|
Filed
Pursuant to Rule
424(b)(3)
|
|
|
Registration
No.
333-131357
|
255
Consumers Road, Suite 500
Toronto,
Ontario
Canada
A6
M2J 1R4
MERGER
PROPOSAL - YOUR VOTE IS VERY IMPORTANT
To
the
Stockholders of WaveRider Communications Inc.:
WaveRider
Communications Inc., Wave Wireless Corporation and Wave Acquisition Corporation,
a wholly owned subsidiary of Wave Wireless, have entered into an Agreement
and
Plan of Merger, dated as of January 3, 2006, as amended. The merger contemplated
by the merger agreement will result in the combination of the businesses of
Wave
Wireless and WaveRider.
The
board
of directors of WaveRider believes that the proposed merger is a strategic
fit
that brings together complementary business lines, engineering skills, sales
and
marketing capabilities and innovative technology. The combination of Wave
Wireless’ SPEEDLAN family of mesh networking products and WaveRider’s Last Mile
Solution® non-line-of-sight, fixed and mobile wireless 900 MHz products will
provide customers with a wide range of line-of-sight and non-line-of-sight
products and services, and position the combined company as a worldwide provider
of robust, wireless broadband applications and solutions. The combined company
will offer wireless broadband solutions capable of delivering high-speed
connectivity to a variety of large and rapidly growing market segments,
including public safety, and security and surveillance for a broad range of
public and private sector customers.
Upon
completion of the merger, WaveRider anticipates that its stockholders will
be
entitled to receive approximately 1.3 shares of Wave Wireless common stock
for
each share of WaveRider common stock then held by them, together with cash
in
lieu of fractional shares. The precise number of shares of Wave Wireless
common
stock to be issued for each share of WaveRider common stock in the merger
is
subject to adjustment and will not be determined until immediately prior
to the
completion of the merger. Wave Wireless common stock is traded over the counter
on the OTC Bulletin Board of the National Association of Securities Dealers,
Inc. under the trading symbol “WVWC.” On February 8, 2006, the closing sale
price of Wave Wireless common stock on the OTC Bulletin Board was $0.16.
WaveRider common stock is traded on the OTC Bulletin Board under the trading
symbol “WAVR.” On February 8, 2006, the closing sale price of WaveRider common
stock on the OTC Bulletin Board was $0.12.
The
merger cannot be completed unless and until WaveRider stockholders approve
and
adopt the merger agreement and approve the merger. The WaveRider board of
directors unanimously recommends that WaveRider stockholders vote “FOR”
the
proposal to approve and adopt the merger agreement and approve the
merger.
We
encourage you to read this proxy statement/prospectus for important information
about the merger and the WaveRider special meeting. In particular, you should
carefully consider the discussion in the section of the accompanying proxy
statement/prospectus entitled “Risk Factors” beginning on page
17.
Sincerely,
/s/
Charles W. Brown
Charles
W. Brown
Chief
Executive Officer
Toronto,
Ontario
February
9, 2006
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved these securities or determined if the accompanying
proxy
statement/ prospectus is accurate or adequate. Any representation to the
contrary is a criminal offense.
The
accompanying proxy statement/prospectus is dated February 9, 2006, and is
first
being mailed to WaveRider stockholders on or about February 14,
2006.
255
Consumers Road, Suite 500
Toronto,
Ontario
Canada
A6
M2J 1R4
(416)
502-3200
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
To
the
Stockholders of WaveRider Communications Inc.:
You
are
cordially invited to attend a special meeting of the stockholders of WaveRider
Communications Inc. to be held at 255 Consumers Road, Suite 500, Toronto,
Ontario Canada M2J 1R4, on March 20, 2006, at 2:00 p.m. At the special meeting,
you will be asked to vote on and approve the following
proposals:
|
1.
|
To
approve and adopt the Agreement and Plan of Merger, dated as of January
3,
2006, as amended, among Wave Wireless Corporation, WaveRider
Communications Inc. and Wave Acquisition Corporation, and to approve
the
merger contemplated by the Agreement and Plan of Merger, as
amended.
|
|
2.
|
To
approve any motion for adjournment or postponement of the special
meeting
to another time or place to permit, among other things, further
solicitation of proxies if necessary to establish a quorum or to
obtain
additional votes in favor of Proposal
1.
|
Upon
completion of the merger, WaveRider anticipates that its stockholders will
be
entitled to receive approximately 1.3 shares (subject to adjustment) of Wave
Wireless common stock for each share of WaveRider common stock held by them,
together with cash in lieu of fractional shares (see page
45).
No
other
business will be conducted at the special meeting. These proposals are described
more fully in this proxy statement/prospectus. Please give your careful
attention to all of the information in this proxy
statement/prospectus.
Only
stockholders of record of WaveRider common stock at the close of business
on
February 8, 2006, the record date for the special meeting, are entitled to
notice of and to vote at this special meeting or any adjournment(s) or
postponement(s) that may take place.
Your
vote is important. Whether or not you expect to attend the special meeting
in
person, you are urged to complete, sign, date and return the enclosed proxy
card
or voting instruction card as soon as possible or to vote by telephone or on
the
Internet using the instructions on the enclosed proxy card or voting instruction
card.
YOU
MAY BE ENTITLED TO ASSERT DISSENTERS’ RIGHTS UNDER NEVADA REVISED STATUTES
92A.300 TO 92A.500, INCLUSIVE, WITH RESPECT TO THE MERGER AND OBTAIN CASH
PAYMENT FOR THE FAIR VALUE OF YOUR SHARES INSTEAD OF THE CONSIDERATION PROVIDED
FOR IN THE MERGER AGREEMENT. FOR SPECIFIC INSTRUCTIONS ON HOW TO ASSERT YOUR
DISSENTERS’ RIGHTS, PLEASE REFER TO THE SECTION OF THIS PROXY/STATEMENT
PROSPECTUS ENTITLED “DISSENTERS’ RIGHTS OF APPRAISAL” BEGINNING ON PAGE
43.
For
specific instructions on how to vote your shares, please refer to the section
of
this proxy statement/prospectus entitled “The Special Meeting of WaveRider
Stockholders” beginning on page 30. Returning the proxy card or voting
instruction card or voting by telephone or on the Internet does not deprive
you
of your right to attend the meeting and to vote your shares in person. If
you
need any assistance in the voting of your proxy card, please contact Investor
Relations, WaveRider Communications Inc., 255 Consumers Road, Suite 500,
Toronto, Ontario, Canada, M2J 1R4, (416) 502-3200.
By
Order
of the Board of Directors
/s/
Charles W. Brown
Charles
W. Brown
Chief
Executive Officer
Toronto,
Ontario
February
9, 2006
TABLE
OF CONTENTS
|
QUESTIONS
AND ANSWERS REGARDING THE PROPOSED MERGER
|
|
1
|
|
|
SUMMARY
|
|
7
|
|
|
SUMMARY
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF WAVE
WIRELESS
|
|
10
|
|
|
SUMMARY
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
WAVERIDER
|
|
12
|
|
|
SELECTED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
|
|
13
|
|
|
COMPARATIVE
HISTORICAL AND PRO FORMA PER SHARE DATA
|
|
14
|
|
|
COMPARATIVE
PER SHARE MARKET PRICE DATA
|
|
14
|
|
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
|
|
16
|
|
|
RISK
FACTORS
|
|
17
|
|
|
THE
SPECIAL MEETING OF WAVERIDER STOCKHOLDERS
|
|
30
|
|
|
Date,
Time and Place of the Special Meeting
|
|
30
|
|
|
Matters
for Consideration
|
|
30
|
|
|
Recommendation
of the WaveRider Board of Directors
|
|
31
|
|
|
Admission
to the Special Meeting
|
|
31
|
|
|
Record
Date; Shares Held by WaveRider's Directors and Executive
Officers
|
|
31
|
|
|
Interests
of WaveRider Directors and Executive Officers in the
Merger
|
|
31
|
|
|
Quorum
and Vote Required
|
|
31
|
|
|
Voting
of Proxies
|
|
32
|
|
|
Abstentions
|
|
32
|
|
|
Broker
Non-Votes
|
|
32
|
|
|
Voting
Shares in Person that are Held in Street Name
|
|
32
|
|
|
Voting
Procedures
|
|
32
|
|
|
How
to Revoke a Proxy
|
|
33
|
|
|
Contact
for Questions and Assistance in Voting
|
|
33
|
|
|
Solicitation
of Proxies and Expenses
|
|
33
|
|
|
THE
MERGER
|
|
34
|
|
|
Background
of the Merger
|
|
34
|
|
|
WaveRider's
Reasons for the Merger
|
|
36
|
|
|
Recommendation
of the WaveRider Board of Directors
|
|
38
|
|
|
Interests
of WaveRider Directors and Executive Officers in the
Merger
|
|
39
|
|
|
Material
United States Federal Income Tax Consequences
|
|
41
|
|
|
Accounting
Treatment of the Merger
|
|
42
|
|
|
Effect
of the Merger on WaveRider Stock Options, Warrants and Employee
Stock
Purchase Plan
|
|
42
|
|
-i-
|
Trading
of Shares of Wave Wireless Common Stock on the OTC Bulletin
Board
|
|
42
|
|
|
Cessation
of Trading and Deregistration of WaveRider Common Stock After
the
Merger
|
|
42
|
|
|
Restrictions
on Sales of Shares of Wave Wireless Common Stock Received in
the
Merger
|
|
42
|
|
|
Dissenters'
Rights of Appraisal
|
|
43
|
|
|
THE
MERGER AGREEMENT
|
|
45
|
|
|
Structure
of the Merger
|
|
45
|
|
|
Completion
and Effectiveness of the Merger
|
|
45
|
|
|
Conversion
of WaveRider Common Stock in the Merger
|
|
45
|
|
|
Conversion
of WaveRider Convertible Debentures and Convertible Preferred
Stock
|
|
46
|
|
|
Fractional
Shares
|
|
47
|
|
|
Exchange
Procedures
|
|
47
|
|
|
Distributions
with Respect to Unexchanged Shares
|
|
47
|
|
|
Representations
and Warranties
|
|
47
|
|
|
Conduct
of Business Before Completion of the Merger
|
|
50
|
|
|
Wave
Wireless and WaveRider Prohibited from Soliciting Other
Offers
|
|
51
|
|
|
Treatment
of WaveRider Stock Options and Warrants
|
|
53
|
|
|
Treatment
of Rights under the WaveRider Employee Stock Purchase Plan
|
|
53
|
|
|
Directors
and Officers Indemnification and Insurance
|
|
54
|
|
|
Conditions
to Completion of the Merger
|
|
54
|
|
|
Termination
of the Merger Agreement
|
|
55
|
|
|
Payment
of Termination Fee
|
|
55
|
|
|
Extension,
Waiver and Amendment of the Merger Agreement
|
|
56
|
|
|
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
56
|
|
|
WAVE
WIRELESS MANAGEMENT AFTER THE MERGER
|
|
56
|
|
|
WAVE
WIRELESS' BUSINESS
|
|
64
|
|
|
WAVE
WIRELESS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
|
|
73
|
|
|
WAVE
WIRELESS' PRINCIPAL STOCKHOLDERS
|
|
88
|
|
|
WAVERIDER'S
BUSINESS
|
|
89
|
|
|
WAVERIDER
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
|
|
97
|
|
|
WAVERIDER'S
PRINCIPAL STOCKHOLDERS
|
|
110
|
|
|
DESCRIPTION
OF WAVE WIRELESS CAPITAL STOCK
|
|
111
|
|
|
COMPARISON
OF RIGHTS OF HOLDERS OF WAVE WIRELESS COMMON STOCK AND WAVERIDER
COMMON
STOCK
|
|
116
|
|
|
PROPOSAL
TO ADJOURN OR POSTPONE THE WAVERIDER SPECIAL MEETING
|
|
118
|
|
|
SELLING
STOCKHOLDERS
|
|
119
|
|
-ii-
|
PLAN
OF DISTRIBUTION
|
|
120
|
|
|
USE
OF PROCEEDS
|
|
121
|
|
|
LEGAL
MATTERS
|
|
122
|
|
|
EXPERTS
|
|
122
|
|
|
CHANGE
IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
122
|
|
|
FUTURE
WAVERIDER STOCKHOLDER PROPOSALS
|
|
122
|
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
|
123
|
|
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
|
|
F-1
|
|
|
ANNEX
A-1 - Agreement and Plan of Merger
|
|
||
|
ANNEX
A-2 - Amendment to Agreement and Plan of Merger
|
|
||
|
ANNEX
B - Nevada Revised Statutes Sections 92A.300 to 92A.500
|
|
||
-iii-
ADDITIONAL
INFORMATION
This
proxy statement/prospectus incorporates important business and financial
information about WaveRider and Wave Wireless from documents that each company
has filed with the Securities and Exchange Commission but that have not been
included in or delivered with this proxy statement/prospectus. For a listing
of
documents incorporated by reference into this proxy statement/prospectus,
please
see the section entitled “Where You Can Find More Information” on page 123 of
this proxy statement/prospectus.
WaveRider
will provide you with copies of this information relating to WaveRider
(excluding all exhibits unless WaveRider has specifically incorporated by
reference an exhibit in this proxy statement/prospectus), without charge, upon
written or oral request to:
WaveRider
Communications Inc.
255
Consumers Road, Suite 500
Toronto,
Ontario
Canada,
M2J 1R4
Attention:
Investor Relations
(416)
502-3200.
Wave
Wireless will provide you with copies of this information relating to Wave
Wireless (excluding all exhibits unless Wave Wireless has specifically
incorporated by reference an exhibit in this proxy statement/prospectus),
without charge, upon written or oral request to:
Wave
Wireless Corporation
1996
Lundy Avenue
San
Jose,
CA 95131
Attention:
Corporate Secretary
(408)
943-4200
In
order
to receive timely delivery of the documents, you must make your requests
no
later than March 10, 2006.
-iv-
QUESTIONS
AND ANSWERS REGARDING THE PROPOSED MERGER
The
following questions and answers are intended to address briefly some commonly
asked questions regarding the proposed merger and the WaveRider special
meeting.
General
Questions and Answers
|
Q:
|
Why
am I receiving this proxy
statement/prospectus?
|
|
A:
|
Wave
Wireless and WaveRider have agreed to combine their businesses
under the
terms of a merger agreement that is described in this proxy
statement/prospectus. A copy of the merger agreement is attached
to this
proxy statement/prospectus as Annex A. For specific information
regarding
the merger agreement, please refer to the section entitled “The Merger
Agreement” beginning on page 45 of this proxy
statement/prospectus.
|
In
order
to complete the merger, WaveRider stockholders must approve and adopt the merger
agreement and approve the merger. WaveRider will hold a special meeting of
its
stockholders to obtain this approval. This proxy statement/prospectus contains
important information about the merger and the WaveRider special meeting, and
you should read it carefully. The enclosed voting materials allow you to vote
your shares of WaveRider common stock without attending the WaveRider special
meeting.
Your
vote
is important. We encourage you to vote as soon as possible. For more specific
information on how to vote, please see the questions and answers about the
WaveRider special meeting below.
|
Q:
|
What
is the merger?
|
|
A:
|
The
merger is a proposed business combination between Wave Wireless and
WaveRider where Wave Acquisition Corporation, a wholly owned subsidiary
of
Wave Wireless, will merge with and into WaveRider, with WaveRider
surviving the merger and becoming a wholly owned subsidiary of Wave
Wireless immediately following the
merger.
|
|
Q:
|
Why
are Wave Wireless and WaveRider proposing to merge? (see page
36)
|
|
A:
|
The
boards of directors of Wave Wireless and WaveRider believe that
the
proposed merger will create a combined company that will establish
a
position as a worldwide provider of robust, wireless broadband
applications and solutions. The merger will bring together Wave
Wireless’
SPEEDLAN family of 2.4GHz, 4.9GHz and 5.8GHz mesh networking products
and
WaveRider’s Last Mile Solution® non-line-of-sight, fixed and mobile
wireless 900MHz products to provide customers with a range of
line-of-sight and non-line-of-sight products and services, and
position
the combined company as a leading worldwide provider of wireless
broadband
applications and solutions. For a detailed description of WaveRider’s
reasons for the merger, please refer to the section entitled “The
Merger—WaveRider’s Reasons for the Merger” beginning on page 36 of this
proxy statement/prospectus.
|
|
Q:
|
How
does WaveRider’s board of directors recommend that I vote? (see page
38)
|
|
A:
|
After
careful consideration, WaveRider’s board of directors has determined that
the merger with Wave Wireless is advisable, fair to and in the
best
interests of WaveRider and its stockholders and unanimously approved
the
merger agreement and the merger. Accordingly, WaveRider’s board of
directors unanimously recommends that WaveRider stockholders vote
“FOR”
the proposal to approve and adopt the merger agreement and approve
the
merger. For a description of the reasons underlying the recommendation
of
WaveRider’s board of directors with respect to the merger, please refer to
the section of this proxy statement/prospectus entitled “The
Merger—WaveRider’s Reasons for the Merger” beginning on page 36 of
this proxy/statement/prospectus. WaveRider's board of directors also
unanimously recommends the WaveRider stockholders vote
"FOR" the proposal to permit adjournment or postponement
of the WaveRider special
meeting.
|
-1-
|
Q:
|
What
will I receive in the merger? (see page
45)
|
|
A:
|
If
the merger is completed, it is expected that you will be entitled
to
receive approximately 1.3 shares of Wave Wireless common stock
(subject to
adjustment as described in the section entitled “The Merger
Agreement—Conversion of WaveRider Common Stock in the Merger” on
page 45 of this proxy statement/prospectus) for each share of
WaveRider common stock that you own at the effective time of the
merger.
No fractional shares of Wave Wireless common stock will be issued
in the
merger. If you would otherwise be entitled to receive a fraction
of a
share of Wave Wireless common stock, you will receive an amount
of cash
equal to the value of the fractional
share.
|
|
Q:
|
What
should I do now?
|
|
A:
|
Please
review this proxy statement/prospectus carefully and sign, date and
return
each proxy card and voting instruction card you receive as soon as
possible.
|
|
Q:
|
Do
I need to send in my WaveRider stock certificate
now?
|
|
A:
|
No.
You should not send in your WaveRider stock certificates now. Following
the merger, a letter of transmittal will be sent to WaveRider stockholders
informing them where to deliver their WaveRider stock certificates
in
order to receive shares of Wave Wireless common stock and any cash
in lieu
of a fractional share of Wave Wireless common stock. You should not
send
in your WaveRider common stock certificates prior to receiving this
letter
of transmittal.
|
|
Q:
|
What
percentage of Wave Wireless capital stock will former WaveRider
stockholders own after the merger? (see page
45)
|
|
A:
|
Following
the merger, the former securityholders of WaveRider will own approximately
50% of the outstanding shares of Wave Wireless common stock on a
fully-diluted basis, which assumes that all outstanding options and
warrants to acquire shares of Wave Wireless common stock are exercised
and
that all outstanding shares of Wave Wireless’ convertible preferred stock
are converted into shares of Wave Wireless common
stock.
|
|
Q:
|
What
vote is required to approve and adopt the merger agreement and
approve the
merger? (see page
31)
|
|
A:
|
Approval
and adoption of the merger agreement and approval of the merger
requires
the affirmative vote of the holders of a majority of the shares
of
WaveRider’s voting stock outstanding on February 8, 2006, the
record date for the WaveRider special
meeting.
|
|
Q:
|
What
vote is required to approve the proposal to permit adjournment
or
postponement of the WaveRider special meeting? (see page
31)
|
|
A:
|
The
affirmative vote of the holders of a majority of the shares of WaveRider
voting stock present in person or represented by proxy and entitled
to
vote thereon is necessary for this proposal to
pass.
|
|
Q:
|
When
do Wave Wireless and WaveRider expect to complete the
merger?
|
|
A:
|
Wave
Wireless and WaveRider are working toward completing the merger as
quickly
as possible and currently plan to complete the merger in Wave Wireless’
first fiscal quarter of 2006. However, the exact timing of the completion
of the merger cannot be predicted because the merger is subject to
approval of the stockholders of WaveRider, governmental and regulatory
review processes and other conditions set forth in the merger
agreement.
|
-2-
|
Q:
|
As
a WaveRider stockholder, will I be able to trade the Wave Wireless
common
stock that I receive in connection with the merger? (see page
42)
|
|
A:
|
The
shares of Wave Wireless common stock issued to you in connection
with the
merger will be freely tradable, unless you are an affiliate of WaveRider,
and will be listed on the OTC Bulletin Board under the symbol “WVWC.”
Persons who are deemed to be affiliates of WaveRider must comply
with Rule
145 under the Securities Act of 1933, as amended, if they wish to
sell or
otherwise transfer any of the shares of Wave Wireless common stock
that
they receive in connection with the
merger.
|
|
Q:
|
Am
I entitled to appraisal rights? (see page
43)
|
|
A:
|
Yes.
Under Nevada law, appraisal rights are available to WaveRider stockholders
in connection with the merger.
|
|
Q:
|
What
will happen to WaveRider’s outstanding options and warrants in the merger?
(see page 53)
|
|
A:
|
All
options and warrants to purchase shares of WaveRider common stock
outstanding at the effective time of the merger will be assumed
by Wave
Wireless and will become exercisable for shares of Wave Wireless
common
stock. The number of shares of Wave Wireless common stock issuable
upon
the exercise of these options and warrants will be the number of
shares of
WaveRider common stock subject to the assumed option or warrant
multiplied
by the exchange ratio (subject to adjustment as described in the
section
entitled “The Merger Agreement—Conversion of WaveRider Common Stock in the
Merger” on page 45 of this proxy statement/prospectus), rounded down
to the nearest whole number of shares. The exercise price per share
of
each assumed WaveRider option and warrant will be equal to the
exercise
price of the assumed WaveRider option or warrant divided by the
exchange
ratio (subject to adjustment as described in the section entitled
“The
Merger Agreement—Conversion of WaveRider Common Stock in the Merger” on
page 45 of this proxy statement/prospectus), rounded up to the
nearest whole cent. Other than with respect to the number of shares
subject to WaveRider’s outstanding options and warrants and the exercise
price, both of which will be adjusted as described above, the assumed
WaveRider options and warrants will continue to have the same terms
and
conditions as they had prior to the
merger.
|
|
Q:
|
What
will happen to WaveRider’s convertible debentures? (see page
46)
|
|
A:
|
As
of December 31, 2005, Crescent International Ltd. (“Crescent”), held
convertible debentures issued by WaveRider with a total outstanding
principal amount of approximately $1.5 million. Prior to the completion
of
the merger, WaveRider will issue to Crescent a number of shares
of
WaveRider’s Series D Convertible Preferred Stock with an aggregate face
value of $350,000 as consideration for Crescent’s agreement to: (i) not
convert most of its convertible debentures into shares of WaveRider
common
stock prior to the merger, (ii) vote in favor of the merger, and
(iii) exchange the convertible debentures and preferred shares
for Wave
Wireless’ equity securities in the merger. In the merger, all outstanding
shares of WaveRider’s convertible preferred stock issued to Crescent and
all of WaveRider’s outstanding convertible debentures will be converted,
in the aggregate, into equity securities of Wave Wireless, as more
fully
described in the section entitled “The Merger Agreement—Conversion of
WaveRider Convertible Debentures and Convertible Preferred Stock” on page
46 of this proxy
statement/prospectus.
|
|
Q:
|
What
are the tax consequences of the merger to me? (see page
41)
|
|
A:
|
Wave
Wireless and WaveRider expect, but cannot assure you, that for
United
States federal income tax purposes you will not recognize gain
or loss on
your exchange of WaveRider common shares in the merger for shares
of Wave
Wireless common stock, except to the extent of the cash, if any,
received
in lieu of a fractional share of common stock of the combined company.
It
is possible, however, that you may recognize gain or loss in the
exchange,
to the extent of the difference between the fair market value of
the Wave
Wireless common stock and cash you receive in the merger and your
adjusted
tax basis in your shares of WaveRider common stock that you exchange
therefor. See the section entitled “The Merger—Material U.S. Federal
Income Tax Consequences of the Merger” beginning on page
41.
|
-3-
|
Q:
|
What
risks should I consider in deciding whether to vote in favor of
approving
and adopting the merger agreement and approving the merger? (see
page
17)
|
|
A:
|
You
should carefully review the section of this proxy statement/prospectus
entitled “Risk Factors” beginning on page 17 which sets forth certain
risks and uncertainties related to the merger, as well as risks
and
uncertainties to which the combined company’s business will be subject.
Additionally, each of Wave Wireless and WaveRider are, as independent
companies, subject to certain risks and uncertainties as more fully
described in Wave Wireless’ Annual Report on Form 10-K/A and WaveRider’s
Annual Report on Form 10-KSB/A for the fiscal year ended December
31,
2004, each of which is available on the SEC website. The address
of the
SEC website is
http://www.sec.gov.
|
|
Q:
|
How
can I find out whether the stockholders of WaveRider approved the
merger
proposal?
|
|
A:
|
Wave
Wireless and WaveRider intend to issue a joint press release announcing
the voting results of the WaveRider special meeting promptly after
the
meeting is held.
|
Questions
and Answers About the WaveRider Special Meeting
|
Q:
|
When
and where will the WaveRider special meeting be held? (see page
30)
|
|
A:
|
The
special meeting of WaveRider stockholders will begin promptly at
2:00
p.m., local time, at WaveRider’s headquarters located at 255 Consumers
Road, Suite 500, Toronto, Ontario, M2J 1R4 on March 20, 2006. Check
in
will begin at 1:00 p.m. Please allow ample time for the check-in
procedures.
|
|
Q:
|
How
can I attend the WaveRider special meeting? (see page
31)
|
|
A:
|
You
are entitled to attend the special meeting only if you were a WaveRider
stockholder as of the close of business on February 8, 2006, the
record
date for the WaveRider special meeting, or you hold a valid proxy
for the
special meeting. You should be prepared to present valid government-issued
photo identification for admittance to the special meeting. In
addition,
if you are a record holder, your name will be verified against
the list of
record holders on the record date prior to being admitted to the
meeting.
If you are not a record holder but hold shares through a broker
or nominee
(i.e., in street name), you should provide proof of beneficial
ownership
on the record date, such as your most recent account statement
prior to
the record date, or other similar evidence of ownership. If you
do not
provide valid government-issued photo identification or comply
with the
other procedures outlined above upon request, you may not be admitted
to
the special meeting.
|
|
Q:
|
How
can I vote? (see page
32)
|
|
A:
|
You
may direct your vote without attending the WaveRider special meeting.
If
you are a stockholder of record, you may vote by granting a proxy.
If you
hold shares of WaveRider in street name, you may vote
by
|
| · |
completing,
signing, dating and returning the proxy card in the pre-addressed
envelope
provided;
|
| · |
using
the telephone; or
|
| · |
using
the Internet.
|
For
specific instructions on how to vote by telephone or through the Internet,
please refer to the instructions on your proxy or voting instruction card.
If
you hold your shares of WaveRider common stock in a stock brokerage account
or
if your shares are held in street name, you must provide the record holder
of
your shares with instructions on how to vote your shares. Please check the
voting instruction card used by your broker or nominee to see if you may vote
using the telephone or the Internet. If you are a stockholder of record, you
may
also vote at the WaveRider special meeting. If you hold shares in street name,
you may not vote in person at the WaveRider special meeting unless you obtain
a
signed proxy from the record holder giving you the right to vote the
shares.
-4-
|
Q:
|
If
my shares are held in “street name” by my broker, will my broker vote my
shares for me?
|
|
A:
|
Your
broker will vote your shares only if you provide instructions on
how to
vote. Therefore, you should be sure to provide your broker with
instructions on how to vote your shares. Without instructions, your
shares
will not be voted, which will have the effect of a vote against the
approval and adoption of the merger agreement and approval of the
merger.
|
|
Q:
|
What
should I do if I receive more than one set of voting
materials?
|
|
A:
|
Please
complete, sign, date and return each proxy card and voting instruction
card that you receive.
You may receive more than one set of voting materials, including
multiple
copies of this proxy statement/prospectus and multiple proxy cards
or
voting instruction cards. For example, if you hold shares in more
than one
brokerage account, you will receive a separate voting instruction
card for
each brokerage account in which you hold shares. If your shares are
held
in more than one name, you will receive more than one proxy or voting
instruction card.
|
|
Q:
|
May
I change my vote after I have mailed my signed proxy or voting
instruction
card or voted using the telephone or Internet? (see page
33)
|
|
A:
|
Yes.
If you have completed a proxy, you may change your vote at any time
before
your proxy is voted at the WaveRider special meeting. You can do
this in
one of four ways:
|
| · |
send
a written, dated notice to the Secretary of WaveRider at WaveRider’s
principal executive offices stating that you would like to revoke
your
proxy;
|
| · |
complete,
date and submit a new later-dated proxy
card;
|
| · |
vote
at a later date by telephone or by using the Internet;
or
|
| · |
attend
the special meeting and vote in person. Your attendance alone will
not
revoke your proxy.
|
If
you
have instructed a broker or bank to vote your shares of WaveRider common stock
by executing a voting instruction card or by using the telephone or Internet,
you must follow the directions received from your broker or bank to change
your
instructions.
|
Q:
|
What
happens if I do not indicate how to vote on my proxy card? (see
page
32)
|
|
A:
|
If
you sign and send in your proxy card and do not indicate how you
want to
vote, your proxy will be counted as a vote “FOR”
the proposal to approve and adopt the merger agreement and approve
the
merger and “FOR”
the proposal to permit adjournment or postponement of the WaveRider
special meeting.
|
|
Q:
|
What
happens if I do not return a proxy card or vote? (see page
32)
|
|
A:
|
If
you do not sign and send in your proxy card, vote using the telephone
or
Internet or vote at the special meeting or if you mark the “abstain” box
on the proxy card, it will have the same effect as a vote against
the
approval and adoption of the merger agreement and approval of the
merger.
Moreover, failure to vote or give voting instructions to your broker
or
nominee for the WaveRider special meeting could make it more difficult
to
ensure that a quorum is present at the WaveRider special meeting.
Therefore, whether or not you plan on attending the special meeting,
you
are urged to vote.
|
-5-
|
Q:
|
Who
can answer my questions about the merger or WaveRider’s special meeting of
stockholders?
|
|
A:
|
If
you would like additional copies of this proxy statement/prospectus
without charge or if you have any questions about the merger or
WaveRider’s special meeting of stockholders, including the procedures for
voting your shares, you should
contact:
|
Investor
Relations
WaveRider
Communications Inc.
255
Consumers Road, Suite 500
Toronto,
Ontario M2J 1R4
Phone:
(416)502-3200
Email:
investors@WaveRider.com
-6-
SUMMARY
The
following is a summary of the information contained in this proxy
statement/prospectus. This summary may not contain all of the information
about
the merger and the adjournment proposal that is important to you. For a more
complete description of the merger and the adjournment proposal, we encourage
you to read carefully this entire proxy statement/prospectus, including the
attached annexes. You are encouraged to read the information under the heading
“Risk Factors” beginning on page 17 of this proxy statement/prospectus for
a discussion of important factors you should consider in connection with
the
merger. For more information, please see “Where You Can Find More Information”
on page 123 of this proxy statement/prospectus.
The
Merger and the Merger Agreement
Wave
Wireless has agreed to acquire WaveRider under the terms of a merger agreement
between the companies that is described in this proxy statement/prospectus.
Under the terms of the merger agreement, Wave Acquisition Corporation, a
newly
formed, wholly-owned subsidiary of Wave Wireless, will merge with and into
WaveRider with WaveRider surviving the merger as a wholly-owned subsidiary
of
Wave Wireless. Upon completion of the merger, it is anticipated that holders
of
WaveRider common stock will be entitled to receive approximately 1.3 shares
of
Wave Wireless common stock (subject to adjustment as described in the section
entitled “The Merger Agreement—Conversion of WaveRider Common Stock in the
Merger" on page 45 of this proxy statement/prospectus) for each share of
WaveRider common stock that they then hold. A copy of the merger agreement
is
attached as Annex A to this proxy statement/prospectus, and we encourage
you to
read the merger agreement in its entirety.
Parties
to the Merger
Wave
Wireless Corporation
1996
Lundy Avenue
San
Jose
California 95131
(408)
943-4200
Wave
Wireless develops, manufactures, and markets highly secure and reliable wireless
mesh routers to the telecommunications market worldwide. Wave Wireless’ wireless
mesh routers are designed to combine high performance, multiple operating
frequencies and hardware AES encryption to provide networking professionals
with
flexible and scalable mesh routers for integrated network requirements of
Internet access and private networks including security and surveillance
requirements. Cellular and personal communications service (PCS) providers
utilize Wave Wireless’ repair and maintenance business for a range of services
required to support technical issues associated with the installation,
maintenance and operation of refurbished legacy Wave Wireless licensed products.
Wave Wireless is traded on the OTC Bulletin Board, under the symbol “WVWC.” For
more information visit www.wavewireless.com or call 408-943-4200.
WaveRider
Communications Inc.
255
Consumers Road, Suite 500
Toronto,
Ontario M2J 1R4
(416)
502-3200
WaveRider
Communications Inc. provides broadband wireless deployments and technologies.
WaveRider’s Last Mile Solution® non-line-of-sight 900 MHz and 5.8 GHz networks
enable communications providers to establish full-saturation coverage networks,
deliver communications services, and generate a rapid return on their
investment. WaveRider is committed to the development of standards-based
wireless technologies that support advanced applications and address the needs
of the North American and International markets. WaveRider is traded on the
OTC
Bulletin Board, under the symbol WAVR. For more information, visit www.waverider.com
or call
(416) 502-3200.
-7-
Wave
Acquisition Corporation
1996
Lundy Avenue
San
Jose
California 95131
(408)
943-4200
Wave
Acquisition Corporation is a newly formed, wholly owned subsidiary of Wave
Wireless. Wave Acquisition Corporation was formed on December 28, 2005 solely
to
effect the merger and has not conducted any business during any period of its
existence.
Recommendation
of the WaveRider Board of Directors (see page 38)
After
careful consideration, the WaveRider board of directors determined that the
merger agreement and the merger are advisable, fair to and in the best interests
of WaveRider and its stockholders and unanimously approved the merger agreement
and the merger. The WaveRider board of directors unanimously recommends that
the
WaveRider stockholders vote “FOR”
the
proposal to approve and adopt the merger agreement and to approve the merger
and
“FOR”
the
proposal to permit adjournment or postponement of the WaveRider special
meeting.
Risk
Factors (see page 17)
The
“Risk
Factors” beginning on page 17 of this proxy statement/prospectus, should be
considered carefully by WaveRider stockholders in evaluating whether to approve
and adopt the merger agreement and approve the merger. These risk factors
should
be considered along with any additional risk factors in the reports of Wave
Wireless and WaveRider filed with the Securities and Exchange Commission
and any
other information included in this proxy
statement/prospectus.
Special
Meeting of Stockholders of WaveRider (see page 30)
WaveRider
will hold a special meeting of its stockholders on March 20, 2006, at 2:00
p.m.,
local time, at WaveRider’s corporate headquarters located at 255 Consumers Road,
Suite 500, Toronto, Ontario M2J 1R4, at which stockholders will be asked
to vote
upon a proposal to approve and adopt the merger agreement and approve the
merger
and a proposal to permit adjournment or postponement of the WaveRider special
meeting.
All
WaveRider Executive Officers and Directors Have Interests in the Merger
(see
page 39)
When
WaveRider stockholders consider the recommendation of the WaveRider board of
directors that they vote in favor of the proposal to approve and adopt the
merger agreement and approve the merger, WaveRider stockholders should be aware
that all of the WaveRider directors and executive officers have interests in
the
merger that may be different from, or in addition to, their interests as
stockholders of WaveRider. These interests include:
| · |
the
continued indemnification of current directors and officers of WaveRider
under the merger agreement and the continuation of directors’ and
officers’ liability insurance after the
merger;
|
| · |
the
retention of some of the officers of WaveRider as officers, employees
or
consultants of Wave Wireless or its subsidiaries, which include,
Charles
W. Brown, WaveRider’s Chief Executive Officer, who will become Chief
Executive Officer of Wave Wireless, and T. Scott Worthington, WaveRider’s
Chief Financial Officer, who will become Chief Financial Officer
of Wave
Wireless;
|
| · |
appointment
of three WaveRider designees to the Wave Wireless board of directors,
in
addition to Mr. Brown; and
|
| · |
the
assumption of WaveRider stock options by Wave
Wireless.
|
For
a
more detailed description of the interests of the directors and executive
officers of WaveRider, please see the section entitled “The Merger—Interests of
WaveRider Directors and Executive Officers in the Merger” beginning on
page 39 of this proxy statement/prospectus.
-8-
Conditions
to Completion of the Merger (see page 54)
Several
conditions must be satisfied or waived before we complete the merger, including
those summarized below:
| · |
approval
and adoption of the merger agreement and approval of the merger by
the
affirmative vote of holders of a majority of the shares of WaveRider
voting stock outstanding on the record
date;
|
| · |
absence
of any law, regulation or order making the merger illegal or otherwise
prohibiting or delaying the merger;
|
| · |
accuracy
of each party’s respective representations and warranties in the merger
agreement, except as would not have a material adverse effect on
such
party;
|
| · |
material
compliance by each party with its covenants in the merger agreement;
and
|
| · |
absence
of any material change that has had or would have a material adverse
effect on WaveRider.
|
WaveRider
and Wave Wireless are Prohibited from Soliciting Other Offers (see page
51)
The
merger agreement contains detailed provisions that prohibit WaveRider, Wave
Wireless and their subsidiaries, and their officers and directors, from taking
any action to solicit or engage in discussions or participate in negotiations
with any person or group with respect to an acquisition proposal as defined
in
the merger agreement, including an acquisition that would result in the person
or group acquiring more than a 15% interest in WaveRider’s total outstanding
voting securities, a sale of more than 15% of WaveRider’s or Wave Wireless’, as
the case may be, assets or a merger or other business combination. WaveRider
and
Wave Wireless are also required to use commercially reasonable efforts to cause
their non-officer employees and advisors to comply with these restrictions.
The
merger agreement does not, however, prohibit WaveRider or its board of directors
from considering, and in the event of a tender or exchange offer made directly
to WaveRider stockholders potentially recommending, an unsolicited bona fide
written acquisition proposal from a third party if specified conditions are
met.
Wave
Wireless and WaveRider May Terminate the Merger Agreement Under Specified
Circumstances (see page 55)
Wave
Wireless and WaveRider may terminate the merger agreement by mutual consent
with
the approval of their respective boards of directors. In addition, either Wave
Wireless or WaveRider may terminate the merger agreement if:
| · |
the
merger is not consummated by April 30,
2006;
|
| · |
a
court or other governmental entity issues a final, non-appealable
order,
decree or ruling or takes any other action having the effect of
permanently restraining, enjoining or prohibiting the merger;
or
|
| · |
the
WaveRider stockholders do not approve and adopt the merger agreement
and
approve the merger at the WaveRider special
meeting.
|
Wave
Wireless and WaveRider may terminate the merger agreement under other specified
conditions described in the section entitled “The Merger Agreement—Termination
of the Merger Agreement” on page 55 of this proxy
statement/prospectus.
Payment
of a Termination Fee under Specified Circumstances (see page
55)
The
merger agreement may be terminated by either Wave Wireless or WaveRider under
specified circumstances. If the merger agreement is terminated, Wave Wireless
or
WaveRider may be required to pay to the other party a termination fee of up
to
$300,000.
-9-
Treatment
of the Merger for United States Federal Income Tax Purposes (see page
41)
Wave
Wireless and WaveRider expect, but cannot be certain, that for United States
federal income tax purposes, the merger will be treated as a tax-free
reorganization, with the result that WaveRider stockholders will not recognize
gain or loss on the exchange of WaveRider common shares in the merger for shares
of Wave Wireless common stock, except to the extent of the cash, if any,
received in lieu of a fractional share of common stock of the combined company.
Inconsistencies under existing law and uncertainties raised by proposed Treasury
Regulations, however, create the possibility that the merger will not be treated
as a “reorganization” for United States federal income tax purposes, but will
instead be treated as a taxable sale of WaveRider common shares, with the result
that stockholders will recognize gain or loss in the merger.
Accounting
Treatment of the Merger (see page 42)
In
accordance with United States generally accepted accounting principles, Wave
Wireless will account for the merger under the purchase method of accounting
for
business combinations.
Dissenters’
Rights of Appraisal (see page 43)
Under
Nevada law, the stockholders of WaveRider will be entitled to dissent from
the
merger and obtain cash payment for the fair value of their shares instead of
the
consideration provided for in the merger agreement.
Comparison
of the Rights of Holders of Wave Wireless Common Stock and WaveRider Common
Stock (see page 116)
Wave
Wireless is incorporated under the laws of the State of Delaware and WaveRider
is incorporated under the laws of the State of Nevada. WaveRider stockholders
who receive shares of Wave Wireless common stock in connection with the merger
will become holders of Wave Wireless common stock, and their rights as such
will
be governed by the laws of the State of Delaware and the certificate of
incorporation and bylaws of Wave Wireless. For a more detailed description
of
the material differences between the rights of holders of Wave Wireless common
stock and WaveRider common stock, please see the section entitled “Comparison of
Rights of Holders of Wave Wireless common stock and WaveRider common stock”
beginning on page 116 of this proxy
statement/prospectus.
SUMMARY
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL
DATA OF WAVE WIRELESS
The
table
below presents a summary of selected historical consolidated financial data
with
respect to Wave Wireless as of the dates and for the periods indicated. The
historical consolidated statement of operations data presented below for the
fiscal years ended December 31, 2004, 2003 and 2002 and the historical balance
sheet data as of December 31, 2004 and 2003 have been derived from Wave
Wireless’ audited historical consolidated financial statements, which are
included in this proxy statement prospectus beginning on page F-C1. The
historical consolidated statement of operations data for the nine months ended
September 30, 2005 and September 30, 2004 and the historical balance sheet
data
as of September 30, 2005 and 2004 have been derived from Wave Wireless’
unaudited interim condensed historical consolidated financial statements which
are included in this proxy statement prospectus beginning on page F-B1.
Operating results of the nine months ended September 30, 2005 and September
30,
2004 are not necessarily indicative of the results that may be expected for
the
entire year ending December 31, 2005 or any other period. In the opinion of
Wave
Wireless’ management, the accompanying unaudited financial data included all
adjustments (consisting only of normal recurring adjustments) necessary for
their fair presentation. The historical consolidated statement of operations
data presented below for the fiscal years ended December 31, 2001 and 2000
and
the historical balance sheet data as of December 31, 2002, 2001 and 2000 are
derived from Wave Wireless’ audited historical consolidated financial statements
which are not included in, or incorporated by reference into, this proxy
statement/prospectus. The historical results are not necessarily indicative
of
results to be expected for any future period.
You
should read the summary consolidated financial data set forth below in
conjunction with Wave Wireless’ historical financial statements and related
notes set forth on pages F-C1 through F-C37 of this proxy statement/prospectus
and the section entitled “Wave Wireless Management’s Discussion and Analysis of
Financial Condition and Results of Operations” beginning on page 73 of this
proxy statement/prospectus.
-10-
|
Year
Ended December 31,
|
Nine
Months Ended
September
30,
|
|||||||||||||||||||||
|
2004
|
2003
|
2002
|
2001
|
2000
|
2005
|
2004
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
||||||||||||||||||||||
|
Total
revenue
|
$
|
24,175
|
$
|
20,841
|
$
|
29,686
|
$
|
73,236
|
$
|
183,606
|
$
|
9,691
|
$
|
19,897
|
||||||||
|
Total
cost of revenue (1)
|
18,720
|
20,604
|
30,777
|
94,890
|
160,965
|
7,028
|
15,009
|
|||||||||||||||
|
Gross
profit
|
5,455
|
237
|
(1,091
|
)
|
(21,654
|
)
|
22,641
|
2,663
|
4,888
|
|||||||||||||
|
Total
operating expenses (2)(3)(4)
|
16,300
|
18,975
|
41,525
|
61,540
|
69,343
|
13,241
|
12,396
|
|||||||||||||||
|
Loss
from operations
|
(10,845
|
)
|
(18,738
|
)
|
(42,616
|
)
|
(83,194
|
)
|
(46,702
|
)
|
(10,578
|
)
|
(7,508
|
)
|
||||||||
|
Non-operating
items (5)(6)(7)(8)(9)
|
7,525
|
5,852
|
(11,690
|
)
|
7,656
|
(23,247
|
)
|
(986
|
)
|
7,942
|
||||||||||||
|
Net
income (loss)
|
$
|
(3,320
|
)
|
$
|
(12,886
|
)
|
$
|
(54,306
|
)
|
$
|
(75,538
|
)
|
$
|
(69,949
|
)
|
$
|
(11,564
|
)
|
$
|
434
|
||
|
Preferred
stock charges (10)
|
(2,548
|
)
|
(1,521
|
)
|
—
|
—
|
—
|
(3,829
|
)
|
(2,132
|
)
|
|||||||||||
|
Net
loss attributable to common stockholders
|
(5,868
|
)
|
(14,407
|
)
|
(54,306
|
)
|
(75,538
|
)
|
(69,949
|
)
|
(15,393
|
)
|
(1,698
|
)
|
||||||||
|
Basic
and diluted loss per share (11)
|
$
|
(0.56
|
)
|
$
|
(7.98
|
)
|
$
|
(63.77
|
)
|
$
|
(136.92
|
)
|
$
|
(134.40
|
)
|
$
|
(1.10
|
)
|
$
|
(0.16
|
)
|
|
|
Shares
used in computing basic and diluted loss per share
|
10,429
|
1,805
|
852
|
552
|
520
|
13,931
|
10,842
|
|||||||||||||||
|
As
of December 31,
|
As
of September 30,
|
|||||||||||||||||||||
|
2004
|
2003
|
2002
|
2001
|
2000
|
2005
|
2004
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||||
|
Total
assets
|
$
|
25,423
|
$
|
34,565
|
$
|
35,723
|
$
|
92,234
|
$
|
216,219
|
$
|
17,361
|
$
|
29,041
|
||||||||
|
Working
capital
|
1,283
|
(2,075
|
)
|
(2,356
|
)
|
(10,185
|
)
|
76,823
|
(7,320
|
)
|
1,730
|
|||||||||||
|
Long-term
portion of obligations
|
—
|
—
|
24,488
|
769
|
30,290
|
1,520
|
150
|
|||||||||||||||
|
Redemable
preferred stock (10)
|
6,106
|
4,231
|
—
|
—
|
—
|
—
|
5,849
|
|||||||||||||||
|
Total
stockholders' equity
|
$
|
7,508
|
$
|
9,753
|
$
|
(15,350
|
)
|
$
|
24,256
|
$
|
95,247
|
$
|
3,870
|
$
|
9,989
|
|||||||
|
(1)
|
In
2004, this caption reflects charges of approximately $1.1 million
for
contractual losses and obsolescence of uncontracted inventory purchases.
In 2003, this caption reflects charges of approximately $3.4 million
related to excess and obsolete inventory. In 2002, this caption reflects
charges of approximately $5.8 million related to excess and obsolete
inventory. In 2001, this caption reflects charges of approximately
$30
million related to excess inventory and inventory purchase commitments.
In
2000, this caption reflects charges of $21.7 million related to excess
inventory and purchase commitments.
|
|
(2)
|
In
2001, this caption reflects a $11.6 million charge for bad debt arising
from the bankruptcy of a customer.
|
|
(3)
|
In
2002, 2001 and 2000, this caption reflects impairment and amortization
charges made to Wave Wireless’ goodwill carrying value of $11.4 million,
$8.0 million and $19.6 million,
respectively.
|
|
(4)
|
In
2003, this caption reflects restructuring charges that were recorded
due
to exiting certain product lines. Restructuring charges were expensed
when
the loss was estimable and
incurred.
|
|
(5)
|
In
2001, this caption reflects a realized gain on the sale of Wave Wireless’
RT Masts subsidiary.
|
|
(6)
|
In
2004, this caption reflects a restructuring gain of $7.5 million
related
to a contract settlement.
|
|
(7)
|
In
2000, this caption includes a $9.9 million charge to income tax expense,
representing an increase in the valuation allowance against the carrying
value of deferred tax assets.
|
|
(8)
|
Wave
Wireless sold its PCNS subsidiary in 2003, which resulted in a loss
of
$1.5 million and accounted for the transaction as a discontinued
operation. In accordance with applicable accounting standards, Wave
Wireless restated its financial statements for all periods presented
to
exclude the operations of PCNS from continuing operations for all
periods
presented.
|
|
(9)
|
In
2002, this caption reflects a $5.5 million charge representing the
cumulative effect of Wave Wireless’ change in accounting principle for
accounting for goodwill. In 2002, this caption reflects a non-cash
charge
of approximately $1.5 million for the cumulative effect of the accounting
change made to comply with SEC revenue recognition standards contained
in
Staff Accounting Bulletin SAB 101.
|
|
(10)
|
The
carrying value of Wave Wireless’ redeemable preferred stock is discounted
for the allocation of proceeds to warrants that were issued concurrent
with the sale of redeemable preferred stock and beneficial conversion
features embedded in the convertible instrument. Wave Wireless is
accreting the redeemable preferred stock to its redemption value
through
periodic accretions that increase preferred stock and decrease retained
earnings. Wave Wireless is required to display preferred stock accretions
as an increase to loss applicable to common
stockholders.
|
-11-
|
(11)
|
The
per share amounts have been restated to give effect to a one-for-30
reverse stock split on July 19, 2004. The numerator for calculation
of net
loss per common share from continuing operations is Wave Wireless’ net
loss from continuing operations for the respective period, less preferred
stock dividends and accretions. The numerator for the calculation
of net
loss per common share from discontinued operations is Wave Wireless’ net
loss from discontinued operations. The numerator for calculation
of the
per common share effect of the cumulative effects of accounting changes
is
the charge associated with the change in accounting principle. In
all
instances, the denominator, weighted average common shares outstanding,
does not include stock options with an exercise price that exceeds
the
average fair market value of the underlying Wave Wireless common
stock or
other dilutive securities because the effect would be
anti-dilutive.
|
SUMMARY
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL
DATA OF WAVERIDER
The
tables below present summary selected historical consolidated financial data
of
WaveRider prepared in accordance with U.S. GAAP. You should read the information
set forth below in conjunction with the selected consolidated financial data,
the audited consolidated financial statements (including the notes thereto)
and
Management’s Discussion and Analysis of the Financial Condition and Results of
Operations of WaveRider. Among other things, this section includes a discussion
of accounting changes, business combinations and dispositions of businesses
affecting the comparability of the information reflected in the selected
financial data.
The
summary selected historical consolidated statements of operations for each
of
the fiscal years in the three year period ended December 31, 2004 and the
summary selected historical consolidated balance sheet data as of December
31,
2004 and 2003 are derived from the audited consolidated financial statements
of
WaveRider and the related notes thereto, which are included in this proxy
statement/prospectus beginning on page F-E1. The summary selected historical
consolidated statement of operations data for the fiscal years ended December
31, 2001 and 2000 and the summary selected historical consolidated balance
sheet
data as of December 31, 2002, 2001 and 2000 are derived from audited
consolidated financial statements that are not included in, or incorporated
by
reference into, this proxy statement/prospectus.
|
|
|
Year
Ended December 31,
|
|
Nine
Months Ended
September
30,
|
|
|||||||||||||||||
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
2005
|
|
2004
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|||||||||
|
|
|
(in
thousands, except per share data)
|
|
|||||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total
revenue
|
|
$
|
9,542
|
|
$
|
13,079
|
|
$
|
9,009
|
|
$
|
7,804
|
|
$
|
4,133
|
|
$
|
7,930
|
|
$
|
7,388
|
|
|
Total
cost of revenue
|
|
|
6,193
|
|
|
7,899
|
|
|
6,779
|
5,956
|
5,239
|
5,235
|
4,894
|
|||||||||
|
Gross
profit
|
3,349
|
5,180
|
2,230
|
1,848
|
(1,106
|
)
|
2,695
|
2,494
|
||||||||||||||
|
Total
operating expenses
|
6,931
|
7,074
|
8,814
|
17,607
|
30,831
|
3,599
|
5,525
|
|||||||||||||||
|
Loss
from operations
|
(3,582
|
)
|
(1,894
|
)
|
(6,584
|
)
|
(15,759
|
)
|
(31,937
|
)
|
(904
|
)
|
(3,031
|
)
|
||||||||
|
Non-operating
items
|
(1,943
|
)
|
(308
|
)
|
(4,666
|
)
|
5,734
|
464
|
(180
|
)
|
(2,010
|
)
|
||||||||||
|
Net
income (loss)
|
$
|
(1,639
|
)
|
$
|
(1,586
|
)
|
$
|
(11,250
|
)
|
$
|
(21,493
|
)
|
$
|
(31,473
|
)
|
$
|
(1,084
|
)
|
$
|
(1,021
|
)
|
|
|
Basic
and diluted loss per share
|
$
|
(0.11
|
)
|
$
|
(0.12
|
)
|
$
|
(1.07
|
)
|
$
|
(3.74
|
)
|
$
|
(5.92
|
)
|
$
|
(0.05
|
)
|
$
|
(0.07
|
)
|
|
|
Shares
used in computing basic and diluted loss per share
|
15,139
|
13,068
|
10,526
|
6,027
|
5,320
|
23,524
|
14,837
|
|||||||||||||||
|
As
of December 31,
|
As
of September 30,
|
|||||||||||||||||||||
|
2004
|
2003
|
2002
|
2001
|
2000
|
2005
|
2004
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||||
|
Total
assets
|
$
|
3,838
|
$
|
5,486
|
$
|
5,484
|
$
|
4,645
|
$
|
20,933
|
$
|
3,168
|
$
|
9,553
|
||||||||
|
Working
capital
|
409
|
(46
|
)
|
2,296
|
780
|
7,331
|
(580
|
)
|
127
|
|||||||||||||
|
Long-term
obligations
|
1,579
|
653
|
777
|
6
|
2,060
|
891
|
707
|
|||||||||||||||
|
Total
stockholders' equity
|
$
|
(873
|
)
|
$
|
(291
|
)
|
$
|
1,927
|
$
|
1,660
|
$
|
12,183
|
$
|
(1,262
|
)
|
$
|
2,694
|
|||||
-12-
SELECTED
UNAUDITED PRO FORMA
CONDENSED
CONSOLIDATED FINANCIAL DATA
The
following selected unaudited pro forma condensed consolidated financial data
were prepared using the purchase method of accounting and are based upon
the
historical financial statements of Wave Wireless and WaveRider adjusted to
give
effect to the merger as if it had occurred on January 1, 2004 for the
consolidated statement of operations data and on December 31, 2004 for the
consolidated balance sheet data. After considering the criteria set forth
in
paragraphs 17-19 of Statement of Financial Accounting Standards No. 141,
Wave
Wireless and WaveRider have determined that, for accounting purposes, Wave
Wireless is the acquiring entity in the merger (see page F-A4 of this
proxy/statement/prospectus). The pro forma financial information for the
year ended December 31, 2004 has been developed from (a) the audited
consolidated financial statements of Wave Wireless for the year ended December
31, 2004, which are included in this proxy statement/prospectus beginning
on
page F-C1, and (b) the audited consolidated financial statements of WaveRider
for the year ended December 31, 2004, which are included in this proxy
statement/prospectus beginning on page F-E1. The pro forma financial information
for the nine months ended September 30, 2005 has been developed from (a)
the
unaudited condensed consolidated financial statements of Wave Wireless for
the
nine months ended September 30, 2005, which are included in this proxy
statement/prospectus beginning on page F-B1, and (b) the unaudited consolidated
financial statements of WaveRider for the nine months ended September 30,
2005,
which are included in this proxy statement/prospectus beginning on page
F-D1.
The
selected unaudited pro forma condensed consolidated financial data is based
on
estimates and assumptions, which are preliminary. This data is presented for
informational purposes only and is not intended to represent or be indicative
of
the consolidated results of operations or financial condition of Wave Wireless
that would have been reported had the merger been completed as of the dates
presented, and should not be taken as representative of future consolidated
results of operations or financial condition of Wave Wireless.
This
selected unaudited pro forma condensed consolidated financial data should be
read in conjunction with the summary selected historical consolidated financial
data and the unaudited pro forma condensed consolidated financial statements
and
accompanying notes contained elsewhere in this proxy/statement prospectus and
the separate historical consolidated financial statements and accompanying
notes
of Wave Wireless and WaveRider included in this proxy statement/prospectus
beginning on page F-1.
Selected
Unaudited Pro Forma Condensed Consolidated Financial Data
(1)
(in
thousands, except per share amounts)
|
Year
ended
December
31,
|
|
Nine
months ended
September
30,
|
|||||
|
2004
|
2005
|
||||||
|
Pro
forma consolidated statement of operations data:
|
|||||||
|
Total
revenue
|
$
|
33,717
|
$
|
17,621
|
|||
|
Gross
profit
|
8,804
|
5,358
|
|||||
|
Income
(loss) from operations
|
(14,427
|
)
|
(11,482
|
)
|
|||
|
Non-operating
items
|
7,346
|
(903
|
)
|
||||
|
Net
income (loss)
|
(7,081
|
)
|
(12,385
|
)
|
|||
|
Preferred
stock accretions and dividends
|
(2,548
|
)
|
(3,829
|
)
|
|||
|
Net
loss attributable to common shareholders
|
$
|
(9,629
|
)
|
$
|
(16,214
|
)
|
|
|
Basic
and diluted net income (loss) per share
|
$
|
(0.12
|
)
|
$
|
(0.20
|
)
|
|
|
Shares
used in computing basic and diluted net income (loss) per
share
|
78,142
|
81,644
|
|||||
|
As
of
September 30, |
|||||||
|
2005
|
|||||||
|
Pro
forma consolidated balance sheet data:
|
|||||||
|
Non-restricted
cash and cash equivalents, short- and long-term
investments
|
$
|
854
|
|||||
|
Total
assets
|
30,174
|
||||||
|
Working
capital (deficiency)
|
(5,808
|
)
|
|||||
|
Total
long term liabilities
|
1,520
|
||||||
|
Total
stockholders' equity
|
$
|
15,237
|
|||||
|
(1)
|
See
the section entitled “Unaudited Pro Forma Condensed Consolidated Financial
Information” on page 56 of this proxy
statement/prospectus.
|
-13-
COMPARATIVE
HISTORICAL AND PRO FORMA PER SHARE DATA
The
following table presents certain unaudited historical per share data and pro
forma per share data of Wave Wireless and WaveRider after giving effect to
the
acquisition of WaveRider by Wave Wireless using the purchase method of
accounting. The pro forma data does not purport to be indicative of the results
of future operations or the results that would have occurred had the acquisition
been consummated at the beginning of the periods presented. The information
set
forth below should be read in conjunction with the historical consolidated
financial statements and notes thereto of Wave Wireless and WaveRider included
in this proxy statement/prospectus beginning on page F-1, and the unaudited
pro
forma condensed combined consolidated financial data included elsewhere in
this
proxy statement/prospectus. The unaudited pro forma combined and unaudited
pro
forma equivalent per share data combine the results of operations of Wave
Wireless and WaveRider for the year ended December 31, 2004, the results of
operations of Wave Wireless and WaveRider for the nine months ended September
30, 2005, and Wave Wireless’ financial position at September 30, 2005 with
WaveRider’s financial position at September 30, 2005. No cash dividends have
ever been declared or paid on Wave Wireless common stock or WaveRider common
stock.
|
Wave
Wireless
|
WaveRider
|
|||||||||
|
Net
income (loss) per share (diluted):
|
Net
income (loss) per share (diluted):
|
|||||||||
|
Year
ended December 31, 2004
|
($0.56
|
)
|
Year
ended December 31, 2004
|
($0.11
|
)
|
|||||
|
Nine
months ended September 30, 2005
|
($1.10
|
)
|
Nine
months ended September 30, 2005
|
($0.05
|
)
|
|||||
|
Book
value (deficit) per share (1):
|
Book value (deficit) per share (1): | |||||||||
|
December
31, 2004
|
$
|
0.63
|
December
31, 2004
|
($0.05
|
)
|
|||||
|
September
30, 2005
|
$
|
0.28
|
September
30, 2005
|
($0.04
|
)
|
|||||
|
WaveWireless
Pro
Forma Combined
|
WaveRider
Equivalent
Pro
Forma Combined (2)
|
||||||
|
Net
income (loss) per share (diluted):
|
|||||||
|
Year
ended December 31, 2004
|
($0.12
|
)
|
($0.08
|
)
|
|||
|
Nine
months ended September 30, 2005
|
($0.20
|
)
|
($0.04
|
)
|
|||
|
Book
value (deficit) per share (1):
|
|||||||
|
September
30, 2005
|
$
|
0.19
|
($0.03
|
)
|
|||
|
(1)
|
Historical
book value per share is computed by dividing stockholders’ equity by the
number of shares of Wave Wireless or WaveRider common stock outstanding
at
the end of each period. Pro forma book value per share is computed
by
dividing pro forma stockholders’ equity by the pro forma number of shares
of Wave Wireless common stock outstanding at the end of each
period.
|
|
(2)
|
The
WaveRider equivalent pro forma combined per share amounts are calculated
by multiplying the Wave Wireless combined pro forma share amounts
by the
anticipated exchange ratio in the merger of approximately 1.3 shares
of
Wave Wireless common stock (subject to adjustment) for each share
of
WaveRider common stock.
|
COMPARATIVE
PER SHARE MARKET PRICE DATA
Wave
Wireless common stock trades on the OTC Bulletin Board under the symbol “WVWC.”
WaveRider common stock trades on the OTC Bulletin Board under the symbol
“WAVR.”
The
following table shows, for the calendar quarters indicated, the high and low
sale prices per share, adjusted for stock splits, reverse stock splits and
stock
dividends, of Wave Wireless common stock and WaveRider common stock as reported
on the OTC Bulletin Board.
-14-
|
Wave
Wireless
|
WaveRider
|
||||||||||||
|
Calendar
Quarters
|
High
|
Low
|
High
|
Low
|
|||||||||
|
2004:
|
|||||||||||||
|
First
Quarter
|
$
|
6.00
|
$
|
1.80
|
$
|
3.50
|
$
|
2.20
|
|||||
|
Second
Quarter
|
2.31
|
1.17
|
2.50
|
0.90
|
|||||||||
|
Third
Quarter
|
1.26
|
0.63
|
1.15
|
0.90
|
|||||||||
|
Fourth
Quarter
|
0.66
|
0.38
|
0.35
|
0.22
|
|||||||||
|
2005:
|
|||||||||||||
|
First
Quarter
|
0.59
|
0.10
|
0.29
|
0.05
|
|||||||||
|
Second
Quarter
|
0.26
|
0.01
|
0.09
|
0.01
|
|||||||||
|
Third
Quarter
|
0.34
|
0.15
|
0.06
|
0.03
|
|||||||||
|
Fourth
Quarter
|
0.24
|
0.13
|
0.21
|
0.04
|
|||||||||
|
2006:
|
|
|
|
|
|||||||||
|
First
Quarter (through February 8, 2006)
|
0.20
|
0.09 | 0.15 | 0.10 | |||||||||
The
following table shows the high and low sales prices per share of Wave Wireless
common stock and WaveRider common stock, each as reported on the OTC Bulletin
Board on (1) November 16, 2005, the last full trading day preceding the public
announcement of the proposed merger of Wave Wireless and WaveRider had entered
into the merger agreement, and (2) February 8, 2006, the last full trading
day
for which high and low sales prices were available as of the date of this
proxy
statement/prospectus. The table also includes the equivalent high and low
sales
prices per share of WaveRider common stock on those dates. These equivalent
high
and low sales prices per share reflect the value of the Wave Wireless common
stock that a WaveRider stockholder would receive for each share of WaveRider
common stock if the merger were completed on either of those dates applying
the
anticipated exchange ratio of approximately 1.3 shares of Wave Wireless common
stock (subject to adjustment) for each share of WaveRider common stock and
using
the closing sale price of Wave Wireless common stock on those
dates.
|
Wave
Wireless
Common
Stock
|
WaveRider
Common
Stock
|
Equivalent
Price
Per
Share
|
|||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
November
16, 2005
|
$ |
0.16
|
$ |
0.13
|
$ |
0.07
|
$ |
0.06
|
$ |
0.21
|
$ |
0.17
|
|||||||
|
February
8, 2006
|
0.16
|
0.13
|
0.13
|
0.12
|
0.21
|
0.17
|
|||||||||||||
The
above
table shows only historical comparisons. These comparisons may not provide
meaningful information to WaveRider stockholders in determining whether to
approve and adopt the merger agreement and approve the merger. WaveRider
stockholders are urged to obtain current market quotations for Wave Wireless
and
WaveRider common stock and to review carefully the other information contained
in this proxy statement/prospectus or incorporated by reference into this
proxy
statement/prospectus in considering whether to approve and adopt the merger
agreement and approve the merger. See the section entitled “Where You Can Find
More Information” on page 123 of this proxy
statement/prospectus.
As
of the
record date, there were approximately 1,123 holders of record of WaveRider
common stock.
Neither
Wave Wireless nor WaveRider has ever declared or paid a cash dividend on its
common stock. Wave Wireless and WaveRider currently intend to retain any future
earnings to fund the growth and development of their businesses and do not
anticipate paying any cash dividends in the foreseeable future.
-15-
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This
proxy statement/prospectus contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties, as well as assumptions, that, if they never materialize
or prove incorrect, could cause the results of Wave Wireless and its
consolidated subsidiaries, on the one hand, or WaveRider and its consolidated
subsidiaries, on the other, to differ materially from those expressed or implied
by such forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements,
including:
| · |
any
projections of earnings, revenues, synergies, cost savings or other
financial items;
|
| · |
any
statements of the plans, strategies and objectives of management
for
future operations, including the execution of integration plans and
the
anticipated timing of filings and approvals relating to the
merger;
|
| · |
any
statements concerning proposed new products, services or
developments;
|
| · |
any
statements regarding future economic conditions or
performance;
|
| · |
any
statements regarding outcome of claims and
litigation;
|
| · |
any
statements of belief; and
|
| · |
any
statements of assumptions underlying any of the
foregoing.
|
The
risks, uncertainties and assumptions referred to above include:
| · |
the
difficulty
of keeping expense growth at modest levels while increasing
revenues;
|
| · |
the
challenges of integration associated with the merger and the challenges
of
achieving anticipated synergies;
|
| · |
the
possibility that the merger may not
close;
|
| · |
the
assumption of maintaining revenues on a combined company basis following
the close of the merger; and
|
| · |
other
risks that are described in the section entitled “Risk Factors,” which
follows on the next page, and in the documents that are incorporated
by
reference into this proxy
statement/prospectus.
|
If
any of
these risks or uncertainties materializes or any of these assumptions proves
incorrect, results of Wave Wireless and WaveRider could differ materially from
the expectations in these statements. Wave Wireless and WaveRider are not under
any obligation and do not intend to update their respective forward-looking
statements.
-16-
RISK
FACTORS
Wave
Wireless and WaveRider will operate as a combined company in a market
environment that is difficult to predict and that involves significant risks,
many of which will be beyond the combined company’s control. In addition to the
other information contained in this proxy statement/prospectus, you should
carefully consider the risks described below before deciding how to vote your
shares. Additional risks and uncertainties not presently known to Wave Wireless
and WaveRider or that are not currently believed to be important to you, if
they
materialize, also may adversely affect the merger and Wave Wireless and
WaveRider as a combined company.
Risks
Related to the Merger
Although
Wave Wireless and WaveRider expect that the merger will result in benefits
to
the combined company, the combined company may not realize those benefits
because of integration and other challenges.
The
failure of the combined company to meet the challenges involved in integrating
the operations of Wave Wireless and WaveRider successfully or otherwise to
realize any of the anticipated benefits of the merger could seriously harm
the
results of operations of the combined company. Realizing the benefits of the
merger will depend in part on the successful integration of technology,
products, services, operations and personnel. The integration of the companies
is a complex, time-consuming and expensive process that, without proper planning
and implementation, could significantly disrupt the business, controls and
procedures of the combined company. The challenges involved in this integration
include the following:
| · |
successfully
combining product and service
offerings;
|
| · |
coordinating
research and development activities to enhance introduction of new
products and services;
|
| · |
preserving
customer, distribution, reseller, manufacturing, supplier and other
important relationships of both Wave Wireless and WaveRider and resolving
potential conflicts that may arise;
|
| · |
minimizing
the diversion of management attention from other strategic opportunities
and operational matters;
|
| · |
addressing
differences in the business cultures of Wave Wireless and WaveRider,
maintaining employee morale and retaining key employees;
and
|
| · |
coordinating
and combining overseas operations, relationships and facilities,
which may
be subject to additional constraints imposed by geographic distance,
local
laws and regulations.
|
The
combined company may not successfully integrate the operations of Wave Wireless
and WaveRider in a timely manner, or at all, and the combined company may not
realize the anticipated benefits of the merger to the extent, or in the
timeframe, anticipated. The anticipated benefits of the merger are based on
projections and assumptions, including successful integration, not actual
experience. In addition to the integration risks discussed above, the combined
company’s ability to realize these benefits could be adversely affected by
practical or legal constraints on its ability to combine
operations.
Neither
Wave Wireless nor WaveRider has obtained fairness or other opinions regarding
the fairness of the proposed merger to WaveRider’s or Wave Wireless’
shareholders.
No
professional opinion of legal counsel, public accountants, or investment bankers
was obtained regarding the fairness of the proposed merger to either company’s
shareholders. The consideration to be received by the stockholders of WaveRider
and the other terms of the merger were determined by the board of directors
of
Wave Wireless and WaveRider, following a recommendation from their respective
management, and may not reflect the value of the net assets of either company
if
an independent third party had been involved in negotiation of the terms of
the
merger.
-17-
The
shares of Wave Wireless common stock that WaveRider stockholders will receive
as
part of the merger consideration may not maintain their
value.
At
the
closing of the merger, each share of WaveRider common stock is expected to
be
exchanged for approximately 1.3 shares of Wave Wireless common stock (subject
to
adjustment as described in the section entitled “The Merger Agreement—Conversion
of WaveRider Common Stock in the Merger” on page 45 of this proxy
statement/prospectus). There will be no adjustment in the number of shares
of
Wave Wireless common stock issued to WaveRider stockholders (or reserved
for
issuance pursuant to assumed WaveRider stock options and warrants) because
of
changes in the market price of either Wave Wireless common stock or WaveRider
common stock. Accordingly, the specific dollar value of Wave Wireless common
stock that WaveRider stockholders will receive upon the merger’s completion will
depend entirely upon the market value of Wave Wireless common stock at the
time
the merger is completed. This value may substantially decrease from the date
you
submit your proxy. Moreover, completion of the merger may occur some time
after
WaveRider stockholder approval has been obtained, so that the specific dollar
value of Wave Wireless common stock that WaveRider stockholders will receive
upon the merger’s completion may substantially decrease from the date of the
special meeting of WaveRider stockholders. In addition, WaveRider or Wave
Wireless may only terminate the merger agreement or refuse to complete the
merger in certain limited circumstances which do not include changes in the
dollar value of Wave Wireless common stock or WaveRider common stock. The
share
prices of Wave Wireless common stock and WaveRider common stock are subject
to
the general price fluctuations in the market for publicly-traded equity
securities, and the prices of both companies’ common stock have experienced
volatility in the past. Wave Wireless and WaveRider urge you to obtain recent
market quotations for Wave Wireless common stock and WaveRider common stock.
Neither Wave Wireless nor WaveRider can predict or give any assurances as
to the
respective market prices of its common stock at any time before or after
the
completion of the merger.
Wave
Wireless common stock is considered “penny stock,” which may severely limit the
ability of the holders of Wave Wireless common stock to sell their
shares.
Effective
March 10, 2003, Wave Wireless common stock commenced trading electronically
on
the OTC Bulletin Board of the National Association of Securities Dealers, Inc.,
resulting in a less liquid market to trade shares of Wave Wireless common stock,
relative to the liquidity provided by the NASDAQ National Market or the NASDAQ
Small Cap Market, where Wave Wireless common stock previously was listed. In
addition, Wave Wireless common stock is subject to the Securities Exchange
Commission’s “penny stock” regulation. For transactions covered by this
regulation, broker-dealers must make a special suitability determination for
the
purchase of the securities and must have received the purchaser’s written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, the rules generally require the delivery,
prior to the transaction, of a risk disclosure document mandated by the SEC
relating to the penny stock market. The broker-dealer is also subject to
additional sales practice requirements. Consequently, the penny stock rules
may
restrict the ability of broker-dealers to sell Wave Wireless common stock and
may affect the ability of holders to sell Wave Wireless common stock in the
secondary market, and the price at which a holder can sell Wave Wireless common
stock.
Wave
Wireless’ stock price has been volatile and has experienced significant decline,
and it may continue to be volatile and decline.
Wave
Wireless common stock is thinly traded on the OTC Bulletin Board. The market
for
Wave Wireless common stock may continue to be an inactive market, and the market
price of Wave Wireless common stock may experience significant volatility.
In
recent years, the stock market in general, and the market for shares of small
capitalization technology stocks in particular, have experienced extreme price
fluctuations. These fluctuations have often negatively affected small cap
companies such as Wave Wireless, and may impact its ability to raise equity
capital during periods of limited liquidity. Companies with liquidity problems
also often experience downward stock price volatility. Wave Wireless believes
that factors such as announcements of developments related to its business
(including any financings or any resolution of liabilities), announcements
of
technological innovations or new products or enhancements by Wave Wireless
or
its competitors, developments in the emerging countries’ economies, sales by
competitors, sales of significant volumes of Wave Wireless common stock into
the
public market, developments in its relationships with customers, partners,
lenders, distributors and suppliers, shortfalls or changes in revenues, gross
margins, earnings or losses or other financial results that differ from
analysts’ expectations, regulatory developments and fluctuations in results of
operations could and have caused the price of Wave Wireless common stock to
fluctuate widely and decline over the past two years. The market price of Wave
Wireless common stock may continue to decline, or otherwise continue to
experience significant fluctuations in the future, including fluctuations that
are unrelated to Wave Wireless’ performance, and Wave Wireless stockholders may
not be able to resell shares of Wave Wireless common stock at or above the
price
paid for those shares.
-18-
Wave
Wireless and WaveRider each expect to incur significant costs associated with
the merger which could leave the combined company with inadequate working
capital to support its business plan.
Wave
Wireless estimates that it will incur direct transaction costs of approximately
$300,000 in cash associated with the merger, which will be included as part
of
the total purchase price for financial accounting purposes. In addition,
WaveRider estimates that it will incur direct transaction costs of approximately
$100,000 in cash, which will be recognized as expenses as incurred. Wave
Wireless and WaveRider believe the combined entity may incur charges to
operations, which cannot be reasonably estimated at this time, in the quarter
in
which the merger is completed or the following quarters, to reflect costs
associated with integrating the two companies. There can be no assurance that
the combined company will not incur additional material charges in subsequent
quarters to reflect additional costs associated with the merger and the
integration of the two companies and such costs may adversely affect the
financial results, operations and available cash of Wave Wireless, WaveRider
or
the combined company. These costs could leave Wave Wireless and WaveRider with
insufficient working capital to support their operations. In addition, there
can
be no assurance that either company will be able to raise additional capital
or
that either company will be able to do so on terms that are not highly dilutive
to existing stockholders.
The
stock prices and businesses of Wave Wireless and WaveRider may be adversely
affected if the merger is not completed.
Completion
of the merger is subject to a number of closing conditions, including approval
of WaveRider’s stockholders, and WaveRider may be unable to obtain such approval
on a timely basis or at all. If the merger is not completed, the price of
Wave
Wireless common stock and WaveRider common stock may decline to the extent
that
the current market prices of Wave Wireless common stock and WaveRider common
stock reflect a market assumption that the merger will be completed. In
addition, either company’s operations may be harmed to the extent that
customers, distributors, resellers and others believe that it cannot effectively
compete in the marketplace without the merger, or there is uncertainty
surrounding the future direction of the product and service offerings and
strategy of Wave Wireless or WaveRider on a standalone basis. If the merger
is
not completed, Wave Wireless and WaveRider would not derive the strategic
benefits expected to result from the merger, which could adversely affect
their
respective businesses. Wave Wireless and WaveRider will also be required
to pay
significant costs incurred in connection with the merger, including legal,
accounting and a portion of the financial advisory fees, whether or not the
merger is completed. In addition, under specified circumstances described
in the
section entitled “The Merger Agreement—Payment of Termination Fee” beginning on
page 55 of this proxy statement/prospectus, WaveRider or Wave Wireless may
be required to pay to the other party a termination fee of up to $300,000
in
connection with the termination of the merger agreement. These costs could
leave
Wave Wireless and WaveRider with insufficient working capital to support
their
operations. In addition, there can be no assurance that either company will
be
able to raise additional capital or that either company will be able to do
so on
terms that are not highly dilutive to existing stockholders.
Some
of the directors and executive officers of WaveRider have interests and
arrangements that could affect their decision to support or approve the
merger.
When
considering the WaveRider board of directors’ recommendation that the WaveRider
stockholders vote in favor of the proposal to approve and adopt the merger
agreement and approve the merger, WaveRider stockholders should be aware that
the directors and executive officers of WaveRider have interests in the merger
that may be different from, or in addition to, the interests of WaveRider
stockholders. These interests include:
-19-
| · |
the
continued indemnification of current directors and officers of WaveRider
under the merger agreement and the continuation of directors’ and
officers’ liability insurance after the
merger;
|
| · |
the
retention of some of the officers of WaveRider as officers, employees
or
consultants of Wave Wireless or its subsidiaries, including, Charles
W.
Brown, WaveRider’s Chief Executive Officer, who will become Chief
Executive Officer of Wave Wireless, and T. Scott Worthington, WaveRider’s
Chief Financial Officer, who will become Chief Financial Officer
of Wave
Wireless;
|
| · |
appointment
of three WaveRider designees to the Wave Wireless board of directors,
in
addition to Messrs. Brown and Bruce Sinclair, WaveRider’s former Chief
Executive Officer; and
|
| · |
the
assumption of WaveRider stock options by Wave
Wireless.
|
These
interests, among others, may influence the WaveRider directors in recommending
that you vote in favor of the proposal to approve and adopt the merger agreement
and approve the merger. For a more detailed description of the interests
of the
directors and executive officers of WaveRider, please see the section entitled
“The Merger—Interests of WaveRider Directors and Executive Officers in the
Merger” beginning on page 31 of this proxy
statement/prospectus.
Charges
to future earnings resulting from the application of the purchase method of
accounting may adversely affect the market value of Wave Wireless common stock
following the merger.
In
accordance with United States generally accepted accounting principles, the
combined company will account for the merger using the purchase method of
accounting, which will result in charges to future earnings that could have
a
material adverse effect on the market value of Wave Wireless common stock
following completion of the merger. Under the purchase method of accounting,
the
combined company will allocate the total estimated purchase price to WaveRider’s
net tangible assets and amortizable intangible assets based on their fair values
as of the date of completion of the merger, and record the excess of the
purchase price over those fair values as goodwill. The combined company will
incur amortization expense over the useful lives of amortizable intangible
assets acquired in connection with the merger. In addition, to the extent the
value of goodwill becomes impaired, the combined company may be required to
incur material charges relating to the impairment of that asset. These
amortization and potential impairment charges could have a material adverse
impact on the combined company’s results of operations.
Uncertainty
regarding the merger may cause customers, distributors, resellers and others
to
delay or defer decisions concerning the purchase of Wave Wireless’ and
WaveRider’s products or services which may harm either company’s results of
operations.
Because
the merger is subject to a number of closing conditions, there may be
uncertainty regarding its completion. This uncertainty may cause customers,
distributors, resellers and others to delay or defer decisions concerning the
purchase of Wave Wireless’ or WaveRider’s products or services, which could
negatively affect their businesses and results of operations. Prospective
customers could also be reluctant to purchase the products and services of
Wave
Wireless, WaveRider or the combined company due to uncertainty about the
direction of their respective products and services, and willingness to support
and service existing products which may be discontinued. In addition, customers,
distributors, resellers and others may also seek to change existing agreements
with Wave Wireless or WaveRider as a result of the merger. These and other
actions by customers, distributors, resellers and others could negatively affect
Wave Wireless’ and WaveRider’s businesses and results of
operations.
Wave
Wireless, WaveRider and the combined company must continue to retain and
motivate executives and other key employees and recruit new employees, which
may
be difficult in light of uncertainty regarding the merger, and failure to do
so
could seriously harm Wave Wireless, WaveRider and the combined
company.
In
order
to be successful, during the period before the merger is completed, each of
Wave
Wireless and WaveRider must continue to retain and motivate executives and
other
key employees and recruit new employees. Experienced personnel in the networking
and network security industries are in high demand and competition for their
talents is intense. Employees of Wave Wireless or WaveRider may experience
uncertainty about their future role with the combined company until or after
strategies with regard to the combined company are announced or executed. These
potential distractions of the merger may adversely affect each company’s ability
to attract, motivate and retain executives and key employees and keep them
focused on the strategies and goals of the combined company. Any failure by
Wave
Wireless or WaveRider to retain and motivate executives and key employees during
the period prior to the completion of the merger could seriously harm their
respective businesses, as well as the business of the combined
company.
-20-
The
market price of the shares of Wave Wireless common stock may be affected by
factors different from or in addition to those affecting the shares of WaveRider
common stock.
Upon
completion of the merger, holders of WaveRider common stock will become holders
of Wave Wireless common stock. An investment in Wave Wireless common stock
has
different risks than an investment in WaveRider common stock. Former holders
of
WaveRider common stock will be subject to risks associated with Wave Wireless
upon exchange of their shares of WaveRider common stock for Wave Wireless
common
stock in the merger, some of which are described below in the section entitled
“—Risks Related to Wave Wireless” beginning on page 21 of this proxy
statement/prospectus.
Wave
Wireless’ and WaveRider’s obligation to pay a termination fee under certain
circumstances and the restrictions on their ability to solicit other acquisition
proposals may discourage other companies from trying to acquire Wave Wireless
or
WaveRider.
Until
the
merger is completed or the merger agreement is terminated, with limited
exceptions, the merger agreement prohibits Wave Wireless and WaveRider from
entering into or soliciting any acquisition proposal or offer for a merger
or
other business combination with a party other than WaveRider or Wave Wireless,
respectively. Wave Wireless and WaveRider have agreed to pay to the other party
a termination fee of up to $300,000 under specified circumstances. These
provisions could discourage other companies from trying to acquire Wave Wireless
or WaveRider even though they might be willing to offer greater value to Wave
Wireless’ or WaveRider’s stockholders than the proposed merger.
Risks
Related to Wave Wireless
Wave
Wireless needs additional financing and the failure to obtain additional
financing will adversely affect its business.
