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 October 2003
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(Commission File. No 0-30718).
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SIERRA WIRELESS, INC., A CANADA CORPORATION
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(Translation of registrant's name in English)
13811 Wireless Way
Richmond, British Columbia, Canada V6V 3A4
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(Address of principal executive offices and zip code)
Registrant's Telephone Number, including area code: 604-231-1100
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F:
Form 20-F X 40-F
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes: No: X
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SIERRA WIRELESS, INC.
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
UNITED STATES GAAP
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.
VOQ PROFESSIONAL PHONE
Subsequent to the third quarter, we announced the Voq line of professional
phones and value-added software for business users. New Voq-branded professional
phones will be based on Microsoft Windows Mobile software for Smartphones and
will feature both a familiar phone keypad and unique flip-open QWERTY thumbpad.
The Voq product line also includes other hardware and software innovations for
easy information navigation and retrieval, compelling text entry, and email that
is automatically updated. The first Voq model will support global markets by
operating over the GSM and GPRS wireless networks and is expected to be
commercially available in the first half of 2004.
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. As a result of the acquisition, we expect 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 $23.7 million including common shares valued at
$22.4 million and costs related to the acquisition of $1.3 million. The 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.
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 three and nine months ended
September 30, 2003, we recorded restructuring and other charges of $1.2 million
as follows:
Fixed and intangible asset writedowns.......................... $ 0.6
Workforce reductions........................................... 0.3
Expense in-process research and development costs.............. 0.3
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Total restructuring and other charges..................... $ 1.2
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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 which 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 are no restructuring amounts
remaining to be paid out related to workforce reductions. The in-process
research and development costs of $0.3 million represent projects that have not
yet reached technological feasibility and have no alternative future use.
Accordingly, this amount was immediately expensed.
In the third quarter of 2003, we also incurred integration costs of $1.0
million, which included costs related to 13 existing employees retained for
the transition period. All of these employees are expected to complete their
integration activities and will be terminated by December 31, 2003.
SUPPLY CHAIN
During the second quarter of 2003, we implemented significant changes to our
supply chain. These included the transfer of global fulfillment and CDMA product
manufacturing to Flextronics. By using their fully integrated supply chain
services, we expect to reduce product costs, improve alignment with our
increasingly international customer base and achieve increased operating
efficiencies and scalability.
2002 RESTRUCTURING
In the second quarter of 2002, we implemented a business restructuring program
intended to reduce operating expenses and asset levels as a result of our
assessment of current and visible demand. We expected sales growth to continue
to be challenged by the low level of enterprise spending and by overall
conditions affecting the wireless communications industry.
For the three and nine months ended September 30, 2002, we recorded
restructuring and other costs of nil and $36.1 million. We reduced our workforce
from 275 to 180 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.
We recorded a writedown of inventory, including purchase commitments, amounting
to $16.7 million. The writedown was related primarily to our CDPD and 2G CDMA
products.
Fixed and intangible assets impairment charges of $4.8 million and $3.0 million,
respectively, consisted of writedowns primarily for research and development
equipment, test equipment, corporate assets and research and development
licenses. The fixed assets were written down to the current fair value for this
type of equipment. The research and development licenses, which were no longer
required, were written down to nil. In addition, our deferred tax asset
valuation allowance was increased by $3.8 million to reflect 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 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.
As a result of the above noted workforce reduction and our assessment of demand,
it was determined that the leased facilities exceeded our requirements, and we
recorded a provision of $4.7 million that represented the estimated net present
value of future contractual obligations that are in excess of our estimated
future requirements. The cash outlay of approximately $4.7 million related to
the facilities restructuring is expected to be incurred 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 an investment, and other professional fees in connection with the
restructuring activities.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2002
REVENUE
Revenue amounted to $26.2 million in the third quarter of 2003, compared to
$21.1 million in the same period in 2002, an increase of 24.2%. Included in our
revenue was engineering services of $0.4 million in the third quarter of 2003,
compared to $1.0 million in the third quarter of 2002. The increase in revenue
was a result of additional revenue from selling newly acquired products and an
increase in sales of our 2.5G AirCard products in the Asia-Pacific region. Our
revenue by product for the third quarter of 2003 was AirCards 68%, OEM 21%,
Mobile 7% and Other 4%, compared to 62%, 25%, 7% and 6%, respectively, in the
same period of 2002. Our revenue by region for the third quarter of 2003 was the
Americas 78%, the Asia-Pacific region 15% and Europe 7%, compared to 84%, 6% and
10%, respectively, in the same period of 2002.
GROSS MARGIN
Gross margin amounted to $10.7 million in the third quarter of 2003, compared to
$8.3 million in the third quarter of 2002. Gross margin as a percentage of
revenue increased to 40.8% in 2003, compared to 39.2% in 2002. Included in our
gross margin was engineering services of $0.4 million in the third quarter of
2003, compared to $1.0 million in the same period of 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 the
three months ended September 30, 2003, we sold $0.4 million of products that had
a book value after writedowns of nil.
SALES AND MARKETING
Sales and marketing expenses amounted to $2.7 million in the third quarter of
2003, compared to $2.8 million in the same period of 2002, a decrease of 5.3%.
The decrease is a result of our continued focus on operating expense control.
Sales and marketing expenses as a percentage of revenue decreased to 10.1% in
2003, compared to 13.3% in 2002, primarily as a result of higher revenue.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of research and development funding,
amounted to $4.7 million in the third quarter of 2003, compared to $3.2 million
in the same period in 2002, an increase of 45.4%. Research and development
expenses increased in the third quarter of 2003 due to reduced research and
development funding, the addition of staff and projects from the AirPrime
acquisition and the development costs of the Voq professional phone. Gross
research and development expenses, before research and development funding, were
$4.7 million or 17.9% of revenue in 2003, compared to $3.6 million or 16.9% of
revenue in 2002. We expect to continue to invest in research and development for
future growth.
ADMINISTRATION
Administration expenses amounted to $1.3 million, or 5.1% of revenue, in the
third quarter of 2003, compared to $1.3 million, or 6.3% of revenue, in the
third quarter of 2002. Included in administration expenses for the third
quarter of 2003 is an additional recovery from Metricom of $0.2 million.
Administration expenses, excluding the recovery from Metricom, increased by
18.3% due primarily to increased insurance costs and the addition of staff
from the AirPrime acquisition.
RESTRUCTURING AND OTHER CHARGES
In the third quarter of 2003, we incurred restructuring and other charges of
$1.2 million as a result of our acquisition of AirPrime. The charges included
writedowns of fixed and intangible assets, severance costs for workforce
reductions and expensing of in-process research and development costs. In the
third quarter of 2003, there were no adjustments to the 2002 restructuring
charges.
INTEGRATION COSTS
In the third quarter of 2003, we incurred integration costs of $1.0 million as a
result of our acquisition of AirPrime. The charges include costs of existing
staff and contractors retained for the transition period and costs related to
integration activities. All of these employees and contractors are expected to
complete their integration activities and will be terminated by December 31,
2003.
OTHER INCOME (EXPENSE)
Other expense was $0.1 million in the third quarter of 2003, compared to other
income $0.1 million in the same period of 2002. Other expense includes foreign
exchange gains and losses, interest expense and interest income. The increase in
expenses in 2003 is due primarily to net foreign exchange losses resulting from
the strength of the U.S. dollar against the Canadian dollar during the third
quarter of 2003.
