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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2002
Commission File No. 0-25680
WaveRider Communications Inc.
(Name of business issuer in its charter)
Nevada 33-0264030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
255 Consumers Road, Suite 500
Toronto, Ontario, Canada M2J 1R4
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (416) 502-3200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.001
Common Stock purchase warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 checkmark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not herein, and will not be contained, to the best
of 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 ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES ___ NO X
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of June 28, 2002, was $14,263,315.
As of February 13, 2003, there were 117,264,457 shares of the
registrant's common stock, par value $.001 per share, outstanding.
TABLE OF CONTENTS
Page
SPECIAL CONSIDERATIONS 1
PART 1 2
Item 1. Description Of Business 2
Item 2. Description Of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission Of Matters To A Vote Of Security Holders 8
PART II 9
Item 5. Market For Common Equity And Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations 11
Item 7a. Quantitative And Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements And Supplementary Data 19
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. 19
PART III 19
Item 10. Directors, Executive Officers, Promoters And Control Persons; Compliance With
Section 16(A) Of The Exchange Act. 19
Item 11. Executive Compensation 21
Item 12. Security Ownership Of Certain Beneficial Owners And Management. 23
Item 13. Certain Relationships And Related Transactions. 25
Item 14. Controls And Procedures 25
PART IV 25
Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K 25
SIGNATURES 64
CERTIFICATIONS 65
SPECIAL CONSIDERATIONS
During the year ended December 31, 2002, WaveRider Communications Inc.
("WaveRider" or the "Company") experienced a substantial decrease in the
Company's stock price and market capitalization, continued losses from
operations and substantial and continuing dilution to existing stockholders due
to the sale of a significant number of common shares and the conversion features
of convertible securities sold by the Company. The following special
considerations should be carefully noted by the reader:
Financial Condition of the Company
For the year ended December 31, 2002, the Company has incurred a net
loss of $11,249,702. As of December 31, 2002, the Company had $1,025,604 in cash
and cash equivalents and a net worth of $1,659,619. The Company's current
liabilities, as of such date, aggregated $2,985,601. The Company expects that
its cash and cash equivalents at March 31, 2003, may be less than $600,000 and
that its current liabilities as of such date may exceed $2,600,000.
The Company has a plan that it believes will allow it to achieve
profitability and cash flow positive operations without the need for additional
financing. However, if the Company fails to achieve positive cash flow in the
near term, the Company does not presently have adequate cash to fund ongoing
operations. In that case, in order to meet its needs for cash to fund its
operations, the Company would need to obtain additional financing. In the past,
the Company has obtained financing primarily through the sale of convertible
securities. Due to the Company's low stock price and the overhang represented by
outstanding convertible securities, the Company believes that it is unlikely to
be able to obtain additional financing. If the Company is unable to either
achieve its planned cash flow positive operations and profitability or obtain
significant additional financing, it will, in all likelihood, be obliged to seek
protection under the bankruptcy laws in which event, the Company believes it is
unlikely that its common stock will have any value. See "Management's Discussion
and Analysis -- Liquidity and Capital Resources"; the financial statements and
notes thereto included as part of this Report.
Company's Ability to Continue As A Going Concern
The Company's independent auditors have issued an opinion on the
financial statements of the Company, as of December 31, 2002, and for the year
then ended, which includes an explanatory paragraph expressing substantial doubt
about the Company's ability to continue as a going concern. Among the reasons
cited by the independent auditors as raising substantial doubt as to the
Company's ability to continue as a going concern are the following: the Company
has incurred recurring losses from operations resulting in an accumulated
deficit and a working capital deficiency at December 31, 2002.
These circumstances raise substantial doubt about the Company's ability
to continue as a going concern. If the Company is unable to achieve
profitability and cash flow positive operations or to secure significant
additional financing, it will, in all likelihood, be obliged to seek protection
under the bankruptcy laws in which event, the Company believes that it is
unlikely that its common stock will have any value. See "Management's Discussion
and Analysis -- Liquidity and Capital Resources"; the financial statements and
notes thereto included as part of this Report.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties, including the risks associated with the effect of changing
economic conditions, trends in the development of the Internet as a commercial
medium, market acceptance risks, technological development risks, seasonality
and other risk factors as described in item 7, Management Discussion and
Analysis. More specifically, within Item 1. Description of Business and Item 7,
Management Discussion and Analysis, there are a number of forward-looking
statements contained within the sections regarding Products, Markets, Sales
Strategy, Competition and the Regulatory Environment
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background
We were originally incorporated under the laws of the State of Nevada on August
6, 1987, as Athena Ventures Inc. By the end of 1996, the Company had become
inactive but was still listed on the OTC Bulletin Board.
In February 1997, we entered into negotiations to purchase Major Wireless
Communications Inc. Major Wireless was organized in British Columbia, Canada, as
a private company in 1996 to address an existing and growing market need to
provide cost-effective, high-speed wireless Internet links. To finance the
acquisition of and ongoing development of products by Major Wireless we
completed, in February 1997, the sale of common share and preferred share units.
In May 1997, we completed the acquisition of Major Wireless through a share
exchange and entered into an escrow arrangement which restricted the conversion
of the preferred shares received by the former shareholders of Major Wireless
into common stock until certain performance milestones were achieved.
Subsequently, we changed the Company's name to WaveRider Communications Inc. and
Major Wireless Inc's name to WaveRider Communications (Canada) Inc.
On June 11, 1999, WaveRider acquired Transformation Techniques, Inc. or TTI
through a merger with our newly created subsidiary WaveRider Communications
(USA) Inc. On October 1, 2000, we acquired ADE Network Technology Pty Ltd. or
ADE of Melbourne, Australia, a privately held wireless infrastructure company.
Subsequently, we changed the name of ADE to WaveRider Communications (Australia)
Pty Ltd.
Our executive offices are located at 255 Consumers Road, Suite 500, Toronto,
Ontario, Canada, M2J 1R4. Our telephone number is (416) 502-3200 and our Web
Site address is www.waverider.com.
WaveRider Communications Inc. - Our Business
We design, develop, market and support fixed wireless Internet access products.
Our products are designed to deliver efficient, reliable, and cost-effective
solutions to bring high-speed Internet access to markets around the world.
We are focused on providing the solution to the "last mile" problem faced by
traditional wired telecommunications services: how to profitably build out a
network that provides the level of services demanded by end users. In medium to
small markets, and in areas of the world with limited or no existing
telecommunications infrastructure, the cost to install or upgrade wired services
to provide the level of access customers expect can be prohibitive.
We believe that our fixed wireless Internet access products are faster and less
expensive to deploy than traditional wired services, with a lower cost-per-user
to install, deploy and manage.
Our wireless network products are designed to operate in the license-free ISM
radio spectrum, which facilitates a more rapid and low-cost market introduction
for service providers than for licensed or hardwire solutions. Our products
utilize direct sequence spectrum or DSS communications, which ensures reliable,
secure, low-interference communications.
Our Products
Our current product portfolio includes the Last Mile Solution or LMS product
line and the Network Communications Links or NCL product line. These product
families are designed to deliver scalable, high-speed, fixed wireless Internet
access to all sizes of businesses, home offices and residential users.
Both our LMS and NCL product families include our proprietary technologies
developed at our research and development facility.
Last Mile Solution
The LMS product family has evolved from our earlier product offerings, the
LMS2000 and LMS3000 systems to our dual-band LMS4000 wireless network system.
The LMS4000 is designed to enable service providers to deliver high-speed
Internet access to both business and residential customers utilizing multiple
frequency bands. This multi-frequency approach enables WaveRider to support our
customers' needs to provide differentiated service offerings to large, medium
and small businesses as well as residential and SOHO users.
2
When operating in the 2.4GHz band the LMS4000 delivers raw data throughput
speeds of up to 11 megabits per second (Mbps) via line-of-sight connectivity.
Such speeds support the Internet access requirements of the large and medium
business market segments.
While operating in the license-free 900 MHz spectrum the LMS4000 delivers data
throughput speeds up to 2.0 Mbps and delivers non-line-of-sight communication
between the communications access point and the end-user modem. This eliminates
the need for an external antenna and thereby permits the end-user to install the
equipment residing at their office or home themselves.
The LMS4000 supports a variety of services including Internet access for e-mail,
large file transfers, web browsing, streaming audio and streaming video. The
LMS4000 is optimized for Internet Protocol or IP Networks. Connectivity is
provided to network users via an LMS end user modem designed specifically for
business or residential use.
The LMS4000 is designed to be highly scalable, allowing network operators to
begin with a small initial network and gradually build out a larger network with
more users over time. There are no limits as to the number of network
subscribers that can be supported by an LMS4000 network due to its cellular like
architecture which allows for the efficient re-use of radio channels.
NCL Products
The NCL product family is a series of wireless bridges and routers designed
specifically for use by Internet service providers, network managers and
information technology managers. Offering point-to-point and point-to-multipoint
line of sight wireless connectivity in the 2.4 to 2.485 GHz license-free
frequency band, our NCL products can be used to establish wide area networks and
building-to-building links. The NCL can connect a single computer or computer
network to other single computers or computer networks.
The operating system built into the NCL products incorporates a complete Simple
Network Management Protocol (or "SNMP") compliant managed routing solution,
which facilitates the installation and use of these products. The operating
system also integrates Internet Protocol or IP, which provides a variety of
network routing capabilities.
We launched our first product, the NCL135, during the first quarter of 1999. The
latest product in our NCL family, the NCL1170 bridge/router, was launched in May
2001. The NCL1170 delivers high-speed wireless connections for LAN-to-LAN and
LAN-to-Internet connectivity. The NCL1170 delivers throughput speeds up to 8.0
mbps, using our proprietary radio technology that uses an 11 mbps radio. The
product can be used for point-to-point and point-to-multipoint applications and
to extend Ethernet networks without additional telephone lines.
Our Market
The market for our fixed wireless access products is driven by the worldwide
demand for Internet access as well as the increasing demand for high speed
Internet access. Our target market in North America is comprised of cities with
a population of fewer than 150,000, suburban areas of larger cities and
industrial parks. In these markets, our products address the demands of
organizations and consumers who require broadband access to the Internet, but do
not have access to cable or digital subscriber line connections from traditional
service providers. We believe this market includes 40% of North American homes
and businesses.
In many international markets, the telecommunications infrastructure is
inadequate or unavailable for basic Internet access. There are large parts of
less developed regions in India, Africa, South East Asia and South America that
have only limited and high cost Internet access. In these markets, our wireless
products have a significant cost advantage over wired technologies. Accordingly,
we believe our international target markets are potentially even broader than
our North American target markets.
3
Internet access prices can be broken down into three components: access
equipment, Internet access provision and telephone service charges. In relative
terms, the costs to get connected are much higher in developing countries. While
prices may not differ drastically in absolute terms, there is a large gap
between high and low income countries when costs relative to per capita income
are considered. In our view, fixed wireless access technology is well positioned
to bridge the gap between those who have access to high-speed services and those
who do not, and to provide the means to overcome the obstacles to gain basic
access to the Internet. We believe there are significant advantages, such as
reduced cost and faster deployment, to our fixed wireless access technology over
traditional wired access.
In summary, the key demand drivers for fixed wireless access include:
o Growth in the number of Internet users world wide,
o Growing demand for high speed Internet access,
o Scarcity of access technologies that are capable of
efficiently and economically delivering more than 1 Mbps, o
Lack of wireline infrastructures in developing countries, and
o Lack of suitable broadband access technologies in rural and
suburban areas in North America.
In meeting these market requirements, our fixed wireless access product line
offers several benefits as a communications technology:
o Instant blanket coverage without digging up streets or leasing
capacity from competitors,
o A pay-as-you-grow deployment model, which allows for low-cost
market entry with incremental costs matched to incremental
revenues,
o Bandwidth increments that address the requirements of small
and mid-size businesses,
o Point-to-multipoint technology allowing for burstable,
bandwidth on demand services, which are specially suited
towards a data-centric environment,
o Wireless technology which enables those who do not have access
to copper, coaxial or fiber optic wire to participate in the
high-speed Internet access market,
o Significant cost advantages through the use of license-free
radio frequencies, and
o Easy to set up, non-line-of-sight modems resulting in further
significant cost savings by avoiding expensive truck rolls to
install customer premise equipment.
Currently, our products operate in the unlicensed spectrum, specifically 900 MHz
and 2.4 GHz. We believe that our 900 MHz products in particular could enjoy wide
acceptance because of their non-line-of-sight and easy to set up features.
Deployments that combine business and consumer subscribers can be shown to offer
a viable and profitable business case for service operators.
Our Market Strategy
We believe that we are in a position to meet the Internet access needs of
organizations and consumers in North America and abroad. In North America, our
products address the demands of users who require broadband access to the
Internet, but do not have access to cable or digital subscriber line connections
from traditional service providers. These customers are typically found in
smaller cities in North America, and in most suburban and semi-rural areas where
there are few Internet access options other than traditional telephone dial-up
connections.
In many international markets, the basic telecommunications infrastructure is
inadequate or unavailable for basic Internet access. In these markets, our
wireless products have a significant cost advantage over wired technologies. In
addition, they can be deployed rapidly and be maintained easily.
Our approach to the market uses a direct and indirect sales model consisting of
strategic industry partnerships and key relationships: direct to strategic
partners such as carriers and Internet service providers and indirect to channel
partners including distributors, value added resellers and system integrators.
For the LMS product family, we market directly to Internet service providers,
telephone companies (including competitive local exchange carriers, independent
local exchange carriers and independents) cellular providers and emerging
carriers (municipal governments and power utilities). In some international
markets, we expect to form alliances with local partners who will provide sales,
support and installation services for LMS systems.
The LMS system provides an attractive and profitable business model for
operators. Our system enables the operator to provide high-speed wireless
Internet access to both the business and consumer/residential markets. Also, the
system's scalability allows an operator to launch a wireless network with a
relatively small investment and grow the network as the number of subscribers
increase.
4
Target Customers
Wireless Carriers - Internet access provides wireless carriers with the
opportunity to expand their service offerings and revenue base. Wireless
carriers are an attractive target market for us because they have wireless
expertise and an existing infrastructure that can be used to build a wireless
Internet access service using our equipment.
Rural cellular providers in the United States provide the largest potential in
this segment. There are approximately 428 Rural Service Areas in the United
States. The cost to develop and build an advanced rural communication network
infrastructure is substantial. Our systems enable the rural cellular providers
to establish a wireless Internet access service to meet the demand for broadband
services at a relatively low cost per subscriber.
Wireline Carriers (Independent Telephone Companies) - Independent regional
telephone companies offer a significant potential market for our wireless
service package. This target is attractive for us because of the market serviced
by these companies where there is an unmet need for broadband services, and
because the challenges they face in expanding the range of services to
customers.
In the United States there are nearly 1,000 independent telephone companies
ranging in size from fewer than 50 customers to more than 50,000. These
companies provide telephone service to nearly five million rural Americans. In
Canada there are approximately 50 independent telephone companies of which nine
are municipally owned and the rest are privately owned. In addition to basic
telephone service, many independents offer other communications services
including cellular, paging, cable television, and Internet access services.
Several characteristics make rural communities different from urban areas.
Greater distances between centers and smaller more scattered populations make
single lines more expensive given the longer cable loops required which reduce
the advantage of volume concentration. Because of this and regulatory changes,
much less upgrading and modernization has been done in rural areas.
Internet Service Providers - ISPs fall into three categories: national backbone
providers, regional networks and independent service providers. Independent and
regional providers act as intermediaries between the owners of the transmission
networks over which Internet traffic is passed and the owners of the traffic
that is available on the World Wide Web. For this reason, in the Internet
service provider market, we are targeting national and regional operators who
understand that the value of incorporating a wireless strategy to enhance their
position in the marketplace reduces their dependence on independent local
exchange carriers.
The demand for high-speed access has provided additional challenges,
opportunities and threats to Internet service providers. As telephone companies
roll out digital subscriber line services and cable companies offer their own
Internet access services, the independent internet service provider has an
opportunity to partner with us to remain a competitive player in the high-speed
access market. In regions that lack a communications infrastructure for
high-speed access, our solution provides independent and regional Internet
service providers with an opportunity to satisfy the demand for high-speed
Internet access. We offer additional benefits to Internet service providers. An
Internet service provider can go beyond just being an access provider to
becoming a communications provider with control over their own infrastructure by
implementing a wireless Internet access system.
Emerging Carriers - Over the past year we have seen the emergence of two new
carrier segments.
First is a Municipal Government segment where municipal governments are building
and operating or partnering with carriers to build broadband wireless networks
in order to provide broadband services to their residential and business
taxpayers. The driving force behind this segment is the need to attract new
taxpayers to the municipality, a task that is greatly hampered if broadband
access is not available.
Second, power utilities (distributors, co-ops, etc.) are expanding their
capabilities and deploying wireless broadband networks. In this case, these
entities are utilizing existing infrastructure such as towers, right of ways,
and network management systems to build out broadband networks upon which they
can offer Internet access services to their customer base.
5
International Sales Strategies
Our target markets outside of North America, for our LMS4000 product family, are
predicated on spectrum availability. Most parts of South America, the Caribbean
and Latin America provide the 900MHz spectrum on a license exempt basis, with
rules that are compatible with our LMS product offering.
We believe that our revenue potential in these international markets can be
quite significant because the telecommunications infrastructure required for
Internet access is underdeveloped. However, we recognize that international
business has longer sales cycles and requires a local presence for major LMS
deals.
In 2000, we acquired ADE Network Technology Pty, LTD. in Australia, a wireless
product integrator. This acquisition has provided a strong base of customers and
staff to exploit NCL and third party wireless product market opportunities in
Australia and South East Asia.
See Note No. 21 to our attached Consolidated financial statements, entitled
"Segmented Information", for a list of the foreign countries from which we
derive revenues.
Professional Services
Our professional services group is an important component in our sales and
marketing strategy and in our opinion, provides an important competitive
advantage.
Our professional services strategy is to deliver flexible, cost effective
and market driven service offerings. We believe that we are positioned to
deliver this support strategy globally. During the last few months a number of
key programs have been launched to meet the Ftime to market requirements of our
products.
We have formed key global partnerships with General Dynamics' Worldwide
Telecommunications Systems (an ISO 9001 company) and Comsearch-SCIENTECH to
provide global engineering design and installation services of our LMS and NCL
products. These two global service partners work under our program management
office. This office is staffed with our program managers and systems engineers
and is responsible to contract directly with our customers for these services.
The program management office, coupled with our global service partners, has the
international capabilities to provide:
Application engineering; System and program planning and implementation
management;
Path survey, design ; Network engineering,operations and
and engineering wireless services;
Permitting; Civil works (engineering
and construction);
Line of sight verification; Backhaul;
Site inspection and audit; Installation, testing and acceptance;
Structured cable installation; and Final documentation.
Manufacturing and Distribution
We have entered into long term manufacturing agreements with Solectron
Corporation, or Solectron, and Adeptron Technologies Corporation (formerly
Electronic Manufacturing Group), or Adeptron, to manufacture, package and
distribute our products. We have a long term distribution agreement with
Alliance Corporation or Alliance for the pick, pack and shipment of our
products.
Solectron (www.solectron.com) provides a full range of global manufacturing and
supply-chain management services to the world's premier high-tech electronics
companies. Solectron's offerings include new-product design and introduction
services, materials management, high-tech product manufacturing, and product
warranty and end-of-life support. Solectron, the first two-time winner of the
Malcolm Baldrige National Quality Award, has a full range of industry-leading
capabilities on five continents. Its headquarters are in Milpitas, California.
Adeptron Technologies Corporation (www.adeptron.com) - Adeptron is an ISO 9002
registered Electronics Manufacturing Services company that provides a complete
range of integrated product development and delivery services to the global
technology and electronics industry. Such services include design, rapid
prototyping, manufacturing and assembly, testing, product assurance, supply
chain management, worldwide distribution and after-sales service. Located in
Markham, Ontario, Canada, Adeptron's manufacturing facility employs 200 people.
Adeptron brings extensive insight to the principles of wireless manufacturing
and production.
6
Through our association with Solectron and Adeptron, we have the capability to
meet the demands of a rapidly growing Internet market, with high quality
products which are efficiently manufactured.
We provide our contract manufacturers with ongoing production forecasts to
enable them to forecast and procure required parts. Under the terms of the
Agreements with the contract manufacturers, we have committed to assume
liability for all parts required to manufacture our forecast products for 13
weeks and all final assembly costs for the forecast products for four weeks, on
a rolling basis.
Alliance Corporation (www.alliancecorporation.ca) - Alliance is a value-added
distribution and logistics resource that has historically focused on the
Wireless Communications and Broadcast Industries. Starting in 2000, Alliance has
and continues to make substantial investments to develop a similar strength in
the Broadband Communications Industry with particular emphasis on wireless
solutions. Adding skilled technical and engineering services to its offering,
Alliance is positioned to support Systems Integrators as they develop wireless
solutions for their enterprise customers including ISPs.
