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, 2001 Commission File No.
0-25680
WaveRider Communications Inc.
(Name of small business issuer in its charter)
Nevada 33-0264030
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
255 Consumer 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 ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $16,930,158 as of March 22,
2002 (based on the closing price for such stock as of March 22, 2002).
As of March 22, 2002, there were 96,585,767 shares of the registrant's
common stock, par value $.001 per share, outstanding.
1
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Description of Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis or Plan of Operation 13
Item 8. Financial Statements 19
Item 9. Changes in and Disagreements with Accountants on Accounting 19
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
2
PART I
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 identified below under "Item 7 - Certain factors that may
affect future results". More specifically, within Item 1. Description of
Business there are a number of forward-looking statements contained within the
sections regarding Products, Markets, Sales Strategy, Competition and the
Regulatory Environment
ITEM 1. DESCRIPTION OF BUSINESS
Background
We commenced activities in the wireless industries through the acquisition of
Major Wireless Communications Inc. in May 1997. 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. In May 1997, Major Wireless consummated a business combination with
Channel i Inc., pursuant to which Channel i Inc., a company trading on the OTC
Bulletin Board, issued stock to the stockholders of Major Wireless. Major
Wireless became a subsidiary of Channel i Inc., and Channel i Inc. changed its
name to WaveRider Communications Inc. WaveRider then completed a private
placement of common and preferred share units for $1.5 million.
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.
We were originally incorporated under the laws of the State of Nevada on
August 6, 1987, as Athena Ventures Inc. From 1987 until the acquisition of
Channel i PLC in November 1993, Athena Ventures had no activities or operations.
From November 1993 until May 1997, the company operated under the names Channel
i Limited and Channel i Inc. and was in the business of developing an
interactive multimedia kiosk network to provide consumers with convenient access
to an array of products and services. Prior to the acquisition of Major Wireless
Communications Inc. (which is now known as WaveRider Communications (Canada)
Inc.) in May 1997, Channel i Inc. had become inactive.
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 bringing 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.
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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 includes the LMS2000, LMS3000and LMS4000 wireless
networks. The LMS family is designed to enable service providers to deliver
high-speed Internet access to both business and residential customers. The LMS
series supports a variety of services including Internet access for e-mail,
large file transfers, web browsing, and streaming audio and video. All LMS
products are optimized for Internet Protocol or IP networks. Connectivity is
provided to the end-users via a LMS end-user modem designed specifically for
business or residential use.
The Last Mile Solution wireless networks include a Network Management System or
NMS which features subscriber management, data distribution and bandwidth
management, interface to the service provider's network, user authentication and
network security management. The NMS enables service providers to offer varying
levels of services to their customers via a single network, monitor their
network from a single location and implement detailed customer billing systems.
The network is designed to be highly scalable, allowing service providers to
begin with a small initial network and gradually build out a larger network with
more users over time.
LMS2000
The LMS2000 was the first of our Last Mile Solution products to be released
and enables service providers to deliver high-speed Internet access to business
customers. Operating in the license-free 2.4 GHz spectrum, the LMS2000 delivers
raw data throughput speeds of up to 11 megabits per second (Mbps) via
line-of-sight connectivity.
LMS3000
Our LMS3000 is designed to deliver high-speed wireless Internet access to
small business and residential users. The LMS3000 operates in the license-free
900 MHz spectrum and delivers data throughput speeds up to 1.4 Mbps. The LMS3000
delivers non-line-of-sight communication between the communications access point
and the end-user modem, which eliminates the need for an external antenna. The
LMS3000 modem has its own antenna and can be easily set up by the end-user.
LMS4000
We also offer the combined capabilities of the LMS2000 and the LMS3000 in a
single network called the LMS4000. A fully deployed LMS4000 network can connect
more than 10,000 users in a combination of 2.4 GHz line-of-sight and 900 MHz
non-line-of sight.
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.
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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 7.75 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 this potential market, 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.
The growth in the number of Internet users in the United States is slowing
due to a high level of penetration, nevertheless the Internet population is
expected to grow from 166 million users in 2002 to 208 million in 2005 according
to eTForecasts. The greatest growth potential is provided by the demand for
broadband Internet access. According to a study released by eMarketer in July
2001, there will be nearly 10 million broadband households by the end of 2001.
They further project that this figure will rise to over 31 million households by
2004. We estimate that our addressable market for wireless broadband access will
account for over 10 percent of all broadband subscribers.
In many international markets, the telecommunications infrastructure is
inadequate or unavailable for basic Internet access. In these markets, our
wireless products have a significant cost advantage over wired technologies.
Accordingly, our international target markets are broader than our North
American target market, and we believe have an even greater revenue potential as
large parts of less developed regions such as China, India, Africa, South East
Asia and South America have only limited and high cost Internet access. To tap
these markets, we have focused significant sales and marketing efforts
internationally. This has proven particularly advantageous given the current
North American economic slowdown and curtailment of telecommunications related
capital expenditures. During 2001 our revenue from international markets
exceeded that from North America and we expect this trend to continue.
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 could also provide the means to overcome the obstacles gaining
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.
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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/mid-size
businesses,
o Point-to-multipoint technology allows for burstable, bandwidth on
demand services, which are specially suited towards a data-centric
environment,
o Wireless technology 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 result in further significant
cost savings by avoiding expensive truck rolls to install customer
premise equipment.
There are a number of different forecasts for fixed wireless access users
that predict steady growth in the next few years. ARC Group, for example,
projects that in the United States users that access the Internet using fixed
wireless access modems will increase from 180,000 in 2000 to 6.76 million in
2005. Rapid growth is also predicted for Europe, the Far East and China.
Globally, fixed wireless access users are projected to grow from a total of
240,000 in 2000 to more than 28 million in 2005.
Also, in a study published by Allied Business Intelligence Inc in July
2001, wireless Internet subscribers in the unlicensed frequency are projected to
approach 7 million by year-end 2006. According to the study the use of
unlicensed frequencies is growing faster than other fixed wireless because of
lower costs and reduced barriers to entry into the market.
The industry projections presented above were provided in studies performed
by two industry sources:
o ARC Group provides a range of analysis, research and consultancy
services to leading clients around the world, with a team of full time
consultants based in the UK supported by a global network of associates
and analysts; and
o Allied Business Intelligence Inc., a New York based technology research
think tank specializing in communications and emerging technology
markets. Allied publishes strategic research on the broadband,
wireless, electronics, networking and energy industries.
The studies contain forward-looking information which is based on
expectations and projections about future events in the wireless industry.
Actual results in the industry could differ materially from the results of these
studies. We have done nothing to verify the accuracy of the underlying sources
of the studies or the assumptions used in the studies.
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.
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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. In some international markets, we will 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.
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 State 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 5 million rural Americans. In
Canada there are approximately 50 independent telephone companies of which 9 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.
7
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 the value of incorporating a wireless strategy to
enhance their position in the marketplace by lessening 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 in
that by implementing a wireless Internet access system, an internet service
provider can go beyond just being an access provider to becoming a
communications provider with control over their own infrastructure.
From our standpoint, internet service provider targets should occupy
markets with a high demand for higher speed connections but lack the
infrastructure to deliver high-speed services. These operators should also have
a good mixture of home offices and business customers who require high-speed
access to the Internet.
International Sales Strategies
Our target markets outside of North America are predicated on spectrum
availability. Our LMS3000 product uses the 900 MHz spectrum and can operate only
in parts of South America. The LMS2000 operates in the 2.4 GHz spectrum and can
be deployed in most international markets except for Europe.
We believe that the revenue potential for our products in international
markets are even larger than in North America because the telecommunications
infrastructure required for Internet access is underdeveloped in countries such
as China, India, parts of South America and South East Asia. From the outset, we
have focused significant sales and marketing efforts internationally.
We recognize that international business has longer sales cycles and
requires a local presence for major LMS deals. As a result, we have begun to
develop our global infrastructure by establishing field sales and support
offices in key strategic regions. 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 the market
opportunities in Australia and South East Asia.
Over the past 24 months, contracts have been established with strategic
distribution partners in China, India, and the Middle East. In 2001, the Asia
Pacific region represented over 45% of our revenues. Details of geographic
sales and assets can be seen in note 22 of the attached financial statements.
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 that exceed our customer's expectations. 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 time 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.
8
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 and engineering; Network engineering, operations and 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 Electronic Manufacturing Group or EMG to
manufacture, package and distribute 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.
Electronics Manufacturing Group - EMG 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, EMG's manufacturing facility employs 200 people. EMG brings extensive
insight to the principles of wireless manufacturing and production.
Through our association with Solectron and EMG, 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 the
next 13 weeks and all final assembly costs for the forecast products for the
next 4 weeks, on a rolling basis.
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, Cisco/Aironet and Agere/Orinoco.
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.
9
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 regulator 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
With the commercial release of the LMS 4000 in Q4 of 2001, we have moved
our attention to sustaining engineering and product enhancement in three
development areas:
o increasing the speed and user capacity of the networks to allow more
users at greater throughput speeds;
o expanding the product offerings into other licensed and unlicensed
bands, to address additional international markets; and
o further enhancing the network capabilities of the systems to support
new developing applications.
In September 2001, we announced the lay off of over half of our staff,
including a significant number of engineering and development staff. Over 2002,
we intend to integrate our Research and Development facilities with our sales,
marketing and support organization in Toronto. As such, our Research and
Development spending declined significantly in Q4 of 2001 and we expect it to
stay at this reduced level until the integration is completed in the second half
of 2002.
Research and Development expenditures in 2001, excluding depreciation,
amortization and non-cash stock based compensation amounted to $4,471,567
compared with $6,127,360 in 2000 and $2,319,707 in 1999.
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 56 employees located in our head office in
Toronto, Ontario, our Research and Development facility in Calgary, Alberta and
our sales offices and subsidiaries in the United States, Canada, Australia, and
Germany, as well as at our subsidiary, JetStream Internet Services in Salmon
Arm, British Columbia.
10
In March 2002, we announced plans to close our Calgary facility and integrate
the operations in our Toronto location. It is our expectation that the
Calgary based employees will be relocated or replaced as part of this
transition. 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, and Calgary, Alberta in Canada and ADE'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, Germany and the United States. In
addition, our subsidiary JetStream Internet Services Inc maintains offices in
Salmon Arm, British Columbia in Canada.
