Notice of 2003 Annual Meeting of Shareholders
and Proxy Statement
Proxy Statement
Description of Business
Management's Discussion and Analysis
2002 Consolidated Financial Statements and Notes
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WAVERIDER COMMUNICATIONS INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held September 4, 2003
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To our Shareholders:
You are cordially invited to attend the annual meeting of Shareholders
of WaveRider Communications Inc. (the "Company") to be held at the Radisson
Hotel Toronto East, 55 Hallcrown Place, Toronto, Ontario Canada M2J 4R1, on
Thursday, September 4, 2003, at 2:00 p.m. The purpose of the annual meeting is
to consider and vote upon the following matters, as more fully described in the
accompanying proxy statement:
(1) To elect six members to the board of directors, each to serve
until the next annual meeting of shareholders or until his
respective successor has been duly elected and qualified. The
nominees the board proposes to present for election are: Gerry
Chastelet, John E. Curry, Michael J. Milligan, Cameron A.
Mingay, D. Bruce Sinclair and Dennis R. Wing.
(2) To consider and act upon a proposed plan of recapitalization
that will result in a reverse stock split of our common stock
based on one of four ratios to be determined by our board of
directors.
(3) To consider such other matters as may properly come before the
annual meeting or any adjournment thereof.
The board of directors has fixed the close of business on July 7, 2003
as the record date for the determination of shareholders entitled to receive
notice of and to vote at the annual meeting or any adjournment or postponement
thereof.
YOUR VOTE IS IMPORTANT!
Please date, sign and return the accompanying proxy card promptly so
that we can be assured of having a quorum at the meeting and so that your shares
may be voted in accordance with your wishes. Doing so will assist the Company in
reducing the expenses of additional proxy solicitation.
BY ORDER OF THE BOARD OF DIRECTORS
T. Scott Worthington
Secretary
DATED: July 28, 2003
Toronto, Ontario Canada
IMPORTANT
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, TO ASSURE THAT
YOUR SHARES WILL BE REPRESENTED, PLEASE DATE, FILL IN, SIGN AND MAIL THE
ENCLOSED PROXY TO THE ADDRESS PROVIDED.
The year 2002 will be remembered as a year of change, recovery and adjustment.
While severe international issues dominated the world economic order, the
telecommunications industry suffered another year of decline in most sectors. We
are proud that WaveRider has not only survived these difficult times, but exited
2002 as one of the few companies in our industry that grew revenues and expanded
its customer base.
Despite the major restructuring we undertook in 2002, we kept a very active
product development program on track, achieved new product milestones with lower
costs, and introduced software with new features and functions.
Our wireless broadband products have been installed by service providers in more
than 45 states in the United States, and WaveRider has become recognized as the
industry leader in non-line-of-sight technologies. In fact, more than 10,000
homes and small businesses throughout North America are using WaveRider modems
to achieve high-speed connectivity to the Internet. We are starting to achieve
our vision of "changing the way the world connects".
2003 promises to be no less challenging than last year, however, we are
confident that we have taken many of the steps necessary to continue our drive
to growth and profitability.
The customer and industry response to our products and our customer support has
been strong. We are now in a position to build upon these experiences and expand
to new markets through enhanced sales and marketing strategies, new products,
and our ongoing dedication to our customers' satisfaction.
Diversification of our sales approach, through the implementation of a North
American distribution strategy to complement our direct sales approach,
positions us to further increase our share of the wireless market. In addition,
with the acquisition of Avendo Wireless in 2003, and the new financing
arrangements finalized during the first half of 2003, WaveRider has strengthened
both its balance sheet and its capabilities to continue to enhance our current
products and develop new, advanced non-line-of-sight products.
WaveRider's research and development resources will continue to focus on new
designs that promise to achieve reduced product costs and increased
functionality. We expect that these new products will help keep our leadership
position and provide our customers with the ability to expand their addressable
markets with lower cost service offerings.
In the meantime, we are hopeful that 2003 will bring about improved global
economic stability and that large markets with limited broadband availability
will begin to enjoy the benefits of high speed Internet service with WaveRider
products.
As the industry shows signs of stability and recovery, we intend to continue to
invest in WaveRider's foundation of technology, distribution and support
capabilities. This growth will be achieved through a combination of internal
growth, acquisitions and strategic alliances. Our goal is to expand our recent
North American success with new products and new growth into international
markets.
In order to reach these objectives, however, WaveRider may have to take another
major restructuring step and reorganize its capital structure, as described in
the attached proxy statement. To this end, WaveRider's Board of Directors is
asking for your support for a resolution giving the Board of Directors the
flexibility to modify the capital structure of the company. Your support will
enable the Board of Directors to take steps to ensure the continued growth of
our company and the attainment of our goals.
Thank you for your commitment to WaveRider. With the continued support of all
WaveRider stakeholders - our shareholders, our employees, our customers, and our
business partners - we will continue to "change the way the world connects".
Sincerely,
Bruce Sinclair
TABLE OF CONTENTS [Needs to be Updated]
PAGE
ANNUAL MEETING PROCEDURES 1
o Introduction 1
o Solicitation of Proxies 1
o Purpose of the Annual Meeting 1
o Record Date 1
o Proxies 1
o Quorum 2
o Vote Required 2
o Revocation of Proxies 2
o Interests Of Certain Persons In Matters To Be Acted Upon 2
o Proposals Of Security Holders For 2002 Annual Meeting 2
PROPOSAL NO. 1-- ELECTION OF DIRECTORS 3
o Nominees 3
o Board and Committees Meetings of the Board of Directors 4
o Director Compensation 4
o Certain Relationships And Related Transactions 5
PROPOSAL NO. 2-- APPROVAL OF REVERSE STOCK SPLIT AT ONE OF FOUR RATIOS 5
AUDIT COMMITTEE 11
o Report 11
o Change in Accountants 12
o Independent Accountants 12
o Fees for Professional Services 13
COMPENSATION COMMITTEE
o Report 13
o Compensation Committee Interlocks and Insider Participation 14
EXECUTIVE OFFICERS 15
o Executive Officer Compensation 15
o Summary Compensation Table 15
o Options Granted in 2002 15
o Aggregated Option Exercises in Last Fiscal Year and
Year End Option Values 16
o Employment Agreements 16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 17
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 18
PERFORMANCE MEASUREMENT COMPARISON 18
APPENDIX A - Text of Proposed Amendment of Articles of Incorporation
ADDITIONAL INFORMATION 21
ATTACHMENTS 21
Description Of Business B-1
Management's Discussion And Analysis or Plan of Operations F-1
Financial Statements And Notes F-12
WAVERIDER COMMUNICATIONS INC.
255 Consumers Road, Suite 500
Toronto, Ontario, Canada M2J 1R4
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PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS
To be held on September 4, 2003
Introduction
This proxy statement is being furnished to the shareholders of WaveRider
Communications Inc., a Nevada corporation, in connection with the solicitation
by our board of directors of proxies from holders of outstanding shares of our
common stock, $0.001 par value, for use at our annual meeting of shareholders to
be held at the Radisson Hotel Toronto East, 55 Hallcrown Place, Toronto, Ontario
Canada M2J 4R1, on Thursday, September 4, 2003, at 2:00 p.m., and at any
adjournment or postponement thereof. This proxy statement, the notice of annual
meeting of shareholders and the accompanying form of proxy are first being
mailed to our shareholders on or about July 28, 2003.
Solicitation of Proxies
We will bear all costs and expenses relating to the solicitation of
proxies, including the costs of preparing, printing and mailing to shareholders
this proxy statement and accompanying materials. In addition to the solicitation
of proxies by use of the mails, our directors, officers and employees, without
receiving additional compensation therefor, may solicit proxies personally or by
telephone or telegram. Arrangements will be made with brokerage firms and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of the shares of common stock held by such
persons, and we will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith.
Purpose of the Annual Meeting
At the annual meeting, we will submit two proposals to the shareholders:
Proposal One: To elect six directors; and
Proposal Two: To approve a proposed plan of recapitalization
that will result in a reverse stock split of our
common stock based on one of four ratios to be
determined by our board of directors.
Record Date
The board of directors has fixed the close of business on July 7, 2003 as
the record date for determination of shareholders entitled to notice of and to
vote at the annual meeting. As of the record date, there were issued and
outstanding 138,707,863 shares of common stock. The holders of record of the
shares of common stock on the record date entitled to be voted at the annual
meeting are entitled to cast one vote per share on each matter submitted to a
vote at the annual meeting.
Proxies
Shares of the common stock which are entitled to be voted at the annual
meeting and which are represented by properly executed proxies will be voted in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such shares will be voted FOR the election of each of the six
director nominees, FOR the amendment to our articles of incorporation to effect
a reverse stock split based on one of four ratios, and in the discretion of the
proxy holder as to any other matters which may properly come before the annual
meeting.
Quorum
Our by-laws provide that a majority of the issued and outstanding shares of
common stock entitled to vote, represented in person or by properly executed
proxy, is required for a quorum at the annual meeting. We will treat shares of
voting capital stock represented by a properly signed and returned proxy as
present at the meeting for purposes of determining the existence of a quorum at
the meeting. If a properly signed proxy is returned marked "abstain" with
respect to any matter, or containing a broker non-vote on any matter, which are
indications by a broker that it does not have discretionary authority to vote on
a particular matter, we will nonetheless count the shares represented by the
proxy as present or represented for purposes of determining the existence of a
quorum.
Vote Required
Under Nevada corporate law, once a quorum is established, shareholder
approval with respect to a particular proposal is generally obtained when the
votes cast in favor of the proposal exceed the votes cast against such proposal.
However, the election of directors requires a plurality of the votes cast at the
election. The six nominees receiving the highest number of votes will be
elected. Shareholders are not allowed to cumulate their votes. Approval of the
amendment to our articles of incorporation requires a vote in favor by the
majority of the total outstanding shares. Accordingly, abstentions and broker
non-votes will not affect the outcome of the election of directors, amendment to
our articles of incorporation, or any other matter presented for approval by the
shareholders.
We do not intend to submit any other proposals to the shareholders at the
annual meeting. The board of directors was not aware, a reasonable time before
mailing of this proxy statement to shareholders, of any other business that may
properly be presented for action at the annual meeting. If any other business
should properly come before the annual meeting, shares represented by all
proxies that we receive will be voted with respect thereto in accordance with
the best judgment of the persons named as attorneys in the proxies.
Revocation of Proxies
A shareholder who has executed and returned a proxy may revoke it at any
time prior to its exercise at the annual meeting by executing and returning a
proxy bearing a later date, by filing with our Secretary, at the address set
forth above, a written notice of revocation bearing a later date than the proxy
being revoked, or by voting the common stock covered thereby in person at the
annual meeting.
Interests of Certain Persons in Matters to be Acted Upon
No person who has been a director or executive officer since January 1,
2002 has any interest in the adoption of any of the proposals submitted to the
shareholders except for Proposal No. 1 relating to the election of directors.
Proposals of Security Holders for 2004 Annual Meeting
It is contemplated that the next annual meeting of shareholders will be
held on or about June 30, 2004. Shareholders desiring to submit proposals for
the proxy statement for our 2004 annual meeting of shareholders will be required
to submit them to Scott Worthington, our Vice President and Chief Financial
Officer, at our executive offices, 255 Consumers Road, Suite 500, Toronto,
Ontario, Canada M2J 1R4, in writing on or before March 26, 2004. Any shareholder
proposal must also be proper in form and substance, as determined in accordance
with the Securities Exchange Act of 1934, as amended and the rules and
regulations promulgated thereunder. In order to avoid controversy as to the date
on which we received a proposal, we suggest that shareholders desiring to submit
proposals do so by certified mail, return receipt requested.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
Our by-laws provide for the annual election of the board of directors. At
the annual meeting, six directors will be elected to serve until the next annual
meeting of shareholders and until their successors are duly elected and
qualified. Each of the nominees for director identified below is currently a
director.
Shareholders do not have cumulative voting rights in the election of
directors (each shareholder is entitled to vote one vote for each share held for
each director). Unless authority is withheld, it is the intention of the persons
named in the enclosed form of proxy to vote FOR the election of each of the
persons identified as nominees for directors below. If the candidacy of any one
or more of such nominees should, for any reason, be withdrawn, the proxies will
be voted FOR such other person or persons, if any, as may be designated by the
board of directors. The board has no reason to believe that any nominee herein
named will be unable or unwilling to serve.
The following sets forth information about each nominee for election as a
director:
Name Age Position Director Since
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Gerry Chastelet (1) (2) 56 Director 1999
John E. Curry (2) 56 Director 1999
Michael J. Milligan 45 Director 2003
Cameron A. Mingay (1) 51 Director 1999
D. Bruce Sinclair 52 Chief Executive Officer, Director 1997
Dennis R. Wing (2) 54 Director 1999
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(1) Member of the compensation committee. (2) Member of the audit committee.
Gerry Chastelet has been one of our directors since April 1999. From
December 1998 to January 2002, Mr. Chastelet was the President, Chairman and
Chief Executive Officer of Digital Lightwave, Inc., a leading provider of fiber
optic network analysis equipment. From December 1995 to October 1998, he served
as President and Chief Executive Officer of Wandel and Goltermann Technologies,
Inc., a global supplier of communication test and measurement equipment. He is
currently on the boards of directors 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 Masters in Business Administration program.
John E. Curry has been a director since October 1999. His company,
Hydrovane Self Steering Inc. (formerly Karina Ventures Inc.), recently acquired
a business based in the United Kingdom that manufacturers and markets
internationally a yacht self steering device. From 1985 to 1999, Mr. Curry was a
partner with Bedford Curry & Co., Chartered Accountants, a Vancouver based firm
specializing in public companies and business financings which he co-founded.
Mr. Curry is a member of the British Columbia Institute of Chartered Accountants
and has a Bachelors of Arts degree from the University of Western Ontario.
Michael Milligan, has been one of our directors since July 2, 2003. Mr.
Milligan is Executive Vice President of Kasten Chase, which he joined in 1995,
and acts as Chief Financial Officer, General Counsel and Secretary. Prior to
joining Kasten Chase, Mr. Milligan was a partner in the law firm of Cunningham,
Swan, Carty, Little & Bonham in Kingston Ontario. He earned a Bachelor of
Commerce degree at Carleton University and a Bachelor of Laws degree at Queen's
University.
Cameron A. Mingay has been one of our directors since April 1999. He
also served as our Secretary from May 1999 until March 2003. Since July 1999,
Mr. Mingay has been a partner at Cassels Brock & Blackwell LLP, Toronto,
Ontario, Canada, specializing in 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 directors of
Kinross Gold Corporation. He completed his undergraduate degree at the
University of Wisconsin and York University and earned his law degree from
Queen's University.
D. Bruce Sinclair has been a director since December 1997 and our Chief
Executive Officer since November 1997. From December 1997 until October 2002,
Mr. Sinclair also served as our President. Mr. Sinclair is an experienced
management professional who has worked in sales and management with companies
including IBM Canada, Nortel and Harris Systems Limited. From 1995 until
November 1997, he operated his own independent consulting business. From 1988 to
1995, Mr. Sinclair was with Dell Computer Corporation where he held numerous
positions including President of the Canadian subsidiary, Vice-President of
Europe and head of Dell in Europe. He earned his Masters of Business
Administration from the University of Toronto.
Dennis R. Wing has been one of our directors since November 1999. Mr.
Wing is President and Chief Executive Officer of Fahnestock Canada Inc., an
investment bank. Previously, he was a founding partner and board member of First
Marathon Securities Inc. and was its Director of International Operations for 18
years. He is also on the board of directors of Vengold Inc. and the University
of Waterloo. He holds a Bachelor of Arts degree in economics from the University
of Waterloo.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE SIX
NOMINEES FOR DIRECTORS.
Board and Committee Meetings of the Board of Directors
During the fiscal year ended December 31, 2002, the board of directors held
eight (8) meetings and acted by unanimous written consent two times. Each
director, with the exception of Mr. Milligan who joined the board in 2003,
attended at least 75% of all board meetings during the fiscal year ended
December 31, 2002.
During 1999, the board established an audit committee and a compensation
committee. The board does not have a nominating committee or any committee that
functions as a nominating committee.
The audit committee meets with our independent auditors at least annually
to review the results of the annual audit and discuss the financial statements,
recommends to the board the independent auditors to be retained, and receives
and considers the accountants' comments as to controls, adequacy of staff and
management performance and procedures in connection with audit and financial
controls. During the fiscal year ended December 31, 2002, the audit committee
was composed of Messrs. Chastelet, Curry, and Wing. The members of the audit
committee are independent as defined in Rule 4200(a)(14) of the National
Association of Securities Dealers' listing standards. The audit committee
operates under a written charter which was filed as an appendix to the proxy
statement for our 2001 annual meeting of shareholders. The audit committee is
governed by applicable provisions of the recently enacted Sarbanes-Oxley Act of
2002. The board of directors and the audit committee are currently reviewing the
audit committee's charter in light of applicable provisions of the Act, and
anticipate amending the charter to conform to the Act. The audit committee met
four times during the fiscal year ended December 31, 2002.
The compensation committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
our stock option plans and otherwise determines compensation levels and performs
such other functions regarding compensation as the board may delegate. During
the fiscal year ended December 31, 2002, the compensation committee was composed
of Messrs. Chastelet and Mingay. It met four times during the fiscal year ended
December 31, 2002.
Director Compensation
During the six months ended June 30, 2002, our non-employee directors
each received $1,000 per meeting attended. Subsequent to June 30, 2002, the
board of directors adopted a compensation plan for the directors which includes:
(i) a $2,500 annual retainer for each non-employee director, payable quarterly;
(ii) a $1,000 annual retainer for each committee chairman; (iii) a $1,000
meeting fee for each director who attends a board of directors or committee
meeting in person; (iv) a $250 meeting fee for each director who attends a board
of directors or committee meeting via telephone; and (v) effective the next
annual meeting of shareholders, an award to purchase 50,000 shares of common
stock for each non-employee director elected at the annual meeting. During the
year, Messrs. Chastelet, Curry, Mingay and Wing were each awarded 25,000 stock
options, under the Employee Stock Option (2000) Plan for their participation in
the board of directors and each of its subcommittees.
Certain Relationships and Related Transactions
There were no other transactions or series of transactions, for the
fiscal year ended December 31, 2002, to which we are a party, in which the
amount exceeds $60,000 and in which, to our knowledge, any director, executive
officer, nominee, 5% or greater shareholder, or any member of the immediate
family of any of the foregoing persons, have or will have any direct or indirect
material interest.
PROPOSAL NO. 2 - TO APPROVE AN AMENDMENT TO OUR ARTICLES OF INCORPORATION TO
EFFECT A REVERSE STOCK SPLIT AT ONE OF FOUR RATIOS.
General
Our board of directors has unanimously adopted a resolution declaring
the advisability of, and submitting to the shareholders for approval, a proposal
to amend our articles of incorporation to effect one of four recapitalizations
within one year from the date of the 2003 annual meeting of shareholders
pursuant to which either: (i) five shares of common stock will automatically be
converted into one share of common stock; (ii) ten shares of common stock will
automatically be converted into one share of common stock; (iii) fifteen shares
of common stock will automatically be converted into one share of common stock;
or (iv) twenty shares of common stock will automatically be converted into one
share of common stock at the discretion of our board of directors. In addition,
notwithstanding approval of this proposal by our shareholders, our board of
directors may, in its sole discretion, determine not to effect, and abandon, the
reverse stock split without further action by our shareholders. Once an
amendment authorizing a reverse stock split is filed, the board of directors has
no authority to file additional amendments without further shareholder approval.
If an amendment authorizing a reverse stock split has not been filed by
September 4, 2004, the authority of the board of directors under the existing
shareholder resolution lapses.
Authorized Shares
The reverse stock split would affect all issued and outstanding shares
of our common stock and outstanding rights to acquire our common stock and the
total number of authorized shares would remain 400,000,000. Upon the
effectiveness of the reverse stock split, the number of authorized shares of our
common stock that are not issued or outstanding would increase due to the
reduction in the number of shares of our common stock issued and outstanding
based on the reverse stock split ratio selected by our board of directors. As of
July 7, 2003, we had 400,000,000 shares of authorized common stock and
138,707,863 shares of common stock issued and outstanding. We will continue to
have 5,000,000 authorized shares of preferred stock after the reverse stock
split.
Background
Over the past three years market prices for stocks trading in the
United States markets, particularly the telecommunications industry market, have
generally declined. For example, during the three years ended December 31, 2002,
the Nasdaq stock market and the Nasdaq telecommunications index have declined
67% and 89%, respectively. In order to reduce the number of shares of our common
stock outstanding and thereby attempt to proportionally raise the per share
price of our common stock, our board of directors believes that it is in the
best interests of our shareholders for the board of directors to obtain the
authority to implement a reverse stock split.
Our board of directors believes that shareholder approval of several
potential exchange ratios (rather than a single exchange ratio) provides them
with the flexibility to achieve the desired results of the reverse stock split.
If the shareholders approve this proposal, the reverse stock split will be
effected, if at all, only upon a determination by our board of directors that
the reverse stock split is in the best interests of our shareholders at that
time. In connection with any determination to effect a reverse stock split, our
board of directors will set the timing for such a split and select the specific
ratio from among the four ratios set forth herein. No further action on the part
of our shareholders will be required to either implement or abandon the reverse
stock split. If our board of directors does not implement the reverse stock
split prior to September 4, 2004, the authority granted in this proposal to
implement the reverse stock split on these terms will terminate. Our board of
directors reserves their right to elect not to proceed, and abandon, the reverse
stock split if they determine, in their sole discretion, that this proposal is
no longer in the best interests of our shareholders.
Purposes of the Reverse Stock Split
Eligibility for Listing on the Nasdaq National Market or the Nasdaq
SmallCap Market
Our common stock is currently traded on the OTC Bulletin Board. Our
board of directors believes that if the proposed reverse split is approved by
our shareholders and the reverse split is effected, our common stock could have
a greater likelihood of satisfying the Nasdaq National Market or the Nasdaq
SmallCap Market initial listing criteria. Our board of directors believes that
either the Nasdaq National Market or the Nasdaq SmallCap Market would provide a
better trading market for our common stock, and the listing of our common stock
on the Nasdaq National Market or the Nasdaq SmallCap Market could improve the
liquidity of our common stock. However, even if the reverse split is effected
there can be no assurance that our common stock will be accepted for listing on
the Nasdaq National Market or the Nasdaq SmallCap Market. In addition, even if
we are successful in listing our common stock on the Nasdaq National Market or
the Nasdaq SmallCap Market there can be no assurance that our common stock will
meet the requirements for continued listing on either market.
Effect of Low Trading Price on Market for Our Securities
Our board of directors believes that low trading prices of our common
stock may have an adverse impact upon the efficient operation of the trading
market in our securities. In particular, brokerage firms may charge a greater
percentage commission on low-priced shares than that which would be charged on a
transaction in the same dollar amount of securities with a higher per share
price. Also, we believe that some brokerage firms may be reluctant to recommend
purchases of low-priced stock to their clients or make a market in such shares.
Such tendencies may adversely affect us. The reverse stock split may lessen
these adverse effects if it results in a higher price per share of our common
stock. You should note that the effect of the reverse stock split upon the
market prices for our common stock cannot be accurately predicted. In
particular, there can be no assurance that the market price per share of our
common stock after the reverse stock split will remain unchanged or increase in
proportion to the reduction in the number of shares of our common stock
outstanding before the reverse stock split. For example, based on the closing
market price of our common stock on July 9, 2003 of $0.40 per share, if our
board of directors decides to implement the reverse stock split and selects a
reverse stock split ratio of ten-for-one, there can be no assurance that the
post-split market price of our common stock would be $4.00 per share or greater.
If the reverse stock split is effected and the market price of our
common stock declines, the percentage decline may be greater than would occur in
the absence of a reverse stock split. The market price of our common stock will,
however, also be based on our performance and other factors, which are unrelated
to the number of shares outstanding. Furthermore, the liquidity of our common
stock could be adversely affected by the reduced number of shares that would be
outstanding after the reverse stock split.
