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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to ________
Commission file number 0-29944
INFOWAVE SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
British Columbia, Canada 98 0183915
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(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
200 - 4664 Lougheed Highway
Burnaby, British Columbia, Canada V5C 5T5
(Address of principal executive offices)
Registrant's telephone number: (604) 473-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the registrant's Common Shares held by non-affiliates
as of December 31, 2001 was approximately US$19,437,500. The number of the
Registrant's Common Shares outstanding as of December 31, 2001, was 23,440,203.
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TABLE OF CONTENTS
Part I........................................................................1
Item 1: Business..............................................................1
Item 2: Properties............................................................12
Item 3: Legal Proceedings.....................................................12
Item 4: Submission of Matters to a Vote of Security Holders...................13
Part II.......................................................................13
Item 5: Market for Registrants Common Equity and Related Stockholder
Matters.............................................................13
Item 6: Selected Financial Data...............................................18
Item 7: Managements' Discussion and Analysis of Financial Condition
and Results of Operations...........................................20
Item 7A: Quantitative and Qualitative Disclosure about Market Risk............26
Item 8: Financial Statements and Supplementary Data...........................27
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................56
Part III......................................................................56
Item 10: Directors and Officers of the Registrant.............................56
Item 11: Executive Compensation...............................................59
Item 12: Security Ownership of Certain Beneficial Owners and Management.......61
Item 13: Certain Relationships and Related Transactions.......................63
Part IV.......................................................................64
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....64
Signatures....................................................................67
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PART I
ITEM 1: BUSINESS
THE COMPANY
Infowave Software, Inc. ("Infowave" or the "Company") develops, markets and
sells infrastructure software solutions that facilitate wireless computing.
Infowave's software leverages wireless communications networks to provide
secure, real-time mobile access to corporate information. The Company's software
works over a variety of wireless networks and with a spectrum of mobile devices
ranging from laptop computers to the new generation of digital mobile phones,
enabling users to gain wireless access to e-mail, corporate data, enterprise
applications and the Internet. Except where otherwise indicated, all dollar
amounts in this annual report are stated in United States dollars.
The Company is amalgamated under the Company Act (British Columbia). The
Company's head office and development facilities are located at The Infowave
Building, Suite 200, 4664 Lougheed Highway, Burnaby, British Columbia, Canada,
V5C 5T5 (telephone 604.473.3600). The Company's registered office is at Suite
2600, Three Bentall Centre, 595 Burrard Street, PO Box 49314, Vancouver, British
Columbia, Canada, V7X 1L3. The Company's wholly-owned subsidiary, Infowave USA
Inc., was incorporated under the laws of the State of Washington and is located
at Suite 500, 3535 Factoria Blvd. SE, Bellevue, Washington, 98006 (telephone
425.806.3100). The Company operates a sales office in London, England at 33 St
James Square, London, United Kingdom SW1Y 4JS (telephone + 44 (0) 20 7661 9374)
and in Munich, Germany at Leopoldstrasse 244, 80807 Munich, Germany (telephone
49 89 24445-2163).
GENERAL DEVELOPMENT OF THE BUSINESS
The Company was originally formed in 1984 as GDT Softworks Inc under the laws of
the Province of British Columbia, Canada. The Company initially focussed on the
development of software solutions for printer driver products. In 1993, the
Company began to expand its focus to include developing wireless messaging
software.
By 1998, the Company began to operate its wireless business (the "Wireless
Division") and its printer driver business (the "Imaging Division") as distinct
operating divisions. The Company's name was changed to Infowave Wireless
Messaging Incorporated in 1997 and to its current name in 1998. In 2000,
management of the Company determined that it was in the best interests of the
Company to focus its time and resources solely on the Wireless Division. As a
result, the Company sold the Imaging Division effective August 31, 2000 for
$1.32 million in cash. The Imaging Division generated revenue but was operating
at a loss at the time of its sale. Since the sale of the Imaging Division, the
Company has focussed solely on the development of its wireless software
products. The development of the Company's wireless business is described below
under "Business of the Company".
In February 2001, Mr. Thomas Koll was appointed Chief Executive Officer of the
Company. Mr. Koll joined Infowave from Microsoft Corporation, where he held
several executive positions in the US and Europe from 1989 to 2001. Most
recently, he was Vice President of Microsoft's Network Solutions Group where he
was responsible for, among other things, Microsoft's worldwide business with
telecommunications companies in the wireless and wireline markets.
In March 2002, the Company entered into a strategic alliance and sales agreement
with Compaq Computer Corporations ("Compaq") (the "Compaq Strategic Alliance and
Sales Agreement"). Under that agreement, the two companies agreed to collaborate
on joint marketing activities, and Compaq agreed to make commercially reasonable
efforts to bundle certain of Infowave's products with certain of their products.
Concurrent with the signing of that agreement, Compaq made available to the
Company, a three-year $2 million revolving loan facility, convertible at
Compaq's option into Common Shares at a price of $1.00 per share. Infowave has
also granted Compaq the ability to have an observer attend meetings of the Board
of Directors.
1
BUSINESS OF THE COMPANY
Company Overview
Infowave's core commercial software product is the Infowave Wireless Business
Engine(TM), which is a software infrastructure solution for extending corporate
information and applications to mobile workers. The Infowave Wireless Business
Engine has a modular architecture optimized for enterprise applications and
supports multiple devices, networks, platforms and applications. Consequently,
the mobile worker is given choice and flexibility while providing the enterprise
with centralized management, scalability, security and encryption to protect and
extend existing corporate investments in information technology. The Company's
software solution, extending from mobile devices to enterprise servers, creates
a wireless Virtual Private Network ("VPN") that the Company believes offers a
very high level of security.
The functionality of the Infowave Wireless Business Engine extends to Infowave's
suite of application connectors including the Exchange Connector, which provides
access to Microsoft(R) Exchange(R) data, the Web Connector, which provides
access to corporate intranets, web-enabled applications and the Internet, and
the Open Application Connector which provides access to client server and legacy
applications. These application connectors connect enterprise software, such as
Microsoft Exchange, to the Wireless Business Engine so that the enterprise
software can be operated wirelessly.
Infowave utilizes value-added resellers, systems integrators and application
service providers to sell the Infowave Wireless Business Engine into the
enterprise. The Company also has Original Equipment Manufacturer ("OEM")
relationships with hardware and software vendors to develop proprietary or
private-label wireless solutions. The Company's revenue is primarily derived
from the sale of client access licenses, annual maintenance and support
agreements and OEM-related engineering fees for customization and branding.
The Company's current customers and commercial alliances include Compaq, AT&T
Wireless Services ("AT&T Wireless"), Rogers AT&T Wireless (Canada) ("Rogers
AT&T") and Telus Mobility ("Telus"). Compaq is a reseller of the Company's
products. Compaq is currently reselling the Company's software as a stand-alone
product or with Compaq's Proliant Servers, iPAQnet Mobile Intranet and iPAQnet
Mobile Email Pocket PC. Compaq has also selected the Company's products for
internal deployment. Any future revenue from Compaq will depend upon Compaq's
success in reselling the Company's products through its various sales channels
and upon Compaq continuing to resell such products. There can be no assurance,
however, that the relationship with Compaq will prove to be successful and will
generate material revenues for the Company. See "Risk Factors - Reliance on
Compaq." Each of AT&T Wireless, Rogers AT&T and Telus Mobility has selected the
Company's products for internal deployment and are engaged in joint marketing
activities.
Market Opportunity
The wireless "middleware" industry represents an opportunity in the enterprise
software market that ties together several major trends that have developed over
the past decade:
o The deployment of back-end applications within the corporate Local
Area Network ("LAN") such as Enterprise Resource Planning ("ERP"),
Sales Force Automation ("SFA"), Groupware (Email, Personal Information
Management) and Customer Relationship Management ("CRM") services has
helped to drive increased productivity and efficiency within the
enterprise.
o The increase in the number of mobile workers has expanded the virtual
office beyond the physical plant.
o The integration of the Internet and the extension of back-end database
applications to the Internet/Intranet have enabled web-based access to
mission-critical data.
o The increase in mobile device sales among professionals has driven the
demand for remote, wireless access to corporate data.
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Middleware is a general term for any programming that serves to "glue together"
or mediate between two separate and usually pre-existing software programs.
Messaging is a common service provided by middleware programs so that different
applications can communicate.
Wireless middleware is enabling remote connectivity to the corporate LAN without
being physically connected to the network, just as the cell phone removed the
physical restraints of being connected to a land-based telephone line.
Infowave believes that providing wireless access to corporate data provides the
following advantages:
o Improved productivity and efficiency by enabling mobile workers to
stay connected to mission-critical data at all times, either in the
field or at home.
o Leveraging existing hardware and software investments by extending
these applications out of the office and into the field.
o Improved revenue generation by selling the right product to the right
customer at the right time.
o Cost savings by providing faster and less expensive means to interact
with employees and clients, and by lowering customer acquisition costs
by reaching a wider audience unconstrained by time and place.
o Competitive advantage by being able to respond to customer
queries/concerns in a much more timely manner.
Infowave's Wireless Business Engine is a wireless middleware platform that
provides a single point of connectivity to wireless networks and acts as an
interpreter/translator between mobile devices and back-end enterprise
applications.
Infowave's technology was attained through several years of research and
development. In the years ended December 31, 2001, 2000, and 1999 research and
development expenditures were $5.39 million, $3.99 million, and $1.23 million,
respectively.
Business Strategy
The Company's objective is to become the leading provider of wireless
infrastructure software solutions to the enterprise. To achieve this objective,
the Company has adopted the following strategy:
o Continue to develop and maintain products to support a broad array of
mobile information management products and technologies
Management believes that one of the advantages of the Company's products
are that they provide fast and secure access to corporate data without bias
toward a particular operating system, network or device. The Company's
products support the current leading mobile devices, including Palm
operating system devices, Windows CE devices and Research in Motion's
("RIM") Blackberry devices. Furthermore, Infowave's products are compatible
with most existing wireless protocols and networks, including CDPD, CDMA,
GPRS, GSM and Mobitex. The Company is currently developing solutions to
support additional 2.5G and new 3.0G networks, as well as support for
Pocket PC 2002, new Palm OS devices and other messaging platforms. The
Company has also released a desktop-redirector software product, Symmetry
Pro, which enables the end-user to access email and other Microsoft
Exchange information from a wireless Palm OS or Pocket PC device. By
continuing to provide a broad range of products and supported application,
devices and networks, management believes the Company can successfully meet
the enterprise's mobile information needs.
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o Leverage relationships with leading mobile carriers, device
manufacturers, application developers and professional services
organizations
The Company has relationships with leading companies, including Compaq,
Intel Corporation ("Intel"), AT&T Wireless, Sierra Wireless, Inc., Sprint,
Rogers AT&T, Telus, Handango, Inc. ("Handango"), Handspring, Inc.
("Handspring") and MobilePlanet, Inc. ("MobilePlanet"). See "Business of
the Company - Distribution Channels." Management believes these
relationships will help the Company achieve broader distribution of its
products and technologies.
o Focus sales and marketing efforts on channel partners and larger
account opportunities
Management believes that focused sales and marketing efforts are important
to the Company's success in the developing wireless software market. The
Company generates revenue from the Infowave Wireless Business Engine
product primarily through sales channels described above. The Company also
maintains a small direct sales force to assist channel partners with larger
account opportunities and to pursue other select opportunities. Sales and
marketing expenditures are primarily comprised of sales force, installation
and customer support salaries, as well as travel and meals related to
customer acquisition. The Company also participates in sales and marketing
initiatives with partners as described above.
o Expand sales internationally
Management believes that the European market for wireless data solutions is
growing rapidly. Management intends to focus these resources on selling to
large corporations within Europe that have a high demand for wireless
enterprise solutions. The Company currently maintains a total staff of four
full time employees among its offices in London, England and Munich,
Germany.
Infowave Wireless Business Engine
The Infowave Wireless Business Engine is a wireless platform installed on the
server and designed to support a suite of application connectors suitable for
most enterprises. The Infowave Wireless Business Engine provides end-to-end
security, data transport and bandwidth optimizations, session reliability, and
multiple device and network support. Application connectors allow applications
already being used by an enterprise behind a firewall to be accessed by the
Infowave Wireless Business Engine. Infowave is currently shipping three
application connectors: Exchange Connector, Web Connector and Open Application
Connector ("Connectors"). Infowave is developing its messaging connector
platform to include support for Lotus(R) Domino (Notes).
The Infowave Wireless Business Engine also creates an efficient wireless Virtual
Private Network and improves remote dial-up connections by optimizing slower
dialup (landline) connections into enterprise accounts and Wide Area Networks.
As a result, mobile workers have fast, secure and feature-rich access to
corporate data over either a wired or a wireless connection. The Infowave
Wireless Business Engine is also network independent, allowing users to optimize
their access to information over most major wireless data networks, including
CDPD, CDMA, GRPS, GSM and Mobitex. The Company is currently developing the
Infowave Wireless Business Engine to support additional 2.5G and new 3G
networks.
The Infowave Wireless Business Engine also includes a client software component
for mobile computing devices using a Windows operating system. The client
software is installed on the wireless device and enables a secure wireless
connection that extends through a wireless carrier, over the Internet and into
the Infowave Wireless Business Engine installed at the enterprise or service
provider. The client and server software manages the connection to ensure
security, reliability, and optimization of all data sent and received.
Infowave's client software has been developed to work with Windows 95/98/NT/2000
and Windows CE / Pocket PC.
The Infowave Wireless Business Engine and Connectors are distributed on CD-ROM.
The Company generates revenue through the sale of end-user licenses, with the
price for each license varying based upon the number of Connectors purchased.
Preferential pricing is available for large enterprise site licenses. In
addition to one-time software license fees, the Company charges annual
maintenance and support fees that vary with
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the level of support purchased. The Company also charges fees for installation
services, training and professional services such as customization of its
software products.
During 2001, revenue was divided approximately as follows: 69% from software
licenses, 28% from technical services and 3% from other sources. During 2000,
revenue from the Company's Wireless Division was divided approximately as
follows: 28% from software licenses, 61% from technical services and 11% from
other sources. 71% of the Company's 2001 revenue was from customers in the
United States, 26% from customers in Canada and 3% from customers in Europe.
This compares to 96% from the United States, 4% from Canada and 0% from Europe
in 2000 and 97% from the Unites Stated, 3% from Canada and 0% from Europe in
1999. A substantial portion of the Company's software licenses and contracts for
services may be terminated at any time by the customer without penalty. While
the Company is not aware that a material amount of its current licenses or
contracts will be terminated or renegotiated during the next 12 months, if such
terminations or renegotiations do occur, it may have a material adverse effect
on the Company. See also "Risk Factors."
Modular Architecture
Infowave has developed Connectors for the Infowave Wireless Business Engine that
address the three areas of enterprise data: Messaging - Exchange Connector,
Intranet/Web - Web Connector and Client Server/Legacy - Open Application
Connector. The Connectors are plugged into the Infowave Wireless Business Engine
allowing Information Technology managers to easily and efficiently manage the
solution. Unlike many other wireless solutions that allow users to access only a
subset of the features associated with an application, Infowave's Connectors
allow users to gain access to the application as if they were in their office
connected to their corporate network. Many corporate applications, such as ERP
and CRM, have traditionally been accessed only through fast networks on full
workstation computers and have not been well-suited for rendering to smaller
devices in a mobile environment. However, each Connector developed by Infowave
extends the entire application to the wireless device.
Exchange Connector
Infowave's Exchange Connector is an application connector which provides
wireless access to Microsoft Exchange servers using Microsoft Outlook client
software. Rather than plugging into a phone jack, users simply turn on their
portable computing device and launch Infowave's software. The user then opens
Microsoft Outlook, types a regular username and password and is connected
wirelessly and securely to Microsoft Exchange. An important and timesaving
feature of Exchange Connector is that it does not require a traditional
synchronization procedure before enabling communication. All unread email in the
corporate message store is immediately pushed out to the end-user and all
outgoing email in the user's outbox is immediately sent. All data transmission
is encrypted and compressed for speed and security. Infowave's Exchange
Connector also features real-time synchronization capability - all incoming
messages are stored to Microsoft Outlook and can be accessed when the user
disconnects from the network. This capability gives end users online and offline
access to data and allows productivity in situations such as on an airplane or
when out of a wireless network coverage area. The user requires no unique
training because Microsoft Outlook is used in the same way in the mobile
environment as it would on a desktop. Similarly, the information technology
manager requires little training as he or she manages users through existing
standard management utilities.
Web Connector
Infowave's Web Connector is an application connector which is directed towards
the growing demand for secure, wireless access to the Internet, corporate
Intranets and extranets and web-based enterprise applications using standard web
browsers on mobile computing devices. This application connector is important
because enterprises are using Intranets to host information such as customer and
sales data, service records and other back-end databases that employees,
partners, customers and management access and share regularly. Upon installation
of the Web Connector, mobile workers are meant to attain secure, reliable
wireless access to this information. Enterprises can then leverage their
existing applications, network architecture and important corporate information.
The Enterprise's security policies and procedures for Internet and Intranet
access are seamlessly extended to mobile users using the Infowave Wireless
Business Engine and do not require any modifications or changes to the way in
which these may be currently implemented.
5
Open Application Connector
In June 2001, Infowave released the Open Application Connector and a
corresponding software development kit, which are designed to enable enterprises
to independently develop solutions to wirelessly enable their legacy
client/server applications using the Wireless Business Engine. The Infowave Open
Application Connector leverages the security and optimization of the Infowave
Wireless Business Engine and is intended to help provide a common platform for
wireless access to all primary corporate applications, including CRM and ERP.
With the addition of the Open Application Connector, Infowave offers a broad
ranging enterprise solution enabling access to an array of corporate data
including: messaging, Intranet/Web and client server/legacy applications.
Symmetry
Infowave has also developed a desktop software product, Symmetry, which delivers
email, calendar, contacts and task information stored in Microsoft Outlook to
any wireless mobile device capable of receiving short message service ("SMS")
text messages, including pagers and digital mobile phones.
Symmetry is available on CD-ROM or can be downloaded from the Internet. The
Company derives revenue from the sale of Symmetry through one-time software
license fees.
Symmetry Pro
In January 2002, Infowave released Symmetry Pro which is a wireless software
service for Palm and PocketPC powered device users. Symmetry Pro enables users
to wirelessly access corporate email, contacts, attachments and calendar
information. The service can be purchased and activated by the end-user,
generally without the assistance of his or her enterprise's information
technology department. It requires installation of Infowave's software on both
the client desktop and mobile device, as well as subscription to the Infowave
Symmetry Pro service. The service will be marketed directly by Infowave, through
third-party agreements as well as private-label/OEM arrangements.
The Symmetry Pro service redirects email and other personal information
management ("PIM") information from the user's desktop computer to a Symmetry
Pro gateway (server) managed by Infowave or other secure third-party providers.
The gateway manages the flow of information between the user's mobile device and
desktop. Unlike Infowave's traditional software revenue model, Symmetry Pro is
sold as a service and, therefore, revenue is to be derived from the user
software license (one-time), subscription to the service (monthly or annually),
maintenance and support (monthly or annually) or sale of the gateway server
software (one-time). The end-user component of Symmetry Pro is distributed via
the Internet, and the gateway server component is distributed via CD-ROM.
Distribution Channels
Resellers
Infowave entered into a worldwide reseller agreement with Compaq in April 2000.
Compaq's professional services organization has 34,000 people in over 200
countries that can bring Infowave's products into their vast installed base of
accounts. Infowave's relationship with Compaq brings a global installation,
integration and support infrastructure. The Company will also have direct access
to over 1,600 Compaq resellers. In March 2002, the Company entered into the
Compaq Strategic Alliance and Sales Agreement which builds on previous sales,
marketing and services agreements established between Compaq and Infowave over
the past two years. Under the terms of this agreement, Compaq and Infowave will
collaborate on a comprehensive marketing and communication program and a sales
engagement strategy designed to generate demand for software and services. In
addition to specific initiatives already underway, such as Compaq's recent
Wireless Enterprise Framework announcement, Compaq has agreed to make
commercially reasonable efforts to include certain Infowave software solutions
and documentation with certain Compaq product and service offerings.
The Compaq Strategic Alliance and Sales Agreement also contains various other
terms intended to expand and strengthen the relationship between the two
companies. Infowave and Compaq have agreed to participate in certain
co-development projects for new technology solutions. Infowave has provided
Compaq with a volume pricing incentive. Infowave will showcase Compaq products
and services at promotional events and will provide Compaq
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with the opportunity to deliver presentations at these events. Infowave and
Compaq will explore methods of developing additional partnerships between their
respective existing strategic relationships.
Concurrent with the signing of the Compaq Strategic Alliance and Sales
Agreement, Compaq made available to the Company, a three-year $2 million
revolving loan facility, convertible into Common Shares at a price of $1.00 per
share. Infowave has also granted Compaq the ability to have an observer attend
meetings of the Board of Directors. Any future revenue from Compaq will depend
upon Compaq's success in reselling the Company's products through its various
sales channels and upon Compaq continuing to resell such products. There can be
no assurance, however, that this relationship with Compaq will prove successful
or will generate material revenues for the Company. See "Risk Factors - Reliance
on Compaq."
Infowave has developed an Authorized Partner Program for regional or specialty
channel partners. This standardized program is designed to allow the Company to
scale its relationships with many reseller channel partners and drive further
revenue opportunities and market penetration. Infowave resellers include
Handango, Rogers AT&T and MobilePlanet in North America and Getronics NV (UK) in
Europe. Any future revenue from these resellers will depend upon their success
in reselling the Company's products through their various sales channels and
upon these resellers continuing to resell such products. See "Risk Factors -
Reliance on Key Third-Party Relationships."
OEM and Embedded Partners
Infowave is working to establish Original Equipment Manufacturers ("OEM") and
bundling agreements with hardware manufacturers (device, server, infrastructure)
and enterprise software vendors (such as CRM, ERP, etc.). The intent is for
Infowave products and technology to be embedded for distribution and
installation with partner products.
