As filed with the Securities and Exchange Registraiton Statement No. 333-
Commission on September 4, 2002.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
7438 Fraser Park Drive, Burnaby, British Columbia, Canada V5J 5B9 (800)337-6642
(Address and telephone number of principal executive offices
and principal place of business)
Evergreen Corporate Services, Inc.
33713 9th Avenue South
Federal Way, WA 98003-6762
(253) 874-2949
(Name, address and telephone number of agent for service)
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Copies to:
Kenneth Sam
Ryan Pardo
Dorsey & Whitney LLP
1420 Fifth Avenue, Suite 3400
Seattle, WA 98101
(206) 903-8800
Approximate date of proposed sale to the public: From time to time after the
effective date of this registraiton statement.
*Pursuant to Rule 429 adopted under the Securities Act of 1933, this
Registration Statement also constitutes a post effective amendment to
Registraiton Statements Nos. 333-82922, 333-71400 and 333-47328.
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
statement for the same offering. |_|
-----------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective statement for the same
offering. |_|
-----------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
-------------------------------
Proposed Maximum Proposed Maximum
Title of Shares Amount to be Offering Aggregate offering Amount of
to be registered registered(1)(2) Price Per Share(3) Price(3) Registration Fee
---------------------------------------------------------------------------------------------------------------
Common Stock issued in 2,317,857 $0.20 $ 463,571.40 $ 42.65
Private Offering
Common Stock underlying 2,454,786 $0.23 $ 564,600.78 $ 51.94
Warrants issued in Private
Offering
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TOTAL 4,722,643 $1,028,172.10 $ 94.59
(1) Calculated pursuant to Rule 457(c) and (g) under the Securities Act of
1933.
(2) Based on the actual warrant exercise price per Rule 457(g).
(3) Estimated pursuant to Rule 457(c), solely for purposes of calculating
amount of registration fee, based on the average of the bid and ask sales
prices of the Registrant's common stock on August 15, 2002, as quoted in
the National Association of Securitites Dealers Over-the-Counter Bulletin
Board.
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The Registrant hereby amends this Registraiton Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that htis Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securitites Act of 1933, as amended, or until this Registraiton Statment shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
EXPLANATORY NOTE
Unity Wireless Corporation has previously filed Registration Statements
Nos. 333-82922, 333-71400 and 333-47328 to register shares of its common stock,
as well as shares of its common stock underlying warrants held by certain
selling stockholders. Pursuant to Rule 429 of the Securities Act of 1933, as
amended, this Registration Statement also serves as a post-effective amendment
to the prior registration statements. This Registration Statement eliminates
those selling stockholders who have previously sold their shares pursuant to the
previous registration statements and also eliminates those selling stockholders
to whom the Company no longer has registration obligations. This Registration
Statement registers an additional 4,772,643 shares of common stock which have
not previously been registered, including 2,317,857 shares issued in a private
placement and 2,454,786 shares of common stock or shares of common stock
underlying warrants.
The information contained in this prospectus is not complete and may be changed.
The selling stockholders may not sell these securitites until the registration
statement filed with the Securitites and Exchange Commission is effective. This
propsectus is not an offer to sell these shares and the selling stockholders are
not soliciting an offer to buy these shares in any state where the offer or sale
is not permitted.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
September 4, 2002
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UNITY WIRELESS CORPORATION
15,514,974 Shares of Common Stock
-----------
This is a public offering of 15,514,974 shares of the common stock of Unity
Wireless Corporation.
All of the shares being offered, when sold, will be sold by selling
stockholders as listed in this prospectus on pages 10 through 13. The selling
stockholders are offering:
o 8,312,636 shares of common stock acquired in private placements; and
o 7,202,338 shares of common stock issuable on exercise of warrants.
We will receive $1,664,324 in proceeds upon exercise of the warrants
outstanding on August 15, 2002, if exercised. We will not receive any of the
proceeds from the sale of the shares.
Our common stock is traded on the National Association of Securities
Dealers Over-the-Counter Bulletin Board under the symbol "UTYW" and on the TSX
Venture Exchange (formerly known as the Canadian Venture Exchange) under the
symbol "UWC." On August 15, 2002, the closing sale price for our common stock
was $0.20 on the NASD OTCBB and CDN$0.30 on the TSX Venture Exchange.
Investing in the Shares involves risks. See "Risk Factors and
Uncertainties" beginning on page 3.
These Securities have not been approved or disapproved by the SEC or any
state securities commission nor has the SEC or any state securities commission
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
The date of this prospectus is September 4, 2002.
TABLE OF CONTENTS
SUMMARY INFORMATION...........................................................2
RISK FACTORS AND UNCERTAINTIES................................................3
SELLING STOCKHOLDERS.........................................................12
PLAN OF DISTRIBUTION.........................................................17
LEGAL PROCEEDINGS............................................................18
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............21
DESCRIPTION OF SECURITIES....................................................23
THE SEC'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.........24
DESCRIPTION OF THE BUSINESS..................................................24
MARKET OVERVIEW..............................................................31
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................41
DESCRIPTION OF PROPERTY......................................................50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................51
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................51
EXECUTIVE COMPENSATION.......................................................53
FINANCIAL STATEMENTS........................................................F-1
i
FORWARD-LOOKING STATEMENTS
We use words like "expects," "believes," "intends," "anticipates," "plans,"
"targets," "projects" or "estimates" in this prospectus. When used, these words
and other, similar words and phrases or statements that an event, action or
result "will," "may," "could," or "should" occur, be taken or be achieved
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 the 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 sales of our products;
o the pace of changes in wireless telecommunications technologies;
o the demand for our products;
o competition in the wireless telecommunications industry; and
o our anticipated results of operations.
We are making these forward-looking statements only as of the date of this
prospectus, based on our management's current beliefs and expectations. Our
forward-looking statements are subject to a number of risks and uncertainties
that could cause our actual results or actual events to differ materially from
those reflected in our forward-looking statements. These risks and uncertainties
include, but are not limited to, changes in the economic and political
environments in the markets in which we conduct business, changes in technology,
increased competition and changes in the wireless telecommunications industry
and the other factors described under the heading "Risk Factors" beginning on
page 3. Forward-looking statements are by their nature subject to many varied
uncertainties and risks. Actual results could vary greatly. You should not place
undue reliance on forward-looking statements. Potential investors should review
the "Risk Factors and Uncertainties" below for a discussion of some of these
risks.
SUMMARY INFORMATION
Because this section is a summary, it may not contain all of the
information important to an investor. Investors should read this prospectus and
our financing statement and notes completely and carefully before deciding
whether to invest.
Summary of the Offering
This is an offering of up to 15,514,974 shares of our common stock,
including up to 8,312,636 shares held by our security holders, referred to in
this Prospectus as the selling stockholders, and 7,202,338 shares issuable upon
the exercise of outstanding warrants issued by us to some of the selling
stockholders. We will not receive any proceeds from the sale of the shares by
the selling stockholders, but we will receive up to $1,664,324 in proceeds upon
exercise of the warrants, if exercised. We cannot assure you that the warrants
will be exercised.
2
Summary of Our Business
We, Unity Wireless Corporation, are a designer, developer and manufacturer
of wireless technologies and products for a broad range of industrial and
commercial applications. Our business is primarily focused on high power linear
radio frequency amplifiers.
High power linear radio frequency amplifiers are used in both mobile and
fixed wireless voice, Internet and data base station and repeater networks and
support cellular, personal communications services referred to as "PCS", Paging
and wireless local loop frequencies. We produce more than 16 different models of
high power radio frequency amplifiers. We are also currently in the process of
developing a new feed forward radio frequency amplifier that is designed to
improve the performance of wireless telecommunications networks, making them
faster and more cost effective for our customers to build out the
next-generation 2.5 and third generation 3G networks.
We have one subsidiary, Unity Wireless Systems Corporation, a British
Columbia Corporation.
Our principal office is at 7438 Fraser Park Drive, Burnaby, British
Columbia V5J 5B9, and our telephone number is (800) 337-6642. We maintain a
website at www.unitywireless.com. Information contained on our website is not
part of this prospectus.
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.
Our failure to successfully address the risks and uncertainties described
below would have 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.
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
We have a history of losses. We had an accumulated deficit at June 30, 2002
of $14,415,321 and at December 31, 2001 of $12,830,289. During 2001 and the
first half of 2002, we focused our business entirely on the wireless product
segment, primarily our amplifier products, and incurred a net loss in 2001,
after deducting expense attributed to stock option grants to employees, of
$2,098,014 (2000 - loss of $5,318,633), and a net loss for the six month period
ended June 30, 2002 after giving effect to accounting gains as a result of stock
option grants of $1,585,032 (2001 - loss of $505,164). We also used cash from
operations of $1,847,392 in 2001 (2000 - $3,097,829 in cash used) and $1,014,663
(2001 - $644,838 in cash used) during the six month period ended June 30, 2002.
Our operations to date have been primarily financed by the sale of equity
securities. We anticipate that we will continue to incur net losses during our
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current year ending December 31, 2002 due to increased research & development
costs and additional sales & marketing costs related to pursuing our revised
business strategy of securing long-term customer supply agreements and a
prolonged slow down in the telecommunications industry. 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 will 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. As of June 30, 2002, we had working capital
deficiency of $286,159. Our operations presently are generating negative cash
flow, and we do not expect positive cash flow from operations in the near term.
In early July 2002, we received gross proceeds of $270,000 from the exercise of
$0.30 warrants by certain stockholders including some of our officers and
directors. We need to secure additional working capital in the short-term in
order to sustain our operations and met our current obligations.
In addition, we will require additional 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. We are incurring expenses in
anticipation of future sales that may not materialize. If future sales fall
significantly below our expectations or if we incur unanticipated costs or
expenses our financing needs could be increased. Any inability to obtain
sufficient capital to sustain our existing operations, to meet commitments or to
fund our obligations under our existing sales orders may require us to delay
delivery of products, to default on one or more agreements or to significantly
reduce or eliminate sales and marketing, research and development or
administrative functions. The occurrence of any of these, or other adverse
affects of inability to raise adequate capital 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. Our 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 debt or permanent equity financing, the continued support
of creditors and stockholders, and, ultimately, profitable operations. We can
not assure you 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.
Our 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 and a working capital deficiency, substantial doubt
exists about our ability to continue as a going concern. Our 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). Our common stock is considered penny stock. The
penny stock rules require a
4
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 stockholders
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 TSX Venture Exchange. 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 stockholders. Further, any
such issuance may result in a change of control of our corporation. Our Board of
Directors has the authority to issue shares of preferred stock with such
liquidation preferences, voting rights, dividend rights, conversion rights and
other terms as the Board may determine, without approval of our shareholders.
The rights and preferences of holders of any preferred stock we issue could make
acquisition of the Company by a third party more difficult or costly and could
operate to discourage or frustrate acquisition proposals.
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
stockholders
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 our common stock, including shares
of common stock previously issued under the plan. We had options for 3,924,917
shares of common stock issued and outstanding as of August 15, 2002 (out of
6,903,379 issuable under the plan as of that date) at the following exercise
prices:
Number of Exercise
Shares(1) Price ($)
--------- ---------
2,887,500 0.17
5
20,000 0.21
15,000 0.22
155,000 0.23
25,000 0.24
30,000 0.25
150,000 0.31
10,000 0.33
105,000 0.35
397,000 0.38
1,667 0.40
143,750 1.00
(1) These numbers do not include options for 500,000 shares at an exercise
price of $1.00 originally granted to Integrated Global Financial
Corporation. Integrated Global has sued us for a declaration that the grant
of 500,000 options is of unlimited duration. We believe the options have
expired. See "Legal Proceedings."
As of August 15, 2002, we had warrants outstanding to acquire 7,202,338
shares of our common stock as follows:
Number of Shares Exercise Price ($)
---------------- ------------------
2,454,786 (1) $0.35
4,247,552 (1) $0.30
200,000 $0.38
300,000 $0.29
(1) On July 31, 2002, the exercise price of the above 6,702,338
un-exercised warrants were re-priced to Cdn$0.35 on the condition that
warrant holders exercise their warrants within a 30 day period, otherwise
the original warrant terms would prevail. As well, if the closing price of
the Company's shares on the TSX venture Exchange or the NASD OTC-BB is
Cdn$0.437 or greater for a period of 10 consecutive trading days, then the
warrant holders must exercise their warrants within 30 days otherwise the
warrants will expire of the 31st day.
The existence of 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.
It is unlikely that options or warrants will be exercised unless the market
price of our common stock exceeds the exercise price of the warrants or options.
Accordingly, we cannot assure you that any of these warrants or options will be
exercised. Exercise of any options or warrants will result in dilution of the
proportional interests of our stockholders 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.
Re-pricing of options and warrants may affect our results
We have modified the exercise price of options and warrants in the past and
may do so in the future. Re-pricing of options has resulted in variable
accounting treatment for our stock options plan and
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as a result has impacted our quarterly results. Variable accounting treatment
requires us to record an expense with respect to the re-priced stock options or
warrants when our stock price increases and an compensation recovery when our
stock price declines. Further re-pricing of options and warrants may further
amplify the variation of our quarterly results as a result of variable
accounting treatment of such options and warrants.
Industry and Market Trend
In general, starting in the first half of 2001, the telecom markets have
softened and currently many wireless providers and equipment makers have
significantly cut back staff and expectations. Planned deployment of new third
generation networks has been delayed in almost all markets. Many countries have
already sold or allocated the required frequency spectrum for third generation
network deployment, and operators are caught in a difficult position having on
the one hand enormous pressure to deploy equipment and make use of their
expensive asset (the spectrum) and on the other hand enormous expense with an
uncertain payback to build the network. Several countries have reduced the cost
of the spectrum or offered other incentives for the operators to build the third
generation network networks. This situation has caused some new technologies to
be developed in an effort to reduce the cost of deploying third generation
network. These include methods of reducing the amount of infrastructure
investment (in particular the number of base stations and antennas) required to
complete the minimum coverage footprints required. Although it remains to be
seen which, if any, of these new technologies will be successful, they all
appear to have the possibility of reducing capital costs of network operators to
meet their third generation network coverage obligations and they all utilize
the kind of repeater-style amplifiers that we specialize in. However, if
conditions in the wireless telecommunications industry do not improve in the
near term, the roll-out of third generation networks may be slowed or delayed
indefinitely.
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. We have yet to generate positive earnings and there
can be no assurance that we will ever operate profitably. 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:
o the completion of developed products,
o levels of demand for our products,
o levels of product and price competition,
o the relative strength or weakness of the telecommunications industry,
o general economic trends,
o success in setting up and expanding distribution channels, and
o whether we can develop and market new products and control costs.
7
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. We cannot assure you that our
actual financial results will be consistent with our financial forecasts or that
any positive trends will continue.
We depend on experienced management and key technical employees
We are a growing company dependent upon the services of our senior
management team. 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 and 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 able 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 to 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 currently enjoy. We may not be able
to successfully compete. Our competitors may 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.
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 among other things:
o customers changing delivery schedules or canceling orders,
o long sales cycle,
o availability of component parts,
o competitive pressures on sales prices and discounts,
o delays in product development and redesign of customer specifications,
o mix of products with varying gross margins,
o management of our variable accounting and non-cash compensation
expenses, and
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o fixed expenses and warranty expenses.
Our customers also provide us with varying order sizes, short lead times,
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.
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 that could be costly and thus adversely affect
our business.
We do not own any patents in connection with our products or technologies
and depend entirely on trade secrets, confidentiality agreements and continual
improvement to our products to protect our proprietary technology. We have
applied for patent protection for certain technologies we have developed and we
have filed applications for trademark protection in the U.S. and Canada.
However, there can be no assurance that our efforts to protect our proprietary
technology will be effective and failure to protect such technology could have a
material adverse effect on our results of operation and financial condition.
Disputes related to our intellectual property may adversely impact our
business
While we are not aware of any disputes with respect to any of our
intellectual property and we are not currently involved in any litigation
respecting our intellectual property, there can be no assurances that we will
avoid such disputes in the future. The use of trade marks, service marks, trade
names, slogans, phrases and other expressions in the course of our business and
our subsidiary 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 subsidiary will be
able to continue to use our current trade names and marks. Any changes could
result in confusion to potential customers and loss of valuable name recognition
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 to increase manufacturing output is limited by the
size of our facilities and our ability to hire, train and retain qualified
personnel. On August 1, 2002, we announced that we have selected Burnaby,
British Columbia based contract electronics manufacturer Creation Technologies
Inc. for volume production of our power amplifiers. We expect to start
outsourcing our larger orders during the third quarter of 2002. This is expected
to allow us to take advantage of better purchasing power, reduce our inventory
levels and ensure that a consistent quality product is delivered on time.
However, we may not be able to effectively control quality of outsourced
products. In addition, the loss of such an outsourcing relationship could have a
material adverse effect on our business, financial condition and
9
results of operations and there can be no assurances that we will be able to
find another manufacturer on a timely basis necessary to fill orders or at all.
