UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 000-30620
UNITY WIRELESS CORPORATION
(Name of Small Business Issuer in its charter)
Delaware 4812 91-1940650
(State or jurisdiction of (Primary Standard (I.R.S. Employee
incorporation or Industrial Classification Identification No.)
organization Code Number)
7438 Fraser Park Drive
Burnaby, British Columbia, Canada V5J 5B9
(800) 337-6642
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(Address of principal place of business)
Evergreen Corporate Services, Inc.
33713 9th Avenue South
Federal Way, WA 98003 6762
(253) 874-2949
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(Name, address and telephone number of agent for service)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common shares, par value $0.001
------------------------------------
(Title of Class)
Check whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $3,544,770
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of
December 31, 2001 was $10,897,785.
As of March 15, 2002, 30,915,704 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X]
TABLE OF CONTENTS
Page
----
Forward Looking Statements.....................................................4
Item 1. Business...............................................................4
Item 2. Description Of Property...............................................17
Item 3. Legal Proceedings.....................................................17
Item 4. Submission of Matters to a Vote of Security Holders...................17
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................17
Item 6. Management's Discussion and Analysis or Plan of Operation.............19
Item 7. Financial Statements..................................................25
Item 8. Changes In And Disagreements With Accountants on Accounting
and Financial Disclosure..............................................25
Item 9. Directors And Executive Officers, Promoters, And Control Persons......26
Item 10. Executive Compensation...............................................28
Item 11. Security Ownership Of Certain Beneficial Owners And Management.......32
Item 12. Certain Relationships And Related Transactions.......................35
Item 13. Exhibits and Reports on Form 8-K.....................................35
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PART I
Forward Looking Statements
We may use words like "expects," "intends," "anticipates," "plans,"
"projects" or "estimates" in this Form 10-KSB. When used, these words identify
"forward-looking" statements. We have made forward-looking statements with
respect to the following, among others:
o our goals and strategies;
o our expectations related to growth of the wireless telecommunication
industry in China and the other markets in which we conduct business;
o our ability to develop, manufacture and market telecommunications
amplifiers on a competitive basis;
o our ability to earn sufficient revenues from our products;
o the pace of change in wireless telecommunications technologies;
o the demand for our products;
o competition in the wireless telecommunications industry; and
o our anticipated results of operations.
These statements are forward-looking and reflect our current expectations.
They are subject to a number of risks and uncertainties, including but not
limited to, changes in the economic and political environments in China and
other Asian markets, changes in technology, increased competition and changes in
the wireless telecommunications industry. Forward-looking statements are by
their nature subject to many varied uncertainties and risks. Actual results
could vary greatly. Potential investors should review the section entitled "Risk
Factors" beginning on page 10 of this report.
We are making these statements only as of the date of this Form 10-KSB.
ITEM 1. BUSINESS
General
We, Unity Wireless Corporation, design, develop and manufacture wireless
technologies and products for a broad range of industrial and commercial
applications. Our business is focused on developing, marketing and selling our
UltraTech high power linear radio frequency (RF) amplifiers.
UltraTech high performance linear RF amplifiers are used in current
generation wireless voice, Internet and data base station and repeater networks
and support Cellular, PCS (Personal Communications Services), Paging, and WLL
(Wireless Local Loop) frequencies.
Corporate History
We were incorporated in the State of Delaware on October 1, 1998, under the
name Sonic Systems Corporation. We are the successor to M&M International
Realty, Inc., a Florida corporation, which effected a re-incorporation as a
Delaware corporation by merger on December 1, 1998, with Unity Wireless
Corporation as the surviving corporation. Before the merger, the Florida
corporation had no material commercial activity. On December 11, 1998, we
acquired all of the issued and outstanding stock of UW Systems in exchange for
11,089,368 shares of our common shares. As a result, the former shareholders of
UW Systems owned a majority of our outstanding stock. Therefore, for accounting
purposes, UW Systems was deemed to have acquired Unity Wireless Corporation.
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In connection with the acquisition of UW Systems, we formed 568608 B.C.
Ltd. ("568608") to act as an acquisition vehicle to acquire Ultratech Linear
Solutions Inc., a designer, developer and manufacturer of linear power
amplifiers for the wireless network infrastructure industry ("Ultratech"). We
acquired Ultratech in a share purchase transaction that was completed on
November 16, 2000. Ultratech is a wireless communications technology designer,
developer and marketer specializing in high power linear RF amplifiers. In
consideration of the Ultratech shares, we paid to the shareholders of Ultratech
$48,000 (Cdn.$72,000) on account of shareholder loans, and issued 700,000 shares
of our common stock. We had loaned $200,000 (Cdn.$300,000) to Ultratech before
closing. As of December 31, 2000, 568608, Ultratech and UW Systems were merged,
with UW Systems remaining as the surviving corporation.
In keeping with its decision to focus on wireless technologies, we changed
our name to Unity Wireless Corporation by filing Articles of Amendment with the
State of Delaware Secretary of State that became effective on July 20, 2000. We
began using the new name as a "dba" in March, 2000.
Our fiscal year end is December 31.
Principal Products & Services
High Power Linear RF Amplifiers
High power linear RF amplifiers allow radio frequency signals to be
amplified and broadcast in a given area with minimal distortion. RF signals
carry voice and data information used in wireless transmissions such as those
used for cell phones and wireless Internet access.
"Linearity" of the signal (the lack of distortion) becomes more important
as the amount of data transported and the density and interference of adjacent
channels in a cell increases.
We produce amplifiers in a variety of frequency bands and output power
levels, tuned for optimal performance with certain network protocols. In
general, our products fall into 3 frequency bands for cellular telephone
infrastructures (800-900 MHz, also known as "cellular band" or 1st generation;
18-1900 MHz, aka "PCS" or 2nd generation; and 2.1GHz, aka "3G" or 3rd generation
networks). Collectively, these are all known as cellular networks. We also
manufacture one amplifier family for use in Digital TV broadcasting, which
operates in the frequency range of 460-870 MHz.
Within the cellular network bands, products can be tuned for optimal
operation with Code Division Multiple Access ("CDMA"), Time Division Multiple
Access ("TDMA"), Global System for Mobile Communications ("GSM"), Wideband CDMA
("W-CDMA") and other network protocols. Not all protocols are used in all bands;
some amplifiers support multiple protocols and/or multiple channels within a
band.
Our products range from 2 watts output power to 80 watts (sometimes
expressed as "dBm" (deci-bell milliwatts, where 33dBm =2W and 47dBm=50W).
Wireless communications infrastructure is one of the quickest and most
cost-effective method of providing both fixed and mobile voice, Internet and
data network communications. The global market is being driven by several
economic and other factors as it goes wireless:
o Consumers and businesses worldwide are driving up penetration rates
and therefore increasing the demands for voice, Internet and data
wireless communication networks.
o Affordable telecommunication infrastructure is becoming necessary in
developing countries and the construction of wireless local loops is
one of the quickest and most cost-effective solution.
o Telecommunication service providers are starting to incorporate and
bundle wireless technology into their suite of offerings.
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o Applications such as video demand higher bandwidths.
o The move to one or a small number of global standards for 3G or
third-generation wireless will cause most current infrastructure to be
upgraded or replaced.
We expect that factors such as these will continue to drive the global
demand for wireless technologies for the foreseeable future. As consumer usage
of wireless applications increases, the demand for more system capacity and
greater system coverage also increases, thus creating an increased demand for
amplifiers. Industry analysts estimate that the wireless telecommunications
networks and technologies market will grow to $135 billion by 2004, and that the
total global market sales of RF power amplifiers to support such growth will
increase from $1.1 billion in 1999 to $3.5 billion by 2004.
Network service providers typically source their network equipment from
companies known as system integrators, which in turn source their system
components from a variety of subcontractors and component suppliers. Typically
system integrators use representative agents to source and present to them
suppliers of network sub components such as amplifiers. The amplifier supplier
that has experienced sales and agent representation, combined with the required
technical and operational capability will have the market advantage. We
currently have agent representation in 19 countries around the world, and we are
building our direct sales and marketing capabilities.
The wireless telecommunications equipment industry consists of four primary
sectors: (1) wireless system integrators or infrastructure providers; (2)
handset and end user terminal devices; (3) accessory items, including towers,
cable, connectors, etc.; and (4) the amplifying equipment sector. Our products
compete in the amplifying equipment sector.
Several trends have affected the supply and demand for high power linear
amplifiers in the global market. As recently as a few years ago, the global
market was small and dominated by a few suppliers. With the explosion in the
growth of wireless technologies in the past five years, the number of
competitors increased and smaller companies that supplied amplifiers to niche
markets grew very quickly and gained market share.
We believe certain competitors are unable to deal with the rapid pace of
change in the second tier amplifier market, which creates additional
opportunities for us to provide quality products for specialty applications.
We believe the large, conventional amplifier suppliers will continue to
represent approximately 70% of the market, and that opportunity exists for
smaller and focused amplifier businesses, like us, to supply the non-captive or
specialized markets.
These specialized markets are expected to become even more important as the
3G networks begin to build out over the next few years. The nature of 3G RF
signals is such that the signals have higher attenuation rates which means that
the "footprint" of each 3G cell site is much smaller in area than that of
earlier generations of wireless technology. The solution for network operators
who wish to (or need to) move to 3G is to a) build out as many as 5 times as
many base stations, or b) to deploy one or more "infill" technologies such as
repeaters, smart antennas, distributed base stations and micro-cells. Unity
Wireless believes that network operators will choose the latter approach since
it is a much more cost effective way of achieving coverage. Our products are
particularly well suited for use in 3G infill applications.
Product Research and Development
We have recently augmented our research and development capabilities in the
area of our Ultratech High Power Linear Amplifiers, with the addition of RF
design engineers and the leasing of additional test and measurement equipment.
We have devoted and will continue to devote a large portion of our research and
development resources towards next generation products, using leading edge
design techniques and other progressive technologies.
3
We are also actively working with leading-edge technology developers to
potentially increase the performance and efficiency of our amplifiers. Most
recently we have entered into a licensing agreement with an Israeli company,
which is expected to lead to a new generation of amplifiers with measurable
competitive advantage in the third quarter of 2002.
We spent $842,487 on research and development in 2001, including $152,436
in stock based compensation and $880,818 on research and development in 2000,
including $238,655 in stock based compensation. The 2000 research and
development expenses related to discontinued operations.
Sales and Marketing
We plan to build strategic alliances and partnerships to assist in
technology development which will help to extend our position in the wireless
communications market.
We sell our high power linear RF amplifiers primarily through sales agent
channels and on-site visits with customers. The majority of UltraTech amplifier
sales to date have been in South Korea through one agent. The agent is under
contract with us for sales commissions, and has been granted a significant
number of options (vesting over three years) in our stock as a longer-term
incentive.
We have expanded our marketing efforts to include North America, Europe and
countries in Asia, including China. In late 2001 and the first quarter 2002, our
marketing efforts led to sales contracts in North America, Europe and China, We
intend to participate in industry trade shows in 2002 to build brand awareness
in the wireless network infrastructure market.
We hired an experienced Vice-President of Marketing during the fourth
quarter 2001 to work with our Vice-President of Sales to develop and implement
our marketing sales strategy. Short term marketing efforts focus on two areas to
expand sales: (i) direct sales and (ii) channel development. Direct sales
activities will target the large "tier one" suppliers of base transceiver
station (BTS) equipment. We intend to position ourselves as having the ability
to quickly produce specialty products meeting high standards, evidenced by our
successful installation of several thousand installed units in Korea.
Direct sales activities also target manufacturers of infill coverage
products, in particular repeaters and smart antennas. Much of our Korea product
is already built into repeaters, and our primary US customer is also a repeater
manufacturer. Initial orders from a European-based repeater manufacturer and 2
European antenna manufacturers have also been received.
Channel development activities will focus on sales representatives
following closely the model already working in Korea, that is, to contract with
agents who are currently representing manufacturers of complementary products,
selling to system integrators of cellular, PCS and related wireless transceiver
equipment.
A third, longer-term component of our marketing strategy for the RF
amplifier products is to align with developers of new technologies in the RF
marketplace to keep current with technical advances and position as key supplier
to the innovators. Several organizations with exciting technologies have been
identified and/or are being worked with currently.
Manufacturing and Suppliers
We subcontract our electronics manufacturing to qualified companies with a
history of quality assurance. This minimizes the need for capital expenditures
related to electronics manufacturing facilities, minimizes staff and uses
specialists in each stage of manufacturing. All enclosure metalwork is also
subcontracted. Alternate contract manufacturers are available, should any of our
existing contract manufacturers cease providing services to us.
We currently assemble, configure, tune and test our products and RF
circuitry in our facility located in Burnaby, British Columbia. We have limited
manufacturing capacity, and the process to assemble, test and tune our
4
current products is labor intensive. We believe our manufacturing capacity is
sufficient to meet our requirements during 2002. In the future, we may be
required to expand our manufacturing facilities, hire additional personnel
and/or automate assembling, tuning and testing processes to meet future demand
for our products. We may also subcontract certain manufacturing functions.
The principal raw materials used in the production of our products are
mostly standard electronic, plastic and hardware components. We have, from time
to time, experienced difficulties in obtaining raw materials and we reduce
supply risk by using alternate suppliers.
Competition
We believe that there are two sizes and types of competitors in the RF
amplifier business: (1) large-scale manufacturers with annual sales ranging from
$100,000,000 to $500,000,000, specializing in large volume production runs and
mainstream type products; and (2) smaller companies with annual sales ranging
from $1,000,000 to $30,000,000, specializing in custom order markets. The large
and dominant RF amplifier companies are Powerwave Technologies Inc., Spectrian
Inc., Andrew Corporation, Celiant Corporation and Microwave Power Devices Inc.
Microwave Power Devices Inc. was recently purchased by Ericsson and Celiant
Corporation was also recently purchased by Andrew Corporation. The dominant
smaller companies are Amplidyne Inc., Stealth Microwave Inc. and AML
Communications.
Powerwave, located in Irvine, California, is an independent supplier of RF
high performance amplifiers that it designs and manufacturers for the
multi-carrier ultra-linear high power RF amplifier market. These types of
amplifiers are key components in wireless communications networks such as
Cellular and PCS (Personal Communications Services). Powerwave is also the
leading supplier of RF amplifiers for the Land Mobile Radio (LMR) market. A
significant portion of Powerwave's annual revenue comes from Nortel Networks.
Spectrian, located in Sunnyvale, California, is also a leading supplier of
ultra-linear high power RF amplifiers to wireless communications infrastructure
manufacturers and service providers worldwide. Spectrian designs and
manufactures power amplifiers for use in microcell and macrocell base stations
for cellular, PCS and wireless local loop.
Amplidyne, located in Somerset, New Jersey, designs, manufactures and sells
ultra-linear power amplifiers and related subsystems to the worldwide wireless
telecommunications market. These single and multi-carrier linear power
amplifiers, which are key components in cellular and PCS base stations, utilize
a patented pre-distortion technique.
Stealth, located in Trenton, New Jersey, designs and manufactures single
channel amplifiers for the cellular market and is trying to penetrate the PCS
bands with newer technology.
AML Communications, located in Camarillo, California, designs and
manufactures high power linear amplifiers for cellular, PCS and satellite
markets. AML Communications is also involved in the design and manufacture of
low noise amplifiers.
Intellectual Property
Trade Marks
We registered the trade marks "We Hear the Future Now(R)," "Sonic
Solution(R)," and "Sonic Systems Corporation(R)" with the Canadian Intellectual
Property Office in 1997. We have also been using the unregistered trade mark
"SONEM 2000(TM)" since 1997, but did not register it at the time due to resource
constraints. As a result of the sale of our Sonem division, we do not intend to
formally register this trade mark. We are also using the unregistered trade mark
"Unity Wireless(TM)". We intend to register this mark in the U.S., Canada and,
possibly, other countries.
5
Our Sonem business was sold on October 6, 2000, to Traffic Systems LLC, an
Arizona limited liability corporation ("Traffic Systems") owned 37% by UW
Systems and 63% by one of the Sonem contractors of UW Systems. The US and
Canadian siren detector patents and trade marks related to our Sonem business,
except for the trade mark Sonic Solution(R), were licensed on an exclusive basis
to Traffic Systems, and all rights to the trade mark Sonic Solution(R) were sold
to Traffic Systems in connection with the sale. See "Recent Developments - Sale
of Sonem Business."
Patents
We do not have any patents with respect to our Ultratech technology. We
have an immaterial residual interest in several patents associated with the
Sonem technology, substantially all of which we have transferred to Traffic
Systems. See "Recent Developments - Sale of Sonem Business."
Service and Product Warranty
We offered a standard warranty on our Sonem products covering parts and
labor for a fixed period, either one year or two years, depending on the product
and application. Our warranty obligations for Sonem products were assumed by
Traffic Systems. See "Recent Developments - Sale of Sonem Business."
We installed a one-off system for audible tornado warnings in Batesville,
Arkansas in 1998. These systems were sold with a five year warranty. There are
about 18 months remaining on that warranty and no failures have been reported
recently.
We offer a standard warranty of one year on parts and labor from date of
shipment on our Ultratech amplifiers. In some cases, a warranty period of two
years may be negotiated. For instance, the sale of Ultratech amplifiers into
Korea to date typically have a two year warranty.
We will repair units under warranty at our cost and return freight prepaid
back to the customer. A repaired unit will be warranted for the remainder of the
original warranty period or for one year from the repair date, whichever is
longer.
Our warranties specifically exclude all liabilities for "special,
incidental, direct, indirect, or consequential damages or expenses whatsoever"
arising from the functioning or use, or inability to use, the warranted
products. The warranties are void if the product has been improperly installed,
subjected to abuse or negligence, or tampered with. State and other laws may
limit our ability to limit our liability or exclude certain types of damages.
Government Regulation
UltraTech RF power amplifiers are sold as components which form part of
larger systems, which are tested for FCC compliance at the system level, by the
manufacturer or integrator of the system equipment. We do not test our amplifier
products for compliance at the component level.
Management and Employees
Our senior management team has experience in exploiting technologies in
emerging markets and our technical team is proficient in wireless technologies.