The Company signed a five-year software license and development agreement with
Intel in June 2000. Under this agreement, the Company provided wireless
enterprise expertise and technology to Intel and received engineering fees from
Intel. This agreement contributed 18% of the Company's total revenue in 2001 and
58% of the Company's total revenue in 2000. The Company has completed all
engineering services for Intel under this agreement. Any future revenue from
Intel under this agreement will depend on whether Intel releases a product
utilizing the Company's technology and the commercial success of any such
product offering. There can be no assurance, however, that this relationship
with Intel will generate material revenues for the Company in the future.
Marketing Alliances
Infowave has entered into a select number of marketing alliances with carriers,
hardware companies, and other software companies. Marketing alliance partners do
not resell the Company's products, but rather engage in joint marketing
initiatives such as customer referrals, events, and direct mail activities that
create sales leads for Infowave. Infowave is engaged in marketing activities
with companies such as AT&T Wireless (US), Handspring, Rogers AT&T, Telus,
Sierra Wireless, Inc. and Novatel Wireless, Inc.
Competition
The emerging wireless marketplace is presenting a variety of choices in wireless
products that are required to satisfy the diverse needs of enterprises and their
different classes of mobile workers. Infowave has attempted to differentiate
itself by offering intelligent support for multiple devices, platforms,
networks, applications, and services with centralized management. Infowave
believes this approach will allow enterprise customers to optimize choice while
leveraging their existing investments in hardware, software and training.
Furthermore, Infowave has attempted to provide enterprise-grade security and
optimization along with real-time access to both corporate applications and the
Internet.
The mainstream market for business and consumer wireless data solutions is in
its early stages and distinct categories for solutions are still evolving.
Infowave currently offers technology to support all of these solutions.
7
Server Software
Server-based solutions sit behind the firewall in the enterprise or are hosted
by service providers. Currently, Infowave's primary competition in the
enterprise-server market comes from Aether Systems, Inc., Extended Systems Inc.,
RIM, Wireless Knowledge, Inc., Broadbeam Corporation and Microsoft Corporation.
Desktop Software
Desktop products require that end users have a desktop computer running at all
times in order to redirect information to their mobile device. Infowave believes
that these solutions generally appeal to the individual user rather than to the
information technology manager. Currently, Infowave's primary competition in the
desktop products market includes RIM Blackberry service, ViAir's Wireless Inbox
and Microsoft's Mobile Outlook Manager. See "Risk Factors - Wireless Industry
Growth and Competition."
Proprietary Protection
Infowave's software solutions are protected by a combination of certain
intellectual property rights. Infowave relies principally upon a combination of
copyright, trademark and trade secret laws, non-disclosure agreements and other
contractual provisions to establish and maintain its rights. Infowave has also
applied for several patents. As part of its confidentiality procedures, the
Company generally enters into a non-disclosure and confidentiality agreement
with each of its consultants and specifically with any third-party that would
have access to the source code for the Company's software products. As well, the
Company strictly limits access to and distribution of its software in executable
code form.
Infowave has trademarks for or has applied for a trademark for "Infowave,"
"Symmetry", "Wireless Business Engine", "Infowave Wireless Enabler", the "I
Design" design mark and the Circle within a Circle design. Infowave has Canadian
and U.S. copyrights for "Infowave for Exchange", "Infowave for the Net" and
"Symmetry".
There can be no assurance that the measures taken by the Company to protect its
intellectual property rights will adequately protect those rights. See "Legal
Matters".
Although Infowave believes it has the right to use all of the intellectual
property incorporated in its products, third parties may claim that the
Company's products violate their proprietary rights, including copyrights and
patents. If any such claims are made and found to be valid, the Company may have
to re-engineer its products or obtain licenses from third parties to continue
offering its products. Any efforts to re-engineer its products or obtain
licenses from third parties may not be successful and could substantially
increase the Company's costs and have a material adverse effect on the business,
financial condition and results of operations of the Company. See "Risk Factors
- - Intellectual Property Protection" and "Legal Matters".
Employees
As at December 31, 2001, the Company had 122 employees at its offices in
Burnaby, British Columbia, Bellevue, Washington, Munich, Germany and London,
England in the following capacities:
Burnaby Bellevue Munich London
------- -------- ------ ------
Management and Administration 14 1 -- --
Research and Development 55 -- -- --
Sales and Marketing 26 22 2 2
------- -------- ------ ------
TOTAL 95 23 2 2
The Company's research and development employees are primarily software
developers, some with extensive experience in the wireless area. The Company
currently believes that there are sufficient available software developers in
the marketplace to meet its short-term needs, if any.
8
Risk Factors
In addition to the other information contained in this Annual Report, readers
should carefully consider the following risk factors which may have a material
adverse effect on the Company's business, financial condition or results of
operation.
History of Losses
The Company is not currently profitable and incurred losses from continuing
operations (which excludes the discontinued operations of the Imaging Division)
calculated in accordance with Canadian Generally Accepted Accounting Principles
of $20,860,436, $16,255,917 and $3,773,523 for the years ended December 31,
2001, 2000 and 1999, respectively. The Company expects to continue to incur
losses in the future. The Company anticipates that its expenses may increase as
the Company continues to increase its research and development, sales and
marketing and general and administrative expenses. The Company cannot predict if
it will ever achieve profitability and, if it does, it may not be able to
sustain or increase profitability.
Wireless Industry Growth
There can be no assurance that the market for the Company's existing or proposed
wireless software products will grow, that firms within the industry will adopt
the Company's software products for integration with their wireless data
communications solutions, or that the Company will be successful in
independently establishing product markets for its wireless software products.
If the various markets in which the Company's software products compete fail to
grow, or grow more slowly than the Company currently anticipates, or if the
Company were unable to establish product markets for its new software products,
the Company's business, results of operation and financial condition would be
materially adversely affected.
Reliance on New Technologies
The wireless data communications market is characterized by rapidly changing
technology and evolving industry standards. Therefore, it is difficult to
predict the rate at which the market for the Company's wireless software
products will grow, if at all. If the market fails to grow, or grows more slowly
than anticipated, the Company will be materially adversely affected. Even if the
market does grow, there can be no assurance that the Company's products will
achieve commercial success. The Company may find itself competing in the market
for wireless mobile computing software against other companies with
significantly greater financial, marketing and other resources. Such competitors
may be able to institute and sustain price wars, or imitate the features of the
Company's wireless mobile computing software, reducing prices and the Company's
revenues and share of the market.
In addition, the Company's competitors may develop alternative technologies that
gain broader market acceptance than the Company's software solutions. As a
result, the life cycle of the Company's software solutions is difficult to
estimate. The Company may need to develop and introduce new products and
enhancements to its existing solutions on a timely basis to keep pace with
technological developments, evolving industry standards, changing customer
requirements and competitive technologies that may render its solution obsolete.
These research and development efforts may require the Company to expend
significant capital and other resources. In addition, as a result of the
complexities inherent in the Company's solutions, major enhancements or
improvements will require long development and testing periods. If the Company
fails to develop products and services in a timely fashion, or if it does not
enhance its products to meet evolving customer needs and industry standards,
including security technology, it may not remain competitive or sell its
solutions.
Product Improvements
The Company will be at risk if it is unable to continually upgrade and improve
its software products, or to develop new software products. The software
industry is characterized by a constant flow of new or improved products, which
quickly render existing software products obsolete. The Company's competitors
may develop technically superior and comparably priced or lower priced software
that would have a material adverse effect on the Company.
Additional Financing
The Company may not have sufficient capital to fund its operations. In
particular, additional financing may be required to develop and market the
Company's software products and services. The Company believes that the total
amount of cash and short-term investments will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures through
2002. This is predicated on the Company meeting certain internal revenue
9
projections and working capital metrics. If the Company fails to meet these
projections, it will not have sufficient resources to meet anticipated cash
needs for working capital and expenditures in 2002 without raising additional
capital, and/or implementing additional reductions in expenses. Further
reductions in expenses may negatively impact the Company's ability to grow the
business.
No assurance can be given that any additional financing required will be
available, or that additional financing will be available on terms that may be
advantageous to existing shareholders. Such financings, to the extent they are
available may result in substantial dilution to shareholders. To the extent such
financing is not available, the Company may not be able to or may be delayed in
being able to continue to commercialize its software products and services.
Reliance on Microsoft
Some of the Company's wireless software products wirelessly enable the
functionality of Microsoft Exchange. The Company is aware that Microsoft has
developed its own wireless functionality for Microsoft Exchange that competes
with software products of the Company.
Reliance on Compaq
The Company has entered into the Compaq Strategic Alliance and Sales Agreement
dated March 8, 2002 and a Worldwide Reseller Agreement with Compaq. Under these
agreements, the Company's software is sold both as a stand-alone product and is
bundled with Compaq's Proliant Servers, and iPAQnet Mobile Intranet and iPAQnet
Mobile Email Pocket PC. There is no assurance, however, that this relationship
with Compaq will prove to be successful or result in material revenues for the
Company.
Management of Growth
The Company has been expanding, and intends to continue to expand. This growth
has placed, and any further growth is likely to continue to place, a significant
strain on the Company's resources. The Company's ability to achieve and maintain
profitability, if at all, will depend on its ability to manage growth
effectively, to implement and expand operational and customer support systems,
and to hire additional personnel. The Company may not be able to augment or
improve existing systems and controls or implement new systems and controls to
respond to any future growth. In addition, future growth may result in increased
responsibilities for management personnel, which may limit their ability to
effectively manage the Company's business.
Reliance on Key Personnel and Consultants
The Company is currently dependent upon its senior management, board of
directors and consultants, the loss of any of which may significantly affect the
performance of the Company and its ability to carry out the successful
development and commercialization of its software products and services. Failure
to retain management, directors and consultants or to attract and retain
additional key employees with necessary skills could have a material adverse
impact upon the Company's growth and profitability. The Company may be required
to recruit additional software development personnel, expand its sales force,
expand its customer support functions and train, motivate and manage its
employees. The Company's ability to assimilate new personnel will be critical to
its performance. Competition for qualified software development personnel and
other professionals is expected to increase. There can be no assurance that the
Company will be able to recruit the personnel required to execute its programs
or to manage these changes successfully.
Reliance on Key Third-Party Relationships
The Company relies on key third-party relationships, including its relationships
with resellers and OEMs, for marketing and sales of its software products. These
third parties are not within the control of the Company, may not be obligated to
purchase software products from the Company and may also represent and sell
competing software products. The loss of any of these third-party relationships,
the failure of such parties to perform under agreements with the Company or the
inability of the Company to attract and retain new resellers or OEMs with the
technical, industry and application experience required to market and sell the
Company's software products successfully could have a material adverse effect on
the Company.
Competition
Certain of the Company's competitors have substantially greater financial,
technical and marketing resources than the Company. In addition, the market for
wireless mobile computing software products continues to develop, and
10
additional competitors with substantially greater financial, technical and
marketing resources than the Company may enter the market and competition may
intensify. Current or future competitors may develop software products that are
superior to the Company's software products or achieve greater market
acceptance.
Product Defects
Software products as complex as those offered by the Company may contain
undetected errors or defects when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new software
products after commencement of commercial shipments resulting in product recalls
and market rejection of the Company's software products and resulting in damage
to the Company's reputation, as well as lost revenue, diverted development
resources and increased support costs.
Intellectual Property Protection
The Company considers its software products and trademarks to be of value and
important to its business. The Company relies principally upon a combination of
copyright, trademark and trade secret laws, non-disclosure agreements and other
contractual provisions to establish and maintain its rights. The Company has
several patent applications pending. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or obtain and
use information that the Company regards as proprietary. There can be no
assurance that the steps taken by the Company to protect its proprietary
information will prevent misappropriation of such information. The cost of
litigation necessary to enforce the Company's proprietary rights may be
prohibitive. Such steps may not preclude competitors from developing confusingly
similar brand names or promotional materials or developing software products and
services similar to those of the Company.
Although the Company believes that it has the right to use all of the
intellectual property incorporated in its software products, third parties may
claim that the Company's software products violate their proprietary rights,
including copyrights and patents. If any such claims are made and found to be
valid, the Company may have to reengineer its software products or obtain
licenses from third parties to continue offering its software products. Any
efforts to re-engineer its software products or obtain licenses from third
parties may not be successful and could substantially increase the Company's
costs and have a material adverse effect on the business, financial condition
and results of operations of the Company.
Foreign Exchange Rate Exposure
The majority of the Company's revenue is denominated in U.S. dollars (the
currency in which the Company's financial statements are presented) or
currencies other than Canadian dollars (the functional currency of the Company)
and in the future may be denominated in currencies other than Canadian or U.S.
dollars. The Company does not engage in currency hedging activities to limit the
risks of exchange rate fluctuations. As a result, changes in the relative value
of the U.S. dollar to the Canadian dollar and other foreign currencies will
affect the Company's revenues and operating margins. The impact of future
exchange rate fluctuations between the U.S. dollar and the Canadian dollar or
other foreign currencies on revenues and operating margins cannot be accurately
predicted and could have a material adverse effect on the Company.
Enforcement of Civil Liabilities
The Company is a corporation incorporated under the laws of British Columbia,
Canada. Certain of the directors and the Company's professional advisors are
residents of Canada or otherwise reside outside of the U.S. All or a substantial
portion of the assets of such persons are or may be located outside of the U.S.
It may be difficult to effect service of process within the United States upon
the Company or upon such directors or professional advisors or to realize in the
U.S. upon judgments of U.S. courts predicated upon civil liability of the
Company or such persons under U.S. federal securities laws. The Company has been
advised that there is doubt as to whether Canadian courts would (i) enforce
judgments of U.S. courts obtained against the Company or such directors or
professional advisors predicated solely upon the civil liabilities provisions of
U.S. federal securities laws, or (ii) impose liabilities in original actions
against the Company or such directors and professional advisors predicated
solely upon such U.S. laws. However, a judgment against the Company predicated
solely upon civil liabilities provisions of such U.S. federal securities laws
may be enforceable in Canada if the U.S. court in which such judgment was
obtained has a basis for jurisdiction in that matter that would be recognized by
a Canadian court.
11
Potential Fluctuations in Quarterly Financial Results
The Company's financial results vary from quarter to quarter based on factors
such as the timing of significant orders and contract completions and the timing
of new product introductions. Any significant fluctuation in revenue could
materially adversely affect the Company.
Change in Sales Strategy and Reliance on a Small Number of Customers
A significant proportion of the Company's revenues are from a small number of
customers with large orders. In 2001, four customers accounted for 61% of total
revenue. No single customer accounted for greater than 20% of revenues. In 2000,
one customer represented 57% of revenue. The Company has changed its sales
strategy, focusing on larger, Fortune 500 opportunities, which have the
potential for significant sales. In the past, the Company also was targeting
smaller opportunities with less potential for future upsell. As a result of the
change in strategy, the Company may experience swings in revenue, as single
large opportunities can materially affect the revenue results of any quarter,
and it is difficult to accurately predict revenue timing with these
opportunities.
Certain Shareholders May Exercise Control Over Matters Voting Upon by the
Shareholders
Certain of the Company's officers, directors and entities affiliated with the
Company together beneficially owned a significant portion of the Company's
outstanding common shares as of December 31, 2001. While these shareholders do
not hold a majority of the Company's outstanding common shares, they may be able
to exercise significant influence over matters requiring shareholder approval,
including the election of directors and the approval of mergers, consolidations
and sales of the Company's assets. This may prevent or discourage tender offers
for the Company's common shares.
Possible Market Volatility
The market price for the Common Shares may be subject to significant volatility.
Quarterly operating results of the Company or of other companies involved in the
wireless industry specifically or technology industries generally, changes in
general conditions in the North American economy, the financial markets in North
America, failure to meet the projections of securities analysts or other
developments affecting the Company or its competitors could cause the market
price of the Common Shares to fluctuate substantially. In addition, in recent
years the stock market has experienced extreme price and volume fluctuations.
This volatility has had a significant effect on the market prices of securities
of many companies for reasons unrelated to their operating performance.
ITEM 2: PROPERTIES
The Company owns no real property. Pursuant to a lease agreement that expires
May 31, 2006, the Company leases 30,276 square feet of office space in Burnaby,
British Columbia, which the Company uses as its corporate, administrative, and
research and development offices. Under a lease agreement that expires March 31,
2003, the Company leases an additional 11,920 square feet in Burnaby, which
space has been sublet to a third party.
Pursuant to a lease agreement that expires July 15, 2006, the Company leases
14,217 square feet in Bellevue, Washington, which the Company uses as a sales
and marketing office. The Company is currently subletting 1,969 square feet of
this space to a third party. Under a lease agreement that expires March 31,
2005, the Company leases 7,329 square feet of office space in Bothell,
Washington, the former sales and marketing office of the Company, which is
currently sublet to a third party.
ITEM 3: LEGAL PROCEEDINGS
The Company has received a letter dated January 18, 2000 on behalf of Geoworks
Corporation ("Geoworks") asserting that it holds a patent on certain aspects of
technology which are part of the Wireless Access Protocol ("WAP") standard.
Certain of the Company's products use or operate in conjunction with
WAP-compliant technology. After an internal investigation, and consultation with
outside legal counsel, based upon the description provided by Geoworks of its
purportedly patented technology, the Company believes that its products do not
include
12
implementation of the Geoworks technology. The Company is not aware of Geoworks
taking any further action against the Company at this time.
The Company has received a letter dated September 17, 2001 from Glenayre
Electronics, Inc. ("Glenayre") informing Infowave that Glenayre requires
indemnity under certain agreements Infowave has with Glenayre. The Company has
previously developed and supplied technology to Glenayre. After an internal
investigation, and consultation with outside legal counsel, based upon the
description provided by Glenayre in relation to its possible need for indemnity,
the Company believes that the technology Infowave developed and supplied to
Glenayre does not infringe the intellectual property rights of any third party
and therefore, that the Company does not need to indemnify Glenayre. The Company
is not aware of Glenayre taking any further action against the Company at this
time.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 2001.
PART II
ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Shares
The Common Shares of the Company are currently traded on the Toronto Stock
Exchange (the "TSE") under the symbol "IW". The Common Shares were listed on the
TSE on October 14, 1999. Prior to listing on the TSE, the Common Shares were
listed on the Vancouver Stock Exchange (the "VSE") on October 14, 1997 and were
delisted from the VSE on November 26, 1999. The Common Shares do not currently
trade on any exchange in the United States. The following table sets forth the
high and low closing sale prices, as reported by the TSE, of the Common Shares
for the calendar quarters indicated.
Price Range Of Common Shares
High Low
(Cdn$) (Cdn$)
------ ------
2001
----
Oct - Dec 1.86 0.38
Jul - Sep 2.60 0.36
Apr - Jun 4.35 2.05
Jan - Mar 7.90 2.40
2000
----
Oct - Dec 12.75 4.45
Jul - Sep 17.20 8.00
Apr - Jun 34.00 8.55
Jan - Mar 69.35 14.05
As of December 31, 2001, there were 23,440,203 Common Shares issued and
outstanding. At such date, there were approximately 59 shareholders of record,
18 of whom had addresses in the United States who collectively held 1,015,650
Common Shares, or approximately 4.3% of the total number of issued and
outstanding Common Shares.
Dividends
The Company did not pay any dividends in the past two fiscal years and it does
not foresee the declaration or payment of any dividends on the Common Shares in
the near future. Any decision to pay dividends on the Common
13
Shares will be made by the board of directors on the basis of the Company's
earnings, financial requirements and other conditions existing at such future
time.
Warrants
The Company issued 34,121,289 special warrants (the "Special Warrants") in three
tranches on November 23, 28 and 30, 2001. Each Special Warrant entitled the
holder thereof, upon exercise of the Special Warrant and without payment of any
additional consideration, to receive one Common Share and one-half of a purchase
warrant. Each whole purchase warrant entitles the holder thereof to purchase one
Common Share at a price of Cdn.$0.90 until is the earlier of: (i) November 23,
2004; and (ii) 30 days after the Company gives written notice that the closing
trading price for the Common Shares has equaled or exceeded at least Cdn.$9.00
for a period of 20 consecutive trading days, provided the Common Shares are at
the time trading on the TSE, the New York Stock Exchange, the American Stock
Exchange, or the Nasdaq SmallCap or the Nasdaq National Market and the Common
Shares underlying the purchase warrants are not subject to any lock-up
provisions imposed by the Company or Commonwealth Associates L.P.
("Commonwealth"), an agent under the offering. Of the 34,121,289 Special
Warrants, 31,965,319, 1,960,784 and 195,186 were issued at a price per Special
Warrant of Cdn.$0.69, Cdn.$0.81 and Cdn.$0.86, respectively. A final prospectus
was receipted in British Columbia, Alberta, Manitoba and Ontario on February 21,
2002 qualifying the distribution of 34,121,289 Common Shares and 17,060,644
purchase warrants issuable upon the exercise of the 34,121,289 previously issued
Special Warrants. All of the Special Warrants were deemed exercised for Common
Shares on February 26, 2002. As partial consideration for their services,
Commonwealth and Canaccord Capital Corporation (collectively, the "Agents") also
received options (the "Compensation Options") to purchase up to 2,386,775 units
(the "Agent's Units") until November 23, 2004 at a price of Cdn.$0.81 per
Agent's Unit. Each Agent's Unit shall be comprised of one Common Share and
one-half of a Common Share purchase warrant. Each whole Common Share purchase
warrant shall entitle the holder to acquire one Common Share at a price of
Cdn.$0.90 per share until November 23, 2004.
The Special Warrants, the Common Shares underlying the Special Warrants and the
Compensation Options were issued in reliance upon exemptions from registration
available under either (i) Rule 903(b)(1) of Regulation S ("Regulation S") or
(ii) Rule 506 of Regulation D ("Regulation D") promulgated under the Securities
Act of 1933, as amended (the "Securities Act"). The Company was a "foreign
issuer", as such term is defined in Regulation S, and it issued such securities
(i) outside the United States and not for the account or benefit of any "U.S.
Person", as such term is defined in Regulation S, or (ii) inside the United
States only to "accredited investors", as such term in defined in Rule 501(a) of
Regulation D.