In the future, we may be required to out source additional manufacturing or
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 other 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 radio frequency amplifier
revenues to date have been derived through a single South Korean sales agent.
Historically, we have generated approximately 90% of our revenues from the
Korean market. During the second quarter of 2002, the Korean market contributed
less than 10% of our revenues, while sales to new customers in United States,
China, Israel and Sweden increased. We anticipate that this trend will continue
during the second half of 2002 and beyond. 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 continue to 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 or in a volume sufficient to sustain our operations.
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.
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
10
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. We invest heavily in
the research and development of new products and we cannot assure you that the
new products we develop will be commercially viable or that a sufficient demand
will develop for such products. If markets do not accept our products in
sufficient numbers to offset costs of developing and marketing such products,
our results of operation and financial condition will be materially and
adversely affected.
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.
Potential product liability related to our Sonem products
In the past, we sold emergency traffic preemption devices of our Sonem
division (which we sold in October 2000) that are installed at traffic
intersections. Also, we have sold some of our UniLinx(TM) devices (we sold the
UniLinx 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, that the actual claim would be covered by our insurance, 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.
11
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 US 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.
SELLING STOCKHOLDERS
This prospectus covers the offering of shares of common stock by selling
stockholders, and the sale of common stock by us to certain warrant holders upon
the exercise of their warrants. This prospectus is part of a registration
statement filed in order to register, on behalf of the selling stockholders and
us, a total of 15,514,974 shares of common stock as follows:
o 5,147,551 shares of common stock issued to investors on December 24,
2001 in a private placement of units, each unit consisting of one
share of common stock and one warrant;
o a total of 4,247,552 shares of common stock issuable by us upon the
exercise of outstanding warrants issued on December 24, 2001 in the
unit private placement;
o 2,317,857 shares of common stock issued to investors on May 14, 2002
in a private placement of units, each unit consisting of one share of
common stock and one warrant;
o a total of 2,454,786 shares of common stock issuable by us upon the
exercise of outstanding warrants issued on May 14, 2002 in the unit
private placement;
o 847,228 shares of common stock issued to investors pursuant to the
acquisition of Ultratech Linear Solutions, Inc.;
o shares issued to consultants and shares purchased by investors in
various private transactions named in previously filed registration
statements;
o 250,000 shares of common stock issuable to Mueller & Company, Inc.
upon the exercise of warrants issued under a consulting agreement, as
amended November 15, 2001; and
o 250,000 shares of common stock issuable to Ideas Inc. upon the
exercise of warrants issued. under a consulting agreement, as amended
by a letter dated November 13, 2001.
The shares issued to the selling stockholders are "restricted" shares under
applicable federal and state securities laws and are being registered to give
the selling stockholders the opportunity to sell their shares. The registration
of such shares does not necessarily mean, however, that any of these shares will
be offered or sold by the selling stockholders. The selling stockholders may
from time to time offer and sell all or a portion of their shares in the
over-the-counter market, in negotiated transactions, or otherwise, at prices
then prevailing or related to the then current market price or at negotiated
prices.
The registered shares may be sold directly or through brokers or dealers,
or in a distribution by one or more underwriters on a firm commitment or best
efforts basis. To the extent required, the names of any agent or broker-dealer
and applicable commissions or discounts and any other required information with
respect to any particular offer will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution." Each of the selling stockholders
reserves the sole right to accept or reject, in whole or in part, any proposed
purchase of the registered shares to be made directly or through agents. The
selling stockholders and any agents or broker-dealers that participate with the
selling stockholders in
12
the distribution of registered shares may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"),
and any commissions received by them and any profit on the resale of the
registered shares may be deemed to be underwriting commissions or discounts
under the Securities Act.
We will receive no proceeds from the sale of the registered shares, and we
have agreed to bear the expenses of registration of the shares, other than
commissions and discounts of agents or broker-dealers and transfer taxes, if
any.
We will sell the warrant shares to the holders of the above-described
warrants if and when they choose to exercise them. If this (or any subsequent)
registration statement is then in effect, once the warrant holders have
exercised their warrants, they will be free to re-sell the stock they receive at
such time or times as they may choose, just as any purchaser of stock in the
open market is allowed to do. We do not know how much, if any, of such stock
these investors will hold or re-sell upon exercise of their warrants.
The foregoing summary of the warrant terms is qualified in its entirety by
the full terms of the applicable warrant agreements, a sample form of which is
incorporated by reference in this Prospectus as an exhibit to the registration
statement.
Selling stockholders who acquired their shares through private placements
The following is a list of the selling stockholders who own or have the
right to acquire 15,514,974 of the registered shares, including 8,312,636 shares
of common stock acquired in private placements, acquisitions & private
transactions and 7,202,338 which are acquirable upon the exercise of warrants.
Some of these selling stockholders hold or have held a position, office or any
other material relationship with us or our predecessors or affiliates within the
past three years. See "Directors, Executive Officers, Promoters, and Control
Persons." At August 15, 2002, we had 34,516,894 shares of common stock issued
and outstanding.
13
Number of Number of Total Number Amount to be
Shares of Shares Total Number of of Shares of Owned After
Common Stock Acquirable Shares of Common Stock Offering is
Name of Owned on Upon Common Stock to be Complete(c)
selling stockholder August 15, 2002 Exercise of Beneficially Offered for
Warrants Owned Security
Holder's
Account
---------------------------------- ------------------ -------------- ---------- ------ -------------- ---------- ----
Amount % Amount %
---------------------------------- ------------------ -------------- ---------- ------ -------------- ---------- ----
324168 AB Ltd. 159,086 57,086 216,172 (b) 114,172 102,000 (b)
3OE Enterprises Inc(1) 65,000(8) 65,000 (b) 25,000 40,000 (b)
Abraham Muller 19,857 17,857 37,714 (b) 35,714 2,000 (b)
Alan Gelfand 35,713 35,713 71,426 (b) 71,426 - (b)
Albert Betar 130,000 100,000 230,000 (b) 200,000 30,000 (b)
Ben Rosenblum 91,269(10) 91,269(11) 182,538 (b) 182,538 - (b)
Beth Medrash Govohah of America 333,333 333,333(11) 666,666 2% 666,666 - (b)
Chris Neumann 117,262(8) - 225,596(a) (b) 117,262 108,334 (b)
Clayton Duxbury 132,386 57,086 189,472 (b) 114,172 75,300 (b)
David Zajac 53,571 53,571 107,142 (b) 107,142 - (b)
Doug Stewart 25,000(9) - 25,000 (b) 15,000 10,000 (b)
Ezra Schnapp 285,714 285,714 571,428 2% 571,428 - (b)
Friendly Trend Fund Inc. 97,086 57,086 154,172 (b) 114,172 40,000 (b)
Halkin Management Ltd. FBO Ilan
Kenig(2) 416,667(10) 255,608(11) 711,858(a) 2% 672,275 25,000 (b)
Holger Spielberg 27,500(8) - 27,500 (b) 25,000 2,500 (b)
Hugh Notman 645,000(10) 395,680(11) 1,040,680 3% 1,040,680 - (b)
James Carruthers 31,000(8) - 81,000(a) (b) 25,000 56,000 (b)
James Fletcher 507,500(10) 345,000(11) 852,500 3% 690,000 162,500 (b)
Jeffery Rubin 222,697(10) 162,697(11) 385,394 1% 325,394 60,000 (b)
John Leslie 721,822(10) 521,822(11) 1,243,644 4% 1,043,644 200,000 (b)
John MacBain 43,706(8) - 43,706 (b) 43,706 - (b)
John Robertson(3) 203,315(8) - 203,315 (b) 203,315 - (b)
Jon Gahre 53,000 30,000 83,000 (b) 60,000 23,000 (b)
Jong Kil Kim(4) 50,000(8) - 50,000 (b) 50,000 - (b)
14
Number of Number of Total Number Amount to be
Shares of Shares Total Number of of Shares of Owned After
Common Stock Acquirable Shares of Common Stock Offering is
Name of Owned on Upon Common Stock to be Complete(c)
selling stockholder August 15, 2002 Exercise of Beneficially Offered for
Warrants Owned Security
Holder's
Account
---------------------------------- ------------------ -------------- ---------- ------ -------------- ---------- ----
Amount % Amount %
---------------------------------- ------------------ -------------- ---------- ------ -------------- ---------- ----
Ken Coward 107,086 57,086 164,172 (b) 114,172 50,000 (b)
Keren MYCB Elias Foundation Inc. 352,629(10) 272,818(11) 625,447 2% 545,636 79,811 (b)
Louise Blouin 43,706(8) - 43,706 (b) 43,706 - (b)
Mark Godsy(5) 3,252,079(8)(10) 562,337(11) 3,966,916(a) 11% 1,500,432 2,449,402 7%
Mark Hammerstone 36,508(10) 36,508(11) 73,016 (b) 73,016 - (b)
Michael Hammerstone 80,158(10) 80,158(11) 160,316 (b) 160,316 - (b)
Mirza Kassam 144,198(8) - 144,198 (b) 144,198 - (b)
Morten Borch 597,143 97,143 694,286 2% 194,286 500,000 1%
Murray Weitman 74,603(10) 74,603(11) 149,206 (b) 149,206 - (b)
Nochum Barnetsky 8,929 8,929 17,858 (b) 17,858 - (b)
Ole Nyflot 50,000 30,000 80,000 (b) 60,000 20,000 (b)
Patrick Robinson 446,112(10) 361,112(11) 807,224 2% 722,224 85,000 (b)
Pemo AS 110,000 40,000 150,000 (b) 80,000 70,000 (b)
Pergola AS 120,000 40,000 160,000 (b) 80,000 80,000 (b)
Peter A Scott Consulting Ltd 26,250(8) - 26,250 (b) 26,250 - (b)
Rachel Mendelovitz 183,333(10) 183,333(11) 366,666 1% 366,666 - (b)
Robert Fetherstonhaugh 82,363(8) - 82,363 (b) 82,363 - (b)
Robert Millham 35,713 35,713 71,426 (b) 71,426 - (b)
Robert W Singer(6) 25,000 - 62,500(a) (b) 25,000 31,250 (b)
Roland Sartorius(7) 350,000(10) 214,710(11) 870,127(a) 3% 564,710 281,935 (b)
Salvatore Amato 71,775 71,775 143,550 (b) 143,550 - (b)
Shalom Torah Centers 292,857 267,857 560,714 2% 535,714 25,000 (b)
Sondre Invest AS 514,000 80,000 594,000 2% 160,000 434,000 1%
Van Wyck Window Fashions Inc. 242,857(10) 242,857(11) 485,714 1% 485,714 - (b)
Wayne Gambell 1,206,434(10) 833,234(11) 2,039,668 6% 1,666,468 373,200 1%
15
Number of Number of Total Number Amount to be
Shares of Shares Total Number of of Shares of Owned After
Common Stock Acquirable Shares of Common Stock Offering is
Name of Owned on Upon Common Stock to be Complete(c)
selling stockholder August 15, 2002 Exercise of Beneficially Offered for
Warrants Owned Security
Holder's
Account
---------------------------------- ------------------ -------------- ---------- ------ -------------- ---------- ----
Amount % Amount %
---------------------------------- ------------------ -------------- ---------- ------ -------------- ---------- ----
Wayne Saker 135,714 135,714 271,428 (b) 271,428 - (b)
Wimo Invest AS 90,000 40,000 130,000 (b) 80,000 50,000 (b)
Canaccord Capital Corporation - 20,550 20,550 (b) 20,550 - (b)
John Anderson - 21,429 21,429 (b) 21,429 - (b)
Liz Biderman - 17,143 17,143 (b) 17,143 - (b)
Mueller & Company Inc. - 75,664 75,664 (b) 75,664 - (b)
Wolverton Securities Ltd. - 2,143 2,143 (b) 2,143 - (b)
Ideas Inc. - 250,000(12) 250,000 (b) 250,000 - (b)
Mueller & Company Inc. - 250,000(12)(13) 250,000 (b) 250,000 - (b)
-------------------------------------------------------------------------------------------------------------------------
TOTAL 7,202,338 15,514,974
(a) Includes shares of common stock acquirable upon exercise of Warrants
by the selling stockholder and options exercisable to acquire common
stock within 60 days of August 15, 2002. See "Security Ownership of
Certain Beneficial Owners and Management" for additional information
regarding warrants and options held by management.
(b) Less than 1%.
(c) Assuming all shares registered for the benefit of the selling
stockholder are sold.
(1) Includes 40,000 shares owned directly or indirectly by Norm Dowds, the
principal of 3OE Enterprises.
(2) Mr. Kenig is our President and a Director.
(3) Mr. Robertson resigned as our President, Chief Executive Officer
effective March 31, 2002 and as a Director of the Company on June 13,
2002.
(4) Mr. Kim is a sales agent for the Company responsible for sales in
Korea.
(5) Mr. Godsy is our Chairman and a Director.
(6) Mr. Singer is a Director of the Company.
(7) Mr. Sartorius is our Chief Financial Officer
(8) Includes shares that were previously registered on a registration
statement on Form SB-2/A filed with the Securities and Exchange
Commission on October 18, 2001.
16
(9) Includes shares that were previously registered on a registration
statement on Form SB-2 filed with the Securities and Exchange
Commission May 3, 2001.
(10) Includes shares that were previously registered on a registration
statement on Form SB-2 filed with the Securities and Exchange
Commission February 15, 2002.
(11) Includes shares issuable upon exercise of warrants that are registered
on a registration statement on Form SB-2 filed with the Securities and
Exchange Commission on February 15, 2002.
(12) Including 100,000 shares issuable upon exercise of warrants registered
on a registration statement on Form SB-2/A filed on May 3, 2001, and
200,000 shares issuable upon exercise of warrants registered on a
registration statement on Form SB-2/A filed on October 18, 2001.
(13) 100,000 shares are acquirable by Mueller upon the exercise of warrants
at $0.38 per share, 90,628 of which are fully vested and the balance
of which vest quarterly beginning September 30, 2002; and 150,000
shares are acquirable by Mueller upon the exercise of warrants at
$0.29 per share, of which 62,500 are fully vested and the balance of
which vest quarterly beginning September 30, 2002.
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling stockholders. When
we refer to selling stockholders, we intend to include donees and pledgees
selling shares received from a named selling stockholder after the date of this
prospectus. All costs, expenses and fees in connection with the registration of
the shares offered under this registration statement will be borne by us.
Brokerage commissions and similar selling expenses, if any, attributable to the
sale of shares will be borne by the selling stockholders. Sales of shares may be
effected by the selling stockholders from time to time in one or more types of
transactions (which may include block transactions) on the over-the-counter
market, in negotiated transactions, through put or call options transactions
relating to the shares, through short sales of shares, or a combination of such
methods of sale, at market prices prevailing at the time of sale, or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
The selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling stockholders.
The selling stockholders may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling stockholders and/or
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The selling stockholders and any broker-dealers that act in connection with
the sale of shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of shares sold by them while acting
as principals might be deemed to be underwriting discounts or commissions under
the Securities Act. We have agreed to indemnify the selling stockholders against
some liabilities arising under the Securities Act.
The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares
against some liabilities arising under the Securities Act.
Because the selling stockholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling stockholders
will be subject to the prospectus delivery requirements of
17
the Securities Act. We have informed the selling stockholders that the
anti-manipulative provisions of Regulation M promulgated under the Exchange Act
may apply to their sales in the market.
Selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
they meets the criteria and conform to the requirements of such Rule.
Upon being notified by any selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, we will file a supplement to
this prospectus, if required, under Rule 424(b) of the Act, disclosing:
o the name of each selling stockholder(s) and of the participating
broker-dealer(s),
o the number of shares involved,
o the price at which the shares were sold,
o the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable,
o that the broker-dealer(s) did not conduct any investigation to
verify information set out or incorporated by reference in this
prospectus; and
o other facts material to the transaction.
In addition, upon being notified by any selling stockholder that a donee or
pledgee intends to sell more than 500 shares, we will file a supplement to this
prospectus.
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 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 position that these options have expired and we have not included such
options in our outstanding options at August 15, 2002.
We have filed a lawsuit against Cobratech Industries Inc. in the Supreme
Court of British Columbia, Canada, to recover $88,000 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 $85,600, including principal and accrued, but unpaid interest,
under the note. We have reached a tentative settlement arrangement with
Cobratech whereby Cobratech would satisfy the obligation by converting the debt
into shares of its parent's, CTI Diversified Holdings Inc., shares at a
conversion price determined by the average of the bid and ask price of CTI
Diversified Holdings Inc. shares as quoted on the NASD OTC BB
18
on the day immediately before conversion. There can be no assurances that the
settlement will be finalized, or that we will realize any cash value from any
shares of CTI Diversified Holdings Inc. we receive pursuant to the settlement.
For financial reporting purposes, we have already set up a provision for the
full amount owing against income in 2001 for the possibility of non-repayment.