NET EARNINGS (LOSS)
Our net loss amounted to $0.9 million in the third quarter of 2003, compared to
net earnings of $0.5 million in the same period of 2002. Our net earnings,
excluding restructuring and integration costs of $2.2 million and the Metricom
recovery of $0.2 million, was $1.1 million in 2003, compared to net earnings of
$0.5 million in 2002. Our loss per share amounted to $0.05 for the third
quarter of 2003, compared to diluted earnings per share of $0.03 in 2002. Our
diluted earnings per share, excluding restructuring and integration costs and
the Metricom recovery, were $0.06 for 2003, compared to $0.03 in 2002. Our
weighted average number of shares outstanding on a diluted basis increased to
18.4 million in 2003, compared to 16.5 million in 2002 due to the issuance of
3.7 million common shares related to the acquisition of AirPrime.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2002
REVENUE
Revenue was $66.9 million for the nine months ended September 30, 2003, compared
to $54.6 million in the same period in 2002, an increase of 22.5%. Included in
our revenue was engineering services of $0.4 million in 2003, compared to $3.4
million in 2002. The increase in revenue was a result of additional revenue from
selling newly acquired products and an increase in sales of our 2.5G AirCard
products in the Asia-Pacific region and Europe. Our revenue by product for the
nine months ended September 30, 2003 was AirCards 76%, OEM 15%, Mobile 6% and
Other 3%, compared to 52%, 27%, 12% and 9%, respectively, in the same period of
2002. Our revenue by region for the first nine months of 2003 was the Americas
64%, the Asia-Pacific region 18% and Europe 18%, compared to 81%, 4% and 7%,
respectively, in the same period of 2002.
GROSS MARGIN
Gross margin amounted to $27.0 million, or 40.3% of revenue, in the first
nine months of 2003, compared to a gross margin of $1.4 million or 2.6% of
revenue in 2002. Gross margin amounted to $27.0 million, or 40.3% of revenue
in the first nine months of 2003, compared to a gross margin, excluding
restructuring and other charges of $19.0 million, of $20.4 million, or 37.4%
of revenue, in the same period of 2002. Included in our gross margin was
engineering services of $0.4 million for the nine months ended September 30,
2003, compared to $3.4 million in the same period of 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 reduction.
During the nine months ended September 30, 2003, we sold $1.0 million of
products that had a book value after writedowns of nil. We also recorded an
additional writedown for 2G inventory of $0.3 million. The net effect on the
gross margin percentage of 2G products was negligible.
SALES AND MARKETING
Sales and marketing expenses amounted to $8.0 million for the nine months ended
September 30, 2003, compared to $8.4 million in the same period of 2002, a
decrease of 5.4%. Sales and marketing expenses decreased in 2003 as a result of
our continued focus on operating expense control. Sales and marketing expenses
as a percentage of revenue decreased to 11.9% in 2003, compared to 15.4% in 2002
due to an increase in revenue.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of research and development funding,
amounted to $10.4 million, or 15.5% of revenue, for the nine months ended
September 30, 2003, compared to $12.6 million, or 23.1% of revenue, for the same
period in 2002. Research and development expenses in 2003 decreased 17.9% due
primarily to cost reductions under our restructuring plan implemented during the
second quarter of 2002 and a reduction in costs during 2003 related to the
development of products based on CDMA and GPRS standards. The decrease was
partially offset by the addition of staff and projects from the AirPrime
acquisition and the development costs of the Voq professional phone. Gross
research and development expenses, before research and development funding, were
$10.9 million or 16.2% of revenue in 2003, compared to $14.2 million or 25.9% of
revenue in 2002. We expect to continue to invest in research and development for
future growth.
ADMINISTRATION
Administration expenses were $4.4 million, or 6.6% of revenue, in the nine
months ended September 30, 2003, compared to $5.1 million, or 9.4% of revenue,
for the same period of 2002. Included in administration expense for the nine
months ended September 30, 2003 is an additional recovery from Metricom of $0.5
million. Administration expenses, excluding the Metricom recovery, decreased by
4.5% due primarily to the cost reductions under our restructuring plan
implemented in the second quarter of 2002.
RESTRUCTURING AND OTHER CHARGES
In the nine months ended September 30, 2003, we incurred restructuring charges
of $1.2 million as a result of our acquisition of AirPrime. The charges included
writedowns of fixed and intangible assets, severance costs for workforce
reductions and expensing of in-process research and development costs. In the
nine months ended September 30, 2003, there were no adjustments to the 2002
restructuring charges.
In the nine months ended September 30, 2002 we 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 for
our products. As a result, in 2002 we recorded restructuring and other
charges of $13.1 million consisting of charges for impairment of fixed and
intangible assets, severance costs, provision for facilities restructuring
and other costs related to the restructuring.
INTEGRATION COSTS
In the nine months ended September 30, 2003, we incurred integration costs of
$1.0 million as a result of our acquisition of AirPrime. The charges include
costs of existing employees and contractors retained for the transition period
and costs related to integration activities. All of these employees and
contractors are expected to complete their integration activities and will be
terminated by December 31, 2003.
NET EARNINGS (LOSS)
Our net earnings amounted to $0.3 million in the nine months ended September 30,
2003, compared to a net loss of $43.0 million in the same period of 2002. Our
net earnings, excluding restructuring and integration costs of $2.2 million and
the Metricom recovery of $0.5 million, were $2.1 million in 2003, compared to a
net loss, excluding restructuring and other costs of $36.1 million, of $6.8
million in 2002. Our diluted earnings per share were $0.02 for the first nine
months of 2003, compared to a loss per share of $2.64 in 2002. Our diluted
earnings per share, excluding restructuring and integration costs and the
Metricom recovery, amounted to $0.12 for first nine months of 2003, compared to
a loss per share, excluding restructuring costs, of $0.42 in 2002. Our weighted
average number of shares outstanding on a diluted basis increased to 17.6
million in 2003, as compared to 16.3 million in 2002 due to the issuance of 3.7
million common shares related to the acquisition of AirPrime.
CONTINGENT LIABILITIES
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. In 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.
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 have significant development and volume purchase contracts with three
wireless carriers, AT&T Wireless, Sprint PCS, and Verizon Wireless. These
agreements provide that we will develop new products for new wireless
technologies that the wireless carriers are deploying and that the wireless
carriers will then purchase those new products for resale. Under the terms of
these agreements, if our products do not meet various specifications and
schedules, mutually acceptable adjustments may be made, volume commitments may
be reduced or deliveries may be delayed, any of which could have a material
adverse impact on our results of operations. In 2002, development and deployment
of these new technologies by the wireless industry and development of our new
products were affected by various delays. During 2002, we commenced commercial
volume shipments to each of the wireless carriers and we continued to ship under
these contracts in the first nine months of 2003. We expect to substantially
complete volume shipments on all three contracts during the last quarter of
2003.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with generally
accepted accounting principles 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. We base our
estimates on historical experience and other assumptions that we believe are
reasonable in the circumstances. Actual results may differ from our estimates.
The following critical accounting policies affect our more significant estimates
and assumptions used in preparing our consolidated financial statements:
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. 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 market 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. If market conditions are worse than our projections, we may
further writedown the value of our inventory.
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 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 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 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 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 deteriorate, we may increase our
provision.
o We monitor the recoverability of long-lived assets, which includes capital
assets and intangible assets, based on our evaluation of factors such
as future asset utilization and the future undiscounted cash flows
expected to result from the use of the related assets. We 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 the undiscounted estimated future net cash flows
from the asset.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we did not have any off-balance sheet finance or
special purpose entities. We have entered into a number of capital leases
relating to research and development equipment and information systems. These
leases and commitments are disclosed in the annual consolidated financial
statements.
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 provided by operations amounted to $10.9 million for the nine months ended
September 30, 2003, compared to cash used by operations of $7.3 million in the
same period of 2002, an improvement of $18.2 million. The source of cash during
2003 was due mainly to our operating income and changes in working capital.
Cash used for capital expenditures was $1.0 million in the nine months ended
September 30, 2003, compared to $2.0 million in 2002, and was primarily for
research and development equipment. Expenditures on intangible assets were $3.9
million in 2003, compared to $1.0 million in 2002 and were primarily for license
fees and patents. During the third quarter of 2003, we provided interim
financing to AirPrime, Inc. of $1.0 million for working capital purposes until
the combination closed. As a result of closing the combination in August 2003,
the $1.0 million interim financing became an intercompany debt and has been
eliminated on consolidation.