Competition
There is intense competition in the data communications industry. We compete not
only with other fixed wireless Internet companies, but also with companies that
deliver hard-wired technologies (wire or fiber optic cable). Competition is
based on design and quality of the products, product performance, price and
service, with the relative importance of each factor varying among products and
markets.
We compete against companies of various sizes in each of the markets we serve.
Many of these companies have much greater financial and other resources
available to help them withstand adverse economic or market conditions. These
factors, in addition to other influences such as increased price competition and
market and economic conditions could potentially impair our ability to compete.
Our major competitors include Alvarion and Proxim.
Regulation of Wireless Communications
Currently, our technology is deployed in the highly regulated license free
frequency bands. As such, our products are not subject to any wireless or
transmission licensing in the United States, Canada and many other jurisdictions
worldwide. The products do, however, have to be approved by the Federal
Communications Commission, for use in the United States, Industry Canada, for
use in Canada, and other regulatory bodies for use in other jurisdictions, to
ensure they meet the rigorous requirements for use of these bands.
Continued license-free operation will be dependent upon the continuation of
existing government policy and, while we are not aware of any policy changes
planned or expected, this cannot be assured. License-free operation of our
products in the 902 to 928 MHz and the 2.4 GHz bands are subordinate to certain
licensed and unlicensed uses of the bands and our products must not cause
harmful interference to other equipment operating in the bands and must accept
interference from any of them. If we should be unable to eliminate any such
harmful interference, or should our products be unable to accept interference
caused by others, we or our customers could be required to cease operations in
the bands in the locations affected by the harmful interference. Additionally,
in the event the 902 to 928 MHz or the 2.4 GHz bands becomes unacceptably
crowded, and no additional frequencies are allocated, our business could be
adversely affected.
Research and Development
In 2002 and into fiscal 2003, we have concentrated our efforts on sustaining
engineering and product enhancement in three development areas:
o increasing the speed, reliability and user capacity of the
networks to allow more users at greater throughput speeds;
o enhancing the network capabilities of the systems to support
new developing applications, and
o reducing the cost of our product offerings to provide pricing
flexibility and higher margins.
7
Over 2002, we integrated our Research and Development facilities with our sales,
marketing and support organization in Toronto. Our Research and Development
spending declined significantly in 2002 and we expect it to stay at these
reduced levels through fiscal 2003.
Research and Development expenditures in 2002, excluding depreciation,
amortization and non-cash stock based compensation amounted to $1,494,880
compared with $4,471,567 in 2001 and $6,127,360 in 2000.
Summary
We are a wireless technology company that develops, manufactures and markets
products to take advantage of the world-wide growth of the Internet, increasing
acceptance of wireless technology, and the demand for high speed, Internet
access.
We believe that providing the "last mile solution" is the key to capitalize on
the opportunities presented by today's rapidly changing telecommunications
market place. The ability to provide a full suite of products and services that
will quickly enable all types of users to conduct business, access services and
communication is key to securing a dominant market position. The demands of the
customer are growing beyond traditional voice communication, as today's end user
wants access to a growing set of services that require high-speed access. As a
result, we have developed a family of fixed wireless access products capable of
providing wireless high-speed Internet access to businesses, organizations and
consumers.
With an early-to-market family of products that include the world's first
non-line-of-sight, easy to set up, wireless Internet network available today, we
are well positioned to take a leadership position in the fixed wireless access
market. Further, cost advantages are derived from operating in the unlicensed
frequencies and result in one of the only viable and profitable wireless
Internet networks available to service providers today.
Employees
We currently have approximately 40 employees located in our head office in
Toronto, Ontario and our sales offices and subsidiaries in the United States,
Canada and Australia, as well as at our subsidiary, JetStream Internet Services
in Salmon Arm, British Columbia.
The majority of these employees are involved in the design, development and
marketing of our line of wireless data communications products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real estate or other properties. WaveRider's main offices
and test sites are in Toronto, Ontario, Canada and our Australian Subsidiary's
head office is in Melbourne, Australia. These offices house sales,
administration and research operations and are leased from unrelated parties. We
maintain sales offices in Australia, Canada, and the United States. In addition,
our subsidiary JetStream Internet Services Inc. maintains offices in Salmon Arm,
British Columbia, Canada.
WaveRider's Toronto Office is leased for a period of five years ending May 31,
2004, our Melbourne office lease expires in April 2003 and the lease for our
JetStream's office was renewed effective January 1, 2001, for a three-year
period.
Cost commitments related to present leases are set forth in note 15 "Commitments
and contingencies" in the attached financial statements.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of 2002.
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's outstanding shares of Common stock, par value $.001 per share, are
traded under the symbol "WAVC.OB" in the over-the-counter market on the OTC
Electronic Bulletin Board by the National Association of Securities Dealers,
Inc. Prior to April 10, 2002, the Company's Common stock traded on the Nasdaq
National Market System. The following table sets forth the closing high and low
bid prices of the Common Stock for the periods indicated, as reported by the
NASD. These quotations are believed to be representative inter-dealer prices,
without retail mark-up, markdown or commissions and may not represent prices at
which actual transactions occurred:
2002 Bid 2001 Bid
High Low High Low
First Quarter $0.46 $0.16 $2.69 $1.25
Second Quarter $0.18 $0.08 $1.81 $1.03
Third Quarter $0.17 $0.09 $1.28 $0.31
Fourth Quarter $0.20 $0.07 $0.50 $0.21
Holders: The Company has approximately 1,134 common shareholders of record as of
February 13, 2003. This number does not include shareholders whose shares are
held in street or nominee names.
Dividends: While there are no restrictions on the ability of the Company to pay
dividends other than those common to all companies incorporated under the laws
of the State of Nevada, no dividends have been paid to common stock shareholders
by the Company in the last two years. The Company does not expect to pay a cash
dividend on its common stock in the foreseeable future and payment of dividends
in the future will depend on the Company's earnings and cash requirements.
ITEM 6. SELECTED FINANCIAL DATA
STATEMENTS OF LOSS DATA:
Year ended December 31
2002 2001 2000 1999 1998
Revenue $ 9,008,915 $ 7,804,017 $ 4,132,992 $ 1,716,045 $ 205,882
Cost of revenue 6,778,794 5,956,495 5,239,048 1,294,815 75,467
----------------------------------------------------------------------
Gross margin 2,230,121 1,847,522 (1,106,056) 421,230 130,415
Expenses 13,479,823 23,142,172 30,523,604 8,373,080 4,607,933
----------------------------------------------------------------------
Net loss before income taxes and
extraordinary item (11,249,702) (21,294,650) (31,629,660) (7,951,850) (4,477,518)
Deferred income tax recovery - - 157,045 504,000 -
----------------------------------------------------------------------
Net loss before
extraordinary item (11,249,702) (21,294,650) (31,472,615) (7,447,850) (4,477,518)
Loss on extinguishment of debt - (198,300) - - -
----------------------------------------------------------------------
Net loss $ (11,249,702) $(21,492,950) $(31,472,615) $(7,447,850) $(4,477,518)
=======================================================================
Basic and diluted loss per share
before extraordinary item $ (0.11) $ (0.371) $ (0.59) $ (0.25) $ (0.18)
=======================================================================
Basic and diluted loss per share
For extraordinary item $ - $ (0.003) $ - $ - $ -
======================================================================
Basic and diluted loss per share $ (0.11) $ (0.374) $ (0.59) $ (0.25) $ (0.18)
=======================================================================
Weighted Average Number
of Common Shares 105,261,523 60,269,617 53,203,750 34,258,565 29,485,320
======================================================================
9
BALANCE SHEET DATA:
As at December 31,
2002 2001 2000 1999 1998
Cash and cash equivalents $ 1,025,604 $ 2,244,625 $ 7,720,902 $ 5,540,917 $ 3,047,257
----------------------------------------------------------------------
Working capital 780,148 1,931,418 7,331,220 5,222,841 2,259,824
Property, plant & equipment 885,475 1,671,088 2,395,373 978,160 808,531
Total assets 4,645,220 10,618,503 20,933,045 10,080,516 4,146,834
Convertible promissory notes - - 1,835,299 - -
Long term capital leases 6,004 36,312 224,347 18,625 12,555
Shareholders' Equity 1,659,619 7,596,472 12,182,589 8,298,382 3,098,368
Our current operations commenced in 1997 with the acquisition of Major Wireless
Communication Inc. and JetStream Internet Services Inc. In 1999, we purchased
Transformation Techniques, Inc. (TTI) and in 2000 we purchased ADE Network
Technology Pty Ltd. Refer to note 4 of the attached financial statements for
more details about the acquisition of subsidiaries.
When we acquired Major Wireless Communication Inc., in 1997, the founders agreed
to put their shares into an escrow agreement. As the Company reached each of the
milestones under the escrow agreement, we released a specific percentage of the
shares and up until 2002 the value of those shares, at the time of release, was
included in goodwill or compensation expense. As a result of our Director's
decision to extend the escrow agreement, in 2002 the accounting for the releases
changed and the value was charged directly to compensation expense or to
selling, general and administration expense. Depending on the price of the
common shares at the time of release, the value assigned to the escrow release
varied dramatically. During 2002, we released 5,381,250 common shares from the
escrow agreement (2001 - 2,250,000, 2000 - 900,000). This resulted in a charge
of $172,500 to compensation expense (2001 - $629,000, 2000 - $ 712,500) and a
charge to selling, general and administrative expense of $710,813. In accordance
with the changed circumstances, there was no increase of goodwill in 2002 (2001
- - $2,201,500, 2000 - $2,493,750). Also, due to a change in accounting
principals, effective January 1, 2002, goodwill ceased to be amortized on an
ongoing basis, but was reviewed for impairment. In prior years, the release of
the escrow shares and the resulting goodwill has resulted in a significant
increase in amortization expense (2001 - $2,385,495, 2000 - $1,455,305).
During the third quarter of fiscal 2002, as a result of the continued and, more
recently, sharp decline in the telecommunications sector, the Company determined
that it could not continue its operations at its current level without further
funding and that, given the state of the telecommunications sector and the
financial markets, it was unlikely that additional funding would be available.
As such, the Company took a number of actions to reduce costs and restructure
its operations. Included in these actions was a complete revision of the
operating plans of WaveRider Communications (Australia) Pty Ltd. (formerly ADE
Network Technology Pty Ltd.), our wholly owned subsidiary in Australia, which we
view as an independent reporting unit and for WaveRider Communications Inc. In
each case, we compared the expected net present value of the discounted future
cash flows of the restructured operations to the current net assets of the
respective operations after a revision of all key assumptions underlying
management's goodwill valuation judgments, including those relating to short and
longer-term growth rates and discount factors reflecting increased risks in a
declining market. As a result of management's analysis, it was determined that
an impairment charge of $4,069,696 was required on the basis that the carrying
value of goodwill exceeded its fair value, which was determined to be nil.
In 2000, we wrote off $1,028,430 of acquired core technology and goodwill,
related to our purchase of TTI. In 2000, we also extended our employee stock
option (1997) plan, which resulted in a charge to the consolidated statement of
loss in the amount of $11,099,858.
10
Our financing activities have resulted in a significant number of non-cash
accounting charges amounting to $263,607 in 2002 and $5,410,846 in 2001. Our
financing activities resulted in financing expenses of $331,041 in 2002 (2001 -
$5,493,373, 2000 - $274,347).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We incurred a net loss for the year ended December 31, 2002 of $11.2 million on
revenues of $9.0 million compared to a net loss for the year ended December 31,
2001 of $21.5 million on revenues of $7.8 million and a net loss for the year
ended December 31, 2000 of $31.5 million on revenues of $4.1 million. Our
reported results for 2002 included non-cash expenses in the amount of $6.2
million (2001 - $10.8 million, 2000 - $17.9 million).
On October 15, 2002, the Company announced a restructuring plan that included
headcount reductions and salary deferrals. On November 6, 2002, principally as
compensation for accepting salary deferrals or reductions, the Board of
Directors of the Company authorized the award of 2,525,000 stock options,
exercisable at $0.01 per share, to the Company's staff and certain management.
Over 2002, we integrated our Calgary based Research and Development facilities
with our sales, marketing and support organization in Toronto. Our Research and
Development spending declined significantly in 2002 and we expect it to stay at
these reduced levels through fiscal 2003.
Our cash balance decreased to $1.0 million compared to $2.2 million at December
31, 2001 and $7.7 million at December 31, 2000.
Escrow Share Agreement - When the current operations of WaveRider were
established in May 1997, the initial founders chose to put their shares into an
escrow agreement, which would only release the shares to them upon achievement
of certain milestones. This display of commitment to the Company was viewed as
necessary to allow us to raise the funds needed to develop our products and
markets. In September 2001, in recognition of the ongoing commitment of the
founders, the Board of Directors authorized a two year extension of the escrow
agreement, as was contemplated in the original agreement. With the extension of
the escrow agreement, the charges resulting from the final release of escrow
shares were to be charged directly to selling, general and administrative
expenses and not recorded as goodwill.
As the Company reached each of the milestones under the escrow agreement, we
released a specific percentage of the shares and the value of those shares, at
the time of release, was included in goodwill or compensation expense. Depending
on the price of the common shares at the time of release, the value assigned
varied dramatically. During 2002, we released the remaining 5,381,250 common
shares from the escrow agreement (2001 - 2,250,000, 2000 - 900,000). This
resulted in a charge of $172,500 to compensation expense (2001 - $629,000, 2000
- - $712,500) and a charge of $710,813 to selling, general and administrative
expenses. In prior years the non-compensation charges resulted in an increase of
goodwill in the amount (2001 - $2,201,500, 2000 - $2,493,750).
Revenue
Total revenue increased 15.4% in 2002, compared to 2001, primarily due to the
strong growth of sales of our LMS 4000 network system in North America. North
American revenues grew 145% in 2002 to $5.9 million, while International
revenues declined 42% on a year on year basis, down to $3.1 million. Revenue in
the fourth quarter of 2002 increased 37.8% compared to the third quarter of 2002
and 61.6% compared to the fourth quarter of 2001.
We expect to see continued strong growth in the North American markets as we
continue to increase our customer base and our customers increase the size of
their networks. Internationally, we expect revenue to stabilize at current
levels and then slowly grow in the second half of 2003, as our initiatives into
South and Central America start to achieve results.
Revenues in 2001 increased 89% coFmpared to 2000, primarily due to the
commercial release of our LMS3000 network system and to the continued expansion
of our sales and marketing.
11
Cost of Sales
We recorded a gross margin of $2,230,121 in 2002 compared to $1,847,522 in 2001
and a gross margin deficiency in 2000 of $1,106,056. As a percentage of revenue,
gross margins grew to 24.75% in 2002 compared to 23.7% in 2001 and a 26.8%
deficiency in 2000. Gross margins in the fourth quarter of 2002 were 27.6%
compared to 14.3% in the third quarter of 2002 and 7.4% in the fourth quarter of
2001.
With the growth of the LMS 4000 as a percentage of our total revenues, we expect
that gross margins, as a percent of revenue, will continue to strengthen. We
anticipate reducing the cost of the LMS 4000 end user modem, which is the most
significant component of a LMS 4000 network, through economies of scale and
design simplification. These cost reductions will be used to enhance margins and
to provide selective volume discounts to drive higher unit sales.
Cost of Sales in 2000 was adversely affected by the $1,568,739 write-off of TTI
technology related inventories and warranty provisions.
Expenses
Selling, general and administrative -- Selling, general and administrative
expenses, excluding non-cash stock related charges, declined to $6,212,458 in
2002 (2001 - $8,239,747, 2000 - $8,605,887). Included in the 2002 expenses was a
charge of $710,813 related to the release of escrow shares as more fully
discussed under "Escrow Share Agreement" above.
On October 15, 2002, we announced a restructuring plan that included headcount
reductions and salary deferrals. Included in the plan was a commitment to pay
terminated employees deferred severance payments of approximately $167,000.
These amounts were accrued in the fourth quarter of 2002 and will be paid during
the fourth quarter of 2003. Additionally, we have deferred and expensed $34,400,
and will defer and expense an additional $48,600 during the first quarter of
2003, in compensation to senior staff, which we will not pay until the fourth
quarter of 2003. We have also structured our sales compensation to reduce fixed
salary costs and increase the variable achievement-based component.
In September 2001, we reduced our staff by 56%, our executive staff waived all
salaries, bonuses and other cash compensation for a period from October 1 to
December 14 and other senior managers accepted a 25% pay decrease for the same
period. During 2000, we expanded our sales operations in the United States and
internationally and, in the fourth quarter, acquired ADE Technologies in
Australia. The additions were put in place to provide us with the trained sales
and support representatives required to sell and service the LMS network
products.
Employee stock-based compensation -As discussed above, we entered into an escrow
arrangement with our founding shareholders and employees. In addition, we
awarded certain employees options that vested based on the same milestones from
the escrow arrangement. Each time a milestone was achieved, shares were released
and options vested; and the portion that related to employees of the company was
charged to the statement of loss as "Employee stock-based compensation". During
2002, we completed all of the remaining milestones and, as a result, charged
$172,500 to the statement of loss. In 2001, we achieved one of the milestones -
resulting in a $629,000 charge to the statement of loss. In 2000, we charged
$712,500 to the statement of loss, as a result of an escrow release. In
addition, during 2000, the extension of our 1997 Option Plan resulted in
non-cash accounting charges in the amount of $11,099,858.
Research and development -We moved to a level of sustaining engineering in the
second half of 2001, with Research and Development costs, excluding stock
related expenses, depreciation and amortization, in 2002 amounting to $1,494,880
(2001 - $4,471,567, 2000 -$6,127,360). During 2002, we closed our Calgary
facility and transitioned the operations to our Toronto location. We anticipate
that we will continue to maintain our 2002 level expenditures through 2003.
Write-off of goodwill - During the third quarter of 2002, as a result of the
continued and, more recently, sharp decline in the telecommunications sector, we
determined that we could not continue our operations at current level without
further funding and that, given the state of the telecommunications sector and
the financial markets, it was unlikely that additional funding would be
available. As such, we took a number of actions to reduce costs and restructure
our operations. Included in these actions was a complete revision to the
operating plans of WaveRider Communications (Australia) Pty Ltd. (formerly ADE
Network Technology Pty Ltd.), our wholly owned subsidiary in Australia, which is
viewed as an independent reporting unit, and for WaveRider Communications Inc.
12
In each case, we compared the expected net present value of the discounted
future cash flows of the restructured operations to the current net assets of
the respective operations after revising all key assumptions underlying
management's valuation judgments, including those relating to short and
longer-term growth rates and discount factors reflecting increased risks in a
declining market. As a result of management's analysis, it was determined that
an impairment charge of $4,069,696 was required on the basis that the carrying
value of goodwill exceeded its fair value, which was estimated to be nil.
Restructuring charges - In conjunction with our decision to relocate our
Research and Development facility to Toronto and to shut down our Calgary
operations and our further decision, in the third quarter of 2002, to further
restructure our operations, we incurred restructuring costs of $362,588. In
addition to the approximately $167,000 in deferred severance for employees
terminated in the third quarter of 2002, we incurred costs of $76,940 to
terminate the Calgary lease, $50,900 in other severance costs, $28,454 for
moving of fixed assets and corporate records and $39,294 in other termination
related costs.
Depreciation and amortization - In 2002, we adopted the provisions of SFAS No.
142 and, as such, ceased to amortize goodwill. In prior years, the release of
the escrow shares and the resulting goodwill had resulted in significant
amortization expenses of $2,385,495 in 2001 and $1,455,305 in 2000.
With our restructuring, in 2002, we have disposed of certain excess fixed assets
and reduced our depreciation expense to $763,845 (2001 - $1,147,943, 2000 -
$709,333)
Interest expense - During 2002, we redeemed the balance of our promissory notes
and accreted the $263,607 fair value of the notes to financing expense. In
addition, we paid $56,076 in repayment premiums and various ongoing operating
interest charges. This, along with other miscellaneous financing expense,
resulted in financing expenses in 2002 amounting to $331,041 (2001 - $5,493,373,
2000 - $274,347).
Included in interest expense for 2001was $5,410,846 in non-cash charges related
to our financing activities.
