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 August 2003
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(Commission File. No 0-30718).
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SIERRA WIRELESS, INC., A CANADA CORPORATION
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(Translation of registrant's name in English)
13811 WIRELESS WAY
RICHMOND, BRITISH COLUMBIA, CANADA V6V 3A4
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(Address of principal executive offices and zip code)
Registrant's Telephone Number, including area code: 604-231-1100
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Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F: Form 20-F X 40-F
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes: No: X
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SIERRA WIRELESS, INC.
SECOND QUARTER REPORT
FOR THE SIX MONTHS ENDED JUNE 30, 2003
US GAAP
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SIERRA WIRELESS, INC.
CHAIRMAN'S MESSAGE
TO OUR SHAREHOLDERS
I am pleased to report our financial performance continued to improve during the
second quarter of 2003. Our results, which again exceeded our expectations,
included significant increases in revenues, earnings and cash flow compared to
the same quarter in 2002. This is our fourth consecutive quarter of comparable
period revenue growth, profitability and positive cash flow.
RESULTS FOR Q2 2003 COMPARED TO Q2 2002
Where described as adjusted, results for the second quarter of 2003 exclude an
additional recovery of $0.3 million from metricom which was received during the
period. Adjusted results for the second quarter of 2002 exclude restructuring
and other charges of $36.1 million.
For the three months ended June 30 2003, our revenues increased by 22.4% to
$20.7 million, from $16.9 million in the second quarter of 2002. This growth
reflects the success of our AirCard product line in the United States, Europe
and the Asia-Pacific region, and the expansion of our distribution channels in
these markets.
Our adjusted gross margin also increased during the quarter, climbing to $8.3
million, or 40.3% of revenue, from $6.3 million, or 37.1% of revenue, in the
comparable period in 2002. This improvement reflects a greater percentage of
sales coming from our 2.5G AirCard products, as well as reductions in our
product costs.
Adjusted operating expenses for the period declined to $7.8 million, from $10.0
million during the same period in 2002. This was due primarily to the
realization of cost reductions under our restructuring plan implemented during
2002.
Adjusted net earnings for the period increased to $0.6 million, or diluted
earnings per share of $0.04, up significantly from an adjusted net loss of $3.0
million, or loss per share of $0.18, during the second quarter of 2002.
For the second quarter of 2003, our cash flow was positive by $0.5 million
resulting in a closing cash balance of $38.1 million. Our balance sheet remains
strong.
As indicated in our second quarter news release and conference call, second
quarter revenues of $20.7 million exceeded our guidance range of $19.0 to $20.0
million, while our adjusted net earnings of $0.6 million, or diluted earnings
per share of $0.04, exceeded our anticipated earnings of $0.1 million to $0.3
million, or diluted earnings per share of $0.01 to $0.02. Positive cash flow of
$0.5 million exceeded our guidance of neutral cash flow.
BUSINESS DEVELOPMENTS
The second quarter included a number of key business developments:
ACQUISITION OF AIRPRIME, INC.
On June 16, 2003, we announced a definitive agreement to acquire AirPrime, Inc.
("AirPrime"). Located in Carlsbad, California, AirPrime is a privately-held,
leading supplier of high-speed CDMA wireless products and a proven innovator in
embedded modules for OEM applications. The combination of Sierra Wireless and
AirPrime is expected to create a well-positioned market leader with a broad
product line, innovative engineering, blue chip customers, global sales and
distribution channels, and a strong balance sheet. The combination is expected
to close in August 2003.
SUPPLY CHAIN CHANGES
We implemented significant changes to our supply chain with the transfer of our
global fulfillment and CDMA product manufacturing to Flextronics. By using
Flextronic's fully integrated supply chain services, we expect to reduce our
product costs, improve alignment with our increasingly international customer
base, and achieve increased operating efficiencies and scalability. We also
expect to purchase finished goods closer to the time of shipment to our
customers, reducing our working capital requirements associated with carrying
inventory. Previously, our fulfillment services were
3
provided by Globalware, while CDMA production was handled by SCI-Sanmina. We
continue to have GSM production at Solectron and CDPD and specialty production
at Creation Technologies.
OTHER HIGHLIGHTS
o We signed a distribution agreement with Panasonic Canada Inc. As part of
this agreement, Panasonic will distribute our next generation product line,
including CDMA2000 1X and GSM/GPRS products, through its value-added
reseller channels in Canada. Panasonic Canada Inc. is a division of
Matsushita Electric Industrial Co., Ltd. of Japan, one of the world's
largest producers of electronics and electric products for consumer,
business and industrial use.
o We announced the commercial availability of the MP 750 ruggedized wireless
modem for GSM/GPRS networks across North America and in Europe. The MP 750
is the first of our next generation MP Series, built for extreme
environments and for industries that require an in-vehicle mobile solution.
Commercial availability of the MP 555 for CDMA2000 1X networks is expected
to follow later this year.
o The Mesquite Police Department in Texas became the first police force in
North America to implement the MP 750. The department will use the MP 750
to help protect its community, while patrolling over 377 miles of arterial
and residential streets. The MP 750 was chosen specifically for its unique
security features and its ability to provide faster access to mission
critical information.
o Together with IBM, we announced a bundled wireless solution that combines
the Sierra Wireless AirCard 750 with IBM's high-end line of IBM ThinkPad
T40 notebook computers. IBM chose the AirCard specifically for its
high-performance, wide area wireless capabilities, and for its ability to
enhance an end-to-end mobile solution.
o Together with Citrix Systems, Inc. and Zumasys, Inc., we announced that
Momentum Group, a leading supplier of contract textiles, has equipped its
North American sales force with a complete mobile solution that includes
Panasonic Toughbooks, Citrix MetaFrame XP(TM) Presentation Server and the
Sierra Wireless AirCard 550 and AirCard 555. This new implementation gives
Momentum's sales representatives wireless access to critical business
applications, in order to improve response time and overall customer
satisfaction.
CORPORATE DEVELOPMENTS
o We appointed Charles E. Levine, formerly of Sprint PCS, to our Board of
Directors. Mr. Levine has more than 25 years of experience in building
profitable businesses for some of North America's largest companies. Mr.
Levine's expertise in business strategy, marketing and sales will be
invaluable to our team.
o Peter Roberts, our Chief Financial Officer, announced he will retire from
Sierra Wireless in February 2004. Mr. Roberts joined us in January 1999,
and has been instrumental in helping us become a leading wireless solutions
company. To allow for an orderly transition, we have engaged Korn Ferry to
assist with the executive search for his replacement.
o During the second quarter, we instituted and completed a voluntary Employee
Stock Option Plan ("ESOP") surrender initiative. The objective of the ESOP
is to enable us to recruit, retain and motivate participants to increase
the value of our company on a sustainable basis. The objectives of the ESOP
surrender initiative are to have deeply "under water" stock options
returned to the pool now, rather than having them expire unexercised some
time in the future, and to enable us to operate the ESOP within the
existing number of options that have already been approved by shareholders.
Surrenders by employees, officers and directors were voluntary. The
company had approximately 3.2 million net options authorized, with 2.5
million issued and 0.7 million available for issuance. Options with an
exercise price below Cdn$20.00 were not eligible for surrender. Of the
2.5 million issued, there were approximately 1.0 million eligible for
surrender. Of the eligible options, approximately 0.7 million were
surrendered, with exercise prices ranging from Cdn.$20.46 to Cdn.$212.00.
We do not intend to re-price existing options, either immediately or
through a short-term re-issuance of the surrendered options. ESOP
participants who surrendered options are "at risk" through the loss of
the vesting associated with those options and through the uncertainty as
to availability, quantity, timing and exercise price of future grants.
Directors, including David Sutcliffe, the company's Chairman and Chief
Executive Officer, are
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ineligible to receive any future recognition for their participation in
the surrender program. We expect over time to reduce the size of the
ESOP as a percentage of issued and outstanding shares.
OUTLOOK
While we expect overall economic and operating conditions will remain
challenging, we are encouraged by the market success of our 2.5G products, the
growth in our international distribution channels, and by opportunities created
by the combination of Sierra Wireless and AirPrime. We will focus on completing
the AirPrime acquisition and business integration in the months ahead.
As we move forward, our business operating premise remains profitable growth,
while our priorities remain expansion of our distribution channels, sell through
to end-customers and investment for future growth.
/s/ David B. Sutcliffe
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David B. Sutcliffe
Chairman and Chief Executive Officer
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, revenues, gross margins, 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 develop, manufacture and supply
products that we do not produce today and that meet defined specifications. They
also depend on closing the airprime transaction and successfully integrating the
businesses. 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.
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SIERRA WIRELESS, INC.
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.
ACQUISITION OF AIRPRIME, INC.
On June 16, 2003, we announced a definitive agreement to acquire AirPrime, Inc.