See "Certain Relationships and Related Transactions" below for further details.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors, executive officers, and significant employees and the
significant employees of our subsidiary, Unity Wireless Systems Corporation
(Unity Wireless Systems Corporation), are 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 Unity Wireless
Systems Corporation
Ilan Kenig President April 1, 2002
President and Director of Unity Wireless Systems Corporation
Director June 17, 2002
Roland Sartorius Chief Financial Officer and Secretary August 15, 2000
Chief Financial Officer and Secretary of Unity Wireless
Systems Corporation
Thomas Dodd Senior Vice President February 22, 2000
Senior Vice President of Unity Wireless Systems Corporation
Ken Maddison Director October 29, 1998
Robert W. Singer Director June 22, 2001
Brian Nixon Director and Vice Chairman July 11, 2002
Doron Nevo Director July 11, 2002
Mark Godsy - Age 47. Mr. Godsy is a Director and the Chairman of the Board
of Directors of Unity Wireless and Unity Wireless Systems Corporation. He
previously served as a Director and the Chairman of the Board of Directors of
Unity Wireless Systems Corporation from May 1993 to November 1998, and as the
Secretary of Unity Wireless Systems Corporation 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 stockholders 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.
19
Ilan Kenig - Age 42. Mr. Kenig is a Director of Unity Wireless and our
Company's President. His term as a Director of Unity Wireless runs until the
next annual meeting of the stockholders unless earlier terminated. 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 before assuming 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
Roland Sartorius - Age 49. Mr. Sartorius is the Chief Financial Officer and
Secretary of Unity Wireless and of Unity Wireless Systems Corporation. 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/stockholder 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 Senior Vice President of Unity Wireless
and of Unity Wireless Systems Corporation. Mr. Dodd is a senior marketer/manager
with over 25 years experience as an end user, original equipment manufacturer,
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. .
Ken Maddison - Age 61. Mr. Maddison is a Director of Unity Wireless . His
term runs until the next annual meeting of the stockholders unless earlier
terminated. Mr. Maddison, a Chartered Accountant since 1966 and elected a Fellow
of the Institute of Chartered Accountants of British Columbia 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.
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
20
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.
Brian Nixon - Age 47. Mr. Nixon is a Director and Vice Chairman of Unity
Wireless. His term runs until the next annual meeting of the stockholders unless
earlier terminated. Mr. Nixon brings over 20 years of corporate and
entrepreneurial leadership experience to the Board of Unity Wireless. Most
recently he was Senior Vice President, Business Solutions with BCE Media Inc. In
this position, Mr. Nixon was responsible for the development of Business
Television and Interactive e-Learning services in Canada. He also continued as
the President of Infosat Communications, Inc., a position held since 1993 and
was appointed Chairman of the Board of Directors of Vistar Telecommunications
Inc. an Ottawa based high technology company controlled by BCE Media Inc. Vistar
was restructured an subsequently divested resulting in a substantial return on
investment. Prior, he was Vice President of Finance with an Oil & Gas Company
that specialized in asset management and divestiture. Previous positions
included responsibility for distribution and business development of the
Canadian market for a large, multi-national US corporation. In addition to
holding the Certified Management Accountant designation, Mr. Nixon has an MBA
from the University of Calgary.
Doron Nevo - Age 47. Mr. Nevo is a Director of Unity Wireless. His term
runs until the next annual meeting of the stockholders unless earlier
terminated. Mr. Nevo brings more than 20 years of business experience in high
technology and telecommunications companies to the Board of Unity Wireless.
Currently, Mr. Nevo is President and CEO of KiloLambda Technologies, Ltd. an
optical subsystems company he founded in early 2001. Prior to Kilolambda, Mr.
Nevo was President and CEO of NKO, Inc. a company he founded that designed and
developed a carrier grade IP Telephony system platform and established its own
IP network. Mr. Nevo was also President and CEO of Clalcom Ltd., an
international telecommunications service provider in Israel which he founded in
1992. Prior to Clalcom, he held various positions with Sprint International Inc.
He also serves on the board of a number of companies including Audiocodes, Ltd
(NasdaqNM: AUDC), Elcom Technologies (a manufacturer of Satcom and Digital Radio
synthesizers), Notox, Ltd. (a biotech company) and Cellaris, Ltd. (a new
materials company). Mr. Nevo received a B.Sc. in Electrical Engineering from the
Technion and an M.Sc. in Telecommunications Management from Brooklyn
Polytechnic.
Our directors are elected at the annual meeting of the stockholders 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of shares of our common stock as of August 15, 2002 by
o each person who is known by us to beneficially own more than 5% of our
issued and outstanding shares of common stock;
o our chief executive officer and our two former chief executive
officers during our last fiscal year, individually named in the
executive compensation table below;
o our directors; and
21
o 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 August 15, 2002, there were
34,516,894 of our shares of common stock issued and outstanding. To the best of
our knowledge, there exist no arrangements that could cause a change in voting
control of our corporation.
SHARES BENEFICIALLY
TITLE OF CLASS NAME AND ADDRESS OF OWNER RELATIONSHIP TO COMPANY OWNED PERCENT OWNED(1)
Common Stock Mark Godsy Chairman, Director, 5% 3,966,916 11.49%
7575 Carnarvon Street Stockholder and Past CEO
Vancouver, B.C. V6N 1K6 (February 22, 2000 -
November 17, 2000)
Common Stock Ilan Kenig Director and President 736,858 2.13%
1859 Spyglass Place,#201
Vancouver, B.C. V5Z 4K6
Common Stock Brian Nixon Vice-Chairman, Director 17,500 0.05%
1742 Hampton Drive
Coquitlam, BC V3E 3E1
Common Stock Doron Nevo Director 6,667 0.02%
15 Yakov Hazan
Raanana, Israel 43563
Common Stock Ken Maddison Director 84,375 0.24%
2591 Lund Avenue
Coquitlam, B.C. V3K 6J8
Common Stock Robert W. Singer Director 62,500 0.18%
2110 West County Line Road
Jackson, NJ 08527
Common Stock John Robertson Past Director (November 203,315 0.59%
#203 - 728 Farrow Street 17, 2000 - June 17, 2002)
Coquitlam, B.C. V3J 3S6 and Past CEO (November
17, 2000 - March 31, 2002)
22
SHARES BENEFICIALLY
TITLE OF CLASS NAME AND ADDRESS OF OWNER RELATIONSHIP TO COMPANY OWNED PERCENT OWNED(1)
Common Stock H. William Brogdon Past CEO (February 1999 550,000 1.59%
1817 Sleepy Hollow Lane to February 22, 2000)
Petaluma, CA 94954
Common Stock Wayne Gambell 5% Beneficial Owner 2,039,668 5.91%
1040 Memorial Dr., NW
Calgary, AB T2N 3E1
------------------------------------------------------------------------------------------------------------------------------------
Common Stock All directors and executive 6,791,175(1) 19.67%
officers as a group (10
individuals)
(1) Includes the following numbers of shares of common stock (total of
1,974,114 shares) that may be acquired by the exercise of stock options or
warrants that are now exercisable or will become exercisable within 60 days
of August 15, 2002:
Mark Godsy - 714,837 shares, including 562,337 shares acquirable upon
exercise of warrants and 152,500 shares exercisable upon the exercise of
options.
Ilan Kenig - 295,191 shares, including 255,608 shares acquirable upon the
exercise of warrants and 39,583 shares acquirable upon the exercise of
options.
Brian Nixon -17,500 shares acquirable upon the exercise of options.
Doron Nevo - 6,667 shares acquirable upon the exercise of options.
Ken Maddison - 84,375 shares acquirable upon the exercise of options.
Robert Singer - 37,500 shares acquirable upon the exercise of options.
Wayne Gambell - 833,234 shares acquirable upon the exercise of warrants.
DESCRIPTION OF SECURITIES
General Provisions of Common Stock
All outstanding shares of our common stock are duly authorized, validly
issued, fully paid and non-assessable. Upon liquidation, dissolution or winding
up of the corporation, the holders of common stock are entitled to share ratably
in all net assets available for distribution to stockholders after payment to
creditors. The common stock is not convertible or redeemable and has no
preemptive, subscription or conversion rights.
Each outstanding share of common stock is entitled to one vote on all
matters submitted to a vote of stockholders. There are no cumulative voting
rights.
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available therefore at such times and in such
amounts as our Board of Directors may from time to time determine. Holders of
common stock will share equally on a per share basis in any dividend declared by
the Board of Directors. We have not paid any dividends on our common stock and
do not anticipate paying any cash dividends on such stock in the foreseeable
future.
23
In the event of a merger or consolidation, all holders of common stock will
be entitled to receive the same per share consideration.
General Provisions of Preferred Stock
Our Board of Directors is authorized by the Certificate of Incorporation of
the Company to issue up to 5,000,000 shares of preferred stock on such terms as
the Board may determine. No such stock has been issued to date. The preferred
shares could, in certain instances, render more difficult or discourage a
merger, tender offer, or proxy contest and thus potentially have an
"anti-takeover" effect, especially if preferred shares were issued in response
to a potential takeover. In addition, issuances of authorized preferred shares
can be implemented, and have been implemented by some companies in recent years,
with voting or conversion privileges intended to make acquisition of the
corporation more difficult or more costly. Such an issuance could deter the
types of transactions which may be proposed or could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
THE SEC'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our bylaws provide that directors and officers shall be indemnified by us
to the fullest extent authorized by the Delaware General Corporation Law,
against all expenses and liabilities reasonably incurred in connection with
services for us or on our behalf. The bylaws also authorize the board of
directors to indemnify any other person who we have the power to indemnify under
the Delaware General Corporation Law, and indemnification for such a person may
be greater or different from that provided in the bylaws. To the extent that
indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers and controlling persons, we have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
DESCRIPTION OF THE BUSINESS
General
We are a designer, developer and manufacturer of wireless technologies and
products for a broad range of industrial and commercial applications. Our
business is focused on developing, marketing and selling our high power linear
radio frequency amplifiers.
High performance linear radio frequency amplifiers are used in current
generation wireless voice, Internet and data base station and repeater networks
and support cellular, personal communications services also referred to as PCS,
paging, and wireless local loop wireless local loop frequencies.
Corporate History
We, Unity Wireless Corporation, 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 Unity Wireless
Systems Corporation in exchange for 11,089,368 shares of our common shares. As a
result, the former stockholders of Unity Wireless Systems Corporation owned a
majority of our outstanding stock. Therefore, for accounting purposes, Unity
Wireless Systems
24
Corporation was deemed to have acquired Unity Wireless Corporation. Unity
Wireless Systems Corporation survived as a wholly owned subsidiary.
Prior to the introduction of our radio frequency communications products,
we had designed, manufactured, and sold an acoustic-based traffic signal
preemption system under the trade name "Sonem." The system detected approaching
sirens and issued commands to the traffic signal controller to adjust the
traffic lights to give priority passage to the emergency vehicle(s). 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 radio frequency wireless products during 2000, we, through
our subsidiary Unity Wireless Systems Corporation, 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.
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 one of our wholly owned subsidiaries, 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 radio frequency communication products, we assigned
the Orbital contract 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 radio frequency communication
product with the trademark "UniLinx", which we introduced commercially in the
later part of 2000. This wireless 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 radio
frequency 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 on 2001.
On November 16, 2000, we acquired Ultratech Linear Solutions Inc., a
designer, developer and manufacturer of linear power amplifiers for the wireless
network infrastructure industry. 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 radio frequency 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.
25
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 radio frequency
power amplifier products. We have also reviewed other costs and eliminated
expenditures not directly required to implement our radio frequency 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 radio
frequency power amplifier technology. Feed forward is a technique to minimize
the distortion effects introduced by amplification of radio frequency signals.
We listed our common shares on the TSX Venture Exchange (formerly known as the
Canadian Venture Exchange) during December 2001.
To focus our business and eliminate contingencies, we agreed, pursuant to a
term sheet dated January 31, 2001, that warranty obligations of Unity Wireless
Systems Corporation for Sonem products already installed would be assumed by
Traffic Systems LLC, the purchaser of the Sonem business, in consideration of UW
System's transfer of its equity interest in Traffic Systems LLC and our residual
interest in the Sonem patents.
By mid 2002, our business strategy evolved and focused on securing
long-term supply agreements with strategic key customers, thereby providing for
a stabilized revenue base and consistent growth.
Acquisition and Dispositions
Sale of Sonem 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 LLC , an Arizona limited liability corporation owned
37% by Unity Wireless Systems Corporation and 63% by one of the Sonem
contractors of Unity Wireless Systems Corporation, under the terms of an Asset
Purchase Agreement among Unity Wireless Systems Corporation, Traffic Systems LLC
and others. Under the Asset Purchase Agreement, Unity Wireless Systems
Corporation licensed substantially all of its Sonem patent rights to Traffic
Systems LLC (on an exclusive world-wide basis) and Traffic Systems LLC
covenanted to commercialize and sell the Sonem technology. In addition to its
equity interest in Traffic Systems LLC, Unity Wireless Systems Corporation was
entitled to receive $2,000,000 from the gross profits of Traffic Systems LLC.
Unity Wireless Systems Corporation also agreed to assist Traffic Systems LLC in
the transition of the Sonem business, by providing limited technical, consulting
and financial support.
Although Traffic Systems LLC agreed under the Asset Purchase Agreement to
assume the warranty obligations of Unity Wireless Systems Corporation for Sonem
products already installed, Unity Wireless Systems Corporation was required to
advance the costs of such obligations, with repayment to come from the gross
profits of Traffic Systems LLC. We believe that the costs of such obligations in
the
26
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 LLC
in consideration of UW System's transfer of its equity interest in Traffic
Systems LLC and our residual interest in the Sonem patents. On April 30, 2001,
Unity Wireless Systems Corporation and Traffic Systems LLC 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 in this Prospectus
exclude the Sonem business.
Acquisition of Ultratech
Also as part of our strategy to focus on wireless technologies, we acquired
Ultratech Linear Solutions, Inc., of Burnaby, British Columbia, Canada, 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 radio frequency amplifiers. In consideration
of the Ultratech shares, we paid to the stockholders of Ultratech Cdn.$72,000
($48,000) on account of stockholder loans, and issued 700,000 shares of our
common stock. We had loaned Cdn.$300,000 ($200,000) to Ultratech before closing.
Disposition of Integration Services Business
To complement internally developed transportation-related products such as
Sonem and UniLinx, we formed wholly owned UW Integration (and its wholly owned
subsidiary Unity Wireless Integration (S) Pte Ltd.) in early 2000 to further
pursue alliances, licensing agreements and marketing partnerships in the
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., a British Columbia, Canada, company wholly owned by
Siavash Vojdani, a former officer and director of ours, on December 30, 2000.
Principal Products & Services
In general, we make and sell high power radio frequency power amplifiers.
Radio frequency power amplifiers are used to boost the power of a radio signal
before it is broadcast from an antenna. Our amplifiers are targeted primarily at
radio systems used in wireless communications networks such as those which
support cellular telephones.
Industry and Market Trends
In general, starting in the first half of 2001, the telecom markets have
softened and currently many wireless providers and equipment makers have
significantly cut back staff and expectations. Planned deployment of new third
generation networks has been delayed in almost all markets.
Third generation network networks hold the promise of higher capacity and
faster data rates commonly referred to as "higher bandwidth". Third generation
networks use network resources much more efficiently, allowing multiple
connections for voice and/or data to share the same channel simultaneously.
27
Many countries have already sold or allocated the required frequency
spectrum for third generation network deployment, and operators are caught in a
difficult position having on the one hand enormous pressure to deploy equipment
and make use of their expensive asset (the spectrum) and on the other hand
enormous expense with an uncertain payback to build the network. Several
countries have reduced the cost of the spectrum or offered other incentives for
the operators to build the third generation network networks.
This situation has caused some new technologies to be developed in an
effort to reduce the cost of deploying third generation network. These include
methods of reducing the amount of infrastructure investment (in particular the
number of base stations and antennas) required to complete the minimum coverage
footprints required. We have started working with companies in four such areas:
- smart antennas
o technology to increase the capacity and/or coverage of a cell
site by directing the energy broadcast from the antenna towards a
particular cell phone, rather than sending it equally in all
directions; can increase the effective signal strength by
"focusing" it, can permit re-use of the same frequency channel
within a cell by directing it in different directions
- tower top amplifiers
o technology to increase the efficiency of broadcast signals by
locating the final amplifier stage close to the antenna;
traditional systems locate the amplifiers at the base of the
antenna (indoors) - by putting them closer to the broadcast
point, less energy is lost in cables, the cables used can be much
smaller and less expensive, and as a result lower powered
amplifiers can be used to deliver more effective power to the
antenna
- super coverage antennas
o by combining smart antennas and very high power tower top
amplifiers with larger and more efficient antennas on very high
towers, the overall coverage area ("footprint") of a cell site
can be increased; this is of particular interest for networks
operating at higher frequencies, such as third generation
networks, because higher frequency signals do not travel as far
as lower frequency signals - so super coverage antennas may
permit new generation cellular networks to be deployed using the
same base station sites as earlier networks (otherwise, many more
base stations will be required for 3G because of the smaller cell
size)
- distributed / extended base stations (remote heads)
o another approach to overcoming the distance limitations of third
generation signals is to deploy a larger number of smaller
broadcast points; this can be accomplished by separating the base
station from the antenna. One way to do this is by linking the
base station to the broadcast points by fiber optic links, in
this case the computer portions of a number of base stations can
be co-located in a "base station hotel" with convenient network
connections and air-conditioned environment, and then the
broadcast points are called remote heads and consist of a smaller
unit, sometimes mounted at the tower top, to convert the signal
from fiber, amplify it and send to the antenna.