Supplementary financial information
(unaudited)
Three Months Ended
March June September December(1)
-------------------------------------------------------------------
Fiscal 2002
Net revenues $ 1,612,988 $ 2,344,867 $ 2,124,410 $ 2,926,651
Gross profit 461,255 659,615 302,856 806,395
Net loss (2,933,323) (1,414,129) (6,037,909) (864,341)
Net loss per common share (0.04) (0.01) (0.05) (0.01)
Weighted average shares outstanding 79,322,684 110,182,830 114,790,464 116,262,533
Fiscal 2001
Net revenues $ 1,830,403 $ 2,473,418 $ 1,689,209 $ 1,810,987
Gross profit 441,001 834,674 437,090 134,757
Loss before extraordinary item (8,984,708) (5,243,205) (4,489,006) (2,577,731)
Extraordinary item - - - (198,300)
Net loss (8,984,708) (5,243,205) (4,489,006) (2,776,031)
Loss before extraordinary item
per common share (0.16) (0.10) (0.07) (0.04)
Weighted average shares outstanding 55,757,444 60,240,772 61,365,893 63,609,949
(1) In the fourth quarter of 2002, the Company determined that it had recorded
excess depreciation expense in each of the preceding three quarters. As a
result, it recorded an adjustment in the fourth quarter to reduce depreciation
expense by $216,747. The impact on each of the preceding three quarters was
immaterial and had no impact on the reported net losses per share in those
quarters
Liquidity and Capital Resources.
We have funded our operations for the most part through equity financing and
have had no line of credit or similar credit facility available to us. The
Company's outstanding shares of Common stock, par value $.001 per share, are
traded under the symbol "WAVC.OB" in the over-the-counter market on the OTC
Electronic Bulletin Board by the National Association of Securities Dealers,
Inc.
13
Up to the current period, the Company has had to rely on its ability to raise
money through equity financing to pursue its business endeavors. With the
ongoing stock market declines in the technology sector and the Company's current
financial position and results, management has determined that it is unlikely
that we can raise further capital or debt financing at this time. As a result,
on October 15, 2002, we announced a new round of restructuring, which included
headcount reductions, reductions and deferrals of senior level salaries and even
stricter discretionary spending controls. Based on our current plans and
projections, we believe that the Company has the funds to meet our current and
future financial commitments until we achieve positive cash flows from
operations. However, the significant slowdown in capital spending in our target
markets has created unanticipated uncertainty as to the level of demand in those
markets. In addition, the level of demand can change quickly and can vary over
short periods of time, including from month to month. The uncertainty and
variations in our markets means that accurately projecting future results,
earnings and cash flow is increasingly difficult. As a result, we have
determined that a going concern note should be included in the Company's
financial statements until such time as adequate funding can be obtained through
operations or external financing arrangements.
The Company used $4,970,703 of cash in operating activities in 2002 (2001 -
$10,348,489, 2000 - $17,268,000). With the restructuring announced in the fourth
quarter and our continued focus on discretionary spending, the cash used in
operating activities during the fourth quarter was $775,813. We expect to
continue to achieve revenue and gross margin growth and to control cash
expenditures in 2003.
With the relocation of our Research and Development facilities to Toronto, we
used $48,086 of cash in investing activities. These expenditures mainly related
to the cost of retrofitting our offices to provide lab facilities, net of the
recovery we achieved through rationalization of our fixed assets. Throughout
2003, we expect that we will not need to make any significant cash expenditures
for further investments.
During March 2002, we raised $4,497,000, less cash expenses of $165,734, through
the sale of 30,096,662 shares of common stock registered by us on our S-3 shelf
registration statement. In addition, we raised $40,266 through the sale of
401,725 shares of common stock under our employee stock purchase plan.
During 2002, we repaid our outstanding promissory notes, in the amount of
$432,500, and made capital lease payments of $126,101. With these payments we
have reduced our capital lease liability to $18,098 and repaid all other debt.
It is our belief that, with the exception of some small amounts received under
our employee stock purchase plan, we will be unable to raise any significant
amount of cash through financing activities in 2003.
Contractual Obligations
Payments Due by Period
Less than 1 - 3 4 -5 After 5
Contractual obligation Total 1 year years years years
- ----------------------------------------------------------------------------------------------------------
Capital lease obligations $ 20,071 $ 13,901 $ 6,170 - -
Operating leases 510,735 369,282 141,453 - -
Unconditional purchase obligations 1,389,000 1,389,000 - - -
The Company provides its contract manufacturers with ongoing production
forecasts to enable them to forecast and procure required parts. Under the terms
of the agreements with the contract manufacturers, the Company has committed to
assume liability for all parts required to manufacture the Company's forecast
products for 13 weeks and all final assembly costs for the forecast products for
four weeks, on a rolling basis.
The Company plans to pay its contract manufacturers for the unconditional
purchase obligation through net cash generated from operations.
14
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements 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.
On an ongoing basis, management evaluates its estimates and judgments, including
those related to bad debts, inventories, investments, intangible and other
long-lived assets, income taxes, warranty obligations, product returns,
restructuring costs, litigation and contingencies. Management bases its
estimates and judgments on historical experience, current economic and industry
conditions and on various other factors that are believed to be reasonable under
the circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Allowance for Losses on Receivables
The Company has historically provided financial terms to certain customers in
connection with purchases of the Company's products. Financial terms, for
credit-approved customers, are generally on a net 30-day basis.
Total receivables at December 31, 2002 and 2001 were $1,554,757 and $1,533,842,
respectively, with an allowance for losses on these receivables of $212,224 and
$635,410, respectively.
Management periodically reviews customer account activity in order to assess the
adequacy of the allowances provided for potential losses. Factors considered
include economic conditions, collateral values and each customer's payment
history and credit worthiness. Adjustments, if any, are made to reserve balances
following the completion of these reviews to reflect management's best estimate
of potential losses.
Inventory Valuation Reserves
The Company records valuation reserves on its inventory for estimated
obsolescence or unmarketability. The amount of the write-down is equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions.
Net Inventories consisted of the following:
December 31 2002 2001
--------------------------------------------------------------
Finished goods $1,258,620 $ 1,152,834
Raw materials 22,043 681,768
------------------------------
1,280,663 1,834,602
Less inventory reserves (50,615) (431,899)
------------------------------
$ 1,230,048 $ 1,402,703
============================
The Company provides its contract manufacturers with ongoing production
forecasts to enable them to forecast and procure required parts. Under the terms
of the Agreements with the contract manufacturers, the Company has committed to
assume liability for all parts required to manufacture the Company's forecast
products for the next 13 weeks and all final assembly costs for the forecast
products for the next four weeks, on a rolling basis.
The Company balances the need to maintain strategic inventory levels to ensure
competitive lead times with the risk of inventory obsolescence due to rapidly
changing technology and customer requirements. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
15
Valuation of Investments and Long-Lived Assets
The Company assesses the impairment of investments and long-lived assets, which
includes identifiable intangible assets, goodwill and plant and equipment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors considered important which could trigger an
impairment review include the following:
o underperformance relative to expected historical or projected
future operating results;
o changes in the manner of use of the assets or the strategy for
our overall business;
o negative industry or economic trends;
o declines in stock price of an investment for a sustained
period; and
o our market capitalization relative to net book value.
When the Company determines that the carrying value of intangible assets,
goodwill and long-lived assets may not be recoverable an impairment charge is
recorded. Impairment is measured based on a projected discounted cash flow
method using a discount rate determined by our management to be commensurate
with the risk inherent in our current business model or prevailing market rates
of investment securities, if available.
In the third quarter of 2002, the Company determined that it could not continue
its operations at its current level without further funding and that, given the
state of the Telecommunications sector and the financial markets, it was
unlikely that additional funding would be available. As such, the Company took a
number of actions to reduce costs and restructure its operations. Included in
these actions was a complete revision to the operating plans of WaveRider
Communications (Australia) Pty Ltd. (formerly ADE Network Technology Pty Ltd.),
our wholly owned subsidiary in Australia, which we view as an independent
reporting unit, and for WaveRider Communications Inc. As a result of these
changes, the fair market values for our two reporting units were estimated using
the expected present value of future cash flows. Based on this analysis, the
Company wrote off all of its existing goodwill, in the amount of $4,069,696.
In September 2001, the Company announced a restructuring plan, which included
the reduction of approximately half of the staff in WaveRider Communications
(Australia) Pty Ltd. As a result, the Company wrote down the acquired labor
force, resulting from the acquisition of WaveRider Communications (Australia)
Pty Ltd. in the amount of $155,000. In late 2000, management determined that
various long-lived and intangible assets, relating to the Company's acquisition
of Transformation Techniques, Inc. during 1999, had been impaired and impairment
charges were recorded totaling $1,028,430 in 2000.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS.
Following are certain risk factors associated with our Company and with
ownership of our stock.
Company's Ability to Continue As A Going Concern
The Company's independent auditors have issued an opinion on the financial
statements of the Company, as of December 31, 2002, and for the year then ended,
which includes an explanatory paragraph expressing substantial doubt about the
Company's ability to continue as a going concern. Among the reasons cited by the
independent auditors as raising substantial doubt as to the Company's ability to
continue as a going concern are the following: the Company has incurred
recurring losses from operations resulting in an accumulated deficit and a
working capital deficiency at December 31, 2002.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. If the Company is unable to achieve profitability
and cash flow positive operations or to secure significant additional financing,
it will, in all likelihood, be obliged to seek protection under the bankruptcy
laws in which event, the Company believes that it is unlikely that its common
stock will have any value.
We have a history of losses, and our future profitability is uncertain.
Due to our limited operating history, we are subject to the uncertainties and
risks associated with any new business. We have experienced significant
operating losses every year since incorporation. We incurred a net loss of
$11,249,702 for the year ended December 31, 2002 (2001 - $21,492,950 and 2000 -
$31,472,615) and reported an accumulated deficit at that date of $83,200,992
(2001 - $71,951,290). We expect to continue to incur losses at least for the
first quarter of 2003.
16
There can be no assurance that we will ever generate an overall profit from our
products or that we will ever reach profitability on a sustained basis.
Our sales have been adversely affected by recent events and may be adversely
affected by future events.
We are subject to general economic and political risks to a similar extent as
other companies who export products all over the world. We believe our sales
have been, and may continue to be, adversely affected by recent events in Iraq
and by the business slowdown in the United States, our principal market, and
could be adversely affected by other events that may occur in the future. We
have no way of knowing how long these effects will persist or how severe they
may be.
Competition in the data communication industry is intense and there is
uncertainty that given our new technology and limited resources that we will be
able to succeed.
Although our products are based on a wireless technology, we compete not only
against companies that base their products on wireless technology, but also
against companies that base their products on hard-wired technology (wire or
fiber optic cable). There can be no assurance that we will be able to compete
successfully in the future against existing or new competitors or that our
operating results will not be adversely affected by increased price competition.
Competition is based on design and quality of the products, product performance,
price and service, with the relative importance of such factors varying among
products and markets. Competition in the various markets we serve comes from
companies of various sizes many of which are larger and have greater financial
and other resources than we do and, thus, can withstand adverse economic or
market conditions better than we can.
Our future operating results are subject to a number of risks, including our
ability or inability to implement our strategic plan, to attract qualified
personnel and to raise sufficient financing as required. Inability of our
management to guide growth effectively, including implementing appropriate
systems, procedures and controls, could have a material adverse effect on our
business, financial condition and operating results.
The data communication industry is in a state of rapid technological change and
we may not be able to keep up.
We may be unable to keep up with technological advances in the data
communications industry. As a result, our products may become obsolete or
unattractive. The data communications industry is characterized by rapid
technological change. In addition to frequent improvements of existing
technology, there is frequent introduction of new technologies leading to more
complex and powerful products. Keeping up with tFhese changes requires
significant management, technological and financial resources. As a small
company, we do not have the management, technological and financial resources
that larger companies in our industry may have. There can be no assurance that
we will be able or successful in enhancing our existing products, or in
developing, manufacturing and marketing new products. An inability to do so
would adversely affect our business, financial condition and results of
operations.
We have limited intellectual property protection and there is risk that our
competitors will be able to appropriate our technology.
Our ability to compete depends to a significant extent on our ability to protect
our intellectual property and to operate without infringing the intellectual
property rights of others. We regard our technology as proprietary. We have no
issued patents or pending patent applications, nor do we have any registered
copyrights with respect to our intellectual property rights. We rely on employee
and third party non-disclosure agreements and on the legal principles
restricting the unauthorized disclosure and use of trade secrets. Despite our
precautions, it might be possible for a third party to copy or otherwise obtain
our technology, and use it without authorization. Although we intend to defend
our intellectual property, we cannot assure you that the steps we have taken or
that we may take in the future will be sufficient to prevent misappropriation or
unauthorized use of our technology. In addition, there can be no assurance that
foreign intellectual property laws will protect our intellectual property
rights. There is no assurance that patent application or copyright registration
that may be filed will be granted, or that any issued patent or copyrights will
not be challenged, invalidated or circumvented. There is no assurance that the
rights granted under patents that may be issued or copyrights that may be
registered will provide sufficient protection to our intellectual property
rights. Moreover, we cannot assure you that our competitors will not
independently develop technologies similar, or even superior, to our technology.
17
Use of our products is subordinated to other uses and there is risk that our
customers may have to limit or discontinue the use of our products.
License-free operation of our products in certain radio frequency bands is
subordinated to certain licensed and unlicensed uses of these bands. This
subordination means that our products must not cause harmful interference to
other equipment operating in the band, and must accept potential interference
from any of such other equipment. If our equipment is unable to operate without
any such harmful interference, or is unable to accept interference caused by
others, our customers could be required to cease operations in some or all of
these bands in the locations affected by the harmful interference. As well, in
the event these bands become unacceptably crowded, and no additional frequencies
are allocated to unlicensed use, our business could be adversely affected.
Currently, our products are designed to operate in frequency bands for which
licenses are not required in the United States, Canada and other countries that
we view as our potential market. Extensive regulation of the data communications
industry by U.S. or foreign governments and, in particular, imposing license
requirements in the frequency bands of our products could materially and
adversely affect us through the effect on our customers and potential customers.
Continued license-free operation will depend upon the continuation of existing
U.S., Canadian and such other countries' government policies and, while no
planned policy changes have been announced or are expected, this cannot be
assured.
We may be subject to product liability claims and we lack product liability
insurance.
We face an inherent risk of exposure to product liability claims in the event
that the products designed and sold by us contain errors, "bugs" or defects.
There can be no assurance that we will avoid significant product liability
exposure. We do not currently have product liability insurance and there can be
no assurance that insurance coverage will be available in the future on
commercially reasonable terms, or at all. Further, there can be no assurance
that such insurance, if obtained, would be adequate to cover potential product
liability claims, or that a loss of insurance coverage or the assertion of a
product liability claim or claims would not materially adversely affect our
business, financial condition and results of operations.
We depend upon third party manufacturers and there is risk that, if these
suppliers become unavailable for any reason, we may for an unknown period of
time have no product to sell.
We depend upon a limited number of third party manufacturers to make our
products. If our suppliers are not able to manufacture for us for any reason, we
would, for an unknown period of time, have difficulty finding alternate sources
of supply. Inability to obtain manufacturing capacity would have a material
adverse effect on our business, financial condition and results of operations.
We may suffer dilution if we issue substantial shares of our common stock:
o upon conversion of shares of the Series D 5% convertible
preferred stock; and,
o upon exercise of the outstanding warrants and options.
We are obligated to issue a substantial number of shares of common stock upon
the conversion of our Series D 5% convertible preferred stock and exercise of
our outstanding warrants and options. The price, which we may receive for the
shares of common stock, that are issuable upon conversion or exercise of such
securities, may be less than the market price of the common stock at the time of
such conversions or exercise. Should a significant number of these securities be
exercised or converted, the resulting increase in the amount of the common stock
in the public market could have a substantial dilutive effect on our outstanding
common stock.
The conversion and exercise of all of the aforementioned securities or the
issuance of new shares of common stock may also adversely affect the terms under
which we could obtain additional equity capital.
Our common stock now trades on the less well recognized Over the Counter
Bulletin Board, which could limit liquidity.
As a result of our common stock being delisted from the Nasdaq National Market
in April of 2002, we have a less liquid market for our common stock than had
existed. As a result, our shares may be more difficult to sell because
potentially smaller quantities of shares could be bought and sold, transactions
could be delayed and security analyst and news coverage of our company may be
reduced. These factors could result in lower prices and larger spreads in the
bids and ask prices for our shares.
18
Our common stock is subject to the penny stock rules which means our market
liquidity could be adversely affected.
The SEC's regulations define a "penny stock" to be an equity security that has a
market price less than $5.00 per share, subject to certain exceptions. These
rules impose additional sales practice requirements on broker dealers that sell
low-priced securities to persons other than established customers and
institutional accredited investors; and require the delivery of a disclosure
schedule explaining the nature and risks of the penny stock market. As a result,
the ability or willingness of broker-dealers to sell or make a market in our
common stock might decline.
No dividends anticipated.
We intend to retain any future earnings to fund the operation and
expansion of our business. We do not anticipate paying cash dividends on our
shares in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use any derivative financial instruments or other market risk
sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The information required hereunder in this report as set forth in the "Index to
Financial Statements" on page 33.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Executive Officers and Directors
The present directors and officers of the Company, their ages and their
positions held in the Company are listed below. Each director will serve until
the next annual meeting of the stockholders or until his successor has been
elected and duly qualified. Directors serve one year terms and officers hold
office at the pleasure of the Board of Directors, subject to employment
agreements. There are no family relationships between or among directors and
executive officers.
Name Age Position Director or Officer Since
D. Bruce Sinclair .......................... 51 Chief Executive Officer, Director 1997
Cameron A. Mingay (1) ...................... 51 Secretary; Director 1999
Gerry Chastelet (1) (2) .................... 56 Director 1999
John E. Curry (2) .......................... 56 Director 1999
Dennis R. Wing (2) ......................... 54 Director 1999
Charles W. Brown ........................... 47 Executive Vice President 1998
T. Scott Worthington ....................... 48 Vice President; Chief Financial 1998
Officer
- ---------
(1)......Member of the compensation committee
(2)......Member of the audit committee
19
Gerry Chastelet has been one of our directors since April 1999. From December
1998 to January 2002, Mr. Chastelet was the President, Chairman and Chief
Executive Officer of Digital Lightwave, Inc., a leading provider of fiber optic
network analysis equipment. From December 1995 to October 1998, he served as
President and Chief Executive Officer of Wandel and Goltermann Technologies,
Inc., a global supplier of communication test and measurement equipment. He is
currently on the boards of Technology Research Corporation and Fiberspace Inc.
Mr. Chastelet holds a degree in Electronics Engineering from Devry Institute of
Technology and is a graduate of the University of Toronto Executive MBA program.
John E. Curry has been a director since October 1999. His company, Hydrovane
Self Steering Inc. (formerly Karina Ventures Inc.), recently acquired a business
based in the UK that manufacturers and markets internationally a yacht self
steering device. From 1985 to 1999 Mr. Curry was a partner with Bedford Curry &
Co., Chartered Accountants, a Vancouver based firm specializing in public
companies and business financing, which he co-founded. Mr. Curry is a member of
the British Columbia Institute of Chartered Accountants and has a BA from the
University of Western Ontario.
Cameron A. Mingay, has been one of our directors since April 1999 and our
Secretary since May 1999. Since July 1999, Mr. Mingay has been a partner at
Cassels Brock & Blackwell LLP, Toronto, Ontario, Canada, specializing in the
areas of securities and corporate commercial law, with an emphasis on public
offerings, mergers and acquisitions, and corporate reorganizations. Prior to
July 1999, Mr. Mingay was a partner at Smith Lyons LLP, Toronto, Ontario,
Canada. He is currently on the board of Kinross Gold Corporation. He completed
his undergraduate degree at the University of Wisconsin and York University and
his law degree from Queen's University.
D. Bruce Sinclair, has been a director since December 1997 and our Chief
Executive Officer since November 1997. From December 1997 until October 2002,
Mr. Sinclair also served as our President. Mr. Sinclair is an experienced
management professional with a Masters of Business Administration from the
University of Toronto. He has worked in sales and management with companies
including IBM Canada, Nortel and Harris Systems Limited. From 1995 until
November 1997, he operated his own independent consulting business. From 1988 to
1995, Mr. Sinclair was with Dell Computer Corporation where he held numerous
positions including President of the Canadian subsidiary, Vice-President of
Europe and head of Dell in Europe.
Dennis R. Wing, has been one of our directors since November 1999. Mr. Wing is
President and CEO for Fahnestock Canada Inc., an investment bank. Previously, he
was a founding partner and board Member of First Marathon Securities Inc. and
was its Director of International Operations for 18 years. He is also on the
board of directors of Cryptologic Inc., Vengold Inc. and the University of
Waterloo. He holds a Bachelor of Arts degree in Economics from University of
Waterloo.
Charles W. Brown has been the Executive Vice President of the Company since
October 15, 2002. Prior to this, he was Vice President, Marketing of the Company
since February 1998. Mr. Brown has a Masters in Business Administration from the
University of Western Ontario. From 1994 until February 1998, Mr. Brown was
Clearnet Communications' first Vice President and CIO. Prior to this Mr. Brown
has held numerous senior Sales and Marketing positions including Vice President,
Sales and Marketing for Trillium Communications (1993-1994) and Director,
Strategic Planning and Marketing for BCE Mobile (1990-1993).