One of our significant sources of funds is expected to be our future operating
cash flow. Our future revenue is dependent on us fulfilling our commitments in
accordance with agreements with major customers. We have a customer
concentration risk, as a few customers represent a significant portion of our
expected future revenue. 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
on hand, accounts receivable, research and development funding, borrowings and
cash from operations, as follows:
o Net cash and short-term investments amounted to $39.4 million at September
30, 2003 compared to $34.8 million at December 31, 2002.
o Accounts receivable amounted to $18.9 million at September 30, 2003
compared to $13.9 million at December 31, 2002.
o Our operating line of credit is with a Canadian chartered bank. The
available facility amounts to $10.0 million, bears interest at prime plus
1.25% and is secured by a general security agreement providing a first
charge against all assets. At September 30, 2003, there were no borrowings
under this line of credit.
MARKET RISK DISCLOSURE
Our risk from currency fluctuations between the Canadian and U.S. dollars 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 and act accordingly. During
the third quarter of 2003, the U.S. dollar strengthened against the Canadian
dollar. We have purchased Canadian currency to meet our projected Canadian
dollar cash needs for the near term and to manage our foreign currency risk on
Canadian dollar denominated operating expenses. We could be exposed to foreign
exchange losses should the U.S. dollar strengthen in future periods.
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. We have 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 our exposure to Euro transactions
will increase. To date we have not entered into any futures contracts. To manage
our foreign currency risks, consideration will be given to entering into such
contracts should we consider it to be necessary to reduce our exposure to future
foreign exchange fluctuations.
Currently, we do not have any hedging activities or derivative instruments,
hence the impact of FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" is not material to our financial results.
RELATED PARTY TRANSACTIONS
During the three and nine months ended September 30, 2003, except for the $1.0
million loaned to AirPrime for working capital purposes prior to closing the
combination on August 12, 2003, there were no material related party
transactions.
FORWARD-LOOKING STATEMENTS
This 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 conditions, channel
and end-customer demand conditions, revenue, gross margin, operating expenses,
profits, and other expectations, intentions and plans contained in this report
that are not historical fact. Our expectations regarding future revenues and
earnings depend in part upon our ability to successfully integrate AirPrime
into our business and upon our ability to develop, manufacture, and supply
products that we do not produce today and that meet defined specifications.
When used in this 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 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 THREE FISCAL YEARS AND MAY NOT SUSTAIN
PROFITABILITY.
We have incurred a loss from operations in each of the past three fiscal
years. As of September 30, 2003 our accumulated deficit was approximately
$73.2 million. We incurred losses of approximately $41.7 million for the
year ended December 31, 2002. While we had a profit of $0.3 million for the
nine months ended September 30, 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.
The market for our products may not continue to grow, firms within the
industry may not adopt our technology for integration with their wireless
data communications solutions, and we may be unsuccessful in independently
establishing markets for our products. 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 launch successful new products, reduced demand for our
current products would cause our revenues to decline and harm our financial
condition. Significant marketing expenses associated with the launch of new
products could also affect our future profitability.
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 and developing new products to achieve much of our
future growth. Our ability to design and develop 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, 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 expect to
substantially complete volume shipments on all three contracts during
the last quarter of 2003. Thereafter, we will rely only 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. Moreover, we currently rely principally on one
manufacturer, 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 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 seeking to identify the CFO's successor. We are not seeking a
successor for the CTO, and we expect that his present duties will be
shared among 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 data 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.
WE DEPEND ON THIRD PARTIES TO OFFER WIRELESS DATA COMMUNICATIONS SERVICES FOR
OUR PRODUCTS TO OPERATE.
Our products can only be used over wireless data networks operated by third
parties. In addition, our future growth depends, in part, on the successful
deployment of next generation wireless data 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;
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.
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.
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.
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in thousands of United States dollars,
except per share amounts)
(Prepared in accordance with United States generally accepted
accounting principles (GAAP))
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue............................................ $ 26,170 $ 21,068 $ 66,930 $ 54,623
Cost of goods sold................................. 15,486 12,802 39,975 53,185
-------- -------- -------- --------
Gross margin....................................... 10,684 8,266 26,955 1,438
-------- -------- -------- --------
Expenses
Sales and marketing.............................. 2,653 2,801 7,972 8,431
Research and development, net ................... 4,677 3,217 10,373 12,633
Administration................................... 1,331 1,331 4,399 5,141
Restructuring and other charges ................. 1,220 -- 1,220 13,093
Integration costs ............................... 1,026 -- 1,026 --
Amortization..................................... 590 529 1,689 1,776
-------- -------- -------- --------
11,497 7,878 26,679 41,074
-------- -------- -------- --------
Earnings (loss) from operations.................... (813) 388 276 (39,636)
Other income (expense)............................. (74) 124 197 98
-------- -------- -------- --------
Earnings (loss) before income taxes................ (887) 512 473 (39,538)
Income tax expense................................. 54 9 143 3,433
-------- -------- -------- --------
Net earnings (loss)................................ (941) 503 330 (42,971)
Deficit, beginning of period....................... (72,293) (75,375) (73,564) (31,901)
-------- -------- -------- --------
Deficit, end of period............................. $(73,234) $(74,872) $(73,234) $(74,872)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share for the period:
Basic............................................ $ (0.05) $ 0.03 $ 0.02 $ (2.64)
Diluted.......................................... $ (0.05) $ 0.03 $ 0.02 $ (2.64)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares (in thousands)
Basic............................................ 18,409 16,314 17,054 16,294
Diluted.......................................... 18,409 16,539 17,564 16,294
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to consolidated financial statements.
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents..................................... $ 30,690 $ 34,841
Short-term investments........................................ 8,753 --
Accounts receivable........................................... 18,891 13,865
Inventories................................................... 2,929 6,673
Prepaid expenses.............................................. 848 864
-------- --------
62,111 56,243
Fixed assets.................................................... 5,752 7,198
Deferred income taxes........................................... 500 500
Intangible assets............................................... 18,477 6,907
Goodwill........................................................ 16,057 --
Other........................................................... 241 241
-------- --------
$103,138 $ 71,089
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.............................................. $ 1,690 $ 3,017
Accrued liabilities........................................... 23,831 12,431
Deferred revenue and credits.................................. 429 297
Current portion of long-term liabilities...................... 3,114 2,803
Current portion of obligations under capital lease............ 228 831
-------- --------
29,292 19,379
Long-term liabilities........................................... 1,998 2,896
Obligations under capital lease................................. 27 60
Shareholders' equity
Share capital................................................. 145,784 123,047
Deficit....................................................... (73,234) (73,564)
Accumulated other comprehensive income
Cumulative translation adjustments.......................... (729) (729)
-------- --------
71,821 48,754
-------- --------
$103,138 $ 71,089
-------- --------
-------- --------
Contingencies (note 7).
See accompanying notes to consolidated financial statements.
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Cash flows from operating activities:
Net earnings (loss) for the period.................... $ (941) $ 503 $ 330 $(42,971)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Amortization........................................ 1,672 1,280 4,393 5,430
Non-cash restructuring and other charges............ 895 -- 895 25,905
Loss on disposal.................................... -- 2 2 122
Deferred income taxes............................... -- -- -- 3,754
Accrued warrants.................................... -- 41 329 384
Changes in operating assets and liabilities
Accounts receivable................................. (453) 509 (2,537) (2,859)
Inventories......................................... 2,146 146 4,460 3,257
Prepaid expenses.................................... 167 157 288 626
Accounts payable.................................... (6,432) 694 (4,051) (301)
Accrued liabilities................................. 6,873 (790) 6,691 107
Deferred revenue and credits........................ 201 (467) 132 (732)
------- ------- -------- --------
Net cash provided by (used in) operating activities... 4,128 2,075 10,932 (7,278)
Cash flows from investing activities:
Business acquisitions............................... 666 -- (126) --
Proceeds on disposal................................ -- -- 4 31
Purchase of fixed assets............................ (618) (388) (975) (1,984)
Increase in intangible assets....................... (2,614) (167) (3,928) (1,003)
Purchase of short-term investments.................. 52 (3,031) (10,170) (14,662)
Proceeds on maturity of short-term investments...... 1,417 5,521 1,417 40,533
------- ------- -------- --------
Net cash provided by (used in) investing activities... (1,097) 1,935 (13,778) 22,915
Cash flows from financing activities:
Issue of common shares.............................. 319 16 360 346
Repayment of long-term liabilities.................. (507) (301) (1,665) (1,210)
------- ------- -------- --------
Net cash used in financing activities................. (188) (285) (1,305) (864)
------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 2,843 3,725 (4,151) 14,773
Cash and cash equivalents, beginning of period.......... 27,847 23,133 34,841 12,085
------- ------- -------- --------
Cash and cash equivalents, end of period................ $30,690 $26,858 $ 30,690 $ 26,858
------- ------- -------- --------
------- ------- -------- --------
See supplementary cash flow information (note 8).