We can give no assurance that the reverse stock split will achieve the
desired results which we outline herein. Nor can we give any assurance that the
reverse stock split will not adversely impact the market price of our common
stock or, alternatively, that any increased price per share of our common stock
immediately after the proposed reverse stock split will be sustained for any
prolonged period of time.
In addition, the reverse stock split may have the effect of creating
odd lots of stock (i.e., lots of fewer than 100 shares) for some shareholders
and such odd lots may be more difficult to sell or have higher brokerage
commissions associated with the sale of such odd lots.
Greater Availability of Common Stock for Future Issuances
As of July 7, 2003, there were 138,707,863 shares of our common stock
issued and outstanding, and there were outstanding warrants, convertible
preferred stock and options convertible into approximately 32,500,000 shares of
our common stock. The terms of the Series D Convertible Preferred Stock provide
that each share is convertible into a number of shares of our common stock
determined by dividing $100 by the lower of $1.3772 or 95% of the average of the
lowest three consecutive per share closing bid prices during the 22 trading day
period immediately preceding the date the conversion notice is delivered. We
have been issuing shares of our common stock upon the conversion of the Series D
Preferred Stock based on the floating rate. If the closing bid price of our
common stock declines, we will be obligated to issue more shares of our common
stock upon conversion of the Series D Preferred Stock.
If the reverse stock split is approved, our board of directors would
have the authority to issue approximately 391,500,000 additional shares of
common stock without further shareholder approval assuming a 20 for 1 reverse
split. Our board of directors believes that the reverse stock split would
provide sufficient shares for such corporate purposes as our board of directors
may determine to be necessary or desirable. These purposes may include, without
limitation, acquiring other businesses in exchange for shares of common stock or
entering into collaborative arrangements with other companies or acquiring
complementary technologies, products or businesses from third parties in
exchange for common stock. We do not have any current commitments or agreements
relating to any acquisitions. Other corporate purposes may include issuing
shares of common stock in connection with business relationships, strategic
alliances or other corporate partnering programs, and issuing shares of common
stock to raise additional working capital for ongoing operations. We may also
issue additional shares of common stock to attract and retain valuable employees
through the issuance of additional stock options, both under our existing stock
plans and under new plans or arrangements.
Under the General Corporation Law of Nevada, the board of directors
generally may issue authorized but unissued shares of common stock without
further shareholder approval. Our board of directors does not currently intend
to seek shareholder approval prior to any future issuance of additional shares
of common stock, unless shareholder action is required in a specific case by
applicable law, the rules of any exchange or market on which our securities may
then be listed, or our articles of incorporation or by-laws then in effect.
The issuance of any additional shares of common stock may, depending on
the circumstances under which those shares are issued, reduce shareholders'
equity per share and may reduce the percentage ownership of common stock of
existing shareholders. However, we would receive consideration for any
additional shares of common stock issued, which could reduce or eliminate the
economic effect to each shareholder of such dilution.
Institutional Investors and Investment Fund Interest
Our board of directors believes that the higher share price of our
common stock may meet investing guidelines for certain institutional investors
and investment funds. While our board of directors believes that a higher stock
price may help generate investor interest, there can be no assurance that the
reverse stock split will result in a per-share price that will attract
institutional investors or investment funds or that such share price will
satisfy the investing guidelines of institutional investors or investment funds.
Material Effects of the Proposed Reverse Stock Split
If approved and effected, the reverse stock split will be realized
simultaneously for all of our common stock and the ratio will be the same for
all of our common stock. The reverse stock split will affect all of our
shareholders uniformly and will not affect any shareholder's percentage
ownership interests in us, except to the extent that the reverse stock split
would otherwise result in any of our shareholders owning a fractional share or
option. As described below, shareholders otherwise entitled to fractional shares
as a result of the reverse stock split will be entitled to cash payments in lieu
of such fractional shares. Such cash payments will reduce the number of
post-reverse stock split shareholders to the extent there are shareholders
presently who would otherwise receive less than one share of our common stock
after the reverse stock split. In addition, the reverse stock split will not
affect any shareholder's percentage ownership or proportionate voting power
(subject to the treatment of fractional shares). However, because the number of
authorized shares of our common stock will not be reduced, the reverse stock
split will increase our board of directors' ability to issue authorized and
unissued shares without further shareholder action.
The principal effects of the reverse stock split will be that:
o the number of shares of our common stock issued and
outstanding will be reduced from approximately 138.71 million
as of July 7, 2003 to a range of approximately 6.94 to 27.75
million, depending on the reverse stock split ratio
determined by our board of directors;
o the number of shares that may be issued upon the exercise of
conversion rights by holders of securities convertible into
our common stock will, in the most part, be reduced
proportionately based upon the reverse stock split ratio
selected by our board of directors. In the case of the Series
O warrants, the conversion rate and the number of warrants
will be adjusted based on the average closing price of the
common stock for the five trading days immediately after the
reverse stock split compared to the closing price of the
common stock for the five trading days immediately prior to
the reverse stock split;
o based on the reverse stock split ratio selected by the board
of directors, proportionate adjustments will be made to the
per-share exercise price and the number of shares issuable
upon the exercise of all outstanding options entitling the
holders to purchase shares of our common stock, which will
result in approximately the same aggregate price being
required to be paid for such options upon exercise immediately
preceding the reverse stock split; and
o the number of shares reserved for issuance under our employee
stock option and employee stock purchase plans will be reduced
proportionately based on the reverse stock split ratio
selected by our board of directors.
Our common stock is currently registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and as a result, we are subject to
the periodic reporting and other requirements of the Securities Exchange Act of
1934. The reverse stock split will not affect the registration of our common
stock under the Securities Exchange Act of 1934, and we have no current
intention of terminating our registration under the Securities Exchange Act of
1934.
Effect on Fractional Shareholders
In lieu of issuing less than one whole share resulting from the reverse
stock split to holders of a number of shares not evenly divisible by the ratio
determined by our board of directors, we will determine the fair value of each
outstanding share of common stock held immediately before the reverse stock
split takes effect. We currently anticipate that the fair value of the
outstanding common stock will be based on the average daily closing bid price
per share of our common stock as reported by the primary trading market for our
common stock for the ten (10) trading days immediately preceding the reverse
stock split. In the event our board of directors determines that unusual trading
activity would cause such amount to be an inappropriate measure of the fair
value of our common stock, we may base the fair value of the outstanding common
stock on the fair market value of the common stock as reasonably determined in
good faith by our board of directors. Shareholders who hold a number of shares
not evenly divisible based on the ratio determined by our board of directors
immediately before the reverse stock split takes effect will be entitled to
receive, in lieu of a fractional share, cash in an amount equal to the fair
value of the outstanding common stock times the remainder left after dividing
their total number of shares by a number based on the ratio determined by our
board of directors.
After the reverse stock split, you will have no further interest in us
with respect to your cashed-out shares. A person otherwise entitled to a
fractional interest will not have any voting, dividend or other rights except to
receive payment as described above.
If you do not hold a sufficient number of our shares to receive at
least one share in the reverse stock split and you want to continue to hold our
common stock after the reverse stock split, you may do so by taking either of
the following actions far enough in advance so that it is completed by the
effective date:
o purchase a sufficient number of shares of our common stock so that
you hold at least an amount of shares of our common stock in your
account prior to the reverse stock split that would entitle you to
receive at least one share of our common stock on a post-reverse
stock split basis; or
o if applicable, consolidate your accounts so that you hold at least
an amount of shares of our common stock in one account prior to
the reverse stock split that would entitle you to receive at least
one share of our common stock on a post-reverse stock split basis.
Shares held in registered form (that is, shares held by you in
your own name in our stock records maintained by our transfer
agent) and shares held in "street name" (that is, shares held by
you through a bank, broker or other nominee), for the same
investor will be considered held in separate accounts and will not
be aggregated when effecting the reverse stock split.
Effect on Our Employees and Directors
If you are one of our employees, the number of shares reserved for
issuance under our existing stock option plans and the employee stock purchase
plan will be reduced proportionately based on the reverse stock split ratio
selected by our board of directors. In addition, the number of shares issuable
upon the exercise of options and the exercise price for such options will be
adjusted based on the reverse stock split ratio selected by our board of
directors.
Effect on Registered and Beneficial Shareholders
Upon a reverse stock split, we intend to treat shareholders holding our
common stock in "street name", through a bank, broker or other nominee, in the
same manner as registered shareholders whose shares are registered in their
names. Banks, brokers or other nominees will be instructed to effect the reverse
stock split for their beneficial holders holding our common stock in "street
name". However, such banks, brokers or other nominees may have different
procedures than registered shareholders for processing the reverse stock split.
If you hold your shares with such a bank, broker or other nominee and if you
have any questions in this regard, we encourage you to contact your nominee.
Effect on Our Preferred Shareholders
If you are a holder of our Series D 5% Convertible Preferred Stock, the
number of shares of our common stock each share of Series D Preferred Stock
would be converted into would be decreased disproportionately depending on the
reverse stock split ratio determined by our board of directors. The terms of the
Series D Preferred Stock provide that each share is convertible into a number of
shares of our common stock determined by dividing $100 by the lower of $1.3772
or 95% of the average of the lowest three consecutive per share closing bid
prices during the 22 trading day period immediately preceding the date the
conversion notice is delivered. We have been issuing shares of our common stock
to the Series D preferred shareholder based on the floating rate. However, if
95% of the average of the lowest three consecutive per share closing bid prices
during the 22 trading day period immediately preceding the date the conversion
notice is delivered exceeds $1.3772 then we will issue a number of shares of our
common stock upon based upon dividing $100 by $1.3772. This conversion ratio
will be adjusted based on the reverse stock split ratio determined by our board
of directors.
Effect on Our Debenture Holders
If you are a holder of our Debentures, the number of shares of our
common stock you would receive upon conversion of the Debenture would be
decreased disproportionately depending on the reverse stock split ratio
determined by our board of directors. The terms of the Debenture provide that it
is convertible into a number of shares of our common stock determined by
dividing the outstanding principal amount by $0.4318. However, if our closing
bid price is less than $0.5182, we can either redeem for cash the portion of the
Debenture that the holder has elected to convert based on 120% of such principal
amount or issue shares of our common stock based on a conversion price equal to
95% of the average of the lowest three consecutive per share closing bid prices
during the 20 trading day period immediately preceding the date the conversion
notice is delivered. This conversion ratio will be adjusted based on the reverse
stock split ratio determined by our board of directors.
Effect on Registered "Book-entry" Shareholder
Our registered shareholders may hold some or all of their shares
electronically in book-entry form under the direct registration system for
securities. These shareholders will not have stock certificates evidencing their
ownership of our common stock. They are, however, provided with a statement
reflecting the number of shares registered in their accounts.
If you hold registered shares in a book-entry form, you do not need to
take any action to receive your post-reverse stock split shares or your cash
payment in lieu of any fractional share interest, if applicable. If you are
entitled to post-reverse stock split shares, a transaction statement will
automatically be sent to your address of record indicating the number of shares
you hold.
Effect on Registered Certificated Shares
Some of our registered shareholders hold all their shares in
certificate form or a combination of certificate and book-entry form. If any of
your shares are held in certificate form, you will receive a transmittal letter
from our transfer agent, Corporate Stock Transfer, as soon as practicable after
the effective date of the reverse stock split. The letter of transmittal will
contain instructions on how to surrender your certificate(s) representing your
pre-reverse stock split shares to the transfer agent. Upon receipt of your stock
certificate, you will be issued the appropriate number of shares electronically
in book-entry form under the direct registration system.
No new shares in book-entry form will be issued to you until you
surrender your outstanding certificate(s), together with the properly completed
and executed letter of transmittal, to the transfer agent.
If you are entitled to a payment in lieu of any fractional share
interest, such payment will be made as described above under "Effect on
Fractional Shareholders".
At any time after receipt of your direct registration system statement,
you may request a stock certificate representing your ownership interest.
SHAREHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT
ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
Accounting Matters
The reverse stock split will not affect the par value of our common
stock. As a result, as of the effective time of the reverse stock split, the
stated capital attributable to our common stock on our balance sheet will be
reduced proportionately based on the reverse stock split ratio selected by our
board of directors, and the additional paid-in capital account will be credited
with the amount by which the stated capital is reduced. The per-share net income
or loss and net book value of our common stock will be restated because there
will be fewer shares of our common stock outstanding.
Potential Anti-Takeover Effect
Although the increased proportion of unissued authorized shares to
issued shares could, under certain circumstances, have an anti-takeover effect
(for example, by permitting issuances that would dilute the stock ownership of a
person seeking to effect a change in the composition of our board of directors
or contemplating a tender offer or other transaction for our combination with
another company), the reverse stock split proposal is not being proposed in
response to any effort of which we are aware to accumulate shares of our common
stock or obtain control of us, nor is it part of a plan by management to
recommend to our board and shareholders a series of amendments to our articles
of incorporation. Other than the reverse stock split proposal, our board of
directors does not currently contemplate recommending the adoption of any other
amendments to our articles of incorporation that could be construed to affect
the ability of third parties to take over or change our control.
Procedure for Effecting Reverse Stock Split
If the shareholders approve the proposal to authorize the reverse stock
split and our board of directors decides to implement the reverse stock split at
any time prior to September 4, 2004, we will promptly file a certificate of
amendment with the Secretary of State of the State of Nevada to amend our
existing articles of incorporation and issue a press release. The reverse stock
split will become effective on the date of filing the certificate of amendment,
which is referred to as the "effective date." Beginning on the effective date,
each certificate representing pre-reverse stock split shares will be deemed for
all corporate purposes to evidence ownership of post-reverse stock split shares.
The text of the form of the amendment to our articles of incorporation is set
forth in Exhibit A to this proxy statement. The text of the form of amendment to
our articles of incorporation certificate of amendment is subject to
modification to include such changes as may be required by the office of the
Secretary of State of the State of Nevada and as the board of directors deems
necessary and advisable to effect the reverse stock split, including the
applicable ratio for the reverse stock split.
No Appraisal Rights
Under the General Corporation Law of the state of Nevada, our
shareholders are not entitled to appraisal rights with respect to the reverse
stock split, and we will not independently provide shareholders with any such
right.
Federal Income Tax Consequences of the Reverse Stock Split
The following is a summary of certain material United States federal
income tax consequences of the reverse stock split, and does not purport to be a
complete discussion of all of the possible federal income tax consequences of
the reverse stock split and is included for general information only. Further,
it does not address any state, local or foreign income or other tax
consequences. Also, it does not address the tax consequences to holders that are
subject to special tax rules, such as banks, insurance companies, regulated
investment companies, personal holding companies, foreign entities, nonresident
alien individuals, broker-dealers and tax-exempt entities. The discussion is
based on the provisions of the United States federal income tax law as of the
date hereof, which is subject to change retroactively as well as prospectively.
This summary also assumes that the pre-reverse stock split shares were, and the
post-reverse stock split shares will be, held as a "capital asset," as defined
in the Internal Revenue Code of 1986, as amended (i.e., generally, property held
for investment). The tax treatment of a shareholder may vary depending upon the
particular facts and circumstances of such shareholder. Each shareholder is
urged to consult with such shareholder's own tax advisor with respect to the tax
consequences of the reverse stock split. As used herein, the term United States
holder means a shareholder that is, for federal income tax purposes: a citizen
or resident of the United States; a corporation or other entity taxed as a
corporation created or organized in or under the laws of the United States, any
State of the United States or the District of Columbia; an estate the income of
which is subject to federal income tax regardless of its source; or a trust if a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have the authority to control all
substantial decisions of the trust.
We believe that the reverse stock split will constitute a
reorganization within the meaning of section 368(a) (1)(E) of the Internal
Revenue Code. As a result, other than the cash payments for fractional shares
discussed below, no gain or loss should be recognized by a shareholder upon such
shareholder's exchange of pre-reverse stock split shares for post-reverse stock
split shares pursuant to the reverse stock split. The aggregate tax basis of the
post-reverse stock split shares received in the reverse stock split will be the
same as the shareholder's aggregate tax basis in the pre-reverse stock split
shares exchanged therefor, reduced by any cash received and increased by any
gain recognized by such shareholder. In general, shareholders who receive cash
in exchange for their fractional share interests in the post-reverse stock split
shares as a result of the reverse stock split will recognize gain or loss based
on their adjusted basis in the fractional share interests redeemed. The
shareholder's holding period for the post-reverse stock split shares will
include the period during which the shareholder held the pre-reverse stock split
shares surrendered in the reverse stock split.
The receipt of cash instead of a fractional share of our common stock
by a United States holder of our common stock will result in a taxable gain or
loss to such holder for federal income tax purposes based upon the difference
between the amount of cash received by such holder and the adjusted tax basis in
the fractional shares as set forth above. The gain or loss will constitute a
capital gain or loss and will constitute long-term capital gain or loss if the
holder's holding period is greater than one year as of the effective date.
We have not sought and will not seek an opinion of counsel or a ruling
from the Internal Revenue Service regarding the federal tax consequences of the
reverse stock split. Our view regarding the tax consequences of the reverse
stock split is not binding on the Internal Revenue Service or the courts.
ACCORDINGLY, EACH SHAREHOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR
WITH RESPECT TO ALL OF THE POTENTIAL TAX CONSEQUENCES TO HIM OR HER OF THE
REVERSE STOCK SPLIT.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL
TO AMEND OUR ARTICLES OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT.
Report of the Audit Committee
The board of directors appointed an audit committee to monitor the
integrity of WaveRider's consolidated financial statements, its system of
internal controls and the independence and performance of its internal and
independent auditors. The audit committee also recommends to the board of
directors the selection of independent auditors. The audit committee is governed
by a written charter adopted by the board of directors. A copy of the charter
was attached to the proxy statement for the 2001 annual meeting shareholders.
The members of the audit committee are independent as defined in Rule
4200(a)(14) of the National Association of Securities Dealers' listing
standards.
WaveRider's management is responsible for the financial reporting
process, including the system of internal controls, and for the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. WaveRider's independent auditors are responsible for
auditing those financial statements. We are responsible for monitoring and
reviewing these processes. We have relied, without independent verification, on
the information provided to us and on the representations made by WaveRider's
management and independent auditors.
In fulfilling our oversight responsibilities, we discussed with
representatives of Wolf & Company, P.C., WaveRider's independent auditors for
fiscal 2002, the overall scope and plans for their audit of WaveRider's
consolidated financial statements for fiscal 2002. We met with them, with and
without WaveRider's management present, to discuss the results of their
examinations and their evaluations of WaveRider's internal controls and the
overall quality of WaveRider's financial reporting.
We reviewed and discussed the audited consolidated financial statements
for fiscal 2002 with management and the independent auditors.
We discussed with the independent auditors the matters required to be
discussed by Statement of Auditing Standards No. 61, Communication with Audit
Committees, as amended, including a discussion of their judgments as to the
quality, not just the acceptability, of WaveRider's accounting principles and
the other matters required to be discussed with audit committees under generally
accepted auditing standards.
In addition, we received from the independent auditors a letter
containing the written disclosures required by Independence Standards board
Standard No. 1, Independence Discussions with Audit Committees, and discussed
the disclosures with them, as well as other matters relevant to their
independence from management and WaveRider. In evaluating the independence of
WaveRider's auditors, we considered whether the services they provided to
WaveRider beyond their audit and review of WaveRider's consolidated financial
statements was compatible with maintaining their independence. We also
considered the amount of fees they received for audit and non-audit services.
Based on our review and these meetings, discussions and reports, and
subject to the limitations on our role and responsibilities referred to above
and in the audit committee charter, we recommended to the board of directors
that WaveRider's audited consolidated financial statements for fiscal 2002 be
included in WaveRider's annual report on Form 10-K.
Submitted by the Audit Committee of the Board of Directors
John E. Curry (Chairman)
Gerry Chastelet
Dennis R. Wing
Changes in Accountants
On December 19, 2002, we dismissed PricewaterhouseCoopers LLP, Canada,
our independent accountants. The report of PricewaterhouseCoopers on our
consolidated statements as of and for the years ended December 31, 2001 and 2000
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles. The change in
independent accountants was recommended by our audit committee and approved by
our board of directors. In connection with our audit for the fiscal years ended
December 31, 2001 and 2000 and through to December 19, 2002, there were no
disagreements with PricewaterhouseCoopers on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers, would have caused PricewaterhouseCoopers to make
reference to such disagreements in their report on the consolidated financial
statements for such periods. During the two most recent years and through
December 19, 2002, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).
We requested that PricewaterhouseCoopers furnish us with a letter
addressed to the SEC stating whether or not they agreed with the above
statements. A copy of this letter was filed as Exhibit 99-1 to our Form 8-K,
filed with the SEC on December 24, 2002.
On December 19, 2002, we engaged Wolf & Company, P.C. as our new
independent accountants. The engagement of Wolf & Company was recommended by the
audit committee and approved by the board of directors. During the fiscal years
ended December 31, 2002 and 2001 and the interim period ended September 30,
2002, we have not consulted with Wolf & Company, P.C. regarding either: (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
our financial statements, and neither a written report was provided to us or
oral advice was provided that Wolf & Company, P.C. concluded was an important
factor considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was either the subject of a
"disagreement", as that term is defined in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions to Item 304 of regulation S-K, or a "reportable
event", as that term is defined in Item 304 (a)(1)(v) of Regulation S-K.
INDEPENDENT ACCOUNTANTS
The board of directors has selected Wolf & Company, P.C. to serve as
independent auditors for the fiscal year ended December 31, 2003. Wolf &
Company, P.C. served as our independent auditors for the fiscal year ended
December 31, 2002. We expect that Wolf & Company, P.C. will be present at the
meeting with the opportunity to make a statement if so desired and will be
available to respond to appropriate questions.
Fees for Professional Services
The following table provides the fees we paid to Wolf & Company, P.C., our
independent auditors, for professional services rendered during fiscal 2002.
Audit fees (1) ................................................ $106,937
Financial information systems and implementation fees ............ $Nil
All other fees (2) ............................................... $Nil
(1) Audit of annual financial statements and review of
quarterly financial statements during fiscal 2002.
- --------------------------------------------------------------------------------
(2) Includes tax related services, review of registration statements and
participation at meetings of the board of directors and audit committee.
The audit committee has determined that Wolf & Company's provision of
services to us not related to its audit of our financial statements was at all
relevant times compatible with that firm's independence.
The following table provides the fees we paid to PricewaterhouseCoopers
LLP, our former independent auditors, for professional services rendered during
fiscal 2002.
Audit fees.................................................... $146,515
Financial information systems and implementation fees ........ $Nil
All other fees ................................................. $47,352
- --------------------------------------------------------------------------------
(1) Audit of annual financial statements and review of quarterly financial
statements during fiscal 2002.
(2) Includes tax related services, review of registration statements and
participation at meetings of the board of directors and audit committee.
The audit committee has determined that PricewaterhouseCoopers LLP's
provision of services to us not related to its audit of our financial statements
was at all relevant times compatible with that firm's independence.
Report of the Compensation Committee
The compensation committee has general responsibility for WaveRider's
executive compensation policies and practices, including making specific
recommendations to the board of directors concerning salaries and incentive
compensation for WaveRider's executive officers. The following report is made by
Messrs. Chastelet and Mingay, as the members of the compensation committee
during fiscal 2002, and summarizes WaveRider's executive officer compensation
policies for fiscal 2002.
Compensation objectives. WaveRider's executive compensation programs
are generally designed to relate a substantial part of executive compensation
to improvements in WaveRider's financial performance and corresponding increases
in shareholder value. Decisions concerning executive compensation are intended
to:
o establish incentives that will link executive officer compensation to
WaveRider's financial performance and that will motivate executives to
attain WaveRider's annual financial targets;
o establish incentives to encourage long term strategic planning; and
o provide a total compensation package that is competitive among
comparable companies and that will assist WaveRider in attracting and
retaining executives who will contribute to WaveRider's long-term
financial success.