T. Scott Worthington has been a Vice President and the Company's Chief Financial
Officer since January 1998. From 1988 to 1996, he worked at Dell Computer
Corporation, in Canada, where he held numerous positions including CFO of the
Canadian subsidiary. From October 1996 to January 1998, he was a financial and
business consultant. Mr. Worthington is a Chartered Accountant.
20
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act"), requires officers, directors and persons who beneficially own more than
10% of a class of the Company's equity securities registered under the Exchange
Act to file reports of ownership and changes in ownership with the Securities
and Exchange Commission. Based solely on a review of the forms it has received
and on representation from certain reporting persons, the Company believes that,
during the year ended December 31, 2002, all Section 16(a) filing requirements
applicable to its officers, directors and 10% beneficial owners were complied
with by such persons.
ITEM 11. EXECUTIVE COMPENSATION
The following table describes the compensation earned in fiscal 2002 by the
Chief Executive Officer of the Company and the other executive officers who
received compensation in excess of $100,000 in 2002, 2001 and 2000 ("named
executive officers").
Summary Compensation Table
Annual Compensation Long Term
(dollar amounts in U.S. dollars)(1) Compensation
Name and Principal Position Year Salary Bonus Stock Options
Bruce Sinclair 2002 $185,401 $31,468 100,000
Pres./CEO/Director 2001 $174,387 $0 375,000
2000 $235,627 $67,322 500,000
Charles Brown 2002 $122,274 $15,974 600,000
Executive Vice President 2001 $117,943 $0 225,000
2000 $138,683 $42,692 200,000
Scott Worthington 2002 $102,077 $6,294 600,000
Vice President & CFO 2001 $89,800 $0 225,000
2000 $111,665 $25,784 200,000
(1) In accordance with regulations promulgated by the SEC, perquisites are not
included if the aggregate amount is less than the lesser of $50,000 or 10% of
salary and bonus.
Option Grants in Fiscal 2002
The following table summarizes option grants during 2002 to each of the named
executive officers .
Option/SAR Grants in Last Fiscal Year (Individual Grants)
Percent of total
Number of options Potential realizable value
securities granted to Exercise Market at assumed annual rates
underlying employees or base price on of stock price appreciation
options in fiscal price date of Expiration for option term
granted year ($/sh) grant date 0% 5% 10%
-----------------------------------------------------------------------------------------
Bruce Sinclair (1) 100,000 2.4% $0.16 $0.16 02/28/12 0 $10,062 $25,500
Charles Brown (1) 100,000 2.4% $0.16 $0.16 02/28/12 0 $10,062 $25,500
(2) 500,000 12.2% $0.01 $0.09 11/06/12 $40,000 $68,300 $111,718
Scott Worthington (1) 100,000 2.4% $0.16 $0.16 02/28/12 0 $10,062 $25,500
(2) 500,000 12.2% $0.01 $0.09 11/06/12 $40,000 $68,300 $111,718
(1) Options vest on 2/28/07
(2) Options vest during fiscal 2003.
21
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information regarding exercisable and
unexercisable stock options held as of December 31, 2002, by each of the named
executive officers. The value of unexercised in-the-money options has been
calculated by determining the difference between the exercise price per share
payable upon exercise of such options and the last sale price of the common
stock on December 31, 2002, as reported in the over-the-counter market on the
OTC Electronic Bulletin Board ($0.11 per share). No stock options were exercised
by named executive officers during 2002.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of securities Value of unexercised
underlying unexercised in-the-money
options/SARs at options/SARs at
Shares fiscal year end fiscal year end
acquired on value exercisable/ exercisable/
Name exercise (#) realized ($) unexercisable unexercisable
- -------------------------------------------------------------------------------------------------------
Bruce Sinclair (1) 0 $0 2,583,333 / 266,667 $0 / $0
Charles Brown 0 $0 1,082,933 / 816,667 $0 / $50,000
Scott Worthington 0 $0 1,260,733 / 716,667 $0 / $50,000
(1) Included in Mr. Sinclair's options are 775,000 options received from
other shareholders.
Director Compensation
During the six months ended June 30, 2002, the non-employee directors of the
Company received $1,000 per meeting attended. Subsequent to June 30, 2002, the
Board adopted a Director's compensation plan which included: 1) a $2,500 annual
retainer for each non-employee director, payable quarterly; 2) a $1,000 annual
retainer for each committee chairman; 3) a $1,000 meeting fee for each director
who attended a Board of Directors or Committee meeting in person; 4) a $250
meeting fee for each director who attended a Board of Directors or Committee
meeting via telephone; and 5) effective the next annual meeting of shareholders,
an award of options to purchase 50,000 shares of common stock for each
non-employee Director elected at the annual meeting to serve the following year.
During the year, the non-employee Directors were awarded 100,000 options, in
total, under the Employee Stock Option (2000) Plan for their participation on
the board of directors and each of its subcommittees.
Employment Agreements
D. Bruce Sinclair. On November 18, 1997, we entered into an employment agreement
with Mr. Sinclair where by he will serve as our President and Chief Executive
Officer for an initial term of one year subject to annual extensions thereafter.
Under the agreement's terms, Mr. Sinclair had a base salary of Can. $300,000 and
a bonus plan of $200,000. In the event that we terminate Mr. Sinclair without
cause, we will pay him severance in an amount equal to one year's salary plus
one month's salary for each year of employment in excess of twelve years service
Upon termination of Mr. Sinclair's employment for cause, we will have no
obligation to Mr. Sinclair. In addition, Mr. Sinclair may participate in our
employee fringe benefit plans or programs generally available to our employees.
From time to time, since that date, the Board of Directors has reviewed and
amended the base salary and bonus components of that agreement. Additionally,
the Board of Directors' has agreed to amend Mr. Sinclair's agreement to state
that in the event that Mr. Sinclair's employment is terminated, other than for
cause, we will pay him severance in an amount equal to three years' salary.
22
On October 16, 2002, Mr. Sinclair reduced his day-to-day involvement, ceased
using the title President, and waived payment in excess of Can. $84,000 of his
annual salary until such time as the Company's cash position allows payment in
accordance with his employment agreement.
Charles W. Brown. On February 16, 1998, we entered into an employment agreement
with Mr. Brown in substantially the same form as that described for Mr.
Sinclair, with the exception of certain Change in Control provisions. On October
16, 2002, Mr. Brown was named Executive Vice President of the Company.
T. Scott Worthington. On January 5, 1998, we entered into an employment
agreement with Mr. Worthington in substantially the same form as that described
for Mr. Sinclair, with the exception of certain Change in Control provisions .
Mr. Worthington serves as our Vice President and Chief Financial Officer.
The Board of Directors' has agreed to amend Mr. Worthington's agreement to state
that in the event that Mr. Worthington's roles and responsibilities with the
Company are reduced after a change of control of the Company, we will pay him
severance in an amount equal to two years' salary.
Compensation Committee Interlocks and Insider Participation
The Company's compensation committee is currently composed of Messrs. Chastelet
and Mingay. Messrs. Chastelet and Mingay are both non-employee directors. In
2002, no officer or employee of the Company participated in the deliberations of
the compensation committee concerning the compensation of the Company's
executive officers. No interlocking relationship existed between the Company's
Board or compensation committee and the board of directors or compensation
committee of any other company in 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following tables set forth, as of February 13, 2003, the stock ownership of
each officer and director of the Company, of all officers and directors of the
Company as a group, and of each person known by the Company to be a beneficial
owner of 5% or more of its Common Stock, $0.001 par value.
Name and Address of Amount of Common % of Common Stock
Beneficial Owner (1) Stock Beneficially Owned (2) Outstanding
- ----------------------------------------------------------------------------------------------------------
D. Bruce Sinclair, CEO, President, Director (3) 5,387,888 4.39%
Cameron A. Mingay, Secretary, Director (4) 249,000 0.21%
Gerry Chastelet, Director (5) 200,000 0.17%
John Curry, Director (6) 195,000 0.17%
Dennis Wing, Director (5) 150,000 0.13%
Charles Brown, Executive Vice President (7) 1,418,296 1.20%
T. Scott Worthington, Vice-President & CFO (8) 1,595,469 1.34%
------------ -----------
All Directors and Executive Officers (7 persons) 9,195,653 7.15%
------------ ------------
Crescent International Limited (9) 11,578,947 9.0%
Clarendon House
2 Church Street, Hamilton H 11, Bermuda
(1) Each director's address and officer's address is c/o WaveRider
Communications Inc., 255 Consumers Road, Suite 500, Toronto, Ontario,
Canada M2J 1R4.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated each
person possesses sole voting and investment power with respect to all
of the shares of common stock owned by such person, subject to
community property laws where applicable.
23
In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject
to options held by that person that are currently exercisable, or
become exercisable 60 days after February 13, 2003, are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Percentage ownership is based on 117,264,457 shares of common stock
outstanding on February 13, 2003, plus securities deemed to be
outstanding with respect to individual stockholders pursuant to Rule
13d- 3(d)(1) under the Exchange Act.
(3) Consists of 2,290,611 shares of common stock and 505,611 shares of
common stock issuable upon exercise of warrants and 2,591,666 shares of
common stock issuable upon exercise of options that are exercisable
within 60 days of February 13, 2003.
(4) Consists of 25,000 shares of common stock and 46,500 shares of common
stock issuable upon exercise of warrants and 177,500 shares of common
stock issuable upon exercise of options that are exercisable within 60
days of February 13, 2003.
(5) Consists of shares of common stock issuable upon exercise of options
that are exercisable within 60 days of February 13, 2003. (6) Consists
of 20,000 shares of common stock and 175,000 shares of common stock
issuable upon exercise of options that are exercisable within 60 days
of February 13, 2003.
(7) Consists of 75,628 shares of common stock and 126,402 shares of common
stock issuable upon exercise of warrants and 1,216,266 shares of common
stock issuable upon exercise of options that are exercisable within 60
days of February 13, 2003.
(8) Consists of 75,001 shares of common stock and 126,402 shares of common
stock issuable upon exercise of warrants and 1,394,066 shares of common
stock issuable upon exercise of options that are exercisable within 60
days of February 13, 2003.
(9) Consists of 11,578,947 shares of common stock issuable upon conversion
of 16,200 shares of 5% Series D convertible non-voting Preferred Stock
which are currently convertible. The conversion price is based on 95%
of the average of the three lowest consecutive closing bid prices for
the 22 trading days prior to February 13, 2003.
Equity Compensation Plan Disclosure
The following table sets forth certain information as of December 31,
2002, regarding securities authorized for issuance under our equity
compensation plans, including individual compensation arrangements. Our
equity compensation plans include the Employee Stock Option (1997)
Plan, the 1999 Incentive and Nonqualified Stock Option Plan, the
Employee Stock Option (2000) Plan, the Employee Stock Option (2002)
Plan and the Employee Stock Purchase (2000) Plan. All of these equity
compensation plans have been approved by our stockholders.
Plan Category
Number of securities
to be issued upon Weighted-average Number of securities
exercise of exercise price of remaining available for
outstanding options outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans
Equity Compensation Plans Approved by 11,661,909 $2.01 8,458,221(1)
Security Holders
Equity Compensation Plans Not Approved -- -- --
by Security Holders ---------------------- ------------------------- ------------------------
Total 11,661,909 $2.01 8,458,221 (1)
====================================================================================================================
(1) Our Stock Option Plans authorize the issuance of incentive stock options
and nonqualified stock options. The above number includes 421,383 shares of
common stock available for future grants under the Stock Option (1997)
Plan, 698,950 shares of common stock available for future grants under the
1999 Incentive and Nonqualified Stock Option Plan, 1,433,011 shares of
common stock available for future grants under the Stock Option (2000)
Plan, 3,475,000 shares of common stock available for future grants under
the Stock Option (2002) Plan, and 2,429,877 shares of common stock reserved
for future issuances under the 2000 Employee Stock Purchase Plan.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no transactions or series of transactions, for the fiscal
year ended December 31, 2002, to which the Company is a party, in which
the amount exceeds $60,000 and in which, to the knowledge of the
Company, any director, executive officer, nominee, 5% or greater
stockholder, or any member of the immediate family of any of the
foregoing persons, have or will have any direct or indirect material
interest.
ITEM 14. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and
principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on
this evaluation, the Company's principal executive officer and
principal financial officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to
material information required to be included in the Company's reports
filed or submitted under the Securities Exchange Act of 1934.
(b) Changes in Internal Controls
Since this evaluation, there have not been any significant changes in
the Company's internal controls or in other factors that could
significantly affect those controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statement Schedule
*Valuation and qualifying accounts and reserves
(b) Reports on Form 8-K
December 24, 2002 - Change in Independent Auditors
(c) Exhibits. The exhibits below marked with an asterisk (*) are included
with and filed as part of this report. The exhibits marked with a
double asterisk (**) are management contracts or compensatory plans or
arrangements. Other exhibits have previously been filed with the
Securities and Exchange Commission and are incorporated by reference to
another report, registration statement or form. References to the
"Company" below includes Channel i Inc., the Company's previous name
under which exhibits may have been filed.
Exhibit No. Description.
3.1 Articles of Incorporation of the Company, incorporated by reference to
Exhibit 3.1 to a registration statement on Form S-18, File no.
33-25889-LA.
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the
annual report on Form 10-KSB for the year ended December 31, 1996 filed
with the Securities and Exchange Commission on May 6, 1997.
3.3 Certificate of Amendment to the Articles of Incorporation of the
Company filed with the Nevada Secretary of State on October 8, 1993,
incorporated by reference to Exhibit 3.3 to the quarterly report on
Form 10-QSB for the quarter ended September 30, 1994.
3.4 Certificate of Amendment to the Articles of Incorporation of the
Company filed with the Nevada Secretary of State on October 25, 1993,
incorporated by reference to Exhibit 2(d) to the registration statement
on Form 8-A, File No. 0-25680.
25
3.5 Certificate of Amendment to the Articles of Incorporation of the Company
filed with the Nevada Secretary of State on March 25, 1995, incorporated by
reference to Exhibit 2(e) to a registration statement on Form 8-A, File No.
0-25680.
3.6 Certificate of Amendment to the Articles of Incorporation of the
Company, designating the Series A Voting Convertible Preferred Stock, filed
with the Nevada Secretary of State on March 24, 1997, incorporated by
reference to Exhibit 3.6 to Form 10-KSB for the year ended December 31,
1996 filed with the Securities and Exchange Commission on May 6, 1997.
3.7 Certificate of Amendment to the Articles of Incorporation of the
Company designating the Series B Voting Convertible Preferred Stock, filed
with the Nevada Secretary of State on May 16, 1997, incorporated by
reference to Exhibit 3.8 to Form 10-KSB for the year ended December 31,
1997 filed with the Securities and Exchange Commission on April 15, 1998.
3.8 Certificate of Amendment to the Memorandum of the Company changing
the name to WaveRider Communications Inc., filed with the Nevada Secretary
of State on May 27, 1997, incorporated by reference to Exhibit 3.7 to Form
10-KSB for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on April 15, 1998.
3.9 Certificate of Amendment to the Certificate of Designation of the
Series B Voting Convertible Preferred Stock, filed with the Nevada
Secretary of State on May 16, 1997, incorporated by reference to Exhibit
99.1 to Form 8-K filed with the Securities and Exchange Commission on May
4, 1998.
3.10 Certificate of Amendment to the Articles of Incorporation of the
Company designating the Series C Voting 8% Convertible Preferred Stock,
filed with the Nevada Secretary of State on June 3, 1998, incorporated by
reference to Exhibit 4 to Form 8-K filed with the Securities and Exchange
Commission on June 18, 1998.
3.11 Certificate of Amendment to the Articles of Incorporation of the
Company filed with the Nevada Secretary of State on July 17, 2000,
incorporated by reference to Appendix D on Form 14A filed with the
Securities and Exchange Commission on May 25, 2000.
3.12 Certificate of Designation of Series D 5% Convertible Preferred
Stock, incorporated by reference to Exhibit 10.5 to Form 8-K filed with the
Securities and Exchange Commission on June 18, 2001.
3.13 *Certificate of Amendment to the Articles of Incorporation of the
Company filed with the Nevada Secretary of State on February 25, 2003.
10.1 Class G Common Stock Purchase Warrant dated December 15, 1998,
incorporated by reference to Exhibit 4.9 to an annual report on Form 10-KSB
for the year ended December 31, 1998, filed with the Securities and
Exchange Commission on April 1, 1999.
10.2 Common Stock Purchase Warrant dated December 29, 1998, incorporated
by reference to Exhibit 4.10 to an annual report on Form 10-KSB for the
year ended December 31, 1998, filed with the Securities and Exchange
Commission on April 1, 1999.
10.3 Class H Common Stock Purchase Warrant dated June 1999, incorporated
by reference to Exhibit 4.11 to a registration statement on Form S-3, File
no. 333-82855, filed with the Securities and Exchange Commission on July
14, 1999.
10.4 Common Stock Purchase Warrant dated December 1999, incorporated by
reference to Exhibit 4.13 to a registration statement on Form S-3, File no.
333-92591, filed with the Securities and Exchange Commission on December
10, 1999.
10.5 Class J Common Stock Purchase Warrant dated December 8, 2000,
incorporated by reference to Exhibit 10.4 to Form 8-K filed with the
Securities and Exchange Commission on December 14, 2000.
10.6 Class K Common Stock Purchase Warrant dated December 8, 2000,
incorporated by reference to Exhibit 10.5 to Form 8-K filed with the
Securities and Exchange Commission on December 14, 2000.
10.7 Class L Common Stock Purchase Warrant dated December 8, 2000,
incorporated by reference to Exhibit 10.6 to Form 8-K filed with the
Securities and Exchange Commission on December 14, 2000.
10.8 Class M Common Stock Purchase Warrant dated December 8, 2000,
incorporated by reference to Exhibit 4.9 to a registration statement on
Form S-3 filed with the Securities and Exchange Commission on December 28,
2000.
10.9 Share Exchange Agreement executed the May 13, 1997 between the
Company and the shareholders of Major Wireless Communications Inc.,
incorporated by reference to Exhibit 2.1 to Form 8-K filed with the
Securities and Exchange Commission on May 29, 1997.
10.10 Agreement Supplemental to the Share Exchange Agreement executed May
13, 1997, incorporated by reference to Exhibit 10.1 to Form 8-K filed with
the Securities and Exchange Commission on May 29, 1997.
10.11 **Employee Stock Option (1997) Plan, incorporated by reference to
Exhibit 99 to a registration statement on Form S-8 filed with the
Securities and Exchange Commission on August 29, 1997.
10.12 **Employment agreement between Bruce Sinclair and WaveRider
Communications Inc., dated November 18, 1997, incorporated by reference to
Exhibit 10.10 to an annual report on Form 10-KSB for the year ended
December 31, 1997, filed with the Securities and Exchange Commission on
April 15, 1998.
10.13Amendment to the Share Exchange Agreement dated May 13, 1997,
incorporated by reference to Exhibit 10.1 to Form 8-K filed with the
Securities and Exchange Commission on May 4, 1998.
26
10.14**Amendment to the Employee Stock Option (1997) Plan incorporated by
reference to Exhibit 4.11 to a registration statement on Form S-8, filed
with the Securities and Exchange Commission on May 13, 1998.
10.15** the 1999 Incentive and Nonqualified Stock Option Plan incorporated
by reference to Appendix A on Form 14A filed with the Securities and
Exchange Commission on April 29, 1999.
10.16**Employee Stock Option (2000) Plan, incorporated by reference to
Appendix B on Form 14A filed with the Securities and Exchange Commission on
May 25, 2000.
10.17**Employee Stock Purchase (2000) Plan, incorporated by reference to
Appendix C on Form 14A filed with the Securities and Exchange Commission on
May 25, 2000.
10.18Share Sale and Subscription Agreement between WaveRider, ADE Network
Technology Pty Ltd., Philip William Anderson, Maureen Anderson and Wayne
Anderson dated September 29, 2000, incorporated by reference to Exhibit
10.1 to Form 8-K filed with the Securities and Exchange Commission on
October 16, 2000.
10.19.Amendment #1 to Share Sale and Subscription Agreement between
WaveRider, ADE Network Technology Pty Ltd., Philip William Anderson,
Maureen Anderson and Wayne Anderson dated October 9, 2000, incorporated by
reference to Exhibit 10.2 to Form 8-K filed with the Securities and
Exchange Commission on October 16, 2000.
10.20.Security Purchase Agreement between WaveRider and Capital Ventures
International dated December 8, 2000, incorporated by reference to Exhibit
10.1 to Form 8-K filed with the Securities and Exchange Commission on
December 14, 2000.