Although it remains to be seen which, if any, of these new technologies
will be successful, they all appear to have the possibility of reducing capital
costs of network operators to meet their third generation network coverage
obligations and they all utilize the kind of repeater-style amplifiers that we
28
specialize in. However, if conditions in the wireless telecommunications
industry do not improve in the near term, the roll-out of third generation
networks may be slowed or delayed indefinitely.
Technology Background
A typical cellular network includes a number of base stations (also called
base transceiver stations ), repeaters, and handsets or cell phones. The base
stations are organized into "cells" which can be up to several miles in diameter
in rural areas, but are much smaller in urban areas. Each base station manages
all the calls in its cell, connects the mobile handsets to the wired telephone
network, looks after collection of billing data, and transfers the calls to the
next cell as the handsets move to the edge of the cell. Base stations generally
contain eight or more very high power (60-100 watts average output power)
amplifiers for the broadcast of signals "down" from the antenna to the handsets;
the process is sometimes referred to as a "downlink". A different type of
amplifier, called a low noise amplifier, is located close to the antenna for
receiving the weak signals sent from handsets back to the base station,
sometimes referred to as an "uplink" - we do not currently make low noise
amplifiers. Base station amplifiers usually fit into an equipment rack in an
air-conditioned room, and often have built-in cooling fans; most manufacturers
of base transceiver station equipment have their own proprietary mechanical and
electrical interface requirements for the amplifiers.
Cells in urban areas are typically "capacity constrained" (i.e. limited by
the number of simultaneous calls the base transceiver station can support),
where rural and suburban cells are typically "coverage constrained" (i.e.,
limited by the geographic area they can cover with a signal strong enough to
communicate clearly. In many cases, repeaters can be used to extend coverage).
Repeaters are breadbox-sized units usually designed for outdoor, pole mounting,
which receive a weak signal "off air" (i.e. having been broadcast by a distant
base station), filter distortion and noise from the signal, then amplify and
rebroadcast the clean signal in stronger form. Repeaters can be used to provide
coverage along a remote highway, for example, or to a town hidden in a valley
from the nearest base station. Repeaters can be designed for use in tunnels and
buildings, or public spaces such as malls or airports. Some versions of
repeaters can receive their input signal by coaxial or fiber optic cable instead
of from the air, further extending their range from the base transceiver
station. Repeaters generally contain a radio frequency power amplifier of 10-30
watts average output power, about the size and shape of a small hardcover book;
in-building repeaters can be as small as 1 or 2 watts. Radio frequency
amplifiers for repeaters generally are designed to mount inside an outdoor
equipment box that will be mounted on a pole or tower.
A big challenge in broadcasting voice or data is to ensure that the
broadcast signals are as perfect as possible, maintaining the integrity of the
communications and not interfering with other radio equipment or other channels
running on the same equipment. This requires radio frequency power amplifiers
which amplify signals with the least distortion and maximum fidelity possible.
Unfortunately, the power transistors around which power amplifiers must be built
do not on their own exhibit all these characteristics so amplifier designs must
include complex circuitry to compensate for the inherent non-linearity of the
chips. Linearity is a measure of an amplifier's ability to faithfully reproduce
the weak input signal as a stronger output signal without introducing any
distortion in the amplification process.
Several methods exist to compensate for the non-linearity of the devices,
with various technical and cost trade-offs. In all cases, the "efficiency" of
the amplifier is an important factor, where efficiency is the ratio of direct
current or DC power consumed vs. the radio frequency power emitted (the balance,
often more than 90%, being dissipated as heat which must be removed by
air-conditioning or heat fins).
The amplifiers must also contain temperature compensation circuitry to
ensure they maintain effective operation across a very wide temperature range,
often from -20(0)C to +70(0)C or more, and control
29
and monitoring circuitry so they can be integrated into the original equipment
manufacturer's equipment as part of a larger system.
Principal Products of the Company
We make high power radio frequency amplifiers. Most of our products are
high power amplifiers, defined as single channel power amplifiers used for
sending signals from a network to a terminal such as a cell phone. Most are used
in repeaters that are used to extend coverage in cellular telephone networks.
Some products are also used in base station equipment and some are multi-channel
power amplifiers. One product has been tested for digital television
broadcasting in Korea, and one product is for base stations used in wireless
local loop applications. Wireless local loop networks are sometimes referred to
as "the last mile" solution - unlike cellular phone systems which are mobile
wireless networks, wireless local loop is designed to deliver voice and high
speed data (e.g., Internet) services to fixed locations such as homes and small
offices without the need for special wiring via wireless communication devices.
A radio frequency power amplifier for a repeater is typically a rectangular
box about the size of a hardcover book. The box is made from a block of aluminum
with an aluminum cover securely attached. The amplifier will have connectors for
receiving and emitting radio frequencies, DC power in (usually either 12 volts,
27 volts or -48 volts), and a control/monitoring interface for adjusting the
operation of the amplifier. The circuit boards and components inside the
amplifier are designed for the maximum heat dissipation through the base plate
of the box, which when installed by the customer in a repeater will be bonded to
a finned heat sink to best transfer the heat energy from the amplifier to the
outside air.
A radio frequency power amplifier for a base station usually mounts as a
slide-in module in an industry standard electronics equipment rack. These
amplifiers may be designed as repeater amps and then mounted on a slide-in heat
sink, sometimes with other circuitry provided by the base station manufacturer;
or they may be designed as base transceiver station-specific modules.
Our family of amplifiers covers a range of average output power levels
(from 2 watts to 80 watts) and a number of different operating frequency bands:
Frequency Band Usage
-------------- -----
- 450 MHz Russian third generation cellular phones
- 470 - 860 MHz digital television
- 800/900 MHz first generation cell phones know as Cellular Band
- 1800/1900 MHz second generation cell phones know as PCS Band
- 2100 MHz third generation network cell phones and mobile devices
- 3.5 GHz wireless local loop fixed wireless
Most of our sales to date have been of amplifiers in the cellular and PCS
bands, for repeater applications. Recent contracts for supply of third
generation network and wireless local loop products have been signed, and test
or development is underway for the 450MHz and digital television products, as
well as for three base station amplifiers.
Our principal customers are the original equipment manufacturers of
repeaters and base stations. The original equipment manufacturers sell their
products, which include radio frequency power amplifiers, to the operators of
wireless networks.
30
MARKET OVERVIEW
The market for cellular band, PCS band, third generation networks and
wireless local loop networks has grown significantly during the past decade, due
to decreasing prices for wireless handsets, increasing competition among network
operators resulting in lower costs to consumers and a greater availability of
high quality services. In addition, several developing countries are expected to
install wireless telephone networks as an alternative to installing, expanding
or upgrading traditional wire-line networks. Emerging bi-directional wireless
data applications such as Internet browsing and location-based services (where
the service provider can send a user different information depending on the
user's location when making the request) also have the potential to further
expand the market for wireless networks by allowing network operators to
increase revenue-generating traffic on their networks.
We believe that the potential for future growth of the global wireless
market is dependent on several economic and other factors:
o Consumers and businesses worldwide are driving up penetration and
usage rates and therefore increasing the demands for voice,
Internet and data wireless networks.
o Affordable telecommunication infrastructure is becoming necessary
in developing countries and the construction of wireless local
loop networks is one of the quickest and most cost-effective
solutions.
o Traditional telecommunications service providers are
incorporating and bundling wireless technologies into their suite
of offerings.
o The move to one or two global standards for third generation
network wireless services will cause most current infrastructure
to be upgraded or replaced.
Despite the persistent downturn in the wireless telecommunications
industry, we expect that factors such as these will eventually increase global
demand for wireless technologies. According to industry analysts, the Carmel
Group in a report published in January 2002, the global mobile subscriber base
of 480 million in 1999 will grow to 1.8 billion in 2005. The corresponding
traffic volume is also expected to increase to 2,074 billion minutes in 2005
from 541 billion minutes in 1999. We anticipate a significant and corresponding
increase in global wireless network infrastructures to support this subscriber
and traffic growth.
The growth of infrastructure equipment is also influenced by the industry's
focus on price reductions. While the traffic volume is increasing as noted
above, the average revenue per wireless user has been flat or declined.
Competition between network operators for subscribers is significant and
influenced by subscriber plans that include flat rates, free long distance, no
roaming charges (i.e., additional charges assessed for making calls outside your
local calling area) and free minutes of use. This pricing pressure extends to
the equipment manufacturers, including suppliers of amplifiers and components,
in the form of steadily increasing pressure for higher performance, lower cost
equipment to reduce infrastructure capital costs and operating expenses.
Several trends have affected the supply and demand for power amplifiers in
the global market. As recently as a decade ago, the global market was small and
dominated by a few suppliers. With the rapid growth of wireless technology in
the late 1990s, the number of competitors has increased and smaller companies
that supplied amplifiers to niche markets grew quickly and gained market share.
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Another trend in the wireless market is the convergence of high-speed
Internet access with mobile and fixed wireless systems. Cellular Band and PCS
Band systems are currently adopting limited Internet capability, and many
traditional mobile communications systems providers are attempting to provide
high Internet access speeds that should create additional opportunities for new
systems to gain market acceptance. Clearly, as these trends cyclically slow or
accelerate, the wireless market in general will be similarly affected and that
will have a corresponding affect on our potential sales of amplifiers into that
market.
These specialized markets are expected to become even more important as the
third generation network networks begin to build out over the next few years.
The demand for third generation network will be driven from two sources:
o third generation network networks are expected to address consumer
demands by providing higher speed communications and wireless Internet
services; and
o the needs of network operators for higher call capacity and more
billable "subscriber minutes".
The nature of third generation network radio frequency signals is such that the
signals have higher attenuation rates that means that the size of each third
generation network cell site is much smaller in coverage area than that of
earlier generations of wireless technology. The solution for network operators
who wish to (or need to) move to third generation network is to
o build out as many as 5 times as many base stations, or
o to deploy one or more "infill" technologies such as repeaters, smart
antennas, distributed base stations and micro-cells.
Both solutions imply that third generation network networks will need a lot
more radio frequency power amplifiers than earlier generation networks.
Wireless carriers are also actively working to increase system capacity by
implementing additional radio carriers to existing base stations, and by adding
new radio interface standards such as Global System for Mobile Communications
(GSM), General Packet Radio Service (GPRS) and Wideband Code Division Multiple
Access (WCDMA). In adding new radio traffic, the network operator must increase
the radio frequency power available in the transmission equipment in order to
cover the same geographical area. Therefore, the need to increase system
capacity has led many wireless base station manufacturers and network operators
to procure high power amplifiers designed to handle these advanced digital
communications signal formats.
The transition to advanced wireless networks will entail large expense.
According to an UpsideToday Magazine Special Report on March 5, 2002, AT&T
Wireless estimates that it will spend $3.8 billion on third generation network
deployment while Cingular, the second largest wireless service provider in the
United States, estimates spending $2.88 billion. US Cellular, which provides
wireless service to more than 3.5 million subscribers in 25 states, is spending
between $400 million and $450 million on radio and switching equipment for 3,500
base stations and related infrastructure as reported May 16, 2002 in Reuters
Company News.
If the usage of wireless applications increases, the demand for more system
capacity and greater system coverage also increases, thus creating an increased
demand for power amplifiers.
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Market Sectors
The market for radio frequency power amplifiers can be divided in 2 large
sections, called in the industry "captive" and "merchant". The captive market
refers to those amplifier manufacturers who are owned by or have special
allegiance to a specific original equipment manufacturer. For example, Ericsson
recently (late 2000) purchased MPD Inc. to increase their in-house capacity for
amplifiers. The merchant market refers to those independent manufacturers of
amplifiers who sell to independent original equipment manufacturers. We operate
in the merchant market.
According to RadioWAVES Wireless Technology Quarterly, January, 2002, an SG
Cowen publication, in 2001, the overall market for "mobile infrastructure" was
estimated at $47 billion; of that about $785 million represents the radio
frequency power amplifier market. Of the $785 million, about 75% is accounted
for by the five largest merchant suppliers, leaving 25% available for the
smaller players such as Unity Wireless. The 75% includes Celiant, spun off from
Lucent about a year ago and recently purchased by Andrew Corp.; 90% of Celiant's
sales still come from Lucent so although it is technically in the merchant
market, it could also be considered captive
RadioWAVES Wireless Technology Quarterly, January, 2002, also reports that
the merchant market for amplifiers is expected to grow from about 19% of the
total amplifier market in 1998, to about 40% in 2003, and show a 35% cumulative
annual growth rate from 2001 reaching about $1.6 billion by 2005. This strong
growth comes from (1) significant cutbacks by the large original equipment
manufacturers (Ericsson, Nortel, Lucent, Motorola, Siemens) in their staff and
internal abilities to keep current with amplifier technology, and (2) the
anticipated return to growth of the wireless infrastructure markets (in
particular third generation network, which requires two times the number of
power amplifiers to deploy as previous networks).
We believe the growth rate in small- to mid-sized amplifiers as used in
repeaters and smart antennas may be even higher than in the general markets as
third generation network networks are deployed. As well as their traditional
"infill" and coverage extension roles, in third generation network networks
repeaters can be used by network operators to reduce deployment costs. "Smart
antennas", a new technology that increases the performance and coverage of cells
using antennas with beam forming arrays, also favor the use of smaller
repeater-style amplifiers like those made by us. The larger companies so far
appear to be continuing their concentration on traditional network technologies
where they have had a traditional advantage. We believe the new technologies
will make an increasing impact on the way networks are built over the coming
years and are positioning to take advantage of this anticipated trend.
Geographic Sectors
The global market for power amplifiers can also be divided geographically.
Forecast growth rates (shown below as cumulative annual growth rates for the
years 2001 through 2003) for number of subscribers (which can be loosely
indicative of the amount of infrastructure spending and growth rate of the
related amplifier markets) for each of the major markets are given below:
- North & South America 17.9%
- Europe 24.3%
- Asia 9.0%
- Africa/Middle East 23.4%
As at the mid-point of 2002, we feel that the projections above, derived
from RadioWAVES Wireless Technology Quarterly, January, 2002, an SG Cowen
publication, may be optimistic and we feel
33
that such growth may be delayed by one year or more.
We have only recently begun to open new markets beyond our initial sales in
Korea, and for 2002 the Korean market is still expected to be the most
significant for us in 2002. Historically, we have generated over 90% of our
revenues from the Korean market. During the second quarter of 2002, the Korean
market contributed less than 10% of our revenues, while sales to new customers
in United States, China, Israel and Sweden increased. We anticipate that this
trend will continue in the later half of 2002, and beyond.
Initial sales results in China have shown mixed results - we were
successful in signing three companies as sales agents and in securing sales or
trials in several original equipment manufacturers of repeaters and base
stations, but had one order cancelled after completion and have experienced
difficulty collecting on other sales, even when shipped against letters of
credit.
Product Research and Development
We have recently augmented our research and development capabilities in the
area of our high power linear amplifiers, with the addition of radio frequency
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 our understanding
of current best practices for design techniques and other progressive
technologies.
We are also working with technology developers in seeking to increase the
performance and efficiency of our amplifiers. Most recently we have entered into
a licensing agreement with an Israeli company, for the development of a new
generation of amplifiers targeted for production in the third quarter of 2002.
The first bench prototypes using this technology have been demonstrated, and
show significant improvement to the efficiency of the amplifiers for the same
output power and improved linearity.
We have recently been selected by a major developer of digital
pre-distortion technology to develop an amplifier designed for optimal
performance with its chip set, and to publish the design as a reference;
simultaneously we are also developing an amplifier with the digital
pre-distortion technology built in.
Sales and Marketing
We have started building long-term strategic alliances and partnerships to
assist in technology development that will help to extend our position in the
wireless communications market as well as reduce our exposure to shorter-term
projects. By signing multi-year development and supply agreements, we hope to
benefit from a more predictable revenue stream.
On July 9, 2002, we announced the signing of three additional such
agreements, which we believe provide potential revenue of up to US$25.8 million
in new revenue for Unity Wireless with volume shipments commencing in 2003 and
extending through 2005.
The first agreement is to supply a North American manufacturer of wireless
local loop network equipment with power amplifiers over a three-year period
(2003-2005). Unity Wireless has delivered samples and pre-production units of a
custom "Orca" model power amplifier meeting the customer's specifications and
aggressive delivery schedule. The potential revenues generated by this
relationship are estimated at US$15.7 million reflecting a contractual minimum
supply of 75% of the customer's forecast Orca power amplifier requirements.