Wave
Wireless needs additional financing to continue operations, as its core business
product sales are still significantly below levels necessary to achieve positive
cash flow. From inception to December 31, 2004, Wave Wireless’ aggregate net
loss is approximately $369.0 million. Wave Wireless’ cash position has declined
to $376,000 at December 31, 2005. Wave Wireless had negative working capital
of
$6.7 million as of December 31, 2005. As of January 27, 2006, Wave Wireless
has issued $1,025,000 in convertible notes due March 31, 2006. To continue
as a
going concern, Wave Wireless will be required to immediately secure additional
debt or equity capital. To address its liquidity requirements, Wave Wireless
is
aggressively reducing expenses in connection with the implementation of its
restructuring plan and also needs to conduct additional debt or equity
financings to meet its current and anticipated working capital needs. No
assurances can be given that Wave Wireless will be successful in its
restructuring plan, or in its attempts to issue raise additional debt or
equity
financing.
Wave
Wireless’ prospects for obtaining additional financing are uncertain and failure
to obtain needed financing will affect its ability to continue as a going
concern.
Wave
Wireless’ independent registered public accountants’ opinion on its 2004
consolidated financial statements includes an explanatory paragraph indicating
substantial doubt about Wave Wireless’ ability to continue as a going concern.
To continue as a going concern, Wave Wireless will have to increase its sales,
and possibly induce its creditors to forebear or to convert to equity, raise
additional equity financing, and/or raise new debt financing. Wave Wireless
may
not accomplish these tasks. In the event Wave Wireless is unable to raise
additional debt or equity financing, or otherwise improve its liquidity
position, Wave Wireless will not be able to continue as a going concern. Wave
Wireless future capital requirements will depend upon many factors, including
the success of its restructuring plan, the continuation of its RMA Business,
development costs of new products and related software, potential acquisition
opportunities, maintenance of adequate manufacturing facilities and contract
manufacturing agreements, progress of research and development efforts,
expansion of marketing and sales efforts, and status of competitive products.
Additional financing may not be available in the future on acceptable terms
or
at all. Wave Wireless’ history of substantial operating losses could also
severely limit its ability to raise additional financing. If Wave Wireless
is
unable to obtain additional financing, Wave Wireless may need to seek the
protection of the bankruptcy courts and your Wave Wireless shares may become
worthless.
-21-
Wave
Wireless may not be able to repay its existing debt and any repayment of its
debt with shares of Wave Wireless stock or by raising additional funds may
result in significant dilution to its stockholders.
At
December 31, 2005, Wave Wireless owed, including accrued but unpaid interest,
an
aggregate amount of $4.2 million to SDS Capital Group SPC, Ltd (“SDS”). Interest
accrues on such debt at an annual interest rate of 8%, and this rate increases
to 10% on April 1, 2006 through the maturity date of the loan, December 31,
2006. Wave Wireless may make the principal and interest payments under our
Debenture Facility in either shares of its common stock, cash or a combination
of both. In addition, given the recent price for Wave Wireless’ common stock, if
it makes the required amortization payments on the Debenture Financing using
Wave Wireless’ common stock, or raise additional funds by issuing equity
securities, additional significant dilution to its stockholders will result.
In
addition, Wave Wireless owes approximately $1,025,000 under the terms of
certain
Convertible Notes, and it is currently anticipated that it will issue additional
Convertible Notes to satisfy its working capital needs. Interest and accrued
interest under the terms of the Convertible Notes mature on March 31, 2006,
in
the event such Convertible Notes are not previously converted into shares
of
common stock in connection with an Equity Financing, or otherwise. Wave Wireless
may not be able to make the required payments to the holders of the Convertible
Notes, or successfully close an Equity Financing. In the event Wave Wireless
is
not able to close an Equity Financing, and the holders of the Convertible
Notes
do not otherwise convert the Convertible Notes into shares of Wave Wireless’
common stock, Wave Wireless will be unable to repay principal and accrued
interest under the Convertible Notes.
Wave
Wireless may not be able to make its debenture facility installment payments
in
shares of its common stock, and its failure to do so would adversely affect
its
business.
Under
Wave Wireless’ Debenture Facility, it may not issue shares of common stock to
make the quarterly installment payments if the issuance of such shares would
result in SDS beneficially owning (as determined in accordance with Section
13(d) of the Exchange Act) more than 9.9% of all of the common stock outstanding
at such time. Because of this limitation, Wave Wireless issued SDS shares of
Series F Preferred Stock, in lieu of common stock, to make the required
amortization payment due June 30, 2005. SDS may waive this ownership blocker,
or
agree in the future to accept additional shares of preferred stock in lieu
of
common stock, but it is not obligated to do so. In the event that Wave Wireless
is prevented from making an installment payment in shares of common stock due
to
the ownership blocker, or SDS is unwilling to accept preferred stock in lieu
of
common stock, and SDS does not waive compliance with this provision, then Wave
Wireless may be required to issue preferred stock, or default on its payment
obligations under the Debenture Facility. If Wave Wireless is unable to obtain
additional financing, Wave Wireless may need to seek the protection of the
bankruptcy courts and your Wave Wireless shares may become
worthless.
Future
sales of Wave Wireless’ convertible securities could lower its stock price and
adversely affect its ability to raise additional capital in subsequent
financings.
As
of
December 31, 2005, Wave Wireless had issued and outstanding warrants,
convertible preferred stock and employee stock options, convertible into
34,364,425 shares of its common stock. In the event of conversion or exercise
of
any of these convertible securities, future sales of Wave Wireless common
stock
or the perception that future sales will occur could have a significant negative
effect on the market price of Wave Wireless common stock. If the market price
of
Wave Wireless common stock continues to decrease, Wave Wireless may not be
able
to conduct additional financings in the future on acceptable terms or at
all,
and its ability to raise additional capital will be significantly
limited.
-22-
As
a result of its restructuring plan, Wave Wireless’ revenue will decrease
substantially.
As
a
result of the restructuring plan, Wave Wireless’ revenue has decreased
substantially. While management believes that a consequence of the restructuring
plan will be to ultimately return Wave Wireless to profitability, no assurances
can be given that it will achieve the objectives of the restructuring plan,
or
that sales of its remaining product lines will sufficiently increase to allow
it
to achieve positive cash flow from operations. Until sales levels in its
remaining product lines sufficiently increase, Wave Wireless’ business,
financial condition and results of operations will continue to be adversely
affected.
Wave
Wireless relies on a limited number of customers for a material portion of
its
sales. The loss of or reduction in sales to any of its customers could harm
its
business, financial condition and results of operation.
For
the
year ended December 31, 2005, sales to Wave Wireless’ top four customers
accounted for 59% of total sales. Wave Wireless expects that a limited number
of
customers will continue to account for a significant portion of its sales
for
the foreseeable future. The loss of, or diminution in sales to, any one of
these
customers would have an immediate and material adverse effect on Wave Wireless’
sales. If it is unsuccessful in obtaining significant new customers or if
one of
its top customers or several small customers cancel or delay their orders
for
its products, then Wave Wireless’ business and prospects could be harmed which
may cause the price of its common stock to decline. Wave Wireless’ customer
concentration also results in concentration of credit risk. As of December
31,
2005, three customers accounted for 74% of Wave Wireless’ total accounts
receivable balances. If any one of these customers is unable to fulfill its
payment obligations to Wave Wireless, its revenue could decline significantly.
As
a result of its restructuring plan, Wave Wireless is substantially dependent
on
its RMA business, and a reduction in sales attributable to its RMA business
will
materially harm its results of operations.
For
the
years ended December 31, 2004 and 2005 sales of refurbished licensed products
in
connection with Wave Wireless’ RMA Business was $11.2 million and $6.4 million,
or 46% and 54% of total sales, respectively. Total sales of refurbished licensed
products in connection with Wave Wireless’ RMA Business will decline over time
as its customers determine to replace existing radios with new product, rather
than send them to Wave Wireless for continued repair and maintenance. In
addition, Wave Wireless’ customers may elect to source refurbished licensed
products from third parties rather than us, as was the case in the quarter
ended
September 30, 2005, when one of Wave Wireless’ customers elected to use a third
party other than Wave Wireless for its repair and maintenance needs. No
assurances can be given that Wave Wireless will not lose additional customers
in
the future, or that customers will not elect to purchase new licensed products
from third parties rather than send them to Wave Wireless for repair and
maintenance. In the event of a further reduction in the sale of refurbished
licensed products, Wave Wireless’ results of operations will be materially
harmed.
Wave
Wireless’ operating results in the past are not anticipated to reflect its
operating results in the future, which make its results of operation difficult
to predict.
As
a
result of restructuring plan, Wave Wireless’ future operating results will vary
significantly from its past operating results. Factors that will significantly
affect Wave Wireless’ operating results include the following:
| · |
the
divesture of certain licensed product lines, that in the years
ended
December 31, 2004 and 2005, contributed approximately $8.1 million
and
$9.1 million in revenue to Wave Wireless, respectively;
|
| · |
the
increased reliance on Wave Wireless’ RMA Business, that in the years ended
December 31, 2004, and 2005, contributed approximately $11.2 million
and $6.4 million in revenue to Wave Wireless, respectively, and
the risk
that sales attributable to the RMA Business will decline over time;
and
|
-23-
| · |
the
increased reliance on the sale of unlicensed radio products,
that in the
years ended December 31, 2004 and 2005, contributed approximately
$5.1
million and $2.7 million in revenue to Wave Wireless,
respectively.
|
Wave
Wireless faces substantial competition and may not be able to compete
effectively.
Wave
Wireless faces intense competition worldwide from a number of leading
telecommunications equipment and technology suppliers. These companies offer
a
variety of competitive products and services. These companies include Alvarion,
Nortel, Proxim, Tropos Networks, Motorola, Trango Systems, Belair Networks,
Firetide and Tranzeo Wireless Technologies. Many of these companies have greater
financial resources and production, marketing, manufacturing, engineering and
other capabilities than we have. Wave Wireless faces actual and potential
competition not only from these established companies, but also from start-up
companies that are developing and marketing new commercial products and
services.
The
principal elements of competition in Wave Wireless’ market and the basis upon
which customers may select its systems include price, performance, software
functionality, perceived ability to continue to be able to meet delivery
requirements, and customer service and support. Recently, certain competitors
have announced the introduction of new competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. Wave Wireless expects competitors to continue to
improve the performance and lower the price of their current products and
services and to introduce new products and services or new technologies that
provide added functionality and other features. New product and service
offerings and enhancements by Wave Wireless’ competitors could cause a decline
in its sales or loss of market acceptance of Wave Wireless’ systems. New
offerings could also make Wave Wireless’ systems, services or technologies
obsolete or non-competitive. In addition, Wave Wireless is experiencing
significant price competition and Wave Wireless expects that competition will
intensify.
Wave
Wireless does not have the customer base or other resources of more established
companies, which makes it difficult for Wave Wireless to address the liquidity
and other challenges that it faces.
Wave
Wireless has not developed a large installed base of its wireless mesh routers
or the kind of close relationships with a broad base of customers of a type
enjoyed by larger, more developed companies, which would provide a base of
financial performance from which to launch strategic initiatives and withstand
business reversals. In addition, Wave Wireless has not built up the level of
capital often enjoyed by more established companies, so Wave Wireless faces
serious challenges in financing Wave Wireless’ continued operations. Wave
Wireless may not be able to successfully address these risks.
Wave
Wireless relies on third party manufacturers and suppliers and any failure
of or
interruption in the manufacturing, services or products provided by these third
parties could harm Wave Wireless’ business.
Wave
Wireless relies on third-party manufacturers for the manufacturing, repair
and
maintenance of a substantial portion of its products. Wave Wireless has limited
internal manufacturing, repair and maintenance capacity, which may not be
sufficient to fulfill customers’ requirements. Wave Wireless’ contract service
providers may not be able to react to Wave Wireless’ demands on a timely basis.
In addition, certain components and subassemblies necessary for the manufacture
of Wave Wireless’ systems are obtained from a sole supplier or a limited group
of suppliers.
Wave
Wireless’ reliance on third-party manufacturers, service providers and suppliers
involves risks. From time to time, Wave Wireless has experienced an inability
to
obtain, or to receive in a timely manner, an adequate supply of finished
products and required components and subassemblies. This inability has been
due
to a variety of factors, including, in some cases, Wave Wireless’ financial
condition. As a result of Wave Wireless’ reliance on these third parties, Wave
Wireless has reduced control over the price, timely delivery, reliability and
quality of finished products, components and subassemblies. Any failure by
us,
or Wave Wireless’ contract manufacturers to repair, maintain, manufacture,
assemble and ship systems and meet customer demands on a timely and
cost-effective basis could damage relationships with customers and have a
material adverse effect on Wave Wireless’ business, financial condition and
results of operations.
-24-
Wave
Wireless’ business depends on the acceptance of its products and services, and
it is uncertain whether the market will accept and demand its products and
services at levels necessary for success.
Wave
Wireless’ future operating results depend upon the continued growth and
increased availability and acceptance of its products in the U.S. and
internationally. The volume and variety of wireless telecommunications products
or the markets for and acceptance of Wave Wireless’ products may not continue to
grow as expected. The growth of these products may also fail to create
anticipated demand for Wave Wireless’ products. Predicting which segments of
these markets will develop and at what rate these markets will grow is
difficult.
Due
to its international sales and operations, Wave Wireless is exposed to business,
political, regulatory, operational, financial and economic risks, any of which
could increase its costs and hinder its growth.
As
a
result of Wave Wireless’ current heavy dependence on international markets,
especially in the United Kingdom, the European continent, the Middle East,
and
Latin America, Wave Wireless faces business, political, regulatory, operational,
financial and economic risks that are often more volatile than those commonly
experienced in the United States. Approximately 92% and 89% of Wave Wireless’
sales in the year ended December 31, 2003 and December 31, 2004, respectively,
were made to customers located outside of the United States. Due to political
and economic instability in new markets, economic, political and foreign
currency fluctuations may be even more volatile than conditions in developed
countries. Countries in the Asia/Pacific, African, and Latin American regions
have in recent years experienced weaknesses in their currency, banking and
equity markets. These weaknesses have adversely affected and could continue
to
adversely affect demand for Wave Wireless’ products.
Wave
Wireless faces risks associated with currency exchange rate
fluctuations.
Approximately
89% and 90% of Wave Wireless’ sales in the years ended December 31, 2004
and 2005 were made to customers located outside of the United States and a
larger portion of Wave Wireless’ revenues is denominated in foreign currencies.
Historically, Wave Wireless’ international sales have been denominated in
British pounds sterling, Euros or United States dollars. Conducting business
in
currencies other than U.S. dollars subjects us to fluctuations in currency
exchange rates that could have a negative impact on Wave Wireless’ reported
operating results. Fluctuations in the value of the U.S. dollar relative
to
other currencies impact its revenues, cost of revenues and operating margins
and
result in foreign currency translation gains and losses. For example, a decrease
in the value of British pounds or Euros relative to United States dollars,
if
not hedged, will result in an exchange loss for Wave Wireless if it has Euro
or
British pounds sterling denominated sales. Conversely, an increase in the
value
of Euro and British pounds sterling will result in increased margins for
us on
Euro or British pounds sterling denominated sales as Wave Wireless’ functional
currency is in United States dollars. For international sales that Wave Wireless
would require to be United States dollar-denominated, such a decrease in
the
value of foreign currencies could make Wave Wireless’ systems less
price-competitive if competitors choose to price in other currencies and
could
adversely affect its financial condition. Historically, Wave Wireless has
not
engaged in exchange rate-hedging activities. Although Wave Wireless may
implement hedging strategies to mitigate this risk, these strategies may
not
eliminate Wave Wireless’ exposure to foreign exchange rate fluctuations and
involve costs and risks of their own, such as ongoing management time and
expertise, external costs to implement the strategy and potential accounting
implications.
Governmental
regulations affecting markets in which Wave Wireless competes could adversely
affect its business and results of operations.
Radio
communications are extensively regulated by the United States and foreign
governments as well as by international treaties. Wave Wireless systems must
conform to a variety of domestic and international requirements established
to,
among other things, avoid interference among users of radio frequencies and
to
permit interconnection of equipment. Historically, in many developed countries,
the limited availability of radio frequency spectrum has inhibited the growth
of
wireless telecommunications networks. Each country’s regulatory process differs.
To operate in a jurisdiction, Wave Wireless must obtain regulatory approval
for
its systems and comply with differing regulations.
Regulatory
bodies worldwide continue to adopt new standards for wireless telecommunications
products. The delays inherent in this governmental approval process may cause
the cancellation, postponement or rescheduling of the installment of
communications systems by Wave Wireless customers and Wave Wireless. The failure
to comply with current or future regulations or changes in the interpretation
of
existing regulations could result in the suspension or cessation of operations.
Those regulations or changes in interpretation could require Wave Wireless
to
modify its products and services and incur substantial costs in order to comply
with the regulations and changes.
-25-
In
addition, Wave Wireless is also affected by domestic and international
authorities’ regulation of the allocation and auction of the radio frequency
spectra. Equipment to support new systems and services can be marketed only
if
permitted by governmental regulations and if suitable frequency allocations
are
auctioned to service providers. Establishing new regulations and obtaining
frequency allocation at auction is a complex and lengthy process. If PCS
operators and others are delayed in deploying new systems and services, Wave
Wireless could experience delays in orders. Similarly, failure by regulatory
authorities to allocate suitable frequency spectrum could have a material
adverse effect on Wave Wireless results. In addition, delays in the radio
frequency spectra auction process in the United States could delay Wave
Wireless’ ability to develop and market equipment to support new services. Wave
Wireless operates in a regulatory environment subject to significant change.
Regulatory changes, which are affected by political, economic and technical
factors, could significantly impact Wave Wireless operations by restricting
its
development efforts and those of its customers, making current systems obsolete
or increasing competition. Any such regulatory changes, including changes in
the
allocation of available spectra, could have a material adverse effect on Wave
Wireless’ business, financial condition and results of operations. Wave Wireless
may also find it necessary or advisable to modify its systems and services
to
operate in compliance with these regulations. These modifications could be
expensive and time-consuming.
Third
parties may sue Wave Wireless for intellectual property infringement that,
if
successful, could require us to pay significant damage awards or licensing
fees.
Wave
Wireless cannot be certain that it does not and will not infringe the
intellectual property rights of others. Wave Wireless may be subject to legal
proceedings and claims in the ordinary course of Wave Wireless’ business and
third parties may sue it for intellectual property infringement or initiate
proceedings to invalidate its intellectual property. Any intellectual property
claims, whether or not meritorious, could result in costly litigation and could
divert management resources and attention. Moreover, should Wave Wireless be
found liable for infringement, it may be required to enter into licensing
agreements (if available on acceptable terms or at all), pay damages or limit
or
curtail Wave Wireless’ product or service offerings. Moreover, Wave Wireless may
need to redesign some of its products to avoid future infringement liability.
Any of the foregoing could prevent Wave Wireless from competing effectively
and
harm its business and results of operations.
If
Wave Wireless fails to keep pace with rapidly changing technologies, it could
lose customers and its sales may decline.
The
telecommunications equipment industry is characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing customer demands. The introduction of new products
and services embodying new technologies, such as Wi-MAX, and the emergence
of
new industry standards and practices can render Wave Wireless’ existing products
and services obsolete and unmarketable. Wave Wireless’ future success will
depend on its ability to internally develop, source or license leading
technologies to enhance Wave Wireless’ existing products and services, to
develop new products and services that address the changing demands of its
customers, and to respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis. Because of Wave
Wireless’ current financial condition, Wave Wireless may experience difficulties
that could delay or prevent the successful design, development, introduction
or
marketing of new products and services. Any new products, services or
enhancement that Wave Wireless develops will need to meet the requirements
of
its current and prospective customers and may not achieve significant market
acceptance.
Risks
Related to WaveRider
Risks
Related to WaveRider’s Financial Condition
WaveRider
has a history of losses, and its future profitability is
uncertain.
-26-
WaveRider
has experienced significant operating losses every year since incorporation.
WaveRider incurred a net loss of $1,639,060 for the year ended December 31,
2004
(2003 - $1,586,306) and reported an accumulated deficit at that date of
$86,426,358 (2003 - $84,787,298). WaveRider expects to continue to incur losses
for 2005 in part due to the ongoing non-cash financing expenses that WaveRider
will incur over the coming year.
There
can
be no assurance that WaveRider will ever generate an overall profit from its
products or that it will ever reach profitability on a sustained
basis.
WaveRider
has a going concern qualification in the report issued by its independent
registered public accounting firm, which may make capital raising more difficult
and may require it to scale back, cease operations or seek protection under
the
bankruptcy laws, putting investors’ funds at risk.
Its
independent registered public accounting firm has added an explanatory paragraph
to their audit report issued in connection with the financial statements for
the
period ended December 31, 2004, relative to its ability to continue as a going
concern. WaveRider has experienced significant operating losses every year
since
incorporation and have an accumulated deficit of approximately $86,426,358,
which raises substantial doubt about its ability to continue as a going concern.
Its ability to obtain additional funding will determine its ability to continue
as a going concern. Accordingly, there is substantial doubt about its ability
to
continue as a going concern. There can be no assurance that WaveRider will
able
to obtain funding from external sources when needed. If WaveRider continues
to
experience operating losses, WaveRider may be required to scale back, cease
operations or seek protection under the bankruptcy laws; in which event
WaveRider believes it is unlikely that its common stock will have any
value.
Risks
Related to Investing in WaveRider
WaveRider
may suffer dilution if it issues substantial shares of its common
stock:
| · |
upon
conversion of convertible debentures;
and
|
| · |
upon
exercise of the outstanding warrants and
options.
|
WaveRider
is obligated to issue a substantial number of shares of common stock upon the
conversion of its convertible debentures and exercise of its outstanding
warrants and options. The price that WaveRider may receive for the shares of
common stock issuable upon conversion or exercise of such securities may be
less
than the market price of the common stock at the time of such conversions or
exercise. Should a significant number of these securities be exercised or
converted, the resulting increase in the amount of the common stock in the
public market could have a substantial dilutive effect on its outstanding common
stock.
The
conversion and exercise of all of the aforementioned securities or the issuance
of new shares of common stock may also adversely affect the terms under which
WaveRider could obtain additional equity capital.
WaveRider
has limited intellectual property protection, and there is risk that its
competitors will be able to appropriate its technology.
WaveRider’s
ability to compete depends to a significant extent on its ability to protect
its
intellectual property and to operate without infringing the intellectual
property rights of others. WaveRider regards its technology as proprietary.
WaveRider has only one issued patent, and does not WaveRider have any registered
copyrights, with respect to its intellectual property rights. WaveRider relies
on employee and third party non-disclosure agreements and on the legal
principles restricting the unauthorized disclosure and use of trade secrets.
Despite its precautions, it might be possible for a third party to copy or
otherwise obtain its technology, and use it without authorization. Although
WaveRider intends to defend its intellectual property, WaveRider cannot assure
you that the steps WaveRider has taken or that WaveRider may take in the future
will be sufficient to prevent misappropriation or unauthorized use of its
technology. In addition, there can be no assurance that foreign intellectual
property laws will protect its intellectual property rights. There is no
assurance that patent applications or copyright registrations that have been
or
may be filed will be granted, or that any issued patent or copyrights will
not
be challenged, invalidated or circumvented. There is no assurance that the
rights granted under patents that may be issued or copyrights that may be
registered will provide sufficient protection to its intellectual property
rights. Moreover, WaveRider cannot assure you that its competitors will not
independently develop technologies similar, or even superior, to its
technology.
-27-
Use
of WaveRider’s products is subordinated to other uses, and there is risk that
its customers may have to limit or discontinue the use of its
products.
License-free
operation of WaveRider’s products in certain radio frequency bands is
subordinated to certain licensed and unlicensed uses of these bands. This
subordination means that its products must not cause harmful interference to
other equipment operating in the band, and must accept potential interference
from any of such other equipment. If its equipment is unable to operate without
any such harmful interference, or is unable to accept interference caused by
others, its customers could be required to cease operations in some or all
of
these bands in the locations affected by the harmful interference. As well,
in
the event these bands become unacceptably crowded, and no additional frequencies
are allocated to unlicensed use, its business could be adversely
affected.
Currently,
WaveRider’s products are designed to operate in frequency bands for which
licenses are not required in the United States, Canada and other countries
that
WaveRider view as its potential market. Extensive regulation of the data
communications industry by U.S. or foreign governments and, in particular,
the
imposition of license requirements in the frequency bands of its products could
materially and adversely affect us through the effect on its customers and
potential customers. Continued license-free operation will depend upon the
continuation of existing U.S., Canadian and such other countries’ government
policies and, while no planned policy changes have been announced or are
expected, this cannot be assured.
WaveRider
may be subject to product liability claims and WaveRider lacks product liability
insurance.
WaveRider
faces an inherent risk of exposure to product liability claims in the event
that
the products designed and sold by it contain errors, “bugs” or defects. There
can be no assurance that WaveRider will avoid significant product liability
exposure. WaveRider does not currently have product liability insurance and
there can be no assurance that insurance coverage will be available in the
future on commercially reasonable terms, or at all. Further, there can be no
assurance that such insurance, if obtained, would be adequate to cover potential
product liability claims, or that a loss of insurance coverage or the assertion
of a product liability claim or claims would not materially adversely affect
its
business, financial condition and results of operations.
WaveRider
depends upon third party manufacturers and there is risk that, if these
suppliers become unavailable for any reason, WaveRider may for an unknown period
of time have no product to sell.
WaveRider
depends upon a limited number of third party manufacturers to make its products.
If its suppliers are not able to manufacture for it for any reason, WaveRider
would, for an unknown period of time, have difficulty finding alternate sources
of supply. Inability to obtain manufacturing capacity would have a material
adverse effect on its business, financial condition and results of
operations.
Risks
Related to the Data Communications Industry
Competition
in the data communication industry is intense, and there is uncertainty that,
given its new technology and limited resources, WaveRider will be able to
succeed.
Although
its products are based on a wireless technology, WaveRider competes not only
against companies that base their products on wireless technology, but also
against companies that base their products on hard-wired technology (wire or
fiber optic cable). There can be no assurance that WaveRider will be able to
compete successfully in the future against existing or new competitors or that
its operating results will not be adversely affected by increased price
competition. Competition is based on the design and quality of the products,
product performance, price and service, with the relative importance of such
factors varying among products and markets. Competition in the various markets
WaveRider serves comes from companies of various sizes many of which are larger
and have greater financial and other resources than WaveRider does and, thus,
can withstand adverse economic or market conditions better than WaveRider
can.
-28-
WaveRider’s
future operating results are subject to a number of risks, including its ability
or inability to implement its strategic plan, to attract qualified personnel
and
to raise sufficient financing as required. Inability of its management to guide
growth effectively, including implementing appropriate systems, procedures
and
controls, could have a material adverse effect on its business, financial
condition and operating results.
The
data communication industry is in a state of rapid technological change, and
WaveRider may not be able to keep up.
WaveRider
may be unable to keep up with technological advances in the data communications
industry. As a result, its products may become obsolete or unattractive. The
data communications industry is characterized by rapid technological change.
In
addition to frequent improvements of existing technology, there is frequent
introduction of new technologies leading to more complex and powerful products.
Keeping up with these changes requires significant management, technological
and
financial resources. As a small company, WaveRider does not have the management,
technological and financial resources that larger companies in its industry
may
have. There can be no assurance that WaveRider will be able to, or successful
in
enhancing its existing products, or in developing, manufacturing and marketing
new products. An inability to do so would adversely affect its business,
financial condition and results of operations.
Risks
Related to Investing in Low-Priced and Illiquid Securities
WaveRider’s
common stock is subject to the penny stock rules which means its market
liquidity could be adversely affected.
The
SEC’s
regulations define a “penny stock” to be an equity security that has a market
price less than $5.00 per share, subject to certain exceptions. These rules
impose additional sales practice requirements on broker dealers that sell
low-priced securities to persons other than established customers and
institutional accredited investors; and require the delivery of a disclosure
schedule explaining the nature and risks of the penny stock market. As a result,
the ability or willingness of broker-dealers to sell or make a market in its
common stock might decline.
Specifically,
the penny stock rules require a broker-dealer, prior to a transaction in a
penny
stock, to deliver a standardized risk disclosure document prepared by the
Commission, that: (a) contains a description of the nature and level of risk
in
the market for penny stocks in both public offerings and secondary trading;
(b)
contains a description of the broker’s or dealer’s duties to the customer and of
the rights and remedies available to the customer with respect to a violation
of
such duties or other requirements of Securities’ laws; (c) contains a brief,
clear, narrative description of a dealer market, including bid and ask prices
for penny stocks and the significance of the spread between the bid and ask
price; (d) contains a toll-free telephone number for inquiries on disciplinary
actions; (e) defines significant terms in the disclosure document or in the
conduct of trading in penny stocks; and (f) contains such other information
and
is in such form, including language, type, size and format, as the SEC may
require by rule or regulation.
In
addition, the broker-dealer also must provide, prior to effecting any
transaction in a penny stock, the customer with: (a) bid and offer quotations
for the penny stock; (b) the compensation of the broker-dealer and its
salesperson in the transaction; (c) the number of shares to which such bid
and
ask prices apply, or other comparable information relating to the depth and
liquidity of the market for such stock; and (d) monthly account statements
showing the market value of each penny stock held in the customer’s account.
Finally,
the penny stock rules require that prior to a transaction in a penny stock
not
otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement, a written agreement to transactions involving penny
stocks, and a signed and dated copy of a written suitability statement.
-29-
These
requirements may reduce the potential market for its common stock by reducing
the number of potential investors, brokers and traders. This may make it more
difficult for investors in its common stock to sell shares to third parties
or
to otherwise dispose of them. This could cause its stock price to decline.
WaveRider cannot predict the extent to which investor interest in its common
stock, if any, will lead to an increase in its market price or the development
of an active trading market or how liquid that market, if any, might become.
The
market price of WaveRider’s common stock may be volatile. As a result, you may
not be able to sell its common stock in short periods or time or possibly at
all.
WaveRider’s
stock price has been volatile. During fiscal 2005, the trading price of its
common stock ranged from a low price of $0.01 per share to a high price of
$0.29
per share. Many factors may cause the market price of its common stock to
fluctuate, including:
| · |
variations
in its quarterly results of operations;
|
| · |
the
introduction of new products by us or its competitors;
|
| · |
acquisitions
or strategic alliances involving us or its competitors;
|
| · |
future
sales of shares of common stock in the public market; and
|
| · |
market
conditions in its industries and the economy as a whole.
|
In
addition, the stock market has recently experienced extreme price and volume
fluctuations. These fluctuations are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of its common stock. When the market price
of
a company’s stock drops significantly, stockholders often institute securities
class action litigation against that company. Any litigation against us could
cause us to incur substantial costs, divert the time and attention of its
management and other resources or otherwise harm its business.
No
dividends anticipated.
WaveRider
intends to retain any future earnings to fund the operation and expansion of
its
business. WaveRider does not anticipate paying cash dividends on its shares
in
the foreseeable future.
THE
SPECIAL MEETING OF WAVERIDER STOCKHOLDERS
WaveRider
is furnishing this proxy statement/prospectus to WaveRider stockholders to
provide them with important information regarding the proposed merger and
the
merger agreement in connection with the solicitation of proxies by and on
behalf
of WaveRider’s board of directors for use at the WaveRider special meeting and
at any adjournment or postponement thereof. The WaveRider proxy accompanying
this proxy statement/prospectus is solicited on behalf of WaveRider’s board of
directors for use at the WaveRider special meeting. This proxy
statement/prospectus and the accompanying form of proxy were first mailed
to
WaveRider’s stockholders on or about February 14, 2006.
Date,
Time and Place of the Special Meeting
WaveRider
will hold a special meeting of its stockholders on March 20, 2006, promptly
at
2:00 p.m., local time, at its headquarters located at 255 Consumers Road,
Suite
500, Toronto, Ontario M2J 1R4.
Matters
for Consideration
At
the
special meeting, WaveRider stockholders will be asked to consider and vote
on
and approve the following proposals:
-30-
|
1.
|
To
adopt the merger agreement and approve the
merger.
|
|
2.
|
To
approve any motion for adjournment or postponement of the WaveRider
special meeting to another time or place to permit, among other things,
further solicitation of proxies if necessary to establish a quorum
or to
obtain additional votes in favor of Proposal
1.
|
Recommendation
of the WaveRider Board of Directors
After
careful consideration, the WaveRider board of directors determined that the
merger agreement and the merger are advisable and in the best interests of
WaveRider stockholders and has unanimously approved the merger agreement and
the
merger. The WaveRider board of directors unanimously recommends that the
WaveRider stockholders vote “FOR”
the
proposal to adopt the merger agreement and approve the merger and “FOR”
the
proposal to permit adjournment or postponement of the WaveRider special
meeting.
Admission
to the Special Meeting
Only
WaveRider stockholders as of the close of business on February 8, 2006 and
other
persons holding valid proxies for the special meeting are entitled to attend
the
WaveRider special meeting. WaveRider stockholders and their proxies should
be
prepared to present valid government-issued photo identification. WaveRider
stockholders who are not record holders but who hold shares in street name
should provide proof of beneficial ownership on the record date of the WaveRider
special meeting, such as their most recent account statement prior to February
8, 2006, or other similar evidence of ownership. Anyone who does not provide
valid government-issued photo identification or comply with the other procedures
outlined above upon request may not be admitted to the special
meeting.
Record
Date; Shares Held by WaveRider’s Directors and Executive
Officers
The
record date for determining the WaveRider stockholders entitled to vote at
the
WaveRider special meeting is February 8, 2006. Only holders of WaveRider
common
stock as of the close of business on the record date are entitled to vote
at the
WaveRider special meeting. As of that date, there were
approximately 33,765,854 shares of WaveRider common stock issued and
outstanding. Each share of WaveRider common stock issued and outstanding
as of
the WaveRider record date entitles its holder to cast one vote at the WaveRider
special meeting.
As
of the
record date, the directors and executive officers of WaveRider and their
affiliates beneficially owned approximately 1,441,207 shares of WaveRider
common stock, or approximately 3.3% of the total outstanding shares of WaveRider
common stock, excluding shares issuable upon the exercise of stock
options.
Interests
of WaveRider Directors and Executive Officers in the
Merger
All
of
the directors and executive officers of WaveRider have interests and
arrangements that could affect their decision to approve and adopt the merger
agreement and approve the merger. Please refer to the section of this proxy
statement/prospectus entitled “The Merger—Interests of WaveRider Directors and
Executive Officers in the Merger” beginning on page 39.
Quorum
and Vote Required
In
order
to conduct business at the WaveRider special meeting, a quorum must be present.
The holders of a majority of the shares of WaveRider voting stock outstanding
on
the record date for the WaveRider special meeting present in person or
represented by proxy at the WaveRider special meeting and entitled to vote
at
the WaveRider special meeting constitutes a quorum under WaveRider’s bylaws.
WaveRider will treat shares of WaveRider common stock represented by a properly
signed and returned proxy, including abstentions and broker non-votes, as
present at the WaveRider special meeting for purposes of determining the
existence of a quorum. If sufficient votes to constitute a quorum or to approve
and adopt the merger agreement and approve the merger are not received by the
date of the special meeting, the persons named as proxies may propose one or
more adjournments of the meeting to permit further solicitation of
proxies.
-31-
The
affirmative vote of a majority of the shares of WaveRider voting stock
outstanding on the WaveRider record date in favor of the proposal to approve
and
adopt the merger agreement and approve the merger is required in order for
the
merger proposal to pass. The affirmative vote of the holders of a majority
of
the shares of WaveRider voting stock present in person or represented by proxy
and entitled to vote thereon is necessary for the proposal to permit adjournment
or postponement of the WaveRider special meeting to pass. The inspector of
elections appointed for the WaveRider special meeting will tabulate the
votes.
Crescent
International Ltd. and Wave Wireless presently hold 350 shares and 450
shares,
respectively, of WaveRider’s Series D Convertible Preferred Stock. Each share of
Series D Convertible Preferred Stock is convertible into 20,000 shares
of
WaveRider’s common stock, and the holders of Series D Convertible Preferred
Stock are entitled to vote on an as-converted basis together with the holders
of
WaveRider’s common stock, as a single class, on the proposal to approve and
adopt the merger agreement and to approve the merger. Crescent International
Ltd. has agreed to vote all of its shares in favor of approving and adopting
the
merger agreement and approving the merger. Wave Wireless has not entered
into
any agreement regarding the voting of its shares of Series D Convertible
Preferred Stock, but intends to vote its shares in favor of approving and
adopting the merger agreement and approving the merger.
Voting
of Proxies
Shares
represented by a properly signed and dated proxy will be voted at the WaveRider
special meeting in accordance with the instructions indicated on the proxy.
Proxies that are properly signed and dated but which do not contain voting
instructions will be voted “FOR”
the
proposal to approve and adopt the merger agreement and approve the merger and
“FOR”
the
proposal to permit adjournment or postponement of the WaveRider special meeting.
Abstentions
WaveRider
will count a properly executed proxy marked “ABSTAIN” as present for purposes of
determining whether a quorum is present, but the shares represented by that
proxy will not be voted at the WaveRider special meeting. Because the
affirmative vote of a majority of the outstanding shares of WaveRider voting
stock is required to approve and adopt the merger agreement and approve the
merger, if you mark your proxy “ABSTAIN,” it will have the effect of a vote
against the proposal to approve and adopt the merger agreement and approve
the
merger. In addition, if you mark your proxy “ABSTAIN” with respect to the
proposal to permit adjournment or postponement of the WaveRider special meeting,
it will also have the effect of a vote against that proposal.
Broker
Non-Votes
If
your
shares of WaveRider common stock are held in street name, your broker will
vote
your shares for you only if you provide instructions to your broker on how
to
vote your shares. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Your broker cannot
vote your shares of WaveRider common stock without specific instructions from
you. Because the affirmative vote of a majority of the outstanding shares of
WaveRider voting stock is required to approve and adopt the merger agreement
and
approve the merger, if you do not instruct your broker how to vote, it will
have
the effect of a vote against the proposal to approve and adopt the merger
agreement and approve the merger. Failure to instruct your broker to vote your
shares will have no effect on the proposal to permit adjournment or postponement
of the WaveRider special meeting.
Voting
Shares in Person that are Held in Street Name
If
your
shares are held in street name and you wish to vote those shares in person
at
the WaveRider special meeting, you must obtain from your broker a properly
executed legal proxy identifying you as a WaveRider stockholder, authorizing
you
to act on behalf of the nominee at the WaveRider special meeting and identifying
the number of shares with respect to which the authorization is
granted.
Voting
Procedures
You
may
vote by mail by completing and signing your proxy card and mailing it in the
enclosed prepaid and addressed envelope. If you mark your voting instructions
on
the proxy card, your shares will be voted as you instruct.
If
you
properly sign and return your proxy card, but do not mark your voting
instructions on the proxy card, you shares will be voted “FOR”
the
proposal to approve and adopt the merger agreement and approve the merger and
“FOR”
the
proposal to permit adjournment or postponement of the WaveRider special
meeting.
-32-
You
may
vote by telephone by following the “Vote by Telephone” instructions that came
with this proxy statement/prospectus. If you vote by telephone, you do not
need
to mail in your proxy card.
You
may
vote on the Internet by following the “Vote by Internet” instructions that came
with this proxy statement/prospectus. If you vote on the Internet, you do not
need to mail in your proxy card.
You
may
also vote in person at the special meeting. WaveRider will pass out written
ballots to anyone who would like to vote at the WaveRider special meeting.
However, if you hold your shares of WaveRider common stock in street name,
you
must request a proxy from your stockbroker in order to vote at the
meeting.
How
to Revoke a Proxy
If
you
submit a proxy, you may revoke it at any time before it is voted
by:
| · |
sending
a written, dated notice to the Secretary of WaveRider at WaveRider’s
principal executive offices stating that you would like to revoke
your
proxy;
|
| · |
voting
at a later date by telephone or by using the
Internet;
|
| · |
completing,
dating and submitting a new later-dated proxy card;
or
|
| · |
attending
the special meeting and voting in person. Your attendance alone will
not
revoke your proxy.
|
Notices
to WaveRider’s corporate secretary should be addressed to Corporate Secretary,
WaveRider Communications Inc., 255 Consumers Road, Suite 500, Toronto, Ontario
M2J 1R4.
If
you
hold your shares in street name, you must give new instructions to your broker
prior to the special meeting or obtain a signed “legal proxy” from the broker to
revoke your prior instructions and vote in person at the meeting.
Contact
for Questions and Assistance in Voting
Any
WaveRider stockholder who has a question about the merger, the merger agreement,
or how to vote or revoke a proxy, or who wishes to obtain additional copies
of
this joint proxy/registration statement, should contact:
Investor
Relations
WaveRider
Communications Inc.
255
Consumers Road, Suite 500
Toronto,
Ontario M2J 1R4
Phone:
(416) 502-3200
Email:
investors@WaveRider.com
Solicitation
of Proxies and Expenses
WaveRider
will pay its own costs of soliciting proxies for the WaveRider special meeting.
Certain directors, officers and employees of WaveRider may solicit proxies,
without additional remuneration, by telephone, facsimile, electronic mail,
telegraph and in person. WaveRider expects that the expenses of this special
solicitation will be nominal. Following the mailing of this proxy
statement/prospectus, WaveRider will request brokers, custodians, nominees
and
other record holders to forward copies of this proxy statement/prospectus to
persons for whom they hold shares of WaveRider common stock and to request
authority for the exercise of proxies. In such cases, WaveRider, upon the
request of the record holder, will reimburse such holder for their reasonable
expenses.
-33-
THE
MERGER
The
following is a description of the material aspects of the merger. While we
believe that the following description covers the material terms of the merger,
the description may not contain all of the information that is important to
you.
We encourage you to read carefully this entire proxy statement/prospectus,
including the merger agreement attached to this proxy statement/prospectus
as
Annex A, for a more complete understanding of the merger.
Background
of the Merger
In
light
of the current industry and financial market conditions, both Wave Wireless
and
WaveRider have evaluated a wide variety of different strategies to achieve
profitability, and business scenarios to improve their competitive positions
and
enhance their respective stockholder values, including opportunities for
acquisitions of other companies or product lines, possible partnerships or
alliances, and other strategic transactions. In particular, Wave Wireless
throughout much of 2004 and 2005, together with its financial advisor, Burnham
Hill Partners (“BHP”), considered and investigated a variety of possible
strategic transactions. Following its restructuring announced in April 2005,
this effort intensified, given Wave Wireless management’s desire to offset the
decline in Wave Wireless’ revenue caused by the discontinuance of certain
product lines. Similarly, throughout 2004 and 2005, WaveRider explored various
strategic transactions designed to improve WaveRider’s financial
position.
On
August
26, 2005, Michael Abrams, a Senior Vice President of BHP, contacted management
of WaveRider to determine whether WaveRider would be interested in exploring
a
strategic transaction with Wave Wireless. After expressing an interest, Wave
Wireless and WaveRider signed a mutual non-disclosure agreement relating to
the
possible combination of the two companies, dated August 26, 2005.
On
August
31, 2005, Wave Wireless held a special meeting of its board of directors to
discuss, among other issues, possible strategic transactions. At that meeting,
Daniel W. Rumsey, the Acting Chief Executive Officer of Wave Wireless, briefed
the board of directors regarding discussions with WaveRider, including possible
synergies. At that meeting, the board of directors expressed its support to
continue discussions with management of WaveRider.
On
September 6 and 7, 2005, Mr. Rumsey and Mr. Abrams met with Charles Brown and
Scott Worthington, the Chief Executive Officer and Chief Financial Officer,
respectively, of WaveRider, at WaveRider’s offices in Toronto, Canada. At that
meeting, the attendees discussed a proposed structure whereby WaveRider would
merge with and into a subsidiary of Wave Wireless, as well as other issues
relating to product synergies and management. No definitive agreement was
reached at that point. Prior to that meeting, management of Wave Wireless
engaged in several telephone conversations with Messrs. Brown and Worthington,
the purpose of which was to explore whether a combination of WaveRider and
Wave
Wireless was in the best interest of their respective stockholders, given each
company’s product portfolio and financial condition, among other issues. During
this time, Wave Wireless’ management reviewed WaveRider’s public filings and
other information made available to Wave Wireless to assist in its determination
that a combination with WaveRider was consistent with Wave Wireless’ strategy of
acquiring or merging with similar companies offering complementary products
in
the wireless communications industry. Similarly, WaveRider’s management
determined that combining with Wave Wireless represented the most desirable
course of action given the difficult industry and market conditions, as well
as
the synergies represented by the combined companies.
On
September 13, 2005, the board of directors of WaveRider held a special meeting
to consider a possible transaction. At that meeting, the board of directors
expressed its support for ongoing dialog between the management of both
companies.
Discussions
between BHP, Wave Wireless and WaveRider continued through September 2005.
During this time, management exchanged additional information and held several
additional telephone meetings to discuss the potential combination. On September
26 and 27, 2005, Mr. Worthington visited Wave Wireless’ offices in San Jose, the
purpose of which was to better understand the company that would result from
the
combination of WaveRider and Wave Wireless, and to exchange information
necessary to evaluate their respective businesses. Numerous issues were
discussed relating to the combination of the two companies, including
capabilities, synergies, organization and pro-forma financial
projections.
-34-
On
September 28, 2005, Wave Wireless held a special meeting of its board of
directors. At that meeting, Mr. Rumsey presented an overview of the benefits
of
a proposed combination, and reviewed the proposed terms of a transaction,
including the likely conditions to consummating a transaction. At this meeting,
the directors again expressed its support for the proposed combination, subject
to approval of definitive terms, and the satisfactory completion of due
diligence.
On
September 29 and 30, 2005, Mr. Rumsey again visited WaveRider’s offices in
Toronto, the primary purpose of which was to, among other things, conduct due
diligence relating to WaveRider, and to review WaveRider’s operations.
Similarly, on October 11 and 12, 2005, Mr. Brown visited Wave Wireless’ offices
in San Jose, California.
On
October 12, 2005, Wave Wireless held a special meeting of its board of
directors. At that meeting, Mr. Rumsey reviewed his findings relating to
WaveRider’s operations, and presented an overview of the combined company’s
business, including product descriptions, and possible future plans. Management
also discussed the potential synergies that could arise from a combination
of
the two companies, as well as the proposed terms of a merger. Mr. Rumsey also
recommended that the board approve a proposed term sheet and letter of intent
providing for a merger of the two companies. The board unanimously approved
the
term sheet, and authorized Mr. Rumsey to execute the letter of intent on
substantially the terms presented.
On
October 18, 2005, Wave Wireless proposed a draft term sheet to WaveRider on
substantially the terms approved by Wave Wireless’ board of directors. After
discussion, the parties determined to put off the execution of a letter of
intent pending completion of additional due diligence, and resolution of certain
issues pertaining to financing, valuation, deal structure and
integration.
On
November 10, 2005, WaveRider held a special meeting of its board of directors.
At that meeting, the board approved the concept of the merger and authorized
management to sign a letter of intent substantially in the form presented to
the
board.
On
November 15, 2005, WaveRider’s board met, reiterated their support of the
potential merger and authorized the issuance of a press release announcing
the
signing of the letter of intent. On November 16, 2005, the parties executed
the
letter of intent. The next day, the parties issued a joint press release
announcing their intent to merge.
On
November 21 and 22, WaveRider held a special meeting of its board of directors
in Tampa, Florida, the primary purpose of which was to discuss the issues
surrounding the development of the definitive agreement between WaveRider and
Wave Wireless, that was previously circulated for review. At the invitation
of
the board of directors, Messrs. Rumsey and Abrams attended different portions
of
the meeting.
On
November 29 through December 2, 2005, Mr. Brown visited Wave Wireless in San
Jose to evaluate the capabilities of both engineering and operations, and
staffing issues, and to conduct further due diligence. During this visit, Mr.
Brown and Mr. Rumsey discussed and negotiated certain terms of the draft merger
agreement, which reflected comments previously provided by each company’s
advisors.
A
final
briefing of the board of directors of Wave Wireless occurred at a special
meeting of the board held on December 6, 2005. All members of the board, with
the exception of Craig Roos, who was unavailable, attended the meeting. At
that
meeting, Mr. Rumsey briefed the board of directors of Wave Wireless regarding
the final results of his due diligence, and recommended that the board of
directors approve the draft merger agreement presented at the meeting. After
considering issues relating to financing, board composition, the relative
ownership of the surviving corporation, and the benefit to stockholders, the
board of directors voted unanimously to approve the draft merger agreement
in
substantially the form presented to the board. The board of directors then
directed Mr. Rumsey to complete the negotiations with management of WaveRider,
and to execute the draft merger agreement, with such changes as deemed necessary
and advisable by management.
-35-
On
December 9, 2005, WaveRider held a special meeting of its board of directors.
At
that meeting, the board approved the merger and authorized management to sign
a
definitive agreement to merge on substantially the terms presented at the
meeting.
On
December 12 and 13, Mr. Brown visited Wave Wireless’ offices in Sarasota,
Florida to meet with Wave Wireless’ sales staff, and to conduct a review of Wave
Wireless’ sales and sales support operations. Mr. Brown’s findings were
presented to WaveRider’s board of directors at a special meeting of the board
held on December 15, 2005. At that meeting, the board of directors approved
the
appointment of Mr. Michael Chevalier, Mr. Michael Milligan and Mr. Bruce
Sinclair as WaveRider’s representatives on the board of the merged company, upon
closing.
Between
December 13, 2005 and the end of the year, management of Wave Wireless and
WaveRider negotiated with certain of their major creditors in order to obtain
preliminary agreements to convert their debt into equity securities, to ensure
that one of the conditions to closing of the merger would be
satisfied.
On
January 3, 2006, the Agreement and Plan of Merger and related documents were
executed and delivered. The next day, WaveRider and Wave Wireless issued a
joint
public announcement of the merger.
WaveRider’s
Reasons for the Merger
WaveRider’s
board of directors believes that the combination of Wave Wireless and WaveRider
will create a stronger company. WaveRider’s board of directors also believes
that combining the complementary products, services, research and development
efforts, direct sales, marketing and distribution channels of Wave Wireless
and
WaveRider will enable the combined company to reach more customers and compete
more effectively against larger competitors.
In
reaching its conclusion that the combination of Wave Wireless and WaveRider,
and
the terms of the merger agreement, are advisable, fair to, and in the best
interests of, WaveRider and its stockholders, the board of directors of
WaveRider consulted with WaveRider’s management team regarding the strategic and
operational aspects of the merger and the results of the strategic, business
and
operational due diligence efforts undertaken by management. The WaveRider board
of directors also consulted with representatives of Foley Hoag LLP regarding
the
fiduciary duties of the members of the WaveRider board of directors, legal
due
diligence matters and the terms of the merger agreement and related agreements.
The WaveRider board of directors considered many factors which, when taken
as a
whole, supported its decision, including the following business
considerations:
| · |
the
complementary nature of the existing technologies and products of
Wave
Wireless and WaveRider, and the combining of Wave Wireless SPEEDLAN
family
of 2.4GHz, 4.9GHz and 5.8GHz mesh networking products and WaveRider’s Last
Mile Solution® non-line-of-sight, fixed and mobile wireless 900MHz
products;
|
| · |
the
prospect for an improved competitive position for the combined company
which could offer a broad set of products and solutions that provide
robust, wireless broadband applications and solutions;
and
|
| · |
the
combined financial strength and resources of the two companies may
enhance
the ability of the combined company to respond more quickly and
effectively to increased competition and customer
demands.
|
The
WaveRider board of directors also considered a number of additional factors
relevant to the merger, including the following:
| · |
historical
information concerning WaveRider’s and Wave Wireless’ respective
businesses, financial performances and financial conditions, operations,
technology, management and competitive
positions;
|
-36-
| · |
the
financial condition, results of operations, business and strategic
objectives of WaveRider and Wave Wireless before and after giving
effect
to the merger and the merger’s potential effect on stockholder
value;
|
| · |
the
potential effect on stockholder value of WaveRider continuing as
an
independent entity as compared to the potential effect of a combination
with Wave Wireless;
|
| · |
the
likely effect of dilution on WaveRider’s stockholders which will result if
WaveRider seeks to raise further equity capital topurchase the WaveRider
convertible notes or if WaveRider enters into an exchange offer with
the
holders of the WaveRider convertible notes which would result in
a
reduction of the conversion price of such
notes;
|
| · |
current
financial market conditions and historical market prices, volatility
and
trading information with respect to WaveRider and Wave Wireless common
stock;
|
| · |
that
based on the anticipated exchange ratio (which is subject to adjustment)
and the closing prices of Wave Wireless and WaveRider common stock,
the
merger consideration represents a premium to share prices, including
an
approximate 182% premium compared to the November 16, 2005 closing
price,
an approximate 339% premium implied by the 30 day average of the
closing
price of Wave Wireless and WaveRider for the period ending November
16,
2005 and other increased premiums implied by longer
periods;
|
| · |
that
WaveRider will continue to participate in the strategic direction
of the
combined company through participation on Wave Wireless’ board of
directors; and
|
| · |
the
operating challenges, opportunities and prospects of WaveRider as
an
independent company, including increased competition, the remaining
life
cycle of WaveRider’s current products and the level of research and
development spending necessary to develop new products that will
be
competitive with products offered by competitors with greater financial
resources.
|
The
WaveRider board of directors considered the structure of the merger and the
terms of the merger agreement, including the parties’ representations,
warranties and covenants, the conditions to their respective obligations to
complete the transaction, and considered, among others, the following
factors:
| · |
shares
of Wave Wireless common stock issued to WaveRider stockholders will
be
registered on a Form S-4 registration statement and will be freely
tradable for all but affiliates of
WaveRider;
|
| · |
the
terms of the merger agreement, including the conditions to closing,
and
Wave Wireless’ right to terminate the merger
agreement;
|
| · |
WaveRider’s
rights under the merger agreement to consider unsolicited acquisition
proposals and to change its recommendation to WaveRider stockholders
to
adopt the merger agreement and approve the merger should WaveRider
receive
a superior proposal, and the limited number of WaveRider shares of
common
stock that would be covered by voting agreements and proxies;
and
|
| · |
the
fact that, under the merger agreement, each stock option outstanding
under
WaveRider’s stock option plans and each outstanding warrant will be
assumed by Wave Wireless.
|
The
WaveRider board of directors also identified and considered a number of
uncertainties, risks and potentially negative factors in its deliberations
concerning the merger, including:
| · |
the
merger is expected to be a “reorganization” for United States federal
income tax purposes, and as a result stockholders will not recognize
gain
or loss on the exchange of WaveRider common shares in the merger
for
shares of Wave Wireless common stock, except to the extent of the
cash, if
any, received in lieu of a fractional share of common stock of the
combined company. Inconsistencies under existing law and uncertainties
raised by proposed Treasury Regulations, however, create the possibility
that the merger will not be treated as a “reorganization” for United
States federal income tax purposes, with the result that stockholders
will
recognize gain or loss in the
merger;
|
-37-
| · |
the
volatility of the trading prices of Wave Wireless common stock, including
the fact that the exchange ratio for the share consideration to be
received by WaveRider stockholders will not increase in the event
of a
decline in the trading price of Wave Wireless common stock or an
increase
in the trading price of WaveRider common
stock;
|
| · |
the
risk that the potential benefits of the merger might not be
realized;
|
| · |
the
possibility that the merger might not be consummated, even if approved
by
WaveRider’s stockholders, and the effect of the public announcement and
dependency of the merger on WaveRider’s and Wave Wireless’ sales,
operating results, stock price, customers, supplies, employees, partners
and other constituencies;
|
| · |
the
risks of integrating the business of WaveRider and Wave Wireless
and the
potential management, customer, supplier, partner and employee disruption
that may be associated with the
merger;
|
| · |
a
termination fee of up to $300,000 payable to Wave Wireless or WaveRider
upon the occurrence of certain events, and the potential effect of
such
factors in deterring other potential acquirors from proposing an
alternative transaction that may be more advantageous to Wave Wireless’ or
WaveRider’s stockholders;
|
| · |
the
interests that WaveRider’s executive officers and directors may have with
respect to the merger in addition to their interests as WaveRider
stockholders. See “—Interests of WaveRider Directors and Executive
Officers in the Merger” beginning on page 31 of this proxy
statement/prospectus for a more complete discussion of these interests;
and
|
| · |
various
other applicable risks associated with the combined company and
the
merger, including those described under the section entitled
“Risk
Factors” beginning on page 17 of this proxy
statement/prospectus.
|
After
due
consideration, the WaveRider board of directors concluded that overall, the
risks, uncertainties, restrictions and potentially negative factors associated
with the merger were outweighed by the potential benefits of the transaction,
and that many of these risks could be managed or mitigated by WaveRider or
by
the combined company or were unlikely to have a material adverse impact on
the
merger or the combined company.
The
foregoing information and factors considered by the WaveRider board of directors
are not intended to be exhaustive but are believed to include all of the
material factors considered by the WaveRider board of directors. In view of
the
variety of factors and the amount of information considered, WaveRider’s board
of directors did not find it practicable to, and did not, quantify, rank or
otherwise assign relative weights to the specific factors it considered in
approving the merger agreement and the merger. In addition, individual members
of WaveRider’s board of directors may have given different weights to different
factors. The WaveRider board of directors considered all of these factors as
a
whole, and overall considered them to be favorable and to support its
determination.
Recommendation
of the WaveRider Board of Directors
After
careful consideration and based on the foregoing analysis, the WaveRider board
of directors, on December 9, 2005, determined that the terms of the merger
agreement and the merger are advisable, fair to and in the best interests of,
WaveRider and its stockholders and unanimously approved the merger agreement
and
the merger. The WaveRider board of directors unanimously recommends that the
stockholders of WaveRider vote “FOR”
the
proposal to adopt the merger agreement and approve the merger and “FOR”
the
proposal to permit adjournment or postponement of the WaveRider special
meeting.
-38-
Interests
of WaveRider Directors and Executive Officers in the
Merger
In
considering the recommendation of WaveRider’s board of directors that you, as a
WaveRider stockholder, vote to approve and adopt the merger agreement and
approve the merger, you should be aware that some of WaveRider’s executive
officers and directors have interests in the transaction that are different
from, or in addition to, your interests as a WaveRider stockholder. The
WaveRider board of directors was aware of these interests and took these
interests into account in approving the merger agreement and the merger. These
interests are summarized below.
Stock
Options
At
the
effective time of the merger, all outstanding WaveRider stock options, whether
vested or unvested, will be assumed by Wave Wireless and become options to
purchase shares of Wave Wireless common stock. The number of shares of Wave
Wireless common stock issuable upon exercise of each such option, and the
exercise price of each such option, will be adjusted by the exchange ratio,
which will be determined immediately prior to completion of the merger. Each
adjusted option will be subject to the same terms and conditions, including
expiration date, vesting and exercise provisions, as were applicable to the
corresponding option prior to the effective time of the merger.
Employment
and Other Agreements
D.
Bruce Sinclair.
On
November 18, 1997, WaveRider entered into an employment agreement with Mr.
Sinclair whereby he will serve as its president and chief executive officer
for
an initial term of one year subject to annual extensions thereafter. Under
the
agreement’s terms, Mr. Sinclair had a base salary of Can. $300,000 and a bonus
plan of $200,000. The agreement provided that in the event that Mr. Sinclair
was
terminated without cause, he would be paid severance in an amount equal to
one
year’s salary plus one month’s salary for each year of employment in excess of
twelve years service. Upon termination of Mr. Sinclair’s employment for cause,
WaveRider will have no obligation to Mr. Sinclair. Mr. Sinclair is entitled
to
participate in WaveRider’s employee fringe benefit plans or programs generally
available to our employees.
From
time
to time, since that date, the WaveRider board of directors has reviewed and
amended the base salary, bonus and severance components of that agreement.
On
October 16, 2002, Mr. Sinclair reduced his day-to-day involvement, ceased using
the title president, and waived salary payments in excess of Can. $84,000 per
annum. On April 1, 2003, Mr. Sinclair and the compensation committee of the
WaveRider board of directors agreed to a change in the amount being waived
to
any amount in excess of Can. $175,000. On October 15, 2004, in order to support
WaveRider’s cash position, Mr. Sinclair agreed to a further change, which waived
any amount in excess of Can. $60,000. The waiver of salary payments over the
amount agreed does not impact Mr. Sinclair’s potential severance
entitlement.
In
2001,
the WaveRider board of directors agreed to amend Mr. Sinclair’s employment
agreement to provide that in the event that Mr. Sinclair’s employment was
terminated, other than for cause, he would be paid severance in an amount equal
to three year’s salary. On February 9, 2005, the WaveRider board of directors
and Mr. Sinclair agreed to reduce the severance to an amount equal to one year’s
salary in exchange for the issuance of employee stock options to purchase
500,000 shares of common stock, at the then current market price of $0.19 per
share.
On
March
30, 2005, Mr. Sinclair requested medical leave from WaveRider, as its Chief
Executive Officer. Subsequently, Mr. Sinclair and the board of directors agreed
that Mr. Sinclair remain in a consulting role, on the same compensation basis
as
prior to his leave, providing oversight and direction while pursuing
opportunities in mergers, acquisitions and strategic partnerships.
-39-
Charles
W. Brown.
On
February 16, 1998, WaveRider entered into an employment agreement with Mr.
Brown
in substantially the same form as that described for Mr. Sinclair, with the
exception of certain change in control provisions. On October 16, 2002, Mr.
Brown was named executive vice president of WaveRider. On March 30, 2005, Mr.
Brown was named Chief Executive Officer.
T.
Scott Worthington.
On
January 5, 1998, WaveRider entered into an employment agreement with Mr.
Worthington in substantially the same form as that described for Mr. Sinclair,
with the exception of certain change in control provisions. Mr. Worthington
serves as WaveRider’s vice president and Chief Financial Officer.
The
board
of directors’ has agreed to amend Mr. Worthington’s agreement to state that in
the event that Mr. Worthington’s roles and responsibilities with WaveRider are
reduced after a change of control, WaveRider will pay him severance in an amount
equal to two years’ salary.
Effect
of Merger on Existing Agreements
As
a
result of the merger, Mr. Sinclair’s employment with WaveRider will be
terminated. Although Mr. Sinclair is entitled to one year’s severance and other
benefits under the terms of his agreement, he has agreed to accept one-half
of
his severance payable over one year, in addition to the payment of health
benefits, and has agreed to provide certain legal and other consulting services
to Wave Wireless after consummation of the merger as additional consideration
for the severance payments. Mr. Sinclair will continue to serve on the board
of
directors of Wave Wireless after the merger.
It
is
currently anticipated that WaveRider will not be obligated to pay any other
severance obligations to executive officers of WaveRider as a result of the
merger.
Summary
of Equity and Incentive Awards of Directors and Officers of
WaveRider
The
following table identifies, for each WaveRider director and executive officer,
as of December 31, 2005, the aggregate number of shares subject to outstanding
options to purchase shares of WaveRider common stock, the aggregate shares
subject to vested options, the weighted average exercise price of all
outstanding options, and each such person’s relationship to WaveRider (which are
calculated as of December 31, 2005).
|
Name
|
Aggregate
Shares
Subject
to
Outstanding
Options
|
Aggregate
Shares
Subject
to
Vested
Options
|
Weighted
Average
Price
of
Outstanding
Options
|
Relationship
to
WaveRider
|
Estimated
Deferred
Compensation
Payment
|
|||||||||||
|
Robert
Francis
|
50,000
|
50,000
|
0.19
|
Chairman, Director | ||||||||||||
|
Gerry
Chastelet
|
57,500
|
57,500
|
0.46
|
Director | ||||||||||||
|
Michael
Chevalier
|
50,000
|
50,000
|
0.19
|
Director | ||||||||||||
|
Donald
Gibbs
|
50,000
|
50,000
|
0.19
|
Director | ||||||||||||
|
Steven
Grant
|
50,000
|
50,000
|
0.07
|
Director | ||||||||||||
|
Michael
Milligan
|
55,000
|
55,000
|
0.40
|
Director | ||||||||||||
|
Bruce
Sinclair (1)
|
722,500
|
717,500
|
1.27
|
Director | ||||||||||||
|
Charles
Brown
|
130,000
|
75,000
|
0.90
|
Chief Executive Officer | ||||||||||||
|
Scott
Worthington
|
130,000
|
75,000
|
0.90
|
Vice President, Chief Financial Officer and Corporate Secretary | ||||||||||||
|
(1)
|
Included
in Mr. Sinclair’s options are 77,500 options received from other
shareholders.
|
-40-
Board
Seats Following Completion of the Merger
Wave
Wireless has agreed to increase the size of its board of directors from five
members to seven members. Prior to the effective time of the merger, George
P.
Roberts and R. Craig Roos, each a current director of Wave Wireless will resign
from the board of directors of Wave Wireless, and immediately following
completion of the merger, Charles W. Brown, WaveRider’s Chief Executive Officer,
and Michael Chevalier, Michael Milligan and D. Bruce Sinclair, each a current
director of WaveRider, will be appointed to the board of directors of Wave
Wireless.
Indemnification;
Directors’ and Officers’ Insurance
Wave
Wireless will, and has agreed to cause the company surviving the merger to,
honor all of the indemnification obligations of WaveRider to its directors
and
officers that exist immediately prior to completion of the merger pursuant
to
WaveRider’s articles of incorporation and bylaws. For five years after the
completion of the merger, the articles of incorporation and bylaws of the
company surviving the merger will contain provisions regarding indemnification
that are at least as favorable to the directors and officers of WaveRider
immediately prior to completion of the merger as the indemnification provisions
that are contained in the articles of incorporation and bylaws of WaveRider
at
the time the merger agreement was executed.
For
a
period of three years after the completion of the merger, Wave Wireless will
also cause the company surviving the merger to use all reasonable efforts to
maintain directors’ and officers’ liability insurance covering those directors
and officers of WaveRider who are currently covered by WaveRider’s directors’
and officers’ liability insurance on terms comparable to those applicable to the
current directors and officers. However, the company surviving the merger will
not be required to pay, in total, an annual premium for the insurance described
in this paragraph in excess of $50,000.
As
a
result of the interests described above under each heading, WaveRider’s
executive officers and directors have interests in the merger that may have
made
them more likely to vote to approve and adopt the merger agreement and approve
the merger and to recommend the same to the WaveRider stockholders, than if
they
did not hold these interests.
Material
United States Federal Income Tax Consequences
Wave
Wireless and WaveRider expect, but cannot assure you, that for United States
federal income tax purposes the merger will be treated as reorganization
within
the meaning of Section 368(a) of the Code. If the merger is treated as a
reorganization, stockholders of WaveRider who exchange their shares of WaveRider
common stock in the merger for shares of Wave Wireless common stock will
not
recognize gain or loss for United States federal income tax purposes, except
to
the extent of the cash, if any, received in lieu of a fractional share of
common
stock of the combined company. Under existing case law, rulings, and proposed
Treasury Regulations released in March 2005, however, the treatment of the
merger as reorganization is not certain. In particular, uncertainties exist
relating to the surrender and receipt of “net value” in a transaction, and when
and to what extent a corporation’s creditors may be treated as holding
“proprietary interests” in the corporation for purposes of the continuity of
proprietary interest requirement of reorganizations. If the merger is not
treated as a reorganization, stockholders of WaveRider who exchange their
shares
of WaveRider common stock in the merger for shares of Wave Wireless common
stock
will recognize gain or loss in the exchange in an amount equal to the difference
between the fair market value of the Wave Wireless common stock and cash
received in the merger and the stockholder’s adjusted tax basis in his or her
shares of WaveRider common stock exchanged therefor. Neither counsel to Wave
Wireless nor counsel to WaveRider will render an opinion on the tax consequences
of the merger, nor will any ruling be obtained from the Internal Revenue
Service
or other taxing authority. As a result of the uncertainty, Wave Wireless
and
WaveRider urge stockholders to consult their own tax advisors regarding the
specific tax consequences of the merger.
WAVERIDER
STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM OF THE MERGER IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES INCLUDING THE APPLICABILITY AND EFFECT OF UNITED STATES FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
-41-
Accounting
Treatment of the Merger
Wave
Wireless intends to account for the merger using the purchase method of
accounting for business combinations, with Wave Wireless being considered
the
acquiror of WaveRider in conformity with accounting principles generally
accepted in the United States of America. This means that Wave Wireless
will
allocate the purchase price to the fair value of assets, including identifiable
intangible assets acquired and liabilities assumed from WaveRider at the
effective time of the merger, with the excess purchase price being recorded
as
goodwill. The preliminary purchase price allocation is subject to revision
as
more detailed analysis is completed and additional information on the fair
value
of WaveRider’s assets and liabilities becomes available.
Effect
of the Merger on WaveRider Stock Options, Warrants and Employee Stock Purchase
Plan
When
the
merger is completed, Wave Wireless will assume all outstanding options
to
purchase shares of WaveRider common stock granted under WaveRider’s Employee
Stock Option (1997) Plan, the 1999 Incentive and Nonqualified Stock Option
Plan,
the Employee Stock Option (2000) Plan and the Employee Stock Option (2002)
Plan
and all outstanding warrants to purchase shares of WaveRider common stock.
The
assumed options and warrants will have the same terms and conditions (including
vesting schedules and exercise periods), adjusted as necessary to reflect
the
substitution of Wave Wireless common stock for WaveRider stock.
Prior
to
the effective time of the merger, the WaveRider employee stock purchase
plan
will be terminated. Any offering period then underway under the WaveRider
employee stock purchase plan will be shortened by setting a new exercise
date
that is prior to the effective time of the merger, and each participant’s option
to purchase WaveRider common stock under the employee stock purchase
plan will
be exercised automatically on the new exercise date. See the section
entitled
“—Treatment of Rights under the WaveRider Employee Stock Purchase Plan” on
page 53 of this proxy statement/prospectus.
Wave
Wireless intends to file a registration statement on Form S-8 with the
Securities and Exchange Commission to the extent available and applicable
as
soon as practicable following the completion of the merger but not later
than 20
business days following the completion of the merger in connection with
the
shares underlying the assumed and outstanding WaveRider options.
Trading
of Shares of Wave Wireless Common Stock on the OTC Bulletin
Board
Wave
Wireless common stock (including the shares issued in the merger) is traded
on
the OTC Bulletin Board of the National Association of Securities Dealers,
Inc
under the symbol “WVWC.”
Cessation
of Trading and Deregistration of WaveRider Common Stock After the
Merger
When
the
merger is completed, WaveRider common stock will cease to be traded on
the OTC
Bulletin Board and it will be deregistered under the Securities Exchange
Act of
1934, as amended (the “Exchange Act”).
Restrictions
on Sales of Shares of Wave Wireless Common Stock Received in the
Merger
The
shares of Wave Wireless common stock to be issued in the merger will be
registered under the Securities Act of 1933, as amended (the “Securities Act”)
and should be freely transferable, except for shares of Wave Wireless common
stock issued to any person who is deemed to be an “affiliate” of WaveRider prior
to the merger. Persons who may be deemed to be “affiliates” of WaveRider prior
to the merger include individuals or entities that control, are controlled
by,
or are under common control with WaveRider, prior to the merger, and may
include
officers and directors, as well as principal stockholders of WaveRider,
prior to
the merger. Affiliates of WaveRider will be notified separately of their
affiliate status.
Persons
who may be deemed to be affiliates of WaveRider prior to the merger may
not sell
any of the shares of Wave Wireless common stock received by them in connection
with the merger except pursuant to:
|
·
|
an
effective registration statement under the Securities Act covering
the
resale of those shares;
|
-42-
|
·
|
an
exemption under paragraph (d) of Rule 145 under the Securities
Act;
or
|
|
·
|
any
other applicable exemption under the Securities
Act.
|
Wave
Wireless’ registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, covers the resale of shares of Wave
Wireless
common stock to be received in connection with the merger by certain parties
who
may be deemed to be affiliates of WaveRider prior to the merger.
Dissenters’
Rights of Appraisal
Under
Nevada law, subject to certain exceptions that do not apply to the merger,
a
stockholder is entitled to dissent from, and obtain cash payment for the
fair
value of his or her shares (i) in the event of consummation of a plan of
merger
or plan of exchange in which the Nevada corporation is a constituent entity,
and
(ii) any corporate action taken pursuant to a vote of the stockholders
to the
extent that the articles of incorporation, bylaws or a resolution of the
board
of directors provides that voting or non-voting stockholders are entitled
to
dissent and obtain payment for their shares.
You
do
have the right to dissent from the merger and obtain cash payment for the
“fair
value” of your shares, as determined in accordance with the Nevada Revised
Statutes (“NRS”). Below is a description of the steps you must take if you wish
to exercise dissenters’ rights with respect to the merger under NRS Sections
92A.300 to 92A.500, the Nevada dissenters’ rights statute. The text of the
statute is set forth in full as Annex B to this proxy statement/prospectus.
This
description is not intended to be complete. If you are considering exercising
your dissenters’ rights with respect to the merger, you should review NRS
Sections 92A.300 to 92A.500 carefully, particularly the steps required
to
perfect dissenters’ rights. Failure to take any one of the required steps may
result in termination of your dissenters’ rights under Nevada law. If you are
considering dissenting, you should consult with your own legal
advisor.
To
exercise your right to dissent, you must:
|
·
|
before
the effective date of the Merger, deliver written notice to WaveRider
Communications Inc., Attention: Investor Relations, 255 Consumers
Road,
Suite 500, Toronto, Ontario, Canada A6 M2J IR4, stating that
you intend to
demand payment for your shares if the merger is completed;
and
|
|
·
|
not
vote your shares in favor of the merger, either by proxy or in
person.
|
Failure
to vote against the merger will not constitute a waiver of dissenters’ rights. A
vote against is not deemed to satisfy the written notice requirement. If
you
satisfy those conditions, WaveRider will send you a written dissenter’s notice
within 10 days after the merger is effective. This dissenter’s notice
will:
|
·
|
specify
where you should send your payment demand and where and when
you must
deposit your stock certificates, if
any;
|
|
·
|
inform
holders of uncertificated shares to what extent the transfer
of their
shares will be restricted after their payment demand is
received;
|
|
·
|
supply
a form of payment demand that includes the date the merger was
first
publicly announced and the date by which you must have acquired
beneficial
ownership of your shares in order to
dissent;
|
|
·
|
set
a date by when WaveRider must receive the payment demand, which
may not be
less than 30 or more than 60 days after the date the dissenters’ notice is
delivered; and
|
|
·
|
provide
you a copy of Nevada’s dissenters’ rights
statute.
|
After
you
have received a dissenter’s notice, if you still wish to exercise your
dissenters’ rights, you must:
-43-
|
·
|
demand
payment either through the delivery of the payment demand form
to be
provided or other comparable means;
|
|
·
|
certify
whether you have acquired beneficial ownership of the shares
before the
date set forth in the dissenter’s notice;
and
|
|
·
|
deposit
your certificates, if any, in accordance with the terms of the
dissenter’s
notice.
|
FAILURE
TO DEMAND PAYMENT IN THE PROPER FORM OR DEPOSIT YOUR CERTIFICATES AS DESCRIBED
IN THE DISSENTER’S NOTICE WILL TERMINATE YOUR RIGHT TO RECEIVE PAYMENT FOR YOUR
SHARES PURSUANT TO NEVADA’S DISSENTERS’ RIGHTS STATUTE. YOUR RIGHTS AS A
STOCKHOLDER WILL CONTINUE UNTIL THOSE RIGHTS ARE CANCELED OR MODIFIED BY
THE
COMPLETION OF THE MERGER.
Within
30
days after receiving your properly executed payment demand, WaveRider will
pay
you what it determines to be the fair value of your shares, plus accrued
interest (computed from the effective date of the merger until the date
of
payment). The payment will be accompanied by:
|
·
|
WaveRider’s
balance sheet as of the end of a fiscal year ended not more than
16 months
before the date of payment, an income statement for that year,
a statement
of changes in stockholders’ equity for that year, and the latest available
interim financial statements, if
any;
|
|
·
|
an
explanation of how WaveRider estimated the fair value of the
shares and
how the interest was calculated;
|
|
·
|
information
regarding your right to challenge the estimated fair value;
and
|
|
·
|
a
copy of Nevada’s dissenters’ rights
statute.
|
WaveRider
may elect to withhold payment from you if you became the beneficial owner
of the
shares on or after the date set forth in the dissenter’s notice. If WaveRider
withholds payment, after the consummation of the merger, WaveRider will
estimate
the fair value of the shares, plus accrued interest, and offer to pay this
amount to you in full satisfaction of your demand. The offer will contain
a
statement of WaveRider’s estimate of the fair value, an explanation of how the
interest was calculated, and a statement of dissenters’ rights to demand payment
under NRS Section 92A.480.
If
you
believe that the amount WaveRider pays in exchange for your dissenting
shares is
less than the fair value of your shares or that the interest is not correctly
determined, you can demand payment of the difference between your estimate
and
WaveRider’s. You must make such demand within 30 days after WaveRider has made
or offered payment; otherwise, your right to challenge calculation of fair
value
terminates. If there is still disagreement about the fair market value
within 60
days after WaveRider receives your demand, WaveRider will petition the
District
Court of Reno, Nevada to determine the fair value of the shares and the
accrued
interest. If WaveRider does not commence such legal action within the 60-day
period, WaveRider will have to pay the amount demanded for all unsettled
demands. All dissenters whose demands remain unsettled will be made parties
to
the proceeding, and are entitled to a judgment for either:
|
·
|
the
amount of the fair value of the shares, plus interest, in excess
of the
amount WaveRider paid; or
|
|
·
|
the
fair value, plus accrued interest, of the after-acquired shares
for which
WaveRider withheld payment.
|
WaveRider
will pay the costs and expenses of the court proceeding, unless the court
finds
the dissenters acted arbitrarily, vexatiously or in bad faith, in which
case the
costs will be equitably distributed. Attorney fees will be divided as the
court
considers equitable.
-44-
FAILURE
TO FOLLOW THE STEPS REQUIRED BY NRS SECTIONS 92A.400 THROUGH 92A.480 FOR
PERFECTING DISSENTERS’ RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. IF
DISSENTERS’ RIGHTS ARE NOT PERFECTED, YOU WILL BE ENTITLED TO RECEIVE THE
CONSIDERATION RECEIVABLE WITH RESPECT TO SUCH SHARES IN ACCORDANCE WITH
THE
MERGER AGREEMENT. IN VIEW OF THE COMPLEXITY OF THE PROVISIONS OF 13 NEVADA’S
DISSENTERS’ RIGHTS STATUTE, IF YOU ARE CONSIDERING OBJECTING TO THE MERGER YOU
SHOULD CONSULT YOUR OWN LEGAL ADVISOR.
THE
MERGER AGREEMENT
The
following summary describes the material provisions of the merger agreement.
The
provisions of the merger agreement are complicated and not easily summarized.
This summary may not contain all of the information about the merger agreement
that is important to you. The merger agreement is attached to this proxy
statement/prospectus as Annex A and is incorporated by reference into this
proxy
statement/prospectus, and we encourage you to read it carefully in its
entirety
for a more complete understanding of the merger agreement.
Structure
of the Merger
The
merger agreement provides for the merger of Wave Acquisition Corporation,
a
newly formed, wholly-owned subsidiary of Wave Wireless, with and into WaveRider
with WaveRider surviving the merger as a wholly-owned subsidiary of Wave
Wireless.
Completion
and Effectiveness of the Merger
We
will
complete the merger when all of the conditions to completion of the merger
contained in the merger agreement described in the section entitled “—Conditions
to Completion of the Merger” on page 54 of this proxy statement/prospectus
are satisfied or waived, including approval and adoption of the merger
agreement
and approval of the merger by the stockholders of WaveRider. The merger
will
become effective upon the filing of a certificate of merger with the
Secretary
of State of the State of Nevada.
We
are
working to complete the merger as quickly as possible. We currently plan
to
complete the merger in the first quarter of 2006. However, because completion
of
the merger is subject to various conditions, we cannot predict the exact
timing
of the merger or whether the merger will occur at all.
Conversion
of WaveRider Common Stock in the Merger
As
of the
date of this proxy/statement prospectus, it is expected that each share
of
WaveRider common stock issued and outstanding immediately before the effective
time of the merger, other than shares owned by Wave Wireless, Wave Acquisition
Corporation or any other direct or indirect subsidiary of Wave Wireless
or
shares that are owned by WaveRider or its direct or indirect subsidiaries,
will
automatically be converted into the right to receive approximately 1.3
shares of
Wave Wireless common stock (subject to adjustment as described below).
Due to
the adjustments described below, the precise number of shares of Wave Wireless
common stock that will be issued in the merger for each outstanding share
of
WaveRider common stock (which is referred to in this proxy statement/prospectus
as the “exchange ratio”) will not be known until immediately prior to the
completion of the merger. Wave Wireless will not issue any fractional shares.
Instead, WaveRider stockholders that would otherwise be entitled to receive
a
fractional share will receive a cash payment in accordance with the terms
of the
merger agreement, as described below in “— Fractional Shares.”
Wave
Wireless and WaveRider intend that, upon completion of the merger, the
former
stockholders and holders of options, warrants and other convertible securities
of WaveRider, as a group, will hold or be entitled to receive approximately
50%
of the total outstanding shares of Wave Wireless common stock, assuming
the
cashless exercise of all in-the-money options and warrants and the conversion
of
certain other convertible securities of both Wave Wireless and WaveRider.
If all
in-the-money options and warrants had been exercised on a cashless basis
and
certain other convertible securities of both Wave Wireless and WaveRider
had
been converted on January 3, 2006, the date of the merger agreement, Wave
Wireless would have had 63,030,914 shares of common stock outstanding and
WaveRider would have had 51,754,498 shares of common stock outstanding
on that
date. Based on these numbers, if the merger had been completed on that
same
date, the exchange ratio would have been 1.2179, as indicated in the merger
agreement. However, in order to account for any changes that may occur
to the
capital structure of Wave Wireless or WaveRider between the date of the
merger
agreement and the effective time of the merger, the merger agreement provides
that the exchange ratio will be adjusted immediately prior to the completion
of
the merger so that the stockholders and holders of options, warrants and
other
convertible securities of WaveRider will receive or become entitled to
receive
50% of the total outstanding shares of Wave Wireless common stock immediately
following the merger (assuming the cashless exercise of all in-the-money
options
and warrants and the conversion of certain other convertible securities
of Wave
Wireless).
-45-
After
adjusting the exchange ratio as described above, the exchange ratio will
be
further adjusted immediately prior to completion of the merger to account
for
any deficiency or surplus in the required net working capital of Wave Wireless
and WaveRider. The merger agreement requires that Wave Wireless and WaveRider
must each have at least $1 million in net working capital as of December
31,
2005. If the actual net working capital of Wave Wireless or WaveRider on
December 31, 2005 is more or less than $1 million, a corresponding adjustment
will be made to the exchange ratio. The effect of this adjustment may cause
the
stockholders and holders of options, warrants and other convertible securities
of WaveRider, as a group, to receive more or less than 50% of the total
outstanding shares of Wave Wireless common stock immediately after the
merger
(assuming the exercise of all in-the-money options and warrants and the
conversion of all other convertible securities of Wave Wireless).