See accompanying notes to consolidated financial statements.
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except per share amounts)
(Prepared in accordance with United States GAAP)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial information does not include all disclosures
required under United States generally accepted accounting principles
for annual financial statements. The accompanying financial information
reflects all adjustments, consisting primarily of normal recurring
adjustments, which are, in the opinion of management, necessary for a
fair presentation of results for the interim periods. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our fiscal 2002
Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements follow the same accounting policies
and methods of application as our annual financial statements, except
for 2(c).
(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 SRL and Sierra Wireless ULC from
their respective dates of formation or acquisition. We have eliminated
all significant intercompany balances and transactions.
(b) 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. 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:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2003 2002 2003 2002
------- ------- -------- --------
Net earnings (loss):
As reported................................................. $ (941) $ 503 $ 330 $(42,971)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards... (1,333) (2,116) (13,438) (5,875)
------- ------- -------- --------
Pro forma................................................... $(2,274) $(1,613) $(13,108) $(48,846)
------- ------- -------- --------
------- ------- -------- --------
Basic and diluted earnings (loss) per share:
As reported................................................. $ (0.05) $ 0.03 $ 0.02 $ (2.64)
Pro forma................................................... (0.12) (0.10) (0.77) (3.00)
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 related to the surrendered
options was expensed in the nine months ended September 30, 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:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Expected dividend yield....................................... -- -- -- --
Expected stock price volatility............................... 102% 111% 103% 107%
Risk-free interest rate....................................... 3.77% 4.20% 3.82% 4.60%
Expected life of options...................................... 4 years 4 years 4 years 4 years
Weighted average fair value of options granted................ $ 6.14 $ 1.71 $ 5.23 $ 5.88
Stock option activity since December 31, 2001 is presented below:
Number of
Stock Options
-------------
Outstanding, December 31, 2001................................................................ 2,443,449
Granted....................................................................................... 732,250
Exercised..................................................................................... (159,626)
Forfeited..................................................................................... (465,509)
----------
Outstanding, December 31, 2002................................................................ 2,550,564
Granted....................................................................................... 327,400
Exercised..................................................................................... (144,043)
Forfeited..................................................................................... (1,074,387)
----------
Outstanding, September 30, 2003............................................................... 1,659,534
----------
----------
(c) 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 are currently evaluating the impact of
FAS No. 149 on our financial results.
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 $23,743, including common shares valued
at $22,377 and costs related to the acquisition of $1,366. 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.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. We are in
the process of obtaining third party valuations of certain intangible
assets, thus the allocation of the purchase price is subject to change.
Current assets................................................ $ 4,716
Property and equipment........................................ 1,352
Acquired in-process R&D....................................... 290
Intangible assets............................................. 8,760
Goodwill...................................................... 16,057
-------
Total assets acquired....................................... $31,175
Current liabilities........................................... 7,432
-------
Net assets acquired........................................... $23,743
-------
-------
Approximately $290 of the purchase price represents the estimated fair
value of acquired in-process research and development ("IPR&D") projects
that had not yet reached technological feasibility and had no
alternative future use. Accordingly, this amount was immediately
expensed in restructuring and other charges in our consolidated
statements of operations and deficit at the acquisition date. The
estimated fair value allocated to IPR&D was determined by a third party
valuation through established valuation techniques in the
high-technology sector.
The following table presents details of the purchased intangible assets:
Estimated Useful
Life (in years) Amount
---------------- ------
Intellectual property...................... 5 $7,600
Customer relationships..................... 5 690
Licenses................................... 5 320
Databases.................................. 5 150
------
Total purchased intangible assets........ $8,760
------
------
If the acquisition of AirPrime had occurred as of January 1, 2002, the
pro forma operating results may have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- --------
Revenue..................................................... $27,727 $26,540 $83,735 $ 67,578
Net loss.................................................... (1,776) (5,055) (3,537) (58,755)
Loss per share.............................................. $ (0.09) $ (0.25) $ (0.18) $ (2.94)
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 three and
nine months ended September 30, 2003, we recorded restructuring and
other charges of $1,220 as follows:
Fixed and intangible asset writedowns......................... $ 605
Workforce reductions.......................................... 325
Expense in-process research and development costs............. 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 September 30, 2003, there are no
remaining restructuring amounts to be paid out related to workforce
reductions. The in-process research and development costs of $290 were
expensed as described in note 3.
In the third quarter of 2003, we also incurred integration costs related
to 13 existing employees who were retained for the transition period.
These 13 employees are expected to complete their integration activities
and will be terminated by 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 the nine months ended September 30, 2002, we recorded
restructuring and other charges of $36,131 associated with the writedown
of CDPD and 2G CDMA 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 changes in the provision for
restructuring and other charges for the nine months ended September 30,
2003 and the balance of the provision at September 30, 2003.
Facilities Workforce
Restructuring Reduction Other Total
------------- --------- ----- -------
Balance at December 31, 2002.................... $4,547 $ 54 $164 $ 4,765
Cash payments for the three months ended:
March 31, 2003.............................. (301) (44) (44) (389)
June 30, 2003............................... (302) (10) (29) (341)
September 30, 2003.......................... (313) -- (11) (324)
------ ---- ---- -------
(916) (54) (84) (1,054)
------ ---- ---- -------
Balance at September 30, 2003................... $3,631 $ -- $ 80 $ 3,711
------ ---- ---- -------
------ ---- ---- -------
5. INTEGRATION COSTS
In the third quarter of 2003, we also incurred integration costs related
to the AirPrime acquisition of $1.0 million, which included the costs of
13 existing employees retained for the transition period. All of these
employees are expected to complete their integration activities and will
be terminated by December 31, 2003.
6. SHARE CAPITAL
On August 12, 2003, we issued 3,708,521 common shares to acquire
AirPrime at a price of $6.03 per common share. 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 for the
nine months ended September 30, 2003 are as follows:
Number of
Shares Amount
---------- --------
Balance at December 31, 2002...................... 16,345,396 $123,047
Issued for acquisition (note 3)................... 3,708,521 22,377
Stock option exercises............................ 144,043 360
---------- --------
Balance at September 30, 2003..................... 20,197,960 $145,784
---------- --------
---------- --------
7. CONTINGENCIES
(a) 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 $3,644. 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 three and nine months ended September 30,
2003, we have claimed nil and $482 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, the TPC
will receive warrants no later than December 31, 2003, valued at up to
Cdn. $2,000 based on the Black-Scholes pricing model.
(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................................................ 412
Expenditures.............................................. (311)
------
Balance, March 31, 2003................................... 1,264
Provisions................................................ 398
Expenditures.............................................. (210)
------
Balance, June 30, 2003.................................... 1,452
Provisions................................................ 517
Increase due to acquisition (note 3)...................... 418
Expenditures.............................................. (210)
------
Balance, September 30, 2003............................... $2,177
------
------
(b) LEGAL PROCEEDINGS
(i) 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.
(ii) 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.
8. SUPPLEMENTARY CASH FLOW INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
Cash received for
Interest.................................................... $ 95 $ 117 $ 259 $ 812
Income taxes................................................ -- 4 4 165
Cash paid for
Interest.................................................... 12 37 56 296
Income taxes................................................ -- 13 62 43
Non-cash financing and investing activities
Purchase of fixed assets funded by obligations under
capital lease............................................. -- -- 113 267
Issuance of common shares on acquisition (note 3)........... 22,377 -- 22,377 --
9. 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 period.