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The second agreement specifies delivery of standard production model Cougar
power amplifiers to a European manufacturer of repeater antenna systems and
components. Initial production units to this customer have already been
delivered, and the first units are currently under field trial in the UK.
Potential revenues generated by this relationship for the first application over
an initial 18-month period are estimated at US$1.4 million with Unity Wireless
being named the prime supplier of the customer's power amplifier requirements.
The third agreement, a preliminary agreement with a European manufacturer
of third generation network (third generation) base station equipment, is
contingent on modifying Unity's "Cougar" model radio frequency power amplifier
to meet the customer's physical size and control features. To date, production
samples of the Cougar tested by the customer have met their performance
specifications. Assuming the customer's acceptance of further samples modified
to their requirements in September, the parties anticipate signing a definitive,
multi-year supply agreement in Q4, the basic terms of which are defined in the
preliminary agreement. Revenues generated by this relationship over a three-year
period (2003-2005) are estimated at US$8.7 million reflecting supply of 50% of
the customer's minimum forecast for their power amplifier requirements.
The above captioned agreements are subject to many factors that may have a
material effect upon the potential value of the contracts. Forecasts provided by
the customers represent an expectation of business and do not represent firm
orders, or a commitment to order, power amplifiers for the estimated values. The
forecasts have been used by both parties to determine delivery schedules and
volume pricing models. The customer's may delay or terminate the agreements with
a minimum of 30 days notice provided that Unity Wireless fail to consistently
meet delivery and quality requirements as defined in the agreements.
In addition, each customer could be subject to penalties imposed by us
should accepted orders be delayed or cancelled by the customer. Theses penalties
include, but not limited to, any inventory carried by Unity Wireless
specifically for that customer's product. The customers could impose penalties
on us should we fail to meet delivery schedules or quality for accepted orders.
Further penalties could be levied by the customer if they incur late penalties
as a result of a delivery or quality issue relating to our power amplifier
product.
We sell our high power linear radio frequency amplifiers primarily through
sales agent channels and on-site visits with customers. The majority of
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. Sales from our Korean agent comprised of 87% of our total 2001
revenues.
We have expanded our marketing efforts to include North America, China,
Israel and Europe. Initial sales have already been made in each of those
regions.
On March 27, 2002, we announced that we signed our first joint development
agreement with Radio Components Sweden AB for the design and manufacture of an
advanced feedforward multi carrier linear power amplifier (MCLPA) for
integration into Radio Components' high coverage transmission antenna systems
for the third generation network European markets. Feedforward is a particular
technique for improving the signal clarity of an amplifier. This development
agreement provides for the sharing of expenses and technology to design and
build an amplifier to power Radio Components' Phased Array Antenna technology.
The anticipated benefits of a transmission system of this type include a larger
coverage area, more powerful signal and lower operating costs per base station
for wireless service providers.
35
Short-term sales and marketing efforts will focus on current-generation
products and original equipment manufacturer customers who make repeaters.
Medium and long term sales efforts will continue to focus on original equipment
manufacturer developers of new technology solutions and third generation network
suppliers with the goal of establishing long term supply agreements. We had some
recent successes in achieving design wins with such companies (see above), where
we develop product designed specifically for the needs of a customer, and secure
a multi-year exclusive supply arrangement for that product. Ideal target
companies for this strategy are makers of digital and optical repeaters, smart
antennas, specialty fixed wireless equipment, and specialty third generation
network base stations.
Medium and longer-term sales efforts will also center around those
customers who can most benefit from the new technology amplifiers currently
under development.
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 radio
frequency amplifier products is to align with developers of new technologies in
the radio frequency 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 components 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 allows us to utilize 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
radio frequency circuitry in our facility located in Burnaby, British Columbia.
We have limited capacity, and the process to assemble, test and tune our current
products is labor intensive. We believe our capacity is sufficient to meet our
requirements during 2002.
In the future, we plan to out-source the manufacturing for our products. On
August 1, 2002, we announced that we have selected Burnaby, British Columbia
based contract electronics manufacturer Creation Technologies Inc. for volume
production of our power amplifiers.
Our growth orientated business model provides for the out-sourcing of
volume manufacturing so that we may remain focused on developing and marketing
our advanced power amplifier solutions. We believe this flexible model allows us
to respond effectively to orders of various sizes since meeting our customer's
volume and delivery schedules would require substantial investment in
manufacturing facilities, equipment and additional resources. Creation is
located close to our facility and has a proven track record for quality.
Creation Technologies, an ISO 9002 (a manufacturing quality assurance
standard recognized worldwide) certified contract electronics manufacturer, is
100 percent employee owned with assembly plants in British Columbia and Ontario
and provides full manufacturing solutions from design support and new product
development to final assembly, packaging and product distribution.
36
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
Within the merchant market for amplifiers, there are three dominant
companies and a number of smaller ones. The dominant companies are Powerwave,
Spectrian/Remec and Celiant/Andrew. Collectively, they represent 92% of the
merchant market for amplifiers. Historically they have concentrated their
efforts on the high-end, multi-carrier, high power amplifiers used by the
tier-one base station manufacturers.
The smaller amplifier companies compete for the repeater business, and it
is this business that management expects will grow most quickly and be the most
likely to grow if the wireless infrastructure markets pick up again in the
coming quarters.
Our strategy is to compete on based on superior technology to differentiate
our products from the competitors. Initially, for one to two years, we will
continue to compete only with the smaller amplifier companies in niche and
specialty markets, and expect to win sales based on superior technology. Within
two years we hope to make inroads into the larger market segments building on
the technology and track record used first in the niches.
Our products compete on the basis of price, technology, performance,
quality, reliability, customer service and on-time delivery. We believe 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 also have a business strategy to partner with strategically important
niche or new technology companies. For these companies, we will create
customer-specific products in exchange for long-term supply agreements.
Our technology differentiation is based on these development programs:
- early introduction of third generation network single channel
power amplifiers
o product has been tested and accepted by several customers
and field trials are currently underway
- development of high efficiency power amplifiers (up to 50% better
than competitors)
o bench prototypes have been demonstrated - development of
digitally pre-distorted amplifiers for better linearity at
reduced cost o company is working closely with the leading
supplier of digital pre-distortion chip set technology
We have included below a brief description of some of our competitors based
on publicly available information:
Powerwave Technologies Inc., United States
o Public company, the largest independent amplifier supplier, with sales
of about $400-$500M.
o Focused almost exclusively on the tier-one base station original
equipment manufacturers: Ericsson, Nokia, Lucent, Motorola, Siemens,
Nortel.
37
o Do not participate in the niche or specialty segments of the merchant
market.
Spectrian Inc., United States
o Public company, third largest amplifier company in United States
(sales about $150-$200M), recently acquired by Remec, of San Diego.
o Several hundred engineers in four development facilities; recently (18
months ago) outsourced all manufacturing to independent contract
manufacturers in China and Thailand.
o Started with technology and strategy similar to Unity's, selling
primarily to Korea, then started making higher power feedforward
(multi-carrier) amps and developed Nortel as a major customer; for
unknown reasons that business started to stall about a year ago and
Spectrian concentrated on developing new customers.
o Has no product in the mid-range power and single-carrier spaces.
o Have invested in Paragon (an Israeli technology company with power
management technology for radio frequency amplifiers, which is also
working with Unity);
o Is working with PMC-Sierra's Paladin technology for digital
pre-distortion.
o Undergoing some rationalization and integration after merger with
Remec.
Andrews/Celiant, United States
o Large size corporation ($1.3B sales), Celiant was spun off from Lucent
(previously the captive supplier of amps to Lucent) and about a year
later was acquired by Andrews, a maker of antennas and other radio
frequency equipment.
o Focus on large amps for base station original equipment manufacturers;
lead customer is Lucent; does not participate in the repeater and
niche amplifier markets.
Japan Radio Corp., Japan
o Global corporation, maker of all sorts of radio frequency and radio
equipment and systems, with an radio frequency amplifier division.
o Focus on 30 watt and above base station amps.
o Excellent technology, very poor marketing outside of Japan; have
approached Unity to assist with North American marketing. o Very large
supplier of amps to NTT DoCoMo in Japan.
o Competitor of ours for the higher power amplifiers.
EMPower, United States
o Private company generating about $3M in sales, some standard amplifier
product similar to Unity's for about 1/3 of their business, 1/3 is
broadband and balance is specialty and military amplifiers.
BWI Broadband Wireless Inc., United States
o Small private company
o Mainly manufactures one-off and small-run specialty amplifiers for
military market;
Amplidyne, United States
o 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, United States
38
o Designs and manufactures single channel amplifiers for the cellular
market and is trying to penetrate the PCS bands with newer technology.
AML Communications, United States
o Designs and manufactures high power linear amplifiers for cellular,
PCS and satellite markets. Is also involved in the design and
manufacture of low noise amplifiers.
Wiseband, Israel
o Small private company with high power (30 and 60 watt) base station
amps rumored to be built on a third-party's DSP design. o R&D focus
with no manufacturing and limited in-house prototyping facilities. o
Recently started work on their own digital pre-distortion design.
Eyal Microwave Inc., Israel
o Private company manufacturer of military radio frequency components
and subsystems, recently entered the high power (60 watt) radio
frequency amp business.
Additionly, the Korean marketplace has seen many competitors develop over
the last two years, such as Wave Telecom, Chang Won and Sehwon. Most are private
companies who started by copying the competitors' designs and are now providing
superior amplifiers, with good quality and steadily improving features and
performance.
Most of them are selling almost exclusively in the domestic Korean market,
but beginning to compete in the China market (although primarily through Korean
original equipment manufacturers of repeater systems, not selling amps as
components directly to the Chinese original equipment manufacturers).
It should be noted that domestic manufacturers in Korea have a significant
commercial advantage over our Company, as imported amplifiers are subject to a
12% import duty; the local manufacturers also benefit from other government
incentive programs.
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 are also using the unregistered trade-mark "Unity
Wireless". We intend to register this mark in the U.S., Canada and, possibly,
other countries.
In 2002, we registered the trade-mark "Unity Wireless" in Canada .
Our Sonem business was sold on October 6, 2000, to Traffic Systems LLC, an
Arizona limited liability corporation. 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 LLC,
and all rights to the trade-mark Sonic Solution(R) were sold to Traffic Systems
LLC in connection with the sale. See "Acquisition and Dispositions -- Sale of
Sonem Business."
39
Patents
We do not have any patents with respect to our technology, although on
March 15, 2002, we filed for a United States Provisional Patent Application for
our Multi-Carrier Linear Power Amplifier.
We have an immaterial residual interest in several patents associated with
the Sonem technology, substantially all of which we have transferred to Traffic
Systems LLC. See "Acquisition and Dispositions -- Sale of Sonem Business."
Service and Product Warranty
We offer a standard warranty of one year on parts and labour from date of
shipment on our radio frequency amplifiers. In some cases, a warranty period of
two years may be negotiated. For instance, radio frequency amplifiers sold into
Korea to date typically have a two year warranty. We will repair units under
warranty at our cost and return the units 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. Consumer protection and
other laws may limit our ability to limit our liability or exclude certain types
of damages.
We installed a one-off system for audible tornado warnings in Batesville,
Arkansas in 1998. This system was sold with a five year warranty. There is
approximately one year remaining on that warranty and no failures have been
reported recently.
Government Regulation
Our power amplifiers are sold as components that form part of larger
systems. The manufacturer or integrator of the systems must test them for
compliance with Federal Communications Commission standards, to avoid radio
frequency emissions that could interfere with other radio frequency
transmissions or similar regulatory standards in other countries. We do not test
our amplifier products for compliance at the component level. Nonetheless, if a
system in which our amplifiers are included fails to satisfy applicable
standards, whether due to emissions from our amplifiers or other causes, sales
of our amplifiers would be adversely affected.
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 August 15, 2002, we had approximately 45 full-time employees. Our
employees are not represented by a collective bargaining agreement and we
consider our relationship with our employees to be good.
Reports to Security Holders
We are a reporting company under the Exchange Act. We file an annual report
on Form 10-KSB and quarterly statements on Form 10-QSB with the SEC. We must
also file other reports, such as Form
40
8-K, as applicable. In addition, we submit a proxy statement for our annual
stockholders meeting (and, if applicable, any special meetings).
The public may read and copy any materials filed by us with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. We are an electronic filer. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The Internet address of the site is http://www.sec.gov.
By virtue of being listed on the TSX Venture Exchange, we are also a
reporting company under the Securities Act of British Columbia and Alberta,
Canada. We file an annual report and quarterly statements on British Columbia
Form 51-901F with the British Columbia Securities Commission. We must also file
other reports, such as Material Change Reports, as applicable. We are an
electronic filer. The Canadian Depository for Securities through it's
subsidiary, CDS Inc., maintains a website which contains all reports regarding
issuers that file electronically through the Canadian System for Electronic
Document Analysis and Retrieval ("SEDAR"). The Internet address of the site is
http://www.sedar.com.
Our Internet address is http://www.unitywireless.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of our financial condition, changes in financial
condition, and results of operations should be read in conjunction with our
consolidated financial statements and the accompanying notes.
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 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 stockholders,
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. 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.
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
41
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.
Our 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
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 that 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 we consider 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 is 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.
Goodwill is recorded at cost less accumulated amortization. Goodwill is the
residual amount that results when the purchase price of an acquired business
exceeds the sum of the amounts allocated to the identifiable assets acquired,
less liabilities assumed, based on their fair values. Goodwill is allocated as
of the date of the business combination to our reporting units that are expected
to benefit from the synergies of the business combination. Goodwill is not
amortized and is tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the goodwill might be impaired. The
impairment test is carried out in two steps. In the first step, the carrying
amount of the reporting unit is compared with its fair value. When the fair
value of a reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not to be impaired and the second step of impairment test is
unnecessary. The second step is carried out when the carrying amount of a
reporting unit exceeds its fair value, in which case the implied fair value of
the reporting unit's goodwill is compared with its carrying amount to measure
the amount of the impairment loss, if any. The implied fair value of the
reporting unit's goodwill is determined in the same manner as the value of
goodwill is determined in a business combination described in the preceding
paragraph, using the fair value of the reporting unit as if it was the purchase
price. When the carrying amount of a reporting unit exceeds the implied fair
value of the goodwill, an impairment loss is recognized in an amount equal to
the excess and is presented as a separate line item in the earnings statement
before extraordinary items and
42
discontinued operations. We consider ourselves to operate as a single reporting
unit. At June 30, 2002, we had completed our first step assessment as described
above, and had concluded that the fair value of the reporting unit exceeds its
carrying value and accordingly, no impairment of the carrying value of goodwill
is required to be recorded. We intend to carry out the annual assessment of
goodwill commencing in December of 2002.
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. Specifically, revenue from products is
recognized once a sale arrangement exists, delivery has occurred, the revenue is
determinable and collectability is reasonably assured which is upon the later of
shipment or when title passes to the customer depending on the contractual
terms. 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.
We apply 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 our
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 exceeds 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, we have elected to continue to apply the intrinsic
value-based method of accounting described above, and have 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. If the exercise price of fixed employee stock option
award is reduced or if the exercise price is not fixed in our functional
currency 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. We measure variable plan stock compensation as the amount by which
the quoted market value of the common shares of our stock covered by the grant
exceeds the option price with changes in the market price included in the
measurement of loss.
Results of Operations
As mentioned in Note 5 of the Notes to Consolidated Statements and in the
Corporate History section of Description of the Business above, our operations
in 2001 related mainly to the designing, developing and marketing of high power
linear radio frequency amplifiers after the discontinuance of the Sonem, Unilinx
and UW Integration operations.
Three months Ended June 30, 2002 and June 30, 2001
Sales
Net sales of radio frequency amplifiers in the second quarter of 2002
decreased by 52%, or $296,803, to $273,756 from $570,559 in the second quarter
of 2001. The decrease resulted from a
43
significant down turn in the wireless telecommunications industry that resulted
in slower sales of our products, our strategic decisions to diversify
geographically as well as by product type and to develop and seek long-term
customer supply contracts. As a result of this new strategy and the fact that
our products are customized in nature, there is an approximate four month sales
cycle from the time the engineering work starts through the field trials phase,
during which the customer orders small sample orders and eventually when the
order is placed by the customer. We estimate that we are in the middle of the
first sales cycle since we have targeted new long-term customers. Additional
factors contributing to the lower sales in the second quarter of 2002 was the
general world-wide softening and changing of the market conditions in the
wireless sectors and the delayed awarding of wireless infrastructure contracts
by the major Chinese telecom companies to which we had made bids to the third
quarter of 2002 from the originally planned second quarter of 2002 roll-out. We
anticipate that revenues will increase in the second half of 2002 as we near the
end of our initial refocused sales cycle
Operating Expenses
Cost of goods sold in the second quarter of 2002 increased by 57%, or
$192,106, to $528,908 from $336,802 in the second quarter of 2001. The increase
was primarily due to increased wages & benefits, sub-contract labor and testing
equipment required for the large amount of samples that were produced and
shipped to potential long-term supply customers and a one time provision for
obsolete inventory that can no longer be used as newer component parts are now
required for our new technology RF amplifiers. We have subsequently refinanced
and reduced the amount of some of our test equipment, created more efficiency in
our staffing requirements and established a relationship with an outsource
manufacturing company. We expect to start outsourcing our larger orders during
the third quarter of 2002. We believe this will allow us to take advantage of
better purchasing power, reduce our inventory levels and ensure that a
consistent quality product is delivered on time. We anticipate that our cost of
good sold, as a percentage of sales, will be reduced during the second half of
2002 as a result of increased sales and outsourced manufacturing. Costs of goods
sold includes stock-based compensation expenses of $520 in the second quarter of
2002 versus $nil for the same period in 2001.
