect on our business, financial condition and
results of operations. We mitigate this risk by denominating many of our payment
obligations in U.S. dollars.
LINE OF CREDIT
During 2002, we expanded our operating line of credit from $949 (Cdn.$1,500) to
$10,000, which bears interest at prime plus 1.25% per annum. This line of credit
is secured by a general security agreement providing a first charge against all
assets. The balance at December 31, 2003 was nil (2002 -- nil).
13. INCOME TAXES
The composition of our future tax assets at December 31 is as follows:
2002 2003
---- ----
Future tax assets
Capital assets............................................................ $ (1,837) $ (350)
Loss carryforwards........................................................ 3,002 11,995
Scientific research and development expenses.............................. 7,521 10,538
Share issue costs......................................................... 897 1,812
Reserves and other........................................................ 5,218 3,708
-------- ---------
Total gross future tax assets............................................... 14,801 27,703
Less valuation allowance.................................................... 14,301 27,203
-------- ---------
Net future tax assets....................................................... $ 500 $ 500
======== =========
We believe that realization of our net future tax assets is more likely than
not. In assessing the realizability of our future tax assets, we considered
whether it is more likely than not that some portion or all of our future tax
assets will not be realized. The ultimate realization of our future tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. We considered projected future
taxable income and tax planning strategies in making our assessment.
79
At December 31, 2003, we had net operating losses of $6,968 for Canadian income
tax purposes which expire in 2009, and may be used to offset future taxable
income in Canada. We also have approximately $24,613 of scientific research and
development expenditures available to be deducted against future Canadian
taxable income that may be carried forward indefinitely, and investment tax
credits of approximately $13,945 available to offset future Canadian federal and
provincial income taxes payable. The investment tax credits expire commencing in
2004 until 2013.
In addition, at December 31, 2003, net operating loss carryforwards for our
foreign subsidiaries were $26,396 for United States income tax purposes and
$1,796 for U.K. income tax purposes. These carryforwards expire in various
amounts through 2019. Our foreign subsidiaries may be limited in their ability
to use foreign net operating losses in any single year depending on their
ability to generate significant taxable income.
EFFECTIVE TAX RATE
Our income tax expense for the year ended December 31 differs from that
calculated by applying statutory rates for the following reasons:
2001 2002 2003
------- ------- -------
Combined Canadian federal and provincial income taxes at
expected rate of 37.6% (2002 - 39.6%, 2001 - 44.6%)........................ $(10,946) $(15,127) $ 923
Permanent and other differences.............................................. 1,076 1,381 (9)
Unrecognized tax assets...................................................... 2,267 8,826 (635)
Change in enacted tax rates.................................................. 712 - -
Loss subject to tax at rates lower than statutory rate....................... 6,618 4,629 (81)
Writedown of future tax asset................................................ - 3,754 -
--------- --------- ---------
$ (273) $ 3,463 $ 198
========= ========= =========
Our provisions for income taxes consist of the following:
2001 2002 2003
------- ------- -------
Current
Canadian......................................................................... $ 95 $ 94 $ 198
Foreign.......................................................................... (353) (385) --
-------- ------- -------
Total current...................................................................... (258) (291) 198
Future
Canadian......................................................................... (15) 3,754 --
Foreign.......................................................................... -- -- --
Total future (15) 3,754 --
-------- ------- -------
Income tax expense (recovery)...................................................... $ (273) $ 3,463 $ 198
======== ======= =======
14. RESEARCH AND DEVELOPMENT
2001 2002 2003
------- ------- -------
Research and development........................................................... $ 19,929 $ 17,045 $ 16,471
Less government research and development funding and investment tax credits........ 2,527 1,899 477
-------- -------- --------
$ 17,402 $ 15,146 $ 15,994
======== ======== ========
15. EARNINGS (LOSS) PER SHARE
The weighted-average number of shares outstanding (in thousands) used in the
computation of earnings (loss) per share were as follows:
2001 2002 2003
------ ------ ------
Weighted-average shares used in computation of basic earnings (loss) per share........ 16,129 16,304 18,442
Weighted-average shares from assumed conversion of dilutive options................... -- -- 547
------ ------ ------
Weighted-average shares used in computation of diluted earnings (loss) per share...... 16,129 16,304 18,989
====== ====== ======
80
16. COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
We lease equipment and premises with minimum future lease payments denominated
in Cdn. dollars at December 31, 2003 as follows:
CDN.$ U.S.$
----- -----
2004................................................................................. $ 3,711 $ 2,877
2005................................................................................. 3,291 2,551
2006................................................................................. 3,340 2,589
2007................................................................................. 3,431 2,660
2008................................................................................. 3,449 2,674
Thereafter........................................................................... 6,739 5,224
-------- ---------
$ 23,961 $ 18,575
========= =========
(b) CONTINGENT LIABILITY ON SALE OF PRODUCTS
(i) Under license agreements, we are committed to royalty payments
based on the sales of products using certain technologies. We
recognize royalty obligations as determinable in accordance with
agreement terms. Where agreements are not finalized, we have
recognized our current best estimate of the obligation. When the
agreements are finalized, the estimate will be revised accordingly.
(ii) Under certain research and development funding agreements, we are
contingently liable to repay up to $3,242. Repayment for certain
of the research and development funding agreements is contingent
upon reaching certain revenue levels for specified products.