Pursuant to a credit facility agreement dated July 23, 2001, Thomas Koll, the
President and Chief Executive Officer of the Company, agreed to personally make
available to the Company a credit line in an amount up to a maximum of
$5,000,000 (the "Credit Line"). The principal outstanding under the Credit Line
bore interest at a rate of 8% per annum. The Credit Line was due and payable on
demand any time after January 23, 2002. As consideration for making the Credit
Line available, the Company issued to Mr. Koll warrants (the "Bridge Warrants")
to purchase up to 3,510,455 Common Shares at a price of Cdn.$1.10 per share,
exercisable until July 23, 2004. As required under the rules of the TSE, the
Company obtained shareholder approval in September 2001 to the possible issuance
of the Common Shares upon the exercise of the Bridge Warrants. The Bridge
Warrants were issued to Mr. Koll in reliance upon an exemption from registration
available under Rule 506 of Regulation D.
The Company completed a unit offering on February 13, 2001 at a price of
Cdn.$5.50 per unit. Each unit was comprised of one Common Share and one-half of
one purchase warrant of Infowave. Each whole purchase warrant entitle the holder
to purchase one Common Share at a price of Cdn.$7.15, expiring August 22, 2002.
Canaccord Capital Corporation and CIBC World Markets Inc. received as partial
consideration for their services a non-transferable option (the "Placement Agent
Option") to purchase 113,636 Units sold pursuant to the offering at a price per
unit of Cdn$5.50, expiring February 22, 2002.
The units and the Placement Agent's Option were issued in reliance upon
exemptions from registration available either under Rule 903(b)(1) of Regulation
S. The Company was a "foreign issuer", as such term is defined in Regulation S,
and it issued such securities outside the United States and not for the account
or benefit of any "U.S. Person", as such term is defined in Regulation S.
14
Convertible Loan/Credit Facility
The Company has entered into a convertible loan agreement dated March 8, 2002
with Compaq (the "Compaq Loan Agreement"). Under the terms of the Compaq Loan
Agreement, Compaq has made available to the Company a revolving loan (the
"Compaq Loan") of up to US$2 million expiring on March 8, 2005. The principal
amount outstanding from time to time under the Compaq Loan bears interest at the
Canadian prime rate plus 3.25% and may be converted into Common Shares at a
price of $1.00 per share, subject to adjustment in certain circumstances. The
Compaq Loan is secured by substantially all of the Company's assets, excluding
intellectual property. The Company has also granted Compaq a non-exclusive
licence to certain of the Company's intellectual property in order to ensure
that the Company fulfils its obligations under the Compaq Strategic Alliance and
Sales Agreement and other agreements with Compaq. The Company may terminate the
Compaq Loan Agreement at any time provided that no amounts are outstanding or
payable under the Compaq Loan. As at the date of filing, the Company has not
borrowed any amount under the Compaq Loan.
Under the terms of the Compaq Loan Agreement, the Company may borrow amounts
from time to time provided that certain working capital conditions are met.
Until December 31, 2002, the Company may draw down amounts not to exceed 150% of
the total amount of the Company's cash, cash equivalents and net accounts
receivable from Compaq. During the remainder of the term of the Compaq Loan, the
Company may draw down amounts not to exceed the Company's working capital (as
defined in the Compaq Loan Agreement) from time to time.
So long as the Compaq Loan Agreement remains in effect or the Compaq Strategic
Alliance and Sales Agreement remains in effect, the Company shall permit Compaq
to have an observer attend each meeting of the Board of Directors of the
Company. In addition, so long as the Compaq Loan Agreement remains in effect or
the Compaq Strategic Alliance and Sales Agreement remains in effect, the Company
shall not: (i) issue any equity or debt security to, or incur any other
indebtedness to, any of Dell, Hewlett Packard, IBM, Sun, Palm or Handspring
(each, a "Specified Person"); (ii) issue or invest in any equity or debt
security to form, create or participate in any partnership, joint venture or
other corporate business enterprise with any Specified Person; (iii) allow any
director, officer, employee, agent or other representative of any Specified
Person to attend meetings of the Company's Board of Directors or any committee
thereof or any advisory committee as a non-director representative; and (iv)
vote or cause to be voted any of its securities having the power to vote in the
election of directors in favour of the election of any director, officer,
employee, agent or other representative of a Specified Person to the Company's
Board of Directors.
Exchange Controls
Canada has no system of exchange controls. There are no exchange restrictions on
borrowing from foreign countries or on the remittance of dividends, interest,
royalties and similar payments, management fees, loan repayments, settlement of
trade debts, or the repatriation of capital. However, any dividends remitted to
U.S. Holders, as defined below, will be subject to withholding tax. See the
heading "Taxation" below.
There are no limitations under the laws of Canada or British Columbia or in the
Company's Memorandum and Articles on the rights of non-Canadians to hold or vote
the Common Shares. Under the provisions of the Investment Canada Act (the
"ICA"), as amended by the Canada-United States Free Trade Implementation Act
(Canada) (the "Act"), and the Canada-United States Free Trade Agreement, review
and approval of the transaction by the Investment Canada Agency ("Investment
Canada"), the federal agency created by the ICA are required where a U.S. person
directly acquires control of a Canadian business with assets of more than
Cdn$218 million (2002). The term "control" is defined as any one or more
non-Canadian persons acquiring all or substantially all of the assets used in
the Canadian business, or the acquisition of the voting shares of a Canadian
corporation carrying on the Canadian business or the acquisition of the voting
interest of an entity controlling or carrying on the Canadian business. The
acquisition of the majority of the outstanding shares is deemed to be an
"acquisition of control" of a corporation unless it can be established that the
purchaser will not, in fact, control the Canadian corporation.
Subject to the comments contained in the following paragraph regarding WTO
investors, investments requiring notification and review are all direct
acquisitions of Canadian businesses with assets of Cdn$5,000,000 or more and all
indirect acquisitions of Canadian businesses with assets between Cdn$5,000,000
and Cdn$50,000,000 which represent more than 50% of the value of the total
international transaction. (Indirect acquisition means the
15
acquisition of the voting rights of an entity controlling the Canadian
corporation.) In addition, specific acquisitions or new businesses in designated
types of business activities related to Canada's cultural heritage or national
identity, which would normally only be notifiable, could be reviewed if the
Government of Canada considers it in the public interest to do so.
The Act was amended with the implementation of the agreement establishing the
World Trade Organization ("WTO") to provide for special review thresholds for
"WTO investors", as defined in the Act. "WTO investor" generally means (i) an
individual, other than a Canadian, who is a national of a WTO member (such as,
for example, the United States), or who has the right of permanent residence in
relation to that WTO member, (ii) governments of WTO members, and (iii) entities
that are not Canadian controlled, but which are WTO investor controlled, as
determined by rules specified in the Act. The special review thresholds for WTO
investors do not apply, and the general rules described above do apply, to the
acquisition of control of certain types of businesses specified in the Act,
including a business that is a "cultural business". If the WTO Investor rules
apply, an investment in shares of the Issuer by or from a WTO investor will be
reviewable only if it is an investment to acquire control of the Issuer and the
value of the assets of the Issuer is equal to or greater than a specified amount
(the "WTO Review Threshold"). The WTO Review Threshold is adjusted annually by a
formula relating to increases in the nominal gross domestic product of Canada.
The WTO Review Threshold is Cdn$218,000,000 (in 2002).
If any non-Canadian, whether or not a WTO Investor, acquires control of the
Issuer by the acquisition of shares, but the transaction is not reviewable as
described above, the non-Canadian is required to notify the Canadian government
and to provide certain basic information relating to the investment. A
non-Canadian, whether or not a WTO investor, is also required to provide a
notice to the government on the establishment of a new Canadian business. If the
business of the Issuer is a prescribed type of business activity relating to
Canada's cultural heritage or national identity, and if the Canadian government
considers it to be in the public interest to do so, then the Canadian government
may give a notice in writing within 21 days requiring the investment be
reviewed.
For non-Canadians (other than WTO investors), an indirect acquisition of
control, by the acquisition of voting interests of an entity that directly or
indirectly controls the Issuer, is reviewable if the value of the assets of the
Issuer is then Cdn$50,000,000 or more. If the WTO investor rules apply, then
this requirement does not apply to a WTO investor, or to a person acquiring the
entity from a WTO investor. Special rules specified in the Act apply if the
value of the assets of the Issuer is more than 50% of the value of the entity so
acquired. By these special rules, if the non-Canadian (whether or not a WTO
investor) is acquiring control of an entity that directly or indirectly controls
the Issuer, and the value of the assets of the Issuer and all other entities
carrying on business in Canada, calculated in the manner provided in the Act and
the regulations under the Act, is more than 50% of the value, calculated in the
manner provided in the Act and the regulations under the Act, of the assets of
all entities, the control of which is acquired, directly or indirectly, in the
transaction of which the acquisition of control of the Issuer forms a part, then
the thresholds for a direct acquisition of control as discussed above will
apply. That is, a WTO Review threshold of Cdn$218 million (in 2002) for a WTO
investor or a threshold of Cdn$5,000,000 for a non-Canadian other than a WTO
investor. If the value exceeds that level, then the transaction must be reviewed
in the same manner as a direct acquisition of control by the purchase of shares
of the Issuer.
If an investment is reviewable, an application for review in the form prescribed
by regulations is normally required to be filed with the agency established by
the Act (the "Agency") prior to the investment and the investment may not be
consummated until the review has been completed. There are, however, certain
exceptions. Applications concerning indirect acquisition may be filed up to 30
days after the investment is consummated and applications concerning reviewable
investments in culture-sensitive sectors are required upon receipt of a notice
for review. There is, moreover, provision for the Minister (a person designated
as such under the Act) to permit an investment to be consummated prior to
completion of review, if he is satisfied that delay would cause undue hardship
to the acquirer or jeopardize the operation of the Canadian business that is
being acquired. The Agency will submit the application to the Minister, together
with any other information or written undertakings given by the acquirer and any
representation submitted to the Agency by a province that is likely to be
significantly affected by the investment.
The Minister will then determine whether the investment is likely to be of net
benefit to Canada, taking into account the information provided and having
regard for other factors where they are relevant. Some of the factors to be
considered are the effect of the investment on the level and nature of economic
activity in Canada, including the
16
effect on employment, on resource processing, on the utilization of parts,
components and services produced in Canada, and on exports from Canada.
Additional factors of assessment include (i) the degree and significance of
participation by Canadians in the Canadian business and in any industry in
Canada of which it forms a part; (ii) the effect of the investment on
productivity, industrial efficiency, technological development, product
innovation and product variety in Canada; (iii) the effect of the investment on
competition within any industry or industries in Canada; (iv) the compatibility
of the investment with national industrial, economic and cultural policies
taking into consideration industrial, economic and cultural objectives
enunciated by the government or legislature of any province likely to be
significantly affected by the investment; and (v) the contribution of the
investment to Canada's ability to compete in world markets.
To insure prompt review and decision, the Act sets certain time limits for the
Agency and the Minister. Within 45 days after a completed application has been
received, the Minister must notify the acquirer that (a) he is satisfied that
the investment is likely to be of net benefit to Canada, or (b) he is unable to
complete his review, in which case he shall have 30 additional days to complete
his review (unless the acquirer agrees to a longer period), or (c) he is not
satisfied that the investment is likely to be of net benefit to Canada.
Where the Minister has advised the acquirer that he is not satisfied that the
investment is likely to be of net benefit to Canada, the acquirer has the right
to make representations and submit undertakings within 30 days of the date of
the notice (or any further period that is agreed upon between the acquirer and
the Minister). On the expiration of the 30-day period (or the agreed extension),
the Minister must quickly notify the acquirer (a) that he is now satisfied that
the investment is likely to be of net benefit to Canada or (b) confirming that
he is not satisfied that the investment is likely to be of net benefit to
Canada. In the latter case, the acquirer may not proceed with the investment or,
if the investment has already been consummated, must relinquish control of the
Canadian business. The Act authorizes the Minister to give written opinions,
binding the Minister, on the application of the Act or regulations to the
persons seeking the opinions to the Agency or a designated official. The Act
also authorizes the Minister to issue guidelines and interpretations with
respect to the application and administration of any provision of the Act or the
regulations. The Act provides for civil penalties for non-compliance with any
provision except breach of confidentiality or provision of false information,
for which there are criminal penalties.
Taxation
Canadian Federal Income Tax Considerations
The following summarizes certain Canadian federal income tax considerations
generally applicable to the holding and disposition of Common Shares by a holder
(a) who, for the purposes of the Income Tax Act (Canada) (the "Tax Act"), is not
resident in Canada, deals at arm's length with the Company, is not affiliated
with the Company, holds the Common Shares as capital property, is not a
"financial institution" and does not use or hold the Common Shares in the course
of carrying on, or otherwise in connection with, a business in Canada, and (b)
who, for the purposes of the Canada-United States Income Tax Convention (the
"Treaty"), is a resident of the United States, has never been a resident of
Canada, and has not held or used (and does not hold or use) Common Shares in
connection with a permanent establishment or fixed base in Canada. Each such
holder who meets all such criteria in clauses (a) and (b) is referred to herein
as a "U.S. Holder." Except as otherwise expressly provided, the summary does not
deal with special situations, such as particular circumstances of traders or
dealers, limited liability companies, tax-exempt entities, insurers, financial
institutions (including those to which the mark-to-market provisions of the Tax
Act apply), or otherwise.
This summary is based on the current provisions of the Tax Act and the
regulations thereunder, all proposed amendments to the Tax Act and regulations
publicly announced by the Minister of Finance (Canada) to the date hereof, the
current provisions of the Treaty and the current administrative practices of the
Canada Customs and Revenue Agency, formerly known as Revenue Canada. It has been
assumed that all currently proposed amendments will be enacted as proposed and
that there will be no other relevant change in any governing law, the Treaty or
administrative policy, although no assurance can be given in these respects.
This summary does not take into account provincial, U.S. or other foreign income
tax considerations, which may differ significantly from those discussed herein.
17
This summary is not exhaustive of all possible Canadian income tax consequences.
It is not intended as legal or tax advice to any particular holder and should
not be so construed. The tax consequences to any particular holder will vary
according to the status of that holder as an individual, trust, corporation or
member of a partnership, the jurisdictions in which that holder is subject to
taxation and, generally, according to that holder's particular circumstances.
Each holder should consult the holder's own tax advisors with respect to the
income tax consequences applicable to the holder's own particular circumstances.
Dividends
Dividends paid or credited or deemed to be paid or credited to a U.S. Holder by
the Company are subject to Canadian withholding tax. Under the Treaty, the rate
of withholding tax on dividends paid or credited to a U.S. Holder is generally
limited to 15% of the gross dividend (or 5% in the case of corporate
shareholders owning at least 10% of our voting shares).
Disposition
A U.S. Holder is not subject to tax under the Tax Act in respect of a capital
gain realized on the disposition of a Common Share in the open market unless the
share is "taxable Canadian property" to the holder thereof and the U.S. Holder
is not entitled to relief under the Treaty.
A Common Share will be taxable Canadian property to a U.S. Holder if, at any
time during the 5 year period ending at the time of disposition, the U.S. Holder
or persons with whom the U.S. Holder did not deal at arm's length (or the U.S.
Holder together with such persons) owned, or had options, warrants or other
rights to acquire, 25% or more of our issued shares of any class or series. In
the case of a U.S. Holder to whom Common Shares represent taxable Canadian
property, no tax under the Tax Act will be payable on a capital gain realized on
a disposition of such shares in the open market by reason of the Treaty unless
the value of such shares is derived principally from real property situated in
Canada. We believe that the value of our Common Shares is not derived
principally from real property situated in Canada, and that no tax will
therefore be payable under the Tax Act on a capital gain realized by a U.S.
Holder on a disposition of Common Shares in the open market.
ITEM 6: SELECTED FINANCIAL DATA
Set forth below is certain selected financial information of the Company for
each year in the five-year period ended December 31, 2001. The selected
financial information for the three years ended December 31, 2001 is derived
from the Company's audited financial statements for such periods included in
"Item 8. Financial Statements and Supplementary Data." The selected financial
information for the years ended December 31, 1998 and 1997 is derived from the
audited financial statements for such periods. The selected financial
information for the eight quarters prior to December 31, 2001 is derived from
the unaudited quarterly financial statements of the Company. The Company's
financial statements are prepared in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP"), which are not materially different from United
States GAAP except as explained in note 15 of the financial statements included
in "Item 8. Financial Statements and Supplementary Data." The information below
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto.
Canadian GAAP
- -------------
Years Ended December 31 (audited)
---------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income Statement Data
Net sales $ 3,189,253 $ 1,513,557 $ 355,001 $ 170,911 $ 85,474
Loss from continuing operations 20,860,436 16,255,917 3,773,523 2,675,389 1,693,914
Loss from continuing operations
per share 0.90 0.81 0.24 0.21 0.21
Net loss 20,860,436 17,988,868 3,288,251 1,206,266 1,677,032
Net loss per share 0.90 0.90 0.21 0.09 0.19
18
Canadian GAAP
- -------------
Years Ended December 31 (audited)
---------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data
Total assets 13,657,675 12,445,349 8,054,492 6,687,941 1,625,326
Long term obligations - - - - -
Share capital $42,447,141 $35,148,040 $12,526,949 $6,798,707 $2,456,847
Cash dividends declared per Common - - - - $ 91,476
Share
United States GAAP
- ------------------
Years Ended December 31 (audited)
---------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income Statement Data
Net sales $3,189,253 $1,513,557 $355,001 $176,509 $94,496
Loss from continuing operations 20,986,922 16,465,529 3,829,598 2,909,175 1,989,375
Loss from continuing operations
per share 0.79 0.82 0.24 0.24 0.25
Net loss 20,986,922 18,198,480 3,344,326 1,440,052 1,970,792
Net loss per share 0.79 0.90 0.21 0.12 0.24
Balance Sheet Data
Total assets 13,657,675 12,445,349 8,020,392 6,546,596 1,508,802
Long term obligations - - - - -
Share capital $43,618,486 $36,192,899 $13,325,591 $7,416,454 $2,515,083
Cash dividends declared per Common - - - - $ 103,306
Share
Canadian GAAP
- -------------
Quarter Ended (unaudited)
-------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
2001 2001 2001 2001 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
Income Statement Data
Net sales 534,867 923,282 873,340 857,764 768,544 509,849 132,730 102,434
Loss from continuing
operations 4,825,370 5,208,856 6,006,086 4,820,124 7,876,074 3,383,296 2,987,057 2,009,490
Loss from continuing
operations per share 0.21 0.22 0.26 0.22 0.37 0.16 0.16 0.11
Net loss 4,825,370 5,208,856 6,006,086 4,820,124 7,876,074 3,127,084 3,828,132 3,157,578
Net loss per share 0.21 0.22 0.26 0.22 0.37 0.15 0.20 0.17
United States GAAP
Quarter Ended (unaudited)
-------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
2001 2001 2001 2001 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
Income Statement Data
Net sales 534,867 932,282 873,340 857,764 768,544 509,849 132,730 102,434
Loss from continuing
operations 4,828,126 5,208,856 6,006,086 4,943,854 8,070,593 3,388,126 2,992,525 2,014,285
Loss from continuing
operations per share 0.21 0.22 0.26 0.22 0.38 0.16 0.16 0.11
Net loss 4,828,126 5,208,856 6,006,086 4,820,124 8,070,593 3,131,914 3,833,600 3,162,373
Net loss per share 0.21 0.22 0.26 0.22 0.38 0.15 0.20 0.17
19
ITEM 7: MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Investors should read the following in conjunction with the audited financial
statements and notes thereto included in Item 8 of this Annual Report and the
quarterly and selected financial information included in Item 6.
Forward-Looking Statements
Statements in this Annual Report about future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in any forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors listed in "Risk Factors".
In some cases, forward-looking statements can be identified by the use of words
such as "may", "will", "should", "could", "expect", "plan", "intend",
"anticipate", "believe", "estimate", "predict", "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements or other future events.
Moreover, neither the Company nor anyone else assumes responsibility for the
accuracy or completeness of forward-looking statements. The Company is under no
duty to update any of its forward-looking statements after the date of this
Annual Report. The reader should not place undue reliance on forward-looking
statements.
Corporate Summary
During 2001, Infowave achieved significant growth in all areas of the
organization, with annual revenues of $3,189,253, representing a 111% increase
over the prior year. Infowave was also successful in attracting and recruiting
new employees throughout the year, adding talented and experienced staff in key
areas including development, quality assurance, sales and marketing. The Company
expanded its product offering by providing support for the Palm OS and RIM
Blackberry mobile devices in the spring of 2001 and released its
fourth-generation Infowave Wireless Business Engine software platform in May
2001. This release added support for Microsoft Exchange 2000, new 2.5G networks
(GPRS), as well as enhanced security and feature sets.
In February 2001, the Company appointed Mr. Thomas Koll, a former senior
Microsoft executive, as President and Chief Executive Officer of the Company.
In July 2001, the Company announced it had secured a $5 million bridge credit
facility provided by Mr. Thomas Koll, the President and Chief Executive Officer
of the Company. The Company subsequently announced its intention to raise up to
$15 million through a private placement of Special Warrants. The financing
raised $14.9 million in gross proceeds to the Company and closed in November
2001. The bridge credit facility was repaid using proceeds from the sale of
Special Warrants. For a more detailed description of this placement, see "Item
5: Market for Registrant's Common Equity and Related Stockholder Matters -
Warrants".
The Company expanded geographically in 2001 and opened sales offices in London,
England and Munich, Germany. The Company also completed a sale of its first
global site license, to Compaq, in the fall of 2001.
In March 2002, the Company entered into the Compaq Strategic Alliance and Sales
Agreement. In conjunction with the expanded business relationship between the
companies, Compaq has agreed to provide Infowave with up to $2 million in the
form of a revolving loan convertible at Compaq's option into Common Shares of
the Company at $1.00 per share.
While revenue increased by 111% year-over-year, the pace of revenue growth did
not meet the level anticipated at the beginning of the year. Management believes
the lack of significant growth is the result of various factors, including the
delay of 2.5G wireless networks and accompanying devices, confusion over the
timing and speed of the development of 2.5G and 3.0G networks causing
enterprises to defer purchase decisions, reductions in IT spending, and the
general deterioration in the economic climate in North America.