SIERRA WIRELESS, INC.
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
CANADIAN GAAP
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.
VOQ PROFESSIONAL PHONE
Subsequent to the third quarter, we announced the Voq line of professional
phones and value-added software for business users. New Voq-branded professional
phones will be based on Microsoft Windows Mobile software for Smartphones and
will feature both a familiar phone keypad and unique flip-open QWERTY thumbpad.
The Voq product line also includes other hardware and software innovations for
easy information navigation and retrieval, compelling text entry, and email that
is automatically updated. The first Voq model will support global markets by
operating over the GSM and GPRS wireless networks and is expected to be
commercially available in the first half of 2004.
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. As a result of the acquisition, we expect 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 $23.7 million including common shares valued at
$22.4 million and costs related to the acquisition of $1.3 million. The 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.
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 three and nine months ended
September 30, 2003, we recorded restructuring and other charges of $1.2 million
as follows:
Fixed and intangible asset writedowns...................... $ 0.6
Workforce reductions....................................... 0.3
Expense in-process research and development costs.......... 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 which 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 are no restructuring amounts
remaining to be paid out related to workforce reductions. The in-process
research and development costs of $0.3 million represent projects that have not
yet reached technological feasibility and have no alternative future use.
Accordingly, this amount was immediately expensed.
In the third quarter of 2003, we also incurred integration costs of $1.0
million, which included costs related to 13 existing employees retained for
the transition period. All of these employees are expected to complete their
integration activities and will be terminated by December 31, 2003.
SUPPLY CHAIN
During the second quarter of 2003, we implemented significant changes to our
supply chain. These included the transfer of global fulfillment and CDMA product
manufacturing to Flextronics. By using their fully integrated supply chain
services, we expect to reduce product costs, improve alignment with our
increasingly international customer base and achieve increased operating
efficiencies and scalability.
2002 RESTRUCTURING
In the second quarter of 2002, we implemented a business restructuring program
intended to reduce operating expenses and asset levels as a result of our
assessment of current and visible demand. We expected sales growth to continue
to be challenged by the low level of enterprise spending and by overall
conditions affecting the wireless communications industry.
For the three and nine months ended September 30, 2002, we recorded
restructuring and other costs of nil and $36.1 million. We reduced our workforce
from 275 to 180 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.
We recorded a writedown of inventory, including purchase commitments, amounting
to $16.7 million. The writedown was related primarily to our CDPD and 2G CDMA
products.
Fixed and intangible assets impairment charges of $4.8 million and $3.0 million,
respectively, consisted of writedowns primarily for research and development
equipment, test equipment, corporate assets and research and development
licenses. The fixed assets were written down to the current fair value for this
type of equipment. The research and development licenses, which were no longer
required, were written down to nil. In addition, our deferred tax asset
valuation allowance was increased by $3.8 million to reflect 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 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.
As a result of the above noted workforce reduction and our assessment of demand,
it was determined that the leased facilities exceeded our requirements, and we
recorded a provision of $4.7 million that represented the estimated net present
value of future contractual obligations that are in excess of our estimated
future requirements. The cash outlay of approximately $4.7 million related to
the facilities restructuring is expected to be incurred 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 an investment, and other professional fees in connection with the
restructuring activities.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2002
REVENUE
Revenue amounted to $26.2 million in the third quarter of 2003, compared to
$21.1 million in the same period in 2002, an increase of 24.2%. Included in our
revenue were engineering services of $0.4 million in the third quarter of 2003,
compared to $1.0 million in the third quarter of 2002. The increase in revenue
was a result of additional revenue from selling newly acquired products and an
increase in sales of our 2.5G AirCard products in the Asia-Pacific region. Our
revenue by product for the third quarter of 2003 was AirCards 68%, OEM 21%,
Mobile 7% and Other 4%, compared to 62%, 25%, 7% and 6%, respectively, in the
same period of 2002. Our revenue by region for the third quarter of 2003 was the
Americas 78%, the Asia-Pacific region 15% and Europe 7%, compared to 84%, 6% and
10%, respectively, in the same period of 2002.
GROSS MARGIN
Gross margin amounted to $10.7 million in the third quarter of 2003, compared to
$8.3 million in the third quarter of 2002. Gross margin as a percentage of
revenue increased to 40.8% in 2003, compared to 39.2% in 2002. Included in our
gross margin were engineering services of $0.4 million in the third quarter of
2003, compared to $1.0 million in the same period of 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 the
three months ended September 30, 2003, we sold $0.4 million of products that had
a book value after writedowns of nil.
SALES AND MARKETING
Sales and marketing expenses amounted to $2.7 million in the third quarter of
2003, compared to $2.8 million in the same period of 2002, a decrease of 5.3%.
The decrease is a result of our continued focus on operating expense control.
Sales and marketing expenses as a percentage of revenue decreased to 10.1% in
2003, compared to 13.3% in 2002, primarily as a result of higher revenue.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of research and development funding,
amounted to $4.7 million in the third quarter of 2003, compared to $3.2 million
in the same period in 2002, an increase of 45.4%. Research and development
expenses increased in the third quarter of 2003 due to reduced research and
development funding, the addition of staff and projects from the AirPrime
acquisition and the development costs of the Voq professional phone. Gross
research and development expenses, before research and development funding, were
$4.7 million or 17.9% of revenue in 2003, compared to $3.6 million or 16.9% of
revenue in 2002. We expect to continue to invest in research and development for
future growth.
ADMINISTRATION
Administration expenses amounted to $1.3 million, or 5.1% of revenue, in the
third quarter of 2003, compared to $1.3 million, or 6.3% of revenue, in the
third quarter of 2002. Included in administration expenses for the third
quarter of 2003 is an additional recovery from Metricom of $0.2 million.
Administration expenses, excluding the recovery from Metricom, increased by
18.3% due primarily to increased insurance costs and the addition of staff
from the AirPrime acquisition.
RESTRUCTURING AND OTHER CHARGES
In the third quarter of 2003, we incurred restructuring and other charges of
$1.2 million as a result of our acquisition of AirPrime. The charges included
writedowns of fixed and intangible assets, severance costs for workforce
reductions and expensing of in-process research and development costs. In the
third quarter of 2003, there were no adjustments to the 2002 restructuring
charges.
INTEGRATION COSTS
In the third quarter of 2003, we incurred integration costs of $1.0 million as a
result of our acquisition of AirPrime. The charges include costs of existing
staff and contractors retained for the transition period and costs related to
integration activities. All of these employees and contractors are expected to
complete their integration activities and will be terminated by December 31,
2003.
OTHER INCOME (EXPENSE)
Other expense was $0.1 million in the third quarter of 2003, compared to other
income $0.1 million in the same period of 2002. Other expense includes foreign
exchange gains and losses, interest expense and interest income. The increase in
expenses in 2003 is due primarily to net foreign exchange losses resulting from
the strength of the U.S. dollar against the Canadian dollar during the third
quarter of 2003.
NET EARNINGS (LOSS)
Our net loss amounted to $0.9 million in the third quarter of 2003, compared to
net earnings of $0.5 million in the same period of 2002. Our net earnings,
excluding restructuring and integration costs of $2.2 million and the Metricom
recovery of $0.2 million, was $1.1 million in 2003, compared to net earnings of
$0.5 million in 2002. Our loss per share amounted to $0.05 for the third
quarter of 2003, compared to diluted earnings per share of $0.03 in 2002. Our
diluted earnings per share, excluding restructuring and integration costs and
the Metricom recovery, were $0.06 for 2003, compared to $0.03 in 2002. Our
weighted average number of shares outstanding on a diluted basis increased to
18.4 million in 2003, compared to 16.5 million in 2002 due to the issuance of
3.7 million common shares related to the acquisition of AirPrime.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2002
REVENUE
Revenue was $66.9 million for the nine months ended September 30, 2003, compared
to $54.6 million in the same period in 2002, an increase of 22.5%. Included in
our revenue were engineering services of $0.4 million in 2003, compared to $3.4
million in 2002. The increase in revenue was a result of additional revenue from
selling newly acquired products and an increase in sales of our 2.5G AirCard
products in the Asia-Pacific region and Europe. Our revenue by product for the
nine months ended September 30, 2003 was AirCards 76%, OEM 15%, Mobile 6% and
Other 3%, compared to 52%, 27%, 12% and 9%, respectively, in the same period of
2002. Our revenue by region for the first nine months of 2003 was the Americas
64%, the Asia-Pacific region 18% and Europe 18%, compared to 81%, 4% and 7%,
respectively, in the same period of 2002.