Currently each of our employees and managers holds stock and/or options with
future vesting dates to encourage continued commitment and focus for several
years. As of March 15, 2002, we had approximately 50 full-time employees and 10
contract or part-time employees. Our employees are not represented by a
collective bargaining agreement and we consider our relationship with our
employees to be good.
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Disposition of Our Traffic Systems Business
We were founded to commercialize the Sonem technology traffic system
devices. Based on our knowledge of intersection controllers gained in the
traffic signal preemption business, specifically the specialized computers that
control the signal lights, we developed our "UniLinx(TM)" technology. With
further development of the UniLinx(TM) technology, management came to believe
that the Sonem business should be de-emphasized in favor of a focus on
UniLinx(TM) and other wireless technologies.
In keeping with this change in focus, we sold our Sonem business on October
6, 2000, to Traffic Systems, an Arizona limited liability corporation owned 37%
by UW Systems and 63% by one of the Sonem contractors of UW Systems, under the
terms of an Asset Purchase Agreement among UW Systems, Traffic Systems and
others. Under the Asset Purchase Agreement, UW Systems licensed substantially
all of its Sonem patent rights to Traffic Systems (on an exclusive world-wide
basis) and Traffic Systems covenanted to commercialize and sell the Sonem
technology. In addition to its equity interest in Traffic Systems, UW Systems
was entitled to receive $2,000,000 from the gross profits of Traffic Systems. UW
Systems also agreed to assist Traffic Systems in the transition of the Sonem
business, by providing limited technical, consulting and financial support.
Although Traffic Systems agreed under the Asset Purchase Agreement to
assume the warranty obligations of UW Systems for Sonem products already
installed, UW Systems was required to advance the costs of such obligations,
with repayment to come from the gross profits of Traffic Systems. We believe
that the costs of such obligations in the future may be substantial, and have
agreed, pursuant to a term sheet dated January 31, 2001, that these obligations
will be assumed by Traffic Systems in consideration of UW System's transfer of
its equity interest in Traffic Systems and our residual interest in the Sonem
patents. On April 30, 2001, UW Systems and Traffic Systems signed a definitive
agreement consummating the term sheet.
For financial reporting purposes, the ultimate disposition of the Sonem
business results in it being considered to be a discontinued operation.
Accordingly, all discussions of our continuing operations exclude the Sonem
business.
Disposition of Integration Services Business
To complement internally developed Sonem technology, we formed wholly owned
UW Integration (and its wholly owned subsidiary Unity Wireless Integration (S)
Pte Ltd.) in early 2000 to pursue alliances, licensing agreements and marketing
partnerships in the ITS (intelligent transportation systems) and communications
markets. In order to better focus on our new high power linear amplifier
business, we sold UW Integration to Lyma Sales & Management Corp. ("Lyma"), a
British Columbia, Canada company wholly owned by Siavash Vojdani, a former
officer and director of ours, on December 30, 2000.
RISK FACTORS AND UNCERTAINTIES
Readers should carefully consider the risks and uncertainties described
below before deciding whether to invest in shares of our common stock.
If we do not successfully address any of the risks and uncertainties
described below, there could be a material adverse effect on our business,
financial condition or results of operations, and the trading price of our
common stock may decline and investors may lose all or part of their investment.
We cannot assure any investor that we will successfully address these
risks.
7
RISKS AND UNCERTAINTIES RELATING TO OUR COMMON STOCK
You may lose your entire investment
Given our continued need for additional capital and our history of losses,
our stock involves a high degree of risk, and should not be purchased by any
person who cannot afford the loss of the entire investment. A purchase of our
stock is currently "unsuitable" for a person who cannot afford to lose his
entire investment.
We have a history of losses and may never achieve profitability
Sales of our products have provided insufficient cash flow to sustain
operations. We had an accumulated deficit at December 31, 2001 of $12,830,289.
During the year ended December 31, 2001, we incurred a loss of $2,098,014 (2000
- $5,318,633) and used cash from operations of $1,847,392 (2000 - $3,097,829).
We anticipate that we will continue to incur net losses during our current year
ending December 31, 2002 due to increased sales and marketing costs, additional
personnel requirements, research and development costs and our general growth
objectives. Our ability to earn a profit will depend on the commercial
acceptance and profitability of our products. We may never achieve
profitability.
We anticipate that we may require additional capital
Our capital requirements are difficult to plan in light of our current
strategy to expand our customer base and to develop new products and
technologies. Since our inception, we have been dependent on investment capital
as our primary source of liquidity. Our operations to date have been primarily
financed by issuing equity. As of December 31, 2001, we had working capital of
$984,384. During the quarter ended December 31, 2001, we completed a private
placement of 5,147,551 units at $0.18 per unit to raise net cash proceeds of
$788,035 after deducting $47,902 share issue costs and $90,600 unsubscribed
share capital. Each unit consisted of one share of common stock and one warrant
exercisable to acquire one share of common stock at $0.30 per share. We cannot
assure you that the warrants will be exercised. We anticipate that we may
require additional working capital for inventory, components and work in process
or to expand our manufacturing capacity if we enter into contracts for large
quantities of our amplifiers. Our inability to obtain sufficient capital for
these commitments or to fund our obligations under our existing sales orders may
cause us to delay delivery of products or to default on one or more agreements.
Our inability to deliver products on a timely basis may have a material adverse
effect on our business, financial condition and results of operations.
Our auditors have expressed doubt about our ability to continue as a "going
concern"
Our financial statements have been prepared on the going concern basis
under which an entity is considered to be able to realize its assets and satisfy
our liabilities in the ordinary course of business. Operations to date have been
primarily financed by long-term debt and equity transactions. Our future
operations are dependent upon the identification and successful completion of
additional long-term or permanent equity financing, the continued support of
creditors and shareholders, and, ultimately, the achievement of profitable
operations. There can be no assurances that we will be successful. If we are
not, we will be required to reduce operations or liquidate assets. We will
continue to evaluate projected expenditures relative to available cash and to
seek additional means of financing in order to satisfy our working capital and
other cash requirements. The auditors' report on our December 31, 2001
consolidated financial statements includes an explanatory paragraph that states
that as we have suffered recurring losses from operations, substantial doubt
exists about our ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the
recoverability of assets and classification of assets and liabilities that might
be necessary should we be unable to continue as a going concern.
Our common stock is subject to penny stock regulation
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 per share (other than
securities registered on certain national securities exchanges or quoted on the
NASDAQ National Market System, if current
8
price and volume information with respect to transactions in such securities is
provided by the exchange or system). Our common stock is considered penny stock.
The penny stock rules require a broker-dealer, before consummation of a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with bid and ask
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules require that, before consummation of a transaction in a
penny stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that a penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements often have the effect of reducing the level of
trading activity in any secondary market for a stock that becomes subject to the
penny stock rules. Our stock is currently subject to the penny stock rules, and
accordingly, investors may find it difficult to sell their shares.
We may issue additional shares in the future which would result in dilution to
our existing shareholders
Our Certificate of Incorporation authorizes the issuance of 100,000,000
shares of common stock and 5,000,000 shares of preferred stock. Our Board of
Directors have the authority to issue additional shares up to the authorized
capital stated in the certificate of incorporation, subject to the regulatory
requirements of the CDNX. Our Board of Directors may choose to issue some or all
of such shares to acquire one or more businesses or other types of property, or
to provide additional financing in the future. The issuance of any such shares
may result in a reduction of the book value or market price of the outstanding
shares of our common stock. If we do issue any such additional shares, such
issuance also will cause a reduction in the proportionate ownership and voting
power of all other shareholders. Further, any such issuance may result in a
change of control of our corporation.
We do not anticipate we will pay any dividends
We have never paid dividends on our common stock and do not anticipate
paying any dividends in the foreseeable future. The declaration and payment of
dividends are subject to the discretion of our Board of Directors. Any
determination as to the payment of dividends in the future will depend upon
results of operations, capital requirements, and restrictions in loan
agreements, if any, and such other factors as our Board of Directors may deem
relevant.
Exercise of warrants and stock options may cause dilution to our shareholders
We have adopted a stock option plan. The total number of shares of common
stock to be delivered on the exercise of all options granted under the plan may
equal up to 20% of all outstanding shares of such common stock, including shares
of common stock previously issued under the plan. We had options for 4,408,250
shares of common stock issued and outstanding as of March 15, 2002 (out of
7,729,000 issuable under the plan as of that date) at the following exercise
prices:
Number of Shares(1) Exercise Price($)
------------------ -----------------
3,602,500 0.17
20,000 0.21
40,000 0.22
130,000 0.23
25,000 0.28
10,000 0.33
20,000 0.35
397,000 0.38
20,000 0.40
143,750 1.00
9
(1) These numbers do not include options for 500,000 shares at an exercise
price of $1.00 originally granted to Integrated Global Financial
Corporation. Integrated Global has sued us for a declaration that the
grant of 500,000 options is of unlimited duration. We believe the
options have expired. See "Legal Proceedings."
As of March 15, 2002, we had warrants outstanding to acquire 5,647,551
shares of our common stock as follows:
Number of Shares Exercise Price ($)
---------------- ------------------
5,147,551 $0.30
200,000 $0.38
300,000 $0.29
The existence of below-market options or warrants could adversely affect
the market price of our common stock and impair our ability to raise additional
capital through the sale of our equity securities or debt financing.
We cannot assure you that any of these warrants or options will be
exercised. Exercise of any such options or warrants will result in dilution of
the proportional interests of our shareholders at the time of exercise, and, to
the extent that the exercise price is less than the book value of the common
stock at that time, dilution of the book value per share of the common stock.
RISKS AND UNCERTAINTIES RELATED TO OUR BUSINESS AND OPERATIONS
Lack of Prior Operations and Experience
We have a limited history of revenues from operations and have no
significant tangible assets. Accordingly, there can be no assurance that we will
operate at a profitable level. Our business involves the development,
manufacture and marketing of products, novel and otherwise, in the wireless
communications industry. Future development and operating results will depend on
many factors, including the completion of developed products, demand for our
products, level of product and price competition, success in setting up and
expanding distribution channels, and whether we can develop and market new
products and control costs. In addition, our future prospects must be considered
in light of the risks, expenses and difficulties frequently encountered in
establishing a new business in the technology industry, which is characterized
by intense competition, rapid technological change, and significant regulation.
There can be no assurance that our future financial forecasts will be met and
that they will be similar to past results.
We depend on experienced management and key technical employees
We are a growing company dependent upon the services of certain management,
particularly incoming President Ilan Kenig, Roland Sartorius, Chief Financial
Officer, Tom Dodd, Senior Vice President and General Manager and Raffi Antepyan,
Vice President Engineering. The loss of the services of any one of these
persons, or an inability to recruit and retain additional qualified personnel,
could have a material adverse effect on our business. We have no plans at
present to obtain key person life insurance for any of our officers and
directors.
We are also dependent on highly qualified technical end engineering
personnel. Although we have had success in recruiting these employees in today's
competitive marketplace, there can be no assurance that this will continue which
may put us at risk of being unable to sustain and grow our business.
We face substantial competition
The wireless communications industry is characterized by rapidly evolving
technology and intense competition. We may be at a disadvantage with other
companies having larger technical staffs, established market shares and greater
financial and operational resources. Some competitors have achieved greater
brand recognition and technologies than we have been able to as of now. There
can be no assurance that we will be able to
10
successfully compete. There also can be no assurance that our competitors will
not continually succeed in developing products or competing technologies that
are more effective or more effectively marketed than products marketed by us, or
that render our technology obsolete. Earlier and larger entrants into the market
often obtain and maintain significant market share relative to later entrants.
We believe that an increasing number of products in the market and the desire of
other companies to obtain market share will result in increased price
competition.
Price reductions by us in response to competitive pressure or our desire to
also successfully increase market penetration or market share could have a
material, adverse effect on our business, financial condition, and results of
operations.
Our products compete on the basis of price, technology, performance,
quality, reliability, customer service and on-time delivery. Our size,
infrastructure and location allow us to provide our customers with timely
responses to their individual requests. There can be no assurance that this will
continue in the future.
We experience significant fluctuations in revenues and results on a quarterly
basis
Our revenues and operating results experience fluctuations from one quarter
to the next due to amongst other things: customers changing delivery schedules
or canceling orders, long sales cycle, availability of component parts,
competitive pressures on sales prices and discounts, delays in product
development and redesign of customer specifications, mix of products with
varying gross margins, management of our variable and fixed expenses and
warranty expenses. Our customers also provide us with varying order sizes, short
lead, tight delivery time requests and even change their orders on short notice.
We have experienced these fluctuations in the past and may continue to do
so in the future. As a result, our historical results are not a reliable
indicator of our future results. The share price of our common shares could
therefore fluctuate substantially.
We depend on protection of our proprietary technology
Our success will depend in part on our ability to preserve and protect
trade secrets and any proprietary technology, and to operate without infringing
upon the patents or proprietary rights of third parties in both the United
States and other countries. We may inadvertently fail to do so and consequently
could face infringement claims which could be costly and thus adversely affect
our business.
We do not own any patents in connection with its UltraTech products or
technologies and depend entirely on trade secrets, confidentiality agreements
and continual improvement to our products to protect our proprietary technology.
We may apply for patent protection of UltraTech products or technologies in the
future. However, there can be no assurance that our efforts to protect our
proprietary technology will be effective and this could have a material adverse
effect on our results of operation and financial condition.
We have filed applications for trade mark protection in the U.S. and
Canada.
Disputes related to our intellectual property
We are not aware of any disputes with respect to any of our intellectual
property, except as follows:
o a possible opposition to the application for registration of the trade
mark "Unity Wireless" in Canada by a party applying for registration
in Canada of the trade mark "Unity;" and
o an examiner's opposition to the application for registration of the
trade mark "Unity Wireless" in the United States on the basis that the
trade mark "Unity Wireless" is confusing with currently registered
trade marks.
We are working to resolve these issues and believe we will be able to so do
successfully.
11
We are not involved in any other litigation respecting our intellectual
property. The use of trade marks, service marks, trade names, slogans, phrases
and other expressions in the course of our business and our subsidiaries,
however, may be the subject of dispute and possible litigation. We may have to
defend ourselves from infringement claims by others. Such litigation is
expensive and time-consuming, and can be used by well-funded adversaries as a
strategy for depleting the resources of a small enterprise. This could also
affect our competitive position. There is no assurance that we will have
sufficient resources to successfully protect our interests in any litigation
that may be brought. There can be no assurance that we or our subsidiaries will
be able to continue to use their current trade names and marks. Any changes
could result in confusion to potential customers and negatively affect our
business and our financial condition.
We have limited manufacturing capacity
We currently assemble, tune and test our products in our manufacturing
facility located in Burnaby, British Columbia. Current models of our products
are required to be individually assembled, tuned and tested to meet the
specifications of the end-user. This process is time consuming and labor
intensive and our ability increase manufacturing output is limited by the size
of our facilities and our ability to hire, train and retain qualified personnel.
Currently, we believe we have sufficient manufacturing capacity to fill our
orders in 2002. In the future, we may be required to expand our facility, hire
additional personnel and automate the assembly, tuning and/or testing process to
increase our manufacturing capacity in order to meet future demand for our
products. Such expansion will require additional capital investments and
allocation of resources, which may affect our results of operations. We cannot
assure you that adequate resources will be available or that we will be able to
increase our manufacturing capacity in a timely manner, if at all. Our inability
to meet the demand for our products would have an adverse effect on our business
and our results of operations.
We depend on suppliers and third parties
We are a small enterprise and have yet to establish substantial internal
management, personnel and other resources. We depend substantially upon third
parties for several critical elements of our business including, among other
things, promotion and marketing, technology and infrastructure development and
distribution activities. We also depend substantially upon third party sales
agents. A substantial portion of our high power RF amplifier revenues to date
have been derived through a South Korean sales agent. The loss of any of these
resources could have a material adverse effect on our business, financial
condition and results of operations.
We rely on outside suppliers for some components and the assembly of some
portions of our products. There can be no assurance that component parts,
materials or services obtained from outside suppliers will continue to be
available in adequate quantities or on adequate terms. The inability to obtain
sufficient quantities of such materials, parts or services at reasonable cost
could have a material adverse effect on our business, financial condition and
results of operations.
Our success will depend upon future strategic partnerships
The successful execution of our business strategy is partially dependent
upon enlisting a number of strategic partners regionally, nationally and
globally to assist in a focused marketing effort and to provide financial
strength. There is no assurance that we will be successful in developing such
strategic partnerships on a timely basis or in developing enough strategic
partnerships to successfully market our technologies and products globally.
We depend on telecommunication system providers to accept our technology and
products
There can be no assurance that our existing technologies will be
incorporated into products, or that products based on our technologies will be
marketed successfully. In addition, there can be no assurance that our
technologies will be adopted widely as industry standards, even if products
based on its technologies have been introduced successfully to the marketplace.
12
The markets for our technologies and products have only recently begun to
develop. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty and risk. Because the markets for our
technologies and products are new and/or evolving, it is difficult to predict
the future growth rate, if any, and size of these markets. There is no assurance
that the markets for our technologies and products will emerge or become or
remain sustainable. If the markets fail to develop, develop more slowly than
expected or become saturated with competitors, or if our technologies and
products do not achieve or sustain market acceptance, our business, results of
operations and financial condition will be materially and adversely affected.
There are risks and uncertainties related to our development of new products
We have only recently released additional commercial versions of some of
our technologies and products. Additional efforts and expenditures to enhance
their capabilities are critical to commercial viability. Although we invest
heavily in the research and development of new products, we cannot assure you
that the new products we develop will be commercially viable or that a
sufficient demand will develop for such products.
Product warranty risks and uncertainties
Our products are relatively new to their respective markets and lack
extensive field operating experience. While we have tested our products for
failure in certain circumstances, there can be no assurance that our products
will continue to operate satisfactorily after sustained field use. If a
substantial number of products are returned and accepted for warranty
replacement, the cost to us could have a material adverse effect on our business
and financial condition. See "Recent Developments - Sale of Sonem Business."
Potential product liability related to our Sonem products
In the past, we sold emergency traffic preemption devices of our Sonem
division (sold in October 2000) which are installed at traffic intersections.
