UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 6-K
Report of Foreign issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
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For the Month of April 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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1
SIERRA WIRELESS, INC.
2002 ANNUAL REPORT
UNITED STATES GAAP
2
REPORT TO SHAREHOLDERS
In a year that brought continued economic challenges, we strengthened our
position as a leading provider of wireless data modems and enabling software,
increased our revenues by 24%, and returned to profitability in the third and
fourth quarters.
New Networks, New Products
One of 2002's major developments was the deployment of faster, more functional
2.5G wireless data networks by many of the world's wireless carriers. Long
talked about, and now a reality, these new networks have significantly increased
wireless data transmission speeds. The robust new protocols can deliver
transmission rates that match or exceed those achieved with a land line dial-up
connection--making Intranet, Internet, e-mail and a wide range of other
applications highly functional on wirelessly equipped computing devices. With
more ease and functionality comes greater adoption.
We were at the forefront of these developments, providing new products for
the new networks. We began commercial volume shipments of five new, faster
products in 2002: the Sierra Wireless AirCard 710 and AirCard 750 for use on
GSM/GPRS networks, and the AirCard 550, the AirCard 555 and the SB555
embedded module for CDMA2000 1X networks.
Sierra Wireless World
While launching new products, we were also leveraging our leadership position in
the North American market into other global markets. In Europe, where GPRS and
GSM are the dominant network technologies, we received regulatory approval for
the AirCard 750 and developed carrier channel relationships with Vodafone and
Orange in the UK, KPN Mobile in the Netherlands, Telia in Sweden and Telefonica
in Spain. We also signed five new European distribution agreements, and won our
first major GPRS end-customer deployment. Together with Itronix, the maker of
ruggedized GoBook(TM) notebook computers, and Vodafone, Europe's largest
wireless carrier, we landed a large new supply agreement to provide wireless
solutions to Transco--the UK's leading gas transporter. From a standing start at
the beginning of 2002, European sales went on to deliver 7% of the year's
revenues.
In the Asia Pacific region, we secured approvals for our new AirCard products,
including Chinese MII regulatory approval for the AirCard 750. By year-end, we
had deployed the AirCard 750 with a number of regional operators owned by
China's 140-million subscriber strong China Mobile. We also launched the AirCard
750 with Hutchison Telecom in Hong Kong, StarHub in Singapore, and AIS in
Thailand. In addition, we launched the AirCard 555 with China Unicom in China,
Telstra in Australia and Telecom New Zealand. By year-end, the Asia Pacific
region accounted for 6% of our revenues.
Closer to home, we continued to strengthen our lead in North America. We
became the first wireless data modem provider to supply CDMA2000 1X PC Card
modems to four leading North American CDMA carriers: Bell Mobility, Sprint
PCS, TELUS Mobility and Verizon Wireless. We also launched the AirCard 710 on
AT&T's GPRS network, and launched the AirCard 750 with T-Mobile in the U.S.
and with Rogers AT&T Wireless in Canada. Revenues in the Americas represented
87% of our 2002 results.
Together, the combination of new products and new markets boosted revenues to
$77.1 million in 2002 from $62.3 million in 2001, an increase of 24%.
3
Meeting the Challenges
Each of these achievements was hard won. 2002 was a challenging year for us and
for our customers, with our key enterprise markets cutting spending in response
to economic conditions. In June, we undertook a difficult restructuring of our
own business to help turn things around.
It was also a year in which competition in the wireless data market was
evolving. I'm pleased to report Sierra Wireless AirCard products fared well,
continuing to lead the market. We competed by providing high performance
products, teaming with partners for complete solutions, and delivering superb
customer support--a combination that not only positioned us favorably with
customers, but was also pivotal in our return to profitability in the second
half of the year.
Where to Next?
In 2003, we plan to keep the momentum going with a continued focus on
profitability and growth. Focus areas include sell-through with existing
channels, the addition of new distribution channels, particularly in
international markets, and investments in new growth initiatives. On the
product front, we expect to leverage the investments that we have already
made in 2.5G technologies to expand our product line.
In closing, I want to acknowledge the contribution of our employees in helping
us respond to the challenges and opportunities of 2002. The many achievements of
the year reflect the innovation, enthusiasm and hard work of everyone on Team
Sierra Wireless. I also thank our shareholders for their continued confidence in
us and in our mission, and our customers and partners around the world for
helping make our products global market leaders. Together, we're making it a
Sierra Wireless World.
/s/ David B. Sutcliffe
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David B. Sutcliffe
Chairman and CEO
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Information on Sierra Wireless's products, customers and achievements can be
found in our 2002 Annual Review. An electronic version is available on our
website: www.sierrawireless.com. For a hard copy, please call 604-231-1100.
4
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 GAAP AND IS
EXPRESSED IN UNITED STATES DOLLARS.
OVERVIEW
We develop and market a broad range of single and multi-mode wireless data
modems and enabling software for use with handheld computing devices, notebook
computers and vehicle-based or monitoring applications.
In 2001, there was an overall economic slowdown that impacted our business. Our
results for 2001 also were materially affected by the Chapter 11 filing for
reorganization of Metricom, Inc. ("Metricom") with whom we had an agreement to
supply approximately $33.0 million of our AirCard 400 for their Ricochet2
network, over a twelve-month period beginning in March 2001. As a result of
these developments, we recorded a writedown of inventory of $11.0 million and a
provision for doubtful accounts of $3.0 million in 2001.
During 2002, sales growth continued to be constrained by the slowdown in
enterprise spending and by overall conditions affecting the wireless
communications industry. In the second quarter of 2002, we reduced operating
expenses and asset levels as a result of our assessment of current and visible
future demand. Restructuring and other costs amounted to $36.1 million. In the
third quarter of 2002, we returned to profitability as a result of the growth in
sales of 2.5G AirCard products through an expanded range of distribution
channels and a reduction in operating expenses. In the fourth quarter of 2002,
we remained profitable and adjusted our estimates of our restructuring and other
costs from $36.1 million to $37.7 million. In addition, we settled our claims
with Metricom resulting in a recovery of $1.8 million. During 2002, we commenced
commercial shipment of our AirCard 550, AirCard 555, AirCard 710 and AirCard 750
next generation products.
As a result of a changing product mix and an increase in volume orders, our
gross margin has trended down. We expect that our gross margin will fluctuate
moderately as product mix varies from quarter to quarter and as a result of
increased costs due to new product introductions. Our gross margin could
decrease if we incur higher than anticipated production costs for these
products. If we are unable to commit the necessary resources or are unable to
deliver our products as required by the terms of our contracts, our customers
may cancel these contracts. In that event, any costs incurred may not be
recovered and we may incur additional costs.
REVENUE
We derive our revenue primarily from sales of our products to wireless
communications service providers, original equipment manufacturers, resellers
and through direct sales to end-users. We recognize revenue from sales of
products and services upon the later of transfer of title or upon shipment of
the product to the customer or rendering of service, so long as collectibility
is reasonably assured. We recognize revenue on the portion of sales to certain
resellers that are subject to provisions allowing various rights of return and
stock rotation when the rights have expired or the products have been reported
as sold by the resellers.
Funding from research and development agreements, other than government
assistance, 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.
COST OF GOODS SOLD
We outsource most of our manufacturing services to enable us to achieve greater
efficiencies and economies of scale. We have been able to achieve savings in
costs and improvements in efficiencies in 2002, and we will focus on further
cost savings and efficiencies going forward. Since we outsource most of our
manufacturing services, our cost of goods sold consists primarily of the direct
costs of finished goods purchased from our outsource manufacturers, third-party
royalties, warranty costs and an allocation of operating costs.
5
SALES AND MARKETING
Our sales and marketing expenses consist mainly of salaries, commissions, travel
expenses, conferences, marketing materials and market development funding. Our
sales programs rely, in part, on delivering products to end-users identified and
cultivated through our relationships with wireless communications service
providers, original equipment manufacturers and resellers. During 2002, we
expanded our distribution channels in Europe and the Asia-Pacific region as part
of our international growth objectives. We expect to continue to make
significant and increased investments in these strategic areas during 2003.
RESEARCH AND DEVELOPMENT, NET
Since our incorporation in 1993, we have continued to invest in new generations
of technology. We have funded our investment in research and development from
our Initial Public Offering and Follow-on Offering, together with research and
development funding, investment tax credits and operating cash flow. Our
research and development expenses consist mainly of salaries, consulting costs
and amortization, net of government research and development funding and
investment tax credits, and are expensed as incurred. We expect our research and
development expenses to continue to increase as we invest in next generation
technology and develop new products, including those under our existing
contracts.
ADMINISTRATION
Our administration costs consist mainly of salaries, professional fees,
insurance, and general administration. We expect that these costs will increase
as insurance premiums continue to increase and as we continue to build our
information systems infrastructure as part of our international expansion and
scaling for growth.
INCOME TAXES
Prior to 2000, we have recorded no provision for Canadian federal income taxes
for any period since our incorporation. Through the end of fiscal 1997 we had
recorded losses, and when we became profitable in 1998, we had sufficient net
operating losses, investment tax credits or scientific research and development
expenses in Canada to offset any federal income taxes that would otherwise be
payable. During 2000, our taxable income in Canada was reduced through the
utilization of scientific research and development expenses, and in the United
States we had taxable income for the first time. This resulted in us having
current and future taxes payable. In 2002, we incurred operating losses and we
have recorded a recovery of income taxes previously paid.
We believe that it is more likely than not that we will realize our net deferred
tax assets. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences become deductible. We considered projected future taxable income and
tax planning strategies in making our assessment. We have not recognized any
deferred tax assets in 2002.
6
RESULTS OF OPERATIONS
The following table sets forth our operating results for the three years ended
December 31, 2002, expressed as a percentage of revenue:
YEARS ENDED DECEMBER 31,
2000 2001 2002
-------- -------- -------
Revenue.................................................... 100.0% 100.0% 100.0%
Cost of goods sold......................................... 54.0 75.4 89.6
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Gross margin............................................... 46.0 24.6 10.4
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Expenses
Sales and marketing...................................... 18.4 20.4 15.0
Research and development, net............................ 24.0 27.1 19.3
Administration........................................... 11.0 16.8 6.1
Restructuring and other charges.......................... - - 16.7
Amortization............................................. 3.3 3.3 3.0
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56.7 67.6 60.1
Loss from operations....................................... (10.7) (43.0) (49.7)
Other income............................................... 7.4 3.7 0.2
-------- -------- -------
Loss before income taxes................................... (3.3) (39.3) (49.5)
Income tax expense (recovery).............................. 2.5 (0.4) 4.5
-------- -------- -------
Net loss................................................... (5.8) (38.9) (54.0)
======== ======== =======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
During 2002, we announced and implemented a business restructuring program. We
reduced operating expenses and asset levels as a result of our assessment of
current and visible future demand. We expect sales growth to continue to be
constrained by the slowdown in enterprise spending and by overall conditions
affecting the wireless communications industry.
During the second quarter of 2002, we recorded restructuring and other costs of
$36.1 million. We have reduced our workforce from 275 to 181 people. In
addition, the restructuring and other costs included a writedown for excess
inventory, impairment of fixed, intangible and other assets, and a provision for
facilities restructuring and other costs related to the restructuring. The
provisions related to our restructuring and other charges reflected many
estimates which we revised during the last half of 2002, based on actual
experience, resulting in a net charge of $1.6 million. Our restructuring and
other costs for 2002 were $37.7 million. We have substantially completed
implementation of our restructuring program at December 31, 2002.
We recorded a writedown of inventory, including purchase commitments, amounting
to $16.7 million. The writedown was related primarily to CDPD and 2G CDMA
products. In the fourth quarter of 2002, we recorded an additional net writedown
of inventory of $1.9 million which was a result of faster than expected decline
in sales of CDPD products. During 2002, we sold $1.2 million of products that
had a written down net book value of nil.
Fixed assets impairment charges of $4.8 million consisted of writedowns
primarily for research and development equipment, test equipment, and corporate
assets. The fixed assets have been written down to the current fair value for
this type of equipment. The net reversal of the second quarter impairment charge
was $0.5 million, of which $0.1 million was included in cost of sales, and
related primarily to adjusting our estimates of equipment to be disposed of.
Intangible assets impairment charges of $3.0 million consisted of writedowns
primarily for research and development licenses. The research and development
licenses that are no longer required, have been written down to nil. In
addition, our deferred tax asset valuation allowance has been increased by $3.8
million to record the reduction in the portion of our deferred tax assets that
we believe is more likely than not to be realized.
Workforce reduction charges of $1.6 million, of which $0.1 million was included
in cost of sales, were related to the cost of severance and benefits associated
with 95 employees and contractors notified of termination. Of the 95 employees
and contractors, 63 were involved in product development, seven were involved in
manufacturing, 18 were sales and marketing personnel, and seven were in
administration. At December 31, 2002, the workforce reduction provision of $1.5
million estimated in the second quarter, excluding the portion that was included
in cost of sales, has
7
been drawn down by cash payments of $1.3 million and a reversal of $0.2 million,
resulting in an ending provision balance of $0.05 million. We expect the
remaining provision to be substantially drawn down by April 30, 2003.
As a result of the above noted workforce reduction and our assessment of current
and visible demand, there are leased facilities that are excess to our current
requirements. We recorded a provision that represents the estimated net present
value of future contractual obligations that are in excess of our estimated
future requirements. Our provision at June 30, 2002 of $4.7 million has been
drawn down by cash payments of $0.5 million and increased by an additional net
charge of $0.3 million, resulting in a provision balance of $4.5 million at
December 31, 2002. During the second half of 2002, real estate market conditions
in our location softened, resulting in very little progress on our facilities
restructuring. The remaining cash outlays of approximately $4.5 million related
to the facilities restructuring are expected to be paid over the remaining term
of the lease and will be funded from available sources of liquidity.
Other charges of $1.5 million include provisions for purchase commitments, a
writedown of investments, and professional fees in connection with the
restructuring activities. Our provision at June 30, 2002 of $0.8 million has
been drawn down by non-cash reductions of $0.4 million, cash payments of $0.3
million, and an additional charge of $0.1 million resulting in a provision
balance of $0.2 million at December 31, 2002. The additional charges relate to
revised estimates for professional fees. The remaining provision is expected to
be substantially drawn down by March 31, 2003. The remaining cash outlays of
approximately $0.2 million related to other costs are expected to be
substantially paid by April 30, 2003 and will also be funded from available
sources of liquidity.
During the second quarter of 2001, one of our customers Metricom, Inc. refused
shipments and subsequently filed for a Chapter 11 reorganization under the U.S.
bankruptcy laws. In 2002, we negotiated a settlement with the reorganized debtor
and will receive $1.8 million. The recovery of $1.8 million is recorded in the
determination of our net loss for 2002.
In 2001, in addition to the financial impacts from Metricom's bankruptcy, there
was also an overall economic slowdown that impacted our business. As a result of
these developments, we recorded a writedown of inventory of $11.0 million and a
provision for doubtful accounts of $3.0 million in 2001.
The adjusted information provided below for the years ended December 31, 2002
and December 31, 2001 excludes these charges.
REVENUE
Revenue amounted to $77.1 million in 2002, compared to $62.3 million in 2001, an
increase of 23.7%. Included in our revenue was research and development funding
of $3.7 million in 2002, compared to $2.6 million in 2001. The increase in
revenue was a result of sales of our 2.5G products as well as increasing sales
to new channels in Europe and the Asia-Pacific region. We commenced commercial
shipment of our AirCard 550, AirCard 555, AirCard 710, and AirCard 750 next
generation products during 2002. Our revenue by product and by distribution
channel was:
YEARS ENDED DEC. 31,
--------------------
2001 2002
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Revenue by product
AirCard........................................... 62% 58%
OEM............................................... 15 25
Mobile............................................ 13 10
Other............................................. 10 7
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100% 100%
===== =====
Revenue by distribution channel
Wireless carriers................................. 31% 43%
OEM............................................... 17 25
Resellers......................................... 44 25
Direct and Other.................................. 8 7
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100% 100%
===== =====
8
87% of our product revenue was earned in North America, 7% in Europe and 6% in
the Asia-Pacific region, compared to 97%, nil, and 3%, respectively, in 2001.
GROSS MARGIN
Gross margin amounted to $8.0 million in 2002, compared to $15.3 million in
2001. Included in our gross margin was research and development funding of $3.7
million in 2002, compared to $2.6 million in 2001. During the year our gross
margin was negatively affected as we recorded restructuring and other charges of
$20.8 million. As a result of the funding and charges, our gross margin
percentage decreased to 10.4% of revenue in 2002, compared to 24.6% of revenue
in 2001. Our adjusted gross margin, excluding restructuring and other charges
and research and development funding, amounted to $25.1 million in 2002,
compared to adjusted gross margin of $23.7 million in 2001. Our adjusted gross
margin percentage decreased to 34.2% in 2002, compared to 39.6% in 2001. This
decrease was a result of changes in our product mix and new product introduction
costs.
SALES AND MARKETING
Sales and marketing expenses amounted to $11.6 million in 2002, compared to
$12.7 million in 2001, a decrease of 9.1%. This decrease was due primarily to
cost reductions under our restructuring plan. In addition, some costs related to
the initial introduction of new products for 2.5G wireless networks and entry
into the Europe and Asia-Pacific regions occurred in the prior year. Sales and
marketing expenses as a percentage of revenue amounted to 15.0% in 2002,
compared to 20.4% in 2001.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $14.9
million in 2002, compared to $16.9 million in 2001, a decrease of 11.9%.
Research and development expenses in 2002 decreased due primarily to cost
reductions under our restructuring plan. Gross research and development
expenses, before government research and development funding and investment tax
credits, were $16.8 million or 21.8% of revenue in 2002, compared to $19.4
million or 31.2% of revenue in 2001.
ADMINISTRATION
Administration expenses amounted to $4.7 million in 2002, compared to $10.5
million in 2001. Adjusted administration expenses were $6.5 million in 2002,
excluding the Metricom recovery of $1.8 million, compared to adjusted
administration expenses of $7.5 million, excluding the $3.0 million provision
for doubtful accounts in 2001. This decrease of 12.7% is due primarily to cost
reductions under our restructuring plan. Adjusted administration expenses as a
percentage of revenue amounted to 8.4% in 2002 compared to 12.0% in 2001.
OTHER INCOME
Other income decreased to $0.2 million in 2002, compared to $2.3 million in
2001. This decrease is due to a reduction in cash and short-term investment
balances, as well as a reduction in interest rates.
INCOME TAX EXPENSE (RECOVERY)
Income tax expense amounted to $3.5 million in 2002, compared to an income tax
recovery of $0.3 million in 2001. Adjusted income tax recovery, excluding
restructuring and other costs of $4.0 million, was $0.6 million in 2002,
compared to an income tax recovery of $0.3 million. The income tax recovery
recorded in 2002 is a recovery of taxes paid in prior periods.
NET LOSS
Our net loss amounted to $41.7 million in 2002, compared to a net loss of $24.3
million in 2001. Our adjusted net loss amounted to $5.8 million, excluding
restructuring and other costs of $37.7 million and the Metricom recovery of $1.8
million, in 2002, compared to an adjusted net loss of $10.3 million in 2001. Our
loss per share amounted to $2.56 in 2002, compared to a loss per share of $1.50
in 2001. Our adjusted loss per share was $0.35 in 2002, compared to an adjusted
loss per share of $0.64 in 2001. The weighted average number of shares
outstanding increased to 16.3 million in 2002, as compared to 16.1 million in
2001.
9
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
During the year ended December 31, 2001, we recorded a provision for excess
inventory of $11.0 million and a provision for doubtful accounts of $3.0
million. In the year ended December 31, 2000, we recorded charges amounting to
$0.8 million, related to the acquisition of the Qualcomm CDMA data modules
business. The adjusted information provided below excludes these charges.
