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 May 2003
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(Commission File. No 0-30718).
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SIERRA WIRELESS, INC., A CANADA CORPORATION
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(Translation of registrant's name in English)
13811 Wireless Way
Richmond, British Columbia, Canada V6V 3A4
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(Address of principal executive offices and zip code)
Registrant's Telephone Number, including area code: 604-231-1100
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F:
Form 20-F X 40-F
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes: No: X
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SIERRA WIRELESS, INC.
FIRST QUARTER REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 2003
UNITED STATES GAAP
2
CHAIRMAN'S MESSAGE
TO OUR SHAREHOLDERS
I am pleased to report that our results for the first quarter of 2003 were
better than expected. Despite a continuation of difficult economic conditions,
our new products and new markets continued to drive our revenues, while strict
cost control delivered a third consecutive quarter of profitability.
RESULTS FOR Q1 2003 COMPARED TO Q1 2002
For the three months ended March 31, 2003, our revenues increased 20% to $20.1
million, from the $16.7 million reported in the first quarter of 2002. The
significant increase reflects the positive impact of our five new products
introduced during 2002 for the 2.5G wireless data networks, as well as our
successful expansion into Europe and the Asia-Pacific region.
Our gross margin also increased, climbing to $7.9 million, from $5.9 million in
the first quarter of 2002. As a percentage of sales, gross margin increased to
39.5%, from 35.5% for the same period in 2002. This improvement reflects an
increase in sales coming from our 2.5G AirCard products, and a reduction in
product costs.
Operating expenses for the period declined to $7.6 million, from $10.2 million
during the first three months of 2002, due primarily to the realization of cost
reductions under our restructuring plan implemented in 2002. This reflects gross
research and development expenses of $3.1 million, compared to $5.4 million in
the first quarter of 2002.
First quarter net earnings for 2003 increased to $0.4 million, or diluted
earnings per share of $0.02, from a loss of $4.3 million, or loss per share of
$0.27 during the first three months of 2002.
As indicated in our first quarter news release and conference call, first
quarter revenues of $20.1 million were slightly better than our guidance range
of $19.0 to $20.0 million, while our net earnings of $0.4 million, or diluted
earnings per share of $0.02, exceeded our anticipated earnings of $0.1 million
to $0.3 million, or diluted earnings per share of $0.01 to $0.02.
3
BUSINESS DEVELOPMENTS
First quarter highlights included a number of business and corporate
developments:
CDMA 1xRTT Product and Channel Developments:
o The Sierra Wireless AirCard(R) 555 received Microsoft Corp.'s Designed for
Windows XP Logo. This logo assures customers that a product is fully
compatible with Windows XP operating systems and can deliver a superior
computing experience.
o We expanded distribution of the Sierra Wireless AirCard 555 in Latin America
with three independent Verizon International network operators including
Iusacell (Mexico), Movilnet (Venezuela), and Verizon Wireless Puerto Rico.
o We announced the commercial availability of the AirCard 555 on Hutchison CAT
Wireless MultiMedia Ltd. (Hutch), Thailand's first end-to-end high-speed
wireless multimedia service using the latest CDMA2000 1X technology.
o Diebold Incorporated, a global leader in financial, self-service solutions,
wirelessly enabled more than 2,000 of its field service technicians with
AirCard 555s operating on the Verizon Wireless network. The solution gives
Diebold's mobile workforce fast, reliable access to real-time information.
o EarthLink, an Internet service provider, launched "EarthLink Wireless
Enhanced Access for Your Laptop". The new EarthLink service utilizes an
EarthLink configured Sierra Wireless AirCard operating on a CDMA 1xRTT
network to enable mobile professionals to connect to the Internet at higher
speeds than traditional wireless data networks.
GSM/GPRS Product and Channel Developments:
o Together with AT&T Wireless, we announced the commercial availability of the
Sierra Wireless AirCard 750. Operating over the AT&T Wireless GSM and GPRS
network, the AirCard 750 enables mobile users of handheld devices to
wirelessly connect to the Internet, e-mail, and corporate applications.
o The Sierra Wireless AirCard 750 was certified to operate on the Orange
network, a leading GSM/GPRS network in the United Kingdom with over 13.3
million active customers.
o We introduced the Sierra Wireless MP750 GPS Rugged Wireless Modem which will
operate on GSM and GPRS global networks throughout Europe, Asia, and North
America. The MP750 GPS, expected to be commercially available in May 2003,
will offer a durable, versatile wireless solution for use in vehicles and
other demanding environments across global markets.
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o Ryder Systems, Europe's leading Bill Management Solution provider, launched
OPERA, a new service that widens access to vital billing information for
mobile telecom customers. OPERA was demonstrated utilizing a laptop and the
Sierra Wireless AirCard 750 while operating over the Vodafone GSM/GPRS
network.
Other Developments:
o Over 100 companies, including leading IT vendors, service providers and
systems integrators, announced the formation of the Mobile Enterprise
Alliance ("MEA"). We were one of the founding members, along with other
leading companies such as Citrix, Inmarsat, Palm, Symbol, and Symbian. Based
in Geneva, Switzerland and in Washington DC, the MEA is a global,
not-for-profit organization that will help enterprise organizations realize
the productivity benefits generated through access to core business
applications by a mobile or remote workforce.
o We were chosen to display our pioneering wireless data products in the "20
Years of Wireless Commemorative Display" at CTIA Wireless 2003. The CTIA
display highlighted companies and products that made a significant impact in
the world of wireless voice and data communications over the past 20 years.
Corporate Developments:
o We appointed Mr. Nadir Mohamed, President and Chief Executive Officer of
Rogers Wireless Communications Inc. to our Board of Directors. With his
knowledge, expertise, and proven record of success in the wireless industry,
Mr. Mohamed will contribute to furthering the goals and success of Sierra
Wireless.
OUTLOOK
Overall, we are encouraged by our first quarter results and are looking forward
to continued progress in 2003. We expect overall economic and industry
conditions will remain challenging. Our business operating premise is profitable
growth, and our priorities remain expansion of our distribution channels, sell
through to end-customers and investment for future growth.
/s/ David B. Sutcliffe
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David B. Sutcliffe
Chairman and Chief Executive Officer
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This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other things,
plans and timing for the introduction or enhancement of our services and
products, statements about future market conditions, supply conditions, channel
and end customer demand conditions, revenues, gross margins, operating expenses,
profits, and other expectations, intentions and plans contained in this report
that are not historical fact. Our expectations regarding future revenues 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 report,
the words "plan", "expect", "believe", and similar expressions generally
identify forward-looking statements. These statements reflect our current
expectations. They are subject to a number of risks and uncertainties,
including, but not limited to, changes in technology and changes in the wireless
data communications market. In light of the many risks and uncertainties
surrounding the wireless data communications market, you should understand that
we cannot assure you that the forward-looking statements contained in this
report will be realized.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our consolidated financial condition and results of
operations has been prepared in accordance with United States GAAP and is
expressed in United States dollars.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2002
REVENUE
Revenue amounted to $20.1 million in the first quarter of 2003, compared to
$16.7 million in the same period in 2002, an increase of 20.5%. Included in our
revenue was research and development funding of nil in the first quarter of
2003, compared to $1.6 million in the first quarter of 2002. The increase in
revenue was primarily a result of a volume increase in sales of our 2.5G AirCard
products as well as increasing sales to channels in the Asia-Pacific region and
Europe. Our revenue by product for the first quarter of 2003 was AirCards 80%,
OEM 11%, Mobile 7% and Other 2%, compared to 58%, 25%, 10% and 7%, respectively,
in the same period of 2002. Our revenue by region for the first quarter of 2003
was the Americas 61%, the Asia-Pacific region 23% and Europe 16%, compared to
97%, nil and 3%, respectively, in the same period of 2002.
GROSS MARGIN
Gross margin amounted to $7.9 million, or 39.5% of revenue, in the first quarter
of 2003, compared to $5.9 million, or 35.5% of revenue, in first quarter of
2002. Included in our gross margin was research and development funding of nil
in the first quarter of 2003, compared to $1.6 million in the same period of
2002. Gross margin, excluding research and development funding, as a percentage
of revenue increased to 39.5% in 2003, compared to 28.5% of revenue in 2002. The
increase in gross margin was a result of a greater mix of 2.5G AirCard products,
which yield a higher margin than OEM products, as well as product cost
reduction.
SALES AND MARKETING
Sales and marketing expenses amounted to $2.7 million for the three months ended
March 31, 2003, unchanged from $2.7 million in the same period of 2002. Sales
and marketing expenses as a percentage of revenue decreased to 13.6% in 2003,
compared to 16.3% in 2002, primarily as a result of increased revenue.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development arrangements, amounted to $2.7 million in the first
quarter of 2003, compared to $4.8 million in the same period in 2002, a decrease
of 42.7%. Research and development expenses in 2003 decreased due primarily to
the realization of cost reductions under our restructuring plan implemented
during 2002. In addition, costs related to the development of new products based
on CDMA and GPRS standards contributed to the higher costs in 2002. Gross
research and development expenses, before government research and development
funding, were $3.1 million or 15.3% of revenue in 2003, compared to $5.4 million
or 32.4% of revenue in 2002. We expect to continue to invest in research and
development for future growth.
ADMINISTRATION
Administration expenses amounted to $1.6 million, or 7.8% of revenue, in the
first quarter of 2003, compared to $2.1 million, or 12.4% of revenue, in the
first quarter of 2002. Administration expenses decreased by 24.1% due primarily
to the effect of cost reductions under our restructuring plan implemented in the
second quarter of 2002. In addition, included in our 2002 administration
expenses is a non-recurring charge of $0.4 million related to facilities costs
restructuring.