Wave
Wireless and WaveRider anticipate that, after making all of the adjustments
provided for in the merger agreement, the exchange ratio immediately prior
to
the Closing will be approximately 1.3.
Conversion
of WaveRider Convertible Debentures and Convertible Preferred
Stock
As
of
December 31, 2005, Crescent International Ltd. (“Crescent”), held convertible
debentures issued by WaveRider with a total outstanding principal amount
of
approximately $1.5 million. WaveRider has issued to Crescent 350 shares of
WaveRider’s Series D Convertible Preferred Stock with an aggregate face value of
$350,000 as consideration for Crescent’s agreement to: (i) not convert most of
its convertible debentures into shares of WaveRider common stock prior
to the
merger, (ii) vote in favor of the merger, and (iii) exchange the convertible
debentures and preferred shares for Wave Wireless’ equity securities in the
merger. In the merger, all outstanding shares of WaveRider’s Series D
Convertible Preferred Stock issued to Crescent and all of WaveRider’s
outstanding convertible debentures will be converted, in the aggregate,
into the
following securities of Wave Wireless:
|
·
|
a
number of shares of Wave Wireless’ Series H Convertible Preferred Stock
with an aggregate face value of approximately $1.3 million and
a
conversion price of approximately $0.15 per share (which means
that these
shares will be convertible into approximately 8.8 million shares
of Wave
Wireless common stock);
|
|
·
|
a
number of shares of Wave Wireless Series I Convertible Preferred
Stock
with an aggregate face value of approximately $133,000 and a
conversion
price of approximately $0.01 per share (which means these shares
will be
convertible into approximately 13.3 million shares of Wave Wireless
common
stock); and
|
|
·
|
and
warrants to purchase approximately 8.8 million shares of Wave
Wireless
common stock at an exercise price of $0.20 per
share.
|
Under
the
terms of the Series H Convertible Preferred Stock, Series I Convertible
Preferred Stock and warrants issued to Crescent in the merger, the holder
of
these securities may not convert or exercise them into shares of Wave Wireless
common stock, and Wave Wireless may not issue shares of its common stock
to any
of these holders, if the conversion or exercise would cause the holder
or any of
its affiliates, individually or in the aggregate, to beneficially own more
than
4.99% of Wave Wireless’ outstanding common stock.
WaveRider
has also issued 450 shares of Series D Convertible Preferred Stock
to Wave
Wireless in exchange for the cancellation of certain promissory notes
in the
aggregate principal amount of $450,000 previously issued by WaveRider
to Wave
Wireless. In the merger, all shares of Series D Convertible Preferred
Stock held
by Wave Wireless will be automatically cancelled and no securities
of Wave
Wireless will be issued in exchange for those shares.
-46-
Fractional
Shares
Wave
Wireless will not issue any fractional shares of common stock in connection
with
the merger. Instead, each holder of WaveRider common stock exchanged in
connection with the merger who would otherwise be entitled to receive a
fraction
of a share of common stock of Wave Wireless will receive cash, without
interest,
in an amount equal to the fraction multiplied by the average closing sale
price
of one share of Wave Wireless common stock for the ten most recent trading
days
that Wave Wireless common stock has traded ending on the trading day one
day
prior to the date the merger is completed, as reported on the OTC Bulletin
Board.
Exchange
Procedures
Promptly
following completion of the merger, Wave Wireless will cause its transfer
agent,
the exchange agent for the merger, to mail to each record holder of WaveRider
common stock a letter of transmittal and instructions for surrendering
the
record holder’s stock certificates in exchange for a certificate representing
Wave Wireless common stock and the cash portion of the merger consideration.
Those holders of WaveRider common stock who properly surrender their WaveRider
stock certificates in accordance with the exchange agent’s instructions will
receive (1) the number of whole shares of Wave Wireless common stock that
the
holder is entitled to receive pursuant to the merger agreement, (2) cash
in lieu
of any fractional share of Wave Wireless common stock, and (3) any dividends
or
other distributions, if any, to which they are entitled under the terms
of the
merger agreement. The surrendered certificates representing WaveRider common
stock will be canceled. After the effective time of the merger, each certificate
representing shares of WaveRider common stock that has not been surrendered
will
represent only the right to receive each of items (1) through (3) enumerated
in
this paragraph. Following the completion of the merger, WaveRider will
not
register any transfers of WaveRider common stock on its stock transfer
books.
Holders
of WaveRider common stock should not send in their WaveRider stock certificates
until they receive a letter of transmittal from the exchange agent for
the
merger, with instructions for the surrender of WaveRider stock
certificates.
Distributions
with Respect to Unexchanged Shares
Holders
of WaveRider common stock are not entitled to receive any dividends or
other
distributions on Wave Wireless common stock until the merger is completed.
After
the merger is completed, holders of WaveRider common stock will be entitled
to
dividends and other distributions declared or made after completion of
the
merger with respect to the number of whole shares of Wave Wireless common
stock
which they are entitled to receive upon exchange of their WaveRider stock
certificates, but they will not be paid any dividends or other distributions
on
the Wave Wireless common stock until they surrender their WaveRider stock
certificates to the exchange agent in accordance with the exchange agent
instructions.
Representations
and Warranties
WaveRider
made a number of representations and warranties to Wave Wireless in the
merger
agreement regarding aspects of its business, financial condition and structure,
as well as other facts pertinent to the merger, including representations
and
warranties relating to the following subject matters:
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corporate
organization, qualification to do business, good standing and
corporate
power of WaveRider and its
subsidiaries;
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WaveRider’s
capital structure and the absence of restrictions or encumbrances
with
respect to the capital stock of WaveRider or any
subsidiary;
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corporate
authorization to enter into the merger agreement and consummate
the
transactions under the merger agreement, and the enforceability
of the
merger agreement;
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-47-
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absence
of any conflict with or violation of the charter and bylaws of
WaveRider
and equivalent organizational documents of its subsidiaries,
or any
applicable legal requirements resulting from the execution of
the merger
agreement or the completion of the
merger;
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governmental
and regulatory approvals required to complete the
merger;
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filings
and reports with the Securities and Exchange
Commission;
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financial
statements;
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|
the
absence of certain changes and events, including any material
adverse
effect on WaveRider, since September 30,
2005;
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the
absence of certain undisclosed
liabilities;
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litigation;
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good
and valid title to or valid leasehold interests in all material
tangible
properties and assets used in its
business;
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intellectual
property rights;
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real
property rights;
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compliance
with applicable legal requirements;
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possession
of and compliance with all permits required for the operation
of
business;
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agreements,
contracts and commitments;
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taxes;
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|
employee
benefit plans and labor relations;
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personnel;
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environmental
matters;
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accuracy
of information supplied in this proxy statement/prospectus and
the related
registration statement filed by Wave Wireless with the Securities
and
Exchange Commission;
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the
absence of any unlawful payments made to certain
parties;
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transactions
between WaveRider and its
affiliates;
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insurance;
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the
accuracy and completeness of all minutes books of WaveRider and
its
subsidiaries;
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the
vote of stockholders required to complete the merger;
and
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payment,
if any, required to be made to brokers and finders on account
of the
merger.
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-48-
Wave
Wireless made a number of representations and warranties to WaveRider in
the
merger agreement, including representations and warranties relating to
the
following subject matters:
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corporate
organization, qualification to do business, good standing and
corporate
power of Wave Wireless and its
subsidiaries;
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|
Wave
Wireless’ capital structure and the absence of restrictions or
encumbrances with respect to the capital stock of WaveRider or
any
subsidiary;
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|
corporate
authorization to enter into the merger agreement and consummate
the
transactions under the merger agreement, and the enforceability
of the
merger agreement;
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|
absence
of any conflict with or violation of the charter and bylaws of
Wave
Wireless and equivalent organizational documents of its subsidiaries,
or
any applicable legal requirements resulting from the execution
of the
merger agreement or the completion of the
merger;
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governmental
and regulatory approvals required to complete the
merger;
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|
filings
and reports with the Securities and Exchange
Commission;
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|
financial
statements;
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|
the
absence of certain changes and events, including any material
adverse
effect on Wave Wireless, since September 30,
2005;
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|
the
absence of certain undisclosed
liabilities;
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|
litigation;
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|
good
and valid title to or valid leasehold interests in all material
tangible
properties and assets used in its
business;
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intellectual
property rights;
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|
real
property rights;
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compliance
with applicable legal requirements;
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|
possession
of and compliance with all permits required for the operation
of
business;
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|
agreements,
contracts and commitments;
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|
taxes;
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|
employee
benefit plans and labor relations;
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|
personnel;
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|
environmental
matters;
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accuracy
of information supplied in this proxy statement/prospectus and
the related
registration statement filed by Wave Wireless with the Securities
and
Exchange Commission;
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|
the
absence of any unlawful payments made to certain
parties;
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-49-
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transactions
between Wave Wireless and its
affiliates;
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insurance;
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the
accuracy and completeness of all minutes books of Wave Wireless
and its
subsidiaries; and
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payment,
if any, required to be made to brokers and finders on account
of the
merger.
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The
representations and warranties contained in the merger agreement are complicated
and not easily summarized. You are urged to read carefully Articles II
and III
of the merger agreement attached as Annex A entitled “Representations and
Warranties of the Company” and “Representations and Warranties of
Parent.”
Conduct
of Business Before Completion of the Merger
Under
the
merger agreement, Wave Wireless and WaveRider have each agreed that, until
the
earlier of the completion of the merger or termination of the merger agreement,
or unless the other consents in writing, it will use all reasonable efforts
to
carry on its business, in all material respects, in the usual, regular
and
ordinary course, in substantially the same manner as previously conducted,
and
will use all reasonable efforts to preserve intact its present business
organization and continue to manage in the ordinary course its business
relationships with third parties.
Under
the
merger agreement, Wave Wireless and WaveRider have each also agreed that,
until
the earlier of the completion of the merger or termination of the merger
agreement, or unless the other party consents in writing, it will conduct
its
business in compliance with a number of specific restrictions and will
not (and
not permit its subsidiaries to), subject to specified exceptions:
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waive
any stock repurchase rights, accelerate vesting or exercisability
of
options or restricted stock, reprice options or authorize cash
payments in
exchange for options under any equity
plans;
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enter
into any material partnership arrangements, joint development
agreements
or strategic alliances;
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grant
any severance or termination pay to any officer or employee in
excess of
$15,000 individually and $150,000 in the
aggregate;
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adopt
any new severance retention or amend, alter or modify any existing
severance plan or agreement;
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enter
into any agreement which transfers or licenses or otherwise extends,
amends or modifies in any material respect any rights to intellectual
property, other than non-exclusive licenses in the ordinary course
of
business consistent with past
practice;
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declare
or pay dividends or make any other distributions in respect of
any capital
stock, or effect any stock splits, combinations or reclassifications
or
authorize the issuance of any other securities in respect of
capital
stock;
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purchase,
redeem or otherwise acquire any shares of capital stock except
repurchases
of unvested shares at cost pursuant to stock option or purchase
agreements
in connection with the termination of
employees;
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issue,
deliver, sell, authorize or encumber any shares of capital stock
or any
securities convertible into, or rights, warrants or options to
acquire,
shares of capital stock, other than shares pursuant to exercise
of
outstanding stock options or warrants or issuable in accordance
with
WaveRider’s employee stock purchase
plan;
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-50-
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authorize
or propose any amendments to its charter or bylaws (or similar
governing
instruments of its subsidiaries);
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acquire
or agree to acquire any business or any corporation, partnership
or other
business organization or otherwise acquire or agree to acquire
any assets
that are significant, individually or in the aggregate, to its
business,
except in the ordinary course of business consistent with past
practice;
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sell,
transfer, lease, license, encumber or otherwise dispose of any
properties
or assets that are material, individually or in the aggregate,
to its
business except in the ordinary course consistent with past
practice;
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incur
any indebtedness, issue or sell any debt securities or options,
warrants
or other rights to acquire debt securities, enter into any “keep well” or
other agreement to maintain any financial statement condition,
or incur or
modify any other material liability, other than (i) in connection
with the
financing of ordinary course trade payables consistent with past
practice,
and (ii) pursuant to existing credit facilities in the ordinary
course of
business;
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adopt
or amend any employee benefit, stock purchase or stock option
plan;
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make
payments outside of the ordinary course of business in excess
of $75,000
in the aggregate;
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amend
or terminate any material contract or agreement to which it or
a
subsidiary is a party, or waive, delay the exercise of, release
or assign
any material rights or claims under such contracts or agreements,
except
in the ordinary course of business consistent with past
practice;
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except
as required by GAAP, revalue any assets or make any change in
accounting
methods, principles or practices;
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incur
or enter into any agreement or commitment in excess of $100,000
individually;
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hire
any employee or consultant with an annual compensation level
in excess of
$75,000;
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pay,
discharge or satisfy any claim, liability or obligation, other
than the
payment, discharge or satisfaction of amounts in the ordinary
course of
business; or
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agree
in writing or otherwise to take any of the foregoing
actions.
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Wave
Wireless and WaveRider Prohibited from Soliciting Other
Offers
No
Solicitation of Acquisition Proposals
Wave
Wireless and WaveRider have agreed, subject to the limitations described
below,
that they will not nor will they permit or authorize any of their subsidiaries
or any of their or their subsidiaries’ respective officers, directors or
employees or other representatives to:
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solicit,
initiate, knowingly encourage, knowingly facilitate or knowingly
induce
any inquiry with respect to, or the making, submission or announcement
of,
any acquisition proposal;
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participate
in any negotiations regarding, or furnish to any person any nonpublic
information with respect to, or knowingly take any other action
to
facilitate any inquiries or the making of any proposal that constitutes
or
may reasonably be expected to lead to, any acquisition
proposal;
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-51-
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|
engage
in discussions with any person with respect to any acquisition
proposal,
except as to the existence of the terms of the merger agreement
regarding
acquisition proposals;
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approve,
endorse or recommend any acquisition proposal;
or
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enter
into any letter of intent or similar document or any contract,
agreement
or commitment contemplating or otherwise relating to any acquisition
proposal.
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Both
parties further agree that they and their subsidiaries and their respective
representatives, including non-officer employees and other agents will
immediately cease any and all existing activities, discussions or negotiations
with any third parties with respect to any acquisition proposal with respect
to
themselves, and will promptly request each person who has entered into
a
confidentiality agreement in connection with their consideration of an
acquisition proposal to return all confidential information furnished by
the
party.
An
acquisition proposal is any offer or proposal relating to any transaction
or
series of related transactions (other than the merger) involving:
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any
purchase from Wave Wireless or WaveRider, as the case may be,
or any
acquisition by any person or group of more than a 15% interest
in the
total outstanding voting securities of Wave Wireless or WaveRider,
as the
case may be;
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any
merger, consolidation, business combination or similar transaction
involving Wave Wireless or WaveRider, as the case may be, or
any of its
subsidiaries;
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any
purchase from Wave Wireless or WaveRider, as the case may be,
of more than
a 15% interest in the total outstanding voting securities of
Wave Wireless
or WaveRider or the granting or issuance of rights to acquire
more than a
15% interest in the total outstanding voting securities of Wave
Wireless
or WaveRider; or
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any
sale, lease outside the ordinary course of business, transfer,
distribution, acquisition or disposition of more than 15% of
the assets of
Wave Wireless or WaveRider (including its subsidiaries taken
as a
whole).
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Notification
of Unsolicited Acquisition Proposals
Wave
Wireless and WaveRider are obligated to promptly notify the other party
in
writing upon receipt of any type of acquisition proposal described above
or any
request for nonpublic information or inquiry it reasonably believes would
lead
to an acquisition proposal. The notice must include the material terms
and
conditions of the acquisition proposal, request or inquiry, the identity
of the
person or group making the acquisition proposal, request or inquiry and
a copy
of all written materials provided in connection with the acquisition proposal,
request or inquiry. The recipient of an acquisition proposal must also
keep the
other party informed as promptly as practicable in all material respects
of the
status and details of the acquisition proposal, request or inquiry. Wave
Wireless and WaveRider further agreed to generally provide the other party
with
48 hours’ notice (or such lesser prior notice as is provided to the members of
its board of directors) of any meeting of its board of directors at which
its
board of directors is reasonably expected to consider any acquisition
proposal.
Superior
Offers
If
WaveRider receives an acquisition proposal that its board determines in
good
faith constitutes or is reasonably likely to lead to a superior offer,
it may,
at any time prior to obtaining WaveRider stockholder approval for the merger,
take the following actions, but only if WaveRider has not otherwise breached
its
obligations with respect to any acquisition proposal, and its board of
directors
believes in good faith that the failure to take such action is reasonably
likely
to result in a breach of its fiduciary duties:
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furnish
nonpublic information to the third party making the acquisition
proposal,
provided that (i) at least one business day prior to furnishing
any
nonpublic information, WaveRider gives Wave Wireless written
notice of its
intent to furnish the nonpublic information, (ii) WaveRider receives
from
the third party an executed confidentiality agreement, with terms
that are
at least as restrictive as the terms contained in any confidentiality
agreement between Wave Wireless and WaveRider, and (iii) WaveRider
furnishes the same nonpublic information to Wave Wireless;
and
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engage
in discussions or negotiations with the third party with respect
to the
superior offer, after giving Wave Wireless at least 48 hours
prior written
notice of its intent to do so.
|
A
superior offer is any an unsolicited, bona fide written acquisition proposal
made by a third party after the date of the merger agreement on terms that
the
WaveRider board of directors believes in good faith (i) is reasonably capable
of
being completed on the terms proposed and (ii) if completed would result
in a
transaction more favorable, from a financial point of view, to WaveRider’s
stockholders than the terms of the merger.
Change
of Recommendation
In
response to a superior offer, the WaveRider board of directors may withdraw,
amend or modify its recommendation to WaveRider’s stockholders that they approve
and adopt the merger agreement and approve the merger and, in the case
of a
superior offer that is a tender or exchange offer made directly to WaveRider
stockholders, the WaveRider board of directors may recommend that its
stockholders accept the tender or exchange offer, if certain conditions
are
satisfied.
Treatment
of WaveRider Stock Options and Warrants
When
the
merger is completed, Wave Wireless will assume all outstanding options
to
purchase shares of WaveRider common stock. Under the terms of the merger
agreement, these options will be converted into options to purchase shares
of
Wave Wireless common stock. Each assumed WaveRider option will be converted
into
an option to purchase that number of shares of Wave Wireless common stock
equal
to the number of shares of WaveRider common stock purchasable pursuant
to the
WaveRider option immediately prior to the effective time of the merger,
multiplied by the exchange ratio, rounded down to the nearest whole number
of
shares of Wave Wireless common stock. The exercise price per share will
be equal
to the exercise price per share of WaveRider common stock divided by the
exchange ratio, rounded up to the nearest whole cent.
Each
assumed option will be subject to all other terms and conditions set
forth in
the applicable documents evidencing each WaveRider option immediately
prior to
the effective time of the merger, including any repurchase rights or
vesting
provisions. As of the record date, options to purchase
approximately 1,485,912 shares of WaveRider common stock were outstanding
in the aggregate under various WaveRider stock option plans.
The
conversion of options that are intended to be “incentive stock options,” as
defined in Section 422 of the Code will be effected in a manner consistent
with
the applicable provisions of the Code for purposes of preserving incentive
stock
option treatment where appropriate.
Wave
Wireless will file a registration statement on Form S-8 with the Securities
and
Exchange Commission, to the extent available and applicable, for the shares
of
Wave Wireless common stock issuable with respect to WaveRider options assumed
by
Wave Wireless in connection with the merger as soon as practicable after
the
merger.
Treatment
of Rights under the WaveRider Employee Stock Purchase Plan
WaveRider’s
employee stock purchase plan permits eligible WaveRider employees to purchase
WaveRider common stock at a discount pursuant to such employees’ participation
in the WaveRider employee stock purchase plan. Prior to the effective time
of
the merger, the WaveRider employee stock purchase plan will be terminated.
-53-
Directors
and Officers Indemnification and Insurance
Wave
Wireless has agreed to cause the company surviving the merger to honor
all of
the indemnification obligations of WaveRider to its directors and officers
that
exist immediately prior to completion of the merger pursuant to WaveRider’s
articles of incorporation and bylaws. For five years after the completion
of the
merger, the articles of incorporation and bylaws of the company surviving
the
merger will contain provisions regarding indemnification that are at least
as
favorable to the directors and officers of WaveRider immediately prior
to
completion of the merger as the indemnification provisions that are contained
in
the articles of incorporation and bylaws of WaveRider at the time the merger
agreement was executed.
For
a
period of three years after the completion of the merger, Wave Wireless
has also
agreed to cause the company surviving the merger to use all reasonable
efforts
to maintain directors’ and officers’ liability insurance covering those
directors and officers of WaveRider who are currently covered by WaveRider’s
directors’ and officers’ liability insurance on terms comparable to those
applicable to the current directors and officers. However, the company
surviving
the merger will not be required to pay, in total, an annual premium for
the
insurance described in this paragraph in excess of $50,000.
Conditions
to Completion of the Merger
The
respective obligations of Wave Wireless and Wave Acquisition Corporation,
on the
one hand, and WaveRider, on the other, to complete the merger and the other
transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of each of the following conditions before completion
of
the merger:
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the
merger agreement has been adopted and approved and the merger
has been
approved by the vote of the holders of the requisite number of
shares of
WaveRider common stock;
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no
statute, rule, regulation or order has been adopted or promulgated
and no
temporary restraining order, preliminary or permanent injunction
or other
order, judgment, decision, opinion or decree has been issued
by a court or
other governmental entity authority that has the effect of making
the
merger illegal or otherwise prohibiting or unduly delaying consummation
of
the merger; and
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|
the
Securities and Exchange Commission has declared Wave Wireless’
registration statement effective, no stop order suspending its
effectiveness has been issued and no proceedings for suspension
of the
registration statement’s effectiveness, or a similar proceeding in respect
of this proxy statement/prospectus, has been initiated or threatened
in
writing by the Securities and Exchange
Commission.
|
In
addition, individually, the respective obligations of Wave Wireless and
Wave
Acquisition Corporation on the one hand, and WaveRider on the other, to
effect
the merger and the other transactions contemplated by the merger agreement
are
subject to the satisfaction or waiver of the following additional
conditions:
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the
representations and warranties of the other party are true and
correct as
of the date the merger is to be
completed;
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the
other party will have performed or complied in all material respects
with
all of its agreements and covenants required by the merger agreement
to be
performed or complied with by it before completion of the
merger;
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since
the date of the merger agreement, there has not been any state
of facts,
events, changes, effects, developments, conditions or occurrences
that,
individually or in the aggregate, have had or would reasonably
be expected
to have a material adverse effect on the other
party;
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all
waivers, licenses, agreements, permits, consents, approvals and
authorizations of third parties and governmental entities and
any
modifications or amendments to existing agreements with third
parties
required to be obtained by the other party in order to consummate
the
merger have been obtained and are in full force and effect and
without
conditions or limitations that unreasonably restrict the ability
to
consummate the merger;
|
-54-
Termination
of the Merger Agreement
The
merger agreement may be terminated in accordance with its terms at any
time
prior to completion of the merger, whether before or after the approval
and
adoption of the merger agreement and approval of the merger by WaveRider
stockholders:
|
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by
mutual written consent duly authorized by the boards of directors
of Wave
Wireless and WaveRider;
|
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|
by
Wave Wireless or WaveRider if the merger is not completed by
April 30,
2006, except that this right to terminate the merger agreement
is not
available to any party whose action or failure to act has been
a principal
cause of or resulted in the failure of the merger to occur on
or before
that date (the date determined by this paragraph being referred
to as the
“termination date”);
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|
by
Wave Wireless or WaveRider, if there is any order of a court
or other
action or inaction of any governmental entity having the effect
of
permanently restraining, enjoining or otherwise prohibiting the
completion
of the merger which is final and
non-appealable;
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|
by
Wave Wireless or WaveRider if the merger agreement and the merger
fails to
receive the requisite affirmative vote for adoption and approval
at a
meeting of WaveRider stockholders or at any adjournment of that
meeting;
|
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|
by
Wave Wireless, if any of the following triggering events
occur:
|
|
·
|
WaveRider
breaches or fails to perform in any material way its representations,
warranties and agreements made in the merger agreement, and the
breach is
not, or cannot be, cured within 30 days of notice of the breach
or the
termination date, whichever is
earlier;
|
|
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|
WaveRider’s
board of directors fails to authorize, approve or recommend the
merger;
or
|
|
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|
WaveRider’s
board of directors withdraws, amends or modifies, in a manner
adverse to
Wave Wireless, its recommendation in favor of the adoption and
approval of
the merger agreement and approval of the
merger.
|
|
·
|
by
WaveRider, if any of the following triggering events
occur:
|
|
·
|
Wave
Wireless breaches or fails to perform in any material way its
representations, warranties and agreements made in the merger
agreement,
and the breach is not, or cannot be, cured within 30 days of
notice of the
breach or the termination date, whichever is
earlier;
|
|
·
|
WaveRider’s
board of directors withdraws, amends or modifies, in a manner
adverse to
Wave Wireless, its recommendation in favor of the adoption and
approval of
the merger agreement and approval of the
merger.
|
Payment
of Termination Fee
Under
the
terms of the merger agreement, Wave Wireless and WaveRider have each
agreed to
pay to the other party a termination fee of $300,000 if the merger agreement
is
terminated by either party due to its receipt of a superior offer, which
is
described in the section entitled “—Wave Wireless and WaveRider Prohibited from
Soliciting Other Offers” on page 51 of this proxy statement/prospectus. If
the merger agreement is terminated by either Wave Wireless or WaveRider
for any
other reason, the terminating party is required to pay to the non-terminating
party an amount equal to 110% of the non-terminating party’s actual
out-of-pocket costs and expenses incurred in connection with the proposed
merger, up to a maximum of $250,000.
-55-
Extension,
Waiver and Amendment of the Merger Agreement
Wave
Wireless and WaveRider may amend the merger agreement before completion
of the
merger by mutual written consent.
Either
Wave Wireless or WaveRider may extend the other’s time for the performance of
any of the obligations or other acts under the merger agreement, waive
any
inaccuracies in the other’s representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the
merger
agreement.
UNAUDITED
PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
The
unaudited pro forma condensed consolidated financial statements for Wave
Wireless, on pages F-A1 to F-A4 of this proxy statement/prospectus, have
been
prepared to illustrate the acquisition of WaveRider in a transaction to
be
accounted for as a purchase in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 141, “Business Combinations,” with Wave Wireless treated
as the acquiror. The unaudited pro forma condensed consolidated balance
sheet on
page F-A1 combines the historical audited consolidated balance sheets of
Wave
Wireless and WaveRider as of September 30, 2005, prepared in accordance
with
accounting principles generally accepted in the United States of America
(“GAAP”), giving effect to the merger as if it occurred on September 30, 2005.
The unaudited pro forma condensed consolidated statements of operations
on page
F-A2 and F-A3 combine the historical consolidated statement of operations
of
Wave Wireless and WaveRider for the nine-months ended September 30, 2005
and the
year ended December 31, 2004, respectively, prepared in accordance with
GAAP,
giving effect to the merger as if it occurred as of the beginning of the
period
presented, reflecting only pro forma adjustments expected to have a continuing
impact on the combined results.
These
unaudited pro forma condensed consolidated financial statements are for
informational purposes only. They do not purport to present the results
that
would have actually occurred had the merger been completed on the assumed
dates
or for the periods presented, or which may be realized in the future. To
produce
the pro forma financial information, Wave Wireless allocated the purchase
price
of WaveRider using its best estimates of fair value. These estimates are
based
on the most recently available information. To the extent there are significant
changes to WaveRider’s business, the assumptions and estimates herein could
change significantly. Accordingly, the purchase accounting adjustments
reflected
in the unaudited pro forma condensed consolidated financial statements
included
herein are preliminary and subject to change. The pro forma financial
information does not reflect any potential operating efficiencies. The
unaudited
pro forma condensed consolidated financial statements should be read in
conjunction with “Wave Wireless Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” “WaveRider Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the historical consolidated financial statements, including the related
notes,
of Wave Wireless and WaveRider covering these periods, included in this
proxy
statement/prospectus.
WAVE
WIRELESS MANAGEMENT AFTER THE MERGER
Directors
and Officers
Wave
Wireless’ board of directors is authorized to have seven directors. Upon
completion of the merger, the executive officers and directors of Wave
Wireless,
their ages as of Dec 31, 2005, their positions and their backgrounds will
be as
follows:
-56-
|
Name
|
Age
|
Position
|
||
|
Charles
W. Brown
|
50
|
Chief
Executive Officer and Director
|
||
|
T.
Scott Worthington
|
51
|
Chief
Financial Officer
|
||
|
Don
Meiners
|
44
|
President
|
||
|
Carlos
Belfiore
|
61
|
Vice
President – Engineering and Chief Technical
Officer
|
||
|
James
D. Bletas
|
60
|
Vice
President – Sales and Marketing
|
||
|
Frederick
R. Fromm
|
56
|
Director
|
||
|
Daniel
W. Rumsey
|
44
|
Director
|
||
|
Richard
Reiss
|
48
|
Director
|
||
|
Michael
Chevalier
|
63
|
Director
|
||
|
Michael
Milligan
|
48
|
Director
|
||
|
D.
Bruce Sinclair
|
54
|
Director
|
Upon
completing the merger, George P. Roberts and R. Craig Roos, each a current
director of Wave Wireless will resign from the board of directors, and
Charles
W. Brown, the current Chief Executive Officer and a current director of
WaveRider, and Michael Chevalier, Michael Milligan and D. Bruce Sinclair,
each a
current director of WaveRider, will join the combined company’s board of
directors. In addition, upon completing the merger, Daniel W. Rumsey will
resign
from his position as an executive officer of Wave Wireless, and Charles
W. Brown
and T. Scott Worthington, the current Chief Financial Officer of WaveRider,
will
become the Chief Executive Officer and Chief Financial Officer, respectively,
of
the combined company.
Background
Charles
W. Brown.
Mr.
Brown, age 50, has been WaveRider’s chief executive officer since March 2005.
Prior to his promotion to chief executive officer, Mr. Brown was WaveRider’s
executive vice president of the Company since October 15, 2002. From February
1998 to October 2002, he served as WaveRider’s vice president of marketing. From
1994 until February 1998, Mr. Brown was Clearnet Communications’ first vice
president and CIO. From 1993 to 1994, he served as vice president of, sales
and
marketing for Trillium Communications and, from 1990 to 1993, he served
as
director of, strategic planning and marketing for BCE Mobile. Mr. Brown
has a
Masters in Business Administration from the University of Western
Ontario.
T.
Scott Worthington.
Mr.
Worthington, age 51, has been WaveRider’s vice president and the Company’s chief
financial officer since January 1998. Mr. Worthington has over 25 years
of
senior financial and executive management, including 9 years at Dell Computer
Corporation, in Canada, where he held numerous positions including chief
financial officer of the Canadian subsidiary. Mr. Worthington has a Bachelor
of
Business Administration from York University and is a Chartered
Accountant.
Don
Meiners.
Mr.
Meiners, age 44, was appointed President on March 10, 2005. Prior to his
appointment, he served as Wave Wireless’ Vice President - Operations, and has
held a variety of management roles since he joined Wave Wireless in 1992.
These
include Vice President of Operations, Vice President Engineering, Vice
President
Manufacturing and Vice President of Engineering Program Management. Prior
to
joining Wave Wireless, Mr. Meiners served in design engineering roles and
project management for Digital Microwave Corporation and Equitorial Inc.
Mr.
Meiners graduated from the Missouri Institute Of Technology in
1983.
Carlos
T. Belfiore.
Mr.
Belfiore, age 61, currently serves as Wave Wireless’ Vice President –
Engineering, and Chief Technical Officer. Prior to joining Wave Wireless
in
November 2003, he was an independent engineering consultant. Prior to that,
Dr.
Belfiore held various management and technical leadership positions at
Stratex
Networks, which he joined in 1988, including Senior Director IDU Development,
Director of New Technology Development, Director of Modem Development,
and
Senior Scientist. Prior to joining Stratex, Dr. Belfiore was with the Microwave
Communication Division of Harris Corporation, serving as Manager of Advanced
Development and Principal Development Engineer. Dr. Belfiore received a
Ph.D. in
electrical engineering from University of Minnesota in 1976.
James
D. Bletas.
Mr.
Bletas, age 60, currently serves as Wave Wireless’ Vice President – Sales
and Marketing. Mr. Bletas has 35 years of experience in the wireless
telecommunications industry focused on sales and marketing. Prior to joining
Wave Wireless, Mr. Bletas founded Wireless Networks International, Inc.,
a
global distributor of networking and wireless communications products and
services. During his four-year tenure as President and CEO, Mr. Bletas
grew the
company’s annual revenue to more than $20 million, and expanded the operations
to geographic areas outside of the U.S., including Latin America, the Middle
East and Asia. Before joining Wireless Networks International, Inc., Mr.
Bletas
was the Vice President of Sales at Wireless Inc., a pioneer in the licensed
exempt market and an original developer of broadband access and subscriber
equipment. He began his sales career in wireless telecommunications equipment
in
the microwave communications division of Harris Corporation, where he last
served as Vice President of Worldwide Sales and Marketing.
-57-
Frederick
R. Fromm.
Mr.
Fromm, age 56, has served as a director of Wave Wireless since June 2001.
Since
February 2004, Mr. Fromm has served as a consultant to several
telecommunications companies. From May 2003 to February 2004, Mr. Fromm
was
President and Chief Executive Officer of Gluon Networks, Inc. a
telecommunications equipment company. From July 2000 to October 2001, he
was
President, and from Nov. 2001 to October 2002 he was also Chief Executive
Officer, of Oplink Communications, Inc., an optical components company.
From
October 1998 to July 2000, he was President and Chief Executive Officer
of
Siemens Information and Communications, Inc, a telecommunications equipment
company. From October 1996 to October 1998, he was President and Chief
Executive
Officer of Siemens Telecom Networks, Inc., a telecommunications equipment
company.
Daniel
W. Rumsey.
Mr.
Rumsey, age 44, was appointed Chief Restructuring Officer on March 10,
2005 and
to the Wave Wireless board of directors on May 13, 2005. Mr. Rumsey’s title was
changed to Acting Chief Executive Officer in July 2005. Prior to his appointment
as Chief Restructuring Officer, since March 2003, Mr. Rumsey served as
Wave
Wireless’ Vice President, Acting Chief Financial Officer and General Counsel.
Prior to joining Wave Wireless, Mr. Rumsey was Vice President and General
Counsel of Knowledge Kids Network, Inc., a multi-media education company.
Knowledge Kids Network is part of the Knowledge Universe family of companies.
Prior to joining Knowledge Kids Network, Mr. Rumsey was the President and
Chief
Executive Officer of Aspen Learning Systems and NextSchool, Inc., which
he
joined in February 1997. Mr. Rumsey sold Aspen Learning Systems and NextSchool
to Knowledge Kids Network in 1999. Mr. Rumsey has an extensive restructuring,
legal and finance background, dating back to 1987 when he served as a staff
attorney in the U.S. Securities and Exchange Commission’s Division of
Corporation Finance. He has also served as Assistant General Counsel for
Terra
Industries, Inc. and Associate General Counsel and Corporate Secretary
of
EchoStar Communications Corporation. Mr. Rumsey also serves as the Chairman
of
the Board of Directors of Prescient Applied Intelligence, and as a director
of
Dirt Motor Sports, Inc. Mr. Rumsey received his J.D. from the University
of
Denver College of Law in 1985, and his B.S. from the University of Denver
in
1983.
Richard
Reiss.
Mr.
Reiss, age 48, has served as director of Wave Wireless since March 2005.
Mr.
Reiss is currently the Chairman of the Board of Directors of Glowpoint,
Inc.,
where he has served since May 2000. He served as the Chief Executive Officer
of
Glowpoint from May 2000 to April 2002, and as President from May 2000 to
April
2002. Mr. Reiss served as Chairman of the Board of Directors, President
and
Chief Executive Officer of All Communications Corporation from its formation
in
1991 until the formation of Glowpoint’s predecessor pursuant to a merger of All
Communications Corporation and View Tech, Inc. in May 2000.
Michael
Chevalier.
Mr.
Chevalier, age 63, has been a director of WaveRider since January 2005.
From
January 2001 to September 2002, he served as VP and General Manager of
Magnetic
Data International, a worldwide leader in cell phone and hard drive warranty
repair. From 1991 to 2001, he was in varying capacities of increasing
responsibilities for Motorola’s Wireless Data Division. He started up the
Canadian operation in Toronto and subsequently led the European Wide Operations
for the same division in the UK and Germany. Mr. Chevalier studied at Mount
Allison University and Sir George Williams University in Mathematics and
Physics.
Michael
Milligan.
Mr.
Milligan, age 48, has been one of WaveRider’s directors since July 2003. Mr.
Milligan is the president and chief executive officer of Kasten Chase,
a
high-assurance data security solutions company. From 1995 until December
2003,
Mr. Milligan served as executive vice president, chief financial officer,
general counsel and secretary of Kasten Chase. Prior to joining Kasten
Chase,
Mr. Milligan was a partner in the law firm of Cunningham, Swan, Carty,
Little
& Bonham in Kingston Ontario. He earned a Bachelor of Commerce degree at
Carleton University and a Bachelor of Laws degree at Queen’s
University.
D.
Bruce Sinclair.
Mr.
Sinclair, age 54, has been a director of WaveRider since December 1997
and its
chief executive officer from November 1997 to March 2005. Since March 2005,
when
Mr. Sinclair stepped down from his position as chief executive officer
for
short-term medical reasons, he has been a consultant to WaveRider, focused
on
financing, mergers and acquisitions and strategic partnerships. From November
1997 to October 2002, he served as WaveRider’s president. Mr. Sinclair is an
experienced management professional who has worked in sales and management
with
companies including IBM Canada, Nortel and Harris Systems Limited. From
1988 to
1995, Mr. Sinclair was with Dell Computer Corporation where he held numerous
positions including President of the Canadian subsidiary, vice-president
of
Europe and head of Dell in Europe. He earned his Masters of Business
Administration from the University of Toronto.
-58-
Board
Committees
The
board
of directors will have an Audit Committee and a Compensation Committee.
At the
first meeting of the board of directors following the consummation of the
merger, it is intended that the board will nominate individuals to serve
on each
of the committees.
Wave
Wireless’ current Audit Committee, which was established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, currently consists
of two directors, Frederick R. Fromm and R. Craig Roos. The Audit Committee
is
primarily responsible for approving the services performed by Wave Wireless’
independent registered public accounting firm and reviewing their reports
regarding our accounting practices and systems of internal accounting controls.
The board of directors of Wave Wireless has determined that Mr. Roos is
a
financial expert in that he has (i) an understanding of generally accepted
accounting principles and financial statements; (ii) the ability to assess
the
general application of such principles in connection with the accounting
for
estimates, accruals and reserves; (iii) experience preparing, auditing,
analyzing and evaluating financial statements that present a breadth and
level
of complexity of accounting issues that are generally comparable to the
breadth
and complexity of issues that can reasonably be expected to be raised by
our
financial statements, and experience actively supervising one or more persons
engaged in those activities; (iv) an understanding of internal control
over
financial reporting; and (v) an understanding of audit committee functions.
Both
Mr. Fromm and Mr. Roos meet the requirements of an independent director
set
forth in Rule 4200(a)(15) of the Marketplace Rules of The NASDAQ Stock
Market,
Inc. Upon consummation of the Merger, Mr. Roos will resign as a director
of Wave
Wireless.
Wave
Wireless’ Compensation Committee currently consists of two directors, Frederick
R. Fromm and Richard Reiss. Mr. Reiss was appointed to the Compensation
Committee in April 2005. The Compensation Committee is primarily responsible
for
reviewing and approving Wave Wireless’ general compensation policies and setting
compensation levels for its executive officers. The Compensation Committee
also
has the authority to administer Wave Wireless’ Employee Stock Purchase Plan, its
1995 Stock Option/Stock Issuance Plan and our 2004 Equity Incentive
Plan.
Compensation
Committee Interlocks and Insider Participation
None
of
the members of Wave Wireless’ Compensation Committee has at any time been an
officer or employee of Wave Wireless. None of Wave Wireless’ executive officers
currently serves, or in the past year has served, as a member of the board
of
directors or Compensation Committee of any entity that has one or more
executive
officers serving on Wave Wireless’ board of directors or Compensation
Committee.
Wave
Wireless Director Compensation
Non-employee
directors of Wave Wireless do not receive cash compensation for their services
as directors. Following consummation of the merger, it is anticipated that
the
Compensation Committee of the board of directors will meet to decide whether
to
continue the practice of not paying cash compensation to directors for
their
service to the board of directors, or whether to provide for compensation
for
such service.
WaveRider
Director Compensation
Effective
April 1, 2005, the Chairman of the Board of WaveRider, Mr. Robert Francis
received $6,500 per month as total cash compensation for his role. During
the
year ended December 31, 2005, the compensation plan for all other non-employee
directors included: (1) a $2,500 annual retainer, payable quarterly; (2)
a
$1,000 annual retainer for each committee chairman; (3) a $1,000 meeting
fee for
each director who attended a board of directors or committee meeting in
person;
and (4) a $250 meeting fee for each director who attended a board of directors
or committee meeting via telephone. Also, effective the next annual meeting
of
shareholders, there is an automatic award of options to purchase 50,000
shares
of common stock for each non-employee director elected at the annual meeting
to
serve the following year. On February 9, 2005, the non-employee directors
were
each awarded 50,000 options under the Employee Stock Option (2002) Plan
for
their participation on the board of directors and each of its
subcommittees.
-59-
Wave
Wireless Executive Compensation
The
following table provides certain information summarizing the compensation
earned
for services rendered in all capacities to Wave Wireless and its subsidiaries
for each of the last three fiscal years by Wave Wireless’ “named executive
officers,” who consist of its Chief Executive Officer and each of our four other
most highly compensated executive officers, each of whom were executive
officers
as of December 31, 2005 and whose salary and bonus for the fiscal year
ended
December 31, 2005 was in excess of $100,000.
Summary
Compensation Table
|
Long
Term Compensation
|
||||||||||||||||||||||
|
Annual
Compensation
|
Awards
|
|||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
|
Salary
($)(1)
|
|
Bonus
($)
|
|
Other
Annual Compensation ($)
|
|
Restricted
Stock
Awards
($)
|
|
Securities
Underlying Options and Warrants (#)
|
|
All
Other Compensation ($)
|
|||||||||
|
Samuel
Smookler (3)
|
2005
|
73,327
|
—
|
—
|
|
—
|
||||||||||||||||
|
Former
Chief Executive Officer and Former Director
|
2004
|
252,100
|
125,000
|
—
|
—
|
—
|
||||||||||||||||
|
2003
|
139,569
|
—
|
53,083
|
(2)
|
166,667
|
|
—
|
|||||||||||||||
|
Daniel
W. Rumsey
|
2005
|
202,346
|
—
|
—
|
11,250
|
264,000
|
—
|
|||||||||||||||
|
Acting
Chief Executive Officer and Director
|
2004
|
158,269
|
—
|
—
|
—
|
—
|
||||||||||||||||
|
2003
|
104,369
|
—
|
—
|
73,333
|
8,000
|
(4)
|
||||||||||||||||
|
Don
Meiners
|
2005
|
150,469
|
—
|
—
|
9,750
|
240,000
|
—
|
|||||||||||||||
|
President
|
2004
|
130,046
|
—
|
—
|
—
|
—
|
||||||||||||||||
|
2003
|
103,699
|
—
|
—
|
73,333
|
—
|
|||||||||||||||||
|
James
D. Bletas (5)
|
2005
|
115,385
|
—
|
—
|
9,750
|
240,000
|
—
|
|||||||||||||||
|
Vice
President - Sales and Marketing
|
2004
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||
|
2003
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Carlos
A. Belfiore
|
2005
|
138,000
|
41,400
|
—
|
9,750
|
240,000
|
—
|
|||||||||||||||
|
Vice
President - Engineering and Chief Technical Officer
|
2004
|
138,000
|
—
|
—
|
—
|
—
|
||||||||||||||||
|
2003
|
18,577
|
—
|
—
|
91,667
|
—
|
|||||||||||||||||
|
(1)
|
Includes
amounts deferred under Wave Wireless’ 401(k)
Plan.
|
|
(2)
|
On
October 8, 2003, Mr. Smookler acquired 23.33 shares of Series
C Preferred
Stock of Wave Wireless convertible into 13,611 shares of common
stock,
resulting in an effective purchase price of $3.00 per share of
common
stock. The closing price per share of common stock as reported
on the OTC
Bulletin Board on October 8, 2003 was $6.90 per
share.
|
|
(3)
|
Mr.
Smookler’s employment with Wave Wireless was terminated on March 10,
2005.
|
|
(4)
|
Prior
to joining Wave Wireless full time in April 2003, Mr. Rumsey
was paid
$8,000 as a consultant to Wave
Wireless.
|
|
(5)
|
Mr.
Bletas was hired as Executive Vice President – Sales and Marketing on
March 21, 2005.
|
Option
Grants in Last Fiscal Year
No
stock
options were granted by Wave Wireless to its named executive officers during
the
2005 fiscal year. No stock appreciation rights were granted to these individuals
during that fiscal year.
-60-
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The
table
below provides information with respect to Wave Wireless’ named executive
officers concerning: (i) the options that they exercised in 2005 and (ii)
the
number and value of their unexercised options as of December 31,
2005.
|
Number
of Securities Underlying Unexercised Options at Fiscal Year
End
(#)(3)
|
|
Value
of Unexercised In-The-Money Options at Fiscal Year End
($)(1)
|
|||||||||||||||||
|
Name
|
Shares
Acquired On Exercise (#)
|
|
Value
Realized
($)(2)
|
|
Exercisable
|
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||||||
|
Sam
Smookler
|
—
|
—
|
79,999
|
—
|
—
|
—
|
|||||||||||||
|
Don
Meiners
|
—
|
—
|
44,513
|
30,555
|
—
|
—
|
|||||||||||||
|
Daniel
W. Rumsey
|
—
|
—
|
42,778
|
30,555
|
—
|
—
|
|||||||||||||
|
James
Bletas
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Carlos
A. Belfiore
|
—
|
—
|
48,268
|
34,731
|
—
|
—
|
|||||||||||||
|
(1)
|
Based
on the fair market value of the option shares at the 2005 fiscal
year-end
($0.13 per share based on the closing selling price on the OTC
Bulletin
Board as of December 31, 2005) less the exercise
price.
|
|
(2)
|
Based
on the fair market value of the shares on the exercise date less
the
exercise price paid for those
shares.
|
|
(3)
|
The
options are immediately exercisable for all the options shares.
However,
any shares purchased under the options are subject to repurchase
by Wave
Wireless, at the original exercise price paid per share, upon
the
optionee’s cessation of service prior to vesting in such
shares.
|
WaveRider
Executive Compensation
The
following table describes the compensation earned in fiscal 2005 by the
Chief
Executive Officer of WaveRider and the other executive officers who received
compensation in excess of $100,000 in 2005, 2004 and 2003 (“named executive
officers”).
Summary
Compensation Table
|
Annual
Compensation
|
Long
Term
Compensation
|
|||||||||||||||
|
Name
and Principal Position
|
Year
|
|
Salary
($)
|
Bonus
($)
|
Stock
Options
(#)
|
All
Other
Compensation
($)(1)
|
||||||||||
|
D.
Bruce Sinclair
|
2005
|
49,519
|
—
|
500,000
|
—
|
|||||||||||
|
CEO/Director
|
2004
|
115,972
|
—
|
—
|
—
|
|||||||||||
|
2003
|
105,966
|
62,214
|
—
|
—
|
||||||||||||
|
Charles
W. Brown
|
2005
|
131,721
|
—
|
50,000
|
—
|
|||||||||||
|
Executive
Vice President
|
2004
|
159,729
|
—
|
—
|
—
|
|||||||||||
|
2003
|
157,442
|
25,627
|
—
|
—
|
||||||||||||
|
T.
Scott Worthington
|
2005
|
131,721
|
—
|
50,000
|
—
|
|||||||||||
|
Vice
President and CFO
|
2004
|
135,089
|
—
|
—
|
—
|
|||||||||||
|
2003
|
128,016
|
21,390
|
—
|
—
|
||||||||||||
|
(1)
|
In
accordance with regulations promulgated by the SEC, perquisites
are not
included if the aggregate amount is less than the lesser of $50,000
or 10%
of salary and bonus.
|
Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
The
following table sets forth certain information regarding exercisable and
unexercisable stock options held as of December 31, 2005, by each of the
named
executive officers of WaveRider. The value of unexercised in-the-money
options
has been calculated by determining the difference between the exercise
price per
share payable upon exercise of such options and the last sale price of
WaveRider
common stock on December 31, 2005, as reported on the OTC Bulletin Board
($0.11
per share). No stock options were exercised by WaveRider’s named executive
officers during 2005.
-61-
|
Name
|
|
Shares
Acquired On Exercise (#)
|
|
Value
Realized
($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
||||||
|
D.
Bruce Sinclair (1)
|
—
|
—
|
717,500
|
5,000
|
—
|
—
|
|||||||||||||
|
Charles
W. Brown
|
—
|
—
|
75,000
|
55,000
|
500
|
—
|
|||||||||||||
|
T.
Scott Worthington
|
—
|
—
|
75,000
|
55,000
|
500
|
—
|
|||||||||||||
|
(1)
|
Included
in Mr. Sinclair’s options are 77,500 options received from other
stockholders.
|
Employment
Contracts, Termination of Employment and Change-in-Control
Arrangements
The
Compensation Committee of the Wave Wireless board of directors, as Plan
Administrator of the Wave Wireless 2004 Equity Incentive Plan, has the
authority
to provide for accelerated vesting of the shares of Wave Wireless common
stock
subject to any outstanding options held by the Chief Executive Officer
and any
other executive officer or any unvested share issuances actually held by
such
individual, in connection with certain changes in control of Wave Wireless
or
the subsequent termination of the officer’s employment following the change in
control event.
Existing
and Terminated Agreements.
Wave
Wireless entered into an Employment and Continuity of Benefits Agreement
with
George P. Roberts, dated May 31, 2001 (“Roberts Agreement”), outlining his
continued employment with Wave Wireless as Chairman of the Board following
his
resignation as Chief Executive Officer on May 30, 2001. The Roberts Agreement
provided for an employment period commencing May 31, 2001 through May 30,
2002.
Throughout the employment period, Mr. Roberts was eligible to participate
in all
benefit plans that are made available to Wave Wireless’ executives and for which
Mr. Roberts qualified.
Wave
Wireless entered into a letter agreement with George P. Roberts, dated
April 28,
2003, extending the employment period under the Roberts Agreement through
May
30, 2005. The letter agreement provided for the amendment of the Roberts
Agreement upon the assignment of a new Chief Executive Officer of Wave
Wireless.
Effective September 1, 2003, due his resignation and the appointment of
a new
Chief Executive Officer of Wave Wireless, Mr. Roberts was entitled to
compensation equal to half his salary prior to recent reductions, with
one half
of his total salary of $188,000 paid in cash, and the other half paid in
common
stock of Wave Wireless. On June 14, 2005, Wave Wireless entered into a
further
letter agreement with Mr. Roberts terminating the Roberts Agreement. Under
the
terms of the letter agreement, in lieu of paying Mr. Roberts approximately
$132,000 due him under the Roberts Agreement, Mr. Roberts received a warrant
to
purchase 600,000 shares of common stock of Wave Wireless at an exercise
price of
$.30 per share. In addition, Wave Wireless agreed to pay Mr. Roberts’ medical,
dental and supplemental executive health care coverage for the remainder
of Mr.
Roberts’ natural life.
Wave
Wireless entered into an agreement with Sam Smookler, its former President
and
Chief Executive Officer, dated July 25, 2003, providing for the employment
of
Mr. Smookler as President and Chief Executive Officer for a period of
two years.
The agreement further provided for the payment to Mr. Smookler of a salary
of
$36,000 per month beginning September 1 and continuing through December
31,
2003. Beginning January 1, 2004, Mr. Smookler was paid a base salary
of $250,000
per year. On September 2, 2004, Mr. Smookler was paid a cash bonus equal
to 50%
of his base salary. The agreement also provided for the grant of an option
to
purchase 2% of Wave Wireless’ total number of shares of common stock issued and
outstanding as of September 2, 2003. By agreement with the board of directors,
this number was fixed at 166,666 shares, which amount was reduced to
80,000 due
to limitations in Wave Wireless 1995 Stock Option/Stock Issuance Plan.
Wave
Wireless granted Mr. Smookler a warrant to purchase 86,666 shares of
common
stock, thereby making up the difference between the 166,666 shares granted
by
the board of directors, and the 80,000 actually issued under the 1995
Stock
Option/Stock Issuance Plan. Mr. Smookler’s employment with Wave Wireless was
terminated on March 10, 2005. On January 17, 2006, Wave Wireless and
Mr.
Smookler entered into a Settlement Agreement and Release of Claims, pursuant
to
which Wave Wireless will pay Mr. Smookler $50,000 upon the earlier to
occur of
the receipt of at least $1.5 million in financing, or March 31, 2006.
In
addition, Wave Wireless has agreed to pay Mr. Smookler $3,750 for twenty
months,
with a balloon payment of $25,000 on September 1, 2007 the end of such
period.
Wave Wireless also issued Mr. Smookler a warrant to purchase 769,231
shares of
its common stock at an exercise price of $.13 per share.
-62-
Wave
Wireless entered into an agreement with Daniel W. Rumsey, its Acting Chief
Executive Officer, and former Vice President, General Counsel and Acting
Chief
Financial Officer, on April 4, 2003. Under the terms of the agreement,
in the
event Mr. Rumsey’s employment with Wave Wireless terminates at any time by
reason of an involuntary termination, Wave Wireless is obligated to pay
him
severance equal to the higher of his base salary on the date of the agreement,
or his base salary on the date of his involuntary termination, which amount
is
obligated to be paid in a series of successive biweekly installments over
the
twelve month period measured from the date of his involuntary termination.
At
the time of his involuntary termination, each unvested option granted to
Mr.
Rumsey shall continue to vest, and such options plus options already vested
but
unexercised as of the date of his involuntary termination shall continue
to be
exercisable in accordance with the 1995 Stock Option/Stock Issuance Plan
from
the date of involuntary termination to the first anniversary date thereof.
For
purposes of the agreement, an involuntary termination shall mean the termination
of his employment with Stock Option/Stock Issuance (i) involuntarily upon
his
discharge or dismissal; or (ii) voluntarily following his resignation following
(a) a change in level of management to which he reports, (b) a decrease
or
material change in his responsibilities, or (c) a reduction in his base
salary.
Mr. Rumsey’s agreement with Wave Wireless was amended on July 13, 2005. Under
the terms of the amendment, Mr. Rumsey’s base salary was reduced to $190,000
(“Interim Salary”) from $240,000 (“Base Salary”), until such time as Wave
Wireless either achieves positive earnings before income taxes, depreciation
and
amortization, or the board of directors restores his Interim Salary to
the Base
Salary. In the event of an involuntary termination under the existing agreement,
Wave Wireless is obligated to pay Mr. Rumsey the difference between his
Interim
Salary and his Base Salary.
Wave
Wireless entered into an agreement with Dr. Carlos Belfiore, its Vice President
of Engineering and Chief Technical Officer, on October 20, 2003. Under
the terms
of the agreement, Dr. Belfiore is paid a base salary of $138,000 per year.
Dr.
Belfiore was also paid a cash bonus equal to 30% of his base salary on
January
15, 2005. The agreement also provided for the grant of an option to purchase
91,666 shares of common stock of Wave Wireless, which amount was reduced
to
80,000 due to limitations in the 1995 Stock Option/Stock Issuance Plan.
Wave
Wireless granted Dr. Belfiore a warrant to purchase 11,666 shares of common
stock, thereby making up the difference between the 91,666 shares granted
by the
board of directors, and the 80,000 actually issued under the 1995 Stock
Option/Stock Issuance Plan. In the event Dr. Belfiore’s employment is terminated
at any time without cause, Wave Wireless is obligated to pay Dr. Belfiore
his
salary for six months following such termination, and all options previously
granted to Dr. Belfiore continue to vest in accordance with their terms
and
conditions for a period of two years following the date of such termination.
Following a change in control of Wave Wireless, Wave Wireless is obligated
to
pay Dr. Belfiore his base salary for a period of one year, and his options
shall
automatically accelerate so that each option becomes fully vested and
immediately exercisable for the total number of shares subject to the option.
A
change in control will be deemed to occur under the agreements upon: (a)
a
merger or consolidation in which Wave Wireless is not the surviving entity;
(b)
the sale, transfer or other disposition of all or substantially all of
the
assets of Wave Wireless in complete liquidation or dissolution of Wave
Wireless;
(c) a reverse merger in which Wave Wireless is the surviving entity but
in which
securities representing fifty percent (50%) or more of the total combined
voting
power of Wave Wireless’ outstanding securities are transferred to persons
different from the persons holding those securities immediately prior to
such
merger; and the acquisition, directly or indirectly by any person or related
group of persons of beneficial ownership of securities possessing more
than
thirty percent (30%) of Wave Wireless’ outstanding voting securities pursuant to
a tender or exchange offer made directly to Wave Wireless
stockholders.
In
the
event that Mr. Meiners is terminated within twelve months of a change in
control, Wave Wireless is obligated to pay his salary for a period of one
year
following such termination and all options granted shall automatically
accelerate so that each option will become fully vested and immediately
exercisable for the total number of shares of Wave Wireless common stock
subject
to those options (“Severance Benefits”). For purposes of the agreement, a Change
of Control shall mean any of the following transactions effecting a change
in
ownership or control of Wave Wireless: (a) a merger or consolidation in
which
Wave Wireless is not the surviving entity; (b) the sale, transfer or other
disposition of all or substantially all of the assets of Wave Wireless
in
complete liquidation or dissolution of Wave Wireless; (c) any reverse merger
in
which Wave Wireless is the surviving entity but in which securities representing
50% or more of the total combined voting power of Wave Wireless’ outstanding
securities are transferred to a person(s) different from the person(s)
holding
those securities immediately prior to such merger; or (d) the acquisition,
directly or indirectly by a person or related group of persons of beneficial
ownership of securities possessing more than 30% of the total combined
voting
power of Wave Wireless’ outstanding securities pursuant to a tender or exchange
offer made directly to Wave Wireless’ stockholders.
-63-
Mr.
Meiners shall be entitled to receive his Severance Benefits if, at any
time
within twelve months of a Change of Control: (a) his level of responsibility
at
Wave Wireless is materially reduced; (b) his place of employment is moved
to a
location that is more than 50 miles from his place of employment immediately
prior to a Change in Control; or (c) his salary or bonus plan is reduced
without
his prior written consent. Effective March 10, 2005, Mr. Meiners annual
salary
was increased to $150,000.
Effect
of Merger on Existing Agreements.
As
a
result of the merger, Mr. Rumsey’s employment with Wave Wireless will be
terminated, resulting in the payment of $50,000 in deferred compensation
to him.
Although Mr. Rumsey is entitled to one-year’s severance and other benefits under
the terms of his agreement, he has agreed to accept one-half of his severance
payable over one year, in addition to the payment of health benefits, and
has
agreed to provide certain legal and other consulting services to Wave Wireless
after consummation of the merger as additional consideration for the severance
payments. Mr. Rumsey will continue to serve on the board of directors of
Wave
Wireless after the merger.
It
is
currently anticipated that Wave Wireless will not be obligated to pay any
other
severance obligations to executive officers of Wave Wireless as a result
of the
merger.
See
also
the description of the employment agreements and other arrangements entered
into
between WaveRider and certain of its executive officers in the section
entitled
“The Merger—Interests of WaveRider Directors and Executive Officers in the
Merger” on page 39 of this proxy/statement prospectus.
WAVE
WIRELESS’ BUSINESS
Summary
Wave
Wireless develops, manufactures and distributes next generation wireless
mesh
routers for the telecommunications, security and surveillance and public
safety
markets. Wave Wireless’ mesh, point-to-point and point-to-multipoint broadband
wireless access systems combine high performance, versatility and AES encryption
to deliver a broad range of powerful applications and turnkey solutions
ideally
suited for internet service providers, educational institutions, corporate
enterprises and government agencies. Wave Wireless’ wireless access systems are
sold globally through its own sales force, as well as through strategic
partners, distributors, systems integrators, and value added resellers.
Wave
Wireless also is focused on supporting its global customer base in connection
with its repair and maintenance business (“RMA Business”).
Wave
Wireless originally acquired the Wave Wireless networking product line
(“SPEEDLAN”) from SPEEDCOM Wireless Corporation in December 2003 as a means to
complement its legacy business focused on licensed wireless backhaul products,
and to gain entry into the rapidly growing market for enterprise-class
license-exempt wireless solutions. In April 2005, Wave Wireless announced
a
formal restructuring plan designed to dramatically reduce costs, refocus
its
strategic direction, and ultimately achieve profitability (“Restructuring
Plan”). Key elements of the Restructuring Plan involved both (i) divesting Wave
Wireless’ legacy product lines for the licensed market that were expected to
result in continued substantial operating losses, and (ii) refocusing Wave
Wireless’ product strategy around its SPEEDLAN product line and the market for
robust license-exempt and licensed public safety band wireless applications.
Wave Wireless will also continue to provide repair and maintenance (“RMA”)
support services to its installed base of legacy products for the licensed
wireless backhaul market.
In
connection with the Restructuring Plan, Wave Wireless changed its corporate
name
from “P-Com, Inc.” to “Wave Wireless Corporation” on August 22, 2005, and on
August 12, 2005, Wave Wireless effected a recapitalization whereby all
outstanding shares of its Series C Preferred Stock were automatically converted
into shares of its Series G Preferred Stock and common stock. Both the
name
change and the recapitalization were approved at Wave Wireless’ 2005 Annual
Meeting of Stockholders, which was held on August 12, 2005.
-64-
Wave
Wireless was formed in 1991, and its executive offices are located at
1996 Lundy Avenue, San Jose, California 95131, and its telephone number
is (408)
943-4200.
Information
About Wave Wireless’ Products
Wave
Wireless’ products consist of license exempt, next generation wireless mesh
routers and other licensed and unlicensed point-to-point, spread spectrum
and
point-to-multipoint radio systems for carriers, systems integrators and
value
added resellers. Wave Wireless also provides RMA and other services to
its
licensed and other customers worldwide.
The
contribution of each product line to total sales was as follows:
|
Year
Ended December 31,
|
||||||
|
Product
Line
|
2004
|
2003
|
2002
|
|||
|
Point-to-Point
(Licensed)
|
79%
|
79%
|
71%
|
|||
|
Spread
Spectrum (Unlicensed)
|
21%
|
19%
|
21%
|
|||
|
Point-to-Multipoint
(Licensed)
|
—
|
2%
|
8%
|
|||
|
Total
|
100%
|
100%
|
100%
|
|||
As
a
result of the Restructuring Plan, a substantial portion of Wave Wireless’ sales
in subsequent periods are anticipated to come from the sale of refurbished
point-to-point radios in connection with Wave Wireless’ RMA Business and from
the sale of unlicensed spread spectrum radios.
Information
About Our Geographic Segments
Wave
Wireless’ sales by geographic region for each year ended December 31, 2004 are
as follows (in thousands):
|
Sales
|
2004
|
2004
|
2003
|
2002
|
|||||||||
|
North
America
|
11%
|
|
$
|
2,579
|
$
|
3,042
|
$
|
2,949
|
|||||
|
United
Kingdom
|
23%
|
|
5,583
|
6,349
|
5,894
|
||||||||
|
Continental
Europe
|
21%
|
|
5,178
|
3,693
|
4,487
|
||||||||
|
Asia
|
14%
|
|
3,386
|
5,831
|
15,018
|
||||||||
|
Other
|
31%
|
|
7,449
|
1,926
|
1,338
|
||||||||
|
100%
|
|
$
|
24,175
|
$
|
20,841
|
$
|
29,686
|
||||||
Narrative
Description of Wave Wireless’ Business
Wave
Wireless currently develops, manufactures and markets licensed exempt,
next
generation wireless mesh routers and other licensed and unlicensed
point-to-point, spread spectrum and point-to-multipoint radio systems to
carriers, systems integrators and value added resellers. Wave Wireless
also
provides repair, maintenance and other services to its licensed and other
customers worldwide. Wave Wireless’ systems enable Internet service providers,
enterprises and governmental organizations to deliver high-speed video,
data,
and voice transmissions across a broad range of applications, including
safety
and surveillance. Cellular and personal communications service providers
have
employed Wave Wireless’ point-to-point systems to transmit data between remote
tower sites and switching centers. Network service providers and Internet
service providers are able, through the deployment of Wave Wireless’ equipment
and systems, to respond to the demands for high-speed wireless access services,
such as Internet access associated with business-to-business and e-commerce
business processes. Systems integrators have utilized Wave Wireless’ products
for various security and surveillance applications, including fixed and
mobile
video surveillance for public safety organizations, such as the Chicago
Police
Department.
-65-
Industry
Background
Growth
of
the Internet and Internet Protocol applications including security,
surveillance, video, IP telephony and Voice over IP (VoIP) are driving
access
and bandwidth demand. End users such as cellular providers, consumers,
universities, businesses, state and local governments and other enterprise
customers can transport data using wireline (cable, fiber, DSL) or wireless
(microwave, spread spectrum) protocols. Global deregulation and privatization
of
telecommunications markets and increased demand for broadband wireless
access to
the Internet, and local and storage area networks have spurred competition
to
supply wireless-based systems as a cost-effective alternative to traditional
wireline service delivery systems. Broadband wireless systems are competitive
due to the relatively short set up and deployment time, high return on
capital
investment, scalability, portability and ability to connect customers quickly
once the transmission hardware and software infrastructure are in place.
Moreover, network operators can mitigate the risk of “stranded capital costs”
inherent in wireline hardware.
In
addition to the above considerations, wired networks often fall short of
supplying cost effective, reliable “last mile” connectivity to the end user. To
overcome such limitations in a quick and efficient manner, wireless solutions
are increasingly being adopted and integrated with wired solutions. Furthermore,
in many parts of the world, telecommunications services are inadequate,
unreliable or non-existent due to the lack of existing wired infrastructure.
Additionally, many such countries have privatized the state-owned
telecommunications monopoly and opened their markets to competitive network
service providers. Competitive service providers in such markets often
find
deployment of wireless broadband the quickest, most economical and scalable
means of providing reliable, modern telecommunications services.
Most
wireless networks use RF (radio frequency) spectrum to provide network
access
for data, voice and video applications. RF based wireless broadband networks
are
designed to run on radio frequencies that do not require a license (typically
2.4 GHz and 5.8 GHz) or the “public bands,” as well as frequencies that require
the carrier to own a license (typically microwave and up to 38 GHz or the
4.9
GHz public safety band). For a communications service provider to use licensed
spectrum, they have to own the licenses required to operate these systems.
Historically, Wave Wireless’ business was focused on the sale of licensed
products to large carriers and system integrators. With the implementation
of
the restructuring plan, Wave Wireless is now focused on the market for
license
exempt product solutions that enable corporate enterprises, educational
institutions, government agencies and municipalities, and wireless internet
service providers to rapidly and cost effectively deliver high-speed data,
voice
and video connectivity to their customers and subscribers. Wave Wireless
is also
focused on the emerging Homeland Security market, as a result of the November
2005 introduction of the SPEEDLAN 9200 operating in the 4.9 GHz public
safety
band.
Broadband
Wireless Implementation
Global
deregulation of telecommunications markets and the related allocation of
radio
frequencies for broadband wireless access transmission has spurred competition
to supply wireless-based systems as a cost-effective alternative to traditional
wireline service delivery systems. Broadband wireless systems are competitive
due to the relatively short set-up and deployment time, high return on
capital
investment, and ability to connect customers quickly once the transmission
hardware and software infrastructure are in place. Moreover, network operators
can mitigate the risk of “stranded capital costs” inherent in wireline hardware.
Such systems do not scale as well as the wireless alternatives as users’ needs
expand or change over time.
End
users
who need to transport information from one location to another have a choice
of
wired or wireless solutions. Wired solutions typically take the form of
lines
that are leased from telephone companies. The associated lease payments
tend to
be less attractive than the cost of ownership of a wireless digital microwave
system. Wireless transmission of voice, data and video traffic has become
a
desirable alternative to wired solutions due to its advantages in cost,
speed of
deployment, reliability, range, and ease of installation Extended range
license
exempt wireless broadband systems allow telecommunications providers to
establish an alternative network that they can control to enable them to
offer
superior connectivity.
-66-
Global
Privatization and Deregulation: Stimuli to Broadband Wireless Access
Growth
In
many
parts of the world, telecommunications services are inadequate, unreliable
or
non-existent due to the lack of existing infrastructure. Additionally,
many such
countries have privatized the state-owned telecommunications monopoly and
have
opened their markets to competitive network service providers. Wave Wireless
believes competitive service providers in such markets often find deployment
of
wireless broadband the quickest, most economical and scalable means of
providing
reliable, modern telecommunications services.
Network
Architecture Bottlenecks
Fiber
optic networks have received much attention because of the speed and quality
associated with the technology. Increasingly, network service providers
are
constructing fiber optic interoffice backbones to meet the significant
demand
created by Internet and data, video conferencing, and voice services. To
satisfy
the growing user demand for high-speed access, the fiber optic channels
would
(if not supplemented by other systems) have to extend all the way into
the
buildings in which the users reside. The fiber optic channel usually ends
short
of the building, at the beginning of the “last mile.” Thus, users are often
forced to use slower dial-up modem connections and ISDN (Integrated Services
Digital Network) services, or ADSL (Asymmetrical Digital Subscriber Line)
service, with its inherent distance limitations. This local access “bottleneck”
denies users the real benefits afforded by fiber optic backbones because
the
highest speed that users can experience is limited by the local access
portion
of their end-to-end connection. To overcome such limitations in a quick
and
efficient manner, Wave Wireless believes a broadband wireless solution
is
attractive to incumbent and competitive carriers alike because the local
access
speed restrictions are eliminated with broadband wireless
equipment.
The
Wave Wireless Strategy
Wave
Wireless’ current strategy is to be a leading worldwide supplier of
high-performance license-exempt wireless access equipment in point to point,
point to multipoint and self-healing mesh topologies. In addition, Wave
Wireless
intends to continue its focus on the security and surveillance market by
offering advanced encryption, multi-band, wireless networking solutions,
serving
both license-exempt and licensed users accessing the 4.9 GHz public safety
band.
To accomplish these objectives, Wave Wireless intends to:
|
·
|
Focus
on point-to-point licensed and spread spectrum point-to-point
and
point-to-multipoint microwave markets. Wave Wireless designs
products
specifically for the spread spectrum (unlicensed band) microwave
frequency
bands, and licensed public safety bands. Wave Wireless has designed
its
core architecture to optimize the systems for operation at microwave
frequencies.
|
|
·
|
Focus
on the safety and surveillance markets. Wave Wireless currently
has
systems deployed in public safety, and security and surveillance
applications. Wave Wireless intends to market the benefits of
its
microwave systems, as well as the success of current installations,
to
drive additional demand for its wireless access
equipment.
|
|
·
|
Continue
expansion of Wave Wireless’ identified global market opportunities. Wave
Wireless maintains international sales and/or support offices
in Italy,
Brazil, Mexico, Singapore and the United Kingdom. Wave Wireless
intends to
continue its focus on the international market where it believes
substantial demand exists for its
products.
|
|
·
|
Build
and sustain manufacturing cost advantage. Wave Wireless designs
its system
architecture to reduce the number of components incorporated
into each
system, thereby allowing for the use of common components and
“building
blocks” across the range of Wave Wireless’ products. This approach reduces
Wave Wireless’ manufacturing costs enabling it to take advantage of volume
purchases and a standardized manufacturing
process.
|
|
·
|
Outsource
manufacturing to reduce costs. Beginning in January 2004, Wave
Wireless
outsourced the manufacture of the SPEEDLAN product to a contract
manufacturer. Wave Wireless also entered into an arrangement
to outsource
manufacturing of its point-to-point products. Utilization of
turnkey
contract manufacturers eliminates expensive in-house manufacturing
assembly, and provides Wave Wireless with the ability to scale
up or down
as market conditions dictate.
|
-67-
|
·
|
Position
Wave Wireless’ products for the anticipated convergence of carrier class
and unlicensed technology. Wave Wireless believes that its technology
and
experience in both the licensed and unlicensed markets will allow
it to
rapidly develop network solutions for the anticipated convergence
of
carrier grade and unlicensed
technology.
|
|
·
|
Leverage
and maintain software leadership. Wave Wireless differentiates
its systems
through proprietary software. This software is designed to allow
Wave
Wireless to deliver to its customers a high level of functionality
that
can be easily reconfigured by the customer to meet changing needs.
Software tools are also used to facilitate network
management.
|
Wave
Wireless also intends to continue the sale of refurbished licensed products
in
connection with its RMA Business.
Products
& Services
License
Exempt Products.
Wave
Wireless intends to focus on the large growth opportunity in the license
exempt
and licensed public safety band markets, as it believes its leading edge
SPEEDLAN family of products is uniquely positioned to capture market share.
The
current SPEEDLAN product line enables service providers, enterprises and
government agencies to deliver high-speed data, voice and video connectivity
enabling a broad range of applications. The SPEEDLAN product line, which
currently consists of the SPEEDLAN 9100 and 9200 series, are high performance
wireless routers that provide wireless connectivity for local area networks
utilizing mesh, point-to-point and point-to-multipoint topologies. Introduced
in
2002, SPEEDLAN 9100 was the very first mesh product to market. The mesh
topology
creates networks that use multi-hop connections to transmit IP packets
between
the initiation and termination points. The ability to use different paths
between any two points, based on the detected conditions, allows path redundancy
and, in essence, a self-healing wireless network.
|
·
|
SPEEDLAN
9100.
The SPEEDLAN 9100 series of broadband wireless routers offers
flexibility
in meeting the challenges of designing, building, and managing
today’s
fixed wireless networks. By allowing the user to choose between
star,
mesh, or a point-to-point deployment, the SPEEDLAN 9100 provides
a
platform that can grow and easily be re-deployed as the customers
needs
change. The SPEEDLAN 9100 utilizes 802.11 standards to communicate
at 11
Mbps per second in the 2.4 GHz
band.
|
|
·
|
SPEEDLAN
9200.
The SPEEDLAN 9200, released in September 2004, combines high
performance,
a broad feature set and multiple operating frequencies to provide
a
flexible, scalable and robust solution. The SPEEDLAN 9200 is
designed for
outdoor environments such as outdoor wireless LANs, metropolitan
wireless
infrastructures, or security and surveillance solutions. Based
on a
self-healing mesh network architecture, the 9200 provides 54
Mbps
throughput at either 2.4 GHz, 5.8 GHz or 4.9 GHz and supports
the latest
802.11a/g-based standards and remote access by laptop and PDA
users. The
9200 utilizes OFDM non-line-of-sight technology and provides
for secure
network performance through 128-bit AES encryption technology.
These
features make the 9200 ideally suited for the current and emerging
IP-based applications, and particularly attractive for video
applications.
|
|
·
|
SPEEDLAN
9300 (Under Development).
The SPEEDLAN 9300, currently under development, is a higher capacity,
scalable unit, featuring several internal radio modules based
on
state-of-the-art 802.11x technology. The product can be configured
as a
node in a multiple-radio channel mesh backbone and/or a combination
of
mesh node plus standard access points, thus providing the flexibility
needed to address challenging customer network requirements in
difficult
environments. This multiple radio feature, a new improved mesh
protocol,
and the use of a powerful network processor with hardware acceleration
engines that can perform packet classification, bring the SPEEDLAN
9300 to
a new level of performance.
|
-68-
The
SPEEDLAN 9100, 9200 and 9300 series are all outdoor units designed for
the most
severe environmental conditions. Target markets for the SPEEDLAN family
of
products include security, surveillance, wireless ISPs and other private
networks for a myriad of IP-based applications.
Repair
and Maintenance (“RMA”) Business.
As a
result of the Restructuring Plan, a substantial portion of Wave Wireless’s
revenue is derived from the RMA Business. The RMA Business results from
the
repair and maintenance of a single legacy product line, Tel-Link, which
was the
first product introduced by Wave Wireless in 1992. The Tel-Link radio was
very
successful, shipping over 150,000 radios during the life of the product
line,
which continued until 2005. While these radios have proved to be very reliable
over the years, they often require repair due to standard wear and tear
and
degradation of performance. Because Wave Wireless maintains a buffer stock
of
repaired, fully tested refurbished Tel-Link radios, it is uniquely positioned
to
provide unmatched service to its network customers.
Wave
Wireless’s RMA customers consist of operators of large networks, as well as a
number of smaller network operators and system integrators geographically
dispersed throughout the world, Wave Wireless’ top three customers accounted for
approximately 95% of all revenue attributable to the RMA Business during
the
fiscal year ended December 31, 2004. It
is
currently anticipated that Wave Wireless’ RMA Business will decline over
time as its customers replace existing Tel-Link radios with new radios
rather than send them to Wave Wireless for repair and
maintenance.
Most
failed radios are shipped to Wave Wireless’ intake facility in Reddich, England,
which Wave Wireless maintains to satisfy the requirements of many of its
European customers. All indoor units (“IDUs”) are sent to Wave Wireless’
facility in San Jose, California, while all outdoor units (“ODUs”) are sent to
Tortona, Italy, where they are refurbished under a Repair Service Agreement
with
Nuove Officine Radio Tortona s.r.l. The Repair Service Agreement expires
in June
2007. Refurbished ODUs and IDUs are then returned to the Reddich facility
for
shipment back to the customers.
Technology
Wave
Wireless’ technological approach to digital microwave radio systems is different
from conventional approaches. Through the use of proprietary designs, Wave
Wireless can quickly produce highly integrated, feature-rich systems. The
results of these integrated designs are reliability, ability to customize
customer specific designs and continuing ability to be cost competitive,
particularly in the current market.
Wave
Wireless’ products are optimized for streamlined components, immunity to noise
and interference, ease of high-volume manufacturing and installation. Yet,
Wave
Wireless’ radios contain superior features. Equally important, because critical
components and building blocks perform common functions across different
product
lines, Wave Wireless’ philosophy is to design sections of each radio in a way
that enables the designs to be reused with little or no modification in
a
different product line.
Wave
Wireless’ point-to-point and certain of its spread spectrum microwave radios
consist of three primary assemblies: the IDU, the ODU and the antenna.
The IDU
houses the digital signal processing and interfaces to the ODU via a single
coaxial cable. The ODU, a radio frequency drum or enclosure, which is installed
outdoors, establishes the specific frequencies for transmitting and receiving
data. The antenna interfaces directly with the ODU via proprietary technology.
Wave Wireless’ SPEEDLAN product family consists of an ODU only.
Software
embedded in Wave Wireless’ systems allows the user to easily configure and
adjust system settings such as frequency, power, and capacity without manual
tuning and mechanical adjustments. Software provided with Wave Wireless’ systems
includes PC-based sophisticated diagnostics, maintenance, network management,
and system configuration tools.
Competing
systems also employ the ODU/IDU concept but Wave Wireless’ products are
differentiated by how Wave Wireless implements the components within the
IDU and
ODU. By moving many frequency-sensitive components to the ODU, the user
is
afforded improved reliability, lower cost and easier
interchangeability.
Wave
Wireless believes that its spread spectrum products are industry leaders,
especially with its latest product release in November 2005 of the SPEEDLAN
9200
operating in the 4.9 GHz public safety band. This product delivers 54 Mbps
per
second signaling rate at 4.9 GHz utilizing mesh networking, non-line of
site
OFDM modulation, and mobility.
-69-
Manufacturing
and Testing
Wave
Wireless’ San Jose, California facility received its initial ISO 9001
registration in December 1993, and maintains a current certification. Wave
Wireless’ ISO 9001 registration for the United Kingdom sales and customer
support facility was received in 1996 and has current certifications. On
December 15, 2003, Wave Wireless successfully upgraded to ISO 9001:2000.
Once a
system reaches commercial status, Wave Wireless outsources manufacturing
to one
or more of several turnkey fabricators available to Wave Wireless to build
radio
system units in commercial quantities. Utilization of such fabricators
relieves
Wave Wireless of expensive investments in manufacturing facilities, equipment,
and parts inventories. This strategy enables Wave Wireless to quickly scale
to
meet varying customer demands and changes in technology.
Sales
Channels and Wave Wireless’ Customers
Wave
Wireless’ sales and marketing efforts are directed from its corporate offices in
San Jose, California. In the United States, Wave Wireless maintains sales
support through offices located in Florida, California, Washington D.C.
and
Oregon. Wave Wireless plans to add additional sales support in the Midwest
region. Outside the United States, Wave Wireless maintains sales operations
and
customer support facilities in the United Kingdom that serves the European
market, Singapore for the Asian market, and Mexico for the Latin American
market. Internationally, Wave Wireless uses a variety of sales channels,
including system integrators, original equipment manufacturers, dealers,
and
local agents with full service local capabilities, ranging from marketing
and
sales, to systems design, installation, and maintenance. Wave Wireless
also
sells directly to select customers, while avoiding conflict with its authorized
local distribution channels. Wave Wireless has established agent relationships
in numerous other countries in the Asia/Pacific region, the Middle East,
Latin
America, and Europe, and continues to add to its growing network of resellers
and agents.
Typically,
Wave Wireless’ sales process commences with the solicitation of bids by
prospective customers. If selected to proceed further, Wave Wireless may
provide
systems for incorporation into system trials, or Wave Wireless may proceed
directly to contract negotiations. Wave Wireless can not record revenue
until
system trials are successfully completed, and Wave Wireless then negotiates
a
contract with the customer to set technical and commercial terms of sale.
These
terms of sale govern the purchase orders issued by the customer as the
network
is deployed and/or enhanced.
Due
to
the complexity of Wave Wireless’ radio systems, a high level of technical
sophistication is required on the part of its sales and marketing personnel.
In
addition, Wave Wireless believes that post-sale customer service programs
are
fundamental to customer satisfaction and the potential for follow-on business.
New customers are provided engineering assistance for installation of the
initial units as well as varying degrees of field training depending upon
the
customer’s technical aptitude. Wave Wireless’ customer service efforts are
supplemented by its system providers.