REVENUE
Revenue amounted to $62.3 million in 2001, compared to $53.8 million in 2000, an
increase of 15.9%. Included in our revenue was research and development funding
of $2.6 million in 2001, compared to $0.3 million in 2000. The increase was a
result of strong growth in our base business, including CDPD AirCards and
original equipment modules (OEM), as well as the introduction of new products.
In accordance with our supply agreement with Metricom, we were to supply
approximately $33.0 million of our AirCard 400 over a twelve-month period
beginning March 2001 for Metricom's Ricochet2 network. In the first quarter of
2001, we commenced commercial shipments of our AirCard 400 to Metricom. On July
2, Metricom filed for Chapter 11 reorganization, and as a result, we ceased
further manufacturing and sales of our AirCard 400. Our total revenue for the
year from sales to Metricom amounted to approximately $4.5 million, the balance
of the revenue for the year that was expected under the supply agreement was
lost, and we ceased operations on the Ricochet2 network standard. We had
expected to commence commercial shipment of our AirCard 555 to Verizon in the
fourth quarter. We decided to delay the commencement of commercial volume
shipments of this product, and this had a material impact on our revenue for the
fourth quarter. Our revenue by product segment for 2001 was Aircards 62%, Mobile
13%, OEM 15% and Other 10%, compared to 47%, 18%, 30% and 5%, respectively, in
2000. Our revenue by distribution channel for 2001 was Resellers 44%, Wireless
carriers 31%, OEM 17% and Direct and Other 8%, compared to 39%, 21%, 32% and 8%,
respectively, in 2000. In 2001, 92% of our revenue was earned in the United
States, compared to 78% in 2000.
GROSS MARGIN
Our gross margin amounted to $15.3 million in 2001, compared to $24.7 million in
2000. Included in our gross margin was research and development funding of $2.6
million in 2001, compared to $0.3 million in 2000. During the year, our gross
margins were negatively affected as we recorded a charge of $11.0 million to
provide for excess inventory as a result of the Metricom Chapter 11 filing and
our assessment of demand. As a result of the funding and these charges, our
gross margin percentage decreased to 24.6% of revenue in 2001, compared to 46.0%
of revenue in 2000. Our adjusted gross margin, excluding the provision for
excess inventory and research and development funding, amounted to $23.7 million
in 2001, compared to $24.4 million in 2000. Our adjusted gross margin percentage
decreased to 39.6% in 2001, compared to 45.6% in 2000. This decrease was a
result of changes in our product and pricing mix and new product introduction
costs.
SALES AND MARKETING
Our sales and marketing expenses increased significantly in 2001 and amounted to
$12.7 million in 2001, compared to $9.9 million in 2000, an increase of 28.4%.
This increase was due to increased sales and marketing initiatives related to
the introduction of new products for 2.5G wireless networks. In addition, we
continued our market entry activities in Europe and the Asia-Pacific region.
Sales and marketing expenses as a percentage of revenue amounted to 20.4% in
2001, compared to 18.4% in 2000.
RESEARCH AND DEVELOPMENT, NET
Research and development expenditures, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $16.9
million in 2001, compared to $12.9 million in 2000, an increase of 31.2%.
Research and development expenses in 2001 increased due to costs relating to the
development of new products based on the CDMA and GPRS standards. Research and
development expenses, before government research and development funding and
investment tax credits, were $19.4 million or 31.2% of revenue in 2001, compared
to $13.6 million or 25.3% of revenue in 2000.
ADMINISTRATION
Administration expenses amounted to $10.5 million in 2001, compared to $5.9
million in 2000, an increase of 76.8%. During the year, we increased our
provision for doubtful accounts by $3.0 million, as a result of the Metricom
Chapter 11 filing. Our adjusted administration expenses were $7.5 million
compared to $5.9 million in 2000. This increase is
10
due to investment in people, systems and infrastructure to support our
operations growth and to scale for volume and international expansion. Adjusted
administration expenses as a percentage of revenue amounted to 12.0% in 2001,
compared to 11.0% in 2000.
OTHER INCOME
Other income decreased to $2.3 million in 2001, compared to $4.0 million in
2000. This decrease is due to a reduction in cash and short-term investment
balances, as well as a reduction in interest rates.
NET LOSS
Our net loss amounted to $24.3 million in 2001, compared to a net loss of $3.1
million in 2000. Our adjusted net loss amounted to $10.3 million in 2001,
compared to an adjusted net loss of $2.3 million. Our loss per share amounted to
$1.50 in 2001, compared to a loss per share of $0.20 in 2000. Our adjusted loss
per share was $0.64 in 2001, compared to an adjusted loss per share of $0.15 in
2000. The weighted average number of shares outstanding increased to 16.1
million in 2001 as compared to 15.3 million in 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUE
Revenue amounted to $53.8 million in 2000, compared to $24.0 million in 1999, an
increase of 124.6%. Included in our revenue was research and development funding
of $0.3 million in 2000, compared to nil in 1999. The increase was a result of
strong growth in our base business, including CDPD AirCards and original
equipment modules (OEM), as well as the introduction of new products. In the
second quarter, we acquired the CDMA module business, including its module
inventory, manufacturing and customer commitments from Qualcomm Incorporated,
and commenced shipment of these products. In the fourth quarter, we commenced
commercial shipment of the AirCard 510. Our revenue by product segment for 2000
was Aircards 47%, Mobile 18%, OEM 30% and Other 5%, compared to 39%, 47%, 7% and
7%, respectively, in 1999. Our revenue by distribution channel for 2000 was
Resellers 39%, Wireless carriers 21%, OEM 32% and Direct and Other 8%, compared
to 46%, 28%, 13% and 13%, respectively, in 1999.
GROSS MARGIN
Our gross margin amounted to $24.7 million in 2000, compared to $12.2 million in
1999. Included in our gross margin was research and development funding of $0.3
million in 2000, compared to nil in 1999. Our gross margin percentage decreased
to 45.6% of revenue in 2000, excluding the research and development funding,
compared to 51.0% of revenue in 1999. This decrease was a result of changing
product mix and an increase in volume orders and new product introduction costs.
SALES AND MARKETING
Our sales and marketing expenses increased significantly in 2000 and amounted to
$9.9 million in 2000, compared to $5.1 million in 1999, an increase of 94.4%.
This increase was due to sales and marketing initiatives and the additional
personnel costs associated with implementing these initiatives in order to
increase awareness of our company and sales of our products. In addition, we
undertook market entry activities in Europe and the Asia-Pacific region. Sales
and marketing expenses as a percentage of revenue amounted to 18.4% in 2000,
compared to 21.3% in 1999.
RESEARCH AND DEVELOPMENT, NET
Research and development expenditures, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $12.9
million in 2000, compared to $4.1 million in 1999, an increase of 212.5%.
Research and development expenses in 2000 increased due to costs relating to the
development of new products based on the Ricochet, CDMA, EDGE and GPRS
standards. Research and development expenses, before government research and
development funding and investment tax credits, were $13.6 million or 25.3% of
revenue in 2000, compared to 17.2% of revenue in 1999.
11
ADMINISTRATION
Administration expenses amounted to $5.9 million in 2000, compared to $1.4
million in 1999. This increase is due to investment in people, systems and
infrastructure to support our operations growth, international expansion, an
increase in our allowance for doubtful accounts and costs associated with being
publicly listed in both the U.S. and Canada.
OTHER INCOME
Other income increased to $4.0 million in 2000, compared to $1.3 million in
1999. This increase is a result of the investment of surplus funds resulting
from our initial and secondary public offerings in 1999 and 2000.
NET EARNINGS (LOSS)
Our net loss amounted to $3.1 million in 2000, compared to net earnings of $3.2
million in 1999. Our loss per share amounted to $0.20 in 2000, compared to
diluted earnings per share of $0.23 in 1999. The weighted average number of
shares outstanding, on a diluted basis, increased to 15.3 million in 2000,
principally as a result of our secondary public offering, as compared to 13.9
million in 1999.
CONTINGENT LIABILITIES
In July 2001, we learned that Metricom, one of our customers, had filed a
Chapter 11 reorganization under the U.S. bankruptcy laws. We filed a proof of
claim for amounts due to us totaling $13.7 million. Metricom objected to that
claim asserting that all but $2.3 million should be disallowed. Metricom also
filed an adversary complaint against us in the U.S. bankruptcy court seeking
return of payments totaling $1.9 million made to us within 90 days of the
bankruptcy filing, alleging that the payments are avoidable as "preferences". We
contended that the payments were in the ordinary course of business and that we
supplied additional product to Metricom after receiving the payments, which
would offset any preference liability. During 2002, we executed a global
settlement with the reorganized debtor under which we agreed to reduce our
general unsecured claim to $10.3 million and Metricom agreed to dismiss the
preference claims. We will receive a settlement of $1.8 million that has been
included in the determination of our net loss for 2002.
In November 2002, Sierra Wireless, Inc., along with several other defendants,
was served with the second amended complaint of MLR, LLC filed in the U.S.
District Court for the Northern District of Illinois Eastern Division for
alleged patent infringement. We have assessed the complaint and have determined
that there has been no infringement of the patents referred to in this claim and
that the claim is invalid. We have filed our response to the complaint. Although
there can be no assurance that an unfavourable outcome of the dispute would not
have a material adverse effect on our operating results, liquidity or financial
position, we believe the claims are without merit and will vigorously defend the
action.
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. Development and deployment of these
new technologies by the wireless industry and development of our new products
have been affected by various delays. As of the end of the first quarter of
2002, commercial volume deliveries to Verizon Wireless had commenced. During the
second quarter, we reported that we continued to experience delays in completion
of the new product approval process on the AT&T Wireless network and we
suspended the AT&T Wireless order from our backlog. During the third quarter, we
completed amendments to our supply agreement with AT&T Wireless that reduced
volume commitments to total approximately $6.5 million, AT&T Wireless granted
commercial acceptance of the AirCard 710, and volume shipments of the AirCard
710 to AT&T Wireless commenced. During the fourth quarter of 2002, we commenced
commercial volume deliveries to Sprint PCS.
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CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, and we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent liabilities. 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.
During the year ended December 31, 2002, we did not adopt any new accounting
policies that have a material impact on our consolidated financial statements,
or make changes to existing accounting policies. Senior management has discussed
with our audit committee the development, selection, and disclosure of
accounting estimates used in the preparation of our consolidated financial
statements.
The following critical accounting policies affect our more significant estimates
and assumptions used in preparing our consolidated financial statements:
- 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, increases in our allowance may be required.
- 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, an
additional inventory writedown may be required.
- 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
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, an adjustment to our deferred tax asset would
be charged to income.
- 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 assistance, 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.
- 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 estimates are made by
management. If we suffer a decrease in the quality of our products, an
increase in our accrual may be required.
- We recorded a lease provision 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 sublease rates
obtainable 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, an increase
in our provision may be required.
13
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, we did not have any off-balance sheet finance or
special purpose entities. During the year ended December 31, 2002, we entered
into a number of capital leases relating to purchases of research and
development equipment and information systems. These leases and commitments are
disclosed in the consolidated financial statements.
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.
In May 2000, we completed a new issue and secondary public offering in the
United States and Canada. Our net proceeds after selling commissions and
expenses of the offering amounted to approximately $65.8 million. The net
proceeds from the secondary public offering were used for continuing research
and development, sales and marketing initiatives, strategic investments and
working capital.
In May and June 1999, we completed an initial public offering in Canada. Our net
proceeds after selling commissions and expenses of the offering amounted to
approximately Cdn.$42.5 million. The net proceeds from the initial public
offering were used for continuing research and development, sales and marketing
initiatives and working capital.
We have continued to utilize these financings to fund our operations and have
generated positive cash flow in the second half of 2002. Therefore, we have had
no requirement to date to return to the capital markets for additional funding.
Prior to our initial public offering in 1999, our operations and growth were
funded by cash flow from operations, private placements of our equity, research
and development funding and an operating line of credit.
Cash used by operations amounted to $4.7 million in 2002 compared to $21.1
million in 2001, an improvement of $16.4 million. The use of cash during 2002
was due mainly to our operating loss, restructuring costs and changes in working
capital. Cash used for capital expenditures was $2.2 million in 2002, compared
to $10.5 million in 2001, and was primarily for research and development
equipment and leasehold improvements. Expenditures on intangible assets were
$1.4 million in 2002, compared to $3.3 million in 2001 and were primarily for
license fees.
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:
- Net cash and short-term investments amounted to $34.8 million at
December 31, 2002 compared to $44.0 million at December 31, 2001.
- Accounts receivable amounted to $13.9 million at December 31, 2002
compared to $10.5 million at December 31, 2001.
- During 2002, we increased our operating line of credit with a Canadian
chartered bank. The available facility was increased to $10.0 million
from $0.9 million (Cdn.$1.5 million). The expanded facility bears
interest at prime plus 1.25% and is secured by a general security
agreement providing a first charge against all assets. At December 31,
2002, there were no borrowings under this line of credit.
MARKET RISK DISCLOSURE
During the year ended December 31, 2002, 78% of our revenue was earned from
United States-based customers compared to 92% in the year ended December 31,
2001. Our risk from currency fluctuations between the Canadian and U.S. dollar
is reduced by purchasing inventory, other costs of sales and many of our
services in U.S. dollars. We are exposed to foreign currency fluctuations since
the majority of our research and development, sales and marketing, and
administration costs are incurred in Canada. We monitor our exposure to
fluctuations between the Canadian and U.S. dollars. As a result of the adoption
of U.S. dollars as our currency of measurement in the year ended December 31,
14
1999, our foreign currency risk has changed from U.S. dollar denominated
monetary assets and liabilities to non-U.S. dollar denominated monetary assets
and liabilities and the risk of the impact of exchange rate changes relative to
the U.S. dollar. As we have available funds and very little debt, we have not
been adversely affected by significant interest rate fluctuations.
With our international expansion into Europe and the Asia-Pacific region, we are
transacting business in additional foreign currencies and the potential for
currency fluctuations is increasing. The risk associated with currency
fluctuations between the U.S. dollar and foreign currencies in Europe and the
Asia-Pacific has been minimal as such transactions have not been material to
date. During 2002, we continued to enter into additional distribution agreements
in Europe and the Asia-Pacific that are denominated primarily in US dollars. We
expect that, as our business expands in Europe, we will also continue to be
exposed to Euro transactions. To date we have not entered into any futures
contracts. To manage our foreign currency risks, 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 is not material to our financial results.
RELATED PARTY TRANSACTIONS
During 2002, there were no material related party transactions.
FORWARD-LOOKING STATEMENTS
Our annual report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other things,
plans and timing for the introduction or enhancement of our services and
products, statements about future market conditions, supply and demand
conditions, channel inventory and sell through, revenue, gross margin, operating
expenses, profits, and other expectations, intentions and plans contained in
this annual report that are not historical fact. Our expectations regarding
future revenues depend upon our ability to develop, manufacture, and supply
products that we do not produce today and that meet defined specifications. When
used in this annual report, the words "plan", "expect", "believe", and similar
expressions generally identify forward-looking statements. These statements
reflect our current expectations. They are subject to a number of risks and
uncertainties, including but not limited to, changes in technology and changes
in the wireless data communications market. In light of the many risks and
uncertainties surrounding the wireless data communications market, you should
understand that we cannot assure you that the forward-looking statements
contained in this annual report will be realized.
RISK FACTORS
Our business is subject to significant risks and past performance is no
guarantee of future performance. Some of the risks we face are:
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. As of the
end of 2002, commercial volume deliveries to AT&T, Sprint PCS and Verizon
Wireless had commenced. In order to realize the benefits of these
agreements, we will have to continue to successfully manage the following
risks:
- 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.
- 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, any costs incurred may not be recovered and we may incur
additional costs as penalties.
15
- 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
reputation could be harmed and our margins and revenues could decrease.
OUR PAST REVENUE GROWTH RATES AND OTHER OPERATING RESULTS MAY NOT BE ACCURATE
INDICATORS OF OUR FUTURE PERFORMANCE.
Although our revenues have increased year-over-year, we may not be able to
sustain these historical growth rates. We may not achieve or 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:
- Our ability to attract and retain skilled technical employees.
- The availability of critical components from third parties.
- Our ability to successfully complete the development of products
in a timely manner.
- 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 are unable to
recover our research and development expenses and could result in a
decrease in our market share and our revenues.
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:
- The absence of guaranteed manufacturing capacity.
- Reduced control over delivery schedules, production yields and
costs.
- 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.
16
WE HAVE A CUSTOMER CONCENTRATION RISK, AS A FEW CUSTOMERS REPRESENT A
SIGNIFICANT PORTION OF OUR EXPECTED FUTURE REVENUE.
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 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 on 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 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:
17
- Continuing to train, motivate, manage and retain our existing
employees and attract and integrate new employees.
- Maintaining and growing manufacturing capacity.
- Developing new products in a timely manner.
- 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:
- We may be liable for damages and litigation costs, including
attorneys' fees.
- We may be prohibited from further use of the intellectual
property.
- We may have to license the intellectual property, incurring
licensing fees.
- 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:
- Non-recognition of the proprietary nature or inadequate
protection of our methodologies in the United States, Canada or
foreign countries.
- Undetected misappropriation of our intellectual property.
- The substantial legal and other costs of protecting and enforcing
our rights in our intellectual property.
- 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:
- The timing of releases of our new products.
- The timing of substantial orders.
- Possible seasonal fluctuations in demand.
- Possible delays in the manufacture or shipment of current or new
products.
- Possible delays or shortages in component supplies.
18
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.
POTENTIAL ACQUISITIONS MAY RESULT IN INCREASED EXPENSES AND DIVERT MANAGEMENT'S
ATTENTION.
In the past, our strategy has included expanding our operations and
business through strategic acquisitions of businesses and products. We may
continue to pursue this strategy in order to further expand our business.
Acquisitions involve a number of risks, including:
- Diversion of management's attention during the acquisition
process.
- Impact on our financial condition due to the timing of the
acquisition.
- The failure of the acquired business to achieve anticipated
revenue levels, cost savings or other synergies.
If realized, these risks could result in substantial costs and disrupt our
operations. In addition, acquisitions could result in issuances of
securities that may dilute the value of our common shares.
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR MAY AFFECT OUR OPERATING RESULTS.
Approximately 78% 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 to cover our Canadian currency
requirements. During 2002, we continued to enter into additional
distribution agreements in Europe and the Asia-Pacific 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:
- Increased credit management risks and greater difficulties in
collecting accounts receivable.
- Unexpected changes in regulatory requirements, wireless
communications standards, exchange rates, trading policies,
tariffs and other barriers.
- Uncertainties of laws and enforcement relating to the protection
of intellectual property.
- Language barriers.
- 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.
19
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.
20
MANAGEMENT'S STATEMENT OF RESPONSIBILITIES
The management of Sierra Wireless, Inc. is responsible for the preparation of
the accompanying consolidated financial statements and the preparation and
presentation of information in the Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and are considered by management to present fairly
the financial position and operating results of the Company.
The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded and that financial reports are properly maintained to
provide accurate and reliable financial statements.
The Company's audit committee is comprised entirely of non-management directors
and is appointed by the Board of Directors annually. The committee meets
periodically with the Company's management and independent auditors to review
the consolidated financial statements and the independent auditors' report. The
audit committee reported its findings to the Board of Directors who have
approved the consolidated financial statements.
The Company's independent auditors, KPMG LLP, have examined the consolidated
financial statements and their report follows.
/s/ David B. Sutcliffe /s/ Peter W. Roberts
David B. Sutcliffe Peter W. Roberts
Chairman and Chief Executive Officer Chief Financial Officer
January 22, 2003
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Sierra Wireless, Inc. as at
December 31, 2002 and 2001 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 2002 and 2001 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2002 in
accordance with accounting principles generally accepted in the United States of
America.