Also, we have sold some of our UniLinx(TM) devices (division sold in June 2001)
for use with traffic control equipment located at intersections. If any of these
products fail to perform properly, significant personal injury, property damage
or death could arise from traffic accidents resulting from such failure.
Although we maintain product liability insurance, there is no assurance that the
amount of coverage will be sufficient in the event of a claim, or that coverage
will continue to be available to us on reasonable terms and conditions or at
all.
Risks and uncertainties related to failure to maintain technological advantages
and risks of obsolescence
We are dependent upon what we perceive as the technological advantages of
our products and the ability to maintain trade secret protection for our
products. There can be no assurance that we will be able to obtain or maintain
such advantages; failure to do so would have substantial adverse consequences to
our business.
Technological obsolescence of our technologies and products remains a
possibility. There is no assurance that our competitors will not succeed in
developing related products using similar processes and marketing strategies
before us, or that they will not develop technologies and products that are more
effective than any which have been or are being developed by us. Accordingly,
our ability to compete will be dependent on timely enhancement and development
of our technologies and products, as well as the development and enhancement of
future products. There is no assurance that we will be able to keep pace with
technological developments or that our products will not become obsolete.
We face risks and uncertainties of foreign currency exposure
Our functional currency is the Canadian dollar, which means that most of
our operations are undertaken in Canadian dollars. We are exposed to
fluctuations in the US dollar relative to the Canadian dollar, because we
collect revenues in U.S. dollars. As we expand our operations, we may begin to
collect revenues from customers in currencies other than the US or Canadian
dollar. We do not currently engage in any hedging activities.
13
ITEM 2. DESCRIPTION OF PROPERTY
We currently lease 11,425 square feet of office, research and development,
and production space on a triple net basis at 7438 Fraser Park Drive, Burnaby,
British Columbia, Canada. The lease has a five-year term expiring on August 31,
2005, with an option to renew for an additional three-year term. Minimum basic
rental rates are as follows:
(a) years 1 and 2 - Cdn$10.00 ($6.70) per square foot per annum;
(b) year 3 - Cdn$10.25($6.87) per square foot per annum; and
(c) years 4 and 5 - Cdn$10.50 ($7.04) per square foot per annum.
We do not currently maintain any investments in real estate, real estate
mortgages or employ persons primarily engaged in real estate activities, nor do
we expect to do so in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We, along with Sonic Systems Corporation and M&M Realty Incorporated, have
been sued in the Supreme Court of British Columbia, Canada, by Integrated Global
Financial Corporation. The action is dated January 5, 2001. Integrated Global
alleges it has options to purchase 500,000 shares at an alleged exercise price
of $1.00 per share, plus unspecified damages. We dispute the allegations and are
defending the claim vigorously. No trial date has been set. No Examinations for
Discovery have been conducted or are even set down. The matter is at a very
preliminary stage. It is our view that the claim has little, if any, merit and
we do not expect the proceeding to have any material adverse effect on us. It is
our belief that these options are expired and we have not included such options
in our outstanding options.
We have filed a lawsuit against Cobratech Industries Inc. in the Supreme
Court of British Columbia, Canada to recover certain funds owed to us by
Cobratech. The action is dated October 24, 2001. We made a bridge loan of
$200,000 to Cobratech in November 2000, secured by a security interest in all of
the personal and real property of Cobratech. The obligation was evidenced by a
promissory note bearing interest at the rate of 1% per month. Cobratech owes us
approximately $78,000 in principal under the note. The action has been stayed
until May 2002 on the condition that Cobratech Industries Inc. pays 10 percent
of all funds received from financing until May 2002, in excess of $100,000,
until the outstanding amount has been paid. Two of our former directors were
also directors of Cobratech. See, "Certain Relationships and Related
Transactions" below for further details.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We submitted no matters to a vote of security holders during the quarter
ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In Canada, our common stock traded on the Canadian Venture Exchange (CDNX)
under the symbol "UWC". Our common stock is traded on the NASD over-the-counter
or "Bulletin Board" market under the symbol "UTYW." Between February 6, 1999 and
August 17, 2000, our common stock traded under the symbol "ZSON." Before
February 6, 1999, our common stock traded under the symbol "MMIM." The following
comprises the high and low bid prices for our common stock as of the end of each
period indicated since March 31, 1999 (the stock was not "publicly traded"
before December 31, 1998), unless otherwise indicated:
14
Fiscal Year 2000
Period High Bid Low Bid
------ -------- -------
January 1 - February 9, 2000 1.27 0.89
February 10 - April 27, 2000* 6.25 0.9000
April 28 - June 30, 2000 4.50 1.0625
Third Quarter 2000 1.90 1.16
Fourth Quarter 2000 1.53 0.37
Fiscal Year 2001
Period High Bid Low Bid
------ -------- -------
First Quarter 2001 0.68 0.26
Second Quarter 2001 0.48 0.19
Third Quarter 2001 0.30 0.11
Fourth Quarter 2001 0.35 0.15
Source: Nasdaq Trading & Marketing Services
* Our common shares were traded on the National Quotation Bureau "Pink
Sheets" from February 10, 2000 until April 27, 2000, and therefore
high and low bid information is not available during this period and
the numbers reflect high and low trade prices.
Over-the-counter market quotations reflect inter-dealer prices without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
Our common stock began trading on the CDNX on December 24, 2001. On March
15, 2002, the closing price of our common stock was Cdn $0.39 on the CDNX and
$0.26 on the OTCBB.
As of March 15, 2002 there were approximately 300 holders of record of our
common stock. We have never declared a cash dividend on our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
On June 22, 2001, we issued 25,000 shares of common stock to Robert Singer
in return for consulting services rendered by Mr. Singer and valued at $7,000.
This issuance was exempt from registration pursuant to Rule 701 and Section 4(2)
under the Securities Act of 1933.
We issued in January, 2001 to Mueller and Ideas 200,000 warrants (100,000
for each party) at an exercise price of $0.38, which vest until December 31,
2002 and expire up to March 31, 2005. In April 2001, we issued to Mueller and
Ideas 300,000 (150,000 for each party) warrants at an exercise price of $0.29,
which vest until March 31, 2004 and expire up to March 31, 2005. On December 15,
2001 the 250,000 warrants allocated to Ideas were terminated, which resulted in
them becoming fully vested on that date and expire on December 14, 2002. The
issuance was exempt from registration under Section 4(2) of the Securities Act
of 1933.
On December 24, 2001, we completed an equity financing through private
offering of 5,147,551 units at $0.18 per unit in reliance upon Regulation D to
persons in the United States and Regulation S to persons outside the United
States. Each unit consisted of one share of common stock and one warrant
exercisable to acquire one additional common share at $0.30 per share until
December 25, 2003. We agreed to use our reasonable efforts to cause the shares
and the shares acquirable upon exercise of the warrants to be registered under
the Securities Act. An SB-2 registration statement was filed on February 15,
2002 pursuant to that agreement, and declared effective on March 7, 2002.
15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of our financial condition, changes in financial
condition, and results of operations should be read in conjunction with our most
recent financial statements and the accompanying notes.
Overview
We are in the business of designing, developing and manufacturing high
power linear RF amplifiers and specialized communications products that use
traditional wireless channels. Prior to the introduction of our RF
communications products, we had designed, manufactured, and sold an
acoustic-based traffic signal preemption system under the trade name "Sonem."
The Sonem product accounted for all revenues earned in the fiscal years ended
December 31, 1998 and 1999, and the quarter ending March 31, 2000. In view of
our strategic repositioning toward RF wireless products during 2000, we, through
our subsidiary Unity Wireless Systems Corporation (UW Systems), sold our Sonem
business to Traffic Systems, L.L.C. on October 6, 2000. Accordingly, revenue
from acoustic products ended in the third quarter of 2000.
We agreed, pursuant to a term sheet dated January 31, 2001, that warranty
obligations of UW Systems for Sonem products already installed were assumed by
the purchaser of the Sonem business, in consideration of UW System's transfer of
its equity interest in Traffic Systems and our residual interest in the Sonem
patents. On April 30, 2001, UW Systems and Traffic Systems signed a definitive
agreement consummating the term sheet.
Also, in late 1999, we increased our marketing efforts in Asia, resulting
in a contract in the first quarter of 2000 with the Transportation Management
Systems division of Orbital Sciences. Under the Orbital contract, UW
Integration, through our wholly owned subsidiary, UW Singapore, provided systems
integration support, warranty and maintenance services for the Automatic Vehicle
Management System to be delivered by Orbital and Sanyo Trading Company to
Singapore Bus Services Ltd. Revenue from this contract started in the quarter
ended June 30, 2000, and continued for the rest of the year. As we continued to
refocus upon RF communication products, the Orbital contract was assigned to
Lyma Sales & Management Corp. on December 30, 2000, and therefore we had no
further interest in any revenue resulting from the contract.
In 1999 and 2000, we designed a specialized RF communication product with
the trade mark "UniLinx", which we introduced commercially in the later part of
2000. This wireless IP (Internet Protocol) gateway was deployed in the traffic
control market and the remote POS market during 2000. Sales from UniLinx
commenced in the quarter ended June 30, 2000 and continued for the rest of the
year and into the first quarter of 2001. In order to focus solely on the RF
communication products, we sold the UniLinx business and assets on June 12, 2001
to Horton Automation Inc. for Cdn $150,000, which is payable on a percentage of
unit sales by Horton. Consequently, revenue from the Unilinx business ended in
second quarter of 2001.
On November 16, 2000 we acquired Ultratech. Ultratech's operations have
been consolidated from the date of acquisition. The revenues from sales of
Ultratech amplifiers from its inception on April 22, 1999 to December 31, 2000
were approximately $3,200,000. We received revenue from the sale of RF power
amplifiers starting in the quarter ended December 31, 2000. Management expects
that the Ultratech acquisition will have a significant positive impact on our
revenues in the current year and beyond.
We have incurred net losses since we became active in July 1995. Losses
resulted from low sales of our Sonem traffic signal preemption system, combined
with startup manufacturing activity and engineering and research and development
costs relating to product improvement and new technologies.
Losses continued into 2000 as our revenue from Sonem sales, and the later
revenue from UniLinx and the Orbital contract, did not exceed expenditures for
research and development, marketing, and general and administrative activities.
In the first half of 2000, we became a registrant with the SEC, requiring
additional expenditures on legal and accounting services. Also, up to the time
of the sale of the Sonem product, we made further development expenditures on
this product to improve performance and to reduce unit costs. Marketing and
additional development costs were also incurred on the UniLinx product.
16
With the completion of the Ultratech purchase, the discontinuance of the
contract services (Singapore) business segment, the ending of active
participation in the Sonem product and the sale of the Unilinx business, we have
restructured our operations and staff complement to adjust for the needs of
higher manufacturing volumes and development activities for RF power amplifier
products. We have also reviewed other costs and eliminated expenditures not
directly required to implement our RF wireless focus.
During 2001, we focused on developing our marketing, sales and global
distribution network by increasing the number of distributors from one to over
twenty by year-end. As well, we introduced over twenty-five new products into
the marketplace. Our development activities were concentrated on increasing our
engineering resources to develop our new products and the new feed forward RF
power amplifier technology.
Results of Operations
(All amounts are in US dollars unless otherwise stated)
Years Ended December 31, 2001 and 2000
Net Sales in fiscal 2001 increased by 648%, or $3,070,767, to $3,544,770
from $474,003 in 2000. 2001 sales were totally attributable to RF amplifier
sales and in 2000 net sales were $474,003 from RF amplifiers between November 16
and December 31, 2000.
Cost of goods in fiscal 2001 increased by 605%, or $2,206,031, to
$2,570,454 from $364,423 in 2000. The increase was primarily due to increased
sales of RF amplifiers in 2001. The cost of goods sold in 2001 was also
increased by an inventory write down of $88,429 for the UniLinx inventory. The
gross margin for the RF amplifiers was positive. Stock compensation resulting
from the granting of stock options was $30,548 in 2001 and $354 in 2000.
Research and development expenses for fiscal 2001 were $842,487, including
$152,436 in stock based compensation. Expenses in 2001 were primarily due to the
hiring of senior level RF engineering positions, leasing of RF test equipment
and development of additional amplifier products. During 2001, we also received
$225,448 related to a Canadian Government Investment Tax Credit that was paid to
us as a result of RF amplifier research and development activities in 2000.
Stock compensation resulting from the granting of stock options was $152,436 in
2001.
Sales and marketing expenses in fiscal 2001 increased by 4,696%, or
$504,560 to $515,305 from $10,745. Costs in 2001 were primarily attributable to
the RF amplifier business and included the restructuring of sales and marketing
staff, hiring senior level sales and marketing positions, revamping corporate
and promotional material, attendance at various industry trade shows, building
up a worldwide distributor network as well as travel to visit customers and
distributors. In 2000 sales and marketing expenses were attributable to RF
amplifier sales between November 16 and Decemebr 31, 2000. Stock compensation
resulting from the granting of stock options was $112,331 in 2001 and $88,766 in
2000.
Depreciation and amortization in fiscal 2001 increased by 14,175%, or
$286,900, to $288,924 from $2,024 in 2000. $185,399 of the increase was
attributable to amortization of goodwill arising from the acquisition of
Ultratech Linear Solutions Inc. on November 16, 2000.
Exchange gain (loss) increased by $46,222 to ($49,258) from ($3,036) in
2000. The exchange gain in 2001 was due to fluctuations in the currency exchange
rate between the United States and Canada. Our revenues are received mostly in
US dollars, while the majority of expenses are incurred in Canadian dollars. As
we measure our financial results in Canadian dollars, strength of the US dollar
results in exchange rate gains.
General and administrative expenses in fiscal 2001 decreased by 6%, or
$108,323, to $1,844,146 from $1,952,469 in 2000. Expenses in 2001 included
non-recurring legal and regulatory related costs associated with restructuring
our operations during the year, hiring additional operations related
administrative staff, general
17
operating overhead expenses associated with the leased premesis, expenses
related to listing our shares on the CDNX, financing costs of the private
placement which was completed in December 2001, initiation of the ISO 9001
certification process as well as increased legal, audit, regulatory, investor
relations and corporate finance activities which are associated with being a
public company. Stock compensation resulting from the granting of stock options
was $360,139 in 2001 and $354,426 in 2000.
Interest income in 2001 was $43,545. This amount results primarily from
interest earned from term deposits.
Net gain from discontinued operations amounted to $267,504. A loss of
$165,125 is attributable to sale of the UniLinx business on May 1, 2001 and a
gain of $432,629 resulting from the sale of the Sonem business from a reduction
of the warranty accrual for the Sonem product due to the replacement of
previously installed Sonem systems and the sale of the remaining interest in the
Sonem business.
Liquidity and Capital Resources
Since inception, we have been dependent on equity capital as our primary
source of funding. Prior to December 31, 2000, sales of our Sonem traffic signal
priority product, and sales of our UniLinx product, provided insufficient cash
flow to sustain operations. We had an accumulated deficit at December 31, 2001
of $12,830,289. During 2001, we focused entirely on the wireless product
segment, primarily our amplifier products, and incurred a net loss, after
stock-based compensation expense, of $2,098,014 (2000 - loss of $5,318,633). We
also used cash from operations of $1,847,392 (2000 - $3,097,829 in cash used).
Operations to date have been primarily financed by equity.
The financial statements have been prepared on the going concern basis
under which an entity is considered to be able to realize its assets and satisfy
its liabilities in the ordinary course of business. Operations to date have been
primarily financed by long-term debt and equity transactions. Our future
operations are dependent upon the identification and successful completion of
additional long-term or permanent equity financing, the continued support of
creditors and shareholders, and, ultimately, the achievement of profitable
operations. There can be no assurance that we will be successful. If we are not,
we will be required to reduce operations or liquidate assets. We will continue
to evaluate our projected expenditures relative to our available cash and to
seek additional means of financing in order to satisfy working capital and other
cash requirements. Our auditors' report on the December 31, 2001 consolidated
financial statements includes an explanatory paragraph that states that as we
have suffered recurring losses from operations, substantial doubt exists about
our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability of
assets and classification of assets and liabilities that might be necessary
should we be unable to continue as a going concern.
During 2001, our cash position decreased by $989,654 to $1,012,430 from
$2,002,084 on December 31, 2000. The $1,847,392 used by operations comprised a
net loss of $2,098,014, and non-cash charges including $103,525 in depreciation
of equipment and $185,399 in goodwill amortization and $655,454 in stock-based
compensation expense. Other significant non-cash working capital changes
included accounts receivable and government grant receivables which increased by
$43,708, inventory which increased by $56,104 and accounts payable and accrued
liabilities which deceased by $70,224. The product warranty accrual decreased by
$591,997 as we contributed to the replacement of previously installed Sonem
systems.
Our investing activities during 2001 amounted to $53,286, which was
primarily attributable to increased capital leases of testing and tuning
hardware and software.
Financing activities included a decrease in the Cobratech loan receivable
of $118,823 and the bank overdraft decreased by $38,144 due to a lower level of
cheques outstanding at December 31, 2001 than at December 31, 2000. In May 2001,
we replaced an existing demand revolving loan with Royal Bank of Canada with a
$79,263 (Cdn $125,000) operating line of credit from HSBC Bank Canada, at an
interest rate of HSBC prime, and secured
18
by an $80,000 guaranteed investment certificate. The HSBC Bank Canada operating
line was replaced in February 2002 with a $78,616 (Cdn 125,000) operating line
from CIBC bank, at an interest rate of prime and secured by a $78,616 (Cdn
$125,000) guaranteed investment certificate. In March 2002, we secured a
$750,000 account receivable credit facilty with CIBC at an interest rate of CIBC
prime + 1% and an administrative fee of 1% of invoice value. See "Subsequent
Events". In December 2001, we completed an equity financing through a private
placement offering under regulation D and Regulation S of the Securities Act. We
accepted subscriptions for 5,147,551 units resulting in net cash proceeds of
$788,035 (gross proceeds of $926,537 less $47,902 share issue costs and $90,600
unsubscribed share capital as a result of an advance that was made to John
Robertson, our CEO and President. See item "Certain Relationships and Related
Transactions").