("AirPrime"), a privately-held, supplier of high-speed CDMA wireless products
located in Carlsbad, California. The combined entity is expected 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.
Under the terms of the definitive agreement, we will issue approximately 3.7
million shares to the shareholders of AirPrime. As a result of the combination,
AirPrime shareholders will hold approximately 18.5% of the combined entity,
based on the issued and outstanding shares. In addition, Sierra Wireless will
provide interim financing to AirPrime of up to $2.0 million for working capital
purposes until the combination is closed.
The completion of the combination is expected to occur in August 2003 and is
conditioned upon, among other things, regulatory approval and approval from
AirPrime shareholders. Sierra Wireless has received commitments from AirPrime
shareholders, representing 82% of AirPrime's shares, to vote their AirPrime
shares in favour of the combination.
SUPPLY CHAIN
During the quarter, 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. We
expect to purchase finished goods closer to the time of shipment to our
customers, reducing our working capital requirements associated with carrying
inventory.
Previously, fulfillment services were provided by Globalware while CDMA
production was handled by SCI-Sanmina. We continue to have GSM production at
Solectron and CDPD and specialty production at Creation Technologies.
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 six months ended June 30, 2002, we recorded restructuring and
other costs of $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.
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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.
The adjusted information provided below for the three and six months ended June
30, 2002 excludes these charges.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2002
REVENUE
Revenue amounted to $20.7 million in the second quarter of 2003, compared to
$16.9 million in the same period in 2002, an increase of 22.4%. Included in our
revenue was research and development funding of nil in the second quarter of
2003, compared to $0.8 million in the second quarter of 2002. The increase in
revenue was primarily a result of a volume increase in sales of our 2.5G AirCard
products as well as increasing sales to channels in the Asia-Pacific region and
Europe. Our revenue by product for the second quarter of 2003 was AirCards 82%,
OEM 10%, Mobile 4% and Other 4%, compared to 57%, 21%, 14% and 8%, respectively,
in the same period of 2002. Our revenue by region for the second quarter of 2003
was the Americas 50%, the Asia-Pacific region 26% and Europe 24%, compared to
86%, 6% and 8%, respectively, in the same period of 2002.
GROSS MARGIN
Gross margin amounted to $8.3 million in the second quarter of 2003, compared to
an adjusted gross margin, excluding restructuring and other charges of $19.0
million, of $6.3 million in the second quarter of 2002. Gross margin as a
percentage of revenue increased to 40.3% in 2003, compared to an adjusted gross
margin of 37.1% in 2002. Included in our gross margin was research and
development funding of nil in the second quarter of 2003, compared to $0.8
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 three months ended June
30, 2003, we sold $0.6 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 was a normal gross margin percentage on 2G
products.
SALES AND MARKETING
Sales and marketing expenses amounted to $2.6 million in the second quarter of
2003, compared to $2.9 million in the same period of 2002. Sales and marketing
expenses as a percentage of revenue decreased to 12.5% in 2003, compared to
17.3% in 2002, due to an increase in revenue and cost reductions resulting from
our restructuring program.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development arrangements, amounted to $2.9 million in the second
quarter of 2003, compared to $4.6 million in the same period in 2002, a decrease
of 36.1%. Research and development expenses in 2003 decreased due primarily to
the realization of cost reductions under our restructuring plan implemented
during 2002. In addition, costs related to the development of new products based
on CDMA and GPRS standards contributed to the higher costs in 2002. Gross
research and development expenses, before government research and development
funding, were $3.1 million or 15.0% of revenue in 2003, compared to $5.2 million
or 30.8% of revenue in 2002. We expect to continue to invest in research and
development for future growth.
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ADMINISTRATION
Administration expenses amounted to $1.4 million, or 7.0% of revenue, in the
second quarter of 2003, compared to $1.8 million, or 10.9% of revenue, in the
second quarter of 2002. Included in administration expense in 2003 is an
additional recovery from Metricom of $0.3 million. Excluding the recovery from
Metricom, administration expenses decreased by 6.4% due primarily to the effect
of cost reductions under our restructuring plan implemented in the second
quarter of 2002.
RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2003, there were no adjustments to the 2002
restructuring charges. In the second quarter of 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.
AMORTIZATION
Amortization amounted to $0.5 million in the second quarter of 2003, compared to
$0.6 million in the second quarter of 2002. Amortization decreased due primarily
to the writedown of fixed and intangible assets under our restructuring plan
implemented in the second quarter of 2002.
OTHER INCOME
Other income increased to $0.2 million in the second quarter of 2003, compared
to $0.1 million in the same period of 2002. Other income includes foreign
exchange gains and losses, interest expense and interest income. This increase
is due to net foreign exchange gains in 2003 as well as a reduction in inventory
carrying charges which were incurred in 2002.
NET EARNINGS (LOSS)
Our net earnings amounted to $0.9 million in the second quarter of 2003,
compared to a net loss of $39.1 million in the same period of 2002. Our
adjusted net earnings, excluding the Metricom recovery of $0.3 million, were
$0.6 million in 2003, compared to an adjusted net loss, excluding
restructuring and other charges of $36.1 million, of $3.0 million in 2002.
Our adjusted diluted earnings per share amounted to $0.04 for the second
quarter of 2003, compared to an adjusted loss per share of $0.18 in 2002. Our
weighted average number of shares outstanding on a diluted basis increased to
16.8 million in 2003, as compared to 16.3 million in 2002.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2002
REVENUE
Revenue was $40.8 million for the six months ended June 30, 2003, compared to
$33.6 million in the same period in 2002, an increase of 21.5%. Included in our
revenue was research and development funding of nil in 2003, compared to $2.4
million in 2002. The increase in revenue was primarily a result of a volume
increase in sales of our 2.5G AirCard products as well as increasing sales to
channels in the Asia-Pacific region and Europe. Our revenue by product for the
six months ended June 30, 2003 was AirCards 81%, OEM 11%, Mobile 5% and Other
3%, compared to 46%, 29%, 15% and 10%, respectively, in the same period of 2002.
Our revenue by region for the first six months of 2003 was the Americas 55%, the
Asia-Pacific region 25% and Europe 20%, compared to 86%, 6% and 8%,
respectively, in the same period of 2002.
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GROSS MARGIN
Gross margin amounted to $16.3 million, or 39.9% of revenue, in the first half
of 2003, compared to an adjusted gross margin, excluding restructuring and other
charges of $19.0 million, of $12.2 million, or 36.3% of revenue, in the same
period of 2002. Included in our gross margin was research and development
funding of nil for the six months ended June 30, 2003, compared to $2.4 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 six months ended June
30, 2003, we sold $0.6 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 was a normal gross margin percentage on 2G
products.
SALES AND MARKETING
Sales and marketing expenses amounted to $5.3 million for the six months ended
June 30, 2003, compared to $5.6 million in the same period of 2002, a decrease
of 5.5%. Sales and marketing expenses as a percentage of revenue decreased to
13.0% in 2003, compared to 16.8% in 2002, due to an increase in revenue and cost
reductions under our restructuring program.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development arrangements, amounted to $5.7 million, or 14.0% of
revenue, for the six months ended June 30, 2003, compared to $9.4 million, or
28.1% of revenue, for the same period in 2002. Research and development expenses
in 2003 decreased 39.5% due primarily to cost reductions under our restructuring
plan implemented during 2002. In addition, costs related to the development of
new products based on CDMA and GPRS standards contributed to the higher costs in
2002. Gross research and development expenses, before government research and
development funding, were $6.2 million or 15.1% of revenue in 2003, compared to
$10.6 million or 31.6% of revenue in 2002. We expect to continue to invest in
research and development for future growth.
ADMINISTRATION
Administration expenses were $3.1 million, or 7.5% of revenue, in the six months
ended June 30, 2003, compared to $3.8 million, or 11.4% of revenue, for the same
period of 2002. Included in administration expense was an additional recovery
from Metricom of $0.3 million. Administration expenses, excluding the Metricom
recovery, decreased by 12.4% due primarily to the cost reductions under our
restructuring plan implemented in the second quarter of 2002.
RESTRUCTURING AND OTHER CHARGES
In the six months ended June 30, 2003, there were no adjustments to the 2002
restructuring charges. In the second quarter of 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.
AMORTIZATION
Amortization amounted to $1.1 million for the first six months of 2003, compared
to $1.2 million in the same period of 2002. Amortization decreased due primarily
to the writedown of fixed and intangible assets under our restructuring plan
implemented in the second quarter of 2002.
OTHER INCOME
Other income increased to $0.3 million for the first half of 2003, compared to
nil in the same period of 2002. Other income includes foreign exchange gains and
losses, interest expense and interest income. This increase is due primarily to
net foreign exchange gains in 2003.