10.21.**Employment agreement between T. Scott Worthington and WaveRider
dated January 5, 1998, incorporated by reference to Exhibit 10.19 to an
annual report on Form 10-K/A filed with the Securities and Exchange
Commission on June 29, 2001.
10.22.**Employment agreement between Charles W. Brown and WaveRider dated
February 16, 1998, incorporated by reference to Exhibit 10.20 to an annual
report on Form 10-K/A filed with the Securities and Exchange Commission on
June 29, 2001.
10.23.**Employment agreement between James H. Chinnick and WaveRider dated
January 4, 1999, incorporated by reference to Exhibit 10.21 to an annual
report on Form 10-K/A filed with the Securities and Exchange Commission on
June 29, 2001.
10.24.Stock Purchase Agreement between WaveRider and Crescent International Inc.
dated June 4, 2001, incorporated by reference to Exhibit 10.1 to Form
8-K filed with the Securities and Exchange Commission on June 18, 2001.
10.25.Class N Common Stock Purchase Warrant dated June 4, 2001,
incorporated by reference to Exhibit 10.2 to Form 8-K filed with the
Securities and Exchange Commission on June 18, 2001.
10.26.Class O Common Stock Purchase Warrant, incorporated by reference to
Exhibit 10.3 to Form 8-K filed with the Securities and Exchange Commission
on June 18, 2001.
10.27 Form of Unit Subscription Agreement dated October 2001, incorporated
by reference to Exhibit 99.1 to Form 8-K filed with the Securities and
Exchange Commission on October 26, 2001.
10.28.Form of Series A Promissory Note dated October 19, 2001, incorporated
by reference to Exhibit 99.5 to Form 8-K filed with the Securities and
Exchange Commission on October 26, 2001.
10.29.Form of Common Stock Purchase Warrant dated October 2001,
incorporated by reference to Exhibit 99.6 to Form 8-K filed with the
Securities and Exchange Commission on October 26, 2001.
10.30.General Security Agreement between WaveRider and William E. Krebs
dated October 19, 2001, incorporated by reference to Exhibit 99.1 to Form
8-K filed with the Securities and Exchange Commission on November 8, 2001.
10.31.General Security Agreement between WaveRider (Canada) and William E.
Krebs dated October 19, 2001, incorporated by reference to Exhibit 99.2 to
Form 8-K filed with the Securities and Exchange Commission on November 8,
2001.
10.32.Guarantee by WaveRider (Canada) to William E. Krebs dated October 19,
2001, incorporated by reference to Exhibit 99.3 to Form 8-K filed with the
Securities and Exchange Commission on November 8, 2001.
10.33.Form of Subscription Rights Agreement between Corporate Stock Transfer,
Inc. and WaveRider dated October 17, 2001, incorporated by reference to
Exhibit 4.2 to a registration statement on Form S-3/A filed with the
Securities and Exchange Commission on November 2, 2001.
10.34.Warrant Agent Agreement between Corporate Stock Transfer, Inc. and
WaveRider dated October 17, 2001, incorporated by reference to Exhibit
4.4 to a registration statement on Form S-3/A filed with the Securities
and Exchange Commission on November 2, 2001.
10.35.Solicitation Agent Agreement between Gruntal & Co., L.L.C. and WaveRider
dated October 31, 2001, incorporated by reference to Exhibit 10.1 to a
registration statement on Form S-3/A filed with the Securities and
Exchange Commission on November 2, 2001.
10.36.Agreement between WaveRider and Innisfree M&A Incorporated dated October
22, 2001, incorporated by reference to Exhibit 10.2 to a registration
statement on Form S-3/A filed with the Securities and Exchange
Commission on November 2, 2001.
27
10.37.Key Bank National Association Escrow Agreement between WaveRider,
Corporate Stock Transfer, Inc. and Key Bank National Association dated
October 2001, incorporated by reference to Exhibit 10.3 to a
registration statement on Form S-3/A filed with the Securities and
Exchange Commission on November 2, 2001.
10.38.Form of Common Stock Purchase Warrant, incorporated by reference to
Exhibit 4.5 to a registration statement on Form S-3/A filed with the
Securities and Exchange Commission on November 2, 2001.
10.39.Form of Unit Purchase Warrant, incorporated by reference to Exhibit 4.6
to a registration statement on Form S-3/A filed with the Securities and
Exchange Commission on November 2, 2001.
10.40.**Employee Stock Option (2002) Plan incorporated by reference to Appendix
A on Form 14A filed with the Securities and Exchange Commission on May
24, 2002.
21 *Subsidiaries
23.1 *Consent of Wolf & Company, P.C., independent accountants
23.2 *Consent of PricewaterhouseCoopers LLP, independent accountants
99.1 *Officers' certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
28
WaveRider Communications Inc.
Valuation And Qualifying Accounts And Reserves
For The Years Ended December 31:
Balance Charges to Balance
Beginning Costs and at End
Description of Period Expenses Write-offs Other of Period
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
2002 $ 635,410 $ 99,413 $ (522,599) $ - $ 212,224
2001 591,877 532,842 (492,933) 3,684 635,410
2000 66,316 539,378 (13,817) - 591,877
Allowance for Deferred Income Taxes
2002 $ 14,771,000 $ 2,478,000 $ - $ -
$ 17,249,000
2001 12,498,000 2,273,000 - - 14,771,000
2000 4,738,000 7,760,000 - - 12,498,000
29
CONSOLIDATED FINANCIAL STATEMENTS
WaveRider Communications Inc.
TORONTO, ONTARIO, CANADA
DECEMBER 31, 2002
1. REPORTS OF INDEPENDENT AUDITORS
2. CONSOLIDATED BALANCE SHEETS
3. CONSOLIDATED STATEMENTS OF LOSS
4. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
5. CONSOLIDATED STATEMENTS OF CASH FLOWS
6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30
Report of Independent Accountants
To the Shareholders of WaveRider Communications Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of loss and comprehensive loss, shareholders' equity and
cash flows present fairly, in all material respects, the financial position of
WaveRider Communications Inc. (the "Company") as at December 31, 2001 and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial schedule listed in the index appearing under Item 15(b) on page 29
presents fairly, in all material respects, the information set forth herein as
at December 31, 2001 and for each of the two years then ended when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about 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, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
February 15, 2002 (except for Note 24 which is March 26, 2002)
31
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
WaveRider Communications Inc.
Toronto, Ontario, Canada
We have audited the accompanying consolidated balance sheet of WaveRider
Communications Inc. as of December 31, 2002, and the related consolidated
statements of loss, changes in shareholders' equity and comprehensive loss and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free 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. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WaveRider
Communications Inc. as of December 31, 2002, and the results of its consolidated
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial schedule listed in the index
appearing under Item 15(b) on page 29 presents fairly, in all material respects,
the information set forth herein when read in conjunction with the related
consolidated financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and its working capital has declined, as has shareholders' equity. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Wolf and Company, P.C.
Boston, Massachusetts, U.S.A.
February 14, 2003
32
WaveRider Communications Inc.
CONSOLIDATED BALANCE SHEETS
December 31
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $ 1,025,604 $ 2,244,625
Accounts receivable, less allowance for doubtful accounts 1,342,533 898,432
Due from contract manufacturers 53,437 41,295
Inventories 1,230,048 1,402,703
Current portion of note receivable 32,761 32,800
Prepaid expenses and other assets 75,362 297,282
-------------------------------
Current assets 3,759,745 4,917,137
Note receivable, net of current portion - 32,801
Property, plant and equipment, net 885,475 1,671,088
Goodwill - 3,997,477
-------------------------------
$ 4,645,220 $ 10,618,503
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,708,268 $ 2,314,920
Consideration payable on business combination - 105,256
Promissory notes - 168,893
Deferred revenue 259,235 265,505
Current portion of obligation under capital lease 12,094 131,145
-------------------------------
Current liabilities 2,979,597 2,985,719
Obligation under capital lease 6,004 36,312
-------------------------------
Total liabilities 2,985,601 3,022,031
-------------------------------
Commitments and Contingencies (Note 15) - -
Shareholders' equity:
Preferred Stock, $0.01 par value per share:
issued and outstanding 16,700 shares in 2002 and 29,000 shares in 2001. 167 290
Common Stock, $0.001 par value per share:
issued and outstanding - 116,755,119 shares in 2002 and
72,973,681 shares in 2001 116,755 72,974
Additional paid-in capital 72,397,489 65,830,352
Other equity 12,621,831 13,748,732
Deferred compensation (173,260) -
Accumulated other comprehensive income (loss) (102,371) (104,586)
Accumulated deficit (83,200,992) (71,951,290)
--------------------------------
Total shareholders' equity 1,659,619 7,596,472
-------------------------------
$ 4,645,220 $ 10,618,503
===============================
REFER TO ACCOMPANYING NOTES
33
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF LOSS
Years ended December 31
2002 2001 2000
REVENUE
Product revenue $ 7,382,123 $ 6,005,653 $ 3,592,253
Service revenue 1,626,792 1,798,364 540,739
-----------------------------------------------
9,008,915 7,804,017 4,132,992
-----------------------------------------------
COST OF REVENUE
Product revenue 6,383,955 5,519,604 4,983,048
Service revenue 394,839 436,891 256,000
-----------------------------------------------
6,778,794 5,956,495 5,239,048
-----------------------------------------------
GROSS MARGIN 2,230,121 1,847,522 (1,106,056)
------------------------------------------------
EXPENSES
Selling, general and administration 6,212,458 8,239,747 8,605,887
Employee stock-based compensation 172,500 812,200 10,386,498
Research and development 1,494,880 4,471,567 6,127,360
Employee stock-based compensation - - 1,978,679
Depreciation and amortization 763,845 3,533,438 2,164,638
Bad debt expense 99,413 532,842 539,379
Write-off of goodwill 4,069,696 155,050 -
Restructuring charges 362,588 - -
Impairment of assets - - 1,028,430
Interest expense 331,041 5,493,373 274,347
Interest income (26,598) (96,045) (581,614)
------------------------------------------------
13,479,823 23,142,172 30,523,604
-----------------------------------------------
NET LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (11,249,702) (21,294,650) (31,629,660)
DEFERRED INCOME TAX RECOVERY - - 157,045
-----------------------------------------------
NET LOSS BEFORE EXTRAORDINARY ITEM (11,249,702) (21,294,650) (31,472,615)
LOSS ON EXTINGUISHMENT OF DEBT - (198,300) -
-----------------------------------------------
NET LOSS $ (11,249,702) $ (21,492,950) $(31,472,615)
================================================
BASIC AND DILUTED LOSS PER SHARE
BEFORE EXTRAORDINARY ITEM $ (0.11) $ (0.371) $ (0.59)
================================================
BASIC AND DILUTED LOSS PER SHARE
FOR EXTRAORDINARY ITEM $ - $ (0.003) $ -
===============================================
BASIC AND DILUTED LOSS PER SHARE $ (0.11) $ (0.374) $ (0.59)
================================================
Weighted Average Number of Common Shares 105,261,533 60,269,617 53,203,750
===============================================
REFER TO ACCOMPANYING NOTES
34
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
Additional
Common Shares Preferred Shares Paid-in Share Warrants
Number Par Value Number Par Value Capital Capital Number Amount
------------------------------------------------------------------------------------------------
December 31, 1999 43,903,145 $ 43,903 764,000 $ 764 $22,599,172 $ 22,643,839 6,659,629 $3,355,434
Extension of option plan
Issuances 1,437,036 1,437 1,495,031 1,496,468 9,334,970 2,250,180
Conversions & exercises 8,881,717 8,882 (764,000) (764) 18,714,845 18,722,963 (6,466,350) (3,311,347)
Release of shares from escrow 900,000 900 3,205,350 3,206,250
Compensatory options to employees
Options to non-employees
Dividends on preferred shares
Beneficial conversion
Cumulative translation adjustments
Net loss
Comprehensive net loss ------------------------------------------------------------------------------------------------
December 31, 2000 55,121,898 $ 55,122 - $ - $46,014,398 $ 46,069,520 9,528,249 $2,294,267
Issuances 8,300,837 8,301 30,000 300 5,287,540 5,296,141 11,478,684 1,170,383
Conversions & exercises 6,300,946 6,301 (1,000) (10) 8,367,836 8,374,127 1,343,480 (593,274)
Release of shares from escrow 2,250,000 2,250 2,828,250 2,830,500
Issue for purchase of subsidiary 1,000,000 1,000 972,161 973,161
Expiration of warrants 772,818 772,818 (6,507,960) (772,818)
Compensatory options to employees -
Options to non-employees -
Amendment to conversion price 1,144,654 1,144,654 113,781
Beneficial conversion 442,695 442,695
Cumulative translation adjustments -
Net loss
Comprehensive net loss ------------------------------------------------------------------------------------------------
December 31, 2001 72,973,681 $ 72,974 29,000 $ 290 $65,830,352 $ 65,903,616 15,842,453 $2,212,339
Issuances 30,498,387 30,498 - 4,344,514 4,375,012
Conversions & exercises 7,901,801 7,902 (12,300) (123) (7,779) -
Release of shares from escrow 5,381,250 5,381 877,932 883,313
Options to non-employees -
Expiry of extended 1997 options 1,352,470 1,352,470
Cumulative translation adjustments -
Net loss -
Comprehensive net loss -------------------------------------------------------------------------------------------------
December 31, 2002 116,755,119 $ 116,755 16,700 $ 167 $72,397,489 $ 72,514,411 15,842,453 $2,212,339
=========== ========= ====== ===== =========== ============ ========== ==========
Refer to Accompanying Notes
35
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE LOSS (con't)
Accumulated
Other
Other equity Compensation Deficit Income (Loss) Total
-----------------------------------------------------------------------------------
December 31, 1999 $ 209,893 $ 3,565,327 $ - $(17,910,784) $ 8,298,382
Extension of option plan 11,099,858 11,099,858 11,099,858
Issuances 2,250,180 3,746,648
Conversions & exercises (678,024) (3,989,371) 14,733,592
Release of shares from escrow - 3,206,250
Compensatory options to employees 552,819 552,819 552,819
Options to non-employees 92,301 92,301 92,301
Dividends on preferred shares - (31,109) (31,109)
Beneficial conversion 1,911,605 1,911,605 1,911,605
---------
Cumulative translation adjustments 44,858 44,858
Net loss (31,472,615) (31,472,615)
------------
Comprehensive net loss - (31,427,757)
----------------------------------------------------------------------------------------------
December 31, 2000 $13,188,452 $ 15,482,719 $ - $(49,414,508) $ 44,858 $ 12,182,589
Issuances 1,170,383 6,466,524
Conversions & exercises (2,068,665) (2,661,939) 5,712,188
Release of shares from escrow - 2,830,500
Issue for purchase of subsidiary - 973,161
Expiration of warrants (772,818)
Compensatory options to employees 183,200 183,200 183,200
Options to non-employees 85,612 85,612 85,612
Amendment to conversion price 113,781 1,258,435
Beneficial conversion 147,794 147,794 (1,043,832) (453,343)
---------
Cumulative translation adjustments - (149,444) (149,444)
Net loss (21,492,950) (21,492,950)
------------
Comprehensive net loss - (21,642,394)
----------------------------------------------------------------------------------------------
December 31, 2001 $11,536,393 $ 13,748,732 $ - $(71,951,290) $ (104,586) $ 7,596,472
Issuances 204,000 204,000 (173,260) 4,405,752
Conversions & exercises - -
Release of shares from escrow - 883,313
Options to non-employees 21,569 21,569 21,569
Expiry of extended 1997 options (1,352,470) (1,352,470) -
-----
Cumulative translation adjustments - 2,215 2,215
Net loss (11,249,702) (11,249,702)
------------
Comprehensive net loss - (11,247,487)
----------------------------------------------------------------------------------------------
December 31, 2002 $10,409,492 $ 12,621,831 $ (173,260) $(83,200,992) $ (102,371) $ 1,659,619
=========== ============ =========== ============= =========== ===========
35 (con't)
Years ended December 31
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
2002 2001 2000
OPERATING
Net loss $ (11,249,702) $(21,492,950) $ (31,472,615)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 763,845 1,147,943 709,333
Write off of goodwill 4,069,696 155,050 -
Amortization of goodwill - 2,385,495 1,455,305
Extension of Employee Stock Option (1997) plan - - 11,099,858
Charges for issuance of options and warrants 763,121 385,940 645,120
Non-cash financing expenses 263,607 5,410,846 255,387
Compensatory shares released from escrow to employee 172,500 629,000 712,500
Write-off of acquired core technologies and goodwill - - 1,028,430
Write-off of inventories 79,953 593,072 1,568,739
Bad debt expense 99,413 532,842 539,379
Deferred income tax recovery - - (157,045)
Unrealized foreign exchange (gain) loss (91,982) (46,781) 19,150
Loss on disposal of property, plant and equipment 51,858 - -
Loss on extinguishments of debt - 198,300 -
Net changes in working capital items 106,988 (247,246) (3,671,541)
-----------------------------------------------
Net cash used in operating activities (4,970,703) (10,348,489) (17,268,000)
-----------------------------------------------
INVESTING
Acquisition of property, plant and equipment (83,206) (301,843) (1,474,040)
Proceeds on disposal of property, plant and equipment 35,120 - -
Purchase of notes - (65,601) -
Purchase of ADE Network Technology Pty. Ltd. - (567,372) (492,082)
----------------------------------------------
Net cash used in investing activities (48,086) (934,816) (1,966,122)
----------------------------------------------
FINANCING
Proceeds from sale of shares and warrants (net of issue fees) and
exercise of options and warrants 4,371,532 5,100,939 16,757,800
Repayment of promissory notes (432,500) - -
Proceeds from sale of promissory notes - 999,500 -
Proceeds from sale of convertible promissory notes (net of issue fees) - - 4,818,000
Dividends on preferred shares - - (31,109)
Payments on capital lease obligations (126,101) (295,056) (132,753)
----------------------------------------------
Net cash provided by financing activities 3,812,931 5,805,383 21,411,938
---------------------------------------------
Effect of exchange rate changes on cash (13,163) 1,645 2,169
---------------------------------------------
(Decease) Increase in cash and cash equivalents (1,219,021) (5,476,277) 2,179,985
Cash and cash equivalents, beginning of year 2,244,625 7,720,902 5,540,917
---------------------------------------------
Cash and cash equivalents, end of year $ 1,025,604 $ 2,244,625 $ 7,720,902
=============================================
REFER TO ACCOMPANYING NOTES
36
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
1. GOING CONCERN
These consolidated financial statements are prepared on a going-concern basis
which assumes that WaveRider Communications Inc. (the "Company") will realize
its assets and discharge its liabilities in the normal course of business. The
Company incurred a net loss of $11,249,702 for the year ended December 31, 2002
(2001 - $21,492,950 and 2000 - $31,472,615) and reported an accumulated deficit
at that date of $83,200,992 (2001 - $71,951,290). In addition, the requirements
to continue investing in research and development activities to meet the
Company's growth objectives, without assurance of broad commercial acceptance of
the Company's products, lend significant doubt as to the ability of the Company
to continue in normal business operations. Furthermore, the current financial
markets and the Company's current financial position make it unlikely in
management's view that the Company will be able to raise any additional capital
or debt financing within the next twelve months.
The Company has a plan that it believes will allow it to achieve profitability
and cash flow positive operations without the need for additional financing. In
recognition of these circumstances, the Company took significant steps in
October 2002 (see Note 5) to reduce its workforce and operating costs. However,
if the Company fails to achieve positive cash flow in the near term, the Company
does not presently have adequate cash to fund ongoing operations. In that case,
in order to meet its needs for cash to fund its operations, the Company would
need to obtain additional financing. In the past, the Company has obtained
financing primarily through the sale of convertible securities. Due to the
Company's low stock price and the overhang represented by outstanding
convertible securities, the Company believes that it is unlikely to be able to
obtain additional financing. If the Company is unable to either achieve its
planned cash flow positive operations and profitability or obtain significant
additional financing, it will, in all likelihood, be obliged to seek protection
under the bankruptcy laws in which event, the Company believes it is unlikely
that its common stock will have any value.
The ability of the Company to continue as a going concern is dependent upon it
achieving and maintaining profitable and cash flow positive operations or
securing additional external funding to meet its obligations as they come due.
Should the Company be unable to continue as a going concern, assets and
liabilities would require restatement on a liquidation basis which would differ
materially from the going concern basis.
2. NATURE OF OPERATIONS
WaveRider Communications Inc. was incorporated in 1987 under the laws of the
state of Nevada.