Other than operating loan commitments, we have no material commitments,
including capital commitments, outstanding December 31, 2001.
Subsequent Events
In January 2002, we announced sales to our first three customers in China.
All three of which have placed initial orders and two have signed supply
agreements for the development and delivery of our RF power amplifiers. We also
announced the first commercial sales of our new power amplifier for base station
applications which is a new market for us. As well, we announced purchase orders
for RF power amplifiers worth $640,930 destined for export to Korean customers
and that we had a 26% increase to our technical and engineering staff, now in
excess of 35 people.
In February 2002, we announced follow-on orders from two of our US
customers worth approximately $625,000 for the delivery of RF amplifiers in the
first quarter 2002. In addition, we announced that of January's orders,
approximately 60% were from new customers representing 20% to customers in
China, and 40% to customers in the US in comparison to January 2001 where 100%
of the orders were from customers in Korea.
The existing HSBC Bank Canada operating line was replaced in February 2002
with a $78,616 (Cdn $125,000) operating line from CIBC bank, at an interest rate
of prime, and secured by a $78,616 (Cdn $125,000) guaranteed investment
certificate. In March 2002 , we secured a $750,000 account receivable credit
facilty with CIBC at an interest rate of CIBC prime + 1% and an administrative
fee of 1% of invoice value.
On March 12, 2002, we announced the appointment of Mr. Ilan Kenig, as our
President effective April 1, 2002. Mr. John Robertson, our President and CEO
resigned his positions effective March 31, 2002 and remains as a Director. As
noted in Item 12, Certain Relationships and Related Transactions, The Board of
Directors agreed to advance $90,000 to John Robertson to enable him to subscribe
for 500,000 units in conjunction with the private placement completed on
December 24, 2001. The loan principal plus interest is currently still
outstanding and is secured by the subscribing shares. On his resignation, John
Robertson will either repay the loan and all interest owing on the loan in cash
or transfer to us, all of the securities comprising of the units he subscribed
to.
Mr. Featherstonhaugh resigned as a director effective March 31, 2002.
Trends and uncertainties
The wireless infrastructure market is in various stages of maturity
throughout the world. Developed countries generally have an established system
of cell phone capabilities, usually with more than one service provider
competing for subscribers. In some places competing technologies have been
deployed. Developing countries are continuing to build out 1st and 2nd
generation networks to complete their coverage footprints, often in place of
wired phone systems.
There are 2 main sources of future growth. First, ever-growing numbers of
subscribers require more infrastructure to support the number of simultaneous
calls (compounded by the increasing length of calls) all driven by aggressive
rate programs offered by the carriers as well as by new features and services
being offered to subscribers. Second, new network technologies (2.5G and 3G) are
being or about to be deployed, which will require
19
significant new investment in infrastructure. These new network technologies are
being driven by their ability to handle more simultaneous calls and offer more
features, which will attract even more subscriber-minutes to the carriers.
Some examples of new features being offered by the 2.5G and 3G networks
are: wireless access to the Internet for e-mail, stock quotes, weather/traffic
reports, etc.; SMS short message services, particularly popular with young
people; location-based services; and the growing wireless connectivity offered
by PDA manufacturers. Longer calls are being encouraged by million-minute plans,
free weekend calls, free roaming, and other billing incentives, as well as by
increased coverage footprints.
Wireless infrastructures will continue to expand for some time to come to
accommodate the increasing number of subscribers, increasing number of features,
and increasing bandwidth required by many of the new features. The 3G networks
typically operate at higher frequencies, so their coverage area tends to be
smaller per base station, requiring more base station and repeater equipment to
be deployed to achieve the same geographic coverage (although a larger number of
subscribers can be supported on each 3G base station).
In an effort to further increase subscriber-minutes, a growing number of
repeater systems (both high power repeaters and "pico-repeaters" for indoor use)
will be deployed to fill in coverage gaps in wireless network footprints.
Wireless technology is getting more complex as the newer network
technologies use limited bandwidth (capacity) more efficiently. And the market
is getting more competitive, as a small but growing number of amplifier
companies pursue the business worldwide. This causes intense price competition
and resulting lower gross profit margins. If we cannot continue to reduce our
manufacturing costs on all our products, our gross margins will decline.
There are a number of emerging technologies that promise to increase the
efficiency of the RF systems which carry the wireless signals in cellular and
wireless communications networks. Some of these have the potential to be built
into the amplifiers, transparently increasing performance; others require larger
system-level changes to the base station equipment. It is not clear which, if
any, of these technologies will be adopted, or what effects they will have on
the suppliers of RF amplifiers.
However, the primary uncertainty in this market revolves around the timing
of the infrastructure build-out and the network type(s) that will be built. We
are aware of the timing issue and are developing products, and establishing
alliances in order to secure the potential and/or technical ability to react to
current and planned network architectures and amplifier technologies.
The timing of major network build-outs is uncertain, in different parts of
the world, for different reasons. In North America, where a number of competing
network technologies coexist, the move to 3G is expected to be slower than in
other geographies. In Europe, where a unified GSM system already exists, several
large carriers have committed huge amounts of money for 3G spectrum allocation,
but now they may not be able to afford to build it out quickly, and the GPRS
2.5G system offers many of the benefits. In Asia, China is beginning a very
large push to expand their 2G networks with virtually all suppliers in the world
competing for the business, and Korea is planning a 3G push this year (2002).
There is general consensus that the 3G networks will prevail within a few
years, but there have been some disappointments in the early technology trials,
and most of the currently-envisioned applications can run well enough on 2.5G
networks.
The overall trend is for continued growth of the wireless communications
infrastructure worldwide, driven primarily by increasing numbers of
subscriber-minutes and by new features which require more bandwidth. The primary
uncertainty in the market is the pace at which the new generation networks will
roll out, and the geographic sequence of the roll out. Uncertainty of a lesser
concern surrounds the technology itself.
20
We believe that our company is well positioned to compete aggressively in
the worldwide buildup of the wireless infrastructure. Although we have had
recent success in Asia , there can be no assurance that this trend will continue
and that the Chinese market buildup will be fast as first expected. A slow down
of the build-up could be a result from a mixture of political, economic,
regulatory, technical or market driven conditions. Since a significant portion
of our revenues originate in Asia, our success could be negatively materially
affected.
Our operations have been successfully funded to date by cash flow, equity
funding and to a certain extent debt financing. We are relying on these sources
of funding in order to provide our company with sufficient capital to continue
our fast growth strategy. The can be no assurance that the past trend will
continue, which would significantly affect the financial condition of the
Company.
Our business in Korea is transacted on the basis of "L/C at sight" (letter
of credit, payable when the product ships our plant). As we expand and diversify
our business geographically, different business models are used by different
cultures. Our US and European business is typically on "net 30" terms, and
China-based customers are demanding even longer payment terms. As our business
grows and expands, accounts receivable and financing sales become more relevant
cash management issues for the company.
Current models of our products are required to be individually assembled,
tuned and tested in our manufacturing facility to meet the specifications of the
end-user. This process is time consuming and labor intensive and our ability
increase manufacturing output is limited by the size of our facilities and our
ability to hire, train and retain qualified personnel. Currently, we believe we
have sufficient manufacturing capacity to fill our orders in 2002. In the
future, we may be required to expand our facility, hire additional personnel and
automate the assembly, tuning and/or testing process to increase our
manufacturing capacity to meet demand for our products. Such expansion will
require additional capital investments and allocation of resources, which may
affect our results of operations. We cannot assure you that adequate resources
will be available or that we will be able to increase our manufacturing capacity
in a timely manner, if at all.
Inflation
We do not believe that inflation has had a significant impact on our
consolidated results of operations or financial condition. However, we have
recently experienced some significant price increases for certain components
that are used in the wireless industry.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations, including the discussion on liquidity and capital resources, are
based on our consolidated financial statements that have been prepared in
accordance with generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates and judgments that
affect reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
reevaluate our estimates and judgments, particularly those related to the
determination of the recoverability of equipment, and goodwill. We base our
estimates and judgments on historical experience, contractual arrangements and
commitments, and on various other assumptions that we believe are reasonable in
the circumstances. Changes in these estimates and judgments will impact the
amounts recognized in the consolidated financial statements, and the impact may
be material.
We believe the following critical accounting policies require more
significant estimates and judgments in the preparation of the consolidated
financial statements.
The consolidated financial statements have been prepared on the going
concern basis, which assumes the realization of assets and liquidation of
liabilities in the normal course of operations. The continuation as a going
concern for the foreseeable future is dependent upon the identification and
successful completion of additional debt or equity financing or the generation
of positive cash flows from operating activities. Our ability to raise financing
is, in part, based on market conditions that are outside of our control. If we
are not able to continue as a going concern, we would likely not be able to
realize on our assets at values comparable to the carrying value or the fair
21
value estimates reflected in the balances set out in the preparation of the
consolidated financial statements. Based on the carrying value of assets at
December 31, 2001, the inability to continue as a going concern would require
liquidation of assets not in the normal course which would primarily impact
inventory, equipment and goodwill's recoverable amounts.
Inventory is carried at the lower of cost, determined on an average cost
method, and market. We provide an allowance that it considers to be reasonable
for its non-moving or slow moving inventory items and for items with expected
future realizable value lower than cost. Changes in customer demands and
requirements in the short term could reduce product demand and prices having a
material impact on future realizable value of inventory.
Equipment and goodwill are recorded at cost less accumulated depreciation.
We review these assets for impairments when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. As actual future net cash flows are uncertain, the estimation process
requires us to make reasonable assumptions about future economic trends and
events. These trends and events are substantially outside of our control. To the
extent that the expected future cash flows generated by the asset are reduced,
we may be required to record an impairment charge against the carrying value of
the equipment and goodwill.
On an ongoing basis, we record our best estimate of our warranty
obligations related to products sold. These estimates are made after the
consideration of contractual warranty obligations and historical experience.
Unforeseen events, including increased technological difficulties with products,
could occur that have not been anticipated in estimating the warranty provision.
Additional costs or estimates will be recognized as determinable.
We recognize revenue when criteria specified in generally accepted
accounting principles have been met. Although we have no current intention of
doing so, changes in our business model could impact the timing of recognition
in our consolidated financial statements.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the financial statements listed under the heading
"(a)(1) Financial Statements" of Item 13 herein, which financial statements are
incorporated herein by reference in response to this Item 7.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Ernst & Young LLP (E&Y) was dismissed from its position as our certifying
accountant on December 31, 2000. KPMG LLP (KPMG) was appointed as our new
certifying accountant on the same day.
E&Y's report on the financial statements for the years ended December 31,
1999 and 1998 did not contain an adverse opinion or a disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope, or accounting
principles, except for the report on the 1998 financial statement, which
contained an explanatory paragraph (after the opinion paragraph) that stated
that our recurring losses from operations raised substantial doubt about our
ability to continue as a going concern. The 1998 financial statements did not
include any adjustments that might result from the outcome of this uncertainty.
The report on the 1999 financial statement did not contain any such explanatory
paragraph as to uncertainty.
The decision to change accountants was approved by our board of directors
pursuant to a consent board resolution dated December 31, 2000. We have an audit
committee, but the decision to change accountants was not considered by this
committee.
During the Company's years ended December 31, 1999 and 1998 and the
subsequent interim period preceding the dismissal of E&Y, there were no
disagreements with E&Y on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
22
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Our directors, executive officers, and significant employees and the
significant employees of our subsidiary, Unity Wireless Systems Corporation (UW
Systems), as of December 31, 2001, were as follows:
NAME POSITION APPOINTMENT
---- -------- -----------
Mark Godsy Director and Chairman of Board of Directors February 22, 2000
Director and Chairman of Board of Directors of UW Systems
John Robertson Director, President and Chief Executive Officer (1) November 17, 2000
Director, President and Chief Executive Officer of UW Systems(1)
Roland Sartorius Director, Chief Financial Officer and Secretary August 15, 2000
Director, Chief Financial Officer and Secretary of UW Systems
Thomas Dodd Director, Senior Vice President February 22, 2000
Director, Senior Vice President of UW Systems
Raffi Antepyan Vice President of UW Systems February 19, 2001
Ilan Kenig Vice President, Business Development(2) December 1, 2001
Ken Maddison Director October 29, 1998
Robert W. Singer Director June 22, 2001
Robert Fetherstonhaugh Director(3) June 22, 2001
(1) Mr. Robertson resigned as President and Chief Executive Officer of the
Corporation and UW Systems effective March 31, 2002. Mr. Robertson
remains as a director of the Corporation.
(2) Mr. Ilan Kenig was appointed President of the Corporation and UW
Systems effective April 1, 2002.
(3) Mr. Fetherstonhaugh resigned as a director of the Corporation
effective March 31, 2002.
Mark Godsy - Age 47. Mr. Godsy is a Director and the Chairman of the Board
of Directors of Unity Wireless and UW Systems. He previously served as a
Director and the Chairman of the Board of Directors of UW Systems from May 1993
to November 1998, and as the Secretary of UW Systems from May 1993 to July 1995,
and from May 1997 to November 1998. Mr. Godsy was also the Chief Executive
Officer from February 2000 until November 17, 2000. His term as a Director of
Unity Wireless runs until the next annual meeting of the shareholders unless
earlier terminated. Mr. Godsy is an experienced entrepreneur working in the
areas of corporate development and venture capital. He practiced law for
approximately five years before entering business and co-founding two successful
companies, ID Biomedical Corporation and Angiotech Pharmaceuticals Ltd., both of
which are leading Canadian biotechnology firms. Mr. Godsy's responsibilities
included building executive management teams, coordinating corporate finance
activities and strategic positioning. Mr. Godsy is a graduate of the University
of British Columbia and received his law degree from McGill University. He is
currently a member of the Law Society of British Columbia.
23
John Robertson - Age 50. Mr. Robertson is a Director of Unity Wireless and
the Chief Executive Officer of Unity Wireless and of UW Systems. His term as
Director of Unity Wireless runs until the next annual meeting of shareholders
unless earlier terminated. Mr. Robertson has over 18 years experience in the
telecommunications industry with both public and private companies. He has held
senior executive positions with Glentel, Glenayre Communications and Uniden
Canada. He founded Ultratech Linear Solutions ("Ultratech") in mid-1999.
Ultratech was acquired in November 2000 by Unity Wireless.
Roland Sartorius - Age 49. Mr. Sartorius is a Director of Unity Wireless
and the Chief Financial Officer and Secretary of Unity Wireless and of UW
Systems. His term as Director of Unity Wireless runs until the next annual
meeting of shareholders unless earlier terminated. Mr. Sartorius has over 12
years experience in the position of Chief Financial Officer in several public
and private multinational entities. Most recently, he was based in Switzerland
and held the same position with a private equity/venture capital firm managing
several equity funds, with investments in various European and North American
technological/industrial companies. His focus has been in the areas of corporate
finance, strategic planning, financial reporting and controls, international tax
planning, compliance and investor/shareholder relations. From 1981 to 1988, Mr.
Sartorius was employed with KPMG, initially as an auditor and subsequently as a
Management Consultant in Corporate Finance. Mr. Sartorius, a Certified General
Accountant, holds a Bachelor of Commerce & Business Administration degree from
the University of British Columbia. He currently serves and has previously
served on boards of directors for a variety of private companies.
Thomas Dodd - Age 51. Mr. Dodd is a Director of Unity Wireless and Senior
Vice President of Unity Wireless and of UW Systems. His term as a Director of
Unity Wireless runs until the next annual meeting of the shareholders unless
earlier terminated. Mr. Dodd is a senior marketer/manager with over 25 years
experience as an end user, OEM, consultant, and manufacturer, in roles ranging
from field technical support to executive management. He has held senior
executive positions with Dynapro Systems Inc. and Campbell Technologies with
primary responsibilities in sales and marketing. Currently, Mr. Dodd serves on
the Board of Directors of FutureFund (VCC) Capital Corp.
Raffi Antepyan - Age 43. Mr. Antepyan is an Executive and Vice President of
Engineering. He has over 20 years of wireless experience. Recently he was Vice
President and managing Director of privately held Wavesat Telecom, which
specialized in the development and manufacture of wireless components and
systems including Cellular and PCS (personal communication service) amplifier
for base station and repeater applications. Mr. Antepyan has also held
engineering and management positions with and northern Telecom (Nortel
Networks), Wavefront Precision Technologies, Advantech Advanced microwave
Technologies Inc., and Harris Farinon Canada. Mr. Antepyan holds a Master's
Degree in Electrical Engineering from Montreal's Concordia University.
Mr. Ilan Kenig - Age 41. Mr. Kenig has over 17 years of legal, venture
capital and investment banking experience on Wall Street with specific emphasis
in the technology and telecommunications arena. Mr. Kenig, with his experience
in international business activities, corporate mergers and acquisitions, joined
the Company as Vice President of Business Development in December 2001 and will
assume the position of President in April 2002. Prior to pursuing international
finance activities in New York, Mr. Kenig was a founder of a successful law firm
in Tel-Aviv representing mostly technology and telecommunications interests. Mr.
Kenig holds a law degree from Bar-Ilan University.
Ken Maddison - Age 61. Mr. Maddison is a Director of Unity Wireless. His
term runs until the next annual meeting of the shareholders unless earlier
terminated. Mr. Maddison, a Chartered Accountant since 1966 and elected a Fellow
of the Institute of Chartered Accountants of BC in 1975, retired in August 1997
after a lengthy career as a partner with the accounting firm KPMG. In public
practice over the past 32 years, Mr. Maddison provided auditing, accounting and
business advisory services to a wide range of clients in the hospitality, real
estate, construction, non-profit and insurance industries. Mr. Maddison
currently serves on the boards of International Wayside Gold Mines Ltd., Island
Mountain Gold Mines Ltd., Northern Continental Resources Inc., Northern
Hemisphere Development Inc. and Golden Cariboo Resources Ltd.
24
Robert W. Singer - Age 54. Senator Singer is a director of Unity Wireless.
