Exhibit 99.1
<page>
Consolidated Financial Statements
Dataradio Inc.
July 31, 2005
<page>
REPORT OF INDEPENDENT AUDITORS
To the Directors of
Dataradio Inc.
We have audited the consolidated balance sheet of Dataradio Inc. as at July 31,
2005 and the consolidated statements of income and retained earnings and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 2005
and the results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
(signed) Ernst & Young LLP
Montreal, Canada Chartered Accountants
November 4, 2005.
<page>
Dataradio Inc.
CONSOLIDATED BALANCE SHEET
(in Canadian Dollars)
As at July 31
2005 2004
$ $
---------- ----------
ASSETS [note 5]
Current
Cash 6,217,804 8,498,692
Accounts receivable, less allowance for doubtful
accounts of $144,206 and $154,703 at July 31, 2005
and 2004, respectively 4,811,410 4,951,613
Unbilled receivables 1,616,744 1,007,210
Inventories [note 3] 5,748,465 6,579,242
Prepaid expenses and other current assets 276,448 280,976
Future income taxes [note 8] 722,640 749,749
Derivative instruments [note 13] 12,610 9,450
---------- ----------
Total current assets 19,406,121 22,076,932
Future income taxes [note 8] 684,031 738,505
Property, plant and equipment [note 4] 1,365,447 1,422,199
---------- ----------
21,455,599 24,237,636
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 2,811,129 2,824,547
Deferred revenues 297,724 1,984,253
Income and other taxes payable 186,252 252,783
Future income taxes [note 8] 287,219 23,096
Due to shareholders and affiliated companies [note 6] - 3,479,488
---------- ----------
Total current liabilities 3,582,324 8,564,167
Long term deferred revenues 316,841 16,300
Future income taxes [note 8] 226,567 249,282
---------- ----------
4,125,732 8,829,749
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock [note 7] 11,008,166 11,008,166
Retained earnings 6,321,701 4,399,721
---------- ----------
Total shareholders' equity 17,329,867 15,407,887
---------- ----------
21,455,599 24,237,636
========== ==========
Commitments and contingencies [note 12]
See accompanying notes
On behalf of the Board:
/s/ Robert T. Rouleau /s/ Norman Zavalkoff
Director Director
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Dataradio Inc.
CONSOLIDATED STATEMENT OF INCOME
AND RETAINED EARNINGS
(in Canadian Dollars)
Year ended July 31
2005 2004
$ $
---------- ----------
Revenues
Products 34,863,422 30,383,359
Services 2,613,420 3,307,895
---------- ----------
37,476,842 33,691,254
Cost of goods sold 16,855,183 15,914,588
---------- ----------
Gross profit 20,621,659 17,776,666
---------- ----------
Expenses [note 11]
Sales and marketing 6,600,324 7,054,268
Administration 3,544,131 3,849,629
Research and development [note 9] 5,098,870 5,421,129
Interest (income) expense, net [note 6] (17,385) (42,951)
Foreign exchange loss 587,055 445,058
Amortization and write-off of property,
plant and equipment 447,813 481,492
---------- ----------
16,260,808 17,208,625
---------- ----------
Income before income taxes 4,360,851 568,041
Income tax provision (recovery) [note 8]
Current 1,193,747 717,249
Future 245,124 (1,335,751)
---------- ----------
1,438,871 (618,502)
---------- ----------
Net income 2,921,980 1,186,543
Retained earnings, beginning of year 4,399,721 3,213,178
Dividends (1,000,000) -
---------- ----------
Retained earnings, end of year 6,321,701 4,399,721
========== ==========
See accompanying notes
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Dataradio Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Canadian Dollars)
Year ended July 31
2005 2004
$ $
---------- ----------
OPERATING ACTIVITIES
Net income 2,921,980 1,186,543
Add (deduct) items not affecting cash
Amortization and write-off of property,
plant and equipment 447,813 481,492
Future income tax provision (recovery) 245,124 (1,335,751)
Increase (decrease) in deferred revenues (1,385,988) 1,695,892
Changes in fair value of derivatives instruments
and unrealized foreign exchange losses 74,707 (126,049)
---------- ----------
2,303,636 1,902,127
Net change in non-cash working capital balances
relating to operations [note 10] 286,025 574,046
---------- ----------
Cash flows related to operating activities 2,589,661 2,476,173
---------- ----------
INVESTING ACTIVITIES
Additions to property, plant and equipment [note 9] (391,061) (282,956)
---------- ----------
Cash flows related to investing activities (391,061) (282,956)
---------- ----------
FINANCING ACTIVITIES
Repayment of due to shareholders and
affiliated companies (3,479,488) -
Dividends (1,000,000) -
---------- ----------
Cash flows related to financing activities (4,479,488) -