On January 22, 2003, we reported separately to the shareholders of the Company
on the consolidated financial statements as at and for the periods presented
above, which consolidated financial statements were prepared in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
January 22, 2003
21
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of United States dollars, except per share amounts)
(Prepared in accordance with United States generally accepted
accounting principles (GAAP))
YEARS ENDED DECEMBER 31,
----------------------------------
2000 2001 2002
--------- --------- -------
Revenue......................................................................... $ 53,801 $ 62,348 $ 77,130
Cost of goods sold.............................................................. 29,067 47,035 69,132
-------- -------- --------
Gross margin.................................................................... 24,734 15,313 7,998
-------- -------- --------
Expenses:
Sales and marketing........................................................... 9,907 12,726 11,564
Research and development, net (note 13)....................................... 12,887 16,902 14,896
Administration................................................................ 5,915 10,460 4,708
Restructuring and other charges (note 3)...................................... -- -- 12,869
Amortization.................................................................. 1,754 2,084 2,331
-------- -------- --------
30,463 42,172 46,368
-------- -------- --------
Loss from operations............................................................ (5,729) (26,859) (38,370)
Other income.................................................................... 3,974 2,317 170
--------- --------- ---------
Loss before income taxes........................................................ (1,755) (24,542) (38,200)
Income tax expense (recovery) (note 12)......................................... 1,363 (273) 3,463
-------- -------- ---------
Net loss........................................................................ $(3,118) $(24,269) $(41,663)
======== ======== =========
Loss per share (note 14):
Basic......................................................................... $ (0.20) $ (1.50) $ (2.56)
Diluted....................................................................... $ (0.20) $ (1.50) $ (2.56)
======== ======== ========
See accompanying notes to consolidated financial statements.
22
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
DECEMBER 31,
------------
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 12,085 $ 34,841
Short-term investments.................................................................... 31,879 --
Accounts receivable, net of allowance for doubtful
accounts of $3,068 (2001-- $5,169)..................................................... 10,504 13,865
Inventories (note 5)...................................................................... 25,591 6,673
Deferred income taxes (note 12)........................................................... 224 --
Prepaid expenses.......................................................................... 1,180 864
--------- ----------
81,463 56,243
Fixed assets (note 6)....................................................................... 14,694 7,198
Deferred income taxes (note 12)............................................................. 4,030 500
Intangible assets (note 7).................................................................. 10,054 6,907
Other....................................................................................... 483 241
--------- ----------
$110,724 $ 71,089
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 4,356 $ 3,017
Accrued liabilities....................................................................... 12,555 12,431
Deferred revenue and credits.............................................................. 1,050 297
Current portion of long-term liabilities.................................................. 341 2,803
Current portion of obligations under capital lease........................................ 947 831
---------- ----------
19,249 19,379
Long-term liabilities (note 8).............................................................. 671 2,896
Obligations under capital lease (note 9).................................................... 761 60
Shareholders' equity:
Share capital (note 10)
Authorized
Unlimited number of common and preference shares with no par value
Common shares, 16,345,396 (2001 - 16,185,770) issued and outstanding .................. 122,673 123,047
Deficit................................................................................... (31,901) (73,564)
Accumulated other comprehensive income
Cumulative translation adjustments..................................................... (729) (729)
----------- -----------
90,043 48,754
---------- ----------
$ 110,724 $ 71,089
========== ==========
Commitments and contingencies (note 15)
See accompanying notes to consolidated financial statements.
/s/ David B. Sutcliffe /s/ S. Jane Rowe
DAVID B. SUTCLIFFE S. JANE ROWE
Director Director
23
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in thousands of United States dollars, except number of shares)
(Prepared in accordance with United States GAAP)
ACCUMULATED
COMMON SHARES OTHER
---------------------- COMPREHENSIVE
NUMBER AMOUNT DEFICIT INCOME (LOSS) TOTAL
-------- -------- --------- ------------- --------
Balance December 31, 1999................. 14,216,395 $ 52,936 $ (4,514) $ (729) $ 47,693
Net and comprehensive loss................ -- -- (3,118) -- (3,118)
Issued for cash (note 10)................. 1,461,106 65,634 -- -- 65,634
Warrants exercised........................ 55,555 259 -- -- 259
Returned to treasury...................... (47,618) -- -- -- --
Stock option exercises.................... 24,137 664 -- -- 664
Tax benefit of share issue costs.......... -- 2,681 -- -- 2,681
----------- ----------- ---------- ---------- -----------
Balance December 31, 2000................. 16,009,575 122,174 (7,632) (729) 113,813
Net and comprehensive loss................ -- -- (24,269) -- (24,269)
Stock option exercises.................... 176,195 499 -- -- 499
------- ----------- ---------- ---------- -----------
Balance December 31, 2001................. 16,185,770 122,673 (31,901) (729) 90,043
Net and comprehensive loss................ -- -- (41,663) -- (41,663)
Stock option exercises.................... 159,626 374 -- -- 374
------------ ----------- ---------- ---------- -----------
Balance December 31, 2002................. 16,345,396 $ 123,047 $ (73,564) $ (729) $ 48,754
=========== =========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
24
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002
--------- --------- -------
Cash flows from operating activities:
Net loss................................................................... $ (3,118) $ (24,269) $ (41,663)
Adjustments to reconcile net loss to net
cash provided by operating activities
Amortization............................................................ 3,068 6,661 6,788
Non-cash restructuring and other charges................................ -- -- 28,593
Loss on disposal........................................................ -- -- 597
Expense in-process research and development costs....................... 1,000 -- --
Deferred income taxes................................................... 448 (15) 3,754
Accrued warrants........................................................ -- 671 481
Changes in operating assets and liabilities
Accounts receivable..................................................... (17,646) 12,084 (3,361)
Inventories............................................................. (5,644) (13,031) 2,517
Prepaid expenses........................................................ (943) 59 159
Accounts payable........................................................ 7,237 (6,945) (1,339)
Accrued liabilities..................................................... 7,069 3,420 (463)
Deferred revenue and credits............................................ 559 300 (753)
--------- --------- ----------
Net cash used in operating activities...................................... (7,970) (21,065) (4,690)
Cash flows from investing activities:
Business acquisitions (note 4)............................................. (7,250) -- --
Proceeds on disposal....................................................... -- -- 338
Purchase of fixed assets................................................... (6,692) (10,523) (2,219)
Increase in intangible assets.............................................. (3,118) (3,328) (1,431)
Increase in other assets................................................... (340) (143) --
Purchase of short-term investments......................................... (212,438) (69,411) (14,662)
Proceeds on maturity of short-term investments............................. 140,294 109,676 46,541
--------- --------- ---------
Net cash provided by (used in) investing activities........................ (89,544) 26,271 28,567
Cash flows from financing activities:
Issue of common shares..................................................... 66,557 499 374
Increase in long-term liabilities.......................................... -- 255 --
Repayment of long-term liabilities......................................... (744) (766) (1,495)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................ 65,813 (12) (1,121)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......................... (31,701) 5,194 22,756
Cash and cash equivalents, beginning of year................................. 38,592 6,891 12,085
--------- --------- ---------
Cash and cash equivalents, end of year....................................... $ 6,891 $ 12,085 $ 34,841
========= ========= =========
See supplementary information (note 16)
See accompanying notes to consolidated financial statements.
25
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000, 2001 and 2002
(Expressed in thousands of United States dollars, except per share amounts
and number of shares)
(Prepared in accordance with United States GAAP)
1. NATURE OF OPERATIONS
We were incorporated under the Canada Business Corporations Act on May 31, 1993.
Our principal business activities include developing, manufacturing, marketing,
selling and supporting a broad range of single and multi-mode wireless data
modems and enabling software for use with handheld computing devices, notebook
computers and vehicle-based or monitoring applications.
2. SIGNIFICANT ACCOUNTING POLICIES
Management has prepared these consolidated financial statements in accordance
with accounting principles generally accepted in the United States.
(a) PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Sierra Wireless,
Inc. and its wholly-owned subsidiaries Sierra Wireless Data, Inc., Sierra
Wireless SRL, Sierra Wireless (UK) Limited and Sierra Wireless ULC from their
respective dates of formation. We have eliminated all significant intercompany
balances and transactions.
(b) USE OF ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets, particularly the recoverability of fixed assets,
deferred income taxes and intangible assets, and warranty accruals and other
liabilities, and disclosures of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
(c) CASH EQUIVALENTS
Cash equivalents include short-term deposits, which are all highly liquid
marketable securities having a term to maturity of three months or less when
acquired. We value our short-term deposits at cost.
(d) SHORT-TERM INVESTMENTS
Short-term investments, all of which we categorize as available-for-sale, are
carried at quoted market value. We reflect unrealized holding gains (losses)
related to available-for-sale investments, after deducting amounts allocable to
income taxes, as a separate component of shareholders' equity. There were no
significant unrealized holding gains or losses on available-for-sale securities
during the three-year period ending December 31, 2002.
(e) INVENTORIES
Inventories consist of electronic components and finished goods and are valued
at the lower of cost, determined on a first-in-first-out basis, and estimated
net realizable value.
26
(f) RESEARCH AND DEVELOPMENT
We expense research and development costs as they are incurred. To date we have
had no significant software development costs that would be required to be
capitalized pursuant to Financial Accounting Standards ("FAS") No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed".
We follow the cost reduction method of accounting for government research and
development funding, whereby the benefit of the funding is recognized as a
reduction in the cost of the related expenditure when certain criteria
stipulated under the terms of those funding agreements have been met, and there
is reasonable assurance the research and development funding will be received.
Certain research and development funding is repayable only on the occurrence of
specified future events. If such events do not occur, no repayment is required.
We recognize the liability to repay research and development funding in the
period in which conditions arise that will cause research and development
funding to be repayable.
(g) FIXED ASSETS
We initially record fixed assets at cost. We subsequently provide amortization
on a straight-line basis over the following periods:
Furniture and fixtures.................................................... 5 years
Research and development equipment........................................ 3 years
Tooling................................................................... 3 years
Software.................................................................. 3-5 years
Office equipment.......................................................... 5 years
We amortize leasehold improvements on a straight-line basis over the lesser of
their useful lives or lease terms.
(h) INTANGIBLE ASSETS
PATENTS
Consideration paid for the patents is amortized on a straight-line basis over
three to five years commencing with the date the patents are granted.
LICENSE FEES
Consideration paid for license fees is amortized on a straight-line basis over
the shorter of the term of the license or five years.
INTELLECTUAL PROPERTY
Consideration paid for intellectual property is amortized on a straight-line
basis over three years.
(i) INCOME TAXES
We account for income taxes in accordance with FAS No. 109, "Accounting for
Income Taxes", which requires the use of the asset and liability method. Under
this method, deferred income taxes are recognized for the future income tax
consequences attributable to differences between the financial statement
carrying values and their respective income tax bases (temporary differences).
Changes in the net deferred tax asset or liability are generally included in
earnings. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is included in income
in the period that includes the enactment date. Deferred income tax assets are
evaluated and if their realization is not considered "more likely than not", a
valuation allowance is provided.
27
(j) STOCK-BASED COMPENSATION
We have elected under FAS No. 123, "Accounting for Stock-based Compensation", to
account for employee stock options using the intrinsic value method. This method
is described in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As we grant all
stock options with an exercise price equal to the market value of the underlying
common shares on the date of the grant, no compensation expense is required to
be recognized under APB 25. FAS No. 123 uses a fair value method of calculating
the cost of stock option grants. Had compensation cost for our employee stock
option plan been determined by this method, our net loss and loss per share
would have been as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
--------- --------- -------
Net loss:
As reported..................................................................... $ (3,118) $ (24,269) $ (41,663)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards.................... (5,575) (10,426) (7,817)
---------- ----------- -----------
Pro forma....................................................................... $ (8,693) $ (34,695) $ (49,480)
========== =========== ===========
Basic and diluted loss per share:
As reported..................................................................... $ (0.20) $ (1.50) $ (2.56)
Pro-forma....................................................................... (0.57) (2.15) (3.03)
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.
We have estimated the fair value of each option on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
--------- --------- -------
Expected dividend yield............................................................. 0 0 0
Expected stock price volatility..................................................... 106% 107% 107%
Risk-free interest rate............................................................. 5.67% 4.88% 4.48%
Expected life of options............................................................ 4 years 4 years 4 years
The fair value of stock options granted during the year was $4.58 (2001 -
$15.04, 2000 - $38.85).
(k) REVENUE RECOGNITION
We recognize revenue from sales of products and services upon the later of
transfer of title or upon shipment of the product to the customer or rendering
of the service, so long as collectibility is reasonably assured. Customers
include resellers, original equipment manufacturers, wireless service providers
and end-users. We record deferred revenue when we receive cash in advance of the
revenue recognition criteria being met.
We recognize revenue on the portion of sales to certain resellers that are
subject to provisions allowing various rights of return and stock rotation when
the rights have expired or the products have been reported as sold by the
resellers.
Funding from research and development agreements, other than government
assistance, 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.
(l) WARRANTY COSTS
We accrue warranty costs upon the recognition of related revenue, based on our
best estimates, with reference to past experience.
28
(m) MARKET DEVELOPMENT COSTS
We accrue for co-op advertising costs upon the later of the recognition date of
the related revenue or date at which the co-op advertising is available. Market
development costs are recorded as marketing expense in accordance with the
criteria in Emerging Issues Task Force 01-9, "Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of Vendor's Products)".
(n) SHARE ISSUE COSTS
We reduce the value of consideration assigned to shares issued by the direct
costs, net of income tax recoveries, of issuing the shares.
(o) IMPAIRMENT OF LONG-LIVED ASSETS
We monitor the recoverability of long-lived assets, which includes fixed assets
and intangible assets, based on factors such as future asset utilization and the
future undiscounted cash flows expected to result from the use of the related
assets. Our policy is to record an impairment loss in the period when we
determine that the carrying amount of the asset will not be recoverable. At that
time the carrying amount is written down to fair value.
(p) EARNINGS (LOSS) PER COMMON SHARE
We calculate basic earnings (loss) per share based on the weighted-average
number of common shares outstanding for the year. If, in a reporting period, we
have had outstanding dilutive stock options and warrants, we calculate diluted
earnings (loss) per share using the treasury stock method.
(q) COMPREHENSIVE INCOME
Under FAS No. 130, "Reporting Comprehensive Income", we are required to report
comprehensive income (loss), which includes our net earnings (loss) as well as
changes in equity from other non-owner sources. In our case, the other changes
in equity included in comprehensive income (loss) comprise the foreign currency
cumulative translation adjustments. Comprehensive income (loss) is presented in
the consolidated statements of shareholders' equity.
(r) INVESTMENT TAX CREDITS
Investment tax credits are accounted for using the cost reduction method whereby
such credits are deducted from the expenses or assets to which they relate in
the period in which their recoverability is reasonably assured.
(s) COMPARATIVE FIGURES
We have reclassified certain of the figures presented for comparative purposes
to conform to the financial statement presentation we adopted for the current
year.
(t) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("FAS No. 148"), which
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, FAS No. 148 amends the disclosure requirements of FAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. FAS No. 148 is effective for
fiscal years ending after December 15, 2002 with earlier application permitted.
We have adopted the disclosure provisions of FAS No. 148 in our consolidated
financial statements.
In November 2002, FASB issued Emerging Issues Task Force 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. In some arrangements, the
different revenue-generating activities are sufficiently separable, and there
may be sufficient evidence of their fair values to separately account for some
or all of the deliverables. In other arrangements, some or all of the
deliverables are not independently functional, or there is not sufficient
evidence of their fair values to account for them separately. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We are currently evaluating the
29
impact of this accounting pronouncement on our financial results.
In July 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("FAS No. 146"), which addresses accounting and
reporting for costs associated with exit or disposal activities. FAS No. 146
relates to the recognition of a liability for a cost associated with an exit or
disposal activity and requires that a liability be recognized for those costs
only when the liability is incurred, that is, when it meets the definition of a
liability under the FASB's conceptual framework. FAS No. 146 also established
fair value as the objective for initial measurement of liabilities related to
exit or disposal activities. As a result, FAS 146 significantly reduces an
entity's ability to recognize a liability for future expenses related to a
restructuring. FAS No.146 is effective for exit or disposal activities that are
initiated after December 31, 2002.
In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS No. 144"), that replaces FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". FAS No. 144 applies to the assessment of the impairment in the
carrying value of long-lived assets, excluding goodwill and certain other
specified items, including those to be disposed of by sale, including
discontinued operations. FAS No. 144 requires that those long-lived assets be
measured at the lower of carrying amount and fair value less costs to sell.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. FAS
No. 144 is effective for fiscal years beginning after December 15, 2001. The
Company has adopted FAS No. 144 which had no material effect on the Company's
financial results.
In August 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement
Obligations" ("FAS No. 143"), which requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. FAS No. 143 is effective for fiscal years beginning after June
15, 2002. Currently, we do not believe that the adoption of this accounting
pronouncement will impact our financial results.
In August 2001, the FASB issued FAS No. 141, "Business Combinations" and FAS No.
142, "Goodwill and Other Intangible Assets". Use of the pooling-of-interests
method is prohibited. FAS No. 142 changes the accounting for goodwill from an
amortization method to an annual impairment test and is required to be applied
prospectively effective January 1, 2002. Under this standard, we will be
required to perform an initial benchmark test of impairment within six months of
adoption and subsequent annual tests of impairment will be at the reporting unit
level. If the carrying value of goodwill of a reporting unit exceeds the fair
value of the reporting unit's goodwill, the carrying value must be written down
to fair value. FAS No. 141 is effective for all business combinations initiated
after June 30, 2001. The Company has adopted FAS No. 141 and FAS No. 142 which
had no material effect on the Company's financial results.
3. RESTRUCTURING AND OTHER CHARGES
During 2002, we announced and implemented a business restructuring program. We
reduced operating expenses and asset levels as a result of our assessment of
current and visible future demand. This restructuring program included a write
down of inventory, fixed and intangible asset impairment charges, workforce
reductions, charges related to facilities and other assets, and an increase in
our deferred tax asset valuation allowance. We have substantially completed
implementation of our restructuring program at December 31, 2002.
During 2002, we recorded restructuring and other charges of $37,707, a net
increase of $1,576 from our original estimate. The details of the restructuring
and other charges at June 30, 2002 and changes from that date follow.
30
During the second quarter of 2002, we recorded restructuring and other charges
of $36,131 as follows:
Inventory writedown $16,705
Fixed assets writedown 4,824
Intangible assets writedown 3,064
Facilities restructuring 4,696
Deferred tax asset reduction 3,754
Workforce reduction 1,616
Other 1,472
-------
Total restructuring and other charges $36,131
Applied:
Inventory writedown, included in cost of sales (16,705)
Portion of fixed assets writedown, included in cost of sales (1,784)
Portion of workforce reduction and other, included in cost of sales (517)
Deferred tax asset and other, included in tax expense (4,032)
-------
Restructuring and other charges $13,093
=======
The total restructuring and other charges for 2002, including the net reversal
indicated below of $224, was $12,869. The following table summarizes the
activity related to the provision for restructuring and other charges for fiscal
2002, the components of the net charge since the second quarter, and the balance
of the provision at December 31, 2002.
Revisions to Provision
-------------------------
June 30, Net Dec. 31,
2002 Net Cash Non-Cash Additional Charge/ 2002
Charge Payments Charges Charges Reduction (Reversal) Provision
------ -------- ------- ------- --------- --------- ---------
Restructuring charges:
Facilities
restructuring (note 8) $4,696 $(471) $ -- $ 346 $ (24) $322 $4,547
Workforce reduction 1,512 (1,282) -- -- (176) (176) 54
Other 781 (259) (404) 46 -- 46 164
------- ------- ------- ------ ------- ------ ------
6,989 (2,012) (404) 392 (200) 192 $4,765
======
Asset writedowns:
Fixed assets writedown 3,040 3,040 -- (416) (416)
Intangible assets writedown 3,064 3,064 -- -- --
------- ------- ------ ------- -----
6,104 6,104 -- (416) (416)
------- ------ ------- -----
Total restructuring and
other charges $13,093 $ 392 $ (616) $(224)
======= ===== ====== ======
The excess inventory charge is related primarily to CDPD and 2G CDMA products.