WaveRider's Toronto Office is leased for a period of five years ending May 31,
2004 and the lease for our JetStream's office was renewed effective January 1,
2001, for a three-year period. Our main Calgary facilities are being leased for
a period of five years ending March 31, 2004 and as part of the transition plan
we will be looking to sublet the location in the second half of 2002.
Cost commitments related to present leases are set forth in note 16 "Commitments
and contingencies" of the attached financial statements.
ITEM 3. LEGAL PROCEEDINGS
The information required hereunder in this report is set forth in note 16
"Commitments and contingencies" of the attached financial statements.
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 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common shares are quoted under the symbol "WAVC" on the NASDAQ
National Market System operated by the National Association of Securities
Dealers, Inc. ("NASD"). 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:
2001 Bid 2000 Bid
High Low High Low
First Quarter $2.69 $1.25 $15.84 $2.00
Second Quarter $1.81 $1.03 $10.25 $3.31
Third Quarter $1.28 $0.31 $9.81 $4.12
Fourth Quarter $0.50 $0.21 $5.37 $1.03
Holders: The Company has approximately 1,000 common shareholders of record as of
March 21, 2002. This number does not include shareholders whose shares are held
in street or nominee names.
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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
2001 2000 1999 1998 1997
REVENUE $ 7,804,017 $ 4,132,992 $ 1,716,045 $ 205,882 $ 77,459
COST OF PRODUCT AND
INTERNET SALES 5,956,495 5,239,048 1,294,815 75,467 21,798
----------------------------------------------------------------------
GROSS MARGIN 1,847,522 (1,106,056) 421,230 130,415 55,661
EXPENSES 23,142,172 30,523,604 8,373,080 4,607,933 1,380,621
----------------------------------------------------------------------
NET LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (21,294,650) (31,629,660) (7,951,850) (4,477,518) (1,324,960)
DEFERRED INCOME TAX RECOVERY - 157,045 504,000 - -
----------------------------------------------------------------------
NET LOSS BEFORE
EXTRAORDINARY ITEM (21,294,650) (31,472,615) (7,447,850) (4,477,518) (1,324,960)
LOSS ON EXTINGUISHMENT OF DEBT (198,300) - - - -
----------------------------------------------------------------------
NET LOSS $ (21,492,950) $ (31,472,615) $(7,447,850)$(4,477,518)$(1,324,960)
===============================================================
BASIC AND DILUTED LOSS PER SHARE
BEFORE EXTRAORDINARY ITEM $ (0.371) $ (0.59) $ (0.25) $ (0.18) $ (0.11)
======================================================================
BASIC AND DILUTED LOSS PER SHARE
OR EXTRAORDINARY ITEM $ (0.003) $ - $ - $ - $ -
======================================================================
BASIC AND DILUTED LOSS PER SHARE $ (0.374) $ (0.59) $ (0.25) $ (0.18) $ (0.11)
======================================================================
Weighted Average Number
of Common Shares 60,269,617 53,203,750 34,258,565 29,485,320 12,299,522
======================================================================
BALANCE SHEET DATA:
As at December 31,
2001 2000 1999 1998 1997
Cash and cash equivalents $ 2,244,625 $ 7,720,902 $ 5,540,917 $ 3,047,257 $ 437,746
----------------------------------------------------------------------
Working capital 1,931,418 7,331,220 5,222,841 2,259,824 241,592
Property, plant & equipment 1,671,088 2,395,373 978,160 808,531 340,599
Total assets 10,618,503 20,933,045 10,080,516 4,146,834 932,161
Convertible promissory notes - 1,835,299 - - -
Long term capital leases 36,312 224,347 18,625 12,555 -
Shareholders' Equity 7,596,472 12,182,589 8,298,382 3,098,368 649,919
12
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 3 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 reaches each of the
milestones under the escrow agreement, we release a specific percentage of the
shares and the value of those shares, at the time of release is included in
goodwill or compensation expense. Depending on the price of the common shares at
the time of release the value assigned can vary dramatically. During 2001, we
released 2,250,000 common shares from the escrow agreement (2000 - 900,000, 1999
- - 450,000). This resulted in a charge of $629,000 to compensation expense (2000
- - $ 712,500, 1999 - nil) and an increase of goodwill in the amount of $2,201500
(2000 - $2,493,750, 1999 - $534,375). The release of the escrow shares and the
resulting goodwill has resulted in a significant increase in depreciation and
amortization expense to $3,533,438 in 2001 (2000 - $2,164,638, 1999 - $736,875).
In 2000, we wrote off $1,028,430 of acquired core technology and goodwill,
related to our purchase of TTI. In addition, in 2000, we 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.
Our financing activities in 2001 have resulted in a significant number of
non-cash accounting charges amounting to $5,410,846. This resulted in financing
expenses increasing to $5,493,373 in 2001 (2000 - $274,347, 1999 - $184,371).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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, are traded under
the symbol "WAVC" on the NASDAQ National Market System.
Subsequent to year-end, during March 2002, we raised $4,497,000, less cash
fees of $134,750, through the sale of 30,096,666 shares common stock
registered by us on our S-3 shelf registration statement.
On December 14, 2001, we completed a shareholders' rights offering selling
10,675,919 units, consisting of one common share and one warrant per unit, for
cash proceeds of $3,132,976 and the extinguishment of debts and warrants, in the
principal amount of $1,017,000, less cash expenses of $935,102 and $50,459 of
expenses paid in warrants.
On October 19, 2001, we sold promissory notes in an aggregate principal amount
of $834,500 and on November 5, 2001, we sold an additional amount of $165,000.
The notes have a one year term and bear interest at an annual rate of 8% plus a
repayment premium of 15%. The notes are secured by a security interest in all
our assets. Also, in connection with the sale of the notes we issued 2,148,925
common stock purchase warrants which are exercisable for a term of five years at
a per share exercise price of $.50 per share.
On December 14, 2001, promissory notes in the principal amount of $567,000 were
returned for cancellation in exchange for the holders participation in the
Shareholders' Rights offering. The holders of the remaining notes may demand
repayment of the notes, including the principal, all accrued interest and the
repayment premium at any time up until maturity.
On June 4, 2001, we raised $2,576,715 through the sale to Crescent International
Ltd. of 30,000 shares of Series D convertible preferred stock and 877,193 Series
N warrants. In connections with this transaction, we issued 61,404 Series M-2
warrants as a finders' fee. We have filed a registration statement (Registration
No. 333-67634) to register the shares of common stock issuable upon conversion
of the Series D convertible preferred stock. This registration statement was
declared effective on September 18, 2001. As of December 31, 2001, Crescent
International Ltd. had converted 1,000 shares of Series D convertible preferred
stock into 317,317 shares of common stock.
13
During 2001, we also raised $132,000 through the sale of common stock
registered by us on our S-3 shelf registration statement and $194,350 through
exercises of employee stock options and purchases under the Company's employee
stock purchase plan.
In 2000, we raised $16,757,800, net of cash expenses, through the sale of
10,318,753 shares of common stock and 940,740 common stock purchase warrants. Of
those shares of common stock, we issued 6,423,872 shares pursuant to exercises
of warrants, net of 42,478 warrants that were cancelled through a cashless
exercise. The private and public sale of shares and attached warrants accounted
for the issue of 1,437,036 shares of common stock and 940,740 common stock
purchase warrants. We issued 1,693,845 shares of common stock pursuant to
exercises under our employee option plans. In addition, we issued 764,000 shares
of common stock pursuant to the conversion of shares of Series C preferred
stock.
In 2000, we also raised $4,818,000, net of cash expenses, through the sale
of convertible promissory notes and warrants to Capital Ventures International
or CVI. On March 14, 2001, CVI converted notes in the principal amount of
$4,550,000, plus interest, for 3,101,249 shares of our common stock and on
December 14, 2001 converted the balance of the notes through participation in
the Shareholders' Rights offering. Included with the promissory notes were
2,461,538 Series J warrants, originally exercisable at$ 3.35 per share for 5
years and repriced to be exercisable at $2.80, and 5,907,692 Series K warrants,
originally exercisable at $2.539 for one year and subsequently repriced at
$2.48. CVI returned 1,500,000 Series J warrants for cancellation as additional
consideration for their participation of the Shareholders' Rights offering, on
December 14, 2001, and all of the Series K warrants expired unexercised. As part
of the agreement, we also issued 25,000 Series M warrants, exercisable at $3.05
for five years, as a finder's fee.
In 1999, we raised $10,909,353, net of cash expenses, through the sale of
11,951,664 shares of common stock and 4,309,629 common stock purchase warrants.
The private and public sale of shares and attached warrants accounted for the
issue of 10,857,766 shares of common stock and 4,309,629 common stock purchase
warrants. We issued 375,440 shares of common stock pursuant to exercises under
our employee option plans, 30,000 shares through the exercise of warrants and
36,000 shares pursuant to the conversion of shares of Series C preferred stock.
In addition, we issued 384,588 shares of common stock pursuant to the
acquisition of Transformation Techniques, Inc. and 267,870 shares of common
stock pursuant to our 1997 employee stock compensation plan.
The details of these offerings were disclosed in previous filings. The
proceeds from these issues have and will continue to be used to continue the
on-going expansion of the operations of the Company and the development of the
WaveRider(R) product families.
General
We incurred a net loss for the year ended December 31, 2001, of $21.5 million on
revenues of $7.8 million, compared to a net loss for the year ended December 31,
2000, of $31.5 million on revenues of $4.1 million and a net loss for the year
ended December 31, 1999 of $7.4 million on revenues of $1.7million. Our reported
results for 2001 included non-cash expenses in the amount of $10.8 million (2000
- - $17.9 million, 1999 - $1.2 million).
On September 24, 2001, we reduced our staff by 56% and our executive staff
waived all salaries, bonuses and other cash payments and other key management
personnel agreed to a 25% pay reduction for the period October 1, 2001 until
December 14, 2001, the date the shareholder rights offering was completed.
In March 2002, we announced that we will be shutting our Calgary facility and
consolidating Research and Development into our Toronto location. It is
anticipated that the integration will improve communications and efficiency
within the organization and as a result increase our ability to assist customers
to plan, install and deploy our LMS products.