The Company develops and markets wireless data communications products
throughout the world, focusing on Internet connectivity. The Company's primary
markets are telecommunications companies and Internet Service Providers (ISPs)
supplying high-speed wireless Internet connectivity to their customers. A
significant secondary market is that of Value Added Resellers, to allow them to
supply their customers with wireless connectivity for local area networks.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis of accounting - The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries; WaveRider Communications (Australia) Pty Ltd (formerly known as
ADE Network Technology Pty Ltd.) ("ADE"), an Australian Corporation, WaveRider
Communications (USA) Inc., a Nevada Corporation, WaveRider Communications
(Canada) Inc., a British Columbia company and JetStream Internet Services Inc.,
a British Columbia company.
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America.
37
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Use of estimates in the preparation of financial statements - The preparation of
financial statements in conformity with generally accepted accounting principles
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reporting period. Actual results could differ from those
estimates.
Revenue recognition and deferred revenue - The Company complies with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
and related communiques; SAB No. 101 provides guidance regarding the
recognition, presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission (SEC).
Revenue from product sales to end-user and Value-Added Reseller customers is
recognized when all of the following criteria have been met: (a) evidence of an
agreement exists, (b) delivery to the customer has occurred, (c) the price to
the customer is fixed and determinable, and (d) collectibility is reasonably
assured. Delivery occurs when the product is shipped, except when the terms of a
specific contract include substantive customer acceptance.
Revenue from hardware maintenance contracts is recognized ratably over the term
of the contract, which is generally one year. Revenue from installation and
other services is recognized as earned and the associated costs and expenses are
recognized as incurred. In cases in which extended warranty, maintenance or
installation services are bundled with the sale of the product, the Company
unbundles these components and defers the recognition of revenue for the
services at the time the product sales revenue is recognized, based upon the
vendor specific evidence of the value of the service element Revenue from
rentals and operating leases is recognized monthly as the fees accrue.
Revenue from Internet service contracts is recognized over the term of the
contracts, which do not exceed one year.
Financial instruments - Financial instruments are initially recorded at
historical cost. If subsequent circumstances indicate that a decline in the fair
value of a financial asset is other than temporary, the financial asset is
written down to its fair value.
Unless otherwise indicated, the fair values of financial instruments approximate
their carrying amounts. By their nature, all financial instruments involve risk,
including credit risk for non-performance by counterparties. The maximum
potential loss may exceed any amounts recognized in the consolidated balance
sheets. However, the Company's maximum exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and financial guarantees is limited to the amount drawn and
outstanding on those instruments. Exposure to credit risk is controlled through
credit approvals, credit limits and monitoring procedures. The Company seeks to
limit its exposure to credit risks in any single country or region.
By virtue of its international operations, the Company is exposed to
fluctuations in currency. The Company manages its exposure to these market risks
through its regular operating and financing activities. The Company is subject
to foreign currency risk on its Canadian and Australian business activities.
The fair values of cash and cash equivalents, accounts receivable, due from
contract manufacturers, current notes receivable, accounts payable and current
liabilities approximate their recorded amounts because of their short term to
realization or settlement.
Cash and cash equivalents - All liquid investments having an original maturity
not exceeding three months are treated as cash equivalents.
Accounts receivable - The Company has historically provided financial terms to
certain customers in connection with purchases of the Company's products.
Financial terms, for credit-approved customers, are generally on a net 30-day
basis.
Management periodically reviews customer account activity in order to assess the
adequacy of the allowances provided for potential losses. Factors considered
include economic conditions, collateral values and each customer's payment
history and credit worthiness. Adjustments, if any, are made to reserve balances
following the completion of these reviews to reflect management's best estimate
of potential losses.
38
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Inventory - Raw materials are recorded at the lower of cost or replacement cost.
Finished goods are recorded at the lower of cost and net realizable value. Cost
is determined on the average cost basis and includes material, labor and
overhead, where applicable.
The Company records valuation reserves on its inventory for estimated
obsolescence or unmarketability. The amount of the write-down is equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions.
The Company balances the need to maintain strategic inventory levels to ensure
competitive lead times with the risk of inventory obsolescence due to rapidly
changing technology and customer requirements. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Product Warranty - The Company offers warranties of various lengths to its
customers depending on the specific product and terms of the customer purchase
agreement. The average length of the warranty period is 18 months. The Company's
warranties require it to repair or replace defective products during the
warranty period at no cost to the customer. At the time product revenue is
recognized, the Company records a liability for estimated costs that may be
incurred under its warranties. The costs are estimated based on historical
experience and any specific warranty issues that have been identified. (Although
historical warranty costs have been within expectations, there can be no
assurance that future warranty costs will not exceed historical amounts.) The
Company periodically assesses the adequacy of its recorded warranty liability
and adjusts the balance as necessary.
Changes in the Company's product warranty liability for the year ended December
31, 2002 are as follows:
2002
------------
Balance, beginning $ 98,155
Warranties issued 78,249
Settlements made in cash or in-kind (58,402)
Changes in estimated pre-existing warranties,
including expirations (77,657)
------------
Balance, ending $ 40,345
============
Property, plant and equipment - Property, plant and equipment are recorded at
historic cost. Effective for the first quarter of 2000, the Company adopted a
change in its method of depreciation from a declining balance to a straight line
basis, with useful lives as follows:
Computer software 3 years
Computer equipment 4 years
Lab equipment and tools 4 years
Equipment and fixtures 5 years
Assets held for lease 5 years
Leasehold improvements over the shorter of the term
of the lease or estimated
useful lives
The change in policy had no significant effect in fiscal 2000 or prior periods
on reported amounts for depreciation.
Foreign currency translation - The Company's functional currency is the US
dollar, except as noted below. Foreign denominated non-monetary assets,
liabilities and operating items of the Company are measured in US dollars at the
exchange rate prevailing at the respective transaction dates. Monetary assets
and liabilities denominated in foreign currencies are measured at exchange rates
prevailing on the consolidated balance sheet dates.
39
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The functional currency of ADE, the Company's subsidiary in Australia, is
Australian dollars. Accordingly, ADE's assets and liabilities are translated
into US dollars using the rate of exchange in effect on the balance sheet dates,
whereas ADE's revenues, expenses, gains and losses are translated at the average
rate of exchange in effect throughout the reporting period. Resulting
translation adjustments are included as a separate component of comprehensive
loss within shareholders' equity in the accompanying consolidated financial
statements.
Recognized and unrecognized foreign exchange gains (losses) included in the
statement of operations is $71,075 in 2002 (2001 - $17,021, 2000 - ($26,244)).
Income taxes - Income taxes are accounted for in accordance with the Statement
of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes". Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and income tax
bases of assets and liabilities and are measured using the income tax rates and
laws currently enacted. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to an amount that is more likely than not
expected to be realized.
Stock options - The Company applies SFAS No. 123, together with APB No. 25 as
permitted under SFAS No. 123, in accounting for its stock option plans.
Accordingly, the Company uses the intrinsic value method to measure the costs
associated with the granting of stock options to employees and this cost is
accounted for as compensation expense in the consolidated statements of loss
over the option vesting period or upon meeting certain performance criteria. In
accordance with SFAS No. 123, the Company discloses the fair values of stock
options issued to employees. Stock options issued to outside consultants are
valued at their fair value and charged to the consolidated statements of loss in
the period in which the services are rendered. Fair values of stock options are
determined using the Black-Scholes option-pricing model.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", to the stock-based employee
compensation:
2002 2001 2000
---- ---- ----
Net loss, as reported $ (11,249,702) $ (21,492,950) $ (31,472,615)
Add: Stock-based employee compensation
expense included in reported net loss 30,740 183,200 552,819
Deduct: Total stock based employee compensation
expense determined under fair value based
method for all awards (1,680,005) (1,537,485) (4,552,823)
------------------ ----------------- ------------------
Pro forma net loss $ (12,898,967) $ (22,847,235) $ (35,472,619)
================== ================= ==================
Basic and fully diluted loss per share,
as reported $ (0.11) $ (0.37) $ (0.59)
================== ================= ==================
Basic and fully diluted loss per share,
pro forma $ (0.12) $ (0.40) $ (0.67)
================== ================= ==================
Research and development costs - Research and development costs are charged to
expense as incurred.
Valuation of long-lived assets - The Company considers the carrying value of
long-lived assets when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the Company expects an
asset to generate cash flows less than the asset's carrying value, at the lowest
level of identifiable cash flows, the Company recognizes a loss for the
difference between the asset's carrying value and its fair value.
40
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Comprehensive income (loss) - Under SFAS No. 130, the Company presents
comprehensive income (loss), in addition to net income (loss) in the accounts.
Comprehensive loss differs from net loss as a result of foreign currency
translation adjustments. Accumulated other comprehensive income (loss) is
included in the consolidated statements of changes in shareholders' equity and
reflects the cumulative effect of other comprehensive income (loss) excluded
from net income (loss) as reported in the consolidated statements of income
(loss).
Recently issued accounting standards - On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") and, accordingly, the Company reclassified
acquired labor force intangibles, in the amount of $98,949, to goodwill in
compliance with the requirements of the standard. In addition, the Company
ceased the amortization of goodwill, totaling $3,997,477, as of the beginning of
fiscal 2002.
SFAS 142 requires goodwill to be tested for impairment on an annual basis and
under certain circumstances, written down when impaired, and requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. The Company determined that
there was impairment under SFAS No. 142, as of September 30, 2002, and wrote off
all existing goodwill (See Note 5).
Prior to the impairment charge, during the year ended December 31, 2002,
goodwill increased by $72,219 due to foreign exchange translation.
The following tables reflect consolidated results adjusted as though the
Company's adoption of SFAS 142 had occurred as of January 1, 2001:
Year Ended December 31
2001 2000
---------------------------------
Net Loss - as reported $ (21,492,950) $ (31,472,615)
Amortization of goodwill 2,385,495 1,455,305
---------------------------------
Net Loss - as adjusted $ (19,107,455) $(30,017,310)
=================================
Basic and fully diluted loss per share - as reported $ (0.37) $ (0.59)
Amortization of goodwill 0.04 0.03
--------------------------------
Basic and full diluted loss per share - as adjusted $ (0.33) $ (0.56)
=================================
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets -
replaces Statement No. 121--an earlier pronouncement on this topic. The new
Statement establishes a single accounting model for long-lived assets to be
disposed of by sale. Under its provisions, which apply to both continuing and
discontinued operations, companies must measure long-lived assets at the lower
of fair value--minus cost to sell--or the carrying amount. As a result, they
should no longer report discontinued operations at net realizable value or
include in them operating losses that have not yet occurred. Statement No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early implementation encouraged. The Company has adopted
SFAS No. 144 and there was no material impact as a result.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities -
The FASB has issued Statement No.146, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). The principal difference between
this Statement and Issue 94-3 relates to the requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the Board in this Statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. The provisions of the new Standard are effective for
exit or disposal activities initiated after December 31, 2002, with early
application encouraged.
41
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
SFAS No. 148, Accounting for Stock-Based Compensation -Transition and Disclosure
- -- an Amendment of FASB Statement No. 123 - This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The FASB has prescribed a tabular format and location
for the disclosures in a company's footnotes. This Statement requires that
companies having a year-end after December 15, 2002 follow the prescribed format
and provide the additional disclosures in their annual reports. The Company has
adopted SFAS No. 148 and has included the disclosure requirements in Note 3
above.
4. ACQUISITION OF SUBSIDIARIES
WaveRider Communications (Australia) Pty Ltd. - Effective October 1, 2000, the
Company acquired ADE Network Technology Pty Ltd. of Melbourne, Australia,
("ADE") a privately-held wireless infrastructure company. The Company undertook
this acquisition to provide a sales presence in Australia and South East Asia.
Subsequently, ADE changed its name to WaveRider Communications (Australia) Pty
Ltd.
Under the terms of agreement, the Company committed to pay a minimum of
$2,227,000 ($4,000,000 Australian) in 4 equal quarterly installments commencing
on the closing date. Payment of the first two installments of $1,000,000
Australian each was made in cash. On April 1, 2001, the Company issued 298,706
shares of common stock in consideration of the third installment and, on July 1,
2001, the Company issued 520,163 shares of common stock in consideration of the
fourth installment. On December 18, 2001, the Company issued 181,131 shares of
common stock in consideration of deficiencies in the fourth installment. On
January 7, 2002, the Company paid $105,256 in cash for the final consideration
owing. The shares issued and cash paid to fund deficiencies were recorded
against additional paid in capital.
As a result of the reduction of approximately half the staff of ADE, on
September 24, 2001, the Company wrote down the acquired labor force resulting
from the acquisition of ADE, in the amount of $155,050. With the ongoing decline
in the telecom sector, in September 2002, the Company wrote off the balance of
the goodwill arising from the acquisition of ADE (see Note 5).
5. RESTRUCTURING AND IMPAIRMENT OF ASSETS
Restructuring - In October 2002, in response to the continued decline in the
telecommunications sector, the Company completed a restructuring of its
operations in an effort to reduce costs. Our restructuring plan resulted in,
among other things, the reduction of 10 employees across our operations, the
majority of which were terminated by December 31, 2002. As a result of our
restructuring plan, in the fourth quarter of 2002, we recorded a restructuring
expense of approximately $167,000 related primarily to severance and related
costs. These severance expenses are included in Accounts Payable and Accrued
Liabilities at December 31, 2002 and are expected to be paid during the fourth
quarter of 2003. We also incurred and paid costs of $76,940 to terminate the
Calgary lease, $50,900 in other severance costs, $28,454 for moving of fixed
assets and corporate records and $39,294 in other termination related costs.
In addition, certain employees agreed to defer a certain portion of their
salaries until the fourth quarter of 2003. We have deferred and expensed
$34,400, and will defer and expense an additional $48,600 during the first
quarter of 2003, in compensation to senior staff, which we will not pay until
the fourth quarter of 2003. At December 31, 2002, the total deferred
compensation amount included in Accounts Payable and Accrued Liabilities was
$34,400.
42
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Write off of goodwill -In conjunction with the planned restructuring, in
September 2002, the Company undertook a complete revision to the operating plans
of WaveRider Communications (Australia) Pty Ltd. (formerly ADE Network
Technology Pty Ltd.), our wholly owned subsidiary in Australia, which we view as
an independent reporting unit and for WaveRider Communications Inc. In each
case, we compared the expected net present value of the discounted future cash
flows of the restructured operations to the current net assets of the respective
operations after a revision of all key assumptions underlying management's
goodwill valuation judgments, including those relating to short and longer-term
growth rates and discount factors reflecting increased risks in a declining
market. As a result of management's analysis, it was determined that an
impairment charge of $4,069,696 was required on the basis that the carrying
value of goodwill exceeded its fair value.
Write off of technology - During the fourth quarter of fiscal 2000, it was
determined that products built from technologies acquired from Transformation
Techniques, Inc. ("TTI") in 1999 did not meet customers' expectations under
certain operating conditions and that these technologies, in fact, could not be
remedied.
Accordingly, the Company developed replacement technologies and abandoned the
TTI technologies. All TTI amounts carried on the Company's balance sheet have
appropriately been written off, and related costs recorded, as follows:
Write off of acquired core technology $ 762,430
Write off of goodwill 266,000
-------------
Impairment of assets recorded in operating expenses $ 1,028,430
=============
In addition, the Company recorded in cost of goods sold, inventory write downs
and warranty provisions during fiscal 2000 in the amount of $1,568,739.
6. ACCOUNTS RECEIVABLE
2002 2001
------------------------------------
Accounts receivable - trade $ 1,494,622 $ 1,370,805
Other receivables 60,135 163,037
Allowance for doubtful accounts (212,224) (635,410)
------------------------------------
$ 1,342,533 $ 898,432
====================================
7. INVENTORIES
2002 2001
------------------------------------
Finished products $ 1,258,620 $ 1,152,834
Raw materials 22,043 681,768
Valuation allowance (50,615)) (431,899)
-------------------------------------
$ 1,230,048 $ 1,402,703
====================================
8. NOTE RECEIVABLE
On February 28, 2001, the Company purchased a promissory note from Platinum
Communications Corporation ("Platinum") in the amount of approximately $65,601
(Can $100,000). The note is secured by certain assets of Platinum, bears
interest at Canadian prime rate plus 2% and is repayable in 20 equal monthly
installments commencing March 1, 2002.
9. PROPERTY, PLANT AND EQUIPMENT
Net Book Net Book
Accumulated Value Accumulated Value
Cost Depreciation 2002 Cost Depreciation 2001
-----------------------------------------------------------------------------------------
Computer software $ 916,902 $ 818,555 $ 98,347 $ 1,218,946 $ 900,290 $ 318,656
Computer equipment 1,098,653 838,087 260,566 1,242,779 694,521 548,258
Lab equipment and tools 1,010,215 763,674 246,541 972,567 591,272 381,295
Equipment and fixtures 339,994 238,988 101,006 459,745 223,632 236,113
Assets held for lease 171,532 42,185 129,347 184,697 11,735 172,962
Leasehold improvements 70,263 20,594 49,669 163,049 149,245 13,804
-----------------------------------------------------------------------------------------
$ 3,607,559 $ 2,722,084 $ 885,475 $ 4,241,783 $ 2,570,695 $ 1,671,088
=========================================================================================
43
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Capital leases - computer software includes $nil (2001 - 1,714) net of
accumulated depreciation of $nil (2001 - $8,568), Computer equipment includes
$73,149 (2001 - $127,959) net of accumulated depreciation of $138,380 (2001 -
$83,570), Lab Equipment and tools includes $65,243 (2001 - $138,226) net of
accumulated depreciation of $285,342 (2001 - $212,359) and Equipment and
fixtures includes $10,904 (2001 - $90,935) net of accumulated depreciation of
$18,347 (2001 - $65,548).
The assets held for lease consist of a communication tower and wireless
communications equipment which has been leased to a customer on a fixed
three-year term. The minimum lease payments receivable under the contracts are
$34,750 in 2003 and $22,900 in 2004.
10. GOODWILL
2002 2001
-----------------------------------
Cost (Notes 3, 4 and 5) $ - $ 7,281,827
Less: Accumulated amortization - 3,284,350
----------------------------------
$ - $ 3,997,477
==================================
See Note 5
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2002 2001
-----------------------------------
Accounts payable $ 1,656,236 $ 1,528,810
Accrued salaries and benefits 241,928 208,734
Accrued severance 166,667 -
Accrued liability for obsolete inventory at third party manufacturers 161,853 60,000
Accrued audit 156,787 91,035
Other accrued liabilities 324,797 426,341
----------------------------------
$ 2,708,268 $ 2,314,920
==================================
12. PROMISSORY NOTES
On October 19, 2001, the Company issued promissory notes in the aggregate
principal amount of $834,500 and 1,794,175 common stock purchase warrants to the
Company's senior management team, certain directors and significant accredited
shareholders and received cash proceeds of $834,500. On November 5, 2001, the
Company issued, in connection with a second closing, promissory notes in the
aggregate principal amount of $165,000 and 354,750 common stock purchase
warrants to certain significant accredited shareholders and received cash
proceeds of $165,000. The notes bear an interest rate of 8%, compounded annually
and are repayable on October 19, 2002. The promissory notes, which had a general
security interest over the Company's assets, were redeemable in whole or in part
at any time by the Company subject to payment of accrued interest and a
repayment premium of 15% of the outstanding principal.
44
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The warrants are exercisable at a price of $0.50 for a period of five years,
have registration rights, a cashless exercise feature and, in addition to
regular terms and conditions, have a special adjustment clause in the event of a
consolidated or reverse split of the Company's common stock.
The net proceeds of the transaction were allocated to the primary financial
instruments as follows:
Promissory notes $ 759,620
Class O warrants 239,880
------------
Net cash proceeds $ 999,500
============
Under the terms of the notes, if, prior to maturity, the Company makes an
offering of its securities, the investors have the option and right to
participate in the offering to the extent of the value of their note plus
accrued but unpaid interest and the 15% repayment premium. With the completion
of the Company's shareholders' rights offering, on December 14, 2001, (see
"Shareholders' Rights Offering" under Shareholders' Equity) the beneficial
conversion feature ("BCF"), in the amount of $442,695, embedded in the
promissory notes was calculated and measured using the intrinsic value of the
feature based on the most beneficial conversion available to the investors, was
recorded as a reduction of the promissory notes and an increase in accumulated
paid in capital.
On December 14, 2001, the senior management and directors of the Company, and
certain other holders, returned their notes in exchange for participation in the
Company's shareholders' rights offering. Included in the exchange was the
nominal value of the notes, in the amount of $567,000, and accrued interest and
repayment premium, in the amount of $87,259. As a result of the exchange, the
promissory notes returned, which had a book value of $200,665, were accreted to
the nominal value, which resulted in a financing expense of $366,335, and with
the interest and repayment premium were transferred to share capital.
During the year ended December 31, 2001, $37,120 and $23,896 were charged to the
consolidated statements of loss for accretion of the promissory notes and
accrual of interest and repayment premium, respectively, for the notes that were
not returned. At December 31, 2001, the outstanding nominal value of the
remaining notes was $432,500.