In the fourth quarter of 2002, we recorded an additional net writedown of
inventory of $1,862 which was a result of faster than expected decline in sales
of CDPD products.
Fixed assets impairment charges consisted of writedowns primarily for research
and development equipment, test equipment, and corporate assets. The fixed
assets were written down to the current fair value for this type of equipment.
The net reversal of $416 to the second quarter impairment charge related
primarily to adjusting our estimate of equipment to be disposed of.
Intangible assets impairment charges consisted of writedowns primarily for
research and development licenses. The research and development licenses, which
are no longer required, have been written down to nil.
Our deferred tax asset valuation allowance has been increased to record the
reduction in the portion of our deferred tax assets that we believe is more
likely than not to be realized.
Workforce reduction charges of $1,616, of which $104 was included in cost of
sales, were related to the cost of severance and benefits associated with 95
employees and contractors notified of termination. Of the 95 employees and
31
contractors, 63 were involved in product development, seven were involved in
manufacturing, 18 were sales and marketing personnel, and seven were in
administration. Actual severance costs were lower than the original estimates
therefore the excess provision of $176 was reversed subsequent to the second
quarter. We expect the remaining provision to be substantially drawn down by
April 30, 2003.
As a result of the above noted workforce reduction and our assessment of current
and visible demand, there are leased facilities that are excess to our current
requirements. We have recorded a provision that represents the estimated net
present value of future contractual obligations that are in excess of our
estimated future requirements. During the second half of 2002, we made very
little progress on our facilities restructuring and have estimated that an
additional $346 is required. The facilities restructuring provision will be paid
in Canadian dollars.
Other charges include provisions for purchase commitments, writedown of
investments, and professional fees in connection with the restructuring
activities. The additional charges of $46 relate to revised estimates of
professional fees. The remaining provision is expected to be substantially drawn
down by March 31, 2003.
4. ACQUISITIONS
On June 22, 2000, we acquired the Code Division Multiple Access (CDMA) module
business, including the module inventory, manufacturing and customer
commitments, from Qualcomm Incorporated ("QUALCOMM"). In addition, we signed a
supply agreement for CDMA modules and extended our existing license agreement
with QUALCOMM. The purchase price of $9,500 was settled by cash payment of
$7,250 and a payable of $2,250, which was paid during 2001. The acquisition was
accounted for by the purchase method of accounting and the results of operations
have been consolidated since the date of acquisition. Our interest in the net
assets acquired at fair values are as follows:
License fees................................................................ $ 4,500
Inventory................................................................... 3,813
In-process research and development......................................... 1,000
Goodwill.................................................................... 277
-------
9,590
Warranty reserve............................................................ (90)
-------
$ 9,500
=======
The amount allocated to in-process research and development ("in-process R&D")
was determined by management in light of guidance provided by the United States
Securities and Exchange Commission regarding valuation methodology. For purposes
of reporting under United States GAAP, companies are required to immediately
expense purchased in-process R&D and, accordingly, the purchased in-process R&D
acquired from QUALCOMM was expensed at the time of acquisition. In-process R&D
of $1,000 has been included in research and development expense in the
consolidated statements of operations for the year ended December 31, 2000.
If the acquisition of QUALCOMM's CDMA module business had occurred as of January
1, 2000, the pro forma results of operations would not be significantly
different than that reported.
5. INVENTORIES
2001 2002
---- ----
Electronic components.................................................. $ 12,754 $ 1,430
Finished goods......................................................... 12,837 5,243
-------- --------
$ 25,591 $ 6,673
======== ========
32
6. FIXED ASSETS
2002
-----------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION AND VALUE
WRITEDOWN
---- ---------------- -------
Furniture and fixtures....................................................... $ 2,262 $ 995 $ 1,267
Research and development equipment............................................ 7,791 5,672 2,119
Tooling....................................................................... 6,453 4,952 1,501
Software...................................................................... 4,406 2,694 1,712
Leasehold improvements........................................................ 1,738 1,257 481
Office equipment.............................................................. 337 219 118
--------- ------------ ---------
$ 22,987 $ 15,789 $ 7,198
========= ============ =========
2001
---------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---- ---------------- -------
Furniture and fixtures........................................................ $ 2,062 $ 438 $ 1,624
Research and development equipment............................................ 9,665 4,255 5,410
Tooling....................................................................... 5,639 1,903 3,736
Software...................................................................... 3,173 514 2,659
Leasehold improvements........................................................ 1,608 520 1,088
Office equipment.............................................................. 322 145 177
--------- ----------- ---------
$ 22,469 $ 7,775 $ 14,694
========= =========== =========
As at December 31, 2002, assets under a capital lease with a cost of $1,764
(2001 -- $1,584) and accumulated amortization of $781 (2001 -- $204) are
included in fixed assets.
7. INTANGIBLE ASSETS
2002
-----------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AND WRITEDOWN
---- ---------------- -------
Patents....................................................................... $ 1,846 $ 414 $ 1,432
License fees.................................................................. 12,978 7,503 5,475
Intellectual property......................................................... 434 434 --
--------- ----------- -------
$ 15,258 $ 8,351 $ 6,907
========= =========== =======
2001
------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---- ---------------- -------
Patents....................................................................... $ 888 $ 104 $ 784
License fees.................................................................. 12,505 3,235 9,270
Intellectual property......................................................... 434 434 --
--------- ----------- ---------
$ 13,827 $ 3,773 $ 10,054
========= =========== ==========
The estimated aggregate amortization expense for each of 2003, 2004, 2005, 2006
and 2007 is expected to be $2,302, $2,302, $2,302, nil and nil, respectively.
33
8. LONG-TERM LIABILITIES
2001 2002
---- ----
Facilities (note 3)........................................................... $ -- $ 4,547
TPC warrants (note 15(b))..................................................... 671 1,152
Other......................................................................... 341 --
-------- --------
1,012 5,699
Less current portion.......................................................... 341 2,803
-------- --------
$ 671 $ 2,896
======== ========
9. OBLIGATIONS UNDER CAPITAL LEASE
We lease research and development equipment, computer equipment and office
furniture under capital leases, denominated in Cdn. dollars, and expiring at
various dates to 2004. As at December 31, 2002 our future minimum lease payments
under capital leases were as follows:
CDN.$ U.S.$
------ -------
2003.......................................................................... $1,405 $ 889
2004.......................................................................... 85 54
------ -------
1,490 943
Less amount representing interest at approximately 8.4%....................... 82 52
------ -------
1,408 891
Less current portion.......................................................... 1,313 831
------ -------
$ 95 $ 60
====== =======
Interest expense on capital lease obligations for the year ended December 31,
2002 is $149 (2001 -- $51).
10. SHARE CAPITAL
FOLLOW-ON OFFERING
On May 10, 2000, we completed a new issue and secondary public offering of
2,221,139 common shares in the United States and Canada at a price of $48.63
(Cdn. $72.75) per common share. In addition, our shares were co-listed for
trading on The Nasdaq National Market under the trading symbol "SWIR". Of the
2,221,139 common shares, 1,461,106 common shares were offered by the Company
and 760,033 common shares were offered by certain shareholders of the Company.
STOCK OPTION PLAN
Under the terms of our employee stock option plan, our board of directors may
grant options to employees, officers and directors. The plan provides for the
granting of options at the fair market value of our stock at the grant date.
Options generally vest over four years, with the first 25% vesting at the first
anniversary date of the grant and the balance vesting in equal amounts at the
end of each month thereafter. We determine the term of each option at the time
it is granted, with options having a five year or a ten year term. Since
February 1999, options have been granted with a five year term. We have reserved
3,882,233 options for issuance under our employee stock option plan. Stock
options have been granted in Canadian and U.S. dollars.
34
Stock option activity since December 31, 1999 is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ------------------
CDN.$ U.S.$
Outstanding, December 31, 1999............................................1,583,240 $ 8.44 $ 5.84
Granted................................................................... 918,642 78.52 52.35
Exercised................................................................. (318,055) 3.10 2.07
Forfeited................................................................. (62,693) 24.62 16.41
---------
Outstanding, December 31, 2000............................................2,121,134 39.10 26.07
Granted................................................................... 594,628 32.37 20.27
Exercised................................................................. (175,571) 4.30 2.69
Forfeited................................................................. (96,742) 48.99 30.68
---------
Outstanding, December 31, 2001............................................2,443,449 39.57 24.78
Granted................................................................... 732,250 9.79 6.20
Exercised................................................................. (159,626) 3.73 2.36
Forfeited................................................................. (465,509) 50.22 31.78
---------
Outstanding, December 31, 2002............................................2,550,564 19.83 12.55
=========
EXERCISABLE,
DECEMBER 31, END OF YEAR
------------ ------------
2000...................................................................................... 543,657
2001...................................................................................... 1,035,002
2002...................................................................................... 1,378,101
The following table summarizes the stock options outstanding at December 31,
2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------- --------- ---------------- --------------- ----------- ---------------
IN YEARS CDN.$ U.S.$ CDN.$ U.S.$
$0.57 - $0.95 (Cdn.$0.90 - Cdn.$1.50)..... 114,239 4.6 $ 1.11 $ 0.70 114,239 $ 1.11 $ 0.70
$0.96 - $3.56 (Cdn.$1.51 - Cdn.$5.63)..... 787,701 5.0 3.89 2.46 291,393 4.50 2.85
$3.57 - $11.58 (Cdn.$5.64 - Cdn.$18.30)... 390,377 2.1 15.11 9.56 287,380 15.03 9.51
$11.59 - $39.08 (Cdn.$18.31 - Cdn.$61.75). 748,310 3.2 37.61 23.80 361,112 44.96 28.46
$39.09 - $60.51 (Cdn.$61.76 - Cdn.$95.60). 402,395 2.6 70.28 44.48 255,175 70.81 44.82
$60.52 - $134.18
(Cdn.$95.61 - Cdn.$212.00).......... 107,542 2.4 133.92 84.76 68,802 136.33 86.28
-------- ---------
2,550,564 3.5 19.83 12.55 1,378,101 35.88 22.71
========= =========
The options outstanding at December 31, 2002 expire between March 29, 2004 and
January 29, 2009.
11. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of our financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities and current portions of long-term liabilities, approximate
their fair value due to their short maturities. Based on borrowing rates
currently available to us for loans with similar terms, the carrying value of
our obligations under capital lease and long-term liabilities approximates their
fair value.
35
CONCENTRATIONS OF BUSINESS RISK
We maintain substantially all of our cash and cash equivalents and short-term
investments with major financial institutions or government instruments.
Corporate paper is uninsured. Deposits we hold with banks may exceed the amount
of insurance provided on such deposits.
We outsource our manufacturing of our products to third parties. We are
dependent upon the development and deployment by third parties of their
manufacturing abilities. The inability of any supplier or manufacturer to
fulfill our supply requirements could impact future results. We have supply
commitments to our outsource manufacturers based on our estimates of customer
and market demand. Where actual results vary from our estimates, whether due to
execution on our part or market conditions, we are at risk.
We have a customer concentration risk as a few customers represent a significant
portion of our revenue for the year and also our future revenue, see note 17.
Financial instruments that potentially subject us to concentrations of credit
risk are primarily accounts receivable. We perform on-going credit evaluations
of our customers' financial condition and require letters of credit or other
guarantees whenever deemed appropriate.
Although substantially all of our revenues are received in U.S. dollars, we
incur operating costs and have obligations under capital lease that are
denominated in Cdn. dollars. Fluctuations in the exchange rates between these
currencies could have a material effect on our business, financial condition and
results of operations. We mitigate this risk by denominating many of our payment
obligations in U.S. dollars.
LINE OF CREDIT
During 2002, we expanded our operating line of credit from $949 (Cdn.$1,500) to
$10,000, which bears interest at prime plus 1.25% per annum. This line of credit
is secured by a general security agreement providing a first charge against all
assets. The balance at December 31, 2002, was nil (2001 -- nil).
12. INCOME TAXES
The composition of our deferred tax assets at December 31 is as follows:
2001 2002
-------- --------
Deferred tax assets
Fixed assets................................................................................... $ (1,235) $ (1,837)
Loss carryforwards............................................................................. 775 3,002
Scientific research and development expenses................................................... 3,724 7,521
Share issue costs.............................................................................. 1,465 897
Reserves and other............................................................................. 1,792 5,218
-------- --------
Total gross deferred tax assets.................................................................. 6,521 14,801
Less valuation allowance......................................................................... 2,267 14,301
-------- --------
Net deferred tax assets.......................................................................... $ 4,254 $ 500
======== ========
We believe that realization of our net deferred tax assets is more likely than
not. In assessing the realizability of our deferred tax assets, we considered
whether it is more likely than not that some portion or all of our deferred tax
assets will not be realized. The ultimate realization of our deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. We considered projected future
taxable income and tax planning strategies in making our assessment.
The scientific research and development expenses are available to be carried
forward indefinitely and deducted against future taxable income otherwise
calculated. We also have investment tax credits of approximately $10,700
available to offset future Canadian federal income taxes payable. The investment
tax credits expire commencing in 2004 and to 2012.
EFFECTIVE TAX RATE
Our income tax expense for the year ended December 31 differs from that
calculated by applying statutory rates for the following reasons:
2000 2001 2002
---- ---- ----
Combined Canadian federal and provincial income taxes at
expected rate of 39.6% (2001 - 44.6%, 2000 - 45.6%)................................. $ (800) $(10,946) $(15,127)
Permanent and other differences....................................................... 1,480 1,076 1,381
Unrecognized tax assets............................................................... (1,165) 2,267 8,826
Change in enacted tax rates........................................................... - 712 -
Loss subject to tax at rates lower than statutory rate................................ 1,848 6,618 4,629
Write-down of deferred tax asset...................................................... - - 3,754
-------- --------- ---------
$ 1,363 $ (273) $ 3,463
======== ========= =========
Our provisions for income taxes consist of the following:
2000 2001 2002
---- ---- ----
Current
Canadian............................................................................ $ 124 $ 95 $ 94
Foreign............................................................................. 791 (353) (385)
-------- ------- -------
Total current......................................................................... 915 (258) (291)
Deferred
Canadian............................................................................ 264 (15) 3,754
Foreign............................................................................. 184 -- --
-------- ------- -------
Total deferred........................................................................ 448 (15) 3,754
-------- ------- -------
Income tax expense (recovery)......................................................... $ 1,363 $ (273) $ 3,463
======== ======= =======
13. RESEARCH AND DEVELOPMENT, NET
2000 2001 2002
---- ---- ----
Research and development.............................................................. $13,590 $19,429 $16,795
Less government research and development funding and investment tax credits........... 703 2,527 1,899
------- ------- -------
$12,887 $16,902 $14,896
======== ======= =======
14. LOSS PER SHARE
The weighted-average number of shares outstanding we used in the computation of
loss per share were as follows:
2000 2001 2002
---- ---- ----
Weighted-average shares used in computation of loss per share......................... 15,318 16,129 16,304
====== ====== ======
All stock options outstanding are anti-dilutive for all periods presented.
15. COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
We lease equipment and premises with minimum future lease payments denominated
in Cdn. dollars at December 31, 2002 as follows:
CDN.$ U.S.$
----- -----
2003....................................................................................... $ 2,654 $ 1,680
2004....................................................................................... 2,482 1,571
2005....................................................................................... 2,454 1,553
2006....................................................................................... 2,512 1,590
2007....................................................................................... 2,586 1,637
Thereafter................................................................................. 9,325 5,902
-------- --------
$ 22,013 $ 13,933
======== ========
37
(b) CONTINGENT LIABILITY ON SALE OF PRODUCTS
(i) Under license agreements, we are committed to royalty payments based
on the sales of products using certain technologies. We recognize
royalty obligations as determinable in accordance with agreement
terms. Where agreements are not finalized, we have recognized our
current best estimate of the obligation. When the agreements are
finalized, the estimate will be revised accordingly.
(ii) Under certain research and development funding agreements, we are
contingently liable to repay up to $3,153. As at December 31, 2002,
$304 has been paid to date against sales amounting to $7,709, 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
conditionally repayable research and development funding amounting to
Cdn. $9,999 to support the development of a range of third generation
wireless technologies. During the year, we have claimed $2,265 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.
(c) LEGAL PROCEEDINGS
(i) In July 2001, we learned that Metricom, Inc. ("Metricom"), one of our
customers, had filed a Chapter 11 reorganization under the U.S.
bankruptcy laws. We filed a proof of claim for amounts due to us
totaling $13,745. Metricom objected to that claim asserting that all
but $2,254 should be disallowed. Metricom also filed an adversary
complaint against us in the U.S. bankruptcy court seeking return of
payments totaling $1,900 made to us within 90 days of the bankruptcy
filing, alleging that the payments are avoidable as "preferences". We
contended that the payments were in the ordinary course of business
and that we supplied additional product to Metricom after receiving
the payments, which would offset any preference liability. During
2002, we executed a global settlement with the reorganized debtor
under which we agreed to reduce our general unsecured claim to
$10,250, and Metricom agreed to dismiss the preference claims. We will
receive a settlement of $1.8 million that has been included in the
determination of our net loss for 2002.
(ii) In November 2002, Sierra Wireless, Inc., along with several other
defendants, was served with the second amended complaint of MLR, LLC
filed in the U.S. District Court for the Northern District of Illinois
Eastern Division for alleged patent infringement. We have assessed the
complaint and have determined that there has been no infringement of
the patents referred to in this claim and that the claim is invalid.
We have filed our response to the complaint. Although there can be no
assurance that an unfavourable outcome of the dispute would not have a
material adverse effect on our operating results, liquidity or
financial position, we believe the claims are without merit and will
vigorously defend the action.
(iii) We are engaged in other legal actions arising in the ordinary course
of business and believe that the ultimate outcome of these actions
will not have a material adverse effect on our operating results,
liquidity or financial position.
38
16. SUPPLEMENTARY INFORMATION
2000 2001 2002
------ ------ ------
(a) CASH FLOW INFORMATION:
Cash received
Interest.......................................................................... $ 3,331 $ 2,782 $ 912
Income taxes...................................................................... -- -- 905
Cash paid for
Interest.......................................................................... 128 48 323
Income taxes...................................................................... 39 958 57
Non-cash financing activities
Purchase of fixed assets funded by obligations under
capital lease.................................................................. 419 1,759 328
(b) ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Opening balance...................................................................... $ 108 $ 1,320 $ 5,169
Bad debt expense..................................................................... 1,254 4,040 623
Write offs and settlements........................................................... (42) (191) (2,724)
-------- -------- --------
Closing balance...................................................................... $ 1,320 $ 5,169 $ 3,068
======== ======== ========
(c) OTHER:
Rent expense......................................................................... $ 711 $ 1,334 $ 1,599
Foreign exchange gain................................................................ 177 187 77
17. SEGMENTED INFORMATION
We operate in the wireless data modem technology industry and all sales of our
products and services are made in this segment. Management makes decisions about
allocating resources based on the one operating segment.
Revenues by product were as follows:
2000 2001 2002
---- ---- ----
MP modems............................................................................ $ 9,815 $ 8,039 $ 7,781
AirCard modems....................................................................... 25,271 38,627 44,616
OEM modems........................................................................... 16,227 9,319 19,025
Other................................................................................ 2,163 3,718 1,984
Research and development funding...................................................... 325 2,645 3,724
-------- --------- --------
$ 53,801 $ 62,348 $ 77,130
======== ========= ========
85% (2001 - 75%) of our fixed assets are in Canada. Product sales in North
America were 87% (2001-- 97%; 2000-- 82%).