Our cash balance decreased to $2.2 million compared to $7.7 million at December
31, 2000 and $5.5 million at December 31, 1999. See "Liquidity and Capital
Resources" for fuller discussion of our equity financings.
14
Revenue
Total revenue increased 89% in 2001, compared to 2000, primarily due to the
commercial release of our LMS3000 network system and to the continued expansion
of our sales and marketing. Revenues increased 141% in 2000, compared to 1999,
primarily due to the commercial release of our LMS 2000 network system and to
the expansion of our sales and marketing.
Cost of Product and Internet Sales
We recorded a gross margin of $1,847,522 in 2001 compared to a gross margin
deficiency in 2000 of $1,106,056 and a gross margin of $421,230 in 1999. Cost of
Product and Internet Sales in 2000 was adversely affected by the $1,568,739
write-off of TTI technology related inventories and warranty provisions.
Costs for service sales include third party service contracts and direct
purchased costs for provision of the services. The costs do not include salaries
and overheads for our employees or indirect costs of providing services. These
costs are included in selling, general and administrative expenses.
Over the past year, we have continued to see pricing pressures on our NCL
product line as telecom spending remains weak. In addition, with the
introduction of the new non-line of sight products, the EUM3000 modems,
economies of scale and design simplification had not been reached during 2001.
These factors combined to result in lower margins than would be expected over
the product lives.
Expenses
Selling, general and administrative expenses, excluding non-cash stock related
charges, declined to $8,239,747 in 2001 (2000 - $8,605,887, 1999 - $4,634,505).
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. We anticipate that we will continue to curtail expenditures through
2002. 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.
We moved to a level of sustaining engineering in the second half of 2001 for our
NCL and LMS product families, with Research and Development costs, excluding
stock related expenses, depreciation and amortization, in 2001 amounting to
$4,471,567 (2000 -$6,127,360, 1999 - $2,319,707). Further, in early 2002, we
announced that we intend to close our Calgary facility during the second half of
2002 and transition the operations to our Toronto location. We anticipate that
we will continue to maintain our 2001 level expenditures through 2002 as we
consolidate our Research and Development activities into our Toronto location.
The final costs of this transition have not been determined but due to the
relatively long transition period we believe that costs will not have a
significant impact on our ongoing expense levels.
When the current operations of the 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, any charges resulting from future releases in escrow shares will be
charged directly to the consolidated statement of loss 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 2001, we released 2,250,000 common shares from the
escrow agreement (2000 - 900,000, 1999 - 450,000). This resulted in a charge of
$629,000 to compensation expense (2000 - $ 712,500, 1999 - nil) and an increase
of goodwill in the amount of $2,201500 (2000 - $2,493,750, 1999 - $534,375). As
of December 31, 2001, we had achieved the first three performance events in the
escrow agreement resulting in the release of 3,600,000 shares of Common Stock or
40% of the escrow shares. We expect that the remaining 5,400,000 shares will be
released from escrow during 2002 and the value of the shares will be recorded at
the date the respective performance events occur. The release of the escrow
shares and the resulting goodwill has resulted in a significant increase in
depreciation and amortization expense to $3,533,438 in 2001 (2000 - $2,164,638,
1999 - $736,875).
15
Our financing activities in 2001 have resulted in a significant number of
non-cash accounting charges amounting to $5,410,846. This resulted in financing
expenses increasing to $5,493,373 in 2001 (2000 - $274,347, 1999 - $184,371).
During 2000, the extension of our 1997 Option Plan resulted in non-cash
accounting charges in the amount of $11,099,858.
Supplementary financial information
Three Months Ended
Fiscal 2001 March June September December
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
Fiscal 2000
Net revenues $ 806,152 $ 715,620 $ 1,206,854 $ 1,404,366
Gross profit 158,668 109,245 83,312 (1,457,281)
Loss before extraordinary item (2,544,861) (5,071,757) (15,758,357) (8,097,640)
Net loss (2,544,861) (5,071,757) (15,758,357) (8,097,640)
Net loss per common share (0.05) (0.09) (0.29) (0.15)
Weighted average shares outstanding 49,263,629 53,434,117 54,992,503 55,113,848
Certain factors that may affect future results.
Following are certain risk factors associated with our Company and with
ownership of our stock.
We have a limited operating history, therefore there is a high degree of
uncertainty whether our business plans or our products will be successful.
Up to the beginning of the year 2000, our company had been mainly focused on the
research and development of our products and as a result had limited sales or
revenues. There can be no assurance that the products that we offer will meet
with wide market acceptance. In addition, there is no guarantee that even if
there proves to be a wide market for our products, such market will be able to
sustain our profitability requirements.
None of our current products has achieved widespread distribution or customer
acceptance. Although, some of our products have passed the development stage, we
have not yet established a commercially viable market for them. Although we
believe that we have the expertise to commercialize our products and establish a
market for them, there is no assurance that we will be successful or that such
products will prove to have widespread customer appeal.
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
$21,492,950 for the year ended December 31, 2001 (2000 - $31,472,615 and 1999 -
$7,447,850) and reported an accumulated deficit at that date of $71,951,290
(2000 - $49,414,508). We expect to continue to incur losses until at least the
fourth quarter of 2002.
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 conditions to a similar extent as other
companies who export products all over the world. Our sales have been adversely
affected by recent world events and could be adversely affected if similar
events occur in the future.
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 these 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.
18
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.
If our common stock is delisted from the Nasdaq National Market, you may find it
more difficult to sell your shares of our common stock.
Our common stock is currently listed on the Nasdaq National Market. On
March 21, 2002, the last reported sale price of our common stock was $0.18 per
share. Since our minimum bid price has been below $1.00 for 30 consecutive
trading days, we may not be able to maintain the standards for continued listing
on the Nasdaq National Market and our common stock could be delisted. Delisting
from the Nasdaq National Market could result in a less liquid market for our
common stock than would otherwise exist. 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.
If our common stock were subject to the penny stock rules, 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. If our shares are delisted from the Nasdaq National Market, they are
likely to become subject to the SEC penny stock rules which could adversely
affect the market liquidity of our common stock. 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 8. FINANCIAL STATEMENTS
The information required hereunder in this report as set forth in the "Index to
Financial Statements" on page 22.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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.
19
Name Age Position
D. Bruce Sinclair 51 Chief Executive Officer, President, Director
Charles W. Brown 46 Vice President, Sales and Marketing
James H. Chinnick 55 Vice President, Engineering
T. Scott Worthington 47 Vice President, Chief Financial Officer
Cameron A. Mingay (1) 50 Secretary, Director
Gerry Chastelet (1), (2) 55 Director
John E. Curry (2) 55 Director
Dennis R. Wing (2) 53 Director
- ----------
(1) Member of the compensation committee
(2) Member of the audit committee
Gerry Chastelet has been a director of the Company 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 was appointed a director of the Company in October 1999. Mr. Curry
has been President of Karina Ventures Inc., a venture capital consulting company
since September 1999. Prior, Mr. Curry was with Bedford Curry & Co., Chartered
Accountants, a Vancouver based firm specializing in public companies and
business financing, which he co-founded in 1985. 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 a director of the Company since April 1999 and the
Secretary of the Company 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 and is the
Corporate Secretary of Nextair Inc. 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 and the President of the Company since
December 1997 and the Chief Executive Officer of the Company since November
1997. 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, Northern Telecom and Harris
Systems Limited. From 1988 to 1991, Mr. Sinclair was with Dell Computer
Corporation, a computer manufacturing company, where he held the office of
President of its Canadian subsidiary. In 1991 he was appointed Vice-President,
Europe for Dell Computer Corporation and subsequently head of Dell in Europe. He
resigned from Dell in 1995 and, until November 1997, he operated his own
independent consulting business.
Dennis R. Wing was appointed a director of the Company in November 1999. Mr.
Wing is Director of International Operations for Fahnestock & Co. Inc., a U.S.
investment bank. Previously, he was founding partner and Board Member of First
Marathon Securities Inc. and was its Director of International Operations for 18
years. His other Board memberships include Cryptologic Inc., Vengold Inc. and
the University of Waterloo. He holds a Bachelor of Arts degree in Economics from
University of Waterloo.
20
Charles W. Brown has been the 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).
James H. Chinnick has been Vice President, Engineering of the Company since
January 1999. From 1995 until 1998, Mr. Chinnick was vice president and general
manager of Harris Corporation's Wireless Access Division in Calgary, AB. Prior
to this, Mr. Chinnick held several senior positions with NovAtel (1988-1995),
Northern Telecom (1985-1988), Foundation Electronic Instruments (1980-1984) and
the Communications Research Centre in Ottawa (1971-1980). In addition to a B.Sc.
Engineering (Physics) from Queens University, he has a M.Sc. in Electrical
Engineering (Communications) from Queens University and a Diploma in Business
Administration from the University of Ottawa. He is a member of the Association
of Professional Engineers, Geologists and Geophysicists of Alberta.
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.
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, 2001, all Section 16(a) filing requirements
applicable to its officers, directors and 10% beneficial owners were complied
with by such persons. Subsequent to year-end, the Annual Statements of
Beneficial Ownership of Securities, on Form 5, were filed 11 days late by the
officers and directors.
ITEM 11. EXECUTIVE COMPENSATION
The following table describes the compensation earned in fiscal 2001 by the
Chief Executive Officer of the Company and all executives officer who received
compensation in excess of $100,000 in 2001, 2000 and 1999. The non-employee
directors of the Company received $1,000 per meeting attended during the year
and in total were awarded 100,000 options under the Employee Stock Option (2000)
Plan for their participation in the board of directors and each of its
subcommittees.