Under the terms of the promissory notes, the remaining investors in the
promissory notes had the right to demand reFpayment of the outstanding notes as
a result of the Company completing additional financing with net proceeds in
excess of $5 million. As a result, on March 28, 2002, the Company repaid the
principal amount of $432,500 plus accrued interest and repayment premium. During
2002, $263,607 and $64,726 were charged to the consolidated statements of loss
for accretion of the promissory notes and accrual of interest and repayment
premium, respectively.
13. CONVERTIBLE PROMISSORY NOTES
On December 8, 2000, the Company issued convertible promissory notes in the
aggregate principal amount of $5,000,000 to Capital Ventures International
("CVI") and received cash proceeds of $5,000,000, less cash fees of $182,000 and
warrants valued at $23,680. The notes bore an interest rate of 6%, compounded
annually and were repayable on December 8, 2002, if not converted prior to that
date. In connection with the private placement, the Company also issued to CVI
Series J and Series K warrants to purchase up to 2,461,538 and 5,907,692 shares
of common stock at an exercise price of $3.35 per share and $2.539 per share,
respectively. The Series J warrants have a term of five years and contain a
cashless exercise feature.
The note agreement provided for the automatic conversion of the principal amount
of the notes plus accrued and unpaid interest, subject to certain terms and
conditions, into shares of the Company's common stock upon the effectiveness of
a registration statement filed with the Securities and Exchange Commission
("SEC") on December 28, 2000. The registration statement was declared effective
on March 14, 2001 and, accordingly, the conversion price has been adjusted,
based on the provisions of the agreement, to $1.49 per share, which was 90% of
the market price at the time of conversion.
45
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
In connection with the sale to CVI, the Company agreed to pay Avondale Capital
Partners Inc. ("Avondale") a fee equal to 2% of the total aggregate amount of
financing received by the Company pursuant to the Securities Purchase Agreement,
to a maximum fee of $400,000 plus 50,000 Series M warrants, for its involvement
as a consultant in connection with the Securities Purchase Agreement. Upon the
First Closing, the Company issued to Avondale Series M warrants to purchase
25,000 shares of common stock at an exercise price of $3.05 per share, which
expire on December 8, 2005. The fair value of $23,680 for the warrants has been
included in the cost of financing.
The net proceeds of the transaction were allocated to the primary financial
instruments, as follows:
Convertible promissory notes $ 1,732,346
Beneficial conversion feature 1,911,605
Series J warrants 1,195,663
Series K warrants 503,097
Series M warrants 23,680
Put option 117,736
Call option (516,229)
Deferred financing costs (149,898)
-------------
Net cash proceeds $ 4,818,000
============
The proceeds received were first allocated to the convertible promissory note,
the warrants and the options based on the relative fair values of the respective
instruments. Then the beneficial conversion feature embedded in the convertible
promissory note was calculated and measured using the intrinsic value of the
feature based on the most beneficial conversion available to the investor on the
commitment date. The Put Option reflects the value of the investor's right to
require the company to issue additional convertible promissory notes and
warrants. The Call Option reflects the value of the company's right to require
the investor to purchase additional convertible promissory notes and warrants.
On March 14, 2001, CVI exercised their right to convert promissory notes in the
principal amount of $4,550,000, with a book value of $3,481,699, plus interest
of $72,800, for 3,101,249 shares of common stock of the Company. As result,
$1,739,560 of the beneficial conversion feature was transferred from other
equity to additional paid in capital.
During the second quarter of 2001, CVI informed the Company that it was waiving
its option to purchase an additional $7,000,000 worth of shares of common stock.
As a result, the Company entered into a separate sale of Convertible Preferred
Stock (see "Issue of Convertible Preferred Stock" under Shareholders' Equity).
The sale of the convertible preferred stock triggered the repricing provisions
of the CVI convertible promissory notes and warrant agreements. Accordingly, the
conversion rate of the convertible promissory notes was reduced from $1.49 to
$1.455 and the exercise prices of the Series J and Series K warrants were
reduced from $3.35 and $ 2.539 to $2.80 and $2.48 respectively. The adjustment
to the conversion price of the convertible promissory notes resulted in a
decrease in the fair value of the convertible promissory notes and an increase
in other equity in the amount of $147,794. In addition, the fair value of
$113,781 for the changes in the exercise prices of the warrants has been
expensed in the cost of financing.
The balance of the promissory notes was converted on December 14, 2001 in
conjunction with the Company's shareholders' rights offering. In consideration
of the Company allowing CVI to convert into the shareholders' rights offering,
CVI returned 1,500,000 Series J warrants for cancellation. As a result, the
Company recorded a loss on extinguishment of debt in the amount of $198,300 and
the remaining $319,839 of the beneficial conversion feature was transferred from
other equity to additional paid in capital. The 5,907,692 Series K warrants,
valued at $530,036, had a one-year term and expired unexercised.
45
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
During the year ended December 31, 2001, $3,024,445, $1,144,654 and $85,520 were
charged to the statement of loss relating to the accretion of interest expense,
the adjustment of the conversion price and accrual of interest, respectively.
The convertible promissory note was being accreted over the period to its
redemption date of December 7, 2002.
The Call Option was amortized over the period of the option and for the year
ended December 31, 2001 $408,796 (2000 -$107,433) was charged to the
consolidated statements of loss. The Put Option, of $117,736, was credited to
the consolidated statements of loss upon its expiration in 2001.
14. SHAREHOLDERS' EQUITY
A Authorized share capital
Preferred shares issuable in series, par value of $0.01 - 5,000,000
shares Common shares, par value of $0.001 - 400,000,000 shares in 2002,
200,000,000 shares in 2001
B Issued share capital
i) Series B preferred shares - 4,000,000 Series B preferred shares were
issued upon the acquisition of Major Wireless Communication Inc. in
1997. The shares were voting and convertible into common shares at a
ratio of ten common shares for each preferred share. Each preferred
share entitled the holder to 10 votes.
The shares were held in escrow to be released upon occurrence of
certain performance related events. On April 15, 1998, the Company and
the Series B preferred shareholders agreed to amend the terms of the
preferred shares. The conversion ratio was amended to a ratio of 2.5
common shares for each preferred share. On the same date, the preferred
shares were converted into 10,000,000 common shares. These common
shares were held in escrow and released upon the occurrence of certain
performance related events. Under the original terms, if the specified
criteria had not been met by February 7, 2002, the remaining common
shares held in escrow could have been cancelled. On September 21, 2001,
the Board of Directors extended the escrow period by two years to
February 2004.
In 1999, and prior to any release of the escrow shares, two of the
shareholders agreed to donate back to the Company 500,000 shares each.
These shares have been received by the Company and returned to
treasury.
The first milestone related to the release of the common shares held in
escrow was met with the delivery of prototype product on August 18,
1999. As a result, the Company requested and the Escrow Agent released
the first 5% of the shares held under the Escrow Agreement, valued at
$534,375. The valuation was based on the closing price of the common
stock on August 18, 1999, of $1.1875 per share and was charged to
goodwill.
During the second quarter of 2000, the second milestone was met with
the first of the LMS systems becoming operational in at least one
community. As a result, the Company requested and the Escrow Agent
released, on May 26, 2000, the second 10% of the shares held under the
Escrow Agreement, 900,000 shares of common stock, valued at $3,206,250.
The Company charged $712,500 to compensation expense and charged
$2,493,750 to goodwill. The valuation was based on the closing price of
the common stock on May 26, 2000 of $3.5625 per share.
During the second quarter of 2001, a third milestone was met with the
Company surpassing cumulative gross revenues of $10 million Canadian
which results in the release of 25% of the shares held under the Escrow
Agreement. The 2,250,000 common shares released were recorded at a fair
value of $2,830,500 based on an average stock price of $1.258 at the
time the milestone was achieved. The Company charged $629,000 to
compensation expense and $2,201,500 to goodwill.
47
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
With the change in terms in September 2001, the escrow arrangement
ceased to be related to the original Major Wireless acquisition and is
now considered to be in the substance of a stock compensation
arrangement. Accordingly, the fair value of the remaining 5.4 million
shares held in escrow was charged to the consolidated statement of loss
(and not recorded as goodwill) at March 31, 2002, when it was
determined probable that the escrow milestones would be met.
Prior to the determination, one of the escrow shareholders, through
mutual agreement, returned 18,750 shares of common stock to the Company
for cancellation. The remaining 5,381,250 common shares held in escrow
were recorded at a fair value of $914,813 based on the stock price of
$0.17 at March 31, 2002. The Company charged $204,000 and $710,813 to
the consolidated statement of loss as compensation and selling, general
and administration expenses, respectively.
On April 24, 2002, the Company achieved the fourth milestone and
accordingly released 1,345,312 shares of common stock. Based on the
stock price of $0.13 on that date, the intrinsic value of the shares
released to an employee was reduced by $12,000 from the amount recorded
in March. This recovery amount was included in compensation expenses in
the consolidated statement of loss.
On or about June 6, 2002, the Company achieved the fifth milestone and
released 1,345,313 shares of common stock. Based on the average stock
price of $0.145 during that period, the intrinsic value of the shares
released to an employee was reduced by $7,500 from the amount recorded
in March. This recovery amount was included in compensation expenses in
the consolidated statement of loss.
At June 30, 2002, the intrinsic value of the shares held in escrow for
an employee was reduced by $24,000 from the amount recorded in March,
based on the stock price of $0.13 on that date. This recovery amount
was included in compensation expenses in the consolidated statement of
loss.
On July 16, 2002, the Company achieved the final milestone and released
the remaining 2,690,625 shares of common stock. Based on the stock
price of $0.15 on that date, the intrinsic value of the shares released
to an employee was increased by $12,000 from the amount recorded at
June 30, 2002. This expense amount was included in compensation
expenses in the consolidated statement of loss.
As a result of the determination that achievement of milestones was
probable, an amount of $21,569, being the fair value of certain
performance based non-employee options, was charged to consulting
expense, in March 2002.
ii) Series C Preferred share units - On June 11, 1998, the Company issued
800,000 preferred share units at a price of $2.50 per unit for cash
proceeds of $2,000,000, less costs of $50,000. Each unit consisted of
an 8% voting, convertible preferred share and one Series F warrant.
Each preferred share may be converted at the option of the holder into
one common share for no additional consideration on or before April 30,
2000. Based upon the fair value of the underlying instruments within
the preferred share unit, $1,536,343 of the total proceeds, net of
costs, was allocated to preferred shares and $413,657 was allocated to
the Series F warrants. As the preferred shares were immediately
convertible into common shares, the $712,265 difference between the
proceeds allocated to preferred shares and the fair value of the
underlying common shares has been recorded as a dividend in 1998.
Each Series F warrant entitles the holder to purchase one common share
at the exercise price of $2.50 on or before June 11, 2000. During 2000,
all of the Series F warrants were exercised for cash proceeds of
$2,000,000.
During 1999, 36,000 shares of preferred stock were converted to shares
of common stock and, in 2000, the balance of 764,000 shares of
preferred stock were converted to shares of common stock.
48
iii) Common share purchase agreement - Under a Common Share Purchase
Agreement dated December 29, 1998, the Company entered into an
arrangement to sell up to an aggregate amount of $10,000,000 of common
stock in three tranches and to issue four groups of warrants. In 1998,
1,167,860 shares of common stock in the first tranche were issued for
gross proceeds of $3,000,000 and in 1999 1,660,945 shares of common
stock in the second tranche were issued for gross proceeds of
$3,000,000. In 1999, the Company decided not to sell the third and
final tranche of shares to investors.
In 1998, as part of the agreement, the Company issued four groups of
warrants to the investors, as follows: 225,000 with an exercise price
of $2.00, 225,000 with an exercise price of $2.61, 225,000 with an
exercise price of $3.00 and 225,000 with an exercise price of $4.00.
Each warrant entitled the holder to acquire one common share at the
specified exercise price, and contain a cashless exercise feature. The
warrants expire on December 29, 2003.
In addition, 150,000 warrants with a fair value of $103,686 were
issued, in 1998, to a placement agent. Each warrant entitled the holder
to acquire one common share at an exercise price of $3.00 per share.
The warrants expire on December 29, 2003.
The initial proceeds less costs of the First Tranche have been
allocated between common stock and warrants, based on the respective
relative fair values, as follows:
Common stock $2,136,846
$2.00 warrant 124,980
$2.61 warrant 117,662
$3.00 warrant 113,607
$4.00 warrant 104,800
During 2000, the investors exercised all of the warrants with exercise
prices of $2.00, $2.61 and $3.00 and 191,249 warrants with an exercise
price of $4.00, for total proceeds of $2,477,246. In addition, the
placement agent's warrants to purchase 150,000 shares of common stock
at $3.00, with an assigned value of $103,686, were exercised using the
cashless exercise feature. This resulted in the issuance of 107,522
common shares and the return and cancellation of the balance of 42,478
warrants.
iv) Series G Warrants - As a commitment fee for the right to issue up to
$2,000,000 in convertible debentures to certain investors, the Company
issued, on December 15, 1998, the investors warrants to purchase
500,000 common shares at an exercise price of $1.50 per share. The
warrants expire on December 15, 2003. The warrants have been recorded
at their fair value of $313,325 with the costs charged to the
consolidated statements of loss in 1998. The Company terminated the
debenture agreement on January 8, 1999 without drawing any funds.
v) Series H Warrants - On June 29, 1999, the Company issued, for services
rendered, warrants to purchase 500,000 common shares at an exercise
price of $2.00 per share, up to June 29, 2004. The warrants have been
recorded at their fair value of $295,120 with the costs charged to the
consolidated statements of loss in 1999. During 2000, all of the
warrants were exercised for cash proceeds of $1,000,000.
vi) Loan Agreement - On October 15, 1999, the Company entered into a loan
agreement with AMRO International, S.A. ("AMRO") under which the
Company borrowed from AMRO $1,500,000 payable on or before May 23,
2000. Under the terms of the agreement, the Company paid interest at
10% per annum and was subject to a repayment premium of 5% of the
outstanding balance if the loan was repaid within 120 days or a 10%
premium if paid after 120 days.
Pursuant to the loan agreement the Company issued warrants to purchase
180,000 common shares at an exercise price of $1.01 per share, up to
October 31, 2003. The warrants have been recorded at their fair value
of $64,978 with the costs charged to the consolidated statement of loss
in 1999.
49
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The loan was repaid in full on December 23, 1999. During 2000, all of
the warrants were exercised for cash proceeds of $181,800.
vii) Common Stock Purchase Agreement - Under a Common Stock Purchase
Agreement, dated October 18, 1999, the Company agreed to sell and the
investor agreed to buy up to $5,000,000 in common shares of the
Company. Pursuant to the agreement, the Company issued warrants to
purchase 200,000 common shares at an exercise price of $1.01 per share,
up to October 31, 2003. The warrants have been recorded at their fair
value of $72,198 with the costs charged against the investment made in
December 1999. During 2000, all of the warrants were exercised for cash
proceeds of $202,000.
In December 1999, the investor purchased 400,000 shares of common stock
at $1.35 per share, for cash proceeds of $540,000 less fees of $33,400.
In connection with the public underwriting completed on December 23,
1999, the investor agreed to the termination of the Common Stock
Purchase Agreement and committed to purchase $4,000,000 in common stock
units.
During 1999, the investor purchased 1,525,926 common share units,
consisting of one common share and a half of a common share purchase
warrant, at $1.35 per unit, for cash proceeds of $2,060,000, less fees
of $125,600. Based on the fair value of the underlying instruments
within the common share units, $1,625,815 of the total proceeds was
allocated to common shares and the balance of $308,585 was allocated to
the warrants. During 2000, the investor exercised all of the 762,963
warrants for cash proceeds of $1,525,926.
In January 2000, the investor purchased the balance of 1,437,036 common
share units for cash proceeds of $1,940,000, less fees of $117,408.
Based on the fair value of the underlying instruments within the common
share unit, $1,496,468 of the total proceeds was allocated to common
shares and the balance of $326,124 was allocated to the warrants.
During 2000, the investor exercised all of the 718,518 warrants for
cash proceeds of $1,437,036.
viii) Public Underwriting - On December 20, 1999, the Company entered into an
underwriting agreement with Groome Capital.com Inc. ("Groome"). Under
the terms of the agreement, the Company sold 4,444,444 common stock
units, consisting of one common share and one-half common share
purchase warrant, for $1.35 per unit. The sale of units was completed
on December 23, 1999 and the Company received cash proceeds of
$6,000,000, less fees of $607,500. In addition, the Company issued to
Groome 444,444 underwriter warrants, which provide Groome with the
right to purchase 444,444 common share units at $1.35 per unit for up
to two years after the offering. Based on the fair value of the
underlying instruments within the common share unit, $4,069,664 of the
total proceeds was allocated to common shares, $898,792 was allocated
to the share purchase warrants and $424,044 was allocated to the
underwriter warrants.
During 2000, all of the underwriter warrants were exercised for cash
proceeds of $600,000. This resulted in the issuance of 222,222
additional common share purchase warrants, valued at $201,616. In
addition, during the year, 1,844,176 of the common share purchase
warrants, valued at $857,626, were exercised for cash proceeds of
$3,688,352. The remaining 600,268 warrants, with a value of $242,782,
expired unexercised on December 21, 2001.
ix) Warrants issued in connection with a Strategic Partnership Agreement -
On March 9, 2000, the Company entered into a Strategic Partnership
Agreement with VoIP International S.A. de C.V. ("VoIP"), a company
incorporated in Mexico. Under the terms of the agreement, the Company
granted VoIP exclusive rights to market the Company's products in
Mexico in exchange for commitments from VoIP to procure a minimum of
$28,000,000 of the Company's products. As an incentive, the Company
issued to VoIP 4,500,000 Common Stock Purchase Warrants which VoIP
would earn based on achievement of the minimum procurement commitments.
In addition, the Company issued 55,000 Common Stock Purchase Warrants
to an agent in connection with this transaction.
50
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
On December 8, 2000, the Company notified VoIP that it had cancelled
the Agreement for lack of performance. With the cancellation of the
Agreement, the warrants for both VoIP and the agent cannot be earned
and are, therefore, cancelled.
x) Warrants issued in connection with Investment banking services - On
April 25, 2001, the Company issued 350,000 Series M-1 warrants to the
Company's investment bankers for services rendered. The Series M-1
warrants have a term of three years and have an exercise price of $1.63
per share. The fair value of $117,128 was charged to the statement of
loss as a consulting expense.
xi) Issue of Convertible Preferred Stock - On June 4, 2001, the Company
issued 30,000 shares of Series D 5% convertible preferred stock, with a
par value of $0.01 per share and Series N warrants to purchase 877,193
shares of common stock, to Crescent International Ltd. ("Crescent") for
cash consideration of $3,000,000, less cash expenses of $423,285 and
the $22,007 fair value of 61,404 Series M-2 warrants issued to the
Company's investment bankers. Based upon the fair value of the
underlying instruments, $2,215,798 of the total proceeds, net of costs,
was allocated to preferred shares and $338,910 was allocated to the
Series N warrants. The Series D 5% convertible preferred stock has a
liquidation preference of $100 per share.
The beneficial conversion feature (BCF) embedded in the convertible
preferred stock was calculated to be $1,043,832 using the intrinsic
value of the feature based on the most beneficial conversion available
to the investor on the commitment date. The shares of preferred stock
were accreted by $1,043,832, to their redemption value, with a
corresponding charge to accumulated deficit.
The Series D convertible preferred stock is convertible to shares of
common stock at the liquidation preference value divided by the lesser
of; a) $1.3772 or b) 95% of the average of the lowest three consecutive
closing bid prices during the twenty-two trading day period immediately
preceding the Conversion Date. The Series N warrants have a term of
five years and an exercise price of $1.71 per share and contain a
cashless exercise feature. The Series M-2 warrants have a term of three
years and an exercise price of $1.71.
During 2002, 12,300 shares of the Series D 5% convertible preferred
stock were converted to 7,901,801 shares of common stock. During the
fourth quarter of 2001, 1,000 shares of the SeriFes D 5% convertible
preferred stock were converted to 317,317 shares of common stock.
xii) Sale of Common Stock - On December 18, 2001, the Company completed the
sale of 300,000 shares of common stock for cash proceeds of $132,000.
xiii) Shareholders' Rights Offering - On December 14, 2001, the Company
issued 10,675,919 common shares and Series P warrants to purchase
10,675,919 common shares, under a Shareholders' rights offering. Of the
total, 7,832,439 common shares and warrants each were issued for cash
consideration of $3,132,976, less cash expenses of $935,102. In
connection with the rights offering, the company issued 208,723
underwriter warrants to the Company's investment bankers with a fair
value of $50,459. The Series P warrants were allocated a value of
$608,436. The remaining 2,843,480 shares and warrants each were issued
as a result of; 1) the return for cancellation of promissory notes,
including interest and repayment premium, 2) conversion of convertible
promissory notes, including interest, and 3) cancellation of 1,500,000
Series J warrants. This resulting in increased accumulated paid in
capital and other equity of $1,647,707 and $188,254 respectively.