We sell certain products through resellers, original equipment manufacturers,
and wireless service providers who sell these products to end-users. The
approximate sales to the significant resellers are as follows:
2000 2001 2002
-------------- -------------- ----------
Reseller A...................................................... less than 10% less than 10% $ 17,808
Reseller B...................................................... less than 10% less than 10% 15,605
Reseller C...................................................... $ 6,230 $ 8,228 less than 10%
Reseller D...................................................... less than 10% $ 6,098 less than 10%
Reseller E...................................................... $ 8,750 less than 10% less than 10%
39
SIERRA WIRELESS, INC.
2002 ANNUAL REPORT
CANADIAN GAAP
40
REPORT TO SHAREHOLDERS
In a year that brought continued economic challenges, we strengthened our
position as a leading provider of wireless data modems and enabling software,
increased our revenues by 24%, and returned to profitability in the third and
fourth quarters.
New Networks, New Products
One of 2002's major developments was the deployment of faster, more functional
2.5G wireless data networks by many of the world's wireless carriers. Long
talked about, and now a reality, these new networks have significantly increased
wireless data transmission speeds. The robust new protocols can deliver
transmission rates that match or exceed those achieved with a land line dial-up
connection--making Intranet, Internet, e-mail and a wide range of other
applications highly functional on wirelessly equipped computing devices. With
more ease and functionality comes greater adoption.
We were at the forefront of these developments, providing new products for the
new networks. We began commercial volume shipments of five new, faster products
in 2002: the Sierra Wireless AirCard 710 and AirCard 750 for use on GSM/GPRS
networks, and the AirCard 550, the AirCard 555 and the SB555 embedded module
for CDMA2000 1X networks.
Sierra Wireless World
While launching new products, we were also leveraging our leadership position in
the North American market into other global markets. In Europe, where GPRS and
GSM are the dominant network technologies, we received regulatory approval for
the AirCard 750 and developed carrier channel relationships with Vodafone and
Orange in the UK, KPN Mobile in the Netherlands, Telia in Sweden and Telefonica
in Spain. We also signed five new European distribution agreements, and won our
first major GPRS end-customer deployment. Together with Itronix, the maker of
ruggedized GoBook(TM) notebook computers, and Vodafone, Europe's largest
wireless carrier, we landed a large new supply agreement to provide wireless
solutions to Transco--the UK's leading gas transporter. From a standing start at
the beginning of 2002, European sales went on to deliver 7% of the year's
revenues.
In the Asia Pacific region, we secured approvals for our new AirCard products,
including Chinese MII regulatory approval for the AirCard 750. By year-end, we
had deployed the AirCard 750 with a number of regional operators owned by
China's 140-million subscriber strong China Mobile. We also launched the AirCard
750 with Hutchison Telecom in Hong Kong, StarHub in Singapore, and AIS in
Thailand. In addition, we launched the AirCard 555 with China Unicom in China,
Telstra in Australia and Telecom New Zealand. By year-end, the Asia Pacific
region accounted for 6% of our revenues.
Closer to home, we continued to strengthen our lead in North America. We became
the first wireless data modem provider to supply CDMA2000 1X PC Card modems
to four leading North American CDMA carriers: Bell Mobility, Sprint PCS,
TELUS Mobility and Verizon Wireless. We also launched the AirCard 710 on
AT&T's GPRS network, and launched the AirCard 750 with T-Mobile in the U.S.
and with Rogers AT&T Wireless in Canada. Revenues in the Americas represented
87% of our 2002 results.
Together, the combination of new products and new markets boosted revenues to
$77.1 million in 2002 from $62.3 million in 2001, an increase of 24%.
41
Meeting the Challenges
Each of these achievements was hard won. 2002 was a challenging year for us and
for our customers, with our key enterprise markets cutting spending in response
to economic conditions. In June, we undertook a difficult restructuring of our
own business to help turn things around.
It was also a year in which competition in the wireless data market was
evolving. I'm pleased to report Sierra Wireless AirCard products fared well,
continuing to lead the market. We competed by providing high performance
products, teaming with partners for complete solutions, and delivering superb
customer support--a combination that not only positioned us favorably with
customers, but was also pivotal in our return to profitability in the second
half of the year.
Where to Next?
In 2003, we plan to keep the momentum going with a continued focus on
profitability and growth. Focus areas include sell-through with existing
channels, the addition of new distribution channels, particularly in
international markets, and investments in new growth initiatives. On the
product front, we expect to leverage the investments that we have already
made in 2.5G technologies to expand our product line.
In closing, I want to acknowledge the contribution of our employees in helping
us respond to the challenges and opportunities of 2002. The many achievements of
the year reflect the innovation, enthusiasm and hard work of everyone on Team
Sierra Wireless. I also thank our shareholders for their continued confidence in
us and in our mission, and our customers and partners around the world for
helping make our products global market leaders. Together, we're making it a
Sierra Wireless World.
/s/ David B. Sutcliffe
- -----------------------
David B. Sutcliffe
Chairman and CEO
- --------------------------------------------------------------------------------
Information on Sierra Wireless's products, customers and achievements can be
found in our 2002 Annual Review. An electronic version is available on our
website: www.sierrawireless.com. For a hard copy, please call 604-231-1100.
42
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 GAAP, WITH A
RECONCILIATION TO CANADIAN GAAP, AND IS EXPRESSED IN UNITED STATES DOLLARS.
OVERVIEW
We develop and market a broad range of single and multi-mode wireless data
modems and enabling software for use with handheld computing devices, notebook
computers and vehicle-based or monitoring applications.
In 2001, there was an overall economic slowdown that impacted our business. Our
results for 2001 also were materially affected by the Chapter 11 filing for
reorganization of Metricom, Inc. ("Metricom") with whom we had an agreement to
supply approximately $33.0 million of our AirCard 400 for their Ricochet2
network, over a twelve-month period beginning in March 2001. As a result of
these developments, we recorded a write down of inventory of $11.0 million and a
provision for doubtful accounts of $3.0 million in 2001.
During 2002, sales growth continued to be constrained by the slowdown in
enterprise spending and by overall conditions affecting the wireless
communications industry. In the second quarter of 2002, we reduced operating
expenses and asset levels as a result of our assessment of current and visible
future demand. Restructuring and other costs amounted to $36.1 million. In the
third quarter of 2002, we returned to profitability as a result of the growth in
sales of 2.5G AirCard products through an expanded range of distribution
channels and a reduction in operating expenses. In the fourth quarter of 2002,
we remained profitable and adjusted our estimates of our restructuring and other
costs from $36.1 million to $37.7 million. In addition, we settled our claims
with Metricom resulting in a recovery of $1.8 million. During 2002, we commenced
commercial shipment of our AirCard 550, AirCard 555, AirCard 710 and AirCard 750
next generation products.
As a result of a changing product mix and an increase in volume orders, our
gross margin has trended down. We expect that our gross margin will fluctuate
moderately as product mix varies from quarter to quarter and as a result of
increased costs due to new product introductions. Our gross margin could
decrease if we incur higher than anticipated production costs for these
products. If we are unable to commit the necessary resources or are unable to
deliver our products as required by the terms of our contracts, our customers
may cancel these contracts. In that event, any costs incurred may not be
recovered and we may incur additional costs.
REVENUE
We derive our revenue primarily from sales of our products to wireless
communications service providers, original equipment manufacturers, resellers
and through direct sales to end-users. We recognize revenue from sales of
products and services upon the later of transfer of title or upon shipment of
the product to the customer or rendering of service, so long as collectibility
is reasonably assured. We recognize revenue on the portion of sales to certain
resellers that are subject to provisions allowing various rights of return and
stock rotation when the rights have expired or the products have been reported
as sold by the resellers.
Funding from research and development agreements, other than government
assistance, 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.
COST OF GOODS SOLD
We outsource most of our manufacturing services to enable us to achieve greater
efficiencies and economies of scale. We have been able to achieve savings in
costs and improvements in efficiencies in 2002, and we will focus on further
cost savings and efficiencies going forward. Since we outsource most of our
manufacturing services, our cost of goods sold consists primarily of the direct
costs of finished goods purchased from our outsource manufacturers, third-party
royalties, warranty costs and an allocation of operating costs.
43
SALES AND MARKETING
Our sales and marketing expenses consist mainly of salaries, commissions, travel
expenses, conferences, marketing materials and market development funding. Our
sales programs rely, in part, on delivering products to end-users identified and
cultivated through our relationships with wireless communications service
providers, original equipment manufacturers and resellers. During 2002, we
expanded our distribution channels in Europe and the Asia-Pacific region as part
of our international growth objectives. We expect to continue to make
significant and increased investments in these strategic areas during 2003.
RESEARCH AND DEVELOPMENT, NET
Since our incorporation in 1993, we have continued to invest in new generations
of technology. We have funded our investment in research and development from
our Initial Public Offering and Follow-on Offering, together with research and
development funding, investment tax credits and operating cash flow. Our
research and development expenses consist mainly of salaries, consulting costs
and amortization, net of government research and development funding and
investment tax credits, and are expensed as incurred. We expect our research and
development expenses to continue to increase as we invest in next generation
technology and develop new products, including those under our existing
contracts.
ADMINISTRATION
Our administration costs consist mainly of salaries, professional fees,
insurance, and general administration. We expect that these costs will increase
as insurance premiums continue to increase and as we continue to build our
information systems infrastructure as part of our international expansion and
scaling for growth.
INCOME TAXES
Prior to 2000, we have recorded no provision for Canadian federal income taxes
for any period since our incorporation. Through the end of fiscal 1997 we had
recorded losses, and when we became profitable in 1998, we had sufficient net
operating losses, investment tax credits or scientific research and development
expenses in Canada to offset any federal income taxes that would otherwise be
payable. During 2000, our taxable income in Canada was reduced through the
utilization of scientific research and development expenses, and in the United
States we had taxable income for the first time. This resulted in us having
current and future taxes payable. In 2002, we incurred operating losses and we
have recorded a recovery of income taxes previously paid.
We believe that it is more likely than not that we will realize our net deferred
tax assets. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences become deductible. We considered projected future taxable income and
tax planning strategies in making our assessment. We have not recognized any
deferred tax assets in 2002.
44
RESULTS OF OPERATIONS
The following table sets forth our operating results for the three years ended
December 31, 2002, expressed as a percentage of revenue:
YEARS ENDED DECEMBER 31,
------------------------------
2000 2001 2002
--------- --------- -------
Revenue................................................................................ 100.0% 100.0% 100.0%
Cost of goods sold..................................................................... 54.0 75.4 89.6
----- ----- -----
Gross margin........................................................................... 46.0 24.6 10.4
----- ----- -----
Expenses
Sales and marketing.................................................................. 18.4 20.4 15.0
Research and development, net........................................................ 24.0 27.1 19.3
Administration....................................................................... 11.0 16.8 6.1
Restructuring and other charges...................................................... - - 16.7
Amortization......................................................................... 3.3 3.3 3.0
-------- -------- --------
56.7 67.6 60.1
Loss from operations................................................................... (10.7) (43.0) (49.7)
Other income........................................................................... 7.4 3.7 0.2
----- ----- -----
Loss before income taxes............................................................... (3.3) (39.3) (49.5)
Income tax expense (recovery).......................................................... 2.5 (0.4) 4.5
----- ------ -----
Net loss............................................................................... (5.8) (38.9) (54.0)
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
During 2002, we announced and implemented a business restructuring program. We
reduced operating expenses and asset levels as a result of our assessment of
current and visible future demand. We expect sales growth to continue to be
constrained by the slowdown in enterprise spending and by overall conditions
affecting the wireless communications industry.
During the second quarter of 2002, we recorded restructuring and other costs of
$36.1 million. We have reduced our workforce from 275 to 181 people. In
addition, the restructuring and other costs included a writedown for excess
inventory, impairment of fixed, intangible and other assets, and a provision for
facilities restructuring and other costs related to the restructuring. The
provisions related to our restructuring and other charges reflected many
estimates which we revised during the last half of 2002, based on actual
experience, resulting in a net charge of $1.6 million. Our restructuring and
other costs for 2002 were $37.7 million. We have substantially completed
implementation of our restructuring program at December 31, 2002.
We recorded a writedown of inventory, including purchase commitments,
amounting to $16.7 million. The writedown was related primarily to CDPD and
2G CDMA products. In the fourth quarter of 2002, we recorded an additional
net writedown of inventory of $1.9 million which was a result of faster than
expected decline in sales of CDPD products. During 2002, we sold $1.2 million
of products that had a written down net book value of nil.
Fixed assets impairment charges of $4.8 million consisted of writedowns
primarily for research and development equipment, test equipment, and corporate
assets. The fixed assets have been written down to the current fair value for
this type of equipment. The net reversal of the second quarter impairment charge
was $0.5 million, of which $0.1 million was included in cost of sales, and
related primarily to adjusting our estimates of equipment to be disposed of.
Intangible assets impairment charges of $3.0 million consisted of writedowns
primarily for research and development licenses. The research and development
licenses that are no longer required, have been written down to nil. In
addition, our deferred tax asset valuation allowance has been increased by $3.8
million to record the reduction in the portion of our deferred tax assets that
we believe is more likely than not to be realized.
Workforce reduction charges of $1.6 million, of which $0.1 million was included
in cost of sales, were related to the cost of severance and benefits associated
with 95 employees and contractors notified of termination. Of the 95 employees
and contractors, 63 were involved in product development, seven were involved in
manufacturing, 18 were sales and marketing personnel, and seven were in
administration. At December 31, 2002, the workforce reduction provision of $1.5
million estimated in the second quarter, excluding the portion that was included
in cost of sales, has
45
been drawn down by cash payments of $1.3 million and a reversal of $0.2 million,
resulting in an ending provision balance of $0.05 million. We expect the
remaining provision to be substantially drawn down by April 30, 2003.
As a result of the above noted workforce reduction and our assessment of current
and visible demand, there are leased facilities that are excess to our current
requirements. We recorded a provision that represents the estimated net present
value of future contractual obligations that are in excess of our estimated
future requirements. Our provision at June 30, 2002 of $4.7 million has been
drawn down by cash payments of $0.5 million and increased by an additional net
charge of $0.3 million, resulting in a provision balance of $4.5 million at
December 31, 2002. During the second half of 2002, real estate market conditions
in our location softened, resulting in very little progress on our facilities
restructuring. The remaining cash outlays of approximately $4.5 million related
to the facilities restructuring are expected to be paid over the remaining term
of the lease and will be funded from available sources of liquidity.
Other charges of $1.5 million include provisions for purchase commitments, a
writedown of investments, and professional fees in connection with the
restructuring activities. Our provision at June 30, 2002 of $0.8 million has
been drawn down by non-cash reductions of $0.4 million, cash payments of $0.3
million, and an additional charge of $0.1 million resulting in a provision
balance of $0.2 million at December 31, 2002. The additional charges relate to
revised estimates for professional fees. The remaining provision is expected to
be substantially drawn down by March 31, 2003. The remaining cash outlays of
approximately $0.2 million related to other costs are expected to be
substantially paid by April 30, 2003 and will also be funded from available
sources of liquidity.
During the second quarter of 2001, one of our customers Metricom, Inc. refused
shipments and subsequently filed for a Chapter 11 reorganization under the U.S.
bankruptcy laws. In 2002, we negotiated a settlement with the reorganized debtor
and will receive $1.8 million. The recovery of $1.8 million is recorded in the
determination of our net loss for 2002.
In 2001, in addition to the financial impacts from Metricom's bankruptcy, there
was also an overall economic slowdown that impacted our business. As a result of
these developments, we recorded a writedown of inventory of $11.0 million and a
provision for doubtful accounts of $3.0 million in 2001.
The adjusted information provided below for the years ended December 31, 2002
and December 31, 2001 excludes these charges.
REVENUE
Revenue amounted to $77.1 million in 2002, compared to $62.3 million in 2001, an
increase of 23.7%. Included in our revenue was research and development funding
of $3.7 million in 2002, compared to $2.6 million in 2001. The increase in
revenue was a result of sales of our 2.5G products as well as increasing sales
to new channels in Europe and the Asia-Pacific region. We commenced commercial
shipment of our AirCard 550, AirCard 555, AirCard 710, and AirCard 750 next
generation products during 2002. Our revenue by product and by distribution
channel was:
YEARS ENDED DEC. 31,
2001 2002
---- ----
Revenue by product
AirCard.............................................................. 62% 58%
OEM.................................................................. 15 25
Mobile............................................................... 13 10
Other................................................................ 10 7
----- ------
100% 100%
===== ======
Revenue by distribution channel
Wireless carriers.................................................... 31% 43%
OEM.................................................................. 17 25
Resellers............................................................ 44 25
Direct and Other..................................................... 8 7
----- ------
100% 100%
===== ======
46
87% of our product revenue was earned in North America, 7% in Europe and 6% in
the Asia-Pacific region, compared to 97%, nil, and 3%, respectively, in 2001.
GROSS MARGIN
Gross margin amounted to $8.0 million in 2002, compared to $15.3 million in
2001. Included in our gross margin was research and development funding of $3.7
million in 2002, compared to $2.6 million in 2001. During the year our gross
margin was negatively affected as we recorded restructuring and other charges of
$20.8 million. As a result of the funding and charges, our gross margin
percentage decreased to 10.4% of revenue in 2002, compared to 24.6% of revenue
in 2001. Our adjusted gross margin, excluding restructuring and other charges
and research and development funding, amounted to $25.1 million in 2002,
compared to adjusted gross margin of $23.7 million in 2001. Our adjusted gross
margin percentage decreased to 34.2% in 2002, compared to 39.6% in 2001. This
decrease was a result of changes in our product mix and new product introduction
costs.
SALES AND MARKETING
Sales and marketing expenses amounted to $11.6 million in 2002, compared to
$12.7 million in 2001, a decrease of 9.1%. This decrease was due primarily to
cost reductions under our restructuring plan. In addition, some costs related to
the initial introduction of new products for 2.5G wireless networks and entry
into the Europe and Asia-Pacific regions occurred in the prior year. Sales and
marketing expenses as a percentage of revenue amounted to 15.0% in 2002,
compared to 20.4% in 2001.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $14.9
million in 2002, compared to $16.9 million in 2001, a decrease of 11.9%.
Research and development expenses in 2002 decreased due primarily to cost
reductions under our restructuring plan. Gross research and development
expenses, before government research and development funding and investment tax
credits, were $16.8 million or 21.8% of revenue in 2002, compared to $19.4
million or 31.2% of revenue in 2001.
ADMINISTRATION
Administration expenses amounted to $4.7 million in 2002, compared to $10.5
million in 2001. Adjusted administration expenses were $6.5 million in 2002,
excluding the Metricom recovery of $1.8 million, compared to adjusted
administration expenses of $7.5 million, excluding the $3.0 million provision
for doubtful accounts in 2001. This decrease of 12.7% is due primarily to cost
reductions under our restructuring plan. Adjusted administration expenses as a
percentage of revenue amounted to 8.4% in 2002 compared to 12.0% in 2001.
OTHER INCOME
Other income decreased to $0.2 million in 2002, compared to $2.3 million in
2001. This decrease is due to a reduction in cash and short-term investment
balances, as well as a reduction in interest rates.
INCOME TAX EXPENSE (RECOVERY)
Income tax expense amounted to $3.5 million in 2002, compared to an income tax
recovery of $0.3 million in 2001. Adjusted income tax recovery, excluding
restructuring and other costs of $4.0 million, was $0.6 million in 2002,
compared to an income tax recovery of $0.3 million. The income tax recovery
recorded in 2002 is a recovery of taxes paid in prior periods.
NET LOSS
Our net loss amounted to $41.7 million in 2002, compared to a net loss of $24.3
million in 2001. Our adjusted net loss amounted to $5.8 million, excluding
restructuring and other costs of $37.7 million and the Metricom recovery of $1.8
million, in 2002, compared to an adjusted net loss of $10.3 million in 2001. Our
loss per share amounted to $2.56 in 2002, compared to a loss per share of $1.50
in 2001. Our adjusted loss per share was $0.35 in 2002, compared to an adjusted
loss per share of $0.64 in 2001. The weighted average number of shares
outstanding increased to 16.3 million in 2002, as compared to 16.1 million in
2001.