The gross margin of $(255,152) or (93)% of net sales for the second quarter
of 2002 represented decrease from a gross margin of 41% of net Sales for the
second quarter of 2001. This decrease represented refocused sales strategy and
associated long sales cycle to potential long-term (e.g., three or more years)
supply customers which results in costs of goods sold exceeding revenue
generated by sales to long-term customers early in the relationship as sales
volumes start low and production costs start high as we develop custom
amplifiers of each customer's particular installation. If we are successful in
establishing favorable relationships with long-term customers, we anticipate
that these trends will reverse themselves as sales volumes increase during the
term of the relationship with our long-term customers and we are able to
standardize production and take advantage of economies of scale. As well, we
recorded a provision in the amount of $74,000 for obsolete inventory as newer
parts are required for our new technology RF amplifiers. We anticipate that we
will increase our gross margin during the second half of 2002 with increased
sales and reduced overhead as a result of our new sales and manufacturing
strategies.
Research and development expenses in the second quarter of 2002 increased
by 168%, or $365,831, to $584,135 from $218,304 in the second quarter of 2001.
This increase was primarily due to increased R&D activities and related
expenditures as a result of the larger number of engineering personnel on staff
and the increased development of additional radio frequency amplifier products
during the second quarter of 2002 versus the same period of 2001. During the
second quarter of 2002 we had an average staff number of over 20 engineers who
were working on over 30 projects versus
44
approximately 10 engineers who were working on under 5 projects for the same
period in 2001. Research and development expenses include stock-based
compensation expenses of $8,905 in the second quarter of 2002 versus $58,621 for
the same period in 2001.
Sales and marketing expenses in the second quarter of 2002 increased by
27%, or $37,876, to $177,863 from $139,987 in the second quarter of 2001. The
increase was primarily a net effect of decreased advertising, promotional
activities, tradeshow and travel expenses to visit new customers and
distributors, which was required in the second quarter of 2002 offset by
increased expenses from samples supplied to potential new customers. Providing
customers with trial samples is an industry norm that is required in order to
secure new long-term customer supply contracts. Over the second half of 2002, we
anticipate plan to increase our marketing and sales resources due to the
geographic diversification of our new customer base and with the goal of
securing additional short and long-term supply agreements Sales and marketing
expenses include stock-based compensation recovery of $397 in the second quarter
of 2002 versus an expense of $36,870 for the same period in 2001.
Exchange loss (gain) in the second quarter of 2002 increased by 166%, or
$33,695, to $13,375 from $(20,320) the second quarter of 2001 due to
fluctuations in the currency exchange rate between the U.S. and Canada. The
Company's revenues are received mostly in U.S. dollars, while the majority of
expenses are incurred in Canadian dollars. During the quarter the Canadian
dollar generally strengthened against the U.S. dollar.
General and administrative expenses in the second quarter of 2002 decreased
by 41%, or $269,965, to $391,875 from $661,840 in the second quarter of 2001.
The reduction was a result of better control of overhead expenses, reduced stock
compensation expense and less public company filings and associated expenses
than in the same period as last year. General and administrative expenses
include stock-based compensation expenses of $30,002 in the second quarter of
2002 versus $218,678 for the same period in 2001.
Other Income
Interest income in the second quarter of 2002 decreased by 79%, or $4,780,
to $1,289 from $6,069 in the second quarter of 2001. This decrease results
primarily from a lower balance on deposited funds on deposit in the quarter.
Other income in the second quarter of 2002 decreased by 68%, or $418, to
$198 from $616 in the second quarter of 2001.
Comprehensive Loss
Comprehensive loss increased by $766,523, or 125%, from $611,856 to
$1,378,379. This increase was primarily due to the increased focused on
long-term contracts that resulted in lower initial sales and higher upfront
costs in order to tailor the solution to our customer's needs and the continued
weakness in the telecommunications industry. As a percentage of sales,
comprehensive loss increased from 107% to 504%.
Six months Ended June 30, 2002 and June 30, 2001
Sales
Net sales of radio frequency amplifiers in the first half of 2002 decreased
by 11%, or $207,256, to $1,756,250 from $1,963,506 in the first half of 2001.
This decrease was due to the reduced sales in the second quarter of 2002 as a
result of the longer sales cycle required from the newly initiated sales
strategy that focuses on achieving sales from long-term customer supply
agreements. Additional factors contributing to the
45
lower sales for the first six months of 2002 was the general world-wide
softening and changing of the market conditions in the wireless sectors during
the second quarter of 2002 and the delayed awarding of wireless infrastructure
contracts by the major Chinese telecom companies to which we had made bids to
the third quarter of 2002 from the originally planned second quarter of 2002
roll-out. We anticipate that revenues will increase in the second half of 2002
as we near the end of our initial refocused sales cycle.
Operating Expenses
Cost of goods sold in the first half of 2002 increased by 22%, or $303,676,
to $1,686,478 from $1,382,802 in the first half of 2001. The increase was
primarily due to increased wages and benefits, sub-contract labor and testing
equipment required for the large amount of samples that were produced and
shipped to potential long-term supply customers during the first six months of
2002 and a second quarter of 2002 one time provision for obsolete inventory that
can no longer be used as newer component parts are now required for our new
technology RF amplifiers. We have subsequently, refinanced and reduced the
amount of some of our test equipment, created more efficiency in our staffing
requirements and established a relationship with an outsource manufacturing
company. We expect to start outsourcing our larger orders during the third
quarter of 2002. This will allow us to take advantage of better purchasing
power, reduce our inventory levels and ensure that a consistent quality product
is delivered on time. We anticipate that our cost of goods sold, as a percentage
of sales, will be reduced during the second half of 2002 as a result of
increased sales and outsourced manufacturing. Cost of goods includes stock-based
compensation recovery of $19,221 in the first half of 2002 versus an expense of
$350 for the same period in 2001.
The gross margin of $69,772 or 4% of net sales for the first half of 2002
represented decrease from a gross margin of 30% of net sales for the first half
of 2001 due to the initiation during the second quarter of 2002 of our refocused
sales strategy which transitioned from a focus on short-term relationships
resulting in immediate sales, but no commitment for additional purchases, to a
focus on building long-term relationships with customers who would commit to
purchase a specified percentage of their amplifier requirement from us over a
term of three or more years. The associated long sales cycle to potential
long-term supply customers results in costs of goods sold exceeding revenue
generated by sales due to low initial volume of sales as the long-term customer
begins to deploy their applications using our products and the higher production
cost initially associated with designing a custom solution for each long-term
customer's installation needs. If we are successful in establishing favorable
relationships with long-term customers, we anticipate that these trends will
reverse themselves over the course of the supply relationships as sales volumes
increase and we are able to standardize production and realize economies of
scale in production as a result of the standardization and increased sales. As
well, we recorded a provision in the amount of $74,000 for obsolete inventory as
newer parts are required for our new technology RF amplifiers. We anticipate
that we will increase our gross margin during the second half of 2002 with
increased sales and reduced overhead as a result increased volumes and lower per
unit costs associated with more standardized production of our amplifiers and
increased volumes of amplifiers we hope to sell.
Research and development expenses in the first half of 2002 increased by
174%, or $543,745, to $856,628 from $312,883 in the first half of 2001. This
increase was primarily due to increased R&D activities and related expenditures
as a result of the larger number of engineering personnel on staff and the
increased projects for development of additional RF amplifier products during
the first six months of 2002 versus the first six months of 2001. Research and
development expenses include stock-based compensation recovery of $56,433 in the
first half of 2002 versus an expense of $33,985 for the same period in 2001.
Sales and marketing expenses in the first half of 2002 increased by 20%, or
$35,977, to $216,649 from $180,672 in the first half of 2001. The increase was a
net effect of decreased advertising, promotional activities, tradeshow and
travel expenses to visit new customers and distributors which was required in
the
46
first six months of 2002 offset by increased expenses from samples supplied to
potential new customers. Providing customers with trial samples is an industry
norm that is required in order to secure new long-term customer supply
contracts. Over the second half of 2002, we plan to increase our marketing and
sales resources due to the geographic diversification of our new customer base
and with the goal of securing additional short and long-term supply agreements.
Sales and marketing expenses include stock-based compensation recovery of
$61,123 in the first half of 2002 versus an expense of $25,897 for the same
period in 2001.
Exchange loss in the first half of 2002 increased by 129%, or $97,445 to
$22,127 from an exchange gain of $75,318 in the first half of 2001 due to
fluctuations in the currency exchange rate between the U.S. and Canada. The
Company's revenues are received mostly in U.S. dollars, while the majority of
expenses are incurred in Canadian dollars.
General and administrative expenses in the first half of 2002 decreased by
22%, or $184,345, to $651,005 from $835,350 in the first half of 2001. The
reduction was a result of better control of overhead expenses, reduced stock
compensation expense and less public company filings and associated expenses
than in the same period as last year. General and administrative expenses
include stock-based compensation recovery of $84,737 in the first half of 2002
versus an expense of $165,183 for the same period in 2001.
Other Income
Interest income in the first half of 2002 decreased by 92%, or $31,968, to
$2,671 from $34,639 in the first half of 2001. This decrease results primarily
from a lower balance on deposited funds on deposit during the period.
Other income in the first half of 2002 increased by 708%, or $65,649, to
$74,927 from $9,278 in the first half of 2001. This increase results primarily
from a $74,451 settlement of a government debt.
Comprehensive Loss
Comprehensive loss increased by $1,187,792, or 306%, from $388,336 to
$1,576,128. This increase was primarily due to the increased focused on
long-term contracts that resulted in lower initial sales and higher upfront
costs in order to tailor the solution to our customer's needs and the continued
weakness in the telecommunications industry. As a percentage of sales,
comprehensive loss increased from 20% to 90%.
Years Ended December 31, 2001 and 2000
Sales
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 radio frequency
amplifier sales and in 2000 net sales were $474,003 from radio frequency
amplifiers between November 16 and December 31, 2000.
Operating Expenses
Cost of goods sold 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 costs
associated with building an increased number of radio frequency amplifiers. The
cost of goods sold in 2001 was also increased by an inventory write down of
$88,429 for the UniLinx inventory.
47
The gross margin for the radio frequency 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 as compared to $880,818 in 2000, including
stock compensation of $238,655. Expenses in 2001 were primarily due to the
hiring of senior level radio frequency engineering positions, leasing of radio
frequency 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 radio frequency
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 radio frequency 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 radio frequency amplifier sales between November 16 and December
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 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 operating overhead expenses associated with the
leased premises, expenses related to listing our shares on the TSX Venture
Exchange (formerly known as the Canadian Venture Exchange), financing costs of
the private placement which was completed in December 2001 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.
Other Income
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.
48
Comprehensive Loss
Comprehensive loss decreased by $3,305,403, or 63%, from $5,284,615 to
$1,979,212. This decrease was primarily due to the increased the re-structuring
and increased our focus on the production and marketing of amplifiers. As a
percentage of sales, comprehensive loss decreased from 1,115% to 56%.
Liquidity and Capital Resources
Since our inception, we have been dependent on investment capital as our
primary source of liquidity. Prior to December 31, 2000, sales of the 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
June 30, 2002 of $14,415,321. During the 6 months ended June 30, 2002, we
focused entirely on the wireless product segment, primarily our amplifier
products, and incurred a net loss, after stock-based compensation expense, of
$1,585,032 (2001 - loss of $505,164).
During the first six months of 2002, our cash position decreased
significantly. The primary use of cash was for operations which also included
non-cash charges in depreciation expense, stock-based compensation recovery,
write down of research and development and outdated inventory, write off of non
recoverable samples inventory and a gain on settlement of debt. Other
significant non-cash working capital changes included a decrease in accounts
receivable and a significant increase in accounts payable and accrued
liabilities.
Our investing activities during the first six months of 2002 were
attributable mainly to purchases of testing and tuning equipment and
expenditures in related to securing intellectual property.
Financing activities during the first six months included replacing the
previous HSBC Bank Canada operating line in February 2002 with a $82,500 (Cdn
$125,000) operating line from Canadian Imperial Bank of Commerce, at an interest
rate of prime, and secured by a $82,500 (Cdn $125,000) guaranteed investment
certificate and a general security agreement over all our assets. In March 2002,
we secured a $750,000 account receivable credit facility with Canadian Imperial
Bank of Commerce at an interest rate of Canadian Imperial Bank of Commerce's
prime rate plus 1% and an administrative fee of 1% of invoice value. As well, on
May 14, 2002, we completed an equity financing through a private offering of
2,317,857 units at $0.28 per unit, thereby raising equity capital for gross
proceeds of $649,000. Each unit consisted of one share of common stock and one
warrant exercisable to acquire one additional common share at $0.35 per share
until May 14, 2003. On July 2, 2002 certain stockholders of our Company
exercised share purchase warrants issued pursuant to the December 24, 2001
private placement. A total of 899,999 warrants were exercised at $ 0.30 per
share for total gross proceeds of $270,000. In the short term, we plan to raise
additional equity capital for working capital and expansion through the exercise
of existing warrants, an offering or a combination both.
Other than operating loan commitments and a commitment under a existing
leases for an aggregate of $442,000 through 2004, we have no material
commitments, including capital commitments, outstanding at June 30, 2002.
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 sales of equity securities. As of June 30, 2002, we had working
capital deficiency of $286,159. Our operations presently are generating negative
cash flow, and we do not expect positive cash flow from operations in the near
term. During early July, we received gross proceeds of $270,000
49
from the exercise of $0.30 warrants issued in December 2001 by certain
stockholders including officers and directors of the Company. We cannot assure
you that additional outstanding warrants will be exercised. We need to secure
additional working capital in the short-term in order to sustain our operations
and execute our business plan.
We anticipate that we will require a greater amount of 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. We are incurring expenses in anticipation of future sales that may
not materialize. If future sales fall significantly below our expectations or if
we incur unanticipated costs or expenses our financing needs could be increased.
Any inability to obtain sufficient capital to sustain our existing operations,
to meet commitments or to fund our obligations under our existing sales orders
may require us to delay delivery of products, to default on one or more
agreements or to significantly reduce or eliminate sales and marketing, research
and development or administrative functions. The occurrence of any of these, or
other adverse affects of inability to raise adequate capital may have a material
adverse effect on our business, financial condition and results of operations.
Subsequent Events
On July 2, 2002 certain stockholders exercised share purchase warrants
issued pursuant to the December 24, 2001 private placement. A total of 899,999
warrants were exercised at $ 0.30 per share for total gross proceeds of
$270,000.
On July 31, 2002, the exercise price of 6,702,338 un-exercised warrants
were re-priced to Cdn$0.35 on the condition that warrant holders exercise their
warrants within a 30 day period, otherwise the original warrant terms would
prevail. As well, if the closing price of our shares is Cdn$0.437 or greater for
a period of 10 consecutive trading days, then the warrant holders must exercise
their warrants within 30 days otherwise the warrants will expire of the 31st
day. A total of 1,032,655 of the 6,702,338 re-priced warrants were held by
certain of our directors, officers and employees.
On August 20, 2002, our Chairman repaid and satisfied his obligations under
the terms of a loan by repaying the $90,000 principal amount and exercising
500,000 warrants at an exercise price of Cdn$0.35 per share for total gross
proceeds of $205,000. For financial statement reporting purposes, this loan was
recorded as a reduction in stockholders' equity until August 20, 2002, the
repayment date. See - Certain Relationships and Related Transactions.
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.
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
50
(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 persons primarily engaged in real estate activities, nor do we
expect to do so in the foreseeable future.
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 January 31, 2001, Cobratech has repaid $111,112. We
have sued Cobratech in the Supreme Court of British Columbia, Canada for some
$78,000 in respect of the remaining balance. The obligation was evidenced by a
promissory note bearing interest at the rate of 1% per month. Cobratech owes us
approximately $85,600, including principle and accrued, but unpaid interest,
under the note. We have reached a tentative settlement arrangement with
Cobratech whereby Cobratech would satisfy the obligation by converting the debt
into shares of its parent, CTI Diversified Holdings Inc., at a conversion price
determined by the average of the bid and ask price of CTI Diversified Holdings
Inc. shares as quoted on the OTC-BB on the day immediately before conversion.