Section 162(m) of the Internal Revenue Code limits WaveRider's tax
deduction for compensation in excess of $1.0 million paid to WaveRider's chief
executive officer and WaveRider's four other most highly compensated executive
officers at the end of any fiscal year unless the compensation qualifies as
"performance-based compensation." The compensation committee's policy with
respect to Section 162(m) is to make every reasonable effort to cause
compensation to be deductible by WaveRider while simultaneously providing
executive officers of WaveRider with appropriate rewards for their performance.
Executive compensation programs. WaveRider's compensation package
consists of three principal components:
o salary;
o discretionary bonuses; and
o stock options.
WaveRider's executive officers are also eligible to participate in
other employee benefit plans, including health and life insurance plans and a
stock purchase plan, on substantially the same terms as other employees who meet
applicable eligibility criteria, subject to any legal limitations on the amounts
that may be contributed or the benefits that may be payable under these plans.
In establishing base salaries for executives, the compensation
committee monitors salaries at other companies, particularly companies in the
same industry and companies located in the same geographic area as WaveRider. In
addition, for each executive the compensation committee considers historic
salary levels, work responsibilities and base salary relative to other
executives at WaveRider. To some extent, the compensation committee also
considers general economic conditions, WaveRider's financial performance and
each individual's performance.
WaveRider's executive officer compensation policy emphasizes bonuses
and stock options which align the interests of management with the shareholders'
interest in the financial performance of WaveRider for the fiscal year and the
longer term. Consistent with this approach, in fiscal 2002, a substantial part
of the cash compensation that the executive officers were eligible to earn was
tied to WaveRider's performance.
In fiscal 2002, stock options were a component of WaveRider's approach
to compensation for all executive officers. We recommended that WaveRider grant
stock options to Messrs. Sinclair, Brown, Chinnick and Worthington in order to
provide them additional long-term incentives to act in the best interests of
WaveRider's shareholders. See "Option grants in last fiscal year." In
determining the size of the stock option grants recommended for these executive
officers, we emphasized the seniority, responsibilities and performance of the
executives, as well as the number and exercise price of outstanding stock
options previously granted to the executive officers. The compensation committee
believes that stock options provide a significant incentive to executive
officers to continue their employment with WaveRider and create long-term value
for its shareholders.
Chief Executive Officer compensation. Consistent with WaveRider's
overall executive officer compensation policy, WaveRider's approach to the Chief
Executive Officer's compensation package in 2002 was to be competitive with
other companies in the industry. The compensation committee believes that this
approach provided additional incentive to Mr. Sinclair to achieve WaveRider's
performance goals and enhance shareholder value. Mr. Sinclair's salary was
designed to assure him of a base level of compensation commensurate with his
position and duration of employment with WaveRider and compete with salaries for
officers holding comparable positions in the industry.
Submitted by the Compensation Committee of the Board of Directors
Cameron A. Mingay (Chairman)
Gerry Chastelet
Compensation Committee Interlocks and Insider Participation
Our compensation committee is currently composed of Messrs. Chastelet and
Mingay. Messrs. Chastelet and Mingay are both non-employee directors. In 2002,
none of our officers or employees participated in the deliberations of the
compensation committee concerning the compensation of our executive officers. No
interlocking relationship existed between our board or compensation committee
and the board of directors or compensation committee of any other company in
2002.
EXECUTIVE OFFICERS
In addition to D. Bruce Sinclair, certain information is furnished with
respect to our executive officers:
Name Age Position Officer Since
D. Bruce Sinclair 52 Chief Executive Officer, Director 1997
Charles W. Brown 47 Executive Vice President 1998
T. Scott Worthington 48 Vice President, Chief Financial Officer,
Corporate Secretary 1998
Executive officers are appointed by the board of directors and serve at
the discretion of the board or until their respective successors have been duly
elected and qualified. There are no family relationships among the executive
officers and directors.
Charles W. Brown has been our Executive Vice President since October
2002. From February 1998 until October 2002, he was our Vice President, Sales
and Marketing. From 1994 until February 1998, Mr. Brown was the first Vice
President and Chief Information Officer of Clearnet Communications. Prior to
this, Mr. Brown held numerous senior Sales and Marketing positions including
Vice President of Sales and Marketing for Trillium Communications from 1993
until 1994 and Director of Strategic Planning and Marketing for BCE Mobile from
1990 until 1993. Mr. Brown has a Masters in Business Administration from the
University of Western Ontario.
T. Scott Worthington has been our Vice President and Chief Financial
Officer since January 1998 and our Corporate Secretary since March 2003. From
1988 to 1996, he worked at Dell Computer Corporation in Canada where he held
numerous positions including Chief Financial Officer of Dell's Canadian
subsidiary. After leaving Dell, he was a financial and business consultant. Mr.
Worthington is a Chartered Accountant.
Executive Officer Compensation
The following table sets forth certain information concerning the
compensation for services rendered in all capacities to us for the fiscal years
ended December 31, 2002, 2001, and 2000, of each of the named executive
officers.
Summary Compensation Table
Annual Compensation Long Term
(amounts in U.S. dollars)(1) Compensation
Name and Principal Position Year Salary Bonus Stock Options
Bruce Sinclair 2002 $185,401 $31,468 100,000
CEO/Director 2001 $174,387 $0 375,000
2000 $235,627 $67,322 500,000
Charles Brown 2002 $122,274 $15,974 600,000
Executive Vice President 2001 $117,943 $0 225,000
2000 $138,683 $42,692 200,000
Scott Worthington 2002 $102,077 $6,294 600,000
Vice President & CFO 2001 $89,800 $0 225,000
2000 $111,665 $25,784 200,000
(1) In accordance with regulations promulgated by the SEC, perquisites are not
included if the aggregate amount is less than the lesser of $50,000 or 10% of
salary and bonus.
Option Grants in Fiscal 2002
The following table summarizes each grant of stock options made during
the year ended December 31, 2002 to each of the named executive officers.
Option/SAR Grants in Last Fiscal Year (Individual Grants)
Percent of
total
Number of options Potential realizable value
securities granted to Exercise Market at assumed annual rates
underlying employees or base price on of stock price appreciation
options in fiscal price date of Expiration for option term
granted year ($/sh) grant date 0% 5% 10%
-------------------------------------------------------------------------------------------------
Bruce Sinclair (1) 100,000 2.4% $0.16 $0.16 02/28/12 0 $10,062 $25,500
Charles Brown (1) 100,000 2.4% $0.16 $0.16 02/28/12 0 $10,062 $25,500
(2) 500,000 12.2% $0.01 $0.09 11/06/12 $40,000 $68,300 $111,718
Scott Worthington (1) 100,000 2.4% $0.16 $0.16 02/28/12 0 $10,062 $25,500
(2) 500,000 12.2% $0.01 $0.09 11/06/12 $40,000 $68,300 $111,718
(1) Options vest on February 28, 2007.
(2) Options vest during fiscal 2003.
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information regarding
exercisable and unexercisable stock options held as of December 31, 2002, by
each of the named executive officers. The value of unexercised in-the-money
options has been calculated by determining the difference between the exercise
price per share payable upon exercise of such options and the last sale price of
the common stock on December 31, 2002, as reported on the over-the-counter
bulletin board ($0.11 per share). No stock options were exercised by named
executive officers during 2002.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of securities Value of
underlying unexercised
unexercised in-the-money
options/SARs at options/SARs at
Shares fiscal year end fiscal year end
acquired on Value exercisable/ exercisable/
Name exercise (#) realized ($) unexercisable unexercisable
- --------------------------------------------------------------------------------
Bruce Sinclair (1) 0 $0 2,583,333 / 266,667 $0 / $0
Charles Brown 0 $0 1,082,933 / 816,667 $0 / $50,000
Scott Worthington 0 $0 1,260,733 / 716,667 $0 / $50,000
(1) Included in Mr. Sinclair's options are 775,000 options received from
other shareholders.
Employment Arrangements
D. Bruce Sinclair. In November 1997, we entered into an employment
agreement with Mr. Sinclair whereby he will serve as our President and Chief
Executive Officer for an initial term of one year subject to annual extensions
thereafter. In October 2002, Mr. Sinclair reduced his day-to-day involvement and
ceased using the title President. While his original base salary was Can.
$300,000 with a bonus plan of Can. $200,000, his current salary is Can. $150,000
until such time as our cash position allows payment in accordance with his
employment agreement. In the event that we terminate Mr. Sinclair without cause,
we will pay him severance in an amount equal to one year's salary plus one
month's salary for each year of employment in excess of twelve years service.
Upon termination of Mr. Sinclair's employment for cause, we will have no
obligation to Mr. Sinclair. The board of directors has agreed to amend Mr.
Sinclair's agreement to provide that in the event that Mr. Sinclair's employment
is terminated, other than for cause, we will pay him severance in an amount
equal to three years' salary. In addition, Mr. Sinclair may participate in our
employee fringe benefit plans or programs generally available to our employees.
Charles W. Brown. In February 1998, we entered into an employment
agreement with Mr. Brown in substantially the same form as that described for
Mr. Sinclair. In the event that we terminate Mr. Brown without cause, we will
pay him severance in an amount equal to one year's salary plus one month's
salary for each year of employment in excess of twelve years service. In October
2002, Mr. Brown was named our Executive Vice President.
T. Scott Worthington. In January 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 and Chief
Financial Officer. The board of directors has agreed to amend Mr. Worthington's
agreement to state that in the event that Mr. Worthington's roles and
responsibilities are reduced after our change of control, we will pay him
severance in an amount equal to two years' salary.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 7, 2003, information with
respect to our common stock owned beneficially by each director or nominee for
director, by our Chief Executive Officer, by all officers and directors as a
group and by each person known by us to be a beneficial owner of more than 5% of
the outstanding shares of common stock. Except as otherwise indicated below,
each person named has sole voting and investment power with respect to the
shares indicated.
Amount of Common Stock % of Common Stock
Name and Address of Beneficial Owner (1) Beneficially Owned (2) Outstanding
- ---------------------------------------- ----------------------- ------------------
D. Bruce Sinclair (3) 5,387,889 3.80%
Gerry Chastelet (5) 200,000 0.14%
John Curry (6) 170,000 0.12%
Michael J. Milligan 0 0.00%
Cameron A. Mingay (4) 249,000 0.18%
Dennis Wing (5) 150,000 0.11%
Charles Brown (7) 1,668,297 1.19%
T. Scott Worthington (8) 1,845,470 1.31%
---------------- ---------
9,670,656 6.63%
---------------- ----------
All Directors and Executive Officers (7 persons)
Crescent International Limited (9) 11,942,700 8.50%
Clarendon House, 2 Church Street,
Hamilton H 11, Bermuda
- ------------------
(1) Each director's and officer's address is c/o WaveRider Communications
Inc., 255 Consumers Road, Suite 500, Toronto, Ontario, Canada M2J1R4.
(2) 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 July 7, 2003 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.
(3) Consists of 2,290,611 shares of common stock, 505,611 shares of common
stock issuable upon exercise of warrants and 2,591,667 shares of common
stock issuable upon exercise of options that are currently exercisable
or exercisable within 60 days of July 7, 2003.
(4) Consists of 25,000 shares of common stock, 46,500 shares of common
stock issuable upon exercise of warrants and 177,500 shares of common
stock issuable upon exercise of options that are currently exercisable
or exercisable within 60 days of July 7, 2003.
(5) Consists of shares of common stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of July 7,
2003.
(6) Consists of 20,000 shares of common stock and 150,000 shares of common
stock issuable upon exercise of options that are currently exercisable
or exercisable within 60 days of July 7, 2003.
(7) Consists of 75,628 shares of common stock, 126,402 shares of common
stock issuable upon exercise of warrants and 1,466,267 shares of common
stock issuable upon exercise of options that are currently exercisable
or exercisable within 60 days of July 7, 2003.
(8) Consists of 75,001 shares of common stock, 126,402 shares of common
stock issuable upon exercise of warrants and 1,644,067 shares of common
stock issuable upon exercise of options that are currently exercisable
or exercisable within 60 days of July 7, 2003.
(9) Consists of 10,190,000 shares of common stock and 1,752,700 shares of
common stock issuable upon conversion of 5,800 shares of Series D 5%
convertible non-voting preferred stock which are currently convertible.
The number of shares is calculated based on 95% of the average of the 3
lowest consecutive closing bid prices for the 22 trading days prior to
July 7, 2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
officers, directors and persons who beneficially own more than 10% of a class of
our equity securities registered under the Securities Exchange Act of 1934 to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Based solely on a review of the forms we have received and
on representation from certain reporting persons, we believe 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.
PERFORMANCE MEASUREMENT COMPARISON(1)
The following table shows the total shareholder return of an investment of
$100 in cash on December 31, 1997 for: (a) our common stock, (b) the Nasdaq
Stock Market (U.S.) Index, and (c) the Nasdaq Telecommunications Index. All
values assume reinvestment of the full amount of all dividends and are
calculated as of December 31 of each year:
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
AMONG WAVERIDER COMMUNICATIONS INC., THE NASDAQ STOCK
MARKET (U.S.) INDEX AND THE NASDAQ TELECOMMUNICATIONS INDEX
Nasdaq Stock Nasdaq
WaveRider Market (US$) Telecommunications
--------- ------------ ------------------
Dec-97 $ 100.00 $ 100.00 $ 100.00
Dec-98 $ 234.38 $ 139.63 $ 163.38
Dec-99 $ 200.89 $ 259.13 $ 331.18
Dec-00 $ 131.14 $ 157.32 $ 151.15
Dec-01 $ 22.32 $ 124.20 $ 77.18
Dec-02 $ 9.82 $ 85.05 $ 35.48
* $100 Invested on 12/31/97 in stock or index, including reinvestment of
dividends. Fiscal year ending December 31.
(1) The material in this section is not "soliciting material", is not
deemed "filed" with the SEC, and is not to be incorporated by reference
into any of our filings the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or
after the date hereof and irrespective of any general incorporation
language contained in such filing.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our outstanding shares of common stock, par value $.001 per share, are
traded under the symbol "WAVC.OB" in the over-the-counter market on the OTC
Electronic Bulletin Board by the National Association of Securities Dealers,
Inc. Prior to April 10, 2002, our common stock traded on the Nasdaq National
Market System. The following table sets forth the closing high and low bid
prices of our common stock for the periods indicated, as reported by the NASD.
These quotations are believed to be representative inter-dealer prices, without
retail mark-up, markdown or commissions and may not represent prices at which
actual transactions occurred:
2002 Bid 2001 Bid
High Low High Low
First Quarter $0.46 $0.16 $2.69 $1.25
Second Quarter $0.18 $0.08 $1.81 $1.03
Third Quarter $0.17 $0.09 $1.28 $0.31
Fourth Quarter $0.20 $0.07 $0.50 $0.21
We had approximately 1,200 common shareholders of record as of July 7,
2003. This number does not include shareholders whose shares are held in street
or nominee names.
While there are no restrictions on our ability to pay dividends other
than those common to all companies incorporated under the laws of the State of
Nevada, we have not paid dividends to common stock shareholders in the last two
years. We do not expect to pay a cash dividend on our common stock in the
foreseeable future and the payment of dividends in the future will depend on our
earnings and cash requirements.
Selected Financial Data
Year ended December 31
2002 2001 2000 1999 1998
-------------- -------------- ----------- ----------- -----------
Revenue $ 9,008,915 $ 7,804,017 $ 4,132,992 $ 1,716,045 $ 205,882
Cost of revenue 6,778,794 5,956,495 5,239,048 1,294,815 75,467
-------------- -------------- ----------- ----------- -----------
Gross margin 2,230,121 1,847,522 (1,106,056) 421,230 130,415
Expenses 13,479,823 23,142,172 30,523,604 8,373,080 4,607,933
-------------- -------------- ----------- ----------- -----------
Net loss before income taxes and
extraordinary item (11,249,702) (21,294,650) (31,629,660) (7,951,850) (4,477,518)
Deferred income tax recovery - - 157,045 504,000 -
-------------- -------------- ----------- ----------- -----------
Net loss before
extraordinary item (11,249,702) (21,294,650) (31,472,615) (7,447,850) (4,477,518)
Loss on extinguishment of debt - (198,300) - - -
-------------- -------------- ----------- ----------- -----------
Net loss $ (11,249,702) $(21,492,950) $(31,472,615) $(7,447,850) $(4,477,518)
============== =============== ============= ============ ============
Basic and diluted loss per share
before extraordinary item $ (0.11) $ (0.371) $ (0.59) $ (0.25) $ (0.18)
============== =============== ============= ============ ============
Basic and diluted loss per share
For extraordinary item $ - $ (0.003) $ - $ - $ -
============== =============== ============= ============ ============
Basic and diluted loss per share $ (0.11) $ (0.374) $ (0.59) $ (0.25) $ (0.18)
============== =============== ============= ============ ============
Weighted Average Number
of Common Shares 105,261,523 60,269,617 53,203,750 34,258,565 29,485,320
============== =============== ============= ============ ============
BALANCE SHEET DATA:
As at December 31,
2002 2001 2000 1999 1998
-------------- -------------- ----------- ----------- -----------
Cash and cash equivalents $ 1,025,604 $ 2,244,625 $ 7,720,902 $ 5,540,917 $ 3,047,257
-------------- -------------- ----------- ----------- -----------
Working capital 780,148 1,931,418 7,331,220 5,222,841 2,259,824
Property, plant & equipment 885,475 1,671,088 2,395,373 978,160 808,531
Total assets 4,645,220 10,618,503 20,933,045 10,080,516 4,146,834
Convertible promissory notes - - 1,835,299 - -
Long term capital leases 6,004 36,312 224,347 18,625 12,555
Shareholders' Equity 1,659,619 7,596,472 12,182,589 8,298,382 3,098,368
Our current operations commenced in 1997 with the acquisition of Major
Wireless Communication Inc. and JetStream Internet Services Inc. In 1999, we
purchased Transformation Techniques, Inc. (TTI) and in 2000 we purchased ADE
Network Technology Pty Ltd. Refer to note 4 of the attached financial statements
for more details about the acquisition of subsidiaries.
When we acquired Major Wireless Communication Inc., in 1997, the
founders agreed to put their shares into an escrow agreement. As we reached each
of the milestones under the escrow agreement, we released a specific percentage
of the shares and up until 2002 the value of those shares, at the time of
release, was included in goodwill or compensation expense. As a result of our
director's decision to extend the escrow agreement, in 2002 the accounting for
the releases changed and the value was charged directly to compensation expense
or to selling, general and administration expense. Depending on the price of the
shares of common stock at the time of release, the value assigned to the escrow
release varied dramatically. During 2002, we released 5,381,250 shares of common
stock from the escrow agreement (2001 - 2,250,000, 2000 - 900,000). This
resulted in a charge of $172,500 to compensation expense (2001 - $629,000, 2000
- - $ 712,500) and a charge to selling, general and administrative expense of
$710,813. Due to the change in accounting, there was no increase of goodwill in
2002 (2001 - $2,201,500, 2000 - $2,493,750). Also, due to a change in accounting
principals, effective January 1, 2002, goodwill ceased to be amortized on an
ongoing basis, but was reviewed for impairment. In prior years, the release of
the escrow shares and the resulting goodwill had resulted in a significant
increase in amortization expense (2001 - $2,385,495, 2000 - $1,455,305).
During the third quarter of fiscal 2002, as a result of the continued
and, more recently, sharp decline in the telecommunications sector, we
determined that we could not continue our operations at our current level
without further funding and that, given the state of the telecommunications
sector and the financial markets, it was unlikely that additional funding would
be available. As such, we took a number of actions to reduce costs and
restructure our operations. Included in these actions was a complete revision of
the operating plans of WaveRider Communications (Australia) Pty Ltd. (formerly
ADE Network Technology Pty Ltd.), our wholly owned subsidiary in Australia,
which we view as an independent reporting unit and for WaveRider Communications
Inc. In each case, we compared the expected net present value of the discounted
future cash flows of the restructured operations to the current net assets of
the respective operations after a revision of all key assumptions underlying
management's goodwill valuation judgments, including those relating to short and
longer-term growth rates and discount factors reflecting increased risks in a
declining market. As a result of management's analysis, it was determined that
an impairment charge of $4,069,696 was required on the basis that the carrying
value of goodwill exceeded its fair value, which was determined to be nil.
In 2000, we wrote off $1,028,430 of acquired core technology and
goodwill, related to our purchase of TTI. In 2000, we also extended our employee
stock option (1997) plan, which resulted in a charge to the consolidated
statement of loss in the amount of $11,099,858.
Our financing activities have resulted in a significant number of
non-cash accounting charges amounting to $263,607 in 2002 and $5,410,846 in
2001. The change in the accounting for the release of escrow shares and the
financing activities resulted in financing expenses of $331,041 in 2002 (2001 -
$5,493,373, 2000 - $274,347).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use any derivative financial instruments or other market risk
sensitive instruments.
APPENDIX A
FORM OF PROPOSED AMENDMENT
RESOLVED: That the Articles of Incorporation of WaveRider
Communications Inc. (the "Corporation") be amended on or prior to September 4,
2004 to provide for a plan of recapitalization pursuant to which either: (i)
five shares of common stock will automatically be converted into one share of
common stock; (ii) ten shares of common stock will automatically be converted
into one share of common stock; (iii) fifteen shares of common stock will
automatically be converted into one share of common stock; or (iv) twenty shares
of common stock will automatically be converted into one share of common stock
and thereby deleting the first paragraph of Article FIFTH thereof and inserting
in its place the following paragraphs based on the reverse stock split ratio
determined by the board of directors in their sole discretion. Notwithstanding
the foregoing, the board of directors may, in its sole discretion, determine not
to effect, and abandon, the reverse stock split without further action by the
shareholders of the Corporation:
"FIFTH, The aggregate number of shares of capital stock of all classes
which the Corporation shall have authority to issue is FOUR HUNDRED AND FIVE
MILLION (405,000,000), of which FOUR HUNDRED MILLION (400,000,000) shares having
a par value of $0.001 per share shall be of a class designated "Common Stock"
(or "Common Shares") and FIVE MILLION (5,000,000) shares having a par value of
$0.001 per share shall be of a class designated "Preferred Stock" (or "Preferred
Shares"). All shares of the Corporation shall be issued for such consideration
or considerations as the Board of Directors may from time to time determine.
"At the same time as the filing of this Amendment to the Articles of
Incorporation of the Corporation with the Secretary of State of Nevada becomes
effective, each: (i) five, (ii) ten, (iii) fifteen, or (iv) twenty shares of
common stock of the Corporation, par value $.001 per share (the "Old Common
Stock"), issued and outstanding or held in the treasury of the Corporation
immediately prior to the effectiveness of such filing, shall be combined,
reclassified and changed into one (1) fully paid and non-assessable share of
Common Stock.
"Each holder of record of a certificate or certificates for one or more
shares of the Old Common Stock shall be entitled to receive as soon as
practicable, upon surrender of such certificate, a certificate or certificates
representing the largest whole number of shares of Common Stock to which such
holder shall be entitled pursuant to the provisions of the immediately preceding
paragraph. Any certificate for one or more shares of the Old Common Stock not so
surrendered shall be deemed to represent one share of the Common Stock for each:
(i) five, (ii) ten, (iii) fifteen, or (iv) twenty shares of the Old Common Stock
previously represented by such certificate.
"No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon such combination and reclassification of the Old
Common Stock into shares of Common Stock. Instead of issuing any fractional
shares of Common Stock which would otherwise be issuable upon such combination
and reclassification, the Corporation shall pay to the holders of the shares of
Old Common Stock which were thus combined and reclassified cash in respect of
such fraction in an amount equal to the same fraction of the market price per
share of the Common Stock (as determined in a manner prescribed by the Board of
Directors) at the close of business on the date such combination and
reclassification becomes effective.
"The designations, voting powers, preferences, optional or other
special rights and qualifications, limitations, or restrictions of the above
classes of stock shall be as follows:"
ADDITIONAL INFORMATION
We will mail, without charge, a copy of the Annual Report on Form 10-K
(without exhibits), to any shareholder solicited hereby who requests in writing.