AMORTIZATION
Amortization amounted to $0.6 million in the first quarter of 2003, compared to
$0.7 million the first quarter of 2002. Amortization decreased by 15.3% due
primarily to the writedown of fixed and intangible assets under our
restructuring plan implemented in the second quarter of 2002.
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OTHER INCOME
Other income increased to $0.1 million in the first quarter of 2003, compared to
nil in the same period of 2002. This increase is due to a reduction in inventory
carrying charges, which were incurred in 2002.
NET EARNINGS (LOSS)
Our net earnings amounted to $0.4 million in the first quarter of 2003, compared
to a net loss of $4.3 million in the same period of 2002. Our diluted earnings
per share amounted to $0.02 for the first quarter of 2003, compared to a loss
per share of $0.27 in 2002. Our weighted average number of shares outstanding on
a diluted basis increased to 16.7 million in 2003, as compared to 16.3 million
in 2002.
CONTINGENT LIABILITIES
In November 2002, Sierra Wireless, Inc., along with several other defendants,
was served with the second amended complaint of MLR, LLC ("MLR") filed in the
U.S. District Court for the Northern District of Illinois Eastern Division for
alleged patent infringement. We assessed the complaint and believed that there
was no infringement of the patents referred to in this claim and that the claim
was invalid. Subsequent to March 31, 2003, we reached an agreement with MLR.
Under the agreement, we will receive non-royalty bearing licenses to use all of
MLR's present and future patents for certain of our products and MLR will
release us from their claim of alleged patent infringement.
We are engaged in other legal actions arising in the ordinary course of business
and believe that the ultimate outcome of these actions will not have a material
adverse effect on our operating results, liquidity or financial position.
SIGNIFICANT CONTRACTS
We have significant development and volume purchase contracts with three
wireless carriers, AT&T Wireless, Sprint PCS, and Verizon Wireless. These
agreements provide that we will develop new products for new wireless
technologies that the wireless carriers are deploying and that the wireless
carriers will then purchase those new products for resale. Under the terms of
these agreements, if our products do not meet various specifications and
schedules, mutually acceptable adjustments may be made, volume commitments may
be reduced or deliveries may be delayed, any of which could have a material
adverse impact on our results of operations. In 2002, development and deployment
of these new technologies by the wireless industry and development of our new
products were affected by various delays. During 2002, we commenced commercial
volume shipments to each of the wireless carriers and we continued to ship under
these contracts during the first quarter of 2003.
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.
The following critical accounting policies affect our more significant estimates
and assumptions used in preparing our consolidated financial statements:
o We maintain an allowance for doubtful accounts for estimated losses that
may arise if any of our customers are unable to make required payments. If
the financial condition of any of our customers deteriorates, increases in
our allowance may be required.
o We value our inventory at the lower of cost, determined on a
first-in-first-out basis, and estimated market value. We assess the need
for an inventory writedown based on our assessment of estimated market
value using assumptions about future demand and market conditions. If
market conditions are worse than our projections, an additional inventory
writedown may be required.
7
o We evaluate our deferred income tax assets, and we believe their
realization is more likely than not. However, if their realization is not
considered more likely than not, we provide for a valuation allowance. The
ultimate realization of our deferred tax assets is dependent upon the
generation of future taxable income during the 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 assets would be charged to income.
o We recognize revenue from sales of products and services upon the later of
transfer of title or upon shipment of the product to the customer or
rendering of the service, so long as collectibility is reasonably assured.
Customers include resellers, original equipment manufacturers, wireless
service providers and end-users. We record deferred revenue when we receive
cash in advance of the revenue recognition criteria being met.
An increasing amount of our revenue is generated from sales to resellers.
We recognize revenue on the portion of sales to certain resellers that are
subject to provisions allowing various rights of return and stock rotation
when the rights have expired or the products have been reported as sold by
the resellers.
Funding from research and development agreements, other than government
research and development arrangements, is recognized as revenue when
certain criteria stipulated under the terms of those funding agreements
have been met, and when there is reasonable assurance the funding will be
received. Certain research and development funding will be repayable only
on the occurrence of specified future events. If such events do not occur,
no repayment would be required. We will recognize the liability to repay
research and development funding in the period in which conditions arise
that would cause research and development funding to be repayable.
o We accrue product warranty costs to provide for the repair or replacement
of defective products. Our accrual is based on an assessment of historical
experience and estimates are made by management. If we suffer a decrease in
the quality of our products, an increase in our accrual may be required.
o We recorded a lease provision during 2002 as a result of our restructuring
program by estimating the net present value of the future cash outflows
over the remaining lease period. The estimate was based on various
assumptions including the 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we did not have any off-balance sheet finance or special
purpose entities. We have entered into a number of capital leases relating to
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.
Cash provided by operations amounted to $3.9 million in the first quarter of
2003 compared to cash used by operations of $2.1 million in the same period of
2002, an improvement of $6.0 million. The source of cash during 2003 was due
mainly to our operating income, and changes in working capital.
Cash used for capital expenditures was $0.1 million in the three months ended
March 31, 2003, compared to $1.2 million in 2002, and was primarily for
production equipment. Expenditures on intangible assets were $0.6 million in
2003, compared to $0.8 million in 2002 and were primarily for license fees and
patents.
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.
8
The source of funds for our future capital expenditures and commitments is cash
on hand, accounts receivable, research and development funding, borrowings and
cash from operations, as follows:
o Net cash and short-term investments amounted to $37.5 million at March 31,
2003 compared to $34.8 million at December 31, 2002.
o Accounts receivable amounted to $10.1 million at March 31, 2003 compared to
$13.9 million at December 31, 2002.
o Our operating line of credit is with a Canadian chartered bank. The
available facility amounts to $10.0 million, bears interest at prime plus
1.25% and is secured by a general security agreement providing a first
charge against all assets. At March 31, 2003, there were no borrowings
under this line of credit.
MARKET RISK DISCLOSURE
Our risk from currency fluctuations between the Canadian and U.S. dollars is
reduced by purchasing inventory, other costs of sales and many of our services
in U.S. dollars. We are exposed to foreign currency fluctuations since the
majority of our research and development, sales and marketing, and
administration costs are incurred in Canada. We monitor our exposure to
fluctuations between the Canadian and U.S. dollars. As we have available funds
and very little debt, we have not been adversely affected by significant
interest rate fluctuations.
With our international expansion into Europe and the Asia-Pacific region, we are
transacting business in additional foreign currencies and the potential for
currency fluctuations is increasing. We have distribution agreements in Europe
and the Asia-Pacific region that are denominated primarily in U.S. dollars. We
expect that as our business expands in Europe 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, "Accounting for Derivative Instruments and
Hedging Activities" is not material to our financial results.
RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2003, there were no material related
party transactions.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other things,
plans and timing for the introduction or enhancement of our services and
products, statements about future market conditions, supply conditions, channel
and end-customer demand conditions, revenue, gross margin, operating expenses,
profits, and other expectations, intentions and plans contained in this report
that are not historical fact. Our expectations regarding future revenues 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 report,
the words "plan", "expect", "believe", and similar expressions generally
identify forward-looking statements. These statements reflect our current
expectations. They are subject to a number of risks and uncertainties, including
but not limited to, changes in technology and changes in the wireless data
communications market. In light of the many risks and uncertainties surrounding
the wireless data communications market, you should understand that we cannot
assure you that the forward-looking statements contained in this report will be
realized.
9
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. During
the three months ended March 31, 2003, commercial volume deliveries to
AT&T, Sprint PCS and Verizon Wireless continued to occur. In order to
realize the benefits of these agreements, we will have to continue to
successfully manage the following risks:
o We priced these contracts based on our estimate of future
production costs. If we incur higher costs than anticipated, our
gross margins on these contracts will decrease or these contracts
may not be as profitable.
o If we are unable to continue to commit the necessary resources or
are unable to deliver our products as required by the terms of
these contracts, our customers may cancel the contracts. In that
event, any costs incurred may not be recovered and we may incur
additional costs as penalties.
o If we fail to meet a delivery deadline or if the products we
deliver do not meet the agreed-upon specifications, we may have to
reduce the price we can charge for our products, we may be liable
to pay damages to the customer, or volume commitments may be
reduced.
If we are unable to successfully manage these risks or meet required
deadlines in connection with one or more significant contracts, our
reputation could be harmed and our margins and revenues could decrease.
OUR FUTURE REVENUE GROWTH RATES AND OTHER OPERATING RESULTS MAY NOT BE AS
FAVOURABLE AS PAST RESULTS, WHICH MAY ADVERSELY AFFECT PROFITABILITY AND
SHAREHOLDER VALUE.
Although our revenues have increased, we may not be able to sustain these
historical growth rates. We may not 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:
o Our ability to attract and retain skilled technical employees.
o The availability of critical components from third parties.
o Our ability to successfully complete the development of products
in a timely manner.
o Our ability to manufacture products at an acceptable price and
quality.
A failure by us, or our suppliers, in any of these areas, or a failure of
these products to obtain commercial acceptance, could mean we 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
10
our sales of lower margin products exceed our sales of higher margin
products, our profitability may decrease and our business could suffer.
WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS AND SUPPLY KEY
COMPONENTS. IF THEY DO NOT MANUFACTURE OUR PRODUCTS PROPERLY OR CANNOT MEET OUR
NEEDS IN A TIMELY MANNER, WE MAY BE UNABLE TO FULFILL OUR PRODUCT DELIVERY
OBLIGATIONS AND OUR COSTS MAY INCREASE, AND OUR REVENUE AND MARGINS COULD
DECREASE.