SUMMARY COMPENSATION TABLE 2001
Annual Compensation
(dollar amounts in U.S. dollars)
Name and Principal Position Year Salary Bonus Stock Options
Bruce Sinclair 2001 $174,387 $0 375,000
Pres./CEO/Director 2000 $235,627 $67,322 500,000
1999 $204,730 $134,617 100,000
Charles Brown 2001 $117,943 $0 225,000
Vice Pres., Sales & Marketing 2000 $138,683 $42,692 200,000
1999 $128,156 $50,885 535,000
James Chinnick 2001 $104,218 $0 225,000
Vice Pres., Engineering 2000 $97,482 $71,631 200,000
1999 $87,748 $76,732 630,000
Scott Worthington 2001 $89,800 $0 225,000
Vice President & CFO 2000 $111,665 $25,784 200,000
1999 $103,863 $26,923 450,000
21
The following table summarizes option grants during 2001 to the executive
officers named in the Summary Compensation Table (the "Named Executive
Officers")
Option/SAR Grants in Last Fiscal Year (Individual Grants)
Percent of total
Number of options Potential realizable value
securities granted to Exercise Market at assumed annual rates
underlying employees or base price on of stock price appreciation
options in fiscal price date of Expiration for option term
granted year ($/sh) grant date 0% 5% 10%
-----------------------------------------------------------------------------------------
Bruce Sinclair (1) 25,000 1.1% $1.63 $1.63 2/28/11 0 $ 2,038 $ 4,075
(2) 350,000 15.0% $0.43 $0.43 10/10/11 0 $ 7,525 $15,050
Charles Brown (1) 25,000 1.1% $1.63 $1.63 2/28/11 0 $ 2,038 $ 4,075
(2) 200,000 8.6% $0.43 $0.43 10/10/11 0 $ 4,300 $ 8,600
James Chinnick (1) 25,000 1.1% $1.63 $1.63 2/28/11 0 $ 2,038 $ 4,075
(2) 200,000 8.6% $0.43 $0.43 10/10/11 0 $ 4,300 $ 8,600
Scott Worthington (1) 25,000 1.1% $1.63 $1.63 2/28/11 0 $ 2,038 $ 4,075
(2) 200,000 8.6% $0.43 $0.43 10/10/11 0 $ 4,300 $ 8,600
(1) Options vest at a rate of one third per year from date of award.
(2) Options vest during fiscal 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 (1)
- ---------------------------------------------------------------------------------------------------------
Bruce Sinclair 0 $0 1,565,000 / 1,185,000 $0 / $0
Charles Brown 0 $0 553,600 / 746,000 $0 / $0
James Chinnick 0 $0 354,000 / 731,000 $0 / $0
Scott Worthington 0 $0 782,400 / 595,000 $0 / $0
(1) Calculated based on the difference between the exercise price and the price
of a share of the Company's Common Stock on December 31, 2001. The Closing
sale price of the Common Stock was $0.25 on December 31, 2001.
Employment Agreements
D. Bruce Sinclair. On November 18, 1997, we entered into an employment agreement
for an initial term of one year subject to annual extensions thereafter. Under
this employment agreement, Mr. Sinclair serves as our President and Chief
Executive Officer at a base salary of Can. $500,000. The base salary may be
increased from time to time in accordance with our regular administrative
practices as applied to our officers. In addition, Mr. Sinclair may participate
in our employee fringe benefit plans or programs generally available to
employees of comparable status and position. He was also granted options to
purchase 1,000,000 shares. The options vest on the basis of performance
objectives.
22
In the event that we terminate Mr. Sinclair without cause, we will pay him
severance pay in the 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.
Under his employment agreement, Mr. Sinclair is subject to restrictive
covenants, including confidentiality provisions. Also, during his employment and
for 12 months after termination of employment with us, Mr. Sinclair is subject
to a non-competition provision.
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. Mr. Brown serves as our Vice President of Marketing at a base annual
salary of Can. $240,000. He was also granted 240,000 shares. The options vested
in increments of 60,000 on March 31, June 30, September 30 and December 31,
1998.
James H. Chinnick. On January 4, 1999, we entered into an employment agreement
with Mr. Chinnick in substantially the same form as that described for Mr.
Sinclair. Mr. Chinnick serves as our Vice President of Technology at a base
annual salary of Can. $240,000. He was also granted 120,000 shares. The options
vested in increments of 30,000 on March 31, June 30, September 30 and December
31, 1999.
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. Mr. Worthington serves as our Vice President of Finance and
Administration at a base annual salary of Can. $138,000. He was also granted
300,000 shares. The options vested in increments of 150,000 on the completion of
our then public financing and on December 31, 1998.
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
2001, 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 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following tables set forth, as of March 21, 2002, 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. Except as otherwise
noted, each person listed below is the sole beneficial owner of the shares and
has sole investment and voting power with respect to such shares. No person
listed below has any option, warrant or other right to acquire additional
securities of the Company, except as may otherwise be noted. The Company had
96,585,767 shares of Common Stock issued and outstanding as of such date, which
numbers do not include any options or warrants issued and outstanding.
Name and Address of Amt. Of Common % of Common Stock
Beneficial Owner Stock benef. Owned (1) outstanding
- ----------------------------------------------------------------------------------------------------------
D. Bruce Sinclair, Director, CEO, President, Director (2)4,369,555 4.43%
Cameron A. Mingay, Secretary/Director (3) 224,000 0.23%
Gerry Chastelet, Director (4) 175,000 0.18%
John Curry, Director (5) 145,000 0.15%
Dennis Wing, Director (4) 125,000 0.13%
Charles Brown, Vice President, Sales & Marketing (6) 763,963 0.79%
Jim Chinnick, Vice President, Engineering (7) 479,823 0.49%
T. Scott Worthington, Vice-President & CFO (8) 992,136 1.02%
------------ -------
All Directors and Executive Officers (8 persons) 7,274,477 7.18%
------------ --------
23
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission (the "SEC") that deem shares to be
beneficially owned by any person who has voting or investment power with
respect to such shares. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable. Shares of Common Stock subject to options that are
currently exercisable or exercisable within 60 days of March 21, 2002 are
deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Consists of 1,090,611 shares of Common Stock, 1,200,000 shares,
which are subject to an Escrow Agreement, dated March 16, 1998, as amended
September 27, 1999, 505,611 shares issuable upon exercise of warrants and
1,573,333 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of March 21, 2002.
(3) Consists of 25,000 shares of Common Stock, 46,500 shares issuable
upon exercise of warrants and 152,500 shares issuable upon exercise of
options that are currently exercisable or exercisable within 60 days of
March 21, 2002.
(4) Consists of shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 21, 2002.
(5) Consists of 20,000 shares of Common Stock and 125,000 shares
issuable upon exercise of options that are currently exercisable or
exercisable within 60 days of March 21, 2002.
(6) Consists of 75,628 shares of Common Stock, 126,402 shares issuable
upon exercise of warrants and 561,933 shares issuable upon exercise of
options that are currently exercisable or exercisable within 60 days of
March 21, 2002.
(7) Consists of 43,090 shares of Common Stock, 74,400 shares issuable
upon exercise of warrants and 362,333 shares issuable upon exercise of
options that are currently exercisable or exercisable within 60 days of
March 21, 2002.
(8) Consists of 75,001 shares of Common Stock, 126,402 shares issuable
upon exercise of warrants and 790,733 shares issuable upon exercise of
options that are currently exercisable or exercisable within 60 days of
March 21, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no transactions or series of transactions, for the fiscal year ended
December 31, 2001, 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 other than as disclosed in the 10 K filed by the Company for
the year ended December 31, 2001.
24
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits. The exhibits below marked with an asterisk (*) are included with
and filed as part of this report. 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.
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 Exchanzge Commission on June 18, 2001.
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.
25
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.
10.13 Amendment 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.
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 Share 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
26
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34
10.35 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.
10.36 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.
10.37 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.
21 *Subsidiaries
23.1 * Consent of PricewaterhouseCoopers LLP, independent accountants
(b) Financial Statement Schedule
*Valuation and qualifying accounts and reserves
(c) Reports on Form 8-K
October 11, 2001 - Regulation FD Disclosure - A brief description of
WaveRider's shareholders' rights offering
October 26, 2001 - Sales of Series "A" promissory notes
November 8, 2001 - Sales of Series "A" promissory notes
27
Exhibit 21
SUBSIDIARIES
The company has a wholly-owned subsidiary, WaveRider Communications (Australia)
Pty Ltd. (formerly ADE Network Technology Pty Ltd.) ACN 006 395 026,
incorporated under the laws of the State of Victoria, Australia on April 1, 1985
The company has a wholly-owned subsidiary, WaveRider Communications (USA) Inc.
(formerly TTI Merger, Inc.), incorporated under the laws of the State of Nevada,
on May 19, 1999.
The company has a wholly-owned subsidiary, WaveRider Communications (Canada)
Inc. (formerly Major Wireless Communications Inc.), incorporated under the laws
of the Province of British Columbia, Canada the 9th day of October, 1996 under
no. 0528772.
WaveRider Communications (Canada) Inc. has a wholly-owned subsidiary, JetStream
Internet Services Inc., incorporated under the laws of the Province of British
Columbia, Canada the 29th day of July, 1997, under no. 0547668.
28
Exhibit 23.1
March 26, 2002
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements of WaveRider Communications Inc. on Form S-8 (File Nos 333-49464,
333-34647, 333-49454, 333-30140) and on Form S-3 (File Nos 333-70114, 333-52834,
333-70821) of our report dated February 15, 2002 (except for note 24 which is
March 26, 2002) relating to the consolidated financial statements and
consolidated financial statements schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Pricewaterhouse Coopers refers to the Canadian firm of Pricewaterhouse Coopers
LLP and other members of the worldwide Pricewaterhouse Coopers organization.
29
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
2001 $ 591,877 $ 532,842 $ (492,933) $ 3,684
$ 635,410
2000 66,316 539,378 (13,817) - 591,877
1999 3,261 55,948 - 7,107 66,316
Allowance for Deferred Income Taxes
2001 $ 12,498,000 $ 2,273,000 $ - $ - $ 14,771,000
2000 4,738,000 7,760,000 - - 12,498,000
1999 2,290,000 2,448,000 - - 4,738,000
30
CONSOLIDATED FINANCIAL STATEMENTS
WaveRider Communications Inc.
TORONTO, ONTARIO, CANADA
DECEMBER 31, 2001
1. REPORT OF INDEPENDENT ACCOUNTANTS
2. CONSOLIDATED BALANCE SHEETS
3. CONSOLIDATED STATEMENTS OF LOSS
4. CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS
5. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
6. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31
Report of Independent Accountants
To the Shareholders of WaveRider Communications Inc.
In our opinion, the accompanying consolidated balance sheets 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 2000
and the results of its operations and its cash flows for each of the three 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 14(b) on page 30
presents fairly, in all material respects, the information set forth herein 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)
32
WaveRider Communications Inc.