There can be no assurances that the settlement will be finalized, or that we
will realize any cash value from any shares of CTI Diversified Holdings Inc. we
receive pursuant to the settlement. For financial reporting purposes, we have
already set up a provision for the full amount owing against income in 2001 for
the possibility of non-repayment. See "Legal Proceedings."
The Board of Directors agreed to advance $90,000 to John Robertson, our
President, CEO and director, at the time, 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. The units as well as all
obligations under this loan were transferred to Mark Godsy, our Chairman of the
Board, on May 24, 2002. On August 20, 2002, Mark Godsy repaid and satisfied his
obligations under the terms of the loan by repaying the $90,000 principal amount
and exercising 500,000 warrants at an exercise price of Cdn$0.35 per share for
total gross proceeds of $205,000. For financial statement reporting purposes,
this loan was recorded as a reduction in stockholders' equity until August 20,
2002, the repayment date.
There are no other material related transactions or related contracts with
a value of over $60,000.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In Canada, our common stock trades on the TSX Venture Exchange (formerly
known as the Canadian Venture Exchange) under the symbol "UWC". Our common stock
is traded on the NASD over-the-counter or "Bulletin Board" market under the
symbol "UTYW." Between February 6, 1999 and August 17, 2000, our common stock
traded under the symbol "ZSON." Before February 6, 1999, our common stock traded
under the symbol "MMIM." The following comprises the high and low bid prices for
our common stock as of the end of each period indicated since March 31, 1999
(the stock was not "publicly traded" before December 31, 1998), unless otherwise
indicated on the NASDA Bulletin Board and the TSX Venture Exchange:
51
UTYW UWC
(US$) (Cdn$)
Period High Bid Low Bid High Low
January 1 - March 31, 1999 3.3125 0.0000
April 1 - June 30, 1999 3.0000 0.8750
July 1 - September 30, 1999 1.0625 0.4375
October 1 - December 31, 1999 1.1875 0.3750
January 1 - February 9, 2000 1.27 0.89
February 10 - April 27, 2000* 6.25 0.9000
(No Bid/Ask - High (No Bid/Ask - Low
Trade) Trade)
April 28 - June 30, 2000 4.50 1.0625
July 1 - September 30, 2000 1.90 1.16
October 1 - December 31, 2000 1.53 0.37
January 1 - March 31, 2001 0.68 0.26
April 1 - June 30, 2001 0.48 0.19
July 1- September 30, 2001 0.30 0.11
October 1, - December 31, 2001 0.35 0.15 0.60 0.40
January 1, - March 31, 2002 0.38 0.16 0.60 0.27
April 1, 2002 - June 30, 2002 0.48 0.20 0.73 0.35
Source: UTYW - Nasdaq Trading & Marketing Services, UWC - Yahoo.com
Historical Data
* 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.
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 TSX Venture Exchange (formerly known
as the Canadian Venture Exchange) on December 24, 2001. On August 15, 2002, the
closing price of our common stock was Cdn $0.30 on the TSX Venture Exchange and
$0.20 on the OTCBB.
As of August 15, 2002 there were approximately 180 holders of record of our
common stock. We have never declared a cash dividend on our common stock.
52
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 $100,000 in total salary and bonus during 2001,
2000 or 1999.
Summary Compensation Table
Annual Compensation Long Term Compensation
----------------------------------------------------------------------------------
Awards Payouts
-----------------------------------------
Other Restricted
Annual Securities Shares or
Fiscal Compen under Restricted LTIP All Other
Name and Principal Year Salary Bonus sation Option/SAR Share Units Payouts Compensation
Position Ended (US$) (US$) (US$)(5) Granted(#) (US$) (US$)
---------------------------------------------------------------------------------------------------------------------
John Robertson, 2001 107,137 0 0 100,000(2) 0 0 0
Chief Executive 2000 10,300 0 275,000(2) 0 0 0
Officer(1) 1999
Mark Godsy, 2001 0 0 0 5,000(4) 0 0 0
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)
NOTES:
(1) Mr. Robertson served as our Chief Executive Officer from November 17, 2000
- 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 our Chief Executive
Officer. He also received 75,000 options in December 2000 as compensation
for serving as a director of our company.
(3) Mr. Godsy served as our Chief Executive Officer 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 our Chairman of the Board and 5,000 options in June 2001 as
compensation for serving on the Compensation Committee.
(5) Mr. Brogdon served as Chief Executive Officer of Unity Wireless Systems
Corporation from February 1, 1998 and our company from December, 1998. Both
appointments concluded on February 22, 2000.
(6) In accordance with the rules of the SEC, no amounts are shown with respect
to certain "perquisites" where such amounts do not exceed the lesser of
$50,000 or 10% of any named executive officer's salary and bonus.
53
Option/SAR Grants in Last Fiscal Year
Option Grants
Individual Grants
-------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options Exercise or
Underlying Granted(1) Base Price
Options ($/Sh) Expiration Date
Name Granted(#)
------------------------------------------------------------------------------------------------------------
John Robertson, 100,000(2) 6.1% $0.17 Dec. 31, 2005
Chief Executive Officer
Mark Godsy, 5,000(3) 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) 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.
(3) 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 $0.17.
FISCAL YEAR-END OPTION VALUE
The following table presents the value of unexercised options held as of
December 31, 2001 by each of the named executive officers appearing in the
Summary Compensation Table in this section. None of these named executive
officers exercised any of their options in 2001. Mr. Brogdon held no options as
of December 31, 2001.
Aggregated Options Exercised
During the Financial Year Ended December 31, 2001
and Financial Year-End Option Values
---------------------------------------------------------------------------------------------------------------------
Name Securities Aggregate Unexercised Options Value of Unexercised in the
Acquired on Value At FY-End (#) Money-Options at FY-End
Exercise (#) Realized ($) Exercisable(2)/ ($) Exercisable/
Unexercisable Unexercisable (1)
---------------------------------------------------------------------------------------------------------------------
John Robertson, Nil Nil 206,250 (exercisable) $72,188 (exercisable)
Chief Executive Officer 168,750 (unexercisable) $59,063 (unexercisable)
---------------------------------------------------------------------------------------------------------------------
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.
54
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
Employment Agreements
There are no employment agreements between us or any of our subsidiaries
and the named executive officers appearing in the Summary Compensation Table in
this section.
55
UNITY WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(expressed in U.S. dollars)
June 30, Dec. 31,
2002 2001
----------------------------------------------------------------------------------------------------------------
(unaudited)
$ $
ASSETS
Current assets
Cash and cash equivalents 404,277 1,012,430
Restricted cash 82,500 80,000
Accounts receivable (less allowance for doubtful accounts
of $34,474 (2001-$26,128)) 85,598 263,747
Government grant receivable 30,268 26,457
Inventory (note 4) 469,584 519,516
Prepaid expenses 55,302 38,643
Other receivable 9,009 18,241
----------------------------------------------------------------------------------------------------------------
1,136,538 1,959,034
Equipment, net 299,946 276,909
Patents and licenses, net 33,392 -
Goodwill 741,596 741,596
----------------------------------------------------------------------------------------------------------------
2,211,472 2,977,539
----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (note 5) 100,412 238,667
Accounts payable and accrued liabilities (note 6) 1,270,934 658,583
Product warranty 33,000 31,500
Obligations under capital leases 18,351 45,900
----------------------------------------------------------------------------------------------------------------
1,422,697 974,650
Loans payable - 74,451
Obligations under capital leases 3,654 3,488
----------------------------------------------------------------------------------------------------------------
Total liabilities 1,426,351 1,052,589
----------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, $0.001 par value 100,000,000 authorized,
33,616,895 (2001 - 30,915,704) issued and outstanding 33,617 30,916
Additional paid-in capital 15,158,267 14,896,893
Share subscription receivable (90,600) (90,600)
Deferred stock compensation (26,974) (199,198)
Accumulated deficit (14,415,321) (12,830,289)
Other accumulated comprehensive gain 126,132 117,228
----------------------------------------------------------------------------------------------------------------
785,121 1,924,950
----------------------------------------------------------------------------------------------------------------
2,211,472 2,977,539
----------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (note 12)
See accompanying notes to consolidated financial statements
F-1
UNITY WIRELESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(expressed in U.S. dollars)
(Unaudited)
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
Net sales: 273,756 570,559 1,756,250 1,963,506
Cost of goods sold (3 months data includes stock-based
compensation expenses $520 in 2002 and nil in 2001; 6
months data includes stock-based compensation
(recovery) expense $(19,221) in 2002 and $350 in 2001) 528,908 336,802 1,686,478 1,382,802
---------------------------------------------------------------------------------------------------------------------------------
(255,152) 233,757 69,772 580,704
---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Research and development (3 months data includes
stock-based compensation expenses $8,905 in 2002 and
$58,621 in 2001; 6 months data includes stock-based
compensation (recovery) expense $(56,433) in 2002 and
$33,985 in 2001) 584,135 218,304 856,628 312,883
Sales and marketing (3 months data includes stock-based
compensation (recovery) expenses $(397) in 2002 and
$36,870 in 2001; 6 months data includes stock-based
compensation (recovery) expense $(61,123) in 2002 and
$25,897 in 2001) 177,863 139,987 216,649 180,672
Less: Government assistance (65,348) - (65,348) -
Depreciation and amortization 22,944 73,250 46,372 141,483
Exchange (gain) loss 13,375 (20,320) 22,127 (75,318)
Interest expense 3,536 1,151 4,969 2,219
General and administrative (3 months data includes stock-
based compensation expenses $30,002 in 2002 and
$218,678 in 2001; 6 months data includes stock-based
compensation (recovery) expense $(84,737) in 2002 and
$165,183 in 2001) 391,875 661,840 651,005 835,350
---------------------------------------------------------------------------------------------------------------------------------
1,128,380 1,074,212 1,732,402 1,397,289
---------------------------------------------------------------------------------------------------------------------------------
Operating loss for the period (1,383,532) (840,455) (1,662,630) (816,585)
Interest income 1,289 6,069 2,671 34,639
Other income 198 616 74,927 9,278
Provision for income taxes - - - -
---------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (1,382,045) (833,770) (1,585,032) (772,668)
---------------------------------------------------------------------------------------------------------------------------------
Gain from discontinued operations - 217,966 - 267,504
---------------------------------------------------------------------------------------------------------------------------------
Loss for the period (1,382,045) (615,804) (1,585,032) (505,164)
Comprehensive loss:
Loss for the period (1,382,045) (615,804) (1,585,032) (505,164)
Currency translation adjustment 3,666 3,948 8,904 116,828
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss (1,378,379) (611,856) (1,576,128) (388,336)
---------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share (note 8):
Continuing operations (0.043) (0.032) (0.050) (0.030)
Discontinued operations - 0.008 - 0.010
---------------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share (0.043) (0.024) (0.050) (0.020)
---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-2
UNITY WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in U.S. dollars)
(Unaudited)
Six months ended June 30,
Cash provided by (used in): 2002 2001
Operating activities:
Loss for period (1,585,032) (505,164)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of patents and licenses 455 -
Depreciation of equipment 45,917 48,783
Amortization of goodwill - 92,700
Shares issued for service - 7,000
Stock based compensation (221,514) 225,415
Gain on settlement of debt (74,451) -
Changes in non-cash working capital relating to operations:
Accounts receivable 178,149 68,716
Government grant receivable (3,811) 13,733
Inventory 49,932 182,741
Prepaid expenses (16,659) (19,521)
Accounts payable and accrued liabilities 612,351 (287,541)
Product warranty - (471,700)
--------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,014,663) (644,838)
Investing activities:
Acquisition of equipment (56,863) (77,278)
Increase in patents and licenses (33,847) -
Other receivables 9,232 30,750
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (81,478) (46,528)
Financing activities:
Repayment of loan receivable - 118,824
Restricted cash (2,500) 20,000
Bank overdraft (138,255) (34,872)
Repayment of loan payable - (83,642)
Cash proceeds from issued and to be issued common shares 714,167 -
Share issue costs (56,354) -
Obligations under capital lease (27,383) -
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 489,675 20,310
Effect of foreign exchange rate changes on cash and cash equivalents (1,687) 117,662
Decrease in cash (608,153) (553,394)
Cash, beginning of period 1,012,430 2,002,084
Cash, end of period 404,277 1,448,690
See accompanying notes to consolidated financial statements
F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The accompanying interim unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB
and Regulation SB. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for a
complete annual set of consolidated financial statements. In the opinion of
management, all adjustments (consisting of normally recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ending June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2002.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Unity Wireless Corporation's annual report on
Form 10-KSB for the year ended December 31, 2001. Except as indicated in
note 2, the accounting principles applied in the preparation of these
interim consolidated financial statements are consistent with those applied
in the consolidated financial statements filed with the Company's annual
report.
The Company's ability to realize the carrying value of its assets is
dependent on achieving profitable operations, and continuing development of
new technologies, the outcome of which cannot be predicted at this time.
Accordingly, the Company will require for the foreseeable future ongoing
capital infusions in order to continue its operations, fund its research
and development activities, and ensure orderly realization of its assets at
their carrying values. 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 Company be
unable to continue as a going concern.
2. Change in accounting policies:
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards ("FAS") 141, Business Combinations, and FAS 142,
Goodwill and other Intangible Assets. Under FAS 141, intangible assets
acquired in a business combination should be identified and recognized
apart from goodwill when they arise from either contractual or other legal
rights or they can be separated from the acquired enterprise and sold,
transferred, licensed, rented or exchanged, either individually or with a
group of related assets or liabilities. Under FAS 142, goodwill and
intangible assets having indefinite lives are not amortized and tested for
impairment at least annually. Intangible assets with definite lives are
amortized over their estimated useful lives.
The Company has adopted FAS 141 and 142 effective January 1, 2002. As of
the date of adoption, the Company had unamortized goodwill in the amount of
$741,596. This change in accounting policy resulted in a reduction in
amortization expense related to goodwill of $92,700 ($0.003 per share), for
the six months ended June 30, 2002. In accordance with the requirements of
FAS 142, this change in accounting policy is not applied retroactively and
the amounts presented for prior periods have not been restated for this
change. If this change in accounting policy had been applied retroactively,
net loss for the six months ended June 30, 2001 would have decreased by
$92,700 to
F-4
$412,464 and the net loss for the three months ended June 30, 2001 would
have decreased by $46,350 to $569,454.
3. Significant Accounting Policies
a) Goodwill
Goodwill is the residual amount that results when the purchase price of an
acquired business exceeds the sum of the amounts allocated to the
identifiable assets acquired, less liabilities assumed, based on their fair
values. Goodwill is allocated as of the date of the business combination to
the Company's reporting units that are expected to benefit from the
synergies of the business combination.
Goodwill is not amortized and is tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the goodwill
might be impaired. The impairment test is carried out in two steps. In the
first step, the carrying amount of the reporting unit is compared with its
fair value. When the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not to be impaired and
the second step of impairment test is unnecessary. The second step is
carried out when the carrying amount of a reporting unit exceeds its fair
value, in which case the implied fair value of the reporting unit's
goodwill is compared with its carrying amount to measure the amount of the
impairment loss, if any. The implied fair value of the reporting unit's
goodwill is determined in the same manner as the value of goodwill is
determined in a business combination described in the preceding paragraph,
using the fair value of the reporting unit as if it was the purchase price.
When the carrying amount of a reporting unit exceeds the implied fair value
of the goodwill, an impairment loss is recognized in an amount equal to the
excess and is presented as a separate line item in the earnings statement
before extraordinary items and discontinued operations.
The Company considers itself to operate as a single reporting unit. At June
30, 2002, the Company had completed its first step assessment as described
above, and had concluded that the fair value of the reporting unit exceeds
its carrying value and accordingly, no impairment of the carrying value of
goodwill is required to be recorded. The Company intends to carry out its
annual assessment of goodwill commencing in December of 2002 .
b) Patents
Consideration paid for the patents is amortized on a straight-line basis
over three years commencing with the date the patents are granted.
c) License fees
Consideration paid for license fees is amortized on a straight-line basis
over the shorter of the term of the license or three years.
F-5
d) Government assistance
Government assistance consists of government grants. The Company follows
the cost reduction method of accounting for government assistance, whereby
the benefit of the assistance is recognized as a reduction in the cost of
the related asset or expenditure when there is reasonable assurance the
government grants will be received. Certain government assistance has a
contingent liability for repayment. The liability to repay government
assistance is recognized in the period in which conditions arise that will
cause government assistance to be repayable.
e) Stock compensation expense (recovery)
The Company 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 Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and have
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. 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 Company 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 Company measures
variable plan stock compensation as the amount by which the quoted market
value of the common shares of the Company covered by the grant exceeds the
option price with changes in the market price included in the measurement
of loss.