Please submit any such written request to Investor Relations, WaveRider
Communications Inc., 255 Consumers Road, Suite 500, Toronto, Ontario, Canada M2J
1R4.
DESCRIPTION OF BUSINESS
Background
We were originally incorporated under the laws of the State of Nevada on August
6, 1987, as Athena Ventures Inc. By the end of 1996, the Company had become
inactive but was still listed on the OTC Bulletin Board.
In February 1997, we entered into negotiations to purchase Major Wireless
Communications Inc. Major Wireless was organized in British Columbia, Canada, as
a private company in 1996 to address an existing and growing market need to
provide cost-effective, high-speed wireless Internet links. To finance the
acquisition of and ongoing development of products by Major Wireless we
completed, in February 1997, the sale of common share and preferred share units.
In May 1997, we completed the acquisition of Major Wireless through a share
exchange and entered into an escrow arrangement, which restricted the conversion
of the preferred shares received by the former shareholders of Major Wireless
into common stock until certain performance milestones were achieved.
Subsequently, we changed the Company's name to WaveRider Communications Inc. and
Major Wireless Inc's name to WaveRider Communications (Canada) Inc.
On June 11, 1999, WaveRider acquired Transformation Techniques, Inc., or TTI,
through a merger with our newly created subsidiary WaveRider Communications
(USA) Inc. On October 1, 2000, we acquired ADE Network Technology Pty Ltd. or
ADE of Melbourne, Australia, a privately held wireless infrastructure company.
Subsequently, we changed the name of ADE to WaveRider Communications (Australia)
Pty Ltd.
Our executive offices are located at 255 Consumers Road, Suite 500, Toronto,
Ontario, Canada, M2J 1R4. Our telephone number is (416) 502-3200 and our Web
Site address is www.waverider.com.
WaveRider Communications Inc. - Our Business
We design, develop, market and support fixed wireless Internet access products.
Our products are designed to deliver efficient, reliable, and cost-effective
solutions to bring high-speed Internet access to markets around the world.
We are focused on providing the solution to the "last mile" problem faced by
traditional wired telecommunications services: how to profitably build out a
network that provides the level of services demanded by end users. In medium to
small markets, and in areas of the world with limited or no existing
telecommunications infrastructure, the cost to install or upgrade wired services
to provide the level of access customers expect can be prohibitive.
We believe that our fixed wireless Internet access products are faster and less
expensive to deploy than traditional wired services, with a lower cost-per-user
to install, deploy and manage.
Our wireless network products are designed to operate in the license-free ISM
radio spectrum, which facilitates a more rapid and low-cost market introduction
for service providers than for licensed or hardwire solutions. Our products
utilize direct sequence spectrum or DSS communications, which ensures reliable,
secure, low-interference communications.
Our Products
Our current product portfolio includes the Last Mile Solution or LMS product
line and the Network Communications Links, or NCL product line. These product
families are designed to deliver scalable, high-speed, fixed wireless Internet
access to all sizes of businesses, home offices and residential users.
Both our LMS and NCL product families include our proprietary technologies
developed at our research and development facility.
Last Mile Solution
The LMS product family has evolved from our earlier product offerings, the
LMS2000 and LMS3000 systems to our dual-band LMS4000 wireless network system.
The LMS4000 is designed to enable service providers to deliver high-speed
Internet access to both business and residential customers utilizing multiple
frequency bands. This multi-frequency approach enables WaveRider to support our
customers' needs to provide differentiated service offerings to large, medium
and small businesses as well as residential and SOHO users.
When operating in the 2.4GHz band the LMS4000 delivers raw data throughput
speeds of up to 11 megabits per second (Mbps) via line-of-sight connectivity.
Such speeds support the Internet access requirements of the large and medium
business market segments.
While operating in the license-free 900 MHz spectrum the LMS4000 delivers data
throughput speeds up to 2.0 Mbps and delivers non-line-of-sight communication
between the communications access point and the end-user modem. This eliminates
the need for an external antenna and thereby permits the end-user to install the
equipment residing at their office or home themselves.
The LMS4000 supports a variety of services including Internet access for e-mail,
large file transfers, web browsing, streaming audio and streaming video. The
LMS4000 is optimized for Internet Protocol or IP Networks. Connectivity is
provided to network users via an LMS end user modem designed specifically for
business or residential use.
The LMS4000 is designed to be highly scalable, allowing network operators to
begin with a small initial network and gradually build out a larger network with
more users over time. There are no limits as to the number of network
subscribers that can be supported by an LMS4000 network due to its cellular-like
architecture, which allows for the efficient re-use of radio channels.
NCL Products
The NCL product family is a series of wireless bridges and routers designed
specifically for use by Internet service providers, network managers and
information technology managers. Offering point-to-point and point-to-multipoint
line of sight wireless connectivity in the 2.4 to 2.485 GHz license-free
frequency band, our NCL products can be used to establish wide area networks and
building-to-building links. The NCL can connect a single computer or computer
network to other single computers or computer networks.
The operating system built into the NCL products incorporates a complete Simple
Network Management Protocol, or SNMP, compliant managed routing solution, which
facilitates the installation and use of these products. The operating system
also integrates Internet Protocol or IP, which provides a variety of network
routing capabilities.
We launched our first product, the NCL135, during the first quarter of 1999. The
latest product in our NCL family, the NCL1170 bridge/router, was launched in May
2001. The NCL1170 delivers high-speed wireless connections for LAN-to-LAN and
LAN-to-Internet connectivity. The NCL1170 delivers throughput speeds up to 8.0
mbps, using our proprietary radio technology that uses an 11 mbps radio. The
product can be used for point-to-point and point-to-multipoint applications and
to extend Ethernet networks without additional telephone lines.
Our Market
The market for our fixed wireless access products is driven by the worldwide
demand for Internet access as well as the increasing demand for high speed
Internet access. Our target market in North America is comprised of cities with
a population of fewer than 150,000, suburban areas of larger cities and
industrial parks. In these markets, our products address the demands of
organizations and consumers who require broadband access to the Internet, but do
not have access to cable or digital subscriber line connections from traditional
service providers. We believe this market includes 40% of North American homes
and businesses.
In many international markets, the telecommunications infrastructure is
inadequate or unavailable for basic Internet access. There are large parts of
less developed regions in India, Africa, South East Asia and South America that
have only limited and high cost Internet access. In these markets, our wireless
products have a significant cost advantage over wired technologies. Accordingly,
we believe our international target markets are potentially even broader than
our North American target markets.
Internet access prices can be broken down into three components: access
equipment, Internet access provision and telephone service charges. In relative
terms, the costs to get connected are much higher in developing countries. While
prices may not differ drastically in absolute terms, there is a large gap
between high and low income countries when costs relative to per capita income
are considered. In our view, fixed wireless access technology is well positioned
to bridge the gap between those who have access to high-speed services and those
who do not, and to provide the means to overcome the obstacles to gain basic
access to the Internet. We believe there are significant advantages, such as
reduced cost and faster deployment, to our fixed wireless access technology over
traditional wired access.
In summary, the key demand drivers for fixed wireless access include:
o Growth in the number of Internet users world wide,
o Growing demand for high speed Internet access,
o Scarcity of access technologies that are capable of efficiently and
economically delivering more than 1 Mbps,
o Lack of wireline infrastructures in developing countries, and
o Lack of suitable broadband access technologies in rural and suburban
areas in North America.
In meeting these market requirements, our fixed wireless access product line
offers several benefits as a communications technology:
o Instant blanket coverage without digging up streets or leasing capacity
from competitors,
o A pay-as-you-grow deployment model, which allows for low-cost market
entry with incremental costs matched to incremental revenues,
o Bandwidth increments that address the requirements of small and
mid-size businesses,
o Point-to-multipoint technology allowing for burstable, bandwidth on
demand services, which are specially suited towards a data-centric
environment,
o Wireless technology which enables those who do not have access to
copper, coaxial or fiber optic wire to participate in the high-speed
Internet access market,
o Significant cost advantages through the use of license-free radio
frequencies, and
o Easy to set up, non-line-of-sight modems resulting in further
significant cost savings by avoiding expensive truck rolls to install
customer premise equipment.
Currently, our products operate in the unlicensed spectrum, specifically 900 MHz
and 2.4 GHz. We believe that our 900 MHz products in particular could enjoy wide
acceptance because of their non-line-of-sight and easy to set up features.
Deployments that combine business and consumer subscribers can be shown to offer
a viable and profitable business case for service operators.
Our Market Strategy
We believe that we are in a position to meet the Internet access needs of
organizations and consumers in North America and abroad. In North America, our
products address the demands of users who require broadband access to the
Internet, but do not have access to cable or digital subscriber line connections
from traditional service providers. These customers are typically found in
smaller cities in North America, and in most suburban and semi-rural areas where
there are few Internet access options other than traditional telephone dial-up
connections.
In many international markets, the basic telecommunications infrastructure is
inadequate or unavailable for basic Internet access. In these markets, our
wireless products have a significant cost advantage over wired technologies. In
addition, they can be deployed rapidly and be maintained easily.
Our approach to the market uses a direct and indirect sales model consisting of
strategic industry partnerships and key relationships: direct to strategic
partners such as carriers and Internet service providers and indirect to channel
partners including distributors, value added resellers and system integrators.
For the LMS product family, we market directly to Internet service providers,
telephone companies (including competitive local exchange carriers, independent
local exchange carriers and independents) cellular providers and emerging
carriers (municipal governments and power utilities). In some international
markets, we expect to form alliances with local partners who will provide sales,
support and installation services for LMS systems.
The LMS system provides an attractive and profitable business model for
operators. Our system enables the operator to provide high-speed wireless
Internet access to both the business and consumer/residential markets. Also, the
system's scalability allows an operator to launch a wireless network with a
relatively small investment and grow the network as the number of subscribers
increase.
Target Customers
Wireless Carriers - Internet access provides wireless carriers with the
opportunity to expand their service offerings and revenue base. Wireless
carriers are an attractive target market for us because they have wireless
expertise and an existing infrastructure that can be used to build a wireless
Internet access service using our equipment.
Rural cellular providers in the United States provide the largest potential in
this segment. There are approximately 428 Rural Service Areas in the United
States. The cost to develop and build an advanced rural communication network
infrastructure is substantial. Our systems enable the rural cellular providers
to establish a wireless Internet access service to meet the demand for broadband
services at a relatively low cost per subscriber.
Wireline Carriers (Independent Telephone Companies) - Independent regional
telephone companies offer a significant potential market for our wireless
service package. This target is attractive for us because of the market serviced
by these companies where there is an unmet need for broadband services, and
because the challenges they face in expanding the range of services to
customers.
In the United States there are nearly 1,000 independent telephone companies
ranging in size from fewer than 50 customers to more than 50,000. These
companies provide telephone service to nearly five million rural Americans. In
Canada there are approximately 50 independent telephone companies of which nine
are municipally owned and the rest are privately owned. In addition to basic
telephone service, many independents offer other communications services
including cellular, paging, cable television, and Internet access services.
Several characteristics make rural communities different from urban areas.
Greater distances between centers and smaller more scattered populations make
single lines more expensive given the longer cable loops required which reduce
the advantage of volume concentration. Because of this and regulatory changes,
much less upgrading and modernization has been done in rural areas.
Internet Service Providers - ISPs fall into three categories: (i) national
backbone providers, (ii) regional networks, and (iii) independent service
providers. Independent and regional providers act as intermediaries between the
owners of the transmission networks over which Internet traffic is passed and
the owners of the traffic that is available on the World Wide Web. For this
reason, in the Internet service provider market, we are targeting national and
regional operators who understand that the value of incorporating a wireless
strategy to enhance their position in the marketplace reduces their dependence
on independent local exchange carriers.
The demand for high-speed access has provided additional challenges,
opportunities and threats to Internet service providers. As telephone companies
roll out digital subscriber line services and cable companies offer their own
Internet access services, the independent internet service provider has an
opportunity to partner with us to remain a competitive player in the high-speed
access market. In regions that lack a communications infrastructure for
high-speed access, our solution provides independent and regional Internet
service providers with an opportunity to satisfy the demand for high-speed
Internet access. We offer additional benefits to Internet service providers. An
Internet service provider can go beyond just being an access provider to
becoming a communications provider with control over their own infrastructure by
implementing a wireless Internet access system.
Emerging Carriers - Over the past year we have seen the emergence of two new
carrier segments.
First, Municipal Governments segment where municipal governments are building
and operating or partnering with carriers to build broadband wireless networks
in order to provide broadband services to their residential and business
taxpayers. The driving force behind this segment is the need to attract new
taxpayers to the municipality, a task that is greatly hampered if broadband
access is not available.
Second, power utilities (distributors, co-ops, etc.) are expanding their
capabilities and deploying wireless broadband networks. In this case, these
entities are utilizing existing infrastructure such as towers, right of ways,
and network management systems to build out broadband networks upon which they
can offer Internet access services to their customer base.
International Sales Strategies
Our target markets outside of North America, for our LMS4000 product family, are
predicated on spectrum availability. Most parts of South America, the Caribbean
and Latin America provide the 900MHz spectrum on a license exempt basis, with
rules that are compatible with our LMS product offering.
We believe that our revenue potential in these international markets can be
quite significant because the telecommunications infrastructure required for
Internet access is underdeveloped. However, we recognize that international
business has longer sales cycles and requires a local presence for major LMS
deals.
In 2000, we acquired ADE Network Technology Pty, LTD. in Australia, a wireless
product integrator. This acquisition has provided a strong base of customers and
staff to exploit NCL and third party wireless product market opportunities in
Australia and South East Asia.
See Note No. 21 to our attached Consolidated financial statements, entitled
"Segmented Information", for a list of the foreign countries from which we
derive revenues.
Professional Services
Our professional services group is an important component in our sales and
marketing strategy, and, in our opinion, provides an important competitive
advantage.
Our professional services strategy is to deliver flexible, cost effective and
market driven service offerings. We believe that we are positioned to deliver
this support strategy globally. During the last few months a number of key
programs have been launched to meet the 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 for contracting directly with our customers for these
services.
The program management office, coupled with our global service partners, has the
international capabilities to provide:
Application engineering; System and program planning and
implementation management;
Path survey, design 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 Adeptron Technologies Corporation (formerly
Electronic Manufacturing Group), or Adeptron, to manufacture, package and
distribute our products. We have a long term distribution agreement with
Alliance Corporation, or Alliance, for the pick, pack and shipment of our
products.
Solectron (www.solectron.com) provides a full range of global manufacturing and
supply-chain management services to the world's premier high-tech electronics
companies. Solectron's offerings include new-product design and introduction
services, materials management, high-tech product manufacturing, and product
warranty and end-of-life support. Solectron, the first two-time winner of the
Malcolm Baldrige National Quality Award, has a full range of industry-leading
capabilities on five continents. Its headquarters are in Milpitas, California.
Adeptron Technologies Corporation (www.adeptron.com) is an ISO 9002 registered
Electronics Manufacturing Services company that provides a complete range of
integrated product development and delivery services to the global technology
and electronics industry. Such services include design, rapid prototyping,
manufacturing and assembly, testing, product assurance, supply chain management,
worldwide distribution and after-sales service. Located in Markham, Ontario,
Canada, Adeptron's manufacturing facility employs 200 people. Adeptron brings
extensive insight to the principles of wireless manufacturing and production.
Through our association with Solectron and Adeptron, we have the capability to
meet the demands of a rapidly growing Internet market, with high quality
products which are efficiently manufactured.
We provide our contract manufacturers with ongoing production forecasts to
enable them to forecast and procure required parts. Under the terms of the
Agreements with the contract manufacturers, we have committed to assume
liability for all parts required to manufacture our forecast products for 13
weeks and all final assembly costs for the forecast products for four weeks, on
a rolling basis.
Alliance Corporation (www.alliancecorporation.ca) is a value-added distribution
and logistics resource that has historically focused on the Wireless
Communications and Broadcast Industries. Starting in 2000, Alliance has and
continues to make substantial investments to develop a similar strength in the
Broadband Communications Industry with particular emphasis on wireless
solutions. Adding skilled technical and engineering services to its offering,
Alliance is positioned to support Systems Integrators as they develop wireless
solutions for their enterprise customers including ISPs.
Competition
There is intense competition in the data communications industry. We compete not
only with other fixed wireless Internet companies, but also with companies that
deliver hard-wired technologies (wire or fiber optic cable). Competition is
based on design and quality of the products, product performance, price and
service, with the relative importance of each factor varying among products and
markets.
We compete against companies of various sizes in each of the markets we serve.
Many of these companies have much greater financial and other resources
available to help them withstand adverse economic or market conditions. These
factors, in addition to other influences such as increased price competition and
market and economic conditions could potentially impair our ability to compete.
Our major competitors include Alvarion and Proxim.
Regulation of Wireless Communications
Currently, our technology is deployed in the highly regulated license free
frequency bands. As such, our products are not subject to any wireless or
transmission licensing in the United States, Canada and many other jurisdictions
worldwide. The products do, however, have to be approved by the Federal
Communications Commission, for use in the United States, Industry Canada, for
use in Canada, and other regulatory bodies for use in other jurisdictions, to
ensure they meet the rigorous requirements for use of these bands.
Continued license-free operation will be dependent upon the continuation of
existing government policy and, while we are not aware of any policy changes
planned or expected, this cannot be assured. License-free operation of our
products in the 902 to 928 MHz and the 2.4 GHz bands are subordinate to certain
licensed and unlicensed uses of the bands and our products must not cause
harmful interference to other equipment operating in the bands and must accept
interference from any of them. If we should be unable to eliminate any such
harmful interference, or should our products be unable to accept interference
caused by others, we or our customers could be required to cease operations in
the bands in the locations affected by the harmful interference. Additionally,
in the event the 902 to 928 MHz or the 2.4 GHz bands becomes unacceptably
crowded, and no additional frequencies are allocated, our business could be
adversely affected.
Research and Development
In 2002 and into fiscal 2003, we have concentrated our efforts on sustaining
engineering and product enhancement in three development areas:
o increasing the speed, reliability and user capacity of the networks to allow
more users at greater throughput speeds; o enhancing the network capabilities of
the systems to support new developing applications, and o reducing the cost of
our product offerings to provide pricing flexibility and higher margins.
Over 2002, we integrated our Research and Development facilities with our sales,
marketing and support organization in Toronto. Our Research and Development
spending declined significantly in 2002 and we expect it to stay at these
reduced levels through fiscal 2003.
Research and Development expenditures in 2002, excluding depreciation,
amortization and non-cash stock based compensation amounted to $1,494,880
compared with $4,471,567 in 2001 and $6,127,360 in 2000.
Summary
We are a wireless technology company that develops, manufactures and markets
products to take advantage of the world-wide growth of the Internet, increasing
acceptance of wireless technology, and the demand for high speed, Internet
access.
We believe that providing the "last mile solution" is the key to capitalize on
the opportunities presented by today's rapidly changing telecommunications
marketplace. 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 50 employees located in our head office in
Toronto, Ontario and our sales offices and subsidiaries in the United States,
Canada and Australia, as well as at our subsidiary, JetStream Internet Services
in Salmon Arm, British Columbia.
The majority of these employees are involved in the design, development and
marketing of our line of wireless data communications products.
Management Discussion and Analysis F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
We incurred a net loss for the year ended December 31, 2002 of $11.2 million on
revenues of $9.0 million compared to a net loss for the year ended December 31,
2001 of $21.5 million on revenues of $7.8 million and a net loss for the year
ended December 31, 2000 of $31.5 million on revenues of $4.1 million. Our
reported results for 2002 included non-cash expenses in the amount of $6.2
million (2001 - $10.8 million, 2000 - $17.9 million).
On October 15, 2002, we announced a restructuring plan that included headcount
reductions and salary deferrals. On November 6, 2002, principally as
compensation for accepting salary deferrals or reductions, our board of
directors authorized the award of 2,525,000 stock options, exercisable at $0.01
per share, to our staff and certain management.
Over 2002, we integrated our Calgary based Research and Development facilities
with our sales, marketing and support organization in Toronto. Our Research and
Development spending declined significantly in 2002 and we expect it to stay at
these reduced levels through fiscal 2003.
Our cash balance decreased to $1.0 million compared to $2.2 million at December
31, 2001 and $7.7 million at December 31, 2000.
Escrow Share Agreement - When our current operations 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 us was viewed as necessary to allow us
to raise the funds needed to develop our products and markets. In September
2001, in recognition of the ongoing commitment of the founders, the Board of
Directors authorized a two year extension of the escrow agreement, as was
contemplated in the original agreement. With the extension of the escrow
agreement, the charges resulting from the final release of escrow shares were to
be charged directly to selling, general and administrative expenses and not
recorded as goodwill.
As we reached each of the milestones under the escrow agreement, we released a
specific percentage of the shares and the value of those shares, at the time of
release, was included in goodwill or compensation expense. Depending on the
price of the common shares at the time of release, the value assigned varied
dramatically. During 2002, we released the remaining 5,381,250 shares of common
stock from the escrow agreement (2001 - 2,250,000, 2000 - 900,000). This
resulted in a charge of $172,500 to compensation expense (2001 - $629,000, 2000
- - $712,500) and a charge of $710,813 to selling, general and administrative
expenses. In prior years, the non-compensation charges resulted in an increase
of goodwill in the amount of $2,201,500 in 2001 and $2,493,750 in 2000.
Revenue
Total revenue increased 15.4% in 2002, compared to 2001, primarily due to the
strong growth of sales of our LMS 4000 network system in North America. North
American revenues grew 145% in 2002 to $5.9 million, while International
revenues declined 42% on a year on year basis, down to $3.1 million. Revenue in
the fourth quarter of 2002 increased 37.8% compared to the third quarter of 2002
and 61.6% compared to the fourth quarter of 2001.
We expect to see continued strong growth in the North American markets as we
continue to increase our customer base and our customers increase the size of
their networks. Internationally, we expect revenue to stabilize at current
levels and then slowly grow in the second half of 2003 as our initiatives into
South and Central America start to achieve results.
Revenues in 2001 increased 89% compared to 2000, primarily due to the commercial
release of our LMS3000 network system and to the continued expansion of our
sales and marketing.
Cost of Sales
We recorded a gross margin of $2,230,121 in 2002 compared to $1,847,522 in 2001
and a gross margin deficiency in 2000 of $1,106,056. As a percentage of revenue,
gross margins grew to 24.75% in 2002 compared to 23.7% in 2001 and a 26.8%
deficiency in 2000. Gross margins in the fourth quarter of 2002 were 27.6%
compared to 14.3% in the third quarter of 2002 and 7.4% in the fourth quarter of
2001.
Management Discussion and Analysis F-2
With the growth of the LMS 4000 as a percentage of our total revenues, we expect
that gross margins, as a percent of revenue, will continue to strengthen. We
anticipate reducing the cost of the LMS 4000 end user modem, which is the most
significant component of a LMS 4000 network, through economies of scale and
design simplification. These cost reductions will be used to enhance margins and
to provide selective volume discounts to drive higher unit sales.
Cost of Sales in 2000 was adversely affected by the $1,568,739 write-off of TTI
technology related inventories and warranty provisions.
Expenses
Selling, general and administrative -- Selling, general and administrative
expenses, excluding non-cash stock related charges, declined to $6,212,458 in
2002 (2001 - $8,239,747, 2000 - $8,605,887). Included in the 2002 expenses was a
charge of $710,813 related to the release of escrow shares as more fully
discussed under "Escrow Share Agreement" above.
On October 15, 2002, we announced a restructuring plan that included headcount
reductions and salary deferrals. Included in the plan was a commitment to pay
terminated employees deferred severance payments of approximately $167,000.
These amounts were accrued in the fourth quarter of 2002 and will be paid during
the fourth quarter of 2003. Additionally, we have deferred and expensed $34,400,
and will defer and expense an additional $48,600 during the first quarter of
2003, in compensation to senior staff, which we will not pay until the fourth
quarter of 2003. We have also structured our sales compensation to reduce fixed
salary costs and increase the variable achievement-based component.