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NET EARNINGS (LOSS)
Our net earnings amounted to $1.3 million in the six months ended June 30, 2003,
compared to a net loss of $43.5 million in the same period of 2002. Our adjusted
net earnings, excluding the Metricom recovery of $0.3 million, were $1.0 million
in 2003, compared to an adjusted net loss of $7.3 million. Our adjusted diluted
earnings per share amounted to $0.06 for first six months of 2003, compared to
an adjusted loss per share of $0.45 in 2002. Our weighted average number of
shares outstanding on a diluted basis increased to 16.7 million in 2003, as
compared to 16.3 million in 2002.
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 six months of 2003. We expect to substantially
complete volume shipments on all three contracts during the second half 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, and we believe their
realization is more likely than not. However, 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
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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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 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 $6.8 million for the six months ended
June 30, 2003, compared to cash used by operations of $9.3 million in the same
period of 2002, an improvement of $16.1 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 $0.4 million in the six months ended June
30, 2003, compared to $1.6 million in 2002, and was primarily for software.
Expenditures on intangible assets were $1.3 million in 2003, compared to $0.8
million in 2002 and were primarily for license fees and patents. During Q3 2003,
we expect to provide interim financing to AirPrime of up to $2.0 million for
working capital purposes until the combination is closed.
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:
11
o Net cash and short-term investments amounted to $38.1 million at June
30, 2003 compared to $34.8 million at December 31, 2002.
o Accounts receivable amounted to $15.9 million at June 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 June 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 second quarter of 2003, the Canadian dollar strengthened significantly
against the U.S. 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 six months ended June 30, 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 develop, manufacture, and supply
products that we do not produce today and that meet defined specifications. They
also depend on closing the AirPrime transaction and successfully integrating the
businesses. 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.
12
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:
OUR ACQUISITION OF AIRPRIME AND OTHER ACQUISITIONS WE MAY DO IN THE FUTURE MAY
RESULT IN ADVERSE IMPACTS ON OUR RESULTS OF OPERATIONS.
In the past, our strategy has included expanding our operations and
business through strategic acquisitions of businesses and products. During
the second quarter, we signed a definitive agreement to acquire AirPrime,
Inc. in Carlsbad, California. The combination is expected to close in
August 2003 and is subject to a number of risks, including the following:
o AirPrime's business may not be as profitable as we anticipate,
which could reduce the overall profitability of our company.
o Diversion of management's attention away from our business during
the acquisition and integration process.
o The acquisition may not close, resulting in substantial
acquisition costs that would increase our expenses and reduce our
profitability without any offsetting revenues.
o If we are unable to successfully integrate AirPrime, we may not
achieve anticipated revenue levels, cost savings or other
synergies.
o The integration may result in substantial costs that would
decrease our profitability.
o The issuance of securities may dilute the value of our common
shares.
If realized, these risks could result in substantial costs, disrupt our
operations, reduce our profitability and reduce shareholder value.
IF WE CANNOT DELIVER PRODUCTS ASSOCIATED WITH SIGNIFICANT CONTRACTS IN A
PROFITABLE AND TIMELY MANNER OUR MARGINS AND REVENUES WILL BE NEGATIVELY
IMPACTED.
Since late 1999, we have entered into significant supply contracts with
AT&T Wireless Services ("AT&T"), Sprint PCS and Verizon Wireless. Our right
to receive revenues under these contracts depends upon our ability to
manufacture and supply products that meet defined specifications. During
the six months ended June 30, 2003, commercial volume deliveries to AT&T,
Sprint PCS and Verizon Wireless continued to occur. In order to realize the
benefits of these agreements, we will have to continue to successfully
manage the following risks:
o We priced these contracts based on our estimate of future
production costs. If we incur higher costs than anticipated, our
gross margins on these contracts will decrease or these contracts
may not be as profitable.
o If we are unable to continue to commit the necessary resources or
are unable to deliver our products as required by the terms of
these contracts, our customers may cancel the contracts. In that
event, we will not receive expected revenues, incurred costs may
not be recovered and we may incur additional costs as penalties,
all of which would adversely affect our results from operations.
o If we fail to meet a delivery deadline or if the products we
deliver do not meet the agreed-upon specifications, we may have
to reduce the price we can charge for our products, we may be
liable to pay damages to the customer, or volume commitments may
be reduced.
If we are unable to successfully manage these risks or meet required
deadlines in connection with one or more significant contracts, our
margins, revenues and profitability could decrease. We expect to
substantially complete volume shipments on all three contracts during the
second half of 2003.
OUR FUTURE REVENUE GROWTH RATES AND OTHER OPERATING RESULTS MAY NOT BE AS
FAVOURABLE AS PAST RESULTS, WHICH MAY ADVERSELY AFFECT PROFITABILITY AND
SHAREHOLDER VALUE.
Although our revenues have increased, we may not be able to sustain these
historical growth rates. We may not sustain profitability in the future,
and as a result, our share price may decline.
13
IF WE ARE UNABLE TO DESIGN AND DEVELOP NEW PRODUCTS THAT GAIN SUFFICIENT
COMMERCIAL ACCEPTANCE, WE MAY BE UNABLE TO RECOVER OUR RESEARCH AND DEVELOPMENT
EXPENSES AND WE MAY NOT BE ABLE TO MAINTAIN OUR MARKET SHARE AND OUR REVENUES
COULD DECLINE.
We depend on designing and developing new products that have not been
commercially tested 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.
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
these products 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 our market price for
our shares.
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT GROSS MARGINS FOR ANY GIVEN PRODUCT
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 anticipated, our gross
margins will decrease. In addition, competitive pressures may force us to
lower our product prices, which may further 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.
WE DEPEND ON 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, with respect to the manufacture of our current
products, we currently rely on three manufacturers, any one of whom may
terminate the manufacturing contract with us annually. 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.
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.
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.
14
IF DEMAND FOR OUR CURRENT PRODUCTS DECLINES AND WE ARE UNABLE TO LAUNCH
SUCCESSFUL NEW PRODUCTS, OUR REVENUES WILL DECREASE.
Demand for one or all of these 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 results of operations to decline and harm our financial
condition.
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.
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. 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 favourable 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. IF
THESE SERVICES ARE NOT DEPLOYED AS ANTICIPATED, CONSUMERS WILL BE UNABLE TO USE
OUR PRODUCTS, AND OUR SALES AND REVENUES WILL DECLINE.
Our customers can only use our products over wireless data networks
operated by third parties. 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.
In addition, our future growth depends on the successful deployment of next
generation wireless data networks by third parties, especially the
successful deployment by AT&T Wireless Services, Sprint PCS and Verizon
Wireless of networks for which we have developed products. If these next
generation networks are not deployed or widely accepted, or if deployment
is delayed, there will be no market for the products we are developing to
operate on these networks. As a result, we will not be able to recover our
research and development expenses, our revenues would be reduced and our
results of operations will be harmed.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY DAMAGE OUR ABILITY TO
RETAIN KEY PERSONNEL AND TO COMPETE EFFECTIVELY.
Our revenues have increased from approximately $9.3 million in 1997 to
$77.1 million in 2002 and our number of employees has more than doubled
during that period. Our growth has placed significant demands on our
management and other resources. Our future success will depend on our
ability to manage our growth, including:
o Continuing to train, motivate, manage and retain our existing
employees and attract and integrate new employees.
o Maintaining and growing manufacturing capacity.
o Developing new products in a timely manner.
o Improving and upgrading our financial and management information
systems and controls.
15
If we are unable to manage our growth effectively, our ability to retain
key personnel and to compete effectively may be damaged.
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.
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.
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.
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.
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.
16
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR MAY AFFECT OUR OPERATING RESULTS.
Approximately 55% of all of our sales are in United States dollars to
United States-based customers. 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. 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, we will also be exposed to Euro transactions and to the
associated currency risk. To date, we have not entered into any futures
contracts.
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.
o Potential adverse tax consequences.
Furthermore, if we are unable to 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.
OUR BUSINESS MAY SUFFER IF GROWTH IN THE WIRELESS DATA COMMUNICATIONS DEVICES
MARKET DECLINES.
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.
Certain factors that may limit the growth of the market include, but are
not limited to, failure of carriers to successfully deploy new services on
schedule or the failure of the services to achieve satisfactory price and
performance conditions.
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.