Senator Singer is a New Jersey state senator and serves within the Senate
leadership circle as Assistant Majority Leader. Senator Singer is also
Vice-Chairman of the Senate Commerce Committee and a member of the Senate Health
Committee. In his former duties as an elected representative in the Upper House,
Senator Singer was Chairman of the Senate Senior Citizens, Veterans Affairs and
Agriculture Committee and was Vice-Chairman of the Senate Environment Committee,
and had been appointed to chair the Joint Legislative Biotechnology Task Force
and the Software Task Committee. Senator Singer is presently Chairman of the
Senate Task Force on Science and Technology, which was established in 2001. On a
national level, Senator Singer was also appointed as a member of the Health
Committee of the Assembly on Federal Issues of the National Conference of State
Legislatures. Members of the Assembly on Federal Issues meet with federal
officials and play a key role in developing recommendations on a wide range of
national issues that affect state-federal relations. Senator Robert Singer has
distinguished himself among his national peers through his recognition and
understanding of high technology industries, particularly biotechnology and the
economic development, health care, agricultural and environmental benefits this
industry offers his state and the nation. The Senator has also been honored at
the national and state level for his leadership and support in promoting the
biotechnology industry. Senator Singer currently serves on the boards of Brocker
Technology Group and Healthchoice Incorporated.
Robert Fetherstonhaugh - Age 46. Mr. Fetherstonhaugh is a director of Unity
Wireless and a chartered accountant with executive experience in technology
companies and public accounting. He is presently Executive Vice President of
Claridge, Inc. Prior to Claridge, Inc., he was Deputy Chairman and Corporate
Secretary of Trader.com, a public company in the business of online and print
publication, which he joined in 1998. Mr. Fetherstonhaugh was responsible for
internet and media acquisitions in Canada, the United States, Holland, and
Russia, and closed three such acquisitions in 1999. He was also responsible for
coordinating Trader.com's Russian operations, which now generate $20 million in
free cash flows per year, and has set up operation in China. From 1978 to 1998
he served with KPMG and became Partner in charge of the Financial Institutions
Practice for Montreal. He also set up, led, and significantly expanded the High
Technology Practice in Montreal. Mr. Fetherstonhaugh currently serves on the
board of Trader.com and Stake Technology.
Our directors are elected at the annual meeting of the shareholders and
serve until their successors are elected and qualified, or their earlier
resignation or removal. Officers are appointed by our Board of Directors and
serve at the discretion of the Board of Directors or until their earlier
resignation or removal.
There are no family relationships among our directors or executive
officers.
Section 16(a) Beneficial Ownership Reporting
For the fiscal year ended December 31, 2001, all Section 16(a) beneficial
ownership reports were filed in a timely manner.
The foregoing disclosure is based solely on a review of Forms 3 and 4 and
amendments thereto furnished to the Company under Rule 16a-3(e) during its most
recent fiscal year and Forms 5 and amendments thereto furnished to the Company
with respect to its most recent fiscal year, and any written representations
received by the Company referred to in paragraph (b)(2)(i) of Regulation S-B.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation earned by all persons
serving as our Chief Executive Officer during the fiscal years ended December
31, 2001, 2000 and 1999. None of our other officers or those of any of our
subsidiaries earned greater than $100,000 in total salary and bonus during 2001,
2000 or 1999.
25
Summary Compensation Table
Annual Compensation Long Term Compensation
--------------------------------------------------------------------------------
Awards Payouts
---------------------------------
Restricted
Shares or
Securities Restricted
Name and Fiscal Other Annual under Share LTIP
Principal Year Salary Bonus Compensation Option/SAR Units Payouts All Other
Position Ended (US$) (US$) (US$) Granted(#) (US$) (US$) Compensation
--------------------------------------------------------------------------------------------------------------
John Robertson, 2001 107,137 0 0 100,000 0 0 0
Chief Executive 2000 10,300 0 275,000(2) 0 0 0
Officer(1) 1999
Mark Godsy,
Chief Executive 2000 0 0 200,000(4) 72,000 0 0
Officer(3) 1999
William Brogdon,
Chief Executive 1999 38,756 0 0 0 0 0 0
Officer(5)
Annual Compensation ($) Long-Term Compensation
----------------------- ----------------------
Securities
Restricted Stock Underlying
Name and Position Year Salary Award ($) Options(#)
----------------- ---- ------ --------- -----------
John Robertson 2001 107,137 0 100,000(2
2000(1) 10,300 0 275,000(2)
Mark Godsy 2001 0 0 5,000(4)
2000(3) 0 72,000 200,000(4)
William Brogdon 1999 38,756 0 0
William Brogdon 1998 64,167 61,480(5) 200,000
NOTES:
(1) Mr. Robertson, served as served as Chief Executive Officer during the
period November 17, 2001 to March 31, 2002.
(2) Mr. Robertson received 200,000 options in December 2000 and 100,000 options
in February 2001 as partial compensation for serving as Chief Executive
Officer of our company. He also received 75,000 options in December 2000 as
compensation for serving as a director of our company.
(3) Mr. Godsy served as Chief Executive Officer of our company during the
period February 22 - November 17, 2000. At the end of this period, Mr.
Godsy was paid accrued wages in restricted stock (171,428 shares)
equivalent to $72,000 on the date of issue.
(4) Mr. Godsy received 200,000 options in December 2000 as compensation for
serving as the Chairman of the Board of our company and 5,000 options in
June 2001 as compensation for serving on the Compensation Committee.
(5) Mr. Brogdon served as Chief Executive Officer of UW Systems from February
1, 1998 and our company from December, 1998. Both appointments concluded on
February 22, 2000.
26
At the end of 2001, the named executive officers held restricted stock of
our company as follows. The value of these holdings is calculated at $0.35,
which was the price of our stock on December 31, 2001.
Restricted shares held Value of restricted shares held
---------------------- -------------------------------
John Robertson(1) 622,065 $217,723
Mark Godsy(2) 2,444,928 $855,725
William Brogdon 0 $0
(1) Mr. Robertson served as our President and CEO from November 17, 2001 to
March 31, 2002.
(2) As of December 31, 2001, Mark Godsy also owned 307,151 unrestricted shares
for a total of 2,752,079.
Option Grants in 2001
Option/SAR Grants in Last Fiscal Year
OPTION GRANTS
Individual Grants
-------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities
Underlying % of Total Exercise or
Options Granted Options Granted Base Price
Name (#) (1) ($/Sh) Expiration Date
-------------------------------------------------------------------------------------------------
John Robertson, 100,000(3) 6.1% $0.17 Dec. 31, 2005
Chief Executive Officer(2)
Mark Godsy, 5,000(4) 0.3% $0.17 June 30, 2006
Chief Executive Officer
-------------------
(1) The denominator (of 1,629,500) was arrived at by calculating the net total
number of new options awarded during the year.
(2) Mr. Robertson served as our President and CEO from November 17, 2001 to
March 31, 2002.
(3) John Robertson received 100,000 options at $0.51 (time-based vesting) on
February 6, 2001. These options were re-priced on December 11, 2001 to
$0.17.
(4) Mark Godsy received 5,000 options at $0.38 (time-based vesting) on June 22,
2001. These options were re-priced on December 11, 2001 to $0.17.
Fiscal Year-End Option Value
The following table presents the value of unexercised options held as of
December 31, 2001 by each of the named executive officers appearing in the
Summary Compensation Table in this section. None of these named executive
officers exercised any of their options in 2001. Mr. Brogdon held no options as
of December 31, 2001.
27
Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
Aggregated Options Exercised
During the Financial Year Ended December 31, 2001
and Financial Year-End Option Values
----------------------------------------------------------------------------------------------------------
Name Securities Aggregate Unexercised Options Value of Unexercised in the
Acquired on Value At FY-End (#) Money-Options at FY-End
Exercise (#) Realized ($) Exercisable/ ($) Exercisable/
Unexercisable Unexercisable (1)
----------------------------------------------------------------------------------------------------------
John Robertson, Nil Nil 206,250 (exercisable) $72,188 (exercisable)
Chief Executive 168,750 (unexercisable) $59,063 (unexercisable)
Officer(2)
----------------------------------------------------------------------------------------------------------
Mark Godsy, Nil Nil 84,166 (exercisable) $29,458 (exercisable)
Chief Executive Officer 120,834 (unexercisable) $42,292 (unexercisable)
----------------------------------------------------------------------------------------------------------
(1) Based on NASD OTCBB closing price of $0.35 on December 31, 2001.
(2) Mr. Robertson served as our President and CEO from November 17, 2001 to
March 31, 2002.
Compensation of Directors
Our directors do not receive salaries or fees for serving as directors, nor
do they receive any compensation for attending meetings of the Board of
Directors or serving on committees of the Board of Directors. We may, however,
determine to compensate its directors in the future. Directors are entitled to
reimbursement of expenses incurred in attending meetings. In addition, our
directors are entitled to participate in our stock option plan. We have adopted
a policy whereby members of the Board of Directors receive initial grants of
options upon appointment or upon adoption of the policy, as follows:
Chairman 200,000 options
Director (other than Chairman) 75,000 options
Compensation Committee 5,000 options
Audit Committee 5,000 options
Options Committee 2,500 options
Employment Agreements
There are no employment agreements between us or any of our subsidiaries
and William Brogdon or Mark Godsy. We had an employment agreement with John
Robertson, dated November 16, 2000, which was replaced with a consulting
agreement on February 1, 2001 and further replaced with a five year employment
agreement dated November 1, 2001. Mr. Robertson is entitled to, amongst other
things, an annual salary of Cdn $190,000 ($119,700) reviewable annually, with
such increases as we deem appropriate. Mr. Robertson is also entitled to options
to purchase up to 375,000 shares of our common stock, benefits that are
ordinarily made available to our employees, and the reimbursement of reasonable
job-related expenses. Mr. Robertson resigned from his position on President and
CEO of our Company effective March 31, 2002 thereby terminating his employment
agreement.
Report on Repricing of Options - December 11, 2001
On December 11, 2001, our Board of Directors determined that it was in the
best interest of the corporation to reprice issued and outstanding stock options
held by most of our employees, officers and directors. Our Board of Directors
approved a stock option repricing program effective December 11, 2001. Under the
program, each eligible holder of stock options (employed by us for the majority
of the period between July 1, 2001 and December 11, 2001)
28
granted under our Stock Option Plan, including options held by directors and
officers, was entitled to exchange their existing stock option for a repriced
stock option to purchase the same number of shares at an exercise price of $0.17
per share. The new exercise price was equal to the then market price of $0.17
per share of common stock. Other than the lower exercise price, each repriced
stock option under the repricing program has terms substantially equivalent to
the terms of the original grant, including the same vesting terms, number of
shares and expiration date. Options to purchase a total of 4,253,250 shares of
common stock were eligible to participate in the program, all of which were
repriced. The Board of Directors approved the stock option repricing program as
a result of the significant reduction in the price of our common stock in fiscal
2001. The Board determined that our existing stock options no longer provided
meaningful incentive to the option holders to remain in our employ and to
maximize shareholder value. The eligible existing stock options had exercise
prices of $0.38 to $1.00 per share, which exercise price exceeded the trading
prices of our common stock prior to the date the option repricing program was
approved. The Board determined that the exchange of new stock options with a
lower exercise price for our existing stock options would once again provide
incentive to our officers, directors and employees to continue to provide
services to us and to maximize shareholder value.
For financial reporting purposes, the repriced options will be accounted
for as variable plan options with increases in the market price of the
underlying common stock reflected as compensation expense until the options are
exercised, expire or are forfeited.
The following named executive officers held the following options that were
repriced:
----------------------------------------------------------------------------------------------
Number of securities Exercise Price under
Name underlying options Original Grant Reprice Exercise Price
----------------------------------------------------------------------------------------------
John Robertson(1) 375,000 $0.38 $0.17
Mark Godsy 205,000 $0.38 $0.17
------------------
(1) Mr. Robertson served as our President and CEO from November 17, 2001 to
March 31, 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our shares of common stock as of March 15, 2002 by (i) each person
who is known by us to beneficially own more than 5% of our issued and
outstanding shares of common stock; (ii) our chief executive officer and our two
former chief executive officers during our last fiscal year, individually named
in the executive compensation table below; (iii) our directors; and (iv) all of
our executive officers and directors as a group. Unless otherwise indicated, the
persons named below have sole voting and investment power with respect to all
shares beneficially owned by them, subject to community property laws where
applicable. As of March 15, 2002, there were 30,915,704 of our shares of common
stock issued and outstanding. Each common share entitles the holder thereof to
one vote in respect of any matters that may properly come before our
shareholders. To the best of our knowledge, there exist no arrangements that
could cause a change in voting control of our corporation.
29
SHARES
TITLE OF NAME AND ADDRESS RELATIONSHIP TO BENEFICIALLY PERCENT
CLASS OF OWNER COMPANY OWNED OWNED(1)
-------- ---------------- --------------- ------------ --------
Common Stock Mark Godsy Chairman, Director, 5% 3,269,996 10.58%
7575 Carnarvon Street Shareholder and Past CEO
Vancouver, B.C. V6N 1K6 (February 22, 2000 -
November 17, 2000)
Common Stock John Robertson Director and CEO 1,432,482 4.63%
#203 - 728 Farrow Street (November 17, 2000 -
Coquitlam, B.C. V3J 3S6 March 31, 2002)
Common Stock Roland Sartorius Director and Executive 934,167 3.02%
4172 Yuculta Crescent Officer
Vancouver, B.C. V6N 3RS
Common Stock Thomas Dodd Director and Executive 249,167 0.81%
808 Seymour Blvd. Officer
North Vancouver, B.C.
V7J 2J6
Common Stock Ken Maddison Director 56,250 0.18%
2591 Lund Avenue
Coquitlam, B.C. V3K 6J8
Common Stock Robert W. Singer Director 43,750 0.14%
2110 West County Line Road
Jackson, NJ 08527
Common Stock Robert Fetherstonhaugh Director 103,613 0.34%
20 Avenue Lilas
Dorval, Quebec H9S 3L9
Common Stock H. William Brogdon Past CEO (February, 1999 550,000 1.80%
1817 Sleepy Hollow Lane to February 22, 2000
Petaluma, CA 94954
Common Stock Raffi Antepyan Executive 125,000 0.40%
2192 Loiseau
St. Laurent,
Quebec H2K 2K7
Common Stock Wayne Gambell 5% Beneficial Owner 2,039,668 6.60%
1040 Memorial Dr., NW
Calgary, AB T2N 3E1
----------------------------------------------------------------------------------------------------
Common Stock All directors and 6,214,425(1) 20.10%
executive officers as a
group (8 individuals)
30
--------------------------
(1) Includes for each beneficial owner or group the following numbers of shares
of common stock that may be acquired by the exercise of stock options or
warrants that are now exercisable or will become exercisable within 60 days
of January 31, 2002:
o Mark Godsy - 517,917 shares, including 416,667 shares acquirable upon
exercise of warrants and 101,250 shares exercisable upon the exercise
of options.
o John Robertson - 729,167 shares, including 500,000 shares acquirable
upon the exercise of warrants and 229,167 shares acquirable upon the
exercise of options.
o Roland Sartorius - 584,167 shares, including 350,000 shares acquirable
upon the exercise of warrants and 234,167 shares acquirable upon the
exercise of options.
o Thomas Dodd - 229,167 shares acquirable upon the exercise of
options.
o Ken Maddison - 56,250 shares acquirable upon the exercise of
options.
o Robert Singer - 18,750 shares acquirable upon the exercise of
options.
o Robert Fetherstonhaugh - 21,250 shares acquirable upon the
exercise of options.
o Raffi Antepyan - 125,000 shares acquirable upon the exercise of
options.
o Wayne Gambell - 833,284 shares acquirable upon the exercise of
warrants.
31
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have a November 2000 loan receivable from Cobratech Industries Inc., a
company with which we had two former directors in common, in the principal
amount of $200,000. Interest is payable to us at 1% per month, calculated
monthly not in advance. The loan is secured by a general security agreement
which includes all of the personal and real property of Cobratech. The loan is
repayable upon demand. As of March 15, 2001, $77,778 in principal remains
unpaid. We have sued Cobratech in the Supreme Court of British Columbia, Canada
in respect of the remaining balance. The action has been stayed until May 2002
on the condition that Cobratech Industries Inc. pays 10 percent of all funds
received from financing until May 2002, in excess of $100,000, until the
outstanding amount has been paid. See "Legal Proceedings."
The Board of Directors agreed to advance $90,000 to John Robertson, our
director and outgoing President,and CEO to enable him to subscribe for 500,000
units in conjunction with the private placement completed on December 24, 2001.
The loan principal plus interest is due on December 24, 2003, bears interest at
4% per annum and is secured by the subscribing shares. On maturity, the loan and
all interest owing on the loan may be repaid either in cash or by John Robertson
transferring to us, all of the securities comprising of the units he subscribed
to. For financial statement reporting purposes, this loan will be recorded as a
reduction in shareholders' equity.
On October 11, 2001, we filed a registration statement on Form SB-2
covering the resale of certain shares of our Common Stock and shares of Common
Stock subject to warrants. This Form SB-2 covered 203,315 shares of Common Stock
held by John Robertson and 21,428 shares of Common Stock held by Mark Godsy, a
director.
On February 15, 2002, we filed a registration statement on Form SB-2
covering the resale of certain shares of our Common Stock and shares of Common
Stock subject to warrants. This Form SB-2 covered 1,203,315 shares of Common
Stock held by John Robertson and 854,762 shares of Common Stock held by Mark
Godsy, a director.
There are no other material related transactions or related contracts with
a value of over $60,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following financial statements of the Registrant and the Report of
Independent Auditors thereon are included herewith in response to Item 8 above.
Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(a) Pursuant to Rule 601 of Regulation SB, the following exhibits are
included herein or incorporated by reference.