We outsource a substantial part of the manufacture of our products to third
parties and depend heavily on the ability of these manufacturers to meet
our needs in a timely and satisfactory manner. Some components used by us
may only be available from a small number of suppliers, in some cases from
only one supplier. Moreover, with respect to the manufacture of our current
products, we currently rely on three manufacturers, any one of whom may
terminate the manufacturing contract with us annually. Our reliance on
third party manufacturers and suppliers subjects us to a number of risks,
including the following:
o The absence of guaranteed manufacturing capacity.
o Reduced control over delivery schedules, production yields and
costs.
o Inability to control the amount of time and resources devoted to
the manufacture of our products.
If we are unable to successfully manage any of these risks or to locate
alternative or additional manufacturers or suppliers in a timely and
cost-effective manner, we may not be able to deliver products in a timely
manner. In addition, our results of operations could be harmed by increased
costs, reduced revenues and reduced margins.
THE LOSS OF ANY OF OUR MATERIAL CUSTOMERS COULD ADVERSELY AFFECT OUR REVENUE AND
PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE.
We depend on a small number of customers for a significant portion of our
revenues. In the last two fiscal years, there have been four different
customers that individually accounted for more than 10% of our revenues. If
any of these customers reduce their business with us or suffer from
business failure, our revenues and profitability could decline, perhaps
materially.
IF DEMAND FOR OUR CURRENT PRODUCTS DECLINES AND WE ARE UNABLE TO LAUNCH
SUCCESSFUL NEW PRODUCTS, OUR REVENUES WILL DECREASE.
Demand for one or all of these products could decline as a result of
competition, technological change or other factors. If we are unable to
launch successful new products, reduced demand for our current products
would cause our results of operations to decline and harm our financial
condition.
WE MAY HAVE DIFFICULTY RESPONDING TO CHANGING TECHNOLOGY, INDUSTRY STANDARDS AND
CUSTOMER PREFERENCES, WHICH COULD CAUSE US TO BE UNABLE TO RECOVER OUR RESEARCH
AND DEVELOPMENT EXPENSES AND LOSE REVENUES.
Our success will depend in part on our ability to develop products that
keep pace with the continuing changes in technology, evolving industry
standards and changing customer and end-user preferences and requirements.
Our products embody complex technology that may not meet those standards,
changes and preferences. In addition, wireless communications service
providers require that wireless data systems deployed in their networks
comply with their own standards, which may differ from the standards of
other providers. We may be unable to successfully address these
developments in a timely basis or at all. Our failure to respond quickly
and cost-effectively to new developments through the development of new
products or enhancements to existing products could cause us to be unable
to recover significant research and development expenses and reduce our
revenues.
COMPETITION FROM BIGGER MORE ESTABLISHED COMPANIES WITH GREATER RESOURCES MAY
PREVENT US FROM INCREASING OR MAINTAINING OUR MARKET SHARE AND COULD RESULT IN
PRICE REDUCTIONS AND REDUCED REVENUES.
The wireless data industry is intensely competitive and subject to rapid
technological change. We expect competition to intensify. More established
and larger companies with greater financial, technical and marketing
resources sell products that compete with ours. Existing or future
competitors may be able to respond more quickly to technological
developments and changes or may independently develop and patent
technologies and products that are superior to ours or achieve greater
acceptance due to factors such as more favourable pricing or more
11
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:
o Continuing to train, motivate, manage and retain our existing
employees and attract and integrate new employees.
o Maintaining and growing manufacturing capacity.
o Developing new products in a timely manner.
o Improving and upgrading our financial and management information
systems and controls.
If we are unable to manage our growth effectively, our ability to retain
key personnel and to compete effectively may be damaged.
OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT ATTENTION
AND HARM TO OUR REPUTATION.
It is possible that other parties may claim that we have violated their
intellectual property rights. Rights to intellectual property can be
difficult to verify. Competitors could assert, for example, that former
employees of theirs whom we have hired have misappropriated their
proprietary information for our benefit. A successful infringement claim
against us could damage us in the following ways:
o We may be liable for damages and litigation costs, including
attorneys' fees.
o We may be prohibited from further use of the intellectual
property.
o We may have to license the intellectual property, incurring
licensing fees.
o We may have to develop a non-infringing alternative, which could
be costly and delay or result in the loss of sales.
Regardless of the outcome, an infringement claim could result in
substantial costs, diversion of resources and management attention and harm
to our reputation.
MISAPPROPRIATION OF OUR INTELLECTUAL PROPERTY COULD PLACE US AT A COMPETITIVE
DISADVANTAGE.
Our intellectual property is important to our success. We rely on a
combination of patent protection, copyrights, trademarks, trade secrets,
licenses, non-disclosure agreements and other contractual agreements to
protect our intellectual property. Third parties may attempt to copy
aspects of our products and technology or obtain information we regard as
proprietary without our authorization. If we are unable to protect our
intellectual property against unauthorized use by others it could have an
adverse effect on our competitive position.
12
Our strategies to deter misappropriation could be inadequate due to the
following risks:
o Non-recognition of the proprietary nature or inadequate protection
of our methodologies in the United States, Canada or foreign
countries.
o Undetected misappropriation of our intellectual property.
o The substantial legal and other costs of protecting and enforcing
our rights in our intellectual property.
o Development of similar technologies by our competitors.
In addition, we could be required to spend significant funds and our
managerial resources could be diverted in order to defend our rights, which
could disrupt our operations.
OUR REVENUES AND EARNINGS MAY FLUCTUATE FROM QUARTER TO QUARTER, WHICH COULD
AFFECT THE MARKET PRICE OF OUR COMMON SHARES.
Our revenues and earnings may vary from quarter to quarter as a result of a
number of factors, including:
o The timing of releases of our new products.
o The timing of substantial sales orders.
o Possible seasonal fluctuations in demand.
o Possible delays in the manufacture or shipment of current or new
products.
o Possible delays or shortages in component supplies.
Because our operating expenses are determined based on anticipated sales,
are generally fixed and are incurred throughout each fiscal quarter, any of
the factors listed above could cause significant variations in our revenues
and earnings in any given quarter. Thus, our quarterly results are not
necessarily indicative of our overall business, results of operations and
financial condition. However, quarterly fluctuations in our revenues and
earnings may affect the market price of our common shares.
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:
o Diversion of management's attention during the acquisition
process.
o Impact on our financial condition due to the timing of the
acquisition.
o 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 55% of all of our sales are in United States dollars to
United States-based customers. We are exposed to fluctuations in the
exchange rate between the United States dollar and the Canadian dollar
through our operations in Canada. To reduce our risk because of currency
fluctuations, we purchase inventory, other costs of sales items and many of
our services in United States dollars. If the Canadian dollar rises
relative to the United States dollar, our operating results may be
impacted. To date, we have not entered into any foreign currency futures
contracts as part of a hedging policy to cover our Canadian currency
requirements. We expect that as our business continues to expand into
Europe, we will also be exposed to Euro transactions and to the associated
currency risk. We have entered into distribution agreements in Europe and
the Asia-Pacific region that are denominated primarily in U.S. dollars. We
expect that as our business expands in Europe, we will also be exposed to
Euro transactions. To date, we have not entered into any futures contracts.
13
AS OUR BUSINESS EXPANDS INTERNATIONALLY, WE WILL BE EXPOSED TO ADDITIONAL RISKS
RELATING TO INTERNATIONAL OPERATIONS.
Our expansion into international operations exposes us to additional risks
unique to such international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable.
o Unexpected changes in regulatory requirements, wireless
communications standards, exchange rates, trading policies,
tariffs and other barriers.
o Uncertainties of laws and enforcement relating to the protection
of intellectual property.
o Language barriers.
o Potential adverse tax consequences.
Furthermore, if we are unable to develop distribution channels in Europe
and the Asia-Pacific region we may not be able to grow our international
operations and our ability to increase our revenue will be negatively
impacted.
OUR BUSINESS MAY SUFFER IF GROWTH IN THE WIRELESS DATA COMMUNICATIONS DEVICES
MARKET DECLINES.
The market for our products may not continue to grow, firms within the
industry may not adopt our technology for integration with their wireless
data communications solutions, and we may be unsuccessful in independently
establishing markets for our products. If the markets in which we compete
fail to grow, or grow more slowly than we currently anticipate, or if we
are unable to establish markets for our new products, it would
significantly harm our business, results of operations and financial
condition.
Certain factors that may limit the growth of the market include, but are
not limited to, failure of carriers to successfully deploy new services on
schedule or the failure of the services to achieve satisfactory price and
performance conditions.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL OUR
PRODUCTS.
Our products are subject to certain mandatory regulatory approvals in the
United States, Canada and other countries in which we operate. In the
United States, the Federal Communications Commission regulates many aspects
of communications devices. In Canada, similar regulations are administered
by the Ministry of Industry, through Industry Canada. Although we have
obtained all the necessary Federal Communications Commission, Industry
Canada and other required approvals for the products we currently sell, we
may not obtain approvals for future products on a timely basis, or at all.
In addition, regulatory requirements may change or we may not be able to
obtain regulatory approvals from countries other than the United States and
Canada in which we may desire to sell products in the future.
14
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in thousands of United States dollars, except per share amounts)
(Prepared in accordance with United States generally accepted
accounting principles (GAAP))
(Unaudited)
Three months ended March 31, 2003 2002
-------- --------
Revenue.................................................. $ 20,095 $ 16,672
Cost of goods sold....................................... 12,155 10,752
-------- --------
Gross margin 7,940 5,920
-------- --------
Expenses:
Sales and marketing.................................... 2,729 2,710
Research and development, net.......................... 2,749 4,801
Administration......................................... 1,569 2,067
Amortization........................................... 553 653
-------- --------
7,600 10,231
-------- --------
Earnings (loss) from operations.......................... 340 (4,311)
Other income (expense)................................... 56 (28)
-------- --------
Earnings (loss) before income taxes...................... 396 (4,339)
Income tax expense....................................... 35 --
-------- --------
Net earnings (loss)...................................... 361 (4,339)
Deficit, beginning of period............................. (73,564) (31,901)
-------- --------
Deficit, end of period................................... $(73,203) $(36,240)
======== ========
Earnings (loss) per share:
Basic.................................................. $ 0.02 $ (0.27)
Diluted................................................ $ 0.02 $ (0.27)
======== ========
Weighted average number of shares (in thousands):
Basic.................................................. 16,355 16,263
Diluted................................................ 16,718 16,263
======== ========
See accompanying notes to consolidated financial statements.