During 2002, the Company determined that it had over accrued $3,480 of
costs and increased additional paid in capital by this amount.
The Underwriters' warrants provide for the purchase of common stock
units consisting of one share of common stock and one Series P warrant.
They have a term of three years, an exercise price of $0.40 per unit
and contain a cashless exercise feature. The Series P warrants have a
term of three years, an exercise price of $0.50 per share and are
callable if the Company's common stock closes at over $1.50 for a
period of 30 consecutive trading days.
51
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
xiv) Sale of Common Stock - During March, 2002, the Company issued
30,096,662 shares of common stock for cash consideration of $4,497,000,
less costs of $165,734. C Warrants
The Company has several series of warrants outstanding at December 31,
2002 as follows:
Number Outstanding Weighted Average
Exercise Prices Remaining Life
$0.40 208,723 23 months
$0.50 12,824,844 27 months
$1.50 500,000 11 months
$1.63 350,000 16 months
$1.71 938,597 39 months
$2.80 961,538 35 months
$3.05 25,000 35 months
$4.00 33,751 11 months
-------
$0.40 - $4.00 15,842,453
==========
D Other Equity
2002 2001 2000
-------------------------------------------
Stock option extension from 1997 plan $ 9,309,048 $ 10,661,518 $ 10,661,518
Stock options to non-employees 127,662 106,092 29,747
Stock options to employees that vested on performance 768,782 768,783 585,582
Options issued below market to employees 204,000 - -
Beneficial conversion - - 1,911,605
Warrants 2,212,339 2,212,339 2,294,267
-----------------------------------------------------
$ 12,621,831 $ 13,748,732 $ 15,482,719
=====================================================
E Employee Stock Option Plans
Employee Stock Option (1997) Plan -
During 1997, the Company authorized an Employee Stock Option Plan for a total of
5,000,000 common shares that may be awarded to employees and certain
consultants. During 1998, the Company amended the plan to authorize an
additional 1,250,000 common shares. Each option under the incentive plan allows
for the purchase of one common share and expires not later than three years from
the date granted. The options are subject to various vesting and performance
requirements as outlined in the plan and any unvested options may be cancelled
if employment is terminated. Generally, for employees the options vest at 5% per
complete month from date of award and for non-employees are earned out over
their contract period.
On July 7, 2000, at the Company's annual general meeting of shareholders, a
resolution was passed extending the life of all the outstanding options awarded
to the then current employees and non-employee consultants under the Company's
Employee Stock Option (1997) Plan.
A modification that either renews a fixed award or extends the award's period
(life) results in a new measurement of compensation cost as if the award were
newly granted. Accordingly, for the fixed awards to employees, the difference
between the fair market value of the shares of Common Stock at the time of the
extension and the time of the original award was recorded as a compensation
expense to the Company. At July 7, 2000, the total charge to compensation
expense, related to the extension of the fixed awards, based on a closing stock
price of $8.75 per share, was $11,099,858.
52
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
During 2002, employees exercised none of the extended options (2001 - none, 2000
- - 58,000 for $438,000). During 2002, options to purchase 194,375 shares of
Common Stock expired unexercised. As a result, the $1,352,470 fair market value
of these options was transferred from other equity to additional paid-in
capital.
1999 Incentive and Nonqualified Stock Option Plan -
During 1999, the Company authorized a new option plan for a total of 3,000,000
common shares that may be awarded to the employees and certain consultants. Each
option under the incentive plan allows for the purchase of one common share,
which expires not later than ten years from the date of grant. The options are
subject to various vesting and performance requirements as outlined in the plan
and any unvested options may be cancelled if employment is terminated.
Generally, for employees the options vest equally over a three year period
following the date of award.
Employee Stock Option (2000) Plan -
During 2000, the Company authorized a new option plan for a total of 6,000,000
common shares that may be awarded to the employees and certain consultants. Each
option under the incentive plan allows for the purchase of one common share,
which expires not later than ten years from the date of grant. The options are
subject to various vesting and performance requirements as outlined in the plan
and any unvested options may be cancelled if employment is terminated.
Generally, for employees, the options vest equally over a three year period
following the date of award.
Employee Stock Option (2002) Plan -
During 2002, the Company authorized a new option plan for a total of 6,000,000
common shares that may be awarded to the employees and certain consultants. Each
option under the incentive plan allows for the purchase of one common share,
which expires not later than ten years from the date of grant. The options are
subject to various vesting and performance requirements as outlined in the plan
and any unvested options may be cancelled if employment is terminated.
Generally, for employees, the options vest equally over a three year period
following the date of award.
On November 6, 2002, principally as compensation for accepting salary deferrals
or reductions, the Board of Directors of the Company awarded 2,525,000 stock
options, exercisable at $0.01per share, to the Company's staff and certain
management. These options vest equally over four quarters and were recorded as
compensation options. As such, the intrinsic value on the date of grant of
$204,000 was recorded as other equity in shareholders' equity with a
corresponding charge to deferred compensation. The deferred compensation charge
will be amortized in the consolidated statement of loss over the vesting period.
In 2002, the Company recorded compensation expense related to these options of
$30,740.
53
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Stock options to employees, directors and consultants are summarized as follows:
Weighted
Average
Granted to Employees and Directors Number Exercisable Exercise Price
Balance at December 31, 1999 6,228,500 3,196,447 $ 1.31
Granted to employees and directors @ $1.31 - $13.81 3,193,192 7.55
Cancelled on termination (175,270) 3.23
Exercised (1,507,220) 1.14
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 7,739,202 3,302,360 $ 3.93
Granted to employees and directors @ $0.43 - $2.38 2,338,829 0.80
Cancelled on termination (1,069,866) 3.69
Exercised (28,900) 1.05
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 8,979,265 4,123,497 $ 3.15
Granted to employees and directors @ $0.01 - $0.16 4,090,700 .07
Cancelled on termination (1,727,392) 3.07
Exercised - -
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 11,342,573 6,666,173 $ 2.05
===================================================================================================================
Weighted
Average
Granted to Consultants Number Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 528,035 154,102 $ 0.54
Granted to consultants @ $10.00 10,000 10.00
Cancelled (22,075) 3.34
Exercised (186,625) 0.53
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 329,335 15,230 $ 0.67
Granted to consultants -
Cancelled -
Exercised (10,000) 0.50
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 319,335 97,614 $ 0.67
Granted to consultants
Cancelled -
Exercised -
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 319,335 319,335 $ 0.67
===================================================================================================================
54
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Number Weighted Average Number Weighted Average
Outstanding at Exercise Price of Weighted Average Exercisable at Exercise Price
Range of December 31 Outstanding Remaining Life December 31, of Exercisable
Exercise 2002 Options (months) 2002 Options
Prices
- ----------------------- --------------------- -------------------- --------------------- ----------------- ---------------------
$0.01 2,525,000 $ 0.01 118 - $ -
$0.14 - $0.16 1,155,000 0.16 109 100,000 0.16
$0.43 1,291,000 0.43 105 1,291,000 0.43
$0.50 - $0.56 1,308,535 0.55 90 1,308,535 0.55
$0.91 - $2.00 1,521,509 1.31 90 1,364,150 1.30
$2.03 1,667,650 2.03 76 1,604,217 2.03
$2.06 - $10.00 2,193,214 7.57 84 1,317,606 7.19
--------- ----- --- --------- -----
$0.01 - $10.00 11,661,908 $ 2.01 97 6,985,508 $ 2.26
========== ====== ==== ========= ======
The weighted average exercise price for the exercisable options for 2001 was
$3.57 (2000 - $3.76)
Non-employee and Performance Based Options -
Options granted to consultants, and performance based options granted to
employees, are valued when earned and probable that the options will vest and
the value continues to be adjusted until actual vesting is achieved. The Company
did not grant any non-employee options or any performance based employee options
during 2002. At December 31, 2002 all outstanding non-employees options had
vested (2001 - 221,720 unvested, 2000 - 314,105 unvested) and all performance
based employee options had vested (2001 -1,559,000 unvested, 2000 - 2,207,750
unvested). The non-employee options referred to above and all of the performance
based employee options, which were issued in prior years, vested based on the
escrow agreement milestones (Note 15B(i)).
The fair value of each stock option granted to consultants was estimated on the
date the consultant earned the option using the Black-Scholes option-pricing
model. The following weighted average assumptions were used in the model: nil
annual dividends (2001 - nil, 2000 - nil), expected volatility of 90% (2001 -
90%, 2000 - 90%), risk-free interest of 4.50% (2001 - 4.50%, 2000 - 5.76%) and
expected life of five years (2001 - five years, 2000 - three years). The Company
estimates that approximately 20% of options will expire prior to exercise. The
weighted average fair value of the stock options granted in 2002 was nil (2001 -
nil, 2000 - $2.98).
The remeasurement of the fair value of the non-employee options through the
vesting period resulted in a charge to the 2002 consolidated statement of loss
of $21,569 (2001 - $85,612, 2000 - $92,301).
The remeasurement of the intrinsic value of the performance-based options
awarded to employees through the vesting period resulted in no charge to
compensation expense in the 2002 consolidated statement of loss (2001 -
$183,200, 2000 - $552,819).
Fixed Option Awards -
For disclosure purposes, the fair value of each stock option granted to
employees was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
stock options granted in 2002: nil annual dividends (2001 - nil, 2000 - nil),
expected volatility of 90% (2001 - 90%, 2000 - 90%), risk-free interest of 4.50%
(2001 - 4.50%, 2000 - 5.76%) and expected life of five years (2001 - five years,
2000 - five years). The Company estimates that approximately 20% of options will
expire prior to exercise. The weighted average fair value of the stock options
granted in 2002 was $0.07 (2001 - $0.80, 2000 - $7.55).
55
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock option plans have characteristics significantly different
from those of traded options, and because change in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F Employee Stock Purchase (2000) Plan
During 2000, the Company authorized a new employee stock purchase plan for a
total of 3,000,000 common shares that may be purchased by employees at 85% of
the lower of the closing price of the Company's common stock at the beginning or
ending date of each plan period. In 2002, the Company sold 401,725 shares of
common stock for cash proceeds of $40,266. In 2001, the Company sold 168,398
shares of common stock for cash proceeds of $159,095.
15. COMMITMENTS AND CONTINGENCIES
Obligation under Capital Lease
2002
Gross Lease commitments:
2003 $ 13,901
2004 6,170
---------------
20,071
Less: Imputed interest 1,973
---------------
18,098
Less: Current portion 12,094
---------------
Long-term obligation under capital lease $ 6,004
===============
Operating Leases
2003 $ 369,282
2004 141,453
The Company rents office space with remaining terms of less than 2 years. The
Company incurred rental expenses in 2002 of $529,141 (2001 - $708,038 and 2000 -
$652,104).
Contract Manufacturers
The Company provides its contract manufacturers with ongoing production
forecasts to enable them to forecast and procure required parts. Under the terms
of the Agreements with the contract manufacturers, the Company has committed to
assume liability for all parts required to manufacture the Company's forecast
products for the next 13 weeks and all final assembly costs for the forecast
products for the next 4 weeks, on a rolling basis. These obligations amount to
approximately $1,389,000. Total purchases from contract manufacturers were
$4,607,941 in 2002 (2001 - $4,256,858, 2000 - $2,150,563). Management believes
that, should it be necessary, they could find alternative contract manufacturers
without significant disruption to the business.
Employment Agreements
The Company has entered into employment agreements with certain key employees.
These agreements include provisions relating to salaries and bonuses, severance
payments and non-competition among others.
56
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Litigation
As of December 31, 2002, there are no litigation matters outstanding against the
Company.
16. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
2002 2001 2000
--------------------------------------------------
Net changes in working capital items relating to operations
Accounts receivable $ (493,652) $ 417,196 $ (1,536,885)
Due from contract manufacturers (12,142) 1,086,497 (1,127,792)
Prepaid expenses and other assets 263,436 118,300 (190,224)
Inventory 152,721 193,856 (2,653,078)
Accounts payable and accrued liabilities 308,768 (1,907,686) 1,650,008
Consideration payable on business combination (105,256) 23,872 -
Notes payable - (24,659) -
Deferred revenue (6,887) (154,622) 186,430
----------------------------------------------------
$ 106,988 $ (247,246) $ (3,671,541)
=====================================================
Cash paid during the year for:
Interest $ 29,253 $ 34,231 $ 61,860
Non-cash investing and financing activities
Stock released from escrow $ 883,313 $ 2,201,500 $ 2,493,750
Conversion of convertible promissory
notes to common shares - 5,105,934 -
Conversion of promissory notes to common shares - 654,258 -
Capital lease additions - 37,155 370,711
Accounts receivable exchanged for assets for lease - 84,824 -
Disposal of capital lease 30,987 40,769 -
Consideration payable for acquisition - 973,161 1,534,917
Conversion of warrants - - 103,686
17. RELATED PARTY TRANSACTIONS
During the year, a total of $30,044 (2001 - $18,745 and 2000 - $25,283) was paid
or payable to directors and officers or to companies related to them for their
management and administrative services. During 2001, in connection with the sale
of promissory notes, management and directors purchased $176,000 of promissory
notes. Accrued interest, repayment premium and the total principal, in the
amount of $200,367, were converted into the shareholders' rights offering, in
2001.
57
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
18. NON-CASH INTEREST EXPENSES
2002 2001 2000
----------------------------------------------------
Accretion of promissory notes $ 263,607 $ 424,461 $ -
Accrued interest expense on consideration payable on
business combination - 65,872 45,000
Accrued interest and repayment premium
on promissory notes - 111,155 -
Accretion of interest on convertible promissory notes - 3,024,445 102,954
Adjustment of conversion price of notes - 1,144,654 -
Accrued interest on convertible promissory notes - 85,520 -
Amortization of deferred financing expense - 149,898 -
Amortization of call option - 408,796 107,433
Financing expense due to change in exercise price - 113,781 -
Expiry of put options - (117,736) -
----------------------------------------------------
Non-cash interest expenses $ 263,607 $ 5,410,846 $ 255,387
====================================================
19. INCOME TAXES
Net loss before income tax expense for each year is summarized as follows:
2002 2001 2000
----------------------------------------------------
United States $ 6,738,920 $ 15,264,526 $ 21,458,701
Canada 3,218,266 4,907,697 9,810,052
Australia 1,292,516 1,320,727 360,907
----------------------------------------------------
Net loss before income taxes $ 11,249,702 $ 21,492,950 $ 31,629,660
====================================================
US statutory rate at 35% $ 3,937,000 $ 7,522,000 $ 11,070,000
Amounts permanently not deductible for income tax purposes (1,656,000) (2,584,000) (4,734,000)
Foreign income tax rate differential 271,000 406,000 1,045,000
Net operating loss and temporary differences for which
no benefit was recognized (2,552,000) (5,344,000) (7,223,955)
-------------------------------------------------------
Deferred income tax recovery $ - $ - $ 157,045
====================================================
Deferred income tax assets/(liabilities) consist of the following:
2002 2001 2000
----------------------------------------------------
Net operating loss carry forwards $ 17,103,000 $ 14,559,000 $ 11,776,000
Property, plant and equipment 133,000 92,000 722,000
Other 13,000 120,000 -
----------------------------------------------------
Net deferred income tax assets 17,249,000 14,771,000 12,498,000
Valuation allowance (17,249,000) (14,771,000) (12,498,000)
-----------------------------------------------------
$ - $ - $ -
=====================================================
58
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The Company provides a valuation allowance for deferred income tax assets when
it is more likely than not that some portion or all of the net deferred income
tax assets will not be realized. Based on a number of factors, including the
lack of a history of profits and that the market in which the Company competes
is intensely competitive and characterized by rapidly changing technology,
management believes that there is sufficient uncertainty regarding the
realization of deferred income tax assets that a full valuation allowance has
been provided. The deferred income tax valuation allowance increased in 2002 by
$2,478,000 (2001 - $2,273,000, 2000 - $7,760,000).
As of December 31, 2002, the Company had available net operating loss carry
forwards for United States, Canadian and Australian purposes of approximately
$30,520,000, $21,534,000 and $659,000, respectively. The United States net
operating loss carry forwards begin to expire in 2008, the Canadian net
operating loss carry forwards begin to expire in 2004 and the Australian net
operating losses begin to expire in 2020. The net operating losses are subject
to certain Canadian and United States restrictions that may apply on any change
in the control of the Company and which could adversely affect the amounts and
benefits to be derived therefrom.
20. LOSS PER SHARE
The warrants, which could result in the issue of 15,842,453 additional shares of
common stock (Note 14C) and the options, exercisable at a price above the
closing sale price of the common stock of $0.11 on December 31, 2002, which
could result in the issue of 11,661,909 additional shares of common stock (Note
14E) have not been included in the loss per share calculation as they are
anti-dilutive. The shares held in escrow pertaining to the Major Wireless
Communication Inc. transaction (Note 14B(i)) have not been included in the loss
per share calculation for 2001 and 2000 as they were contingently issuable
shares.
Year ended December 31, 2002
Loss Shares Per Share
(Numerator) (Denominator) Amount
Basic and fully diluted LPS
Loss attributable to common shareholders $11,249,702 105,261,533 $0.11
==============================================
Year ended December 31, 2001
Loss Shares Per Share
(Numerator) (Denominator) Amount
Net Loss $ 21,492,950
Add: Deemed dividend on beneficial conversion (Note 14B(xi))1,043,832
---------
Basic LPS
Loss attributable to common shareholders $ 22,536,782 60,269,617 $0.374
==============================================
Year ended December 31, 2000
Loss Shares Per Share
(Numerator) (Denominator) Amount
Net Loss $ 31,472,615
Add: Cash dividends paid on preferred stock in year 31,109
--------------
Basic LPS
Loss attributable to common shareholders $31,503,724 53,203,750 $0.59
=============================================
59
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
21. SEGMENTED INFORMATION
INDUSTRY SEGMENTS
The Company operates in one industry segment: wireless data communications
product.
GEOGRAPHIC SEGMENTS
The Company operated in the following geographic segments;
Year Ended December 31,
Revenue by region 2002 2001 2000
---------------------------------------------------
United States $ 5,196,196 $ 1,909,912 $ 899,334
Australia 2,067,790 3,078,879 699,878
United Arab Emirates (1) 1,030,125 (1)
Canada 690,325 490,661 1,314,968
Rest of world 1,054,605 1,294,440 1,218,812
----------------------------------------------------
$ 9,008,915 $ 7,804,017 $ 4,132,992
====================================================
(1) Less than 10% of consolidated revenue.
Year ended December 31, 2002
Canada Australia Total
---------------------------------------------------
Property, plant and equipment $ 790,009 $ 95,466 $ 885,475
====================================================
Year ended December 31, 2002
Canada Australia Total
---------------------------------------------------
Property, plant and equipment $ 1,524,076 $ 147,012 $ 1,671,088
Goodwill 2,843,090 1,154,387 3,997,477
----------------------------------------------------
$ 4,367,166 $ 1,301,399 $ 5,668,565
====================================================
22. COMPARATIVE FIGURES
Certain comparative amounts have been reclassified to correspond with the
current year's presentation.
60
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 25, 2003 WAVERIDER COMMUNICATIONS INC.
By: /s/ D. Bruce Sinclair
------------------------------
D. Bruce Sinclair, President, Chief Executive
Officer and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities and on
the dates indicated.
Name Title Date
/s/ D. Bruce Sinclair Chief Executive Officer March 25, 2003
- ---------------------
D. Bruce Sinclair and Director
/s/ T. Scott Worthington Chief Financial Officer March 25, 2003
- ------------------------
T. Scott Worthington
/s/ Cameron A. Mingay Secretary/Director March 25, 2003
- ---------------------
Cameron A. Mingay
/s/ Gerry Chastelet Director March 25, 2003
- -------------------
Gerry Chastelet
/s/ John Curry Director March 25, 2003
- --------------
John Curry
/s/ Dennis R. Wing Director March 25, 2003
- ------------------
Dennis R. Wing
61
CERTIFICATIONS
I, D. Bruce Sinclair, Chief Executive Officer of WaveRider Communications Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of WaveRider
Communications Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 25, 2003
By: /s/ D. Bruce Sinclair
------------------------------------------
D. BRUCE SINCLAIR, CHIEF EXECUTIVE OFFICER
62
I, T. Scott Worthington, Chief Financial Officer of WaveRider Communications
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of WaveRider
Communications Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 25, 2003
By: /s/ T. Scott Worthington
----------------------------------------------
T. SCOTT WORTHINGTON, CHIEF FINANCIAL OFFICER
63