CONSOLIDATED BALANCE SHEETS
December 31
2001 2000
ASSETS
Current
Cash and cash equivalents $ 2,244,625 $ 7,720,902
Accounts receivable 898,432 1,996,473
Due from contract manufacturers 41,295 1,127,792
Inventories 1,402,703 2,193,502
Current portion of notes receivable 32,800 -
Prepaid expenses and other assets 297,282 983,361
-------------------------------
4,917,137 14,022,030
Notes receivable 32,801 -
Property, plant and equipment 1,671,088 2,395,373
Acquired labor force 98,949 400,659
Goodwill 3,898,528 4,114,983
-------------------------------
$ 10,618,503 $ 20,933,045
===============================
LIABILITIES
Current
Accounts payable and accrued liabilities $ 2,314,920 $ 4,372,365
Consideration payable on business combination 105,256 1,621,917
Promissory notes 168,893 -
Deferred revenue 265,505 423,677
Current portion of obligation under capital lease 131,145 272,851
-------------------------------
2,985,719 6,690,810
Convertible promissory notes - 1,835,299
Obligation under capital lease 36,312 224,347
-------------------------------
3,022,031 8,750,456
SHAREHOLDERS' EQUITY
Preferred Stock, $0.001 par value per share:
issued and outstanding 29,000 shares in 2001 and nil shares in 2000. 290 -
Common Stock, $0.001 par value per share:
issued and outstanding - 72,973,681 shares in 2001 and 55,121,898
shares in 2000 72,974 55,122
Additional paid-in capital 65,830,352 46,014,398
Other equity 13,748,732 15,482,719
Accumulated other comprehensive income (loss) (104,586) 44,858
Accumulated deficit (71,951,290) (49,414,508)
--------------------------------
7,596,472 12,182,589
$ 10,618,503 $ 20,933,045
===============================
Commitments and Contingencies (Note 16)
Approved by the Board /s/ D.B. Sinclair /s/ John E. Curry
---------------- -----------------
D.B. Sinclair, Director John E. Curry, Director
REFER TO ACCOMPANYING NOTES
33
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF LOSS
Years ended December 31
2001 2000 1999
REVENUE
Product sales $ 6,005,653 $ 3,592,253 $ 1,519,469
Service sales 1,798,364 540,739 196,576
-----------------------------------------------
7,804,017 4,132,992 1,716,045
COST OF PRODUCT AND INTERNET SALES
Product sales 5,519,604 4,983,048 1,225,194
Service sales 436,891 256,000 69,621
-----------------------------------------------
5,956,495 5,239,048 1,294,815
-----------------------------------------------
GROSS MARGIN 1,847,522 (1,106,056) 421,230
-----------------------------------------------
EXPENSES
Selling, general and administration 8,239,747 8,605,887 4,634,505
Employee stock-based compensation 812,200 10,386,498 482,763
Research and development 4,471,567 6,127,360 2,319,707
Employee stock-based compensation - 1,978,679 7,007
Depreciation and amortization 3,533,438 2,164,638 736,875
Bad debt expense 532,842 539,379 55,948
Write-down of acquired labor force 155,050 - -
Impairment of assets - 1,028,430 -
Interest expenses 5,493,373 274,347 184,371
Interest income (96,045) (581,614) (48,096)
-----------------------------------------------
23,142,172 30,523,604 8,373,080
-----------------------------------------------
NET LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (21,294,650) (31,629,660) (7,951,850)
DEFERRED INCOME TAX RECOVERY - 157,045 504,000
-----------------------------------------------
NET LOSS BEFORE EXTRAORDINARY ITEM (21,294,650) (31,472,615) (7,447,850)
LOSS ON EXTINGUISHMENT OF DEBT (198,300) - -
-----------------------------------------------
NET LOSS $ (21,492,950) $ (31,472,615) $ (7,447,850)
===============================================
BASIC AND DILUTED LOSS PER SHARE
BEFORE EXTRAORDINARY ITEM $ (0.371) $ (0.59) $ (0.25)
===============================================
BASIC AND DILUTED LOSS PER SHARE
FOR EXTRAORDINARY ITEM $ (0.003) $ - $ -
===============================================
BASIC AND DILUTED LOSS PER SHARE $ (0.374) $ (0.59) $ (0.25)
===============================================
Weighted Average Number of Common Shares 60,269,617 53,203,750 34,258,565
===============================================
REFER TO ACCOMPANYING NOTES
34
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
2001 2000 1999
OPERATING
Net loss $ (21,492,950) $(31,472,615) $ (7,447,850)
Items not involving cash
Amortization of goodwill and acquired labor force 2,385,495 1,455,305 409,539
Depreciation 1,147,943 709,333 327,336
Write down of acquired labor force 155,050 - -
Extension of Employee Stock Option (1997) plan - 11,099,858 -
Charges for issuance of options and warrants 385,940 645,120 463,273
Non-cash financing expenses 5,410,846 255,387 -
Compensatory shares released from escrow to employee 629,000 712,500 -
Compensatory shares issued to employees - 457,007
Write-off of acquired core technologies and goodwill - 1,028,430 -
Write-off of inventories - 1,568,739 -
Bad debt expense 532,842 539,379 55,948
Deferred income tax recovery (157,045) (504,000)
Unrealized foreign exchange (gain) loss (46,781) 19,150 22,044
Loss on extinguishments of debt 198,300 - -
Net changes in non-cash working capital items 345,826 (3,671,541) (907,113)
-----------------------------------------------
(10,348,489) (17,268,000) (7,123,816)
-----------------------------------------------
INVESTING
Acquisition of property, plant and equipment (301,843) (1,474,040) (376,767)
Purchase of notes (65,601) - -
Purchase of Transformation Techniques Inc. - - (655,288)
Purchase of ADE Network Technology Pty. Ltd. (567,372) (492,082) -
---------------------------------------------
(934,816) (1,966,122) (1,032,055)
----------------------------------------------
FINANCING
Proceeds from sale of shares and warrants (net of issue fees) and
exercise of options and warrants 5,100,939 16,757,800 10,909,353
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) (158,144)
Payments on capital lease obligations (295,056) (132,753) (105,848)
----------------------------------------------
5,805,383 21,411,938 10,645,361
---------------------------------------------
Effect of exchange rate changes on cash 1,645 2,169 4,170
---------------------------------------------
Increase in cash and cash equivalents (5,476,277) 2,179,985 2,493,660
Cash and cash equivalents, beginning of year 7,720,902 5,540,917 3,047,257
---------------------------------------------
Cash and cash equivalents, end of year $ 2,244,625 $ 7,720,902 $ 5,540,917
=============================================
REFER TO ACCOMPANYING NOTES
35
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Years ended December 31
Additional
Common Shares Preferred Shares Paid-in Share
Number Par Value Number Par Value Capital Capital
---------------------------------------------------------------------------------
December 31, 1998 31,501,481 $ 31,501 800,000 $ 800 10,817,075 $ 10,849,376
Issuances (Notes 15B(iv), (vii), (viii), (ix)
(x) 10,857,766 10,858 10,026,885 10,037,743
Conversions & exercises (Notes 15B(i), (iii),
15E 441,440 441 (36,000) (36) 322,933 323,338
Release of shares from escrow (Note 15B(ii)) 450,000 450 533,925 534,375
Issue for purchase of subsidiary (Note 15B(vi)) 384,588 385 441,615 442,000
Issued as compensation (Note 15F) 267,870 268 456,739 457,007
Compensatory options to employees (Note 15E)
Options to non-employees (Note 15E) -
Dividends on preferred shares -
Net loss -
---------------------------------------------------------------------------------
December 31, 1999 43,903,145 $ 43,903 764,000 $ 764 $22,599,172 $ 22,643,839
Extension of option plan (Note 15E)
Issuances (Notes 14, 15B(ix), (x)) 1,437,036 1,437 1,495,031 1,496,468
Conversions & exercises (Notes 15B(iii), (iv), 8,881,717 8,882 (764,000) (764) 18,714,845 18,722,963
(vii), (viii), (ix), (x), 15E)
Release of shares from escrow (Note 15B(ii)) 900,000 900 3,205,350 3,206,250
Compensatory options to employees (Note 15E)
Options to non-employees (Note 15E)
Dividends on preferred shares
Beneficial conversion (Note 14)
Cumulative Translation Adjustments
Net loss
Comprehensive net loss
---------------------------------------------------------------------------------
December 31, 2000 55,121,898 $ 55,122 - $ - $46,014,398 $ 46,069,520
Issuances (Notes 13, 15B(xii), (xiii), (xiv),
(xv), 15G) 8,300,837 8,301 30,000 300 5,287,540 5,296,141
Conversions & exercises (Notes 13, 14, 15B(xiii)
(xv), 15E) 6,300,946 6,301 (1,000) (10) 8,367,836 8,374,127
Release of shares from escrow (Note 15B(ii)) 2,250,000 2,250 2,828,250 2,830,500
Issue for purchase of subsidiary (Note 3) 1,000,000 1,000 972,161 973,161
Expiration of warrants (Notes 14, 15B(x)) 772,818 772,818
Compensatory options to employees (Note 15E) -
Options to non-employees (Note 15E) -
Amendment to conversion price (Note 14) 1,144,654 1,144,654
Beneficial conversion (Notes 13, 14, 15B(xiii)) 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
=================================================================================
36
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Years ended December 31 (con't)
Accumulated
Other
Warrants Other Comprehensive
Number Amount Other equity Deficit Income (Loss) Total
----------------------------------------------------------------------------------
December 31, 1998 2,380,000 $1,297,434 $ 206,348 $ 1,503,782 $ (9,254,790) $3,098,368
Issuances (Notes 15B(iv), (vii), (viii), (ix)
(x)) 4,309,629 2,063,717 2,063,717 (1,050,000) 11,051,460
Conversions & exercises (Notes 15B(i),
(iii), 15E) (30,000) (5,717) (99,630) (105,347) 217,991
Release of shares from escrow (Note 15B(ii)) 534,375
Issue for purchase of subsidiary (Note 15B(vi)) 442,000
Issued as compensation (Note 15F) 457,007
Compensatory options to employees (Note 15E) 32,763 32,763 32,763
Options to non-employees (Note 15E) 70,412 70,412 70,412
Dividends on preferred shares - (158,144) (158,144)
Net loss - (7,447,850) (7,447,850)
-----------------------------------------------------------------------------------
December 31, 1999 6,659,629 $3,355,434 $ 209,893 $ 3,565,327 $(17,910,784) $8,298,382
Extension of option plan (Note 15E) 11,099,858 11,099,858 11,099,858
Issuances (Notes 14, 15B(ix), (x)) 9,334,970 2,250,180 2,250,180 3,746,648
Conversions & exercises (Notes 15B(iii), (iv), (6,466,350) (3,311,347) (678,024) (3,989,371) 14,733,592
(vi),(viii), (ix), (x), 15E)
Release of shares from escrow (Note 15B(ii)) - 3,206,250
Compensatory options to employees (Note 15E) 552,819 552,819 552,819
Options to non-employees (Note 15E) 92,301 92,301 92,301
Dividends on preferred shares - (31,109) (31,109)
Beneficial conversion (Note 14) 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 9,528,249 $2,294,267 $13,188,452 15,482,719 $(49,414,508)$ 44,858 $12,182,589
Issuances (Notes 13, 15B(xii), (xiii), (xiv),
(xv), 15G) 11,478,684 1,170,383 1,170,383 6,466,524
Conversions & exercises (Notes 13, 14, 15B(xiii)
(xv), 15E) 1,343,480 (593,274) (2,068,665) (2,661,939) 5,712,188
Release of shares from escrow (Note 15B(ii)) - 2,830,500
Issue for purchase of subsidiary (Note 3) - 973,161
Expiration of warrants (Notes 14, 15B(x)) (6,507,960) (772,818) (772,818)
Compensatory options to employees (Note 15E) 183,200 183,200 183,200
Options to non-employees (Note 15E) 85,612 85,612 85,612
Amendment to conversion price (Note 14) 113,781 113,781 1,258,435
Beneficial conversion (Notes 13, 14, 15B(xiii)) 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 15,842,453 $2,212,339 $11,536,393 $13,748,732 $(71,951,290)(104,586) (7,596,472)
==================================================================================
36 (con't)
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
1. 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.