Exhibit
Number Description
------ -----------
3.1* Amended and Restated Certificate of Incorporation of Unity
Wireless Corporation (incorporated by reference to Exhibit
3.1 to the Company's Form SB-2 filed on October 4, 2000)
32
Exhibit
Number Description
------ -----------
3.2* Amended and Restated Bylaws of Unity Wireless Corporation
(incorporated by reference to Exhibit 3.2 to the Company's
Form SB-2 filed on October 4, 2000)
4.1* Consulting agreement among Mueller & Company, Inc., Ideas,
Inc., Mark Mueller, Aaron Fertig and Unity Wireless
Corporation dated January 1, 2001 (incorporated by reference
to Exhibit 4.2 to the Company's Form 10-KSB filed on April
2, 2001)
4.2* Consulting agreement amendment among Mueller & Company, Inc.
and Unity Wireless Corporation dated November 15, 2001
(incorporated by reference to Exhibit 4.2 to the Company's
Form SB-2 filed on February 15, 2002)
10.1* Asset Purchase Agreement dated October 6, 2000 among Unity
Wireless Systems Corporation, a British Columbia, Canada
corporation, 568608 B.C. Ltd., a British Columbia, Canada
corporation, Traffic Systems, L.L.C., an Arizona limited
liability company, Traffic Safety Products, Inc., an Arizona
corporation and James L. Hill (incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K filed on October 23,
2000)
10.2* Intellectual Property License Agreement dated October 6,
2000 between Unity Systems as licensor and Traffic Systems
as licensee (incorporated by reference to Exhibit 2.2 to the
Company's Form 8-K filed on October 23, 2000)
10.3* Share Purchase Agreement, dated November 16, 2000 among John
Robertson, Mirza Kassam, Chris Neumann, Robert
Fetherstonhaugh, Unity Wireless Corporation, Stirling
Mercantile Corporation, Peter A. Scott Consulting Ltd., W.
Hugh Notman (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on December 4, 2000)
10.4* Asset Purchase Agreement, dated for reference December 30,
2000, among Unity Wireless Integration Corporation as
vendor, Lyma Sales & Management Corp. as purchaser and Unity
Wireless Corporation (incorporated by reference to Exhibit
2.1 to the Company's Form 8-K filed on January 16, 2001)
10.5* Agreement to Redeem Membership Interest, Transfer
Intellectual Property and Amend Asset Purchase Agreement,
effective April 9, 2001, by and among Traffic Systems,
L.L.C., Unity Wireless Systems Corporation, Traffic Safety
Products, Inc. and Jim Hill (incorporated by reference to
Exhibit 10.5 to the Company's Form SB-2A filed on May 3,
2001)
10.6* 1999 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-KSB filed
on April 2, 2001)
10.7* Recommended Stock Option Grant Policy for the Company
(incorporated by reference to Exhibit 10.7 to the Company's
Form 10-KSB filed on April 2, 2001)
21.1 Subsidiaries of the Company
23.1 Consent of KPMG LLP
-------------------
* Previously filed
33
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K January 8, 2001, with
respect to a change in the registrant's certifying accountant. Ernst & Young LLP
(E&Y) was dismissed from its position as the certifying accountant of the
registrant December 31, 2000. KPMG LLP (KPMG) was appointed the new certifying
accountant of the registrant the same day. During the registrant's two most
recent fiscal years and the subsequent interim period preceding the dismissal of
E&Y, there were no disagreements with E&Y on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
The Company filed a current report on Form 8-K January 15, 2001, with
respect to the disposition of the assets of the registrant's wholly-owned
subsidiary Unity Wireless Integration Corporation (UWIC) to an unrelated company
controlled by a former employee and director of the registrant. UWIC sold all
its assets in return for $61,500 (Cdn.$92,000) payable within one year of
closing in equal semi-annual installments, plus interest on the unpaid balance
at a rate equal to the prime rate of HSBC Canada per annum. In addition, the
purchaser agreed to repay a $37,100 (Cdn.$54,000) demand loan within ten
business days of closing. The loan was repaid as agreed. The financial terms
represented a fair disposition price for the included assets as determined
through arms length negotiations.
The Company filed an amended current report on Form 8-K/A January 22, 2001,
which amended a current report filed on Form 8-K January 10, 2001, with respect
to the registrant's change in certifying accountant. The amendment was filed to
include a letter from the registrant's prior independent accountants stating
they had no basis to agree or disagree with other statements of the registration
contained in the previously filed Form 8-K.
The Company filed an amended current report on Form 8-K/A February 13,
2001, which amended a current report filed on Form 8-K December 4, 2000, with
respect to the registrant's acquisition of Ultratech Linear Solutions Inc. and
the inclusion of certain financial statements and pro forma financial
information as exhibits.
The Company filed a current report on Form 8-K February 16, 2001, with
respect to the pre-disclosed disposition of significant assets to Traffic
Systems, L.L.C. It was determined that warranty obligations retained by the
registrant under an earlier Asset Purchase Agreement would be substantial.
Therefore, Traffic Systems L.L.C. agreed to assume the warranty obligations in
consideration of the registrant's residual interest in certain intellectual
property and the registrant's 37% membership interest in Traffic Systems L.L.C.
It was further determined that for accounting purposes, we did not expect the
disposition to result in a material loss or gain.
The Company filed a current report on Form 8-K/A March 8, 2001, to amend
its Form 8-K filed on January 16, 2001, with respect to the disposition of the
assets and liabilities of Unity Wireless' wholly-owned subsidiary, Unity
Wireless Integration Corporation.
34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ....................................F-2
Consolidated Balance Sheets .......................................F-3
Consolidated Statements of Operations and Deficit ................F-4
Consolidated Statements of Cash Flows .............................F-5
Notes to the Consolidated Financial Statements ....................F-6
F-1
AUDITORS' REPORT
To the Stockholders
Unity Wireless Corporation
We have audited the accompanying consolidated balance sheets of Unity Wireless
Corporation as at December 31, 2001 and 2000 and the related consolidated
statements of operations and comprehensive loss, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and in Canada. U.S. standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement. An audit also 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Unity Wireless
Corporation and subsidiaries as at December 31, 2001 and 2000 and the results of
its operations and its cash flows for the years then ended in accordance with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has incurred recurring losses from operations
and has a working deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On March 1, 2002, we reported separately to the stockholders of the Company on
the consolidated financial statements as at and for the periods presented above,
which consolidated financial statements were prepared in accordance with
Canadian generally accepted accounting principles.
Chartered Accountants
Vancouver, Canada
March 1, 2002
F-2
UNITY WIRELESS CORPORATION
Consolidated Balance Sheets
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
December 31, 2001 and 2000
====================================================================================================
2001 2000
----------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,012,430 $ 2,002,084
Restricted cash (note 11(b, c)) 80,000 100,000
Accounts receivable (less allowance for doubtful
accounts of $26,128 in 2001 and $4,245 in 2000) 263,747 232,591
Loan receivable (note 7) - 204,434
Government grant receivable 26,457 13,905
Inventory (note 8) 519,516 463,412
Prepaid expenses and deposits 38,643 14,309
Other receivable (note 5) 18,241 61,500
----------------------------------------------------------------------------------------------------
1,959,034 3,092,235
Equipment, net (note 9) 276,909 221,651
Goodwill (net of accumulated amortization
2001 - $185,399; 2000 - nil) (note 6) 741,596 926,995
----------------------------------------------------------------------------------------------------
$ 2,977,539 $ 4,240,881
====================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness $ 238,667 $ 276,811
Accounts payable and accrued liabilities (note 10) 658,583 728,807
Loans payable (note 11) - 42,312
Product warranty (note 3(m)) 31,500 623,497
Obligations under capital leases (note 12) 45,900 -
----------------------------------------------------------------------------------------------------
974,650 1,671,427
Loans payable (note 11) 74,451 115,781
Obligations under capital leases (note 12) 3,488 -
----------------------------------------------------------------------------------------------------
1,052,589 1,787,208
Stockholders' equity:
Common stock, $0.001 par value 100,000,000 authorized,
30,916,000 (2000 - 25,743,153) issued and outstanding 30,916 25,743
Additional paid-in capital 14,896,893 13,251,498
Share subscription receivable (note 14) (90,600) -
Deferred stock compensation (199,198) (89,719)
Accumulated deficit (12,830,289) (10,732,275)
Cumulative translation adjustments 117,228 (1,574)
----------------------------------------------------------------------------------------------------
1,924,950 2,453,673
----------------------------------------------------------------------------------------------------
$ 2,977,539 $ 4,240,881
====================================================================================================
Future operations (note 2)
Commitments (note 15)
Subsequent event (notes 13(a) and 19)
Contingent liabilities (note 20)
See accompanying notes to consolidated financial statements.
F-3
UNITY WIRELESS CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
========================================================================================================
2001 2000
--------------------------------------------------------------------------------------------------------
Net sales $ 3,544,770 $ 474,003
Cost of goods sold (includes stock-based compensation
$30,548 in 2001 and $354 in 2000) 2,570,454 364,423
--------------------------------------------------------------------------------------------------------
974,316 109,580
Expenses:
Research and development (includes stock-based
compensation $152,436 in 2001 and $238,655 in 2000) 842,487 -
Government grant (note 16) (52,036) -
Sales and marketing (includes stock-based compensation
$112,331 in 2001 $88,766 in 2000) 515,305 10,745
Depreciation and amortization 288,924 2,024
Exchange gain (49,258) (3,036)
Interest expense 5,890 659
General and administrative (includes stock-based
compensation $360,139 in 2001 and $354,426 in 2000) 1,844,146 1,952,469
---------------------------------------------------------------------------------------------------
3,395,458 1,962,861
--------------------------------------------------------------------------------------------------------
Operating loss for the year (2,421,142) (1,853,281)
Interest income 43,545 3,855
Other income 12,079 10,217
--------------------------------------------------------------------------------------------------------
Loss from continuing operations (2,365,518) (1,839,209)
Discontinued operations:
Gain (loss) from discontinued operations (note 5) 267,504 (3,479,424)
--------------------------------------------------------------------------------------------------------
Loss for the year $ (2,098,014) $ (5,318,633)
========================================================================================================
Comprehensive loss:
Loss for the year $ (2,098,014) $ (5,318,633)
Currency translation adjustment 118,802 34,018
--------------------------------------------------------------------------------------------------------
Comprehensive loss $ (1,979,212) $ (5,284,615)
========================================================================================================
Basic and diluted earnings (loss) per common share (note 13(c)):
Continuing operations $ (0.09) $ (0.08)
Discontinued operations 0.01 (0.14)
--------------------------------------------------------------------------------------------------------
$ (0.08) $ (0.22)
========================================================================================================
See accompanying notes to consolidated financial statements.
F-4
UNITY WIRELESS CORPORATION
Consolidated Statements of Stockholders' Equity
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
====================================================================================================================================
Common Other
stock Additional Deferred accumulated Total
Common issued and paid-in Subscription stock Accumulated comprehensive stockholders'
stock outstanding capital receivable compensation deficit (loss) income equity
------------------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 1999 20,588,725 $ 20,589 $ 5,909,624 $ - $ - $ (5,413,642) $ (35,592) $ 480,979
Issued for debt
settlement 65,000 65 117,903 - - - - 117,968
Issued for services
rendered (note 13(a)) 254,428 254 142,886 - - - - 143,140
Issued pursuant to
private placement 3,850,000 3,850 5,771,150 - - - - 5,775,000
Issued for cost of
share issuance
(note 13(a)) 285,000 285 427,215 - - - - 427,500
Share issue costs - - (427,500) - - - - (427,500)
Shares issued on
acquisition of
Ultratech 700,000 700 538,300 - - - - 539,000
Compensation expense
of options and
warrants - - 682,201 - - - - 682,201
Deferred stock
compensation - - 89,719 - (89,719) - - -
Loss for the year - - - - - (5,318,633) - (5,318,633)
Currency translation
adjustment - - - - - - 34,018 34,018
------------------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2000 25,743,153 25,743 13,251,498 - (89,719) (10,732,275) (1,574) 2,453,673
Issued for services
rendered (note 13(a)) 25,000 25 6,975 - - - - 7,000
Issued pursuant to
private placement 5,147,551 5,148 921,389 - - - - 926,537
Share issue costs - - (47,902) - - - - (47,902)
Compensation expense
of options and
warrants - - 655,454 - - - - 655,454
Deferred stock
compensation - - 109,479 - (109,479) - - -
Loss for the year - - - - (2,098,014) - (2,098,014)
Currency translation
adjustment - - - - - 118,802 118,802
Share subscription
receivable for issuance
pursuant to private
placement - - - (90,600) - - - (90,600)
------------------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2001 30,915,704 $ 30,916 $14,896,893 $ (90,600) $ (199,198) $(12,830,289) $ 117,228 $1,924,950
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
UNITY WIRELESS CORPORATION
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
=====================================================================================================
2001 2000
-----------------------------------------------------------------------------------------------------
Operating activities:
Loss for the year $(2,098,014) $(5,318,633)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of goodwill 185,399 -
Amortization of patents - 66,657
Depreciation of equipment 103,525 12,578
Write down of assets and investment - 581,800
Shares issued for services rendered (note 13(a)) 7,000 143,140
Stock based compensation 655,454 682,201
Loss on sale of business (note 5) - 80,726
Provision for loan receivable (note 7) 85,611 -
Changes in non-cash working capital relating to operations:
Accounts receivable and government grant receivables (43,708) (146,824)
Investment tax credit receivable - 123,245
Inventory (56,104) 27,224
Prepaid expenses (24,334) (13,283)
Accounts payable and accrued liabilities (70,224) 109,129
Product warranty (591,997) 554,211
-------------------------------------------------------------------------------------------------------
(1,847,392) (3,097,829)
Investments:
Acquisition of equipment (96,545) (200,941)
Increase in patents - (5,050)
Other receivable 43,259 10,024
Sale of business, net cash and cash equivalents
disposed of (note 5) - (314,990)
-------------------------------------------------------------------------------------------------------
(53,286) (510,957)
Financing:
Loan receivable 118,823 (204,434)
Bank overdraft (38,144) 115,001
Restricted cash (note 11(b, c)) 20,000 (100,000)
Repayment of loan payable (83,642) (49,603)
Repayment of capital lease obligation (12,850) -
Cash proceeds on issuance of common shares 835,937 5,775,000
Share issue costs (47,902) -
-------------------------------------------------------------------------------------------------------
792,222 5,535,964
Effect of foreign exchange rate changes on cash and cash equivalents 118,802 41,936
-------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (989,654) 1,969,114
Cash, beginning of year 2,002,084 32,970
-------------------------------------------------------------------------------------------------------
Cash, end of year $ 1,012,430 $ 2,002,084
=====================================================================================================
Supplementary information:
Cash paid for:
Interest 5,890 $ 26,749
Income taxes - -
Non-cash financing and investing activities:
Shares issued in acquisition of business (note 6) - 539,000
Shares issued for services rendered (note 13(a)) 7,000 143,140
Shares issued on settlement of debt - 117,968
Share issue cost - 427,500
Sale of assets for 37% interest in Traffic Systems (note 4) - 150,000
Receivable on sale of business (note 5) - 61,500
Purchase of equipment funded by obligation under
capital lease (note 9) 62,237 -
=====================================================================================================
See accompanying notes to consolidated financial statements.
F-6
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
1. Nature of business:
Unity Wireless Corporation (the "Corporation") was incorporated in Delaware
on October 1, 1998 under the name Sonic Systems Corporation ("Sonic
Delaware"). Sonic Delaware changed its name to Unity Wireless Corporation
on July 17, 2000. The Corporation is a designer, developer and manufacturer
of wireless technologies and produces its Ultratech high power linear radio
frequency (RF) amplifiers. Ultratech high power linear RF amplifiers are
used in both mobile and fixed wireless voice, Internet and data base
station and repeater networks and support Cellular, PCS (Personal
Communications Services), Paging and WLL (Wireless Local Loop) frequencies.
2. Future operations:
During the year, the Corporation incurred a loss, inclusive of stock-based
compensation, of $2,098,014 (2000 - $5,318,633) and used cash in operations
of $1,847,392 (2000 - $3,097,829).
The Corporation is investing in new technologies for medium and long-term
strategic positioning. A recent licensing partnership, and ongoing
investigations of new technologies designed to increase the linearity and
efficiency of RF amplifiers when designed into the Corporation's products,
is expected to provide a competitive edge in both pricing and performance.
The resulting products, planned for introduction starting in the second
half of 2002, will be sold to existing customers and are also expected to
open new opportunities for the Corporation as the market for 3G infill
products (repeaters, micro-cells and smart antennas) begins an expected
growth phase in 2003. The Corporation's medium term strategy is to leverage
this technology to increase sales and establish technical credibility in
the 3G market over the next nine to eighteen months.
The Corporation's 3G feedforward LPA, being introduced in the spring of
2002, is also expected to open new markets for the Corporation, in
particular with base station manufacturers, in the medium to longer term.
The feedforward and other new technologies will target OEMs of cellular
systems and will be design-in products.
These financial statements have been prepared on the going concern basis
under which an entity is considered to be able to realize its assets and
satisfy its liabilities in the ordinary course of business. Operations to
date have been primarily financed by long-term debt and equity
transactions. The Corporation's future operations are dependent upon the
identification and successful completion of additional long-term or
permanent equity financing, the continued support of creditors and
shareholders, and, ultimately, the achievement of profitable operations.
There can be no assurances that the Corporation will be successful. If it
is not, the Corporation will be required to reduce operations or liquidate
assets. The Corporation will continue to evaluate its projected
expenditures relative to its available cash and to seek additional means of
financing in order to satisfy its working capital and other cash
requirements. The consolidated financial statements do not include any
adjustments relating to the recoverability of assets and classification of
assets and liabilities that might be necessary should the Corporation be
unable to continue as a going concern.
F-7
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies:
(a) Principles of consolidation:
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, Unity Wireless Systems
Corp. ("Unity Systems"). The Statements of Operations and
Comprehensive Loss also includes the accounts of Unity Wireless
Singapore from April 1, 2000 (date of incorporation). All significant
intercompany accounts and transactions have been eliminated.
On December 31, 2000 the Corporation amalgamated three Canadian
subsidiaries: Unity Wireless Systems Corp., Ultratech Linear Solutions
Inc., and 568608 B.C. Ltd., with Unity Wireless Systems Corp., the
surviving entity.
(b) Use of estimates:
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, particularly the recoverability of inventory, equipment and
goodwill, and liabilities (particularly product warranty) 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. Actual results could differ from these
estimates.