15
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
March 31, December 31,
2003 2002
----------- ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 37,543 $ 34,841
Accounts receivable.......................................... 10,140 13,865
Inventories.................................................. 7,488 6,673
Prepaid expenses............................................. 858 864
-------- --------
56,029 56,243
Fixed assets................................................... 6,284 7,198
Deferred income taxes.......................................... 500 500
Intangible assets.............................................. 7,341 6,907
Other.......................................................... 241 241
-------- --------
$ 70,395 $ 71,089
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 3,581 $ 3,017
Accrued liabilities.......................................... 10,842 12,431
Deferred revenue and credits................................. 401 297
Current portion of long-term liabilities..................... 2,954 2,803
Current portion of obligations under capital lease........... 761 831
-------- --------
18,539 19,379
Long-term liabilities.......................................... 2,614 2,896
Obligations under capital lease................................ 86 60
Shareholders' equity:
Share capital................................................ 123,088 123,047
Deficit...................................................... (73,203) (73,564)
Accumulated other comprehensive income
Cumulative translation adjustments........................ (729) (729)
-------- --------
49,156 48,754
-------- --------
$ 70,395 $ 71,089
======== ========
Contingencies (note 4)
See accompanying notes to consolidated financial statements.
16
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with United States GAAP)
(Unaudited)
Three months ended March 31, 2003 2002
------- -------
Cash flows from operating activities:
Net earnings (loss)........................................... $ 361 $(4,339)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities
Amortization............................................... 1,338 2,189
Loss on disposal........................................... -- 120
Accrued warrants........................................... 168 149
Changes in operating assets and liabilities
Accounts receivable........................................ 3,725 (4,735)
Inventories................................................ (815) 996
Prepaid expenses........................................... 6 603
Accounts payable........................................... 564 5,759
Accrued liabilities........................................ (1,589) (3,346)
Deferred revenue and credits............................... 104 517
------- -------
Net cash provided by (used in) operating activities............. 3,862 (2,087)
Cash flows from investing activities:
Proceeds on disposal.......................................... -- 31
Purchase of fixed assets...................................... (143) (1,240)
Increase in intangible assets................................. (602) (820)
Purchase of short-term investments............................ -- (2,137)
Proceeds on maturity of short-term investments................ -- 18,234
------- -------
Net cash provided by (used in) investing activities............. (745) 14,068
Cash flows from financing activities:
Issue of common shares........................................ 41 325
Repayment of long-term liabilities............................ (456) (399)
------- -------
Net cash used in financing activities........................... (415) (74)
------- -------
Net increase in cash and cash equivalents....................... 2,702 11,907
Cash and cash equivalents, beginning of period.................. 34,841 12,085
------- -------
Cash and cash equivalents, end of period........................ $37,543 $23,992
======= =======
See supplementary cash flow information (note 5)
See accompanying notes to consolidated financial statements.
17
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except per share amounts)
(Prepared in accordance with United States GAAP)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial information does not include all disclosures
required under United States generally accepted accounting principles for
annual financial statements. The accompanying financial information reflects
all adjustments, consisting primarily of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of
results for the interim periods. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in our fiscal 2002 Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements follow the same accounting policies and
methods of application as our annual financial statements, except for 2(b).
(a) STOCK-BASED COMPENSATION
We account for employee stock options using the intrinsic value method. As we
grant all stock options with an exercise price equal to the market value of
the underlying common shares on the date of the grant, no compensation
expense is required to be recognized. Had compensation cost for our employee
stock option plan been determined by the fair value method, our net earnings
(loss) and earnings (loss) per share would have been as follows:
Three months ended March 31, 2003 2002
----------- -----------
Net earnings (loss):
As reported............................................................. $ 361 $ (4,339)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards........... (2,577) (2,713)
----------- -----------
Pro forma............................................................... $ (2,216) $ (7,052)
=========== ===========
Basic and diluted earnings (loss) per share:
As reported............................................................. $ 0.02 $ (0.27)
Pro-forma............................................................... (0.14) (0.43)
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:
Three months ended March 31, 2003 2002
--------- ---------
Expected dividend yield.................................................... -- --
Expected stock price volatility............................................ 104% 104%
Risk-free interest rate.................................................... 4.10% 4.72%
Expected life of options................................................... 4 years 4 years
The fair value of stock options granted during the three months ended March
31 was $2.45 (2002 - $11.44).
18
(b) RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 expands on previously issued accounting guidance
and requires additional disclosure by a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability is applied on a prospective basis to guarantees
issued or modified after December 31, 2002. We have adopted FIN 45 in our
consolidated financial statements.
3. RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2002, we announced and implemented a business
restructuring program under which we reduced operating expenses and asset
levels as a result of our assessment of current and visible future demand.
During 2002, we recorded restructuring and other charges of $37,707
associated with the writedown of CDPD and 2G CDMA inventory, fixed and
intangible asset impairment charges, workforce reductions, charges related to
excess facilities and other assets, and an increase in our deferred tax asset
valuation allowance. We substantially completed implementation of our
restructuring program at December 31, 2002.
The following table summarizes the changes in the provision for restructuring
and other charges for the first quarter of 2003 and the balance of the
provision at March 31, 2003.
Dec. 31, March 31,
2002 Cash 2003
Provision Payments Provision
----------- ------------ -----------
Restructuring charges:
Facilities restructuring............................... $ 4,547 $ (301) $ 4,246
Workforce reduction.................................... 54 (44) 10
Other.................................................. 164 (44) 120
----------- ------------ -----------
$ 4,765 $ (389) $ 4,376
=========== ============ ===========
4. CONTINGENCIES
(a) CONTINGENT LIABILITY ON SALE OF PRODUCTS
(i) Under license agreements, we are committed to royalty payments based
on the sales of products using certain technologies. We recognize
royalty obligations as determinable in accordance with agreement
terms. Where agreements are not finalized, we have recognized our
current best estimate of the obligation. When the agreements are
finalized, the estimate will be revised accordingly.
(ii) Under certain research and development funding agreements, we are
contingently liable to repay up to $3,095. To date, $315 has been paid
against sales amounting to $7,886, that are subject to royalties.
(iii) Under an agreement with the Government of Canada's Technology
Partnerships Canada ("TPC") program, we are eligible to receive Cdn.
$9,999 to support the development of a range of third generation
wireless technologies. During the three months ended March 31, 2003,
we have claimed $316 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.
19
(iv) We accrue product warranty costs, when we sell the related products,
to provide for the repair or replacement of defective products. Our
accrual is based on an assessment of historical experience and
estimates are made by management. An analysis of changes in the
liability for product warranties follows:
Balance, January 1, 2002.......................... $ 1,251
Provisions........................................ 819
Expenditures...................................... (907)
------------
Balance, December 31, 2002........................ 1,163
Provisions........................................ 412
Expenditures...................................... (311)
------------
Balance, March 31, 2003........................... $ 1,264
============
(b) LEGAL PROCEEDINGS
(i) In November 2002, Sierra Wireless, Inc., along with several other
defendants, was served with the second amended complaint of MLR, LLC
("MLR") filed in the U.S. District Court for the Northern District of
Illinois Eastern Division for alleged patent infringement. We assessed
the complaint and believed that there was no infringement of the
patents referred to in this claim and that the claim was invalid.
Subsequent to March 31, 2003, we reached an agreement with MLR. Under
the agreement, we will receive non-royalty bearing licenses to use all
of MLR's present and future patents for certain of our products and
MLR will release us from their claim of alleged patent infringement.
(ii) We are engaged in other legal actions arising in the ordinary course
of business and believe that the ultimate outcome of these actions
will not have a material adverse effect on our operating results,
liquidity or financial position.
5. SUPPLEMENTARY CASH FLOW INFORMATION
Three months ended March 31, 2003 2002
------ ------
Cash received for interest........................................... $ 76 $ 509
Cash paid for
Interest........................................................... 25 132
Income taxes....................................................... 14 2
Non-cash financing activities
Purchase of fixed assets funded by obligations under
capital lease..................................................... 113 267
6. COMPARATIVE FIGURES
We have reclassified certain of the figures presented for comparative
purposes to conform to the financial statement presentation we adopted for
the current period.
20
SIERRA WIRELESS, INC.
FIRST QUARTER REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 2003
CANADIAN GAAP
21
CHAIRMAN'S MESSAGE
TO OUR SHAREHOLDERS
I am pleased to report that our results for the first quarter of 2003 were
better than expected. Despite a continuation of difficult economic
conditions, our new products and new markets continued to drive our revenues,
while strict cost control delivered a third consecutive quarter of
profitability.
RESULTS FOR Q1 2003 COMPARED TO Q1 2002
For the three months ended March 31, 2003, our revenues increased 20% to
$20.1 million, from the $16.7 million reported in the first quarter of 2002.
The significant increase reflects the positive impact of our five new
products introduced during 2002 for the 2.5G wireless data networks, as well
as our successful expansion into Europe and the Asia-Pacific region.