20
In mid-2001, management recognized that the Company would not meet its expected
revenue for 2001. As a result, the Company undertook an initiative to reduce
expenses. The Company reduced operating expenses by over 30%, and headcount was
reduced from 192 at June 30, 2001 to 122 at December 31, 2001. Management
significantly reduced expenses related to marketing, advertising and other
public relations activity as it did not believe that, in the short term, such
investments would result in a commensurate increase in revenue. Management also
refocused development efforts on areas where, in its opinion, it would have the
potential to generate incremental revenue. As a result, several non-core
development initiatives, such as Linux support, were delayed, while others, such
as Palm support, were accelerated. For the year 2001, the Company charged
restructuring costs of $1,253,707 related to the expense reduction initiative
commencing mid-2001 as described earlier. This included employee severance
payments to 57 individuals of $497,442, lease termination costs of $468,680
related to the Bothell, WA office and write-downs of unrecoverable leasehold
improvements of $287,585 related primarily to Bothell, WA. The Company does not
anticipate any further restructuring charges related to this initiative to be
charged in 2002.
Management believes there are several events that will increase market growth
and acceptance of wireless solutions in 2002. This includes the commercial
launch of 2.5G and 3.0G networks, and general availability of new integrated
wireless devices such as the Handspring Treo and `smartphones' from several
vendors. These new devices and faster networks will provide the end-user with
more service options and functionality than was available in 2001. The Company
has also introduced its Symmetry Pro software and service, which enables the
user to wirelessly enable certain devices without IT support. Despite these
trends, management is cognizant of the inherent revenue risks associated with an
emerging market. Revenue targets could be negatively affected by delays in the
deployment of such networks, release of integrated devices and success of its
Symmetry Pro service. Management also recognizes that, as the market for
wireless solutions grows, new entrants and competitors will emerge.
Quarter Ended December 31, 2001 Compared to Quarters Ended December 31, 2000 and
September 30, 2001
Revenue for the fourth quarter of 2001 was $534,867, a decrease of 30% from
$768,544 for the same period in 2000, and a decrease of 42% from $923,282 for
the third quarter of 2001. The decrease in sales was largely the result of a
weak North American economy which management believes effectively froze
corporate spending in the fourth quarter. The fourth quarter also did not
benefit from large contributions from sales to partners - in the third quarter
of 2001, the Company sold a global site license to Compaq and a significant
upgrade to AT&T Wireless, and in the fourth quarter of 2000, more than 50% of
revenue was derived under an agreement with Intel.
During 2001, the Company changed its sales strategy, focusing on larger, Fortune
500 opportunities, which have the potential for significant sales. In the past,
the Company was also targeting smaller opportunities with less potential for
future larger sales. As a result of the change in strategy, the Company may
experience swings in revenue, as single large opportunities can materially
affect the revenue results of any quarter, and it is difficult to accurately
predict revenue timing with these opportunities.
Gross margins for the fourth quarter were 87%, compared to 78% in the comparable
period in 2000, and 83% in the third quarter of 2001. During 2001, the Company
reclassified sales commissions as costs of goods sold and restated previous
periods to reflect this change. In 2001, the Company reduced the sales
commission structure resulting in higher overall margins. Management expects
that gross margins will fluctuate between 80% and 85%, depending on the revenue
mix.
Research and development ("R&D") expenses were $933,469, a 20% decrease from
$1,172,492 in the fourth quarter of 2000, and a 17% decrease from $1,124,893 in
the third quarter of 2001. Total R&D headcount was 55 at December 31, 2001,
compared to 67 at December 31, 2000 and 52 at September 30, 2001. Reductions in
R&D expense from the third quarter of 2001 to the fourth quarter of 2001 were
achieved primarily through reductions in the amounts spent on contract
personnel. Reductions in R&D expense from the fourth quarter of 2000 to the
fourth quarter of 2001 were achieved through headcount reductions and reductions
in the amounts spent on contract personnel. The Company has focussed R&D efforts
on projects which, in its opinion, had the greatest potential to positively
impact revenue in the short to mid-term.
Sales and Marketing ("S&M") expenses were $1,749,265, a 72% decrease from
$6,290,170 in the fourth quarter of 2000, and a 23% decrease from $2,287,515 in
the third quarter of 2001. Expenses in the fourth quarter of 2000 were impacted
by a branding and advertising campaign of approximately $4 million. Excluding
this one-time expense,
21
S&M expenses decreased approximately 24%. Total S&M headcount was 52 at December
31, 2001, compared to 56 at December 31, 2000 and 62 at September 30, 2001.
Reductions in S&M expenses were achieved through headcount reductions in the
second half of 2001, as well as significantly reduced expenses related to
marketing, advertising and other public relations activity where the Company did
not believe that, in the short term, such investments would result in a
commensurate increase in revenue.
Administration ("G&A") expenses were $1,072,797, a 17% increase from $918,093 in
the fourth quarter of 2000, and a 24% increase from $867,313 in the prior
quarter. Total G&A headcount was 15 at December 31, 2001, compared to 24 at
December 31, 2000 and 21 at September 30, 2001. Reductions in headcount reduced
G&A salary expense, however, this was partially offset as a result of the
addition of a US-based Chief Executive Officer. Expenses in the fourth quarter
were also negatively impacted by increased foreign exchange expense.
Depreciation and amortization costs totaled $483,152 in the fourth quarter of
2001 compared to $253,262 in the fourth quarter of 2000 and $584,757 in the
third quarter of 2001. The year-over-year increase is attributable to capital
asset acquisitions during 2001, and the decrease from the prior quarter is
attributable to the timing of prior asset additions, a decrease in acquisitions
during the fourth quarter of 2001 and an adjustment recognized in the fourth
quarter of 2001 due to a revised estimate of the useful life of certain assets.
Interest and other income for the fourth quarter of 2001 was $12,610 compared to
$154,642 in the fourth quarter of 2000 and $32,664 in the previous quarter.
Fluctuations between this quarter and prior quarters are attributable to changes
in cash and short-term investment balances as well as to a decrease in interest
rates offered on short-term investments. The Company also charged $1,039,920 of
interest and financing costs during the quarter, primarily consisting of
amortization of the fair value of warrants granted as compensation for the
credit facility as described in Note 8(d)(ii) to the financial statements and
interest costs associated with the utilization of the credit facility.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Total revenue for the year ended December 31, 2001 was $3,189,253, an increase
of 111% from $1,513,557 in 2000. In fiscal 2000, approximately 57% of revenue
was derived under an agreement with Intel. This contribution declined throughout
2001 and comprised 18% of full-year revenue. By the fourth quarter of 2001, it
represented 4%. Not including the Intel revenue, the Company's core business
grew by 300%.
In addition to the revenue obtained from Intel, three other customers accounted
for greater than 10% of 2001 revenue. In total, these four customers accounted
for 61% of 2001 revenue. No single customer accounted for greater than 20% of
revenues. This compares to 2000, where sales to Intel represented 57% of
revenue.
71% of the Company's 2001 revenue was from customers in the United States, 26%
from customers in Canada and 3% from customers in Europe. This compares to 96%
from the United States, 4% from Canada and 0% from Europe in 2000. The Company
does not currently experience any revenue fluctuations on a seasonal basis.
Gross margins for the year were 87%, compared to 80% in 2000. During 2001, the
Company reduced reclassified sales commissions as costs of goods sold. Previous
year comparisons are restated to reflect this change. The Company also reduced
its sales commission structure in 2001, resulting in increased margins in 2001
compared to 2000. Management expects that gross margins will fluctuate between
80% and 85%, depending on the revenue mix.
Total operating expenses (comprised of research and development, sales and
marketing and administration) for 2001 were $19,101,409 compared to $17,484,802,
which included a one-time $4 million branding and advertising campaign in 2000.
The Company's expense rate was significantly higher in the first half of 2001,
which was prior to the implementation of a cost-reduction initiative. At
mid-year, company headcount peaked at 192, compared to 122 at the end of 2001
and 147 at the end of 2000. Therefore the Company believes that quarterly
comparisons as described above, are more relevant and can be better relied upon
as a future predictor of expense levels.
R&D expenses were $5,394,684, an increase of 55% from $3,487,624 in 2000. Total
R&D headcount was 55 at December 31, 2001, compared to 67 at December 31, 2000.
The increase in total R&D expense is primarily a result of increased headcount
and associated expenses in the first half of 2001, which peaked at 89 at the end
of the first quarter and was 85 at the end of the second quarter. Reductions in
R&D expense in the latter half of the year were
22
achieved through headcount reductions and reductions in the amounts spent on
contract personnel, as the Company focussed R&D efforts on projects which, in
its opinion, had the greatest potential to positively impact revenue in the
short to mid-term.
S&M expenses were $9,298,149, a 17% decrease from $11,183,483 in 2000. A
one-time marketing and branding campaign of approximately $4 million impacted
expenses in 2000. Excluding this expense, S&M expenses increased approximately
29%. Total S&M headcount was 52 at December 31, 2001, compared to 56 at December
31, 2000. The increase in expenses was attributable to headcount additions in
the first half of 2001, which peaked at 82 at June 30, 2001. Expenses also
increased as a result of expansion into Europe through the opening of offices in
London, England and Munich, Germany. These increased expenditures were partially
offset in the latter half of the year through headcount reductions and
reductions in marketing, advertising and other public relations programs. Due to
the general economic slowdown, and the focus on larger Fortune 500 sales
opportunities, the Company does not believe the reduction in expenditures in
these areas will have a detrimental short-term effect on its ability to generate
revenue.
G&A expenses were $4,408,576, a 57% increase from $2,813,695 in 2000. Total G&A
headcount was 15 at December 31, 2001, compared to 24 at December 31, 2000. Cost
savings achieved from reductions in headcount on a year-over-year basis was
offset by the addition of a US-based Chief Executive Officer and increased
executive compensation. Salary and other expense for G&A totalled $1.9 million
in 2001 compared to $0.8 million in 2000. G&A expenses also increased as a
result of increased professional fees resulting from various corporate
initiatives, including the filing of several patent applications.
In 2001, the Company charged restructuring costs of $1,253,707 related to the
expense reduction initiative commencing mid-2001 as described earlier. This
included employee severance payments to 57 individuals of $497,442, lease
termination costs of $468,680 related to the Bothell, WA office and write-downs
of unrecoverable leasehold improvements of $287,585, primarily to the Bothell,
WA office. The Company does not anticipate any further restructuring charges
related to this initiative to be charged in 2002.
Depreciation and amortization costs totaled $1,831,301 in 2001 compared to
$700,045 in 2000. The year-over-year increase is attributable to capital asset
acquisitions during the year.
Interest and other income for 2001 was $258,792 compared to $713,365 in 2000.
The reduction in income is attributable to a decline in cash and short-term
investment balances as well as to a decrease in interest rates offered on
short-term investments. The company also charged $1,705,982 of interest and
financing costs during the year, primarily consisting of amortization of the
fair value of warrants granted as compensation for the credit facility as
described in Note 8(d)(ii) to the financial statements and interest costs
associated with the utilization of the credit facility.
Year ended December 31, 2000 Compared to Year Ended December 31, 1999
Total revenues for the year ended December 31, 2000 were $1,513,357,
representing an increase of 326% over revenues of $355,001 in the prior year.
Revenues in 2000 were comprised of 28% software license fees, 58% technical
service fees, 11% hardware sales and 3% recurring service revenues. When viewed
from a customer perspective, revenues for 2000 were derived 56% from original
equipment manufacturers and 44% from enterprise sales. Gross margins for the
year were 80%, compared to 86% in the prior year. The decrease in gross margins
compared to the prior year is largely the result of a one-time sale of redundant
hardware inventory in the second quarter of 2000.
Research and development expenses in 2000 totaled $3,487,624, compared to
$1,231,869 in the prior year. The majority of this increase in expenditures is
attributable to employee-related costs, including salaries, recruitment,
communications and facilities. Research and development headcount was 67 at
December 31, 2000 compared to 29 at December 31, 1999. These headcount increases
included additional software developers, quality assurance technicians and the
formation of an emerging technologies team. Total research and development
salaries were $2,360,000 million in 2000, compared to $790,000 in 1999, with
average employee compensation increasing 30% over the prior year, largely due to
the addition of senior developers. Sales and marketing expenses totaled
$11,183,483 in 2000, representing an increase of 659% over expenses of
$1,473,904 in 1999. A large part of this
23
increase relates to an increase in employee headcount to 56 employees at
December 31, 2000 compared to 23 employees at December 31, 1999. The employee
additions included regional sales managers, inside sales representatives,
channel marketing managers and marketing event staff. Total salaries expense for
the department was $3,210,000 million in 2000, compared to $650,000 in 1999.
Average employee compensation nearly doubled in 2000, largely due to the fact
that the majority of new staff are based in the United States. Sales and
marketing expenditures were also affected by significantly increased marketing
activities during 2000, including increased attendance at trade shows and
industry events, as well as the $4.0 million branding and advertising campaign
in the fourth quarter. Commensurate with the increased employee headcount and
marketing activities, the Company incurred significantly higher travel-related
costs in 2000. Sales and marketing expenses for travel, tradeshows, and other
related initiatives increased to $2,600,000 in 2000, compared to $670,000 in the
prior year.
Administrative expenses of $2,813,695 in 2000 represented an increase of 119%
over 1999 expenses of $1,286,883. This increase is largely due to increased
employee headcount and infrastructure costs to support the growth of the
organization. The Company also incurred increased professional fees in 2000
related to increased business development activities and to securities reporting
obligations in Canada and the United States. In addition, a portion of the
increase in administrative expenses can be attributed to the fact that the prior
periods included an allocation of some administrative costs to the former
Imaging Division. Administration headcount was 24 at December 31, 2000 compared
to eight at December 31, 1999, with salaries increasing to $870,000 compared to
$330,000 in the prior year. The average compensation for administrative
personnel was unchanged from the prior year.
Depreciation and amortization costs in 2000 totaled $700,045 compared to
$204,069 million in 1999. This increase is directly attributable to capital
acquisitions of $2,861,833 in 2000. Capital acquisitions included $1.72 million
of computer equipment and software, $0.58 million of office equipment, $0.46
million of leasehold improvements, and $0.10 million of purchased software
licenses. The capital acquisitions during the year were related to the increase
in employee headcount as well as to the move of the Burnaby office to new
facilities within the existing building and the move of the Bothell office to a
more permanent location. Interest income for 2000 was $713,365, compared to
$118,204 million in 1999. The increase in interest income is due to the increase
in cash and investment balances held by the Company during 2000.
Liquidity and Capital Resources
During 2001, the Company raised $20,303,441 through offerings of its equity
securities, net of issue costs including a $7,243,914 public issuance of equity
and warrant securities in February 2001, $13,004,340 from the private placement
of Special Warrants in November 2001 in the US and Canada, and $55,187 raised
through the exercise of previously issued employee stock options.
The Company used $17,311,489 in operations during 2001, primarily due to the
$20,860,436 loss from continuing operations. The effect of the loss on cash
flows was partially offset by non-cash depreciation charges and non-cash
interest and financing costs associated with the amortization of the fair value
of warrants granted as compensation for the credit facility as described in Note
8(d)(ii) to the financial statements.
Net cash gained from investing activities was $3,783,075, consisting of capital
expenditures of $2,288,424 offset by redemption of short-term investments
totalling $6,071,499.
At December 31, 2001, the Company's cash, cash equivalents and short-term
investments totalled $9,440,401, which includes approximately $350,000 pledged
as security for a Cdn.$100,000 operating line that has not been drawn upon as at
December 31, 2001 and letters of credit totalling $260,000 supporting certain
lease obligations discussed below. The Company had $9,276,808 in working capital
at the end of the year. The Company does not engage in any foreign exchange or
other hedging activities, and is not a counterparty to any derivative securities
transactions.
At December 31, 2001, the Company held accounts receivable of $1,454,681, net of
allowances for doubtful accounts of $148,539. Trade receivables - those arising
from customers and suppliers - accounted for approximately 90% of this amount..
The increase of trade accounts receivables is primarily due to two large
customer sales sold late in Q3 totalling $563,600 and a sale for $160,000 late
in Q4, all of which was collected in the first 75 days of
24
2002. A further $330,000 of trade receivables is comprised of amounts accrued in
accordance with percentage of completion revenue recognition, but not invoiced
as at December 31, 2001.
In March 2002, in conjunction with the signing of a strategic partnership and
sales agreement, the Company entered into a convertible loan agreement with
Compaq. Under this convertible loan agreement, Compaq will provide Infowave with
a convertible revolving loan of up to $2 million. The principal amount
outstanding under the loan may be converted into Common Shares at a price of
$1.00 per share, at any time up to March 8, 2005, subject to adjustment in
certain circumstances. Infowave may draw down amounts under the loan at anytime
provided that certain standard working capital conditions are met. The principal
amount outstanding bears interest at the prime rate plus 3.25%. The convertible
loan is secured by certain assets of Infowave, excluding its intellectual
property. Infowave has also granted Compaq the right to have observers attend
meetings of the Board of Directors.
The Company has entered into lease agreements for premises and equipment. These
leases have been treated as operating leases for accounting purposes. The annual
payment commitments total $3,278,692 and are as follows: 2002 - $768,490, 2003 -
$714,648, 2004 - $705,939, 2005 - $617,404, after 2005 - $275,364.
During the year ended December 31, 2001, the Company made operating lease
payments totalling approximately $829,000 (2000 - $702,000; 1999 - $160,000).
The Company believes that the total amount of cash and short-term investments
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures through 2002. This is predicated on the Company meeting
certain internal revenue projections and working capital metrics. If the Company
fails to meet these projections, it will not have sufficient resources to meet
anticipated cash needs for working capital and expenditures in 2002 without
raising additional capital, and/or implementing additional reductions in
expenses. Further reductions in expenses may negatively impact the Company's
ability to grow the business.
The Company may also need to raise additional capital for working capital or
other expenses, should the business model of the Company change. The Company may
also encounter opportunities for acquisitions, or other business initiatives
that require significant cash commitments, or unanticipated problems or expenses
that could result in a requirement for additional cash. There can be no
assurance that additional financing will be available on terms favorable to the
Company or its shareholders, or on any terms at all. The inability to obtain
such financing would have a material adverse impact on the Company's operations.
To the extent that such financing is available, it may result in substantial
dilution to existing shareholders.
Critical Accounting Policies
In preparing the consolidated financial statements, estimated and judgements are
applied that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities for the
reporting periods. The Company bases its estimates based on historical
experience and on various other assumptions that are believed to be reasonable
in the circumstances, the results of which form the basis for making judgements
about the carrying values of assets and liabilities that are not readily
available from other sources. On an on-going basis, the Company evaluates areas
of estimate or judgement to ensure they reflect currently available assessments
and knowledge. Actual results may differ from these estimates under different
assumptions and conditions.
The Company believes that the following critical accounting policies affect the
more significant judgements and estimates.
The consolidated financial statements reflect a full valuation allowance against
the net future income tax assets based on the Company's assessment that it is
not more likely than not to be able to utilize certain deductions before their
expiry. The Company's assessment is based on a judgement of estimated loss
before such deductions. Changes in the timing of the recognition and amount of
revenues and expenses in the future may impact the Company's ability to utilize
these deductions.
The Company recognizes revenue on the percentage of completion basis for
software development contracts. The Company assesses the portion of each
contract that is completed based upon estimates of time and resources
25
incurred and required for completion of the contract. Various factors, including
unforeseen complications in the development and availability of key resources,
could impact these estimates materially.
The Company prepares its financial statements in accordance with Canadian
Generally Accepted Accounting Principals ("GAAP") and subsequently reconciles
them to US GAAP. A detailed description of this reconciliation, and assumptions
therein, is included in Note 15 to the financial statements.
Recent Accounting Pronouncements
Effective January 1, 2001, the recommendations outlined in FASB Statement No.
133 - Accounting for Derivative Instruments and Hedging Activities were adopted
by the Company. Since the Company does not have any outstanding derivative
instruments and does not engage in hedging activities, adoption of this new
standard did not affect the financial statements of the Company.
During the year ended December 31, 2001, the Financial Accounting Standards
Board announced new rules related to the accounting for goodwill. Financial
Accounting Statement No. 141, Business Combinations ("SFAS 141") eliminates the
pooling of interest method of accounting for business combinations and is
effective for all transactions initiated after June 30, 2001. Financial
Accounting Statement No. 142, goodwill and other intangible assets ("SFAS 142")
requires that goodwill no longer be amortized, but the carrying value of
goodwill be subject to a regular impairment test. SFAS 142 is effective for the
first fiscal quarter beginning after December 15, 2001 except to the extent that
it relates to acquisitions after June 30, 2001. As the Company has not had any
business combinations to date and no recorded goodwill or intangible assets,
these new rules will not affect the Company's financial statements on adoption
effective January 1, 2002.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company conducts the approximately two-thirds of its transactions in
Canadian dollars and therefore uses the Canadian dollar as its base currency of
measurement. Most of the Company's revenues and approximately one-third of its
expenses are denominated in United States dollars which results in an exposure
to foreign currency gains and losses on the resulting U.S. dollar denominated
cash, accounts receivable, and accounts payable balances. For every one-cent
change in the US/Canada foreign currency exchange rate, the effect on the
Company's expenses is approximately 1.1%. As of December 31, 2001, the Company
has not engaged in any derivative hedging activities on foreign currency
transactions and/or balances. Although foreign currency gains and losses have
not historically been material, fluctuations in exchange rates between the
United States dollar and other foreign currencies and the Canadian dollar could
materially affect the Company's results of operations. To the extent that the
Company implements hedging activities in the future with respect to foreign
currency exchange transactions, there can be no assurance that the Company will
be successful in such hedging activities.
While the Company believes that inflation has not had a material adverse effect
on its results of operations, there can be no assurance that inflation will not
have a material adverse effect on the Company's results of operations in the
future.