In September 2001, we reduced our staff by 56%, our executive staff waived all
salaries, bonuses and other cash compensation for a period from October 1 to
December 14 and other senior managers accepted a 25% pay decrease for the same
period. During 2000, we expanded our sales operations in the United States and
internationally and, in the fourth quarter, acquired ADE Technologies in
Australia. The additions were put in place to provide us with the trained sales
and support representatives required to sell and service the LMS network
products.
Employee stock-based compensation -As discussed above, we entered into an escrow
arrangement with our founding shareholders and employees. In addition, we
awarded certain employees options that vested based on the same milestones from
the escrow arrangement. Each time a milestone was achieved, shares were released
and options vested; and the portion that related to our employees was charged to
the statement of loss as "Employee stock-based compensation". During 2002, we
completed all of the remaining milestones and, as a result, charged $172,500 to
the statement of loss. In 2001, we achieved one of the milestones resulting in a
$629,000 charge to the statement of loss. In 2000, we charged $712,500 to the
statement of loss, as a result of an escrow release. In addition, during 2000,
the extension of our 1997 Option Plan resulted in non-cash accounting charges in
the amount of $11,099,858.
Research and development -We moved to a level of sustaining engineering in the
second half of 2001, with Research and Development costs, excluding stock
related expenses, depreciation and amortization, in 2002 amounting to $1,494,880
(2001 - $4,471,567, 2000 -$6,127,360). During 2002, we closed our Calgary
facility and transitioned the operations to our Toronto location. We anticipate
that we will continue to maintain our 2002 level expenditures through 2003.
Write-off of goodwill - During the third quarter of 2002, as a result of the
continued and, more recently, sharp decline in the telecommunications sector, we
determined that we could not continue our operations at current levels without
further funding and that, given the state of the telecommunications sector and
the financial markets, it was unlikely that additional funding would be
available. As such, we took a number of actions to reduce costs and restructure
our operations. Included in these actions was a complete revision to the
operating plans of WaveRider Communications (Australia) Pty Ltd. (formerly ADE
Network Technology Pty Ltd.), our wholly owned subsidiary in Australia, which is
viewed as an independent reporting unit, and for WaveRider Communications Inc.
In each case, we compared the expected net present value of the discounted
future cash flows of the restructured operations to the current net assets of
Management Discussion and Analysis F-3
the respective operations after revising all key assumptions underlying
management's valuation judgments, including those relating to short and
longer-term growth rates and discount factors reflecting increased risks in a
declining market. As a result of management's analysis, it was determined that
an impairment charge of $4,069,696 was required on the basis that the carrying
value of goodwill exceeded its fair value, which was estimated to be nil.
Restructuring charges - In conjunction with our decision to relocate our
research and development facility to Toronto and to shut down our Calgary
operations and our further decision, in the third quarter of 2002, to further
restructure our operations, we incurred restructuring costs of $362,588. In
addition to the approximately $167,000 in deferred severance for employees
terminated in the third quarter of 2002, we incurred costs of $76,940 to
terminate the Calgary lease, $50,900 in other severance costs, $28,454 for
moving of fixed assets and corporate records and $39,294 in other termination
related costs.
Depreciation and amortization - In 2002, we adopted the provisions of SFAS No.
142 and, as such, ceased to amortize goodwill. In prior years, the release of
the escrow shares and the resulting goodwill had resulted in significant
amortization expenses of $2,385,495 in 2001 and $1,455,305 in 2000.
With our restructuring, in 2002, we have disposed of certain excess fixed assets
and reduced our depreciation expense to $763,845 (2001 - $1,147,943, 2000 -
$709,333).
Interest expense - During 2002, we redeemed the balance of our promissory notes
and accreted the $263,607 fair value of the notes to financing expense. In
addition, we paid $56,076 in repayment premiums and various ongoing operating
interest charges. This, along with other miscellaneous financing expenses,
resulted in financing expenses in 2002 amounting to $331,041 (2001 - $5,493,373,
2000 - $274,347).
Included in interest expense for 2001was $5,410,846 in non-cash charges related
to our financing activities.
Supplementary financial information
(unaudited)
Three Months Ended
March June September December(1)
-------------- ------------ ------------ ------------
Fiscal 2002
Net revenues $ 1,612,988 $ 2,344,867 $ 2,124,410 $ 2,926,651
Gross profit 461,255 659,615 302,856 806,395
Net loss (2,933,323) (1,414,129) (6,037,909) (864,341)
Net loss per common share (0.04) (0.01) (0.05) (0.01)
Weighted average shares outstanding 79,322,684 110,182,830 114,790,464 116,262,533
Fiscal 2001
Net revenues $ 1,830,403 $ 2,473,418 $ 1,689,209 $ 1,810,987
Gross profit 441,001 834,674 437,090 134,757
Loss before extraordinary item (8,984,708) (5,243,205) (4,489,006) (2,577,731)
Extraordinary item - - - (198,300)
Net loss (8,984,708) (5,243,205) (4,489,006) (2,776,031)
Loss before extraordinary item
per common share (0.16) (0.10) (0.07) (0.04)
Weighted average shares outstanding 55,757,444 60,240,772 61,365,893 63,609,949
(1) In the fourth quarter of 2002, we determined that we had recorded
excess depreciation expense in each of the preceding three quarters. As
a result, we recorded an adjustment in the fourth quarter to reduce
depreciation expense by $216,747. The impact on each of the preceding
three quarters was immaterial and had no impact on the reported net
losses per share in those quarters
Management Discussion and Analysis F-4
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. Our
outstanding shares of common stock, par value $.001 per share, are traded under
the symbol "WAVC.OB" in the over-the-counter Electronic Bulletin Board by the
National Association of Securities Dealers, Inc.
Up to the current period, we have had to rely on our ability to raise money
through equity financing to pursue our business endeavors. With the ongoing
stock market decline in the technology sector and our current financial position
and results, management has determined that it is unlikely that we can raise
further capital or debt financing at this time. As a result, on October 15,
2002, we announced a new round of restructuring, which included headcount
reductions, reductions and deferrals of senior level salaries and even stricter
discretionary spending controls. Based on our current plans and projections, we
believe that we have the funds to meet our current and future financial
commitments until we achieve positive cash flows from operations. However, the
significant slowdown in capital spending in our target markets has created
unanticipated uncertainty as to the level of demand in those markets. In
addition, the level of demand can change quickly and can vary over short periods
of time, including from month to month. The uncertainty and variations in our
markets means that accurately projecting future results, earnings and cash flow
is increasingly difficult. As a result, we have determined that a going concern
note should be included in our financial statements until such time as adequate
funding can be obtained through operations or external financing arrangements.
We used $4,970,703 of cash in operating activities in 2002 (2001 - $10,348,489,
2000 - $17,268,000). With the restructuring announced in the fourth quarter and
our continued focus on discretionary spending, the cash used in operating
activities during the fourth quarter was $775,813. We expect to continue to
achieve revenue and gross margin growth and to control cash expenditures in
2003.
With the relocation of our Research and Development facilities to Toronto, we
used $48,086 of cash in investing activities. These expenditures mainly related
to the cost of retrofitting our offices to provide lab facilities, net of the
recovery we achieved through rationalization of our fixed assets. Throughout
2003, we expect that we will not need to make any significant cash expenditures
for further investments.
During March 2002, we raised $4,497,000, less cash expenses of $165,734, through
the sale of 30,096,662 shares of common stock registered by us on our S-3 shelf
registration statement. In addition, we raised $40,266 through the sale of
401,725 shares of common stock under our employee stock purchase plan.
During 2002, we repaid our outstanding promissory notes, in the amount of
$432,500, and made capital lease payments of $126,101. With these payments we
have reduced our capital lease liability to $18,098 and repaid all other debt.
It is our belief that, with the exception of some small amounts received under
our employee stock purchase plan, we will be unable to raise any significant
amount of cash through financing activities in 2003.
Contractual Obligations
Payments Due by Period
Less than 1-3 4-5 After 5
Contractual obligation Total 1 year years years years
- ----------------------------------------------------------------------------------------------------------
Capital lease obligations $ 20,071 $ 13,901 $ 6,170 - -
Operating leases 510,735 369,282 141,453 - -
Unconditional purchase obligations 1,389,000 1,389,000 - - -
We provide our contract manufacturers with ongoing production forecasts to
enable them to forecast and procure required parts. Under the terms of the
agreements with the contract manufacturers, we have committed to assume
liability for all parts required to manufacture our forecast products for 13
weeks and all final assembly costs for the forecast products for four weeks, on
a rolling basis.
We plan to pay our contract manufacturers for the unconditional purchase
obligation through net cash generated from operations.
Management Discussion and Analysis F-5
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
On an ongoing basis, management evaluates its estimates and judgments, including
those related to bad debts, inventories, investments, intangible and other
long-lived assets, income taxes, warranty obligations, product returns,
restructuring costs, litigation and contingencies. Management bases its
estimates and judgments on historical experience, current economic and industry
conditions and on various other factors that are believed to be reasonable under
the circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Allowance for Losses on Receivables
We have historically provided financial terms to certain customers in connection
with purchases of our products. Financial terms, for credit-approved customers,
are generally on a net 30-day basis.
Total receivables at December 31, 2002 and 2001 were $1,554,757 and $1,533,842,
respectively, with an allowance for losses on these receivables of $212,224 and
$635,410, respectively.
Management periodically reviews customer account activity in order to assess the
adequacy of the allowances provided for potential losses. Factors considered
include economic conditions, collateral values and each customer's payment
history and credit worthiness. Adjustments, if any, are made to reserve balances
following the completion of these reviews to reflect management's best estimate
of potential losses.
Inventory Valuation Reserves
We record valuation reserves on our inventory for estimated obsolescence or
unmarketability. The amount of the write-down is equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions.
Net Inventories consisted of the following:
December 31 2002 2001
-----------------------------------------------------------
Finished goods $1,258,620 $ 1,152,834
Raw materials 22,043 681,768
----------------------------
1,280,663 1,834,602
Less inventory reserves (50,615) (431,899)
----------------------------
$ 1,230,048 $ 1,402,703
============================
We provides 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 four weeks, on a rolling basis.
Management Discussion and Analysis F-6
We balance the need to maintain strategic inventory levels to ensure competitive
lead times with the risk of inventory obsolescence due to rapidly changing
technology and customer requirements. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Valuation of Investments and Long-Lived Assets
We assess the impairment of investments and long-lived assets, which includes
identifiable intangible assets, goodwill and plant and equipment whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important which could trigger an impairment
review include the following:
o underperformance relative to expected historical or projected future
operating results;
o changes in the manner of use of the assets or the strategy for our
overall business;
o negative industry or economic trends; o declines in stock price of an
investment for a sustained period; and o our market capitalization
relative to net book value.
When we determine that the carrying value of intangible assets, goodwill and
long-lived assets may not be recoverable an impairment charge is recorded.
Impairment is measured based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk
inherent in our current business model or prevailing market rates of investment
securities, if available.
In the third quarter of 2002, we determined that we could not continue our
operations at our current level without further funding and that, given the
state of the Telecommunications sector and the financial markets, it was
unlikely that additional funding would be available. As such, we took a number
of actions to reduce costs and restructure our operations. Included in these
actions was a complete revision to the operating plans of WaveRider
Communications (Australia) Pty Ltd. (formerly ADE Network Technology Pty Ltd.),
our wholly owned subsidiary in Australia, which we view as an independent
reporting unit, and for WaveRider Communications Inc. As a result of these
changes, the fair market values for our two reporting units were estimated using
the expected present value of future cash flows. Based on this analysis, we
wrote off all of our existing goodwill, in the amount of $4,069,696.
In September 2001, we announced a restructuring plan, which included the
reduction of approximately half of the staff in WaveRider Communications
(Australia) Pty Ltd. As a result, we wrote down the acquired labor force,
resulting from the acquisition of WaveRider Communications (Australia) Pty Ltd.
in the amount of $155,000. In late 2000, management determined that various
long-lived and intangible assets, relating to our acquisition of Transformation
Techniques, Inc. during 1999, had been impaired and impairment charges were
recorded totaling $1,028,430 in 2000.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS.
Following are certain risk factors associated with our Company and with
ownership of our stock.
Our Ability to Continue As A Going Concern
Our independent auditors have issued an opinion on our financial statements, as
of December 31, 2002, and for the year then ended, which includes an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern. Among the reasons cited by the independent auditors as raising
substantial doubt as to our ability to continue as a going concern are that we
have incurred recurring losses from operations resulting in an accumulated
deficit and a working capital deficiency as of December 31, 2002.
These circumstances raise substantial doubt about our ability to continue as a
going concern. If we are unable to achieve profitability and cash flow positive
operations or to secure significant additional financing, we will, in all
likelihood, be obliged to seek protection under the bankruptcy laws in which
event, we believe that it is unlikely that our common stock will have any value.
3
Management Discussion and Analysis F-7
We have a history of losses, and our future profitability is uncertain.
Due to our limited operating history, we are subject to the uncertainties and
risks associated with any new business. We have experienced significant
operating losses every year since incorporation. We incurred a net loss of
$11,249,702 for the year ended December 31, 2002 (2001 - $21,492,950 and 2000 -
$31,472,615) and reported an accumulated deficit at that date of $83,200,992
(2001 - $71,951,290). We expect to continue to incur losses at least for the
first quarter of 2003.
There can be no assurance that we will ever generate an overall profit from our
products or that we will ever reach profitability on a sustained basis.
Our sales have been adversely affected by recent events and may be adversely
affected by future events.
We are subject to general economic and political risks to a similar extent as
other companies who export products all over the world. We believe our sales
have been, and may continue to be, adversely affected by recent events in Iraq
and by the business slowdown in the United States, our principal market, and
could be adversely affected by other events that may occur in the future. We
have no way of knowing how long these effects will persist or how severe they
may be.
Competition in the data communication industry is intense and there is
uncertainty that given our new technology and limited resources that we will be
able to succeed.
Although our products are based on a wireless technology, we compete not only
against companies that base their products on wireless technology, but also
against companies that base their products on hard-wired technology (wire or
fiber optic cable). There can be no assurance that we will be able to compete
successfully in the future against existing or new competitors or that our
operating results will not be adversely affected by increased price competition.
Competition is based on design and quality of the products, product performance,
price and service, with the relative importance of such factors varying among
products and markets. Competition in the various markets we serve comes from
companies of various sizes many of which are larger and have greater financial
and other resources than we do and, thus, can withstand adverse economic or
market conditions better than we can.
Our future operating results are subject to a number of risks, including our
ability or inability to implement our strategic plan, to attract qualified
personnel and to raise sufficient financing as required. Inability of our
management to guide growth effectively, including implementing appropriate
systems, procedures and controls, could have a material adverse effect on our
business, financial condition and operating results.
The data communication industry is in a state of rapid technological change and
we may not be able to keep up.
We may be unable to keep up with technological advances in the data
communications industry. As a result, our products may become obsolete or
unattractive. The data communications industry is characterized by rapid
technological change. In addition to frequent improvements of existing
technology, there is frequent introduction of new technologies leading to more
complex and powerful products. Keeping up with 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 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
Management Discussion and Analysis F-8
rights. There is no assurance that patent application or copyright registration
that have or 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.
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 our 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.
Management Discussion and Analysis F-9
The conversion and exercise of all of the aforementioned securities or the
issuance of new shares of common stock may also adversely affect the terms under
which we could obtain additional equity capital.
Our common stock now trades on the less well recognized Over the Counter
Bulletin Board, which could limit liquidity.
As a result of our common stock being delisted from the Nasdaq National Market
in April of 2002, we have a less liquid market for our common stock than had
existed. As a result, our shares may be more difficult to sell because
potentially smaller quantities of shares could be bought and sold, transactions
could be delayed and security analyst and news coverage of our company may be
reduced. These factors could result in lower prices and larger spreads in the
bids and ask prices for our shares.
Our common stock is subject to the penny stock rules which means our market
liquidity could be adversely affected.
The SEC's regulations define a "penny stock" to be an equity security that has a
market price less than $5.00 per share, subject to certain exceptions. These
rules impose additional sales practice requirements on broker dealers that sell
low-priced securities to persons other than established customers and
institutional accredited investors, and require the delivery of a disclosure
schedule explaining the nature and risks of the penny stock market. As a result,
the ability or willingness of broker-dealers to sell or make a market in our
common stock might decline.
No dividends anticipated.
We intend to retain any future earnings to fund the operation and
expansion of our business. We do not anticipate paying cash dividends on our
shares in the foreseeable future.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, integrity and objectivity of
the consolidated financial statements and other financial information presented
in this report. The accompanying consolidated financial statements were prepared
in accordance with accounting principles generally accepted in the United States
of America, applying certain estimates and judgments as required. In support of
its responsibility, management maintains a system of internal controls designed
to provide reasonable assurance as to the integrity and reliability of the
financial statements and to adequately safeguard, verify and maintain
accountability of assets.
Wolf & Company, P.C., independent accountants, were retained to audit
WaveRider's financial statements for the year ended December 31, 2002 and
PricewaterhouseCoopers, LLP, independent accountants, was retained to audit
WaveRider's financial statements for the two years ended December 21, 2001.
Their accompanying reports are based on audits conducted in accordance with
auditing standards generally accepted in the United States of America.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of independent
non-management board members. The Audit Committee meets periodically with the
independent accountants, both privately and with management present, to review
accounting, auditing, internal controls and financial reporting matters.
D. Bruce Sinclair T. Scott Worthington
Chief Executive Officer Vice President and Chief
Financial Officer
Consolidated Financial Statements F-10
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders of WaveRider Communications Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of loss and comprehensive loss, shareholders' equity and
cash flows present fairly, in all material respects, the financial position of
WaveRider Communications Inc. (the "Company") as at December 31, 2001 and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial schedule listed in the index appearing under Item 15(b) on page 33
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)
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and other members of the worldwide PricewaterhouseCoopers organization.
Consolidated Financial Statements F-11
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
WaveRider Communications Inc.
Toronto, Ontario, Canada
We have audited the accompanying consolidated balance sheet of WaveRider
Communications Inc. as of December 31, 2002, and the related consolidated
statements of loss, changes in shareholders' equity and comprehensive loss and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WaveRider
Communications Inc. as of December 31, 2002, and the results of its consolidated
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial schedule listed in the index
appearing under Item 15(b) on page 33 presents fairly, in all material respects,
the information set forth herein when read in conjunction with the related
consolidated financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and its working capital has declined, as has shareholders' equity. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Wolf and Company, P.C.
Boston, Massachusetts, U.S.A.
February 14, 2003
Consolidated Financial Statements F-12
WaveRider Communications Inc.
CONSOLIDATED BALANCE SHEETS
December 31
2002 2001
ASSETS ------------ ------------
Current assets:
Cash and cash equivalents ......................................... $ 1,025,604 $ 2,244,625
Accounts receivable, less allowance for doubtful accounts ......... 1,342,533 898,432
Due from contract manufacturers ................................... 53,437 41,295
Inventories ....................................................... 1,230,048 1,402,703
Current portion of note receivable ................................ 32,761 32,800
Prepaid expenses and other assets ................................. 75,362 297,282
------------ ------------
Current assets ...................................... 3,759,745 4,917,137
Note receivable, net of current portion ............................... -- 32,801
Property, plant and equipment, net .................................... 885,475 1,671,088
Goodwill .............................................................. -- 3,997,477
------------ ------------
$ 4,645,220 $ 10,618,503
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .......................... $ 2,708,268 $ 2,314,920
Consideration payable on business combination ..................... -- 105,256
Promissory notes .................................................. -- 168,893
Deferred revenue .................................................. 259,235 265,505
Current portion of obligation under capital lease ................. 12,094 131,145
------------ ------------
Current liabilities ................................. 2,979,597 2,985,719
Obligation under capital lease ........................................ 6,004 36,312
------------ ------------
Total liabilities ................................... 2,985,601 3,022,031
------------ ------------
Commitments and Contingencies (Note 15) ............................... -- --
Shareholders' equity:
Preferred Stock, $0.01 par value per share: issued and outstanding
16,700 shares in 2002 and 29,000 shares in 2001 ................ 167 290
Common Stock, $0.001 par value per share: issued and outstanding -
116,755,119 shares in 2002 and 72,973,681 shares in 2001 ........ 116,755 72,974
Additional paid-in capital ........................................ 72,397,489 65,830,352
Other equity ...................................................... 12,621,831 13,748,732
Deferred compensation ............................................. (173,260) --
Accumulated other comprehensive income (loss) ..................... (102,371) (104,586)
Accumulated deficit ............................................... (83,200,992) (71,951,290)
------------ ------------
Total shareholders' equity .......................... 1,659,619 7,596,472
------------ ------------
$ 4,645,220 $ 10,618,503
============ ============
Consolidated Financial Statements F-13
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF LOSS
Years ended December 31
2002 2001 2000
------------- ------------- -------------
REVENUE
Product revenue ......................................... $ 7,382,123 $ 6,005,653 $ 3,592,253
Service revenue ......................................... 1,626,792 1,798,364 540,739
------------- ------------- -------------
9,008,915 7,804,017 4,132,992
------------- ------------- -------------
COST OF REVENUE
Product revenue ......................................... 6,383,955 5,519,604 4,983,048
Service revenue ......................................... 394,839 436,891 256,000
------------- ------------- -------------
6,778,794 5,956,495 5,239,048
------------- ------------- -------------
GROSS MARGIN ............................................ 2,230,121 1,847,522 (1,106,056)
------------- ------------- -------------
EXPENSES
Selling, general and administration ..................... 6,212,458 8,239,747 8,605,887
Employee stock-based compensation .................... 172,500 812,200 10,386,498
Research and development ................................ 1,494,880 4,471,567 6,127,360
Employee stock-based compensation .................... -- -- 1,978,679
Depreciation and amortization ........................... 763,845 3,533,438 2,164,638
Bad debt expense ........................................ 99,413 532,842 539,379
Write-off of goodwill ................................... 4,069,696 155,050 --
Restructuring charges ................................... 362,588 -- --
Impairment of assets .................................... -- -- 1,028,430
Interest expense ........................................ 331,041 5,493,373 274,347
Interest income ......................................... (26,598) (96,045) (581,614)
------------- ------------- -------------
13,479,823 23,142,172 30,523,604
------------- ------------- -------------
NET LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ................................ (11,249,702) (21,294,650) (31,629,660)
DEFERRED INCOME TAX RECOVERY ............................ -- -- 157,045
------------- ------------- -------------
NET LOSS BEFORE EXTRAORDINARY ITEM ...................... (11,249,702) (21,294,650) (31,472,615)
LOSS ON EXTINGUISHMENT OF DEBT .......................... -- (198,300) --
------------- ------------- -------------
NET LOSS ................................................ $ (11,249,702) $ (21,492,950) $ (31,472,615)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE
BEFORE EXTRAORDINARY ITEM ............................ $ (0.11) $ (0.371) $ (0.59)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE
FOR EXTRAORDINARY ITEM ............................... $ -- $ (0.003) $ --
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE ........................ $ (0.11) $ (0.374) $ (0.59)
============= ============= =============
Weighted Average Number of Common Shares ................ 105,261,533 60,269,617 53,203,750
============= ============= =============
REFER TO ACCOMPANYING NOTES
Consolidated Financial Statements F-14
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Years ended December 31
Additional
Common Shares Preferred Shares Paid-in Share Warrants
Number Par Value Number Par Value Capital Capital Number Amount
------------------------------------------------------------------------------------------------
December 31, 1999 43,903,145 $ 43,903 764,000 $ 764 $22,599,172 $ 22,643,839 6,659,629 $3,355,434
Extension of option plan
Issuances 1,437,036 1,437 1,495,031 1,496,468 9,334,970 2,250,180
Conversions & exercises 8,881,717 8,882 (764,000) (764) 18,714,845 18,722,963 (6,466,350) (3,311,347)
Release of shares from escrow 900,000 900 3,205,350 3,206,250
Compensatory options to employees
Options to non-employees
Dividends on preferred shares
Beneficial conversion
Cumulative translation adjustments
Net loss
Comprehensive net loss ------------------------------------------------------------------------------------------------
December 31, 2000 55,121,898 $ 55,122 - $ - $46,014,398 $ 46,069,520 9,528,249 $2,294,267
Issuances 8,300,837 8,301 30,000 300 5,287,540 5,296,141 11,478,684 1,170,383
Conversions & exercises 6,300,946 6,301 (1,000) (10) 8,367,836 8,374,127 1,343,480 (593,274)
Release of shares from escrow 2,250,000 2,250 2,828,250 2,830,500
Issue for purchase of subsidiary 1,000,000 1,000 972,161 973,161
Expiration of warrants 772,818 772,818 (6,507,960) (772,818)
Compensatory options to employees -
Options to non-employees -
Amendment to conversion price 1,144,654 1,144,654 113,781
Beneficial conversion 442,695 442,695
Cumulative translation adjustments -
Net loss
Comprehensive net loss ------------------------------------------------------------------------------------------------
December 31, 2001 72,973,681 $ 72,974 29,000 $ 290 $65,830,352 $ 65,903,616 15,842,453 $2,212,339
Issuances 30,498,387 30,498 - 4,344,514 4,375,012
Conversions & exercises 7,901,801 7,902 (12,300) (123) (7,779) -
Release of shares from escrow 5,381,250 5,381 877,932 883,313
Options to non-employees -
Expiry of extended 1997 options 1,352,470 1,352,470
Cumulative translation adjustments -
Net loss -
Comprehensive net loss -------------------------------------------------------------------------------------------------
December 31, 2002 116,755,119 $ 116,755 16,700 $ 167 $72,397,489 $ 72,514,411 15,842,453 $2,212,339
=========== ========= ====== ===== =========== ============ ========== ==========
Refer to Accompanying Notes
Consolidated Financial Statements F-15
WaveRider Communications Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
2002 2001 2000
OPERATING ------------ ------------ ------------
Net loss ................................................................... $(11,249,702) $(21,492,950) $(31,472,615)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................................ 763,845 1,147,943 709,333
Write off of goodwill .................................................... 4,069,696 155,050 --
Amortization of goodwill ................................................. -- 2,385,495 1,455,305
Extension of Employee Stock Option (1997) plan ........................... -- -- 11,099,858
Charges for issuance of options and warrants ............................. 763,121 385,940 645,120
Non-cash financing expenses .............................................. 263,607 5,410,846 255,387
Compensatory shares released from escrow to employee ..................... 172,500 629,000 712,500
Write-off of acquired core technologies and goodwill ..................... -- -- 1,028,430
Write-off of inventories ................................................. 79,953 593,072 1,568,739
Bad debt expense ......................................................... 99,413 532,842 539,379
Deferred income tax recovery ............................................. -- -- (157,045)
Unrealized foreign exchange (gain) loss .................................. (91,982) (46,781) 19,150
Loss on disposal of property, plant and equipment ........................ 51,858 -- --
Loss on extinguishments of debt .......................................... -- 198,300 --
Net changes in working capital items ....................................... 106,988 (247,246) (3,671,541)
------------ ------------ ------------
Net cash used in operating activities .................... (4,970,703) (10,348,489) (17,268,000)
------------ ------------ ------------
INVESTING
Acquisition of property, plant and equipment ............................... (83,206) (301,843) (1,474,040)
Proceeds on disposal of property, plant and equipment ...................... 35,120 -- --
Purchase of notes .......................................................... -- (65,601) --
Purchase of ADE Network Technology Pty. Ltd. ............................... -- (567,372) (492,082)
------------ ------------ ------------
Net cash used in investing activities .................... (48,086) (934,816) (1,966,122)
------------ ------------ ------------
FINANCING
Proceeds from sale of shares and warrants (net of issue fees) and
exercise of options and warrants ......................................... 4,371,532 5,100,939 16,757,800
Repayment of promissory notes .............................................. (432,500) -- --
Proceeds from sale of promissory notes ..................................... -- 999,500 --
Proceeds from sale of convertible promissory notes (net of issue fees) ..... -- -- 4,818,000
Dividends on preferred shares .............................................. -- -- (31,109)
Payments on capital lease obligations ...................................... (126,101) (295,056) (132,753)
------------ ------------ ------------
Net cash provided by financing activities ................ 3,812,931 5,805,383 21,411,938
------------ ------------ ------------
Effect of exchange rate changes on cash .................................... (13,163) 1,645 2,169
------------ ------------ ------------
(Decease) Increase in cash and cash equivalents ............................ (1,219,021) (5,476,277) 2,179,985
Cash and cash equivalents, beginning of year ............................... 2,244,625 7,720,902 5,540,917
------------ ------------ ------------
Cash and cash equivalents, end of year ..................................... $ 1,025,604 $ 2,244,625 $ 7,720,902
============ ============ ============
REFER TO ACCOMPANYING NOTES
Consolidated Financial Statements F-16
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
1. GOING CONCERN
These consolidated financial statements are prepared on a going-concern basis
which assumes that WaveRider Communications Inc. (the "Company") will realize
its assets and discharge its liabilities in the normal course of business. The
Company incurred a net loss of $11,249,702 for the year ended December 31, 2002
(2001 - $21,492,950 and 2000 - $31,472,615) and reported an accumulated deficit
at that date of $83,200,992 (2001 - $71,951,290). In addition, the requirements
to continue investing in research and development activities to meet the
Company's growth objectives, without assurance of broad commercial acceptance of
the Company's products, lend significant doubt as to the ability of the Company
to continue in normal business operations. Furthermore, the current financial
markets and the Company's current financial position make it unlikely in
management's view that the Company will be able to raise any additional capital
or debt financing within the next twelve months.