(c) Financial instruments:
At December 31, 2001, the Corporation has the following financial
instruments: cash and cash equivalents, accounts receivable, other
receivable, accounts payable and accrued liabilities, and loans
payable. The carrying value of these financial instruments is
considered to approximate fair value based on their short-term nature.
The Corporation adopted SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" in fiscal 2001. SFAS No. 133,
as amended, requires the Corporation to recognize derivatives on the
balance sheet at fair value. The gains or losses resulting from
changes in the fair value of derivative instruments will either be
recognized in current earnings or in other comprehensive income,
depending on the use of the derivative and whether the hedging
instrument is effective or ineffective when hedging changes in fair
value. For a derivative not designated as a hedging instrument, the
gain or loss is recognized in earnings in the period of change of
value. The Corporation did not hold any derivative instruments and was
not involved in any hedging activities at December 31, 2001.
F-8
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(d) Cash and cash equivalents:
Cash equivalents include short-term deposits, which are all highly
liquid securities with a term to maturity of three months or less when
acquired. Short-term deposits are valued at cost.
(e) Inventory:
Inventory is carried at the lower of cost, determined on an average
cost method, and market. Market is considered to be replacement cost
for raw materials and net realizable value for work in progress and
finished goods. The cost of work in progress and finished goods
includes the cost of raw material, direct labour, and an appropriate
allocation of related overhead.
(f) Equipment:
Equipment is stated at cost. Depreciation is computed on a declining
balance basis over the estimated useful lives of the assets as
follows:
------------------------------------------------------
Asset Rate
------------------------------------------------------
Computer equipment and software 30%
Furniture and fixtures 20%
Production and R&D equipment 20%
------------------------------------------------------
Leasehold improvements are stated at cost and depreciated over the
five-year term of the lease on a straight-line basis.
(g) Goodwill:
Goodwill arising on business combinations represents the excess of the
purchase price over the fair values of net identifiable assets
acquired, and is amortized on a straight-line basis over 5 years.
Management periodically reviews the valuation and amortization of
goodwill, taking into consideration any events and circumstances which
may impair its value. If it is determined that undiscounted future
cash flows do not exceed the carrying value of goodwill, an impairment
charge is recorded to the extent that the carrying value exceeds the
asset's fair value.
F-9
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(h) Impairment of long-lived assets:
The Corporation accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(i) Income taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted or substantially enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the substantive enactment date. To the extent
that it is not considered to be more likely than not that a deferred
tax asset will be realized, a valuation allowance is provided.
(j) Advertising costs:
Advertising costs are expensed as incurred. The Corporation incurred
advertising expenses of $95,259 in 2001 and $19,022 in 2000.
(k) Foreign currency translation:
The Corporation's functional or primary operating currency is the
Canadian dollar while the reporting currency in the consolidated
financial statements is the United States dollar. The Corporation's
financial statements are prepared in Canadian dollars before
translation to the U.S. dollar reporting currency. The Corporation
translates transactions in currencies other than the Canadian dollar
at the exchange rate in effect on the transaction date. Monetary
assets and liabilities denominated in a currency other than the
Canadian dollar are translated at the exchange rates in effect at the
balance sheet date. The resulting exchange gains and losses are
recognized in earnings.
F-10
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(k) Foreign currency translation (continued):
Amounts reported in Canadian dollars have been translated into U.S.
dollars as follows: assets and liabilities are translated into U.S.
dollars at the rate of exchange in effect at the balance sheet date
and revenue and expense items are translated at the average rates for
the period. Unrealized gains and losses resulting from the translation
to the reporting currency are accumulated in cumulative translation
adjustments, a separate component of shareholders' equity.
(l) Revenue recognition:
Revenue from products is recognized once a sale arrangement exists,
delivery has occurred, the revenue is determinable and collectibility
is reasonably assured which is upon the later of shipment or when
title passes to the customer depending on the contractual terms. The
Corporation does not enter into sales arrangements having post
contract customer support or rights of return. The Corporation records
deferred revenue when cash is received in advance of the revenue
recognition criteria being met.
(m) Product warranty:
A liability for estimated warranty expense is established by a charge
against cost of goods sold at the time revenue is recognized as
products are sold. The subsequent costs incurred for warranty claims
serve to reduce the product warranty liability. The actual warranty
costs the Corporation will ultimately pay could differ materially from
this estimate.
(n) Research and development:
Research and development costs are expensed as incurred.
(o) Stock option plan:
The Corporation applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations including FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation an interpretation of
APB Opinion No. 25" issued in March 2000, to account for its employee
plan stock option grants. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123,
"Accounting for Stock-Based Compensation", established accounting and
disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No.
123, the Corporation has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123. Stock compensation granted to
non-employees is recognized at its fair value as the services are
provided and the options are earned.
F-11
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(o) Stock option plan (continued):
If the exercise price of fixed employee stock option award is reduced
or if the exercise price is not fixed in the functional currency of
the Corporation or in the currency the employee is paid, the award is
accounted for as a variable award until the award is exercised,
forfeited, or expires unexercised. The Corporation measures variable
plan stock compensation as the amount by which the quoted market value
of the common shares of the Corporation's stock covered by the grant
exceeds the option price with changes in the market price included in
the measurement of loss.
(p) Loss per common share:
The basic loss per share is computed by dividing the loss attributable
to common stockholders by the weighted average number of common shares
outstanding for that period. The Corporation has not included
potential common shares representing performance shares in the basic
loss per share computation. Escrow shares with time-based vesting
which are not contingently returnable are included in the basic loss
per share computation. Diluted loss per share is computed using the
treasury stock method, giving effect to all dilutive potential common
shares that were outstanding during the period except to the extent
where anti-dilutive.
(q) Government grants:
Government grants are recognized when there is a reasonable assurance
that grant will be received.
(r) Comprehensive (loss) income:
Comprehensive (loss) income measures all changes in stockholders'
equity excluding capital transactions. For the periods presented,
other comprehensive (loss) income comprises of only foreign currency
translation.
(s) Comparative figures:
Certain comparative figures have been reclassified to conform to the
presentation adopted in the current year.
F-12
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
3. Significant accounting policies (continued):
(t) Recent pronouncements:
During 2001, the Financial Accounting Standards Board issued the
following new pronouncements:
o Statement 141, Business Combinations, requires the purchase
method or accounting for an business combinations and applies to
all business combinations initiated after June 30, 2001 and to
all business combinations accounted for by the purchase method
that are completed after June 30, 2001.
o Statement 142, Goodwill and Other Intangible Assets, requires
that goodwill as well as other indefinite life intangible assets
not be amortized but be tested annually for impairment and is
effective for fiscal years beginning after December 15, 2001.
o Statement 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, provides that long-lived assets to be disposed
of by sale be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing
operations or in discontinued operations and broadens the
reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. Statement 144
is effective for fiscal years beginning after December 15, 2001.
The adoption of Statement 141 will not have an effect on the
historical consolidated financial statements. The Corporation is
currently assessing the impact of adopting Statements 142 and 144 on
its financial condition and results of operations.
4. Disposal of Sonem business:
On October 6, 2000, the Corporation disposed of its acoustic emergency
traffic preemption business to Traffic Systems LLC ("Traffic Systems"), an
Arizona corporation. Unity Systems sold or licensed substantially all of
its assets and undertaking involved in its acoustic emergency traffic
preemption business. The assets include equipment, inventory, distribution
contracts, customer lists, marketing materials and the goodwill of the
business. Unity Systems retained ownership of the intellectual property
used in connection with the acoustic emergency traffic preemption business,
including software, patents and know-how, other than certain trade marks.
The intellectual property is being licensed to Traffic Systems under an
intellectual property license agreement dated October 6, 2000. The license
is royalty-free and has a term expiring on the earlier of October 5, 2020
and the date of the final payment of the purchase price at which time the
intellectual property will be transferred to Traffic Systems.
F-13
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
4. Disposal of Sonem business (continued):
As consideration for the sale of the traffic preemption business, Unity
Systems received a 37% interest in the purchaser, Traffic Systems, and is
entitled to receive up to $2,000,000, subject to certain upwards
adjustments, payable in quarterly installments equal to 10% of the gross
profits of Traffic Systems for the relevant quarter. If Traffic Systems
becomes a publicly traded entity before or after payment of the $2,000,000
(as adjusted), Unity Systems will be entitled to a 25% interest in the
public entity. In addition to the foregoing, if Traffic Systems becomes a
publicly traded entity before payment of the $2,000,000, then the balance
owing will be converted into an initial public offering interest of Traffic
Systems at a 20% discount to the pricing of the offering. The Corporation
has not recorded the $2,000,000 consideration as it is contingent on
Traffic Systems generating gross profits.
The net book value of assets disposed of were as follows:
-----------------------------------------------------------------------
Inventory $ 150,000
-----------------------------------------------------------------------
Since the Corporation has a 37% interest in Traffic Systems over which it
can exert significant influence, the sale of the Sonem business was not
considered at October 6, 2000 to be a discontinued operation.
Also under the Asset Purchase Agreement, Traffic Systems was responsible
for warranty work on Unity Systems' acoustic emergency traffic preemption
products already installed, except Unity Systems had advanced $100,000 for
costs in connection with such work. Traffic Systems is responsible for any
costs in excess of $100,000, but Unity Systems will fund such costs
initially and Traffic Systems will reimburse Unity Systems by adding the
costs over the initial $100,000 to the $2,000,000 otherwise payable as part
of the purchase price. The $100,000 for the initial warranty costs was paid
by Unity Systems on closing and is non-refundable regardless of the costs
incurred by Traffic Systems.
On April 30, 2001, the Corporation disposed of its 37% interest in Traffic
System and all remaining intellectual property related to the acoustic
business and in return the purchaser assumed the warranty liability related
to the acoustic business. The warranty as at June 30, 2001 was estimated to
be $383,091. As a result, the Corporation has no direct or indirect
continuing interest in the acoustic business.
F-14
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
5. Discontinued operations:
Effective December 30, 2000, Unity Wireless Integration Corporation
("UWIC"), a wholly-owned subsidiary of the Corporation, disposed of all of
its assets and obligations, including its 100% shareholding interest in
Unity Wireless Integration (S) Pte Ltd., a Singapore company ("UW
Singapore") to Lyma Sales & Management Corp. ("Lyma"), a British Columbia,
Canada company. Unity Wireless Integration (S) Pte Ltd. commenced its
operations during 2000.
Under the terms of the Asset Purchase Agreement, UWIC sold all its assets
in return for $61,500 (Cdn. $92,000), payable within one year of closing,
in equal semi-annual instalments of $30,730 (Cdn. $46,000), plus interest
on the unpaid balance at a rate equal to the prime rate of HSBC Canada per
annum. As at December 31, 2001, Lyma Paid $43,259 (Cdn. $65,112), and has
agreed with the Corporation to pay the remainder in 2002. Also in
consideration of the purchase of assets, Lyma agreed to repay a $37,100
(Cdn. $54,000) demand loan within ten business days of closing. The loan
has been repaid as agreed.
The disposition price was arrived at through arm's length negotiations and
management's determination that the purchase price of $61,500 (Cdn.
$92,000) represented a fair disposition price for the included assets.
The net book value of assets disposed of were as follows:
-----------------------------------------------------------------
Cash and cash equivalents $ 314,990
Accounts receivable 20,396
Prepaid expenses 9,977
Equipment 26,178
Accounts payable (229,315)
-----------------------------------------------------------------
$ 142,226
-----------------------------------------------------------------
Lyma is wholly-owned by an ex-director of the Corporation who was also
responsible for management of the operations of UWIC and its wholly-owned
subsidiary UW Singapore.
Sales from UWIC during 2000 was $383,214.
F-15
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
5. Discontinued operations (continued):
As discussed in note 4, on April 30, 2001, the Corporation disposed of its
remaining interest in Sonem. As a result, the 2000 consolidated financial
statement figures have been retroactively restated to present the results
of operations in the Sonem business as a discontinued operation. Sales for
Sonem products during 2001 was nil (2000 - $120,741).
On June 12, 2001, the Corporation also disposed of its last non-amplifier
operation, the Unilinx business, to Horton Automation Inc. ("Horton"), a
British Columbia, Canada corporation. The Corporation sold all of its
assets and undertakings involved in the Unilinx business. The assets
involved include inventory, equipment and intellectual property of the
business. The purchase price is being paid over time on a percentage of
future sales basis within a period of two years until June 12, 2003. The
Corporation has not recorded the consideration as it is contingent on
Horton generating sales for the Unilinx product. Consequently, the
Corporation recorded a loss on the disposition of the Unilinx business.
Sales for Unilinx products during 2001 was nil (2000 - $125,425).
Therefore, in summary, the gain (loss) from discontinued operations
presented in the consolidated statements of operations are comprised of the
following:
--------------------------------------------------------------------------------------------------------------------------
2001 2000
Unilinx Sonem UWIC Total Unilinx Sonem UWIC Total
--------------------------------------------------------------------------------------------------------------------------
Gain (loss) on disposal $ (165,125) $432,629 $ - $ 267,504 $ - $ - $ - $ -
Gain (loss) from
discontinued operations - - - - (1,803,986) (1,619,806) (55,632) (3,479,424)
--------------------------------------------------------------------------------------------------------------------------
Gain (loss) on disposal $ (165,125) $432,629 $ - $ 267,504 $(1,803,986) $(1,619,806) $(55,632) $(3,479,424)
--------------------------------------------------------------------------------------------------------------------------
6. Business acquisition:
On November 16, 2000, the Corporation acquired all the issued and
outstanding shares of Ultratech Linear Solutions Inc. ("Ultratech").
Ultratech, founded in May, 1999 and based in Burnaby, British Columbia,
Canada, is a wireless communications technology designer, developer,
manufacturer and marketer specializing in radio frequency high power linear
amplifiers.
The acquisition was recorded by the purchase method with the results of
Ultratech included in the financial statements from the date of acquisition
(November 16, 2000). The total consideration paid was allocated, based on
estimated fair values of the assets acquired and the liabilities assumed on
November 16, 2000 as follows:
F-16
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
6. Business acquisition (continued):
-------------------------------------------------------------------------
Net assets acquired at assigned values:
Bank indebtedness $(143,590)
Accounts receivable 68,083
Inventories 111,108
Intellectual property 606
Equipment 17,114
Accounts payable and accrued liabilities (393,316)
Loans payable to shareholders of Ultratech (48,000)
Goodwill 926,995
-------------------------------------------------------------------------
$ 539,000
-------------------------------------------------------------------------
Consideration:
Issuances of shares (700,000 common shares at
$0.77 per share) $ 539,000
-------------------------------------------------------------------------
Shares issued on the combination were valued at $0.77, the market price of
the shares at the date the acquisition was announced to the public. The
Corporation repaid the loans payable to the shareholders of Ultratech for
$48,000 (Cdn. $72,000).
All of Ultratech's management and key employees have been retained.
Ultratech has combined its operations with Unity Systems through an
amalgamation on December 31, 2000 (note 3(a)).
7. Loan receivable:
The Corporation has a loan receivable from Cobratech Industries Inc.
("Cobratech"), a company with two common directors, the original principal
amount being $200,000. Interest is payable to the Corporation at 1% per
month, calculated monthly not in advance. The loan is secured by a general
security agreement which includes all of the personal and real property of
Cobratech. The loan is repayable upon demand. Cobratech repaid the
Corporation $122,222 in 2001, and has agreed to repay the balance in 2002,
repaying 10% of all funds received from any future financing it receives.
As at December 31, 2001, the Corporation has recorded an $85,611 provision
on the remaining balance for uncollectibility because of uncertainty with
regard to future operations, profitability and cash flows of Cobratech.
F-17
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
8. Inventory:
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Raw materials $ 261,220 $ 248,863
Work in progress - 195,504
Finished goods 258,296 19,045
---------------------------------------------------------------------------
$ 519,516 $ 463,412
---------------------------------------------------------------------------
9. Equipment:
Equipment consists of the following:
---------------------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------------------
Accumulated Accumulated
Cost depreciation Cost depreciation
---------------------------------------------------------------------------------------------------
Computer equipment $ 162,004 $ 70,479 $ 150,475 $ 38,331
Computer software 48,406 39,386 27,073 -
Furniture and fixtures 43,116 12,379 33,784 6,825
Leasehold improvements 23,623 2,784 12,172 -
Production and R&D equipment 154,894 30,106 56,783 13,480
---------------------------------------------------------------------------------------------------
$ 432,043 $ 155,134 $ 280,287 $ 58,636
---------------------------------------------------------------------------------------------------
Net book value $ 276,909 $ 221,651
---------------------------------------------------------------------------------------------------
Included in equipment are capital leases consisting of research and
development equipment at cost of $62,237 with accumulated depreciation of
$6,224. The Corporation recorded $6,224 of depreciation during 2001.
10. Accounts payable and accrued liabilities:
-------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------
Trade accounts payable $ 415,164 $ 468,866
Accrued liabilities 243,419 259,941
-------------------------------------------------------------------------
$ 658,583 $ 728,807
-------------------------------------------------------------------------
F-18
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
11. Loans payable:
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------
Government of Canada - Ministry of Western Economic
Diversification (d) $ 74,451 $ 74,451
Royal Bank of Canada (b) - 83,642
--------------------------------------------------------------------------------
74,451 158,093
Current portion - 42,312
--------------------------------------------------------------------------------
$ 74,451 $ 115,781
--------------------------------------------------------------------------------
(a) Government of British Columbia:
The Corporation agreed to perform certain specified research and
development work and the British Columbia Advanced Systems Institute
("ASI") agreed to assist in the funding of this work up to $69,286
(Cdn. $100,000). As of February 22, 2000, ASI had advanced the maximum
amount under this agreement. In addition, $24,250 (Cdn. $35,000)
became payable on March 31, 2000.
The Corporation discharged all of its obligations under this loan by
converting the outstanding balance $93,536 (Cdn. $135,000) to equity
by issuing 45,000 shares to ASI on February 22, 2000.
(b) Royal Bank of Canada:
As of December 31, 2000, the Corporation had a $83,642 (Cdn. $125,288)
loan with the Royal Bank of Canada with an interest rate of Canadian
prime plus 1%. The Corporation discharged all of its obligations under
this loan on January 29, 2001.