2. 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.
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 for 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 maintenance is recognized ratably over the term of the contract.
Revenue from installation and consulting 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 verifiable objective evidence of the service element.
Revenue from rentals and operating leases is recognized monthly as the fees
accrue.
Fees billed for internet services on long-term service contracts are recognized
over the period of the contracts.
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.
37
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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 of settlement.
Cash and cash equivalents - All liquid investments having an original maturity
not exceeding three months are treated as cash equivalents.
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 weighted average cost basis and includes material, labor
and overheads, where applicable.
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, 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 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.
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
income within shareholders' equity in the accompanying consolidated financial
statements.
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 when realization is not more likely than not.
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 plan.
38
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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.
Research and development costs - Research and development costs are charged to
expense as incurred.
Acquired core technologies - Acquired core technologies are recorded at cost and
amortized over their estimated useful lives using the straight-line method.
Acquired labor force - Acquired labor force costs are recorded at cost and
amortized using the straight-line method over a period of three years.
Goodwill - Goodwill is recorded at cost and amortized using the straight-line
method over a period not exceeding five years. Effective 2000, the Company
modified the amortization period for goodwill from a period of three years to a
period not exceeding five years. This modification was adopted prospectively and
had the effect of increasing the total asset and decreasing the net loss as at
and for the year ended December 31, 2000 by $162,000.
Valuation of long-lived assets - The Company periodically evaluates the carrying
value of its long-lived assets, including, but not limited to, property, plant
and equipment, acquired core technologies, acquired labor force and goodwill.
The carrying value of a long-lived asset is considered to be impaired when the
undiscounted cash flow from such asset is estimated to be less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of would be determined in a similar manner, except that fair market
values would be reduced by the cost of disposal.
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 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 - SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
acquired labor force would be reclassified as goodwill and amortization of
goodwill will cease upon adoption of that statement. SFAS No. 142 will be
applicable for fiscal years beginning after December 15, 2001. Had this standard
been applied January 1, 2001 the amortization of goodwill and acquired labor
force in the amount of $2,385,495 would not have been charged to the
consolidated statement of loss. The Company has not yet assessed whether there
is an impairment under the new standard and have until June 30, 2002 to make
such assessment.
3. 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. In addition, the former shareholders of ADE could receive
up to $501,000 ($900,000 Australian) additional consideration based on 40% of
any revenue in excess of $4,175,000 ($7.5 Million Australian) earned by ADE
during the year ended September 30, 2001.
39
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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. Subsequent to the year
end, 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.
The transaction, accounted for as a purchase, is summarized as follows:
Current assets $ 1,038,352
Fixed assets 271,537
Current liabilities (1,160,762)
Non-current liabilities (199,825)
----------------
Net liabilities assumed (50,698)
Expenses incurred on acquisition (51,237)
Acquired labor force 425,000
Deferred income tax liability (153,000)
Goodwill 1,917,917
---------------
Purchase price $ 2,087,982
===============
Cash paid on closing $ 553,065
Cash paid in installments 567,372
Issuance of shares - 1,000,000 shares of common stock 973,161
Balance due at December 31, 2001 105,256
---------------
2,198,854
Less: Interest paid 110,872
---------------
Total consideration given $ 2,087,982
===============
The cash effect of this transaction is summarized as follows:
Bank indebtedness assumed $ 75,631
Cash paid on closing 553,065
Cash acquired (136,614)
---------------
Net cash paid to December 31, 2000 $ 492,082
===============
The following summarizes certain supplementary pro forma disclosure assuming
that the acquisition had occurred at the beginning of 1999:
2000 1999
--------------------------------
(unaudited) (unaudited)
Pro forma consolidated revenue $ 7,276,639 $ 5,883,252
================================
Pro forma consolidated net loss $ (32,529,320) $ (8,188,491)
=================================
Pro forma consolidated basic and diluted loss per share $ (0.61) $ (0.27)
================================
40
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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.
WaveRider Communications (USA) Inc. - In December 2000, the Company determined
that there was significant impairment of its investment in WaveRider
Communications (USA) Inc. and, accordingly, wrote off a number of assets
relating to this acquisition (Note 4 - Impairment of Assets).
Effective June 11, 1999, the Company acquired, through a merger with the
Company's newly formed subsidiary, TTI Merger Inc., all of the issued and
outstanding shares of Transformation Techniques, Inc. ("TTI"). Subsequently, the
subsidiary changed its name to WaveRider Communications (USA) Inc.
TTI was a designer and manufacturer of wireless radio frequency communications
systems, offering wireless data, bridging and LAN connectivity systems in both
licensed and unlicensed frequencies. It had product design, manufacturing and
head office facilities in Cleveland, Ohio as well as sales and support
operations in California and Louisiana.
The transaction, accounted for as a purchase, is summarized as follows:
Other current assets $ 345,265
Bank indebtedness (401,303)
Accounts payable and accrued liabilities (593,582)
Deferred income tax liability (504,000)
---------------
Net liabilities assumed (1,153,620)
Goodwill 504,000
Acquired core technologies 1,444,605
--------------
Purchase price $ 794,985
==============
Cash paid on closing $ 253,985
Issuance of shares, including reset shares issued pursuant to certain market value
share performance provisions - 384,588
shares of common stock 442,000
Note payable, included in accounts payable and accrued liabilities 99,000
--------------
Total consideration given $ 794,985
==============
The cash effect of this transaction is summarized as follows:
Bank indebtedness assumed $ 401,303
Cash paid on closing 253,985
--------------
Net cash paid to December 31, 2000 $ 655,288
==============
The following summarizes certain supplementary pro forma disclosure assuming
that the acquisition had occurred at the beginning of 1998:
1999
----------------
(unaudited)
Pro forma consolidated revenue $ 2,369,510
================
Pro forma consolidated net loss $ (7,755,009)
================
Pro forma consolidated basic and fully diluted loss per share $ (0.26)
=================
41
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
4. IMPAIRMENT OF ASSETS
During the fourth quarter of fiscal 2000, it was determined that products built
from technologies acquired from 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.
5. ACCOUNTS RECEIVABLE
2001 2000
----------------------------------
Accounts receivable - trade $ 1,370,805 $ 2,453,565
Other receivables 163, 037 134,785
Allowance for doubtful accounts (635,410) (591,877)
------------------------------------
$ 898,432 $ 1,996,473
===================================
6. INVENTORIES
2001 2000
---------------------------------
Finished products $ 959,786 $ 1,116,651
Raw materials 442,917 1,076,851
------------------------------------
$ 1,402,703 $ 2,193,502
====================================
7. NOTES 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 a fixed charge over certain assets of
Platinum, bears interest at Canadian prime rate plus 2% and is repayable in 20
equal monthly installments commencing March 1, 2002.
8. PREPAID EXPENSES AND OTHER ASSETS
2001 2000
---------------------------------
Prepaid expenses $ 297,282 $ 430,914
Call option - 408,795
Deferred financing expense - 143,652
------------------------------------
$ 297,282 $ 983,361
====================================
42
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
9. PROPERTY, PLANT AND EQUIPMENT
c
Net Book Net Book
Accumulated Value Accumulated Value
Cost Depreciation 2001 Cost Depreciation 2000
-------------------------------------------------------------------------------------
Computer software $ 1,218,946 $ 900,290 $ 318,656 $ 1,162,873 $ 498,515 $ 664,358
Computer equipment 1,242,779 694,521 548,258 1,198,592 426,399 772,193
Lab equipment and tools 972,567 591,272 381,295 840,922 375,637 465,285
Equipment and fixtures 459,745 223,632 236,113 581,255 186,763 394,492
Assets held for lease 184,697 11,735 172,962 - - -
Leasehold improvements 163,049 149,245 13,804 193,867 94,822 99,045
-------------------------------------------------------------------------------------
$ 4,241,783 $ 2,570,695 $ 1,671,088 $ 3,977,509 $ 1,582,136 $ 2,395,373
=====================================================================================
Computer software includes $1,714 (2000 - $5,141) net of accumulated
depreciation of $8,568 (2000 - $5,141), Computer equipment includes $127,959
(2000 - $183,968) net of accumulated depreciation of $83,570 (2000 - $30,688),
Lab Equipment and tools includes $138,226 (2000 - $ 211,231) net of accumulated
depreciation of $212,359 (2000 - $125,123) and Equipment and fixtures includes
$90,935 (2000 - $230,403) net of accumulated depreciation of $65,548 (2000 -
$71,386) related to capital leases.