17
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue............................................................. $ 20,665 $ 16,883 $ 40,760 $ 33,555
Cost of goods sold.................................................. 12,334 29,631 24,489 40,383
--------- --------- --------- ---------
Gross margin........................................................ 8,331 (12,748) 16,271 (6,828)
--------- --------- --------- ---------
Expenses
Sales and marketing............................................... 2,590 2,920 5,319 5,630
Research and development, net .................................... 2,947 4,615 5,696 9,416
Administration.................................................... 1,451 1,837 3,068 3,810
Restructuring and other charges .................................. -- 13,093 -- 13,093
Amortization...................................................... 546 594 1,099 1,247
--------- --------- --------- ---------
7,534 23,059 15,182 33,196
--------- --------- --------- ---------
Earnings (loss) from operations..................................... 797 (35,807) 1,089 (40,024)
Other income (expense).............................................. 167 96 271 (26)
--------- --------- --------- ---------
Earnings (loss) before income taxes................................. 964 (35,711) 1,360 (40,050)
Income tax expense.................................................. 54 3,424 89 3,424
--------- --------- --------- ---------
Net earnings (loss)................................................. 910 (39,135) 1,271 (43,474)
Deficit, beginning of period........................................ (73,203) (36,240) (73,564) (31,901)
--------- --------- --------- ---------
Deficit, end of period.............................................. $ (72,293) $ (75,375) $ (72,293) $ (75,375)
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per share for the period:
Basic............................................................. $ 0.06 $ (2.40) $ 0.08 $ (2.67)
Diluted........................................................... $ 0.05 $ (2.40) $ 0.08 $ (2.67)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares (in thousands):
Basic............................................................. 16,375 16,305 16,365 16,284
Diluted........................................................... 16,754 16,305 16,736 16,284
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
18
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets
Cash and cash equivalents............................................................. $ 27,847 $ 34,841
Short-term investments................................................................ 10,222 --
Accounts receivable................................................................... 15,949 13,865
Inventories........................................................................... 4,359 6,673
Prepaid expenses...................................................................... 743 864
----------- ----------
59,120 56,243
Fixed assets............................................................................ 5,354 7,198
Deferred income taxes................................................................... 500 500
Intangible assets....................................................................... 7,808 6,907
Other................................................................................... 1,033 241
----------- ----------
$ 73,815 $ 71,089
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...................................................................... $ 5,398 $ 3,017
Accrued liabilities................................................................... 12,249 12,431
Deferred revenue and credits.......................................................... 228 297
Current portion of long-term liabilities.............................................. 3,114 2,803
Current portion of obligations under capital lease.................................... 397 831
----------- ----------
21,386 19,379
Long-term liabilities................................................................... 2,311 2,896
Obligations under capital lease......................................................... 52 60
Shareholders' equity
Share capital......................................................................... 123,088 123,047
Deficit............................................................................... (72,293) (73,564)
Accumulated other comprehensive income
Cumulative translation adjustments................................................. (729) (729)
----------- ----------
50,066 48,754
----------- ----------
$ 73,815 $ 71,089
----------- ----------
----------- ----------
Contingencies (note 5).
See accompanying notes to consolidated financial statements.
19
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Cash flows from operating activities:
Net earnings (loss) for the period............................... $ 910 $ (39,135) $ 1,271 $ (43,474)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities
Amortization.................................................. 1,383 1,961 2,721 4,150
Non-cash restructuring and other charges...................... -- 25,905 -- 25,905
Loss on disposal.............................................. 2 -- 2 120
Deferred income taxes......................................... -- 3,754 -- 3,754
Accrued warrants.............................................. 161 194 329 343
Changes in operating assets and liabilities
Accounts receivable........................................... (5,809) 1,367 (2,084) (3,368)
Inventories................................................... 3,129 2,115 2,314 3,111
Prepaid expenses.............................................. 115 (134) 121 469
Accounts payable.............................................. 1,817 (6,754) 2,381 (995)
Accrued liabilities........................................... 1,407 4,243 (182) 897
Deferred revenue and credits.................................. (173) (782) (69) (265)
-------- --------- --------- ---------
Net cash provided by (used in) operating activities.............. 2,942 (7,266) 6,804 (9,353)
Cash flows from investing activities:
Business acquisitions......................................... (792) -- (792) --
Proceeds on disposal.......................................... 4 -- 4 31
Purchase of fixed assets...................................... (214) (356) (357) (1,596)
Increase in intangible assets................................. (712) (16) (1,314) (836)
Purchase of short-term investments............................ (10,222) (9,494) (10,222) (11,631)
Proceeds on maturity of short-term investments................ -- 16,778 -- 35,012
-------- --------- --------- ---------
Net cash provided by (used in) investing activities.............. (11,936) 6,912 (12,681) 20,980
Cash flows from financing activities:
Issue of common shares........................................ -- 5 41 330
Repayment of long-term liabilities............................ (702) (510) (1,158) (909)
-------- --------- --------- ---------
Net cash used in financing activities............................ (702) (505) (1,117) (579)
-------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... (9,696) (859) (6,994) 11,048
Cash and cash equivalents, beginning of period..................... 37,543 23,992 34,841 12,085
-------- --------- --------- ---------
Cash and cash equivalents, end of period........................... $ 27,847 $ 23,133 $ 27,847 $ 23,133
-------- --------- --------- ---------
-------- --------- --------- ---------
See supplementary cash flow information (note 6).
See accompanying notes to consolidated financial statements.
20
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(b).
(a) 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net earnings (loss):
As reported..................................................... $ 910 $ (39,135) $ 1,271 $ (43,474)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards....... (9,528) (1,046) (12,105) (3,759)
--------- --------- --------- ---------
Pro forma......................................................... $ (8,618) $ (40,181) $ (10,834) $ (47,233)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings (loss) per share:
As reported..................................................... $ 0.06 $ (2.40) $ 0.08 $ (2.67)
Pro forma....................................................... (0.53) (2.46) (0.66) (2.90)
Diluted earnings (loss) per share:
As reported..................................................... $ 0.05 $ (2.40) $ 0.08 $ (2.67)
Pro forma....................................................... (0.53) (2.46) (0.66) (2.90)
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 cost related to the surrendered options has been expensed in the
current quarter in our pro forma disclosure.
21
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Expected dividend yield........................................... -- -- -- --
Expected stock price volatility................................... 102% 107% 103% 106%
Risk-free interest rate........................................... 3.59% 4.88% 3.84% 4.80%
Expected life of options.......................................... 4 years 4 years 4 years 4 years
Weighted average fair value of options granted.................... $ 2.89 $ 6.07 $ 2.69 $ 15.98
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....................................................................................... 66,250
Exercised..................................................................................... (29,967)
Forfeited..................................................................................... (834,231)
---------
Outstanding, June 30, 2003.................................................................... 1,752,616
---------
---------
(b) 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 July
1, 2003. However, because we do not have any variable interest entities, there
is no impact 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 in our
consolidated financial statements.
22
3. ACQUISITIONS
On June 16, 2003, we signed a definitive agreement to acquire AirPrime, Inc.
("AirPrime"), a privately-held supplier of high-speed CDMA wireless products
located in Carlsbad, California. Under the terms of the definitive agreement, we
will issue approximately 3.7 million shares to the shareholders of AirPrime. As
a result of the combination, AirPrime shareholders will hold approximately 18.5%
of the combined entity, based on the issued and outstanding shares. In addition,
Sierra Wireless will provide bridge financing to AirPrime of up to $2.0 million
for working capital purposes until the combination is closed.
The completion of the combination is expected in August 2003 and is conditional
upon, among other things, regulatory approval and approval from AirPrime
shareholders. Sierra Wireless has received voting commitment from AirPrime
shareholders representing 82% of AirPrime's shares.
4. RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2002, we announced and implemented a business
restructuring program under which we reduced operating expenses and asset levels
as a result of our assessment of current and visible future demand. During 2002,
we recorded restructuring and other charges of $37,707 associated with the
writedown of CDPD and 2G CDMA inventory, 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 six months ended June 30, 2003 and the balance of the
provision at June 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)
---------- ------ ----- --------
(603) (54) (73) (730)
---------- ------ ----- --------
Balance at June 30, 2003............................... $ 3,944 $ -- $ 91 $ 4,035
---------- ------ ----- --------
---------- ------ ----- --------
5. 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 $3,022. To date, $315 has been paid
against sales amounting to $7,894, that are subject to royalties.
(iii) Under an agreement with the Government of Canada's Technology
Partnerships Canada ("TPC") program, we are eligible to receive Cdn.
$9,999 to support the development of a range of third generation
wireless technologies. During the six months ended June 30, 2003, we
have claimed $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 may receive warrants no later
than December 31, 2003, valued at up to Cdn. $2,000 based on the
Black-Scholes pricing model.
23
(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
--------
--------
(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.
6. SUPPLEMENTARY CASH FLOW INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Cash received for
Interest................................................. $ 88 $ 186 $ 164 $ 695
Income taxes............................................. 4 161 4 161
Cash paid for
Interest................................................. 44 127 69 259
Income taxes............................................. 48 28 62 30
Non-cash financing activities
Purchase of fixed assets funded by obligations under
capital lease......................................... -- -- 113 267
7. 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.