The Company has a plan that it believes will allow it to achieve profitability
and cash flow positive operations without the need for additional financing. In
recognition of these circumstances, the Company took significant steps in
October 2002 (see Note 5) to reduce its workforce and operating costs. However,
if the Company fails to achieve positive cash flow in the near term, the Company
does not presently have adequate cash to fund ongoing operations. In that case,
in order to meet its needs for cash to fund its operations, the Company would
need to obtain additional financing. In the past, the Company has obtained
financing primarily through the sale of convertible securities. Due to the
Company's low stock price and the overhang represented by outstanding
convertible securities, the Company believes that it is unlikely to be able to
obtain additional financing. If the Company is unable to either achieve its
planned cash flow positive operations and profitability or obtain significant
additional financing, it will, in all likelihood, be obliged to seek protection
under the bankruptcy laws in which event, the Company believes it is unlikely
that its common stock will have any value.
The ability of the Company to continue as a going concern is dependent upon it
achieving and maintaining profitable and cash flow positive operations or
securing additional external funding to meet its obligations as they come due.
Should the Company be unable to continue as a going concern, assets and
liabilities would require restatement on a liquidation basis which would differ
materially from the going concern basis.
2. NATURE OF OPERATIONS
WaveRider Communications Inc. was incorporated in 1987 under the laws of the
state of Nevada. The Company develops and markets wireless data communications
products throughout the world, focusing on Internet connectivity. The Company's
primary markets are telecommunications companies and Internet Service Providers
(ISPs) supplying high-speed wireless Internet connectivity to their customers. A
significant secondary market is that of Value Added Resellers, to allow them to
supply their customers with wireless connectivity for local area networks.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis of accounting - The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries; WaveRider Communications (Australia) Pty Ltd (formerly known as
ADE Network Technology Pty Ltd.) ("ADE"), an Australian Corporation, WaveRider
Communications (USA) Inc., a Nevada Corporation, WaveRider Communications
(Canada) Inc., a British Columbia company and JetStream Internet Services Inc.,
a British Columbia company.
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America.
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.
Consolidated Financial Statements F-17
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Revenue recognition and deferred revenue - The Company complies with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
and related communiques; SAB No. 101 provides guidance regarding the
recognition, presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission (SEC).
Revenue from product sales to end-user and Value-Added Reseller customers is
recognized when all of the following criteria have been met: (a) evidence of an
agreement exists, (b) delivery to the customer has occurred, (c) the price to
the customer is fixed and determinable, and (d) collectibility is reasonably
assured. Delivery occurs when the product is shipped, except when the terms of a
specific contract include substantive customer acceptance.
Revenue from hardware maintenance contracts is recognized ratably over the term
of the contract, which is generally one year. Revenue from installation and
other services is recognized as earned and the associated costs and expenses are
recognized as incurred. In cases in which extended warranty, maintenance or
installation services are bundled with the sale of the product, the Company
unbundles these components and defers the recognition of revenue for the
services at the time the product sales revenue is recognized, based upon the
vendor specific evidence of the value of the service element. Revenue from
rentals and operating leases is recognized monthly as the fees accrue.
Revenue from Internet service contracts is recognized over the term of the
contracts, which do not exceed one year.
Financial instruments - Financial instruments are initially recorded at
historical cost. If subsequent circumstances indicate that a decline in the fair
value of a financial asset is other than temporary, the financial asset is
written down to its fair value.
Unless otherwise indicated, the fair values of financial instruments approximate
their carrying amounts. By their nature, all financial instruments involve risk,
including credit risk for non-performance by counterparties. The maximum
potential loss may exceed any amounts recognized in the consolidated balance
sheets. However, the Company's maximum exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and financial guarantees is limited to the amount drawn and
outstanding on those instruments. Exposure to credit risk is controlled through
credit approvals, credit limits and monitoring procedures. The Company seeks to
limit its exposure to credit risks in any single country or region.
By virtue of its international operations, the Company is exposed to
fluctuations in currency. The Company manages its exposure to these market risks
through its regular operating and financing activities. The Company is subject
to foreign currency risk on its Canadian and Australian business activities.
The fair values of cash and cash equivalents, accounts receivable, due from
contract manufacturers, current notes receivable, accounts payable and current
liabilities approximate their recorded amounts because of their short term to
realization or settlement.
Cash and cash equivalents - All liquid investments having an original maturity
not exceeding three months are treated as cash equivalents.
Accounts receivable - The Company has historically provided financial terms to
certain customers in connection with purchases of the Company's products.
Financial terms, for credit-approved customers, are generally on a net 30-day
basis.
Management periodically reviews customer account activity in order to assess the
adequacy of the allowances provided for potential losses. Factors considered
include economic conditions, collateral values and each customer's payment
history and credit worthiness. Adjustments, if any, are made to reserve balances
following the completion of these reviews to reflect management's best estimate
of potential losses.
Consolidated Financial Statements F-18
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Inventory - Raw materials are recorded at the lower of cost or replacement cost.
Finished goods are recorded at the lower of cost and net realizable value. Cost
is determined on the average cost basis and includes material, labor and
overhead, where applicable.
The Company records valuation reserves on its inventory for estimated
obsolescence or unmarketability. The amount of the write-down is equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions.
The Company balances the need to maintain strategic inventory levels to ensure
competitive lead times with the risk of inventory obsolescence due to rapidly
changing technology and customer requirements. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Product Warranty - The Company offers warranties of various lengths to its
customers depending on the specific product and terms of the customer purchase
agreement. The average length of the warranty period is 18 months. The Company's
warranties require it to repair or replace defective products during the
warranty period at no cost to the customer. At the time product revenue is
recognized, the Company records a liability for estimated costs that may be
incurred under its warranties. The costs are estimated based on historical
experience and any specific warranty issues that have been identified. (Although
historical warranty costs have been within expectations, there can be no
assurance that future warranty costs will not exceed historical amounts.) The
Company periodically assesses the adequacy of its recorded warranty liability
and adjusts the balance as necessary.
Changes in the Company's product warranty liability for the year ended December
31, 2002 are as follows:
2002
-----------------
Balance, beginning $ 98,155
Warranties issued 78,249
Settlements made in cash or in-kind (58,402)
Changes in estimated pre-existing warranties,
including expirations (77,657)
-----------------
Balance, ending $ 40,345
================
Property, plant and equipment - Property, plant and equipment are recorded at
historic cost. Effective for the first quarter of 2000, the Company adopted a
change in its method of depreciation from a declining balance to a straight line
basis, with useful lives as follows:
Computer software 3 years
Computer equipment 4 years
Lab equipment and tools 4 years
Equipment and fixtures 5 years
Assets held for lease 5 years
Leasehold improvements over the shorter of the term of the
lease or estimated useful lives
The change in policy had no significant effect in fiscal 2000 or prior periods
on reported amounts for depreciation.
Foreign currency translation - The Company's functional currency is the US
dollar, except as noted below. Foreign denominated non-monetary assets,
liabilities and operating items of the Company are measured in US dollars at the
exchange rate prevailing at the respective transaction dates. Monetary assets
and liabilities denominated in foreign currencies are measured at exchange rates
prevailing on the consolidated balance sheet dates.
Consolidated Financial Statements F-19
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The functional currency of ADE, the Company's subsidiary in Australia, is
Australian dollars. Accordingly, ADE's assets and liabilities are translated
into US dollars using the rate of exchange in effect on the balance sheet dates,
whereas ADE's revenues, expenses, gains and losses are translated at the average
rate of exchange in effect throughout the reporting period. Resulting
translation adjustments are included as a separate component of comprehensive
loss within shareholders' equity in the accompanying consolidated financial
statements.
Recognized and unrecognized foreign exchange gains (losses) included in the
statement of operations is $71,075 in 2002 (2001 - $17,021, 2000 - ($26,244)).
Income taxes - Income taxes are accounted for in accordance with the Statement
of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes". Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and income tax
bases of assets and liabilities and are measured using the income tax rates and
laws currently enacted. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to an amount that is more likely than not
expected to be realized.
Stock options - The Company applies SFAS No. 123, together with APB No. 25 as
permitted under SFAS No. 123, in accounting for its stock option plans.
Accordingly, the Company uses the intrinsic value method to measure the costs
associated with the granting of stock options to employees and this cost is
accounted for as compensation expense in the consolidated statements of loss
over the option vesting period or upon meeting certain performance criteria. In
accordance with SFAS No. 123, the Company discloses the fair values of stock
options issued to employees. Stock options issued to outside consultants are
valued at their fair value and charged to the consolidated statements of loss in
the period in which the services are rendered. Fair values of stock options are
determined using the Black-Scholes option-pricing model.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", to the stock-based employee
compensation:
2002 2001 2000
------------ ------------ ------------
Net loss, as reported .............................. $(11,249,702) $(21,492,950) $(31,472,615)
Add: Stock-based employee compensation expense
included in reported net loss ........... 30,740 183,200 552,819
Deduct: Total stock based employee compensation
expense determined under fair value based
method for all awards .................. (1,680,005) (1,537,485) (4,552,823)
------------ ------------ ------------
Pro forma net loss ................................. $(12,898,967) $(22,847,235) $(35,472,619)
============ ============ ============
Basic and fully diluted loss per share, as reported $ (0.11) $ (0.37) $ (0.59)
============ ============ ============
Basic and fully diluted loss per share, pro forma .. $ (0.12) $ (0.40) $ (0.67)
============ ============ ============
Research and development costs - Research and development costs are charged to
expense as incurred.
Valuation of long-lived assets - The Company considers the carrying value of
long-lived assets when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the Company expects an
asset to generate cash flows less than the asset's carrying value, at the lowest
level of identifiable cash flows, the Company recognizes a loss for the
difference between the asset's carrying value and its fair value.
Consolidated Financial Statements F-20
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Comprehensive income (loss) - Under SFAS No. 130, the Company presents
comprehensive income (loss), in addition to net income (loss) in the accounts.
Comprehensive loss differs from net loss as a result of foreign currency
translation adjustments. Accumulated other comprehensive income (loss) is
included in the consolidated statements of changes in shareholders' equity and
reflects the cumulative effect of other comprehensive income (loss) excluded
from net income (loss) as reported in the consolidated statements of income
(loss).
Recently issued accounting standards - On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") and, accordingly, the Company reclassified
acquired labor force intangibles, in the amount of $98,949, to goodwill in
compliance with the requirements of the standard. In addition, the Company
ceased the amortization of goodwill, totaling $3,997,477, as of the beginning of
fiscal 2002.
SFAS 142 requires goodwill to be tested for impairment on an annual basis and
under certain circumstances, written down when impaired, and requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. The Company determined that
there was impairment under SFAS No. 142, as of September 30, 2002, and wrote off
all existing goodwill (See Note 5).
Prior to the impairment charge, during the year ended December 31, 2002,
goodwill increased by $72,219 due to foreign exchange translation.
The following tables reflect consolidated results adjusted as though the
Company's adoption of SFAS 142 had occurred as of January 1, 2001:
Year Ended December 31
2001 2000
---------------------------------
Net Loss - as reported ............................. $ (21,492,950) $ (31,472,615)
Amortization of goodwill ........................... 2,385,495 1,455,305
-------------- --------------
Net Loss - as adjusted ............................. $ (19,107,455) $ (30,017,310)
=============== ==============
Basic and fully diluted loss per share - as reported $ (0.37) $ (0.59)
Amortization of goodwill ........................... 0.04 0.03
--------------- --------------
Basic and fully diluted loss per share - as adjusted $ (0.33) $ (0.56)
============== ==============
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets -
replaces Statement No. 121--an earlier pronouncement on this topic. The new
Statement establishes a single accounting model for long-lived assets to be
disposed of by sale. Under its provisions, which apply to both continuing and
discontinued operations, companies must measure long-lived assets at the lower
of fair value--minus cost to sell--or the carrying amount. As a result, they
should no longer report discontinued operations at net realizable value or
include in them operating losses that have not yet occurred. Statement No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early implementation encouraged. The Company has adopted
SFAS No. 144 and there was no material impact as a result.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities -
The FASB has issued Statement No.146, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). The principal difference between
this Statement and Issue 94-3 relates to the requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the Board in this Statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
Consolidated Financial Statements F-21
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
definition of a liability. The provisions of the new Standard are effective for
exit or disposal activities initiated after December 31, 2002, with early
application encouraged.
SFAS No. 148, Accounting for Stock-Based Compensation -Transition and Disclosure
- -- an Amendment of FASB Statement No. 123 - This Statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The FASB has prescribed a tabular format and location
for the disclosures in a company's footnotes. This Statement requires that
companies having a year-end after December 15, 2002 follow the prescribed format
and provide the additional disclosures in their annual reports. The Company has
adopted SFAS No. 148 and has included the disclosure requirements in Note 3
above.
4. ACQUISITION OF SUBSIDIARIES
WaveRider Communications (Australia) Pty Ltd. - Effective October 1, 2000, the
Company acquired ADE Network Technology Pty Ltd. of Melbourne, Australia,
("ADE") a privately-held wireless infrastructure company. The Company undertook
this acquisition to provide a sales presence in Australia and South East Asia.
Subsequently, ADE changed its name to WaveRider Communications (Australia) Pty
Ltd.
Under the terms of agreement, the Company committed to pay a minimum of
$2,227,000 ($4,000,000 Australian) in 4 equal quarterly installments commencing
on the closing date. Payment of the first two installments of $1,000,000
Australian each was made in cash. On April 1, 2001, the Company issued 298,706
shares of common stock in consideration of the third installment and, on July 1,
2001, the Company issued 520,163 shares of common stock in consideration of the
fourth installment. On December 18, 2001, the Company issued 181,131 shares of
common stock in consideration of deficiencies in the fourth installment. On
January 7, 2002, the Company paid $105,256 in cash for the final consideration
owing. The shares issued and cash paid to fund deficiencies were recorded
against additional paid in capital.
As a result of the reduction of approximately half the staff of ADE, on
September 24, 2001, the Company wrote down the acquired labor force resulting
from the acquisition of ADE, in the amount of $155,050. With the ongoing decline
in the telecom sector, in September 2002, the Company wrote off the balance of
the goodwill arising from the acquisition of ADE (see Note 5).
5. RESTRUCTURING AND IMPAIRMENT OF ASSETS
Restructuring - In October 2002, in response to the continued decline in the
telecommunications sector, the Company completed a restructuring of its
operations in an effort to reduce costs. Our restructuring plan resulted in,
among other things, the reduction of 10 employees across our operations, the
majority of which were terminated by December 31, 2002. As a result of our
restructuring plan, in the fourth quarter of 2002, we recorded a restructuring
expense of approximately $167,000 related primarily to severance and related
costs. These severance expenses are included in Accounts Payable and Accrued
Liabilities at December 31, 2002 and are expected to be paid during the fourth
quarter of 2003. We also incurred and paid costs of $76,940 to terminate the
Calgary lease, $50,900 in other severance costs, $28,454 for moving of fixed
assets and corporate records and $39,294 in other termination related costs.
In addition, certain employees agreed to defer a certain portion of their
salaries until the fourth quarter of 2003. We have deferred and expensed
$34,400, and will defer and expense an additional $48,600 during the first
quarter of 2003, in compensation to senior staff, which we will not pay until
the fourth quarter of 2003. At December 31, 2002, the total deferred
compensation amount included in Accounts Payable and Accrued Liabilities was
$34,400.
Consolidated Financial Statements F-22
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Write off of goodwill -In conjunction with the planned restructuring, in
September 2002, the Company undertook a complete revision to the operating plans
of WaveRider Communications (Australia) Pty Ltd. (formerly ADE Network
Technology Pty Ltd.), our wholly owned subsidiary in Australia, which we view as
an independent reporting unit and for WaveRider Communications Inc. In each
case, we compared the expected net present value of the discounted future cash
flows of the restructured operations to the current net assets of the respective
operations after a revision of all key assumptions underlying management's
goodwill valuation judgments, including those relating to short and longer-term
growth rates and discount factors reflecting increased risks in a declining
market. As a result of management's analysis, it was determined that an
impairment charge of $4,069,696 was required on the basis that the carrying
value of goodwill exceeded its fair value.
Write off of technology - During the fourth quarter of fiscal 2000, it was
determined that products built from technologies acquired from Transformation
Techniques, Inc. ("TTI") in 1999 did not meet customers' expectations under
certain operating conditions and that these technologies, in fact, could not be
remedied.
Accordingly, the Company developed replacement technologies and abandoned the
TTI technologies. All TTI amounts carried on the Company's balance sheet have
appropriately been written off, and related costs recorded, as follows:
Write off of acquired core technology $ 762,430
Write off of goodwill 266,000
-------------
Impairment of assets recorded in operating expenses $ 1,028,430
=============
In addition, the Company recorded in cost of goods sold, inventory write downs
and warranty provisions during fiscal 2000 in the amount of $1,568,739.
6. ACCOUNTS RECEIVABLE
2002 2001
------------------------------------
Accounts receivable - trade $ 1,494,622 $ 1,370,805
Other receivables 60,135 163,037
Allowance for doubtful accounts (212,224) (635,410)
------------------------------------
$ 1,342,533 $ 898,432
====================================
7. INVENTORIES
2002 2001
------------------------------------
Finished products $ 1,258,620 $ 1,152,834
Raw materials 22,043 681,768
Valuation allowance (50,615) (431,899)
-------------------------------------
$ 1,230,048 $ 1,402,703
====================================
Consolidated Financial Statements F-23
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
8. NOTE RECEIVABLE
On February 28, 2001, the Company purchased a promissory note from Platinum
Communications Corporation ("Platinum") in the amount of approximately $65,601
(Can $100,000). The note is secured by certain assets of Platinum, bears
interest at Canadian prime rate plus 2% and is repayable in 20 equal monthly
installments commencing March 1, 2002.
9. PROPERTY, PLANT AND EQUIPMENT
Net Book Net Book
Accumulated Value Accumulated Value
Cost Depreciation 2002 Cost Depreciation 2001
-----------------------------------------------------------------------------------------
Computer software $ 916,902 $ 818,555 $ 98,347 $ 1,218,946 $ 900,290 $ 318,656
Computer equipment 1,098,653 838,087 260,566 1,242,779 694,521 548,258
Lab equipment and tools 1,010,215 763,674 246,541 972,567 591,272 381,295
Equipment and fixtures 339,994 238,988 101,006 459,745 223,632 236,113
Assets held for lease 171,532 42,185 129,347 184,697 11,735 172,962
Leasehold improvements 70,263 20,594 49,669 163,049 149,245 13,804
-----------------------------------------------------------------------------------------
$ 3,607,559 $ 2,722,084 $ 885,475 $ 4,241,783 $ 2,570,695 $ 1,671,088
=========================================================================================
Capital leases - computer software includes $nil (2001 - 1,714) net of
accumulated depreciation of $nil (2001 - $8,568), Computer equipment includes
$73,149 (2001 - $127,959) net of accumulated depreciation of $138,380 (2001 -
$83,570), Lab Equipment and tools includes $65,243 (2001 - $138,226) net of
accumulated depreciation of $285,342 (2001 - $212,359) and Equipment and
fixtures includes $10,904 (2001 - $90,935) net of accumulated depreciation of
$18,347 (2001 - $65,548).