26
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Auditors' Report to shareholders
We have audited the consolidated balance sheets of Infowave Software, Inc. as at
December 31, 2001 and 2000 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three year period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2001 in accordance with
Canadian generally accepted accounting principles. As required by the Company
Act (British Columbia), we report that, in our opinion, these principles have
been applied, after giving retroactive effect to the change in method of
calculating loss per share explained in note 2(p) to the financial statements,
on a consistent basis.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
January 25, 2002 except as to note 8(e),
which is as of February 26, 2002 and note 14,
which is as of March 8, 2002
27
INFOWAVE SOFTWARE, INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
December 31, 2001 and 2000
===============================================================================================================
2001 2000
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 8(e)) $ 9,087,730 $ 2,368,092
Short term investments (notes 6(a) and 11(b)) 352,670 6,585,852
Accounts receivable, net of allowances of $148,539
(2000 - $19,044) 1,454,681 492,097
Inventory (note 4) 49,710 93,499
Prepaid expenses and deposits 181,740 374,687
---------------------------------------------------------------------------------------------------------
11,126,531 9,914,227
Fixed assets (note 5) 2,531,144 2,531,122
- ---------------------------------------------------------------------------------------------------------------
$ 13,657,675 $ 12,445,349
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,568,303 $ 1,087,536
Deferred revenue 281,420 206,347
---------------------------------------------------------------------------------------------------------
1,849,723 1,293,883
Shareholders' equity:
Share capital (note 8):
Authorized: 200,000,000 voting common shares
without par value (2000 - 100,000,000)
Issued: 23,440,203 (2000 - 21,095,458) common shares 42,447,141 35,148,040
Special warrants, net of issue costs of $1,882,912 (note 8(e)) 13,004,340 -
Other equity instruments (note 8(d)(ii)) 1,613,096 -
Deficit (44,626,077) (23,765,641)
Cumulative translation account (630,548) (230,933)
---------------------------------------------------------------------------------------------------------
11,807,952 11,151,466
- ---------------------------------------------------------------------------------------------------------------
$ 13,657,675 $ 12,445,349
===============================================================================================================
Continuing operations (note 2(a))
Commitments and contingencies (note 11)
Subsequent event (note 14)
See accompanying notes to consolidated financial statements.
28
INFOWAVE SOFTWARE, INC.
Consolidated Statements of Operations and Deficit
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================================================
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Sales $ 3,189,253 $ 1,513,557 $ 355,001
Cost of goods sold 416,082 297,992 50,003
- ----------------------------------------------------------------------------------------------------------------
2,773,171 1,215,565 304,998
Expenses:
Research and development 5,394,684 3,487,624 1,231,869
Sales and marketing 9,298,149 11,183,483 1,473,904
Administration 4,408,576 2,813,695 1,286,883
Restructuring (note 10) 1,253,707 - -
Depreciation and amortization 1,831,301 700,045 204,069
- ----------------------------------------------------------------------------------------------------------------
22,186,417 18,184,847 4,196,725
- ----------------------------------------------------------------------------------------------------------------
Operating loss from continuing operations 19,413,246 16,969,282 3,891,727
Other income (expenses):
Interest and other income 258,792 713,365 118,204
Interest and financing costs (1,705,982) - -
- ----------------------------------------------------------------------------------------------------------------
Loss from continuing operations 20,860,436 16,255,917 3,773,523
Discontinued operations (note 3):
Loss (earnings) from operations - 473,088 (485,272)
Loss on disposal - 1,259,863 -
- ----------------------------------------------------------------------------------------------------------------
- 1,732,951 (485,272)
- ----------------------------------------------------------------------------------------------------------------
Net loss for the year 20,860,436 17,988,868 3,288,251
Deficit, beginning of year 23,765,641 5,776,773 2,488,522
- ----------------------------------------------------------------------------------------------------------------
Deficit, end of year $ 44,626,077 $23,765,641 $ 5,776,773
- ----------------------------------------------------------------------------------------------------------------
Loss (earnings) per share:
Continuing operations $ 0.90 $ 0.81 0.24
Discontinued operations - 0.09 (0.03)
- ----------------------------------------------------------------------------------------------------------------
Net loss per share, basic and diluted $ 0.90 $ 0.90 $ 0.21
- ----------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 23,125,831 20,020,938 15,963,036
Adjustment for shares contingently issued - (53,448) (249,188)
- ----------------------------------------------------------------------------------------------------------------
23,125,831 19,967,490 15,713,848
================================================================================================================
See accompanying notes to consolidated financial statements.
29
INFOWAVE SOFTWARE, INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================================================
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Loss from continuing operations $ (20,860,436) $ (16,255,917) $(3,773,523)
Items not involving cash:
Depreciation and amortization 1,831,301 700,045 204,069
Write-off of fixed assets 287,585 - -
Non-cash interest and financing costs 1,590,184 - -
Allowance for obsolescence of inventory 30,000 - -
Changes in non-cash operating working capital:
Accounts receivable (1,036,049) 984,119 1,581,881
Inventory 8,913 33,629 782,688
Prepaid expenses and deposits 176,496 (372,770) 56,284
Accounts payable and accrued liabilities 569,201 199,647 (1,464,010)
Deferred revenue 91,316 203,095 -
- ------------------------------------------------------------------------------------------------------------------------------------
(17,311,489) (14,508,152) (2,612,611)
Earnings (loss) from discontinued operations - (1,732,951) 485,272
Items not involving cash:
Depreciation - 119,160 162,904
Amortization of deferred charges - 22,733 36,344
Gain on sale of Imaging Division - (41,492) -
- ------------------------------------------------------------------------------------------------------------------------------------
- (1,632,550) 684,520
- ------------------------------------------------------------------------------------------------------------------------------------
(17,311,489) (16,140,702) (1,928,091)
Cash flows from investing activities:
Redemption (purchase) of short term
investments 6,071,499 (6,667,429) -
Proceeds on sale of Imaging Division - 1,322,774 -
Purchase of capital assets (2,288,424) (2,861,833) (635,454)
- ------------------------------------------------------------------------------------------------------------------------------------
3,783,075 (8,206,488) (635,454)
Cash flows from financing activities:
Issuance of shares and special warrants for
cash, net of issue costs 20,303,441 22,621,685 5,760,720
Foreign exchange gain (loss) on cash and cash
equivalents held in a foreign currency (55,389) (265,493) 114,596
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 6,719,638 (1,990,998) 3,311,771
Cash and cash equivalents, beginning of year 2,368,092 4,359,090 1,047,319
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 9,087,730 $ 2,368,092 $ 4,359,090
================================================================================================================
30
INFOWAVE SOFTWARE, INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================================================
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Supplementary information:
Interest paid $ 48,727 $ - $ -
Interest received 243,033 491,567 118,204
Non-cash transactions:
Cancellation of shares pursuant to
termination of employment contracts - (594) (32,478)
Conversion of special warrants into
common shares 2,272,728 19,027,038 4,284,797
Warrants issued for financing costs
(note 8(d)(ii)) 1,613,096 - -
================================================================================================================
See accompanying notes to consolidated financial statements.
31
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
1. Operations:
The Company was formed on February 21, 1997, following the amalgamation of
GDT Softworks Inc., Infowave Wireless Messaging Incorporated and G.W.
McIntosh Holdings Ltd. and is incorporated under the laws of the Province
of British Columbia. The principal business activities of the Company are
software development and sales.
2. Significant accounting policies:
(a) Continuing operations:
These financial statements have been prepared on a going concern basis
notwithstanding the fact that the Company has experienced operating
losses and negative cash flows from operations during each of the
three years ended December 31, 2001. To date, the Company has financed
its continuing operations through revenue, the issuance of common
shares, and from cash flows from its former Imaging Division (note 3).
Continued operations of the Company will depend upon the attainment of
profitable operations, which may require the successful completion of
external financing arrangements.
Together with estimated revenue, the exercise of options and warrants
and the debt financing obtained subsequent to December 31, 2001 (note
14), existing working capital is expected to be sufficient to meet the
Company's projected working capital and cash requirements for the
foreseeable future. However, unanticipated costs and expenses or lower
than anticipated revenues could necessitate additional financing or
reductions in expenditures which may include further restructuring of
the Company. There can be no assurances that such financing, if
required, will be available on a timely or cost effective basis. To
the extent that such financing is not available or reductions in
expenditures are required, the Company may not be able to or may be
delayed in being able to commercialize its products and services and
to ultimately attain profitable operations. The Company will continue
to evaluate its projected expenditures relative to its available cash
and to evaluate additional means of financing in order to satisfy its
working capital and other cash requirements.
(b) Basis of presentation:
These consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada and include
the accounts of the Company and its wholly owned subsidiary company,
Infowave USA Inc., which was incorporated on July 1, 2000. All
material intercompany transactions and balances have been eliminated
on consolidation. Material differences between the accounting
principles used in these financial statements and accounting
principles generally accepted in the United States are disclosed in
note 15.
32
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
2. Significant accounting policies (continued):
(c) Cash and cash equivalents:
Cash and cash equivalents include short term investments, which are
highly liquid interest bearing marketable securities with maturities
of ninety days or less when acquired.
(d) Short term investments:
Short-term investments, which consist of investment grade interest
bearing securities having terms to maturity when acquired of greater
than ninety days but less than one year, are stated at the lower of
cost and fair market value. Short-term investments includes accrued
interest on interest bearing securities classified as short term
investments.
(e) Inventory:
Inventory is valued at the lower of cost and net realizable value.
Cost is determined using the weighted average cost method.
(f) Fixed assets:
Fixed assets are recorded at cost. Depreciation is provided using the
following methods and annual rates:
---------------------------------------------------------------------------------------------
Asset Basis Rate
---------------------------------------------------------------------------------------------
Computer equipment and system software Straight-line three years
Computer software Straight-line two years
Leasehold improvements Straight-line shorter of lease
term or 20%
Office equipment Declining balance 20%
Software licences and purchased source code Declining balance 30%
---------------------------------------------------------------------------------------------
(g) Impairment of long-lived assets and assets to be disposed:
Fixed assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to future net
cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
33
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
2. Significant accounting policies (continued):
(h) Income taxes:
Future income tax assets and liabilities are determined based on
temporary differences between the accounting and tax basis of the
assets and liabilities, and are measured using the tax rates expected
to apply when these differences reverse. A valuation allowance is
recorded against any future tax asset if it is more likely than not
that the asset will not be realized.
(i) Translation of foreign currency:
These consolidated financial statements are presented in United States
dollars although the Company uses the Canadian dollar as its
functional currency. The Canadian dollar functional currency financial
statements are translated into U.S. dollars using the current rate
method. Under this method, assets and liabilities are translated at
rates of exchange in effect at the balance sheet date. Revenues and
expenses are translated at rates in effect at the time of the
transaction. Any gains or losses from this translation are included in
a separate cumulative translation adjustment account in shareholders'
equity on the balance sheet.
The financial statements of the Company's integrated foreign
subsidiary, Infowave USA Inc., have been translated into the Canadian
dollar functional currency using the temporal method. Under this
method, the financial statements are translated as follows: monetary
assets and liabilities at the rate in effect on the balance sheet
date; non-monetary assets and liabilities at the rate in effect on the
transaction date; and revenues and expenses at the average rate for
the period. Gains and losses on translation are included in results
from operations.
(j) Revenue recognition:
Revenue from the license of software products is recognized when all
of the following criteria have been met: (i) persuasive evidence of an
arrangement exists; (ii) the product has been delivered; (iii) the fee
is fixed and determinable; and (iv) the collection of the fee is
probable. An allowance for future returns is recorded at the time
revenue is recognized based on estimated future returns including
returns of older product versions.
Revenue on software development contracts is recognized on a
percentage of completion basis. Payment in advance for software
support and maintenance is deferred and amortized over the term of the
contract. The Company believes that its accounting policies comply
with SOP 97-2 issued by the American Institute of Certified Public
Accountants.
(k) Cost of goods sold:
Cost of goods sold includes the cost of commissions, royalties,
hardware, packaging and distribution costs associated with software
license revenue.
34
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
2. Significant accounting policies (continued):
(l) Research and development costs:
Research costs are expensed as incurred. Development costs are
expensed as incurred unless certain specific criteria for deferral
have been met. No development costs have been deferred in the periods
ended December 31, 2001, 2000 and 1999 as the criteria for deferral
were not met. During the year ended December 31, 2001, the Company
received government assistance totaling nil (2000 - nil; 1999 -
$87,102) related to research and development expenditures which has
been recorded as a reduction of research and development expenditures.
(m) Stock-based compensation:
The Company has a stock-based compensation plan, which is described in
note 8(c). No compensation expense is recognized for this plan when
stock options are issued to employees, directors, consultants and
other service providers as the exercise price of the options is equal
to the price of the underlying common shares on the date of grant. Any
consideration paid by employees on exercise of stock options is
credited to share capital.
(n) Advertising costs:
Expenditures related to advertising are expensed in the period the
first associated advertising takes place.
(o) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. In particular,
management estimates are required in the determination of provisions
for doubtful accounts receivable, sales returns and obsolete
inventory. Actual results could differ from those estimates.
35
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
2. Significant accounting policies (continued):
(p) Loss per share:
Effective January 1, 2001, the Company adopted the new accounting
standard, Handbook Section 3500 - Earnings per Share, issued by the
Canadian Institute of Chartered Accountants ("CICA"). For the Company,
the new Section does not affect the calculation of basic earnings per
share amounts but does affect diluted per share amounts. Section 3500
requires the use of the treasury stock method for calculating the
dilutive effect of outstanding warrants and options and requires
disclosure of a reconciliation of the numerator and denominator of
basic and fully diluted per share calculations. The new section also
requires disclosure of any potentially dilutive securities that are
currently anti-dilutive. Dilutive securities, such as stock options
and warrants, are included in the calculation of diluted per share
amounts only if the market price of the underlying common shares
exceeds the exercise price. This change in accounting policy has been
applied retroactively which reduced the weighted average shares
outstanding for the years ended December 31, 2000 and 1999 by 53,448
and 249,188 shares, respectively, for contingently issuable shares.
However, these adjustments did not change per share amounts reported
in prior periods.
Basic loss per share has been calculated using the weighted average
number of common shares outstanding. For purposes of the weighted
average shares outstanding, shares held in escrow pursuant to the
employee incentive plan and employment agreements are excluded from
the calculation as they are considered contingently issuable.
(q) Comparative figures:
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current year.
36
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
3. Discontinued operations:
Effective August 31, 2000 the Company completed the sale of the net assets
and business operations of its Imaging Division for net cash consideration
of $1,322,774. The measurement date used to determine the loss on
disposition was March 31, 2000.
The loss on disposal of the Imaging Division consisted of:
------------------------------------------------------------------------
Loss from operations subsequent to March 31, 2000 $ 1,096,120
Employee severance costs 91,277
Professional fees 113,958
Gain on sale of net assets (41,492)
------------------------------------------------------------------------
$ 1,259,863
------------------------------------------------------------------------
The net assets of the Imaging Division on August 31, 2000 were comprised
of:
---------------------------------------------------------------------------
Accounts receivable $ 392,957
Inventory 448,906
Prepaid expenses 68,777
Capital assets 451,534
Accounts payable and accrued liabilities (80,892)
---------------------------------------------------------------------------
$ 1,281,282
---------------------------------------------------------------------------
4. Inventory:
Inventory consists of:
--------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------
Raw materials $ - $ -
Finished goods 79,710 93,499
--------------------------------------------------------------------------
79,710 93,499
Allowance for obsolete stock (30,000) -
--------------------------------------------------------------------------
$ 49,710 $ 93,499
--------------------------------------------------------------------------
37
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
5. Fixed assets:
----------------------------------------------------------------------------------------------------------
Accumulated Net book
2001 Cost depreciation value
----------------------------------------------------------------------------------------------------------
Computer equipment and system software $ 2,127,436 $ 1,125,134 $ 1,002,302
Computer software 1,836,760 1,140,657 696,103
Leasehold improvements 425,590 110,840 314,750
Office equipment 619,634 151,669 467,965
Software licenses and purchased source code 192,895 142,871 50,024
----------------------------------------------------------------------------------------------------------
$ 5,202,315 $ 2,671,171 $ 2,531,144
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Accumulated Net book
2000 Cost depreciation value
----------------------------------------------------------------------------------------------------------
Computer equipment and system software $ 1,719,096 $ 536,810 $ 1,182,286
Computer software 513,102 214,736 298,366
Leasehold improvements 481,866 36,701 445,165
Office equipment 597,013 67,481 529,532
Software licenses and purchased source code 204,927 129,154 75,773
----------------------------------------------------------------------------------------------------------
$ 3,516,004 $ 984,882 $ 2,531,122
----------------------------------------------------------------------------------------------------------
6. Operating loan:
(a) The Company has an operating loan facility with a credit limit of
Cdn.$100,000. The facility is repayable on demand, bears interest at
the prime rate plus 1.0% and is secured by a hypothecation of short
term investments equal to the amount of the credit facility. As at
December 31, 2001 and 2000 no amounts were outstanding.
(b) During the year ended December 31, 2001, the Company entered into an
agreement with Thomas Koll, Chief Executive Officer of the Company,
for a credit facility in the amount of $5,000,000. The Company was
able to draw down the credit facility at its discretion, with the
principal outstanding under the loan bearing interest at a rate of 8%
per annum, payable at maturity. The loan amounts drawn were secured by
a first charge on all of the assets of the Company and were to be due
and payable on demand on or after January 23, 2002. The Company also
agreed to pay Koll $50,000 as reimbursement for his legal expenses
incurred with respect to the operating loan. In addition, the Company
issued warrants to Koll (note 8(d)(ii)). Prior to December 31, 2001,
the Company repaid all amounts that were outstanding under this
facility and terminated the agreement.
38
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
7. Related party transactions:
During the year ended December 31, 2001, the Company paid interest of
$42,184 to Thomas Koll in connection with the operating loan (note 6(b))
and paid $110,000 (2000 - $142,000; 1999 - $90,000) for legal services to a
firm controlled by a Director of the Company. The Company also recognized
revenue of $467,500 (2000 - nil; 1999 - nil) on sales to a company that has
a common director with the Company.
8. Share capital:
The share capital of the Company is as follows:
(a) Authorized:
200,000,000 voting common shares without par value (December 31, 2000
- 100,000,000).
(b) Issued:
-----------------------------------------------------------------------------------------------------
Number
of shares Amount
-----------------------------------------------------------------------------------------------------
Balance, December 31, 1998 15,236,500 $ 6,798,707
Share issuance pursuant to exercise of share options 604,535 560,576
Share issuance pursuant to exercise of purchase warrants 300,577 763,011
Share issuance pursuant to exercise of agent's warrants 69,051 152,336
Share cancellation pursuant to termination of employment
contracts (137,840) (32,478)
Share issuance pursuant to issue and conversion of
special warrants, net of issue costs of $623,070 2,224,647 4,284,797
-----------------------------------------------------------------------------------------------------
Balance, December 31, 1999 18,297,470 12,526,949
Share issuance pursuant to exercise of share options 921,327 1,240,527
Share issuance pursuant to exercise of purchase warrants 811,747 2,037,586
Share issuance pursuant to exercise of agent's warrants 143,414 316,534
Share cancellation pursuant to termination of employment
contracts (2,500) (594)
Share issuance pursuant to issue and conversion of
special warrants, net of issue costs of $1,266,383 924,000 19,027,038
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 21,095,458 35,148,040
Share issuance pursuant to exercise of share options 72,017 55,187
Share issuance pursuant to issue and conversion of
special warrants, net of issue costs of $938,833 2,272,728 7,243,914
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2001 23,440,203 $ 42,447,141
-----------------------------------------------------------------------------------------------------
39
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
8. Share capital (continued):
(c) Share purchase options:
The Company has reserved common shares, to a maximum of 20% of the
total number outstanding from time-to-time, pursuant to an Employee
Stock Option Plan. The purpose of the Plan is to assist eligible
employees to participate in the growth and development of the Company.
Options to purchase common shares of the Company under the Plan may be
granted by the Board of Directors to certain full-time employees of
the Company. These options vest over periods from three to four years
and expire five years from the date of grant. All stock options
granted by the Company are exercisable in Canadian dollars.
A summary of the status of the Company's stock option plan as of
December 31, 2001, 2000 and 1999 and changes during the periods ended
on those dates is presented below:
--------------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- -------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------------------------------------------------------------------------------------------------------------
U.S.$/Cdn.$ U.S.$/Cdn.$ U.S.$/Cdn.$
Outstanding, beginning of year 4,269,883 7.02/10.52 3,091,075 3.52/5.08 2,087,921 0.82/1.26
Granted 3,468,908 1.42/2.26 2,802,488 9.32/13.97 1,829,584 5.37/7.75
Exercised (72,017) 0.77/1.22 (921,327) 0.91/1.98 (604,535) 0.94/1.36
Cancelled (1,250,085) 6.35/10.10 (702,353) 8.69/13.02 (221,895) 0.93/1.34
--------------------------------------------------------------------------------------------------------------
Outstanding, end of year 6,416,689 3.88/6.18 4,269,883 7.02/10.52 3,091,075 3.52/5.08
--------------------------------------------------------------------------------------------------------------
Options exercisable, end of year 2,530,783 4.81/7.66 1,075,626 3.33/4.99 841,462 0.87/1.25
--------------------------------------------------------------------------------------------------------------
40
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
8. Share capital (continued):
(c) Share purchase options (continued):
The following table summarizes information about stock options
outstanding at December 31, 2001:
---------------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
--------------------------------------------- -------------------------------
Number Weighted Weighted Number
outstanding, average average exercisable, Weighted
Range of December 31, remaining exercise December 31, average
exercise prices 2001 contractual life price 2001 exercise price
---------------------------------------------------------------------------------------------------------
U.S.$/(Cdn.$) U.S.$/Cdn.$ U.S.$/Cdn.$
$0.25 to $0.63
($0.40 to $0.99) 1,688,100 4.75 years $ 0.26/0.41 135,835 $0.25/0.40
$0.64 to $1.26
($1.00 to $1.99) 783,715 2.36 0.78/1.24 692,815 0.77/1.23
$1.27 to $1.90
($2.00 to $2.99) 93,800 2.54 1.63/2.60 57,800 1.60/2.55
$1.91 to $2.53
($3.00 to $3.99) 516,939 3.78 2.37/3.77 131,930 2.28/3.63
$2.54 to $3.79
($4.00 to $5.99) 800,300 3.94 3.39/5.39 261,550 3.39/5.40
$3.80 to $5.07
($6.00 to $7.99) 727,667 3.98 3.88/6.17 273,545 3.84/6.11
$5.08 to $6.33
($8.00 to $9.99) 195,800 3.57 5.69/9.06 83,484 5.65/8.99
$6.34 to $7.60
($10.00 to $11.99) 562,235 3.62 7.03/11.18 243,955 7.02/11.17
$7.61 to $9.50
($12.00 to $14.99) 665,333 3.06 8.28/13.18 450,352 8.29/13.19
$9.51 to $12.67
($15.00 to $19.99) 133,400 3.40 10.59/16.85 66,804 10.57/16.82
$12.68 to $40.89
($20.00 to $64.50) 249,400 3.20 19.88/31.63 132,713 20.10/31.99
---------------------------------------------------------------------------------------------------------
$0.25 to $40.89
($0.40 to $64.50) 6,416,689 3.76 $ 3.88/6.18 2,530,783 $4.81/7.66
---------------------------------------------------------------------------------------------------------
41
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
8. Share capital (continued):
(d) Share purchase warrants:
(i) On February 22, 2001, the Company issued 2,272,728 units (the
"Units") at a price of $3.62 (Cdn. $5.50) per Unit for gross
proceeds of $8,217,500 (Cdn. $12,500,000). Each Unit is comprised
of one common share and one-half of one common share purchase
warrant of the Company. Each whole warrant entitles the holder to
purchase one common share for a period of 18 months from closing
at a price equal to $4.71 (Cdn. $7.15) per share. In addition,
the Company issued 113,636 Units ("Agents' units") each
exercisable into one common share and 1/2 purchase warrant of the
Company at $3.62 (Cdn. $5.50) until August 22, 2002 to the Agents
as partial compensation for services rendered in connection with
the financing. All of the units were converted into common shares
and share purchase warrants during the year. As at December 31,
2001, none of the share purchase warrants or Agents' units had
been exercised.