24
SIERRA WIRELESS, INC.
SECOND QUARTER REPORT
FOR THE SIX MONTHS ENDED JUNE 30, 2003
CANADIAN GAAP
25
SIERRA WIRELESS, INC.
CHAIRMAN'S MESSAGE
TO OUR SHAREHOLDERS
I am pleased to report our financial performance continued to improve during the
second quarter of 2003. Our results, which again exceeded our expectations,
included significant increases in revenues, earnings and cash flow compared to
the same quarter in 2002. This is our fourth consecutive quarter of comparable
period revenue growth, profitability and positive cash flow.
RESULTS FOR Q2 2003 COMPARED TO Q2 2002
Where described as adjusted, results for the second quarter of 2003 exclude an
additional recovery of $0.3 million from Metricom which was received during the
period. Adjusted results for the second quarter of 2002 exclude restructuring
and other charges of $36.1 million.
For the three months ended June 30 2003, our revenues increased by 22.4% to
$20.7 million, from $16.9 million in the second quarter of 2002. This growth
reflects the success of our AirCard product line in the United States, Europe
and the Asia-Pacific region, and the expansion of our distribution channels in
these markets.
Our adjusted gross margin also increased during the quarter, climbing to $8.3
million, or 40.3% of revenue, from $6.3 million, or 37.1% of revenue, in the
comparable period in 2002. This improvement reflects a greater percentage of
sales coming from our 2.5G AirCard products, as well as reductions in our
product costs.
Adjusted operating expenses for the period declined to $7.8 million, from $10.1
million during the same period in 2002. This was due primarily to the
realization of cost reductions under our restructuring plan implemented during
2002.
Adjusted net earnings for the period increased to $0.6 million, or diluted
earnings per share of $0.04, up significantly from an adjusted net loss of $3.1
million, or loss per share of $0.19, during the second quarter of 2002.
For the second quarter of 2003, our cash flow was positive by $0.5 million
resulting in a closing cash balance of $38.1 million. Our balance sheet remains
strong.
As indicated in our second quarter news release and conference call, second
quarter revenues of $20.7 million exceeded our guidance range of $19.0 to $20.0
million, while our adjusted net earnings of $0.6 million, or diluted earnings
per share of $0.04, exceeded our anticipated earnings of $0.1 million to $0.3
million, or diluted earnings per share of $0.01 to $0.02. Positive cash flow of
$0.5 million exceeded our guidance of neutral cash flow.
BUSINESS DEVELOPMENTS
The second quarter included a number of key business developments:
ACQUISITION OF AIRPRIME, INC.
On June 16, 2003, we announced a definitive agreement to acquire AirPrime, Inc.
("AirPrime"). Located in Carlsbad, California, AirPrime is a privately-held,
leading supplier of high-speed CDMA wireless products and a proven innovator in
embedded modules for OEM applications. The combination of Sierra Wireless and
AirPrime is expected to create a well-positioned market leader with a broad
product line, innovative engineering, blue chip customers, global sales and
distribution channels, and a strong balance sheet. The combination is expected
to close in August 2003.
SUPPLY CHAIN CHANGES
We implemented significant changes to our supply chain with the transfer of our
global fulfillment and CDMA product manufacturing to Flextronics. By using
Flextronic's fully integrated supply chain services, we expect to reduce our
product costs, improve alignment with our increasingly international customer
base, and achieve increased operating efficiencies and scalability. We also
expect to purchase finished goods closer to the time of shipment to our
customers, reducing our working capital requirements associated with carrying
inventory. Previously, our fulfillment services were
26
provided by Globalware, while CDMA production was handled by SCI-Sanmina. We
continue to have GSM production at Solectron and CDPD and specialty production
at Creation Technologies.
OTHER HIGHLIGHTS
o We signed a distribution agreement with Panasonic Canada Inc. As part of
this agreement, Panasonic will distribute our next generation product line,
including CDMA2000 1X and GSM/GPRS products, through its value-added
reseller channels in Canada. Panasonic Canada Inc. is a division of
Matsushita Electric Industrial Co., Ltd. of Japan, one of the world's
largest producers of electronics and electric products for consumer,
business and industrial use.
o We announced the commercial availability of the MP 750 ruggedized wireless
modem for GSM/GPRS networks across North America and in Europe. The MP 750
is the first of our next generation MP Series, built for extreme
environments and for industries that require an in-vehicle mobile solution.
Commercial availability of the MP 555 for CDMA2000 1X networks is expected
to follow later this year.
o The Mesquite Police Department in Texas became the first police force in
North America to implement the MP 750. The department will use the MP 750
to help protect its community, while patrolling over 377 miles of arterial
and residential streets. The MP 750 was chosen specifically for its unique
security features and its ability to provide faster access to mission
critical information.
o Together with IBM, we announced a bundled wireless solution that combines
the Sierra Wireless AirCard 750 with IBM's high-end line of IBM ThinkPad
T40 notebook computers. IBM chose the AirCard specifically for its
high-performance, wide area wireless capabilities, and for its ability to
enhance an end-to-end mobile solution.
o Together with Citrix Systems, Inc. and Zumasys, Inc., we announced that
Momentum Group, a leading supplier of contract textiles, has equipped its
North American sales force with a complete mobile solution that includes
Panasonic Toughbooks, Citrix MetaFrame XP(TM) Presentation Server and the
Sierra Wireless AirCard 550 and AirCard 555. This new implementation gives
Momentum's sales representatives wireless access to critical business
applications, in order to improve response time and overall customer
satisfaction.
CORPORATE DEVELOPMENTS
o We appointed Charles E. Levine, formerly of Sprint PCS, to our Board of
Directors. Mr. Levine has more than 25 years of experience in building
profitable businesses for some of North America's largest companies. Mr.
Levine's expertise in business strategy, marketing and sales will be
invaluable to our team.
o Peter Roberts, our Chief Financial Officer, announced he will retire from
Sierra Wireless in February 2004. Mr. Roberts joined us in January 1999,
and has been instrumental in helping us become a leading wireless solutions
company. To allow for an orderly transition, we have engaged Korn Ferry to
assist with the executive search for his replacement.
o During the second quarter, we instituted and completed a voluntary Employee
Stock Option Plan ("ESOP") surrender initiative. The objective of the ESOP
is to enable us to recruit, retain and motivate participants to increase
the value of our company on a sustainable basis. The objectives of the ESOP
surrender initiative are to have deeply "under water" stock options
returned to the pool now, rather than having them expire unexercised some
time in the future, and to enable us to operate the ESOP within the
existing number of options that have already been approved by shareholders.
Surrenders by employees, officers and directors were voluntary. The company
had approximately 3.2 million net options authorized, with 2.5 million
issued and 0.7 million available for issuance. Options with an exercise
price below Cdn. $20.00 were not eligible for surrender. Of the 2.5 million
issued, there were approximately 1.0 million eligible for surrender. Of the
eligible options, approximately 0.7 million were surrendered, with exercise
prices ranging from Cdn. $20.46 to Cdn. $212.00.
We do not intend to re-price existing options, either immediately or
through a short-term re-issuance of the surrendered options. ESOP
participants who surrendered options are "at risk" through the loss of the
vesting associated with those options and through the uncertainty as to
availability, quantity, timing and exercise price of future grants.
Directors, including David Sutcliffe, the company's Chairman and Chief
Executive Officer, are
27
ineligible to receive any future recognition for their participation in the
surrender program. We expect over time to reduce the size of the ESOP as a
percentage of issued and outstanding shares.
OUTLOOK
While we expect overall economic and operating conditions will remain
challenging, we are encouraged by the market success of our 2.5G products, the
growth in our international distribution channels, and by opportunities created
by the combination of Sierra Wireless and AirPrime. We will focus on completing
the AirPrime acquisition and business integration in the months ahead.
As we move forward, our business operating premise remains profitable growth,
while our priorities remain expansion of our distribution channels, sell through
to end-customers and investment for future growth.
/S/ DAVID B. SUTCLIFFE
----------------------
David B. Sutcliffe
Chairman and Chief Executive Officer
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, revenues, gross margins, 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 develop, manufacture and supply
products that we do not produce today and that meet defined specifications. They
also depend on closing the airprime transaction and successfully integrating the
businesses. 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.
28
SIERRA WIRELESS, INC.
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.
ACQUISITION OF AIRPRIME, INC.
On June 16, 2003, we announced a definitive agreement to acquire AirPrime, Inc.
("AirPrime"), a privately-held, supplier of high-speed CDMA wireless products
located in Carlsbad, California. The combined entity is expected 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.
Under the terms of the definitive agreement, we will issue approximately 3.7
million shares to the shareholders of AirPrime. As a result of the combination,
AirPrime shareholders will hold approximately 18.5% of the combined entity,
based on the issued and outstanding shares. In addition, Sierra Wireless will
provide interim financing to AirPrime of up to $2.0 million for working capital
purposes until the combination is closed.