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 2002, $34,750 in 2003 and $22,900 in 2004.
10. ACQUIRED LABOR FORCE
2001 2000
-----------------------------------
Cost (Note 3) $ 169,627 $ 436,076
Less: Accumulated amortization 70,678 35,417
----------------------------------
$ 98,949 $ 400,659
==================================
11. GOODWILL
2001 2000
-----------------------------------
Cost (Notes 3, 4 and 15B(ii)) $ 7,112,200 $ 5,070,449
Less: Accumulated amortization 3,213,672 955,466
----------------------------------
$ 3,898,528 $ 4,114,983
==================================
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2001 2000
-----------------------------------
Accounts payable $ 1,528,810 $ 2,006,608
Accrued liabilities 479,221 1,449,700
Accrued salaries and benefits 208,734 558,276
Accrued warranty provision 98,155 240,045
Put option (Note 14) - 117,736
----------------------------------
$ 2,314,920 $ 4,372,365
==================================
43
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
13. 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 have a
general security interest over the Company's assets, may be redeemed 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.
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 have been 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.
If, prior to maturity, the Company makes a further offering of its securities,
completes a financing with net proceeds of more than $5 million or enters into a
business combination with another company such that the resulting entity will
have more than $5 million in working capital, the remaining investors have the
right to demand repayment, including principal, all accrued interest and the
repayment premium, or participation in the offering.
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.
44
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
14. 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.
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
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.
45
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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.
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.
15. SHARE CAPITAL
A Authorized share capital
Preferred shares issuable in series, par value of $0.001 - 5,000,000
shares Common shares, par value of $0.001 - 200,000,000 shares
B Issued share capital
i) Common share units - On February 16, 1998, the Company issued 500,000
common share units, at a price of $1.00 per unit, for cash proceeds of
$500,000. Each unit consisted of one common share and a Series E
warrant. Based on the fair value of the underlying instruments within
the common share unit, $404,713 of the total proceeds was allocated to
common shares and the balance of $95,287 was allocated to the Series E
warrants. The Series E warrants entitled the holder to purchase one
common share at $1.25 per share on or before February 16, 1999.
During 1998, 470,000 of the warrants were exercised for cash proceeds
of $587,500. The remaining 30,000 were exercised in 1999 for cash
proceeds of $37,500.
ii) Series B preferred shares - 4,000,000 Series B preferred shares were
issued upon the acquisition of Major Wireless Communication Inc. 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 are held in escrow and will be released upon the occurrence of
certain performance related events. Under the original terms, if the
specified criteria were not 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.
46
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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.
The remaining 5,400,000 shares held in escrow are not included in the
number of shares outstanding and the par value ascribed is not recorded
in the respective share capital accounts. The shares will be considered
to be issued when and if the respective performance events have
occurred and the value of the shares will be measured and recorded at
that date.
iii) 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.
iv) 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.
On December 29, 1998, the Company issued 1,167,860 shares of common
stock in the First Tranche at $2.57 per share for cash proceeds of
$3,000,000. On June 4, 1999, the Company issued 1,660,945 shares of
common stock in the Second Tranche at $1.81 per share for cash proceeds
of $3,000,000.
Pursuant to the agreement, the Company was required to issue additional
shares to the investors if the average bid price for the common stock
for 30 days prior to certain future dates ("Reset Price") is below the
initial purchase price multiplied by 117.5%. The number of shares to be
issued will be based on the following formula: ((Number of shares
subject to repricing) X (Initial Purchase Price X 117.5% - Reset
Price)) / Reset Price.
47
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
During 1999, the Company issued 1,002,441 common shares pursuant to the
reset provisions of the First Tranche and 1,753,812 common shares
pursuant to the reset provisions of the Second Tranche. In addition,
the Company issued 70,198 common shares pursuant to an agreement to
amend the timing of the resets of the Second Tranche. The $92,100 fair
value of this transaction was included in share issue costs for the
year. The $1,050,000 value of the 17.5% premium over the Reset Price
has been recorded as a dividend in 1999.
During the third quarter of 1999, the Company informed the investors
that it would not be taking up its option to sell the Third and Final
Tranche of shares to the 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 entitles 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.
Cost of the transactions included fees of $142,508 related to the
Second Tranche and $298,419 related to the First Tranche. In addition,
150,000 warrants with a fair value of $103,686 were issued, in 1998, to
a placement agent. Each warrant entitles 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.
v) 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.
vi) Common Stock issued upon acquisition - On June 15, 1999, the Company
finalized a merger agreement between Transformation Techniques, Inc.
("TTI") and a newly incorporated subsidiary, TTI Merger Inc. The new
subsidiary subsequently changed its name to WaveRider Communications
(USA) Inc.
As part of the consideration, the Company issued 256,232 shares of
common stock, having a market value of $442,000 to Mr. Peter Bonk, the
sole shareholder of TTI, and TTI was merged into TTI Merger Inc. Prior
to the merger agreement, Mr. Bonk had no shares in or affiliation with
the Company.
Pursuant to the Acquisition Agreement, the Company was required to
issue additional shares to Mr. Peter Bonk if the average bid price for
the common stock for five days prior to certain future dates ("Reset
Price") fell below the original price of the shares at acquisition.
48
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
During the third quarter of 1999, the Company issued 57,463 common
shares pursuant to the first reset. During the fourth quarter of 1999,
the Company issued a further 70,893 common shares pursuant to the
second and the third resets. The additional shares issued did not
affect the cost of the acquired company. The Company has now satisfied
this requirement and there are no further resets (Note 3).
vii) 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.
viii) 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 a 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.
The loan was repaid in full on December 23, 1999. During 2000, all of
the warrants were exercised for cash proceeds of $181,800.
ix) 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 $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.
x) 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 with 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.
49
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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.
xi) 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.
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.
xii) 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.
xiii) 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 dividend 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 the fourth quarter of 2001, 1,000 shares of the Series D 5%
convertible preferred stock were converted to 317,317 shares of common
stock.
xiv) 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.
50
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
xv) 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, the
$50,459 fair value of 208,723 underwriter warrants issued the Company's
investment bankers. 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, in, 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.
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.
C Warrants
The Company has several series of warrants outstanding at December 31,
2001 as follows:
Number Outstanding Weighted Average
Exercise Prices Remaining Life
$0.40 208,723 35 months
$0.50 12,824,844 39 months
$1.50 23 months
500,000
$1.63 350,000 28 months
$1.71 51 months
938,597
$2.80 961,538 47 months
$3.05 47 months
25,000
$4.00 33,751 23 months
------- -------
$0.40 - $4.00 15,842,453
==========
D Other Equity
2001 2000 1999
-------------------------------------------
Stock option extension from 1997 plan $ 10,661,518 $ 10,661,518 $ -
Stock options to non-employees 106,092 29,747 177,130
Stock options to employees that vested on performance 768,783 585,582 32,763
Beneficial conversion - 1,911,605 -
Warrants 2,212,339 2,294,267 3,355,434
-------------------------------------------
$ 13,748,732 $ 15,482,719 $ 3,565,327
===========================================
E Employee Stock Option Plans
51
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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 warrants 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.
During 2001, employees exercised none of the extended options for no value (2000
- - 58,000 for $438,000).
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.
52
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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, 1998 4,015,510 2,596,641 $ 0.92
Granted to employees and directors @ $0.78 - $2.66 2,754,610 1.82
Cancelled on termination (259,180) 2.61
Exercised (282,440) 0.49
- ------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================
Weighted
Average
Granted to Consultants Number Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 685,035 189,125 $ 0.51
Granted to consultants @ $2.09 6,000 2.09
Cancelled (70,000) 0.44
Exercised (93,000) 0.45
- ------------------------------------------------------------------------------------------------------------------------------------
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 0
Cancelled (0)
Exercised (10,000) 0.50
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 319,335 97,614 $ 0.67
==================================================================================================================
53
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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 2001 Options (months) 2001 Options
Prices
-------------- --------------------- -------------------- --------------------- ----------------- ---------------------
$0.43 1,568,000 $ 0.43 117 - $ 0.00
$0.50 - $0.56 1,308,535 0.55 103 486,814 0.55
$0.78 - $1.50 1,191,625 1.09 95 984,600 1.08
$1.51 - $2.00 652,495 1.71 95 387,185 1.75
$2.03 1,671,150 2.03 89 692,167 2.03
$2.06 - $3.81 624,915 2.47 87 452,248 2.43
$4.00 - $8.75 428,415 6.95 72 256,726 7.19
$9.00 - $13.81 1,853,465 9.05 96 961,372 9.06
--------- ----- --- --------- -----
$0.43 - $13.81 9,298,600 $ 3.06 97 4,221,111 $ 3.57
========= ====== ==== ========= ======
The weighted average exercise price for the exercisable options for 2000 was
$3.76 (1999 - $1.27)
Non-employee and Performance Based Options -
Options granted to consultants, and performance based options awarded to
employees, are valued when earned and probable that the options will vest and
will continue to be adjusted until actual vesting is achieved. Included in
options granted but not exercisable at December 31, 2001 are 221,720
non-employee options (2000 -314,105, 1999 - 351,058) and 1,559,000 performance
based employee options (2000 - 2,207,750, 1999 - 2,465,250) which vest on the
same basis as the release of shares from the escrow agreement (Note 15B(ii)).
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 (2000 - nil, 1999 - nil), expected volatility of 90% (2000 -
90%, 1999 - 90%), risk-free interest of 4.50% (2000 - 5.76%, 1999 - 5.76%) and
expected life of five years (2000 - three years, 1999 - three years). The
weighted average fair value of the stock options granted in 2001 was nil (2000 -
$2.98, 1999 - $1.41).
The resulting values have been charged to the consolidated statements of loss
over the contract period of the consultant. The amount charged to the
consolidated statement of loss in 2001 was $85,612 (2000 - 92,301, 1999 -
$70,412).
The amount recorded in the accounts with respect to performance-based options
awarded to employees is calculated using the intrinsic value at the valuation
date. The amount charged to compensation expense in 2001 was $183,200 (2000 -
$552,819, 1999 - $32,763)
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 2001: nil annual dividends (2000 - nil, 1999 - nil),
expected volatility of 90% (2000 - 90%, 1999 - 90%), risk-free interest of 4.50%
(2000 - 5.76%, 1999 - 5.76%) and expected life of five years (2000 - five years,
1999 - two years). The weighted average fair value of the stock options granted
in 2001 was $0.80 (2000 - $7.55, 1999 - $1.08).