---------- ----------
Increase (decrease) in cash (2,280,888) 2,193,217
Cash, beginning of year 8,498,692 6,305,475
---------- ----------
Cash, end of year 6,217,804 8,498,692
========== ==========
Supplemental cash flow information
Cash paid during the year for:
Interest 42,615 105,388
Income taxes 919,776 143,568
See accompanying notes
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Dataradio Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company was incorporated on September 6, 1983 under the Canada Business
Corporations Act and designs, manufactures, markets, sells and supports a broad
range of wireless modems, infrastructure and supporting software for fixed and
mobile applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles. The most
significant accounting policies are summarized below:
Use of estimates
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Dataradio Corporation, Dataradio Cor Ltd. and
Dataradio Holdings Inc.
Inventories
Raw materials are valued at the lower of cost and replacement cost, finished
goods and work-in-process are valued at the lower of cost and net realizable
value. Cost is determined on the first-in, first-out basis.
Property, plant and equipment
Property, plant and equipment are recorded at cost less related investment tax
credits and other government assistance, and are amortized based on their
estimated useful lives according to the following methods and rates:
<table>
<s> <c>
Research and test equipment 20% declining balance and five years straight line
Furniture and fixtures 20% declining balance
Computers 20%, 30% declining balance and two years straight line
Tooling Straight line over three years
Leasehold improvements Straight line over term of the lease
</table>
The costs of servicing the Company's patents and other intellectual property
are expensed as incurred.
Impairment of property, plant and equipment
Property, plant and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable. Impairment is assessed by comparing the carrying amount of the
asset with the sum of the undiscounted cash flows expected from its use and
disposal. If such assets are considered impaired, the impairment loss to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds its fair value generally determined on a discounted cash flow basis.
Any impairment results in a write-down of the asset and a charge to income
during the year.
Foreign currency translation
Monetary assets and liabilities of domestic and foreign integrated operations
are translated to Canadian dollars at the rates in effect at the balance sheet
date. Other assets and liabilities are translated at the rates prevailing at
the transaction dates. Revenues and expenses are translated at average rates
prevailing during the year, except for the cost of inventory used and
amortization, which are translated at exchange rates prevailing when the
related assets were acquired. Gains and losses arising from the fluctuations in
exchange rates are reflected in net income of the year.
Revenue recognition
Revenue from sales of products is recognized upon shipment of the product, when
title has passed and collection is reasonably assured. Revenue from sales of
services including maintenance services and extended warranties are recognized
over the period that the service is provided. Revenue from systems and other
contracts which may include multiple elements including equipment,
installation, engineering, training, maintenance and other services are
reviewed in order to determine whether the multiple elements can be divided
into separate units of accounting, if certain criteria are met. If separable,
the consideration is allocated among the separate units of accounting based on
their respective fair values and the applicable revenue recognition criteria
are applied to each of the separate units generally upon shipment or upon
rendering of the services. Otherwise, the applicable revenue recognition
criteria are applied to combined elements as a single unit of accounting.
Amounts received in advance of goods being shipped or services performed are
recorded as deferred revenues and amounts recognized as revenue prior to
billing are recorded as unbilled receivables.
Research and development
Research costs are charged against income in the year of expenditure.
Development costs are charged against income in the year of expenditure unless
a development project meets the criteria under generally accepted accounting
principles for deferral and amortization. The Company has not deferred any such
development costs to date.