The completion of the combination is expected to occur in August 2003 and is
conditioned upon, among other things, regulatory approval and approval from
AirPrime shareholders. Sierra Wireless has received commitments from AirPrime
shareholders, representing 82% of AirPrime's shares, to vote their AirPrime
shares in favour of the combination.
SUPPLY CHAIN
During the quarter, 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. We
expect to purchase finished goods closer to the time of shipment to our
customers, reducing our working capital requirements associated with carrying
inventory.
Previously, fulfillment services were provided by Globalware while CDMA
production was handled by SCI-Sanmina. We continue to have GSM production at
Solectron and CDPD and specialty production at Creation Technologies.
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 six months ended June 30, 2002, we recorded restructuring and
other costs of $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.
29
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.
The adjusted information provided below for the three and six months ended June
30, 2002 excludes these charges.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2002
REVENUE
Revenue amounted to $20.7 million in the second quarter of 2003, compared to
$16.9 million in the same period in 2002, an increase of 22.4%. Included in our
revenue was research and development funding of nil in the second quarter of
2003, compared to $0.8 million in the second quarter of 2002. The increase in
revenue was primarily a result of a volume increase in sales of our 2.5G AirCard
products as well as increasing sales to channels in the Asia-Pacific region and
Europe. Our revenue by product for the second quarter of 2003 was AirCards 82%,
OEM 10%, Mobile 4% and Other 4%, compared to 57%, 21%, 14% and 8%, respectively,
in the same period of 2002. Our revenue by region for the second quarter of 2003
was the Americas 50%, the Asia-Pacific region 26% and Europe 24%, compared to
86%, 6% and 8%, respectively, in the same period of 2002.
GROSS MARGIN
Gross margin amounted to $8.3 million in the second quarter of 2003, compared to
an adjusted gross margin, excluding restructuring and other charges of $19.0
million, of $6.3 million in the second quarter of 2002. Gross margin as a
percentage of revenue increased to 40.3% in 2003, compared to an adjusted gross
margin of 37.1% in 2002. Included in our gross margin was research and
development funding of nil in the second quarter of 2003, compared to $0.8
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 three months ended June
30, 2003, we sold $0.6 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 was a normal gross margin percentage on 2G
products.
SALES AND MARKETING
Sales and marketing expenses amounted to $2.6 million in the second quarter of
2003, compared to $2.9 million in the same period of 2002. Sales and marketing
expenses as a percentage of revenue decreased to 12.5% in 2003, compared to
17.3% in 2002, due to an increase in revenue and cost reductions resulting from
our restructuring program.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development arrangements, amounted to $2.9 million in the second
quarter of 2003, compared to $4.6 million in the same period in 2002, a decrease
of 36.1%. Research and development expenses in 2003 decreased due primarily to
the realization of cost reductions under our restructuring plan implemented
during 2002. In addition, costs related to the development of new products based
on CDMA and GPRS standards contributed to the higher costs in 2002. Gross
research and development expenses, before government research and development
funding, were $3.1 million or 15.0% of revenue in 2003, compared to $5.2 million
or 30.8% of revenue in 2002. We expect to continue to invest in research and
development for future growth.
30
ADMINISTRATION
Administration expenses amounted to $1.4 million, or 7.0% of revenue, in the
second quarter of 2003, compared to $1.8 million, or 10.9% of revenue, in the
second quarter of 2002. Included in administration expense in 2003 is an
additional recovery from Metricom of $0.3 million. Excluding the recovery from
Metricom, administration expenses decreased by 6.4% due primarily to the effect
of cost reductions under our restructuring plan implemented in the second
quarter of 2002.
RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2003, there were no adjustments to the 2002
restructuring charges. In the second quarter of 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.
AMORTIZATION
Amortization amounted to $0.5 million in the second quarter of 2003, compared to
$0.6 million in the second quarter of 2002. Amortization decreased due primarily
to the writedown of fixed and intangible assets under our restructuring plan
implemented in the second quarter of 2002.
OTHER INCOME
Other income increased to $0.2 million in the second quarter of 2003, compared
to $0.1 million in the same period of 2002. Other income includes foreign
exchange gains and losses, interest expense and interest income. This increase
is due to net foreign exchange gains in 2003 as well as a reduction in inventory
carrying charges which were incurred in 2002.
NET EARNINGS (LOSS)
Our net earnings amounted to $0.9 million in the second quarter of 2003,
compared to a net loss of $39.1 million in the same period of 2002. Our
adjusted net earnings, excluding the Metricom recovery of $0.3 million, were
$0.6 million in 2003, compared to an adjusted net loss, excluding
restructuring and other charges of $36.1 million, of $3.0 million in 2002.
Our adjusted diluted earnings per share amounted to $0.04 for the second
quarter of 2003, compared to an adjusted loss per share of $0.18 in 2002. Our
weighted average number of shares outstanding on a diluted basis increased to
16.8 million in 2003, as compared to 16.3 million in 2002.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2002
REVENUE
Revenue was $40.8 million for the six months ended June 30, 2003, compared to
$33.6 million in the same period in 2002, an increase of 21.5%. Included in our
revenue was research and development funding of nil in 2003, compared to $2.4
million in 2002. The increase in revenue was primarily a result of a volume
increase in sales of our 2.5G AirCard products as well as increasing sales to
channels in the Asia-Pacific region and Europe. Our revenue by product for the
six months ended June 30, 2003 was AirCards 81%, OEM 11%, Mobile 5% and Other
3%, compared to 46%, 29%, 15% and 10%, respectively, in the same period of 2002.
Our revenue by region for the first six months of 2003 was the Americas 55%, the
Asia-Pacific region 25% and Europe 20%, compared to 86%, 6% and 8%,
respectively, in the same period of 2002.
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GROSS MARGIN
Gross margin amounted to $16.3 million, or 39.9% of revenue, in the first half
of 2003, compared to an adjusted gross margin, excluding restructuring and other
charges of $19.0 million, of $12.2 million, or 36.3% of revenue, in the same
period of 2002. Included in our gross margin was research and development
funding of nil for the six months ended June 30, 2003, compared to $2.4 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 six months ended June
30, 2003, we sold $0.6 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 was a normal gross margin percentage on 2G
products.
SALES AND MARKETING
Sales and marketing expenses amounted to $5.3 million for the six months ended
June 30, 2003, compared to $5.6 million in the same period of 2002, a decrease
of 5.5%. Sales and marketing expenses as a percentage of revenue decreased to
13.0% in 2003, compared to 16.8% in 2002, due to an increase in revenue and cost
reductions under our restructuring program.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development arrangements, amounted to $5.7 million, or 14.0% of
revenue, for the six months ended June 30, 2003, compared to $9.4 million, or
28.1% of revenue, for the same period in 2002. Research and development expenses
in 2003 decreased 39.5% due primarily to cost reductions under our restructuring
plan implemented during 2002. In addition, costs related to the development of
new products based on CDMA and GPRS standards contributed to the higher costs in
2002. Gross research and development expenses, before government research and
development funding, were $6.2 million or 15.1% of revenue in 2003, compared to
$10.6 million or 31.6% of revenue in 2002. We expect to continue to invest in
research and development for future growth.
ADMINISTRATION
Administration expenses were $3.1 million, or 7.5% of revenue, in the six months
ended June 30, 2003, compared to $3.8 million, or 11.4% of revenue, for the same
period of 2002. Included in administration expense was an additional recovery
from Metricom of $0.3 million. Administration expenses, excluding the Metricom
recovery, decreased by 12.4% due primarily to the cost reductions under our
restructuring plan implemented in the second quarter of 2002.
RESTRUCTURING AND OTHER CHARGES
In the six months ended June 30, 2003, there were no adjustments to the 2002
restructuring charges. In the second quarter of 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.
AMORTIZATION
Amortization amounted to $1.1 million for the first six months of 2003, compared
to $1.2 million in the same period of 2002. Amortization decreased due primarily
to the writedown of fixed and intangible assets under our restructuring plan
implemented in the second quarter of 2002.
OTHER INCOME
Other income increased to $0.3 million for the first half of 2003, compared to
nil in the same period of 2002. Other income includes foreign exchange gains and
losses, interest expense and interest income. This increase is due primarily to
net foreign exchange gains in 2003.
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NET EARNINGS (LOSS)
Our net earnings amounted to $1.3 million in the six months ended June 30, 2003,
compared to a net loss of $43.5 million in the same period of 2002. Our adjusted
net earnings, excluding the Metricom recovery of $0.3 million, were $1.0 million
in 2003, compared to an adjusted net loss of $7.3 million. Our adjusted diluted
earnings per share amounted to $0.06 for first six months of 2003, compared to
an adjusted loss per share of $0.45 in 2002. Our weighted average number of
shares outstanding on a diluted basis increased to 16.7 million in 2003, as
compared to 16.3 million in 2002.