Our gross margin also increased, climbing to $7.9 million, from $5.9 million
in the first quarter of 2002. As a percentage of sales, gross margin
increased to 39.5%, from 35.5% for the same period in 2002. This improvement
reflects an increase in sales coming from our 2.5G AirCard products, and a
reduction in product costs.
Operating expenses for the period declined to $7.6 million, from $10.4
million during the first three months of 2002, due primarily to the
realization of cost reductions under our restructuring plan implemented in
2002. This reflects gross research and development expenses of $3.1 million,
compared to $5.5 million in the first quarter of 2002.
First quarter net earnings for 2003 increased to $0.4 million, or diluted
earnings per share of $0.02, from a loss of $4.5 million, or loss per share
of $0.27 during the first three months of 2002.
As indicated in our first quarter news release and conference call, first
quarter revenues of $20.1 million were slightly better than our guidance
range of $19.0 to $20.0 million, while our net earnings of $0.4 million, or
diluted earnings per share of $0.02, exceeded our anticipated earnings of
$0.1 million to $0.3 million, or diluted earnings per share of $0.01 to $0.02.
22
BUSINESS DEVELOPMENTS
First quarter highlights included a number of business and corporate
developments:
CDMA 1xRTT Product and Channel Developments:
o The Sierra Wireless AirCard(R) 555 received Microsoft Corp.'s Designed for
Windows XP Logo. This logo assures customers that a product is fully
compatible with Windows XP operating systems and can deliver a superior
computing experience.
o We expanded distribution of the Sierra Wireless AirCard 555 in Latin America
with three independent Verizon International network operators including
Iusacell (Mexico), Movilnet (Venezuela), and Verizon Wireless Puerto Rico.
o We announced the commercial availability of the AirCard 555 on Hutchison CAT
Wireless MultiMedia Ltd. (Hutch), Thailand's first end-to-end high-speed
wireless multimedia service using the latest CDMA2000 1X technology.
o Diebold Incorporated, a global leader in financial, self-service solutions,
wirelessly enabled more than 2,000 of its field service technicians with
AirCard 555s operating on the Verizon Wireless network. The solution gives
Diebold's mobile workforce fast, reliable access to real-time information.
o EarthLink, an Internet service provider, launched "EarthLink Wireless
Enhanced Access for Your Laptop". The new EarthLink service utilizes an
EarthLink configured Sierra Wireless AirCard operating on a CDMA 1xRTT
network to enable mobile professionals to connect to the Internet at higher
speeds than traditional wireless data networks.
GSM/GPRS Product and Channel Developments:
o Together with AT&T Wireless, we announced the commercial availability of the
Sierra Wireless AirCard 750. Operating over the AT&T Wireless GSM and GPRS
network, the AirCard 750 enables mobile users of handheld devices to
wirelessly connect to the Internet, e-mail, and corporate applications.
o The Sierra Wireless AirCard 750 was certified to operate on the Orange
network, a leading GSM/GPRS network in the United Kingdom with over 13.3
million active customers.
o We introduced the Sierra Wireless MP750 GPS Rugged Wireless Modem which will
operate on GSM and GPRS global networks throughout Europe, Asia, and North
America. The MP750 GPS, expected to be commercially available in May 2003,
will offer a durable, versatile wireless solution for use in vehicles and
other demanding environments across global markets.
23
o Ryder Systems, Europe's leading Bill Management Solution provider, launched
OPERA, a new service that widens access to vital billing information for
mobile telecom customers. OPERA was demonstrated utilizing a laptop and the
Sierra Wireless AirCard 750 while operating over the Vodafone GSM/GPRS
network.
Other Developments:
o Over 100 companies, including leading IT vendors, service providers and
systems integrators, announced the formation of the Mobile Enterprise
Alliance ("MEA"). We were one of the founding members, along with other
leading companies such as Citrix, Inmarsat, Palm, Symbol, and Symbian. Based
in Geneva, Switzerland and in Washington DC, the MEA is a global,
not-for-profit organization that will help enterprise organizations realize
the productivity benefits generated through access to core business
applications by a mobile or remote workforce.
o We were chosen to display our pioneering wireless data products in the "20
Years of Wireless Commemorative Display" at CTIA Wireless 2003. The CTIA
display highlighted companies and products that made a significant impact in
the world of wireless voice and data communications over the past 20 years.
Corporate Developments:
o We appointed Mr. Nadir Mohamed, President and Chief Executive Officer of
Rogers Wireless Communications Inc. to our Board of Directors. With his
knowledge, expertise, and proven record of success in the wireless industry,
Mr. Mohamed will contribute to furthering the goals and success of Sierra
Wireless.
OUTLOOK
Overall, we are encouraged by our first quarter results and are looking forward
to continued progress in 2003. We expect overall economic and industry
conditions will remain challenging. Our business operating premise is profitable
growth, and our priorities remain expansion of our distribution channels, sell
through to end-customers and investment for future growth.
/s/ DAVID B. SUTCLIFFE
------------------------------------
David B. Sutcliffe
Chairman and Chief Executive Officer
--------------------------------------------------------------------------------
This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other
things, plans and timing for the introduction or enhancement of our services
and products, statements about future market conditions, supply conditions,
channel and end customer demand conditions, revenues, gross margins,
operating expenses, profits, and other expectations, intentions and plans
contained in this report that are not historical fact. Our expectations
regarding future revenues 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 report, the words "plan", "expect",
"believe", and similar expressions generally identify forward-looking
statements. These statements reflect our current expectations. They are
subject to a number of risks and uncertainties, including, but not limited
to, changes in technology and changes in the wireless data communications
market. In light of the many risks and uncertainties surrounding the wireless
data communications market, you should understand that we cannot assure you
that the forward-looking statements contained in this report will be realized.
24
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2002
REVENUE
Revenue amounted to $20.1 million in the first quarter of 2003, compared to
$16.7 million in the same period in 2002, an increase of 20.5%. Included in
our revenue was research and development funding of nil in the first quarter
of 2003, compared to $1.6 million in the first quarter of 2002. The increase
in revenue was primarily a result of a volume increase in sales of our 2.5G
AirCard products as well as increasing sales to channels in the Asia-Pacific
region and Europe. Our revenue by product for the first quarter of 2003 was
AirCards 80%, OEM 11%, Mobile 7% and Other 2%, compared to 58%, 25%, 10% and
7%, respectively, in the same period of 2002. Our revenue by region for the
first quarter of 2003 was the Americas 61%, the Asia-Pacific region 23% and
Europe 16%, compared to 97%, nil and 3%, respectively, in the same period of
2002.
GROSS MARGIN
Gross margin amounted to $7.9 million, or 39.5% of revenue, in the first
quarter of 2003, compared to $5.9 million, or 35.5% of revenue, in first
quarter of 2002. Included in our gross margin was research and development
funding of nil in the first quarter of 2003, compared to $1.6 million in the
same period of 2002. Gross margin, excluding research and development
funding, as a percentage of revenue increased to 39.5% in 2003, compared to
28.5% of revenue in 2002. The increase in gross margin was a result of a
greater mix of 2.5G AirCard products, which yield a higher margin than OEM
products, as well as product cost reduction.
SALES AND MARKETING
Sales and marketing expenses amounted to $2.7 million for the three months
ended March 31, 2003, unchanged from $2.7 million in the same period of 2002.
Sales and marketing expenses as a percentage of revenue decreased to 13.6% in
2003, compared to 16.3% in 2002, primarily as a result of increased revenue.
RESEARCH AND DEVELOPMENT, NET
Research and development expenses, net of conditionally repayable government
research and development arrangements, amounted to $2.7 million in the first
quarter of 2003, compared to $4.8 million in the same period in 2002, a
decrease of 42.7%. Research and development expenses in 2003 decreased due
primarily to the realization of cost reductions under our restructuring plan
implemented during 2002. In addition, costs related to the development of new
products based on CDMA and GPRS standards contributed to the higher costs in
2002. Gross research and development expenses, before government research and
development funding, were $3.1 million or 15.3% of revenue in 2003, compared
to $5.4 million or 32.4% of revenue in 2002. We expect to continue to invest
in research and development for future growth.
ADMINISTRATION
Administration expenses amounted to $1.6 million, or 7.8% of revenue, in the
first quarter of 2003, compared to $2.1 million, or 12.4% of revenue, in the
first quarter of 2002. Administration expenses decreased by 24.1% due
primarily to the effect of cost reductions under our restructuring plan
implemented in the second quarter of 2002. In addition, included in our 2002
administration expenses is a non-recurring charge of $0.4 million related to
facilities costs restructuring.
AMORTIZATION
Amortization amounted to $0.6 million in the first quarter of 2003, compared
to $0.7 million the first quarter of 2002. Amortization decreased by 15.3%
due primarily to the writedown of fixed and intangible assets under our
restructuring plan implemented in the second quarter of 2002.
25
OTHER INCOME
Other income increased to $0.1 million in the first quarter of 2003, compared
to nil in the same period of 2002. This increase is due to a reduction in
inventory carrying charges, which were incurred in 2002.
NET EARNINGS (LOSS)
Our net earnings amounted to $0.4 million in the first quarter of 2003,
compared to a net loss of $4.3 million in the same period of 2002. Our
diluted earnings per share amounted to $0.02 for the first quarter of 2003,
compared to a loss per share of $0.27 in 2002. Our weighted average number of
shares outstanding on a diluted basis increased to 16.7 million in 2003, as
compared to 16.3 million in 2002.
CONTINGENT LIABILITIES
In November 2002, Sierra Wireless, Inc., along with several other defendants,
was served with the second amended complaint of MLR, LLC ("MLR") filed in the
U.S. District Court for the Northern District of Illinois Eastern Division
for alleged patent infringement. We assessed the complaint and believed that
there was no infringement of the patents referred to in this claim and that
the claim was invalid. Subsequent to March 31, 2003, we reached an agreement
with MLR. Under the agreement, we will receive non-royalty bearing licenses
to use all of MLR's present and future patents for certain of our products
and MLR will release us from their claim of alleged patent infringement.