(ii) As consideration for providing a credit facility (note 6(b)), the
Company granted Koll warrants to purchase up to 3,510,455 common
shares at a price of Cdn. $1.10, exercisable for three years. The
fair value of these warrants of $1,613,096 has been recognized as
a financing cost that was being recognized over the term of the
related debt and as other equity instruments. As at December 31,
2001 none of these warrants had been exercised.
(iii)On April 13, 2000 the Company issued 924,000 special warrants at
a price of $21.96 (Cdn. $32.50) per special warrant for net cash
proceeds of $19,027,038. Each special warrant was exercisable
without payment of additional consideration for one Common Share
of the Company. In addition, the Company issued 46,200 special
compensation warrants to the underwriters in connection with this
issuance. Each special compensation warrant is exercisable
without additional consideration into one compensation warrant
entitling the holder to acquire one common share at a price of
$21.96 (Cdn. $32.50) per share for a two year period ending April
13, 2002. As at December 31, 2001, all of the special warrants
and none of the special compensation warrants had been exercised.
42
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
8. Share capital (continued):
(e) Special warrants:
On November 23, 28 and 30, 2001 the Company issued 31,965,319,
1,960,784 and 195,186, special warrants at a price per special warrant
of $0.69, $0.81 and $0.86 respectively, for gross proceeds of
$14,887,252 (Cdn. $23,812,165) of which $4,475,309 was held in escrow
and included in cash and cash equivalents at December 31, 2001. The
special warrants are exercisable, without payment of additional
consideration, for units each comprised of one common share and
one-half of one common share purchase warrant.
Each whole purchase warrant will entitle the holder to purchase one
common share for a period of three years at a price of $0.56 (Cdn.
$0.90). The Company has the right to force conversion of the purchase
warrants thirty days after providing written notice that the closing
price for its common shares has equalled or exceeded Cdn. $9.00 for 20
consecutive trading days. The purchase warrants will also contain
provisions for cashless exercise.
The agents were paid a cash commission equal to 7% of the gross
proceeds of the private placement and agents' warrants entitling them
to purchase 2,386,775 units at a price of $0.51 (Cdn. $0.81) until
November 23, 2004. Each unit shall be comprised of one common share
and one-half of one common share purchase warrant.
On February 21, 2002, the Company received final receipt for a
prospectus filed in certain provinces in Canada, qualifying the
special warrants for distribution and releasing the funds held in
escrow. The special warrants were deemed to be exercised for freely
tradable common shares and purchase warrants on February 26, 2002.
(f) Loss per share:
For the year ended December 31, 2001 - 3,928,074 options (2000 -
438,200; 1999 - 1,659,907) and 1,353,018 warrants (2000 - 46,200; 1999
- nil) were not included in the diluted per share calculations as
their exercise prices exceeded the market value of the underlying
shares.
43
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
9. Income taxes:
Income taxes attributable to net loss in these financial statements differ
from amounts computed by applying the Canadian federal and provincial
statutory rate of 44.6% (2000 and 1999 - 45.62%) as follows:
----------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------------------------------
Net loss before income taxes $ 20,860,436 $ 17,988,868 $ 3,288,251
----------------------------------------------------------------------------------------------------------
Expected tax recovery $ 9,307,927 $ 8,206,522 $ 1,500,100
Tax effect of:
Loss of foreign subsidiary taxed at
lower rates (776,192) (871,645) -
Change in enacted tax rates (958,830) (433,160) -
Non-deductible interest expense (27,355) (46,021) -
Other non-deductible expenses (709,576) - (64,612)
Change in valuation allowance (6,835,974) (6,855,696) (1,435,488)
----------------------------------------------------------------------------------------------------------
$ - $ - $ -
----------------------------------------------------------------------------------------------------------
The Company has non-capital losses carried forward in Canada of
approximately $30,488,200 which are available to reduce future years'
income for income tax purposes and capital losses of $106,000 which are
available indefinitely to offset future capital gains for income tax
purposes.
Non-capital loss carry forwards expire in:
------------------------------------------------------------------------
2002 $ 33,574
2003 740,354
2004 1,677,907
2005 956,315
2006 1,341,068
2007 14,649,259
2008 11,089,723
------------------------------------------------------------------------
$ 30,488,200
------------------------------------------------------------------------
As at December 31, 2001 the Company's wholly owned subsidiary, Infowave USA
Inc. has non-capital losses carried forward of $9,050,000 which are
available to reduce future years' taxable income for income tax purposes to
2021. The Company also has available unclaimed Scientific Research and
Experimental Development Expenditures of approximately $1,015,200 as at
December 31, 2001, which may be carried forward indefinitely and used to
reduce future taxable income.
44
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
9. Income taxes (continued):
The tax effect of the significant temporary differences which comprise tax
assets and liabilities, at December 31, 2001 and 2000 are as follows:
----------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------------------------------------
Future income tax assets:
Amalgamation and reorganization costs $ 43,370 $ 49,941
Deferred revenues - 61,444
Fixed assets, principally due to differences between
accounting and tax depreciation 818,602 228,493
Loss carry forwards 13,919,936 8,164,128
Scientific research and development
expenditure carry forwards 361,417 1,196,959
Share issue costs 1,211,404 679,438
----------------------------------------------------------------------------------------------------------
Total gross future income tax assets 16,354,729 10,380,403
Valuation allowance (16,354,729) (10,380,403)
----------------------------------------------------------------------------------------------------------
Net future income tax asset $ - $ -
----------------------------------------------------------------------------------------------------------
In assessing the ability to realize future income tax assets, management
considers whether it is more likely than not that some or all of the future
tax assets will be realized. The ultimate realization of the future tax
assets is dependent on the generation of taxable income during periods in
which the temporary differences reverse. Due to the fact that as at
December 31, 2001 and 2000, sufficient evidence does not exist to support a
conclusion that it is more likely than not that the future income tax
assets will be realized, a valuation allowance has been recorded against
all of the future tax assets.
10. Restructuring costs:
During the year ended December 31, 2001 the Company completed a
restructuring that included employee severance payments of $497,442, lease
termination costs of $468,680 and the write-offs of unrecoverable leasehold
improvements of $287,585. Accounts payable and accrued liabilities includes
$120,200 related to these costs at December 31, 2001.
45
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
11. Commitments and contingencies:
(a) Lease obligations:
The Company has entered into lease agreements for premises and
equipment. These leases have been treated as operating leases for
accounting purposes. The annual payment commitments are as follows:
----------------------------------------------------------------------
2002 $ 768,490
2003 714,648
2004 705,939
2005 617,404
After 2005 275,364
----------------------------------------------------------------------
$ 3,081,845
----------------------------------------------------------------------
During the year ended December 31, 2001, the Company made operating
lease payments totaling approximately $829,000 (2000 - $702,000; 1999
- $160,000).
(b) Letters of credit:
The Company has secured certain lease commitments through outstanding
letters of credit totaling $260,000.
(c) Contingency:
The Company has received a letter dated September 17, 2001 from
Glenayre Electronics, Inc. ("Glenayre") informing it that Glenayre
requires indemnity under certain agreements the Company has with
Glenayre. The Company has previously developed and supplied technology
to Glenayre. After an internal investigation and consultation with
outside counsel, and based upon the description provided by Glenayre
in relation to its need for indemnity, the Company believes that the
technology the Company developed and supplied to Glenayre does not
infringe the intellectual property rights of any third party and
therefore any costs associated with indemnification, if required, will
not be material.
46
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
12. Financial instruments and risk management:
(a) Fair values:
The carrying amounts of cash and cash equivalents, short term
investments, accounts receivable and accounts payable and accrued
liabilities approximate fair values due to their ability for prompt
liquidation and short term to maturity.
(b) Credit risk:
The Company is exposed to credit risk only with respect to
uncertainties as to timing and amount of collectibility of accounts
receivable. At December 31, 2000, no individual customer represented
greater than ten percent of outstanding accounts receivable. At
December 31, 2001 two customers represented 57% of outstanding
accounts receivable. The Company mitigates its credit risk by
concentrating its direct sales efforts on Fortune 500 companies and
conducting standard credit checks on all new customers.
(c) Foreign currency risk:
Foreign currency risk is the risk to the Company's earnings that
arises from fluctuations in foreign currency exchange rates, and the
degree of volatility of these rates. A substantial portion of the
Company's sales are derived in United States dollars and accordingly
the majority of the Company's accounts receivable is denominated in
United States dollars. The Company has not entered into foreign
exchange contracts to hedge against gains or losses from foreign
exchange fluctuations.
13. Segmented information:
(a) Industry segments:
Until the disposition of the Imaging Division on August 31, 2000 (note
3), the Company had two reportable segments based on its two distinct
product lines, being the Company's wireless and imaging products.
Subsequent to August 31, 2000, the Company operates only in one
reportable segment being its wireless products. Segmented information
has not been presented as the results from the Imaging Division are
disclosed as discontinued operations on the statement of operations
and results from continuing operations consist of only the results of
the Wireless Division.
(b) Geographic information:
71% of sales for the year ended December 31, 2001 (2000 - 96%; 1999 -
97%) were to customers located in the United States, with 26% and 3%
of sales being to customers located in Canada and Europe, respectively
(2000 - 4% and nil; 1999 - 3% and nil). 15% of capital assets at
December 31, 2001 (2000 - 20%) were located in the United States, and
the remaining capital assets were located in Canada.
47
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
13. Segmented information (continued):
(c) Major customers:
For the year ended December 31, 2001, revenue from four (2000 - one)
customers represented approximately 61% (2000 - 57%) of revenues.
14. Subsequent event:
(a) On March 8, 2002, the Company entered into a convertible loan
agreement with a strategic partner for a convertible revolving loan of
up to $2,000,000. The principal amount outstanding under the loan
bears interest at the prime rate plus 3.25% and may be converted into
common shares of the Company at a price of US$1.00 per share, which
was greater than the market price at that date, at any time up to
March 8, 2005, subject to adjustment in certain circumstances.
Infowave may draw down amounts under the loan at anytime provided that
certain standard working capital conditions are met. The convertible
loan will be secured by certain assets of Infowave, excluding its
intellectual property.
(b) Subsequent to December 31, 2001, the Company issued 265,000 stock
options pursuant to the Employee Stock Option Plan with exercise
prices ranging from $0.41 to $1.11 (Cdn. $0.65 to $1.77). In addition,
115,316 stock options were exercised for proceeds of approximately
$32,880 (Cdn. $52,280).
48
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
15. Reconciliation to United States generally accepted accounting principles:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Canada. These
principles differ in the following material respects from those in the
United States:
(a) Net loss and loss per share:
--------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------------------
Loss from continuing operations in
accordance with Canadian GAAP $ 20,860,436 $ 16,255,917 $ 3,773,523
Adjustment for stock based compensation
relating to stock options issued to
non-employees (c)(i) 126,486 195,690 21,782
Adjustment for stock based compensation
relating to escrow shares (c)(ii) - 13,922 34,293
--------------------------------------------------------------------------------------------------------
Loss from continuing operations in
accordance with United States GAAP 20,986,922 16,465,529 3,829,598
Discontinued operations:
Loss (earnings) from operations - 473,088 (485,272)
Loss on disposal - 1,259,863 -
--------------------------------------------------------------------------------------------------------
- 1,732,951 (485,272)
--------------------------------------------------------------------------------------------------------
Net loss in accordance with United
States GAAP $ 20,986,922 $ 18,198,480 $ 3,344,326
--------------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding in accordance
with Canadian GAAP 23,125,831 19,967,490 15,713,848
Adjustment for special warrants (e) 3,458,870 174,674 -
--------------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding in accordance with
US GAAP 26,584,701 20,142,164 15,713,848
--------------------------------------------------------------------------------------------------------
Loss (earnings) per share:
Continuing operations $ 0.79 $ 0.82 $ 0.24
Discontinued operations - 0.09 (0.03)
--------------------------------------------------------------------------------------------------------
Net loss per share $ 0.79 $ 0.90 $ 0.21
--------------------------------------------------------------------------------------------------------
Comprehensive loss for the years ended December 31, 2001,
2000 and 1999 is as follows:
Net loss in accordance with U.S. GAAP $ 20,986,922 $ 18,198,480 $ 3,344,326
Other comprehensive loss (income):
Foreign currency translation adjustment 399,615 523,079 (272,067)
--------------------------------------------------------------------------------------------------------
Comprehensive loss $ 21,386,537 $ 18,721,559 $ 3,072,259
--------------------------------------------------------------------------------------------------------
49
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
15. Reconciliation to United States generally accepted accounting principles
(continued):
(b) Balance sheet:
-------------------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------------------------------
Total Assets
Total assets in accordance with Canadian GAAP and
United States GAAP $ 13,657,675 $ 12,445,349
-------------------------------------------------------------------------------------------------------
Shareholders' Equity
Share capital in accordance with Canadian GAAP $ 42,447,141 $ 35,148,040
Adjustments to share capital:
Foreign exchange effect on conversion of 1998 and
prior share capital transactions (d) 543,269 543,269
Additional paid in capital from stock based compensation
relating to stock options issued to non-employees (c)(i) 520,999 394,513
Additional paid in capital from stock based compensation
relating to escrow shares (c)(ii) 107,077 107,077
-------------------------------------------------------------------------------------------------------
Share capital in accordance with United States GAAP 43,618,486 36,192,899
-------------------------------------------------------------------------------------------------------
Special warrants in accordance with Canadian and
United States GAAP 13,004,340 -
-------------------------------------------------------------------------------------------------------
Other equity instruments in accordance with Canadian and
United States GAAP 1,613,096 1,613,096
-------------------------------------------------------------------------------------------------------
Deficit in accordance with Canadian GAAP (44,626,077) (23,765,641)
Adjustments to deficit:
Foreign exchange effect on conversion of 1998 and
prior income statements (d) (189,240) (189,240)
Cumulative effect of stock based compensation relating
to stock options issued to non-employees (c)(i) (519,411) (392,925)
Cumulative effect of stock based compensation
relating to escrow shares (c)(ii) (101,474) (101,474)
-------------------------------------------------------------------------------------------------------
Deficit in accordance with United States GAAP (45,436,202) (24,449,280)
-------------------------------------------------------------------------------------------------------
Cumulative translation account in accordance with
Canadian GAAP (630,548) (230,933)
Adjustments to cumulative translation account:
Foreign exchange effect on conversion of 1998 and
prior income statements (d) (341,140) (341,140)
Cumulative foreign exchange effect of US GAAP adjustments (20,080) (20,080)
-------------------------------------------------------------------------------------------------------
(991,768) (592,153)
-------------------------------------------------------------------------------------------------------
Shareholders' equity in accordance with United States
GAAP $ 11,807,952 $ 11,151,466
-------------------------------------------------------------------------------------------------------
50
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
15. Reconciliation to United States generally accepted accounting principles
(continued):
(c) Stock-based compensation:
(i) Stock options:
The Company has adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123") for stock options
granted to employees, including directors, and has elected to
continue measuring compensation costs using the intrinsic value
based method of accounting under APB Opinion 25. Under the
intrinsic value based method, employee stock option compensation
is the excess, if any, of the quoted market value of the stock at
the date of the grant over the amount an optionee must pay to
acquire the stock. As the exercise price of the options is equal
to the market value on the measurement date, the Company has
determined that this accounting policy has no significant effect,
with respect to employee stock options, on its results of
operations.
Had compensation cost for employee stock options been determined
based on fair value at the grant date of the stock options and
charged to earnings over the vesting period of the options
consistent with the measurement provision of FAS 123, net loss
under United States GAAP would have been increased by $8,603,514
for the year ended December 31, 2001 (2000 - $5,682,914; 1999 -
$382,689). Pro forma net loss for the year ended December 31,
2001 would have been $29,590,436 (2000 - $23,880,494; 1999 -
$3,727,015). Net loss per share in accordance with U.S. GAAP for
the year ended December 31, 2001 would have been $1.11 (2000 -
$1.19; 1999 - $0.24). The fair value of these options for the
year ended December 31, 2001 has been determined using the
Black-Scholes option pricing formula with the following factors:
expected dividend yield - 0%; expected stock price volatility -
150% (2000 - 149%; 1999 - 175%); risk fee interest rate - 4.23%
(2000 - 5.64%; 1999 - 5.01%); expected life of options - 5 years.
For United States GAAP purposes, stock options issued to
non-employees for services rendered would be considered
compensation expense and charged to earnings based on their fair
value as the services are provided and the options are earned.
The amount of compensation costs is calculated using the
Black-Scholes option pricing formula as described above.
Additional compensation expense of $126,486 for the year ended
December 31, 2001 (2000 - $195,690; 1999 - $21,782) would be
recorded under United States GAAP for non-employee options.
51
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
15. Reconciliation to United States generally accepted accounting principles
(continued):
(c) Stock-based compensation (continued):
(ii) Shares held in escrow:
Certain shares held in escrow pursuant to the employee incentive
program and employment contracts were recorded as compensation
expense under Canadian GAAP at a deemed value of $0.23 (Cdn.
$0.35) per share based on their fair market value at the time of
issue discounted for escrow restrictions.
For United States GAAP purposes, any restrictions on the
employee's right to receive these shares would not be taken into
account for purposes of calculating compensation costs and would
result in additional compensation costs. As a result, additional
compensation expense of nil is recorded for the year ended
December 31, 2001 (2000 - $13,922; 1999 - $34,293).
(iii) Weighted average fair value:
Financial statements prepared in accordance with U.S. GAAP
require the disclosure of weighted average grant date fair value
of stock options granted in the year by the Company. Weighted
average grant date fair values for options granted during the
years ended December 31, 2001, 2000 and 1999 are $0.99 (Cdn.
$1.57), $9.37 (Cdn. $14.03) and $5.49 (Cdn. $7.92), respectively.
(d) Foreign currency translation:
These financial statements are in U.S. dollars. Prior to 1999, these
financial statements were reported in Canadian dollars. In accordance
with Canadian GAAP, the comparative figures presented for 1998 have
been translated at the rate in effect on December 31, 1998. For U.S.
GAAP, the 1998 comparative figures should have been restated
retroactively as if the Company had always reported in U.S. dollars.
As a result, share capital and deficit would be adjusted to translate
the Canadian dollar functional currency financial statements to U.S.
dollars at the rates in effect on the transaction dates with
offsetting adjustments to the cumulative translation account.
(e) Earnings (loss) per share:
During the year the Company issued special warrants, which were
converted to common shares subsequent to their issue. For Canadian
GAAP purposes, the common shares were included in the weighted average
shares outstanding from the date the special warrants were converted
into common shares. For United States GAAP purposes, where there are
no material uncertainties with respect to the ultimate issuance of the
common shares that underly the special warrants, the effective number
of common shares would be included from the date that is the later of
the date the special warrants were issued and the date the uncertainty
as to exercise is removed.
52
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
15. Reconciliation to United States generally accepted accounting principles
(continued):
(f) Short term investments:
United States GAAP requires that investments in securities be
classified as either "trading", "held-to-maturity" or "available for
sale". Trading securities are bought and held principally for the
purpose of selling in the near term. Held-to-maturity securities are
those which the Company has the ability and intention of holding to
maturity. All other securities not included in trading or
held-to-maturity are classified as available for sale.
The Company's short-term investments would be classified as available
for sale securities and would be recorded at fair value with the
unrealized holding gains and losses reported as a separate component
of shareholders' equity. As explained in note 12(a), the carrying
value of the short-term investments approximates their fair value.
Accordingly, there are no unrealized gains or losses.
(g) Future income taxes:
Under both Canadian and United States GAAP, future income tax assets
and liabilities are measured using the income tax rates and income tax
laws that, at the balance sheet date, are expected to apply when the
assets are realized or the liabilities are settled. In Canada,
announcements of changes in income tax rates and tax laws by the
government have the effect of being substantially enacted at the
balance sheet date even though the enactment date is at a subsequent
date. When persuasive evidence exists that the government is able and
committed to enacting proposed changes in the foreseeable future, the
substantially enacted rate is used to measure the future tax assets
and liabilities. Under United States GAAP, only the income tax rates
and income tax laws enacted at the balance sheet date are used to
measure the future income tax assets and liabilities.