47
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
During the year ended December 31, 2001, we recorded a provision for excess
inventory of $11.0 million and a provision for doubtful accounts of $3.0
million. In the year ended December 31, 2000, we recorded charges amounting to
$0.8 million, related to the acquisition of the Qualcomm CDMA data modules
business. The adjusted information provided below excludes these charges.
REVENUE
Revenue amounted to $62.3 million in 2001, compared to $53.8 million in 2000, an
increase of 15.9%. Included in our revenue was research and development funding
of $2.6 million in 2001, compared to $0.3 million in 2000. The increase was a
result of strong growth in our base business, including CDPD AirCards and
original equipment modules (OEM), as well as the introduction of new products.
In accordance with our supply agreement with Metricom, we were to supply
approximately $33.0 million of our AirCard 400 over a twelve-month period
beginning March 2001 for Metricom's Ricochet2 network. In the first quarter of
2001, we commenced commercial shipments of our AirCard 400 to Metricom. On July
2, Metricom filed for Chapter 11 reorganization, and as a result, we ceased
further manufacturing and sales of our AirCard 400. Our total revenue for the
year from sales to Metricom amounted to approximately $4.5 million, the balance
of the revenue for the year that was expected under the supply agreement was
lost, and we ceased operations on the Ricochet2 network standard. We had
expected to commence commercial shipment of our AirCard 555 to Verizon in the
fourth quarter. We decided to delay the commencement of commercial volume
shipments of this product, and this had a material impact on our revenue for the
fourth quarter. Our revenue by product segment for 2001 was Aircards 62%, Mobile
13%, OEM 15% and Other 10%, compared to 47%, 18%, 30% and 5%, respectively, in
2000. Our revenue by distribution channel for 2001 was Resellers 44%, Wireless
carriers 31%, OEM 17% and Direct and Other 8%, compared to 39%, 21%, 32% and 8%,
respectively, in 2000. In 2001, 92% of our revenue was earned in the United
States, compared to 78% in 2000.
GROSS MARGIN
Our gross margin amounted to $15.3 million in 2001, compared to $24.7 million in
2000. Included in our gross margin was research and development funding of $2.6
million in 2001, compared to $0.3 million in 2000. During the year, our gross
margins were negatively affected as we recorded a charge of $11.0 million to
provide for excess inventory as a result of the Metricom Chapter 11 filing and
our assessment of demand. As a result of the funding and these charges, our
gross margin percentage decreased to 24.6% of revenue in 2001, compared to 46.0%
of revenue in 2000. Our adjusted gross margin, excluding the provision for
excess inventory and research and development funding, amounted to $23.7 million
in 2001, compared to $24.4 million in 2000. Our adjusted gross margin percentage
decreased to 39.6% in 2001, compared to 45.6% in 2000. This decrease was a
result of changes in our product and pricing mix and new product introduction
costs.
SALES AND MARKETING
Our sales and marketing expenses increased significantly in 2001 and amounted to
$12.7 million in 2001, compared to $9.9 million in 2000, an increase of 28.4%.
This increase was due to increased sales and marketing initiatives related to
the introduction of new products for 2.5G wireless networks. In addition, we
continued our market entry activities in Europe and the Asia-Pacific region.
Sales and marketing expenses as a percentage of revenue amounted to 20.4% in
2001, compared to 18.4% in 2000.
RESEARCH AND DEVELOPMENT, NET
Research and development expenditures, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $16.9
million in 2001, compared to $12.9 million in 2000, an increase of 31.2%.
Research and development expenses in 2001 increased due to costs relating to the
development of new products based on the CDMA and GPRS standards. Research and
development expenses, before government research and development funding and
investment tax credits, were $19.4 million or 31.2% of revenue in 2001, compared
to $13.6 million or 25.3% of revenue in 2000.
ADMINISTRATION
Administration expenses amounted to $10.5 million in 2001, compared to $5.9
million in 2000, an increase of 76.8%. During the year, we increased our
provision for doubtful accounts by $3.0 million, as a result of the Metricom
Chapter 11 filing. Our adjusted administration expenses were $7.5 million
compared to $5.9 million in 2000. This increase is
48
due to investment in people, systems and infrastructure to support our
operations growth and to scale for volume and international expansion. Adjusted
administration expenses as a percentage of revenue amounted to 12.0% in 2001,
compared to 11.0% in 2000.
OTHER INCOME
Other income decreased to $2.3 million in 2001, compared to $4.0 million in
2000. This decrease is due to a reduction in cash and short-term investment
balances, as well as a reduction in interest rates.
NET LOSS
Our net loss amounted to $24.3 million in 2001, compared to a net loss of $3.1
million in 2000. Our adjusted net loss amounted to $10.3 million in 2001,
compared to an adjusted net loss of $2.3 million. Our loss per share amounted to
$1.50 in 2001, compared to a loss per share of $0.20 in 2000. Our adjusted loss
per share was $0.64 in 2001, compared to an adjusted loss per share of $0.15 in
2000. The weighted average number of shares outstanding increased to 16.1
million in 2001 as compared to 15.3 million in 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUE
Revenue amounted to $53.8 million in 2000, compared to $24.0 million in 1999, an
increase of 124.6%. Included in our revenue was research and development funding
of $0.3 million in 2000, compared to nil in 1999. The increase was a result of
strong growth in our base business, including CDPD AirCards and original
equipment modules (OEM), as well as the introduction of new products. In the
second quarter, we acquired the CDMA module business, including its module
inventory, manufacturing and customer commitments from Qualcomm Incorporated,
and commenced shipment of these products. In the fourth quarter, we commenced
commercial shipment of the AirCard 510. Our revenue by product segment for 2000
was Aircards 47%, Mobile 18%, OEM 30% and Other 5%, compared to 39%, 47%, 7% and
7%, respectively, in 1999. Our revenue by distribution channel for 2000 was
Resellers 39%, Wireless carriers 21%, OEM 32% and Direct and Other 8%, compared
to 46%, 28%, 13% and 13%, respectively, in 1999.
GROSS MARGIN
Our gross margin amounted to $24.7 million in 2000, compared to $12.2 million in
1999. Included in our gross margin was research and development funding of $0.3
million in 2000, compared to nil in 1999. Our gross margin percentage decreased
to 45.6% of revenue in 2000, excluding the research and development funding,
compared to 51.0% of revenue in 1999. This decrease was a result of changing
product mix and an increase in volume orders and new product introduction costs.
SALES AND MARKETING
Our sales and marketing expenses increased significantly in 2000 and amounted to
$9.9 million in 2000, compared to $5.1 million in 1999, an increase of 94.4%.
This increase was due to sales and marketing initiatives and the additional
personnel costs associated with implementing these initiatives in order to
increase awareness of our company and sales of our products. In addition, we
undertook market entry activities in Europe and the Asia-Pacific region. Sales
and marketing expenses as a percentage of revenue amounted to 18.4% in 2000,
compared to 21.3% in 1999.
RESEARCH AND DEVELOPMENT, NET
Research and development expenditures, net of conditionally repayable government
research and development funding and investment tax credits, amounted to $12.9
million in 2000, compared to $4.1 million in 1999, an increase of 212.5%.
Research and development expenses in 2000 increased due to costs relating to the
development of new products based on the Ricochet, CDMA, EDGE and GPRS
standards. Research and development expenses, before government research and
development funding and investment tax credits, were $13.6 million or 25.3% of
revenue in 2000 compared to 17.2% of revenue in 1999.
49
ADMINISTRATION
Administration expenses amounted to $5.9 million in 2000, compared to $1.4
million in 1999. This increase is due to investment in people, systems and
infrastructure to support our operations growth, international expansion, an
increase in our allowance for doubtful accounts and costs associated with being
publicly listed in both the U.S. and Canada.
OTHER INCOME
Other income increased to $4.0 million in 2000, compared to $1.3 million in
1999. This increase is a result of the investment of surplus funds resulting
from our initial and secondary public offerings in 1999 and 2000.
NET EARNINGS (LOSS)
Our net loss amounted to $3.1 million in 2000, compared to net earnings of $3.2
million in 1999. Our loss per share amounted to $0.20 in 2000, compared to
diluted earnings per share of $0.23 in 1999. The weighted average number of
shares outstanding, on a diluted basis, increased to 15.3 million in 2000,
principally as a result of our secondary public offering, as compared to 13.9
million in 1999.
CONTINGENT LIABILITIES
In July 2001, we learned that Metricom, one of our customers, had filed a
Chapter 11 reorganization under the U.S. bankruptcy laws. We filed a proof of
claim for amounts due to us totaling $13.7 million. Metricom objected to that
claim asserting that all but $2.3 million should be disallowed. Metricom also
filed an adversary complaint against us in the U.S. bankruptcy court seeking
return of payments totaling $1.9 million made to us within 90 days of the
bankruptcy filing, alleging that the payments are avoidable as "preferences". We
contended that the payments were in the ordinary course of business and that we
supplied additional product to Metricom after receiving the payments, which
would offset any preference liability. During 2002, we executed a global
settlement with the reorganized debtor under which we agreed to reduce our
general unsecured claim to $10.3 million and Metricom agreed to dismiss the
preference claims. We will receive a settlement of $1.8 million that has been
included in the determination of our net loss for 2002.
In November 2002, Sierra Wireless, Inc., along with several other defendants,
was served with the second amended complaint of MLR, LLC filed in the U.S.
District Court for the Northern District of Illinois Eastern Division for
alleged patent infringement. We have assessed the complaint and have determined
that there has been no infringement of the patents referred to in this claim and
that the claim is invalid. We have filed our response to the complaint. Although
there can be no assurance that an unfavourable outcome of the dispute would not
have a material adverse effect on our operating results, liquidity or financial
position, we believe the claims are without merit and will vigorously defend the
action.
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. Development and deployment of these
new technologies by the wireless industry and development of our new products
have been affected by various delays. As of the end of the first quarter of
2002, commercial volume deliveries to Verizon Wireless had commenced. During the
second quarter, we reported that we continued to experience delays in completion
of the new product approval process on the AT&T Wireless network and we
suspended the AT&T Wireless order from our backlog. During the third quarter, we
completed amendments to our supply agreement with AT&T Wireless that reduced
volume commitments to total approximately $6.5 million, AT&T Wireless granted
commercial acceptance of the AirCard 710, and volume shipments of the AirCard
710 to AT&T Wireless commenced. During the fourth quarter of 2002, we commenced
commercial volume deliveries to Sprint PCS.
50
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, and we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent liabilities. 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.
During the year ended December 31, 2002, we did not adopt any new accounting
policies that have a material impact on our consolidated financial statements,
or make changes to existing accounting policies. Senior management has discussed
with our audit committee the development, selection, and disclosure of
accounting estimates used in the preparation of our consolidated financial
statements.
The following critical accounting policies affect our more significant estimates
and assumptions used in preparing our consolidated financial statements:
- 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, increases in our allowance may be required.
- 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, an
additional inventory writedown may be required.
- 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
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, an adjustment to our deferred tax asset would
be charged to income.
- 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 assistance, 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.
- 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 estimates are made by
management. If we suffer a decrease in the quality of our products, an
increase in our accrual may be required.
- We recorded a lease provision 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 sublease rates
obtainable 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, an increase
in our provision may be required.
51
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, we did not have any off-balance sheet finance or
special purpose entities. During the year ended December 31, 2002, we entered
into a number of capital leases relating to purchases of research and
development equipment and information systems. These leases and commitments are
disclosed in the consolidated financial statements.
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.
In May 2000, we completed a new issue and secondary public offering in the
United States and Canada. Our net proceeds after selling commissions and
expenses of the offering amounted to approximately $65.8 million. The net
proceeds from the secondary public offering were used for continuing research
and development, sales and marketing initiatives, strategic investments and
working capital.
In May and June 1999, we completed an initial public offering in Canada. Our net
proceeds after selling commissions and expenses of the offering amounted to
approximately Cdn.$42.5 million. The net proceeds from the initial public
offering were used for continuing research and development, sales and
marketing initiatives and working capital.
We have continued to utilize these financings to fund our operations and have
generated positive cash flow in the second half of 2002. Therefore, we have had
no requirement to date to return to the capital markets for additional funding.
Prior to our initial public offering in 1999, our operations and growth were
funded by cash flow from operations, private placements of our equity, research
and development funding and an operating line of credit.
Cash used by operations amounted to $4.7 million in 2002 compared to $21.1
million in 2001, an improvement of $16.4 million. The use of cash during 2002
was due mainly to our operating loss, restructuring costs and changes in working
capital. Cash used for capital expenditures was $2.2 million in 2002, compared
to $10.5 million in 2001, and was primarily for research and development
equipment and leasehold improvements. Expenditures on intangible assets were
$1.4 million in 2002, compared to $3.3 million in 2001 and were primarily for
license fees.
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:
- Net cash and short-term investments amounted to $34.8 million at
December 31, 2002 compared to $44.0 million at December 31, 2001.
- Accounts receivable amounted to $13.9 million at December 31, 2002
compared to $10.5 million at December 31, 2001.
- During 2002, we increased our operating line of credit with a Canadian
chartered bank. The available facility was increased to $10.0 million
from $0.9 million (Cdn.$1.5 million). The expanded facility bears
interest at prime plus 1.25% and is secured by a general security
agreement providing a first charge against all assets. At December 31,
2002, there were no borrowings under this line of credit.
MARKET RISK DISCLOSURE
During the year ended December 31, 2002, 78% of our revenue was earned from
United States-based customers compared to 92% in the year ended December 31,
2001. Our risk from currency fluctuations between the Canadian and U.S. dollar
is reduced by purchasing inventory, other costs of sales and many of our
services in U.S. dollars. We are exposed to foreign currency fluctuations since
the majority of our research and development, sales and marketing, and
administration costs are incurred in Canada. We monitor our exposure to
fluctuations between the Canadian and U.S. dollars. As a result of the adoption
of U.S. dollars as our currency of measurement in the year ended December 31,
52
1999, our foreign currency risk has changed from U.S. dollar denominated
monetary assets and liabilities to non-U.S. dollar denominated monetary assets
and liabilities and the risk of the impact of exchange rate changes relative to
the U.S. dollar. As we have available funds and very little debt, we have not
been adversely affected by significant interest rate fluctuations.
With our international expansion into Europe and the Asia-Pacific region, we are
transacting business in additional foreign currencies and the potential for
currency fluctuations is increasing. The risk associated with currency
fluctuations between the U.S. dollar and foreign currencies in Europe and the
Asia-Pacific has been minimal as such transactions have not been material to
date. During 2002, we continued to enter into additional distribution agreements
in Europe and the Asia-Pacific that are denominated primarily in US dollars. We
expect that as our business expands in Europe we will also continue to be
exposed to Euro transactions. To date we have not entered into any futures
contracts. To manage our foreign currency risks, 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 is not material to our financial results.
RELATED PARTY TRANSACTIONS
During 2002, 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.
Differences also exist between research and development expense, intangible
assets and income taxes due to the differences in the accounting treatment
applied to in-process research and development ("IPR&D"). 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 has been fully amortized. There is an increase in
our net loss under Canadian GAAP of $0.2 million for the year ended December 31,
2002.
FORWARD-LOOKING STATEMENTS
Our annual report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other things,
plans and timing for the introduction or enhancement of our services and
products, statements about future market conditions, supply and demand
conditions, channel inventory and sell through, revenue, gross margin, operating
expenses, profits, and other expectations, intentions and plans contained in
this annual report that are not historical fact. Our expectations regarding
future revenues depend upon our ability to develop, manufacture, and supply
products that we do not produce today and that meet defined specifications. When
used in this annual report, the words "plan", "expect", "believe", and similar
expressions generally identify forward-looking statements. These statements
reflect our current expectations. They are subject to a number of risks and
uncertainties, including but not limited to, changes in technology and changes
in the wireless data communications market. In light of the many risks and
uncertainties surrounding the wireless data communications market, you should
understand that we cannot assure you that the forward-looking statements
contained in this annual report will be realized.
53
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:
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. As of the
end of 2002, commercial volume deliveries to AT&T, Sprint PCS and Verizon
Wireless had commenced. In order to realize the benefits of these
agreements, we will have to continue to successfully manage the following
risks:
- 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.
- 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, any costs incurred may not be recovered and we may incur
additional costs as penalties.
- 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
reputation could be harmed and our margins and revenues could decrease.
OUR PAST REVENUE GROWTH RATES AND OTHER OPERATING RESULTS MAY NOT BE ACCURATE
INDICATORS OF OUR FUTURE PERFORMANCE.
Although our revenues have increased year-over-year, we may not be able to
sustain these historical growth rates. We may not achieve or 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:
- Our ability to attract and retain skilled technical employees.
- The availability of critical components from third parties.
- Our ability to successfully complete the development of products
in a timely manner.
- 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 are unable to
recover our research and development expenses and could result in a
decrease in our market share and our revenues.
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.
54
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:
- The absence of guaranteed manufacturing capacity.
- Reduced control over delivery schedules, production yields and
costs.
- Inability to control the amount of time and resources devoted to
the manufacture of our products.
If we are unable to successfully manage any of these risks or to locate
alternative or additional manufacturers or suppliers in a timely and
cost-effective manner, we may not be able to deliver products in a timely
manner. In addition, our results of operations could be harmed by increased
costs, reduced revenues and reduced margins.
WE HAVE A CUSTOMER CONCENTRATION RISK, AS A FEW CUSTOMERS REPRESENT A
SIGNIFICANT PORTION OF OUR EXPECTED FUTURE REVENUE.
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 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 on 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.
55
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 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:
- Continuing to train, motivate, manage and retain our existing
employees and attract and integrate new employees.
- Maintaining and growing manufacturing capacity.
- Developing new products in a timely manner.
- 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:
- We may be liable for damages and litigation costs, including
attorneys' fees.
- We may be prohibited from further use of the intellectual
property.
- We may have to license the intellectual property, incurring
licensing fees.
- 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:
56
- Non-recognition of the proprietary nature or inadequate
protection of our methodologies in the United States, Canada or
foreign countries.
- Undetected misappropriation of our intellectual property.
- The substantial legal and other costs of protecting and enforcing
our rights in our intellectual property.
- 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:
- The timing of releases of our new products.
- The timing of substantial orders.
- Possible seasonal fluctuations in demand.
- Possible delays in the manufacture or shipment of current or new
products.
- 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.
POTENTIAL ACQUISITIONS MAY RESULT IN INCREASED EXPENSES AND DIVERT MANAGEMENT'S
ATTENTION.
In the past, our strategy has included expanding our operations and
business through strategic acquisitions of businesses and products. We may
continue to pursue this strategy in order to further expand our business.
Acquisitions involve a number of risks, including:
- Diversion of management's attention during the acquisition
process.
- Impact on our financial condition due to the timing of the
acquisition.
- The failure of the acquired business to achieve anticipated
revenue levels, cost savings or other synergies.
If realized, these risks could result in substantial costs and disrupt our
operations. In addition, acquisitions could result in issuances of
securities that may dilute the value of our common shares.
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR MAY AFFECT OUR OPERATING RESULTS.
Approximately 78% 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 to cover our Canadian currency
requirements. During 2002, we continued to enter into additional
distribution agreements in Europe and the Asia-Pacific 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 an to the associated
currency risk. To date, we have not entered into any futures contracts.
57
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:
- Increased credit management risks and greater difficulties in
collecting accounts receivable.
- Unexpected changes in regulatory requirements, wireless
communications standards, exchange rates, trading policies,
tariffs and other barriers.
- Uncertainties of laws and enforcement relating to the protection
of intellectual property.
- Language barriers.
- 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.
58
MANAGEMENT'S STATEMENT OF RESPONSIBILITIES
The management of Sierra Wireless, Inc. is responsible for the preparation of
the accompanying consolidated financial statements and the preparation and
presentation of information in the Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada and are considered by management to present fairly the
financial position and operating results of the Company.