We are engaged in other legal actions arising in the ordinary course of
business and believe that the ultimate outcome of these actions will not have
a material adverse effect on our operating results, liquidity or financial
position.
SIGNIFICANT CONTRACTS
We have significant development and volume purchase contracts with three
wireless carriers, AT&T Wireless, Sprint PCS, and Verizon Wireless. These
agreements provide that we will develop new products for new wireless
technologies that the wireless carriers are deploying and that the wireless
carriers will then purchase those new products for resale. Under the terms of
these agreements, if our products do not meet various specifications and
schedules, mutually acceptable adjustments may be made, volume commitments
may be reduced or deliveries may be delayed, any of which could have a
material adverse impact on our results of operations. In 2002, development
and deployment of these new technologies by the wireless industry and
development of our new products were affected by various delays. During 2002,
we commenced commercial volume shipments to each of the wireless carriers and
we continued to ship under these contracts during the first quarter of 2003.
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.
The following critical accounting policies affect our more significant
estimates and assumptions used in preparing our consolidated financial
statements:
o We maintain an allowance for doubtful accounts for estimated losses
that may arise if any of our customers are unable to make required
payments. If the financial condition of any of our customers
deteriorates, increases in our allowance may be required.
o We value our inventory at the lower of cost, determined on a
first-in-first-out basis, and estimated market value. We assess the
need for an inventory writedown based on our assessment of estimated
market value using assumptions about future demand and market
26
conditions. If market conditions are worse than our projections,
an additional inventory writedown may be required.
o We evaluate our deferred income tax assets, and we believe their
realization is more likely than not. However, if their realization is
not considered more likely than not, we provide for a valuation
allowance. The ultimate realization of our deferred tax assets is
dependent upon the generation of future taxable income during the
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 assets
would be charged to income.
o We recognize revenue from sales of products and services upon the
later of transfer of title or upon shipment of the product to the
customer or rendering of the service, so long as collectibility is
reasonably assured. Customers include resellers, original equipment
manufacturers, wireless service providers and end-users. We record
deferred revenue when we receive cash in advance of the revenue
recognition criteria being met.
An increasing amount of our revenue is generated from sales to
resellers. We recognize revenue on the portion of sales to certain
resellers that are subject to provisions allowing various rights of
return and stock rotation when the rights have expired or the products
have been reported as sold by the resellers.
Funding from research and development agreements, other than
government research and development arrangements, is recognized as
revenue when certain criteria stipulated under the terms of those
funding agreements have been met, and when there is reasonable
assurance the funding will be received. Certain research and
development funding will be repayable only on the occurrence of
specified future events. If such events do not occur, no repayment
would be required. We will recognize the liability to repay research
and development funding in the period in which conditions arise that
would cause research and development funding to be repayable.
o We accrue product warranty costs to provide for the repair or
replacement of defective products. Our accrual is based on an
assessment of historical experience and estimates are made by
management. If we suffer a decrease in the quality of our products, an
increase in our accrual may be required.
o We recorded a lease provision during 2002 as a result of our
restructuring program by estimating the net present value of the
future cash outflows over the remaining lease period. The estimate was
based on various assumptions including the 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we did not have any off-balance sheet finance or
special purpose entities. We have entered into a number of capital leases
relating to 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.
Cash provided by operations amounted to $3.9 million in the first quarter of
2003 compared to cash used by operations of $2.1 million in the same period
of 2002, an improvement of $6.0 million. The source of cash during 2003 was
due mainly to our operating income, and changes in working capital.
Cash used for capital expenditures was $0.1 million in the three months ended
March 31, 2003, compared to $1.2 million in 2002, and was primarily for
production equipment. Expenditures on intangible assets were $0.6 million in
2003, compared to $0.8 million in 2002 and were primarily for license fees
and patents.
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.
27
The source of funds for our future capital expenditures and commitments is
cash on hand, accounts receivable, research and development funding,
borrowings and cash from operations, as follows:
o Net cash and short-term investments amounted to $37.5 million at March
31, 2003 compared to $34.8 million at December 31, 2002.
o Accounts receivable amounted to $10.1 million at March 31, 2003
compared to $13.9 million at December 31, 2002.
o Our operating line of credit is with a Canadian chartered bank. The
available facility amounts to $10.0 million, bears interest at prime
plus 1.25% and is secured by a general security agreement providing a
first charge against all assets. At March 31, 2003, there were no
borrowings under this line of credit.
MARKET RISK DISCLOSURE
Our risk from currency fluctuations between the Canadian and U.S. dollars is
reduced by purchasing inventory, other costs of sales and many of our
services in U.S. dollars. We are exposed to foreign currency fluctuations
since the majority of our research and development, sales and marketing, and
administration costs are incurred in Canada. We monitor our exposure to
fluctuations between the Canadian and U.S. dollars. As we have available
funds and very little debt, we have not been adversely affected by
significant interest rate fluctuations.
With our international expansion into Europe and the Asia-Pacific region, we
are transacting business in additional foreign currencies and the potential
for currency fluctuations is increasing. We have distribution agreements in
Europe and the Asia-Pacific region that are denominated primarily in U.S.
dollars. We expect that as our business expands in Europe 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, "Accounting for Derivative Instruments and
Hedging Activities" is not material to our financial results.
RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2003, there were no material related
party transactions.
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GAAP
The MD&A has been prepared in accordance with U.S. GAAP. Differences between
our consolidated financial statements under U.S. GAAP and our consolidated
financial statements under Canadian GAAP reflect differences in exchange
rates used to translate prior years' assets, liabilities, revenue, and
expenses on adopting the U.S. dollar as our primary currency for measurement
and display during the year ended December 31, 1999.
Research and development expense for the first quarter of 2002 was different
under Canadian GAAP due to the difference in the accounting treatment applied
to in-process research and development ("IPR&D") which resulted in an
increase in our net loss of $0.1 million. In accordance with U.S. GAAP,
purchased IPR&D is expensed on acquisition, whereas under Canadian GAAP,
purchased IPR&D is treated as an intangible asset and amortized. At December
31, 2002, the IPR&D had been fully amortized.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other
things, plans and timing for the introduction or enhancement of our services
and products, statements about future market conditions, supply conditions,
channel and end-customer demand conditions, revenue, gross margin, operating
expenses, profits, and other expectations, intentions and plans contained in
this report that are not historical fact. Our expectations regarding future
revenues depend upon our ability to develop, manufacture, and
28
supply products that we do not produce today and that meet defined
specifications. When used in this report, the words "plan", "expect",
"believe", and similar expressions generally identify forward-looking
statements. These statements reflect our current expectations. They are
subject to a number of risks and uncertainties, including but not limited to,
changes in technology and changes in the wireless data communications market.
In light of the many risks and uncertainties surrounding the wireless data
communications market, you should understand that we cannot assure you that
the forward-looking statements contained in this report will be realized.
RISK FACTORS
Our business is subject to significant risks and past performance is no
guarantee of future performance. Some of the risks we face are:
IF WE CANNOT DELIVER PRODUCTS ASSOCIATED WITH SIGNIFICANT CONTRACTS IN A
PROFITABLE AND TIMELY MANNER OUR MARGINS AND REVENUES WILL BE NEGATIVELY
IMPACTED.
Since late 1999, we have entered into significant supply contracts with
AT&T Wireless Services ("AT&T"), Sprint PCS and Verizon Wireless. Our right
to receive revenues under these contracts depends upon our ability to
manufacture and supply products that meet defined specifications. During
the three months ended March 31, 2003, commercial volume deliveries to
AT&T, Sprint PCS and Verizon Wireless continued to occur. In order to
realize the benefits of these agreements, we will have to continue to
successfully manage the following risks:
o We priced these contracts based on our estimate of future production
costs. If we incur higher costs than anticipated, our gross margins on
these contracts will decrease or these contracts may not be as
profitable.
o If we are unable to continue to commit the necessary resources or are
unable to deliver our products as required by the terms of these
contracts, our customers may cancel the contracts. In that event, any
costs incurred may not be recovered and we may incur additional costs
as penalties.
o If we fail to meet a delivery deadline or if the products we deliver
do not meet the agreed-upon specifications, we may have to reduce the
price we can charge for our products, we may be liable to pay damages
to the customer, or volume commitments may be reduced.
If we are unable to successfully manage these risks or meet required
deadlines in connection with one or more significant contracts, our
reputation could be harmed and our margins and revenues could decrease.
OUR FUTURE REVENUE GROWTH RATES AND OTHER OPERATING RESULTS MAY NOT BE AS
FAVOURABLE AS PAST RESULTS, WHICH MAY ADVERSELY AFFECT PROFITABILITY AND
SHAREHOLDER VALUE.
Although our revenues have increased, we may not be able to sustain these
historical growth rates. We may not 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:
o Our ability to attract and retain skilled technical employees.
o The availability of critical components from third parties.
o Our ability to successfully complete the development of products in a
timely manner.
o Our ability to manufacture products at an acceptable price and
quality.
A failure by us, or our suppliers, in any of these areas, or a failure of
these products to obtain commercial acceptance, could mean we are unable to
recover our research and development expenses and could result in a
decrease in our market share and our revenues.
29
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT GROSS MARGINS FOR ANY GIVEN PRODUCT
AND, AS A RESULT, OUR PROFITABILITY MAY DECREASE.