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 six months of 2003. We expect to substantially
complete volume shipments on all three contracts during the second half 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, and we believe their
realization is more likely than not. However, 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
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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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 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 $6.8 million for the six months ended
June 30, 2003, compared to cash used by operations of $9.3 million in the same
period of 2002, an improvement of $16.1 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 $0.4 million in the six months ended June
30, 2003, compared to $1.6 million in 2002, and was primarily for software.
Expenditures on intangible assets were $1.3 million in 2003, compared to $0.8
million in 2002 and were primarily for license fees and patents. During Q3 2003,
we expect to provide interim financing to AirPrime of up to $2.0 million for
working capital purposes until the combination is closed.
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 $38.1 million at June
30, 2003 compared to $34.8 million at December 31, 2002.
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o Accounts receivable amounted to $15.9 million at June 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 June 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 second quarter of 2003, the Canadian dollar strengthened significantly
against the U.S. 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 six months ended June 30, 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 six months ended June
30, 2002 was different under Canadian GAAP due to the difference in the
accounting treatment applied to in-process research and development ("IPR&D")
which resulted in an increase in our net loss of $0.1 and $0.2 million,
respectively. In accordance with U.S. GAAP, purchased IPR&D is expensed on
acquisition, whereas under Canadian GAAP, purchased IPR&D is treated as an
intangible asset and amortized. At December 31, 2002, the IPR&D had been fully
amortized.
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,
35
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 develop, manufacture, and supply products that we do not produce
today and that meet defined specifications. They also depend on closing the
AirPrime transaction and successfully integrating the businesses. 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:
OUR ACQUISITION OF AIRPRIME AND OTHER ACQUISITIONS WE MAY DO IN THE FUTURE MAY
RESULT IN ADVERSE IMPACTS ON OUR RESULTS OF OPERATIONS.
In the past, our strategy has included expanding our operations and
business through strategic acquisitions of businesses and products. During
the second quarter, we signed a definitive agreement to acquire AirPrime,
Inc. in Carlsbad, California. The combination is expected to close in
August 2003 and is subject to a number of risks, including the following:
o AirPrime's business may not be as profitable as we anticipate,
which could reduce the overall profitability of our company.
o Diversion of management's attention away from our business during
the acquisition and integration process.
o The acquisition may not close, resulting in substantial
acquisition costs that would increase our expenses and reduce our
profitability without any offsetting revenues.
o If we are unable to successfully integrate AirPrime, we may not
achieve anticipated revenue levels, cost savings or other
synergies.
o The integration may result in substantial costs that would
decrease our profitability.
o The issuance of securities may dilute the value of our common
shares.
If realized, these risks could result in substantial costs, disrupt our
operations, reduce our profitability and reduce shareholder value.
IF WE CANNOT DELIVER PRODUCTS ASSOCIATED WITH SIGNIFICANT CONTRACTS IN A
PROFITABLE AND TIMELY MANNER OUR MARGINS AND REVENUES WILL BE NEGATIVELY
IMPACTED.
Since late 1999, we have entered into significant supply contracts with
AT&T Wireless Services ("AT&T"), Sprint PCS and Verizon Wireless. Our right
to receive revenues under these contracts depends upon our ability to
manufacture and supply products that meet defined specifications. During
the six months ended June 30, 2003, commercial volume deliveries to AT&T,
Sprint PCS and Verizon Wireless continued to occur. In order to realize the
benefits of these agreements, we will have to continue to successfully
manage the following risks:
o We priced these contracts based on our estimate of future
production costs. If we incur higher costs than anticipated, our
gross margins on these contracts will decrease or these contracts
may not be as profitable.
o If we are unable to continue to commit the necessary resources or
are unable to deliver our products as required by the terms of
these contracts, our customers may cancel the contracts. In that
event, we will not receive expected revenues, incurred costs may
not be recovered and we may incur additional costs as penalties,
all of which would adversely affect our results from operations.
o If we fail to meet a delivery deadline or if the products we
deliver do not meet the agreed-upon specifications, we may have
to reduce the price we can charge for our products, we may be
liable to pay damages to the customer, or volume commitments may
be reduced.
36
If we are unable to successfully manage these risks or meet required
deadlines in connection with one or more significant contracts, our
margins, revenues and profitability could decrease. We expect to
substantially complete volume shipments on all three contracts during the
second half of 2003.
OUR FUTURE REVENUE GROWTH RATES AND OTHER OPERATING RESULTS MAY NOT BE AS
FAVOURABLE AS PAST RESULTS, WHICH MAY ADVERSELY AFFECT PROFITABILITY AND
SHAREHOLDER VALUE.
Although our revenues have increased, we may not be able to sustain these
historical growth rates. We may not sustain profitability in the future,
and as a result, our share price may decline.
IF WE ARE UNABLE TO DESIGN AND DEVELOP NEW PRODUCTS THAT GAIN SUFFICIENT
COMMERCIAL ACCEPTANCE, WE MAY BE UNABLE TO RECOVER OUR RESEARCH AND DEVELOPMENT
EXPENSES AND WE MAY NOT BE ABLE TO MAINTAIN OUR MARKET SHARE AND OUR REVENUES
COULD DECLINE.
We depend on designing and developing new products that have not been
commercially tested 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.
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
these products 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 our market price for
our shares.
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT GROSS MARGINS FOR ANY GIVEN PRODUCT
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 anticipated, our gross
margins will decrease. In addition, competitive pressures may force us to
lower our product prices, which may further 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.
WE DEPEND ON 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, with respect to the manufacture of our current
products, we currently rely on three manufacturers, any one of whom may
terminate the manufacturing contract with us annually. 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.
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.
37
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.
IF DEMAND FOR OUR CURRENT PRODUCTS DECLINES AND WE ARE UNABLE TO LAUNCH
SUCCESSFUL NEW PRODUCTS, OUR REVENUES WILL DECREASE.
Demand for one or all of these 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 results of operations to decline and harm our financial
condition.
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.
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. 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 favourable 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. IF
THESE SERVICES ARE NOT DEPLOYED AS ANTICIPATED, CONSUMERS WILL BE UNABLE TO USE
OUR PRODUCTS, AND OUR SALES AND REVENUES WILL DECLINE.
Our customers can only use our products over wireless data networks
operated by third parties. 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.
In addition, our future growth depends on the successful deployment of next
generation wireless data networks by third parties, especially the
successful deployment by AT&T Wireless Services, Sprint PCS and Verizon
Wireless of networks for which we have developed products. If these next
generation networks are not deployed or widely accepted, or if deployment
is delayed, there will be no market for the products we are developing to
operate on these networks. As a result, we will not be able to recover our
research and development expenses, our revenues would be reduced and our
results of operations will be harmed.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY DAMAGE OUR ABILITY TO
RETAIN KEY PERSONNEL AND TO COMPETE EFFECTIVELY.
Our revenues have increased from approximately $9.3 million in 1997 to
$77.1 million in 2002 and our number of employees has more than doubled
during that period. Our growth has placed significant demands on our
management and other resources. Our future success will depend on our
ability to manage our growth, including:
38
o Continuing to train, motivate, manage and retain our existing
employees and attract and integrate new employees.
o Maintaining and growing manufacturing capacity.
o Developing new products in a timely manner.
o Improving and upgrading our financial and management information
systems and controls.
If we are unable to manage our growth effectively, our ability to retain
key personnel and to compete effectively may be damaged.
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.
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.
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.
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.
39
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.
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR MAY AFFECT OUR OPERATING RESULTS.
Approximately 55% of all of our sales are in United States dollars to
United States-based customers. 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. 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, we will also be exposed to Euro transactions and to the
associated currency risk. To date, we have not entered into any futures
contracts.
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.
o Potential adverse tax consequences.
Furthermore, if we are unable to 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.
OUR BUSINESS MAY SUFFER IF GROWTH IN THE WIRELESS DATA COMMUNICATIONS DEVICES
MARKET DECLINES.
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.
Certain factors that may limit the growth of the market include, but are
not limited to, failure of carriers to successfully deploy new services on
schedule or the failure of the services to achieve satisfactory price and
performance conditions.
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
40
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.