For
the
years ended December 31, 2005, 2004, and 2003, Wave Wireless’ significant
customers, and their respective percent contribution to its sales are
as
follows:
|
Customer
|
2005
|
2004
|
2003
|
|||
|
MynTahl
Corporation
|
—
|
—
|
13%
|
|||
|
Orange
Personal Communications System
|
27%
|
13%
|
18%
|
|||
|
Vodafone
(Mannesmann)
|
5%
|
15%
|
13%
|
|||
| Aces |
10%
|
1%
|
1%
|
|||
|
T-Mobile
|
10%
|
12%
|
12%
|
|||
|
TelCel
|
12%
|
25%
|
7%
|
|||
|
Total
|
64%
|
66%
|
64%
|
-70-
During
2004, sales to TelCel and Vodafone accounted for 25% and 15% of Wave
Wireless’
total sales, respectively. Sales to TelCel have substantially decreased
due to
management’s decision to discontinue sales of its licensed radio systems in
connection with the Restructuring Plan. Sales to a relatively small number
of
customers, particularly
in connection with its RMA Business, will continue to account for a high
percentage of its sales in the foreseeable future. Although the composition
of
Wave Wireless’ largest customer group may vary from period to period, the loss
of a significant customer or a major reduction in orders by any significant
customer, through reductions due to market, economic or competitive conditions
in the telecommunications industry, may adversely affect Wave Wireless’
business, financial condition, and results of operations. Wave Wireless’ ability
to maintain or increase its sales in the future will depend, in part,
upon its
ability to obtain orders from new customers as well as the financial
condition
and success of its customers, and the economy in general.
Research
and Development
As
part
of the restructuring plan, Wave Wireless divested its interest in P-Com
Italia,
which manufactured certain product components for Wave Wireless, and provided
it
with select research and development services. Wave Wireless ceased further
development of new licensed spectrum products but plans to continue research
and
development on its license exempt products from its San Jose, California
facility. Wave Wireless expects to continue to invest in research and
development to maintain superior features for the SPEEDLAN family of products.
Wave Wireless invested approximately $5.0 million, $6.1 million, and $12.7
million in 2004, 2003 and 2002, respectively, in total research and development
efforts, including amortization and depreciation. As a result of the
Restructuring Plan announced in April 2005, Wave Wireless anticipates investing
approximately $600,000 per quarter in research and development efforts,
focused
principally on the SPEEDLAN product line.
Wave
Wireless’s research and development efforts can be classified into two distinct
efforts: (1) increasing the functionality of its point-to-point,
point-to-multipoint and mesh radio systems through a) the development of
additional frequencies and product capacities, and b) the enhancement of
its
network management system software offering, and (2) integrating new
functionality to extend the reach of its products into customer networks,
such
as access technology which allows the customer to manage telecommunications
services on-site and integrate voice, data, video and facsimile in one
offering.
Wave Wireless also intends to develop additional SPEEDLAN products with
smaller
size, greater functionality and greater ease of use for new markets, including
developing a line of next generation fixed wireless broadband products
based on
the 802.11a/g and/or 802.16 standards.
Competition
The
worldwide wireless communications market is extremely competitive. Wave
Wireless’ wireless radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including
copper
and fiber optic cable. The Company has experienced competition worldwide
from a
number of leading telecommunications companies that offer a variety of
competitive products and services, including Alcatel Network Systems, Alvarion,
Ceragon, AirSpan, Motorola, Cisco Systems, Stratex, and Terabeam Wireless.
Many
of these companies have substantially greater installed bases, financial
resources and production, marketing, manufacturing, engineering and other
capabilities than Wave Wireless.
In
addition, numerous start-ups continue to enter the marketplace with competing
products. The principal elements of competition in Wave Wireless’ market, and
the basis upon which customers typically select the Wave Wireless’ systems,
include price, performance, software functionality, ability to meet quick
delivery requirements, and customer service and support capabilities. Wave
Wireless expects its competitors to continue to improve the performance
and
lower the price of their current products and to introduce new products
or new
technologies that provide added functionality and other features. New product
introductions and enhancements by Wave Wireless’ competitors has caused a
significant decline in its sales or loss of market acceptance of its systems,
and in certain cases, has made its systems or technologies obsolete or
noncompetitive. Wave Wireless has experienced significant price competition
and
expects price competition to intensify as a result of new entrants into
the
market. This has adversely affected Wave Wireless’ business, financial condition
and results of operations. Wave Wireless believes that its ability to continue
to compete successfully is based on factors both within and outside of
its
control. Timing of new product line introductions, performance characteristics
of Wave Wireless’ equipment and the ability of its customers to be successful
all play key roles. In order to remain competitive, Wave Wireless will
be
required to continue to expend significant resources on new product development,
cost reduction and enhancements.
-71-
Government
Regulation
Radio
telecommunications are subject to extensive regulation by the United States
and
foreign governmental agencies and international treaties. Wave Wireless’
products must conform to a variety of domestic and international requirements
established to, among other things, avoid interference among users of radio
frequencies and to permit interconnection of equipment. Each country has
a
different regulatory process. Historically, in many developed countries,
the
limited availability of frequency spectra has inhibited growth of wireless
telecommunications networks.
In
order
for Wave Wireless to operate within a specific country’s jurisdiction, it must
obtain regulatory approval for its systems and comply with different regulations
in each jurisdiction. Regulatory bodies worldwide continue to adopt new
standards for wireless telecommunications products. The delays inherent
in this
governmental approval process may cause the cancellation, postponement
or
rescheduling of the installation of communications systems, which in turn
may
have prevented or delayed the recognition of the sale of Wave Wireless’
systems.
The
failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in suspension or cessation
of operations in that particular jurisdiction. These regulations and changes
could require Wave Wireless to modify its products and incur substantial
costs
and delays to comply with these time-consuming regulations and changes.
In
addition, Wave Wireless is also affected by the regulation, allocation
and
auction of radio frequency spectrum by domestic and international authorities.
Equipment to support new services can be marketed only if permitted by
suitable
frequency allocations, auctions and regulations, and the process of establishing
new regulations is complex and lengthy. If personal communications service
operators and others are delayed in deploying their systems, Wave Wireless
could
experience delays in orders for Wave Wireless’ products. Failure by the
regulatory authorities to allocate suitable frequency spectrum could adversely
affect its business, financial condition and results of operations.
The
regulatory environment in which Wave Wireless operates is subject to significant
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact its operations by restricting
the
development efforts of its customers, making current systems obsolete or
increasing the opportunity for additional competition. Any of these regulatory
changes, including changes in the allocation of available spectrum, could
adversely affect Wave Wireless’ business and results of operations. Wave
Wireless might modify its systems in order to operate in compliance with
applicable regulations. These modifications could be costly and time consuming
to implement.
Intellectual
Property
Wave
Wireless generally owns its intellectual property, except for its existing
patents, which were sold to a third party in November 2005. In connection
with
this sale, Wave Wireless retained a non-exclusive, perpetual, royalty free
right
and license to use the patents in connection with its millimeter wave radio
licensed products.
Wave
Wireless relies on its ability to obtain and enforce its intellectual property
rights, including patents and copyrights on its proprietary software. Wave
Wireless generally enters into confidentiality and nondisclosure agreements
with
service providers, customers and others, and limits access to and distribution
of its proprietary technology. Wave Wireless also enters into software
license
agreements with its customers and others. However, these measures may not
provide adequate protection for Wave Wireless’ trade secrets and other
proprietary information. Disputes over the ownership of Wave Wireless’
intellectual property rights may still arise and its trade secrets and
proprietary technology may otherwise become known or be independently developed
by competitors. Any patent Wave Wireless owns or licenses may be invalidated,
circumvented or challenged, the rights granted thereunder may not provide
competitive advantages or any of its pending or future patent applications
may
not be issued with the scope of the claims sought, if at all. Furthermore,
others may develop similar products or software, duplicate Wave Wireless’
products or software, or third parties may assert intellectual property
infringement claims against it. In addition, foreign intellectual property
laws
may not adequately protect Wave Wireless’ intellectual property rights abroad.
Failure to protect Wave Wireless’ proprietary rights could adversely affect its
business, financial condition, and results of operations.
-72-
Litigation
may be necessary to enforce Wave Wireless’ intellectual property rights, to
protect its trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against claims of infringement
or
invalidity. This litigation could result in substantial costs and diversion
of
resources and could adversely affect Wave Wireless’ business, financial
condition and results of operations regardless of the outcome of the litigation.
Infringement, invalidity, right to use or ownership claims by third parties
or
claims for indemnification resulting from infringement claims may be asserted
in
the future and these assertions may adversely affect Wave Wireless’ business,
financial condition, and results of operations. If any claims or actions
are
asserted against Wave Wireless, it may seek to obtain a license under a
third
party’s intellectual property rights. However, a license may not be available
under reasonable terms or at all. In addition, if Wave Wireless decides
to
litigate these claims, the litigation could be extremely expensive and
time
consuming and could adversely affect Wave Wireless’ business, financial
condition and results of operations, regardless of the outcome of the
litigation.
Employees
As
of
December 31, 2005, Wave Wireless employed a total of 47 employees,
including 18 in Operations, seven in Research and Development, 15
in Sales and Marketing and seven in Administration. Wave Wireless believes
that future success will depend in large part on its ability to attract
and
retain highly skilled employees. No employees are represented by a labor
union,
and Wave Wireless has not experienced any work stoppages.
Properties
|
Location
of Leased Facility
|
Functions
|
Square
Footage
|
Date
Lease Expires
|
|
Headquarters,
San Jose, CA
|
Administration/Customer
|
||
|
|
Support/Sales/Engineering;
|
||
|
|
Manufacturing
|
19,219
|
June
30, 2010
|
|
Redditch,
England
|
Warehouse/Operations
|
6,700
|
September
28, 2009
|
|
Sarasota,
FL
|
Sales/Customer
Support
|
1,200
|
July
31, 2006
|
Wave
Wireless does not own any real property.
Legal
Proceedings
On
June
20, 2003, Agilent Financial Services, Inc. ("Agilent") filed a complaint
against
Wave Wireless for Breach of Lease, Claim and Delivery and Account Stated,
in
Superior Court of the State of California, County of Santa Clara. The
amount
claimed is approximately $2.5 million, and represents accelerated amounts
due
under the terms of capitalized equipment leases of Wave Wireless. On
June 27,
2003, the parties filed a Stipulation for Entry of Judgment and Proposed
Order
of Dismissal of Action With Prejudice. Under the terms of the Stipulation,
Wave
Wireless paid Agilent $50,000 on July 15, 2003 and $100,000 on September
1,
2003, and paid $50,000 per month though November 2004. On November
30, 2004,
Agilent entered into an agreement with us to restructure the $1,725,000
due
Agilent on December 31, 2004. Under the terms of the agreement, we
paid Agilent
an initial payment of $250,000 on December 1, 2004; and paid monthly
payments of
$92,187 though March 2005. Also, we issued Agilent a warrant to purchase
178,571
shares of our common stock. The warrant has an initial exercise price
of $0.56
and a term of five years. On March 31, 2005, Wave Wireless and Agilent
entered
into a further agreement whereby one half of the remaining debt of
$1,111,599
would be paid in equal payments over 18 months beginning April 1, 2005,
with the
other half being paid in the form of senior preferred stock convertible
at any
time at the option of the holder into common stock at a price of $.50
per share.
As a result of the Stipulation, judgment under the Complaint will not
be entered
unless and until Wave Wireless defaults under the terms of the Stipulation,
as
amended to reflect the agreements described above. In the event Wave
Wireless
satisfies each of its payment obligations under the terms of the Stipulation,
the Complaint will be dismissed, with prejudice.
In
June
2000, two former consultants to P-Com Italia S.p.A. filed a complaint
against
P-Com Italia in the Civil Court of Rome, Italy seeking payment of certain
consulting fees allegedly due the consultants totaling approximately
$615,000.
The Civil Court of Rome appointed a technical consultant in order to
determine
the merit of certain claims made by the consultants. On April 20, 2005,
the
Civil Court of Rome issued judgment dismissing the case, and ordered
the
consultants to pay P-Com Italia's legal fees. The Court's order has
been
appealed by the consultants to the Court of Appeal of Rome. While no
assurances
can be given, Wave Wireless believes that the Court of Appeal of Rome
will
dismiss the Appeal.
On
September 16, 2005, Wave Wireless was served with a Complaint filed
by Lakewood
Ranch Properties, Inc. (the "Landlord") for failure to pay one month's
rent due
under the terms of a Sublease Agreement dated January 3, 2005, by and
between
the Landlord and Wave Wireless (the "Sublease"), in the amount of $26,771.43.
The Complaint seeks eviction of the Registrant from its facility in
Sarasota,
Florida, and damages in the amount of $28,110.00. Landlord also alleges
that
Registrant is liable under the Sublease for accelerated future monthly
rent
through September 30, 2016. The total amount of the Complaint filed
was
$3,533,828.70. On October 17, 2005, both parties entered into a Lease
Termination Agreement and Lakewood Ranch has agreed to dismiss the
Complaint
filed in the amount of $3,533,828.70, after payments totaling $310,000
are made.
As of December 31, 2005, the amount remaining to be paid is $240,000.
On January
30, 2006, Wave Wireless and the Landlord entered into an Amendment
to Addendum
of Termination Agreement (“Amendment”). Under the term of the Amendment, Wave
Wireless paid $30,000 to Landlord on February 1, 2006, and is required
to pay
$30,000 to Landlord or before February 28, 2006, and $180,000 on or
before March
31, 2006. Wave Wireless intends to seek financing to make the required
payments.
No assurances can be given that Wave Wireless will be able to obtain
the
necessary financing to make the remaining required payments.
In
the
event Wave Wireless is unable to satisfactorily resolve these and other
proceedings that might arise, its financial position and results of
operations
may be materially affected.
WAVE
WIRELESS MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wave
Wireless’ discussion and analysis of financial condition and results of
operations contains forward-looking statements, which involve risks and
uncertainties. Wave Wireless’ actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors,
including those set forth in the section entitled “Risk Factors” beginning on
page 17 of this proxy statement/prospectus.
Overview
Wave
Wireless develops, manufactures and distributes next generation wireless
mesh
routers for the telecommunications, security and surveillance and public
safety
markets. Wave Wireless’ mesh, point-to-point and point-to-multipoint broadband
wireless access systems combine high performance, versatility and AES encryption
to deliver a broad range of powerful applications and turnkey solutions
ideally
suited for internet service providers, educational institutions, corporate
enterprises and government agencies. Wave Wireless’ wireless access systems are
sold globally through its own sales force, as well as through strategic
partners, distributors, systems integrators, and value added resellers.
Wave
Wireless also is focused on supporting its global customer base in connection
with its repair and maintenance business (“RMA Business”).
Summary
of Operations
Wave
Wireless has incurred substantial losses in recent years. During the years
ended
December 31, 2004, 2003, and 2002, Wave Wireless recorded net losses from
continuing operations of ($3.3) million, ($10.7) million, and ($44.9) million,
respectively. While Wave Wireless achieved revenue growth in the year ended
December 31, 2004 compared to the year ended December 31, 2003, lower average
selling prices have continued to impact Wave Wireless’ operating results in 2004
compared to 2003 and prior periods. As a result, Wave Wireless continued
to
reduce operating and other costs throughout 2004. For example, in the second
quarter of 2004, Wave Wireless restructured its Italian operations conducted
by
P-Com Italia, S.p.A. Under the restructuring plan, certain refurbishment
operations have been outsourced to NORT S.r.L, an Italian third-party contract
manufacturer. The outsourcing arrangement is in addition to arrangements
to
outsource manufacturing of its point - to - point and spread spectrum products
entered into in the first quarter of 2004, which resulted in lower costs
of
manufacturing those product lines.
The
continued curtailments in capital spending among telecommunication carriers
in
the United States, Europe, and many parts of Asia and Latin America countries,
together with Wave Wireless’ customer concentration, and the intense competition
from leading telecommunications equipment and technology suppliers, has
resulted
in lower average selling prices.
-73-
As
a
result, on April 28, 2005, Wave Wireless announced a restructuring plan
that
resulted in a significant reduction in spending, and substantially reduced
operating and other costs (the “Restructuring Plan”). The Restructuring Plan was
caused by the substantial operating losses incurred by Wave Wireless,
and its
assessment that substantial operating losses would continue in the short
term
absent a plan to restructure the business, and substantially reduce its
cost
structure. In addition, absent such a plan, Wave Wireless would likely
be unable
to attract financing on reasonable terms, if at all.
The
Restructuring Plan included the divestiture of certain unprofitable product
lines, which includes certain of Wave Wireless’
point-to-point
microwave products. Wave Wireless will, however, continue the sale of its
unlicensed radio products, and certain of its licensed radio products,
including refurbished licensed products in connection with its repair and
maintenance business (“RMA Business”). The Restructuring Plan also included a
reduction in work force from approximately 130 full and part-time employees
to
approximately 50 employees worldwide by the end of 2005. The Restructuring
Plan
is substantially complete as of the end of 2005.
Summary
of Liquidity and Capital Resources
The
accompanying consolidated financial statements have been prepared assuming
that
Wave Wireless will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course
of business. As reflected in the financial statements, Wave Wireless used
$9.1
million, $5.9 million and $14.5 million cash, respectively, in supporting
its
operating activities during the years ended December 31, 2004, 2003 and
2002,
respectively. Wave Wireless’ financing activities generated $4.7 million, $11.9
million and $8.0 million during the years ended December 31, 2004, 2003
and
2002, respectively.
For
the
nine-month period ended September 30, 2005, Wave Wireless incurred a net
loss
attributable to common stockholders of $15.4 million and used $5.4 million
cash
in its operating activities. As of September 30, 2005, Wave Wireless had
a
surplus in stockholders’ equity of $3.9 million and accumulated deficit of
$384.3 million. Also, as of September 30, 2005, Wave Wireless had approximately
$166,000 in cash and cash equivalents, and a working capital deficiency
of
approximately $7.3 million. These conditions raise substantial doubt about
Wave
Wireless’ ability to continue as a going concern.
Wave
Wireless’ current working capital requirements are being met principally from
available borrowings under a credit facility (“Credit Facility”) with Silicon
Valley Bank (the “Bank”), discussed below, borrowings from the issuance of
promissory notes convertible into shares of Wave Wireless’ common stock
(“Convertible Notes”), and cash from operations. The amount outstanding under
the Credit Facility was approximately $1.9 million at September 30, 2005.
Wave
Wireless’ plan of restructuring announced in April 2005 (“Restructuring Plan”)
was intended to eliminate its dependence on external sources of financing.
While
the Restructuring Plan has resulted in a substantial reduction in operating
losses, and cash used in operations, Wave Wireless currently remains dependent
on external sources of financing to continue operations. As a result, Wave
Wireless has issued Convertible Notes to address its immediate liquidity
needs,
and intends to issue additional Convertible Notes to meet its working capital
requirements. It is currently anticipated that the Convertible Notes will
convert into an equity-based financing that Wave Wireless intends to consummate
prior to the end of the quarter ending March 31, 2006. Wave Wireless intends
to
use the proceeds from the equity-based financing to settle certain commitments,
and provide for its long-term working capital needs.
-74-
In
addition to issuing Convertible Notes, Wave Wireless intends to meet its
working
capital requirements by (i) accessing available borrowings under the Credit
Facility, (ii) further reducing operating and other costs under the
Restructuring Plan, and (iii) focusing sales on higher margin products.
Wave
Wireless currently does not have any commitments from third parties to
acquire
additional Convertible Notes.
There
can
be no assurance that Wave Wireless will be successful in issuing additional
Convertible Notes or that the it will be able to consummate an Equity Financing
on acceptable terms, if at all. Wave Wireless is in the process of a merger
and
is continuing to consider other merger, acquisition and strategic opportunities
that would substantially improve its competitive position, increase sales,
and
accelerate profitability. If Wave Wireless is unsuccessful in its plans
to issue
additional Convertible Notes or raise additional capital in the immediate
term,
or otherwise improve its liquidity position, Wave Wireless will no longer
be
able to continue as a going concern. The financial statements do not include
any
adjustments relating to the recoverability and classification of recorded
asset
amounts or to amounts and classification of liabilities that may be necessary
if
Wave Wireless unable to continue as a going concern.
Subsequent
Events
Since
September 30, 2005, Wave Wireless has issued approximately
$1,025,000 in Convertible Notes, due March 31, 2006. Interest accrues
on the
Convertible Notes at an annual interest rate of 10%. Under the terms
of the
Convertible Notes, the holders have the option to convert the outstanding
balance due under the terms of the Convertible Notes into shares of common
stock
of Wave Wireless at a price per share of $0.15 at any time the Convertible
Notes
remain outstanding. In addition, the outstanding principal amount and
all
accrued but unpaid interest under the terms of the Convertible Notes
automatically convert into any shares issued in an equity or equity-based
financing with gross proceeds of at least $2,500,000 (“Equity Financing”). For
purposes of determining the number of equity securities to be received
by the
holders upon such conversion, the holders shall be deemed to have tendered
120%
of the outstanding balance of the Convertible Notes as payment of the
purchase
price in the Equity Financing. As additional consideration for the loan
evidenced by the Convertible Notes, the holders were issued warrants
for the
issuance of 2,562,500 shares of common stock of Wave Wireless at an exercise
price of $.20 per share.
In
anticipation of the proposed merger with WaveRider, Wave Wireless has
advanced
WaveRider $450,000 from the proceeds received from the issuance of the
Convertible Notes under a series of 10% convertible promissory notes
issued by
WaveRider, which convertible promissory notes are due and payable March
31,
2006. Wave Wireless has converted the convertible promissory notes
into shares of voting preferred stock of WaveRider.
On
November 10, 2005, Wave Wireless and the purchaser of certain promissory
notes
issued under the Debenture Agreement exchanged all issued and outstanding
promissory notes for and in consideration for the issuance to the purchaser
of a
new promissory note, in the principal amount of $4,153,649 (the “New Note”),
which amount represented unpaid principal and accrued interest due under
the
terms of the old promissory notes as of the date of the New Note, October
1,
2005. Under the terms of the New Note, interest accrues on such debt
at an
annual interest rate of 8%, and this rate increases to 10% on April 1,
2006
through the maturity date of the loan, December 31, 2007. Payments of
principal
and accrued interest under the New Note is amortized and paid by Wave
Wireless
over a period of eight quarters in either cash or shares of Wave Wireless’
common stock, with the first amortization payment due December 31, 2005.
Wave
Wireless made the first amortization payment using warrants to purchase
shares of Wave Wireless’ common stock, exercisable
at $.001 per share.
In
consideration for allowing borrowings under the Purchase Agreement after
December 31, 2004, and for waiving, among other things, certain other
conditions
to additional draws under the Purchase Agreement, Wave Wireless lowered
the
exercise price of certain warrants held by the purchaser of the promissory
notes
from $1.50 to $.001 per share on November 10, 2005.
Estimates
and Critical Accounting Policies
Wave
Wireless ‘s discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which
have been
prepared in accordance with accounting principles generally accepted in
the
United States of America. The preparation of these financial statements
requires
Wave Wireless to make estimates and judgments that affect the reported
amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. Wave Wireless evaluates its estimates
frequently. Wave Wireless bases its estimates on historical experience
and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
-75-
Wave
Wireless believes the following critical accounting policies are significant
in
the preparation of its consolidated financial statements:
Revenue
Recognition
Revenue
from product sales is recognized upon transfer of title and risk of loss,
which
is upon shipment of the product, provided no significant obligations remain
and
collection is probable. Revenue from out-of-warranty repair is recognized
upon
replacement of the defective unit with a repaired unit to the customers.
Provisions for estimated warranty repairs, returns and other allowances
are
recorded at the time revenue is recognized.
Allowance
for Doubtful Accounts
Wave
Wireless maintains an allowance for doubtful accounts for estimated losses
on
customer accounts. Wave Wireless evaluates its allowance for doubtful accounts
based on the aging of its accounts receivable, the financial condition
of its
customers and their payment history, its historical write-off experience
and
other assumptions. In order to limit its credit exposure, Wave Wireless
often
require irrevocable letters of credit and even prepayment from certain
of its
customers before commencing production.
Inventory
Wave
Wireless’ inventory is required to be stated at the lower of its cost or
recoverable value. Demand from its customers is highly unpredictable, and
can
fluctuate significantly as a result of factors beyond its control. In addition,
its inventories include parts and components that are specialized and subject
to
rapid technological obsolescence. Finally, Wave Wireless may purchase
inventories in advance of a customer’s formal order if it believes the risk of
loss is not probable. As a result of these conditions, Wave Wireless maintains
an allowance for inventories. Wave Wireless assesses its inventory carrying
value and reduces it if necessary, on a specific identification basis.
However,
such process requires subjective estimates.
Impairment
of Long Lived Assets, Other Than Goodwill
In
the
event that certain facts and circumstances indicate that the long-lived
assets
other than goodwill may be impaired, an evaluation of recoverability would
be
performed. When an evaluation of long lived assets other than goodwill
becomes
necessary, Wave Wireless conducts a probability analysis based on the weighted
future undiscounted cash flows associated with the asset or at the lowest
discernable level of cash flows. The results are then compared to the carrying
amounts to determine if impairment charges require calculation. The cash
flow
analysis for the property and equipment is performed over the shorter of
the
expected useful lives of the assets, or the expected life cycles of its
product
line.
Impairments
of Goodwill
Goodwill
resulting from the purchase of substantially all the assets of SPEEDCOM
Wireless
Corporation will not be amortized into operations. Rather, such amounts
will be
tested for impairment at least annually. This impairment test is calculated
at
the reporting unit level, which is at the enterprise level. The annual
goodwill
impairment test has two steps. The first step identifies potential impairments
by comparing the fair value of Wave Wireless, as determined using its trading
market prices, with its carrying value, including goodwill. If the fair
value
exceeds the carrying amount, goodwill is not impaired and the second step
is not
necessary. If the carrying value exceeds the fair value, the second step
calculates the possible impairment loss by comparing the implied fair value
of
goodwill with the carrying amount. If the implied amount is less than the
carrying amount, a write-down will be recorded. In the event that Wave
Wireless
determines that the value of goodwill has become impaired using this approach,
an accounting charge for the amount of the impairment will be recorded.
No
impairment of goodwill resulted from this measurement approach during the
current year.
-76-
Accounting
For Income Tax Valuation Allowances
Wave
Wireless records a valuation allowance to reduce its deferred tax assets
to the
amount that is more likely than not to be realized in future periods. Wave
Wireless considers historical levels of income, expectations and risks
associated with estimates of future taxable income and ongoing prudent
and
feasible tax planning strategies in assessing the need for the valuation
allowance. In the event that Wave Wireless determines that it would be
able to
realize deferred tax assets in the future in excess of the net recorded
amount,
an adjustment to the deferred tax asset would increase income in the period
that
determination was made.
Years
Ended 2004, 2003 and 2002
Sales
In
2004,
2003 and 2002, Wave Wireless’ sales were approximately $24.2 million, $20.8
million and $29.7 million, respectively. The 16% increase in sales from
2003 to
2004 was primarily due to increased shipments to one customer, which generated
approximately 25% of its total sales, or $6.2 million. Wave Wireless does
not
anticipate generating the same level of sales to this customer in 2005.
Sales
of
licensed products in 2004, including refurbished radios, was $19.1 million,
or
79% of total sales, while sales of unlicensed products was $5.1 million,
or 21%
of total sales. Wave Wireless currently expects the demand for unlicensed
wireless equipment to increase, as unlicensed equipment is generally less
expensive and the spectrum is free. Demand for licensed wireless equipment
has
not significantly increased since 2000, when spending on telecommunications
equipment peaked, and competition has intensified. As part of Wave Wireless’
restructuring plan announced in April 2005, it has discontinued its licensed
product line but will, however, continue the sale of refurbished licensed
products in connection with its repair and maintenance business and focus
on
increasing sales of its unlicensed product line. See Restructuring Activities
below.
Sales
of
refurbished licensed products in 2004 were $11.2 million, or 46% of total
sales,
and 58% of total sales of licensed products. As a percentage of total sales
and
total sales of licensed products, sales of refurbished licensed products
are
anticipated to increase in 2005 relative to 2004 as a result of the decrease
in
sales of new licensed products in 2005.
The
30%
decrease in sales from 2002 to 2003 was primarily due to decreased shipments
to
China and South East Asia, which decreased to $5.8 million in 2003, compared
to
$15.0 million in 2002. The decrease was principally caused by the increased
competition in the region, and economic conditions exacerbated by the SARS
epidemic.
Sales
to
Orange Personal Communications Services accounted for 13%, 18% and 11%
of total
sales in 2004, 2003 and 2002, respectively. Sales to MynTahl Corporation
accounted for 0%, 13% and 14% of total sales in 2004, 2003 and 2002,
respectively. Sales to T-Mobile (previously known as Mercury-One-to-One)
accounted for 12%, 12% and 4% of 2004, 2003 and 2002 sales, respectively.
During
2004, Wave Wireless generated 11% of its sales in the United States, 23%
in the
United Kingdom, 21% in continental Europe, 14% in Asia, 25% in Latin America
and
6% in other geographical regions. During 2003, Wave Wireless generated
8% of its
sales in the United States, 31% in the United Kingdom, 18% in continental
Europe, 32% in Asia, 7% in Mexico and 4% in other geographical regions.
During
2002, Wave Wireless generated 10% of its sales in the United States, 20%
in the
United Kingdom, 15% in continental Europe, 51% in Asia, and 4% in other
geographical regions.
-77-
Gross
Profit (Loss)
Cost
of
sales consists primarily of costs related to materials, labor and overhead,
freight and duty. Cost of sales amounted to $18.7 million, $20.6 million
and
$30.8 million during the years ended December 31, 2004, 2003, and 2002,
respectively. In 2004, 2003, and 2002, gross profit (loss) was $5.5 million,
$0.2 million, and $(1.1) million, respectively, or 23%, 1%, and (4%),
respectively.
In
2004,
2003 and 2002, cost of sales and gross margins were negatively affected
by
inventory and other related charges of $0.9 million, $3.7 million, and
$5.8
million, respectively (see “Restructuring and Other Charges” below). Product
gross profit as a percentage of product sales, not including the effect
of the
inventory charges described above, was approximately 26%, 19%, and 15%,
in 2004,
2003, and 2002, respectively. The higher gross margin in 2004 was principally
due to higher levels of revenue attributable to sales of higher margin
refurbished licensed product sales and the lower cost of outsourced
manufacturing by NORT in its former Italian operations. The NORT arrangement,
which was executed in June 2004, is expected to have a continuing beneficial
effect on gross margins. The higher gross margin in 2003 over 2002 was
principally due to a higher percentage of revenue attributable to refurbished
licensed product sales, which contributes a higher gross margin than the
gross
margin attributable to new product sales.
As
further discussed under Restructuring Activities, below, our restructuring
plans
included the divestiture of certain licensed product lines, other than
refurbished licensed products, which will have the effect of further reducing
its overall operating costs. Divesting certain product lines resulted in
inventories becoming excessive and subject to markdown. Such amounts were
recorded as a component of cost of sales when they were estimable.
Research
and Development
Research
and development expenses consist primarily of costs associated with new
product
development. Wave Wireless’ research and development activities include the
development of additional radio products, frequencies and upgrading operating
features, and related software tools. Software development costs incurred
prior
to the establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the establishment of technological
feasibility and before general release to customers are capitalized, if
material.
In
2004,
2003 and 2002, research and development expenses were approximately $5.0
million, $6.1 million and $12.7 million, respectively. As a percentage
of
product sales, research and development expenses decreased from 29% in
2003 to
20% in 2004, primarily due to increased revenue and decreases in research
and
development spending. As a percentage of sales, research and development
expenses decreased from 43% in 2002 to 29% in 2003, primarily due to
discontinuation of research on the point-to-multipoint product line. Research
and development expenses in 2002 were significant due to the substantial
final
development efforts on the new Encore point - to - point and AirPro Gold
spread
spectrum products in preparation for commercial rollout of this product
line in
2003.
Selling
and Marketing
Selling
and marketing expenses consist of salaries, sales commissions, travel expenses,
customer service and support expenses, and costs related to business development
and trade shows. In 2004, 2003, and 2002, selling and marketing expenses
were
$6.8 million, $3.6 million, and $6.6 million, respectively. As a percentage
of
sales, selling and marketing expenses increased from 17% in 2003 to 28%
in 2004,
primarily due to increased payroll, travel and commissions expenses. As
a
percentage of sales, selling and marketing expenses decreased from 22%
in 2002
to 17% in 2003, primarily due to headcount reductions and cost cutting
programs
that were put in place during the restructuring.
General
and Administrative
General
and administrative expenses consist primarily of salaries and other expenses
for
management, as well as finance, accounting, data processing, public company
costs, legal, and other professional services. In 2004, 2003, and 2002,
general
and administrative expenses, were $4.6 million, $5.6 million, and $10.7
million,
respectively. As a percentage of sales, general and administrative expenses
decreased from 27% in 2003 to 19% in 2004 due to reduced consulting,
underwriting fees and other services. As a percentage of sales, general
and
administrative expenses decreased from 36% in 2002 to 27% in 2003 due to
headcount reductions, lower levels of external professional fees, and other
cost
cutting programs implemented during the year.
-78-
On
March
10, 2005, Wave Wireless’ Chief
Executive
Officer, Samuel Smookler, resigned as Chief Executive Officer and a director
of
Wave Wireless. The Board of Directors is currently negotiating the terms
of his
severance arrangements. Under the terms of his existing Agreement, Mr.
Smookler
may be entitled to receive severance payments totaling $250,000. In addition,
his incentive stock option to acquire 80,000 shares of common stock vests
immediately. Wave Wireless recorded the negotiated severance expense effective
with the date of termination during the first fiscal quarter in the year
ended
December 31, 2005. The acceleration in vesting of Mr. Smookler’s incentive stock
options is not considered a modification and, therefore, no expense will
be
recorded, because acceleration upon termination was provided for in his
original
employment agreement. See also Restructuring Activities, below.
Restructuring
Activities
Wave
Wireless implemented the Restructuring Plan announced in April 2005 that
significantly curtailed current spending, and substantially reduced liabilities
and operating and other costs.
The
Restructuring Plan included significant reductions in costs, including
the
suspension or curtailment of certain research and development efforts,
reductions in headcount, restructuring of committed costs, such as leasing
arrangements, and the curtailment of activities in certain foreign locations.
The Plan also included the divestiture of certain unprofitable product
lines,
which had the effect of further reducing overall costs. Finally, the Plan
included the designation of additional preferred stock that was used to
restructure certain liabilities and existing preferred stock of Wave Wireless.
Many
of
the individual components of the Restructuring Plan resulted in charges
to
operations and, in some instances, the use of a portion of Wave Wireless’
remaining cash reserves. However, under current accounting standards for
restructuring and exit activities, Wave Wireless was required to determine
the
amounts and the timing of recognition of the cost components individually.
Severance costs were recognized when employee groups were identified and
the
severance benefits were communicated. Divesting certain product lines resulted
in inventories becoming excessive and subject to markdown evaluation. Such
amounts were recorded as a component of cost of sales when estimable. Other
costs associated with the Restructuring Plan, such as lease restructuring
or
other exit costs, generally were recognized when the costs were incurred
through
contract execution or otherwise.
Certain
time sensitive elements of its Restructuring Plan have been initiated
at the
direction or approval of the Board of Directors. As noted in General
and
Administrative above, on March 10, 2005, the employment of Wave Wireless'
Chief
Executive Officer, Samuel Smookler, was terminated, and its former Acting
Chief
Financial Officer and General Counsel, Daniel W. Rumsey, was appointed
Chief
Restructuring Officer. Wave Wireless had also commenced efforts to exit
or
modify certain facilities and operating lease arrangements, as well restructure
certain debts and other obligations of Wave Wireless prior to the announcement
in April 2005.
Restructuring
and Other Charges
Wave
Wireless continually monitors its inventory carrying value in the light
of the
slowdown in the global telecommunications market. This has resulted in
a $2.0
million charge to cost of sales for its point - to - multipoint, Tel-Link
point
- to - point and Air-link spread spectrum inventories during the second
quarter
of 2003. In the first quarter of 2003, Wave Wireless recorded a $3.4 million
inventory related charge to cost of sales, of which $2.0 million was related
to
its point - to - multipoint inventories. These charges were offset by credits
of
$1.8 million in the second quarter associated with a restructurings of
accounts
payable and purchase commitment liabilities arising from vendor settlements.
In
the
event that certain facts and circumstances indicate that the long-lived
assets
may be impaired, an evaluation of recoverability would be performed. When
an
evaluation occurs, Wave Wireless conducts a probability analysis based
on the
weighted future undiscounted cash flows associated with the asset. The
results
are then compared to the asset’s carrying amount to determine if impairment is
necessary. The cash flow analysis for the property and equipment is performed
over the shorter of the expected useful lives of the assets, or the expected
life cycles of its product line. An impairment charge is recorded if the
net
cash flows derived from the analysis are less than the asset’s carrying value.
Wave Wireless deems that the property and equipment is fairly stated if
the
future undiscounted cash flows exceed its carrying amount. In the first
and
second quarter of 2003, Wave Wireless continued to reevaluate the carrying
value
of property and equipment relating to its point - to - multipoint product
line,
that are held for sale. The evaluation resulted in a $2.5 million provision
for
asset impairment in the second quarter of 2003, and $0.6 million provision
in
the first quarter of 2003. As a result of these adjustments, there is no
remaining net book value of property and equipment related to the point
- to -
multipoint product line.
-79-
A
summary
of inventory reserve activities is as follows:
|
Inventory
Reserve
|
||||
|
Balance
at January 1, 2004
|
$
|
27,119
|
||
|
Additions
charged to Statement of Operations
|
916
|
|||
|
Deductions
from reserves
|
(3,746
|
)
|
||
|
Balance
at December 31, 2004
|
$
|
24,289
|
||
In
the
fourth quarter of 2002, Wave Wireless determined that there was a need
to
reevaluate its inventory carrying value in light of the continuing worldwide
slowdown in the global telecommunications market, especially with regard
to an
assessment of future demand for its point - to - multipoint product range.
This
resulted in a $5.8 million inventory charge to product cost of sales, of
which
$5.0 million was for point - to - multipoint inventories, and $0.8 million
was
for spread spectrum inventories.
Change
in Accounting Principle
Goodwill
represents the excess of the purchase price over the fair value of the
net
assets of acquired companies accounted for as purchase business combinations.
Wave Wireless adopted SFAS 142 on January 1, 2002, and, as a result,
discontinued recording goodwill amortization; although Wave Wireless did
record
a transitional impairment charge of $5.5 million in the first quarter of
2002,
representing the difference between the fair value of expected cash flows
from
the services business unit, and its book value.
Goodwill
Amortization and Impairment
Wave
Wireless accounted for the SPEEDCOM purchase transaction using the purchase
method of accounting. Under the purchase method of accounting, the total
purchase price, plus the fair value of assumed liabilities, is allocated
to the
net tangible and identifiable intangible assets acquired, based upon their
respective fair values. The total purchase price of approximately $7,514,000
consisted of 2,116,666 shares of its Common Stock, valued using market
values
for such shares around the commitment date ($3.42). The acquisition resulted
in
goodwill of approximately $12.0 million, because the value of the assumed
liabilities exceeded the value of the tangible assets acquired.
In
accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, goodwill resulting from the purchase, if any,
will
not be amortized into operations. Rather, such amounts will be tested for
impairment at least annually. In the event that Wave Wireless determines
that
the value of goodwill has become impaired, an accounting charge for the
amount
of the impairment will be recorded. No impairment of goodwill was recorded
in
2004 or 2003 because the enterprise value of the combined business units
exceeded the goodwill-carrying amount.
In
2002,
Wave Wireless reviewed the carrying value of goodwill related to the services
business unit, and based upon its assessment of future cash value of revenue
flows and the current depressed business condition of the telecommunications
services market, recorded an $11.4 million impairment charge in the fourth
quarter of 2002.
-80-
Loss
on Discontinued Business
In
the
first quarter of 2003, Wave Wireless decided to exit its service business,
P-Com
Network Services, Inc. (“PCNS”). Accordingly, this business is reported as a
discontinued operation and Wave Wireless recorded losses from its operations
for
the year ended December 31, 2003 and 2002. On April 30, 2003, Wave Wireless
entered into an Asset Purchase Agreement with JKB Global, LLC to sell certain
assets of PCNS. Wave Wireless guaranteed PCNS’ obligations under its premises
lease, through July 2007. As part of the sale to JKB Global, LLC, JKB Global,
LLC agreed to sublet the premises from PCNS for one year beginning May
1, 2003.
The terms of the sublease required JKB Global, LLC to pay less than the
total
amount of rent due under the terms of the master lease. As a result, Wave
Wireless remained liable under the terms of the guaranty for the deficiency,
and
the total obligation under the terms of the master lease was approximately
$1.5
million. This amount was accrued in the second quarter of 2003 as loss
on
disposal of discontinued operations. In September 2003, Wave Wireless entered
into an agreement to terminate the premises lease in consideration for
the
payment to the landlord of $240,000.
Interest
Expense
In
2004,
2003 and 2002, interest expense was $0.7 million, $2.2 million and $2.5
million,
respectively. In 2004 and 2003, interest expense primarily related to the
borrowings on the credit facility with the Bank, the issuance of the Convertible
Notes, amortization of discount on promissory notes, and interest on equipment
leases. In 2002, interest expense primarily related to the borrowings under
the
Credit Facility, the 4.25% Convertible Subordinated Notes, the issuance
of the
Convertible Notes, note conversion expenses and interest on equipment leases.
Approximately $0.8 million was charged to interest expense in 2002 related
to
conversion of the 4.25% Convertible Subordinated Notes to Common Stock,
in
compliance with SFAS 84.
Other
Income (Expense), Net
In
2004,
other income, net, related primarily to a gain on the settlement of a contract
of $7.5 million. In 2003, other income, net, related primarily to exchange
gain
arising from the depreciation of the United States dollar against the Euro
and
British pound of $0.9 million, gain on disposals of property and equipment
of
$1.1 million, and gain on vendor settlements of $2.2 million. These were
partially offset by miscellaneous other losses.
In
2002,
other expense, net, related primarily to losses on vendor settlements of
$1.2
million, and writing-off of a notes receivable of $0.8 million. These were
partially offset by exchange gain arising from Euro and British pound
denominated receipts when these currencies appreciated against the United
States
dollar and other miscellaneous income.
Gain
(loss) on Debt Extinguishment
In
the
second quarter of 2003, Wave Wireless repurchased a portion of its 7%
Convertible Subordinated Notes with a face value of $2.3 million, in exchange
for property and equipment valued at $0.8 million, resulting in a gain
of $1.5
million. In the third quarter of 2003, Wave Wireless redeemed the remaining
7%
Convertible Notes plus interest totaling $21.1 million, in exchange for
Series B
Preferred Stock with a valuation of $11.6 million. The amount of unamortized
deferred financing expense of $750,000 was also written-off as part of
this
transaction, which resulted in a gain of $8.8 million. In the fourth quarter
of
2003, Wave Wireless converted Series C Preferred Stock with a face value
of $2.2
million, in exchange for Common Stock valued at $6.0 million on the commitment
date of the transaction, resulting in a loss of $3.8 million.
In
the
second quarter of 2002, Wave Wireless repurchased 4.25% Convertible Subordinated
Notes with a face value of $1.75 million for approximately $367,000 in
cash.
Provision
(Benefit) For Income Taxes
There
was
no provision for income tax in 2004 and 2003, because Wave Wireless incurred
net
operating losses during the year and the realization of benefits is future
years
does not rise to the more likely than not standard. In 2002, Wave Wireless
recorded a net tax benefit of $(0.5) million, relating to recovery of prior
year’s federal income tax, offset by income taxes attributable to foreign
jurisdictions that had local taxable income for the year.
-81-
Nine
Months Ended September 30, 2005 and 2004
Sales
For
the
nine months ended September 30, 2005, sales were approximately $9.7 million,
compared to $19.9 million for the comparable period in the prior year.
The
significant decrease in revenue as compared to the comparable periods last
year
is attributable to substantially lower revenue in certain licensed product
lines
and lower than anticipated refurbished licensed product revenue associated
with
its RMA Business. The lower revenue attributable to its licensed product
lines
principally reflects the exiting of an unprofitable product line contemplated
in
its Restructuring Plan. Because of the significant decline in sales attributable
to its licensed product lines, a substantial portion of its product sales
continue to come from its RMA Business, which generated approximately $5.1
million for the nine months ended September 30, 2005, but were down from
the
$8.6 million for the nine months ended September 30, 2004.
The
decrease in sales attributable to its RMA Business in the nine month period
ending September 30, 2005 is principally caused by lower sales volume
attributable to the loss of a single customer in Europe, as well as by
the
decommissioning of certain of its licensed radio products from another
customer’s network. Wave Wireless anticipates that, as its customers’ networks
age, and the cost to replace these networks decrease, its customers may
similarly elect to decommission its licensed radio products installed in
their
networks. In addition, competition from other repair and maintenance service
providers may negatively affect sales attributable to its RMA Business.
Wave
Wireless recently entered into an agreement with one of its customers to
secure
the sale of refurbished licensed radio products to this customer through
March
2006, and Wave Wireless is currently negotiating similar agreements with
many of
its other customers. Nevertheless, it is anticipated that its RMA Business
will
decline over time. Wave Wireless currently anticipates that the expected
decline
in its RMA Business over time will be offset by increases in new product
sales
attributable to its unlicensed product lines.
For
the
nine months ended September 30, 2005, North America contributed 10% of
its
sales, 37% of its sales were from the United Kingdom, with 10% of its sales
from
Europe, while 6% of its sales originated from Asia, 17% of its sales were
from
Latin America and 20% from other regions. During the comparable period
in 2004,
9% of its sales were from North America, 24% of its sales were from the
United
Kingdom, 18% of its sales were from Europe, 7% of its sales were from Asia,
32%
of its sales were from Latin America, and 10% of its sales were generated
from
other regions.
As
a
result of the Restructuring Plan, Wave Wireless has divested certain
unprofitable product lines, and therefore sales levels for the quarter
and full
year ending December 31, 2005 will not reach the levels achieved in the
comparable periods in 2004. These product lines contributed approximately
$3.3
million in revenue during the first nine months of 2005. Our sales in subsequent
periods will be substantially dependent on sales of its unlicensed products,
which contributed $2.1 million in revenue in the nine months ended September
30,
2005, as well as sales attributable to its RMA Business, which will decline
over
time.
Gross
Profit
Gross
profit for the nine months ended September 30, 2005 and 2004 was $2.7 million
and $4.9 million, respectively, or 27% and 25% of sales in each of the
respective periods. The higher gross margin during the nine months ended
September 30, 2005 was principally attributable to non-recurring adjustment
items consisting of a favorable accrued inventory liability adjustment
of
$243,000, shipments of inventory on terminated purchase orders which reduced
its
accrued cancellation cost by $116,000 and a reduction in inventory reserves
of
$182,000 due to sales of licensed products which were previously reserved.
Absent these favorable non-recurring adjustments, gross margin would have
been
lower during this period compared to the same period in 2004 due to the
significantly lower sales volumes. Sales in connection with its RMA Business
were lower during this period compared to the same period in 2004, which
typically results in higher gross margins, as well as lower sales volumes
in
other licensed product lines. The significantly lower sales volume during
the
nine months ended September 30, 2005 resulted in a substantial amount of
unabsorbed overhead relative to the comparable period in 2004.
-82-
Research
and Development
For
the
nine months ended September 30, 2005 and 2004, R&D expenses were
approximately $2.5 million and $3.8 million, respectively. As a percentage
of
sales, research and development expenses were 25% for the nine months ended
September 30, 2005, compared to 19% for the nine months ended September
30,
2004. The decrease in R&D expenses is principally the result of headcount
reductions and other related expense reductions caused by the implementation
of
the Restructuring Plan, and the resulting focus on unlicensed product
development.
Selling
and Marketing
For
the
nine months ended September 30, 2005 and 2004, sales and marketing expenses
were
approximately $2.7 million and $5.2 million, respectively. The substantial
decrease in sales and marketing expenses is due to headcount reductions
and
other related expense reductions, and lower commissions in light of decreased
sales. As a percentage of sales, selling and marketing expenses were 27%
for the
nine months ended September 30, 2005, and 26% for the comparable period
in 2004.
General
and Administrative
For
the
nine months ended September 30, 2005 and 2004, general and administrative
expenses were approximately $2.5 million and $3.4 million, respectively.
As a
percentage of sales, general and administrative expenses were 26% for the
nine
months ended September 30, 2005, compared to 17% for the nine months ended
September 30, 2004. The decrease in general and administrative expenses
in the
first nine months of 2005 as compared to the comparable period in 2004
is
principally attributable to a realization of savings from cost reduction
efforts
caused by implementation of the Restructuring Plan, including reduced consulting
and legal expenses, and facilities consolidation.
Asset
Impairment and Other Restructuring Charges
In
the
event that certain facts and circumstances indicate that the long-lived
assets
may be impaired, an evaluation of recoverability would be performed. When
an
evaluation occurs, Wave Wireless conducts a probability analysis based
on the
weighted future undiscounted cash flows associated with the asset. The
results
are then compared to the asset’s carrying amount to determine if impairment is
necessary. The cash flow analysis for the property and equipment is performed
over the shorter of the expected useful lives of the assets, or the expected
life cycles of its product line. An impairment charge is recorded if the
net
cash flows derived from the analysis are less than the asset’s carrying value.
Wave Wireless deems that the property and equipment is fairly stated if
the
future undiscounted cash flows exceed its carrying amount.
In
April
2005, Wave Wireless announced the adoption of the Restructuring Plan that
significantly curtailed current spending, and substantially reduced liabilities
and operating and other costs. The Restructuring Plan included the divestiture
of certain unprofitable product lines, workforce reductions, write-down
of
certain inventory, and a loss associated with the divestiture of its research
and development operations in Italy. A restructuring charge of nearly $5.4
million was taken as of March 31, 2005, to cover the costs associated with
the
Restructuring Plan.
At
September 30, 2005, Wave Wireless recorded $310,000 in restructuring expense
resulting from the termination of the Sublease Agreement, dated January
3, 2005,
between Wave Wireless and Lakewood Ranch Properties, Inc. (“Sublease”). The
Termination Agreement, dated October 17, 2005, is intended to result in
the
dismissal of a Complaint filed September 16, 2005 by Lakewood Ranch Properties
for the failure to pay one month’s rent due under the terms of the Sublease, in
the amount of $26,771.43. Lakewood Ranch Properties also alleged that Wave
Wireless was liable under the Sublease for accelerated future monthly rent
through September 30, 2016.
Under
the
terms of the Termination Agreement, the parties have agreed to terminate
the
Sublease for and in consideration for the payment to Lakewood Ranch Properties
of $10,000 in attorney’s fees, and $300,000 payable $25,000 on or before October
31, 2005, $150,000 on or before November 15, 2005, and $125,000 on or before
December 31, 2005. Wave Wireless intends to seek financing to make the
required
payments. No assurances can be given that Wave Wireless will be able to
obtain
the necessary financing to make the required payments.
-83-
Interest
Expense
For
the
nine months ended September 30, 2005 and 2004, interest expense was $589,000
and
$304,000, respectively. Interest expense for the nine months ended September
30,
of 2005 was primarily for interest paid on short-term bank borrowings and
interest on debentures and promissory notes. As a result of Wave Wireless’
dependence on the Credit Facility to meet its working capital needs, as
well as
the issuance of the Notes and Convertible Notes, interest expense is anticipated
to increase in subsequent periods relative to the levels incurred in the
nine
months ended September 30, 2005.
Other
Income (Expense), Net
For
the
nine-month period ended September 30, 2005, other expense, net, totaled
$397,000
compared to other income of $8.3 million for the same period in 2004. The
other
income in 2004 was due to a $7.5 million gain on a settlement of a deferred
contract obligation and a $1.0 million gain on settlements with various
vendors.
Provision
(Benefit) for Income Taxes
Wave
Wireless has not recorded the tax benefit of its net operating losses since
the
criteria for recognition has not been achieved. The net operating losses
will be
available to offset future taxable income, subject to certain limitations
and
expirations.
Liquidity
and Capital Resources
Since
its
inception in August 1991, Wave Wireless have financed its operations and
capital
requirements principally through net proceeds of approximately $97.2 million
from its initial and two follow-on public offerings of its Common Stock;
$113.1
million from private placements of its Common Stock and the exercise of
Warrants; $44.6 million from five Preferred Stock financings; $97.5 million
from
the 4.25% Notes issued in 1997; $3.3 million from the issuance of debentures;
and borrowings under bank lines of credit and equipment lease arrangements.
Cash
Used in Operations
In
2004,
Wave Wireless used approximately $9.1 million of cash in operating activities,
primarily due to its net loss of $3.3 million, a non-recurring gain on
vendor
settlements of approximately $8.5 million, and reductions in accounts payable
and other accrued liabilities of $2.3 million, offset by depreciation expenses
and inventory charges of $2.4 million and lower receivables, and other
assets of
$2.4 million.
In
2003,
Wave Wireless used approximately $5.9 million of cash in operating activities,
primarily due to its net loss of $14.4 million, and a $6.5 million non-cash
gain
arising from the redemption of the Convertible Notes, plus a $2.1 million
of
non-cash gain from vendor settlements. These amounts were offset by a $3.7
million non-cash loss related to inventory and related charges, $3.1 million
of
property and equipment impairment charges, and depreciation expenses of
$3.9
million. Significant contributions to cash flow resulted from a net reduction
in
inventories of $2.5 million, a net reduction in prepaid and other current
assets
of $1.2 million, offset by a net decrease of other accruals and accounts
payable
totaling $2.1 million.
During
the nine month period ended September 30, 2005, Wave Wireless used approximately
$5.4 million of cash in operating activities, primarily due to its net
loss of
$11.6 million, increases in accounts receivable of $0.4 million, increases
in
inventory of $0.6 million (excluding the restructuring write-down), and
reductions in accounts payable of $1.1 million, offset by a non-cash
restructuring charge of $5.6 million, lower other asset values of $0.8
million,
and higher other accrued liabilities of $1.5 million and depreciation expense
of
$0.5 million.
During
the nine month period ended September 30, 2004, Wave Wireless used approximately
$6.7 million of cash in operating activities, primarily to fund operating
losses.
-84-
Cash
from Investing Activities
During
2004, Wave Wireless received $0.6 million from the sale of property and
equipment of $0.9 million, offset by new acquisitions of $0.3
million.
In
2003,
Wave Wireless used approximately $0.7 million of cash from investing activities,
due principally to $1.6 million paid for the acquisition of SPEEDCOM Wireless
Corporation, plus $0.2 million related to the acquisition of property and
equipment, offset by changes in the net assets of discontinued operations
of
$0.6 million.
During
the nine-month period ended September 30, 2005, Wave Wireless generated
approximately $0.4 million in investing activities. Wave Wireless received
$0.5
million from the sale of fixed assets offset by $0.1 million from the
acquisition of other property and equipment and increases in restricted
cash.
During
the nine-month period ended September 30, 2004, Wave Wireless generated
approximately $0.6 million of cash in investing activities, principally
due to
the sale of property in Italy for $0.8 million which was offset by the
acquisition of other property and equipment.
Cash
from Financing Activities
In
2004,
Wave Wireless received $4.7 million through financing activities. This
was due
primarily to $3.3 million of proceeds from the issuance of debentures and
$2.4
million net proceeds from the Special Warrant Offering, offset by $1.0
million
of capital lease payments.
In
2003,
Wave Wireless generated $11.9 million of cash flows from financing activities,
primarily through the receipt of $15.1 million from Preferred Stock and
bridge
note financings, as more particularly described below, and $0.3 million
from the
receipt of proceeds from the sale of Common Stock. These were offset by
payments
of $2.6 million to the Bank under the Credit Facility, a payment of $0.8
million
to redeem certain promissory notes assumed as a result of the acquisition
of
Wave Wireless, and payments of $0.2 million to lessors under capital leases.
During
the nine month period ended September 30, 2005, Wave Wireless received
approximately $2.9 million of cash from financing activities, primarily
from
$1.9 million in advances under the Credit Facility, $1.5 million in Note
proceeds from the Debenture Financing, and $0.1 million from the issuance
of
Convertible Notes, offset by $0.6 million in repayments related to outstanding
Notes.
During
the nine-month period ended September 30, 2004, Wave Wireless generated
cash of
$3.6 million from financing activities, principally due to the receipt
of $2.6
million resulting from the exercise of certain warrants in connection with
a
special warrant offering, advances of $1.5 million from the Bank under
the
Credit Facility, and $0.1 million from the sale of certain common stock
of
SPEEDCOM held by Wave Wireless, offset by $0.6 million in payments related
to
capital lease obligations.
On
March
26, May 28, and July 18, 2003, Wave Wireless completed its bridge financing
transactions in which it issued $1.5 million, $0.3 million and $0.9 million,
respectively, of 10% convertible promissory notes with a maturity date
of one
year from the date of issuance (the “Bridge Notes”). The Bridge Notes were
subordinated to amounts due under the Credit Facility, but senior to the
Convertible Notes. The Bridge Notes were converted into shares of Series
C
Convertible Preferred Stock, in connection with the Series C Financing,
as
discussed below.
On
August
4, 2003, as a result of the restructuring of its Convertible Notes, the
principal amount and accrued interest of $21,138,000 was converted into
approximately 1,000,000 shares of Series B Convertible Preferred Stock
with a
stated value of $21.138 per share.
On
October 3 and December 18, 2003, Wave Wireless raised approximately $13.8
million from the issuance and sale of its Series C Convertible Preferred
Stock
(the “Series C Financing”), resulting in net proceeds of approximately $9.9
million after deducting expenses related to the Series C Financing, and
payment
of certain claims related to its restructuring.
-85-
Current
Liquidity
As
of
September 30, 2005, Wave Wireless’ principal sources of liquidity consisted of
borrowings under the Convertible Notes, borrowing availability under the
Credit
Facility, and approximately $166,000 of cash and cash equivalents, compared
to
approximately $2.3 million in cash and cash equivalents at December 31,
2004.
Available borrowings under the Credit Facility at September 30, 2005 were
approximately $50,000, compared to $1.8 million at December 31, 2004. As
of
September 30, 2005, Wave Wireless was in compliance with the minimum tangible
net worth covenant established in the Credit Facility. Wave Wireless is
currently dependent on the issuance of additional Convertible Notes and
available borrowings under the Credit Facility to satisfy its immediate
liquidity needs, as described below.
At
September 30, 2005, our total liabilities were approximately $13.5 million,
compared to $11.8 million at December 31, 2004. Our current assets of $4.7
million and our current liabilities of $12.0 million at September 30, 2005,
resulted in negative working capital of approximately $7.3 million, compared
to
working capital of $1.3 million at December 31, 2004.
Wave
Wireless’ plan of restructuring announced in April 2005 (“Restructuring Plan”)
is intended to eliminate its dependence on external sources of financing.
While
the Restructuring Plan has resulted in a substantial reduction in operating
losses, and cash used in operations, Wave Wireless currently remains dependent
on external sources of financing to continue operations. As a result, Wave
Wireless has issued Convertible Notes to address its immediate liquidity
needs,
and intends to issue additional Convertible Notes to meet its working capital
requirements through the remainder of 2005. It is currently anticipated
that the
Convertible Notes will convert into an equity-based financing that Wave
Wireless
intends to consummate prior to the end of the quarter ending March 31,
2006
(“Equity Financing”). Wave Wireless intends to use the proceeds from the Equity
Financing to settle certain commitments and provide for its long-term working
capital needs.
-86-
In
addition to issuing Convertible Notes, Wave Wireless intends to meet its
working
capital requirements by (i) accessing available borrowings under the Credit
Facility, (ii) further reducing operating and other costs under the
Restructuring Plan, and (iii) focusing sales on higher margin products.
Wave
Wireless currently does not have any commitments from third parties to
acquire
additional Convertible Notes. There can be no assurance that Wave Wireless
will
be successful in issuing additional Convertible Notes or that it will be
able to
consummate Equity Financing on acceptable terms, if at all. Wave Wireless
is in
the process of a merger and is continuing to consider other merger, acquisition
and strategic opportunities that would substantially improve its competitive
position, increase sales, and accelerate profitability. If Wave Wireless
is
unsuccessful in its plans to issue additional Convertible Notes or raise
additional capital in the immediate term, or otherwise improve its liquidity
position, Wave Wireless will no longer be able to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts
and
classification of liabilities that may be necessary if Wave Wireless is
unable
to continue as a going concern.
There
can
be no assurance that its restructuring plan will be successful. Accordingly,
Wave Wireless is also evaluating the merits of a strategic acquisition
or other
transaction that would substantially improve its liquidity and capital
resource
position, as well as the merits of an outright sale of its business. If
ultimately required, there can also be no assurances that these actions
will be
successful.
Our
consolidated financial statements do not include any adjustments relating
to the
recoverability and classification of recorded asset amounts or to amounts
or to
amounts and classification of liabilities that may be necessary if Wave
Wireless
is unable to continue as a going concern.
Commitments
and Off Balance Sheet Instruments
Rent
expense under operating leases totaled approximately $900,000 for
the year ended
December 31, 2005. Wave Wireless expects to incur rent expense of
approximately
$116,000 through each quarter of 2006. These payments exclude certain
rent
obligations under Wave Wireless’ Lease Agreement by and between Wave Wireless
and Lakewood Ranch Properties, LLC (“Landlord”), which obligations Wave Wireless
has agreed to satisfy for and in consideration for the payment to
the Landlord
of $310,000. As of December 31, 2005, the
amount remaining to be paid to Landlord is $240,000. On January 30,
2006, Wave
Wireless and the Landlord entered into an Amendment to Addendum of
Termination
Agreement (“Amendment”). Under the term of the Amendment, Wave Wireless paid
$30,000 to Landlord on February 1, 2006, and is required to pay $30,000
to
Landlord or before February 28, 2006, and $180,000 on or before March
31, 2006.
Wave Wireless intends to seek financing to make the required payments.
No
assurances can be given that Wave Wireless will be able to obtain
the necessary
financing to make the remaining required payments.
Wave
Wireless has future non-cancelable lease payments under operating leases
of
approximately $438,414 in 2006, and $537,114 in 2007.
During
the first and second quarter of 2005, Wave Wireless entered into several
payment
plan agreements with vendors and creditors requiring Wave Wireless
to pay off
balances past due, or amounts agreed to between Wave Wireless and such
vendors
or creditors under settlement agreements. At December 31, 2005, the
total amount
remaining to be paid under those agreements totaled approximately $631,000,
of
which, approximately $241,000 is remaining for one creditor which will
be paid
over 8 equal monthly installments, and $305,000 to a vendor which was
obligated
to be paid over 9 equal monthly installments. Wave Wireless failed
to make the
required payment to this vendor on October 1, 2005, and is negotiating
a revised
payment plan taking into consideration Wave Wireless’ current liquidity. These
amounts are reflected as other accrued liabilities on Wave Wireless'
balance
sheet.
Wave
Wireless also entered into a Settlement Agreement and Release (“Settlement
Agreement”) on September 15, 2004 with Seimans
Aktiengesellchaft ("Siemens")
with
respect to certain claims between Siemens and Wave Wireless arising
under a
Joint Development and License Agreement and Original Equipment Manufacturer
Agreement entered into between the parties. Under the terms of the
Settlement
Agreement, Wave Wireless agreed to pay Siemens $500,000, of which it
paid
$100,000 on October 1, 2004. Wave Wireless was obligated to pay an
additional
$100,000 upon the earlier of the receipt of financing by Wave Wireless
equal to
at least $100,000 or December 31, 2004, and $300,000 in twelve monthly
installments of $25,000 per month beginning January 1, 2005. Wave Wireless
did
not make the December 31, 2004 $100,000 payment but did make the first
two
monthly payments of $25,000 each in January and February 2005. Wave
Wireless has
made no other payments to Siemens. The
amount due Siemens as of September 30, 2005, $350,000, is reflected
as a
short-term liability on Wave Wireless' balance sheet. In
the
event of a default, all amounts due Siemens are immediately payable
and interest
is accrued at 7%. See
"Current Liquidity" above for a discussion of management's plan to
satisfy Wave
Wireless' requirements with respect to these commitments and to provide
cash to
finance projected operations.
Wave
Wireless does not have any material commitments for capital equipment.
Additional future capital requirements will depend on many factors,
including
its plans to increase manufacturing capacity, working capital requirements
for
its operations, and its internal free cash flow from operations.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued Statement No. 123R, Accounting for Share
Based
Payments. Statement 123R establishes revised accounting standards for
employee-stock based compensation measurement that requires employee stock-based
compensation be measured at the fair value of the award, replacing the
intrinsic
approach currently available to companies under Statement 123. Compensation
cost
continues to be recognized over the period during which the employee is
required
to provide service. The provisions of the revised statement are effective
for
financial statements issued for the first interim or annual reporting period
beginning after December 15, 2005. Wave Wireless accounts for options issued
to
employees using the intrinsic approach. Implementation of this new standard
is
currently expected to result in increases in future compensation expense.
However, such effect is not currently estimable.
In
March
2005, the FASB issued interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”),
which requires an entity to recognize a liability for the fair value of
a
conditional asset retirement obligation when incurred if the liability’s fair
value can be reasonably estimated. FIN 47 is effective for fiscal years
ending
after December 15, 2005. Wave Wireless is currently evaluation the effect
that
the adoption of FIN 47 will have on its consolidated results of operations
and
financial condition but does not expect it to have a material impact.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Correction
(“SFAS 154”), which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No 3, “Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28.” SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle
and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December
15, 2005 and is required to be adopted by Wave Wireless in the first quarter
of
fiscal 2006. Wave Wireless is currently evaluating the effect that the
adoption
of SFAS 154 will have on its consolidated results of operations and financial
condition, but does not expect it to have a material impact.
-87-
WAVE
WIRELESS’ PRINCIPAL STOCKHOLDERS
The
following table presents information concerning the beneficial ownership
of Wave
Wireless common stock and Series E Preferred Stock as of January 20, 2006
by
each of the following:
|
·
|
each
person known by Wave Wireless to be the beneficial owner of 5%
of more of
the outstanding shares of Wave Wireless common stock and Series
E
Preferred Stock;
|
|
·
|
each
of Wave Wireless’ directors and named executive officers;
and
|
|
·
|
all
of Wave Wireless’ directors and executive officers as a
group.
|
Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power over securities.
Except in cases where community property laws apply or as indicated in
the
footnotes to this table, Wave Wireless believes that each stockholder identified
in the table possesses sole voting and investment power over all shares
of
common stock and Series E Preferred Stock shown as being beneficially owned
by
that stockholder. The percentage of beneficial ownership is based on 22,461,684
shares of common stock and approximately 923.1 shares of Series E Preferred
Stock outstanding as of January 20, 2006. Shares of common stock subject
to
convertible notes, warrants and options that are currently convertible
or
exercisable within 60 days of January 20, 2006 are considered outstanding
and
beneficially owned by the stockholder who holds those convertible notes,
warrants or options for the purpose of computing the percentage ownership
of
that stockholder but are not treated as outstanding for the purpose of
computing
the percentage ownership of any other stockholder. Unless otherwise indicated
below, the address of each stockholder listed below is 1996 Lundy Avenue,
San
Jose, California 95131.
-88-
|
Common
Stock
|
Series
E Convertible
Preferred
Stock
|
|||||||||||||||
|
Name
and Address of Beneficial Owner
|
Shares
Issuable Pursuant to Convertible Notes, Warrants and Options
Exercisable
Within 60 Days of January 20, 2006
|
|
Number
of Shares Beneficially Owned (Including the Number of Shares
Shown in the
First Column)
|
Percentage
of Shares Outstanding
|
Number
of Shares Beneficially Owned (1)
|
Percentage
of Shares Outstanding
|
||||||||||
|
North
Sound Legacy Institutional Fund LLC
1209
Orange Street
Wilmington,
DE 19801 (2)
|
888,541
|
2,311,672
|
9.9
|
%
|
—
|
—
|
||||||||||
|
North
Sound Legacy International Fund Ltd.
Bison
Court, Roadtown
Tortola,
BVI (2)
|
888,541
|
2,311,672
|
9.9
|
%
|
—
|
—
|
||||||||||
|
SDS
Capital Group SPC, Ltd.
113
Church Street
PO
Box 134GT
Grand
Canyon, Cayman Islands
|
2,196,122
|
2,441,122
|
9.9
|
%
|
—
|
—
|
||||||||||
|
Bryan
Family Partnership II Ltd.
5450
Thornwood Drive, Ste G
San
Jose, CA 95123
|
2,000,000
|
2,185,378
|
8.9
|
%
|
—
|
—
|
||||||||||
|
Whalehaven
Capital Fund Ltd.
PO
Box HM 2257, 3rd Floor
Par
La Ville Place
14
Par-La-Ville Road
Hamilton
HM JX, Bermuda
|
1,157,331
|
1,157,331
|
4.9
|
%
|
—
|
—
|
||||||||||
|
Agilent
Financial Services, Inc.
1
CIT Drive, MS4110A
Livingston,
NJ 07039
|
178,571
|
178,571
|
*
|
555.8
|
60.2
|
%
|
||||||||||
|
Able
Electronics Corporation
31033
Huntwood Avenue
Hayward,
CA 94544
|
—
|
—
|
—
|
367.3
|
39.8
|
%
|
||||||||||
|
Frederick
R. Fromm
|
13,879
|
83,879
|
*
|
—
|
—
|
|||||||||||
|
R.
Craig Roos
|
—
|
87,333
|
*
|
—
|
—
|
|||||||||||
|
George
P. Roberts
|
653,739
|
743,066
|
3.2
|
%
|
—
|
—
|
||||||||||
|
Daniel
W. Rumsey
|
202,028
|
277,028
|
1.2
|
%
|
—
|
—
|
||||||||||
|
Richard
Reiss
|
—
|
70,000
|
*
|
—
|
—
|
|||||||||||
|
Don
Meiners
|
195,763
|
260,834
|
1.2
|
%
|
—
|
—
|
||||||||||
|
Sam
Smookler (3)
|
139,637
|
148,803
|
*
|
—
|
—
|
|||||||||||
|
Carlos
A. Belfiore
|
206,630
|
271,630
|
1.2
|
%
|
—
|
—
|
||||||||||
|
James
D. Bletas
|
146,667
|
211,667
|
*
|
—
|
—
|
|||||||||||
|
All
current directors and executive officers as a group
(7
persons)
|
1,558,343
|
2,154,240
|
9.0
|
%
|
—
|
—
|
||||||||||
|
*
|
Less
than 1%.
|
|
(1)
|
There
are no outstanding warrants or options to purchase shares of
Series E
Convertible Preferred Stock.
|
|
(2)
|
Includes
shares beneficially owned by North Sound Legacy Fund LLC, North
Sound
Legacy Institutional Fund LLC, and North Sound International
Fund
Ltd.
|
|
(3)
|
Mr.
Smookler’s employment with Wave Wireless was terminated effective March
10, 2005.
|
WAVERIDER’S
BUSINESS
WaveRider
Communications Inc. is incorporated under the laws of the State of Nevada
and
trades on the OTC Bulletin Board under the symbol “WAVR.”
WaveRider
is a wireless technology company that develops, manufactures and markets
products to take advantage of the world-wide growth of the Internet, increasing
acceptance of wireless technology, and the demand for high speed, Internet
access.
WaveRider
believes that providing the “last mile solution” is the key to capitalize on the
opportunities presented by today’s rapidly changing telecommunications market
place. The ability to provide a full suite of products and services that
will
quickly enable all types of users to conduct business, access services
and
enhance communication is key to securing a dominant market position. The
demands
of the customer are growing beyond traditional voice communication, as
today’s
end user wants access to a growing set of services that require high-speed
access. As a result, WaveRider has developed a family of fixed wireless
access
products capable of providing wireless high-speed Internet access to businesses,
organizations and consumers.
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With
an
early-to-market family of products that include the world’s first
non-line-of-sight, easy to set up, wireless Internet network available
today,
WaveRider is well positioned to take a leadership position in the fixed
wireless
access market. Further, cost advantages are derived from operating in the
unlicensed frequencies and result in one of the only viable and profitable
wireless Internet networks available to service providers today.
WaveRider’s
executive offices are located at 255 Consumers Road, Suite 500, Toronto,
Ontario, Canada, M2J 1R4. WaveRider’s telephone number is (416) 502-3200 and its
Web Site address is www.waverider.com.
WaveRider’s
Historical Development
WaveRider
was originally incorporated under the laws of the State of Nevada on August
6,
1987, as Athena Ventures Inc. By the end of 1996, the Company had become
inactive but was still listed on the OTC Bulletin Board.
In
May
1997, the Company completed the acquisition of Major Wireless through a
share
exchange and entered into an escrow arrangement which restricted the conversion
of the preferred shares, received by the former stockholders of Major Wireless,
into common stock until certain performance milestones were achieved.
Subsequently, the name was changed to WaveRider Communications Inc. and
Major
Wireless Inc.’s name to WaveRider Communications (Canada) Inc.
On
June
11, 1999, WaveRider acquired Transformation Techniques, Inc. or TTI through
a
merger with WaveRider’s newly created subsidiary WaveRider Communications (USA)
Inc. On October 1, 2000, WaveRider acquired ADE Network Technology Pty
Ltd. or
ADE of Melbourne, Australia, a privately held wireless infrastructure company.
Subsequently, ADE’s name was changed to WaveRider Communications (Australia) Pty
Ltd. On July 2, 2003, WaveRider acquired Avendo Wireless Inc, a privately
held
wireless development company.
WaveRider’s
Business
WaveRider
designs, develops, markets and supports fixed wireless Internet access
products.
WaveRider’s products are designed to deliver efficient, reliable, and
cost-effective solutions to bring high-speed Internet access to markets
around
the world.
WaveRider
is focused on providing the solution to the “last mile” problem faced by
traditional wired telecommunications services: how to profitably build
out a
network that provides the level of services demanded by end users. In medium
to
small markets, and in areas of the world with limited telecommunications
infrastructure, the cost to install or upgrade wired services to provide
the
level of access customers expect can be prohibitive.
WaveRider
believes that its fixed wireless Internet access products are faster and
less
expensive to deploy than traditional wired services, with a lower cost-per-user
to install, deploy and manage.
WaveRider’s
wireless network products are designed to operate in the license-free ISM
radio
spectrum, which facilitates a more rapid and low-cost market introduction
for
service providers than for licensed or hardwire solutions. WaveRider’s products
utilize direct sequence spectrum or DSS communications, which ensures high
speed, reliable, secure, low-interference communications.
WaveRider’s
Products
WaveRider’s
current product portfolio includes the Last Mile Solution or LMS product
line
and the Network Communications Links or NCL product line. These product
families
are designed to deliver scalable, high-speed, fixed wireless Internet access
to
businesses, home offices and residential users. Both WaveRider’s LMS and NCL
product families include WaveRider’s proprietary patent-pending technologies
developed at WaveRider’s research and development facility.
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Last
Mile Solution
The
Last
Mile Solution systems are designed to enable service providers to deliver
high-speed Internet access to both business and residential customers.
Operating
in the license-free 900 MHz spectrum the LMS delivers data throughput speeds
up
to 2.0 Mbps and delivers non-line-of-sight communication between the
communications access point and the end-user modem. This eliminates the
need for
an external antenna and thereby permits the end-user to self install the
equipment at their office or home. WaveRider’s non-line of-sight capability
significantly reduces the time and cost of installations.
The
LMS
supports a variety of services including Internet access for Voice over
IP,
e-mail, large file transfers, web browsing, streaming audio and streaming
video.
The LMS is optimized for Internet Protocol or IP Networks. Connectivity
is
provided to network users via an LMS end user modem designed specifically
for
business or residential use.
The
LMS
is designed to be highly scalable, allowing network operators to begin
with a
small initial network and gradually build out a larger network with more
users
over time. There are no limits as to the number of network subscribers
that can
be supported by an LMS network due to its cellular like architecture which
allows for the efficient re-use of radio channels.
NCL
Products
The
NCL
product family is a series of wireless bridges and routers designed specifically
for use by Internet service providers, network managers and information
technology managers. Offering point-to-point and point-to-multipoint line
of
sight wireless connectivity in the 5.8GHz and 900MHz license-free frequency
bands, WaveRider’s NCL products can be used to establish wide area networks and
building-to-building links. The NCL can connect a single computer or computer
network to other single computers or computer networks.
NCL5000
Series
WaveRider’s
NCL5000 Series of 5.8 GHz bridge/routers with OFDM technology is an ideal
solution for point-to-point backhaul and enterprise applications. With
data
rates of up to 72 Mbps, the NCL5000 Series supports heavy user traffic
including
large data files, video, MP3 files and other high-bandwidth applications
such as
streaming multimedia. The NCL5000’s advanced OFDM technology offers the NLOS
characteristics needed for successful wireless deployments. With increased
spectral frequency and multiple, non-overlapping channels, OFDM is much
more
immune to multi-path problems and more resistant to potential interferers
than
other wireless technologies. Equipped with a 400 mW radio, the NCL5000
outperforms other 5.8 GHz products in its class.
NCL1900
WaveRider
launched the NCL1900 in May 2003. The NCL1900 delivers high speed wireless
connections for LAN-to-LAN and LAN-to-Internet connectivity, on a non-line
of
sight basis, in the 900MHz license-free frequency band. The NCL1900 features
WaveRider’s proprietary dynamic polling algorithm, which drastically improves
performance in point-to-multipoint connections, eliminating the frequent
packet
collisions inherent with CSMA/CA. WaveRider’s Dynamic Polling MAC also
alleviates “hidden node” and “near-far” problems associated with 802.11-based
systems.
WaveRider’s
Market
The
market for WaveRider’s fixed wireless access products is driven by the worldwide
demand for Internet access as well as the increasing demand for high speed
Internet access. WaveRider’s target market in North America is comprised of
cities with a population of fewer than 150,000, suburban areas of larger
cities
and industrial parks. In these markets, WaveRider’s products address the demands
of organizations and consumers who require broadband access to the Internet,
but
do not have access to cable or digital subscriber line connections from
traditional service providers.
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In
many
international markets, the telecommunications infrastructure is inadequate
or
unavailable for basic Internet access. There are large parts of less developed
regions in India, Africa, Southeast Asia and South America that have only
limited and high cost Internet access. In these markets, WaveRider’s wireless
products have a significant cost advantage over wired technologies. Accordingly,
WaveRider believes that its international target markets are potentially
even
broader than WaveRider’s North American target markets.
Internet
access prices can be broken down into three components: access equipment,
Internet access provision and telephone service charges. In relative terms,
the
costs to get connected are much higher in developing countries. While prices
may
not differ drastically in absolute terms, there is a large gap between
high and
low income countries when costs relative to per capita income are considered.
In
WaveRider’s view, fixed wireless access technology is well positioned to bridge
the gap between those who have access to high-speed services and those
who do
not, and to provide the means to overcome the obstacles to gain basic access
to
the Internet. WaveRider believes there are significant advantages, such
as
reduced cost and faster deployment, to WaveRider’s fixed wireless access
technology over traditional wired access.
In
summary, the key demand drivers for fixed wireless access include:
|
·
|
Growth
in the number of Internet users world
wide,
|
|
·
|
Growing
demand for high speed Internet access,
|
|
·
|
Scarcity
of access technologies that are capable of efficiently and economically
delivering more than 1 Mbps,
|
|
·
|
Lack
of wireline infrastructures in developing countries, and
|
|
·
|
Lack
of suitable broadband access technologies in rural and suburban
areas in
North America.
|
In
meeting these market requirements, WaveRider’s fixed wireless access product
line offers several benefits as a communications technology:
|
·
|
Instant
blanket coverage without digging up streets or leasing capacity
from
competitors,
|
|
·
|
A
pay-as-you-grow deployment model, which allows for low-cost market
entry
with incremental costs matched to incremental revenues,
|
|
·
|
Bandwidth
increments that address the requirements of small and mid-size
businesses,
|
|
·
|
Point-to-multipoint
technology allowing for burstable, bandwidth on demand services,
which are
specially suited towards a data-centric environment,
|
|
·
|
Wireless
technology which enables those who do not have access to copper,
coaxial
or fiber optic wire to participate in the high-speed Internet
access
market,
|
|
·
|
Significant
cost advantages through the use of license-free radio frequencies,
and
|
|
·
|
Easy
to set up, non-line-of-sight modems resulting in further significant
cost
savings by avoiding expensive truck rolls to install customer
premise
equipment.
|
Currently,
WaveRider’s products operate in the unlicensed spectrum, specifically 900 MHz
and 5.8 GHz. WaveRider believes that its 900 MHz products in particular
could
enjoy wide acceptance because of their non-line-of-sight and easy to set
up
features. Deployments that combine business and consumer subscribers can
be
shown to offer a viable and profitable business case for service operators.
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WaveRider’s
Market Strategy
WaveRider
believes that it is in a position to meet the Internet access needs of
organizations and consumers in North America and abroad. In North America,
WaveRider’s products address the demands of users who require broadband access
to the Internet, but do not have access to cable or digital subscriber
line
connections from traditional service providers. These customers are typically
found in smaller cities in North America, and in most suburban and semi-rural
areas where there are few Internet access options other than traditional
telephone dial-up connections.
In
many
international markets, the basic telecommunications infrastructure is inadequate
or unavailable for basic Internet access. In these markets, WaveRider’s wireless
products have a significant cost advantage over wired technologies. In
addition,
they can be deployed rapidly and easily maintained.
WaveRider’s
market approach uses a direct and indirect sales model consisting of strategic
industry partnerships and key relationships. WaveRider markets directly
to
larger Internet service providers, telephone companies (including competitive
local exchange carriers, independent local exchange carriers and independents),
cellular providers and emerging carriers (municipal governments and power
utilities). WaveRider also markets indirectly through channel partners
including
distributors, value added resellers and system integrators. In some
international markets, WaveRider expects to form alliances with local partners
who will provide sales, support and installation services for LMS systems.
The
LMS
system provides an attractive and profitable business model for operators.
WaveRider’s system enables the operator to provide high-speed wireless Internet
access to both the business and consumer/residential markets. Also, the
system’s
scalability allows an operator to launch a wireless network with a relatively
small investment and grow the network as the number of subscribers increase.
Target
Customers
Wireless
Carriers
-
Internet access provides wireless carriers with the opportunity to expand
their
service offerings and revenue base. Wireless carriers are an attractive
target
market for WaveRider because they have wireless expertise and an existing
infrastructure that can be used to build a wireless Internet access service
using WaveRider’s equipment.
Rural
cellular providers in the United States provide the largest potential in
this
segment. There are approximately 428 Rural Service Areas in the United
States.
The cost to develop and build an advanced rural communication network
infrastructure is substantial. WaveRider’s systems enable the rural cellular
providers to establish a wireless Internet access service to meet the demand
for
broadband services at a relatively low cost per subscriber.
Wireline
Carriers (Independent Telephone Companies)
-
Independent regional telephone companies offer a significant potential
market
for WaveRider’s wireless service package. WaveRider is attracted to this type of
company because it services a market that has an unmet need for broadband
services and is challenged by expanding the range of services to its customers.