Had the Company followed United States GAAP, the future income tax
assets, liabilities and valuation allowance would have been as
follows:
------------------------------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------------------------------
Future income tax assets:
Amalgamation and reorganization costs $ 43,370 $ 57,799
Deferred revenue - 62,822
Fixed assets, principally due to differences between
accounting and tax depreciation 818,602 248,489
Loss carry forwards 13,919,936 8,730,577
Scientific research and development expenditure
carry forwards 361,417 1,343,706
Share issue costs 1,211,404 734,256
------------------------------------------------------------------------------------------------------
Total gross future income tax assets 16,354,729 11,177,649
Valuation allowance (16,354,729) (11,177,649)
------------------------------------------------------------------------------------------------------
Net future income tax asset $ - $ -
------------------------------------------------------------------------------------------------------
53
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
15. Reconciliation to United States generally accepted accounting principles
(continued):
(h) Advertising costs:
United States GAAP requires the disclosure of amounts spent on
advertising costs. For the years ended December 31, 2001, 2000 and
1999, the Company spent $194,931 and $4,146,004 and $478,513,
respectively, on advertising costs.
(i) Valuation and qualifying accounts:
--------------------------------------------------------------------------------------------------------------
Effect of foreign
Beginning exchange on End of
of year Charged to Recoveries conversion year
balance expenses and write-offs to US$ balance
--------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2001 $ 12,698 $ 172,067 $ 45,711 $ (2,583) $ 136,471
Year ended December 31, 2000 12,164 - 977 (443) 12,698
Year ended December 31, 1999 - 11,819 - 345 12,164
Allowance for sales return:
Year ended December 31, 2001 6,346 205,395 199,231 (442) 12,068
Year ended December 31, 2000 41,576 - 35,230 - 6,346
Year ended December 31, 1999 39,204 - - 2,372 41,576
Allowance for obsolete stock:
Year ended December 31, 2001 - 30,000 - - 30,000
Year ended December 31, 2000 41,572 - 41,572 - -
Year ended December 31, 1999 49,044 11,570 21,709 2,667 41,572
--------------------------------------------------------------------------------------------------------------
(j) Recent accounting pronouncements:
(i) Effective January 1, 2001, the recommendations outlined in FASB
Statement No. 133 - Accounting for Derivative Instruments and
Hedging Activities were adopted by the Company. Since the Company
does not have any outstanding derivative instruments and does not
engage in hedging activities, adoption of this new standard did
not affect the financial statements of the Company.
54
INFOWAVE SOFTWARE, INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended December 31, 2001, 2000 and 1999
================================================================================
15. Reconciliation to United States generally accepted accounting principles
(continued):
(j) Recent accounting pronouncements (continued):
(ii) During the year ended December 31, 2001, the Financial Accounting
Standards Board announced new rules related to the accounting for
goodwill. Financial Accounting Statement No. 141, Business
Combinations ("SFAS 141") eliminates the pooling of interest
method of accounting for business combinations and is effective
for all transactions initiated after June 30, 2001.
Financial Accounting Statement No. 142, goodwill and other
intangible assets ("SFAS 142") will requires that goodwill no
longer be amortized, but the carrying value of goodwill be
subject to a regular impairment test. SFAS 142 is effective for
the first fiscal quarter beginning after December 15, 2001 except
to the extent that it relates to acquisitions after June 30,
2001.
The Canadian Institute of Chartered Accounts ("CICA") approved
similar rules and in November, 2001 issued new CICA handbook
sections 1581, Business Combinations, and 3062, goodwill and
other intangible assets. As the Company has not had any business
combinations to date and no recorded goodwill or intangible
assets, these new rules will not affect the Company's financial
statements on adoption effective January 1, 2002.
55
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10: DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table sets forth certain current information regarding the
executive officers, directors and key employees of Infowave.
Name Age Position
- -------------------------------------------------------------------------------------------------------------
Thomas Koll.......................................... 45 Chief Executive Officer, President and Director
Todd Carter.......................................... 41 Chief Financial Officer
George Reznik........................................ 35 Incoming Chief Financial Officer
Sal Visca............................................ 36 Chief Technology Officer
Jeff Feinstein....................................... 37 Senior Vice President, Worldwide Sales
John Diack........................................... 43 Vice President, Business Development
David Hunter......................................... 56 Vice President, Product Development and
Customer Service
Ron Jasper........................................... 38 Vice President, Marketing
Morgan Sturdy (3) ................................... 50 Chairman and Director
Gary Ames (1)........................................ 57 Director
Jim McIntosh (2) (3)................................. 37 Director
David Neale (2)...................................... 49 Director
Travis Lee Provow (1)................................ 44 Director
Barb Richardson (2) (3).............................. 39 Director
Bijan Sanii (1)...................................... 43 Director
Geoffrey Belsher..................................... 35 Secretary
- ---------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Corporate Governance and Nominating Committee
Thomas Koll joined Infowave in February 2001 as Chief Executive Officer and was
appointed President on August 15, 2001. Mr. Koll joined Infowave from Microsoft
Corporation, where he held several executive positions in the US and in Europe
from 1989 to 2001. Most recently, from 1997 to 2001, he was Vice President of
Microsoft's Network Solutions Group where he was responsible for Microsoft's
worldwide business with telecommunications companies in the wireline and
wireless markets, network equipment providers and Internet service providers. In
this position, Mr. Koll was instrumental in developing Microsoft's vision for
mobility and initiated its wireless strategy. Prior to this position, he held
positions of General Manager of the Dedicated System Group, General Manager of
Microsoft's worldwide business planning and strategy, as well as General Manager
and Acting Country Manager, Microsoft Germany. Thomas Koll holds a master's
degree in political science from Free University of Berlin.
Todd Carter has served as Chief Financial Officer since October 1998. Mr. Carter
originally provided financial consulting services to Infowave beginning in
September 1997 pursuant to an independent contractor agreement with Capital
Ridge Communications Inc. (formerly Channel One Systems Corp.). Mr. Carter
served as President of Channel One, formerly a division of Nexus Engineering
Corp., from July 1986 to November 1990. He was appointed Managing Director for
Nexus' European operations in December 1990 (based in the UK) and Vice President
of Operations of Nexus in January 1992. Mr. Carter took private control of
Channel One in November 1992 after Nexus was acquired by Scientific Atlanta Inc.
Todd Carter graduated with honors from the British Columbia Institute of
Technology in 1983. Mr. Carter also serves as a director and an officer of
Brightwave Ventures Inc. Mr. Carter has advised the Board of his intention to
resign as Chief Financial Officer effective March 31, 2002.
George Reznik has served as Chief Financial Officer since March 1, 2002. Prior
to joining Infowave, Mr. Reznik served as Vice-President of Finance of Pivotal
Corporation from April 1999 to February 2002, where he was a member of the
executive management team. From July 1994 to March 1999, Mr. Reznik was a Senior
Manager, Corporate Finance, at Deloitte & Touche, LLP, where he was a member of
the senior management team and led the business valuation practice for British
Columbia. Prior to July 1994, Mr. Reznik was with Deloitte & Touche LLP since
May 1987 in various capacities with their London, UK, Caribbean and Winnipeg,
Canada offices. Mr. Reznik received a Bachelor's of Commerce (Honors) degree
from the University of Manitoba, is a Chartered Accountant, Certified Fraud
Examiner and Chartered Business Valuator.
Sal Visca has served as Chief Technology Officer since November 1999. Mr. Visca
has over 12 years of software development experience with IBM Canada where he
gained world-class architectural and design skills in the areas of leading-edge
web technologies and application servers. His most recent IBM position, from May
1996 - October 1999, was Senior Manager, where he established the e-business
Solution Development Business Unit in Vancouver, Canada. This IBM Unit develops
and implements e-business and e-commerce web applications for major industry
56
groups, such as banking, airlines and government. Mr. Visca's previous IBM
positions included Lead Architect, Strategist Program Manager and Development
Manager. Mr. Visca graduated with honors from the University of Western Ontario
with a Bachelor of Science in Computer Science.
Jeff Feinstein has served as Senior Vice President, Sales since May 2001. From
August 1999 to January 2001, Mr. Feinstein was Vice President of Worldwide Sales
and Business Development for DataChannel. Prior to DataChannel, Mr. Feinstein
was the Senior Vice President of Worldwide Sales and Business Development for
Metapath Software Corporation from December 1996 to August 1999. Prior to that
time, he was Vice President of Enterprise Sales at Sequent Computing Corporation
from 1992 to December 1996. Mr. Feinstein brings more than 15 years of sales and
sales management experience, with an emphasis on selling sophisticated products
to Fortune 500 companies. Mr. Feinstein graduated cum laude with a business
degree from Washington State University in 1985. Mr. Feinstein has advised the
Company of his intention to resign effective March 31, 2002.
John Diack has served as Vice President, Business Development since June 2000.
Between September 1997 and June 2000, Mr. Diack held positions at NICE Systems
Ltd. as Director of Business Development and Director, North American Channel
Management. Prior to joining NICE, Mr. Diack was National Sales Manager with
Circon Systems Corp. from April 1996 to September 1997 and Western Region Sales
Manager with Dynapro Systems.
David Hunter has served as Vice President, Product Development and Customer
Service since January 2001. Mr. Hunter has over 30 years of executive level
experience in development, sales and marketing with IBM Canada. From June 2000
to December 2000, Mr. Hunter served as Global Development Executive for Customer
Care and Billing Solution for the Telecommunications Industry at IBM. From
February 1996 to June 2000, Mr. Hunter served as the Development Executive for
the Americas for IBM. He served as IBM's Deputy Commissioner to Expo `86
(World's Fair on Transportation and Communication) in Vancouver and oversaw the
development and delivery of the Visitor Information System used by over 11
million Expo `86 attendees. Mr. Hunter has advised the Company of his intention
to resign effective March 31, 2002.
Ron Jasper has served as Vice President, Marketing since October 1998. From
October 1997 to October 1998, Mr. Jasper served as Director of Product
Management of the Wireless Division of Infowave. From June 1993 to September
1997, Mr. Jasper worked for Chancery Software Ltd. where he held the positions
of Product Manager and Senior Systems Engineer. Mr. Jasper graduated from Simon
Fraser University with a B.Sc. in Computing Science and has received
accreditation with, among others, Novell, Compaq and Apple.
In addition to Mr. Koll, the Chief Executive Officer of the Company, the
directors of the Company are described below:
Morgan Sturdy has served as Chairman and a director since October 1999. Since
September 1997, Mr. Sturdy has served as Executive Vice President and Chief
Operating Officer of NICE Systems Ltd. Prior to September 1997, Mr. Sturdy
served as President of Dees Communications Engineering Ltd. from January 1985 to
August 1997. Mr. Sturdy also serves as a director of Q/Media Services,
Wavemakers Inc., Voice Mobility International, CREO Products Inc., Ignition
Point, Intrinsyc Software and TIR Systems. Mr. Sturdy is a director of Discovery
Parks Incorporated and Chairman of the British Columbia Technology Industries
Association (BCTIA).
Gary Ames has served as a director since November 2000. From 1995 to 2000, Mr.
Ames served as President and Chief Executive Officer of MediaOne International.
Prior to joining MediaOne International, Mr. Ames served as President and Chief
Executive Officer of US West Communications. From 1987 to 1988, Mr. Ames was
President and Chief Executive Officer of Mountain Bell. Mr. Ames also currently
serves as a director of Albertson's Inc., TekTronix Inc., Pac-West Telecomm
Inc., etrieve Inc., Imandi.com Inc. and AT&T Latin America Corp.
Jim McIntosh has served as a director since June 1991. From June 1991 to July
2000, Mr. McIntosh served as President and Chief Executive Officer of the
Company.
David Neale has served as a director since May 1998. Since November 1999, Mr.
Neale has served as Vice President, New Product Development and Deployment for
Rogers AT&T Wireless Inc. (formerly, Rogers Cantel Inc.). From January 1998 to
November 1999, Mr. Neale served as the Vice President of Data and Emerging
Technologies for Rogers
57
AT&T Wireless Inc. From September 1995 to January 1998, Mr. Neale served as the
Vice President of Marketing and Planning, Paging and Data, for Rogers AT&T
Wireless Inc. Mr. Neale served as the Vice President of Sales and Marketing for
Westel Communications Ltd. from December 1993 to September 1995. Mr. Neale
serves as a director of Aeris.net and is a member of the International Mobitex
Operators Association.
Travis Lee Provow has served as a director since December 2001. Mr. Provow has
been Managing Director of Commonwealth Associates, L.P. since January 2002.
Until December 2001, Mr. Provow was Group Vice President of McLeod USA, which
acquired Intelispan in May of 2001. Mr. Provow was President, Chief Executive
Officer and Director of Intelispan, a provider of advanced network management
solutions from January 2000 to June 2001. Prior to joining Intelispan, Mr.
Provow served as the Chief Operating Officer of Slingshot Networks LLC from May
1998 to December 1999, a provider of digital media storage. Mr. Provow has also
served as the Executive Vice President and Chief Operating Officer of GridNet
International from June 1995 to May 1998, a provider of enhanced data
communications services, which he founded and was purchased by MCI WorldCom in
July 1997. Prior to founding GridNet, Mr. Provow spent 15 years with NCR and its
successor, AT&T Global Information Services, in various domestic and
international technical, marketing, product management, and strategic planning
positions, including Vice President of Retail Product and Systems Marketing. Mr.
Provow also serves as a director of Slingshot Networks LLC.
Barb Richardson has served as a director since December 2001. Ms. Richardson is
the President of B.A. Richardson Consulting Services Inc. and a principal and
director of SpringBank TechVentures Management Inc since September 2000., a
Calgary-based investment fund focused on companies involved in developing the
enabling technologies, infrastructure and services to support the growth sectors
of wireless, Internet and telecommunications. Prior to SpringBank, Ms.
Richardson was a pioneer in MetroNet Communications joining the small firm of 10
people in 1996 to lead the business development and planning efforts. Ms.
Richardson had overall responsibility for developing MetroNet's business
strategy and plan that lead to over $1 billion in financing over an 18-month
period and ultimately its merger with AT&T. Ms. Richardson was Chief Integration
Officer of AT&T Canada from May 1999 to March 2000. Ms. Richardson currently
serves as a member of the Calgary Centre for Non-Profit Management, and the
University of Calgary Faculty of Management Advisor Board.
Bijan Sanii has served as a director since January 2001. Mr. Sanii is the
President, CEO and director of IDELIX Software Inc. since February 2002.
Previous to joining IDELIX, Mr. Sanii served in various executive capacities
with Infowave from May 1997 until August 2001, most recently as President from
November 2000 to August 2001 and Chief Operating Officer from September 1998 to
August 2001. From May 1994 to May 1997, Mr. Sanii served as Vice President of
Sales and Marketing of INETCO Systems Limited a software development company
focused on delivering NT server based gateway products. Bijan Sanii graduated
with honors from the Polytechnic of Central London in the United Kingdom, with a
Bachelor of Arts in Economics. Mr. Sanii currently serves on the Board of
Directors for IDELIX, NewMedia BC, BC Technology Social Venture Partners, and
Wireless Innovations Network BC (WINBC).
Board Committees
The Board of Directors (the "Board") has established three board committees: the
Audit Committee; the Compensation Committee; and the Corporate Governance and
Nominating Committee.
Audit Committee
The responsibilities of the Audit Committee include reviewing the Company's
audited financial statements and presenting them to the Board for approval,
reviewing internal accounting procedures and consulting with and reviewing the
services provided by the Company's auditors. The Audit Committee is comprised of
members independent of management.
58
Compensation Committee
The responsibilities of the compensation committee include reviewing and
recommending to the Board the compensation and benefits of all the executive
officers of the Company, and establishing and reviewing general policies
relating to compensation and benefits for the employees of the Company.
Corporate Governance Committee
The responsibilities of the corporate governance committee include evaluating
the contribution of each director on an individual basis, assessing the
collective performance of the Board, proposing new nominees to the Board and
analyzing the existing structure of the Board.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our Chief Executive
Officer and four other most highly compensated executive officers earning more
than $100,000 for the years ended December 31, 2001, December 31, 2000 and
December 31, 1999.
Summary Compensation Table
Long-Term
Compensation
----------------------
Annual Compensation
------------------------ Securities All Other
Name and Principal Position Salary Bonus Underlying Options Compensation
- --------------------------------------------------------------------------------------------------------------------
Thomas Koll 2001 $305,577 - 925,000 -
Chief Executive Officer, President 2000 - - - -
And Director(1) 1999 - - - -
- --------------------------------------------------------------------------------------------------------------------
Bijan Sanii 2001 $161,354 $53,540 25,000 $107,273
Interim Chief Executive Officer, 2000 94,257 18,178 117,000 -
President and Director (2) 1999 74,052 99,414 290,000
- --------------------------------------------------------------------------------------------------------------------
Todd Carter 2001 $147,697 $34,469 135,000 -
Chief Financial Officer 2000 94,257 35,346 90,000 -
1999 74,052 60,588 150,000 -
- --------------------------------------------------------------------------------------------------------------------
Sal Visca 2001 $141,291 $15,457 198,000 -
Chief Technology Officer 2000 121,188 10,660 - -
1999 6,991 41,592 117,000 -
- --------------------------------------------------------------------------------------------------------------------
Ron Jasper 2001 $160,000 $30,575 90,000 -
Vice President, Marketing 2000 96,154 26,500 45,000 $ 4,327
1999 60,588 11,564 25,000 1,346
- --------------------------------------------------------------------------------------------------------------------
Jeff Feinstein 2001 $121,154 $37,085 365,000 -
Senior Vice President, Worldwide Sales 2000 - - - -
1999 - - - -
- --------------------------------------------------------------------------------------------------------------------
(1) Mr. Koll was appointed Chief Executive Officer and Director on February 15,
2001. Mr. Koll was appointed President on August 8, 2001.
(2) Mr. Sanii resigned as Interim Chief Executive Officer on February 15, 2001
and resigned as President of the Company on August 8, 2001. Mr. Sanii's
other compensation for 2001 is comprised of severance payments and vacation
pay.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock option grants
to our Chief Executive Officer and four other most highly compensated executive
officers during the year ended December 31, 2001. The potential realizable value
is calculated based on the assumption that the Common Stock appreciates at the
annual rate shown, compounded annually, from the date of grant until the
expiration of its term. These numbers are calculated based on
59
Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future stock price growth. Potential realizable values
are computed by multiplying the number of Common Shares subject to a given
option by the exercise price; assuming that the aggregate stock value derived
from that calculation compounds at the annual 5% or 10% rate shown in the table
for the entire five-year term of the option; and subtracting from that result
the aggregate option exercise price.
Option Grants in 2001
INDIVIDUAL GRANTS
-------------------------------------------------------- Potential Realizable value
% of Total at Assumed Annual Rates
Number of Options of Stock Price
Securities Granted to Exercise Appreciation for Option
Underlying Employees Price (per Term
Options in Fiscal share)(2) Expiration CDN$
Name Granted Year(1) Cdn.$ Date 5% 10%
- -------------------------------------------------------------------------------------------------------------------------
Thomas Koll 500,000 15.42% 5.50 Feb 22, 2006 759,774 1,678,902
400,000 12.33% 0.40 Oct 4, 2006 44,205 97,681
25,000 0.77% 1.56 Dec 7, 2006 10,774 23,809
Bijan Sanii 25,000 0.77% 1.56 Dec 7, 2006 10,774 23,809
Todd Carter 135,000 4.16% 0.40 Sep 27, 2006 14,919 32,967
Sal Visca 198,000 6.10% 0.40 Sep 27, 2006 21,881 48,352
Ron Jasper 90,000 2.77% 0.40 Sep 27, 2006 9,946 21,978
Jeff Feinstein 240,000 6.89% 3.95 Apr 30, 2006 261,914 578,763
125,000 3.59% 0.40 Sep 27, 2006 13,814 30,525
- -------------------------------------------------------------------------------------------------------------------------
(1) During 2001, options to purchase a total of 3,243,477 Common Shares were
issued to employees.
(2) The exercise price per share was equal to the fair market value of the
Common Shares at the close of business on the date prior to the date of
grant as determined by the Board, with the exception of the grant of
400,000 options to Thomas Koll on October 4, 2001, for which the exercise
price per share was Cdn.$0.01 higher than the fair market value of the
Common Shares at the close of business on the date prior to the date of the
grant as determined by the Board.
Option Exercises and Fiscal Year-End Values
The following table sets forth for the Chief Executive Officer and four other
most highly compensated executive officers earning over $100,000 the number of
shares acquired upon exercise of stock options during the year ended December
31, 2001 and the number of shares subject to exercisable and unexercisable stock
options held at December 31, 2001.
Aggregated Option Exercises in 2001 and Year-End Option Values
Value of Unexercised but
Number of Securities Exercisable in-the-money
Securities Aggregate Underlying Unexercised Options at Year End (1)
Acquired on Value Realized Options at Year End (#) (CDN$)
Name Exercise (#) (CDN$) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------------------------------------
Thomas Koll - - 368,750/1,056,250 500/472,000
Bijan Sanii - - 275,170/130,753 6,938/NIL
Todd Carter - - 194,400/217,500 32,564/139,387
Sal Visca - - 111,000/204,000 38,940/194,700
Ron Jasper 41,700 38,219 42,948/117,086 13,275/92,925
Jeff Feinstein - - 10,417/354,483 12,292/135,207
- --------------------------------------------------------------------------------------------------------------------
(1) The value of unexercised in-the-money options at December 31, 2001 is based
on Cdn.$1.58 per share, the closing price of the Common Shares at such
time, less the exercise price per share.
60
Employment Agreements
The Company's policy is to require all employees, including its executive
officers, to enter into agreements requiring the non-disclosure of confidential
information of the Company, and the assignment and confirmation of the Company's
ownership of all intellectual property rights in the course of such employee's
employment with the Company.