Under the above model, the total value of stock options granted to employees and
directors in 2001 was $1,073,970 (2000 - $14,002,639, 1999 - $2,612,610), which
would be amortized on a pro forma basis over the option vesting period. Had the
Company determined compensation cost for these plans in accordance with SFAS No.
123, the Company's loss and loss per share would have been $23,731,340 and
$0.40, respectively (2000 - $36,025,438 and $0.68, 1999 - $10,086,384 and
$0.29).
54
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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.
Shareholder Option Agreement -
In November 1997, certain shareholders agreed to provide the Company's president
with a private option to purchase 1,000,000 common shares directly from the
shareholders. These options vested at the rate of 150,000 options per month of
employment.
Had the Company determined compensation cost for these options in accordance
with SFAS No. 123, the Company's 2001 pro forma loss and pro forma loss per
share would not have changed (2000 and 1999 - no change)
F Employee Stock Compensation (1997) Plan
In 1999, the Employee Stock Compensation (1997) Plan, authorized by the Company
in 1997, which allowed for a total of 2,500,000 common shares that could be
awarded to employees and certain consultants, expired. As such, during 2001, the
Company did not authorize any issuance of common shares (2000 - nil and 1999 -
267,870) pursuant to the plan. In the prior years, the value of the shares at
the date of the award was recorded in the consolidated statements of loss during
the year.
G 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 closing price of the Company's common stock at the beginning or
ending date of each plan period. In 2001, the Company sold 168,398 shares of
common stock for cash proceeds of $159,095.
16. COMMITMENTS AND CONTINGENCIES
Obligation under Capital Lease
2001 2000
----------------------------------
Gross Lease commitments:
2001 $ - $ 326,138
2002 157,397 184,348
2003 33,930 53,653
2004 5,586 -
--------------------------------
196,913 564,139
Less: Imputed interest 29,456 66,941
--------------------------------
167,457 497,198
Less: Current portion 131,145 272,851
--------------------------------
Long-term obligation under capital lease $ 36,312 $ 224,347
================================
Operating Leases
2002 $ 569,816
2003 524,923
2004 181,263
55
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
The Company incurred rental expenses in 2001 of $708,038 (2000 - $652,104 and
1999 - $421,242).
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.
Escrow Shares
As at December 31, 2001, the Company had 5,400,000 shares of common stock
outstanding which were held under an escrow agreement (Note 15B(ii)). The shares
will be considered to be issued when and if the respective performance events
have occurred and the value of the shares will be measured and recorded at that
date.
Litigation
On January 30, 2002, a former employee of the Company filed suit for breach of
contract of employment and has made claims in the amount of $345,000 plus costs.
The Company believes that the case is without merit and plans to vigorously
defend this lawsuit. No provisions have been made for expenses that may be
incurred to resolve the lawsuit, and although there can be no assurance as to
the ultimate outcome, the Company believes it will not have a material impact on
its business, results of operations and financial condition.
17. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
2001 2000 1999
--------------------------------------------------
Net changes in non-cash working capital items relating to operations
Accounts receivable $ 417,196 $ (1,536,885) $ (558,662)
Due from contract manufacturers 1,086,497 (1,127,792) -
Prepaid expenses and other assets 118,300 (190,224) (98,027)
Inventory 786,928 (2,653,078) (250,946)
Accounts payable and accrued liabilities (1,907,686) 1,650,008 (955)
Consideration payable on business combination 23,872 - -
Notes payable (24,659) - -
Deferred revenue (154,622) 186,430 1,477
---------------------------------------------------
$ 345,826 $ (3,671,541) $ (907,113)
====================================================
Cash paid during the year for:
Interest $ 34,231 $ 61,860 $ 32,349
Non-cash investing and financing activities
Share release from escrow to goodwill $ 2,201,500 $ 2,493,750 $ 534,375
Conversion of convertible promissory
notes to common shares 5,105,934 - -
Conversion of promissory notes to common shares 654,258 - -
Capital lease additions 37,155 370,711 125,830
Accounts receivable exchanged for assets for lease 84,824 - -
Disposal of capital lease 40,769 - -
Consideration payable for acquisition 973,161 1,534,917 -
Conversion of warrants - 103,686 -
56
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
18. RELATED PARTY TRANSACTIONS
During the year, a total of $18,745 (2000 - $25,283 and 1999 - $29,093) was paid
or payable to directors and officers or to companies related to them for their
management and administrative services. In connection with the sale of
promissory notes, management and directors purchased $176,000 of promissory
notes. The total principal, accrued interest and repayment premium, in the
amount of $200,367, were converted into the shareholders' rights offering.
19. FINANCING EXPENSES
2001 2000 1999
--------------------------------------------------
Accrued interest expense on consideration payable on
business combination $ 65,872 $ 45,000 $ -
Accretion of promissory notes 424,461 - -
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 financing expenses $ 5,410,846 $ 255,387 $ -
====================================================
20. INCOME TAXES
Net loss before income tax expense for the each year is summarized as follows:
2001 2000 1999
----------------------------------------------
United States 15,264,526 21,458,701 4,947,362
Canada 4,907,697 9,810,052 3,004,488
Australia 1,320,727 360,907 -
-----------------------------------------------
Net loss before income taxes $ 21,492,950 $ 31,629,660 $ 7,951,850
===============================================
US statutory rate at 35% 7,522,000 11,070,000 2,783,000
Amounts permanently not deductible for income tax purposes (2,584,000) (4,734,000) (190,000)
Foreign income tax rate differential 406,000 1,045,000 319,000
Net operating loss and temporary differences for which
no benefit was recognized (5,344,000) (7,223,955) (2,408,000)
------------------------------------------------
Deferred income tax recovery $ - $ 157,045 $ 504,000
===============================================
57
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
Deferred income tax assets/(liabilities) consist of the following:
2001 2000 1999
-------------------------------------------
Net operating loss carry forwards $ 14,559,000 $ 11,776,000 $ 4,878,000
Property, plant and equipment 92,000 722,000 280,000
Acquired core technology - - (420,000)
Other 120,000 - -
-----------------------------------------------
Net deferred income tax assets 14,771,000 12,498,000 4,738,000
Valuation allowance (14,771,000) (12,498,000) (4,738,000)
------------------------------------------------
$ - $ - $ -
================================================
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 2001 by
$2,273,000 (2000 - $7,760,000, 1999 - $2,448,000).
As of December 31, 2001, the Company had available net operating loss carry
forwards for United States, Canadian and Australian purposes of approximately
$27,086,000, $18,356,000 and $621,000, 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.
21. LOSS PER SHARE
The warrants, which could result in the issue of 15,842,453 additional shares of
common stock (Note 15C) and the options, which could result in the issue of
9,298,600 additional shares of common stock (Note 15E) 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
15B(ii)) have not been included from the loss per share calculation as they are
contingently issuable shares.
Year ended December 31, 2001
Loss Shares Per Share
(Numerator) (Denominator) Amount
Net Loss $ 21,492,950
Add: Deemed dividend on beneficial conversion 1,043,832
(Note 15B(xiii)) -----------
Basic LPS
Loss attributable to common shareholders $ 22,536,782 60,269,617 $0.374
==============================================
58
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
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
=============================================
Year ended December 31, 1999
Loss Shares Per Share
(Numerator) (Denominator) Amount
Net Loss $ 7,447,850
Add: Cash dividends paid on preferred stock in year 158,144
Deemed dividend on share resets (Note 15B(iv)) 1,050,000
---------
Basic LPS
Loss attributable to common shareholders $ 8,655,994 34,258,565 $0.25
=============================================
22. 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 2001 2000 1999
United States $ 1,909,912 $ 899,334 $ 739,826
Australia 3,078,879 699,878 (1)
United Arab Emirates 1,030,125 (1) (1)
Canada 490,661 1,314,968 492,060
Rest of world 1,294,440 1,218,812 484,159
----------------------------------------------------
$ 7,804,017 $ 4,132,992 $ 1,716,045
====================================================
(1) Less than 10% of consolidated revenue.
Year ended December 31, 2001
Canada Australia Total
----------------------------------------------------
Property, plant and equipment $ 1,524,076 $ 147,012 $ 1,671,088
Acquired labor force - 98,949 98,949
Goodwill 2,843,090 1,055,438 3,898,528
-----------------------------------------------------
$ 4,367,166 $ 1,301,399 $ 5,668,565
====================================================
59
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
Year ended December 31, 2000
Canada Australia Total
-----------------------------------------------------
Property, plant and equipment $ 2,111,984 $ 283,389 $ 2,395,373
Acquired labor force - 400,659 400,659
Goodwill 2,305,738 1,809,245 4,114,983
----------------------------------------------------
$ 4,417,722 $ 2,493,293 $ 6,911,015
====================================================
23. COMPARATIVE FIGURES
Certain comparative amounts have been reclassified to correspond with the
current year's presentation.
24. SUBSEQUENT EVENTS
i. Sale of Common Stock - During March 2002, the Company completed the
sale of 30,096,666 shares of common stock for cash proceeds of
$4,497,000, less cash fees of $134,750.
ii. In March 2002, the Company announced that it intends to close its
Calgary Research and Development facility and integrate its operations
at its Toronto location. It is expected that the transition will be
completed in the third quarter of 2002. The final costs of this
transition have not been determined but due to the relatively long
transition period, the Company believes that the costs will not have a
significant impact on ongoing operating expenses.
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 26, 2002 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 President, Chief Executive March 26, 2002
- ---------------------
D. Bruce Sinclair Officer and Director
/s/ T. Scott Worthington Chief Financial Officer March 26, 2002
- ------------------------
T. Scott Worthington
/s/ Cameron A. Mingay Secretary/Director March 26, 2002
- ---------------------
Cameron A. Mingay
/s/ Gerry Chastelet Director March 26, 2002
- -------------------
Gerry Chastelet
/s/ John Curry Director March 26, 2002
- --------------
John Curry
/s/ Dennis R. Wing Director March 26, 2002
- ------------------
Dennis R. Wing
61