In
the
United States there are nearly 1,000 independent telephone companies ranging
in
size from fewer than 50 customers to more than 50,000. These companies
provide
telephone service to nearly five million rural Americans. In Canada there
are
approximately 50 independent telephone companies of which nine are municipally
owned and the rest are privately owned. In addition to basic telephone
service,
many independents offer other communications services including cellular,
paging, cable television, and Internet access services.
Several
characteristics make rural communities different from urban areas. There
are
greater distances between centers and smaller more scattered populations.
These
characteristics make single lines more expensive given the longer cable
loops
required which reduce the advantage of volume concentration. Because of
this and
regulatory changes, much less upgrading and modernization has been done
in rural
areas.
-93-
Internet
Service Providers
- ISPs
fall into three categories: national backbone providers, regional networks
and
independent service providers. Independent and regional providers act as
intermediaries between the owners of the transmission networks over which
Internet traffic is passed and the owners of the traffic that is available
on
the World Wide Web. For this reason, in the Internet service provider market,
WaveRider is targeting independent and regional operators who understand
that
the value of incorporating a wireless strategy to enhance their position
in the
marketplace reduces their dependence on independent local exchange carriers.
The
demand for high-speed access has provided additional challenges, opportunities
and threats to Internet service providers. As telephone companies roll
out
digital subscriber line services and cable companies offer their own Internet
access services, the independent internet service provider has an opportunity
to
partner with us to remain a competitive player in the high-speed access
market.
In regions that lack a communications infrastructure for high-speed access,
WaveRider’s solution provides independent and regional Internet service
providers with an opportunity to satisfy the demand for high-speed Internet
access. WaveRider offers additional benefits to Internet service providers.
An
Internet service provider can go beyond just being an access provider to
becoming a communications provider with control over their own infrastructure
by
implementing a wireless Internet access system.
Alternative
Carriers
-
WaveRider has seen the emergence of two new carrier segments: municipal
government and power utilities.
Municipal
governments are building and operating or partnering with carriers to build
broadband wireless networks in order to provide broadband services to their
residential and business taxpayers. The driving force behind this segment
is the
need to attract new taxpayers to the municipality, a task that is greatly
hampered if broadband access is not available.
Power
utilities (distributors, co-ops, etc.) are expanding their capabilities
and
deploying wireless broadband networks. These entities are utilizing existing
infrastructure such as towers, right of ways, and network management systems
to
build out broadband networks upon which they can offer Internet access
services
to their customer bases.
International
Sales Strategies
WaveRider’s
target markets outside of North America, for WaveRider’s LMS product family, are
predicated on spectrum availability. Most parts of South America, the Caribbean
and Latin America provide the 900MHz spectrum on a license exempt basis,
with
rules that are compatible with WaveRider’s LMS product offering.
WaveRider
believes that its revenue potential in these international markets can
be quite
significant because the telecommunications infrastructure required for
Internet
access is underdeveloped. However, WaveRider recognizes that international
business has longer sales cycles and requires a local presence for major
LMS
deals.
In
2000,
WaveRider acquired ADE Network Technology Pty, LTD. in Australia, a wireless
product integrator. This acquisition provided WaveRider with a base of
customers
and staff to exploit opportunities for the NCL product family and third
party
wireless products in Australia and Southeast Asia.
See
Note
19 to WaveRider’s attached consolidated financial statements, entitled “Segment
Information”, for a list of the foreign countries from which WaveRider derives
revenues.
Professional
Services
WaveRider’s
professional services group is an important component in WaveRider’s sales and
marketing strategy and in WaveRider’s opinion, provides an important competitive
advantage.
WaveRider’s
professional services strategy is to deliver flexible, cost effective and
market
driven service offerings. WaveRider believes that it is positioned to deliver
this support strategy globally.
-94-
WaveRider
has utilized both global and local service partnerships to provide engineering
design and installation services of WaveRider’s LMS and NCL products, under
WaveRider’s direction. Through WaveRider’s systems engineers, WaveRider
contracts directly with its customers for these services.
WaveRider’s
professional services group, coupled with WaveRider’s global service partners,
has the international capabilities to provide:
|
Application
engineering;
|
System
and program planning and implementation management;
|
|
Path
survey, design and engineering;
|
Network
engineering, operations and wireless services;
|
|
Permitting;
|
Civil
works (engineering and construction);
|
|
Line
of sight verification;
|
Backhaul;
|
|
Site
inspection and audit;
|
Installation,
testing and acceptance;
|
|
Structured
cable installation;
|
Final
documentation.
|
Manufacturing
and Logistics
WaveRider
has entered into long term manufacturing agreements with Solectron Corporation,
or Solectron, to manufacture and package WaveRider’s products. WaveRider has a
long term logistics agreement with Alliance Corporation or Alliance for
the
pick, pack and shipment of WaveRider’s products. In addition, WaveRider have a
value added distributor agreement with Alliance in which they purchase
products
for their own account and resell WaveRider products to their customer
base.
Solectron
-
Solectron provides a full range of global manufacturing and supply-chain
management services to the world’s premier high-tech electronics companies.
Solectron’s offerings include new-product design and introduction services,
materials management, high-tech product manufacturing, product warranty
and
end-of-life support. Solectron, the first two-time winner of the Malcolm
Baldrige National Quality Award, has a full range of industry-leading
capabilities on five continents. Its headquarters are in Milpitas,
California.
Through
WaveRider’s association with Solectron, WaveRider has the capability to meet the
demands of a rapidly growing Internet market, with high quality products
which
are efficiently manufactured.
WaveRider
provides its contract manufacturer with ongoing production forecasts to
enable
them to forecast and procure required parts. Under the terms of the agreement
with Solectron, WaveRider has committed to assume liability for all parts
required to manufacture WaveRider’s forecast products for 13 weeks and all final
assembly costs for the forecast products for four weeks, on a rolling basis.
Alliance
Corporation (www.alliancecorporation.ca)
-
Alliance Corporation is a value-added distribution and logistics resource
that
has historically focused on the wireless communications and broadcast
Industries. Since 1999, Alliance has been making substantial ongoing investments
to develop a similar strength in the broadband communications industry
with
particular emphasis on wireless solutions. Adding skilled technical and
engineering services to its offering, Alliance is positioned to support
systems
integrators as they develop wireless solutions for their enterprise customers,
including ISPs.
Competition
There
is
intense competition in the data communications industry. WaveRider competes
not
only with other fixed wireless Internet companies, but also with companies
that
deliver hard-wired technologies (wire or fiber optic cable). Competition
is
based on design and quality of the products, product performance, price
and
service, with the relative importance of each factor varying among products
and
markets.
WaveRider
competes against companies of various sizes in each of the markets it serves.
Many of these companies have much greater financial and other resources
available to help them withstand adverse economic or market conditions.
These
factors, in addition to other influences such as increased price competition
and
market and economic conditions could potentially impair WaveRider’s ability to
compete.
-95-
WaveRider’s
major competitors include AirSpan, Alvarion, Motorola and Proxim.
Regulation
of Wireless Communications
Currently,
WaveRider’s technology is deployed in the highly regulated license- free
frequency bands. As such, WaveRider’s products are not subject to any wireless
or transmission licensing in the United States, Canada and many other
jurisdictions worldwide. The products do, however, have to be approved
by the
Federal Communications Commission, for use in the United States, Industry
Canada, for use in Canada, and other regulatory bodies for use in other
jurisdictions, to ensure they meet the rigorous requirements for use of
these
bands.
Continued
license-free operation will be dependent upon the continuation of existing
government policy and, while WaveRider is not aware of any policy changes
planned or expected, this cannot be assured. License-free operation of
WaveRider’s products in the 902 to 928 MHz and the 5.8 GHz bands are subordinate
to certain licensed and unlicensed uses of the bands and WaveRider’s products
must not cause harmful interference to other equipment operating in the
bands
and must accept interference from any of them. If WaveRider should be unable
to
eliminate any such harmful interference, or should WaveRider’s products be
unable to accept interference caused by others, WaveRider or WaveRider’s
customers could be required to cease operations in the bands in the locations
affected by the harmful interference. Additionally, in the event the 902
to 928
MHz or the 5.8 GHz bands becomes unacceptably crowded, and no additional
frequencies are allocated, WaveRider’s business could be adversely affected.
Research
and Development
In
2003,
WaveRider concentrated its efforts on sustaining engineering and product
enhancement in three development areas:
|
·
|
increasing
the speed, reliability and user capacity of the networks to allow
more
users at greater throughput speeds;
|
|
·
|
enhancing
the network capabilities of the systems to support new developing
applications, and
|
|
·
|
reducing
the cost of WaveRider’s product offerings to provide pricing flexibility
and higher margins.
|
During
2004, WaveRider continued these initiatives while developing new form factors
for WaveRider’s products to enhance outdoor installation capabilities and
portability.
Research
and Development expenditures in 2004, amounted to $1,666,131 compared with
$996,487 in 2003.
Employees
WaveRider
currently has approximately full-time 34 employees located in WaveRider’s head
office in Toronto, Ontario and WaveRider’s sales offices and subsidiaries in the
United States, Canada and Australia, as well as at WaveRider’s subsidiary,
JetStream Internet Services in Salmon Arm, British Columbia.
The
majority of these employees are involved in the design, development and
marketing of WaveRider’s line of wireless data communications
products.
Description
Of Property
WaveRider
owns no real estate or other properties. Its main offices and test sites
are in
Toronto, Ontario, Canada and its Australian subsidiary’s head office is in
Melbourne, Australia. These offices house sales, administration and research
operations and are leased from unrelated parties. WaveRider maintains sales
offices in Australia, Canada, and the United States. In addition, WaveRider’s
subsidiary JetStream Internet Services Inc. maintains offices in Salmon
Arm,
British Columbia, Canada.
-96-
WaveRider’s
Toronto office lease was renewed in March 1, 2003 for a period of six years
and
three months ending May 31, 2009, its Melbourne office lease expires in
March
31, 2006 and the lease for JetStream’s office was renewed effective December 1,
2003, for a five-year period. WaveRider believes its existing facilities
are
adequate to meet its current requirements.
Cost
commitments related to present leases are set forth in Note 13 “Commitments and
contingencies” in the attached financial statements on page F-E21 of this proxy
statement/prospectus.
Legal
Proceedings
None.
WAVERIDER
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE
FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF WAVERIDER AND THE NOTES THERETO APPEARING ELSEWHERE
IN
THIS PROXY STATEMENT/PROSPECTUS. STATEMENTS IN THIS MANAGEMENT’S DISCUSSION AND
ANALYSIS AND ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE “FORWARD-LOOKING
STATEMENTS.”
Overview
WaveRider
designs, develops, markets and supports fixed wireless Internet access
products.
WaveRider’s products are designed to deliver efficient, reliable, and
cost-effective solutions; bringing high-speed Internet access to markets
around
the world.
WaveRider
is focused on providing the solution to the “last mile” problem faced by
traditional wired telecommunications services: how to profitably build
out a
network that provides the level of services demanded by end users. In medium
to
small markets, and in areas of the world with limited or no existing
telecommunications infrastructure, the cost to install or upgrade wired
services
to provide the level of access customers expect can be prohibitive.
WaveRider
believes that its fixed wireless Internet access products are faster and
less
expensive to deploy than traditional wired services, with a lower cost-per-user
to install, deploy and manage.
WaveRider’s
wireless network products are designed to operate in the license-free ISM
radio
spectrum, which facilitates a more rapid and low-cost market introduction
for
service providers than for licensed or hardwire solutions. WaveRider’s products
utilize direct sequence spectrum or DSS communications, which ensures reliable,
secure, low-interference communications.
Market
Environment and Strategic Direction
Over
the
past several years, the global telecommunications market deteriorated,
reflecting a significant reduction in capital spending by established service
providers and a lack of venture capital for new entrants. Reasons for this
market deterioration include the economic slowdown in the technology sector,
network overcapacity, customer bankruptcies, network build-out delays and
limited capital availability. As a result, WaveRider’s sales and results of
operations have been significantly adversely affected.
During
this prolonged sector downturn, WaveRider has concentrated on working closely
with its customers to get WaveRider’s products and services established in a
number of markets, significantly reducing its cost structure, reducing
its
breakeven revenue level and improving its balance sheet, through tightening
accounts receivable and inventory levels. However, if capital investment
levels
continue to decline, or if the telecommunications market does not improve
or
improves at a slower pace than WaveRider anticipates, its revenues and
profitability will continue to be adversely affected. In addition, if
WaveRider’s sales volume and product mix does not improve, or WaveRider does not
continue to realize cost reductions or reduce inventory related costs,
WaveRider’s gross margin percentage may not improve as much as it has targeted,
resulting in lower than expected results of operations.
-97-
Going
Concern
WaveRider’s
financial statements have been prepared on a going-concern basis, which
assumes
that WaveRider will realize its assets and discharge its liabilities in
the
normal course of business. WaveRider incurred a net loss of $1,639,060
for the
year ended December 31, 2004 (2003 - $1,586,306) and reported an accumulated
deficit at that date of $86,426,358 (2003 - $84,787,298). In addition,
the
requirements to continue investing in research and development activities
to
meet WaveRider’s growth objectives, without assurance of broad commercial
acceptance of its products, lend significant doubt as to the ability of
WaveRider to continue normal business operations.
While
WaveRider has a plan that it believes will allow it to achieve profitability
and
cash flow positive operations, it does not presently have, in the absence
of
further financing, adequate cash to fund ongoing operations. In the past,
WaveRider has obtained financing primarily through the sale of convertible
securities. If WaveRider is unable to obtain additional financing and achieve
its planned cash flow positive operations and profitability, it will, in
all
likelihood, be obliged to seek protection under the bankruptcy laws; in
which
event WaveRider believes it is unlikely that its common stock will have
any
value.
The
ability of WaveRider to continue as a going concern is dependent upon it
securing additional external funding and achieving and maintaining profitable
and cash flow positive operations to meet its obligations as they come
due.
Should WaveRider be unable to continue as a going concern, assets and
liabilities would require restatement on a liquidation basis which would
differ
materially from the going concern basis.
Results
of Operations - Year Ended December 31, 2004 Compared to Year Ended December
31,
2003
Revenue
The
following table presents WaveRider’s North American and non-North American
revenues and the approximate percentage of total revenues ($000’s) for the years
ended December 31, 2004 and 2003, respectively:
|
|
Year
ended December 31,
|
|||||||||
|
|
2004
|
2003
|
%
Change
|
|||||||
|
North
America
|
$
|
5,940
|
$
|
10,376
|
(42.8
|
)% | ||||
|
Non-North
America
|
3,602
|
2,703
|
33.3
|
% | ||||||
|
Total
revenues
|
$
|
9,542
|
$
|
13,079
|
(27.0
|
)% | ||||
|
Percentage
of total revenue
|
||||||||||
|
North
America
|
62.2
|
% |
79.3
|
% |
|
|||||
|
Non-North
America
|
37.8
|
% |
20.7
|
% |
|
|||||
Total
revenue declined 27% in the year ended December 31, 2004 compared to the
year
ended December 31, 2003 mainly as a result of a significant decline in
its North
American business caused by WaveRider’s major distributors not placing stocking
orders and, the significant reduction in average selling prices of WaveRider’s
products. In addition, it is WaveRider’s view that new installations have been
hampered by the confusion in the market caused by the announcements surrounding
Wi-MAX, which increase WaveRider’s sales cycles, and by other competitive
offerings.
-98-
Non-North
American revenues were mainly focused on WaveRider’s operating subsidiary in
Australia. WaveRider Australia has experienced a 44% increase in revenues
through an increase in sales of licensed microwave products and related
service
revenues. The relative strength of the Australian dollar versus the U.S.
dollar
has further enhanced Australian based revenues.
WaveRider’s
focus on the 900 MHz non-line of sight LMS product family had allowed it
to make
gains in the North American market but has limited its potential in a large
part
of the rest of the world, where the 900 MHz band is not available on a
license
exempt basis. As a result, WaveRider is exposed to potential significant
swings
when the focused market for WaveRider’s main product experiences periods of
weakness.
WaveRider
has taken initial steps to access the Caribbean, Latin American and South
American markets, which in most parts do provide license exempt availability
of
900 MHz spectrum, but expects that there will be relatively long sales
cycles in
these markets.
Gross
Margin
The
following table presents WaveRider’s gross margin and the percentage of total
revenues ($000’s):
|
Year
ended December 31,
|
|||||||
|
2004
|
2003
|
||||||
|
Product
revenue
|
|||||||
|
Gross
margin
|
$
|
2,470
|
$
|
4,214
|
|||
|
Gross
margin rate
|
31.8
|
%
|
36.5
|
%
|
|||
|
Service
revenue
|
|||||||
|
Gross
margin
|
$
|
879
|
$
|
966
|
|||
|
Gross
margin rate
|
49.3
|
%
|
63.3
|
%
|
|||
|
Total
revenue
|
|||||||
|
Gross
margin
|
$
|
3,349
|
$
|
5,180
|
|||
|
Gross
margin rate
|
35.1
|
%
|
39.6
|
%
|
|||
Gross
margins in 2004 decreased to 35.1% of revenue compared to 39.6% of revenue
in
2003. In addition, due to the decline in quarterly revenues, total gross
margin
dollars decreased 35.3% compared to 2003.
The
decline in product revenue’s gross margin percentage was mainly due to the write
off of surplus inventories. In August 2003, WaveRider was required to place
a
final order for the processors, which are used in the current version of
the its
products, as a result of an end of life announcement by the manufacturer.
These
processors were delivered over the period from September 2003 through June
2004.
As a result of the decline in revenues that WaveRider has experienced,
management determined that WaveRider had an excess number of processors
when
compared to current forecasts. As a result, WaveRider provided for an additional
inventory obsolescence charge of $253,000, included in cost of goods sold,
in
June 2004.
The
remainder of the decrease in product revenue’s gross margin percentage from the
2003 level was due to continued price reductions in the LMS products to
meet
competitive pressures and stimulate demand. WaveRider is actively involved
in
continuing to find cost savings and product enhancements on WaveRider’s LMS
products. WaveRider expects that cost reductions and improved sales mix
will
more than offset ongoing volume discounts and competitive pricing pressures
to
result in gross margin percentages at or above current levels over the
next
fiscal year.
Service
revenue’s gross margin percentage declined due to WaveRider using subcontractors
in 2004 to design and implement network build outs for some of its customers.
While the use of subcontractors allows WaveRider to expand its service
offerings, the gross margins on subcontracted work is significantly
lower.
-99-
Selling,
General and Administrative expenses
Selling,
general and administrative expenses declined by 7.3% to $4,975,289 for
the year
ended December 31, 2004 from $5,366,858 for the year ended December 31,
2003.
The decline in 2004 versus 2003 was mainly due to ongoing tight cost controls.
As a result, WaveRider has reduced its compensation costs and related staff
expenses and reduced its costs of professional services.
While
WaveRider intends to maintain tight cost controls, it believes that tactical
spending in advertising and marketing communications could provide access
to
additional markets and potential customers. As such, WaveRider intends
to
increase spending on sales and marketing, both within North America and
internationally.
Research
and Development expenses
Research
and Development expenses for the year ended December 31, 2004 amounted
to
$1,666,131 compared to $996,487 for the year ended December 31, 2003, an
increase of 67.2%. The increase was mainly due to new development programs
surrounding WaveRider’s integrated outdoor unit, the EUM 3006, next generation
modems based on the 802.16 standard and foreign exchange
fluctuations.
It
is
WaveRider’s view that products based on the Wi-MAX standard will not be
generally available until 2006 or later. It is WaveRider’s belief that its
current product technology will continue to provide technology solutions
until
the next generation modems are developed. At the same time, WaveRider intends
to
continue to enter into OEM and resale agreements with vendors of complementary
products to expand WaveRider’s product offerings and to explore new product
areas to expand its potential markets.
Depreciation
and Amortization expense
Depreciation
and amortization expense declined by 43.1% to $290,529 for the year ended
December 31, 2004 compared to $510,536 for the year ended December 31,
2003.
During the last three years, WaveRider has withheld spending on new capital
assets and does not plan any major capital acquisitions through fiscal
2005.
Foreign
Exchange
WaveRider
incurred a foreign exchange loss for the year ended December 31, 2004 of
$138,627 compared to a gain of $273,909 for the year ended December 31,
2003.
The loss is due to the significant decline of the U.S. dollar versus the
Canadian and Australian dollars throughout 2004. Most of WaveRider’s operating
expenses are denominated in Canadian or Australian dollars, while much
of
WaveRider’s revenue is denominated in US dollars.
Write
down of goodwill
During
the three months ended December 31, 2003, WaveRider undertook a complete
review
of its development plans and resources required to bring the Avendo technology,
acquired in 2003, to commercial viability and compared these costs to the
expected net present value of the discounted future cash flows As a result
of
management’s analysis, it was determined that WaveRider would not undertake to
fully commercialize the product, under current circumstances. WaveRider,
therefore, determined that an impairment charge of $2,755,446 was required
on
the basis that the carrying value of goodwill exceeded its fair
value.
Interest
expense
Interest
expense amounted to $425,320 for the year ended December 31, 2004 compared
to
$210,421 for the year ended December 31, 2003, an increase of 97%. Included
in
interest expense for the year ended December 31, 2004 were non-cash charges
for
the accretion to face value of the convertible debentures and amortization
of
deferred financing charges, in the amount of $279,644 and $88,219 respectively.
Included in interest expense for the year ended December 31, 2003 were
non-cash
charges for the accretion to face value of the convertible debentures and
amortization of deferred financing charges, in the amount of $88,889 and
$36,178
respectively.
-100-
Derivative
instrument income (expense)
Derivative
instrument income (expense) amounted to $2,502,319 for the year ended December
31, 2004 compared to $2,985,601 for the year ended December 31, 2003. Derivative
instrument income arises from fair value adjustments for certain financial
instruments, such as warrants to acquire common stock and the embedded
conversion features of the convertible debentures that are indexed to the
Company’s common stock, and are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances,
net-cash
settlement is assumed for financial accounting and reporting, even when
the
terms of the underlying contracts do not provide for net-cash settlement.
Such
derivative financial instruments are initially recorded at fair value with
subsequently changes in the fair value charged (credited) to operations
each
reporting period.
Fair
value for WaveRider’s option-based derivative financial instruments is
determined using the Black-Scholes Model. The Black-Scholes Model requires
the
development of highly-subjective assumptions, such as the expected term
of
exercise and volatility. Changes to these assumptions may arise from both
internal (e.g. contract renegotiation) and external factors (e.g. changes
in the
trading market value of our common stock); such changes may result in material
changes to the fair values of our derivative financial instruments. The
increase
in the derivative instrument income noted above is largely due to the decline
in
the price of our common stock and, with the passage of time, reductions
in the
life, and in certain case the expiration, of the warrants. Reductions in
the
remaining life of unexercised warrants and continuing declines in our stock
price will reduce the fair value of the warrants resulting in additional
credits
to operations. However, increases in our stock prices will increase the
fair
value of the warrants and may result in charges to operations. WaveRider
will
continue to adjust the derivative financial instruments to fair value throughout
their term, or until WaveRider achieves the ability to net-share settle
these
instruments, at which time they would be reclassified to equity.
Liquidity
and Capital Resources
WaveRider
has funded its operations, for the most part, through equity and convertible
debenture financing and has had no line of credit or similar credit facility
available to it. WaveRider’s outstanding shares of common stock, par value $.001
per share, are traded under the symbol “WAVR” in the over-the-counter market on
the OTC Bulletin Board of the National Association of Securities Dealers,
Inc.
WaveRider must rely on its ability to raise money through equity and convertible
debenture financing to pursue its business endeavors. The majority of funds
raised have been allocated to the development of the WaveRider line of
wireless
data communications products and the operations of the company.
During
November 2004, WaveRider issued convertible debentures, in the aggregate
principal amount of $531,250, for cash proceeds of $500,000, less cash
fees of
$49,000. During April 2004, WaveRider issued convertible debentures, in
the
aggregate principal amount of $2,125,000, for cash proceeds of $2,000,000,
less
cash fees of $100,000.
During
July 2003, WaveRider issued convertible debentures, in the aggregate principal
amount of $1,600,000, for cash proceeds of $1,504,000, less cash fees of
$87,120. WaveRider also entered into an agreement to purchase Avendo Wireless
Inc., through the issue of 8,749,999 shares of common stock and 3,000,000
common
stock purchase warrants. Upon acquisition, WaveRider received $1,177,420
in cash
and $196,925 in other net assets. In addition, WaveRider raised $35,245
through
the sale of 341,167 shares of common stock under its employee stock purchase
plan.
WaveRider
has determined that it does not control its ability to physically or net-share
settle certain financial instruments that are convertible or exercisable
into
common stock. As a result, WaveRider ha recorded its warrants and the embedded
derivatives associated with its convertible debentures as liabilities.
WaveRider
has never net cash settled any conversions or exercises of these instruments
and
does not currently expect to pay cash in settlement of future conversions
or
exercises.
WaveRider
used $2,838,062 of cash in operating activities in 2004 (2003 - $1,613,803).
WaveRider expects to return to revenue and gross margin growth and to control
cash expenditures in 2005. However, based on WaveRider’s current plans and
projections, the company’s management believes that WaveRider will have to raise
additional funds in 2005 to meet its current and future financial commitments
until it achieves positive cash flows from operations.
-101-
While
WaveRider has a plan that it believes will allow it to achieve profitability
and
cash flow positive operations, the company’s management believes that WaveRider
will have to raise additional funds in 2005 to meet its current and future
financial commitments until WaveRider achieves positive cash flows from
operations. In the past, WaveRider has obtained financing primarily through
the
sale of convertible securities. If WaveRider is unable to obtain additional
financing and achieve its planned cash flow positive operations and
profitability, it will, in all likelihood, be obliged to seek protection
under
the bankruptcy laws; in which event WaveRider believes it is unlikely that
its
common stock will have any value.
Contractual
Obligations
|
Obligations
(in $000):
|
Total
|
|
Less
than 1 year
|
|
1
-
3 years
|
|
3
-
5 years
|
|
After
5 years
|
|||||||
|
Long-term
debt obligations
|
$
|
2,427,776
|
$
|
—
|
$
|
2,427,776
|
$
|
—
|
$
|
—
|
||||||
|
Capital
lease obligations
|
4,636
|
2,781
|
1,854
|
—
|
—
|
|||||||||||
|
Operating
leases
|
1,731,613
|
398,758
|
784,076
|
548,779
|
—
|
|||||||||||
|
Purchase
obligations
|
700,000
|
700,000
|
—
|
—
|
—
|
|||||||||||
WaveRider
provides its contract manufacturer with ongoing production forecasts to
enable
them to forecast and procure required parts. Under the terms of the agreement
with the contract manufacturer, WaveRider is committed to assume liability
for
all parts required to manufacture WaveRider’s forecast products for 13 weeks and
all final assembly costs for the forecast products for four weeks, on a
rolling
basis. WaveRider issued a letter of credit to WaveRider’s contract manufacturer
in the amount of $100,000 at December 31, 2004. The letter of credit secures
WaveRider’s payment obligations under the purchase agreement. WaveRider has
pledged cash to WaveRider’s bank as collateral for the letter of credit in the
same amount as the letter of credit. This pledge has been classified as
restricted cash.
WaveRider
plans to pay its contract manufacturer for the unconditional purchase obligation
through net cash generated from operations.
Critical
Accounting Policies and Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses WaveRider’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in
the
United States of America. The preparation of these financial statements
requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period.
On
an
ongoing basis, management evaluates its estimates and judgments, including
those
related to bad debts, inventories, intangible and other long-lived assets,
income taxes, warranty obligations, product returns, fair value of equity
instruments, litigation and contingencies. Management bases its estimates
and
judgments on historical experience, current economic and industry conditions
and
on various other factors that are believed to be reasonable under the
circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Allowance
for Losses on Receivables
WaveRider
has historically provided financial terms to certain customers in connection
with purchases of WaveRider’s products. Financial terms, for credit-approved
customers, are generally on a net 30-day basis.
-102-
Total
receivables at December 31, 2004 and 2003 were $1,090,990 and $2,165,041,
respectively, with an allowance for losses on these receivables of $34,887
and
$243,066, respectively.
Management
periodically reviews customer account activity in order to assess the adequacy
of the allowances provided for potential losses. Factors considered include
economic conditions, collateral values and each customer’s payment history and
credit worthiness. Adjustments, if any, are made to reserve balances following
the completion of these reviews to reflect management’s best estimate of
potential losses.
Inventory
Valuation Reserves
WaveRider
records valuation reserves on its inventory for estimated obsolescence
or
unmarketability. The amount of the write-down is equal to the difference
between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions.
Net
Inventories consisted of the following:
|
December
31
|
2004
|
2003
|
|||||
|
Finished
goods
|
$
|
1,239,278
|
$
|
1,306,580
|
|||
|
Raw
materials
|
314,777
|
36,330
|
|||||
|
1,554,055
|
1,342,910
|
||||||
|
Less
inventory reserves
|
(610,411
|
)
|
(376,477
|
)
|
|||
|
$
|
943,644
|
$
|
966,433
|
||||
WaveRider
provides its contract manufacturer with ongoing production forecasts to
enable
them to forecast and procure required parts. Under the terms of the agreement
with the contract manufacturer, WaveRider has committed to assume liability
for
all parts required to manufacture its forecast products for the next 13
weeks
and all final assembly costs for the forecast products for the next four
weeks,
on a rolling basis.
WaveRider
balances the need to maintain strategic inventory levels to ensure competitive
lead times with the risk of inventory obsolescence due to rapidly changing
technology and customer requirements. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Convertible
Instruments
WaveRider
reviews the terms of convertible debt and equity securities for indications
requiring bifurcation, and separate accounting, for the embedded conversion
feature. Generally, embedded conversion features where the ability to physically
or net-share settle the conversion option is not within the control of
WaveRider
are bifurcated and accounted for as derivative financial instruments. (See
Derivative Financial Instruments below). Bifurcation of the embedded derivative
instrument requires allocation of the proceeds first to the fair value
of the
embedded derivative instrument with the residual allocated to the debt
instrument. The resulting discount to the face value of debt instrument
is
amortized through periodic charges to interest expense.
Derivative
Financial Instruments
WaveRider
generally does not use derivative financial instruments to hedge exposures
to
cash-flow or market risks. However, certain other financial instruments,
such as
warrants to acquire common stock and the embedded conversion features of
debt
and preferred stock instruments that are indexed to WaveRider’s common stock,
are classified as liabilities when either (a) the holder possesses rights
to
net-cash settlement or (b) physical or net share settlement is not within
the
control of WaveRider. In such instances, net-cash settlement is assumed
for
financial accounting and reporting, even when the terms of the underlying
contracts do not provide for net-cash settlement. Such financial instruments
are
initially recorded at fair value with subsequent changes in fair value
charged
(credited) to operations each reporting period. If WaveRider subsequently
achieves the ability to net-share settle the instruments, they would be
reclassified at their fair value to equity.
-103-
Revenue
Recognition
Revenue
from product sales to end-user and Value-Added Reseller customers is recognized
when all of the following criteria have been met: (a) evidence of an agreement
exists, (b) delivery to the customer has occurred, (c) the price to the
customer
is fixed and determinable, and (d) collectibility is reasonably assured.
Delivery occurs when the product is shipped, except when the terms of a
specific
contract include substantive customer acceptance. WaveRider continuously
monitors inventory levels at distributors to ensure that inventory on-hand
is
reasonable.
Revenue
from hardware maintenance contracts is recognized ratably over the term
of the
contract, which is generally one year. Revenue from installation and other
services is recognized as earned and the associated costs and expenses
are
recognized as incurred. In cases in which extended warranty, maintenance
or
installation services are bundled with the sale of the product, WaveRider
unbundles these components and defers the recognition of revenue for the
services at the time the product sales revenue is recognized, based upon
the
vendor specific evidence of the value of the service element. Revenue from
rentals and operating leases is recognized monthly as the fees
accrue.
Revenue
from Internet service contracts is recognized over the term of the contracts,
which do not exceed one year.
Results
of Operations - Three and Nine Months Ended September 30,
2005
Product
supply issues
On
September 7, 2005, WaveRider’s contract manufacturer announced its plans to
close the manufacturing plant that produces WaveRider’s products. The plant will
be wound down over the coming months with final closure taking place on
or
before March 31, 2006. WaveRider is working with the contract manufacturer
to
transition its production to another of the contract manufacturer’s plants and
does not anticipate any significant manufacturing delays or shortages.
However,
any transition can result in unexpected issues, which could impact WaveRider’s
ability to supply products over the coming two quarters.
Over
the
past several years, as the industry downturn continued, most parts manufacturers
reduced their production capacities, shutting down production lines and
reducing
staffing levels. As a result, parts lead times have lengthened and there
are
significantly fewer parts available in the secondary or reseller markets.
As a
result, it has been difficult to react quickly to increased demand and
WaveRider
is vulnerable to production delays resulting from individual part
shortages.
Results
of Operations - Three Months Ended September 30, 2005 Compared to the Three
Months Ended September 30, 2004
Revenue
The
following table presents WaveRider’s North American and non-North American
revenues and the approximate percentage of total revenues ($000’s):
|
Three
Months Ended September 30,
|
||||||||||
|
|
2005
|
2004
|
%
Change
|
|||||||
|
North
America
|
$
|
2,076
|
$
|
1,768
|
17.4
|
%
|
||||
|
Non-North
America
|
933
|
901
|
3.6
|
%
|
||||||
|
Total
revenues
|
$
|
3,009
|
$
|
2,669
|
12.7
|
%
|
||||
|
Percentage
of total revenue
|
||||||||||
|
North
America
|
69.0
|
%
|
66.2
|
%
|
||||||
|
Non-North
America
|
31.0
|
%
|
33.8
|
%
|
||||||
-104-
Total
revenue increased 12.7% in Q3 2005 compared to Q3 2004. WaveRider’s focus on the
900 MHz non-line of sight LMS product family had allowed us to make gains
in the
North American market but has limited its potential in a large part of
the rest
of the world, where the 900 MHz band is not available on a license exempt
basis.
As a result, WaveRider is exposed to potential significant swings when
the
focused market for its main product experiences periods of
weakness.
Total
revenues in North America have increased in Q3 2005 due to the introduction
of
WaveRider’s integrated outdoor end-user modem, the EUM 3006, at the end of
February 2005 and the introduction of the latest generation indoor modem,
the
EUM 3005, at the beginning of June 2005. WaveRider also experienced a
significant increase in its sales of base station units, the LMS4000 CCU,
as its
customers expand their networks.
Non-North
American revenues were mainly focused on WaveRider’s operating subsidiary in
Australia. Revenues in Australia have shown year on year growth during
2005 and
are expected to continue to show growth, subject to changes in the foreign
exchange rate, as that subsidiary expands its ongoing service
offerings.
WaveRider
has taken initial steps to access the Caribbean, Latin American and South
American markets, which in most parts do provide license exempt availability
of
900 MHz spectrum, but it expects that there will be relatively long sales
cycles
in these markets.
Gross
Margins
The
following table presents WaveRider’s gross margin and the percentage of total
revenues ($000’s):
|
Three
months ended September 30,
|
|||||||
|
2005
|
2004
|
||||||
|
Product
revenue
|
|||||||
|
Gross
margin
|
$
|
818
|
$
|
826
|
|||
|
Gross
margin rate
|
33.9
|
%
|
36.4
|
%
|
|||
|
Service
revenue
|
|||||||
|
Gross
margin
|
$
|
255
|
$
|
199
|
|||
|
Gross
margin rate
|
42.9
|
%
|
49.9
|
%
|
|||
|
Total
revenue
|
|||||||
|
Gross
margin
|
$
|
1,073
|
$
|
1,025
|
|||
|
Gross
margin rate
|
35.7
|
%
|
38.4
|
%
|
|||
Gross
margins in Q3 2005 declined to 35.7% compared to 38.4% of revenue in Q3
2004.
However, as a result of the increase in quarterly revenue, total gross
margin
dollars increased by 4.7% compared to Q3 2004.
With
the
introduction of two new products, the EUM3006 and EUM3005, WaveRider has
seen an
increase in both its average selling price and its product cost, resulting
in
higher absolute gross margins but a lower gross margin percentage. As these
products mature, WaveRider expects to continue to be actively involved
in
finding cost savings, through economies of scale and product refinement.
WaveRider expects, however, that future cost reductions will be offset
by volume
discounts offered to its customers and to competitive pricing pressures.
As
such, WaveRider expects that gross margin percentages for product revenue
will
be at or near current levels over the balance of the fiscal year.
Service
revenue gross margins percentages were negatively affected by WaveRider’s use of
subcontract labor for a major installation undertaken in the third quarter.
While use of outside contractors allows WaveRider to provide larger scale
installations and thereby increase overall gross margins it does negatively
impact gross margin percentages.
-105-
Selling,
General and Administrative expenses
Selling,
general and administrative expenses declined to $1,051,346 from $1,121,693
in Q3
2004. The decline was mainly due to a reduction in compensation expense
and
other discretionary expenses. WaveRider anticipates that selling, general
and
administrative expenses, barring a significant change in foreign exchange
rates,
will remain at or near the current levels for the balance of the
year.
Research
and Development expenses
Research
and development expenses declined to $96,896 in Q3 2005 from $521,436 in
Q3
2004. With the introduction of the EUM3006 in late February of 2005 and
the EUM
3005 in June 2005, WaveRider focused on finalizing those programs and getting
the products into manufacturing, before continuing other development
programs.
WaveRider
expects to increase its research and development spending over the balance
of
the year as it continues its programs surrounding next generation modems
based
on 802.XX and Wi-MAX standards and completion of WaveRider’s MobileWAN product
family, designed to provide rapid deployment mobile wireless access networking
solutions for voice, video and data services.
Depreciation
and Amortization expense
Depreciation
and amortization expense declined to $32,386 in Q3 2005 compared to $53,364
in
Q3 2004. During the last several years, WaveRider has withheld spending
on new
capital assets and does not plan any major capital acquisitions through
the
balance of 2005.
Interest
expense
Interest
expense amounted to $90,114 in Q3 2005 compared to $113,593 in Q3 2004.
Included
in interest expense for the three months ended September 30, 2005 is $83,632
(2004 - $105,320) of non-cash charges related to the accretion to face
value of
the convertible debentures and amortization of deferred financing
charges.
Derivative
instrument income (expense)
Derivative
instrument income (expense) amounted to $10,281 for the three months ended
September 30, 2005 compared to $355,646 for the three months ended September
30,
2004. Derivative instrument income arises from fair value adjustments for
certain financial instruments, such as warrants to acquire common stock
and the
embedded conversion features of the convertible debentures that are indexed
to
WaveRider’s common stock, and are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of WaveRider. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when
the
terms of the underlying contracts do not provide for net-cash settlement.
Such
derivative financial instruments are initially recorded at fair value with
subsequent changes in the fair value charged (credited) to operations each
reporting period.
Foreign
Exchange
WaveRider
incurred a foreign exchange loss for the three months ended September 30,
2005
in the amount of $2,738 compared to a loss for the three months ended September
30, 2004 in the amount of $32,345. The foreign exchange losses are due
to a
strengthening of the U.S. dollar versus the Canadian and Australian
dollars.
-106-
Results
of Operations - Nine Months Ended September 30, 2005 Compared to the
Nine Months
Ended September 30, 2004
Revenue
The
following table presents WaveRider’s North American and non-North American
revenues and the approximate percentage of total revenues ($000’s):
|
Nine
Months Ended September 30,
|
||||||||||
|
2005
|
2004
|
%
Change
|
||||||||
|
North
America
|
$
|
5,145
|
$
|
4,619
|
11.4
|
%
|
||||
|
Non-North
America
|
2,785
|
2,769
|
0.6
|
%
|
||||||
|
Total
revenues
|
$
|
7,930
|
$
|
7,388
|
7.3
|
%
|
||||
|
Percentage
of total revenue
|
||||||||||
|
North
America
|
64.9
|
%
|
62.5
|
%
|
||||||
|
Non-North
America
|
35.1
|
%
|
37.5
|
%
|
||||||
Total
revenue increased 7.3% in the nine months ended September 30, 2005 compared
to
2004. WaveRider’s focus on the 900 MHz non-line of sight LMS product family had
allowed us to make gains in the North American market but has limited its
potential in a large part of the rest of the world, where the 900 MHz band
is
not available on a license exempt basis. As a result, WaveRider is exposed
to
potential significant swings when the focused market for its main product
experiences periods of weakness.
Total
revenues in North America have increased in 2005 due to the introduction
of
WaveRider’s integrated outdoor end-user modem, the EUM 3006, at the end of
February 2005 and the introduction of the latest generation indoor modem,
the
EUM 3005, at the beginning of June 2005. WaveRider also experienced a
significant increase in its sales of base station units, the LMS4000 CCU,
as its
customers expand their networks.
Non-North
American revenues were mainly focused on WaveRider’s operating subsidiary in
Australia. Revenues in Australia have shown year on year growth during
2005 and
are expected to continue to show growth, subject to changes in the foreign
exchange rate, as that subsidiary expands its ongoing service
offerings.
WaveRider
has taken initial steps to access the Caribbean, Latin American and South
American markets, which in most parts do provide license exempt availability
of
900 MHz spectrum, but it expects that there will be relatively long sales
cycles
in these markets.
Gross
Margins
The
following table presents WaveRider’s gross margin and the percentage of total
revenues ($000’s):
|
Nine
months ended September 30,
|
|||||||
|
2005
|
2004
|
||||||
|
Product
revenue
|
|||||||
|
Gross
margin
|
$
|
2,076
|
$
|
1,873
|
|||
|
Gross
margin rate
|
31.8
|
%
|
31.6
|
%
|
|||
|
Service
revenue
|
|||||||
|
Gross
margin
|
$
|
619
|
$
|
621
|
|||
|
Gross
margin rate
|
43.9
|
%
|
42.5
|
%
|
|||
|
Total
revenue
|
|||||||
|
Gross
margin
|
$
|
2,695
|
$
|
2,494
|
|||
|
Gross
margin rate
|
34.0
|
%
|
33.8
|
%
|
|||
-107-
Gross
margins remained relatively flat at 34.0% in 2005 compared 33.8% in 2004
but, in
conjunction with the increase in revenue, total gross margin dollars increased
8.0% compared to 2004.
In
Q2
2004, WaveRider recorded an additional inventory obsolescence charge of
$253,000, which reduced product margins by 6.9% and overall margins by
5.4%. No
similar provision was recorded in 2005.
With
the
introduction of two new products, the EUM3006 and EUM3005, WaveRider has
seen an
increase in both its average selling price and its product cost, resulting
in
higher absolute gross margins but a lower gross margin percentage. As these
products mature, WaveRider expects to continue to be actively involved
in
finding cost savings, through economies of scale and product refinement.
WaveRider expects, however, that future cost reductions will be offset
by volume
discounts offered to its customers and to competitive pricing pressures.
As
such, WaveRider expects that gross margin percentages will be at or near
current
levels over the balance of the fiscal year.
Selling,
General and Administrative expenses
Selling,
general and administrative expenses declined to $3,105,720 in 2005 from
$3,871,484 in 2004. Included in 2004 expenses was a charge of $250,000
related
to the joint registration statement/proxy filed on form F-4 on July 20,
2004. No
similar amount was incurred in 2005. The remaining decline was mainly due
to a
reduction in compensation expense and other discretionary expenses. WaveRider
anticipates that selling, general and administrative expenses, barring
a
significant change in foreign exchange rates, will remain at or near the
current
levels for the balance of the year.
Research
and Development expenses
Research
and development expenses declined to $357,236 in 2005 from $1,376,230 in
2004.
With the introduction of the EUM3006 in late February of 2005 and the EUM
3005
in June 2005, WaveRider focused on finalizing those programs and getting
the
products into manufacturing, before continuing other development
programs.
WaveRider
expects to increase its research and development spending over the balance
of
the year as it continues its programs surrounding next generation modems
based
on 802.XX and Wi-MAX standards and completion of WaveRider’s MobileWAN product
family, designed to provide rapid deployment mobile wireless access networking
solutions for voice, video and data services.
Depreciation
and Amortization expense
Depreciation
and amortization expense declined to $117,098 in 2005 compared to $242,087
in
2004. During the last several years, WaveRider has withheld spending on
new
capital assets and does not plan any major capital acquisitions through
the
balance of fiscal 2005.
Interest
expense
Interest
expense amounted to $312,834 for the nine months ended September 30, 2005
compared to $301,910 for the nine months ended September 30, 2004. Included
in
interest expense for the nine months ended September 30, 2005 is $290,685
(2004
- $265,716) of non-cash charges related to the accretion to face value
of the
convertible debentures and amortization of deferred financing
charges.
Derivative
instrument income (expense)
Derivative
instrument income (expense) amounted to $135,598 for the nine months ended
September 30, 2005 compared to $2,491,622 for the nine months ended September
30, 2004. Derivative instrument income arises from fair value adjustments
for
certain financial instruments, such as warrants to acquire common stock
and the
embedded conversion features of the convertible debentures that are indexed
to
WaveRider’s common stock, and are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of WaveRider. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when
the
terms of the underlying contracts do not provide for net-cash settlement.
Such
derivative financial instruments are initially recorded at fair value with
subsequent changes in the fair value charged (credited) to operations each
reporting period.
-108-
Foreign
Exchange
WaveRider
incurred a foreign exchange loss for the nine months ended September 30,
2005 in
the amount of $12,377 compared to a loss for the nine months ended September
30,
2004 in the amount of $182,442. The foreign exchange losses are due to
a
strengthening of the U.S. dollar versus the Canadian and Australian
dollars.
Liquidity
and Capital Resources
WaveRider
has funded its operations for the most part through equity and convertible
debenture financing and has had no line of credit or similar credit facility
available to it. WaveRider’s outstanding shares of Common stock, par value $.001
per share, are traded under the symbol “WAVR” in the over-the-counter market on
the OTC Electronic Bulletin Board by the National Association of Securities
Dealers, Inc. WaveRider must rely on its ability to raise money through
equity
and convertible debenture financing to pursue its business endeavors. The
majority of funds raised have been allocated to the development of the
WaveRider(R) line of wireless data communications products and the operations
of
WaveRider.
WaveRider
used $649,951 of cash in operating activities during the nine months ended
September 30, 2005 (2004 - $2,441,829). WaveRider expects to continue to
have
revenue and gross margin growth and to control cash expenditures through
the
remainder of 2005. However, based on WaveRider’s long term plans and
projections, Management believes that WaveRider will have to raise additional
funds in 2005 or early 2006 to meet its current and future financial commitments
until WaveRider achieves positive cash flows from operations.
WaveRider
has determined that it does not control its ability to physically or net-share
settle certain financial instruments that are convertible or exercisable
into
common stock. As a result, WaveRider has recorded its warrants and the
embedded
derivatives associated with its convertible debentures as liabilities.
WaveRider
has never net cash settled any conversions or exercises of these instruments
and
does not currently expect to pay cash in settlement of future conversions
or
exercises.
In
the
past, WaveRider has obtained financing primarily through the sale of convertible
securities. If WaveRider is unable to obtain additional financing and achieve
its planned cash flow positive operations and profitability, it will, in
all
likelihood, be obliged to seek protection under the bankruptcy laws; in
which
event WaveRider believes it is unlikely that its common stock will have
any
value.
Critical
Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses WaveRider’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in
the
United States of America. The preparation of these financial statements
requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period.
On
an
ongoing basis, management evaluates its estimates and judgments, including
those
related to bad debts, inventories, investments, intangible and other long-lived
assets, income taxes, warranty obligations, product returns, restructuring
costs, litigation and contingencies. Management bases its estimates and
judgments on historical experience, current economic and industry conditions
and
on various other factors that are believed to be reasonable under the
circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
-109-
Current
Activities
WaveRider
currently have approximately 30 employees located in its head office in
Toronto,
Ontario and its sales offices and subsidiaries in the United States, Canada
and
Australia, as well as at WaveRider’s subsidiary, JetStream Internet Services in
Salmon Arm, British Columbia.
The
majority of these employees are involved in the design, development and
marketing of WaveRider’s line of wireless data communications
products.
WAVERIDER’S
PRINCIPAL STOCKHOLDERS
|
Common
Stock
|
Series
D Convertible
Preferred
Stock
|
|||||||||||||||
|
Name
and Address of Beneficial
Owner
(1)
|
Shares
Issuable
Pursuant
to Convertible
Preferred
Stock, Convertible Notes,Warrants
and
Options
Exercisable
Within
60
Days
of
February 8, 2006
|
Number
of Shares
Beneficially
Owned
(Including
the
Number
of
Shares
Shown in the
First
Column) (2)
|
Percentage
of
Shares
Outstanding
|
Number
of
Shares
Beneficially
Owned
(2)
|
Percentage
of
Shares
Outstanding
|
|||||||||||
|
Crescent
International Limited
|
||||||||||||||||
|
Clarendon
House
|
||||||||||||||||
|
2
Church Street
|
||||||||||||||||
|
Hamilton
H11, Bermuda
|
7,000,000
(3
|
)
|
9,614,705
|
19.32
|
%
|
350
|
43.75
|
%
|
||||||||
|
Wave
Wireless Corporation
|
||||||||||||||||
|
1996
Lundy Avenue
|
||||||||||||||||
|
San
Jose, CA 95131
|
9,000,000
|
9,000,000
|
18.08
|
%
|
450
|
56.25
|
%
|
|||||||||
|
Gerry
Chastelet
|
57,500
|
57,500
|
0.12
|
%
|
||||||||||||
|
Michael
Chevalier
|
50,000
|
51,500
|
0.11
|
%
|
||||||||||||
|
Donald
Gibbs
|
50,000
|
50,000
|
0.10
|
%
|
||||||||||||
|
Steven
Grant
|
50,000
|
50,000
|
0.10
|
%
|
||||||||||||
|
Michael
Milligan
|
55,000
|
55,000
|
0.11
|
%
|
||||||||||||
|
Bruce
Sinclair
|
739,000
|
968,061
|
2.36
|
%
|
||||||||||||
|
Charles
Brown
|
97,042
|
104,605
|
0.22
|
%
|
||||||||||||
|
Scott
Worthington
|
97,042
|
104,542
|
0.22
|
%
|
||||||||||||
|
All
current directors and
|
||||||||||||||||
|
executive
officers as a group
|
||||||||||||||||
|
(8
persons)
|
1,195,583
|
1,441,207
|
3.29
|
%
|
-
|
-
|
||||||||||
|
(1)
|
Each
director’s address and officer’s address is c/o WaveRider Communications
Inc., 255 Consumers Road, Suite 500, Toronto, Ontario,
Canada M2J
1R4.
|
|
(2)
|
Beneficial
ownership is determined in accordance with the rules
of the Securities and
Exchange Commission and generally includes voting or
investment power with
respect to securities. Except as indicated each person
possesses sole
voting and investment power with respect to all of the
shares of common
stock owned by such person, subject to community property
laws where
applicable. In computing the number of shares beneficially
owned by a
person and the percentage ownership of that person, shares
of common stock
subject to options held by that person that are currently
exercisable, or
become exercisable 60 days of February 8, 2006, are deemed
outstanding.
Such shares, however, are not deemed outstanding for
the purpose of
computing the percentage ownership of any other person.
Percentage
ownership is based on 33,765,854 shares of common stock
and 800 shares of
Series D Convertible Preferred Stock outstanding as of
February 8, 2006,
plus securities deemed to be outstanding with respect
to individual
stockholders pursuant to Rule 13d-3(d)(1) under the Exchange
Act.
|
|
(3)
|
Consists
entirely of shares of common stock issuable upon conversion
of the Series
D Convertible Preferred Stock. Crescent International Ltd.
(“Crescent”)
also holds convertible debentures issued by WaveRider in
the principal
amount of $1,468,202 and warrants to purchase 547,550 shares
of WaveRider
common stock. The shares issuable upon conversion of the
convertible
debentures and upon exercise of the warrants are not considered
to be
beneficially owned by Crescent as of February 8, 2005 due
to a limitation
that prevents Crescent from converting or exercising these
securities if
such conversion or exercise would result in Crescent, together
with any of
its affiliates, beneficially owning more than 9.999% of
the outstanding
shares of WaveRider common
stock.
|
-110-
DESCRIPTION
OF WAVE WIRELESS CAPITAL STOCK
This
section describes the material terms of Wave Wireless’ capital stock and related
terms of its certificate of incorporation and bylaws as currently in effect.
This summary is not complete. For more detailed information, please see
Wave
Wireless’ certificate of incorporation and bylaws. All share numbers relating to
Wave Wireless common stock have been adjusted to reflect the 1-for-30 reverse
split of Wave Wireless common stock effected on July 19, 2004.
Authorized
Capital Stock
Wave
Wireless is currently authorized to issue a total of 252,000,000 shares
of
capital stock consisting of:
|
·
|
250,000,000
shares of common stock, par value $0.0001 per share;
and
|
|
·
|
2,000,000
shares of preferred stock, par value $0.0001 per
share.
|
Common
Stock
Holders
of Wave Wireless common stock are entitled to one vote for each share held
on
all matters submitted to a vote of Wave Wireless stockholders. Holders
of common
stock are entitled to receive dividends, ratably, if any, as may be declared
by
the Wave Wireless board of directors out of legally available funds, subject
to
any preferential dividend rights of any outstanding preferred stock. If
Wave
Wireless liquidates, dissolves or winds up, the holders of its common stock
are
entitled to share ratably in all assets remaining after satisfaction of
liabilities and the liquidation preference of any shares of preferred stock
that
are outstanding at that time. Holders of common stock have no preemptive
rights
and no right to convert their common stock onto any other securities. There
are
no redemption or sinking fund provisions applicable to Wave Wireless common
stock. The rights, preferences and privileges of holders of Wave Wireless
common
stock are subject to, and may be adversely affected by, the rights of holders
of
shares of any series of preferred stock that Wave Wireless may designate
and
issue in the future without further stockholder approval. As of January
20,
2006, 22,461,684 shares of Wave Wireless common stock were issued and
outstanding.
Preferred
Stock
Wave
Wireless’ board of directors is authorized to issue from time to time, without
further stockholder approval, up to an aggregate of 2,000,000 shares of
preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions
of the
shares of each series, including the dividend rights, dividend rates, conversion
rights, voting rights, term of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of any series. Wave Wireless may
issue
preferred stock in ways that may delay, defer or prevent a change in control
of
the company without further action by its stockholders and may adversely
affect
the voting and other rights of the holders of its common stock. The issuance
of
preferred stock with voting and conversion rights may adversely affect
the
voting power of the holders of Wave Wireless common stock, including the
loss of
voting control to others.
Series
A Junior Participating Preferred Stock
Wave
Wireless has designated 500,000 shares of its preferred stock as Series
A Junior
Participating Preferred Stock, which are issuable under certain circumstances
pursuant to Wave Wireless’ stockholder rights plan, which is described in more
detail below. No shares of Series A Junior Participating Preferred Stock
are
currently issued or outstanding.
-111-
Series
E Convertible Preferred Stock
Wave
Wireless has designated 2,000 shares of its preferred stock as Series E
Convertible Preferred Stock, of which approximately 923.1 shares were issued
and
outstanding as of January 20, 2006. The holders of Wave Wireless’ Series E
Preferred Stock are entitled to certain rights and preferences with respect
to
the holders of its common stock, including the following:
|
·
|
Voting.
The holders of Wave Wireless’ Series E Preferred Stock are entitled to
vote together with the holders of its common stock, as a single
class, on
all matters submitted to a vote of its stockholders. The holders
of Wave
Wireless’ Series E Preferred Stock are entitled to a number of votes equal
to the number of shares of common stock that would be issued
upon
conversion of their shares of Series E Preferred
Stock.
|
|
·
|
Conversion.
The Series E Preferred Stock has a liquidation preference amount
equal to
$1,000 per share. Each share of Series E Preferred Stock is convertible
into a number of shares of common stock equal to the liquidation
preference amount divided by the conversion price of $0.50. This
conversion price is subject to adjustment for any stock splits,
stock
dividends or similar transactions. The holders of Wave Wireless’ Series E
Convertible Stock may convert their shares into shares of common
stock at
any time and, if certain conditions are satisfied, Wave Wireless
has the
right to mandatorily convert their shares into shares of common
stock at
any time.
|
|
·
|
Dividends.
Holders of Wave Wireless’ Series E Preferred Stock are entitled to
receive, out of legally available funds, dividends at the rate
of 6% per
annum beginning on the second anniversary of the date of issuance.
Dividends are payable annually, either in cash or shares of Wave
Wireless’
common stock.
|
|
·
|
Liquidation.
If Wave Wireless liquidates, dissolves or winds up, the holders
of its
Series E Preferred Stock are entitled to receive the liquidation
preference amount ($1,000 per share) of their shares prior to
any amounts
being paid to the holders of Wave Wireless’ Series A Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock and common
stock.
|
Series
F Convertible Preferred Stock
Wave
Wireless has designated 250 shares of its preferred stock as Series F
Convertible Preferred Stock, of which 179 shares were issued and outstanding
as
of January 20, 2006. The holders of Wave Wireless’ Series F Preferred Stock are
entitled to certain rights and preferences with respect to the holders
of its
common stock, including the following:
|
·
|
Voting.
Except for the purpose of approving certain specified corporate
actions
and as otherwise required by the Delaware General Corporation
Law, the
holders of Wave Wireless’ Series F Preferred Stock do not have any voting
rights.
|
|
·
|
Conversion.
The Series F Preferred Stock has a face value of $10,000 per
share. Each
share of Series F Preferred Stock is convertible into a number
of shares
of common stock equal to the face value divided by the conversion
price of
$0.50. This conversion price is subject to adjustment for any
stock
splits, stock dividends or similar transactions. The holders
of Wave
Wireless’ Series F Preferred Stock may voluntarily convert their shares
into shares of common stock at any time and, if certain conditions
are
satisfied, Wave Wireless has the right to mandatorily convert
their shares
into shares of common stock at any time. However, no shares of
Series F
Preferred Stock may be converted (either voluntarily or mandatorily)
into
shares of common stock if the conversion would cause the holder
or any of
its affiliates, individually or in the aggregate, to beneficially
own more
than 9.99% of Wave Wireless’ outstanding common
stock.
|
-112-
|
·
|
Dividends.
Holders of Wave Wireless’ Series F Preferred Stock are entitled to share
pro-rata, on an as-converted basis, in any dividends that may
be declared
by the board of directors with respect to Wave Wireless’ common
stock.
|
|
·
|
Liquidation.
If Wave Wireless liquidates, dissolves or winds up, the holders
of its
Series F Preferred Stock are not entitled to receive any preferential
amounts prior to any amounts being paid to the holders of the
other
classes and series of Wave Wireless’ capital
stock.
|
Series
G Convertible Preferred Stock
Wave
Wireless has designated 10,000 shares of its preferred stock as Series
G
Convertible Preferred Stock, of which approximately 6,556 shares were issued
and
outstanding as of January 20, 2006. The holders of Wave Wireless’ Series G
Preferred Stock are entitled to certain rights and preferences with respect
to
the holders of its common stock, including the following:
|
·
|
Voting.
Except for the purpose of approving certain specified corporate
actions
and as otherwise required by the Delaware General Corporation
Law, the
holders of Wave Wireless’ Series G Preferred Stock do not have any voting
rights.
|
|
·
|
Conversion.
The Series G Preferred Stock has a liquidation preference amount
equal to
$1,000 per share. Each share of Series G Preferred Stock is convertible
into a number of shares of common stock equal to the liquidation
preference amount divided by the conversion price of $0.50. This
conversion price is subject to adjustment for any stock splits,
stock
dividends or similar transactions. The holders of Wave Wireless’ Series G
Preferred Stock may voluntarily convert their shares into shares
of common
stock at any time and, if certain conditions are satisfied, Wave
Wireless
has the right to mandatorily convert their shares into shares
of common
stock at any time. However, no shares of Series G Preferred Stock
may be
converted (either voluntarily or mandatorily) into shares of
common stock
if the conversion would cause the holder or any of its affiliates,
individually or in the aggregate, to beneficially own more than
9.99% of
Wave Wireless’ outstanding common
stock.
|
|
·
|
Dividends.
Holders of Wave Wireless’ Series G Preferred Stock are entitled to share
pro-rata, on an as-converted basis, in any dividends that may
be declared
by the board of directors with respect to Wave Wireless’ common
stock.
|
|
·
|
Liquidation.
If Wave Wireless liquidates, dissolves or winds up, the holders
of its
Series G Preferred Stock are entitled to receive the liquidation
preference amount ($1,000 per share) of their shares prior to
any amounts
being paid to the holders of Wave Wireless’ Series A Preferred Stock,
Series F Preferred Stock and common
stock.
|
Series
H Convertible Preferred Stock
Prior
to
the completion of the merger, Wave Wireless anticipates that it will designate
approximately 1,500 shares of its preferred stock as Series H Convertible
Preferred Stock for issuance to Crescent International Ltd. (“Crescent”) in
connection with the exchange of its existing securities in WaveRider for
securities issued by Wave Wireless. The relative rights, preferences and
privileges of the Series H Convertible Preferred Stock with respect to
the
existing series of Wave Wireless preferred stock and Wave Wireless common
stock
have not yet been determined and are subject to negotiations between Wave
Wireless and Crescent, which must be completed prior to the completion
of the
merger. However, Wave Wireless anticipates that the holders of its Series
H
Preferred Stock will be entitled to certain rights and preferences with
respect
to the holders of its common stock, including the following:
|
·
|
Voting.
Except for the purpose of approving certain specified corporate
actions
and as otherwise required by the Delaware General Corporation
Law, the
holders of Wave Wireless’ Series H Preferred Stock will not have any
voting rights.
|
-113-
|
·
|
Conversion.
The Series H Preferred Stock has a liquidation preference amount
of $1,000
per share. Each share of Series H Preferred Stock is convertible
into a
number of shares of common stock equal to the liquidation preference
amount divided by the conversion price of approximately $0.15.
This
conversion price is subject to adjustment for any stock splits,
stock
dividends or similar transactions. The holders of Wave Wireless’ Series H
Preferred Stock may voluntarily convert their shares into shares
of common
stock at any time and, if certain conditions are satisfied, Wave
Wireless
has the right to mandatorily convert their shares into shares
of common
stock at any time. However, no shares of Series H Preferred Stock
may be
converted (either voluntarily or mandatorily) into shares of
common stock
if the conversion would cause the holder or any of its affiliates,
individually or in the aggregate, to beneficially own more than
4.99% of
Wave Wireless’ outstanding common
stock.
|
|
·
|
Dividends.
Holders of Wave Wireless’ Series H Preferred Stock are entitled to share
pro-rata, on an as-converted basis, in any dividends that may
be declared
by the board of directors with respect to Wave Wireless’ common
stock.
|
|
·
|
Liquidation.
If Wave Wireless liquidates, dissolves or winds up, the holders
of its
Series H Preferred Stock are entitled to receive the liquidation
preference amount ($1,000 per share) of their shares prior to
any amounts
being paid to the holders of Wave Wireless’ Series A Preferred Stock and
common stock.
|
Series
I Convertible Preferred Stock
Prior
to
the completion of the merger, Wave Wireless anticipates that it will designate
approximately 150 shares of its preferred stock as Series I Convertible
Preferred Stock for issuance to Crescent in connection with the exchange
of its
existing securities in WaveRider for securities issued by Wave Wireless.
The
relative rights, preferences and privileges of the Series I Convertible
Preferred Stock with respect to the existing series of Wave Wireless preferred
stock and Wave Wireless common stock have not yet been determined and are
subject to negotiations between Wave Wireless and Crescent, which must
be
completed prior to the completion of the merger. However, Wave Wireless
anticipates that the holders of its Series I Preferred Stock will be entitled
to
certain rights and preferences with respect to the holders of its common
stock,
including the following:
|
·
|
Voting.
The holders of Wave Wireless’ Series I Preferred Stock are entitled to
vote together with the holders of its common stock, as a single
class, on
all matters submitted to a vote of its stockholders. The holders
of Wave
Wireless’ Series I Preferred Stock are entitled to a number of votes equal
to the maximum number of shares of common stock that could be
issued upon
conversion of their shares of Series I Preferred Stock on the
applicable
record date.
|
|
·
|
Conversion.
The Series I Preferred Stock has a face value of $1,000 per share.
Each
share of Series I Preferred Stock is convertible into a number
of shares
of common stock equal to the face value divided by the conversion
price of
$0.01. This conversion price is subject to adjustment for any
stock
splits, stock dividends or similar transactions. The holders
of Wave
Wireless’ Series I Preferred Stock may voluntarily convert their shares
into shares of common stock at any time and, if certain conditions
are
satisfied, Wave Wireless has the right to mandatorily convert
their shares
into shares of common stock at any time. However, no shares of
Series I
Preferred Stock may be converted (either voluntarily or mandatorily)
into
shares of common stock if the conversion would cause the holder
or any of
its affiliates, individually or in the aggregate, to beneficially
own more
than 4.99% of Wave Wireless’ outstanding common
stock.
|
|
·
|
Dividends.
Holders of Wave Wireless’ Series I Preferred Stock are entitled to share
pro-rata, on an as-converted basis, in any dividends that may
be declared
by the board of directors with respect to Wave Wireless’ common
stock.
|
-114-
|
·
|
Liquidation.
If Wave Wireless liquidates, dissolves or winds up, the holders
of its
Series I Preferred Stock are not entitled to receive any preferential
amounts prior to any amounts being paid to the holders of the
other
classes and series of Wave Wireless’ capital
stock.
|
Anti-Takeover
Effects of Wave Wireless’ Certificate of Incorporation and
Bylaws
Provisions
of Wave Wireless’ certificate of incorporation and bylaws may delay, defer or
discourage another party from acquiring control of Wave Wireless. Wave
Wireless
expects that these provisions, which are summarized below, discourage coercive
takeover practices or inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of Wave Wireless
to
first negotiate with its board of directors, which Wave Wireless believes
may
result in an improvement of the terms of any such acquisition in favor
of its
stockholders. However, they also give the board the power to discourage
acquisitions that some stockholders may favor.
Undesignated
Preferred Stock
The
ability to authorize undesignated preferred stock makes it possible for
Wave
Wireless’ board of directors to issue preferred stock with super voting, special
approval, dividend or other rights or preferences that could impede the
success
of any attempt to acquire the company. These and other provisions may have
the
effect of deferring, delaying or discouraging hostile takeovers, or changing
control or management of Wave Wireless.
Requirements
for Advance Notification of Stockholder Meetings, Vacancies and Newly Created
Directorships
Wave
Wireless’ bylaws prohibit the conduct of any business at a special meeting of
the stockholders other than as specified in the notice of special meeting.
This
provision may have the effect of deferring, delaying or discouraging hostile
takeovers, or changes in control or management of Wave Wireless. Additionally,
vacancies and newly created directorships may be filled by a majority of
the
directors then in office, even though less than a quorum. This provision
may
defer, delay or discourage a potential acquiror from conducting a solicitation
of proxies to elect the acquiror’s own slate of directors or otherwise
attempting to obtain control of Wave Wireless.
Amendment
Provisions
Wave
Wireless’ certificate of incorporation grants Wave Wireless’ board of directors
the authority to amend and repeal its bylaws without a stockholder vote
in any
manner not inconsistent with the laws of the State of Delaware or its
certificate of incorporation.
Stockholder
Rights Plan
Wave
Wireless currently has in effect a stockholder rights plan, which is governed
by
the terms and conditions contained in the Amended and Restated Rights Agreement,
dated as of January 24, 2001, between Wave Wireless and Fleet National
Bank, as
rights agent. In the event that Wave Wireless is acquired in an asset purchase
or other business combination transaction or 50% or more of its consolidated
assets or earning power is sold, each holder of Wave Wireless common stock
will
have the right to receive that number of shares of common stock of the
acquiring
company which at the time of such transaction will have a market value
of two
times the exercise price of the right. In the event that any person becomes
the
beneficial owner of 15% or more of the outstanding shares of Wave Wireless
common stock proper provision will be made so that each holder of Wave
Wireless
common stock, other than the acquiring person, will thereafter have the
right to
receive that number of shares of Wave Wireless common stock or preferred
stock
(or cash, other securities or property) having a market value of two times
the
exercise price of the right.
The
rights plan has certain anti-takeover effects. The rights plan will cause
substantial dilution to a person or group that attempts to acquire Wave
Wireless
on terms not approved by its board of directors. The rights plan should
not
interfere with any asset purchase or other business combination approved
by the
board of directors because the rights granted to each holder of common
stock may
be redeemed by us prior to such asset purchase or other business
combination.
-115-
COMPARISON
OF RIGHTS OF HOLDERS OF WAVE WIRELESS
COMMON
STOCK AND WAVERIDER COMMON STOCK
This
section of the proxy statement/prospectus describes certain differences
between
the rights of holders of WaveRider common stock and the rights of holders
of
Wave Wireless common stock. While Wave Wireless and WaveRider believe that
the
description covers the material differences between the two, this summary
may
not contain all of the information that is important to you. You should
carefully read this entire document and refer to the other documents discussed
below for a more complete understanding of the differences between being
a
stockholder of WaveRider and being a stockholder of Wave Wireless.
As
a
stockholder of WaveRider, your rights are governed by Nevada law, WaveRider’s
articles of incorporation, as amended, and WaveRider’s bylaws, each as currently
in effect. After completion of the merger, you will become a stockholder
of Wave
Wireless and your rights will be governed by Delaware law, Wave Wireless’
restated certificate of incorporation, as amended, and Wave Wireless’ amended
and restated bylaws, as amended, each as currently in effect.
Although
the corporate statutes of Nevada and Delaware are similar, certain differences
exist. The most significant differences, in the judgment of the management
of
WaveRider, are summarized below. This summary is not intended to be complete,
and stockholders should refer to the General Corporation Law of the State
of
Delaware (“Delaware law”) and Chapters 78 and 92A of the Nevada Revised Statutes
(“Nevada law”) to understand how these laws apply to WaveRider and Wave
Wireless.
Classified
Board of Directors.
Delaware law permits a corporation to classify its board of directors into
as
many as three classes as equally as possible with staggered terms of office,
while Nevada law permits a corporation to classify its board into as many
as
four classes. Since WaveRider will, after the merger, be a wholly-owned
subsidiary of Wave Wireless, the merger will result in the former business
of
WaveRider being controlled by a corporation that has less flexibility in
classifying its board of directors than WaveRider had as an independent
Nevada
corporation.
Removal
of Directors.
With
respect to removal of directors, under Nevada law, any one or all of the
directors of a corporation may be removed by the holders of not less than
two-thirds of the voting power of a corporation’s issued and outstanding stock.
Nevada does not distinguish between removal of directors with and without
cause
or removal of directors when the board is divided into classes. Under Delaware
law, directors of a corporation without a classified board may be removed
with
or without cause by the holders of a majority of shares then entitled to
vote in
an election of directors. Accordingly, removal is easier in Delaware when
the
board is not classified. However, if the board is classified, Delaware
law
provides that a director can be removed only for cause by the holders of
a
majority of the shares then entitled to vote in an election of directors
unless
the certificate of incorporation provides otherwise.
Special
Meetings of Stockholders.
Delaware law permits special meetings of stockholders to be called by the
board
of directors or by any other person authorized in the certificate of
incorporation or bylaws to call a special stockholder meeting. Nevada law
does
not address the manner in which special meetings of stockholders may be
called.
-116-
Indemnification
of Officers and Directors and Advancement of Expenses.
Delaware and Nevada have substantially similar provisions that permit
indemnification by a corporation of its officers, directors, employees
and
agents where they acted in good faith and in a manner which he or she
reasonably
believed to be in or not opposed to the best interests of the corporation.
However, Nevada law also provides that a director or officer is not liable
to
the corporation or its shareholders for any act or failure to act unless
it is
proven that his or her act or failure to act constitutes a breach of
fiduciary
duty and the breach of that duty involved intentional misconduct, fraud,
or a
knowing violation of law, and the corporation is free to indemnify the
director
or officer if the director or officer is not liable under this provision
and
regardless of any determination of the director’s or officer’s good faith.
Delaware and Nevada law also differ in their provisions for advancement
of
expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding. Delaware law provides that expenses incurred
by an
officer or director in defending any civil, criminal, administrative
or
investigative action, suit or proceeding may be paid by the corporation
in
advance of the final disposition of the action, suit or proceeding upon
receipt
of an undertaking by or on behalf of the director or officer to repay
the amount
if it is ultimately determined that he or she is not entitled to be indemnified
by the corporation. A Delaware corporation has the discretion to decide
whether
or not to advance expenses, unless its certificate of incorporation or
bylaws
provides for mandatory advancement. Under Nevada law, the articles of
incorporation, bylaws or an agreement made by the corporation may provide
that
the corporation must pay advancements of expenses in advance of the final
disposition of the action, suit or proceedings upon receipt of an undertaking
by
or on behalf of the director or officer to repay the amount if it is
ultimately
determined that he or she is not entitled to be indemnified by the corporation.
Thus, a Nevada corporation may have no discretion to decide whether or
not to
advance expenses to directors or officers. For more information regarding
the
indemnification of the officers and directors of WaveRider, please see
“-Interests of WaveRider Directors and Executive Officers in the Merger”
beginning on page 39 of this proxy statement/prospectus.
Limitation
on Personal Liability of Directors.
A
Delaware corporation is permitted to adopt provisions in its certificate
of
incorporation limiting or eliminating the liability of a director to a
company
and its stockholders for monetary damages for breach of fiduciary duty
as a
director, provided that such liability does not arise from certain proscribed
conduct, including breach of the duty of loyalty, acts or omissions not
in good
faith or which involve intentional misconduct or a knowing violation of
law or
liability to the corporation based on unlawful dividends or distributions
or
improper personal benefit. The similar limitation of liability provision
under
Nevada law applies automatically, unless limited in the certificate of
incorporation or bylaws, to both directors and officers and applies to
the
breach of any fiduciary duty, including the duty of loyalty. For more
information regarding the personal liability of the directors of WaveRider,
please see “-Interests of WaveRider Directors and Executive Officers in the
Merger” beginning on page 39 of this proxy statement/prospectus.
Dividends.
Delaware law is more restrictive than Nevada law with respect to when dividends
may be paid. Under Delaware law, unless further restricted in the certificate
of
incorporation, a corporation may declare and pay dividends, out of surplus,
or
if no surplus exists, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year (provided that the
amount
of capital of the corporation is not less than the aggregate amount of
the
capital represented by the issued and outstanding stock of all classes
having a
preference upon the distribution of assets). In addition, Delaware law
provides
that a corporation may redeem or repurchase its shares only if the capital
of
the corporation is not impaired and such redemption or repurchase would
not
impair the capital of the corporation. Nevada law provides that no distribution
(including dividends on, or redemption or repurchases of, shares of capital
stock) may be made if, after giving effect to such distribution, the corporation
would not be able to pay its debts as they become due in the usual course
of
business, or, except as specifically permitted by the articles of incorporation,
the corporation’s total assets would be less than the sum of its total
liabilities plus the amount that would be needed at the time of a dissolution
to
satisfy the preferential rights of preferred stockholders.
Amendment
to Articles of Incorporation/Certificate of Incorporation or
Bylaws.
In
general, both Delaware law and Nevada law require the approval of the holders
of
a majority of all outstanding shares entitled to vote to approve proposed
amendments to a corporation’s certificate/articles of incorporation. Both
Delaware law and Nevada law also provide that in addition to the vote above,
the
vote of a majority of the outstanding shares of a class may be required
to amend
the certificate of incorporation or articles of incorporation. Neither
state
requires stockholder approval for the board of directors of a corporation
to fix
the voting powers, designation, preferences, limitations, restrictions
and
rights of a class of stock provided that the corporation’s organizational
documents grant such power to its board of directors. Both Nevada law and
Delaware law permit, in general, the number of authorized shares of any
such
class of stock to be increased or decreased (but not below the number of
shares
then outstanding) by the board of directors unless otherwise provided in
the
articles of incorporation or resolution adopted pursuant to the certificate
of
incorporation, respectively. However, Nevada law allows the board of directors,
without shareholder approval, to increase or decrease the number of authorized
shares of capital stock if the number of outstanding shares is proportionately
increased or decreased. Delaware law does not have a similar provision.
-117-
Actions
by Written Consent of Stockholders.
Nevada
law and Delaware law each provide that, unless the articles/certificate
of
incorporation provides otherwise, any action required or permitted to be
taken
at a meeting of the stockholders may be taken without a meeting if the
holders
of outstanding stock having at least the minimum number of votes that would
be
necessary to authorize or take such action at a meeting consents to the
action
in writing. In addition, Delaware law requires the corporation to give
prompt
notice of the taking of corporate action without a meeting by less than
unanimous written consent to those stockholders who did not consent in
writing.
Stockholder
Vote for Mergers and Other Corporation Reorganizations.
In
general, both jurisdictions require authorization by an absolute majority
of
outstanding shares entitled to vote, as well as approval by the board of
directors, with respect to the terms of a merger or a sale of substantially
all
of the assets of the corporation. Delaware law does not require a stockholder
vote of the surviving corporation in a merger (unless the corporation provides
otherwise in its certificate of incorporation) if: (a) the merger agreement
does
not amend the existing certificate of incorporation; (b) each share of
stock of
the surviving corporation outstanding immediately before the effective
date of
the merger is an identical outstanding share after the merger; and (c)
either no
shares of common stock of the surviving corporation and no shares, securities
or
obligations convertible into such stock are to be issued or delivered under
the
plan of merger, or the authorized unissued shares or shares of common stock
of
the surviving corporation to be issued or delivered under the plan of merger
plus those initially issuable upon conversion of any other shares, securities
or
obligations to be issued or delivered under such plan do not exceed 20%
of the
shares of common stock of such constituent corporation outstanding immediately
prior to the effective date of the merger. Nevada law does not require
a
stockholder vote of the surviving corporation in a merger under substantially
similar circumstances.
Restrictions
on Business Combinations.
Both
Delaware law and Nevada law contain provisions restricting the ability
of a
corporation to engage in business combinations with an interested stockholder.
The restrictions prohibit a corporation, except in limited circumstances,
from
engaging in a business combination with any interested stockholder for
a
three-year period following the date such stockholder became an interested
stockholder. Under Delaware law an interested stockholder is a person who
holds
15% or more of the outstanding voting stock, which was acquired other than
solely through an action by the corporation. Under Nevada law, the definition
of
interested stockholder is similar except that a holder of 10% or more of
the
voting stock is an interested stockholder. Both Delaware law and Nevada
law
permit a corporation to opt out of application of the statutory provisions
limiting business combinations with interested stockholders by making a
statement to that effect in its certificate of incorporation.
PROPOSAL
TO ADJOURN OR POSTPONE THE WAVERIDER SPECIAL MEETING
General
WaveRider
may propose to adjourn or postpone the WaveRider special meeting to another
time
or place to permit, among other things, further solicitation of proxies
if
necessary to establish a quorum or to obtain additional votes in favor
of the
proposal to adopt the merger agreement and approve the merger. If WaveRider
proposes to adjourn the meeting, WaveRider will ask its stockholders to
vote
only on the adjournment proposal.
Among
other things, approval of the adjournment proposal could mean that if WaveRider
had received a sufficient number of proxies to defeat the merger proposal,
WaveRider could adjourn or postpone the special meeting without a vote
on the
merger proposal and seek to convince the holders of those shares to change
their
votes in favor of approving and adopting the merger agreement and approving
the
merger.
The
affirmative vote of the holders of a majority of the shares of WaveRider
common
stock present in person or represented by proxy and entitled to vote thereon
is
necessary for the proposal to pass.
Recommendation
of the WaveRider Board of Directors
The
WaveRider board of directors unanimously recommends that WaveRider stockholders
vote “FOR”
the
proposal to permit adjournment or postponement of the WaveRider special
meeting
to another time or place to permit, among other things, further solicitation
of
proxies if necessary to establish a quorum or to obtain additional votes
in
favor of the proposal to approve and adopt the merger agreement and approve
the
merger.
-118-
If
your
proxy card does not specify how you want to vote your shares, WaveRider
will
vote your shares “FOR”
the
foregoing proposal to permit adjournment or postponement of the WaveRider
special meeting.
SELLING
STOCKHOLDERS
As
discussed above in the section entitled “The Merger—Restrictions on Sales of
Shares of Wave Wireless Common Stock Received in the Merger” on page 42 of
this proxy statement/prospectus, shares of Wave Wireless common stock
issued in
connection with the Merger should be freely transferable, except for
shares that
are issued to any person who is considered an “affiliate” of WaveRider prior to
the merger. The selling stockholder named in the table below is considered
an
affiliate of WaveRider and, as a result, would not ordinarily be able
to freely
transfer the shares of Wave Wireless common stock that it receives in
the
merger. In order to permit the selling stockholder to offer and sell
the shares
of Wave Wireless common stock that it receives in connection with the
merger,
Wave Wireless is registering the offer and sale of those shares on the
registration statement on Form S-4, of which this proxy statement/prospectus
forms a part.
The
following table sets forth the name of the selling stockholder and the
number of
shares of Wave Wireless common stock being registered for sale as of the
date of
this proxy statement/prospectus and sets forth the number of shares of
Wave
Wireless common stock known by us to be beneficially owned by the selling
stockholder upon completion of the merger. The following table assumes
that the
selling stockholder will sell all of the shares of Wave Wireless common
stock
that it receives in connection with the merger for its account. However,
Wave
Wireless is unable to determine the exact number of shares that will actually
be
sold. The shares of Wave Wireless common stock offered by the selling
stockholder may be offered and sold from time to time. This information
is based
upon information provided by the selling stockholder, and is not necessarily
indicative of beneficial ownership for any other purpose. The number of
shares
of Wave Wireless common stock that will be beneficially owned by the selling
stockholder upon completion of the merger is determined in accordance with
the
rules of the Securities and Exchange Commission.
The
number of shares of Wave Wireless common stock being sold by the selling
stockholder will be greater than the number of shares of Wave Wireless
common
stock beneficially owned immediately following the merger. This is due
to a
limitation on the number of shares of common stock that the selling stockholder
can hold at any given time. Under the terms of the Series H Convertible
Preferred Stock, Series I Convertible Preferred Stock and warrants issued
to the
selling stockholder in connection with the merger, no holder of these securities
may convert or exercise these securities into shares of Wave Wireless common
stock, and Wave Wireless may not issue shares of its common stock to any
of
these holders, if the conversion or exercise would cause the holder or
any of
its affiliates, individually or in the aggregate, to beneficially own more
than
4.99% of Wave Wireless’ outstanding common stock. Due to this limitation, the
selling stockholder does not beneficially own all of the shares of common
stock
that are issuable upon conversion of its Series H Convertible Preferred
Stock or
Series I Convertible Preferred Stock or exercise of its warrants. However,
regardless of this limitation, Wave Wireless is registering the resale
of all of
the shares of common stock that are issuable upon conversion or exercise
of
these securities. Consequently, the selling stockholder is shown in the
table
below as selling a greater number of shares of common stock than it beneficially
owns.