Thomas Koll was appointed Chief Executive Officer of the Company commencing
February 15, 2001. Mr. Koll has entered into an employment agreement with the
Company which provides that, if he is terminated without cause, he shall be
given: (a) 12 months written notice; or (b) 12 months salary, which is currently
US$350,000, and immediate vesting of options which would have vested during the
following 12 months. In the event of a "change of control" of the Company and,
as a result, Mr. Koll's position with the Company is changed or he ceases to
serve as a member of the Board of the Company, Mr. Koll may elect to be deemed
to have been terminated without cause in accordance with the foregoing
provisions, provided that all unvested options shall vest immediately.
The Company has entered into an employment agreement with Sal Visca, Chief
Technology Officer, which provides that the Company will pay Mr. Visca a
retention bonus of Cdn.$175,000, payable in the following circumstances and at
the earliest of the following times: (a) if his employment is neither terminated
by him, nor by the Company for cause prior to July 31, 2003, on August 1, 2003;
(b) if he voluntarily terminates his employment or if the Company terminates his
employment for cause between August 1, 2002 and July 31, 2003, on the day after
his employment is so terminated; or (c) if his employment is terminated by the
Company without cause at any time before July 31, 2003, then on the day after
his employment is terminated.
Except as described above, no Named Executive Officer has any special
compensatory plan or arrangement, including payment to be received from the
Company or any of its subsidiaries, if such plan or arrangement results or will
result from the resignation, retirement or any other termination of employment
of the executive officer's employment with the Company and its subsidiaries or
from a change of control of the Company or any subsidiary or a change in the
executive officer's responsibilities following a change-in-control where the
amount involved, including all periodic payments or instalments, exceeds
$100,000.
Director Compensation
The Company does not currently pay cash compensation to directors for serving on
its Board, but does reimburse directors for out-of-pocket expenses for attending
Board and committee meetings. The Company does not provide additional
compensation for committee participation or special assignments of the Board.
All directors have received stock options for their participation on the Board.
On December 7, 2001, each director received an option grant to purchase 25,000
Common Shares at a price of Cdn.$1.56 expiring December 7, 2006. The option
grant for Ms. Richardson was issued to Springbank TechVentures Management, Inc.
Compensation Committee Interlocks and Insider Participation
During the past fiscal year, the Company's Compensation Committee was composed
of Messrs. Sturdy and McIntosh and Ms. Richardson. No member of the Compensation
Committee was an officer or employee of the Company when deliberations of the
Compensation Committee occurred regarding executive officer compensation. No
executive officer of the Company serves as a member of the board or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board or Compensation Committee.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of its Common Shares as of December 31,
2001, by (i) each person known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Shares, (ii) each director of the Company,
(iii) each Named Executive Officer, and (iv) all directors and officers as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Shares listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
61
Number of Shares Percent of
Directors, Executive Officers Earning More than $100,000 and 5% eneficially Owned total Shares
Shareholders (1) Owned (2)
- -----------------------------------------------------------------------------------------------------------
Jim McIntosh(4)(5) 2,445,161 9.45%
3007 Sunnyside Road, Anmore, BC, V3H 4Y7
Gary McIntosh(5)(6) 1,592,603 6.79%
4651 Fairlawn Drive, Burnaby, British Columbia, V5C 3R5
Morgan Sturdy 118,562 0.50%
#180-6651 Fraserwood Place, Richmond, British Columbia, V6W 1J3
Gary Ames(7) 354,954 1.49%
605 - 39th Avenue East, Seattle, WA 98112
David Neale 73,000 0.31%
1 Mount Pleasant Road, Toronto, Ontario, M4Y 2Y5
Travis Lee Provow 25,000 0.11%
310 Pilgrimage Point, Alpharetta, GA 30022
Barb Richardson 25,000 0.11%
113 Pinnacle Ridge Place, Calgary, Alberta, T3E 6W3
Bijan Sanii 244,081 1.03%
1314 Harwood Drive, West Vancouver, British Columbia, V7T 1V3
Thomas Koll(3)(8) 7,176,631 23.67%
Todd Carter(3) 171,525 0.73%
Sal Visca(3) 98,755 0.42%
Jeff Feinstein(3) 10,417 0.04%
John Diack(3) 46,249 0.20%
Ron Jasper(3) 35,698 0.15%
David Hunter(3)(9) 36,500 0.16%
All Directors and Executive Officers as a group (14 persons) 10,861,533 33.93%
- -----------------------------------------------------------------------------------------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares. Common Shares subject to options
currently exercisable, or exercisable within 60 days after December 31,
2001, are deemed outstanding for computing the percentage ownership of the
person holding such options, but are not deemed outstanding for computing
the percentage ownership for any other person.
(2) Applicable percentage ownership is based on aggregate Common Shares
outstanding as of December 31, 2001 together with the applicable options of
such shareholder, excluding the 34,121,289 special warrants that were
converted to 34,121,289 Common Shares and 17,060,644 purchase warrants on
February 26, 2002.
(3) Unless otherwise indicated, the address of each beneficial owner is that of
the Company.
(4) Includes 1,606,886 Common Shares beneficially owned by 529452 B.C. Ltd. See
note (5).
(5) 529452 B.C. Ltd. is the beneficial owner of 3,150,756 Common Shares. The
issued share capital of 529452 B.C. Ltd. consists of 100 Class A voting
shares and 100 Class B non-voting shares and 1,000 Class C preferred shares
and 1,000 Class D preferred shares. Gary McIntosh holds 49 Class A voting
shares, 49 Class B non-voting shares and all 1,000 of the Class C preferred
shares. Jim McIntosh holds 51 of the Class A voting shares, 51 of the Class
B non-voting shares and all 1,000 of the Class D preferred shares.
(6) Includes 1,543,870 Common Shares beneficially owned by 529452 B.C. Ltd. See
note (5).
(7) Includes 185,186 Common Shares and 92,593 purchase warrants obtained from
the conversion of 185,186 Special Warrants on February 26, 2002.
(8) Includes 1,960,784 Common Shares and 980,392 purchase warrants obtained
from the conversion of 1,960,784 Special Warrants on February 26, 2002 and
3,510,455 Warrants issued as compensation for a credit facility in July
2001.
(9) Includes 10,000 Common Shares and 5,000 purchase warrants obtained from the
conversion of 10,000 Special Warrants on February 26, 2002.
62
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No director, senior officer or principal shareholder of the Company, or
associate or affiliate of any of the foregoing, has any other material interest,
direct or indirect, in any transaction or in any proposed transaction which has
materially affected or will materially affect the Company from January 1, 2001
through December 31, 2001, except as disclosed herein or as follows:
1. David Wedge, who resigned as a Director of the Company on January 25,
2001, is the founder and proprietor of David J. Wedge Computer Law, a
law firm focused on the information technology industry. David J.
Wedge Computer Law has been acting as corporate counsel to the Company
since 1994. In 2001 the Company paid approximately $109,647 for legal
services to David J. Wedge Computer Law.
2. On September 21, 2001, the Company announced that Rogers AT&T Wireless
Inc. placed an order for 5000 seats of the Wireless Business Engine.
David Neale is Vice-President, Product Development and Deployment of
Rogers AT&T Wireless Inc. and a director of the Company. The total
value of the order is $550,000.
3. During the year, the Company entered into an agreement with Thomas
Koll, Chief Executive Officer of the Company, for a credit facility in
the amount of $5,000,000. The Company was able to draw down the credit
facility at its discretion, with the principal outstanding under the
loan bearing interest at a rate of 8% per annum, payable at maturity.
The loan amounts drawn were secured by a first charge on all of the
assets of the Company and were to be due and payable on demand on or
after January 23, 2002. The Company also agreed to pay Koll $50,000 as
reimbursement for his legal expenses incurred with respect to the
operating loan. Prior to December 31, 2001, the Company repaid all
amounts that were outstanding under this facility and terminated the
agreement.
4. The following executive officer is the only director or executive
officer indebted to the Company:
-------------------------------------------------------------------------------------------------------------------------
Name and Principal Involvement of Largest Amount Amount Financially Assisted Security for
Position Issuer or Subsidiary Outstanding During Outstanding as at Securities Purchased Indebtedness
2001 December 31, 2001 During 2001
-------------------------------------------------------------------------------------------------------------------------
Sal Visca, Company Cdn$175,000 Cdn$175,000 Nil Nil
Chief Technology
Officer
-------------------------------------------------------------------------------------------------------------------------
The foregoing amount was loaned to Mr. Visca as part of a retention
arrangement made between Mr. Visca and the Company. See "Directors and
Officers of Registrant - Employment Contracts". The amount bears no
interest and is repayable on demand on or after July 1, 2002 and
matures on the earlier of July 31, 2003 and the date of cessation of
Mr. Visca's employment with Infowave.
63
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statements Schedules
1. Index to Financial Statements
Page
Report of Independent Auditors.....................................27
Consolidated Balance Sheets........................................28
Consolidated Statements of Operations and Deficit..................29
Consolidated Statements of Cash Flows..............................30
Notes to Consolidated Financial Statements.........................31
2. Index to Financial Statement Schedules
Not applicable.
3. Exhibits:
Exhibit
Number Description
------ -----------
2.1(1) Asset Purchase Agreement dated September 8, 2000 between the
Corporation and Strydent Software Inc.
3.1(2) Memorandum and Articles of registrant
* 4.1(2) Employee Incentive Plan dated April 28, 1997, as
supplemented September 25, 1997
4.2(2) Special Warrant Indenture dated April 20, 1998 between the
Corporation and Montreal Trust Company of Canada
4.3(3) Special Warrant Indenture dated June 30, 1999 between the
Corporation and Montreal Trust Company of Canada
4.4(4) Special Warrant Indenture dated April 13, 2000 between the
Corporation and Montreal Trust Company
*4.5(5) Stock Option Plan, as amended
4.6(6) Form of Shareholders Rights Plan Agreement dated as of June
5, 2000 between the Corporation and Montreal Trust Company
of Canada
4.7 Warrant Certificate dated July 24, 2001 issued to Thomas
Koll
10.1(2) Investor Relations Agreement dated September 1, 1998 between
the Corporation and IRG Investor Relations Group Ltd.
10.2(2) Investor Relations Agreement dated September 1, 1998 between
the Corporation and Staff Financial Group Ltd. and 549452 BC
Ltd.
10.3(2) Loan Facility dated October 29, 1998 with a Canadian
chartered bank
10.4(3) Lease Agreement dated February 12, 1998 between Riocan
Holdings Inc. and the Corporation
10.5(3) Lease Agreement dated November 23, 1999 between Bedford
Property Investors, Inc. and the Corporation
*10.6(2) Corporate Development Agreement dated October 26, 1998
between the Corporation and Capital Ridge Communications
Inc. (formerly "Channel One Systems Corp.")
10.7(2) Strategic Partnership Agreement dated March 6, 1998 between
the Corporation and BellSouth Wireless Data
10.8(2) Development Agreement dated March 4, 1998 between the
Corporation and Hewlett-Packard
10.9(2) Source Code License Agreement dated March 31, 1998 between
the Corporation and DTS
64
Exhibit
Number Description
------ -----------
10.10(2) Source Code License Agreement dated June 9, 1998 between the
Corporation and Wynd Communications Corporation
10.11(2) Source Code License Agreement dated November 13, 1997
between the Corporation and Apple Computers
10.12(2) OEM License Agreement dated December 5, 1997 between the
Corporation and Certicom Corp.
10.13(2) Letter Agreement dated April 20, 1998 between the
Corporation and Lexmark International, Inc.
*10.14(2) Employment Agreement dated May 2, 1991 between the
Corporation and Jim McIntosh
*10.15(2) Employment Agreement dated May 23, 1997 between the
Corporation and Bijan Sanii
*10.16(3) Employment Agreement dated September 16, 1999 between the
Corporation and Todd Carter
10.17(2) Agency Agreement dated March 31, 1998 between the
Corporation, Canaccord Capital Corporation and Yorkton
Securities Inc
10.18(2) Consulting Agreement dated July 4, 1997 between the
Corporation and GWM Enterprises Ltd.
10.19(3) Agency Agreement dated June 18, 1999 between the
Corporation, Canaccord Capital Corporation, Yorkton
Securities , Inc., Sprott Securities Limited and Taurus
Capital Markets Ltd.
10.20(4) Letter of Intent dated May 8, 2000 among the Corporation,
Kevin Jampole and Robert Heath
10.21(7) Lease Agreement dated April 26, 2000 between the Corporation
and Tonko-Novam Management Ltd.
*10.22(8) Employment Agreement dated December 14, 2000 between the
Corporation and Thomas Koll
10.23(8) Lease dated December 7, 2000 between the Corporation and
Principal Development Investors, L.L.C.
10.24(9) Employment Agreement dated April 16, 2001 between the
Corporation and Jeff Feinstein
10.25(9) Lease Agreement between the Corporation and Sterling Realty
Organization Co.
10.26(9) Lease Termination Agreement dated May 24, 2001 between the
Corporation and Principal Development Investors, LLC
10.27(10) Loan Agreement dated July 24, 2001 between the Corporation
and Thomas Koll
10.28(10) Security Agreement dated July 24, 2001 made by the
Corporation in favor of Thomas Koll
65
Exhibit
Number Description
------ -----------
10.29(10) Intellectual Property Security Agreement dated July 24, 2001
made by the Corporation in favor of Thomas Koll
10.30(10) Loan Agreement dated August 10, 2001 between the Corporation
and Sal Visca
10.31(10) Promissory Note dated August 10, 2001 between the
Corporation and Sal Visca
10.32(10) Employment letter dated August 10, 2001 between the
Corporation and Sal Visca
*10.33 Employment letter dated March 8, 2002 between the
Corporation and George Reznik
10.34 Convertible loan agreement dated March 8, 2002 between the
Corporation and Compaq
21.1 List of Subsidiaries
23.1 Consent of KPMG LLP, Independent Auditors
- ----------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Corporation's Form 8-K filed on September
25, 2000.
(2) Incorporated by reference to the Corporation's Registration Statement on
Form 20-F (No. 0-29944).
(3) Incorporated by reference to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1999.
(4) Incorporated by reference to the Corporation's Annual Report on Form 10-Q
for the period ended March 31, 2000.
(5) Incorporated by reference to the Corporation's Registration Statement on
Form S-8 (Registration No. 333-39582) filed on June 19, 2000
(6) Incorporated by reference to the Corporation's Registration Statement on
Form 8-A filed on July 13, 2000
(7) Incorporated by reference to the Corporation's Quarterly Report on Form
10-Q for the period ended June 30, 2000.
(8) Incorporated by reference to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2000.
(9) Incorporated by reference to the Corporation's Quarterly Report on Form
10-Q for the period ended June 30, 2001.
(10) Incorporated by reference to the Corporation's Quarterly Report on Form
10-Q for the period ended September 30, 2001.
(b) Reports on Form 8-K
On October 11, 2001 the Company filed on Form 8-K with information
circulars attached as an exhibit thereto that provided notice of the
Company's Annual and Special Meeting of Members on May 8, 2001 and provided
notice of the Company's Extraordinary General Meeting of Members on
September 26, 2001.
On November 1, 2001 the Company filed on Form 8-K with a press release
attached as an exhibit thereto that announced the Company's financial
results for the quarter ended September 30, 2001.
On November 27, 2001 the Company filed on Form 8-K with a press release
attached as an exhibit thereto that announced the closing of a private
placement that resulted in gross proceeds to the Company of $13 million.
On December 10, 2001 the Company filed on Form 8-K with a press release
with certain other documents attached as exhibits thereto related to the
closing of a private placement that resulted in gross proceeds to the
Company of $15 million.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Infowave Software, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 27, 2002.
INFOWAVE SOFTWARE, INC.
By: /s/ Thomas Koll
----------------------------------------
Thomas Koll
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed by the following persons on behalf of Infowave Software,
Inc. in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Thomas Koll President, Chief Executive Officer March 27, 2002
- ----------------------- and Director (Principal Executive
Thomas Koll Officer)
/s/ George Reznik Chief Financial Officer (Principal March 28, 2002
- ----------------------- Financial and Accounting Officer)
George Reznik
- ----------------------- Director March --, 2002
Morgan Sturdy
/s/ Gary Ames
- ----------------------- Director March 27, 2002
Gary Ames
/s/ Jim McIntosh
- ----------------------- Director March 27, 2002
Jim McIntosh
/s/ David Neale
- ----------------------- Director March 27, 2002
David Neale
/s/ Travis Lee Provow
- ----------------------- Director March 27, 2002
Travis Lee Provow
- ----------------------- Director March --, 2002
Barb Richardson
/s/ Bijan Sanii
- ----------------------- Director March 28, 2002
Bijan Sanii
67
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
2.1(1) Asset Purchase Agreement dated September 8, 2000 between the
Corporation and Strydent Software Inc.
3.1(2) Memorandum and Articles of registrant
*4.1(2) Employee Incentive Plan dated April 28, 1997, as
supplemented September 25, 1997
4.2(2) Special Warrant Indenture dated April 20, 1998 between the
Corporation and Montreal Trust Company of Canada
4.3(3) Special Warrant Indenture dated June 30, 1999 between the
Corporation and Montreal Trust Company of Canada
4.4(4) Special Warrant Indenture dated April 13, 2000 between the
Corporation and Montreal Trust Company
*4.5(5) Stock Option Plan, as amended
4.6(6) Form of Shareholders Rights Plan Agreement dated as of June
5, 2000 between the Corporation and Montreal Trust Company
of Canada
4.7 Warrant Certificate dated July 24, 2001 issued to Thomas
Koll
10.1(2) Investor Relations Agreement dated September 1, 1998 between
the Corporation and IRG Investor Relations Group Ltd.
10.2(2) Investor Relations Agreement dated September 1, 1998 between
the Corporation and Staff Financial Group Ltd. and 549452 BC
Ltd.
10.3(2) Loan Facility dated October 29, 1998 with a Canadian
chartered bank
10.4(3) Lease Agreement dated February 12, 1998 between Riocan
Holdings Inc. and the Corporation
10.5(3) Lease Agreement dated November 23, 1999 between Bedford
Property Investors, Inc. and the Corporation
*10.6(2) Corporate Development Agreement dated October 26, 1998
between the Corporation and Capital Ridge Communications
Inc. (formerly "Channel One Systems Corp.")
10.7(2) Strategic Partnership Agreement dated March 6, 1998 between
the Corporation and BellSouth Wireless Data
10.8(2) Development Agreement dated March 4, 1998 between the
Corporation and Hewlett-Packard
10.9(2) Source Code License Agreement dated March 31, 1998 between
the Corporation and DTS
Exhibit
Number Description
------ -----------
10.10(2) Source Code License Agreement dated June 9, 1998 between the
Corporation and Wynd Communications Corporation
10.11(2) Source Code License Agreement dated November 13, 1997
between the Corporation and Apple Computers
10.12(2) OEM License Agreement dated December 5, 1997 between the
Corporation and Certicom Corp.
10.13(2) Letter Agreement dated April 20, 1998 between the
Corporation and Lexmark International, Inc.
*10.14(2) Employment Agreement dated May 2, 1991 between the
Corporation and Jim McIntosh
*10.15(2) Employment Agreement dated May 23, 1997 between the
Corporation and Bijan Sanii
*10.16(3) Employment Agreement dated September 16, 1999 between the
Corporation and Todd Carter
10.17(2) Agency Agreement dated March 31, 1998 between the
Corporation, Canaccord Capital Corporation and Yorkton
Securities Inc
10.18(2) Consulting Agreement dated July 4, 1997 between the
Corporation and GWM Enterprises Ltd.
10.19(3) Agency Agreement dated June 18, 1999 between the
Corporation, Canaccord Capital Corporation, Yorkton
Securities , Inc., Sprott Securities Limited and Taurus
Capital Markets Ltd.
10.20(4) Letter of Intent dated May 8, 2000 among the Corporation,
Kevin Jampole and Robert Heath
10.21(7) Lease Agreement dated April 26, 2000 between the Corporation
and Tonko-Novam Management Ltd.
*10.22(8) Employment Agreement dated December 14, 2000 between the
Corporation and Thomas Koll
10.23(8) Lease dated December 7, 2000 between the Corporation and
Principal Development Investors, L.L.C.
10.24(9) Employment Agreement dated April 16, 2001 between the
Corporation and Jeff Feinstein
10.25(9) Lease Agreement between the Corporation and Sterling Realty
Organization Co.
10.26(9) Lease Termination Agreement dated May 24, 2001 between the
Corporation and Principal Development Investors, LLC
10.27(10) Loan Agreement dated July 24, 2001 between the Corporation
and Thomas Koll
10.28(10) Security Agreement dated July 24, 2001 made by the
Corporation in favor of Thomas Koll
Exhibit
Number Description
------ -----------
10.29(10) Intellectual Property Security Agreement dated July 24, 2001
made by the Corporation in favor of Thomas Koll
10.30(10) Loan Agreement dated August 10, 2001 between the Corporation
and Sal Visca
10.31(10) Promissory Note dated August 10, 2001 between the
Corporation and Sal Visca
10.32(10) Employment letter dated August 10, 2001 between the
Corporation and Sal Visca
*10.33 Employment letter dated March 8, 2002 between the
Corporation and George Reznik
10.34 Convertible loan agreement dated March 8, 2002 between the
Corporation and Compaq
21.1 List of Subsidiaries
23.1 Consent of KPMG LLP, Independent Auditors
- ----------------------
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Corporation's Form 8-K filed on September
25, 2000.
(2) Incorporated by reference to the Corporation's Registration Statement on
Form 20-F (No. 0-29944).
(3) Incorporated by reference to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1999.
(4) Incorporated by reference to the Corporation's Annual Report on Form 10-Q
for the period ended March 31, 2000.
(5) Incorporated by reference to the Corporation's Registration Statement on
Form S-8 (Registration No. 333-39582) filed on June 19, 2000
(6) Incorporated by reference to the Corporation's Registration Statement on
Form 8-A filed on July 13, 2000
(7) Incorporated by reference to the Corporation's Quarterly Report on Form
10-Q for the period ended June 30, 2000.
(8) Incorporated by reference to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2000.
(9) Incorporated by reference to the Corporation's Quarterly Report on Form
10-Q for the period ended June 30, 2001.
(10) Incorporated by reference to the Corporation's Quarterly Report on Form
10-Q for the period ended September 30, 2001.