41
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue............................................................ $ 20,665 $ 16,883 $ 40,760 $ 33,555
Cost of goods sold................................................. 12,334 29,631 24,489 40,383
--------- --------- --------- ---------
Gross margin....................................................... 8,331 (12,748) 16,271 (6,828)
--------- --------- --------- ---------
Expenses
Sales and marketing.............................................. 2,590 2,920 5,319 5,630
Research and development, net ................................... 2,947 4,740 5,696 9,666
Administration................................................... 1,451 1,837 3,068 3,810
Restructuring and other charges ................................. -- 13,093 -- 13,093
Amortization..................................................... 546 594 1,099 1,247
--------- --------- --------- ---------
7,534 23,184 15,182 33,446
--------- --------- --------- ---------
Earnings (loss) from operations.................................... 797 (35,932) 1,089 (40,274)
Other income (expense)............................................. 167 96 271 (26)
--------- --------- --------- ---------
Earnings (loss) before income taxes................................ 964 (35,836) 1,360 (40,300)
Income tax expense................................................. 54 3,424 89 3,424
--------- --------- --------- ---------
Net earnings (loss)................................................ 910 (39,260) 1,271 (43,724)
Deficit, beginning of period....................................... (72,225) (35,137) (72,586) (30,673)
--------- --------- --------- ---------
Deficit, end of period............................................. $ (71,315) $ (74,397) $ (71,315) $ (74,397)
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per share for the period:
Basic............................................................ $ 0.06 $ (2.41) $ 0.08 $ (2.69)
Diluted.......................................................... $ 0.05 $ (2.41) $ 0.08 $ (2.69)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares (in thousands):
Basic............................................................ 16,375 16,305 16,365 16,284
Diluted.......................................................... 16,754 16,305 16,736 16,284
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
42
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets
Cash and cash equivalents............................................................. $ 27,847 $ 34,841
Short-term investments................................................................ 10,222 --
Accounts receivable................................................................... 15,949 13,865
Inventories........................................................................... 4,359 6,673
Prepaid expenses...................................................................... 743 864
---------- ----------
59,120 56,243
Capital assets.......................................................................... 5,354 7,198
Future income taxes..................................................................... 500 500
Intangible assets....................................................................... 7,808 6,907
Other................................................................................... 1,033 241
---------- ----------
$ 73,815 $ 71,089
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...................................................................... $ 5,398 $ 3,017
Accrued liabilities................................................................... 12,249 12,431
Deferred revenue and credits.......................................................... 228 297
Current portion of long-term liabilities.............................................. 3,114 2,803
Current portion of obligations under capital lease.................................... 397 831
---------- ----------
21,386 19,379
Long-term liabilities................................................................... 2,311 2,896
Obligations under capital lease......................................................... 52 60
Shareholders' equity
Share capital......................................................................... 121,865 121,824
Deficit............................................................................... (71,315) (72,586)
Cumulative translation adjustments.................................................... (484) (484)
---------- ----------
50,066 48,754
---------- ----------
$ 73,815 $ 71,089
---------- ----------
---------- ----------
Contingencies (note 5).
See accompanying notes to consolidated financial statements.
43
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Cash flows from operating activities:
Net earnings (loss) for the period............................... $ 910 $ (39,260) $ 1,271 $ (43,724)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities
Amortization.................................................. 1,383 2,086 2,721 4,400
Non-cash restructuring and other charges...................... -- 25,905 -- 25,905
Loss on disposal.............................................. 2 -- 2 120
Future income taxes........................................... -- 3,754 -- 3,754
Accrued warrants.............................................. 161 194 329 343
Changes in operating assets and liabilities
Accounts receivable........................................... (5,809) 1,367 (2,084) (3,368)
Inventories................................................... 3,129 2,115 2,314 3,111
Prepaid expenses.............................................. 115 (134) 121 469
Accounts payable.............................................. 1,817 (6,754) 2,381 (995)
Accrued liabilities........................................... 1,407 4,243 (182) 897
Deferred revenue and credits.................................. (173) (782) (69) (265)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities.............. 2,942 (7,266) 6,804 (9,353)
Cash flows from investing activities:
Business acquisitions......................................... (792) -- (792) --
Proceeds on disposal.......................................... 4 -- 4 31
Purchase of capital assets.................................... (214) (356) (357) (1,596)
Increase in intangible assets................................. (712) (16) (1,314) (836)
Purchase of short-term investments............................ (10,222) (9,494) (10,222) (11,631)
Proceeds on maturity of short-term investments................ -- 16,778 -- 35,012
--------- --------- --------- ---------
Net cash provided by (used in) investing activities.............. (11,936) 6,912 (12,681) 20,980
Cash flows from financing activities:
Issue of common shares........................................ -- 5 41 330
Repayment of long-term liabilities............................ (702) (510) (1,158) (909)
--------- --------- --------- ---------
Net cash used in financing activities............................ (702) (505) (1,117) (579)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... (9,696) (859) (6,994) 11,048
Cash and cash equivalents, beginning of period..................... 37,543 23,992 34,841 12,085
--------- --------- --------- ---------
Cash and cash equivalents, end of period........................... $ 27,847 $ 23,133 $ 27,847 $ 23,133
--------- --------- --------- ---------
--------- --------- --------- ---------
See supplementary cash flow information (note 6).
See accompanying notes to consolidated financial statements.
44
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(b).
(a) 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net earnings (loss):
As reported..................................................... $ 910 $ (39,260) $ 1,271 $ (43,724)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards (9,528) (1,046) (12,105) (3,759)
--------- --------- --------- ---------
Pro forma....................................................... $ (8,618) $ (40,306) $ (10,834) $ (47,483)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings (loss) per share:
As reported..................................................... $ 0.06 $ (2.41) $ 0.08 $ (2.69)
Pro forma....................................................... (0.53) (2.47) (0.66) (2.92)
Diluted earnings (loss) per share:
As reported..................................................... $ 0.05 $ (2.41) $ 0.08 $ (2.69)
Pro forma....................................................... (0.53) (2.47) (0.66) (2.92)
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 cost related to the surrendered options has been expensed in the
current quarter in our pro forma disclosure.
45
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Expected dividend yield............................................ -- -- -- --
Expected stock price volatility.................................... 102% 107% 103% 106%
Risk-free interest rate............................................ 3.59% 4.88% 3.84% 4.80%
Expected life of options........................................... 4 years 4 years 4 years 4 years
Weighted average fair value of options granted..................... $ 2.89 $ 6.07 $ 2.69 $ 15.98
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....................................................................................... 66,250
Exercised..................................................................................... (29,967)
Forfeited..................................................................................... (834,231)
-----------
Outstanding, June 30, 2003.................................................................... 1,752,616
-----------
-----------
(b) RECENT ACCOUNTING PRONOUNCEMENTS
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. ACQUISITIONS
On June 16, 2003, we signed a definitive agreement to acquire AirPrime, Inc.
("AirPrime"), a privately-held supplier of high-speed CDMA wireless products.
Under the terms of the definitive agreement, we will issue approximately 3.7
million shares to the shareholders of AirPrime. As a result of the combination,
AirPrime shareholders will hold approximately 18.5% of the combined entity,
based on the issued and outstanding shares. In addition, Sierra Wireless will
provide bridge financing to AirPrime of up to $2.0 million for working capital
purposes until the combination is closed.
The completion of the combination is expected in August 2003 and is conditional
upon, among other things, regulatory approval and approval from AirPrime
shareholders. Sierra Wireless has received voting commitment from AirPrime
shareholders representing 82% of AirPrime's shares.
46
4. RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2002, we announced and implemented a business
restructuring program under which we reduced operating expenses and asset levels
as a result of our assessment of current and visible future demand. During 2002,
we recorded restructuring and other charges of $37,707 associated with the
writedown of CDPD and 2G CDMA inventory, capital and intangible asset impairment
charges, workforce reductions, charges related to excess facilities and other
assets, and an increase in our future tax asset valuation allowance. We
substantially completed implementation of our restructuring program at December
31, 2002.
The following tables summarize the changes in the provision for restructuring
and other charges for the three and six months ended June 30, 2003 and the
balance of the provision at June 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)
---------- ------ ----- --------
(603) (54) (73) (730)
---------- ------ ----- --------
Balance at June 30, 2003................................ $ 3,944 $ -- $ 91 $ 4,035
---------- ------ ----- --------
---------- ------ ----- --------
5. 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 $3,022. To date, $315 has been paid
against sales amounting to $7,894, that are subject to royalties.
(iii) Under an agreement with the Government of Canada's Technology
Partnerships Canada ("TPC") program, we are eligible to receive Cdn.
$9,999 to support the development of a range of third generation
wireless technologies. During the six months ended June 30, 2003, we
have claimed $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 may 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
------
------
47
(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.
6. SUPPLEMENTARY CASH FLOW INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Cash received for
Interest................................................. $ 88 $ 186 $ 164 $ 695
Income taxes............................................. 4 161 4 161
Cash paid for
Interest................................................. 44 127 69 259
Income taxes............................................. 48 28 62 30
Non-cash financing activities
Purchase of capital assets funded by obligations under
capital lease......................................... -- -- 113 267
7. 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.
48
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: August 6, 2003
49