The
selling stockholder has not had a material relationship with Wave Wireless
within the past three years other than as a result of the ownership of
Wave
Wireless’ securities.
The
term
“selling stockholder” includes the stockholder listed below and its transferees,
assignees, pledgees, donees or other successors. The percent of beneficial
ownership for the selling stockholder is based on approximately 85,225,638
shares of Wave Wireless common stock that are expected to be outstanding
upon
completion of the merger.
-119-
|
Shares
Beneficially Owned
Prior
to the Offering
(Upon
Completion
of
the Merger)
|
Shares
of Common Stock
Being
Sold in the Offering
|
Shares
Beneficially Owned
After
the Offering
|
|||||||||||||||||||||||
|
Name
of Selling Stockholder
|
Number
(1)
|
|
%
|
Common
Stock
|
|
Upon
Conversion
of
Series H
Preferred
Stock
|
|
Upon
Conversion
of
Series I
Preferred
Stock
|
|
Upon
Exercise
of
Warrants
|
|
Number
(2)
|
|
%
|
|||||||||||
|
Crescent
International Ltd.
|
4,216,087
|
4.9
|
%
|
3,399,117
|
8,842,449
|
13,650,000
|
9,554,264
|
—
|
—
|
||||||||||||||||
|
(1)
|
The
shares of Series H Convertible Preferred Stock, Series I Convertible
Preferred Stock and warrants issued in connection with the merger
are
subject to a conversion blocker that caps the number of shares
eligible
for conversion so that the holder will not beneficially own more
than
4.99% of the outstanding common stock of Wave Wireless immediately
following such conversion.
|
|
(2)
|
Assumes
that all shares being offered by the selling stockholder under
this proxy
statement/prospectus are sold and that the selling stockholder
acquires no
additional shares of Wave Wireless common stock before the completion
of
this offering.
|
PLAN
OF DISTRIBUTION
Wave
Wireless is registering, on behalf of the selling stockholder, 35,445,830
shares
of common stock issued in the merger or issuable upon conversion of the
Series H
Convertible Preferred Stock and Series I Convertible Preferred Stock and
upon
exercise of the warrants to be issued to the selling stockholder in the
merger.
The selling stockholder named in the table above or its pledgees, donees,
transferees or other successors-in-interest who receive convertible securities
from the selling stockholder as a gift, partnership distribution or other
non-sale related transfer after the date of this proxy statement/prospectus
may
sell the shares of common stock listed in the table above from time to
time. The
selling stockholder will act independently in making decisions regarding
the
timing, manner and size of each sale. The sales may be made on the OTC
Bulletin
Board or on any stock exchange or automated interdealer quotation system
on
which Wave Wireless’ common stock is listed or quoted at the time of sale, in
the over-the-counter market, through put or call option transactions relating
to
the shares, in negotiated transactions, or a combination of these methods
of
sale or otherwise, at prices and on terms then prevailing or at prices
related
to the then current market price. The selling stockholder may effect these
transactions by selling the shares of Wave Wireless common stock to or
through
broker-dealers, or not. The shares of Wave Wireless common stock may be
sold
through one or more of, or a combination of, the following:
|
·
|
a
block trade in which the broker-dealer will attempt to sell the
shares as
agent but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account under this proxy
statement/prospectus;
|
|
·
|
“at
the market” to or through market makers into an existing market for the
shares;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
through
transactions in options, swaps or other derivative securities
(whether
exchange-listed or otherwise);
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker solicits
purchasers;
|
|
·
|
in
privately negotiated transactions;
and
|
|
·
|
any
other method permitted by applicable
law.
|
To
the
extent required, this proxy statement/prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In effecting
sales, broker-dealers engaged by the selling stockholder may arrange for
other
broker-dealers to participate in the resales.
-120-
The
selling stockholder may enter into hedging transactions with broker-dealers
in
connection with distributions of the shares. In these transactions,
broker-dealers may engage in short sales of the shares in the course of
hedging
the positions they assume with the selling stockholder. The selling stockholder
may also sell shares short and redeliver the shares to close out those
short
positions. The selling stockholder may enter into options or other transactions
with broker-dealers that require the delivery to the broker-dealer of the
shares. The broker-dealer may then resell or otherwise transfer the shares
covered by this proxy statement/prospectus. The selling stockholder also
may
loan or pledge the shares to a broker-dealer. The broker-dealer may sell
the
shares so loaned, or upon default the broker-dealer may sell the pledged
shares
under this proxy statement/prospectus.
Broker-dealers
or agents may receive compensation in the form of commissions, discounts
or
concessions from the selling stockholder. Broker-dealers or agents may
also
receive compensation from the purchasers of the shares for whom they act
as
agents or to whom they sell as principals, or both. Compensation as to
a
particular broker-dealer might be in excess of customary commissions and
will be
in amounts to be negotiated in connection with the sale. Broker-dealers
or
agents and any other participating broker-dealers or the selling stockholder
may
be deemed to be “underwriters” within the meaning of Section 2(11) of the
Securities Act of 1933, as amended, in connection with sales of the shares.
Accordingly, any such commission, discount or concession received by them
and
any profit on the resale of the shares purchased by them may be deemed
to be
underwriting discounts or commissions under the Securities Act of 1933,
as
amended (the “Securities Act”). Because the selling stockholder may be deemed to
be an “underwriter” within the meaning of Section 2(11) of the Securities Act,
the selling stockholder will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any shares covered by this proxy
statement/prospectus which qualify for sale in compliance with Rule 144
promulgated under the Securities Act may be sold under Rule 144 rather
than
under this proxy statement/prospectus. The selling stockholder has advised
Wave
Wireless that it has not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale
of its
shares, and that there is no underwriter or coordinating broker acting
in
connection with the proposed sale of the shares by the selling
stockholder.
The
shares will be sold only through registered or licensed brokers or dealers
if
required under applicable state securities laws. In addition, in certain
states
the shares may not be sold unless they have been registered or qualified
for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under
applicable rules and regulations under the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”), any person engaged in the distribution of the
shares may not simultaneously engage in market making activities with respect
to
Wave Wireless common stock for a restricted period before the commencement
of
the distribution. In addition, the selling stockholder will be subject
to
applicable provisions of the Exchange Act and the associated rules and
regulations under the Exchange Act, including Regulation M, provisions
of which
may limit the timing of purchases and sales of the shares of Wave Wireless
common stock by the selling stockholder.
Wave
Wireless will make copies of this proxy/statement prospectus available
to the
selling stockholder and has informed the selling stockholder of the need
to
deliver copies of this prospectus to purchasers at or before the time of
any
sale of the shares.
Wave
Wireless will bear all costs, expenses and fees in connection with the
registration of the shares being sold by the selling stockholder. The selling
stockholder will bear all commissions and discounts, if any, attributable
to the
sales of those shares. The selling stockholder may agree to indemnify any
broker-dealer or agent that participates in transactions involving sales
of the
shares against various liabilities, including liabilities arising under
the
Securities Act.
USE
OF PROCEEDS
Wave
Wireless will not receive any of the proceeds from the sale of its common
stock
by the selling stockholder. If and when Wave Wireless’ outstanding Series H
Convertible Preferred Stock and Series I Convertible Preferred Stock are
converted by the selling stockholder into shares of Wave Wireless common
stock,
Wave Wireless will not receive any proceeds from the conversion. Wave Wireless
may receive proceeds from the exercise of the warrants issued to the selling
stockholder in connection with the merger if the selling stockholder opts
to pay
the exercise price in cash rather than executing a cashless exercise. Any
net
proceeds that Wave Wireless receives from the exercise of these warrants
will be
used for general corporate purposes, including working capital for its
business.
-121-
LEGAL
MATTERS
Procopio,
Cory, Hargreaves & Savitch LLP will pass upon the validity of the shares of
Wave Wireless common stock offered by this proxy statement/prospectus for
Wave
Wireless.
EXPERTS
The
consolidated financial statements of Wave Wireless as of December 31, 2003
and
2004, and for the years then ended, have been included in this proxy
statement/prospectus and in the registration statement to which this proxy
statement/prospectus relates in reliance upon the report of Aidman, Piser
&
Company, P.A., Wave Wireless’ independent registered public accounting firm, and
upon the authority of said firm as experts in accounting and
auditing.
The
consolidated financial statements of P-Com, Inc. as of December 31, 2002,
and
for the year then ended, have been included in this proxy statement/prospectus
and in the registration statement to which this proxy statement/prospectus
relates in reliance upon the report (which includes an explanatory paragraph
relating to P-Com's ability to continue as a going concern as described
in Note
1 to the financial statements), of PricewaterhouseCoopers, LLP, an independent
registered public accounting firm, given upon the authority of said firm
as
experts in accounting and auditing.
The
consolidated financial statements and schedule of WaveRider as of December
31,
2004 and 2003, and for each of the years in the three-year period ended
December
31, 2004, have been included in this proxy statement/prospectus in reliance
upon
the reports of Wolf & Company, P.C., independent registered public
accounting firm, included herein, and upon the authority of said firm as
experts
in accounting and auditing.
CHANGE
IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On
August
7, 2003, PricewaterhouseCoopers LLP, (“PricewaterhouseCoopers”), was dismissed
as P-Com's independent registered public accounting firm. On August 7,
2003, P-Com’s
Audit Committee
approved Aidman Piser & Company (“Aidman Piser”) as the company’s new
independent registered public accounting firm.
The
reports of PricewaterhouseCoopers on the financial statements of P-Com,
Inc. for
the preceding two fiscal years contained no adverse opinion or disclaimer
of
opinion and were not qualified or modified as to uncertainty, audit scope
or
accounting principle. However, the reports of PricewaterhouseCoopers contained
an explanatory paragraph indicating that there was substantial doubt about
the
ability of P-Com, Inc. to continue as a going concern.
In
connection with the audits for the two most recent fiscal years in the
period
ended December 31, 2002 and through August 7, 2003, there were no disagreements
with PricewaterhouseCoopers, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
would have caused them to make reference in their audit report.
FUTURE
WAVERIDER STOCKHOLDER PROPOSALS
WaveRider
will not hold an annual meeting of stockholders if the merger is completed.
However, the time for WaveRider stockholders to submit proposals for inclusion
in WaveRider’s proxy statement for WaveRider’s 2005 annual meeting of
stockholders in accordance with the standards contained in Rule 14a-8 of
the
Exchange Act has passed. Accordingly, no new stockholder proposals may
be
submitted to WaveRider for inclusion in WaveRider’s proxy statement for
WaveRider’s 2005 annual meeting of stockholders under Rule 14a-8 of the Exchange
Act. In addition, the time for notification of stockholders proposals has
passed, and if a stockholder proposal is received management personnel
who have
been appointed as proxies may have the discretion to vote against such
stockholder proposal. However, if the date of WaveRider’s 2005 stockholder
meeting is moved more than 30 days before or after the anniversary date
of the
prior year’s meeting, the deadline for inclusion of proposals in WaveRider’s
proxy statement or to otherwise submit a proposal is a reasonable time
before
WaveRider begins to print and mail its proxy materials. Stockholder proposals
should be submitted to Corporate Secretary, WaveRider Communications Inc.,
255
Consumers Road, Suite 500, Toronto, Ontario M2J 1R4.
-122-
WHERE
YOU CAN FIND MORE INFORMATION
WaveRider
has filed reports, proxy statements and other information with the Securities
and Exchange Commission. Copies of WaveRider’s reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the SEC at SEC Headquarters, Public Reference Section, 100
F
Street, N.E., Washington D.C. 20549. The public may obtain information
on the
operation of the SEC’s public reference facilities by calling the SEC at
1-800-SEC-0330.
Copies
of
these materials can also be obtained by mail at prescribed rates from the
Public
Reference Section of the SEC at SEC Headquarters or by calling the SEC
at
1-800-SEC-0330. The SEC maintains a website that contains reports, proxy
statements and other information regarding WaveRider. The address of the
SEC
website is http://www.sec.gov.
You
should rely only on the information contained in this proxy statement/prospectus
or on information to which WaveRider has referred you. Wave Wireless and
WaveRider have not authorized anyone else to provide you with any information.
Wave Wireless provided the information concerning Wave Wireless contained
in
this proxy statement/prospectus, and WaveRider provided the information
concerning WaveRider in this proxy statement/prospectus.
Wave
Wireless has filed a registration statement under the Securities Act of
1933, as
amended, with the SEC with respect to the shares of Wave Wireless common
stock
to be issued to WaveRider stockholders in the merger. This proxy
statement/prospectus constitutes the prospectus of Wave Wireless filed
as part
of the registration statement. This proxy statement/prospectus does not
contain
all of the information set forth in the registration statement because
certain
parts of the registration statement are omitted as provided by the rules
and
regulations of the SEC. You may inspect and copy the registration statement
at
any of the addresses listed above.
-123-
Index
to Consolidated Financial Statements and Financial Statement
Schedule
|
PRO
FORMA FINANCIAL INFORMATION
|
|
|
Pro
Forma Condensed Consolidated Balance Sheet as at September 30,
2005
|
F-A1
|
|
Pro
Forma Condensed Consolidated Statements of Operations for the Nine
Months
Ended September 30, 2005
|
F-A2
|
|
Pro
Forma Condensed Consolidated Statements of Operations for the Year
Ended
December 31, 2004
|
F-A3
|
|
Notes
to the Pro Forma Condensed Consolidated Financial
Statements
|
F-A4
|
|
WAVE
WIRELESS CORPORATION (formerly P-Com, Inc.)
|
|
|
Condensed
Consolidated Balance Sheets as at September 30, 2005 (unaudited)
and
December 31, 2004
|
F-B1
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended
September 30, 2005 (unaudited)
|
F-B2
|
|
Condensed
Consolidated Statements of Cash Flows for the three and nine months
ended
September 30, 2005 and 2004 (unaudited)
|
F-B3
|
|
Notes
to the Condensed Consolidated Financial Statements as of September
30,
2005 and December 31, 2004 and for the three and nine months ended
September 30, 2005 and 2004 (unaudited)
|
F-B5
|
|
Report
of Independent Registered Public Accounting Firm of Aidman, Piser
&
Company, P.A.
|
F-C1
|
|
Report
of Independent Registered Public Accounting Firm of
PricewaterhouseCoopers, LLP.
|
F-C2
|
|
Consolidated
Balance Sheets as at December 31, 2004 and 2003
|
F-C3
|
|
Consolidated
Statements of Operations for the years ended December 31, 2004,
2003 and
2002
|
F-C4
|
|
Consolidated
Statements of Stockholders' Equity (Deficit) and Comprehensive
Loss for
the years ended December 31, 2004, 2003 and 2002
|
F-C5
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2004,
2003 and
2002
|
F-C7
|
|
Notes
to the Consolidated Financial Statements as of December 31, 2004
and 2003
and for the years ended December 31, 2004, 2003 and 2002
|
F-C8
|
|
WAVERIDER
COMMUNICATIONS INC.
|
|
|
Consolidated
Balance Sheets as at September 30, 2005 (unaudited) and December
31,
2004
|
F-D1
|
|
Consolidated
Statements of Loss, Deficit and Comprehensive Loss for the three
and nine
months ended September 30, 2005 (unaudited)
|
F-D2
|
|
Consolidated
Statements of Cash Flows for the three and nine months ended September
30,
2005 and 2004 (unaudited)
|
F-D3
|
F-1
|
Notes
to the Consolidated Financial Statements as of September 30, 2005
and
December 31, 2004 and for the three and nine months ended September
30,
2005 and 2004 (unaudited)
|
F-D4
|
|
Report
of Independent Registered Public Accounting Firm of Wolf & Company,
P.C.
|
F-E1
|
|
Consolidated
Balance Sheets as at December 31, 2004 and 2003
|
F-E2
|
|
Consolidated
Statements of Loss for the years ended December 31, 2004 and
2003
|
F-E3
|
|
Consolidated
Statements of Changes in Stockholders' (Deficit) Equity and Comprehensive
Loss for the years ended December 31, 2004 and 2003
|
F-E4
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2004
and
2003
|
F-E5
|
|
Notes
to the Consolidated Financial Statements as of December 31, 2004
and 2003
and for the years ended December 31, 2004 and 2003
|
F-E6
|
F-2
WAVE
WIRELESS CORPORATION
PRO
FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS
AT SEPTEMBER 30, 2005
(In
thousands) (Unaudited)
|
Wave
Wireless
|
WaveRider
|
Pro
forma Adjustments
|
Pro
forma Consolidated
|
||||||||||
|
ASSETS
|
|||||||||||||
|
|
|||||||||||||
|
Current
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
166
|
$
|
688
|
—
|
$
|
854
|
||||||
|
Restricted
cash
|
95
|
95
|
|||||||||||
|
Accounts
receivable, net
|
3,300
|
1,607
|
—
|
4,907
|
|||||||||
|
Inventory
|
220
|
562
|
—
|
782
|
|||||||||
|
Prepaid
expenses and other assets
|
870
|
101
|
971
|
||||||||||
|
Total
current assets
|
4,651
|
2,958
|
—
|
7,609
|
|||||||||
|
Property
and equipment, net
|
691
|
210
|
—
|
901
|
|||||||||
|
Excess
of purchase price over net assets acquired and goodwill
|
11,991
|
—
|
9,645
|
21,636
|
|||||||||
|
Other
assets
|
28
|
—
|
—
|
28
|
|||||||||
|
Total
assets
|
$
|
17,361
|
$
|
3,168
|
$
|
9,645
|
$ |
30,174
|
|||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||||||
|
Current
liabilities:
|
|||||||||||||
|
Accounts
payable
|
$
|
1,399
|
$
|
1,462
|
650
|
$
|
3,511
|
||||||
|
Other
accrued liabilities
|
4,663
|
1,334
|
—
|
5,997
|
|||||||||
|
Loan
payable to bank
|
1,948
|
—
|
—
|
1,948
|
|||||||||
|
Notes
payable current
|
3,777
|
393
|
(2,393
|
)
|
1,777
|
||||||||
|
Derivate
financial instruments
|
—
|
350
|
(350
|
)
|
—
|
||||||||
|
Liabilities
of discontinued operations
|
184
|
—
|
—
|
184
|
|||||||||
|
|
|||||||||||||
|
Total
current liabilities
|
11,971
|
3,539
|
(2,093
|
)
|
13,417
|
||||||||
|
|
|||||||||||||
|
Notes
payable, long-term
|
1,520
|
891
|
(891
|
)
|
1,520
|
||||||||
|
|
|||||||||||||
|
Total
liabilities
|
13,491
|
4,430
|
(2,984
|
)
|
14,937
|
||||||||
|
Stockholders'
equity (deficit):
|
|||||||||||||
|
Series
E Preferred Stock
|
332
|
—
|
—
|
332
|
|||||||||
|
Series
F Preferred Stock
|
711
|
—
|
—
|
711
|
|||||||||
|
Series
G Preferred Stock
|
4,804
|
—
|
—
|
4,804
|
|||||||||
|
Series
H Preferred Stock
|
—
|
—
|
2,416
|
2,416
|
|||||||||
|
Common
Stock
|
2
|
30
|
(25
|
)
|
7
|
||||||||
|
Treasury
stock, at cost; 30 shares
|
(74
|
)
|
—
|
—
|
(74
|
)
|
|||||||
|
Additional
paid-in capital
|
382,373
|
86,542
|
(77,598
|
)
|
391,317
|
||||||||
|
Accumulated
deficit
|
(384,278
|
)
|
(87,512
|
)
|
87,514
|
(384,276
|
)
|
||||||
|
Accumulated
other comprehensive loss
|
—
|
(322
|
)
|
322
|
—
|
||||||||
|
|
|||||||||||||
|
Total
stockholders' equity
|
3,870
|
(1,262
|
)
|
12,629
|
15,237
|
||||||||
|
Total
liabilities and stockholders' equity
|
$
|
17,361
|
$
|
3,168
|
$
|
9,645
|
$
|
30,174
|
|||||
F-A1
WAVE
WIRELESS CORPORATION
PRO
FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE
MONTHS ENDED SEPTEMBER 30, 2005
(In
thousands, except per share data, unaudited)
|
Wave
Wireless
|
WaveRider
|
Pro
forma Adjustments
|
Pro
forma Consolidated
|
||||||||||
|
Sales
|
$
|
9,691
|
$
|
7,930
|
—
|
$
|
17,621
|
||||||
|
Cost
of sales
|
7,028
|
5,235
|
—
|
12,263
|
|||||||||
|
Gross
profit
|
2,663
|
2,695
|
—
|
5,358
|
|||||||||
|
Gross
margin
|
27
|
%
|
34
|
%
|
—
|
30
|
%
|
||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development/engineering
|
2,466
|
357
|
—
|
2,823
|
|||||||||
|
Selling,
general and administration
|
5,178
|
3,242
|
—
|
8,420
|
|||||||||
|
Restructuring
charges
|
5,597
|
—
|
—
|
5,597
|
|||||||||
|
Total
operating expenses
|
13,241
|
3,599
|
—
|
16,840
|
|||||||||
|
Operating
loss
|
(10,578
|
)
|
(904
|
)
|
—
|
(11,482
|
)
|
||||||
|
Interest
expense
|
(589
|
)
|
(313
|
)
|
399
|
(503
|
)
|
||||||
|
Other
income (expense), net
|
(397
|
)
|
133
|
(136
|
)
|
(400
|
)
|
||||||
|
Net
income (loss)
|
(11,564
|
)
|
(1,084
|
)
|
263
|
(12,385
|
)
|
||||||
|
Preferred
stock accretions
|
(3,829
|
)
|
—
|
—
|
(3,829
|
)
|
|||||||
|
|
|||||||||||||
|
Net
loss attributable to common stockholders
|
$
|
(15,393
|
)
|
$
|
(1,084
|
)
|
263
|
$
|
(16,214
|
)
|
|||
|
|
|||||||||||||
|
Basic
and diluted income (loss) per common share
|
$
|
(1.10
|
)
|
(0.05
|
)
|
—
|
$
|
(0.20
|
)
|
||||
|
|
|||||||||||||
|
Shares
used in basic and diluted per share computation
|
13,931
|
23,524
|
67,713
|
81,644
|
|||||||||
|
|
|||||||||||||
|
Diluted
net income (loss) per share applicable to common
stockholders
|
$
|
(1.10
|
)
|
$
|
(0.20
|
)
|
|||||||
|
Shares
used in diluted per share Computation
|
13,931
|
67,713
|
81,644
|
||||||||||
F-A2
WAVE
WIRELESS CORPORATION
PRO
FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR
ENDED DECEMBER 31, 2004
(In
thousands, except per share data, unaudited)
|
Wave
Wireless
|
WaveRider
|
Pro
forma Adjustments
|
Pro
forma Consolidated
|
||||||||||
|
Sales
|
$
|
24,175
|
$
|
9,542
|
—
|
$
|
33,717
|
||||||
|
Cost
of sales
|
18,720
|
6,193
|
—
|
24,913
|
|||||||||
|
Gross
profit
|
5,455
|
3,349
|
—
|
8,804
|
|||||||||
|
Gross
margin
|
23
|
%
|
35
|
%
|
—
|
26
|
%
|
||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development/engineering
|
4,976
|
1,667
|
—
|
6,643
|
|||||||||
|
Selling,
general and administration
|
11,324
|
5,264
|
—
|
16,588
|
|||||||||
|
Total
operating expenses
|
16,300
|
6,931
|
—
|
23,231
|
|||||||||
|
Operating
loss
|
(10,845
|
)
|
(3,582
|
)
|
—
|
(14,427
|
)
|
||||||
|
Interest
expense
|
(687
|
)
|
(425
|
)
|
380
|
(732
|
)
|
||||||
|
Other
income (expense), net
|
8,252
|
2,368
|
(2,502
|
)
|
8,118
|
||||||||
|
Loss
before discontinued operations
|
(3,280
|
)
|
(1,639
|
)
|
(2,124
|
)
|
(7,041
|
)
|
|||||
|
Loss
from discontinued operations
|
(40
|
)
|
—
|
—
|
(40
|
)
|
|||||||
|
Net
income (loss)
|
(3,320
|
)
|
(1,639
|
)
|
(2,124
|
)
|
(7,081
|
)
|
|||||
|
Preferred
stock accretions
|
(2,392
|
)
|
—
|
—
|
(2,392
|
)
|
|||||||
|
Preferred
stock dividends
|
(156
|
)
|
—
|
—
|
(156
|
)
|
|||||||
|
Net
loss attributable to common stockholders
|
$
|
(5,868
|
)
|
$
|
(1,639
|
)
|
(2,124
|
)
|
$
|
(9,629
|
)
|
||
|
Basic
and diluted loss per common share:
|
|||||||||||||
|
Loss
from continuing operations
|
$
|
(0.56
|
)
|
$
|
(0.12
|
)
|
|||||||
|
Loss
from discontinued operations
|
—
|
—
|
|||||||||||
|
Basic
and diluted loss per common share
|
$
|
(0.56
|
)
|
$
|
(0.12
|
)
|
|||||||
|
Shares
used in Basic and Diluted per share computation
|
10,429
|
67,713 |
78,142
|
||||||||||
F-A3
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1: Acquiring entity for accounting purposes
The
companies have performed an analysis based upon Statement of Financial
Accounting Standards ("SFAS”) No. 141 to determine the acquirer for accounting
purposes. In performing this analysis, the companies have considered
the
following facts and circumstances:
| 1) |
Wave
Wireless will be the issuer of securities in the
merger.
|
| 2) |
After
adjustment for Wave Wireless’ holding in WaveRider as a result of their
acquisition of preferred shares upon conversion of the bridge
notes, Wave
Wireless’ current shareholders will maintain approximately 59% of the
voting rights in the merged company while WaveRider shareholders
will have
41% of the voting rights.
|
| 3) |
Upon
consummation
of the merger, Crescent International Ltd., WaveRider’s largest
beneficial owner, will have a 4.99% cap on the number of beneficial
shares
it can hold in the merged company. As a result, the only significant
minority shareholders in the merged company will be Wave Wireless’
existing minority beneficial
shareholders.
|
| 4) |
The
board of directors of the merged company (the governing body)
will be
composed of Mr. Charles Brown, the current CEO of WaveRider,
three current
directors of Wave Wireless and three current directors of
WaveRider.
|
| 5) |
The
officers of the merged company will consist of the Chairman of
the Board
who is appointed by the directors from Wave Wireless, the Chief
Executive
Officer and Chief Financial Officer from WaveRider and the President
of
Wave Wireless.
|
| 6) |
As
of the date of the merger agreement, January 3, 2006, and based
on the
calculated exchange ratio, before adjustments, Wave Wireless
would be
providing the shareholders of WaveRider a 53.6% premium to the
closing
price of the common stock.
|
| 7) |
Based
on number of employees, past revenue, total assets and market
valuation,
Wave Wireless is the larger of the two entities in the
merger.
|
Based
on
these facts and circumstances the companies have determined that Wave Wireless
Corporation is the acquirer for accounting
purposes.
Note 2
- The pro forma balance sheet has been prepared to reflect the acquisition
of
WaveRider Communications Inc. by Wave Wireless Corporation for aggregate
consideration of $9,442,031, as if the acquisition occurred on September
30,
2005. Pro forma adjustments are made to reflect:
|
a)
|
the
elimination of the common shareholders' equity (deficit) in WaveRider
Communications Inc.
|
|
b)
|
conversion
of all of WaveRider Communications Inc.’s convertible debentures and
$2,000,000 in Wave Wireless Corporation’s current notes payable into
capital upon closing.
|
|
c)
|
the
net assets of WaveRider Communications Inc. at estimated fair value
at the
acquisition date.
|
|
d)
|
the
excess of acquisition cost over the fair value of net assets acquired.
This has been presented with
goodwill.
|
|
e)
|
the
expenses incurred on acquisition
|
Note 3
- The pro forma statements of loss have been prepared to reflect the acquisition
of WaveRider Communications Inc. by Wave Wireless Corporation as if the
acquisition occurred on January 1, 2004.
Note 4
- The estimated purchase price and the purchase price allocation for this
acquisition has been based on available information at the time of preparation
of these pro forma financial statements. To the extent that these amounts
prove
to be excessive or inadequate they will be adjusted up to a year from the
date
of acquisition.
F-A4
WAVE
WIRELESS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
|
|
September
30,
|
|
December
31,
|
|
|||
|
|
|
2005
|
|
2004
|
|
||
|
ASSETS
|
|
(unaudited)
|
|
|
|||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
166
|
$
|
2,280
|
|||
|
Restricted
cash
|
95
|
—
|
|||||
|
Accounts
receivable, net
|
3,300
|
2,828
|
|||||
|
Inventory
|
220
|
4,722
|
|||||
|
Prepaid
expenses and other assets
|
870
|
1,519
|
|||||
|
Total
current assets
|
4,651
|
11,349
|
|||||
|
Property
and equipment, net
|
691
|
1,755
|
|||||
|
Goodwill
|
11,991
|
11,991
|
|||||
|
Other
assets
|
28
|
328
|
|||||
|
Total
assets
|
$
|
17,361
|
$
|
25,423
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
1,399
|
$
|
3,139
|
|||
|
Other
accrued liabilities
|
4,663
|
3,500
|
|||||
|
Loan
payable to bank
|
1,948
|
—
|
|||||
|
Notes
payable current
|
3,777
|
3,178
|
|||||
|
Liabilities
of discontinued operations
|
184
|
249
|
|||||
|
Total
current liabilities
|
11,971
|
10,066
|
|||||
|
Notes
payable, long-term
|
1,520
|
1,743
|
|||||
|
Total
liabilities
|
13,491
|
11,809
|
|||||
|
Redeemable
preferred stock:
|
|||||||
|
Series
B Preferred Stock
|
—
|
1,569
|
|||||
|
Series
C Preferred Stock
|
—
|
2,537
|
|||||
|
Series
D Preferred Stock
|
—
|
2,000
|
|||||
|
Total
redeemable Preferred Stock
|
—
|
6,106
|
|||||
|
Commitments
and contingencies (Notes 5 and 10)
|
—
|
—
|
|||||
|
Stockholders'
equity (deficit):
|
|||||||
|
Series
E Preferred Stock
|
332
|
—
|
|||||
|
Series
F Preferred Stock
|
711
|
—
|
|||||
|
Series
G Preferred Stock
|
4,804
|
—
|
|||||
|
Common
Stock
|
2
|
35
|
|||||
|
Treasury
stock, at cost; 30 shares
|
(74
|
)
|
(74
|
)
|
|||
|
Additional
paid-in capital
|
382,373
|
376,430
|
|||||
|
Accumulated
deficit
|
(384,278
|
)
|
(368,885
|
)
|
|||
|
Accumulated
other comprehensive loss
|
—
|
2
|
|||||
|
Total
stockholders' equity
|
3,870
|
7,508
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
17,361
|
$
|
25,423
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
F-B1
WAVE
WIRELESS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data, unaudited)
|
|
|
Three
months ended
September 30, |
Nine
months ended
September 30, |
||||||||||
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
||||||
|
Sales
|
$
|
2,933
|
$
|
6,143
|
$
|
9,691
|
$
|
19,897
|
|||||
|
Cost
of sales
|
1,546
|
4,986
|
7,028
|
15,009
|
|||||||||
|
Gross
profit
|
1,387
|
1,157
|
2,663
|
4,888
|
|||||||||
|
Gross
margin
|
47
|
%
|
19
|
%
|
27
|
%
|
25
|
%
|
|||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development/engineering
|
496
|
1,310
|
2,466
|
3,825
|
|||||||||
|
Selling
and marketing
|
564
|
2,003
|
2,652
|
5,188
|
|||||||||
|
General
and administrative
|
658
|
1,130
|
2,526
|
3,383
|
|||||||||
|
Restructuring
charges
|
310
|
—
|
5,597
|
—
|
|||||||||
|
Total
operating expenses
|
2,028
|
4,443
|
13,241
|
12,396
|
|||||||||
|
Operating
loss
|
(641
|
)
|
(3,286
|
)
|
(10,578
|
)
|
(7,508
|
)
|
|||||
|
Interest
expense
|
(201
|
)
|
(142
|
)
|
(589
|
)
|
(304
|
)
|
|||||
|
Other
income (expense), net
|
(430
|
)
|
(10
|
)
|
(397
|
)
|
8,286
|
||||||
|
Income
(loss) from continuing operations
|
(1,272
|
)
|
(3,438
|
)
|
(11,564
|
)
|
474
|
||||||
|
Loss
from discontinued operations
|
—
|
—
|
—
|
(40
|
)
|
||||||||
|
Net
income (loss)
|
(1,272
|
)
|
(3,438
|
)
|
(11,564
|
)
|
434
|
||||||
|
Preferred
stock accretions
|
(2,670
|
)
|
(683
|
)
|
(3,829
|
)
|
(2,132
|
)
|
|||||
|
Net
loss attributable to common stockholders
|
$
|
(3,942
|
)
|
$
|
(4,121
|
)
|
$
|
(15,393
|
)
|
$
|
(1,698
|
)
|
|
|
Basic
and diluted income (loss) per common share:
|
|||||||||||||
|
Income
(loss) from continuing operations
|
$
|
(0.22
|
)
|
$
|
(0.27
|
)
|
$
|
(1.10
|
)
|
$
|
(0.16
|
)
|
|
|
Basic
and diluted income (loss) per common share
|
$
|
(0.22
|
)
|
$
|
(0.27
|
)
|
$
|
(1.10
|
)
|
$
|
(0.16
|
)
|
|
|
Shares
used in basic and diluted per share computation
|
17,940
|
15,358
|
13,931
|
10,842
|
|||||||||
|
Diluted
net income (loss) per share:
|
|||||||||||||
|
Income
(loss) from continuing operations
|
$
|
(0.22
|
)
|
$
|
(0.27
|
)
|
$
|
(1.10
|
)
|
$
|
(0.16
|
)
|
|
|
Diluted
net income (loss) per share applicable to common
stockholders
|
$
|
(0.22
|
)
|
$
|
(0.27
|
)
|
$
|
(1.10
|
)
|
$
|
(0.16
|
)
|
|
|
Shares
used in diluted per share computation
|
17,940
|
15,358
|
13,931
|
10,842
|
|||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
F-B2
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands, unaudited)
|
|
|
Nine
months ended
September 30, |
|||||
|
|
2005
|
|
2004
|
||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income (loss)
|
$
|
(11,564
|
)
|
$
|
434
|
||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|||||||
|
Loss
from discontinued operations
|
—
|
40
|
|||||
|
Depreciation
|
498
|
1,158
|
|||||
|
(Gain)
or loss on debt extinguishment
|
33
|
—
|
|||||
|
(Gain)
or loss on disposal of property and equipment
|
(237
|
)
|
73
|
||||
|
Warrant
expense
|
169
|
—
|
|||||
|
Amortization
of warrants
|
68
|
115
|
|||||
|
Gain
on vendor settlements
|
(92
|
)
|
(964
|
)
|
|||
|
Gain
of deferred contract obligation
|
—
|
(7,500
|
)
|
||||
|
Bad
debt expense
|
172
|
—
|
|||||
|
Loss
on restructuring
|
5,597
|
—
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(445
|
)
|
121
|
||||
|
Inventory
|
(551
|
)
|
1,114
|
||||
|
Prepaid
expenses and other assets
|
806
|
(313
|
)
|
||||
|
Accounts
payable
|
(1,108
|
)
|
(412
|
)
|
|||
|
Other
accrued liabilities
|
1,241
|
(527
|
)
|
||||
|
Net
cash used in operating activities
|
(5,413
|
)
|
(6,661
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Acquisition
of property and equipment
|
(44
|
)
|
(203
|
)
|
|||
|
Increase
in restricted cash
|
(95
|
)
|
—
|
||||
|
Proceeds
from sale of property and equipment
|
502
|
829
|
|||||
|
Net
cash provided by investing activities
|
363
|
626
|
|||||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from bank loan
|
1,948
|
1,457
|
|||||
|
Proceeds
from debt financing
|
1,500
|
—
|
|||||
|
Proceeds
from convertible note
|
100
|
—
|
|||||
|
Proceeds
from special warrant offer
|
—
|
2,589
|
|||||
|
Payments
under capital lease obligations
|
—
|
(563
|
)
|
||||
|
Proceeds
from sale of SPEEDCOM common stock
|
—
|
100
|
|||||
|
Payments
under note payable obligations
|
(610
|
)
|
—
|
||||
|
Net
cash provided by financing activities
|
2,938
|
3,583
|
|||||
|
Effect
of exchange rate changes on cash
|
(2
|
)
|
(2
|
)
|
|||
|
Net
decrease in cash and cash equivalents
|
(2,114
|
)
|
(2,454
|
)
|
|||
|
Cash
and cash equivalents at beginning of the period
|
2,280
|
6,185
|
|||||
|
Cash
and cash equivalents at end of the period
|
$
|
166
|
$
|
3,731
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
F-B3
|
Nine
months ended
September 30, |
|||||||
|
|
2005
|
|
|
2004
|
|||
|
Supplemental
cash flow disclosures:
|
|||||||
|
Cash
paid for interest
|
$
|
141
|
$
|
303
|
|||
|
Non-cash
investing and financing activities :
|
|||||||
|
Issuance
of notes payable to settle deferred contract obligation
|
$
|
—
|
$
|
500
|
|||
|
Warrants
issued in connection with convertible promissory notes
|
$
|
44
|
$
|
—
|
|||
|
Warrants
issued in connection with promissory notes
|
$
|
32
|
$
|
—
|
|||
|
Conversion
of Series C Preferred stock into Common Stock
|
$
|
3,254
|
$
|
521
|
|||
|
Conversion
of Series B Preferred stock into Common Stock
|
1,708
|
—
|
|||||
|
Conversion
of Series F Preferred stock into Common Stock
|
138
|
—
|
|||||
|
Warrants
issued in connection with lease termination
|
$
|
233
|
$
|
—
|
|||
|
Warrants
issued in connection with officer settlement
|
93
|
—
|
|||||
|
Warrants
issued in connection with Preferred Stock conversion
|
180
|
—
|
|||||
|
Issuance
of Common Stock to settle accounts payable obligation
|
138
|
—
|
|||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
F-B4
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of Wave
Wireless Corporation’s (referred to herein, together with its wholly-owned
subsidiaries, as “Wave Wireless” or the “Company”) financial condition as of
September 30, 2005, and the results of their operations and their cash flows
for
the three-month and nine-month periods ended September 30, 2005 and 2004. These
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's audited 2004 consolidated financial statements,
including the notes thereto, and the other information set forth therein,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004. Operating results for the three-month and nine-month periods ended
September 30, 2005 are not necessarily indicative of the operating results
that
may be expected for the year ending December 31, 2005.
Certain
amounts reported in previous years and interim periods have been reclassified
to
conform to the current year presentation.
LIQUIDITY
AND MANAGEMENT'S PLANS
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
As reflected in the financial statements, for the nine-month period ended
September 30, 2005, the Company incurred a net loss attributable to common
stockholders of $15.4 million and used $5.4 million cash in its operating
activities. As of September 30, 2005, the Company had a surplus in stockholders'
equity of $3.9 million and accumulated deficit of $384.3 million. Also, as
of
September 30, 2005, the Company had approximately $166,000 in cash and cash
equivalents, and a working capital deficiency of approximately $7.3 million.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern.
The
Company's current working capital requirements are being met principally from
available borrowings under a credit facility (“Credit Facility”) with Silicon
Valley Bank (the “Bank”), discussed below, borrowings from the issuance of
promissory notes convertible into shares of the Company’s common stock
(“Convertible Notes”), and cash from operations. The amount outstanding under
the Credit Facility was approximately $1.9 million at September 30, 2005, and
no
amounts remained outstanding as of November 11, 2005.
The
Company's plan of restructuring announced in April 2005 (“Restructuring Plan”)
is intended to eliminate the Company's dependence on external sources of
financing. While the Restructuring Plan has resulted in a substantial reduction
in operating losses, and cash used in operations, the Company currently remains
dependent on external sources of financing to continue operations. As a result,
the Company has issued Convertible Notes to address its immediate liquidity
needs, and intends to issue additional Convertible Notes to meet its working
capital requirements through the remainder of 2005. It is currently anticipated
that the Convertible Notes will convert into an equity-based financing that
the
Company intends to consummate prior to the end of the quarter ending March
31,
2006 (“Equity Financing”). The Company intends to use the proceeds from the
Equity Financing to settle certain commitments of the Company, and provide
for
the Company’s long-term working capital needs.
In
addition to issuing Convertible Notes, the Company intends to meet its working
capital requirements by (i) accessing available borrowings under the Credit
Facility, (ii) further reducing operating and other costs under the
Restructuring Plan, and (iii) focusing sales on higher margin products. The
Company currently does not have any commitments from third parties to acquire
additional Convertible Notes. As of November 11, 2005, the Company had
approximately $200,000 in available borrowing capacity under the Credit
Facility.
F-B5
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
There
can
be no assurance that the Company will be successful in issuing additional
Convertible Notes or that the Company will be able to consummate an Equity
Financing on acceptable terms, if at all. Management is also evaluating merger,
acquisition and other strategic opportunities that would substantially improve
its competitive position, increase sales, and accelerate profitability. If
management is unsuccessful in its plans to issue additional Convertible Notes
or
raise additional capital in the immediate term, or otherwise improve its
liquidity position, the Company will no longer be able to continue as a going
concern. The financial statements do not include any adjustments relating to
the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary if the Company is unable
to
continue as a going concern.
2.
NET
LOSS PER SHARE
For
purposes of computing basic and diluted net loss per common share in the three
and nine- months ended September 30, 2005 and 2004, the weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market of the Company's common stock for the period
because the effect would be anti-dilutive. Because losses were incurred in
the
three and nine-months ended September 30 of 2005 and 2004, all options,
warrants, and convertible notes are excluded from the computations of diluted
net loss per share because they are anti-dilutive.
3.
BORROWING
AND OTHER OBLIGATIONS
Credit
Facility.
On
September 17, 2005, we renewed our credit facility (the “Credit Facility”) with
Silicon Valley Bank (the “Bank”) through November 17, 2005 (the “September
Amendment”). By amendment dated November 4, 2005, the Credit Facility was
further extended through January 17, 2006 (the “November Amendment”). The Credit
Facility consists of a Loan and Security Agreement for a $2.5 million borrowing
line based on domestic receivables, and a Loan and Security Agreement under
the
Export-Import (“EXIM”) program for a $2.5 million borrowing line based on export
related inventories and receivables. On June 29, 2005, the Credit Facility
was
amended, resulting in a reduction in borrowing availability based on domestic
receivables from $1.0 million to $500,000, and a reduction in borrowing
availability under the EXIM program from $3.0 million to $2.0 million. As
amended by the September Amendment and the November Amendment, the Credit
Facility provides for cash advances equal to 75% of eligible accounts receivable
balances for both the EXIM program and domestic lines. Advances under the Credit
Facility bear interest at the Bank's prime rate plus 3.5% per annum. The Credit
Facility is secured by all of our receivables, deposit accounts, general
intangibles, investment properties, inventories, cash, property, plant and
equipment. We also issued a $4.0 million secured promissory note underlying
the
Credit Facility to the Bank. Under the terms of the September Amendment, the
Company was permitted an over-advance under the Credit Facility in the amount
of
$200,000 until October 16, 2005, which over-advance was extended under the
November Amendment until November 10, 2005. As of September 30, 2005, $1.9
million was outstanding under the Credit Facility, and no amounts remained
outstanding as of November 11, 2005.
As
of
September 30, 2005, we were in compliance with the loan covenants established
in
the Credit Facility.
Debenture
Financing. On
November 3, 2004, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with a purchaser (“Purchaser”) whereby the Purchaser
agreed to purchase debentures in the aggregate principal amount of up to
$5,000,000 (the “Notes”) (the “Debenture Financing”). In addition, the Company
agreed to issue warrants to purchase in the aggregate up to 800,000 shares
of
the Company's common stock. The warrants had an initial exercise price of $1.50
and a term of five years. Interest accrues under the terms of the Notes at
an
annual interest rate of 8%, and this rate increases to 10% on April 1, 2006
through the maturity date of the Notes, December 31, 2006. The Purchase
Agreement provided that the Notes and warrants be issued in multiple closings
prior to December 31, 2004, and that payments of principal and accrued interest
under the Notes would be amortized and paid by the Company over a period of
eight quarters in either cash or shares of the Company’s common stock, with the
first amortization payment due March 31, 2005. The total number of shares of
the
Company’s common stock that could be used to make the required amortization
payments under the terms of all outstanding Notes is 6,000,000. The first
closing took place on November 26, 2004, and consisted of a $3,300,000 Note
and
warrants to purchase 528,000 shares of the Company's common stock. The remaining
closings took place after December 31, 2004, with the second and third closings
on March 21, 2005 and March 31, 2005, which consisted of Notes for $250,000
and
$600,000, and warrants to purchase 40,000 and 96,000 of the Company's common
stock, respectively. The fourth and fifth closings took place on May 2, 2005,
and June 30, 2005, and consisted of Notes for $350,000 and $500,000, and
warrants to purchase 56,000 and 80,000 of the Company's common stock,
respectively.
F-B6
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
April
1, 2005, the first amortization payment date, the total principal and accrued
interest due the Purchaser under the terms of the Notes on such date was
$524,396, and was paid $200,000 in cash. The remaining $324,396 was paid in
627,676 shares of the Company’s common stock, and 40.799 shares of the Company’s
Series F Preferred Stock, convertible into 815,980 shares of the Company’s
common stock. The Company owed $719,473 in principal and accrued interest on
June 30, 2005, the second amortization date. On that date, the Company issued
209.201 shares of the Company’s Series F Preferred Stock, convertible into
4,184,020 shares of common stock. As a result of this issuance, the Company
owed
the Purchaser $225,100 in principal and accrued but unpaid interest on the
second amortization date, which amount the Purchaser agreed to add to the total
amount owed the Purchaser under the terms of the Notes. As of September 30,
2005, the total principal and accrued interest due under the terms of the Notes
is $4,153,649.
On
November 10, the Company and the Purchaser exchanged all issued and outstanding
Notes for and in consideration for the issuance to the Purchaser of a new
promissory note, in the principal amount of $4,153,649 (the “New Note”), which
amount represented unpaid principal and accrued interest due under the terms
of
the old Notes as of the date of the New Note, October 1, 2005. Under the terms
of the New Note, interest accrues on such debt at an annual interest rate of
8%,
and this rate increases to 10% on April 1, 2006 through the maturity date of
the
loan, December 31, 2007. Payments of principal and accrued interest under the
Notes are amortized and paid by the Company over a period of eight quarters
in
either cash or shares of the Company’s common stock, with the first amortization
payment due December 31, 2005.
In
consideration for allowing borrowings under the Purchase Agreement after
December 31, 2004, and for waiving, among other things, certain other conditions
to additional draws under the Purchase Agreement, the Company lowered the
exercise price of the warrants from $1.50 to $.0001 per share on November 10,
2005.
Convertible
Notes. On
September 27, 2005, the Company issued a Convertible Note to a purchaser in
the
principal amount of $100,000, payable on or before March 31, 2005. Interest
accrues on the Convertible Note at an annual interest rate of 10%. Under the
terms of the Convertible Note, the holder has the option to convert the
outstanding balance due under the terms of the Convertible Note into shares
of
common stock of the Company at a price per share of $0.15 at any time the
Convertible Note remains outstanding. In addition, the outstanding principal
amount and all accrued but unpaid interest under the terms of the Convertible
Note automatically convert into any shares issued in an equity or equity-based
financing with gross proceeds of at least $2,500,000 (“Equity Financing”). For
purposes of determining the number of equity securities to be received by the
holder upon such conversion, the holder shall be deemed to have tendered 120%
of
the outstanding balance of the Convertible Note as payment of the purchase
price
in the Equity Financing. As additional consideration for the loan evidenced
by
the Convertible Note, the holder was issued warrants for the issuance of 250,000
shares of common stock of the Company at an exercise price of $.20 per
share.
Agilent
Note. On
November 30, 2004, Agilent Financial Services (“Agilent”) entered into an
agreement with us to restructure the $1,725,000 due Agilent on December 31,
2004. Under the terms of the agreement, we paid Agilent an initial payment
of
$250,000 on December 1, 2004; with the balance payable in sixteen monthly
payments of $92,187 beginning January 1, 2005, up to and including April 1,
2006. In addition, we issued Agilent a warrant to purchase 178,571 shares of
our
common stock. The warrant has an initial exercise price of $0.56 and a term
of
five years. On March 31, 2005, the Company and Agilent entered into an agreement
whereby one half of the remaining debt of $1,111,599 will be paid in equal
payments over eighteen months beginning April 1, 2005, with the other half
paid
in the form of 555.799 shares of Series E Convertible Preferred Stock,
convertible at any time at the option of the holder into common stock equal
to
the quotient obtained by dividing the liquidation preference amount of the
shares to be converted by the conversion price. The Series E Preferred Stock
was
authorized and issued in the quarter ending June 30, 2005, and the Company
recorded a gain on the conversion of $355,712.
F-B7
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.
BALANCE
SHEET COMPONENTS
Inventory
Inventory
consists of the following (in thousands of dollars, unaudited):
|
September
30,
|
|
December
31,
|
|
||||
|
|
|
2005
|
|
2004
|
|||
|
Raw
materials
|
$
|
43
|
$
|
475
|
|||
|
Work-in-process
|
102
|
299
|
|||||
|
Finished
goods
|
75
|
3,948
|
|||||
|
|
$
|
220
|
$
|
4,722
|
|||
Other
accrued liabilities consist of the following (in thousands, unaudited):
|
|
September
30,
|
|
December
31,
|
|
|||
|
|
|
2005
|
|
2004
|
|||
|
Purchase
commitment
|
$
|
621
|
$
|
278
|
|||
|
Accrued
warranty (a, b)
|
341
|
491
|
|||||
|
Accrued
compensation and employee benefits
|
657
|
987
|
|||||
|
Value
added tax payable
|
149
|
175
|
|||||
|
Customer
advances
|
270
|
298
|
|||||
|
Accrued
rent
|
6
|
308
|
|||||
|
Deferred
revenue
|
1,714
|
112
|
|||||
|
Other
|
905
|
851
|
|||||
|
Balance
at September 30, 2005
|
$
|
4,663
|
$
|
3,500
|
|||
a)
A
summary of product warranty reserve activity for the nine-month period ended
September 30, 2005 is as follows:
|
Balance
at January 1, 2005
|
$
|
491
|
||
|
Additions
relating to products sold
|
238
|
|||
|
Decreases
in products under warranty
|
(297
|
)
|
||
|
Payments
|
(91
|
)
|
||
|
Balance
at September 30, 2005
|
$
|
341
|
F-B8
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
b)
A
summary of product warranty reserve activity for the nine-month period ended
September 30, 2004 is as follows:
|
Balance
at January 1, 2004
|
$
|
1,110
|
||
|
Additions
relating to products sold
|
353
|
|||
|
Payments
|
(532
|
)
|
||
|
Balance
at September 30, 2004
|
$
|
931
|
5.
INDEMNIFICATIONS
Officer
and Director Indemnifications
As
permitted under Delaware law and to the maximum extent allowable under that
law,
the Company has agreements whereby the Company indemnifies its current and
former officers and directors for certain events or occurrences while the
officer or director is, or was serving, at the Company's request in such
capacity. These indemnifications are valid as long as the director or officer
acted in good faith and in a manner that a reasonable person believed to be
in
or not opposed to the best interests of the corporation, and, with respect
to
any criminal action or proceeding, had no reasonable cause to believe his or
her
conduct was unlawful. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has a director and officer insurance policy
that
limits the Company's exposure and enables the Company to recover a portion
of
any future amounts paid. As a result of the Company's insurance policy coverage,
the Company believes the estimated fair value of these indemnification
obligations is minimal.
Other
Indemnifications
As
is
customary in the Company's industry, as provided for in local law in the U.S.
and other jurisdictions, many of the Company's standard contracts provide
remedies to its customers, such as defense, settlement, or payment of judgment
for intellectual property claims related to the use of our products. From time
to time, the Company indemnifies customers against combinations of loss,
expense, or liability arising from various trigger events related to the sale
and the use of our products and services. In addition, from time to time, the
Company also provides protection to customers against claims related to
undiscovered liabilities or additional product liability. In the Company's
experience, claims made under such indemnifications are rare and the associated
estimated fair value of the liability is not material.
6. STOCKHOLDERS'
EQUITY
The
authorized capital stock of Wave Wireless consists of 250 million shares of
common stock, $0.0001 par value, and 2.0 million shares of preferred stock,
$0.0001 par value, including 500,000 shares of which have been designated Series
A Junior Participating Preferred Stock (the “Series A”) pursuant to the
Stockholder Rights Agreement (see discussion below), 2,000 shares of Series
E
Preferred Convertible Preferred Stock (the “Series E Preferred Stock”), 250
shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock”),
and 10,000 shares of Series G Convertible Preferred Stock (the “Series G
Preferred Stock”). Effective July 19, 2004, Wave Wireless effected a one for
thirty reverse stock split. All numbers have been restated to reflect the stock
split.
During
the quarter ended September 30, 2005, the Company converted all its outstanding
Series B Preferred Stock into common stock and all the Series C Preferred Stock
into a specified number of Series G Preferred Stock and common stock or Warrants
for common stock.
PREFERRED
STOCK
The
Board
of Directors is authorized to issue shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
term of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series, without further action by the holders of common
stock.
F-B9
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SERIES
B CONVERTIBLE PREFERRED STOCK
On
August
4, 2003, as a result of the restructuring of its Convertible Notes, the
principal amount and accrued interest of $21,138,000 was converted into
approximately 1,000,000 shares of Series B Convertible Preferred Stock with
a
stated value of $21.138 per share. Each share of Series B Convertible Preferred
Stock converts into a number of shares of the Company's common stock equal
to
the stated value divided by $6.00. Certain holders of Series B Convertible
Preferred Stock agreed to convert the Series B Convertible Preferred Stock
into
common stock upon receipt of stockholder approval to increase the number of
authorized shares of the Company's common stock to allow for conversion of
the
Series B Preferred Stock. The Company received the stockholder approval on
December 2, 2003 and these holders converted their Series B Convertible
Preferred Stock into common stock. If declared, the holders of the Series B
Preferred Stock shall be entitled to receive dividends payable out of funds
legally available therefore. Holders of Series B Preferred Stock shall share
pro
rata in all dividends and other declared distributions. The basis of
distribution shall be the number of shares of common stock that the holders
would hold if all of the outstanding shares of Series B Preferred Stock had
converted into common stock.
Any
time
after January 31, 2004 and subject to certain limitations, the Company may
require the remaining holders of Series B Preferred Stock to convert all
outstanding shares of Series B Preferred Stock into shares of common stock,
in
accordance with the optional conversion formula, and all of the following
conditions are met:
| o |
Closing
bid price of the common stock for 10 consecutive trading days prior
to
delivery of the mandatory conversion notice equals or exceeds $12.00;
|
| o |
Company
shall have filed a registration statement covering all shares of
common
stock issuable upon conversion of the Series B Preferred Stock, declared
effective by the SEC, and continuing effectiveness through and including
the date of the mandatory conversion;
|
| o |
All
shares of common stock issuable upon conversion of Series B Preferred
Stock are authorized and reserved for issuance; registered for resale
under the 1933 Act; and listed on the Bulletin Board or other national
exchange; and
|
| o |
All
amounts, if any, accrued or payable under the Certificate of Designation,
Rights and Preferences of the Series B Preferred Stock (“Certificate of
Designation”) shall have been paid.
|
| o |
Upon
the occurrence of the following events, the holders of Series B Preferred
Stock may require the Company to purchase their shares of Series
B
Preferred Stock for cash:
|
| o |
Company
fails to remove any restrictive legend on any common stock certificate
issued to Series B Preferred stockholders upon conversion as required
by
the Certificate of Designation;
|
| o |
Company
makes an assignment for creditors or applies for appointment of a
receiver
for a substantial part of its business/property or such receiver
is
appointed;
|
| o |
Bankruptcy,
insolvency, reorganization or liquidation proceedings shall be instituted
by or against the Company;
|
| o |
Company
sells substantially all of its assets;
|
| o |
Company
merges, consolidates or engages in a business combination with another
entity that is required to be reported pursuant to Item 1 of Form
8-K
(unless the Company is the surviving entity and its capital stock
is
unchanged);
|
F-B10
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| o |
Company
engages in transaction(s) resulting in the sale of securities whereby
such
person or entity would own greater than 50% of the outstanding shares
of
common stock of the Company (on a fully-diluted basis);
|
| o |
Company
fails to pay any indebtedness of more than $250,000 to a third party,
or
cause any other default which would have a material adverse effect
on the
business or its operations.
|
The
Series B Preferred Stock ranks senior to the common stock, the Series A
Preferred Stock and any class or series of capital stock of the Company created
thereafter. The consent of the majority holders of the Series B Preferred Stock
is required to create any securities that rank senior or pari passu to the
Series B Preferred Stock. Upon a liquidation event, any securities senior to
the
Series B Preferred Stock shall receive a distribution prior to the Series B
Preferred Stock and pursuant to the rights, preferences and privileges thereof,
and the Series B Preferred Stock shall receive the liquidation preference with
respect to each share. If the assets and funds for distribution are insufficient
to permit the holders of Series B Preferred Stock and any pari passu securities
to receive their preferential amounts, then the assets shall be distributed
ratably among such holders in proportion to the ratio that the liquidation
preference payable on each share bears to the aggregate liquidation preference
payable on all such shares. If the outstanding shares of common stock are
increased/decreased by any stock splits, stock dividends, combination,
reclassification, reverse stock split, etc., the conversion price shall be
adjusted accordingly. Upon certain reclassifications, the holders of Series
B
Preferred Stock shall be entitled to receive such shares that they would have
received with respect to the number of shares of common stock into which the
Series B Preferred Stock would have converted. If the Company issues any
securities convertible for common stock or options, warrants or other rights
to
purchase common stock or convertible securities pro rata to the holders of
any
class of common stock, the holders of Series B Preferred Stock shall have the
right to acquire those shares to which they would have been entitled upon the
conversion of their shares of Series B Preferred Stock into common stock. The
Series B Preferred Stock does not have voting rights.
A
summary
of Series B Preferred Stock activity is as follows (in thousands):
|
|
Shares
|
|
Amount
|
||||
|
Balances
as of December 31, 2004
|
108
|
$
|
1,569
|
||||
|
Preferred
Stock accretions to accrete the fair value to the stated
value
|
|
139
|
|||||
|
September
2005 Conversion into Common Stock
|
(108
|
)
|
(1,708
|
)
|
|||
|
Balances
as of September 30, 2005
|
—
|
$
|
—
|
||||
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the preferred stock as an amount equals to the fair value of the number
of common shares into which the Series B Preferred Stock is convertible into
using the trading market price on the date the Series B Preferred Stock was
issued.
(b)
The
Company accreted its Series B Preferred Stock to redemption value through
periodic charges to retained earnings.
(c)
The
Series B Preferred Stock was classified as a mezzanine security, outside of
stockholders equity in the accompanying consolidated balance sheets due to
the
cash redemption provisions noted above. Under Statements of Financial Accounting
Standards No. 150, this security would have been classified as equity in a
non-public filing context.
F-B11
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of
September 30, 2005, all outstanding Series B Preferred Stock was converted
into
381,914 shares of common stock.
SERIES
C CONVERTIBLE PREFERRED STOCK AND WARRANTS
In
October and December 2003, Wave Wireless issued approximately 10,000 shares
of
Series C Convertible Preferred Stock with a stated value of $1,750 per share,
together with warrants to purchase approximately 4.6 million shares of common
stock. Each share of Series C Convertible Preferred Stock converts into a number
of shares of the Company's common stock equal to the stated value divided by
$3.00. These shares of Series C Convertible Preferred Stock outstanding on
June
30, 2005 are convertible into approximately 3,465 shares of common stock.
Holders of Series C Convertible Preferred Stock are entitled to receive, out
of
legally available funds, dividends at the rate of 6% per annum beginning on
the
first anniversary of their date of issuance and 8% per annum beginning on the
second anniversary of their date of issuance. Dividends are payable
semi-annually, either in cash or shares of Wave Wireless common stock.
Each
share of Series C Convertible Preferred Stock is convertible into a number
of
shares of common stock equal to the stated value, plus any accrued and unpaid
dividends, divided by an initial conversion price of $3.00. This conversion
price is subject to adjustment for any stock splits, stock dividends or similar
transactions. The conversion price is also subject to adjustment in the event
that Wave Wireless makes a dilutive issuance of common stock or other securities
that are convertible into or exercisable for common stock at an effective per
share purchase price that is less than the conversion price of the Series C
Preferred Stock in effect at the time of the dilutive issuance. The holders
of
Series C Preferred Stock may convert their shares into shares of common stock
at
any time. However, no holder of Series C Preferred Stock may convert its shares
into shares of common stock if the conversion would result in the holder or
any
of its affiliates, individually or in the aggregate, beneficially owning more
than 9.999% of Wave Wireless outstanding common stock. In the event a holder
is
prohibited from converting into common stock under this provision due to the
9.999% ownership limitation discussed above, the excess portion of the Series
C
shall remain outstanding, but shall cease to accrue a dividend.
Subject
to limitations above, the Series C Convertible Preferred Stock is also
mandatorily convertible at the option of Wave Wireless 180 days after the
effective date of a registration statement covering the shares of common stock
issuable upon the conversion of the Series C Convertible Preferred Stock, and
upon the satisfaction of the following conditions: (i) for ten consecutive
days,
the Common stock closes at a bid price equal to or greater than $6.00; (ii)
the
continued effectiveness of the registration statement; (iii) all shares of
common stock issuable upon conversion of the Series C Convertible Preferred
Stock and Series C-1 and Series C-2 Warrants are authorized and reserved for
issuance, are registered under the Securities Act for resale by the holders,
and
are listed or traded on the OTC Bulletin Board or other national exchange;
(iv)
there are no uncured redemption events; and (v) all amounts accrued or payable
under the Series C Convertible Preferred Stock Certificate of Designation or
registration rights agreement have been paid. As of September 30, 2005, all
shares of Series C Convertible Preferred Stock had been converted into
approximately 6.4 million shares of common stock (exclusive of approximately
0.7
million shares of common stock issued for unpaid dividends), 5,258 shares of
Series G Preferred Stock (exclusive of 268 shares of Series G Preferred Stock
for unpaid dividends) (“Series C Exchange”), and approximately 4.1 million
warrants at an exercise price of $.0001 per share (exclusive of warrants to
purchase approximately 0.4 million shares of common stock at an exercise price
of $.0001 per share for unpaid dividends). As of September 30, 2005, 3,933
shares of the Series C Warrants have been exercised.
The
number of shares of common stock issuable upon exercise of the Series C-1 and
Series C-2 Warrants are subject to adjustment for stock splits, stock dividends
and similar transactions and for certain dilutive issuances.
The
investors of Series C were issued 233 Series C-1 Warrants and 233 Series C-2
Warrants for every share of Series C purchased. The C-1 Warrant has a term
of
five years and an initial exercise price of $4.50 per warrant, increasing to
$5.40 per warrant beginning February 6, 2005. The Series C-2 Warrant has a
term
of five years and an initial exercise price of $5.40 per warrant, increasing
to
$6.60 per warrant beginning August 6, 2005. Subject to an effective registration
statement, beginning twenty-four (24) months after the Effective Date, the
Company may redeem the Series C-1 Warrants for $0.03 per Warrant if the Closing
Bid Price of the Company's common stock is equal to or greater than $10.80
for
ten (10) consecutive trading days. Beginning February 6, 2007, the Company
may
redeem the Series C-2 Warrants for $0.03 per Warrant if the Closing Bid Price
of
the Company's common stock is equal to or greater than $13.20 for ten (10)
consecutive trading days. The Conversion Price of the Series C and the Exercise
Price of the C-1 and C-2 Warrants shall be subject to adjustment for issuances
of common stock at a purchase price less than the then-effective Conversion
Price or Exercise Price, based on weighted average anti-dilution protection,
subject to customary carve-outs (See Common Stock Warrants, below).
F-B12
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
If
Wave
Wireless completes a private equity or equity-linked financing (the “New
Financing”), the Series C holders may exchange any outstanding Series C at 100%
of face value for the securities issued in the New Financing. Such right shall
be voided in the event the Company raises $5.0 million of additional equity
capital at a price of not less than $3.60 per share.
For
any
equity or equity-linked private financing consummated within 12 months after
the
closing of the Series C Financing, the investors in the Series C shall have
a
right to co-invest in any private financing up to fifty percent (50%) of the
dollar amount invested in the Series C Financing. The investors shall have
five
(5) trading days to respond. This co-investment provision shall not apply to
the
issuance of stock in situations involving bona-fide strategic partnerships,
acquisition candidates and public offerings.
Upon
the
occurrence of the following events, (each a “Redemptive Event”), the holders of
Series C Preferred Stock may require the Company to purchase their shares of
Series C Preferred Stock for cash:
| o |
the
Company fails to remove any restrictive legend on any common stock
certificate issued to Series C Preferred Stock holders upon conversion
as
required by the Certificate of Designation and such failure continues
uncured for five business days after receipt of written notice;
|
| o |
the
Company makes an assignment for the benefit of creditors or applies
for
appointment of a receiver for a substantial part of its business/property
or such receiver is appointed;
|
| o |
bankruptcy,
insolvency, reorganization or liquidation proceedings shall be instituted
by or against the Company and shall not be dismissed within 60 days
of
their initiation;
|
| o |
the
Company sells substantially all of its assets;
|
| o |
the
Company merges, consolidates or engages in a business combination
with
another entity that is required to be reported pursuant to Item 1
of Form
8-K (unless the Company is the surviving entity and its capital stock
is
unchanged);
|
| o |
the
Company engages in transaction(s) resulting in the sale of securities
to a
person or entity whereby such person or entity would own greater
than
fifty percent (50%) of the outstanding shares of common stock of
the
Company (calculated on a fully diluted basis);
|
| o |
the
Company fails to pay any indebtedness of more than $250,000 to a
third
party, or cause any other default which would have a material adverse
effect on the business or its operations.
|
The
Series C Preferred Stock ranks senior to the common stock, the Series A
Preferred Stock, the Series B Preferred Stock and ranks pari passu with the
Series D Preferred Stock. The consent of the majority holders of the Series
C
Preferred Stock is required to create any securities that rank senior or pari
passu to the Series C Preferred Stock. If Wave Wireless liquidates, dissolves
or
winds up, the holders of Series C Preferred Stock and Series D Preferred Stock
are entitled to receive the stated value of their shares plus all accrued and
unpaid dividends prior to any amounts being paid to the holders of Series B
Preferred Stock and Wave Wireless common stock. In addition, the holders of
Series C Preferred Stock are entitled to share ratably together with the holders
of the Series D Preferred Stock, the Series B Convertible Preferred Stock and
Wave Wireless common stock in all remaining assets after the satisfaction of
all
other liquidation preferences. If the assets and funds for distribution are
insufficient to permit the holders of Series C.
F-B13
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Preferred
stock and any pari passu securities to receive their preferential amounts,
then
the assets shall be distributed ratably among such holders in proportion to
the
ratio that the liquidation preference payable on each share bears to the
aggregate liquidation preference payable on all such shares. If the outstanding
shares of common stock are increased/decreased by any stock splits, stock
dividends, combination, reclassification, reverse stock split, etc., the
conversion price shall be adjusted accordingly.
Upon
certain reclassifications, the holders of Series C Preferred Stock shall be
entitled to receive such shares that they would have received with respect
to
the number of shares of common stock into which the Series C Preferred Stock
would have converted. If the Company issues any securities convertible for
common stock or options, warrants or other rights to purchase common stock
or
convertible securities pro rata to the holders of any class of common stock,
the
holders of Series C Preferred Stock shall have the right to acquire those shares
to which they would have been entitled upon the conversion of their shares
of
Series C Preferred Stock into common stock.
The
holders of Series C Preferred Stock are entitled to vote together with the
holders of the Series D Preferred Stock and common stock, as a single class,
on
all matters submitted to a vote of Wave Wireless stockholders. The holders
of
the Series C Preferred Stock are entitled to a number of votes equal to the
number of shares of Wave Wireless common stock that would be issued upon
conversion of their shares of Series C Preferred Stock.
A
summary
of Series C Preferred Stock activities is as follows (in thousands):
|
|
Shares
|
|
Amount
|
||||
|
Balance
as of December 31, 2004
|
6.07
|
$
|
2,537
|
||||
|
Preferred
Stock accretions to accrete the fair value to the stated
value
|
|
1,319
|
|||||
|
Redemption
of Series C Preferred Stock for 6.4 million shares of common stock,
warrants to acquire 4.1 million shares of common stock and 5,258
shares of
Series G preferred stock
|
(6.07
|
)
|
(3,856
|
)
|
|||
|
Balances
as of September 30, 2005
|
—
|
$
|
—
|
||||
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the preferred stock as an amount equal to the fair value of the number
of common shares into which the Series C Preferred Stock is convertible into
using the trading market price on the date the Series C Preferred Stock was
issued.
(b)
The
Company allocated proceeds between the Series C Preferred Stock and the Warrants
based upon their relative fair values.
(c)
The
beneficial conversion feature was calculated using the adjusted conversion
rate,
following the allocation of proceeds to warrants discussed in item (b) above.
(d)
The
Company accretes its Series C Preferred Stock to redemption value through
periodic charges to retained earnings.
(e)
The
Series C Preferred Stock is classified as a mezzanine security, outside of
stockholders equity in the accompanying balance sheet due to the cash redemption
provisions noted above. Under Statements of Financial Accounting Standards
No.
150, this security would have been classified as equity in a non-public filing
context.
F-B14
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of
September 30, 2005, all outstanding Series C Preferred Stock were converted
into
approximately 6.4 million shares of common stock (exclusive of approximately
0.7
million shares of common stock issued for unpaid dividends), and 5,258 shares
of
Series G Preferred Stock (exclusive of 268 shares of Series G Preferred Stock
for unpaid dividends) (“Series C Exchange”). In addition, due to certain
limitations set forth in the Certificate of Designations for the Series C
Preferred Stock, certain shareholders received warrants to purchase
approximately 4.1 million shares of common stock at an exercise price of $0.001
per share (exclusive of warrants to purchase approximately 0.4 million shares
of
common stock at an exercise price of $.0001 per share for unpaid dividends),
in
lieu of shares of common stock otherwise required to be issued to such
shareholders in connection with the Series C Exchange.
Beneficial
conversion feature represents the excess of the aggregate fair value of the
common stock, using the market price at around the Series C commitment date,
that the preferred stockholders would receive at conversion over the proceeds
received, and it is accreted over a five-year period.
SERIES
D CONVERTIBLE PREFERRED STOCK
Wave
Wireless has designated 2,000 shares of its preferred stock as Series D
Convertible Preferred Stock. In December 2003, Wave Wireless issued the 2,000
shares of Series D Convertible Preferred Stock to redeem $2.0 million of notes
payable assumed from the SPEEDCOM asset acquisition. The Series D Preferred
Stock has a stated value of $1,000 per share. Each share of Series D Preferred
Stock is convertible into a number of shares of common stock equal to the stated
value divided by an initial conversion price of $4.50. This conversion price
is
subject to adjustment for any stock splits, stock dividends or similar
transactions. The holders of Series D Preferred Stock may convert their shares
into shares of common stock at any time. However, no holder of Series D
Preferred Stock may convert its shares into shares of common stock if the
conversion would result in the holder or any of its affiliates, individually
or
in the aggregate, beneficially owning more than 9.999% of Wave Wireless
outstanding common stock.
Holders
of Series D Preferred Stock are entitled to share pro-rata, on an as-converted
basis, in any dividends or other distributions that may be declared by the
board
of directors of Wave Wireless with respect to the common stock. If Wave Wireless
liquidates, dissolves or winds up, the holders of Series D Preferred Stock
and
the holders of Series C Preferred Stock are entitled to receive the stated
value
of their respective shares plus all accrued and unpaid dividends, pari passu,
and prior to any amounts being paid to the holders of Series B Preferred Stock
and Wave Wireless common stock. In addition, the holders of Series D Preferred
Stock are entitled to share ratably together with the holders of Series C
Preferred Stock, Series B Preferred Stock and Wave Wireless common stock in
all
remaining assets after the satisfaction of all other liquidation preferences.
The
holders of Series D Preferred Stock are entitled to certain rights and
preferences with respect to the holders of Wave Wireless common stock. The
holders of Series D Preferred Stock are entitled to vote together with the
holders of Wave Wireless common stock and holders of Series C Preferred Stock,
as a single class, on all matters submitted to a vote of Wave Wireless
stockholders. The holders of Series D Preferred Stock are entitled to a number
of votes equal to the number of shares of Wave Wireless common stock that would
be issued upon conversion of their shares of Series D Preferred Stock.
Upon
the
occurrence of the following events, (each a “Redemptive Event”), the holders of
Series D Preferred Stock may require the Company to purchase their shares of
Series D Preferred Stock for cash:
| o |
the
Company fails to remove any restrictive legend from certificates
representing shares of Wave Wireless common stock that are issued
to
holders who convert their shares of Series D Preferred Stock;
|
| o |
the
Company makes an assignment for the benefit of creditors, or applies
for
or consents to the appointment of a receiver or trustee;
|
| o |
Any
bankruptcy, insolvency, reorganization or other proceeding for the
relief
of debtors is instituted by or against Wave Wireless and is not dismissed
within 60 days;
|
F-B15
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| o |
the
Company sells substantially all of its assets, merges or consolidates
with
any other entity or engages in a transaction that results in any
person or
entity acquiring more than 50% of Wave Wireless outstanding common
stock
on a fully diluted basis;
|
| o |
the
Company fails to pay when due any payment with respect to any of
its
indebtedness in excess of $250,000;
|
| o |
the
Company breaches any agreement for monies owed or owing in an amount
in
excess of $250,000 and the breach permits the other party to declare
a
default or otherwise accelerate the amounts due under that agreement;
and
|
| o |
the
Company permits a default under any agreement to remain uncured and
the
default would or is likely to have a material adverse effect on the
business, operations, properties or financial condition of Wave Wireless.
|
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the preferred stock as an amount equal to the fair value of the number
of common shares into which the Series D Preferred Stock is convertible into
using the trading market price on the date the Series D Preferred Stock was
issued.
(b)
The
Series D Preferred Stock is classified as a mezzanine security, outside of
stockholders equity in the accompanying balance sheet due to the cash redemption
provisions noted above. Under Statements of Financial Accounting Standards
No.
150, this security would have been classified as equity in a non-public filing
context.
On
May
31, 2005, the Series D Preferred Stock was exchanged for 1,000 shares of Series
G Convertible Preferred Stock, plus warrants to purchase 1,000,000 shares of
common stock at an exercise price of $0.001 per share.
SERIES
E CONVERTIBLE PREFERRED STOCK
Wave
Wireless has designated 2,000 shares of its Preferred Stock as Series E
Convertible Preferred Stock. In June 2005, Wave Wireless issued 923 shares
of
Series E Convertible Preferred Stock to redeem $555,000 in promissory notes
and
settle certain vendor payables totaling $367,000. These transactions were in
connection with the Company's Restructuring Plan, and resulted in a net gain
of
$267,000 in the quarter ended June 30, 2005.
The
holders of Series E Preferred Stock are entitled to certain rights and
preferences with respect to the holders of our common stock, including the
following:
| o |
Voting.
The holders of Series E Preferred Stock are entitled to vote together
with
the holders of our common stock, as a single class, on all matters
submitted to a vote of our stockholders. The holders of Series E
Preferred
Stock are entitled to a number of votes equal to the number of shares
of
common stock that would be issued upon conversion of their shares
of
Series E Preferred Stock.
|
| o |
Conversion.
The Series E Preferred Stock has a liquidation preference amount
equal to
$1,000 per share. Each share of Series E Preferred Stock is convertible
into a number of shares of common stock equal to the liquidation
preference amount divided by the conversion price of $0.50. This
conversion price is subject to adjustment for any stock splits, stock
dividends or similar transactions. The holders of Series E Convertible
Stock may convert their shares into shares of common stock at any
time.
|
| o |
Dividends.
Holders of Series E Preferred Stock are entitled to receive, out
of
legally available funds, dividends at the rate of 6% per annum beginning
on the second anniversary of the date of issuance. Dividends are
payable
annually, either in cash or shares of our common stock.
|
| o |
Liquidation.
If we liquidate, dissolve or wind up, the holders of Series E Preferred
Stock are entitled to receive the liquidation preference amount ($1,000
per share) of their shares prior to any amounts being paid to the
holders
of our Series B Preferred Stock, Series C Preferred Stock, Series
F
Preferred Stock, Series G Preferred Stock and common stock.
|
F-B16
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the preferred stock as an amount equal to the fair value of the number
of common shares into which the Series E Preferred Stock is convertible into
using the trading market price on the date the Series E Preferred Stock was
issued.
(b)
The
Company allocated proceeds between the Series E Preferred Stock and the Warrants
based upon their relative fair values.
(c)
As of
September 30, 2005, outstanding Series E Preferred Stock are convertible into
approximately 1,846,262 shares of common stock.
SERIES
F CONVERTIBLE PREFERRED STOCK
Wave
Wireless has designated 250 shares of its preferred stock as Series F
Convertible Preferred Stock. In the three months ended June 30, 2005, Wave
Wireless issued 250 shares of Series F Convertible Preferred Stock to make
certain debenture amortization payments due March 31, 2005, and June 30, 2005.
The Company recorded a loss of $228,000 in connection with these equity
transactions in lieu of cash payment transactions.
The
holders of Series F Preferred Stock are entitled to certain rights and
preferences with respect to the holders of our common stock, including the
following:
| o |
Voting.
Except for the purpose of approving certain specified corporate actions
and as otherwise required by the Delaware General Corporation Law,
the
holders of Series F Preferred Stock do not have any voting rights.
|
| o |
Conversion.
The Series F Preferred Stock has a face amount equal to $10,000 per
share.
Each share of Series F Preferred Stock is convertible into a number
of
shares of common stock equal to the face amount divided by the conversion
price of $0.50. This conversion price is subject to adjustment for
any
stock splits, stock dividends or similar transactions. We have the
right
to convert all outstanding shares of our Series F Preferred Stock
into
shares of our common stock, but only if the conversion would not
cause the
holder to beneficially own more than 9.99% of our outstanding common
stock.
|
| o |
Dividends.
Holders of Series F Preferred Stock are entitled to participate in
all
dividends declared on our common stock, based on the number of shares
of
common stock issuable upon conversion of their Series F Preferred
Stock.
|
| o |
Liquidation.
If we liquidate, dissolve or wind up, the holders of Series F Preferred
Stock are not entitled to receive any preferential amounts prior
to any
amounts being paid to the holders of the other classes and series
of our
capital stock.
|
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the preferred stock as an amount equal to the fair value of the number
of common shares into which the Series F Preferred Stock is convertible into
using the trading market price on the date the Series F Preferred Stock was
issued.
(b)
During the third quarter of 2005 41 shares of Series F Preferred Stock was
converted into 815,980 shares of common stock. As of September 30, 2005, 209
shares of Series F Preferred Stock remain outstanding and are convertible into
approximately 4.2 million shares of common stock.
SERIES
G CONVERTIBLE PREFERRED STOCK
Wave
Wireless has designated 10,000 shares of its Preferred Stock as Series G
Convertible Preferred Stock, of which 6,526 shares were issued and outstanding
as of September 30, 2005.
The
holders of Series G Preferred Stock are entitled to certain rights and
preferences with respect to the holders of our common stock, including the
following:
F-B17
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| o |
Voting.
Except for the purpose of approving certain specified corporate actions
and as otherwise required by the Delaware General Corporation Law,
the
holders of Series G Preferred Stock do not have any voting rights.
|
| o |
Conversion.
The Series G Preferred Stock has a liquidation preference amount
equal to
$1,000 per share. Each share of Series G Preferred Stock is convertible
into a number of shares of common stock equal to the liquidation
preference amount divided by the conversion price of $0.50. This
conversion price is subject to adjustment for any stock splits, stock
dividends or similar transactions. The holders of Series G Convertible
Stock may convert their shares into shares of common stock at any
time.
However, no holder of Series G Preferred Stock may convert its shares
into
shares of common stock if the conversion would cause the holder to
beneficially own more than 9.99% of our outstanding common stock.
|
| o |
Dividends.
Holders of Series G Preferred Stock are entitled to participate in
all
dividends declared on our common stock, based on the number of shares
of
common stock issuable upon conversion of their Series G Preferred
Stock.
|
| o |
Liquidation.
If we liquidate, dissolve or wind up, the holders of Series G Preferred
Stock are entitled to receive the liquidation preference amount ($1,000
per share) of their shares prior to any amounts being paid to the
holders
of our Series F Preferred Stock and common stock.
|
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the preferred stock as an amount equal to the carrying value of the
Series D and C Preferred Stock which was exchanged for the Series G Preferred
Stock, less the fair value of the Warrant also received as part of the exchange
transaction.
(b)
As of
September 30, 2005, all outstanding shares of Series G Preferred Stock are
convertible into approximately 13.1million shares of common stock.
STOCKHOLDER
RIGHTS AGREEMENT
On
September 26, 1997, the Board of Directors of Wave Wireless adopted a
Stockholder Rights Agreement (the “Rights Agreement”). Pursuant to the Rights
Agreement, Rights (the “Rights”) were distributed as a dividend on each
outstanding share of its common stock held by stockholders of record as of
the
close of business on November 3, 1997. Each Right will entitle stockholders
to
buy Series A Preferred at an exercise price of $125.00 upon certain events.
The
Rights will expire ten years from the date of the Rights Agreement.
In
general, the Rights will be exercisable only if a person or group acquires
15%
or more of Wave Wireless common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15%
or
more of Wave Wireless common stock. In the case of the State of Wisconsin
Investment Board, Firsthand Capital Management, Alpha Capital and Stone Street
Limited Partnership the threshold figure is 20% rather than 15%. If, after
the
Rights become exercisable, Wave Wireless is acquired in a merger or other
business combination transaction, or sells 50% or more of its assets or earning
power, each unexercised Right will entitle its holder to purchase, at the
Right's then-current exercise price, a number of the acquiring company's common
shares having a market value at the time of twice the Right's exercise price.
At
any time within ten days after the public announcement that a person or group
has acquired beneficial ownership of 15% or more of Wave Wireless common stock,
the Board of Directors, in its sole discretion, may redeem the Rights for $0.003
per Right.
7.