GROSS MARGIN
Gross margin amounted to $27.0 million, or 40.3% of revenue, in the first
nine months of 2003, compared to a gross margin of $1.4 million or 2.6% of
revenue in 2002. Gross margin amounted to $27.0 million, or 40.3% of revenue
in the first nine months of 2003, compared to a gross margin, excluding
restructuring and other charges of $19.0 million, of $20.4 million, or 37.4%
of revenue, in the same period of 2002. Included in our gross margin were
engineering services of $0.4 million for the nine months ended September 30,
2003, compared to $3.4 million in the same period of 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 reduction.
During the nine months ended September 30, 2003, we sold $1.0 million of
products that had a book value after writedowns of nil. We also recorded an
additional writedown for 2G inventory of $0.3 million. The net effect on the
gross margin percentage of 2G products was negligible.
SALES AND MARKETING
Sales and marketing expenses amounted to $8.0 million for the nine months ended
September 30, 2003, compared to $8.4 million in the same period of 2002, a
decrease of 5.4%. Sales and marketing expenses decreased in 2003 as a result of
our continued focus on operating expense control. Sales and marketing expenses
as a percentage of revenue decreased to 11.9% in 2003, compared to 15.4% in 2002
due to an increase in revenue.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of research and development funding,
amounted to $10.4 million, or 15.5% of revenue, for the nine months ended
September 30, 2003, compared to $12.6 million, or 23.1% of revenue, for the same
period in 2002. Research and development expenses in 2003 decreased 17.9% due
primarily to cost reductions under our restructuring plan implemented during the
second quarter of 2002 and a reduction in costs during 2003 related to the
development of products based on CDMA and GPRS standards. The decrease was
partially offset by the addition of staff and projects from the AirPrime
acquisition and the development costs of the Voq professional phone. Gross
research and development expenses, before research and development funding, were
$10.9 million or 16.2% of revenue in 2003, compared to $14.2 million or 25.9% of
revenue in 2002. We expect to continue to invest in research and development for
future growth.
ADMINISTRATION
Administration expenses were $4.4 million, or 6.6% of revenue, in the nine
months ended September 30, 2003, compared to $5.1 million, or 9.4% of revenue,
for the same period of 2002. Included in administration expense for the nine
months ended September 30, 2003 is an additional recovery from Metricom of $0.5
million. Administration expenses, excluding the Metricom recovery, decreased by
4.5% due primarily to the cost reductions under our restructuring plan
implemented in the second quarter of 2002.
RESTRUCTURING AND OTHER CHARGES
In the nine months ended September 30, 2003, we incurred restructuring charges
of $1.2 million as a result of our acquisition of AirPrime. The charges included
writedowns of fixed and intangible assets, severance costs for workforce
reductions and expensing of in-process research and development costs. In the
nine months ended September 30, 2003, there were no adjustments to the 2002
restructuring charges.
In the nine months ended September 30, 2002 we 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 for
our products. As a result, in 2002 we recorded restructuring and other
charges of $13.1 million consisting of charges for impairment of fixed and
intangible assets, severance costs, provision for facilities restructuring
and other costs related to the restructuring.
INTEGRATION COSTS
In the nine months ended September 30, 2003, we incurred integration costs of
$1.0 million as a result of our acquisition of AirPrime. The charges include
costs of existing employees and contractors retained for the transition period
and costs related to integration activities. All of these employees and
contractors are expected to complete their integration activities and will be
terminated by December 31, 2003.
NET EARNINGS (LOSS)
Our net earnings amounted to $0.3 million in the nine months ended September 30,
2003, compared to a net loss of $43.0 million in the same period of 2002. Our
net earnings, excluding restructuring and integration costs of $2.2 million and
the Metricom recovery of $0.5 million, were $2.1 million in 2003, compared to a
net loss, excluding restructuring and other costs of $36.1 million, of $6.8
million in 2002. Our diluted earnings per share were $0.02 for the first nine
months of 2003, compared to a loss per share of $2.64 in 2002. Our diluted
earnings per share, excluding restructuring and integration costs and the
Metricom recovery, amounted to $0.12 for first nine months of 2003, compared to
a loss per share, excluding restructuring costs, of $0.42 in 2002. Our weighted
average number of shares outstanding on a diluted basis increased to 17.6
million in 2003, as compared to 16.3 million in 2002 due to the issuance of 3.7
million common shares related to the acquisition of AirPrime.
CONTINGENT LIABILITIES
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. In 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.
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 have significant development and volume purchase contracts with three
wireless carriers, AT&T Wireless, Sprint PCS, and Verizon Wireless. These
agreements provide that we will develop new products for new wireless
technologies that the wireless carriers are deploying and that the wireless
carriers will then purchase those new products for resale. Under the terms of
these agreements, if our products do not meet various specifications and
schedules, mutually acceptable adjustments may be made, volume commitments may
be reduced or deliveries may be delayed, any of which could have a material
adverse impact on our results of operations. In 2002, development and deployment
of these new technologies by the wireless industry and development of our new
products were affected by various delays. During 2002, we commenced
commercial volume shipments to each of the wireless carriers and we continued
to ship under these contracts in the first nine months of 2003. We expect to
substantially complete volume shipments on all three contracts during the
last quarter of 2003.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with generally
accepted accounting principles 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. We base our
estimates on historical experience and other assumptions that we believe are
reasonable in the circumstances. Actual results may differ from our estimates.
The following critical accounting policies affect our more significant estimates
and assumptions used in preparing our consolidated financial statements:
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. 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 market 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. If
market conditions are worse than our projections, we may further writedown
the value of our inventory.
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 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 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 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 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 deteriorate, we may increase our provision.
o We monitor the recoverability of long-lived assets, which includes capital
assets and intangible assets, based on our evaluation of factors such as
future asset utilization and the future undiscounted cash flows expected to
result from the use of the related assets. We 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 the
undiscounted estimated future net cash flows from the asset.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we did not have any off-balance sheet finance or
special purpose entities. We have entered into a number of capital leases
relating to research and development equipment and information systems. These
leases and commitments are disclosed in the annual consolidated financial
statements.
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 provided by operations amounted to $10.9 million for the nine months ended
September 30, 2003, compared to cash used by operations of $7.3 million in the
same period of 2002, an improvement of $18.2 million. The source of cash during
2003 was due mainly to our operating income and changes in working capital.
Cash used for capital expenditures was $1.0 million in the nine months ended
September 30, 2003, compared to $2.0 million in 2002, and was primarily for
research and development equipment. Expenditures on intangible assets were $3.9
million in 2003, compared to $1.0 million in 2002 and were primarily for license
fees and patents. During the third quarter of 2003, we provided interim
financing to AirPrime, Inc. of $1.0 million for working capital purposes until
the combination closed. As a result of closing the combination in August 2003,
the $1.0 million interim financing became an intercompany debt and has been
eliminated on consolidation.
One of our significant sources of funds is expected to be our future operating
cash flow. Our future revenue is dependent on us fulfilling our commitments in
accordance with agreements with major customers. We have a customer
concentration risk, as a few customers represent a significant portion of our
expected future revenue. 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
on hand, accounts receivable, research and development funding, borrowings and
cash from operations, as follows:
o Net cash and short-term investments amounted to $39.4 million at September
30, 2003 compared to $34.8 million at December 31, 2002.
o Accounts receivable amounted to $18.9 million at September 30, 2003
compared to $13.9 million at December 31, 2002.
o Our operating line of credit is with a Canadian chartered bank. The
available facility amounts to $10.0 million, bears interest at prime plus
1.25% and is secured by a general security agreement providing a first
charge against all assets. At September 30, 2003, there were no borrowings
under this line of credit.