We generally price our products based on our estimate of future production
costs. If actual production costs are higher than we anticipated, our gross
margins will decrease. In addition, competitive pressures may force us to
lower our product prices, which may further decrease our gross margins if
we are unable to offset that effect by cost reduction measures. If our
gross margins are reduced with respect to an important product line, or if
our sales of lower margin products exceed our sales of higher margin
products, our profitability may decrease and our business could suffer.
WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS AND SUPPLY KEY
COMPONENTS. IF THEY DO NOT MANUFACTURE OUR PRODUCTS PROPERLY OR CANNOT MEET
OUR NEEDS IN A TIMELY MANNER, WE MAY BE UNABLE TO FULFILL OUR PRODUCT
DELIVERY OBLIGATIONS AND OUR COSTS MAY INCREASE, AND OUR REVENUE AND MARGINS
COULD DECREASE.
We outsource a substantial part of the manufacture of our products to third
parties and depend heavily on the ability of these manufacturers to meet
our needs in a timely and satisfactory manner. Some components used by us
may only be available from a small number of suppliers, in some cases from
only one supplier. Moreover, with respect to the manufacture of our current
products, we currently rely on three manufacturers, any one of whom may
terminate the manufacturing contract with us annually. Our reliance on
third party manufacturers and suppliers subjects us to a number of risks,
including the following:
o The absence of guaranteed manufacturing capacity.
o Reduced control over delivery schedules, production yields and costs.
o Inability to control the amount of time and resources devoted to the
manufacture of our products.
If we are unable to successfully manage any of these risks or to locate
alternative or additional manufacturers or suppliers in a timely and
cost-effective manner, we may not be able to deliver products in a timely
manner. In addition, our results of operations could be harmed by increased
costs, reduced revenues and reduced margins.
THE LOSS OF ANY OF OUR MATERIAL CUSTOMERS COULD ADVERSELY AFFECT OUR REVENUE
AND PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE.
We depend on a small number of customers for a significant portion of our
revenues. In the last two fiscal years, there have been four different
customers that individually accounted for more than 10% of our revenues. If
any of these customers reduce their business with us or suffer from
business failure, our revenues and profitability could decline, perhaps
materially.
IF DEMAND FOR OUR CURRENT PRODUCTS DECLINES AND WE ARE UNABLE TO LAUNCH
SUCCESSFUL NEW PRODUCTS, OUR REVENUES WILL DECREASE.
Demand for one or all of these products could decline as a result of
competition, technological change or other factors. If we are unable to
launch successful new products, reduced demand for our current products
would cause our results of operations to decline and harm our financial
condition.
WE MAY HAVE DIFFICULTY RESPONDING TO CHANGING TECHNOLOGY, INDUSTRY STANDARDS
AND CUSTOMER PREFERENCES, WHICH COULD CAUSE US TO BE UNABLE TO RECOVER OUR
RESEARCH AND DEVELOPMENT EXPENSES AND LOSE REVENUES.
Our success will depend in part on our ability to develop products that
keep pace with the continuing changes in technology, evolving industry
standards and changing customer and end-user preferences and requirements.
Our products embody complex technology that may not meet those standards,
changes and preferences. In addition, wireless communications service
providers require that wireless data systems deployed in their networks
comply with their own standards, which may differ from the standards of
other providers. We may be unable to successfully address these
developments in a timely basis or at all. Our failure to respond quickly
and cost-effectively to new developments through the development of new
products or enhancements to existing products could cause us to be unable
to recover significant research and development expenses and reduce our
revenues.
30
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:
o Continuing to train, motivate, manage and retain our existing
employees and attract and integrate new employees.
o Maintaining and growing manufacturing capacity.
o Developing new products in a timely manner.
o Improving and upgrading our financial and management information
systems and controls.
If we are unable to manage our growth effectively, our ability to retain
key personnel and to compete effectively may be damaged.
OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS,
WHICH MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT
ATTENTION AND HARM TO OUR REPUTATION.
It is possible that other parties may claim that we have violated their
intellectual property rights. Rights to intellectual property can be
difficult to verify. Competitors could assert, for example, that former
employees of theirs whom we have hired have misappropriated their
proprietary information for our benefit. A successful infringement claim
against us could damage us in the following ways:
o We may be liable for damages and litigation costs, including
attorneys' fees.
o We may be prohibited from further use of the intellectual property.
o We may have to license the intellectual property, incurring licensing
fees.
o We may have to develop a non-infringing alternative, which could be
costly and delay or result in the loss of sales.
Regardless of the outcome, an infringement claim could result in
substantial costs, diversion of resources and management attention and harm
to our reputation.
31
MISAPPROPRIATION OF OUR INTELLECTUAL PROPERTY COULD PLACE US AT A COMPETITIVE
DISADVANTAGE.
Our intellectual property is important to our success. We rely on a
combination of patent protection, copyrights, trademarks, trade secrets,
licenses, non-disclosure agreements and other contractual agreements to
protect our intellectual property. Third parties may attempt to copy
aspects of our products and technology or obtain information we regard as
proprietary without our authorization. If we are unable to protect our
intellectual property against unauthorized use by others it could have an
adverse effect on our competitive position.
Our strategies to deter misappropriation could be inadequate due to the
following risks:
o Non-recognition of the proprietary nature or inadequate protection of
our methodologies in the United States, Canada or foreign countries.
o Undetected misappropriation of our intellectual property.
o The substantial legal and other costs of protecting and enforcing our
rights in our intellectual property.
o Development of similar technologies by our competitors.
In addition, we could be required to spend significant funds and our
managerial resources could be diverted in order to defend our rights, which
could disrupt our operations.
OUR REVENUES AND EARNINGS MAY FLUCTUATE FROM QUARTER TO QUARTER, WHICH COULD
AFFECT THE MARKET PRICE OF OUR COMMON SHARES.
Our revenues and earnings may vary from quarter to quarter as a result of a
number of factors, including:
o The timing of releases of our new products.
o The timing of substantial sales orders.
o Possible seasonal fluctuations in demand.
o Possible delays in the manufacture or shipment of current or new
products.
o Possible delays or shortages in component supplies.
Because our operating expenses are determined based on anticipated sales,
are generally fixed and are incurred throughout each fiscal quarter, any of
the factors listed above could cause significant variations in our revenues
and earnings in any given quarter. Thus, our quarterly results are not
necessarily indicative of our overall business, results of operations and
financial condition. However, quarterly fluctuations in our revenues and
earnings may affect the market price of our common shares.
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:
o Diversion of management's attention during the acquisition process.
o Impact on our financial condition due to the timing of the
acquisition.
o 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 55% of all of our sales are in United States dollars to
United States-based customers. We are exposed to fluctuations in the
exchange rate between the United States dollar and the Canadian dollar
through our operations in Canada. To reduce our risk because of currency
fluctuations, we purchase inventory, other costs of sales items and many
of our services in United States dollars. If the Canadian dollar rises
relative to the United States dollar, our operating results may be
32
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. We expect that as our business continues to expand into
Europe, we will also be exposed to Euro transactions and to the
associated currency risk. We have entered into distribution agreements
in Europe and the Asia-Pacific region that are denominated primarily in
U.S. dollars. We expect that as our business expands in Europe, we will
also be exposed to Euro transactions. To date, we have not entered into
any futures contracts.
AS OUR BUSINESS EXPANDS INTERNATIONALLY, WE WILL BE EXPOSED TO ADDITIONAL
RISKS RELATING TO INTERNATIONAL OPERATIONS.
Our expansion into international operations exposes us to additional risks
unique to such international markets, including the following:
o Increased credit management risks and greater difficulties in
collecting accounts receivable.
o Unexpected changes in regulatory requirements, wireless communications
standards, exchange rates, trading policies, tariffs and other
barriers.
o Uncertainties of laws and enforcement relating to the protection of
intellectual property.
o Language barriers.
o Potential adverse tax consequences.
Furthermore, if we are unable to develop distribution channels in Europe
and the Asia-Pacific region we may not be able to grow our international
operations and our ability to increase our revenue will be negatively
impacted.
OUR BUSINESS MAY SUFFER IF GROWTH IN THE WIRELESS DATA COMMUNICATIONS DEVICES
MARKET DECLINES.
The market for our products may not continue to grow, firms within the
industry may not adopt our technology for integration with their wireless
data communications solutions, and we may be unsuccessful in independently
establishing markets for our products. If the markets in which we compete
fail to grow, or grow more slowly than we currently anticipate, or if we
are unable to establish markets for our new products, it would
significantly harm our business, results of operations and financial
condition.
Certain factors that may limit the growth of the market include, but are
not limited to, failure of carriers to successfully deploy new services on
schedule or the failure of the services to achieve satisfactory price and
performance conditions.
GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL
OUR PRODUCTS.
Our products are subject to certain mandatory regulatory approvals in the
United States, Canada and other countries in which we operate. In the
United States, the Federal Communications Commission regulates many aspects
of communications devices. In Canada, similar regulations are administered
by the Ministry of Industry, through Industry Canada. Although we have
obtained all the necessary Federal Communications Commission, Industry
Canada and other required approvals for the products we currently sell, we
may not obtain approvals for future products on a timely basis, or at all.
In addition, regulatory requirements may change or we may not be able to
obtain regulatory approvals from countries other than the United States and
Canada in which we may desire to sell products in the future.