Government assistance
Amounts received or receivable under government assistance programs, including
grants and investment tax credits for research and development, are reflected
as reductions of the cost of the assets or expenses to which they relate at the
time the eligible expenditures are incurred, provided there is reasonable
assurance the benefits will be realized.
Income taxes
The Company follows the liability method of accounting for income taxes. Under
this method future income tax assets and liabilities are determined based on
the differences between the financial reporting and tax bases of assets and
liabilities and are measured using substantively enacted tax rates and laws
that are expected to be in effect in the periods in which the assets or
liabilities are expected to be realized or settled. A valuation allowance is
provided to the extent that it is more likely than not that future income tax
assets will not be realized.
Derivative instruments
Derivative financial instruments are utilized by the Company in the management
of its foreign currency exposure. The Company's policy is not to utilize
derivative financial instruments for trading or speculative purposes, however
the Company does not formally document the hedging relationships and they are
accounted for at fair value with changes in fair value recorded in income.
3. INVENTORIES
2005 2004
$ $
---------- ----------
Raw materials 4,701,283 4,288,089
Work in process 157,543 952,977
Finished goods 889,639 1,338,176
---------- ----------
5,748,465 6,579,242
========== ==========
4. PROPERTY, PLANT AND EQUIPMENT
<table>
Accumulated Net
Cost amortization book value
$ $ $
--------- ---------- ----------
<s> <c> <c> <c>
2005
Research and test equipment 3,301,933 2,439,305 862,628
Furniture and fixtures 767,144 609,390 157,754
Computers 1,164,413 947,817 216,596
Tooling 730,479 634,741 95,738
Leasehold improvements 333,743 301,012 32,731
---------- ---------- -----------
6,297,712 4,932,265 1,365,447
========== ========== ===========
2004
Research and test equipment 3,333,900 2,392,036 941,864
Furniture and fixtures 762,483 565,096 197,387
Computers 1,148,211 921,702 226,509
Tooling 421,992 394,915 27,077
Leasehold improvements 331,002 301,640 29,362
---------- ---------- ----------
5,997,588 4,575,389 1,422,199
========== ========== ==========
</table>
In 2005, the Company wrote-off fixed assets no longer in use with a net book
value of $15,000.
5. BANK INDEBTEDNESS
The Company has a committed revolving line of credit in the amount of
$3,000,000 expiring on February 28, 2006, that can be advanced in Canadian or
US dollars equivalents, which was unused as at July 31, 2005 and July 31, 2004.
This facility bears interest at either the bank's prime rate of interest [4.25%
at July 31, 2005] plus 0.75% for Canadian dollar loans or the United States
base rate [6.25% at July 31, 2005] plus 0.75% for U.S. dollar loans. The bank
indebtedness is collateralized by various charges on the assets of the Company
and its subsidiaries and also includes various terms and conditions, including
the maintenance of certain financial covenants all of which were met at July
31, 2005.
6. DUE TO SHAREHOLDERS AND AFFILIATED COMPANIES
2005 2004
$ $
---------- ----------
Due to corporate shareholders - 913,968
Due to companies controlled by shareholders - 2,565,520
---------- ----------
- 3,479,488
========== ==========
On September 13, 2004, and on April 25, 2005, the Company repaid its due to
shareholders and affiliated companies.
The Company paid $42,386 [2004 - $81,335] interest on these loans which was
netted against interest income in the statement of income.
7. CAPITAL STOCK
Authorized
An unlimited number of:
Common shares.
Non-voting preferred shares issuable
in series, the terms of which are to
be determined by the Board of Directors
at date of issue.