MARKET RISK DISCLOSURE
Our risk from currency fluctuations between the Canadian and U.S. dollars 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 and act accordingly. During
the third quarter of 2003, the U.S. dollar strengthened against the Canadian
dollar. We have purchased Canadian currency to meet our projected Canadian
dollar cash needs for the near term and to manage our foreign currency risk on
Canadian dollar denominated operating expenses. We could be exposed to foreign
exchange losses should the U.S. dollar strengthen in future periods.
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. We have 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 our exposure to Euro transactions
will increase. To date we have not entered into any futures contracts. To manage
our foreign currency risks, consideration will be given to entering into such
contracts should we consider it to be necessary to reduce our exposure to future
foreign exchange fluctuations.
Currently, we do not have any hedging activities or derivative instruments,
hence the impact of FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" is not material to our financial results.
RELATED PARTY TRANSACTIONS
During the three and nine months ended September 30, 2003, except for the $1.0
million loaned to AirPrime for working capital purposes prior to closing the
combination on August 12, 2003, there were no material related party
transactions.
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 three months and nine months ended
September 30, 2003 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 AirPrime acquisition, which resulted in additional
income of $0.3 million in both periods. 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. In accordance with Canadian
GAAP, the amount of IPR&D that has been recorded as an intangible asset, net of
accumulated amortization, amounted to $0.3 million at September 30, 2003.
At September 30, 2002, the IPR&D, related to the June 2000 acquisition of the
QUALCOMM CDMA modules business, was fully amortized. There is no impact on our
net earnings under Canadian GAAP for the three months ended September 30, 2002
and there is an increase in our net loss under Canadian GAAP of $0.2 million for
the nine months ended September 30, 2002.
FORWARD-LOOKING STATEMENTS
This 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 conditions, channel
and end-customer demand conditions, revenue, gross margin, operating expenses,
profits, and other expectations, intentions and plans contained in this report
that are not historical fact. Our expectations regarding future revenues and
earnings depend in part upon our ability to successfully integrate AirPrime
into our business and upon our ability to develop, manufacture, and supply
products that we do not produce today and that meet defined specifications.
When used in this 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 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 THREE FISCAL YEARS AND MAY NOT SUSTAIN
PROFITABILITY.
We have incurred a loss from operations in each of the past three fiscal
years. As of September 30, 2003 our accumulated deficit was approximately
$73.2 million. We incurred losses of approximately $41.7 million for the
year ended December 31, 2002. While we had a profit of $0.3 million for the
nine months ended September 30, 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.
The market for our products may not continue to grow, firms within the
industry may not adopt our technology for integration with their wireless
data communications solutions, and we may be unsuccessful in independently
establishing markets for our products. 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 launch successful new products, reduced demand for our
current products would cause our revenues to decline and harm our financial
condition. Significant marketing expenses associated with the launch of new
products could also affect our future profitability.
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 and developing new products to achieve much of our
future growth. Our ability to design and develop 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, 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 expect to substantially
complete volume shipments on all three contracts during the last quarter
of 2003. Thereafter, we will rely only 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. Moreover, we currently rely principally on one
manufacturer, 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 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
seeking to identify the CFO's successor. We are not seeking a successor
for the CTO, and we expect that his present duties will be shared among
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 data 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.
WE DEPEND ON THIRD PARTIES TO OFFER WIRELESS DATA COMMUNICATIONS SERVICES FOR
OUR PRODUCTS TO OPERATE.
Our products can only be used over wireless data networks operated by
third parties. In addition, our future growth depends, in part, on the
successful deployment of next generation wireless data 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;
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.
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.
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.
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))
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue............................................ $ 26,170 $ 21,068 $ 66,930 $ 54,623
Cost of goods sold................................. 15,486 12,802 39,975 53,185
-------- -------- -------- --------
Gross margin....................................... 10,684 8,266 26,955 1,438
-------- -------- -------- --------
Expenses
Sales and marketing.............................. 2,653 2,801 7,972 8,431
Research and development, net ................... 4,695 3,217 10,391 12,883
Administration................................... 1,331 1,331 4,399 5,141
Restructuring and other charges ................. 930 -- 930 13,093
Integration costs ............................... 1,026 -- 1,026 --
Amortization..................................... 590 529 1,689 1,776
-------- -------- -------- --------
11,225 7,878 26,407 41,324
-------- -------- -------- --------
Earnings (loss) from operations.................... (541) 388 548 (39,886)
Other income (expense)............................. (74) 124 197 98
-------- -------- -------- --------
Earnings (loss) before income taxes................ (615) 512 745 (39,788)
Income tax expense................................. 54 9 143 3,433
-------- -------- -------- --------
Net earnings (loss)................................ (669) 503 602 (43,221)
Deficit, beginning of period....................... (71,315) (74,397) (72,586) (30,673)
-------- -------- -------- --------
Deficit, end of period............................. $(71,984) $(73,894) $(71,984) $(73,894)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share for the period:
Basic............................................ $ (0.04) $ 0.03 $ 0.04 $ (2.65)
Diluted.......................................... $ (0.04) $ 0.03 $ 0.03 $ (2.65)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares (in thousands)
Basic............................................ 18,409 16,314 17,054 16,294
Diluted.......................................... 18,409 16,539 17,564 16,294
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to consolidated financial statements.
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents..................................... $ 30,690 $ 34,841
Short-term investments........................................ 8,753 --
Accounts receivable........................................... 18,891 13,865
Inventories................................................... 2,929 6,673
Prepaid expenses.............................................. 848 864
-------- --------
62,111 56,243
Fixed assets.................................................... 5,752 7,198
Deferred income taxes........................................... 500 500
Intangible assets............................................... 18,749 6,907
Goodwill........................................................ 16,057 --
Other........................................................... 241 241
-------- --------
$103,410 $ 71,089
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.............................................. $ 1,690 $ 3,017
Accrued liabilities........................................... 23,831 12,431
Deferred revenue and credits.................................. 429 297
Current portion of long-term liabilities...................... 3,114 2,803
Current portion of obligations under capital lease............ 228 831
-------- --------
29,292 19,379
Long-term liabilities........................................... 1,998 2,896
Obligations under capital lease................................. 27 60
Shareholders' equity
Share capital................................................. 144,561 121,824
Deficit....................................................... (71,984) (72,586)
Cumulative translation adjustments............................ (484) (484)
-------- --------
72,093 48,754
-------- --------
$103,410 $ 71,089
-------- --------
-------- --------
Contingencies (note 7).
See accompanying notes to consolidated financial statements.
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Cash flows from operating activities:
Net earnings (loss) for the period.................... $ (669) $ 503 $ 602 $(43,221)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Amortization........................................ 1,690 1,280 4,411 5,680
Non-cash restructuring and other charges............ 605 -- 605 25,905
Loss on disposal.................................... -- 2 2 122
Deferred income taxes............................... -- -- -- 3,754
Accrued warrants.................................... -- 41 329 384
Changes in operating assets and liabilities
Accounts receivable................................. (453) 509 (2,537) (2,859)
Inventories......................................... 2,146 146 4,460 3,257
Prepaid expenses.................................... 167 157 288 626
Accounts payable.................................... (6,432) 694 (4,051) (301)
Accrued liabilities................................. 6,873 (790) 6,691 107
Deferred revenue and credits........................ 201 (467) 132 (732)
------- ------- -------- --------
Net cash provided by (used in) operating activities... 4,128 2,075 10,932 (7,278)
Cash flows from investing activities:
Business acquisitions............................... 666 -- (126) --
Proceeds on disposal................................ -- -- 4 31
Purchase of fixed assets............................ (618) (388) (975) (1,984)
Increase in intangible assets....................... (2,614) (167) (3,928) (1,003)
Purchase of short-term investments.................. 52 (3,031) (10,170) (14,662)
Proceeds on maturity of short-term investments...... 1,417 5,521 1,417 40,533
------- ------- -------- --------
Net cash provided by (used in) investing activities... (1,097) 1,935 (13,778) 22,915
Cash flows from financing activities:
Issue of common shares.............................. 319 16 360 346
Repayment of long-term liabilities.................. (507) (301) (1,665) (1,210)
------- ------- -------- --------
Net cash used in financing activities................. (188) (285) (1,305) (864)
------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 2,843 3,725 (4,151) 14,773
Cash and cash equivalents, beginning of period.......... 27,847 23,133 34,841 12,085
------- ------- -------- --------
Cash and cash equivalents, end of period................ $30,690 $26,858 $ 30,690 $ 26,858
------- ------- -------- --------
------- ------- -------- --------
See supplementary cash flow information (note 8).