The assets held for lease consist of a communication tower and wireless
communications equipment which has been leased to a customer on a fixed
three-year term. The minimum lease payments receivable under the contracts are
$34,750 in 2003 and $22,900 in 2004.
10. GOODWILL
2002 2001
-----------------------------
Cost (Notes 3, 4 and 5) $ - $ 7,281,827
Less: Accumulated amortization - 3,284,350
-----------------------------
$ - $ 3,997,477
=============================
See Note 5
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2002 2001
-----------------------------
Accounts payable $ 1,656,236 $ 1,528,810
Accrued salaries and benefits 241,928 208,734
Accrued severance 166,667 -
Accrued liability for obsolete inventory
at third party manufacturers 161,853 60,000
Accrued audit 156,787 91,035
Other accrued liabilities 324,797 426,341
-----------------------------
$ 2,708,268 $ 2,314,920
=============================
Consolidated Financial Statements F-24
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
12. PROMISSORY NOTES
On October 19, 2001, the Company issued promissory notes in the aggregate
principal amount of $834,500 and 1,794,175 common stock purchase warrants to the
Company's senior management team, certain directors and significant accredited
shareholders and received cash proceeds of $834,500. On November 5, 2001, the
Company issued, in connection with a second closing, promissory notes in the
aggregate principal amount of $165,000 and 354,750 common stock purchase
warrants to certain significant accredited shareholders and received cash
proceeds of $165,000. The notes bear an interest rate of 8%, compounded annually
and are repayable on October 19, 2002. The promissory notes, which had a general
security interest over the Company's assets, were redeemable in whole or in part
at any time by the Company subject to payment of accrued interest and a
repayment premium of 15% of the outstanding principal.
The warrants are exercisable at a price of $0.50 for a period of five years,
have registration rights, a cashless exercise feature and, in addition to
regular terms and conditions, have a special adjustment clause in the event of a
consolidated or reverse split of the Company's common stock.
The net proceeds of the transaction were allocated to the primary financial
instruments as follows:
Promissory notes $ 759,620
Class O warrants 239,880
------------
Net cash proceeds $ 999,500
============
Under the terms of the notes, if, prior to maturity, the Company makes an
offering of its securities, the investors have the option and right to
participate in the offering to the extent of the value of their note plus
accrued but unpaid interest and the 15% repayment premium. With the completion
of the Company's shareholders' rights offering, on December 14, 2001, (see
"Shareholders' Rights Offering" under Shareholders' Equity) the beneficial
conversion feature ("BCF"), in the amount of $442,695, embedded in the
promissory notes was calculated and measured using the intrinsic value of the
feature based on the most beneficial conversion available to the investors, was
recorded as a reduction of the promissory notes and an increase in accumulated
paid in capital.
On December 14, 2001, the senior management and directors of the Company, and
certain other holders, returned their notes in exchange for participation in the
Company's shareholders' rights offering. Included in the exchange was the
nominal value of the notes, in the amount of $567,000, and accrued interest and
repayment premium, in the amount of $87,259. As a result of the exchange, the
promissory notes returned, which had a book value of $200,665, were accreted to
the nominal value, which resulted in a financing expense of $366,335, and with
the interest and repayment premium were transferred to share capital.
During the year ended December 31, 2001, $37,120 and $23,896 were charged to the
consolidated statements of loss for accretion of the promissory notes and
accrual of interest and repayment premium, respectively, for the notes that were
not returned. At December 31, 2001, the outstanding nominal value of the
remaining notes was $432,500.
Under the terms of the promissory notes, the remaining investors in the
promissory notes had the right to demand repayment of the outstanding notes as a
result of the Company completing additional financing with net proceeds in
excess of $5 million. As a result, on March 28, 2002, the Company repaid the
principal amount of $432,500 plus accrued interest and repayment premium. During
2002, $263,607 and $64,726 were charged to the consolidated statements of loss
for accretion of the promissory notes and accrual of interest and repayment
premium, respectively.
Consolidated Financial Statements F-25
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
13. CONVERTIBLE PROMISSORY NOTES
On December 8, 2000, the Company issued convertible promissory notes in the
aggregate principal amount of $5,000,000 to Capital Ventures International
("CVI") and received cash proceeds of $5,000,000, less cash fees of $182,000 and
warrants valued at $23,680. The notes bore an interest rate of 6%, compounded
annually and were repayable on December 8, 2002, if not converted prior to that
date. In connection with the private placement, the Company also issued to CVI
Series J and Series K warrants to purchase up to 2,461,538 and 5,907,692 shares
of common stock at an exercise price of $3.35 per share and $2.539 per share,
respectively. The Series J warrants have a term of five years and contain a
cashless exercise feature.
The note agreement provided for the automatic conversion of the principal amount
of the notes plus accrued and unpaid interest, subject to certain terms and
conditions, into shares of the Company's common stock upon the effectiveness of
a registration statement filed with the Securities and Exchange Commission
("SEC") on December 28, 2000. The registration statement was declared effective
on March 14, 2001 and, accordingly, the conversion price has been adjusted,
based on the provisions of the agreement, to $1.49 per share, which was 90% of
the market price at the time of conversion.
In connection with the sale to CVI, the Company agreed to pay Avondale Capital
Partners Inc. ("Avondale") a fee equal to 2% of the total aggregate amount of
financing received by the Company pursuant to the Securities Purchase Agreement,
to a maximum fee of $400,000 plus 50,000 Series M warrants, for its involvement
as a consultant in connection with the Securities Purchase Agreement. Upon the
First Closing, the Company issued to Avondale Series M warrants to purchase
25,000 shares of common stock at an exercise price of $3.05 per share, which
expire on December 8, 2005. The fair value of $23,680 for the warrants has been
included in the cost of financing.
The net proceeds of the transaction were allocated to the primary financial
instruments, as follows:
Convertible promissory notes $ 1,732,346
Beneficial conversion feature 1,911,605
Series J warrants 1,195,663
Series K warrants 503,097
Series M warrants 23,680
Put option 117,736
Call option (516,229)
Deferred financing costs (149,898)
-------------
Net cash proceeds $ 4,818,000
============
The proceeds received were first allocated to the convertible promissory note,
the warrants and the options based on the relative fair values of the respective
instruments. Then the beneficial conversion feature embedded in the convertible
promissory note was calculated and measured using the intrinsic value of the
feature based on the most beneficial conversion available to the investor on the
commitment date. The Put Option reflects the value of the investor's right to
require the company to issue additional convertible promissory notes and
warrants. The Call Option reflects the value of the company's right to require
the investor to purchase additional convertible promissory notes and warrants.
On March 14, 2001, CVI exercised their right to convert promissory notes in the
principal amount of $4,550,000, with a book value of $3,481,699, plus interest
of $72,800, for 3,101,249 shares of common stock of the Company. As result,
$1,739,560 of the beneficial conversion feature was transferred from other
equity to additional paid in capital.
During the second quarter of 2001, CVI informed the Company that it was waiving
its option to purchase an additional $7,000,000 worth of shares of common stock.
As a result, the Company entered into a separate sale of Convertible Preferred
Stock (see "Issue of Convertible Preferred Stock" under Shareholders' Equity).
Consolidated Financial Statements F-26
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The sale of the convertible preferred stock triggered the repricing provisions
of the CVI convertible promissory notes and warrant agreements. Accordingly, the
conversion rate of the convertible promissory notes was reduced from $1.49 to
$1.455 and the exercise prices of the Series J and Series K warrants were
reduced from $3.35 and $ 2.539 to $2.80 and $2.48 respectively. The adjustment
to the conversion price of the convertible promissory notes resulted in a
decrease in the fair value of the convertible promissory notes and an increase
in other equity in the amount of $147,794. In addition, the fair value of
$113,781 for the changes in the exercise prices of the warrants has been
expensed in the cost of financing.
The balance of the promissory notes was converted on December 14, 2001 in
conjunction with the Company's shareholders' rights offering. In consideration
of the Company allowing CVI to convert into the shareholders' rights offering,
CVI returned 1,500,000 Series J warrants for cancellation. As a result, the
Company recorded a loss on extinguishment of debt in the amount of $198,300 and
the remaining $319,839 of the beneficial conversion feature was transferred from
other equity to additional paid in capital. The 5,907,692 Series K warrants,
valued at $530,036, had a one-year term and expired unexercised.
During the year ended December 31, 2001, $3,024,445, $1,144,654 and $85,520 were
charged to the statement of loss relating to the accretion of interest expense,
the adjustment of the conversion price and accrual of interest, respectively.
The convertible promissory note was being accreted over the period to its
redemption date of December 7, 2002.
The Call Option was amortized over the period of the option and for the year
ended December 31, 2001 $408,796 (2000 -$107,433) was charged to the
consolidated statements of loss. The Put Option, of $117,736, was credited to
the consolidated statements of loss upon its expiration in 2001.
14. SHAREHOLDERS' EQUITY
A Authorized share capital
Preferred shares issuable in series, par value of $0.01 - 5,000,000
shares Common shares, par value of $0.001 - 400,000,000 shares in 2002,
200,000,000 shares in 2001
B Issued share capital
i) Series B preferred shares - 4,000,000 Series B preferred shares were
issued upon the acquisition of Major Wireless Communication Inc. in
1997. The shares were voting and convertible into common shares at a
ratio of ten common shares for each preferred share. Each preferred
share entitled the holder to 10 votes.
The shares were held in escrow to be released upon occurrence of
certain performance related events. On April 15, 1998, the Company and
the Series B preferred shareholders agreed to amend the terms of the
preferred shares. The conversion ratio was amended to a ratio of 2.5
common shares for each preferred share. On the same date, the preferred
shares were converted into 10,000,000 common shares. These common
shares were held in escrow and released upon the occurrence of certain
performance related events. Under the original terms, if the specified
criteria had not been met by February 7, 2002, the remaining common
shares held in escrow could have been cancelled. On September 21, 2001,
the Board of Directors extended the escrow period by two years to
February 2004.
In 1999, and prior to any release of the escrow shares, two of the
shareholders agreed to donate back to the Company 500,000 shares each.
These shares have been received by the Company and returned to
treasury.
The first milestone related to the release of the common shares held in
escrow was met with the delivery of prototype product on August 18,
1999. As a result, the Company requested and the Escrow Agent released
the first 5% of the shares held under the Escrow Agreement, valued at
$534,375. The valuation was based on the closing price of the common
stock on August 18, 1999, of $1.1875 per share and was charged to
goodwill.
Consolidated Financial Statements F-27
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
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.
With the change in terms in September 2001, the escrow arrangement
ceased to be related to the original Major Wireless acquisition and is
now considered to be in the substance of a stock compensation
arrangement. Accordingly, the fair value of the remaining 5.4 million
shares held in escrow was charged to the consolidated statement of loss
(and not recorded as goodwill) at March 31, 2002, when it was
determined probable that the escrow milestones would be met.
Prior to the determination, one of the escrow shareholders, through
mutual agreement, returned 18,750 shares of common stock to the Company
for cancellation. The remaining 5,381,250 common shares held in escrow
were recorded at a fair value of $914,813 based on the stock price of
$0.17 at March 31, 2002. The Company charged $204,000 and $710,813 to
the consolidated statement of loss as compensation and selling, general
and administration expenses, respectively.
On April 24, 2002, the Company achieved the fourth milestone and
accordingly released 1,345,312 shares of common stock. Based on the
stock price of $0.13 on that date, the intrinsic value of the shares
released to an employee was reduced by $12,000 from the amount recorded
in March. This recovery amount was included in compensation expenses in
the consolidated statement of loss.
On or about June 6, 2002, the Company achieved the fifth milestone and
released 1,345,313 shares of common stock. Based on the average stock
price of $0.145 during that period, the intrinsic value of the shares
released to an employee was reduced by $7,500 from the amount recorded
in March. This recovery amount was included in compensation expenses in
the consolidated statement of loss.
At June 30, 2002, the intrinsic value of the shares held in escrow for
an employee was reduced by $24,000 from the amount recorded in March,
based on the stock price of $0.13 on that date. This recovery amount
was included in compensation expenses in the consolidated statement of
loss.
On July 16, 2002, the Company achieved the final milestone and released
the remaining 2,690,625 shares of common stock. Based on the stock
price of $0.15 on that date, the intrinsic value of the shares released
to an employee was increased by $12,000 from the amount recorded at
June 30, 2002. This expense amount was included in compensation
expenses in the consolidated statement of loss.
As a result of the determination that achievement of milestones was
probable, an amount of $21,569, being the fair value of certain
performance based non-employee options, was charged to consulting
expense, in March 2002.
Consolidated Financial Statements F-28
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
ii) Series C Preferred share units - On June 11, 1998, the Company issued
800,000 preferred share units at a price of $2.50 per unit for cash
proceeds of $2,000,000, less costs of $50,000. Each unit consisted of
an 8% voting, convertible preferred share and one Series F warrant.
Each preferred share may be converted at the option of the holder into
one common share for no additional consideration on or before April 30,
2000. Based upon the fair value of the underlying instruments within
the preferred share unit, $1,536,343 of the total proceeds, net of
costs, was allocated to preferred shares and $413,657 was allocated to
the Series F warrants. As the preferred shares were immediately
convertible into common shares, the $712,265 difference between the
proceeds allocated to preferred shares and the fair value of the
underlying common shares has been recorded as a dividend in 1998.
Each Series F warrant entitles the holder to purchase one common share
at the exercise price of $2.50 on or before June 11, 2000. During 2000,
all of the Series F warrants were exercised for cash proceeds of
$2,000,000.
During 1999, 36,000 shares of preferred stock were converted to shares
of common stock and, in 2000, the balance of 764,000 shares of
preferred stock were converted to shares of common stock.
iii) Common share purchase agreement - Under a Common Share Purchase
Agreement dated December 29, 1998, the Company entered into an
arrangement to sell up to an aggregate amount of $10,000,000 of common
stock in three tranches and to issue four groups of warrants. In 1998,
1,167,860 shares of common stock in the first tranche were issued for
gross proceeds of $3,000,000 and in 1999 1,660,945 shares of common
stock in the second tranche were issued for gross proceeds of
$3,000,000. In 1999, the Company decided not to sell the third and
final tranche of shares to investors.
In 1998, as part of the agreement, the Company issued four groups of
warrants to the investors, as follows: 225,000 with an exercise price
of $2.00, 225,000 with an exercise price of $2.61, 225,000 with an
exercise price of $3.00 and 225,000 with an exercise price of $4.00.
Each warrant entitled the holder to acquire one common share at the
specified exercise price, and contain a cashless exercise feature. The
warrants expire on December 29, 2003.
In addition, 150,000 warrants with a fair value of $103,686 were
issued, in 1998, to a placement agent. Each warrant entitled the holder
to acquire one common share at an exercise price of $3.00 per share.
The warrants expire on December 29, 2003.
The initial proceeds less costs of the First Tranche have been
allocated between common stock and warrants, based on the respective
relative fair values, as follows:
Common stock $2,136,846
$2.00 warrant 124,980
$2.61 warrant 117,662
$3.00 warrant 113,607
$4.00 warrant 104,800
During 2000, the investors exercised all of the warrants with exercise
prices of $2.00, $2.61 and $3.00 and 191,249 warrants with an exercise
price of $4.00, for total proceeds of $2,477,246. In addition, the
placement agent's warrants to purchase 150,000 shares of common stock
at $3.00, with an assigned value of $103,686, were exercised using the
cashless exercise feature. This resulted in the issuance of 107,522
common shares and the return and cancellation of the balance of 42,478
warrants.
iv) Series G Warrants - As a commitment fee for the right to issue up to
$2,000,000 in convertible debentures to certain investors, the Company
issued, on December 15, 1998, the investors warrants to purchase
500,000 common shares at an exercise price of $1.50 per share. The
warrants expire on December 15, 2003. The warrants have been recorded
at their fair value of $313,325 with the costs charged to the
consolidated statements of loss in 1998. The Company terminated the
debenture agreement on January 8, 1999 without drawing any funds.
v) Series H Warrants - On June 29, 1999, the Company issued, for services
rendered, warrants to purchase 500,000 common shares at an exercise
price of $2.00 per share, up to June 29, 2004. The warrants have been
recorded at their fair value of $295,120 with the costs charged to the
consolidated statements of loss in 1999. During 2000, all of the
warrants were exercised for cash proceeds of $1,000,000.
Consolidated Financial Statements F-29
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
vi) Loan Agreement - On October 15, 1999, the Company entered into a loan
agreement with AMRO International, S.A. ("AMRO") under which the
Company borrowed from AMRO $1,500,000 payable on or before May 23,
2000. Under the terms of the agreement, the Company paid interest at
10% per annum and was subject to a repayment premium of 5% of the
outstanding balance if the loan was repaid within 120 days or a 10%
premium if paid after 120 days.
Pursuant to the loan agreement the Company issued warrants to purchase
180,000 common shares at an exercise price of $1.01 per share, up to
October 31, 2003. The warrants have been recorded at their fair value
of $64,978 with the costs charged to the consolidated statement of loss
in 1999.
The loan was repaid in full on December 23, 1999. During 2000, all of
the warrants were exercised for cash proceeds of $181,800.
vii) Common Stock Purchase Agreement - Under a Common Stock Purchase
Agreement, dated October 18, 1999, the Company agreed to sell and the
investor agreed to buy up to $5,000,000 in common shares of the
Company. Pursuant to the agreement, the Company issued warrants to
purchase 200,000 common shares at an exercise price of $1.01 per share,
up to October 31, 2003. The warrants have been recorded at their fair
value of $72,198 with the costs charged against the investment made in
December 1999. During 2000, all of the warrants were exercised for cash
proceeds of $202,000.
In December 1999, the investor purchased 400,000 shares of common stock
at $1.35 per share, for cash proceeds of $540,000 less fees of $33,400.
In connection with the public underwriting completed on December 23,
1999, the investor agreed to the termination of the Common Stock
Purchase Agreement and committed to purchase $4,000,000 in common stock
units.
During 1999, the investor purchased 1,525,926 common share units,
consisting of one common share and a half of a common share purchase
warrant, at $1.35 per unit, for cash proceeds of $2,060,000, less fees
of $125,600. Based on the fair value of the underlying instruments
within the common share units, $1,625,815 of the total proceeds was
allocated to common shares and the balance of $308,585 was allocated to
the warrants. During 2000, the investor exercised all of the 762,963
warrants for cash proceeds of $1,525,926.
In January 2000, the investor purchased the balance of 1,437,036 common
share units for cash proceeds of $1,940,000, less fees of $117,408.
Based on the fair value of the underlying instruments within the common
share unit, $1,496,468 of the total proceeds was allocated to common
shares and the balance of $326,124 was allocated to the warrants.
During 2000, the investor exercised all of the 718,518 warrants for
cash proceeds of $1,437,036.
viii) Public Underwriting - On December 20, 1999, the Company entered into an
underwriting agreement with Groome Capital.com Inc. ("Groome"). Under
the terms of the agreement, the Company sold 4,444,444 common stock
units, consisting of one common share and one-half common share
purchase warrant, for $1.35 per unit. The sale of units was completed
on December 23, 1999 and the Company received cash proceeds of
$6,000,000, less fees of $607,500. In addition, the Company issued to
Groome 444,444 underwriter warrants, which provide Groome with the
right to purchase 444,444 common share units at $1.35 per unit for up
to two years after the offering. Based on the fair value of the
underlying instruments within the common share unit, $4,069,664 of the
total proceeds was allocated to common shares, $898,792 was allocated
to the share purchase warrants and $424,044 was allocated to the
underwriter warrants.
During 2000, all of the underwriter warrants were exercised for cash
proceeds of $600,000. This resulted in the issuance of 222,222
additional common share purchase warrants, valued at $201,616. In
addition, during the year, 1,844,176 of the common share purchase
warrants, valued at $857,626, were exercised for cash proceeds of
$3,688,352. The remaining 600,268 warrants, with a value of $242,782,
expired unexercised on December 21, 2001.
Consolidated Financial Statements F-30
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
ix) Warrants issued in connection with a Strategic Partnership Agreement -
On March 9, 2000, the Company entered into a Strategic Partnership
Agreement with VoIP International S.A. de C.V. ("VoIP"), a company
incorporated in Mexico. Under the terms of the agreement, the Company
granted VoIP exclusive rights to market the Company's products in
Mexico in exchange for commitments from VoIP to procure a minimum of
$28,000,000 of the Company's products. As an incentive, the Company
issued to VoIP 4,500,000 Common Stock Purchase Warrants which VoIP
would earn based on achievement of the minimum procurement commitments.
In addition, the Company issued 55,000 Common Stock Purchase Warrants
to an agent in connection with this transaction.
On December 8, 2000, the Company notified VoIP that it had cancelled
the Agreement for lack of performance. With the cancellation of the
Agreement, the warrants for both VoIP and the agent cannot be earned
and are, therefore, cancelled.
x) Warrants issued in connection with Investment banking services - On
April 25, 2001, the Company issued 350,000 Series M-1 warrants to the
Company's investment bankers for services rendered. The Series M-1
warrants have a term of three years and have an exercise price of $1.63
per share. The fair value of $117,128 was charged to the statement of
loss as a consulting expense.
xi) Issue of Convertible Preferred Stock - On June 4, 2001, the Company
issued 30,000 shares of Series D 5% convertible preferred stock, with a
par value of $0.01 per share and Series N warrants to purchase 877,193
shares of common stock, to Crescent International Ltd. ("Crescent") for
cash consideration of $3,000,000, less cash expenses of $423,285 and
the $22,007 fair value of 61,404 Series M-2 warrants issued to the
Company's investment bankers. Based upon the fair value of the
underlying instruments, $2,215,798 of the total proceeds, net of costs,
was allocated to preferred shares and $338,910 was allocated to the
Series N warrants. The Series D 5% convertible preferred stock has a
liquidation preference of $100 per share.
The beneficial conversion feature (BCF) embedded in the convertible
preferred stock was calculated to be $1,043,832 using the intrinsic
value of the feature based on the most beneficial conversion available
to the investor on the commitment date. The shares of preferred stock
were accreted by $1,043,832, to their redemption value, with a
corresponding charge to accumulated deficit.
The Series D convertible preferred stock is convertible to shares of
common stock at the liquidation preference value divided by the lesser
of; a) $1.3772 or b) 95% of the average of the lowest three consecutive
closing bid prices during the twenty-two trading day period immediately
preceding the Conversion Date. The Series N warrants have a term of
five years and an exercise price of $1.71 per share and contain a
cashless exercise feature. The Series M-2 warrants have a term of three
years and an exercise price of $1.71.
During 2002, 12,300 shares of the Series D 5% convertible preferred
stock were converted to 7,901,801 shares of common stock. During the
fourth quarter of 2001, 1,000 shares of the Series D 5% convertible
preferred stock were converted to 317,317 shares of common stock.
xii) Sale of Common Stock - On December 18, 2001, the Company completed the
sale of 300,000 shares of common stock for cash proceeds of $132,000.
xiii) Shareholders' Rights Offering - On December 14, 2001, the Company
issued 10,675,919 common shares and Series P warrants to purchase
10,675,919 common shares, under a Shareholders' rights offering. Of the
total, 7,832,439 common shares and warrants each were issued for cash
consideration of $3,132,976, less cash expenses of $935,102. In
connection with the rights offering, the company issued 208,723
underwriter warrants to the Company's investment bankers with a fair
value of $50,459. The Series P warrants were allocated a value of
$608,436. The remaining 2,843,480 shares and warrants each were issued
as a result of; 1) the return for cancellation of promissory notes,
including interest and repayment premium, 2) conversion of convertible
promissory notes, including interest, and 3) cancellation of 1,500,000
Series J warrants. This resulting in increased accumulated paid in
capital and other equity of $1,647,707 and $188,254 respectively.