4. Inventory:
The components of inventory consist of the following:
June 30, December 31,
2002 2001
$ $
------------------------------------------------------------------------
(unaudited)
Raw materials 259,279 261,220
Finished goods 210,305 258,296
------------------------------------------------------------------------
469,584 519,516
------------------------------------------------------------------------
F-6
5. Bank indebtedness
In February 2002, the HSBC Bank of Canada revolving operating line was
replaced with a U.S. $82,500 (Cdn. $125,000) operating line from CIBC Bank,
at an interest rate of prime and secured by a U.S. $82,500 (Cdn. $125,000)
guaranteed investment certificate and a general security interest in all of
the Company's assets. In March 2002, the Company 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.
6. Accounts payable and accrued liabilities:
June 30, December 31,
2002 2001
$ $
------------------------------------------------------------------------
(unaudited)
Trade accounts payable 1,068,836 415,164
Accrued liabilities 202,098 243,419
------------------------------------------------------------------------
1,270,934 658,583
------------------------------------------------------------------------
7. Other income:
During the six months ended June 30, 2002, the Company recognized a gain of
$74,451 on an extinguishment of debt which is included in other income.
8. Earnings per share data:
The following table sets forth the computation of basic and diluted income
(loss) per share:
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------
Numerator
Loss from continuing operations ($) (1,382,045) (833,770) (1,585,032) (772,668)
Gain from discontinued operations ($) - 217,966 - 267,504
Net loss for the period ($) (1,382,045) (615,804) (1,585,032) (505,164)
Denominator
Weighted average number of common shares
outstanding 32,348,299 25,745,626 31,635,959 25,744,396
Basic and diluted loss per common share ($):
Continuing operations (0.043) (0.032) (0.050) (0.030)
Discontinued operations - 0.080 - 0.010
Basic and diluted loss per common share ($): (0.043) (0.024) (0.050) (0.020)
----------------------------------------------------------------------------------------------------------------
For the 6-month period ended June 30, 2002, all of the Company'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.
9. Stock Option Plan:
During the year ended December 31, 1998, the Company established a stock
option plan pursuant to which 3,000,000 common shares were reserved for
issuance. This plan was replaced on December 6, 1999, by a new stock option
plan ("1999 Plan") pursuant to which 5,000,000
F-7
common shares were reserved for issuance. On July 5, 2000 the shareholders
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 previously issued under the plan. As of June 30, 2002 this
maximum number was 7,345,666. On August 8, 2002 the Board of Directors
further amended and restated the 1999 Plan to create a new plan ("2002
Plan"). The 2002 Plan authorizes the maximum issuance of 6,903,379 shares
of the Company's Common Stock upon exercise of options granted under the
2002 Plan.
F-8
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
Outstanding options
-------------------------------------------------------------------------------------------------
Shares available No. of common Weighted average
under option shares issuable exercise price
-------------------------------------------------------------------------------------------------
Balance, December 31, 2001 3,388,250 4,340,750 0.20
Options granted (285,000) 285,000 0.33
Options expired 386,666 (386,666) 0.18
-------------------------------------------------------------------------------------------------
Options exercised - (383,334) 0.17
Increase in reserve for issuance 722,389 - -
-------------------------------------------------------------------------------------------------
Balance, June 30, 2002 4,212,305 3,855,750 0.24
-------------------------------------------------------------------------------------------------
Had compensation cost been determined based on the fair value at the grant
dates for those options issued to employees, 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.
------------------------------------------------------------------------------------------------------
Six months ended June 30, 2002
------------------------------------------------------------------------------------------------------
Income (loss) for the period, as reported $(1,585,032)
Pro forma loss (1,967,900)
------------------------------------------------------------------------------------------------------
Basic and diluted loss per common shares, net as reported $ (0.050)
Pro forma (0.062)
------------------------------------------------------------------------------------------------------
The fair value of each option granted during the six months ended June 30,
2002, was estimated on the date of the grant using Black-Scholes
option-pricing model with the following weighted-average assumptions: no
dividend yield; volatility of 156% based on weekly stock price; risk-free
interest rate of 3.25% and an expected life of four years.
The weighted-average fair value of options granted during these months
ended June 30, 2002 was $0.26.
10. Segmented information:
a. Segment information:
During the six months ended June 30, 2002, the Company is operating
only in the RF power amplifier product segment. During the six months
ended June 30, 2001, the Company was operating in the wireless product
segment and the RF power amplifier product segment.
F-9
b. Geographic information ($000):
Substantially all assets and operations are in Canada. A summary of
sales by region, based on location of customers, is as follows:
Six months ended June 30,
------------------------------------------------------------------
2002 2001
------------------------------------------------------------------
Korea $ 987 $ 1,821
China 280 -
Sweden 42 -
Canada - 17
United States 447 126
------------------------------------------------------------------
Total sales $1,756 $ 1,964
------------------------------------------------------------------
c. Major customers ($000):
The approximate sales to major customers is as follows:
Six months ended June 30,
------------------------------------------------------------------
2002 2001
------------------------------------------------------------------
Customer A $ 612 $ 852
Customer B 331 810
Customer C 386 -
------------------------------------------------------------------
11. Warrants:
As at June 30, 2002, the Company has warrants outstanding to purchase
8,102,337 common shares at $0.29 to $0.38 per share.
5,147,551 warrants, which were issued in December 2001 with an exercise
price of $0.30, may be callable for exercise by the Company at any time
after the closing price for the Company'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 has not reached $0.75. These
warrants expire in December 2003. On July 2, 2002, 899,999 warrants were
exercised by certain shareholders at $0.30. In addition, 2,454,786
warrants, which were issued in April 2002, may be callable for exercise by
the Company at any time after the closing price for the Company's common
stock is equal to or exceeds $1.50 for at least ten consecutive trading
days. After the issuance of these warrants, the share price level has not
reached $1.50. These warrants expire in May 2003. On July 31, 2002, the
exercise price of the above 6,702,338 un-exercised warrants were re-priced
to Cdn$0.35 on the condition that warrant holders exercise their warrants
within a 30 day period, otherwise the original warrant terms would prevail.
6,565,409 of these re-priced warrants had not been previously issued in
connection with the provision of employment or consulting services. As
well, if the closing price of the Company's shares is Cdn$0.437 or greater
for a period of 10
F-10
consecutive trading days, then the warrant holders must exercise their
warrants within 30 days otherwise the warrants will expire of the 31st day.
Of the remaining 500,000 warrants, 403,128 warrants are fully vested of
which 250,000 expire on December 15, 2002 and 153,128 expire on March 31,
2005 and 96,872 warrants vest until December 31,2002 and expire on March
31,2005.
12. Commitments and contingent liabilities:
a. Lease commitments
The Company has the following future minimum lease commitments for
premises and equipment:
$000
----
2002 120
2003 186
2004 82
2005 54
2006 -
b. Legal proceedings
The Company is currently a party to an action in the Supreme Court of
British Columbia, Vancouver Registry, brought by an option holder
seeking a declaration that 500,000 options to purchase shares in the
common stock of the Company held by it have a term of unlimited
duration.
The Company 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 advise 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 Company.
c. Contingent liability on sale of products
(i) Under a certain license agreement, the Company is committed to
royalty payments based on the sales of products using certain
technologies. The Company recognizes royalty obligations as
determinable in accordance with agreement terms.
(ii) Under an agreement with the Government's National Research
Council Canada IRAP (IRAP) program, the Company is eligible to receive
conditionally repayable government assistance amounting to Cdn$483,491
to support the development of a multi-carrier linear power amplifier.
During the first six months ended June 30, 2002, the Company has
claimed $65,348 (Cdn$99,012) which has been recorded as government
grant income. Under the terms of the agreement, an amount up to a
maximum of Cdn.$725,236 is to be repaid at a rate of 1.5% of quarterly
gross revenue commencing on September 1, 2003, on a quarterly basis.
F-11
Financial Statements for the Years Ended December 31, 2001 and 2000
Consolidated Financial Statements
(Expressed in United States dollars)
UNITY WIRELESS CORPORATION (Prepared in accordance with
United States generally accepted accounting principles)
Years ended December 31, 2001 and 2000
F-12
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-13
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-14
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-15
3
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-16
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-17
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 (radio frequency) amplifiers. Ultratech high power linear radio
frequency 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 radio frequency 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 third generation network 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 third generation
network market over the next nine to eighteen months.
The Corporation's third generation network 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 original equipment manufacturers 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
stockholders, 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-18
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-19
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-20
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-21
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 stockholders' 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-22
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-23
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 of accounting for all 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-24
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-25
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-26
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-27
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 stockholders 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 stockholders 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-28
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-29
--------------------------------------------------------------------------------
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-30
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 stockholder advances or make
significant changes in ownership or financing without the
approval of the Ministry.
F-31
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-32
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-33
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-34
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-35
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 not 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 Company 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-36
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-37
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-38
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-39
PART II
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our by-laws provide that directors and officers shall be indemnified by us
to the fullest extent authorized by the Delaware General Corporation Law,
against all expenses and liabilities reasonably incurred in connection with
services for or on behalf of our company. The by-laws also authorize the board
of directors to indemnify any other person which we have the power to indemnify
under the Delaware General Corporation Law, including for indemnification
greater or different from that provided in the by-laws. To the extent that
indemnification for liabilities arising under the Securities Act may be
permitted for directors, officers and controlling persons of our company, we
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts (if any), payable by the registrant in connection with
the offering of the securities being registered.
SEC registration fee $ 95
NASD filing fee -
Printing and engraving expenses -
Transfer agent and registrar fee -
Legal fees and expenses 9,000
Accounting fees and expenses 4,000
Miscellaneous fees and expenses 1,000
Total $14,095
RECENT SALES OF UNREGISTERED SECURITIES
In the period July to October 1999, we completed an offering under
Regulation S, as contemplated by the acquisition agreement with Unity Wireless
Systems Corporation. The sale was to a non-U.S. person, residing outside of the
U.S., and took place outside of the U.S. We issued 500,000 shares in
consideration of gross proceeds of $1,500,000. We paid $150,000 in commission.
In November 1999, we completed a private offering under Regulation S to a
non-U.S. person, residing outside of the U.S. We issued 350,000 common shares in
consideration of gross proceeds of $175,000. No underwriting discounts were
given or commissions paid.
In December 1999, we completed a private offering under Regulation S to a
non-U.S. person, residing outside of the U.S. We issued 142,857 common shares in
consideration of gross proceeds of $100,000. No underwriting discounts were
given or commissions paid.
In April 2000, we issued common shares to non U.S. persons, residing
outside of the U.S., in partial settlement of debts owed by Unity Systems to
such persons. We issued 65,000 shares in consideration for $117,968 of debt
forgiveness. No underwriting discounts were given or commissions paid.
In April 2000, we completed an equity financing through a private offering
under Regulation D and Regulation S of the Securities Act. We accepted
subscriptions for 3,850,000 units resulting in gross proceeds of $5,775,000.
Each unit consisted of one share of common stock and one non-transferable,
callable warrant to purchase one share of common stock at an exercise price of
$3.25 until October 2001. The warrants expired unexercised. If determined by our
Board of Directors that it would be in the best interests of our stockholders,
and if any of our underwriter or underwriters of the securities determine, in
their discretion, that it would be in our best interests, we agreed to use our
reasonable efforts to cause the shares comprising the units to be included in a
registration statement under the Securities Act, at such time as such
registration is reasonably practicable for us to accomplish. We also agreed to
use reasonable efforts to maintain the effectiveness of any such registration
II-1
statement for at least one year after the Closing of this offering. We filed a
registration on Form SB-2/A to register the securities for resale in May. We
issued 285,000 shares as commissions or fees to qualified persons.
On August 15, 2000, we issued 15,000 shares of common stock to Doug Stewart
in return for consulting services valued at approximately $22,500. The exemption
from registration relied upon was Regulation S under the Securities Act; the
share recipient was a non-U.S. person, residing outside of the U.S.
On August 15, 2000, we issued 18,000 shares of common stock to Hugh Notman
in return for consulting services valued at approximately $26,900. The exemption
from registration relied upon was Regulation S under the Securities Act; the
share recipient was a non-U.S. person, residing outside of the U.S.
On November 16, 2000, we issued 700,000 shares of common stock in exchange
for all the issued and outstanding securities of Ultratech Linear Solutions Inc.
("Ultratech"), as described in the Ultratech Share Purchase Agreement. Pursuant
to the Ultratech Share Purchase Agreement, we purchased the business of
Ultratech as a going concern. The purchase price comprised $48,000 on account of
stockholder loans and 700,000 shares of our common stock. We had previously
loaned Ultratech $200,000. The persons receiving our shares of the Company in
the transaction were as follows: John Robertson, Mirza Kassam, Chris Neumann,
Robert Fetherstonhaugh and Stirling Mercantile Corporation. The exemption from
registration relied upon was Regulation S under the Securities Act; the share
recipients were all non-U.S. persons, residing outside of the U.S.
On December 4, 2000, we issued 25,000 shares of common stock to 3OE
Enterprises Inc. ("3OE") in return for consulting services rendered by 3OE, as
provided under the Consulting Agreement (the "Consulting Agreement") between us
and 3OE dated August 1, 2000. The consulting services did not have an agreed
value; the shares were to be issued to 3OE upon the achieving of an agreed
milestone. The exemption from registration relied upon was Regulation S under
the Securities Act; the share recipient was a non-U.S. person, residing outside
of the U.S., and the consulting services were performed outside the U.S.
On December 15, 2000, we issued 171,428 shares of common stock to Mark
Godsy in return for employment services rendered by Mr. Godsy as Chief Executive
Officer and valued at $72,000. The exemption from registration relied upon was
Regulation S; the share recipient was a non-U.S. person, residing outside of the
U.S., and the services were performed outside the U.S.
On December 15, 2000, we issued 25,000 shares of common stock to Jong Kil
Kim in return for consulting services rendered by Mr. Kim and valued at $10,500.
The exemption from registration relied upon was Regulation S; the share
recipient was a non-U.S. person, residing outside of the U.S., and the services
were performed outside the U.S.
On June 22, 2000, 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 warrants an exercise price of $0.29, which vest until March 31,
2004 and expire up to March 31, 2005. On December 15, 2001, the consulting
arrangements with Ideas was terminated and the 250,000 warrants allocated to
Ideas became fully vested on that date and expire on December 14, 2002.
On December 24, 2001, we completed an equity financing through a private
offering of 5,147,551 units at $0.18 per unit in reliance upon Regulation D and
Regulation S. 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. This registration agreement is being filed pursuant to that
agreement.
On May 14, 2002, we completed an equity financing through a private
offering of 2,317,857 units at $0.28 per unit in reliance upon Regulation D and
Regulation S. Each unit consisted of one share of common stock and one warrant
exercisable to acquire one additional common share at $0.35 per share until May
14, 2003. We agreed to use our reasonable efforts to
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cause the shares and the shares acquirable upon exercise of the warrants to be
registered under the Securities Act. This registration agreement is being filed
pursuant to that agreement.
On July 2, 2002 certain stockholders of our Company exercised share
purchase warrants issued pursuant to the December 24, 2001 private placement. A
total of 899,999 warrants were exercised at $ 0.30 per share for total gross
proceeds of $270,000.
On August 20, 2002 a stockholder of our Company exercised share purchase
warrants issued pursuant to the December 24, 2001 private placement. A total of
500,000 warrants were exercised at Cdn$0.35 per share for total gross proceeds
of $115,000.
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EXHIBITS
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)
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)
3.3* First Amendment to Amended and Restated Bylaws of Unity Wireless
Corporation (incorporated by reference to Exhibit 3.1 to the
Company's Form 8-K filed on August 30, 2002)
3.4* Second Amendment to Amended and Restated Bylaws of Unity Wireless
Corporation (incorporated by reference to Exhibit 3.2 to the
Company's Form 8-K filed on August 30, 2002)
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
5.1 Opinion of Dorsey & Whitney LLP
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)
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Exhibit
Number Description
------ -----------
21.1* Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 to the Company's Form 10-KSB filed on April 2, 2001.)
23.1 Consent of KPMG LLP
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
* Previously filed
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UNDERTAKINGS
We hereby undertake that we will:
(1) File, during any period in which we offer or sell securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) or any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) (ss.230.424(b) of
this chapter) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of
Vancouver, Province of British Columbia, Canada, on September 4, 2002.
Registrant:
UNITY WIRELESS CORPORATION
By: /s/ Roland Sartorius
------------------------------------
Roland Sartorius, Secretary
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Mark Godsy Director and Chairman of September 4, 2002
------------------------- the Board
Mark Godsy
/s/ Ilan Kenig Director, President September 4, 2002
-------------------------
Ilan Kenig
/s/ Robert Singer Director September 4, 2002
-------------------------
Robert Singer
/s/ Brian Nixon Director September 4, 2002
-------------------------
Brian Nixon
/s/ Doron Nevo Director September 4, 2002
-------------------------
Doron Nevo
/s/ Ken Maddison Director September 4, 2002
-------------------------
Ken Maddison
II-7