The loan was secured by a $100,000 term deposit with the Royal Bank.
There were also various covenants, financial reporting requirements,
and conditions precedent associated with the above loan. The
Corporation was in compliance with these covenants as at December 31,
2000.
Canadian bank prime rate at December 31, 2000 was 6.0%.
F-19
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
11. Loans payable (continued):
(c) HSBC Bank Canada:
As of December 31, 2001, the Corporation has a $79,263 (Cdn. $125,000)
revolving operating line with the HSBC Bank Canada with an interest
rate at the bank's prime rate plus 0.25% per annum.
The revolving operating line is secured by a $80,000 term deposit with
the HSBC Bank Canada. There were also various covenants, financial
reporting requirements and conditions precedent associated with the
share loan. The Corporation was in compliance with these covenants as
at December 31, 2001.
HSBC Bank Canada bank prime rate at December 31, 2001 was 4.0%.
(d) Government of Canada:
Ministry of Western Economic Diversification:
The Corporation, through its subsidiary 321373 B.C. Ltd., entered
into an unsecured loan agreement with the Federal Ministry of
Western Economic Diversification, whereby the Ministry agreed to
make financial contributions to assist in the development of
certain research and development projects. Under the terms of the
original agreement, the total loan was to be repaid in five equal
semi-annual installments commencing October 30, 1993. If not
repaid, each installment will incur interest compounded monthly
at the Bank of Canada's prime rate plus 3%.
321373 B.C. Ltd. had agreed to repay this loan by allocating 40%
of royalty payments from Unity Systems. Royalties were payable by
Unity Systems at the rate of 3.5% of net sales of Sonem by Unity
Systems, including a deduction for warranty or replacement costs.
As of the date of the disposal of the Sonem business by Unity
Systems (see note 4), royalties owing to 321373 B.C. Ltd. did not
exceed accumulated warranty or replacement costs, and following
this date no further royalties became payable. 321373 B.C. Ltd.
has assets valued at Cdn. $1 and is in the process of being
liquidated. Until the loan is fully repaid, the Corporation has
agreed to comply with certain contractual responsibilities,
including the following:
(i) to maintain adequate insurance coverage for the projects;
and
(ii) to not issue dividends, repay shareholder advances or make
significant changes in ownership or financing without the
approval of the Ministry.
F-20
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
12. Obligations under capital leases:
The Corporation leases R&D equipment under capital leases expiring at
various dates to 2005. As at December 31, 2001, future minimum lease
payments under capital leases are as follows:
--------------------------------------------------------------------------
2002 $ 47,784
2003 3,628
--------------------------------------------------------------------------
51,412
Amount representing interest 2,024
--------------------------------------------------------------------------
49,388
Current portion 45,900
--------------------------------------------------------------------------
$ 3,488
--------------------------------------------------------------------------
Interest rates on the capital leases average approximately 8%. Interest
expense on capital lease obligations for the year ended December 31, 2001
is $1,555 (2000 - nil).
13. Common stock:
Authorized share capital:
100,000,000 common stock at par value of $0.001 per share
5,000,000 preferred stock at par value of $0.001 per share
(a) Shares issued for services:
In 2001, the Corporation issued 25,000 (2000 - 254,428) common shares
having a market value of $7,000 (2000 - $143,140) for services
rendered. The shares were assigned a value equal to their market value
determined by the closing trading price of the common stock on the
date of issuance. The value assigned has been recorded by a charge
against operations.
In 2000, 285,000 shares were issued to consultants providing services
in connection with the private placement of $5,775,000 in April, 2000.
The shares were issued and assigned a value equal to the per share
value of the shares issued in the private placement. The value
assigned was recorded by a charge against the proceeds pursuant to the
private placement.
F-21
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
13. Common stock (continued):
(b) Escrowed shares:
(i) 700,000 escrowed shares ("Indemnity Shares") were held in Escrow
pursuant to the terms of the Escrow Agreement until the 11th day
of June, 2000, at which time 420,000 Indemnity Shares were
released from the terms of this Escrow Agreement. Thereafter, an
additional 140,000 Indemnity Shares were released from the terms
of this Escrow Agreement and in 2000 and 140,000 Indemnity Shares
were released in 2001.
(ii) 1,800,000 escrowed shares were held in escrow pursuant to the
terms of the Escrow Agreement until December 11, 1999, at which
time 720,000 escrowed shares were released from the terms of this
Escrow Agreement. Thereafter, an additional 720,000 escrowed
shares were released from the terms of this Escrow Agreement in
2000 and 360,000 Indemnity Shares were released in 2001.
(iii)301,982 shares are held in escrow pursuant to the terms of an
Escrow Agreement dated December 24, 2001 until November 16, 2003.
On May 16, 2002, 75,495 escrowed shares will be released from the
terms of the Escrow Agreement. Thereafter, an additional 75,495
escrowed shares will be released every six months until November
16, 2003.
(c) Loss per share:
The following table sets forth the computation of basic and diluted
loss per share:
----------------------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------------------
Numerator:
Loss from continuing operations $ (2,365,518) $ (1,839,209)
Gain (loss) from discontinued operations 267,504 (3,479,424)
Denominator:
Weighted average number of:
Common shares outstanding 25,855,025 23,680,518
----------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.09) $ (0.08)
Discontinued operations 0.01 (0.14)
----------------------------------------------------------------------------------------
For the years ended December 31, 2001 and 2000, all of the
Corporation's common shares issuable upon the exercise of stock
options and warrants were excluded from the determination of diluted
loss per share as their effect would be anti-dilutive.
F-22
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
13. Common stock (continued):
(d) Stock option plan:
During the year ended December 31, 1998 the Corporation established a
stock option plan pursuant to which 3,000,000 common shares were
reserved for issuance. This plan was replaced and on December 6, 1999,
the Corporation adopted a new stock option plan pursuant to which
5,000,000 common shares were reserved for issuance. On July 5, 2000,
the stockholders approved a change in the maximum number of options
issuable under this plan to 20% of the number of common shares
outstanding including shares of common stock issuable under the plan.
As of December 31, 2001, this maximum number was 7,729,000.
Where options issued after January 18, 2001 have an exercise price in
a currency that is not either the (a) functional currency of the
Corporation of (b) the currency in which the employee is paid, the
options are to be accounted for as variable plan options and
compensation expense will be recorded equal to changes in the market
value of the underlying common shares at each reporting period.
During the year ended December 31, 2001, the Corporation granted
options in U.S. dollars when the functional currency of the
Corporation and the currency in which employees are paid is the
Canadian dollar. Accordingly, these employee options are considered to
be variable options. In addition, compensation expense is recognized
to the extent that options are granted having an exercise price less
than the market price of the underlying share on the date of grant.
Stock option transactions for the respective periods and the number of
stock options outstanding are summarized as follows:
-----------------------------------------------------------------------------------------
Outstanding options
-------------------------------------
Shares
available Number of Weighted
to be granted common average
under option shares issuable exercise price
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 2,390,500 2,384,500 $ 1.01
Options granted (5,912,957) 5,912,957 1.24
Options expired 3,842,791 (3,842,791) (1.65)
Increase in reserved for issuance 1,660,789 - -
-----------------------------------------------------------------------------------------
Balance, December 31, 2000 1,981,123 4,454,666 0.67
Options granted (2,084,500) 2,084,500 0.18
Options expired 2,198,416 (2,198,416) (1.12)
Increase in reserved for issuance 1,293,211 - -
-----------------------------------------------------------------------------------------
Balance, December 31, 2001 3,388,250 4,340,750 $ 0.20
-----------------------------------------------------------------------------------------
F-23
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
13. Common stock (continued):
(d) Stock option plan (continued):
The following table summarizes information about stock options under
the plan outstanding at December 31, 2001:
-------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
----------------------------------------------- ----------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average outstanding at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 2001 life (yrs) price 2001 price
-------------------------------------------------------------------------------------------------
$0.17 3,937,000 3.94 0.17 1,599,665 $0.17
$0.21 20,000 5.00 0.21 - $0.21
$0.22 15,000 5.00 0.22 - $0.22
$0.23 155,000 5.00 0.23 - $0.23
$0.25 20,000 5.00 0.25 - $0.25
$0.38 50,000 3.75 0.38 20,833 $0.38
$1.00 143,750 0.86 1.00 143,750 $1.00
-------------------------------------------------------------------------------------------------
4,340,750 3.88 $0.20 1,764,248 $0.24
-------------------------------------------------------------------------------------------------
Stock options become exercisable at dates determined by the Board of
Directors at the time of granting the option.
Stock options have initial terms of five years.
Had compensation cost been determined based on the fair value at the
grant dates for those options issued to employees and consultants,
consistent with the method described in SFAS No. 123, the
Corporation's loss and loss per common share would have been increased
to the pro forma amounts indicated below.
-----------------------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------------------
Loss for the year, as reported $ (2,098,014) $ (5,318,633)
Pro forma loss (2,942,434) (7,059,379)
-----------------------------------------------------------------------------------------
Basic and diluted loss per common shares,
net as reported $ (0.08) $ (0.22)
Pro forma (0.11) (0.30)
-----------------------------------------------------------------------------------------
F-24
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
13. Common stock (continued):
(d) Stock option plan (continued):
The fair value of each option granted in 2001 and 2000 was estimated
on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: no dividend yield;
volatility of 156% (2000 - 139%) based on weekly stock price;
risk-free interest rate of 3.25% (2000 - 5.00%) and an expected life
of four years.
The weighted-average fair value of options granted during 2001 and
2000 was $0.33 and $0.95 respectively.
(e) Warrants:
The Corporation has warrants outstanding to purchase 5,747,551 common
shares at $0.29 to $0.38 per share. 5,147,551 warrants may be callable
for exercise by the Corporation at any time after the closing price
for the Corporation's common stock is equal to or exceeds $0.75 for at
least ten consecutive trading days. After the issuance of these
warrants, the share price level have reached $0.75. These warrants
expire in December 2003. Of the remaining 600,000 warrants, 225,000
warrants are fully vested and expire in December 2002, 75,000 warrants
vest until December 2002 and expire in March 2005 and 300,000 warrants
vest until March 2004 and expire March 2005.
14. Share subscription receivable:
The Corporation advanced $90,000 to an officer of the Corporation for the
subscription of 500,000 units in conjunction with the private placement
completed on December 24, 2001. The loan principal plus interest due on
December 24, 2003, bears interest at 4% per annum and is secured by the
subscribing shares.
15. Commitments:
The Corporation has the following future minimum lease commitments for
premises and equipment:
--------------------------------------------------
2002 $ 231,044
2003 130,615
2004 121,891
2005 79,975
2006 -
Thereafter -
--------------------------------------------------
$ 563,525
--------------------------------------------------
In 2001, rent expense was $180,000 (2000 - $43,526).
F-25
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
16. Government grant:
During the year ended December 31, 2000, the Corporation was awarded a
contribution toward export marketing expenses of up to $33,178 (Cdn.
$55,000) from the Government of Canada. Of this amount, $27,470 (Cdn.
$40,757) (1999 - nil) has been contributed up to December 31, 2001. This
contribution is repayable if the Corporation achieves incremental sales to
the target market, at the rate of 4% of such incremental sales. The amount
awarded has been recognized as a liability and is grouped within accrued
liabilities.
17. Income taxes:
At December 31, 2001, the Corporation has U.S. tax net operating losses
approximating $1,769,000, which will begin to expire in 2019. The
Corporation may have incurred "ownership changes" pursuant to applicable
Regulations in effect under Section 382 Internal Revenue Code of 1986, as
amended. Therefore, the Corporation's use of losses incurred through the
date of these ownership changes may be limited during the carryforward
period.
The Corporation has Canadian tax net operating losses of approximately
$7,550,000 which expire as follows:
--------------------------------------------------------------------
2002 $ 101,000
2003 509,000
2004 620,000
2005 1,478,000
2006 1,250,000
2007 2,610,000
2008 982,000
--------------------------------------------------------------------
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Corporation has recognized a valuation allowance equal to the deferred tax
assets due to the uncertainty of realizing the benefits of the assets.
Significant components of the Corporation's deferred tax assets as of
December 31 are as follows:
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carry forwards $ 3,375,571 $ 4,150,672
Depreciation/amortization 133,112 121,713
Other 463,492 40,129
---------------------------------------------------------------------------
Total deferred tax assets 3,972,175 4,312,514
Valuation allowance (3,972,175) (4,312,514)
---------------------------------------------------------------------------
Net deferred taxes $ - $ -
---------------------------------------------------------------------------
F-26
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
18. Segmented information:
(a) Segment information:
During 1999, the Corporation was only operating in the acoustic
product segment.
During 2001, the Corporation sold its contract services business (note
5) and its continuing operations presented in the consolidated
statements of operations for all periods relate solely to wireless
products. As at December 31, 2000, the Corporation was operating in
the wireless product and acoustic product segments.
(b) Geographic information:
Substantially all assets and operations are in Canada. A summary of
sales by region of customer location is as follows ($000):
-------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------
Korea $ 3,085 $ 474
China 159 -
Canada 14 -
United States 268 -
Other 19 -
-------------------------------------------------------------------
Total sales $ 3,545 $ 474
-------------------------------------------------------------------
(c) Major customers:
Sales to customers representing greater than 10% of total sales are as
follows ($000):
-------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------
Customer A $ 1,582 $ 409
Customer B 851 65
-------------------------------------------------------------------
19. Subsequent event:
(a) In January, 2002, the Corporation granted 80,000 options having
exercise prices between $0.33 and $0.40 per share to various
employees.
(b) In February 2002, the HSBC Bank of Canada revolving operating line was
replaced with a U.S. $78,616 (Cdn. $125,000) operating line from CIBC
Bank, at an interest rate of prime and secured by a U.S. $78,616 (Cdn.
$125,000) guaranteed investment certificate. In March 2002, the
Corporation arranged for a U.S. $750,000 accounts receivable credit
facility with CIBC at an interest rate of CIBC prime plus 1% and an
administrative fee of 1% of invoice value.
F-27
UNITY WIRELESS CORPORATION
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with United States
generally accepted accounting principles)
Years ended December 31, 2001 and 2000
================================================================================
20. Contingent liabilities:
The Corporation is currently a party to an action in the Supreme Court of
British Columbia, Vancouver Registry, brought by an optionholder seeking a
declaration that 500,000 options to purchase shares in the common stock of
the Corporation held by it have a term of unlimited duration.
The Corporation provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. It is the opinion of
management, based in part on advice of legal counsel, that the ultimate
resolution of this contingency, to the extent not previously provided for,
will not have a material adverse effect on the financial condition of the
Corporation.
F-28
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, as
amended, the registrant caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
UNITY WIRELESS CORPORATION
(Registrant)
Date March 27, 2002 By /s/ Roland Sartorius
-------------------------------------
Roland Sartorius, Chief Financial
Officer, Secretary and Director
By /s/ Mark Godsy By /s/ John Robertson
-------------------------- --------------------------
(Signature) (Signature)
Mark Godsy, Chairman John Robertson, Chief Executive
Officer, President and Director
By /s/ Ken Maddison By /s/ Tom Dodd
-------------------------- --------------------------
(Signature) (Signature)
Ken Maddison, Director Tom Dodd, Senior V.P and Director
35
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1* Amended and Restated Certificate of Incorporation of Unity
Wireless Corporation (incorporated by reference to Exhibit
3.1 to the Company's Form SB-2 filed on October 4, 2000)
3.2* Amended and Restated Bylaws of Unity Wireless Corporation
(incorporated by reference to Exhibit 3.2 to the Company's
Form SB-2 filed on October 4, 2000)
4.1* Consulting agreement among Mueller & Company, Inc., Ideas,
Inc., Mark Mueller, Aaron Fertig and Unity Wireless
Corporation dated January 1, 2001 (incorporated by reference
to Exhibit 4.2 to the Company's Form 10-KSB filed on April
2, 2001)
4.2* Consulting agreement amendment among Mueller & Company, Inc.
and Unity Wireless Corporation dated November 15, 2001
(incorporated by reference to Exhibit 4.2 to the Company's
Form SB-2 filed on February 15, 2002)
10.1* Asset Purchase Agreement dated October 6, 2000 among Unity
Wireless Systems Corporation, a British Columbia, Canada
corporation, 568608 B.C. Ltd., a British Columbia, Canada
corporation, Traffic Systems, L.L.C., an Arizona limited
liability company, Traffic Safety Products, Inc., an Arizona
corporation and James L. Hill (incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K filed on October 23,
2000)
10.2* Intellectual Property License Agreement dated October 6,
2000 between Unity Systems as licensor and Traffic Systems
as licensee (incorporated by reference to Exhibit 2.2 to the
Company's Form 8-K filed on October 23, 2000)
10.3* Share Purchase Agreement, dated November 16, 2000 among John
Robertson, Mirza Kassam, Chris Neumann, Robert
Fetherstonhaugh, Unity Wireless Corporation, Stirling
Mercantile Corporation, Peter A. Scott Consulting Ltd., W.
Hugh Notman (incorporated by reference to Exhibit 2.1 to the
Company's Form 8-K filed on December 4, 2000)
10.4* Asset Purchase Agreement, dated for reference December 30,
2000, among Unity Wireless Integration Corporation as
vendor, Lyma Sales & Management Corp. as purchaser and Unity
Wireless Corporation (incorporated by reference to Exhibit
2.1 to the Company's Form 8-K filed on January 16, 2001)
10.5* Agreement to Redeem Membership Interest, Transfer
Intellectual Property and Amend Asset Purchase Agreement,
effective April 9, 2001, by and among Traffic Systems,
L.L.C., Unity Wireless Systems Corporation, Traffic Safety
Products, Inc. and Jim Hill (incorporated by reference to
Exhibit 10.5 to the Company's Form SB-2A filed on May 3,
2001)
10.6* 1999 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-KSB filed
on April 2, 2001)
10.7* Recommended Stock Option Grant Policy for the Company
(incorporated by reference to Exhibit 10.7 to the Company's
Form 10-KSB filed on April 2, 2001)
21.1 Subsidiaries of the Company
23.1 Consent of KPMG LLP
-------------------
* Previously filed