Issued and outstanding
2005 2004
$ $
---------- ----------
20,000,000 common shares 11,008,166 11,008,166
========== ==========
8. INCOME TAXES
The income tax provision (recovery) consists of:
2005 2004
$ $
---------- ----------
Current income taxes 1,193,747 717,249
Future income taxes (recovery) 245,124 (1,335,751)
---------- ----------
1,438,871 (618,502)
========== ==========
The tax effects of temporary differences that give rise to future income tax
assets and liabilities are as follows:
2005 2004
$ $
---------- ----------
Current future income tax assets
Tax basis of deferred revenues in excess of
carrying values 40,000 187,000
Intercompany profit in inventories 65,000 108,000
Accrued expenses and allowances 316,618 454,749
Investment tax credits 301,022 -
---------- ----------
Total current future income tax assets 722,640 749,749
---------- ---------
2005 2004
$ $
---------- ----------
Long-term future income tax assets
Research and development expenditures 174,000 231,000
Tax basis of intangibles and deferred revenues in
excess of carrying values 510,031 507,505
---------- ----------
Total long-term future income tax assets 684,031 738,505
---------- ----------
Current future income tax liability
Investment tax credits claimed in current year 287,219 23,096
---------- ----------
Total current future income tax liability 287,219 23,096
---------- ----------
Long-term future income tax liability
Carrying value of property, plant and equipment in
excess of tax value 226,567 249,282
---------- ----------
Total long-term future income tax liability 226,567 249,282
---------- ----------
Total future income tax assets 1,406,671 1,488,254
========== ==========
Total future income tax liability 513,786 272,378
========== ==========
Differences between the income tax provision (recovery) and income taxes
computed using the statutory federal income tax rate are as follows:
2005 2004
$ $
---------- ----------
Income before income taxes 4,360,851 568,041
Canadian Rate 31.02% 31.85%
---------- ----------
Income tax at statutory rate 1,352,736 180,921
Permanent differences (2,458) (8,853)
Tax benefit of Quebec Labor Tax Credits (87,398) (83,000)
Recognition of previously unrecognized
foreign tax benefits - (634,546)
Recognition of previously unrecognized
Canadian tax benefits - (222,815)
Effect of foreign tax rate differential 171,743 74,911
Effect of tax rate changes - 10,862
Other 4,248 64,018
---------- ----------
Income tax provision (recovery) 1,438,871 (618,502)
========== ==========
9. GOVERNMENT ASSISTANCE
The Company incurred research and development expenditures which are eligible
for investment tax credits. The investment tax credits recorded are based on
management's estimates of amounts expected to be recovered and are subject to
audit by taxation authorities. These amounts have been recorded as a reduction
of research and development expenses and capital assets and are as follows:
2005 2004
$ $
---------- ----------
Research and development expenses 6,710,350 6,538,485
Investment tax credits (1,611,480) (1,117,356)
---------- ----------
5,098,870 5,421,129
========== ==========
Investment tax credits related to purchase
of property, plant and equipment 8,875 21,434
========== ==========
The Company has available non-refundable investment tax credits of
approximately $1,553,000 [July 31, 2004 - $1,159,000] related to research and
development expenditures which may be utilized to reduce Canadian federal
income taxes payable in future years and that expire as follows:
$
----------
2013 158,000
2014 984,000
2015 411,000
----------
1,553,000
==========
The benefits of these non-refundable investment tax credits have not been
recognized in the financial statements. If and when these credits are used in
the future, they will reduce the company's federal income taxes payable.
Subsequent to the year in which the credits are used, the amount of the credit
will reduce the deductible research and development expenditures and any excess
of the credit will be added to taxable income.
10. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATING TO OPERATIONS
2005 2004
$ $
---------- ----------
Decrease (increase) in accounts receivable 140,203 (1,024,966)
(Increase) in unbilled receivables (609,534) (1,007,210)
Decrease (increase) in inventories 830,777 (532,967)
Decrease in prepaid expenses and other current assets 4,528 152,987
Decrease in income and other taxes receivable - 2,474,210
Increase (decrease) in accounts payable and
accrued liabilities (13,418) 259,209
Increase (decrease) in income tax payable (66,531) 252,783
--------- ----------
286,025 574,046
========= ==========
11. RELATED PARTY TRANSACTIONS
In addition to transactions described elsewhere in these financial statements,
the Company incurred occupancy costs of $586,461 [2004 - $515,247], which were
paid to a company controlled by certain shareholders and have been recorded at
the exchange amount.