33
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in thousands of United States dollars,
except per share amounts)
(Prepared in accordance with Canadian generally accepted
accounting principles (GAAP))
(Unaudited)
Three months ended March 31, 2003 2002
-------- --------
Revenue........................................................ $ 20,095 $ 16,672
Cost of goods sold............................................. 12,155 10,752
-------- --------
Gross margin................................................... 7,940 5,920
-------- --------
Expenses:
Sales and marketing.......................................... 2,729 2,710
Research and development, net................................ 2,749 4,926
Administration............................................... 1,569 2,067
Amortization................................................. 553 653
-------- --------
7,600 10,356
-------- --------
Earnings (loss) from operations................................ 340 (4,436)
Other income (expense)......................................... 56 (28)
-------- --------
Earnings (loss) before income taxes............................ 396 (4,464)
Income tax expense............................................. 35 --
-------- --------
Net earnings (loss)............................................ 361 (4,464)
Deficit, beginning of period................................... (72,586) (30,673)
-------- --------
Deficit, end of period......................................... $(72,225) $(35,137)
======== ========
Earnings (loss) per share:
Basic........................................................ $ 0.02 $ (0.27)
Diluted...................................................... $ 0.02 $ (0.27)
======== ========
Weighted average number of shares (in thousands):
Basic........................................................ 16,355 16,263
Diluted...................................................... 16,718 16,263
======== ========
See accompanying notes to consolidated financial statements.
34
SIERRA WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
March 31, December 31,
2003 2002
----------- ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 37,543 $ 34,841
Accounts receivable......................................... 10,140 13,865
Inventories................................................. 7,488 6,673
Prepaid expenses............................................ 858 864
-------- --------
56,029 56,243
Capital assets................................................ 6,284 7,198
Future income taxes........................................... 500 500
Intangible assets............................................. 7,341 6,907
Other......................................................... 241 241
-------- --------
$ 70,395 $ 71,089
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 3,581 $ 3,017
Accrued liabilities......................................... 10,841 12,431
Deferred revenue and credits................................ 402 297
Current portion of long-term liabilities.................... 2,954 2,803
Current portion of obligations under capital lease.......... 761 831
-------- --------
18,539 19,379
Long-term liabilities......................................... 2,614 2,896
Obligations under capital lease............................... 86 60
Shareholders' equity:
Share capital............................................... 121,865 121,824
Deficit..................................................... (72,225) (72,586)
Cumulative translation adjustments.......................... (484) (484)
-------- --------
49,156 48,754
-------- --------
$ 70,395 $ 71,089
======== ========
Contingencies (note 4)
See accompanying notes to consolidated financial statements.
35
SIERRA WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
(Prepared in accordance with Canadian GAAP)
(Unaudited)
Three months ended March 31, 2003 2002
------- -------
Cash flows from operating activities:
Net earnings (loss)........................................... $ 361 $(4,464)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities
Amortization............................................... 1,338 2,314
Loss on disposal........................................... -- 120
Accrued warrants........................................... 168 149
Changes in operating assets and liabilities
Accounts receivable........................................ 3,725 (4,735)
Inventories................................................ (815) 996
Prepaid expenses........................................... 6 603
Accounts payable........................................... 564 5,759
Accrued liabilities........................................ (1,589) (3,346)
Deferred revenue and credits............................... 104 517
------- -------
Net cash provided by (used in) operating activities............. 3,862 (2,087)
Cash flows from investing activities:
Proceeds on disposal.......................................... -- 31
Purchase of capital assets.................................... (143) (1,240)
Increase in intangible assets................................. (602) (820)
Purchase of short-term investments............................ -- (2,137)
Proceeds on maturity of short-term investments................ -- 18,234
------- -------
Net cash provided by (used in) investing activities............. (745) 14,068
Cash flows from financing activities:
Issue of common shares........................................ 41 325
Repayment of long-term liabilities............................ (456) (399)
------- -------
Net cash used in financing activities........................... (415) (74)
------- -------
Net increase in cash and cash equivalents....................... 2,702 11,907
Cash and cash equivalents, beginning of period.................. 34,841 12,085
------- -------
Cash and cash equivalents, end of period........................ $37,543 $23,992
======= =======
See supplementary cash flow information (note 5)
See accompanying notes to consolidated financial statements.
36
SIERRA WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars,
except per share amounts)
(Prepared in accordance with Canadian GAAP)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial information does not include all disclosures required
under Canadian generally accepted accounting principles for annual financial
statements. The accompanying financial information reflects all adjustments,
consisting primarily of normal recurring adjustments, which are, in the opinion
of management, necessary for a fair presentation of results for the interim
periods. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in our
fiscal 2002 Annual Report.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements follow the same accounting policies and
methods of application as our annual financial statements, except for 2(b).
(a) STOCK-BASED COMPENSATION
We account for employee stock options using the intrinsic value method. As we
grant all stock options with an exercise price equal to the market value of the
underlying common shares on the date of the grant, no compensation expense is
required to be recognized under the intrinsic value method. 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 earnings (loss) and earnings (loss) per share would have
been as follows:
Three months ended March 31, 2003 2002
------- -------
Net earnings (loss):
As reported.......................................................... $ 361 $(4,464)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards............ (2,577) (2,713)
------- -------
Pro forma............................................................ $(2,216) $(7,177)
======= =======
Basic and diluted earnings (loss) per share:
As reported.......................................................... $ 0.02 $ (0.27)
Pro-forma............................................................ (0.14) (0.44)
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:
Three months ended March 31, 2003 2002
------- -------
Expected dividend yield............................................... -- --
Expected stock price volatility....................................... 104% 104%
Risk-free interest rate............................................... 4.10% 4.72%
Expected life of options.............................................. 4 years 4 years
The fair value of stock options granted during the three months ended March 31
was $2.45 (2002 - $11.44).
37
(b) RECENT ACCOUNTING PRONOUNCEMENTS
In February 2003, the Accounting Standards Board issued Accounting Guideline
AcG-14, "Disclosure of Guarantees" ("AcG-14"). AcG-14 expands on previously
issued accounting guidance and requires additional disclosure by a guarantor to
disclose information about each guarantee, or each group of similar guarantees,
even when the likelihood of the guarantor having to make any payments under the
guarantee is slight. AcG-14 does not address the recognition or measurement of a
guarantor's liability for obligations under a guarantee. The Guideline is to be
applied to the financial statements of interim and annual periods beginning on
or after January 1, 2003. We have adopted AcG-14 in our consolidated financial
statements.
3. RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2002, we announced and implemented a business
restructuring program under which we reduced operating expenses and asset levels
as a result of our assessment of current and visible future demand. During 2002,
we recorded restructuring and other charges of $37,707 associated with the
writedown of CDPD and 2G CDMA inventory, capital and intangible asset impairment
charges, workforce reductions, charges related to excess facilities and other
assets, and an increase in our future tax asset valuation allowance. We
substantially completed implementation of our restructuring program at December
31, 2002.
The following table summarizes the changes in the provision for restructuring
and other charges for the first quarter of 2003 and the balance of the provision
at March 31, 2003.
Dec. 31, 2002 Cash March 31, 2003
Provision Payments Provision
------------- -------- --------------
Restructuring charges:
Facilities restructuring................................. $4,547 $(301) $4,246
Workforce reduction...................................... 54 (44) 10
Other.................................................... 164 (44) 120
------ ----- ------
$4,765 $(389) $4,376
====== ===== ======
4. CONTINGENCIES
(a) CONTINGENT LIABILITY ON SALE OF PRODUCTS
(i) Under license agreements, we are committed to royalty payments based
on the sales of products using certain technologies. We recognize
royalty obligations as determinable in accordance with agreement
terms. Where agreements are not finalized, we have recognized our
current best estimate of the obligation. When the agreements are
finalized, the estimate will be revised accordingly.
(ii) Under certain research and development funding agreements, we are
contingently liable to repay up to $3,095. To date, $315 has been paid
against sales amounting to $7,886, that are subject to royalties.
(iii) Under an agreement with the Government of Canada's Technology
Partnerships Canada ("TPC") program, we are eligible to receive Cdn.
$9,999 to support the development of a range of third generation
wireless technologies. During the three months ended March 31, 2003,
we have claimed $316 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.
38
(iv) We accrue product warranty costs, when we sell the related products,
to provide for the repair or replacement of defective products. Our
accrual is based on an assessment of historical experience and
estimates are made by management. An analysis of changes in the
liability for product warranties follows:
Balance, January 1, 2002.......................... $ 1,251
Provisions........................................ 819
Expenditures...................................... (907)
------------
Balance, December 31, 2002........................ 1,163
Provisions........................................ 412
Expenditures...................................... (311)
------------
Balance, March 31, 2003........................... $ 1,264
============
(b) LEGAL PROCEEDINGS
(i) In November 2002, Sierra Wireless, Inc., along with several other
defendants, was served with the second amended complaint of MLR, LLC
("MLR") filed in the U.S. District Court for the Northern District of
Illinois Eastern Division for alleged patent infringement. We assessed
the complaint and believed that there was no infringement of the
patents referred to in this claim and that the claim was invalid.
Subsequent to March 31, 2003, we reached an agreement with MLR. Under
the agreement, we will receive non-royalty bearing licenses to use all
of MLR's present and future patents for certain of our products and
MLR will release us from their claim of alleged patent infringement.
(ii) We are engaged in other legal actions arising in the ordinary course
of business and believe that the ultimate outcome of these actions
will not have a material adverse effect on our operating results,
liquidity or financial position.
5. SUPPLEMENTARY CASH FLOW INFORMATION
Three months ended March 31, 2003 2002
------ ------
Cash received for interest..................................... $ 76 $509
Cash paid for
Interest.................................................... 25 132
Income taxes................................................ 14 2
Non-cash financing activities
Purchase of capital assets funded by obligations under
capital lease............................................ 113 267
6. COMPARATIVE FIGURES
We have reclassified certain of the figures presented for comparative purposes
to conform to the financial statement presentation we adopted for the current
period.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sierra Wireless, Inc.
By: /s/ Peter W. Roberts
-----------------------------------------
Peter W. Roberts, Chief Financial Officer
Date: May 15, 2003
40