The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded and that financial reports are properly maintained to
provide accurate and reliable financial statements.
The Company's audit committee is comprised entirely of non-management directors
and is appointed by the Board of Directors annually. The committee meets
periodically with the Company's management and independent auditors to review
the consolidated financial statements and the independent auditors' report. The
audit committee reported its findings to the Board of Directors who have
approved the consolidated financial statements.
The Company's independent auditors, KPMG LLP, have examined the consolidated
financial statements and their report follows.
/s/ David B. Sutcliffe /s/ Peter W. Roberts
David B. Sutcliffe Peter W. Roberts
Chairman and Chief Executive Officer Chief Financial Officer
January 22, 2003
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Sierra Wireless, Inc. as at
December 31, 2002 and 2001 and the consolidated statements of operations and
deficit, and cash flows for each of the years in the three-year period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
On January 22, 2003, we reported separately to the shareholders of the Company
on the consolidated financial statements as at and for the periods presented
above, which consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
January 22, 2003
59
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in thousands of United States dollars, except per share amounts)
(Prepared in accordance with Canadian generally accepted accounting
principles (GAAP))
YEARS ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
--------- --------- -------
Revenue......................................................................... $ 53,801 $ 62,348 $ 77,130
Cost of goods sold.............................................................. 29,067 47,035 69,132
-------- -------- --------
Gross margin.................................................................... 24,734 15,313 7,998
-------- -------- --------
Expenses:
Sales and marketing........................................................... 9,907 12,726 11,564
Research and development, net (note 13)....................................... 12,137 17,402 15,146
Administration................................................................ 5,915 10,460 4,708
Restructuring and other charges (note 3)...................................... -- -- 12,869
Amortization.................................................................. 1,754 2,084 2,331
-------- -------- --------
29,713 42,672 46,618
-------- -------- --------
Loss from operations............................................................ (4,979) (27,359) (38,620)
Other income.................................................................... 3,974 2,317 170
-------- -------- --------
Loss before income taxes........................................................ (1,005) (25,042) (38,450)
Income tax expense (recovery) (note 12)......................................... 1,060 (273) 3,463
-------- -------- --------
Net loss........................................................................ (2,065) (24,769) (41,913)
Deficit, beginning of year...................................................... (3,839) (5,904) (30,673)
-------- -------- --------
Deficit, end of year............................................................ $ (5,904) $(30,673) $(72,586)
======== ========= ========
Loss per share (note 14):
Basic......................................................................... $ (0.13) $ (1.54) $ (2.57)
Diluted....................................................................... $ (0.13) $ (1.54) $ (2.57)
========= ========= =========
See accompanying notes to consolidated financial statements.
60
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
DECEMBER 31,
-------------------
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 12,085 $ 34,841
Short-term investments.................................................................... 31,879 --
Accounts receivable, net of allowance for doubtful
accounts of $3,068 (2001-- $5,169)..................................................... 10,504 13,865
Inventories (note 5)...................................................................... 25,591 6,673
Future income taxes (note 12)............................................................. 224 --
Prepaid expenses.......................................................................... 1,180 864
--------- ----------
81,463 56,243
Capital assets (note 6)..................................................................... 14,694 7,198
Future income taxes (note 12)............................................................... 4,030 500
Intangible assets (note 7).................................................................. 10,304 6,907
Other....................................................................................... 483 241
--------- ----------
$ 110,974 $ 71,089
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 4,356 $ 3,017
Accrued liabilities....................................................................... 12,555 12,431
Deferred revenue and credits.............................................................. 1,050 297
Current portion of long-term liabilities.................................................. 341 2,803
Current portion of obligations under capital lease........................................ 947 831
--------- ----------
19,249 19,379
Long-term liabilities (note 8).............................................................. 671 2,896
Obligations under capital lease (note 9).................................................... 761 60
Shareholders' equity:
Share capital (note 10)
Authorized
Unlimited number of common and preference shares with no par value
Common shares, 16,345,396 (2001 - 16,185,770) issued and outstanding ................ 121,450 121,824
Deficit................................................................................... (30,673) (72,586)
Cumulative translation adjustments........................................................ (484) (484)
--------- ----------
90,293 48,754
--------- ----------
$ 110,974 $ 71,089
========= ==========
Commitments and contingencies (note 15)
See accompanying notes to consolidated financial statements.
/s/ David B. Sutcliffe /s/ S. Jane Rowe
DAVID B. SUTCLIFFE S. JANE ROWE
Director Director
61
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
--------- --------- -----------
Cash flows from operating activities:
Net loss................................................................... $ (2,065) $ (24,769) $ (41,913)
Adjustments to reconcile net loss to net
cash provided by operating activities
Amortization............................................................ 3,318 7,161 7,038
Non-cash restructuring and other charges................................ -- -- 28,593
Loss on disposal........................................................ -- -- 597
Future income taxes..................................................... 145 (15) 3,754
Accrued warrants........................................................ -- 671 481
Changes in operating assets and liabilities
Accounts receivable..................................................... (17,646) 12,084 (3,361)
Inventories............................................................. (5,644) (13,031) 2,517
Prepaid expenses........................................................ (943) 59 159
Accounts payable........................................................ 7,237 (6,945) (1,339)
Accrued liabilities..................................................... 7,069 3,420 (463)
Deferred revenue and credits............................................ 559 300 (753)
--------- --------- ----------
Net cash used in operating activities...................................... (7,970) (21,065) (4,690)
Cash flows from investing activities:
Business acquisitions (note 4)............................................. (7,250) -- --
Proceeds on disposal....................................................... -- -- 338
Purchase of capital assets................................................. (6,692) (10,523) (2,219)
Increase in intangible assets.............................................. (3,118) (3,328) (1,431)
Increase in other assets................................................... (340) (143) --
Purchase of short-term investments......................................... (212,438) (69,411) (14,662)
Proceeds on maturity of short-term investments............................. 140,294 109,676 46,541
--------- --------- ---------
Net cash provided by (used in) investing activities........................ (89,544) 26,271 28,567
Cash flows from financing activities:
Issue of common shares..................................................... 66,557 499 374
Increase in long-term liabilities.......................................... -- 255 --
Repayment of long-term liabilities......................................... (744) (766) (1,495)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................ 65,813 (12) (1,121)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......................... (31,701) 5,194 22,756
Cash and cash equivalents, beginning of year................................. 38,592 6,891 12,085
--------- --------- ---------
Cash and cash equivalents, end of year....................................... $ 6,891 $ 12,085 $ 34,841
========= ========= =========
See supplementary information (note 16)
See accompanying notes to consolidated financial statements.
62
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000, 2001 and 2002
(Expressed in thousands of United States dollars, except per share amounts
and number of shares)
(Prepared in accordance with Canadian GAAP)
1. NATURE OF OPERATIONS
We were incorporated under the Canada Business Corporations Act on May 31, 1993.
Our principal business activities include developing, manufacturing, marketing,
selling and supporting a broad range of single and multi-mode wireless data
modems and enabling software for use with handheld computing devices, notebook
computers and vehicle-based or monitoring applications.
2. SIGNIFICANT ACCOUNTING POLICIES
Management has prepared these consolidated financial statements in accordance
with accounting principles generally accepted in Canada.
(a) PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Sierra Wireless,
Inc. and its wholly-owned subsidiaries Sierra Wireless Data, Inc., Sierra
Wireless SRL, Sierra Wireless (UK) Limited and Sierra Wireless ULC from their
respective dates of formation. We have eliminated all significant intercompany
balances and transactions.
(b) USE OF ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets, particularly the recoverability of capital
assets, future income taxes and intangible assets, and warranty accruals and
other liabilities, and disclosures of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
(c) CASH EQUIVALENTS
Cash equivalents include short-term deposits, which are all highly liquid
marketable securities having a term to maturity of three months or less when
acquired. We value our short-term deposits at cost.
(d) SHORT-TERM INVESTMENTS
Short-term investments are carried at the lower of cost and quoted market value.
(e) INVENTORIES
Inventories consist of electronic components and finished goods and are valued
at the lower of cost, determined on a first-in-first-out basis, and estimated
net realizable value.
63
(f) RESEARCH AND DEVELOPMENT
We expense research costs as they are incurred. Development costs are expensed
as incurred unless they meet certain specified criteria for deferral and
amortization. No development costs have been deferred in the current period as
the criteria for deferral were not met.
We follow the cost reduction method of accounting for government research and
development funding, whereby the benefit of the funding is recognized as a
reduction in the cost of the related expenditure when certain criteria
stipulated under the terms of those funding agreements have been met, and there
is reasonable assurance the research and development funding will be received.
Certain research and development funding is repayable only on the occurrence of
specified future events. If such events do not occur, no repayment is required.
We recognize the liability to repay research and development funding in the
period in which conditions arise that will cause research and development
funding to be repayable.
(g) CAPITAL ASSETS
We initially record capital assets at cost. We subsequently provide amortization
on a straight-line basis over the following periods:
Furniture and fixtures................................................................... 5 years
Research and development equipment....................................................... 3 years
Tooling.................................................................................. 3 years
Software................................................................................. 3-5 years
Office equipment......................................................................... 5 years
We amortize leasehold improvements on a straight-line basis over the lesser of
their useful lives or lease terms.
(h) INTANGIBLE ASSETS
PATENTS
Consideration paid for the patents is amortized on a straight-line basis over
three to five years commencing with the date the patents are granted.
LICENSE FEES
Consideration paid for license fees is amortized on a straight-line basis over
the shorter of the term of the license or five years.
INTELLECTUAL PROPERTY
Consideration paid for intellectual property is amortized on a straight-line
basis over three years. Consideration paid for in-process research and
development is amortized on a straight-line basis over the economic life of the
asset.
(i) INCOME TAXES
We follow the asset and liability method of accounting for income taxes. Under
this method, future income taxes are recognized for the future income tax
consequences attributable to differences between the financial statement
carrying values and their respective income tax bases (temporary differences).
Changes in the net future tax asset or liability are generally included in
earnings. Future tax assets and liabilities are measured using substantively
enacted or enacted tax rates expected to apply to taxable income in the years in
which temporary differences are expected to be recovered or settled. The effect
on future income tax assets and liabilities of a change in tax rates is included
in income in the period that includes the substantive enactment date. Future
income tax assets are evaluated and if their realization is not considered "more
likely than not", a valuation allowance is provided.
64
(j) STOCK-BASED COMPENSATION
Effective January 1, 2002, we adopted the Canadian Institute of Chartered
Accountants' ("CICA") new Handbook Section ("HB") 3870, "Stock-based
Compensation and Other Stock-based Payments". Under HB 3870, which is effective
for stock-based compensation issued on or after January 1, 2002 and is applied
prospectively, we are not required to record compensation expense for
stock-based compensation awards granted to employees, except for employee awards
that are direct awards of stock, call for settlement in cash or other assets, or
are stock appreciation rights that call for settlement by the issuance of equity
instruments. We have granted no such awards and consequently the adoption of the
new standard has had no impact on the figures presented.
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. Consideration paid
by employees on exercise of stock options is recorded as share capital. Had
compensation cost for our employee stock option plan been determined by the fair
value method, our net loss and loss per share would have been as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
-------- -------- -------
Net loss:
As reported........................................................................$(2,065) $(24,769) $ (41,913)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards....................... (5,575) (10,426) (7,817)
------- ----------- -----------
Pro forma..........................................................................$(7,640) $(35,195) $ (49,730)
======== =========== ===========
Basic and diluted loss per share:
As reported........................................................................$ (0.13) $ (1.54) $ (2.57)
Pro-forma.......................................................................... (0.50) (2.18) (3.05)
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.
We have estimated the fair value of each option on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
--------- --------- -------
Expected dividend yield............................................................. 0 0 0
Expected stock price volatility..................................................... 106% 107% 107%
Risk-free interest rate............................................................. 5.67% 4.88% 4.48%
Expected life of options............................................................ 4 years 4 years 4 years
The fair value of stock options granted during the year was $4.58 (2001 -
$15.04, 2000 - $38.85).
(k) REVENUE RECOGNITION
We recognize revenue from sales of products and services upon the later of
transfer of title or upon shipment of the product to the customer or rendering
of the service, so long as collectibility is reasonably assured. Customers
include resellers, original equipment manufacturers, wireless service providers
and end-users. We record deferred revenue when we receive cash in advance of the
revenue recognition criteria being met.
We recognize revenue on the portion of sales to certain resellers that are
subject to provisions allowing various rights of return and stock rotation when
the rights have expired or the products have been reported as sold by the
resellers.
Funding from research and development agreements, other than government
assistance, 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.
65
(l) WARRANTY COSTS
We accrue warranty costs upon the recognition of related revenue, based on our
best estimates, with reference to past experience.
(m) MARKET DEVELOPMENT COSTS
We accrue for co-op advertising costs upon the later of the recognition date of
the related revenue or date at which the co-op advertising is available. Co-op
advertising costs are recorded as a component of sales and marketing expense.
(n) SHARE ISSUE COSTS
We reduce the value of consideration assigned to shares issued by the direct
costs, net of income tax recoveries, of issuing the shares.
(o) IMPAIRMENT OF LONG-LIVED ASSETS
We monitor the recoverability of long-lived assets, which includes capital
assets and intangible assets, based on factors such as future asset utilization
and the future undiscounted cash flows expected to result from the use of the
related assets. Our policy is to record an impairment loss in the period when we
determine that the carrying amount of the asset will not be recoverable. At that
time the carrying amount is written down to undiscounted estimated future net
cash flows from the asset.
(p) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is calculated by dividing net earnings (loss) by
the weighted average number of common shares outstanding during the period.
Under these recommendations, diluted earnings per share under Canadian GAAP is
calculated using the treasury share method which is consistent with the
calculation under United States GAAP for diluted earnings (loss) per share.
(q) INVESTMENT TAX CREDITS
Investment tax credits are accounted for using the cost reduction method whereby
such credits are deducted from the expenses or assets to which they relate in
the period in which their recoverability is reasonably assured.
(r) COMPARATIVE FIGURES
We have reclassified certain of the figures presented for comparative purposes
to conform to the financial statement presentation we adopted for the current
year.
(s) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the CICA issued HB 3063, "Impairment or Disposal of Long-Lived
Assets" and revised HB 3475, "Disposal of Long-Lived Assets and Discontinued
Operations". Together, these two Handbook Sections supersede the writedown and
disposal provisions of HB 3061, "Property, Plant and Equipment" as well as HB
3475, "Discontinued Operations". HB 3063 amends existing guidance on long-lived
asset impairment measurement and establishes standards for the recognition,
measurement and disclosure of the impairment of long-lived assets held for use
by the Company. It requires that an impairment loss be recognized when the
carrying amount of an asset to be held and used exceeds the sum of the
undiscounted cash flows expected from its use and disposal. The impairment
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair value.
66
HB 3475 provides a single accounting model for long-lived assets to be disposed
of by sale. HB 3475 provides specified criteria for classifying an asset as
held-for-sale and requires assets classified as held-for-sale to be measured at
the lower of their carrying amounts or fair value, less costs to sell. HB 3475
also broadens the scope of businesses that qualify for reporting as discontinued
operations to include any disposals of a component of an entity, which comprises
operations and cash flows that can be clearly distinguished from the rest of the
Company, and changes the timing of recognizing losses on such operations.
The new standards contained in HB 3063 on the impairment of long-lived assets
held for use are applicable for years beginning on or after April 1, 2003,
however early application is permitted. The revised standards in HB 3475 are
applicable to disposal activities initiated by the Company's commitment to a
plan on or after May 1, 2003, however early application is permitted. As the
guidance in HB 3063 and revised HB 3475 is consistent with United States GAAP
for fiscal 2003, we will adopt this new guidance effective January 1, 2003. On
adoption of these accounting pronouncements, there will be no impact on our
historically presented financial results.
In November 2001, the CICA issued Accounting Guideline 13, "Hedging
Relationships" ("AcG 13") and in November 2002, the CICA amended the effective
date of the guideline. AcG 13 establishes new criteria for hedge accounting and
will apply to all hedging relationships in effect on or after January 1, 2004.
On January 1, 2004, we will be required to re-assess all hedging relationships
to determine whether the criteria are met or not and will apply the new guidance
on a prospective basis. To qualify for hedge accounting, the hedging
relationship must be appropriately documented at the inception of the hedge and
there must be reasonable assurance, both at the inception and throughout the
term of the hedge, that the hedging relationship will be effective.
Effectiveness requires a high correlation of changes in fair values or cash
flows between the hedged item and the hedging item. Currently, we do not have
any hedging relationships in place and do not expect that the adoption of this
accounting guideline will impact our financial results.
3. RESTRUCTURING AND OTHER CHARGES
During 2002, we announced and implemented a business restructuring program. We
reduced operating expenses and asset levels as a result of our assessment of
current and visible future demand. This restructuring program included a
writedown of inventory, capital and intangible asset impairment charges,
workforce reductions, charges related to facilities and other assets, and an
increase in our future tax asset valuation allowance. We have substantially
completed implementation of our restructuring program at December 31, 2002.
During 2002, we recorded restructuring and other charges of $37,707, a net
increase of $1,576 from our original estimate. The details of the restructuring
and other charges at June 30, 2002 and changes from that date follow.
During the second quarter of 2002, we recorded restructuring and other charges
of $36,131 as follows:
Inventory writedown $16,705
Capital assets writedown 4,824
Intangible assets writedown 3,064
Facilities restructuring 4,696
Future tax asset reduction 3,754
Workforce reduction 1,616
Other 1,472
-------
Total restructuring and other charges $36,131
Applied:
Inventory writedown, included in cost of sales (16,705)
Portion of capital assets writedown, included in cost of sales (1,784)
Portion of workforce reduction and other, included in cost of sales (517)
Future tax asset and other, included in tax expense (4,032)
-------
Restructuring and other charges $13,093
=======
67
The total restructuring and other charges for 2002, including the net reversal
indicated below of $224, was $12,869. The following table summarizes the
activity related to the provision for restructuring and other charges for fiscal
2002, the components of the net charge since the second quarter, and the balance
of the provision at December 31, 2002.
Revisions to Provision
-------------------------
June 30, Net Dec. 31,
2002 Net Cash Non-Cash Additional Charge/ 2002
Charge Payments Charges Charges Reduction (Reversal) Provision
--------- -------- ------- ------- --------- --------- -----------
Restructuring charges:
Facilities
restructuring (note 8) $4,696 $(471) $ -- $346 $(24) $322 $4,547
Workforce reduction 1,512 (1,282) -- -- (176) (176) 54
Other 781 (259) (404) 46 -- 46 164
------- ------- ------- ----- ------- ------ -------
6,989 (2,012) (404) 392 (200) 192 $4,765
=======
Asset writedowns:
Capital assets writedown 3,040 3,040 -- (416) (416)
Intangible assets writedown 3,064 3,064 -- -- --
------- ------- ----- ------- ------
6,104 6,104 -- (416) (416)
------- ----- ------- ------
Total restructuring and
other charges $13,093 $ 392 $(616) $(224)
======= ===== ====== ======
The excess inventory charge is related primarily to CDPD and 2G CDMA products.
In the fourth quarter of 2002, we recorded an additional net writedown of
inventory of $1,862 which was a result of faster than expected decline in sales
of CDPD products.
Capital assets impairment charges consisted of writedowns primarily for
research and development equipment, test equipment, and corporate assets. The
capital assets were written down to the current fair value for this type of
equipment. The net reversal of $416 to the second quarter impairment charge
related primarily to adjusting our estimate of equipment to be disposed of.
Intangible assets impairment charges consisted of writedowns primarily for
research and development licenses. The research and development licenses, which
are no longer required, have been written down to nil.
Our future tax asset valuation allowance has been increased to record the
reduction in the portion of our future tax assets that we believe is more likely
than not to be realized.