ASSET
IMPAIRMENT AND OTHER RESTRUCTURING CHARGES
The
Company continually monitors its inventory carrying value in the light of the
slowdown in the global telecommunications market, especially with regard to
an
assessment of future demand for its licensed, and its other legacy product
lines. In the quarter ended June 30, 2005, the Company decided to discontinue
selling certain licensed products, which resulted in a charge to restructuring
of $3.0 million in licensed inventory.
A
summary
of inventory reserve activities is as follows:
F-B18
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Inventory
|
|
||
|
|
|
Reserve
|
||
|
Balance
at January 1, 2005
|
$
|
25,312
|
||
|
Additions
charged to Statement of Operations
|
3,043
|
|||
|
Deductions
from reserves
|
(14,073
|
)
|
||
|
Balance
at September 30, 2005
|
$
|
14,282
|
||
In
April
2005, Wave Wireless announced a formal restructuring plan that will
significantly reduce current spending and substantially reduce liabilities
and
operating and other costs (the “Restructuring Plan”). The Restructuring Plan was
necessitated in order to curtail the substantial operating losses incurred
by
Wave Wireless and management's assessment that substantial operating losses
would continue absent a plan to restructure the business, and substantially
reduce its cost structure. In addition, absent such a plan, Wave Wireless would
likely be unable to attract financing on reasonable terms, if at all.
The
Restructuring Plan includes the divestiture of certain unprofitable product
lines, which includes certain of our licensed point-to-point microwave products.
Wave Wireless will, however, continue the sale of its unlicensed radio products,
and certain of its licensed radio products, including refurbished licensed
products in connection with our repair and maintenance business. As part of
The
Restructuring Plan, we reduced our work force from approximately 130 full and
part-time employees to approximately 60 employees. The anticipated cost of
the
Restructuring Plan is approximately $5.6 million and includes severance and
related liabilities, costs associated with the cancellation of purchase order
commitments, the write-down of certain inventory, and the loss anticipated
from
the divestiture of the Wave Wireless engineering operation in Italy. As of
the
end of the third quarter of 2005, the Restructuring Plan was substantially
completed.
A
summary
of restructuring costs is as follows:
|
|
Restructuring
|
|
||
|
|
|
Costs
|
||
|
Severance
|
$
|
524
|
||
|
Purchase
commitment charge
|
905
|
|||
|
Impairment
charge on P-Com Italia
|
826
|
|||
|
Licensed
product inventory charge
|
2,987
|
|||
|
Florida
building lease cancellation
|
310
|
|||
|
Other
|
45
|
|||
|
Balance
at September 30, 2005
|
$
|
5,597
|
||
F-B19
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
breakdown of product sales by geographic region is as follows (in thousands):
|
|
|
Three
months ended Sept 30
|
Nine
months ended Sept 30
|
||||||||||
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
||||||
|
North
America
|
$
|
495
|
$
|
834
|
$
|
969
|
$
|
1,897
|
|||||
|
United
Kingdom
|
978
|
1,190
|
3,616
|
4,691
|
|||||||||
|
Europe
|
80
|
1,181
|
967
|
3,596
|
|||||||||
|
Asia
|
94
|
388
|
554
|
1,431
|
|||||||||
|
Latin
America
|
718
|
1,836
|
1,664
|
6,341
|
|||||||||
|
Other
regions
|
568
|
714
|
1,921
|
1,941
|
|||||||||
|
$
|
2,933
|
$
|
6,143
|
$
|
9,691
|
$
|
19,897
|
||||||
During
the nine-month period ended September 30, 2005 and 2004, four customers
accounted for a total of 62% and 67% of our total sales, respectively.
9.
NET
LOSS
The
Company's reported net loss includes the currency translation adjustment
associated with our foreign operations. Net loss attributable to common
stockholders was $3.9 million and $4.1 million for the three months ended
September 30, 2005 and 2004, respectively. Net loss attributable to common
stockholders was $15.4 million and $1.7 million for the nine months ended
September 30, 2005 and 2004, respectively.
10.
CONTINGENCIES
In
June
2000, two former consultants to P-Com Italia S.p.A. filed a complaint against
P-Com Italia in the Civil Court of Rome, Italy seeking payment of certain
consulting fees allegedly due the consultants totaling approximately $615,000.
The Civil Court of Rome has appointed a technical consultant in order to
determine the merit of certain claims made by the consultants. On April 20,
2005, the Civil Court of Rome issued judgment dismissing the case, and ordered
the consultants to pay P-Com Italia's legal fees. The Court's order has been
appealed by the consultants to the Court of Appeal of Rome.
On
September 16, 2005, the Company was served with a Complaint filed by Lakewood
Ranch Properties, Inc. (the “Landlord”) for failure to pay one month's rent due
under the terms of a Sublease Agreement dated January 3, 2005, by and between
the Landlord and the Company (the “Sublease”), in the amount of $26,771.43. The
Complaint seeks eviction of the Company from its facility in Sarasota, Florida,
and damages in the amount of $28,110.00. Landlord also alleges that the Company
is liable under the Sublease for accelerated future monthly rent through
September 30, 2016.
On
October 17, 2005, the Company and Lakewood Ranch Properties, LLC, entered into
a
Termination Agreement, as amended by the Addendum to Termination Agreement,
dated October 21, 2005, pursuant to which the parties have agreed to terminate
the Lease Agreement by and between the Company and Lakewood Ranch for and in
consideration for the payment to Lakewood Ranch of $10,000 in attorney's fees,
and $300,000 payable $25,000 on or before October 31, 2005, $150,000 on or
before November 15, 2005, and $125,000 on or before December 31, 2005. Any
late
payments under the terms of the Termination Agreement are subject to a 5%
penalty and interest in the amount of 10% annually. In the event the required
payments are made, Lakewood Ranch has agreed to dismiss a Complaint filed by
Lakewood Ranch against the Company seeking damages in the amount of
$3,533,828.70.
F-B20
WAVE
WIRELESS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of
November 14, 2005, the Company has not made any payments under the Termination
Agreement, and intends to seek financing to make the required payments. No
assurances can be given that the Company will be able to obtain the necessary
financing to make the required payments.
11.
GOODWILL
Goodwill
represents the excess of the purchase price over the fair values of net assets
acquired in connection with the Wave Wireless acquisition. In accordance with
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”), goodwill resulting from the purchase will not be
amortized into operations. Rather, such amounts will be tested for impairment
annually. This impairment test is calculated at the reporting unit level, which,
for Wave Wireless, is at the enterprise level. The annual goodwill impairment
test has two steps. The first identifies potential impairments by comparing
the
fair value of Wave Wireless, as determined using its trading market prices,
with
its carrying value, including goodwill. If the fair value exceeds the carrying
amount, goodwill is not impaired and the second step is not necessary. If the
carrying value exceeds the fair value, the second step calculates the possible
impairment loss by comparing the implied fair value of goodwill with the
carrying amount. If the implied goodwill is less than the carrying amount,
a
write-down will be recorded. In the event that the management of Wave Wireless
determines that the value of goodwill has become impaired using this or other
approaches, Wave Wireless will record a charge for the amount of the impairment.
No impairment of goodwill resulted from this measurement approach immediately
following the Wave Wireless acquisition, or to date. Wave Wireless will perform
this test annually, on the first day to the fourth quarter of each year. As
the
effects of the Company's restructuring discussed in Note 1 become clearer in
the
fourth quarter of 2005, it is possible that goodwill impairment charges could
result at that time.
12.
SUBSEQUENT
EVENTS
On
October 27, 2005, the Company issued a Convertible Note to a purchaser in the
principal amount of $250,000, payable on or before March 31, 2006. Interest
accrues on the Convertible Note at an annual interest rate of 10%. Under the
terms of the Convertible Note, the holder has the option to convert the
outstanding balance due under the terms of the Convertible Note into shares
of
common stock of the Company at a price per share of $0.15 at any time the
Convertible Note remains outstanding. In addition, the outstanding principal
amount and all accrued but unpaid interest under the terms of the Convertible
Note automatically convert into any shares issued in an equity or equity-based
financing with gross proceeds of at least $2,500,000 (“Equity Financing”). For
purposes of determining the number of equity securities to be received by the
holder upon such conversion, the holder shall be deemed to have tendered 120%
of
the outstanding balance of the Convertible Note as payment of the purchase
price
in the Equity Financing. As additional consideration for the loan evidenced
by
the Convertible Note, the holder was issued warrants for the issuance of 575,000
shares of common stock of the Company at an exercise price of $.20 per
share.
On
November 10, 2005, the Company and the Purchaser of Notes issued under the
Debenture Agreement exchanged all issued and outstanding Notes for and in
consideration for the issuance to the Purchaser of a new promissory note, in
the
principal amount of $4,153,649 (the “New Note”), which amount represented unpaid
principal and accrued interest due under the terms of the old Notes as of the
date of the New Note, October 1, 2005. Under the terms of the New
Note, interest
accrues on such debt at an annual interest rate of 8%, and this rate increases
to 10% on April 1, 2006 through the maturity date of the loan, December 31,
2007. Payments of principal and accrued interest under the New Note is amortized
and paid by the Company over a period of eight quarters in either cash or shares
of the Company’s common stock, with the first amortization payment due December
31, 2005.
In
consideration for allowing borrowings under the Purchase Agreement after
December 31, 2004, and for waiving, among other things, certain other conditions
to additional draws under the Purchase Agreement, the Company lowered the
exercise price of the warrants from $1.50 to $.0001 per share on November 10,
2005.
F-B21
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
P-Com,
Inc.
We
have
audited the accompanying consolidated balance sheets of P-Com, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity (deficit) and comprehensive
loss,
and cash flows for the years then ended. Our audit also included the financial
statement schedule listed in the Index at Item 8. These consolidated financial
statements and schedule are the responsibility of the Company's management.
Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the
overall
financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of P-Com, Inc. and
subsidiaries as of December 31, 2004 and 2003 and the consolidated results
of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
The
Company has incurred recurring net losses, has used significant cash in support
of its operating activities and, based upon current operating levels, requires
additional capital or significant reconfiguration of its operations to sustain
its operations beyond June 30, 2005. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Further information
and management's plans with regard to this uncertainty, including management's
specific plans for restructuring and exit activities, are discussed in the
footnotes. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The
accompanying consolidated financial statements for the year ending 2003 have
been restated to give effect to a one-for-thirty reverse stock split that became
effective on July 19, 2004.
/s/
Aidman, Piser & Company, P.A.
Tampa,
Florida
January
26, 2005, except for Note 17, as to which
the
date
is March 10, 2005
F-C1
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE
BOARD OF DIRECTORS AND STOCKHOLDERS OF P-COM, INC.
In
our
opinion, the accompanying consolidated statements of operations, stockholders'
deficit and comprehensive loss and cash flows present fairly, in all material
respects, the results of operations and cash flows of P-Com, Inc. and
subsidiaries for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. In addition,
in
our opinion, the accompanying financial statement schedule for the year ended
December 31, 2002 presents fairly, in all material respects, the information
set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are
the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audit. We conducted our
audit
of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit 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 1. These financial statements do
not
include any adjustments that might result from the outcome of this
uncertainty.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill effective January 1,
2002.
The
accompanying financial statements for the year ended December 31, 2002 have
been
restated to give effect to a one-for-thirty reverse stock split that became
effective July 19, 2004.
/s/
PricewaterhouseCoopers LLP
San
Jose,
California
March
31,
2003, except for Note 1 (Discontinued Operations), as to which the
date
is
September 3, 2003 and for Note 1 (Restatements), as to which the date
is
July
19,
2004
F-C2
P-COM,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share amount)
|
DECEMBER
31,
|
|||||||
|
2004
|
2003
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,280
|
$
|
6,185
|
|||
|
Accounts
receivable, net of allowances of $430 and $310
respectively
|
2,828
|
4,801
|
|||||
|
Inventory
|
4,722
|
5,258
|
|||||
|
Prepaid
expenses and notes receivable
|
1,519
|
2,216
|
|||||
|
Assets
of discontinued operations
|
—
|
40
|
|||||
|
Total
current assets
|
11,349
|
18,500
|
|||||
|
Property
and equipment, net
|
1,755
|
3,807
|
|||||
|
Goodwill
and other assets
|
12,319
|
12,258
|
|||||
|
Total
assets
|
$
|
25,423
|
$
|
34,565
|
|||
|
LIABILITIES,
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
3,139
|
$
|
4,035
|
|||
|
Other
accrued liabilities
|
3,500
|
16,226
|
|||||
|
Loan
payable to bank
|
—
|
1
|
|||||
|
Liabilities
of discontinued operations
|
249
|
313
|
|||||
|
Notes
payable current
|
3,178
|
—
|
|||||
|
Total
current liabilities
|
10,066
|
20,575
|
|||||
|
Other
long-term liabilities
|
1,743
|
6
|
|||||
|
Total
liabilities
|
11,809
|
20,581
|
|||||
|
Commitments
and contingencies (notes 13 and 14)
|
|||||||
|
Redeemable
preferred stock:
|
|||||||
|
Series
B preferred stock
|
1,569
|
1,361
|
|||||
|
Series
C preferred stock
|
2,537
|
870
|
|||||
|
Series
D preferred stock
|
2,000
|
2,000
|
|||||
|
Total
preferred stock
|
6,106
|
4,231
|
|||||
|
Stockholders'
equity:
|
|||||||
|
Common
stock, par value $0.001 per share: 35 million shares authorized;
11.9 million and 6.8 million shares issued; 11.8
million and 6.8 million shares outstanding,
respectively
|
35
|
20
|
|||||
|
Treasury
stock, at cost; 30 shares
|
(74
|
)
|
(74
|
)
|
|||
|
Additional
paid-in capital
|
376,430
|
373,186
|
|||||
|
Accumulated
deficit
|
(368,885
|
)
|
(363,173
|
)
|
|||
|
Accumulated
other comprehensive loss
|
2
|
(206
|
)
|
||||
|
|
|||||||
|
Total
stockholders' equity
|
7,508
|
9,753
|
|||||
|
Total
liabilities, redeemable preferred stock and stockholders'
equity
|
$
|
25,423
|
$
|
34,565
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-C3
P-COM,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
FOR
THE YEARS ENDED DECEMBER 31,
|
||||||||||
|
2004
|
|
2003
|
|
2002
|
||||||
|
Sales
|
$
|
24,175
|
$
|
20,841
|
$
|
29,686
|
||||
|
Cost
of sales
|
18,720
|
20,604
|
30,777
|
|||||||
|
Gross
profit (loss)
|
5,455
|
237
|
(1,091
|
)
|
||||||
|
Operating
expense:
|
||||||||||
|
Research
and development
|
4,976
|
6,099
|
12,745
|
|||||||
|
Selling
and marketing
|
6,772
|
3,557
|
6,621
|
|||||||
|
General
and administrative
|
4,552
|
5,607
|
10,750
|
|||||||
|
Goodwill
impairment and amortization
|
—
|
—
|
11,409
|
|||||||
|
Restructuring
charges
|
—
|
3,712
|
—
|
|||||||
|
Total
operating expenses
|
16,300
|
18,975
|
41,525
|
|||||||
|
Loss
from operations
|
(10,845
|
)
|
(18,738
|
)
|
(42,616
|
)
|
||||
|
Other
income (expenses):
|
||||||||||
|
Interest
expense
|
(687
|
)
|
(2,249
|
)
|
(2,457
|
)
|
||||
|
Gain
on debt extinguishment, net
|
—
|
6,499
|
1,393
|
|||||||
|
Other
income (expense), net
|
8,252
|
3,739
|
(1,312
|
)
|
||||||
|
Loss
before discontinued operations, income taxes, and cumulative effect
of change in accounting principle
|
(3,280
|
)
|
(10,749
|
)
|
(44,992
|
)
|
||||
|
Income
tax benefit
|
—
|
—
|
(470
|
)
|
||||||
|
Loss
before discontinued operations and cumulative effect of change in
accounting principle
|
(3,280
|
)
|
(10,749
|
)
|
(44,522
|
)
|
||||
|
Loss
from discontinued operations
|
(40
|
)
|
(2,137
|
)
|
(4,284
|
)
|
||||
|
Loss
from continuing operations before cumulative effect of accounting
change
|
(3,320
|
)
|
(12,886
|
)
|
(48,806
|
)
|
||||
|
Cumulative
effect of change in accounting principle
|
—
|
—
|
(5,500
|
)
|
||||||
|
Net
loss
|
(3,320
|
)
|
(12,886
|
)
|
(54,306
|
)
|
||||
|
Preferred
stock accretions
|
(2,392
|
)
|
(1,521
|
)
|
—
|
|||||
|
Preferred
stock dividends in arrears
|
(156
|
)
|
—
|
—
|
||||||
|
Net
loss attributable to common stockholders
|
$
|
(5,868
|
)
|
$
|
(14,407
|
)
|
$
|
(54,306
|
)
|
|
|
Basic
and diluted loss per common share:
|
||||||||||
|
Loss
from continuing operations
|
$
|
(0.56
|
)
|
$
|
(6.80
|
)
|
$
|
(52.28
|
)
|
|
|
Loss
from discontinued operations
|
—
|
(1.18
|
)
|
(5.03
|
)
|
|||||
|
Cumulative
effect of change in accounting principle
|
—
|
—
|
(6.46
|
)
|
||||||
|
Basic
and diluted loss per common share
|
$
|
(0.56
|
)
|
$
|
(7.98
|
)
|
$
|
(63.77
|
)
|
|
|
Shares
used in basic and diluted per share computation
|
10,429
|
1,805
|
852
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-C4
P-COM,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE
LOSS
YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002
(In
thousands)
|
Common
Stock
|
||||||||||||||||||||||
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Comprehensive
Income
(Loss)
|
|
Total
|
||||||||||
|
Balance
at December 31, 2001
|
566
|
8
|
319,994
|
(294,460
|
)
|
(1,286
|
)
|
—
|
24,256
|
|||||||||||||
|
Issuance
of Common Stock for cash, net of issuance costs of $821
|
493
|
7
|
7,706
|
—
|
—
|
—
|
7,713
|
|||||||||||||||
|
Issuance
of warrants for Common Stock
in conjunction with line of credit
borrowings
|
—
|
—
|
65
|
—
|
—
|
—
|
65
|
|||||||||||||||
|
Issuance
of Common Stock as part
of vendor settlements
|
42
|
1
|
1,273
|
—
|
—
|
—
|
1,274
|
|||||||||||||||
|
Conversion
of notes payable to Common
Stock
|
46
|
—
|
4,187
|
—
|
—
|
—
|
4,187
|
|||||||||||||||
|
Issuance
of warrants for Common Stock
for services rendered
|
—
|
—
|
480
|
—
|
—
|
—
|
480
|
|||||||||||||||
|
Issuance
of Common Stock under employee
stock purchase plan
|
1
|
—
|
35
|
—
|
—
|
—
|
35
|
|||||||||||||||
|
Cumulative
translation adjustment
|
—
|
—
|
—
|
—
|
946
|
946
|
946
|
|||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
(54,306
|
)
|
—
|
(54,306
|
)
|
(54,306
|
)
|
||||||||||||
|
Comprehensive
loss
|
(53,360
|
)
|
||||||||||||||||||||
|
Balance
at December 31, 2002
|
1,148
|
$
|
16
|
$
|
333,740
|
$
|
(348,766
|
)
|
$
|
(340
|
)
|
$
|
(15,350
|
)
|
||||||||
The
accompanying notes are an integral part of these financial
statements.
F-C5
P-COM,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE
LOSS (CONTINUED)
YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002
(In
thousands)
|
Common
Stock
|
|||||||||||||||||||||||||
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Treasury
Stock
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Compre-hensive
Income
(Loss)
|
|
Net
Compre-hensive
Income
(Loss)
|
|
Total
|
|||||||||||
|
Balance
at December 31, 2002
|
1,148
|
$
|
16
|
$
|
333,740
|
$
|
(348,766
|
)
|
$
|
(340
|
)
|
—
|
$
|
(15,350
|
)
|
||||||||||
|
Non-monetary
exchange of common stock
for equipment
|
(31
|
)
|
(74
|
)
|
(74
|
)
|
|||||||||||||||||||
|
Issuance
of common stock for cash, net of expenses
|
70
|
307
|
307
|
||||||||||||||||||||||
|
Discount
on convertible promissory notes
|
—
|
693
|
693
|
||||||||||||||||||||||
|
Issuance
of common stock for professional services rendered
|
150
|
450
|
450
|
||||||||||||||||||||||
|
Issuance
of common stock for vendor settlement
|
159
|
558
|
558
|
||||||||||||||||||||||
|
Exercise
of warrants for common stock
|
36
|
1
|
1
|
||||||||||||||||||||||
|
Issuance
of common stock to SpeedCom for business purchase
|
2,117
|
6
|
7,232
|
7,238
|
|||||||||||||||||||||
|
Warrant
amortization expenses
|
—
|
367
|
367
|
||||||||||||||||||||||
|
Conversion
of Series B preferred stock to common stock
|
3,141
|
9
|
10,909
|
10,918
|
|||||||||||||||||||||
|
Discount
on Series C preferred stock, related
to beneficial conversion feature
|
18,918
|
18,918
|
|||||||||||||||||||||||
|
Accretions
of preferred stock; $651 related
to Series B, and $870 related to
Series C
|
(1,521
|
)
|
(1,521
|
)
|
|||||||||||||||||||||
|
Foreign
currency translation adjustments
|
134
|
134
|
134
|
||||||||||||||||||||||
|
Other
changes
|
(11
|
)
|
11
|
||||||||||||||||||||||
|
Net
loss
|
(12,886
|
)
|
(12,886
|
)
|
(12,886
|
)
|
|||||||||||||||||||
|
Comprehensive
loss
|
|||||||||||||||||||||||||
|
(12,752
|
)
|
||||||||||||||||||||||||
|
Balance
at December 31, 2003
|
6,790
|
$
|
20
|
$
|
373,186
|
$
|
(74
|
)
|
$
|
(363,173
|
)
|
$
|
(206
|
)
|
$
|
9,753
|
|||||||||
|
Preferred
series C conversion
|
2,275
|
6
|
517
|
517
|
|||||||||||||||||||||
|
Placement
warrants converted to common stock
|
182
|
1
|
1
|
||||||||||||||||||||||
|
Warrant
issuance net of expense of $187K
|
2,600
|
8
|
2,420
|
2,434
|
|||||||||||||||||||||
|
Warrants
issued in connection with debentures
|
307
|
307
|
|||||||||||||||||||||||
|
Accretion
of preferred stock:
$208 Related to series B and $2,184 related to series C |
(2,392
|
)
|
(2,392
|
)
|
|||||||||||||||||||||
|
Foreign
currency translation adjustments
|
208
|
208
|
208
|
||||||||||||||||||||||
|
Net
loss
|
(3,320
|
)
|
(3,320
|
)
|
(3,320
|
)
|
|||||||||||||||||||
|
Comprehensive
loss
|
(3,112
|
)
|
|||||||||||||||||||||||
|
Balance
at December 31, 2004
|
11,847
|
$
|
35
|
$
|
376,430
|
$
|
(74
|
)
|
$
|
(368,885
|
)
|
2
|
7,508
|
||||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-C6
P-COM,
INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
Years
ended December 31,
|
||||||||||
|
|
2004
|
|
2003
|
|
2002
|
|||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
loss
|
$
|
(3,320
|
)
|
$
|
(12,886
|
)
|
$
|
(54,306
|
)
|
|
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
||||||||||
|
Gain
on retirement of convertible notes
|
—
|
(6,499
|
)
|
(1,393
|
)
|
|||||
|
Depreciation
expense
|
1,489
|
3,890
|
6,602
|
|||||||
|
Inventory
valuation and other charges
|
916
|
3,734
|
5,770
|
|||||||
|
Asset
impairment and other restructuring charges
|
—
|
3,712
|
—
|
|||||||
|
Loss
on discontinued operations
|
40
|
2,137
|
4,284
|
|||||||
|
Goodwill
impairment charge
|
—
|
—
|
11,409
|
|||||||
|
Cumulative
effect of change in accounting principle
|
—
|
—
|
5,500
|
|||||||
|
Gain
on vendor settlements, included in other income (expenses),
net
|
(964
|
)
|
(2,060
|
)
|
—
|
|||||
|
Gain
on settlement of contract
|
(7,500
|
)
|
—
|
—
|
||||||
|
Stock
compensation expenses for consultants
|
—
|
779
|
—
|
|||||||
|
Amortization
of discount on promissory notes
|
—
|
731
|
—
|
|||||||
|
(Gain)
loss on disposal of equipment, included in other income (expenses),
net
|
167
|
(635
|
)
|
153
|
||||||
|
Notes
conversion expense
|
—
|
—
|
771
|
|||||||
|
Amortization
of stock warrants
|
138
|
367
|
546
|
|||||||
|
Write-off
of notes receivable
|
—
|
100
|
159
|
|||||||
|
Increase
(decrease) in cash resulting from changes in:
|
||||||||||
|
Accounts
receivable, net of reserve
|
2,048
|
144
|
979
|
|||||||
|
Inventory
|
(172
|
)
|
2,487
|
12,664
|
||||||
|
Prepaid
expenses and other assets
|
349
|
846
|
3,874
|
|||||||
|
Accounts
payable
|
(1,011
|
)
|
(1,181
|
)
|
440
|
|||||
|
Other
accrued liabilities
|
(1,327
|
)
|
(1,539
|
)
|
(11,963
|
)
|
||||
|
Net
cash flows from operating activities
|
(9,147
|
)
|
(5,873
|
)
|
(14,511
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||||
|
Acquisition
of property and equipment
|
(321
|
)
|
(182
|
)
|
(596
|
)
|
||||
|
Proceeds
from sale of property and equipment
|
829
|
—
|
251
|
|||||||
|
Proceeds
from sales of Speedcom common stock
|
100
|
—
|
—
|
|||||||
|
Change
in restricted cash
|
—
|
415
|
2,496
|
|||||||
|
Cash
paid for Speedcom business purchase
|
—
|
(1,580
|
)
|
—
|
||||||
|
Net
asset of discontinued operation
|
—
|
635
|
2,900
|
|||||||
|
Net
cash flows from investing activities
|
608
|
(712
|
)
|
5,051
|
||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Payments
of notes payable
|
—
|
(750
|
)
|
(2,111
|
)
|
|||||
|
Proceeds
from issuance of common stock, net of expenses
|
—
|
307
|
7,713
|
|||||||
|
Proceeds
from issuance of preferred stock, net of expenses
|
—
|
15,108
|
—
|
|||||||
|
Proceeds
from Employee Stock Purchase Plan
|
—
|
—
|
35
|
|||||||
|
Proceeds
from (repayment of) loan payable to bank
|
(1
|
)
|
(2,603
|
)
|
2,604
|
|||||
|
Proceeds
from exercise of warrant offers, net of expenses
|
2,434
|
—
|
—
|
|||||||
|
Proceeds
from debentures
|
3,300
|
—
|
—
|
|||||||
|
Payments
under capital lease obligations
|
(1,052
|
)
|
(186
|
)
|
(497
|
)
|
||||
|
Net
cash flows from financing activities
|
4,681
|
11,876
|
7,744
|
|||||||
|
Effect
of exchange rate changes on cash
|
(47
|
)
|
33
|
52
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(3,905
|
)
|
5,324
|
(1,664
|
)
|
|||||
|
Cash
and cash equivalents at beginning of the year
|
6,185
|
861
|
2,525
|
|||||||
|
Cash
and cash equivalents at end of the year
|
$
|
2,280
|
$
|
6,185
|
$
|
861
|
||||
The
accompanying notes are an integral part of these financial
statements.
F-C7
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
1.
|
THE
COMPANY, LIQUIDITY AND MANAGEMENT'S PLANS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
THE
COMPANY
P-Com,
Inc. (“P-Com” or the “Company”) was incorporated in Delaware on August 23, 1991
to engage in the design, manufacture and marketing of millimeter network access
wave radio systems for use in the worldwide wireless telecommunications
market. See Note 9 for sales and other information by geographic
area.
BUSINESS
ACQUISITION
As
more
fully discussed in Note 12, on December 10, 2003, P-Com acquired substantially
all of the operating assets and certain liabilities of the Wave Wireless
Division of SPEEDCOM Wireless Corporation (“Wave Wireless”) in a transaction
accounted for using the purchase method. Wave Wireless is engaged in the design,
manufacture, configuration and delivery of a variety of broadband fixed-wireless
products that are intended to complement the Company's current product line
and
geographic presence. Under the purchase method of accounting, the results of
operations are included in the Company's results commencing on the date of
acquisition.
DISCONTINUED
OPERATIONS
Prior
to
March 31, 2003, P-Com's services business unit provided network services
including system and program planning and management, path design, and
installation for the wireless communication market through its service sales
segment. As disclosed in Note 8, the services business was sold and,
accordingly, the consolidated financial statements for December 31, 2003, 2002
and 2001 have been reclassified to reflect P-Com's services business unit as
a
discontinued operation.
LIQUIDITY
AND MANAGEMENT'S PLANS
The
Company has been experiencing challenging operating conditions in recent years
as a result of the continuing depressed telecommunications equipment market;
such conditions have persisted since approximately 2000. These conditions,
coupled with a significant continuing legacy cost structure, which includes,
among other costs, higher than market occupancy costs, have resulted in
substantial losses and the use of substantial amounts of cash in operations.
Notwithstanding significant liability restructuring activities in recent years,
during the years ended December 31, 2004, 2003, and 2002, the Company recorded
losses from continuing operations of ($3.3) million, ($10.7) million, and
($44.5) million, respectively, and used ($9.1) million, ($5.9) million, and
($14.5) million cash, respectively, in supporting its operating activities
at
their current levels. As of December 31, 2004, the Company had cash and cash
equivalents of $2.3 million and working capital of $1.3 million. At current
operating levels, internal projections reflect an aggregate cash shortfall
of
approximately $4.0 million for the year ended December 31, 2005. In addition,
at
current operating levels, management estimates that its cash reserves will
be
exhausted by or near the end of the first quarter of the year ended December
31,
2005. There are currently no formal, committed financing arrangements available
to the Company, other than a highly-restricted bank line of credit, to balance
this projected cash shortfall. These negative trends and conditions raise
substantial doubt about the Company's ability to continue as a going concern
for
a reasonable period.
The
Company's ability to continue as a going concern for a reasonable period at
current operating levels is dependent upon acquiring additional cash through
financing arrangements. While management is actively seeking additional equity
and/or debt financing, there are currently no commitments. There can be no
assurances that any additional financing will be available on acceptable terms,
if at all. Accordingly, management is actively engaged in the development of
a
formal restructuring plan that will significantly curtail current spending,
and
substantially reduce liabilities and operating and other costs. The plan is
subject to the approval of the Company's Board of Directors, and is expected
to
be presented for approval before the end of the first fiscal quarter of
2005.
F-C8
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The
restructuring plan is expected to include significant reductions in costs,
including the suspension or curtailment of certain research and development
efforts, reductions in headcount, restructuring of committed costs, such
as
leasing arrangements, and the curtailment of activities in certain foreign
locations. The plan is also expected to include the divestiture of certain
unprofitable product lines, which will have the effect of further reducing
overall costs. Finally, the plan will likely include the designation of
additional preferred stock that will be used to restructure certain liabilities
and existing preferred stock of the Company.
Many
of
the individual components of the restructuring plan will result in charges
to
operations and, in some instances, the use of a portion of the Company's
remaining cash reserves. The associated amounts have not yet been determined.
However, under current accounting standards for restructuring and exit
activities, the Company will generally be required to determine the amounts
and
the timing of recognition of the cost components individually. Expenses
associated with employee severance costs will not be recorded before the date
that the Board of Directors approves the formal plan (the “Commitment Date”).
Subsequently, severance costs will be recognized when employee groups are
identified and the severance benefits are communicated. Divesting certain
product lines may result in inventories becoming excessive and subject to
markdown evaluation. If markdowns are necessary, such amounts will be recorded
as a component of cost of sales when estimable. Other costs associated with
the
restructuring plan, such as lease restructuring or other exit costs, generally
will be recognized when the costs are incurred through contract execution or
otherwise.
There
can
be no assurance that the aforementioned restructuring plan will be successful.
Accordingly, management is also evaluating the merits of a strategic acquisition
or other transaction that would substantially improve its liquidity and capital
resource position and the merits of an outright sale of the Company's operation.
If ultimately required, there can also be no assurances that these actions
will
be successful.
The
consolidated financial statements do not include any adjustments relating to
the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary if the Company is unable
to
continue as a going concern.
RESTATEMENTS
All
share
and per share information in the accompanying consolidated financial statements
for the years ended December 31, 2003 and 2002 have been restated to give effect
to a one-for-thirty reverse stock split that became effective on July 19,
2004.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S
USE OF ESTIMATES AND ASSUMPTIONS
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of P-Com and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
F-C9
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOREIGN
CURRENCY
The
value of the United States dollar rises and falls day-to-day on
foreign currency exchanges. Since the Company does business in foreign
countries, these fluctuations affect the Company's financial position and
results of operations. Assets and liabilities of our foreign subsidiaries are
translated from their local currencies into United States dollars at exchange
rates in effect at the respective balance sheet date. Income and expense
accounts are translated from their local currencies into United States dollars
at average exchange rates for the respective period.
Accumulated
net translation adjustments are recorded as a component of comprehensive income
(loss) in stockholders' equity (deficit). Foreign exchange transaction gains
and
losses are included in the results of operations in the periods incurred, and
were not material in all periods presented. The Company does not enter into
any
contracts to hedge the effects of foreign currency exchange
fluctuations.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
estimated fair values of cash, accounts receivable and payable, debt and accrued
liabilities at December 31, 2004 and 2003 approximated their respective
historical cost due to the short maturities.
CASH
AND
CASH EQUIVALENTS
P-Com
considers all highly liquid debt instruments with a maturity when acquired
of
three months or less to be cash equivalents.
ACCOUNTS
RECEIVABLE
P-Com
records an allowance for doubtful accounts receivable based on our general
collection history and specifically identified amounts that management believed
to be uncollectible. P-Com has a limited number of customers with individually
large amounts due at any given balance sheet date. However, any unanticipated
change in one of those customer's credit worthiness could have a material
adverse effect on P-Com's results of operations in the period in which such
changes or events occur and losses become estimable. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.
REVENUE
RECOGNITION
Revenue
from product sales is recognized upon transfer of title and risk of loss, which
is upon shipment of the product provided no significant obligations remain
and
collection is probable. Shipping and handling costs related to our product
sales
are included as a component of cost of sales. The Company has not experienced
material returns of products. The Company warrants its products and provides
parts and labor to repair any manufacturing defects on its equipment for a
period of one year to three years. Provisions for estimated warranty repairs,
returns and other allowances are recorded at the time revenue is recognized.
(See Note 3)
INVENTORY
Inventory
is stated at the lower of cost or market; cost is determined on a first-in,
first-out basis.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method based upon the useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized using the
straight-line method based upon the shorter of the estimated useful lives of
the
respective improvements or the lease term.
F-C10
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESEARCH
AND DEVELOPMENT
Research
and development costs are expensed as incurred.
GOODWILL
Goodwill
at December 31, 2004 and 2003 represents the excess of the purchase price over
the fair values of net assets acquired in connection with the Wave Wireless
acquisition. In accordance with Statement of Financial Accounting Standards
No.
142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill resulting from
the purchase will not be amortized into operations. Rather, such amounts will
be
tested for impairment at least annually. This impairment test is calculated
at
the reporting unit level, which, for P-Com is at the enterprise level. The
annual goodwill impairment test has two steps. The first identifies potential
impairments by comparing the fair value of P-Com, as determined using its
trading market prices, with its carrying value, including goodwill. If the
fair
value exceeds the carrying amount, goodwill is not impaired and the second
step
is not necessary. If the carrying value exceeds the fair value, the second
step
calculates the possible impairment loss by comparing the implied fair value
of
goodwill with the carrying amount. If the implied goodwill is less than the
carrying amount, a write-down will be recorded. In the event that P-Com's
management determines that the value of goodwill has become impaired using
this
approach, P-Com will record a charge for the amount of the impairment. No
impairment of goodwill resulted from this measurement approach immediately
following the Wave Wireless acquisition. P-Com will perform this test annually,
on the first day of the fourth quarter of each year. No impairments arose during
2004.
During
the year ended December 31, 2002, management reviewed the carrying value of
goodwill related to the services business unit, and based upon its assessment
of
future cash value of revenue flows and the current depressed business condition
of the telecommunications services market, recorded a ($11.4) million impairment
charge in the fourth quarter of 2002. In addition, effective upon the adoption
of SFAS 142, the Company recorded ($5.5) million of transitional impairment
charges in the first quarter of the year ended December 31, 2002, which
represented the difference between the fair value of expected cash flows from
the services business unit, and its book value on the effective date of the
then
newly-issued pronouncement.
IMPAIRMENT
OF LONG-LIVED ASSETS
In
the
event that facts and circumstances indicate that the long-lived assets, other
than goodwill, may be impaired, an evaluation of recoverability would be
performed to determine whether impairments were present by comparing the net
book value of long-lived assets, other than goodwill, to projected undiscounted
cash flows at the lowest discernable level for which cash flow information
can
be projected. In the event that undiscounted cash flows are insufficient to
recover the net carrying value over the remaining useful lives, impairment
charges are calculated and recorded in the period first estimable using
discounted cash flows or other fair value information, whichever is more
appropriate. During the year ended December 31, 2003, an impairment charge
of
$(3.7) million was reflected in the caption, “Restructuring charges on the
consolidated statement of operations.”
COMPREHENSIVE
INCOME (LOSS)
Under
Statements on Financial Accounting Standards No. 130, Reporting Comprehensive
Income (“SFAS 130”), P-Com is required to display comprehensive income and its
components as part of our full set of financial statements. Comprehensive income
comprises net income (loss) and other comprehensive income (loss) items Other
comprehensive income (loss) includes certain changes in equity of P-Com that
are
excluded from net income (loss). Specifically, SFAS 130 requires adjustments
arising from P-Com's foreign currency translation, which were reported
separately in stockholders' equity, to be included in accumulated other
comprehensive income (loss). Comprehensive income (loss) in 2004, 2003 and
2002
has been reflected in the Consolidated Statement of Stockholders' Equity
(Deficit) and Comprehensive Loss.
F-C11
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCOUNTING
FOR STOCK-BASED COMPENSATION
P-Com
accounts for and reports its stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”),
Financial Accounting Standards Board Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation (“FIN 44”), and Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation
- Transition and Disclosure (“SFAS 148”). Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair value of its stock
at the date of grant over the stock option exercise price. P-Com accounts for
stock issued to non-employees in accordance with the provisions of Statement
of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(“SFAS 123”). Under SFAS 123, stock awards issued to non-employees are accounted
for at their fair value on the date issued.
The
following table reflects supplemental financial information related to
stock-based employee compensation, as required by SFAS 148 for each year ending
December 31:
|
2004
|
|
2003
|
|
2002
|
||||||
|
Stock-based
employee compensation costs used in the determination of net income
(loss)
attributable to common stockholders, as reported
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Loss
attributable to common stockholders, as reported
|
$
|
5,868
|
$
|
14,407
|
$
|
54,306
|
||||
|
Stock-based
employee compensation costs that would have been included in the
determination of net loss if the fair value method (SFAS 123) had
been
applied to all awards
|
$
|
1,940
|
$
|
1,967
|
$
|
2,747
|
||||
|
Unaudited
pro forma net loss attributable to common stockholders, if the
fair value
method had been applied to all awards
|
$
|
7,808
|
$
|
16,374
|
$
|
57,053
|
||||
|
Net
loss attributable to common stockholders per common share, as
reported
|
$
|
0.56
|
$
|
7.98
|
$
|
63.77
|
||||
|
Unaudited
pro forma net loss attributable to common Stockholders per common
share,
if the fair value method had been applied to all awards
|
$
|
0.75
|
$
|
9.07
|
$
|
67.00
|
||||
CONCENTRATION
OF CREDIT RISK AND MAJOR CUSTOMER INFORMATION
Financial
instruments that potentially subject P-Com to significant concentrations of
credit risk consist principally of cash equivalents and trade accounts
receivable. As of December 31, 2003, P-Com had in excess of $2.0 million on
deposit in Silicon Valley Bank. The failure of this bank may result in a
substantial loss of these deposits.
P-Com
has
sold most of its products in international markets. Sales to several customers
have been denominated in British Pounds Sterling and Euro. At December 31,
2004,
2003 and 2002, accounts receivable from these customers represented 40%, 30%,
and 29%, respectively, of total accounts receivable. Any gains or losses that
arise in the translation of foreign denominated financial instruments are
included in operations each period when measurable.
P-Com
performs credit evaluations of its customers' financial condition to determine
the customer's credit-worthiness. Sales are then generally made either on 30
to
90 day payment terms, COD or pursuant to letters of credit. P-Com extends
payment terms to international customers of up to 90 days, which is consistent
with prevailing business practices.
F-C12
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At
December 31, 2004 and 2003, approximately 44% and 50%, respectively, of trade
accounts receivable represent amounts due from three customers, respectively.
For the year ended December 31, 2004, 2003 and 2002, five, four, and two
customers accounted for 56%, 54%, and 26% of total sales,
respectively.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The statement
amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing,” to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. ARB No. 43 previously stated that these
costs must be “so abnormal as to require treatment as current-period charges.”
SFAS No. 151 requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of “so abnormal.” In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. The statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application permitted
for fiscal years beginning after the issue date of the statement. The adoption
of SFAS No. 151 is not expected to have any significant impact on the Company's
current financial condition or results of operations.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets -
An Amendment of APB Opinion No. 29.” APB Opinion No. 29, “Accounting For
Nonmonetary Transactions,” is based on the opinion that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged.
SFAS
No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
of nonmonetary assets whose results are not expected to significantly change
the
future cash flows of the entity. The adoption of SFAS No. 153 is not expected
to
have any impact on the Company's current financial condition or results of
operations.
In
December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”), “Accounting
for Stock Based Compensation.” The revision establishes standards for the
accounting of transactions in which an entity exchanges its equity instruments
for goods or services, particularly transactions in which an entity obtains
employee services in share-based payment transactions. The revised statement
requires a public entity to measure the cost of employee services received
in
exchange for an award of equity instruments based on the grant-date fair value
of the award. That cost is to be recognized over the period during which the
employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or annual reporting period beginning after June
15,
2005, with early adoption encouraged. The Company is currently evaluating the
methodology for adoption on the impending effective date.
2.
CHANGE
IN ACCOUNTING PRINCIPLE
GOODWILL
Effective
January 1, 2002, P-Com adopted Statements of Financial Accounting Standards
No.
142, Goodwill and Other Intangible Assets (“SFAS 142”). Pursuant to the
impairment recognition provisions of SFAS 142, P-Com conducted an evaluation
of
the impact of adopting SFAS 142. Accordingly, under the transitional provisions
of SFAS 142, a goodwill impairment loss of $5.5 million was recorded related
to
P-Com's services segment during the first quarter of 2002, representing the
difference between the fair value of expected cash flows from the services
business unit, and its book value. The fair value of the services segment was
estimated using a discounted cash flows model over a four-year period from
2002
to 2005. A residual value was calculated assuming that the services business
unit will continue as a going concern beyond the discrete projected period.
A
discount factor of 25% was used to compute the present value of expected future
cash flows. The residual of the goodwill balance amount of $11.4 million was
also assessed to be impaired in the fourth quarter of 2002, and a charge was
recorded for the same amount.
F-C13
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The
following table sets forth a reconciliation of net loss and loss per share
information for the year ended December 31, 2002, as adjusted for the
non-amortization provisions of SFAS 142 (in thousands, except per share
amounts):
|
FOR
THE YEAR ENDED DECEMBER 31,
|
|
|||
|
|
|
2002
|
||
|
Reported
net loss attributable to common stockholders
|
$
|
(54,306
|
)
|
|
|
Add
back: Goodwill amortization
|
—
|
|||
|
Adjusted
net loss
|
(54,306
|
)
|
||
|
Basic
and diluted loss per share attributable to common
stockholders:
|
||||
|
Reported
net loss
|
$
|
(63.77
|
)
|
|
|
Add
back: Goodwill amortization
|
—
|
|||
|
Adjusted
net loss
|
$
|
(63.77
|
)
|
|
|
Weighted
average number of shares
|
852
|
|||
Changes
in the carrying amount of goodwill for the year ended December 31, 2004, 2003
and 2002 are as follows (in $000):
|
2004
|
|
2003
|
|
2002
|
||||||
|
Balance
at January 1,
|
$
|
11,981
|
$
|
—
|
$
|
16,909
|
||||
|
Purchased
goodwill during the year
|
—
|
11,981
|
—
|
|||||||
|
Goodwill
amortization expense
|
—
|
—
|
—
|
|||||||
|
Transition
impairment
|
—
|
—
|
(5,500
|
)
|
||||||
|
Impairment
charge
|
—
|
—
|
(11,409
|
)
|
||||||
|
Balance
at December 31,
|
$
|
11,981
|
$
|
11,981
|
$
|
—
|
||||
3.
SELECTED
BALANCE SHEET AND STATEMENT OF OPERATIONS COMPONENTS
Inventory
consists of the following (in thousands of dollars):
|
As
of December 31,
|
|||||||
|
2004
|
|
2003
|
|||||
|
Raw
materials
|
$
|
475
|
$
|
3,219
|
|||
|
Work-in-process
|
299
|
1,682
|
|||||
|
Finished
goods
|
3,948
|
277
|
|||||
|
Inventory
at customer sites
|
—
|
80
|
|||||
|
$
|
4,722
|
$
|
5,258
|
||||
F-C14
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Property
and equipment consists of the following (in thousands of dollars):
|
As
of December 31,
|
||||||||||
|
Useful
life
|
|
2004
|
|
2003
|
||||||
|
Tooling
and test equipment
|
3
- 5 years
|
$
|
27,188
|
$
|
27,196
|
|||||
|
Computer
equipment
|
3
years
|
6,065
|
6,480
|
|||||||
|
Furniture
and fixtures
|
5
years
|
2,307
|
2,360
|
|||||||
|
Land
and buildings and leasehold improvements
|
5
to 7, and 33 years
|
642
|
1,736
|
|||||||
|
Construction
in process
|
147
|
14
|
||||||||
|
|
36,349
|
37,786
|
||||||||
|
Less:
Accumulated depreciation and amortization
|
(34,594
|
)
|
(33,979
|
)
|
||||||
|
|
$
|
1,755
|
$
|
3,807
|
||||||
Depreciation
expense for the years ended December 31, 2004, 2003 and 2002 amounted to $1,489
thousand, $3,890 thousand, and $6,602 thousand, respectively.
The
above
amounts include leasehold improvements under capital leases and related
accumulated amortization of $6,994 thousand and $6,021 thousand at December
31,
2004, $6,994 thousand and $4,889 thousand at December 31, 2003, and $6,990
thousand and $3,370 thousand at December 31, 2002, respectively. In 2003, P-Com
recorded a provision for impairment of equipment relating to the point - to
-
multipoint product lines, of which $5,550 thousand was financed on capital
leases as of December 31, 2003 and this equipment was secured with the
lessor.
Other
accrued liabilities consist of the following (in thousands):
|
|
As
of December 31,
|
||||||
|
|
|||||||
|
|
2004
|
|
2003
|
||||
|
|
|||||||
|
Purchase
commitment
|
$
|
278
|
$
|
1,238
|
|||
|
Deferred
contract obligations (a)
|
—
|
8,000
|
|||||
|
Deferred
revenue
|
112
|
243
|
|||||
|
Accrued
employee benefits
|
987
|
1,092
|
|||||
|
Accrued
warranty (b)
|
491
|
1,110
|
|||||
|
Lease
obligations
|
—
|
2,335
|
|||||
|
Accrued
rent
|
308
|
497
|
|||||
|
Customer
advance
|
298
|
468
|
|||||
|
Other
|
1,026
|
1,243
|
|||||
|
|
$
|
3,500
|
$
|
16,226
|
|||
(a)
Deferred contract obligations
Under
a
joint license and development contract, P-Com determined that an Original
Equipment Manufacturer agreement with a vendor provided for payments of $8.0
million, specifically earmarked for marketing our products under a joint license
and development contract. Accordingly, beginning in 1998, the Company had
recorded a liability of $3.0 million, and this was increased to $8.0 million
in
1999. As of December 31, 2003 and 2002, the liability of $8.0 million under
this
arrangement remained. The Company entered into a settlement agreement with
the
vendor in July 2004 whereby the Company was obligated to pay the vendor
$500,000. As of December 31, 2004, the liability of $400,000 under this
arrangement remained, with a payment of $100,000 due January 1, 2005, and twelve
monthly installments of $25,000 per month beginning on January 31,
2005.
F-C15
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(b)
A
summary of product warranty reserve activity is as follows (in
thousands):
|
|
2004
|
|
2003
|
|
2002
|
|||||
|
Balance
at January 1,
|
$
|
1,110
|
$
|
936
|
$
|
2,843
|
||||
|
Additions
relating to product sold
|
367
|
729
|
430
|
|||||||
|
Payments
|
(984
|
)
|
(555
|
)
|
(2,337
|
)
|
||||
|
Balance
at December 31,
|
$
|
493
|
$
|
1,110
|
$
|
936
|
||||
c)
Other
long-term liabilities consist of the following (in thousands):
|
|
December
31,
|
||||||
|
2004
|
2003
|
||||||
|
Capital
lease obligations
|
$
|
1,743
|
$
|
6
|
|||
|
|
$
|
1,743
|
$
|
6
|
|||
Other
income (expense), net consists of the following for each year ended December
31:
|
|
2004
|
|
2003
|
|
2002
|
|||||
|
Gains
(losses) on settlements of accounts payable and liabilities
|
$
|
8,300
|
$
|
2,194
|
$
|
(1,254
|
)
|
|||
|
Gains
(losses) on disposals of property and equipment
|
(30
|
)
|
1,061
|
(217
|
)
|
|||||
|
Gains
(losses) on transactions denominated in foreign currencies
|
(143
|
)
|
852
|
148
|
||||||
|
Write-off
advance to an ex-employee
|
—
|
(100
|
)
|
(159
|
)
|
|||||
|
Write-off
notes receivable from Spectrasite
|
—
|
—
|
(791
|
)
|
||||||
|
Accruals
write-back
|
—
|
—
|
416
|
|||||||
|
Other
income (expenses), net
|
125
|
(268
|
)
|
545
|
||||||
|
Total
other income (expenses), net
|
$
|
8,252
|
$
|
3,739
|
$
|
(1,312
|
)
|
|||
4.
BORROWING
ARRANGEMENTS
NOTES
PAYABLE
On
November 3, 2004, we entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) with a purchaser (“Purchaser”) whereby the Purchaser
agreed to purchase debentures in the aggregate principal amount of up to
$5,000,000 (the “Notes”) (the “Debenture Financing”). From the date of issuance,
the outstanding principal balance of the Notes bear interest, in arrears, at
a
rate per annum equal to seven percent (7%), increasing to eight percent (8%)
on
July 1, 2005 and ten percent (10%) on April 1, 2006 through the maturity date
of
December 31, 2006. Interest shall be payable on a quarterly basis commencing
on
March 31, 2005.
F-C16
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In
addition, the Company agreed to issue warrants to purchase in the aggregate
up
to 800,000 shares of the Company's common stock (the “Warrants”). The Warrants
will have an initial exercise price of $1.50 and a term of five years. The
Purchase Agreement provided that the Notes and Warrants be issued in two
closings. The first closing took place on November 26, 2004 and consisted of
$3,300,000 principal amount of Notes. The Purchase Agreement originally
contemplated that the second closing would take place no later than December
30,
2004. While no assurances can be given, the parties are currently negotiating
the conditions necessary to obtain the additional $1,700,000 under the Purchase
Agreement, in light of our deteriorating financial condition and results from
operations.
On
November 30, 2004, Agilent Financial Services (“Agilent”) entered into an
agreement with us to restructure the $1.725 million due Agilent on December
31,
2004. Under the terms of the agreement, we paid Agilent an initial payment
of
$250,000 on December 1, 2004. Interest shall accrue on the $1.725 million at
a
rate of 10.25% per annum from December 1, 2004 through April 1, 2006. We are
required to pay monthly payments equal to $92,187, for sixteen months, from
January 1, 2005, up to and including April 1, 2006. On the earlier of May 1,
2006 or within thirty (30) days of full repayment of the $1.725 million, we
shall pay any and all interest accrued. In addition, we issued Agilent a warrant
to purchase 178,571 shares of our common stock. The warrant has an initial
exercise price of $0.56 and a term of five years.
On
September 17, 2004, the Company renewed its Credit Facility with Silicon Valley
Bank (the “Bank”) until September 17, 2005. The Credit Facility consists of a
Loan and Security Agreement for a $1.0 million borrowing line based on domestic
receivables, and a Loan and Security Agreement under the Export-Import (“EXIM”)
program for a $3.0 million borrowing line based on export related inventories
and receivables. The Credit Facility provides for cash advances equal to 75%
of
eligible accounts receivable balances for both the EXIM program and domestic
lines, and up to $750,000 for eligible inventories (limited to 25% of eligible
EXIM accounts receivable), under the EXIM program. Advances under the Credit
Facility bear interest at the Bank's prime rate plus 3.5% per annum. The Credit
Facility is secured by all receivables, deposit accounts, general intangibles,
investment properties, inventories, cash, property, plant and equipment of
the
Company. The Company has also issued a $4.0 million secured promissory note
underlying the Credit Facility to the Bank. As of December 31, 2004, there
was
no balance outstanding under this Credit Facility. The Company has however
issued Letter of Credits totaling $ 294 thousand with maturity to April 2005
to
certain vendors under this Credit Facility. The Letter of Credits have not
been
drawn upon yet, as of December 31, 2004.
The
Company has an unsecured overdraft line with a bank in Italy, for borrowings
of
up to $83,000, based on domestic trade receivables. Borrowings under this line
bear interest at 4.5% per annum. At December 31, 2004, there were no
amounts
drawn under this facility.
CONVERTIBLE
SUBORDINATED NOTES
On
November 5, 1997, P-Com issued $100 million in 4.25% Convertible Subordinated
Notes due November 1, 2002. The 4.25% Convertible Subordinated Notes were
convertible into shares of P-Com Common Stock. Interest on the 4.25% Convertible
Subordinated Notes was due semi-annually on May 1 and November 1 of each year.
During the period following issuance, through November 1, 2002, holders
exercised conversion options reducing the carrying amount to $22.4 million.
During the year ended December 31, 2002, certain conversions resulted in a
gain
on debt extinguishment of $1.3 million.
On
November 1, 2002, P-Com issued $22.4 million aggregate face value of 7%
Convertible Subordinated Notes due November 1, 2005, in exchange for the 4.25%
Convertible Subordinated Notes. The 7% Convertible Subordinated Notes were
originally convertible into P-Com's Common Stock at $63.00 per share. On May
28,
2003, $2.3 million of the Convertible Subordinated Notes were redeemed through
an exchange for property and equipment that resulted in a gain of $1.5 million,
included in the caption, “Gain on Debt Extinguishments, net,” in the
Consolidated Statements of Operations for the year ended December 31, 2003.
On
August 4, 2003, the remaining principal and accrued interest of the Convertible
Subordinated Notes totaling $21.1 million was converted into approximately
1,000,000 shares of Series B Convertible Preferred Stock that resulted in a
gain
of $8.8 million included in the caption, “Gain on Debt Extinguishments, net” in
the Consolidated Statements of Operations for the year ended December 31,
2003.
F-C17
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BRIDGE
NOTES
The
Company received $2.7 million in bridge note financings during the year ended
December 31, 2003 in advance of the sale of Series C Preferred Stock, discussed
in Note 5. The bridge notes were convertible into Series C Preferred Stock,
and
included detachable Series A Warrants to purchase 2.5 million shares of Common
Stock and Series B Warrants to acquire 3.5 million shares of the Company's
Common Stock. The proceeds from the bridge notes was allocated between the
notes
and warrants based upon their relative fair values on the commitment date,
resulting in a debt carrying value of $2.0 million. Neither the original
conversion rate nor the adjusted conversion rate, giving effect to the
allocation of proceeds to warrant equity, resulted in a beneficial conversion
charge. During the year ended December 31, 2003, the discounted bridge notes
were accreted to a balance of $2.2 million, through periodic charges to interest
expense. During the fourth quarter, the holders of the bridge notes converted
their balances into Series C Preferred stock at an induced, beneficial
conversion rate, that resulted in a charge of $3.8 million included in the
caption, “Gain on Debt Extinguishments, net,” in the Consolidated Statements of
Operations for the year ended December 31, 2003.
5.
STOCKHOLDERS'
EQUITY AND REDEEMABLE PREFERRED STOCK
The
authorized capital stock of P-Com is 35 million shares of Common Stock, $0.003
par value (the “Common Stock”), and 2 million shares of Preferred Stock, $0.0001
par value (the “Preferred Stock”), including 500,000 shares of which have been
designated Series A Junior Participating Preferred Stock (the “Series A”)
pursuant to the Stockholder Rights Agreement (see discussion below), 1,000,000
shares as Series B Convertible Preferred Stock (the “Series B Preferred Stock”),
10,000 shares as Series C Convertible Preferred Stock (the “Series C Preferred
Stock”), and 2,000 shares as Series D Convertible Preferred Stock (the “Series D
Preferred Stock”). Effective July 19, 2004, P-Com effected a one for thirty
reverse stock split. All numbers have been restated to reflect the stock
split.
PREFERRED
STOCK
The
Board
of Directors is authorized to issue shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
term of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series, without further action by the holders of Common
Stock.
SERIES
B
CONVERTIBLE PREFERRED STOCK
On
August
4, 2003, as a result of the restructuring of its Convertible Notes, the
principal amount and accrued interest of $21,138,000 was converted into
approximately 1,000,000 shares of Series B Convertible Preferred Stock with
a
stated value of $21.138 per share. Each share of Series B Convertible Preferred
Stock converts into a number of shares of the Company's Common Stock equal
to
the stated value divided by $6.00. Certain holders of Series B Convertible
Preferred Stock agreed to convert the Series B Convertible Preferred Stock
into
Common Stock upon receipt of stockholder approval to increase the number of
authorized shares of the Company's Common Stock to allow for conversion of
the
Series B Preferred Stock. The Company received the stockholder approval on
December 2, 2003 and these holders converted their Series B Convertible
Preferred Stock into Common Stock. If declared, the holders of the Series B
Preferred Stock shall be entitled to receive dividends payable out of funds
legally available therefore. Holders of Series B Preferred Stock shall share
pro
rata in all dividends and other declared distributions. The basis of
distribution shall be the number of shares of Common Stock that the holders
would hold if all of the outstanding shares of Series B Preferred Stock had
converted into Common Stock.
F-C18
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Any
time
after January 31, 2004 and subject to certain limitations, the Company may
require the holders of Series B Preferred Stock to convert all outstanding
shares of Series B Preferred Stock into shares of Common Stock, in accordance
with the optional conversion formula, and all of the following conditions are
met:
| o |
Closing
bid price of the Common Stock for 10 consecutive trading days prior
to
delivery of the mandatory conversion Notice equals or exceeds
$12.00;
|
| o |
Company
shall have filed a registration statement covering all shares of
Common
Stock issuable upon conversion of the Series B Preferred Stock, declared
effective by the SEC, and continuing effectiveness through and including
the date of the mandatory
conversion;
|
| o |
All
shares of Common Stock issuable upon conversion of Series B Preferred
Stock are authorized and reserved for issuance; registered for resale
under the 1933 Act; and listed on the Bulletin Board or other national
exchange; and
|
| o |
All
amounts, if any, accrued or payable under the Certificate of Designation,
Rights and Preferences of the Series B Preferred Stock (“Certificate of
Designation”) shall have been paid.
|
Upon
the
occurrence of the following events, the holders of Series B Preferred Stock
may
require the Company to purchase their shares of Series B Preferred Stock for
cash:
| o |
Company
fails to remove any restrictive legend on any Common Stock certificate
issued to Series B Preferred stockholders upon conversion as required
by
the Certificate of Designation;
|
| o |
Company
makes an assignment for creditors or applies for appointment of a
receiver
for a substantial part of its business/property or such receiver
is
appointed;
|
| o |
Bankruptcy,
insolvency, reorganization or liquidation proceedings shall be instituted
by or against the Company;
|
| o |
Company
sells substantially all of its assets;
|
| o |
Company
merges, consolidates or engages in a business combination with another
entity that is required to be reported pursuant to Item 1 of Form
8-K
(unless the Company is the surviving entity and its capital stock
is
unchanged);
|
| o |
Company
engages in transaction(s) resulting in the sale of securities whereby
such
person or entity would own greater than 50% of the outstanding shares
of
Common Stock of the Company (on a fully-diluted
basis);
|
| o |
Company
fails to pay any indebtedness of more than $250,000 to a third party,
or
cause any other default which would have a material adverse effect
on the
business or its operations.
|
F-C19
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The
Series B Preferred Stock ranks senior to the Common Stock and the Series A
Preferred Stock. The consent of the majority holders of the Series B Preferred
Stock is required to create any securities that rank senior or pari passu to
the
Series B Preferred Stock. Upon a liquidation event, any securities senior to
the
Series B Preferred Stock shall receive a distribution prior to the Series B
Preferred Stock and pursuant to the rights, preferences and privileges thereof,
and the Series B Preferred Stock shall receive the liquidation preference with
respect to each share. If the assets and funds for distribution are insufficient
to permit the holders of Series B Preferred Stock and any pari passu securities
to receive their preferential amounts, then the assets shall be distributed
ratably among such holders in proportion to the ratio that the liquidation
preference payable on each share bears to the aggregate liquidation preference
payable on all such shares. If the outstanding shares of Common Stock are
increased/decreased by any stock splits, stock dividends, combination,
reclassification, reverse stock split, etc., the conversion price shall be
adjusted accordingly. Upon certain reclassifications, the holders of Series
B
Preferred Stock shall be entitled to receive such shares that they would have
received with respect to the number of shares of Common Stock into which the
Series B Preferred Stock would have converted. If the Company issues any
securities convertible for Common Stock or options, warrants or other rights
to
purchase Common Stock or convertible securities pro rata to the holders of
any
class of Common Stock, the holders of Series B Preferred Stock shall have the
right to acquire those shares to which they would have been entitled upon the
conversion of their shares of Series B Preferred Stock into Common Stock. The
Series B Preferred Stock does not have voting rights.
A
summary
of Series B Preferred Stock activity is as follows (in thousands):
|
|
Shares
|
|
Amount
|
||||
|
Activity
during the year ended December 31, 2003:
|
|||||||
|
Issuance
of Series B preferred stock
|
1,000
|
$
|
11,619
|
||||
|
Preferred
stock accretions to accrete the Fair value to the stated value (b)
|
651
|
||||||
|
Conversion
of Series B preferred stock for 3,141 Shares of common stock
|
(892
|
)
|
(10,909
|
)
|
|||
|
Balances
as of December 31, 2003 (c) (d)
|
108
|
$
|
1,361
|
||||
|
Activity
during the year ended December 31, 2004:
|
|||||||
|
Preferred
stock accretions to accrete the fair value to the stated value (b)
|
208
|
||||||
|
Balances
as of December 31, 2004 (c) (d)
|
108
|
$
|
1,569
|
||||
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the Preferred Stock as an amount equals to the fair value of the number
of common shares into which the Series C Preferred Stock is convertible into
using the trading market price on the date the Series C Preferred Stock was
issued.
(b)
The
Company accretes its Series B Preferred Stock to redemption value through
periodic charges to retained earnings.
(c)
The
Series B Preferred Stock is classified as a mezzanine security, outside of
stockholders equity in the accompanying consolidated balance sheets due to
the
cash redemption provisions noted above. Under Statements of Financial Accounting
Standards No. 150, this security would have been classified as equity in a
non-public filing context.
(d)
As of
December 31, 2004, outstanding Series B Preferred Stock is convertible into
381,916 shares of common stock.
SERIES
C
CONVERTIBLE PREFERRED STOCK AND WARRANTS
In
October and December 2003, P-Com issued approximately 10,000 shares of Series
C
Convertible Preferred Stock with a stated value of $1,750 per share, together
with warrants to purchase approximately 4.64 million shares of Common Stock.
Each share of Series C Convertible Preferred Stock converts into a number of
shares of the Company's Common Stock equal to the stated value divided by $3.00.
These shares of Series C Convertible Preferred Stock outstanding on December
31,
2004 are convertible into approximately 3.5 million shares of Common Stock.
Holders of Series C Convertible Preferred Stock are entitled to receive, out
of
legally available funds, dividends at the rate of 6% per annum beginning on
the
first anniversary of their date of issuance and 8% per annum beginning on the
second anniversary of their date of issuance. Dividends are payable
semi-annually, either in cash or shares of P-Com Common Stock.
F-C20
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Each
share of Series C Convertible Preferred Stock is convertible into a number
of
shares of Common Stock equal to the stated value, plus any accrued and unpaid
dividends, divided by an initial conversion price of $3.00. This conversion
price is subject to adjustment for any stock splits, stock dividends or similar
transactions. The conversion price is also subject to adjustment in the event
that P-Com makes a dilutive issuance of Common Stock or other securities that
are convertible into or exercisable for Common Stock at an effective per share
purchase price that is less than the conversion price of the Series C Preferred
Stock in effect at the time of the dilutive issuance. The holders of Series
C
Preferred Stock may convert their shares into shares of Common Stock at any
time. However, no holder of Series C Preferred Stock may convert its shares
into
shares of Common Stock if the conversion would result in the holder or any
of
its affiliates, individually or in the aggregate, beneficially owning more
than
9.999% of P-Com's outstanding Common Stock. In the event a holder is prohibited
from converting into Common Stock under this provision due to the 9.999%
ownership limitation discussed above, the excess portion of the Series C shall
remain outstanding, but shall cease to accrue a dividend.
Subject
to limitations above, the Series C Convertible Preferred Stock is also
mandatorily convertible at the option of P-Com 180 days after the effective
date
of a registration statement covering the shares of Common Stock issuable upon
the conversion of the Series C Convertible Preferred Stock, and upon the
satisfaction of the following conditions: (i) for ten consecutive days, the
Common Stock closes at a bid price equal to or greater than $6.00; (ii) the
continued effectiveness of the registration statement; (iii) all shares of
Common Stock issuable upon conversion of the Series C Convertible Preferred
Stock and Series C-1 and Series C-2 Warrants are authorized and reserved for
issuance, are registered under the Securities Act for resale by the holders,
and
are listed or traded on the OTC Bulletin Board or other national exchange;
(iv)
there are no uncured redemption events; and (v) all amounts accrued or payable
under the Series C Convertible Preferred Stock Certificate of Designation or
registration rights agreement have been paid. As of February 21, 2005,
approximately 3933 shares of Series C Convertible Preferred Stock had been
converted into approximately 2.29 million shares of Common Stock and
approximately 6,009 shares of Series C Convertible Preferred Stock remained
outstanding. As of February 21, 2005, 3,933 shares of the Series C Warrants
have
been exercised.
The
shares of Series C Convertible Preferred Stock that remain outstanding are
convertible into approximately 3.5 million shares of Common Stock, subject
to
the limitation on conversion described above. The number of shares of Common
Stock issuable upon conversion of the Series C Convertible Preferred Stock
and
exercise of the Series C-1 and Series C-2 Warrants are subject to adjustment
for
stock splits, stock dividends and similar transactions and for certain dilutive
issuances.
The
investors of Series C were issued 233 Series C-1 Warrants and 233 Series C-2
Warrants for every share of Series C purchased. The C-1 Warrant has a term
of
five years and an initial exercise price of $4.50 per warrant, increasing to
$5.40 per warrant beginning February 6, 2005. The Series C-2 Warrant has a
term
of five years and an initial exercise price of $5.40 per warrant, increasing
to
$6.60 per warrant beginning August 6, 2005. Subject to an effective registration
statement, beginning twenty-four (24) months after the Effective Date, the
Company may redeem the Series C-1 Warrants for $0.03 per Warrant if the Closing
Bid Price of the Company's Common Stock is equal to or greater than $10.80
for
ten (10) consecutive trading days. Beginning February 6, 2007, the Company
may
redeem the Series C-2 Warrants for $0.03 per Warrant if the Closing Bid Price
of
the Company's Common Stock is equal to or greater than $13.20 for ten (10)
consecutive trading days. The Conversion Price of the Series C and the Exercise
Price of the C-1 and C-2 Warrants shall be subject to adjustment for issuances
of Common Stock at a purchase price less than the then-effective Conversion
Price or Exercise Price, based on weighted average anti-dilution protection,
subject to customary carve-outs (See Common Stock Warrants, below).
F-C21
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
If
P-Com
completes a private equity or equity-linked financing (the “New Financing”), the
Series C holders may exchange any outstanding Series C at 100% of face value
for
the securities issued in the New Financing. Such right shall be voided in the
event the Company raises $5.0 million of additional equity capital at a price
of
not less than $3.60 per share.
For
any
equity or equity-linked private financing consummated within 12 months after
the
closing of the Series C Financing, the investors in the Series C shall have
a
right to co-invest in any private financing up to fifty percent (50%) of the
dollar amount invested in the Series C Financing. The investors shall have
five
(5) trading days to respond. This co-investment provision shall not apply to
the
issuance of stock in situations involving bona-fide strategic partnerships,
acquisition candidates and public offerings.
Upon
the
occurrence of the following events, (each a “Redemptive Event”), the holders of
Series C Preferred Stock may require the Company to purchase their shares of
Series C Preferred Stock for cash:
| o |
the
Company fails to remove any restrictive legend on any Common Stock
certificate issued to Series C Preferred Stock holders upon conversion
as
required by the Certificate of Designation and such failure continues
uncured for five business days after receipt of written
notice;
|
| o |
the
Company makes an assignment for the benefit of creditors or applies
for
appointment of a receiver for a substantial part of its business/property
or such receiver is appointed;
|
| o |
bankruptcy,
insolvency, reorganization or liquidation proceedings shall be instituted
by or against the Company and shall not be dismissed within 60 days
of
their initiation;
|
| o |
the
Company sells substantially all of its
assets;
|
| o |
the
Company merges, consolidates or engages in a business combination
with
another entity that is required to be reported pursuant to Item 1
of Form
8-K (unless the Company is the surviving entity and its capital stock
is
unchanged);
|
| o |
the
Company engages in transaction(s) resulting in the sale of securities
to a
person or entity whereby such person or entity would own greater
than
fifty percent (50%) of the outstanding shares of Common Stock of
the
Company (calculated on a fully-diluted
basis);
|
| o |
the
Company fails to pay any indebtedness of more than $250,000 to a
third
party, or cause any other default which would have a material adverse
effect on the business or its
operations.
|
The
Series C Preferred Stock ranks senior to the Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock and ranks pari passu with the
Series D Preferred Stock. The consent of the majority holders of the Series
C
Preferred Stock is required to create any securities that rank senior or pari
passu to the Series C Preferred Stock. If P-Com liquidates, dissolves or winds
up, the holders of Series C Preferred Stock and Series D Preferred Stock are
entitled to receive the stated value of their shares plus all accrued and unpaid
dividends prior to any amounts being paid to the holders of Series B Preferred
Stock and P-Com Common Stock. In addition, the holders of Series C Preferred
Stock are entitled to share ratably together with the holders of the Series
D
Preferred Stock, the Series B Convertible Preferred Stock and P-Com Common
Stock
in all remaining assets after the satisfaction of all other liquidation
preferences. If the assets and funds for distribution are insufficient to permit
the holders of Series C
Preferred
Stock and any pari passu securities to receive their preferential amounts,
then
the assets shall be distributed ratably among such holders in proportion to
the
ratio that the liquidation preference payable on each share bears to the
aggregate liquidation preference payable on all such shares. If the outstanding
shares of Common Stock are increased/decreased by any stock splits, stock
dividends, combination, reclassification, reverse stock split, etc., the
conversion price shall be adjusted accordingly.
F-C22
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Upon
certain reclassifications, the holders of Series C Preferred Stock shall be
entitled to receive such shares that they would have received with respect
to
the number of shares of Common Stock into which the Series C Preferred Stock
would have converted. If the Company issues any securities convertible for
Common Stock or options, warrants or other rights to purchase Common Stock
or
convertible securities pro rata to the holders of any class of Common Stock,
the
holders of Series C Preferred Stock shall have the right to acquire those shares
to which they would have been entitled upon the conversion of their shares
of
Series C Preferred Stock into Common Stock.
The
holders of Series C Preferred Stock are entitled to vote together with the
holders of the Series D Preferred Stock and Common Stock, as a single class,
on
all matters submitted to a vote of P-Com's stockholders. The holders of the
Series C Preferred Stock are entitled to a number of votes equal to the number
of shares of P-Com Common Stock that would be issued upon conversion of their
shares of Series C Preferred Stock.
A
summary
of Series C Preferred Stock activities is as follows (in
thousands):
|
|
Shares
|
|
Amount
|
||||
|
Activity
during the year ended December 31, 2003:
|
|||||||
|
Sale
of Series C preferred stock for cash, net of issuance expenses
|
9.4
|
$
|
15,108
|
||||
|
Issuance
of Series C preferred stock for services and settlements
|
0.6
|
905
|
|||||
|
Allocation
of cash proceeds to warrants
|
(8,136
|
)
|
|||||
|
Beneficial
conversion feature
|
(7,877
|
)
|
|||||
|
Preferred
stock accretions to accrete the fair value to the stated
value
|
870
|
||||||
|
Balance
as of December 31, 2003
|
10.0
|
870
|
|||||
|
Activity
during the year ended December 31, 2004
|
|||||||
|
Preferred
stock accretions to accrete the fair value to the stated
value
|
2,184
|
||||||
|
Conversion
of Series C preferred stock for 2,275 shares of common
stock
|
(4.0
|
)
|
(517
|
)
|
|||
|
Balances
as of December 31, 2004 (e) (f)
|
6.0
|
$
|
2,537
|
||||
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the Preferred Stock as an amount equal to the fair value of the number
of common shares into which the Series C Preferred Stock is convertible into
using the trading market price on the date the Series C Preferred Stock was
issued.
(b)
The
Company allocated proceeds between the Series C Preferred Stock and the Warrants
based upon their relative fair values.
(c)
The
beneficial conversion feature was calculated using the adjusted conversion
rate,
following the allocation of proceeds to warrants discussed in item (b)
above.
F-C23
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(e)
The
Series C Preferred Stock is classified as a mezzanine security, outside of
stockholders equity in the accompanying balance sheet due to the cash redemption
provisions noted above. Under Statements of Financial Accounting Standards
No.
150, this security would have been classified as equity in a non-public filing
context.
(f)
As of
December 31, 2004, outstanding Series C Preferred Stock are convertible into
approximately 3.5 million shares of Common Stock.
Beneficial
conversion feature represents the excess of the aggregate fair value of the
of
the Common Stock, using the market price at around the Series C commitment
date,
that the Preferred Stockholders would receive at conversion over the proceeds
received, and it is accreted over a five-year period.
SERIES
D
CONVERTIBLE PREFERRED STOCK
P-Com
has
designated 2,000 shares of its Preferred Stock as Series D Convertible Preferred
Stock. In December 2003, P-Com issued the 2,000 shares of Series D Convertible
Preferred Stock to redeem $2 million of notes payable assumed from the SPEEDCOM
asset acquisition. The Series D Preferred Stock has a stated value of $1,000
per
share. Each share of Series D Preferred Stock is convertible into a number
of
shares of Common Stock equal to the stated value divided by an initial
conversion price of $4.50. This conversion price is subject to adjustment for
any stock splits, stock dividends or similar transactions. The holders of Series
D Preferred Stock may convert their shares into shares of Common Stock at any
time. However, no holder of Series D Preferred Stock may convert its shares
into
shares of Common Stock if the conversion would result in the holder or any
of
its affiliates, individually or in the aggregate, beneficially owning more
than
9.999% of P-Com's outstanding Common Stock. The Series D Preferred Stock are
convertible into approximately 444,444 shares of Common Stock.
Holders
of Series D Preferred Stock are entitled to share pro-rata, on an as-converted
basis, in any dividends or other distributions that may be declared by the
board
of directors of P-Com with respect to the Common Stock. If P-Com liquidates,
dissolves or winds up, the holders of Series D Preferred Stock and the holders
of Series C Preferred Stock are entitled to receive the stated value of their
respective shares plus all accrued and unpaid dividends, pari passu, and prior
to any amounts being paid to the holders of Series B Preferred Stock and P-Com
Common Stock. In addition, the holders of Series D Preferred Stock are entitled
to share ratably together with the holders of Series C Preferred Stock, Series
B
Preferred Stock and P-Com Common Stock in all remaining assets after the
satisfaction of all other liquidation preferences.
The
holders of Series D Preferred Stock are entitled to certain rights and
preferences with respect to the holders of P-Com Common Stock. The holders
of
Series D Preferred Stock are entitled to vote together with the holders of
P-Com
Common Stock and holders of Series C Preferred Stock, as a single class, on
all
matters submitted to a vote of P-Com's stockholders. The holders of Series
D
Preferred Stock are entitled to a number of votes equal to the number of shares
of P-Com Common Stock that would be issued upon conversion of their shares
of
Series D Preferred Stock.
Upon
the
occurrence of the following events, (each a “Redemptive Event”), the holders of
Series D Preferred Stock may require the Company to purchase their shares of
Series D Preferred Stock for cash:
| o |
the
Company fails to remove any restrictive legend from certificates
representing shares of P-Com Common Stock that are issued to holders
who
convert their shares of Series D Preferred
Stock;
|
| o |
the
Company makes an assignment for the benefit of creditors, or applies
for
or consents to the appointment of a receiver or
trustee;
|
F-C24
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| o |
Any
bankruptcy, insolvency, reorganization or other proceeding for the
relief
of debtors is instituted by or against P-Com and is not dismissed
within
60 days;
|
| o |
the
Company sells substantially all of its assets, merges or consolidates
with
any other entity or engages in a transaction that results in any
person or
entity acquiring more than 50% of P-Com's outstanding Common Stock
on a
fully diluted basis;
|
| o |
the
Company fails to pay when due any payment with respect to any of
its
indebtedness in excess of $250,000;
|
| o |
the
Company breaches any agreement for monies owed or owing in an amount
in
excess of $250,000 and the breach permits the other party to declare
a
default or otherwise accelerate the amounts due under that agreement;
and
|
| o |
the
Company permits a default under any agreement to remain uncured and
the
default would or is likely to have a material adverse effect on the
business, operations, properties or financial condition of
P-Com.
|
A
summary
of Series D Preferred Stock activities is as follows (in
thousands):
Activity
during the year ended December 31, 2004:
|
Shares
|
|
Amount
|
|||||
|
Issuance
of Series D Preferred Stock, at fair value, to redeem $2 million
face
value of notes (a)
|
2,000
|
$
|
2,000
|
||||
|
Balances
as of December 31, 2004 (b) (c)
|
2,000
|
$
|
2,000
|
||||
(a)
The
Company, after consideration of several valuation models, determined the fair
value of the Preferred Stock as an amount equal to the fair value of the number
of common shares into which the Series D Preferred Stock is convertible into
using the trading market price on the date the Series D Preferred Stock was
issued.
(b)
The
Series D Preferred Stock is classified as a mezzanine security, outside of
stockholders equity in the accompanying balance sheet due to the cash redemption
provisions noted above. Under Statements of Financial Accounting Standards
No.
150, this security would have been classified as equity in a non-public filing
context.
(c)
As of
December 31, 2004, outstanding Series D Preferred Stock is convertible into
444,444 shares of Common Stock.
COMMON
STOCK
In
January 2003, the Company sold 70,000 shares of Common Stock to an existing
stockholder for aggregate net proceeds of $307,000. In December 2003, P-Com
issued 2.1 million shares of its Common Stock in connection with the SPEEDCOM
asset acquisition. In accordance with Statements of Financial Accounting
Standards No. 141, Business Combinations, these common shares were valued based
upon trading market prices around the commitment date of the purchase
transaction, or $7.2 million. In December 2003, holders of Series B Preferred
Stock converted the Preferred Stock into 3.14 million shares of Common Stock.
During the year ended December 31, 2003, the Company also issued 3.43 million
shares of Common Stock in exchange for services and to settle indebtedness.
In
all instances where Common Stock was issued in exchange for services, the Common
Stock was valued using the trading market prices on the commitment date or
issue
date, whichever is appropriate for the respective transaction.
F-C25
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At
December 31, 2004, P-Com had 3,870,393 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants and options.
COMMON
STOCK WARRANTS
Three
Year Warrant Summary. The following table summarizes our Common Stock warrant
activity for each of each year ended December 31, (in thousands, except per
share amounts):
|
|
2004
|
2003
|
2002
|
||||||||||||||||
|
|
|||||||||||||||||||
|
Shares
|
Price
Range
|
Shares
|
Price
Range
|
Shares
|
Price
Range
|
||||||||||||||
|
Outstanding
at beginning of year
|
5,900
|
|
$9.00-1,275.00
|
102
|
|
$15.00-42.50
|
22
|
|
$450.00-1,275.00
|
||||||||||
|
Issued
|
707
|
|
$0.56-1.50
|
5,748
|
|
$0.30-1.02
|
55
|
|
$9.00-30.60
|
||||||||||
|
Adjustments
(a)
|
(525
|
)
|
711
|
$0.38-$12.44
|
25
|
|
$131.40-373.20
|
||||||||||||
|
Exercised
|
(3,255
|
)
|
|
$0.00-0.05
|
(36
|
)
|
|
$0.03-0.03
|
|||||||||||
|
Cancelled
|
(124
|
)
|
|
$0.24-0.24
|
(625
|
)
|
|
$6.12-255.00
|
|||||||||||
|
Outstanding
at end of year
|
2,703
|
5,900
|
102
|
||||||||||||||||
|
Warrants
exercisable at end of year
|
2,703
|
5,801
|
102 | ||||||||||||||||
|
Weighted-average
exercise price of warrants issued during the year
|
$ | 1.26 | $ | 4.80 | $ | 19.20 | |||||||||||||
(a)
Adjustments to Common Stock warrants arise from anti-dilution terms. The
issuance of the Agilent Warrant and the SDS Warrant triggered the antidilution
provisions of the Series C-1 Warrants, the Series C-2 Warrants and the Series
C
Convertible Preferred Stock.
2004
WARRANT ACTIVITIES
In
November 2004, P-Com issued a warrant to purchase 528,000 shares of the
Company's common stock, in connection with the issuance of the $3.3 million
promissory note to SDS Capital SPC Ltd. (the “SDS Warrant”). The SDS Warrant has
an initial exercise price of $1.50 and a term of five years. The Company
allocated the proceeds between the carrying value of the promissory note and
the
warrants based on the fair value of the transaction, resulting in an effective
interest rate for the promissory note of 13.4%.