During 2002, the Company determined that it had over accrued $3,480 of
costs and increased additional paid in capital by this amount.
Consolidated Financial Statements F-31
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
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.
xiv) Sale of Common Stock - During March, 2002, the Company issued
30,096,662 shares of common stock for cash consideration of $4,497,000,
less costs of $165,734.
C Warrants
The Company has several series of warrants outstanding at December 31,
2002 as follows:
Weighted Average
Exercise Prices Number Outstanding Remaining Life
$0.40 208,723 23 months
$0.50 12,824,844 27 months
$1.50 11 months
500,000
$1.63 350,000 16 months
$1.71 39 months
938,597
$2.80 961,538 35 months
$3.05 35 months
25,000
$4.00 33,751 11 months
----------
$0.40 - $4.00 15,842,453
==========
D Other Equity
2002 2001 2000
----------------------------------------------
Stock option extension from 1997 plan $ 9,309,048 $ 10,661,518 $ 10,661,518
Stock options to non-employees 127,662 106,092 29,747
Stock options to employees that vested on performance 768,782 768,783 585,582
Options issued below market to employees 204,000 - -
Beneficial conversion - - 1,911,605
Warrants 2,212,339 2,212,339 2,294,267
----------------------------------------------
$ 12,621,831 $ 13,748,732 $ 15,482,719
==============================================
E Employee Stock Option Plans
Employee Stock Option (1997) Plan -
During 1997, the Company authorized an Employee Stock Option Plan for a total of
5,000,000 common shares that may be awarded to employees and certain
consultants. During 1998, the Company amended the plan to authorize an
additional 1,250,000 common shares. Each option under the incentive plan allows
for the purchase of one common share and expires not later than three years from
the date granted. The options are subject to various vesting and performance
requirements as outlined in the plan and any unvested options may be cancelled
if employment is terminated. Generally, for employees the options vest at 5% per
complete month from date of award and for non-employees are earned out over
their contract period.
Consolidated Financial Statements F-32
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
On July 7, 2000, at the Company's annual general meeting of shareholders, a
resolution was passed extending the life of all the outstanding options awarded
to the then current employees and non-employee consultants under the Company's
Employee Stock Option (1997) Plan.
A modification that either renews a fixed award or extends the award's period
(life) results in a new measurement of compensation cost as if the award were
newly granted. Accordingly, for the fixed awards to employees, the difference
between the fair market value of the shares of Common Stock at the time of the
extension and the time of the original award was recorded as a compensation
expense to the Company. At July 7, 2000, the total charge to compensation
expense, related to the extension of the fixed awards, based on a closing stock
price of $8.75 per share, was $11,099,858.
During 2002, employees exercised none of the extended options (2001 - none, 2000
- - 58,000 for $438,000). During 2002, options to purchase 194,375 shares of
Common Stock expired unexercised. As a result, the $1,352,470 fair market value
of these options was transferred from other equity to additional paid-in
capital.
1999 Incentive and Nonqualified Stock Option Plan -
During 1999, the Company authorized a new option plan for a total of 3,000,000
common shares that may be awarded to the employees and certain consultants. Each
option under the incentive plan allows for the purchase of one common share,
which expires not later than ten years from the date of grant. The options are
subject to various vesting and performance requirements as outlined in the plan
and any unvested options may be cancelled if employment is terminated.
Generally, for employees the options vest equally over a three year period
following the date of award.
Employee Stock Option (2000) Plan -
During 2000, the Company authorized a new option plan for a total of 6,000,000
common shares that may be awarded to the employees and certain consultants. Each
option under the incentive plan allows for the purchase of one common share,
which expires not later than ten years from the date of grant. The options are
subject to various vesting and performance requirements as outlined in the plan
and any unvested options may be cancelled if employment is terminated.
Generally, for employees, the options vest equally over a three year period
following the date of award.
Employee Stock Option (2002) Plan -
During 2002, the Company authorized a new option plan for a total of 6,000,000
common shares that may be awarded to the employees and certain consultants. Each
option under the incentive plan allows for the purchase of one common share,
which expires not later than ten years from the date of grant. The options are
subject to various vesting and performance requirements as outlined in the plan
and any unvested options may be cancelled if employment is terminated.
Generally, for employees, the options vest equally over a three year period
following the date of award.
On November 6, 2002, principally as compensation for accepting salary deferrals
or reductions, the Board of Directors of the Company awarded 2,525,000 stock
options, exercisable at $0.01per share, to the Company's staff and certain
management. These options vest equally over four quarters and were recorded as
compensation options. As such, the intrinsic value on the date of grant of
$204,000 was recorded as other equity in shareholders' equity with a
corresponding charge to deferred compensation. The deferred compensation charge
will be amortized in the consolidated statement of loss over the vesting period.
In 2002, the Company recorded compensation expense related to these options of
$30,740.
Consolidated Financial Statements F-33
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Stock options to employees, directors and consultants are summarized as follows:
Weighted
Average
Granted to Employees and Directors Number Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 6,228,500 3,196,447 $ 1.31
Granted to employees and directors @ $1.31 - $13.81 3,193,192 7.55
Cancelled on termination (175,270) 3.23
Exercised (1,507,220) 1.14
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 7,739,202 3,302,360 $ 3.93
Granted to employees and directors @ $0.43 - $2.38 2,338,829 0.80
Cancelled on termination (1,069,866) 3.69
Exercised (28,900) 1.05
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 8,979,265 4,123,497 $ 3.15
Granted to employees and directors @ $0.01 - $0.16 4,090,700 .07
Cancelled on termination (1,727,392) 3.07
Exercised - -
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 11,342,573 6,666,173 $ 2.05
==================================================================================================================
Weighted
Average
Granted to Consultants Number Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 528,035 154,102 $ 0.54
Granted to consultants @ $10.00 10,000 10.00
Cancelled (22,075) 3.34
Exercised (186,625) 0.53
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 329,335 15,230 $ 0.67
Granted to consultants -
Cancelled -
Exercised (10,000) 0.50
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 319,335 97,614 $ 0.67
Granted to consultants
Cancelled -
Exercised -
Balance at December 31, 2002 319,335 319,335 $ 0.67
==================================================================================================================
Consolidated Financial Statements F-34
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Number Weighted Average Number Weighted Average
Range of Outstanding at Exercise Price of Weighted Average Exercisable at Exercise Price
Exercise December 31 Outstanding Remaining Life December 31, of Exercisable
Prices 2002 Options (months) 2002 Options
- ----------------------- --------------------- -------------------- --------------------- ----------------- ---------------------
$0.01 2,525,000 $ 0.01 118 - $ -
$0.14 - $0.16 1,155,000 0.16 109 100,000 0.16
$0.43 1,291,000 0.43 105 1,291,000 0.43
$0.50 - $0.56 1,308,535 0.55 90 1,308,535 0.55
$0.91 - $2.00 1,521,509 1.31 90 1,364,150 1.30
$2.03 1,667,650 2.03 76 1,604,217 2.03
$2.06 - $10.00 2,193,214 7.57 84 1,317,606 7.19
--------- ----- --- --------- -----
$0.01 - $10.00 11,661,908 $ 2.01 97 6,985,508 $2.26
========== ====== === ========= =====
The weighted average exercise price for the exercisable options
for 2001 was $3.57 (2000 - $3.76)
Non-employee and Performance Based Options -
Options granted to consultants, and performance based options granted to
employees, are valued when earned and probable that the options will vest and
the value continues to be adjusted until actual vesting is achieved. The Company
did not grant any non-employee options or any performance based employee options
during 2002. At December 31, 2002 all outstanding non-employees options had
vested (2001 - 221,720 unvested, 2000 - 314,105 unvested) and all performance
based employee options had vested (2001 -1,559,000 unvested, 2000 - 2,207,750
unvested). The non-employee options referred to above and all of the performance
based employee options, which were issued in prior years, vested based on the
escrow agreement milestones (Note 15B(i)).
The fair value of each stock option granted to consultants was estimated on the
date the consultant earned the option using the Black-Scholes option-pricing
model. The following weighted average assumptions were used in the model: nil
annual dividends (2001 - nil, 2000 - nil), expected volatility of 90% (2001 -
90%, 2000 - 90%), risk-free interest of 4.50% (2001 - 4.50%, 2000 - 5.76%) and
expected life of five years (2001 - five years, 2000 - three years). The Company
estimates that approximately 20% of options will expire prior to exercise. The
weighted average fair value of the stock options granted in 2002 was nil (2001 -
nil, 2000 - $2.98).
The remeasurement of the fair value of the non-employee options through the
vesting period resulted in a charge to the 2002 consolidated statement of loss
of $21,569 (2001 - $85,612, 2000 - $92,301).
The remeasurement of the intrinsic value of the performance-based options
awarded to employees through the vesting period resulted in no charge to
compensation expense in the 2002 consolidated statement of loss (2001 -
$183,200, 2000 - $552,819).
Fixed Option Awards -
For disclosure purposes, the fair value of each stock option granted to
employees was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
stock options granted in 2002: nil annual dividends (2001 - nil, 2000 - nil),
expected volatility of 90% (2001 - 90%, 2000 - 90%), risk-free interest of 4.50%
(2001 - 4.50%, 2000 - 5.76%) and expected life of five years (2001 - five years,
2000 - five years). The Company estimates that approximately 20% of options will
expire prior to exercise. The weighted average fair value of the stock options
granted in 2002 was $0.07 (2001 - $0.80, 2000 - $7.55).
Consolidated Financial Statements F-35
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock option plans have characteristics significantly different
from those of traded options, and because change in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F Employee Stock Purchase (2000) Plan
During 2000, the Company authorized a new employee stock purchase plan for a
total of 3,000,000 common shares that may be purchased by employees at 85% of
the lower of the closing price of the Company's common stock at the beginning or
ending date of each plan period. In 2002, the Company sold 401,725 shares of
common stock for cash proceeds of $40,266. In 2001, the Company sold 168,398
shares of common stock for cash proceeds of $159,095.
15. COMMITMENTS AND CONTINGENCIES
Obligation under Capital Lease
2002
---------------
Gross Lease commitments:
2003 $ 13,901
2004 6,170
---------------
20,071
Less: Imputed interest 1,973
---------------
18,098
Less: Current portion 12,094
---------------
Long-term obligation under capital lease $ 6,004
===============
Operating Leases
2003 $ 369,282
2004 141,453
The Company rents office space with remaining terms of less than 2 years. The
Company incurred rental expenses in 2002 of $529,141 (2001 - $708,038 and 2000 -
$652,104).
Contract Manufacturers
The Company provides its contract manufacturers with ongoing production
forecasts to enable them to forecast and procure required parts. Under the terms
of the Agreements with the contract manufacturers, the Company has committed to
assume liability for all parts required to manufacture the Company's forecast
products for the next 13 weeks and all final assembly costs for the forecast
products for the next 4 weeks, on a rolling basis. These obligations amount to
approximately $1,389,000. Total purchases from contract manufacturers were
$4,607,941 in 2002 (2001 - $4,256,858, 2000 - $2,150,563). Management believes
that, should it be necessary, they could find alternative contract manufacturers
without significant disruption to the business.
Employment Agreements
The Company has entered into employment agreements with certain key employees.
These agreements include provisions relating to salaries and bonuses, severance
payments and non-competition among others.
Consolidated Financial Statements F-36
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Litigation
As of December 31, 2002, there are no litigation matters outstanding against the
Company.
16. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
2002 2001 2000
-----------------------------------------------------
Net changes in working capital items
relating to operations
Accounts receivable $ (493,652) $ 417,196 $ (1,536,885)
Due from contract manufacturers (12,142) 1,086,497 (1,127,792)
Prepaid expenses and other assets 263,436 118,300 (190,224)
Inventory 152,721 193,856 (2,653,078)
Accounts payable and accrued liabilities 308,768 (1,907,686) 1,650,008
Consideration payable on business combination (105,256) 23,872 -
Notes payable - (24,659) -
Deferred revenue (6,887) (154,622) 186,430
----------------------------------------------------
$ 106,988 $ (247,246) $ (3,671,541)
=====================================================
Cash paid during the year for:
Interest $ 29,253 $ 34,231 $ 61,860
Non-cash investing and financing activities
Stock released from escrow $ 883,313 $ 2,201,500 $ 2,493,750
Conversion of convertible promissory
notes to common shares - 5,105,934 -
Conversion of promissory notes to common shares - 654,258 -
Capital lease additions - 37,155 370,711
Accounts receivable exchanged for assets for lease - 84,824 -
Disposal of capital lease 30,987 40,769 -
Consideration payable for acquisition - 973,161 1,534,917
Conversion of warrants - - 103,686
17. RELATED PARTY TRANSACTIONS
During the year, a total of $30,044 (2001 - $18,745 and 2000 - $25,283) was paid
or payable to directors and officers or to companies related to them for their
management and administrative services. During 2001, in connection with the sale
of promissory notes, management and directors purchased $176,000 of promissory
notes. Accrued interest, repayment premium and the total principal, in the
amount of $200,367, were converted into the shareholders' rights offering, in
2001.
Consolidated Financial Statements F-37
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
18. NON-CASH INTEREST EXPENSES
2002 2001 2000
----------------------------------------------------
Accretion of promissory notes $ 263,607 $ 424,461 $ -
Accrued interest expense on consideration payable on
business combination - 65,872 45,000
Accrued interest and repayment premium
on promissory notes - 111,155 -
Accretion of interest on convertible promissory notes - 3,024,445 102,954
Adjustment of conversion price of notes - 1,144,654 -
Accrued interest on convertible promissory notes - 85,520 -
Amortization of deferred financing expense - 149,898 -
Amortization of call option - 408,796 107,433
Financing expense due to change in exercise price - 113,781 -
Expiry of put options - (117,736) -
----------------------------------------------------
Non-cash interest expenses $ 263,607 $ 5,410,846 $ 255,387
====================================================
19. INCOME TAXES
Net loss before income tax expense for each year is summarized as follows:
2002 2001 2000
----------------------------------------------------
United States $ 6,738,920 $ 15,264,526 $ 21,458,701
Canada 3,218,266 4,907,697 9,810,052
Australia 1,292,516 1,320,727 360,907
----------------------------------------------------
Net loss before income taxes $ 11,249,702 $ 21,492,950 $ 31,629,660
====================================================
US statutory rate at 35% $ 3,937,000 $ 7,522,000 $ 11,070,000
Amounts permanently not deductible for income tax purposes (1,656,000) (2,584,000) (4,734,000)
Foreign income tax rate differential 271,000 406,000 1,045,000
Net operating loss and temporary differences for which
no benefit was recognized (2,552,000) (5,344,000) (7,223,955)
------------------------------------------------------
Deferred income tax recovery $ - $ - $ 157,045
====================================================
Deferred income tax assets/(liabilities) consist of the following:
2002 2001 2000
----------------------------------------------------
Net operating loss carry forwards $ 17,103,000 $ 14,559,000 $ 11,776,000
Property, plant and equipment 133,000 92,000 722,000
Other 13,000 120,000 -
----------------------------------------------------
Net deferred income tax assets 17,249,000 14,771,000 12,498,000
Valuation allowance (17,249,000) (14,771,000) (12,498,000)
----------------------------------------------------
$ - $ - $ -
====================================================
Consolidated Financial Statements F-38
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
The Company provides a valuation allowance for deferred income tax assets when
it is more likely than not that some portion or all of the net deferred income
tax assets will not be realized. Based on a number of factors, including the
lack of a history of profits and that the market in which the Company competes
is intensely competitive and characterized by rapidly changing technology,
management believes that there is sufficient uncertainty regarding the
realization of deferred income tax assets that a full valuation allowance has
been provided. The deferred income tax valuation allowance increased in 2002 by
$2,478,000 (2001 - $2,273,000, 2000 - $7,760,000).
As of December 31, 2002, the Company had available net operating loss carry
forwards for United States, Canadian and Australian purposes of approximately
$30,520,000, $21,534,000 and $659,000, respectively. The United States net
operating loss carry forwards begin to expire in 2008, the Canadian net
operating loss carry forwards begin to expire in 2004 and the Australian net
operating losses begin to expire in 2020. The net operating losses are subject
to certain Canadian and United States restrictions that may apply on any change
in the control of the Company and which could adversely affect the amounts and
benefits to be derived therefrom.
20. LOSS PER SHARE
The warrants, which could result in the issue of 15,842,453 additional shares of
common stock (Note 14C) and the options, exercisable at a price above the
closing sale price of the common stock of $0.11 on December 31, 2002, which
could result in the issue of 11,661,909 additional shares of common stock (Note
14E) have not been included in the loss per share calculation as they are
anti-dilutive. The shares held in escrow pertaining to the Major Wireless
Communication Inc. transaction (Note 14B(i)) have not been included in the loss
per share calculation for 2001 and 2000 as they were contingently issuable
shares.
Year ended December 31, 2002
Loss Shares Per Share
(Numerator) (Denominator) Amount
Basic and fully diluted LPS
Loss attributable to common shareholders $11,249,702 105,261,533 $0.11
=============================================
Year ended December 31, 2001
Loss Shares Per Share
(Numerator) (Denominator) Amount
Net Loss $ 21,492,950
Add: Deemed dividend on beneficial conversion
(Note 14B(xi)) 1,043,832
------------
Basic LPS
Loss attributable to common shareholders $ 22,536,782 60,269,617 $0.374
==============================================
Year ended December 31, 2000
Loss Shares Per Share
(Numerator) (Denominator) Amount
Net Loss $ 31,472,615
Add: Cash dividends paid on preferred stock in year 31,109
------------
Basic LPS
Loss attributable to common shareholders $ 31,503,724 53,203,750 $0.59
===============================================
Consolidated Financial Statements F-39
WaveRider Communications Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
21. SEGMENTED INFORMATION
INDUSTRY SEGMENTS
The Company operates in one industry segment: wireless data communications
product.
GEOGRAPHIC SEGMENTS
The Company operated in the following geographic segments;
Year Ended December 31,
Revenue by region 2002 2001 2000
---------------------------------------------------
United States $ 5,196,196 $ 1,909,912 $ 899,334
Australia 2,067,790 3,078,879 699,878
United Arab Emirates (1) 1,030,125 (1)
Canada 690,325 490,661 1,314,968
Rest of world 1,054,605 1,294,440 1,218,812
----------------------------------------------------
$ 9,008,915 $ 7,804,017 $ 4,132,992
====================================================
(1) Less than 10% of consolidated revenue.
Year ended December 31, 2002
Canada Australia Total
----------------------------------------------------
Property, plant and equipment $ 790,009 $ 95,466 $ 885,475
====================================================
Year ended December 31, 2001
Canada Australia Total
----------------------------------------------------
Property, plant and equipment $ 1,524,076 $ 147,012 $ 1,671,088
Goodwill 2,843,090 1,154,387 3,997,477
----------------------------------------------------
$ 4,367,166 $ 1,301,399 $ 5,668,565
====================================================
22. COMPARATIVE FIGURES
Certain comparative amounts have been reclassified to correspond with the
current year's presentation.
Corporate Information
BOARD OF DIRECTORS
D. Bruce Sinclair
Chief Executive Officer
WaveRider Communications Inc.
Toronto, Ontario
Gerry Chastelet (1) (2)
Board Director and Advisor
Clearwater, Florida
John E. Curry, CA (2)
President
Hydrovane Self Steering Inc.
Vancouver, British Columbia
Cameron A. Mingay (1)
Lawyer, Partner
Cassels, Brock & Blackwell LLP
Toronto, Ontario
Dennis R. Wing (2)
President and CEO
Fahnestock Canada Inc.
Toronto, Ontario
(1) Member of Compensation Committee
(2) Member of Audit Committee
EXECUTIVE OFFICERS
D. Bruce Sinclair
Chief Executive Officer
Charles W. Brown
Executive Vice President
T. Scott Worthington, CA
Vice President and Chief Financial Officer, Corporate Secretary
AUDITORS AND TAX ADVISORS
Wolf & Company, P.C.
Chartered Accountants
Boston, Massachusetts
LEGAL ADVISORS
Foley Hoag LLP
Boston, Massachusetts
Cassels, Brock & Blackwell
Toronto, Ontario
TRANSFER AGENT
Corporate Stock Transfer
Denver, Colorado
STOCK EXCHANGE SYMBOL
WAVC.OB (OTC-BB)
OFFICES
Executive and Administration
WaveRider Communications Inc.
255 Consumers Road, Suite 500
Toronto, Ontario
Canada M2J 1R4
Telephone: (416) 502-3200
Fax: (416) 502-2968
Website: www.waverider.com
Email: info@waverider.com
Investor Relations
(416) 502-3265
Email: investors@waverider.com
Subsidiary Offices
WaveRider Communications (Australia) Pty Ltd.
2 Dublin Street
East Oakleigh, VIC,
Australia, 3166
Telephone: 61-3-9543-2677
Fax: 61-3-9543-5582
JetStream Internet Services Inc.
#195K, 1151 - 10 Ave., S.W.
Salmon Arm, British Columbia
Canada V1E 1T3
Telephone: (250) 832-0911
Fax: (250) 832-0062
Website: www.jetstream.net
WaveRider Communications Inc.
255 Consumers Road, Suite 500, Toronto, Ontario, Canada M2J 1R4
Telephone: (416) 502-3200 Fax: (416) 502-2968
Website: www.waverider.com Email: info@waverider.com
[FORM OF PROXY CARD]
WAVERIDER COMMUNICATIONS INC.
PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints T. Scott Worthington and Cameron A. Mingay, and
each of them, as proxies, with full power of substitution, and hereby authorizes
them to represent and vote, as designated below, all shares of the Common Stock
of WaveRider Communications Inc., a Nevada corporation (the "Company"), held of
record by the undersigned on July 7, 2003 at the Annual Meeting of Shareholders
(the "Annual Meeting") to be held at the Radisson Hotel Toronto East, 55
Hallcrown Place, Toronto, Ontario Canada M2J 4R1, on Thursday, September 4,
2003, at 2:00 p.m., local time, or at any adjournment or postponement thereof,
upon the matters set forth below, all in accordance with and as more fully
described in the accompanying Notice of Annual Meeting of Shareholders and Proxy
Statement, receipt of which is hereby acknowledged.
1. ELECTION OF DIRECTORS, each to serve until the next annual Meeting of
shareholders of the Company or until their respective successors all
have been duly elected and qualified.
[ ] FOR all nominees listed below
(except as marked to the contrary).
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
(INSTRUCTION: To withhold authority to vote for any individual nominee strike a
line through the nominee's name in the list below.)
GERRY CHASTELET JOHN CURRY MICHAEL MILLIGAN
CAMERON MINGAY BRUCE SINCLAIR DENNIS WING
2. PROPOSAL TO APPROVE a plan of recapitalization that will result in a
reverse stock split of our common stock based on one of four ratios to
be determined by our board of directors.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF THE DIRECTOR NOMINEES NAMED ABOVE; FOR THE APPROVAL OF
PLAN OF RECAPITALIZATION THAT WILL RESULT IN A REVERSE STOCK SPLIT OF OUR COMMON
STOCK BASED ON ONE OF FOUR RATIOS TO BE DETERMINED BY OUR BOARD OF DIRECTORS.
Please complete, sign and date this proxy where indicated and
return it promptly to:
Mr. T. Scott Worthington, Vice President and Chief
Financial Officer WaveRider Communications Inc., 255 Consumers Road,
Suite 500, Toronto, Ontario Canada M2J 1R4
Date: _____________, 2003
Signature:
-------------------------------------------------
Name (Print):
----------------------------------------------
Signature (if held jointly):
-------------------------------
Name (Print - if held jointly)
----------------------------
Registered Address: __________________________________________________________
________________________________________________________________________________
(Please sign above exactly as the shares are issued. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized
person.)