(iii) Under an agreement with the Government of Canada's Technology
Partnerships Canada ("TPC") program, we have received Cdn. $9,999
to support the development of a range of third generation wireless
technologies. During the year, we claimed $477 (2002 -- $1,899)
that has been recorded as a reduction of research and development
expense. Under the terms of the agreement, an amount up to a
maximum of Cdn. $13,000 is to be repaid based on annual sales, in
excess of certain minimum amounts, of specified products
commencing in the year 2004. In addition, we issued warrants to
TPC to purchase 138,696 common shares on December 30, 2003, valued
at Cdn. $2,000 based on the Black-Scholes pricing model. The
warrants are exercisable at Cdn $20.49 per share for a term of
five years from December 30, 2003.
(iv) We accrue product warranty costs, when we sell the related
products, to provide for the repair or replacement of defective
products. Our accrual is based on an assessment of historical
experience and estimates are made by management. An analysis of
changes in the liability for product warranties follows:
Balance, January 1, 2002....................................... $ 1,251
Provisions..................................................... 819
Expenditures................................................... (907)
------------
Balance, December 31, 2002..................................... 1,163
Provisions..................................................... 1,939
Increase due to acquisition (note 3)........................... 418
Expenditures................................................... (1,179)
------------
Balance, December 31, 2003..................................... $ 2,341
============
(c) OTHER COMMITMENTS
We have entered into purchase commitments totaling $28,287 with certain
contract manufacturers under which we commit to buy a minimum amount of
designated products between January 2004 and August 2004. In certain of these
agreements, we may be required to acquire and pay for such products up to the
prescribed minimum or forecasted purchases.
81
(d) LEGAL PROCEEDINGS
(i) In July 2001, we learned that Metricom, Inc. ("Metricom"), one of
our customers, had filed a Chapter 11 reorganization under the
U.S. bankruptcy laws. We filed a proof of claim for amounts due to
us totaling $13,745. Metricom objected to that claim asserting
that all but $2,254 should be disallowed. Metricom also filed an
adversary complaint against us in the U.S. bankruptcy court
seeking return of payments totaling $1,900 made to us within 90
days of the bankruptcy filing, alleging that the payments are
avoidable as "preferences". We contended that the payments were in
the ordinary course of business and that we supplied additional
product to Metricom after receiving the payments, which would
offset any preference liability. During 2002, we executed a global
settlement with the reorganized debtor under which we agreed to
reduce our general unsecured claim to $10,250, and Metricom agreed
to dismiss the preference claims. We received a settlement of
$2,321 in 2003, of which $513 was included in the determination of
our net income for 2003 (2002 -- $1,808).
(ii) In November 2002, Sierra Wireless, Inc., along with several other
defendants, was served with the second amended complaint of MLR,
LLC ("MLR") filed in the U.S. District Court for the Northern
District of Illinois Eastern Division for alleged patent
infringement. We assessed the complaint and believed that there
was no infringement of the patents referred to in this claim and
that the claim was invalid. During the second quarter of 2003, we
reached an agreement with MLR. Under the agreement, we received
non-royalty bearing licenses to use all of MLR's present and
future patents for certain of our products and MLR released us
from their claim of alleged patent infringement.
(iii) We are engaged in other legal actions arising in the ordinary
course of business and believe that the ultimate outcome of these
actions will not have a material adverse effect on our operating
results, liquidity or financial position.
17. SUPPLEMENTARY INFORMATION
2001 2002 2003
------ ------ ------
(a) CASH FLOW INFORMATION:
Cash received
Interest............................................................................... $ 2,782 $ 912 $ 500
Income taxes........................................................................... -- 905 24
Cash paid for
Interest............................................................................... 48 323 62
Income taxes........................................................................... 958 57 62
Non-cash financing activities
Purchase of capital assets funded by obligations under
capital lease....................................................................... 1,759 328 113
Issuance of common shares on acquisition (note 3)...................................... -- -- 22,377
(b) ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Opening balance........................................................................... $ 1,320 $ 5,169 $ 3,068
Acquisitions.............................................................................. -- -- 62
Bad debt expense.......................................................................... 4,040 623 375
Write offs and settlements................................................................ (191) (2,724) (1,275)
---------- ---------- ----------
Closing balance........................................................................... $ 5,169 $ 3,068 $ 2,230
========== ========== ==========
(c) OTHER:
Rent expense.............................................................................. $ 1,334 $ 1,599 $ 1,603
Foreign exchange loss (gain).............................................................. (187) (77) 439
82
18. SEGMENTED INFORMATION
We operate in the wireless communications solutions industry and all sales of
our products and services are made in this segment. Management makes decisions
about allocating resources based on the one operating segment.
Revenues by product were as follows:
2001 2002 2003
---- ---- ----
MP modems................................................................... $ 8,039 $ 7,781 $ 6,183
AirCard modems.............................................................. 38,627 44,616 71,060
OEM modems.................................................................. 9,319 19,025 20,961
Other....................................................................... 3,718 2,113 2,845
Research and development funding............................................ 2,645 3,724 660
--------- --------- ---------
$ 62,348 $ 77,259 $ 101,709
========= ========= =========
65% (2002 -- 85%) of our capital assets are in Canada. Product sales in North
America were 73% (2002 -- 87%; 2001 -- 97%).
We sell certain products through resellers, original equipment manufacturers,
and wireless service providers who sell these products to end-users. The
approximate sales to the significant channels are as follows:
2001 2002 2003
-------------- -------------- -------------
Reseller A...................................................... less than 10% $ 17,808 $ 18,044
Reseller B...................................................... less than 10% $ 15,605 less than 10%
Reseller C...................................................... $ 8,228 less than 10% less than 10%
Reseller D...................................................... $ 6,098 less than 10% less than 10%
83
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/ DAVID B. SUTCLIFFE
-------------------------------------
David B. Sutcliffe
Chairman and Chief Executive Officer
Date: April 2, 2004