See accompanying notes to consolidated financial statements.
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars,
except per share amounts)
(Prepared in accordance with Canadian GAAP)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial information does not include all disclosures
required under Canadian generally accepted accounting principles for
annual financial statements. The accompanying financial information
reflects all adjustments, consisting primarily of normal recurring
adjustments, which are, in the opinion of management, necessary for a
fair presentation of results for the interim periods. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our fiscal 2002
Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements follow the same accounting policies
and methods of application as our annual financial statements, except
for 2(c).
(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 SRL, and Sierra Wireless ULC from
their respective dates of formation or acquisition. We have eliminated all
significant intercompany balances and transactions.
(b) 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:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2003 2002 2003 2002
------- ------- -------- --------
Net earnings (loss):
As reported................................................. $ (669) $ 503 $ 602 $(43,221)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards... (1,333) (2,116) (13,438) (5,875)
------- ------- -------- --------
Pro forma................................................... $(2,002) $(1,613) $(12,836) $(49,096)
------- ------- -------- --------
------- ------- -------- --------
Basic earnings (loss) per share:
As reported................................................. $ (0.04) $ 0.03 $ 0.04 $ (2.65)
Pro forma................................................... (0.11) (0.10) (0.75) (3.01)
Diluted earnings (loss) per share:
As reported................................................. $ (0.04) $ 0.03 $ 0.03 $ (2.65)
Pro forma................................................... (0.11) (0.10) (0.75) (3.01)
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 related to the
surrendered options was expensed in the nine months ended September 30,
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:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Expected dividend yield....................................... -- -- -- --
Expected stock price volatility............................... 102% 111% 103% 107%
Risk-free interest rate....................................... 3.77% 4.20% 3.82% 4.60%
Expected life of options...................................... 4 years 4 years 4 years 4 years
Weighted average fair value of options granted................ $ 6.14 $ 1.71 $ 5.23 $ 5.88
Stock option activity since December 31, 2001 is presented below:
Number of
Stock Options
-------------
Outstanding, December 31, 2001................................................................ 2,443,449
Granted....................................................................................... 732,250
Exercised..................................................................................... (159,626)
Forfeited..................................................................................... (465,509)
----------
Outstanding, December 31, 2002................................................................ 2,550,564
Granted....................................................................................... 327,400
Exercised..................................................................................... (144,043)
Forfeited..................................................................................... (1,074,387)
----------
Outstanding, September 30, 2003............................................................... 1,659,534
----------
----------
(c) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2003, the Canadian Institute of Chartered Accountants ("CICA")
issued Handbook ("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 in 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.
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 $23,743, including common shares valued
at $22,377 and costs related to the acquisition of $1,366. 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.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. We are in
the process of obtaining third party valuations of certain intangible
assets, thus the allocation of the purchase price is subject to change.
Current assets................................................ $ 4,716
Property and equipment........................................ 1,352
Acquired in-process R&D....................................... 290
Intangible assets............................................. 8,760
Goodwill...................................................... 16,057
-------
Total assets acquired....................................... $31,175
Current liabilities........................................... 7,432
-------
Net assets acquired........................................... $23,743
-------
-------
Approximately $290 of the purchase price represents the estimated fair
value of acquired in-process research and development ("IPR&D") projects
that had not yet reached technological feasibility and had no
alternative future use. The estimated fair value allocated to IPR&D was
determined by a third party valuation through established valuation
techniques in the high-technology sector. We have recorded the IPR&D as
an intangible asset and are amortizing the asset over a two year period.
The following table presents details of the purchased intangible assets:
Estimated Useful
Life (in years) Amount
---------------- ------
Intellectual property...................... 5 $7,600
Customer relationships..................... 5 690
Licenses................................... 5 320
Databases.................................. 5 150
------
Total purchased intangible assets........ $8,760
------
------
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 three and
nine months ended September 30, 2003, we recorded restructuring and
other charges of $930 as follows:
Fixed and intangible asset writedowns......................... $605
Workforce reductions.......................................... 325
----
Total restructuring and other charges....................... $930
----
----
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 September 30, 2003, there are no
remaining restructuring amounts to be paid out related to workforce
reductions.
In the third quarter of 2003, we also incurred integration costs related
to 13 existing employees who were retained for the transition period.
These 13 employees are expected to complete their integration activities
and will be terminated by 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 the nine months ended September 30, 2002, we recorded
restructuring and other charges of $36,131 associated with the writedown
of CDPD and 2G CDMA 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 changes in the provision for
restructuring and other charges for the nine months ended September 30,
2003 and the balance of the provision at September 30, 2003.
Facilities Workforce
Restructuring Reduction Other Total
------------- --------- ----- -------
Balance at December 31, 2002.................... $4,547 $ 54 $164 $ 4,765
Cash payments for the three months ended:
March 31, 2003.............................. (301) (44) (44) (389)
June 30, 2003............................... (302) (10) (29) (341)
September 30, 2003.......................... (313) -- (11) (324)
------ ---- ---- -------
(916) (54) (84) (1,054)
------ ---- ---- -------
Balance at September 30, 2003................... $3,631 $ -- $ 80 $ 3,711
------ ---- ---- -------
------ ---- ---- -------
5. INTEGRATION COSTS
In the third quarter of 2003, we also incurred integration costs related
to the AirPrime acquisition of $1.0 million, which included the costs of
13 existing employees retained for the transition period. All of these
employees are expected to complete their integration activities and will
be terminated by December 31, 2003.
6. SHARE CAPITAL
On August 12, 2003, we issued 3,708,521 common shares to acquire
AirPrime at a price of $6.03 per common share. 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 for the
nine months ended September 30, 2003 are as follows:
Number of
Shares Amount
---------- --------
Balance at December 31, 2002...................... 16,345,396 $121,824
Issued for acquisition (note 3)................... 3,708,521 22,377
Stock option exercises............................ 144,043 360
---------- --------
Balance at September 30, 2003..................... 20,197,960 $144,561
---------- --------
---------- --------
7. CONTINGENCIES
(a) 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 $3,644. Repayment for certain of
the research and development funding 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 three and nine months ended September 30,
2003, we have claimed nil and $482 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, the TPC
will receive warrants no later than December 31, 2003, valued at up to
Cdn. $2,000 based on the Black-Scholes pricing model.
(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................................................ 412
Expenditures.............................................. (311)
------
Balance, March 31, 2003................................... 1,264
Provisions................................................ 398
Expenditures.............................................. (210)
------
Balance, June 30, 2003.................................... 1,452
Provisions................................................ 517
Increase due to acquisition (note 3)...................... 418
Expenditures.............................................. (210)
------
Balance, September 30, 2003............................... $2,177
------
------
(b) LEGAL PROCEEDINGS
(i) 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.
(ii) 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.
8. SUPPLEMENTARY CASH FLOW INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
Cash received for
Interest.................................................... $ 95 $ 117 $ 259 $ 812
Income taxes................................................ -- 4 4 165
Cash paid for
Interest.................................................... 12 37 56 296
Income taxes................................................ -- 13 62 43
Non-cash financing and investing activities
Purchase of fixed assets funded by obligations under
capital lease............................................. -- -- 113 267
Issuance of common shares on acquisition (note 3)........... 22,377 -- 22,377 --
9. 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 period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sierra Wireless, Inc.
By: /s/ Peter W. Roberts
-----------------------------------------
Peter W. Roberts, Chief Financial Officer
Date: October 24, 2003