Workforce reduction charges of $1,616, of which $104 was included in cost of
sales, were related to the cost of severance and benefits associated with 95
employees and contractors notified of termination. Of the 95 employees and
contractors, 63 were involved in product development, seven were involved in
manufacturing, 18 were sales and marketing personnel, and seven were in
administration. Actual severance costs were lower than the original estimates
therefore the excess provision of $176 was reversed subsequent to the second
quarter. We expect the remaining provision to be substantially drawn down by
April 30, 2003.
As a result of the above noted workforce reduction and our assessment of current
and visible demand, there are leased facilities that are excess to our current
requirements. We have recorded a provision that represents the estimated net
present value of future contractual obligations that are in excess of our
estimated future requirements. During the second half of 2002, we made very
little progress on our facilities restructuring and have estimated that an
additional $346 is required. The facilities restructuring provision will be paid
in Canadian dollars.
Other charges include provisions for purchase commitments, writedown of
investments, and professional fees in connection with the restructuring
activities. The additional charges of $46 relate to revised estimates of
professional fees. The remaining provision is expected to be substantially drawn
down by March 31, 2003.
68
4. ACQUISITIONS
On June 22, 2000, we acquired the Code Division Multiple Access (CDMA) module
business, including the module inventory, manufacturing and customer
commitments, from Qualcomm Incorporated ("QUALCOMM"). In addition, we signed a
supply agreement for CDMA modules and extended our existing license agreement
with QUALCOMM. The purchase price of $9,500 was settled by cash payment of
$7,250 and a payable of $2,250, which was paid during 2001. The acquisition was
accounted for by the purchase method of accounting and the results of operations
have been consolidated since the date of acquisition. Our interest in the net
assets acquired at fair values are as follows:
License fees............................................................................ $4,500
Inventory............................................................................... 3,813
In-process research and development..................................................... 1,000
Goodwill................................................................................ 277
------
9,590
Warranty reserve........................................................................ (90)
------
$9,500
======
If the acquisition of QUALCOMM's CDMA module business had occurred as of January
1, 2000, the pro forma results of operations would not be significantly
different than that reported.
5. INVENTORIES
2001 2002
------- --------
Electronic components........................................................................... $12,754 $ 1,430
Finished goods.................................................................................. 12,837 5,243
------- --------
$25,591 $ 6,673
======= ========
6. CAPITAL ASSETS
2002
------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION AND VALUE
WRITEDOWN
---- ---------------- --------
Furniture and fixtures....................................................... $ 2,262 $ 995 $ 1,267
Research and development equipment........................................... 7,791 5,672 2,119
Tooling...................................................................... 6,453 4,952 1,501
Software..................................................................... 4,406 2,694 1,712
Leasehold improvements....................................................... 1,738 1,257 481
Office equipment............................................................. 337 219 118
--------- ------------- ---------
$ 22,987 $ 15,789 $ 7,198
========= ============= =========
2001
---------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---- ------------ --------
Furniture and fixtures....................................................... $ 2,062 $ 438 $ 1,624
Research and development equipment........................................... 9,665 4,255 5,410
Tooling...................................................................... 5,639 1,903 3,736
Software..................................................................... 3,173 514 2,659
Leasehold improvements....................................................... 1,608 520 1,088
Office equipment............................................................. 322 145 177
--------- ---------- ---------
$ 22,469 $ 7,775 $ 14,694
========= ========== =========
As at December 31, 2002, assets under a capital lease with a cost of $1,764
(2001 -- $1,584) and accumulated amortization of $781 (2001 -- $204) are
included in capital assets.
69
7. INTANGIBLE ASSETS
2002
------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
AND WRITEDOWN
---- ---------------- -------
Patents....................................................................... $ 1,846 $ 414 $ 1,432
License fees.................................................................. 12,978 7,503 5,475
Intellectual property......................................................... 1,434 1,434 --
---------- ----------- ---------
$ 16,258 $ 9,351 $ 6,907
========== =========== =========
2001
--------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---- ------------ --------
Patents...................................................................... $ 888 $ 104 $ 784
License fees................................................................. 12,505 3,235 9,270
Intellectual property........................................................ 1,434 1,184 250
-------- ----------- --------
$ 14,827 $ 4,523 $ 10,304
======== =========== ========
The estimated aggregate amortization expense for each of 2003, 2004, 2005, 2006
and 2007 is expected to be $2,302, $2,302, $2,302, nil and nil, respectively.
8. LONG-TERM LIABILITIES
2001 2002
------ ------
Facilities (note 3)........................................................... $ -- $ 4,547
TPC warrants (note 15(b))..................................................... 671 1,152
Other......................................................................... 341 --
------- --------
1,012 5,699
Less current portion.......................................................... 341 2,803
-------- --------
$ 671 $ 2,896
======== ========
9. OBLIGATIONS UNDER CAPITAL LEASE
We lease research and development equipment, computer equipment and office
furniture under capital leases, denominated in Cdn. dollars, and expiring at
various dates to 2004. As at December 31, 2002 our future minimum lease payments
under capital leases were as follows:
CDN.$ U.S.$
------ -------
2003......................................................................... $1,405 $ 889
2004......................................................................... 85 54
------ -------
1,490 943
Less amount representing interest at approximately 8.4%...................... 82 52
------ -------
1,408 891
Less current portion......................................................... 1,313 831
------ -------
$ 95 $ 60
====== =======
Interest expense on capital lease obligations for the year ended December 31,
2002 is $149 (2001 -- $51).
70
10. SHARE CAPITAL
FOLLOW-ON OFFERING
On May 10, 2000, we completed a new issue and secondary public offering of
2,221,139 common shares in the United States and Canada at a price of $48.63
(Cdn. $72.75) per common share. In addition, our shares were co-listed for
trading on The NASDAQ National Market under the trading symbol "SWIR". Of the
2,221,139 common shares, 1,461,106 common shares were offered by the Company
and 760,033 common shares were offered by certain shareholders of the Company.
The following details the changes in issued and outstanding common shares for
the three years ended December 31, 2002:
NUMBER
OF SHARES AMOUNT
---------- ---------
Outstanding, December 31, 1999............................................... 14,216,395 $ 52,016
Issued for cash.............................................................. 1,461,106 65,634
Warrants exercised........................................................... 55,555 259
Stock option exercises....................................................... 324,137 664
Returned to treasury......................................................... (47,618) --
Tax benefit of share issue costs............................................. -- 2,378
---------- ---------
Outstanding, December 31, 2000............................................... 16,009,575 120,951
Stock option exercises....................................................... 176,195 499
---------- ---------
Outstanding, December 31, 2001............................................... 16,185,770 121,450
Stock option exercises....................................................... 159,626 374
---------- ---------
Outstanding, December 31, 2002............................................... 16,345,396 $ 121,824
========== =========
STOCK OPTION PLAN
Under the terms of our employee stock option plan, our board of directors may
grant options to employees, officers and directors. The plan provides for the
granting of options at the fair market value of our stock at the grant date.
Options generally vest over four years, with the first 25% vesting at the first
anniversary date of the grant and the balance vesting in equal amounts at the
end of each month thereafter. We determine the term of each option at the time
it is granted, with options having a five year or a ten year term. Since
February 1999, options have been granted with a five year term. We have reserved
3,882,233 options for issuance under our employee stock option plan. Stock
options have been granted in Canadian and U.S. dollars.
Stock option activity since December 31, 1999 is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ------------------
CDN.$ U.S.$
Outstanding, December 31, 1999............................................ 1,583,240 $ 8.44 $ 5.84
Granted................................................................... 918,642 78.52 52.35
Exercised................................................................. (318,055) 3.10 2.07
Forfeited................................................................. (62,693) 24.62 16.41
---------
Outstanding, December 31, 2000............................................ 2,121,134 39.10 26.07
Granted................................................................... 594,628 32.37 20.27
Exercised................................................................. (175,571) 4.30 2.69
Forfeited................................................................. (96,742) 48.99 30.68
---------
Outstanding, December 31, 2001............................................ 2,443,449 39.57 24.78
Granted................................................................... 732,250 9.79 6.20
Exercised................................................................. (159,626) 3.73 2.36
Forfeited................................................................. (465,509) 50.22 31.78
---------
Outstanding, December 31, 2002............................................ 2,550,564 19.83 12.55
=========
71
EXERCISABLE,
DECEMBER 31, END OF YEAR
- ----------- ------------
2000...................................................................................... 543,657
2001...................................................................................... 1,035,002
2002...................................................................................... 1,378,101
The following table summarizes the stock options outstanding at December 31,
2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------- --------- ---------------- --------------- ----------- ---------------
IN YEARS CDN.$ U.S.$ CDN.$ U.S.$
$0.57 - $0.95 (Cdn.$0.90 - Cdn.$1.50)........ 114,239 4.6 $ 1.11 $ 0.70 114,239 $ 1.11 $ 0.70
$0.96 - $3.56 (Cdn.$1.51 - Cdn.$5.63)........ 787,701 5.0 3.89 2.46 291,393 4.50 2.85
$3.57 - $11.58 (Cdn.$5.64 - Cdn.$18.30)...... 390,377 2.1 15.11 9.56 287,380 15.03 9.51
$11.59 - $39.08 (Cdn.$18.31 - Cdn.$61.75).... 748,310 3.2 37.61 23.80 361,112 44.96 28.46
$39.09 - $60.51 (Cdn.$61.76 - Cdn.$95.60).... 402,395 2.6 70.28 44.48 255,175 70.81 44.82
$60.52 - $134.18 (Cdn.$95.61 - Cdn.$212.00).. 107,542 2.4 133.92 84.76 68,802 136.33 86.28
--------- ---------
2,550,564 3.5 19.83 12.55 1,378,101 35.88 22.71
========= =========
The options outstanding at December 31, 2002 expire between March 29, 2004 and
January 29, 2009.
11. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of our financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities and current portions of long-term liabilities, approximate
their fair value due to their short maturities. Based on borrowing rates
currently available to us for loans with similar terms, the carrying value of
our obligations under capital lease and long-term liabilities approximates their
fair value.
CONCENTRATIONS OF BUSINESS RISK
We maintain substantially all of our cash and cash equivalents and short-term
investments with major financial institutions or government instruments.
Corporate paper is uninsured. Deposits we hold with banks may exceed the amount
of insurance provided on such deposits.
We outsource our manufacturing of our products to third parties. We are
dependent upon the development and deployment by third parties of their
manufacturing abilities. The inability of any supplier or manufacturer to
fulfill our supply requirements could impact future results. We have supply
commitments to our outsource manufacturers based on our estimates of customer
and market demand. Where actual results vary from our estimates, whether due to
execution on our part or market conditions, we are at risk.
We have a customer concentration risk as a few customers represent a significant
portion of our revenue for the year and also our future revenue, see note 17.
Financial instruments that potentially subject us to concentrations of credit
risk are primarily accounts receivable. We perform on-going credit evaluations
of our customers' financial condition and require letters of credit or other
guarantees whenever deemed appropriate.
Although substantially all of our revenues are received in U.S. dollars, we
incur operating costs and have obligations under capital lease that are
denominated in Cdn. dollars. Fluctuations in the exchange rates between these
currencies could have a material effect on our business, financial condition and
results of operations. We mitigate this risk by denominating many of our payment
obligations in U.S. dollars.
72
LINE OF CREDIT
During 2002, we expanded our operating line of credit from $949 (Cdn.$1,500) to
$10,000, which bears interest at prime plus 1.25% per annum. This line of credit
is secured by a general security agreement providing a first charge against all
assets. The balance at December 31, 2002, was nil (2001 -- nil).
12. INCOME TAXES
The composition of our future tax assets at December 31 is as follows:
2001 2002
--------- ---------
Future tax assets
Capital assets............................................................................... $ (1,235) $ (1,837)
Loss carryforwards........................................................................... 775 3,002
Scientific research and development expenses................................................. 3,724 7,521
Share issue costs............................................................................ 1,465 897
Reserves and other........................................................................... 1,792 5,218
--------- --------
Total gross future tax assets.................................................................. 6,521 14,801
Less valuation allowance....................................................................... 2,267 14,301
--------- --------
Net future tax assets.......................................................................... $ 4,254 $ 500
========= ========
We believe that realization of our net future tax assets is more likely than
not. In assessing the realizability of our future tax assets, we considered
whether it is more likely than not that some portion or all of our future tax
assets will not be realized. The ultimate realization of our future tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. We considered projected future
taxable income and tax planning strategies in making our assessment.
The scientific research and development expenses are available to be carried
forward indefinitely and deducted against future taxable income otherwise
calculated. We also have investment tax credits of approximately $10,700
available to offset future Canadian federal income taxes payable. The investment
tax credits expire commencing in 2004 and to 2012.
EFFECTIVE TAX RATE
Our income tax expense for the year ended December 31 differs from that
calculated by applying statutory rates for the following reasons:
2000 2001 2002
---- ---- ----
Combined Canadian federal and provincial income taxes at
expected rate of 39.6% (2001 - 44.6%, 2000 - 45.6%)................................ $ (458) $(11,169) $(15,226)
Permanent and other differences...................................................... 1,354 1,076 1,381
Unrecognized tax assets.............................................................. (1,468) 2,267 8,826
Change in enacted tax rates.......................................................... - 712 -
Loss subject to tax at rates lower than statutory rate............................... 1,632 6,841 4,728
Write-down of future tax asset....................................................... - - 3,754
------- --------- --------
$ 1,060 $ (273) $ 3,463
======= ========== =========
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Our provisions for income taxes consist of the following:
2000 2001 2002
---- -------- ------
Current
Canadian.................................................................... $ 124 $ 95 $ 94
Foreign..................................................................... 791 (353) (385)
-------- -------- --------
Total current................................................................. 915 (258) (291)
Future
Canadian.................................................................... 264 (15) 3,754
Foreign..................................................................... (119) -- --
-------- -------- -------
Total future.................................................................. 145 (15) 3,754
-------- -------- -------
Income tax expense (recovery)................................................. $ 1,060 $ (273) $ 3,463
======== ======== =======
13. RESEARCH AND DEVELOPMENT, NET
2000 2001 2002
------- ------- ------
Research and development...................................................... $ 12,840 $19,929 $ 17,045
Less government research and development funding and investment tax credits... 703 2,527 1,899
-------- ------- --------
$ 12,137 $17,402 $ 15,146
======== ======= ========
14. LOSS PER SHARE
The weighted-average number of shares outstanding we used in the computation of
loss per share were as follows:
2000 2001 2002
------ ------ -----
Weighted-average shares used in computation of loss per share................. 15,318 16,129 16,304
====== ====== ======
All stock options outstanding are anti-dilutive for all periods presented.
15. COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
We lease equipment and premises with minimum future lease payments denominated
in Cdn. dollars at December 31, 2002 as follows:
CDN.$ U.S.$
------ ------
2003............................................................................ 2,654 1,680
2004............................................................................ 2,482 1,571
2005............................................................................ 2,454 1,553
2006............................................................................ 2,512 1,590
2007............................................................................ 2,586 1,637
Thereafter...................................................................... 9,325 5,902
-------- --------
$ 22,013 $ 13,933
======== ========
(b) CONTINGENT LIABILITY ON SALE OF PRODUCTS
(i) Under license agreements, we are committed to royalty payments based on
the sales of products using certain technologies. We recognize royalty
obligations as determinable in accordance with agreement terms. Where
agreements are not finalized, we have recognized our current best
estimate of the obligation. When the agreements are finalized, the
estimate will be revised accordingly.
(iv) Under certain research and development funding agreements, we are
contingently liable to repay up to $3,153. As at December 31, 2002,
$304 has been paid to date against sales amounting to $7,709, that are
subject to royalties.
(v) Under an agreement with the Government of Canada's Technology
Partnerships Canada ("TPC") program, we are eligible to receive
conditionally repayable research and development funding amounting to
Cdn. $9,999 to support the development of a range of third generation
wireless technologies. During the year, we have claimed $2,265 that
has been recorded as a reduction of research and development expense.
Under
74
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.
(c) LEGAL PROCEEDINGS
(iv) In July 2001, we learned that Metricom, Inc. ("Metricom"), one of our
customers, had filed a Chapter 11 reorganization under the U.S.
bankruptcy laws. We filed a proof of claim for amounts due to us
totaling $13,745. Metricom objected to that claim asserting that all
but $2,254 should be disallowed. Metricom also filed an adversary
complaint against us in the U.S. bankruptcy court seeking return of
payments totaling $1,900 made to us within 90 days of the bankruptcy
filing, alleging that the payments are avoidable as "preferences". We
contended that the payments were in the ordinary course of business
and that we supplied additional product to Metricom after receiving
the payments, which would offset any preference liability. During
2002, we executed a global settlement with the reorganized debtor
under which we agreed to reduce our general unsecured claim to
$10,250, and Metricom agreed to dismiss the preference claims. We will
receive a settlement of $1.8 million that has been included in the
determination of our net loss for 2002.
(v) In November 2002, Sierra Wireless, Inc., along with several other
defendants, was served with the second amended complaint of MLR, LLC
filed in the U.S. District Court for the Northern District of Illinois
Eastern Division for alleged patent infringement. We have assessed the
complaint and have determined that there has been no infringement of
the patents referred to in this claim and that the claim is invalid.
We have filed our response to the complaint. Although there can be no
assurance that an unfavourable outcome of the dispute would not have a
material adverse effect on our operating results, liquidity or
financial position, we believe the claims are without merit and will
vigorously defend the action.
(vi) 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.
16. SUPPLEMENTARY INFORMATION
2000 2001 2002
------ ------ ------
(a) CASH FLOW INFORMATION:
Cash received
Interest............................................................................ $ 3,331 $ 2,782 $ 912
Income taxes........................................................................ -- -- 905
Cash paid for
Interest............................................................................ 128 48 323
Income taxes........................................................................ 39 958 57
Non-cash financing activities
Purchase of capital assets funded by obligations under
capital lease.................................................................... 419 1,759 328
(b) ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Opening balance........................................................................ $ 108 $ 1,320 $ 5,169
Bad debt expense....................................................................... 1,254 4,040 623
Write offs and settlements............................................................. (42) (191) (2,724)
---------- -------- --------
Closing balance........................................................................ $ 1,320 $ 5,169 $ 3,068
========== ======== ========
(c) OTHER:
Rent expense.......................................................................... $ 711 $ 1,334 $ 1,599
Foreign exchange gain................................................................. 177 187 77
75
17. SEGMENTED INFORMATION
We operate in the wireless data modem technology industry and all sales of our
products and services are made in this segment. Management makes decisions about
allocating resources based on the one operating segment.
Revenues by product were as follows:
2000 2001 2002
---- ---- ----
MP modems..................................................................... $ 9,815 $ 8,039 $ 7,781
AirCard modems................................................................ 25,271 38,627 44,616
OEM modems.................................................................... 16,227 9,319 19,025
Other......................................................................... 2,163 3,718 1,984
Research and development funding.............................................. 325 2,645 3,724
--------- --------- --------
$ 53,801 $ 62,348 $ 77,130
========= ========= ========
85% (2001 - 75%) of our capital assets are in Canada. Product sales in North
America were 87% (2001-- 97%; 2000-- 82%).
We sell certain products through resellers, original equipment manufacturers,
and wireless service providers who sell these products to end-users. The
approximate sales to the significant resellers are as follows:
2000 2001 2002
-------------- -------------- --------------
Reseller A...................................................... less than 10% less than 10% $ 17,808
Reseller B...................................................... less than 10% less than 10% $ 15,605
Reseller C...................................................... $ 6,230 $ 8,228 less than 10%
Reseller D...................................................... less than 10% $ 6,098 less than 10%
Reseller E...................................................... $ 8,750 less than 10% less than 10%
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sierra Wireless, Inc.
By: /s/ David B. Sutcliffe
------------------------------------
David B. Sutcliffe
Chairman and Chief Executive Officer
Date: April 4, 2003