12. COMMITMENTS
As at July 31, 2005, minimum annual lease costs, including leases with related
parties [note 11], are as follows:
Related Third
Parties parties
$ $
--------- ----------
2006 334,292 518,826
2007 334,292 400,033
2008 334,292 280,730
2009 278,577 163,760
--------- ----------
1,281,453 1,363,349
========= ==========
13. FINANCIAL INSTRUMENTS
Fair value
Short-term financial assets and liabilities
The carrying amounts reported in the financial statements for cash, accounts
receivable and accounts payable and accrued liabilities approximate fair value
due to the short-term maturities of these financial instruments.
Credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risks, consist primarily of cash and accounts receivable. Cash is
maintained with high-credit quality financial institutions. Consequently,
management considers the risk of non-performance related to cash to be minimal.
Approximately 42% of cash is held by a major Canadian chartered bank.
The Company reviews a new customer's credit history before extending credit and
conducts regular reviews of its existing customers' credit performance.
Generally, the Company does not require collateral or other security to support
customer receivables. For the year ended July 31, 2005 the Company's two
largest customers accounted for 10% [2004 - 11%] of sales. As at July 31, 2005
two customers represented 28% [2004 - 23%] of total accounts receivable.
Currency risk
The Company is exposed to currency risk through its cash, accounts receivable
and accounts payable denominated in US dollars. As at July 31, 2005, the US
dollar denominated cash amounts to US $4,772,363 [2004 - US $2,990,428], the US
dollar denominated accounts receivable amounts to US $4,919,364 [2004 - US
$4,172,585] and US dollar denominated accounts payable amounts to US $ $722,164
[2004 - US $1,235,362].
The Company has entered into currency options for the sale of US $900,000,
expiring at various dates until October 17, 2005, to manage foreign exchange
risks. Simultaneously, these options allow the counterparty to purchase US
$900,000 at these same expiry dates. Gains or losses on foreign exchange
include the change in the fair value of derivative financial instruments. As at
July 31, 2005, the fair value of these options is approximately $12,610.
14. SEGMENTED INFORMATION
Management believes the Company operates in a single business segment
consisting of design, manufacture, marketing and sale of wireless components,
software and systems primarily for private networks.
Geographic information
The following tables present revenues based on the location of customers and
property, plant and equipment based on their location.
Property, plant
Revenues and equipment
$ $
---------- ----------
2005
Canada 7,106,951 917,737
United States 27,718,272 447,710
Other foreign countries 2,651,619 -
---------- ----------
37,476,842 1,365,447
========== ==========
2004
Canada 4,283,941 1,000,350
United States 27,085,310 421,849
Other foreign countries 2,322,003 -
---------- ----------
33,691,254 1,422,199
========== ==========
15. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Significant differences between United States and Canadian GAAP, as it relates
to the Company, are described below:
* Income Taxes. Under Canadian GAAP, substantively enacted tax rates and tax
laws are applied to cumulative temporary differences and current tax expense.
The Company has utilized rates which were substantively enacted. U.S. GAAP
requires that enacted tax rates and laws be used. Furthermore, under U.S. GAAP,
current and noncurrent deferred tax liabilities and assets should be presented
for each different tax jurisdiction.
* Investment Tax Credits. U.S. GAAP permits federal investment tax credits
to be recorded using the flow-through method (i.e., recognize the full tax
credit against the tax provision in the year it is received) or the cost
reduction method. Canadian GAAP permits only the cost reduction method and
therefore under U.S. GAAP tax credits would reduce tax expense and not the
related assets or expenditures.
* Research and Development. Under Canadian GAAP, research costs are written off
and development costs meeting certain criteria are deferred. Under U.S. GAAP,
research and development costs are written off when incurred. The Company has
not deferred any such development costs to date.
* Contractual Obligations. U.S. GAAP specifies disclosure requirements for
commitments under unconditional purchase obligations.
* Under U.S. GAAP, a statement of shareholders' equity and a statement of
comprehensive income are required. However in the Company's case, no
additional separate items would need to be presented.