In
November 2004, P-Com issued a warrant to purchase 178,571 shares of the
Company's common stock to Agilent Financial Services, in connection with the
restructuring of the $1.725 million obligation owed to Agilent Financial
Services (the “Agilent Warrant”). The Agilent Warrant has an initial exercise
price of $0.56 and a term of five years. The Company allocated the proceeds
between the carrying value of the note and the warrants based on the fair value
of the transaction, resulting in an effective interest rate for the note of
17.8%.
F-C26
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCKHOLDER
RIGHTS AGREEMENT
On
September 26, 1997, the Board of Directors of P-Com adopted a Stockholder Rights
Agreement (the “Rights Agreement”). Pursuant to the Rights Agreement, Rights
(the “Rights”) were distributed as a dividend on each outstanding share of its
Common Stock held by stockholders of record as of the close of business on
November 3, 1997. Each Right will entitle stockholders to buy Series A Preferred
at an exercise price of $125.00 upon certain events. The Rights will expire
ten
years from the date of the Rights Agreement.
In
general, the Rights will be exercisable only if a person or group acquires
15%
or more of P-Com's Common Stock or announces a tender offer, the consummation
of
which would result in ownership by a person or group of 15% or more of P-Com's
Common Stock. In the case of the State of Wisconsin Investment Board, Firsthand
Capital Management, Alpha Capital and StoneStreet Limited Partnership the
threshold figure is 20% rather than 15%. If, after the Rights become
exercisable, P-Com is acquired in a merger or other business combination
transaction, or sells 50% or more of its assets or earning power, each
unexercised Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at the time of twice the Right's exercise price. At any
time within ten days after the public announcement that a person or group has
acquired beneficial ownership of 15% or more of P-Com's Common Stock, the Board
of Directors, in its sole discretion, may redeem the Rights for $0.003 per
Right.
6.
EMPLOYEE
BENEFIT PLANS
STOCK
OPTION PLANS
On
October 8, 2004, P-Com's stockholders approved the adoption of the 2004 Equity
Incentive Plan (the “2004 Plan”) as a successor to P-Com's 1995 Stock
Option/Stock Issuance Plan (the “1995 Plan”).
The
2004
Plan authorizes the issuance of up to 3,000,000 shares of Common Stock as of
December 31, 2004.
The
2004
Plan provides four different types of equity incentive awards: (i) stock
options, (ii) stock appreciation rights, (iii) restricted stock, and (iv) stock
units.
The
exercise price per share for incentive stock options granted under the 2004
Plan
may not be less than 100% of the fair market value per share of common stock
on
the option grant date. The exercise price for non-statutory stock options
granted under the 2004 Plan may not be less that 85% of the fair market value
per share of common stock on the option grant date. No option will have a term
in excess of 10 years.
STOCK
APPRECIATION RIGHTS
The
Plan
Administrator has complete discretion under the 2004 Plan to determine which
eligible individuals are to receive stock appreciation rights, the time or
times
when such grants are to be made, the number of shares subject to each stock
appreciation right, the vesting schedule (if any) to be in effect for the stock
appreciation right and the maximum term for which any stock appreciation right
is to remain outstanding. Under the 2004 Plan, an individual may not receive
stock appreciation rights that pertain to more than 833,333 shares of common
stock in any given year.
RESTRICTED
STOCK
The
Plan
Administrator has complete discretion under the 2004 Plan to determine which
eligible individuals are to receive shares of restricted stock, the time or
times when such grants are to be made, the number of shares granted and the
vesting schedule (if any) to be in effect for the restricted stock. In any
given
year, the number of shares of restricted stock that are subject to
performance-based vesting conditions granted to a participant in the 2004 Plan
may not exceed 833,333 shares.
F-C27
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCK
UNITS
The
Plan
Administrator has complete discretion under the 2004 Plan to determine which
eligible individuals are to receive stock units, the time or times when such
grants are to be made, the number of stock units granted and the vesting
schedule (if any) to be in effect for the stock units. In any given year, the
number of stock units that are subject to performance-based vesting conditions
granted to a participant in the 2004 Plan may not exceed 833,333
shares.
The
following table summarizes stock option activity under P-Com's 2004 Plan (in
thousands, except per share amounts):
|
2004
|
|
2003
|
|
2002
|
|||||||||||||||
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|||||||||
|
Outstanding
at beginning of year
|
1,104
|
$
|
26.40
|
102
|
$
|
361.50
|
48
|
$
|
876.30
|
||||||||||
|
Granted
|
335
|
2.41
|
1,034
|
|
3.90
|
68
|
30.30
|
||||||||||||
|
Exercised
|
1
|
4.17
|
—
|
—
|
—
|
||||||||||||||
|
Canceled
|
(272
|
)
|
10.42
|
(32
|
)
|
355.80
|
(14
|
)
|
504.60
|
||||||||||
|
Outstanding
at end of year
|
1,168
|
23.30
|
1,104
|
26.40
|
102
|
361.50
|
|||||||||||||
|
Options
exercisable at year-end
|
451
|
54.83
|
151
|
162.00
|
40
|
735.90
|
|||||||||||||
|
Weighted-average
fair value of options granted during the year
|
|
|
$
|
23.30
|
|
|
$ |
3.60
|
$ |
23.10
|
|||||||||
EMPLOYEE
STOCK PURCHASE PLAN
On
January 11, 1995, P-Com's Board of Directors adopted the Employee Stock Purchase
Plan (the “Purchase Plan”), which was approved by stockholders in February 1995.
The Purchase Plan permits eligible employees to purchase Common Stock at a
discount through payroll deductions during successive offering periods with
a
maximum duration of 24 months. Each offering period shall be divided into
consecutive semi-annual purchase periods. The price at which the Common Stock
is
purchased under the Purchase Plan is equal to 85% of the fair market value
of
the Common Stock on the first day of the offering period or the last day of
the
purchase period, whichever is lower. A total of 300,000 shares of Common Stock
have been reserved for issuance under the Purchase Plan. Awards and terms are
established by P-Com's Board of Directors. The Purchase Plan may be canceled
at
any time at the discretion of its Board of Directors prior to its expiration
in
January 2005. Under the Plan, P-Com sold approximately 900, 2,633, and 2,600,
shares in 2002, 2001, and 2000, respectively. The Board of Directors suspended
the plan in January 2002.
Because
P-Com has adopted the disclosure-only provision of SFAS No. 123, no compensation
expense has been recognized for its stock option plan or for its stock purchase
plan. Had compensation costs for its two stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans, consistent with the method of SFAS 123, P-Com's net loss and net loss
per
share would have been reduced to the pro forma amounts indicated as
follows:
F-C28
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
|
2004
|
|
2003
|
|
2002
|
|||||
|
Net
loss attributable to common stockholders
|
||||||||||
|
As
reported
|
$
|
(5,868
|
)
|
$
|
(14,407
|
)
|
$
|
(54,306
|
)
|
|
|
Pro
forma
|
$
|
(7,808
|
)
|
$
|
(16,374
|
)
|
$
|
(57,054
|
)
|
|
|
Net
loss per share
|
||||||||||
|
As
reported --Basic and Diluted
|
$
|
(0.56
|
)
|
$
|
(7.98
|
)
|
$
|
(63.77
|
)
|
|
|
Pro
forma --Basic and Diluted
|
$
|
(0.75
|
)
|
$
|
(9.07
|
)
|
$
|
(67.00
|
)
|
|
The
fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 2004, 2003, and 2002, respectively: expected volatility of 128%,
158%,
and 158%; weighted-average risk-free interest rates of 2.8%, 2.1%, and 3.1%
;
weighted-average expected lives of 4.0, 4.0, and 4.0; respectively, and a zero
dividend yield.
The
fair
value of the employees' stock purchase rights was estimated using the
Black-Scholes model with the following assumptions for 2002: expected volatility
of 197% weighted-average risk-free interest rates of 1.7% weighted-average
expected lives of 0.5 years and a dividend yield of zero. The weighted-average
fair value of those purchase rights granted in 2002 was $24.90. The employee
stock purchase plan was suspended in 2002.
401(K)
PLAN
P-Com
sponsors a 401(k) Plan (the “401(k) Plan”) which provides tax-deferred salary
deductions for eligible employees. Employees may contribute up to 60% of their
annual compensation to the 401(k) Plan, limited to a maximum annual amount
as
set periodically by the Internal Revenue Service. The 401(k) Plan permits,
but
does not require, P-Com to make matching contributions. To date, no matching
contributions have been made.
7.
RESTRUCTURING
AND OTHER CHARGES
The
Company continually monitors its inventory carrying value in the light of the
slowdown in the global telecommunications market, especially with regard to
an
assessment of future demand for its point - to - multipoint, and its other
legacy product line. This has resulted in a $2.0 million charge to cost of
sales
for its point - to - multipoint, Tel-Link point - to - point and Air-link spread
spectrum inventories during the second quarter of 2003. In the first quarter
of
2003, the Company recorded a $3.4 million inventory related charge to cost
of
sales, of which $2.0 million was related to its point - to - multipoint
inventories. These charges were offset by credits of $1.8 million in the second
quarter associated with a write-back of accounts payable and purchase commitment
liabilities arising from vendor settlements.
In
the
event that certain facts and circumstances indicate that the long-lived assets
may be impaired, an evaluation of recoverability would be performed. When an
evaluation occurs, management conducts a probability analysis based on the
weighted future undiscounted cash flows associated with the asset. The results
are then compared to the asset's carrying amount to determine if impairment
is
necessary. The cash flow analysis for the property and equipment is performed
over the shorter of the expected useful lives of the assets, or the expected
life cycles of our product line. An impairment charge is recorded if the net
cash flows derived from the analysis are less than the asset's carrying value.
We deem that the property and equipment is fairly stated if the future
undiscounted cash flows exceed its carrying amount. In the first and second
quarter of 2003, the Company continued to reevaluate the carrying value of
property and equipment relating to its point - to - multipoint product line,
that are held for sale. The evaluation resulted in a $2.5 million provision
for
asset impairment in the second quarter of 2003, and $0.6 million provision
in
the first quarter of 2003. As a result of these adjustments, there is no
remaining net book value of property and equipment related to the point - to
-
multipoint product line.
F-C29
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A
summary
of inventory reserve and provision for impairment of property and equipment
activities is as follows (in thousands):
|
Inventory
Reserve
|
|||||||||||||
|
|
|
Additions
|
|
|
|
|
|
||||||
|
|
|
Balance
at
|
|
Charged
to
|
|
Deductions
|
|
|
|
||||
|
|
|
Beginning
|
|
Statement
|
|
From
|
|
Balance
at
|
|
||||
|
|
|
of
Year
|
|
of
Operations
|
|
Reserves
|
|
End
of Year
|
|||||
|
Year
ended December 31, 2002
|
$
|
38,597
|
$
|
5,770
|
$
|
(
4,800
|
)
|
$
|
39,567
|
||||
|
Year
ended December 31, 2003
|
$
|
39,567
|
$
|
5,460
|
$
|
(17,908
|
)
|
$
|
27,119
|
||||
|
Year
ended December 31, 2004
|
$
|
27,119
|
$
|
916
|
$
|
(3,746
|
)
|
$
|
24,289
|
||||
In
connection with a workforce reduction in May 2003, the Company accrued a $0.2
million charge relating to severance packages given to certain of its executive
officers. All pertinent criteria for recognition of this liability were met
during the period of recognition.
In
the
fourth quarter of 2002, P-Com determined that there was a need to reevaluate
its
inventory carrying value in light of the continuing worldwide slowdown in the
global telecommunications market, especially with regard to an assessment of
future demand for P-Com's point - to - multipoint product range. This resulted
in a $5.8 million inventory charge to product cost of sales, of which $5.0
million was for point - to - multipoint inventories, and $0.8 million was for
spread spectrum inventories.
8.
GAIN
(LOSS) ON DISCONTINUED OPERATIONS
In
the
first quarter of 2003, the Company committed to a plan to sell its services
business, P-Com Network Services, Inc. (“PCNS”). Accordingly, beginning in the
first quarter of 2003, this business is reported as a discontinued operation
and
the financial statement information related to this business has been presented
on one line, entitled, “Discontinued Operations,” in the Consolidated Statements
of Operations. On April 30, 2003, the Company entered into an Asset Purchase
Agreement with JKB Global, LLC (“JKB”) to sell certain assets of PCNS. The total
cash consideration was approximately $105,000, plus the assumption of certain
liabilities. The Company guaranteed PCNS' obligations under its premises lease,
through July 2007. As part of the sale to JKB, JKB agreed to sublet the premises
from PCNS for one year beginning May 1, 2003. The terms of the sublease required
JKB to pay less than the total amount of rent due under the terms of the master
lease. As a result, the Company remained liable under the terms of the guaranty
for the deficiency, under the terms of the master lease of approximately $1.5
million, and the amount is accrued as loss on disposition of discontinued
operations in the second quarter of 2003, which was the period that such loss
was incurred. In the third quarter of 2003, the Company reached an agreement
with the landlord to settle the lease guarantee for $0.3 million, and therefore
wrote-back the excess $1.2 million accrual as a gain in discontinued operations
in the third quarter of 2003.
Summarized
results of PCNS are as follows (in thousands):
|
Year
Ended December 31,
|
||||||||||
|
2004
|
|
2003
|
|
2002
|
||||||
|
Sales
|
$
|
—
|
$
|
1,065
|
$
|
3,337
|
||||
|
Loss
from operations
|
$
|
(40
|
)
|
$
|
(581
|
)
|
$
|
(4,284
|
)
|
|
|
Provision
for income taxes
|
—
|
—
|
—
|
|||||||
|
Net
loss
|
$
|
(40
|
)
|
$
|
(581
|
)
|
$
|
(4,284
|
)
|
|
F-C30
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The
loss
from the sale of the discontinued services unit was $1.6 million for the year
ended December 31, 2003, and this was principally due to the write-off of assets
upon the discontinuation of the services business unit.
The
assets and liabilities of the discontinued operations consisted of the following
(in thousands):
|
December
31,
|
|||||||
|
|
2004
|
2003
|
|||||
|
Total
assets related to discontinued operations
|
|||||||
|
Cash
|
$
|
—
|
$
|
—
|
|||
|
Accounts
receivable
|
—
|
—
|
|||||
|
Inventory
|
—
|
—
|
|||||
|
Prepaid
expenses and other assets
|
—
|
—
|
|||||
|
Property
plant and equipment
|
—
|
—
|
|||||
|
Other
assets
|
—
|
40
|
|||||
|
|
$ | — |
$
|
40
|
|||
|
Total
liabilities related to discontinued operations
|
|||||||
|
Accounts
payable
|
$
|
183
|
$
|
183
|
|||
|
Other
accrued liabilities
|
66
|
130
|
|||||
| $ | 249 | $ | 313 | ||||
9.
SALES
AND
PROPERTY AND EQUIPMENT BY GEOGRAPHIC REGION
The
allocation of sales by geographic customer destination and property, plant
and
equipment, net are as follows (in thousands):
|
%
of total
|
|||||||||||||
|
Sales
|
for
2004
|
|
2004
|
|
2003
|
|
2002
|
||||||
|
North
America
|
11
|
%
|
$
|
2,579
|
$
|
3,042
|
$
|
2,949
|
|||||
|
United
Kingdom
|
23
|
%
|
5,583
|
6,349
|
5,894
|
||||||||
|
Continental
Europe
|
21
|
%
|
5,178
|
3,693
|
4,487
|
||||||||
|
Asia
|
14
|
%
|
3,386
|
5,831
|
15,018
|
||||||||
|
Other
Geographic Regions
|
31
|
%
|
7,449
|
1,926
|
1,338
|
||||||||
|
100
|
%
|
$
|
24,175
|
$
|
20,841
|
$
|
29,686
|
||||||
|
2004
|
|
2003
|
|||||
|
Property,
plant and equipment, net
|
|||||||
|
United
States
|
$
|
1,467
|
$
|
2,324
|
|||
|
United
Kingdom
|
26
|
36
|
|||||
|
Italy
|
253
|
1,439
|
|||||
|
Other
geographic regions
|
9
|
8
|
|||||
|
Total
|
$
|
1,755
|
$
|
3,807
|
|||
F-C31
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10.
NET
LOSS
PER SHARE
The
numerator for calculation of net loss per common share is the Company's net
loss
for the period, less preferred stock dividends and accretions. The denominator,
weighted average common shares outstanding, does not include stock options
with
an exercise price that exceeds the average fair market value of the underlying
Common Stock or other dilutive securities because the effect would be
anti-dilutive.
11.
INCOME
TAXES
Loss
before discontinued operations, income taxes, cumulative effect of change in
accounting principle and Preferred Stock accretions consists of the following
(in thousands):
|
Year
Ended December 31,
|
||||||||||
|
2004
|
|
2003
|
|
2002
|
||||||
|
Domestic
|
$
|
(2,574
|
)
|
$
|
(10,669
|
)
|
$
|
(44,694
|
)
|
|
|
Foreign
|
(706
|
)
|
(80
|
)
|
(298
|
)
|
||||
|
$
|
(3,280
|
)
|
$
|
(10,749
|
)
|
$
|
(44,992
|
)
|
||
The
provision (benefit) for income taxes consists of the following (in
thousands):
|
|
2004
|
|
2003
|
|
2002
|
|||||
|
Current:
|
||||||||||
|
Federal
|
$
|
—
|
$
|
—
|
$
|
(503
|
)
|
|||
|
State
|
—
|
—
|
—
|
|||||||
|
Foreign
|
—
|
—
|
33
|
|||||||
|
|
— |
—
|
(470
|
)
|
||||||
|
Deferred:
|
||||||||||
|
Federal
|
—
|
—
|
—
|
|||||||
|
State
|
—
|
—
|
—
|
|||||||
|
|
— |
—
|
—
|
|||||||
|
Total
|
$
|
—
|
$
|
—
|
$
|
(470
|
)
|
|||
Deferred
tax assets consist of the following (in thousands):
|
December
31,
|
|||||||
|
2004
|
|
2003
|
|||||
|
Net
operating loss carryforwards
|
$
|
98,594
|
$
|
92,133
|
|||
|
Credit
carryforwards
|
4,143
|
4,352
|
|||||
|
Intangible
assets
|
16,126
|
18,868
|
|||||
|
Reserves
and other
|
11,417
|
15,549
|
|||||
|
Total
deferred tax assets
|
$
|
130,280
|
$
|
130,902
|
|||
|
Valuation
allowance
|
(130,280
|
)
|
(130,902
|
)
|
|||
|
Net
deferred tax asset
|
$
|
—
|
$
|
—
|
|||
F-C32
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For
federal and state tax purposes, a portion of P-Com's net operating loss
carryforwards may be subject to certain limitations on utilization in case
of
change in ownership as defined by federal and state tax law.
Deferred
income taxes reflect the tax consequences on future years of differences between
the tax bases of assets and liabilities and their bases for financial reporting
purposes. In addition, future tax benefits, such as net operating loss
carryforwards, are recognized to the extent that realization of such benefits
is
more likely than not. P-Com has assessed its ability to realize future tax
benefits, and concluded that as a result of the history of losses, it was more
likely than not, that such benefits would not be realized. Accordingly, P-Com
has recorded a full valuation allowance against future tax
benefits.
As
of
December 31, 2004, P-Com had a federal net operating loss carry forward of
approximately $271,970,000. If not utilized, the losses will begin to expire
in
2017.
Reconciliation
of the statutory federal income tax rate to its effective tax rate is as
follows:
|
2004
|
|
2003
|
|
2002
|
||||||
|
Income
tax benefit at federal statutory rate
|
-35.0
|
%
|
-35.0
|
%
|
-35.0
|
%
|
||||
|
State
income taxes net of federal benefit
|
-5.8
|
%
|
-5.8
|
%
|
-5.8
|
%
|
||||
|
Foreign
income taxes at different rate
|
0.0
|
%
|
0.0
|
%
|
0.5
|
%
|
||||
|
Change
in valuation allowance
|
40.8
|
%
|
40.8
|
%
|
40.8
|
%
|
||||
|
Other
Net
|
0.0
|
%
|
0.0
|
%
|
-1.4
|
%
|
||||
|
Total
|
0.0
|
%
|
0.0
|
%
|
-0.9
|
%
|
||||
12.
ACQUISITION
WAVE
WIRELESS DIVISION OF SPEEDCOM WIRELESS CORPORATION
On
December 10, 2003, P-Com acquired substantially all of the operating assets
and
liabilities of Wave Wireless (“Wave Wireless”), a division of SPEEDCOM Wireless
Corporation, a Sarasota, Florida-based company, through the issuance of
2,116,667 shares of P-Com Common Stock valued at $7,238,000, using market values
for such shares around the commitment date ($3.42). Wave Wireless designs,
manufactures and markets spread spectrum radio products for voice and data
applications in both domestic and international markets. P-Com accounted for
this acquisition as a purchase business combination. The results of the Wave
Wireless division were included from the date of acquisition.
The
Company accounted for the Wave Wireless acquisition as a purchase under
Statements of Financial Accounting Standards No. 141, Business Combinations
(“SFAS 141”). As a result, the purchase price was allocated to the fair values
of assets acquired and liabilities assumed based upon their fair values. The
excess of the purchase price over the fair values of assets and liabilities
resulted in the recognition of $11.9 million of goodwill. The following tabular
presentation reflects the purchase allocation:
F-C33
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
Fair
value of 63.5 million shares of Common Stock
|
$
|
7,238
|
||
|
Cash
advances to Speedcom
|
1,580
|
|||
|
Liabilities
assumed:
|
||||
|
Operating
liabilities
|
1,483
|
|||
|
Notes
payable
|
3,000
|
|||
|
13,301
|
||||
|
Assets
acquired:
|
||||
|
Current
assets, at fair values
|
1,094
|
|||
|
Property
and equipment and other assets
|
226
|
|||
|
$
|
11,981
|
The
following unaudited pro forma financial information gives effect to the Wave
Wireless acquisition, as if it had occurred at the beginning of the respective
period. Unaudited pro forma financial information is not necessarily indicative
of the results of operations that would have occurred had the acquisition taken
place at the beginning of those periods:
|
December
31,
|
|||||||
|
2003
|
2002
|
||||||
|
Sales
|
$
|
25,222
|
$
|
37,362
|
|||
|
Loss
from continuing operations applicable to common shareholders
|
$
|
15,559
|
$
|
(48,971
|
)
|
||
|
Loss
from continuing operations per common share
|
$
|
(3.90
|
)
|
$
|
(15.90
|
)
|
|
|
Shares
used to compute loss from continuing operations per common
share
|
3,905
|
3,102
|
|||||
13
COMMITMENTS
OBLIGATIONS
UNDER CAPITAL AND OPERATING LEASES
In
2000,
P-Com entered into several capital leases for equipment in the amount of $1,869
thousand with interest accruing at 11%. These leases expired in 2002. In 2001,
P-Com entered into several capital leases for equipment in the amount of $3,212
thousand with interest accruing at 11%. These leases expired in 2004. In 2002,
P-Com entered into several capital leases for equipment in the amount of $459
thousand with interest accruing at 7.25%. These leases expired in 2003. P-Com
did not enter into any new capital lease arrangement in 2003. The capital lease
obligations are secured on all the leased equipment. Future minimum lease
payments required under these leases are as follows (in thousands):
The
present value of net minimum lease payments are reflected in the December 31,
2004 and 2003 balance sheets as a component of other accrued liabilities and
other long-term liabilities of $0.0 and $2,317 thousand,
respectively.
F-C34
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
P-Com
leases its facilities under non-cancelable operating leases, which expire at
various times through 2015. The leases require P-Com to pay taxes, maintenance
and repair costs. Future minimum lease payments under its non-cancelable
operating leases at December 31, 2004 are as follows (in
thousands):
|
Year
Ending December 31,
|
||||
|
2005
|
$
|
1,671
|
||
|
2006
|
319
|
|||
|
2007
|
319
|
|||
|
2008
|
319
|
|||
|
2009
|
319
|
|||
|
Thereafter
|
1,678
|
|||
|
$
|
4,625
|
|||
During
2004, 2003, and 2002, the amount of rent expense incurred by P-Com under
non-cancelable operating leases was $1,718 thousand, $1,446 thousand, and $3,230
thousand respectively.
14.
CONTINGENCIES
In
June
2000, two former consultants to P-Com Italia S.p.A. filed a complaint against
P-Com Italia in the Civil Court of Rome, Italy seeking payment of certain
consulting fees allegedly due the consultants totaling approximately $615,000.
The Civil Court of Rome has appointed a technical consultant in order to
determine the merit of certain claims made by the consultants. P-Com believes
that the claims are wholly without merit and, while no assurances can be given,
that the claims will be rejected.
15.
SUPPLEMENTAL
CASH FLOW INFORMATION
The
following provides additional information concerning supplemental disclosure
of
cash flow activities.
|
|
YEAR
ENDED DECEMBER 31,
|
|||||||||
|
2004
|
|
2003
|
|
2002
|
||||||
|
Cash
paid for income taxes
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Cash
paid for interest
|
$
|
682
|
$
|
204
|
$
|
1,829
|
||||
NON-CASH
TRANSACTIONS
During
2003, P-Com redeemed $20,090,000 of 7% Convertible Notes through an issuance
of
approximately 1,000,000 shares of Series B Preferred Stock. P-Com also redeemed
$2.37 million of the Convertible Notes and repurchased 30,667 shares of Common
Stock through an exchange for property and equipment.
During
2003, P-Com issued shares of Common Stock, valued at approximately $0.5 million
(2002: $1.27 million), to pay vendors for outstanding liabilities, and issued
shares of Common Stock, valued at approximately $0.4 million, to pay a
consultant in lieu of services rendered.
F-C35
P-COM,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During
2003, P-Com issued 2.1 million shares of Common Stock as consideration for
the
asset acquisition from SPEEDCOM.
During
2003, P-Com issued shares of Series D Convertible Preferred Stock valued at
approximately $2 million, to redeem $2 million of promissory notes assumed
from
SPEEDCOM.
During
2002, $459,000 of property and equipment were acquired through the assumption
of
capital lease liabilities, respectively. In 2004 and 2003, no such transactions
transpired.
During
2002, P-Com issued shares of Common Stock in exchange for Convertible
Subordinated Notes. In conjunction with these transactions, the Company recorded
Convertible Subordinated Notes conversion expense of $711 thousand for the
year
ended December 31, 2002, in accordance with FAS 84, a non-operating gain of
$1.4
million for the year ended December 31, 2002. See Note 4 for additional
information.
P-Com
also issued warrants to purchase Common Stock to a consultant in lieu of
services rendered, to Silicon Valley Bank for the bank line of credit, to
investors, brokers, investment bankers and other service providers in
conjunction with the Common Stock and Preferred Stock issuances, and certain
warrant holders for anti-dilution adjustments.
16. SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following table sets forth the Company's condensed consolidated financial
information for the quarterly periods during the years ended December 31, 2004
and 2003. The amounts are in thousands, except income (loss) per common share.
Income (loss) per common share for periods prior to July 19, 2004 has been
restated to give effect to a one-for-thirty reverse stock split.
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
||||||
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|||||
|
YEAR
ENDED DECEMBER 31, 2004
|
|||||||||||||
|
Net
sales
|
$
|
6,837
|
$
|
6,917
|
$
|
6,143
|
$
|
4,278
|
|||||
|
Gross
Profit
|
1,738
|
1,992
|
1,157
|
568
|
|||||||||
|
Income
(loss) from continuing Operations
|
(2,341
|
)
|
6,253
|
(3,438
|
)
|
(3,754
|
)
|
||||||
|
Discontinued
operations
|
(40
|
)
|
—
|
—
|
—
|
||||||||
|
Preferred
stock accretions
|
(776
|
)
|
(673
|
)
|
(683
|
)
|
(260
|
)
|
|||||
|
Net
income (loss) applicable to common shareholders
|
(3,157
|
)
|
5,580
|
(4,121
|
)
|
(4,170
|
)
|
||||||
|
Income
(loss) per common share
|
(0.39
|
)
|
10.83
|
(0.27
|
)
|
(0.35
|
)
|
||||||
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
||||||||||
|
YEAR
ENDED DECEMBER 31, 2003
|
|||||||||||||
|
Net
sales
|
$
|
4,617
|
$
|
4,965
|
$
|
5,569
|
$
|
5,690
|
|||||
|
Gross
profit
|
(3,608
|
)
|
841
|
1,138
|
1,866
|
||||||||
|
Income
(loss) from continuing Operations
|
(8,516
|
)
|
(4,258
|
)
|
8,033
|
(6,008
|
)
|
||||||
|
Discontinued
operations
|
(1,858
|
)
|
(1,767
|
)
|
1,367
|
121
|
|||||||
|
Preferred
stock accretions
|
—
|
—
|
—
|
(1,522
|
)
|
||||||||
|
Net
income (loss) applicable to common shareholders
|
(10,374
|
)
|
(6,025
|
)
|
9,400
|
(7,409
|
)
|
||||||
|
Income
(loss) per share
|
(8.52
|
)
|
(133.10
|
)
|
1.88
|
(2.29
|
)
|
17.
SUBSEQUENT EVENT
On
March
10, 2005, the Company's Chief Executive Officer, Samuel Smookler, resigned
as
Chief Executive Officer and a director of the Company. The Board of Directors
is
currently negotiating the terms of his severance arrangements. Under the terms
of his existing Agreement, Mr. Smookler may be entitled to receive severance
payments totaling $250,000. In addition, his incentive stock option to acquire
80,000 shares of common stock vests immediately. The Company will record the
negotiated severance expense effective with the date of termination during
the
first fiscal quarter in the year ended December 31, 2005. The acceleration
in
vesting of Mr. Smookler's incentive stock options is not considered a
modification and, therefore, no expense will be recorded, because acceleration
upon termination was provided for in his original employment
agreement.
F-C36
WaveRider
Communications Inc.
CONSOLIDATED
BALANCE SHEETS
(in
U.S.
dollars)
|
|
September
30,
|
|
December
31,
|
|
|||
|
|
|
2005
|
|
2004
|
|
||
|
|
|
(Unaudited)
|
|
(Audited)
|
|||
|
(Restated)
|
(Restated)
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
688,202
|
$
|
1,291,822
|
|||
|
Restricted
cash
|
—
|
100,000
|
|||||
|
Accounts
receivable, net
|
1,607,325
|
1,056,103
|
|||||
|
Inventories
|
561,354
|
943,644
|
|||||
|
Prepaid
expenses and other assets
|
101,217
|
150,940
|
|||||
|
Current
assets
|
2,958,098
|
3,542,509
|
|||||
|
Property,
plant and equipment, net
|
209,662
|
295,063
|
|||||
|
|
$
|
3,167,760
|
$
|
3,837,572
|
|||
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued liabilities
|
$
|
2,248,493
|
$
|
2,080,064
|
|||
|
Deferred
revenue
|
544,931
|
407,639
|
|||||
|
Current
portion of convertible debentures, net of discounts of
$57,077
|
392,923
|
—
|
|||||
|
Derivative
financial instruments
|
350,122
|
642,907
|
|||||
|
Current
portion of obligations under capital lease
|
2,013
|
2,781
|
|||||
|
Current
liabilities
|
3,538,482
|
3,133,391
|
|||||
|
Convertible
debentures, net of discounts of $300,743 and $851,793
respectively
|
891,094
|
1,575,984
|
|||||
|
Obligations
under capital lease
|
—
|
1,854
|
|||||
|
Total
liabilities
|
4,429,576
|
4,711,229
|
|||||
|
Commitments
and Contingencies (Note 9)
|
|||||||
|
Shareholders'
deficit:
|
|||||||
|
Preferred
Stock, $0.01 par value per share:
|
|||||||
|
issued
and outstanding Nil shares in 2005 and 2004
|
—
|
—
|
|||||
|
Common
Stock, $0.001 par value per share:
|
|||||||
|
issued
and outstanding – 29,592,443 shares at September 30, 2005 and
16,571,732 shares at December 31, 2004
|
29,592
|
16,572
|
|||||
|
Additional
paid-in capital
|
86,541,720
|
85,873,368
|
|||||
|
Accumulated
other comprehensive loss
|
(322,477
|
)
|
(337,239
|
)
|
|||
|
Accumulated
deficit
|
(87,510,651
|
)
|
(86,426,358
|
)
|
|||
|
Total
shareholders' deficit
|
(1,261,816
|
)
|
(873,657
|
)
|
|||
|
|
$
|
3,167,760
|
$
|
3,837,572
|
|||
See
accompanying notes to financial statements.
F-D1
WaveRider
Communications Inc.
CONSOLIDATED
STATEMENTS OF LOSS, DEFICIT AND COMPREHENSIVE LOSS
(in
U.S.
dollars)
|
Three
Months ended
|
Nine
Months ended
|
||||||||||||
|
|
September
30
|
September
30
|
September
30
|
September
30
|
|||||||||
|
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||
|
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF LOSS
|
|||||||||||||
|
REVENUE
|
|||||||||||||
|
Product
revenue
|
$
|
2,413,951
|
$
|
2,271,435
|
$
|
6,521,398
|
$
|
5,925,002
|
|||||
|
Service
revenue
|
595,543
|
397,784
|
1,408,240
|
1,462,954
|
|||||||||
|
|
3,009,494
|
2,669,219
|
7,929,638
|
7,387,956
|
|||||||||
|
COST
OF REVENUE
|
|||||||||||||
|
Product
revenue
|
1,596,489
|
1,445,226
|
4,445,459
|
4,052,247
|
|||||||||
|
Service
revenue
|
340,089
|
199,177
|
789,495
|
841,705
|
|||||||||
|
|
1,936,578
|
1,644,403
|
5,234,954
|
4,893,952
|
|||||||||
|
GROSS
MARGIN
|
1,072,916
|
1,024,816
|
2,694,684
|
2,494,004
|
|||||||||
|
EXPENSES
|
|||||||||||||
|
Selling,
general and administration
|
1,051,346
|
1,121,693
|
3,105,719
|
3,871,484
|
|||||||||
|
Research
and development
|
96,896
|
521,436
|
357,236
|
1,376,230
|
|||||||||
|
Depreciation
and amortization
|
32,386
|
53,364
|
117,098
|
242,087
|
|||||||||
|
Bad
debt expense
|
—
|
18,975
|
18,599
|
35,715
|
|||||||||
|
|
1,180,628
|
1,715,468
|
3,598,652
|
5,525,516
|
|||||||||
|
LOSS
FROM OPERATIONS
|
(107,712
|
)
|
(690,652
|
)
|
(903,968
|
)
|
(3,031,512
|
)
|
|||||
|
NON-OPERATING
EXPENSES (INCOME)
|
|||||||||||||
|
Interest
expense
|
90,114
|
113,593
|
312,834
|
301,910
|
|||||||||
|
Derivative
financial instrument (income) expense
|
(10,281
|
)
|
(355,646
|
)
|
(135,598
|
)
|
(2,491,622
|
)
|
|||||
|
Foreign
exchange loss
|
2,738
|
32,345
|
12,377
|
182,442
|
|||||||||
|
Interest
income
|
(3,054
|
)
|
(412
|
)
|
(9,288
|
)
|
(3,031
|
)
|
|||||
|
|
79,517
|
(210,120
|
)
|
180,325
|
(2,010,301
|
)
|
|||||||
|
NET
LOSS
|
$
|
(187,229
|
)
|
$
|
(480,532
|
)
|
$
|
(1,084,293
|
)
|
$
|
(1,021,211
|
)
|
|
|
BASIC
AND FULLY DILUTED LOSS PER SHARE
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.07
|
)
|
|
|
Weighted
Average Number of Common Shares
|
27,967,983
|
15,165,678
|
23,524,238
|
14,836,601
|
|||||||||
|
|
|||||||||||||
|
CONSOLIDATED
STATEMENTS OF DEFICIT
|
|||||||||||||
|
OPENING
DEFICIT
|
(87,323,422
|
)
|
(85,327,977
|
)
|
(86,426,358
|
)
|
(84,787,298
|
)
|
|||||
|
NET
LOSS FOR THE PERIOD
|
(187,229
|
)
|
(480,532
|
)
|
(1,084,293
|
)
|
(1,021,211
|
)
|
|||||
|
CLOSING
DEFICIT
|
$
|
(87,510,651
|
)
|
$
|
(85,808,509
|
)
|
$
|
(87,510,651
|
)
|
$
|
(85,808,509
|
)
|
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
|
|||||||||||||
|
NET
LOSS FOR THE PERIOD
|
(187,229
|
)
|
(480,532
|
)
|
(1,084,293
|
)
|
(1,021,211
|
)
|
|||||
|
OTHER
COMPREHENSIVE INCOME
|
|||||||||||||
|
Cumulative
translation adjustment
|
(2,460
|
)
|
(34,182
|
)
|
14,762
|
29,267
|
|||||||
|
COMPREHENSIVE
LOSS
|
$
|
(189,689
|
)
|
$
|
(514,714
|
)
|
$
|
(1,069,531
|
)
|
$
|
(991,944
|
)
|
|
See
accompanying notes to financial statements.
F-D2
WaveRider
Communications Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
U.S.
dollars)
|
Nine
months ended September 30
|
|||||||
|
|
2005
|
|
2004
|
|
|||
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|||
|
(Restated)
|
(Restated)
|
||||||
|
OPERATIONS
|
|||||||
|
Net
loss
|
$
|
(1,084,293
|
)
|
$
|
(1,021,211
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
and amortization
|
117,098
|
242,087
|
|||||
|
Unrealized
foreign exchange loss
|
44,381
|
158,174
|
|||||
|
Non-cash
financing charges
|
290,685
|
265,716
|
|||||
|
Derivative
financial instruments income
|
(135,598
|
)
|
(2,491,622
|
)
|
|||
|
Gain
on disposal of fixed assets
|
(4,600
|
)
|
(9,428
|
)
|
|||
|
Bad
debt expense
|
18,599
|
35,715
|
|||||
|
Net
changes in working capital items
|
103,777
|
378,740
|
|||||
|
Net
cash used in operating activities
|
(649,951
|
)
|
(2,441,829
|
)
|
|||
|
INVESTING
|
|||||||
|
Acquisition
of property, plant and equipment
|
(29,071
|
)
|
(161,324
|
)
|
|||
|
Net
cash used in investing activities
|
(29,071
|
)
|
(161,324
|
)
|
|||
|
FINANCING
|
|||||||
|
Proceeds
from sale of shares net of issue fees
|
8,837
|
30,796
|
|||||
|
Movement
in restricted cash
|
100,000
|
—
|
|||||
|
Proceeds
from sale of convertible debentures net of issue fees
|
—
|
1,900,000
|
|||||
|
Proceeds
from notes receivable
|
—
|
20,698
|
|||||
|
Payments
on capital lease obligations
|
(2,054
|
)
|
(9,644
|
)
|
|||
|
Net
cash provided by financing activities
|
106,783
|
1,941,850
|
|||||
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
(31,381
|
)
|
(130,542
|
)
|
|||
|
Decrease
in cash and cash equivalents
|
(603,620
|
)
|
(791,845
|
)
|
|||
|
Cash
and cash equivalents, beginning of period
|
1,291,822
|
1,843,135
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
688,202
|
$
|
1,051,290
|
|||
|
Supplementary
disclosures of cash flow information:
|
|||||||
|
Cash
paid during the period for:
|
|||||||
|
Interest
|
$
|
1,396
|
$
|
2,292
|
|||
See
accompanying notes to financial statements.
F-D3
WaveRider
Communications Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2005 (unaudited) and December 31, 2004 (audited)
|
1.
|
RESTATEMENT
|
The
Company corrected its accounting for (a) derivative financial instruments to
conform to the requirements of Statements of Financial Accounting Standards
(“SFAS”) No. 133, as amended, and Emerging Issues Task Force (“EITF”) No. 00-19.
Embedded conversion features that meet the definition of derivative financial
instruments have, where applicable, been bifurcated from host instruments and,
in all instances, derivative financial instruments have been recorded as
liabilities and carried at fair value. Other instruments, such as warrants,
where physical or net-share settlement is not within the Company’s control are
recorded as liabilities and carried at fair value. Finally, instruments that
were initially recorded as equity were reclassified to liabilities at the time
that the Company no longer possessed the ability to settle the instruments
on a
physical or net-share basis. Fair value adjustments resulted in a decrease
in
the net loss and loss per share in the amount of $76.599 and nil per share
for
the three months ended September 30, 2005 (2004 - $1,509,070 and $0.10 per
share) and $733,673 and $0.03 per share for the nine months ended September
30,
2005 (2004 - $4,557,799 and $0.31 per share).
|
2.
|
GOING
CONCERN
|
These
consolidated financial statements are prepared on a going-concern basis, which
assumes that WaveRider Communications Inc. (the “Company”) will realize its
assets and discharge its liabilities in the normal course of business. The
Company incurred a net loss of $1,084,293 for the nine months ended September
30, 2005 (2004 - $1,021,211) and reported an accumulated deficit at that date
of
$87,510,651 (2004 - $85,808,509). In addition, the requirements to continue
investing in research and development activities to meet the Company’s growth
objectives, without assurance of broad commercial acceptance of the Company’s
products, lend significant doubt as to the ability of the Company to continue
normal business operations.
While
the
Company has a long term plan that it believes will allow it to achieve
profitability and cash flow positive operations, it does not presently have,
in
the absence of further financing, adequate cash to fund ongoing operations.
In
the past, the Company has obtained financing primarily through the sale of
convertible securities. If the Company is unable to obtain additional financing
and achieve its planned cash flow positive operations and profitability, it
will, in all likelihood, be obliged to seek protection under the bankruptcy
laws; in which event the Company believes it is unlikely that its common stock
will have any value.
The
ability of the Company to continue as a going concern is dependent upon it
achieving and maintaining profitable and cash flow positive operations or
securing additional external funding to meet its obligations as they come due.
Should the Company be unable to continue as a going concern, assets and
liabilities would require restatement on a liquidation basis which would differ
materially from the going concern basis.
|
3.
|
BASIS
OF PRESENTATION
|
The
financial statements for the three and nine months ended September 30, 2005
and
2004 include, in the opinion of Management, all adjustments (which consist
only
of normal recurring adjustments) necessary to present fairly the results of
operations for such periods. Results of operations for the three and nine months
ended September 30, 2005, are not necessarily indicative of results of
operations which will be realized for the year ending December 31, 2005. The
financial statements should be read in conjunction with the Company's Form
10-KSB for the year ended December 31, 2004.
F-D4
WaveRider
Communications Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2005 (unaudited) and December 31, 2004 (audited)
|
4.
|
NET
LOSS PER SHARE
|
Basic
loss per share represents loss applicable to common stock divided by the
weighted average number of common shares outstanding during the period.
Potential common shares that may be issued by the Company relate to outstanding
stock options and warrants (determined using the treasury stock method) and
convertible debentures. For all periods presented, options, warrants and
convertible debentures were anti-dilutive and excluded from the net loss per
share computation. As a result, diluted loss per share is the same as basic
loss
per share.
|
5.
|
STOCK
OPTIONS
|
The
Company applies SFAS No. 123, together with APB No. 25 as permitted under SFAS
No. 123, in accounting for its stock option plans. Accordingly, the Company
uses
the intrinsic value method to measure the costs associated with the granting
of
stock options to employees and this cost is accounted for as compensation
expense in the consolidated statements of loss over the option vesting period
or
upon meeting certain performance criteria. In accordance with SFAS No. 123,
the
Company discloses the fair values of stock options issued to employees. Stock
options issued to outside consultants are valued at their fair value and charged
to the consolidated statements of loss in the period in which the services
are
rendered. Fair values of stock options are determined using the Black-Scholes
option-pricing model.
The
following table illustrates the effect on net loss and net loss per share if
the
Company had applied the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation”, to the stock-based employee
compensation:
|
Three
Months ended
|
Nine
Months ended
|
||||||||||||
|
|
September
30
|
September
30
|
September
30
|
September
30
|
|||||||||
|
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||
|
Net
loss, as reported
|
$
|
(187,229
|
)
|
$
|
(480,532
|
)
|
$
|
(1,084,293
|
)
|
$
|
(1,021,211
|
)
|
|
|
Add:
Stock-based employee compensation expense included in reported
net
loss
|
—
|
—
|
—
|
—
|
|||||||||
|
Deduct:
Total stock based employee compensation expense determined under
fair
value based method for all awards
|
(103,543
|
)
|
(52,054
|
)
|
(215,290
|
)
|
(193,678
|
)
|
|||||
|
Pro
forma net loss
|
$
|
(290,772
|
)
|
$
|
(532,586
|
)
|
$
|
(1,299,583
|
)
|
$
|
(1,214,889
|
)
|
|
|
Basic
and diluted loss per share,
|
|||||||||||||
|
as
reported
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.07
|
)
|
|
|
Basic
and diluted loss per share,
|
|||||||||||||
|
pro
forma
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.06
|
)
|
$
|
(0.08
|
)
|
|
F-D5
WaveRider
Communications Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2005 (unaudited) and December 31, 2004 (audited)
|
6.
|
ACCOUNTS
RECEIVABLE
|
|
|
September
|
December
|
|||||
|
|
30,
2005
|
31,
2004
|
|||||
|
|
(Unaudited)
|
(Audited)
|
|||||
|
Accounts
receivable – trade
|
$
|
1,672,729
|
$
|
1,076,013
|
|||
|
Other
receivables
|
18,207
|
14,977
|
|||||
|
Allowance
for doubtful accounts
|
(83,611
|
) |
(34,887
|
) | |||
|
|
$
|
1,607,325
|
$
|
1,056,103
|
|||
|
7.
|
INVENTORIES
|
|
|
September
|
December
|
|||||
|
|
30,
2005
|
31,
2004
|
|||||
|
|
(Unaudited)
|
(Audited)
|
|||||
|
Finished
products
|
$
|
940,798
|
$
|
1,239,278
|
|||
|
Raw
materials
|
10,723
|
314,777
|
|||||
|
Valuation
allowance
|
(390,167
|
) |
(610,411
|
) | |||
|
|
$
|
561,354
|
$
|
943,644
|
|||
|
8.
|
DERIVATIVE
FINANCIAL INSTRUMENTS
|
|
|
September
|
December
|
|||||
|
|
30,
2005
|
31,
2004
|
|||||
|
|
(Unaudited)
|
(Audited)
|
|||||
|
Warrant
liability
|
$
|
21,755
|
$
|
157,352
|
|||
|
Embedded
derivatives
|
328,367
|
485,555
|
|||||
|
|
$
|
350,122
|
$
|
642,907
|
|||
|
9.
|
CONVERTIBLE
DEBENTURES
|
During
the quarter ended September 30, 2005, convertible debentures in an aggregate
nominal value of $151,485 were converted to 4,166,965 shares of common stock.
During
the quarter ended June 30, 2005, convertible debentures in an aggregate nominal
value of $160,670 were converted to 3,405,113 shares of common
stock.
During
the quarter ended March 31, 2005, convertible debentures in an aggregate nominal
value of $473,784 were converted to 5,275,366 shares of common
stock.
During
the three and nine months ended September 30, 2005, $84,669 and $293,940,
respectively, in non-cash financing expenses were charged to the statement
of
loss. These expenses included those relating to accretion of the convertible
debentures and the amortization of deferred financing expenses. At September
30,
2005, the face amount of convertible debentures outstanding is $1,641,837 less
unamortized discounts of $357,820.
F-D6
WaveRider
Communications Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2005 (unaudited) and December 31, 2004 (audited)
|
10.
|
SHAREHOLDERS’
EQUITY
|
|
a)
|
Employee
Stock Purchase Plan - During
the second quarter of 2005, employees purchased 173,267 shares of
common
stock for $8,837.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
Employee
Stock Option Agreements
The
Company has four existing employee stock option plans -- the Employee Stock
Option (1997) Plan, the 1999 Incentive and Nonqualified Stock Option Plan,
the
Employee Stock Option (2000) Plan and the Employee Stock Option (2002) Plan
which have authorized shares of 625,000, 300,000, 600,000 and 600,000 shares,
respectively. Through September 30, 2005, the Company had awarded 592,808
options under the Employee Stock Option (1997) Plan, 296,318 options under
the
1999 Incentive and Nonqualified Stock Option Plan, 508,072 options under the
Employee Stock Option (2000) Plan and 530,000 options under the Employee Stock
Option (2002) Plan. During the quarter ended September 30, 2005, the Company
did
not award any new options.
Employee
Stock Purchase Agreement
On
July
7, 2000, the shareholders approved the establishment of the Company’s Employee
Stock Purchase (2000) Plan, which has 300,000 authorized shares. Under the
terms
of the plan, employees are eligible to purchase shares of the Company’s common
stock at 85% of the lower of the closing price at the beginning or ending date
of each period. Through the end of the third quarter of 2005, 282,271 shares
of
common stock were purchased under the Plan. As a result, the Company is not
currently offering shares to its employees and will be required to seek approval
and register additional shares prior to opening a new plan session.
Contract
Manufacturers
The
Company provides its contract manufacturers with ongoing production forecasts
to
enable them to forecast and procure required parts. Under the terms of the
Agreements with the contract manufacturers, the Company has committed to assume
liability for all parts required to manufacture the Company’s forecast products
for the next 13 weeks and all final assembly costs for the forecast products
for
the next 4 weeks, on a rolling basis. Management believes that, should it be
necessary, they could find alternative contract manufacturers without
significant disruption to the business.
On
August
31, 2005, the Company’s wholly owned subsidiary, WaveRider Communications
(Canada) Inc., entered into a General Security Agreement with our primary
contract manufacturer. Under the terms of the Agreement, WaveRider
Communications (Canada) Inc. granted a security interest over all of its
properties and assets, as additional security for the repayment and performance
of its obligations under the ongoing supply agreement.
F-D7
WaveRider
Communications Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2005 (unaudited) and December 31, 2004 (audited)
On
September 7, 2005, our primary contract manufacturer announced its plans to
close the manufacturing plant that produces our products. The plant will be
wound down over the coming months with final closure taking place on or before
March 31, 2006. We are working with the contract manufacturer to transition
our
production to another of our contract manufacturer’s plants and do not
anticipate any significant manufacturing delays or shortages. However, any
transition can result in unexpected issues which could impact our ability to
supply products over the coming two quarters.
Development
Contractors
The
Company employs outside contractors to assist in the design and development
of
its products. As at September 30, 2005, the Company had entered into development
contracts with one of its contractors, in the amount of $395,000, of which
$284,000 was expensed up to September 30, 2005. The contract calls for the
payment of progress payments against specific milestones over the course of
the
contracts.
Financial
Consultants
On
September 12, 2005, the Company entered into agreements with consultants for
business planning and financial advise and merger and acquisition support.
Under
the terms of the Agreements the Company paid a cash project fee of $20,000
and
committed to issuing 300,000 shares of common stock, upon the filing of a
registration statement under SEC Form S-8. Should the Company enter into a
financial transaction with a candidate identified by the consultants, a fee
of
six percent (6%) of the total consideration will be payable to the
consultants.
Litigation
As
at
September 30, 2005, there are no litigation matters outstanding against the
Company.
|
12.
|
SEGMENTED
INFORMATION
|
Industry
Segments
The
Company operates in one industry segment: wireless data communications products.
Geographic
Segments
The
Company operated in the following geographic segments;
|
Three
Months ended
September 30 |
Nine
Months ended September
30 |
||||||||||||
|
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
Revenue
by Region
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||
|
United
States
|
$
|
1,846,997
|
$
|
1,607,403
|
$
|
4,597,596
|
$
|
4,027,974
|
|||||
|
Australia
|
794,171
|
789,572
|
2,407,035
|
2,329,150
|
|||||||||
|
Canada
|
229,145
|
161,113
|
547,566
|
591,041
|
|||||||||
|
Rest
of World
|
139,181
|
111,131
|
377,441
|
439,791
|
|||||||||
|
|
|||||||||||||
|
|
$
|
3,009,494
|
$
|
2,669,219
|
$
|
7,929,638
|
$
|
7,387,956
|
|||||
F-D8
WaveRider
Communications Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2005 (unaudited) and December 31, 2004 (audited)
|
As
at September 30, 2005 (Unaudited)
|
||||||||||
|
|
Canada
|
Australia
|
Total
|
|||||||
|
Property,
plant and equipment
|
$
|
129,408
|
$
|
80,254
|
$
|
209,662
|
||||
|
As
at December 31, 2004 (Audited)
|
||||||||||
|
|
Canada
|
Australia
|
Total
|
|||||||
|
Property,
plant and equipment
|
$
|
193,195
|
$
|
101,868
|
$
|
295,063
|
||||
|
13.
|
COMPARATIVE
FIGURES
|
Certain
comparative amounts have been reclassified to correspond with the current
period's presentation.
F-D9
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
WaveRider
Communications Inc.
Toronto,
Ontario, Canada
We
have
audited the accompanying consolidated balance sheets of WaveRider Communications
Inc. as of December 31, 2004 and 2003, and the related consolidated statements
of loss, changes in shareholders’ (deficit) equity and comprehensive loss and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of WaveRider
Communications Inc. as of December 31, 2004 and 2003, and the results of its
consolidated operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has a significant accumulated deficit. This raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
As
described in Note 1 to the consolidated financial statements, the 2004 and
2003
financial statements have been restated for an error in the application of
accounting principles related to derivative financial instruments and
instruments indexed to the Company’s own stock.
/s/
Wolf
& Company, P.C.
Boston,
Massachusetts, U.S.A.
January
28, 2005, except for Note 1 as to which the date is January 23,
2006
F-E1
WaveRider
Communications Inc.
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31
|
|||||
|
|
2004
|
2003
|
|||||
|
(Restated)
|
(Restated)
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,291,822
|
$
|
1,843,135
|
|||
|
Restricted
cash
|
100,000
|
232,125
|
|||||
|
Accounts
receivable, less allowance for doubtful accounts
|
1,056,103
|
1,921,975
|
|||||
|
Inventories
|
943,644
|
966,433
|
|||||
|
Note
receivable
|
—
|
20,698
|
|||||
|
Prepaid
expenses and other assets
|
150,940
|
93,978
|
|||||
|
Current
assets
|
3,542,509
|
5,078,345
|
|||||
|
Property,
plant and equipment, net
|
295,063
|
407,489
|
|||||
|
|
$
|
3,837,572
|
$
|
5,485,834
|
|||
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued liabilities
|
$
|
2,080,064
|
$
|
2,329,938
|
|||
|
Deferred
revenue
|
407,639
|
440,190
|
|||||
|
Derivative
financial instruments
|
642,907
|
2,343,856
|
|||||
|
Current
portion of obligations under capital lease
|
2,781
|
10,458
|
|||||
|
Current
liabilities
|
3,133,391
|
5,124,442
|
|||||
|
Convertible
debentures, net of discount
|
1,575,984
|
648,589
|
|||||
|
Obligations
under capital lease
|
1,854
|
4,155
|
|||||
|
Total
liabilities
|
4,711,229
|
5,777,186
|
|||||
|
Commitments
and Contingencies (Note 13)
|
|||||||
|
Shareholders'
deficit:
|
|||||||
|
Preferred
Stock, $0.01 par value per share:
|
|||||||
|
issued
and outstanding Nil shares in 2004 and 2003
|
—
|
—
|
|||||
|
Common
Stock, $0.001 par value per share:
|
|||||||
|
issued
and outstanding - 16,571,732 shares in 2004 and 14,429,409 shares
in
2003
|
16,572
|
14,429
|
|||||
|
Additional
paid-in capital
|
85,873,368
|
84,786,753
|
|||||
|
Accumulated
other comprehensive loss
|
(337,239
|
)
|
(305,236
|
)
|
|||
|
Accumulated
deficit
|
(86,426,358
|
)
|
(84,787,298
|
)
|
|||
|
|
|||||||
|
Total
shareholders' deficit
|
(873,657
|
)
|
(291,352
|
)
|
|||
|
|
|
||||||
|
|
$
|
3,837,572
|
$
|
5,485,834
|
|||
REFER
TO REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM AND ACCOMPANYING NOTES
F-E2
WaveRider
Communications Inc.
CONSOLIDATED
STATEMENTS OF LOSS
|
Years
ended December 31
|
|||||||
|
|
2004
|
2003
|
|||||
|
(Restated)
|
(Restated)
|
||||||
|
REVENUE
|
|||||||
|
Product
revenue
|
$
|
7,760,329
|
$
|
11,552,992
|
|||
|
Service
revenue
|
1,781,275
|
1,525,563
|
|||||
|
|
|||||||
|
|
9,541,604
|
13,078,555
|
|||||
|
COST
OF REVENUE
|
|||||||
|
Product
revenue
|
5,290,182
|
7,338,875
|
|||||
|
Service
revenue
|
902,590
|
560,141
|
|||||
|
|
|||||||
|
|
6,192,772
|
7,899,016
|
|||||
|
GROSS
MARGIN
|
3,348,832
|
5,179,539
|
|||||
|
|
|
||||||
|
OPERATING
EXPENSES
|
|||||||
|
Selling,
general and administration
|
4,975,289
|
5,366,858
|
|||||
|
Research
and development
|
1,666,131
|
996,487
|
|||||
|
Depreciation
and amortization
|
290,529
|
510,536
|
|||||
|
Bad
debt (recovery) expense
|
(1,437
|
)
|
200,137
|
||||
|
|
|||||||
|
|
6,930,512
|
7,074,018
|
|||||
|
LOSS
FROM OPERATIONS
|
3,581,680
|
1,894,479
|
|||||
|
|
|
||||||
|
NON-OPERATING
EXPENSES (INCOME)
|
|||||||
|
Write-off
of goodwill
|
—
|
2,755,446
|
|||||
|
Interest
expense
|
425,320
|
210,421
|
|||||
|
Derivative
financial instrument (income) expense
|
(2,502,319
|
)
|
(2,985,601
|
)
|
|||
|
Foreign
exchange loss (gain)
|
138,627
|
(273,909
|
)
|
||||
|
Interest
income
|
(4,248
|
)
|
(14,530
|
)
|
|||
|
|
|
||||||
|
|
(1,942,620
|
)
|
(308,173
|
)
|
|||
|
NET
LOSS
|
$
|
(1,639,060
|
)
|
$
|
(1,586,306
|
)
|
|
|
|
|||||||
|
BASIC
AND DILUTED LOSS PER SHARE
|
$
|
(0.11
|
)
|
(0.12
|
)
|
||
|
|
|
||||||
|
Weighted
Average Number of Common Shares
|
15,139,018
|
13,068,331
|
|||||
REFER
TO REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM AND ACCOMPANYING NOTES
F-E3
WaveRider
Communications Inc.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY AND COMPREHENSIVE
LOSS
Years
ended December 31
(Restated)
|
|
Accumulated
|
|||||||||||||||||||||||||||
|
|
Additional
|
Other
|
||||||||||||||||||||||||||
|
|
|
Common
Shares
|
Preferred
Shares
|
Paid-in
|
Deferred
|
Comprehensive
|
||||||||||||||||||||||
|
|
Number
|
Par Value
|
Number
|
Par Value
|
Capital
|
Compensation
|
Deficit
|
Income
(Loss)
|
|
Total
|
||||||||||||||||||
|
December
31, 2002
|
11,675,512
|
$
|
11,675
|
16,700
|
$
|
167
|
$
|
85,124,400
|
$
|
(173,260
|
)
|
$
|
(83,200,992
|
)
|
$
|
(102,371
|
)
|
$
|
1,659,619
|
|||||||||
|
Issuances
|
34,117
|
34
|
35,211
|
35,245
|
||||||||||||||||||||||||
|
Conversions
& exercises
|
1,844,780
|
1,845
|
(16,700
|
)
|
(167
|
)
|
372,558
|
374,236
|
||||||||||||||||||||
|
Issuance
for purchase of Avendo
|
875,000
|
875
|
4,022,051
|
4,022,926
|
||||||||||||||||||||||||
|
Expiry
of options and warrants
|
(14,000
|
)
|
14,000
|
—
|
||||||||||||||||||||||||
|
Fair
value of warrants reclassified to liabilities
|
(4,753,467
|
)
|
(4,753,467
|
)
|
||||||||||||||||||||||||
|
Amortization
of deferred compensation
|
159,260
|
159,260
|
||||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
(202,865
|
)
|
(202,865
|
)
|
||||||||||||||||||||||||
|
Net
loss
|
(1,586,306
|
)
|
(1,586,306
|
)
|
||||||||||||||||||||||||
|
Comprehensive
net loss
|
(1,789,171
|
)
|
||||||||||||||||||||||||||
|
December
31, 2003
|
14,429,409
|
$
|
14,429
|
—
|
$
|
—
|
$
|
84,786,753
|
$
|
—
|
$
|
(84,787,298
|
)
|
$
|
(305,236
|
)
|
$
|
(291,352
|
)
|
|||||||||
|
Issuances
|
17,875
|
18
|
24,292
|
24,310
|
||||||||||||||||||||||||
|
Conversions
& exercises
|
2,124,448
|
2,125
|
1,062,323
|
1,064,448
|
||||||||||||||||||||||||
|
Cumulative
translation adjustments
|
(32,003
|
)
|
(32,003
|
)
|
||||||||||||||||||||||||
|
Net
loss
|
(1,639,060
|
)
|
(1,639,060
|
)
|
||||||||||||||||||||||||
|
Comprehensive
net loss
|
(1,671,063
|
)
|
||||||||||||||||||||||||||
|
December
31, 2004
|
16,571,732
|
$
|
16,572
|
—
|
$
|
—
|
$
|
85,873,368
|
$
|
—
|
$
|
(86,426,358
|
)
|
$
|
(337,239
|
)
|
$
|
(873,657
|
)
|
|||||||||
REFER
TO REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM AND ACCOMPANYING NOTES
F-E4
WaveRider
Communications Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
ended December 31
|
|||||||
|
2004
|
2003
|
||||||
|
(Restated)
|
(Restated)
|
||||||
|
OPERATING
|
|||||||
|
Net
loss
|
$
|
(1,639,060
|
)
|
$
|
(1,586,306
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
and amortization
|
290,529
|
510,536
|
|||||
|
Write-off
of goodwill
|
—
|
2,755,446
|
|||||
|
Charges
for issuance of options and warrants
|
—
|
159,260
|
|||||
|
Non-cash
financing expenses
|
367,863
|
125,067
|
|||||
|
Derivative
financial instrument income
|
(2,502,319
|
)
|
(2,985,601
|
)
|
|||
|
Bad
debt expense
|
(1,437
|
)
|
200,137
|
||||
|
Unrealized
foreign exchange loss (gain)
|
103,411
|
(216,067
|
)
|
||||
|
(Gain)
loss on disposal of property, plant and equipment
|
(9,198
|
)
|
13,064
|
||||
|
Net
changes in working capital items
|
552,149
|
(589,339
|
)
|
||||
|
Net
cash used in operating activities
|
(2,838,062
|
)
|
(1,613,803
|
)
|
|||
|
INVESTING
|
|||||||
|
Acquisition
of property, plant and equipment
|
(165,199
|
)
|
(59,618
|
)
|
|||
|
Cash
received on acquisition of Avendo Wireless Inc.
|
—
|
1,177,420
|
|||||
|
Net
cash provided by (used in) investing activities
|
(165,199
|
)
|
1,117,802
|
||||
|
FINANCING
|
|||||||
|
Proceeds
from sale of shares and warrants (net of issue fees) and
|
|||||||
|
exercise
of options and warrants
|
31,476
|
41,174
|
|||||
|
Proceeds
from sale of convertible debentures net of issue fees
|
2,351,000
|
1,416,880
|
|||||
|
Movement
in restricted cash
|
132,125
|
(232,125
|
)
|
||||
|
Repayment
of note receivable
|
20,698
|
—
|
|||||
|
Payments
on capital lease obligations
|
(10,168
|
)
|
(9,542
|
)
|
|||
|
Net
cash provided by financing activities
|
2,525,131
|
1,216,387
|
|||||
|
Effect
of exchange rate changes on cash
|
(73,183
|
)
|
97,145
|
||||
|
(Decrease)
increase in cash and cash equivalents
|
(551,313
|
)
|
817,531
|
||||
|
Cash
and cash equivalents, beginning of year
|
1,843,135
|
1,025,604
|
|||||
|
Cash
and cash equivalents, end of year
|
$
|
1,291,822
|
$
|
1,843,135
|
|||
REFER
TO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND ACCOMPANYING
NOTES
F-E5
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
1. RESTATEMENT
The Company corrected its accounting for (a) derivative financial instruments to conform to the requirements of Statements of Financial Accounting Standards (“SFAS”) No. 133, as amended, and Emerging Issues Task Force (“EITF”) No. 00-19. Embedded conversion features that meet the definition of derivative financial instruments have, where applicable, been bifurcated from host instruments and, in all instances, derivative financial instruments have been recorded as liabilities and carried at fair value. Other instruments, such as warrants, where physical or net-share settlement is not within the Company’s control are recorded as liabilities and carried at fair value. Finally, instruments that were initially recorded as equity were reclassified to liabilities at the time that the Company no longer possessed the ability to settle the instruments on a physical or net-share basis. Fair value adjustments resulted in a decrease in the net loss and loss per share in the amount of $4,661,609 and $0.31 per share for the year ended December 31, 2004 (2003 - $3,475,001 and $0.27 per share).
2. NATURE
OF OPERATIONS
WaveRider
Communications Inc. was incorporated in 1987 under the laws of the state of
Nevada.
The
Company develops and markets wireless data communications products throughout
the world, focusing on Internet connectivity. The Company’s primary markets are
telecommunications companies and Internet Service Providers (ISPs) supplying
high-speed wireless Internet connectivity to their customers. A significant
secondary market is that of Value Added Resellers, to allow them to supply
their
customers with wireless connectivity for local area networks.
3. GOING
CONCERN
These
consolidated financial statements are prepared on a going-concern basis, which
assumes that WaveRider Communications Inc. (the “Company”) will realize its
assets and discharge its liabilities in the normal course of business. The
Company incurred a net loss of $1,639,060 for the year ended December 31, 2004
(2003 - $1,586,306) and reported an accumulated deficit at that date of
$86,426,358 (2003 - $84,787,298). In addition, the requirements to continue
investing in research and development activities to meet the Company’s growth
objectives, without assurance of broad commercial acceptance of the Company’s
products, lend significant doubt as to the ability of the Company to continue
normal business operations.
While
the
Company has a plan that it believes will allow it to achieve profitability
and
cash flow positive operations, it does not presently have, in the absence of
further financing, adequate cash to fund ongoing operations. In the past, the
Company has obtained financing primarily through the sale of convertible
securities. If the Company is unable to obtain additional financing and achieve
its planned cash flow positive operations and profitability, it will, in all
likelihood, be obliged to seek protection under the bankruptcy laws; in which
event the Company believes it is unlikely that its common stock will have any
value.
The
ability of the Company to continue as a going concern is dependent upon it
achieving and maintaining profitable and cash flow positive operations or
securing additional external funding to meet its obligations as they come due.
Should the Company be unable to continue as a going concern, assets and
liabilities would require restatement on a liquidation basis which would differ
materially from the going concern basis.
4. BASIS
OF PRESENTATION
On
June
17, 2004, our directors approved a 1-for-10 reverse stock split of our common
stock, based on shareholder approval on September 4, 2003. The reverse stock
split became effective on July 1, 2004. All common stock information presented
herein has been retroactively restated to reflect the reverse stock
split.
F-E6
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
5. SIGNIFICANT
ACCOUNTING POLICIES
Principles
of consolidation and basis of accounting – The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries; WaveRider Communications (Australia) Pty Ltd
(formerly known as ADE Network Technology Pty Ltd.) (“ADE”), an Australian
corporation, WaveRider Communications (USA) Inc., a Nevada corporation,
WaveRider Communications (Canada) Inc., a British Columbia company, Avendo
Wireless Inc., an Ontario corporation and JetStream Internet Services Inc.,
a
British Columbia company.
The
Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America.
Use
of estimates in the preparation of financial statements –
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of
the financial statements and the reporting period. Actual results could differ
from those estimates. Material estimates that are susceptible to significant
changes in the near term relate to the allowance for losses on receivables,
inventory valuation reserves, warranty liabilities, income taxes and the fair
value of equity instruments.
Revenue
recognition and deferred revenue – The
Company complies with Staff Accounting Bulletin (SAB) Nos. 101 and 104, “Revenue
Recognition in Financial Statements” and “Revenue Recognition” and related
communiques; SAB Nos. 101 and 104 provide guidance regarding the recognition,
presentation and disclosure of revenue in financial statements filed with the
Securities and Exchange Commission (SEC).
Revenue
from product sales to end-user and Value-Added Reseller customers is recognized
when all of the following criteria have been met: (a) evidence of an agreement
exists, (b) delivery to the customer has occurred, (c) the price to the customer
is fixed and determinable, and (d) collectibility is reasonably assured.
Delivery occurs when the product is shipped, except when the terms of a specific
contract include substantive customer acceptance.
Revenue
from hardware maintenance contracts is recognized ratably over the term of
the
contract, which is generally one year. Revenue from installation and other
services is recognized as earned and the associated costs and expenses are
recognized as incurred. In cases in which extended warranty, maintenance or
installation services are bundled with the sale of the product, the Company
unbundles these components and defers the recognition of revenue for the
services at the time the product sales revenue is recognized, based upon the
vendor specific evidence of the value of the service element. Revenue from
rentals and operating leases is recognized monthly as the fees
accrue.
Revenue
from Internet service contracts is recognized over the term of the contracts,
which do not exceed one year.
Financial
instruments – Financial
instruments are initially recorded at historical cost. If subsequent
circumstances indicate that a decline in the fair value of a financial asset
is
other than temporary, the financial asset is written down to its fair value.
Unless
otherwise indicated, the fair values of financial instruments approximate their
carrying amounts. By their nature, all financial instruments involve risk,
including credit risk for non-performance by counterparties. The maximum
potential loss may exceed any amounts recognized in the consolidated balance
sheets. Exposure to credit risk is controlled through credit approvals, credit
limits and monitoring procedures. The Company seeks to limit its exposure to
credit risks in any single country or region.
F-E7
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
By
virtue
of its international operations, the Company is exposed to fluctuations in
currency. The Company manages its exposure to these market risks through its
regular operating and financing activities. The Company is subject to foreign
currency risk on its Canadian and Australian business activities.
The
fair
values of cash and cash equivalents, accounts receivable, current notes
receivable, accounts payable and current liabilities approximate their recorded
amounts because of their short term to realization or settlement. The fair
value
of convertible debentures approximates its carrying value due to its market
rates and relatively short term to maturity.
Cash
and cash equivalents – All
liquid investments having an original maturity not exceeding three months are
treated as cash equivalents.
Restricted
cash – Restricted
cash consists of amounts collateralizing the letter of credit described in
Note
13.
Accounts
receivable –
The Company has historically provided financial terms to certain
customers in connection with purchases of the Company's products. Financial
terms, for credit-approved customers, are generally on a net 30-day
basis.
Management
periodically reviews customer account activity in order to assess the adequacy
of the allowances provided for potential losses. Factors considered include
economic conditions, collateral values and each customer's payment history
and
credit worthiness. Adjustments, if any, are made to reserve balances following
the completion of these reviews to reflect management's best estimate of
potential losses.
Inventory –
Raw
materials are recorded at the lower of cost or replacement cost. Finished goods
are recorded at the lower of cost and net realizable value. Cost is determined
on the average cost basis and includes material, labor and overhead, where
applicable.
The
Company records valuation reserves on its inventory for estimated obsolescence
or unmarketability. The amount of the write-down is equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions.
The
Company balances the need to maintain strategic inventory levels to ensure
competitive lead times with the risk of inventory obsolescence due to rapidly
changing technology and customer requirements. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Product
Warranty – The
Company offers warranties of various lengths to its customers depending on
the
specific product and terms of the customer purchase agreement. The average
length of the warranty period is 12 months. The Company’s warranties require it
to repair or replace defective products during the warranty period at no cost
to
the customer. At the time product revenue is recognized, the Company records
a
liability for estimated costs that may be incurred under its warranties. The
costs are estimated based on historical experience and any specific warranty
issues that have been identified. Although historical warranty costs have been
within expectations, there can be no assurance that future warranty costs will
not exceed historical amounts. The Company periodically assesses the adequacy
of
its recorded warranty liability and adjusts the balance as
necessary.
Changes
in the Company’s product warranty liability for the year ended December 31, are
as follows:
F-E8
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
|
2004
|
2003
|
||||||
|
Balance,
beginning
|
$
|
110,060
|
$
|
40,345
|
|||
|
Warranties
issued
|
22,794
|
168,933
|
|||||
|
Settlements
made in cash or in-kind
|
(29,704
|
)
|
(71,424
|
)
|
|||
|
Changes
in estimated pre-existing warranties,
including
expirations
|
169
|
(27,794
|
)
|
||||
|
Balance,
ending
|
$
|
103,319
|
$
|
110,060
|
|||
Property,
plant and equipment –
Property,
plant and equipment are recorded at historic cost. The Company uses a straight
line basis for depreciation, with useful lives as follows:
|
Computer
software
|
3
years
|
|
Computer
equipment
|
4
years
|
|
Lab
equipment and tools
|
4
years
|
|
Equipment
and fixtures
|
5
years
|
|
Assets
held for lease
|
5
years
|
|
Leasehold
improvements
|
over
the shorter of the term of the lease or estimated useful
lives
|
Foreign
currency translation – The
Company's functional currency is the US dollar, except as noted below. Foreign
denominated non-monetary assets, liabilities and operating items of the Company
are measured in US dollars at the exchange rate prevailing at the respective
transaction dates. Monetary assets and liabilities denominated in foreign
currencies are measured at exchange rates prevailing on the consolidated balance
sheet dates.
The
functional currency of ADE, the Company's subsidiary in Australia, is Australian
dollars. Accordingly, ADE’s assets and liabilities are translated into US
dollars using the rate of exchange in effect on the balance sheet dates, whereas
ADE’s revenues, expenses, gains and losses are translated at the average rate of
exchange in effect throughout the reporting period. Resulting translation
adjustments are included as a separate component of comprehensive loss within
shareholders' equity in the accompanying consolidated financial
statements.
Realized
and unrealized foreign exchange losses/(gains) included in the statement of
operations are $138,627 in 2004 (2003 - ($273,909)).
Income
taxes - Income
taxes are accounted for in accordance with the Statement of Financial Accounting
Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. Under this method,
deferred income tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and liabilities
and are measured using the income tax rates and laws currently enacted.
Valuation allowances are established, when necessary, to reduce deferred income
tax assets to an amount that is more likely than not expected to be
realized.
Convertible
Instruments – The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features where the ability
to
physically or net-share settle the conversion option is not within the control
of the Company are bifurcated and accounted for as derivative financial
instruments. (See Derivative
Financial Instruments
below).
Bifurcation of the embedded derivative instrument requires allocation of the
proceeds first to the fair value of the embedded derivative instrument with
the
residual allocated to the debt instrument. The resulting discount to the face
value of debt instrument is amortized through periodic charges to interest
expense (See Note 13).
F-E9
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
Derivative
Financial Instruments – The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as warrants to acquire common stock and the embedded
conversion features of debt and preferred stock instruments that are indexed
to
the Company’s common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement. Such
financial instruments are initially recorded at fair value with subsequent
changes in fair value charged to operations each reporting period. If the
Company subsequently achieves the ability to net-share settle the instruments,
they would be reclassified at their fair value to equity.
Stock
options – The
Company applies SFAS No. 123 “Accounting for Stock-Based Compensation”, together
with APB No. 25, “Accounting for Stock Issued to Employees” as permitted under
SFAS No. 123, in accounting for its stock option plans. Accordingly, the Company
uses the intrinsic value method to measure the costs associated with the
granting of stock options to employees and this cost is accounted for as
compensation expense in the consolidated statements of loss over the option
vesting period or upon meeting certain performance criteria. In accordance
with
SFAS No. 123, the Company discloses the fair values of stock options issued
to
employees. Stock options issued to outside consultants are valued at their
fair
value and charged to the consolidated statements of loss in the period in which
the services are rendered. Fair values of stock options are determined using
the
Black-Scholes option-pricing model.
The
following table illustrates the effect on net loss and net loss per share if
the
Company had applied the fair value recognition provisions of SFAS No. 123 to
the
stock-based employee compensation:
|
2004
|
2003
|
|||||||||
|
Net
loss, as reported
|
$
|
(1,639,060
|
)
|
$
|
(1,586,306
|
)
|
||||
|
Add:
|
||||||||||
|
|
Stock-based employee compensation expense included in reported net loss |
159,260
|
||||||||
|
Deduct:
|
||||||||||
| Stock-based employee compensation expense determined under fair value based method for all awards |
(193,877
|
)
|
(941,486
|
)
|
||||||
|
Pro
forma net loss
|
$
|
(1,832,937
|
)
|
$
|
(2,368,532
|
)
|
||||
|
Basic
and diluted loss per share, as reported
|
$
|
(0.11
|
)
|
$
|
(0.12
|
)
|
||||
|
Basic
and diluted loss per share, pro forma
|
$
|
(0.12
|
)
|
$
|
(0.18
|
)
|
||||
Research
and development costs – Research
and development costs are charged to expense as incurred.
Valuation
of long-lived assets –
The Company considers the carrying value of long-lived assets when
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. If the Company expects an asset to generate cash flows
less than the asset’s carrying value, at the lowest level of identifiable cash
flows, the Company recognizes a loss for the difference between the asset’s
carrying value and its fair value.
Comprehensive
income (loss) – Under
SFAS No. 130, the Company presents comprehensive income (loss), in addition
to
net income (loss) in the accounts. Comprehensive loss differs from net loss
as a
result of foreign currency translation adjustments. Accumulated other
comprehensive income (loss) is included in the consolidated statements of
changes in shareholders’ equity and reflects the cumulative effect of other
comprehensive income (loss) excluded from net income (loss) as reported in
the
consolidated statements of income (loss).
F-E10
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
Recent
Accounting Pronouncements – In
December 2003, the Securities and Exchange Commission, (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”. SAB No. 104
supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No.
104's primary purpose is to rescind accounting guidance contained in SAB No.
101
related to multiple element revenue arrangements, superseded as a result of
the
issuance of Emerging Issues Task Force (“EITF”) No. 00-21, “Accounting for
Revenue Arrangements with Multiple Deliverables”. Additionally, SAB No. 104
rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (“FAQ”) issued with SAB No. 101 that had been codified in
SEC Topic No. 13, “Revenue Recognition”. Selected portions of the FAQ have been
incorporated into SAB No. 104. While the wording of SAB No. 104 has changed
to
reflect the issuance of EITF No. 00-21, the revenue recognition principles
of
SAB No. 101 remain largely unchanged by the issuance of SAB No. 104, which
was
effective upon issuance. The adoption of SAB No. 104 did not impact our
consolidated financial statements.
In
December 2003, the FASB issued FASB interpretation No. 46R (“FIN 46R”),
“Consolidation of Variable Interest Entities”. FIN 46R expands upon existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
A
variable interest entity is a corporation, partnership, trust or any other
legal
structure used for business purposes that either (a) does not have equity in
investments with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN
46R
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's or is entitled to receive a majority of the entity's residual returns
or both. The adoption of this interpretation did not have any impact on our
financial position or results of operations.
In
December 2004, the FASB issued SFAS No. 123R, “Accounting for Stock-Based
Compensation” (“SFAS No. 123R”). SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed. Prior to SFAS No. 123R, only certain pro forma
disclosures of fair value were required. The provisions of this Statement are
effective for small business issuers the first interim reporting period that
begins after December 15, 2005. Accordingly, we will adopt SFAS No. 123R
commencing with the quarter ending March 31, 2006. If we had included the fair
value of employee stock options in our financial statements, our net loss for
the fiscal years ended December 31, 2004 and 2003 would have been as disclosed
in Note 4 above. Accordingly, the adoption of SFAS No. 123R is expected to
have
a material effect on our financial statements.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs -- An Amendment of
ARB No. 43, Chapter 4” (“SFAS No. 151”). This Statement amends the guidance in
ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for
“abnormal amounts” of idle facility expense, freight, handling costs, and wasted
material or spoilage. Before revision by SFAS No. 151, the guidance that existed
in ARB No. 43 stipulated that these type items may be “so abnormal” that the
appropriate accounting treatment would be to expense these costs as incurred.
SFAS No. 151 requires that these costs be recognized as current-period charges
without regard to whether the “so abnormal” criterion has been met.
Additionally, SFAS No. 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The
adoption of SFAS 151 is not expected to have a material effect on our financial
statements.
F-E11
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
| 6. |
ACQUISITION
OF SUBSIDIARY
|
Effective
July 2, 2003, the Company acquired Avendo Wireless Inc. (“Avendo”), a
privately-held technology developer located in Mississauga, Ontario, Canada.
The
Company undertook this acquisition to gain control of Avendo’s assets, which
include cash, net receivables, in-process wireless technologies and an
experienced research and development team to aid in expanding and enhancing
WaveRider’s non-line-of-sight wireless broadband products.
Avendo
designs and develops advanced fixed broadband wireless technology. Avendo's
technology, if completed, is targeted to significantly improve spectral
efficiency resulting in the ability to operate in non line of sight environments
thereby providing the reliability needed to meet the needs of leading equipment
vendors and their customers.
Under
the
terms of the acquisition, the Company issued 875,000 shares of common stock
and
300,000 common stock purchase warrants in exchange for all of the issued and
outstanding shares of Avendo and all outstanding long term debt. The warrants
are exercisable at $4.10 per share for a five year period and include a net
share settlement feature. In addition, the Company issued to the employees
and
advisors to Avendo 86,300 employee stock options, with an exercise price of
$3.90, the fair value of the common stock on that date.
The
transaction was accounted for as a purchase and is summarized as
follows:
|
Cash
on hand
|
$
|
1,177,420
|
||
|
Other
current assets
|
245,379
|
|||
|
Fixed
assets
|
16,235
|
|||
|
Current
liabilities
|
(64,689
|
)
|
||
|
Net
assets received
|
1,374,345
|
|||
|
Expenses
incurred on acquisition
|
(106,865
|
)
|
||
|
Goodwill
|
2,755,446
|
|||
|
Total
consideration received
|
$
|
4,022,926
|
||
|
Common
stock issued on closing
|
$
|
3,412,500
|
||
|
Warrants
issued on closing at fair value
|
416,647
|
|||
|
Employee
stock options issued on closing at fair value
|
193,779
|
|||
|
Total
consideration given
|
$
|
4,022,926
|
||
|
The
cash effect of this transaction is summarized as follows:
|
||||
|
Cash
acquired on closing
|
$
|
1,177,420
|
||
|
The
pro forma effect of this transaction is summarized as
follows:
|
||||
|
|
Year
ended December 31, 2003
|
|||
|
Pro
forma consolidated revenue
|
$
|
13,078,555
|
||
|
Pro
forma consolidated net loss
|
$
|
(1,743,685
|
)
|
|
|
Pro
forma consolidated basic and diluted loss per share
|
$
|
(0.13
|
)
|
F-E12
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
In conjunction with our 2003 year-end audit, the Company undertook a complete review of its development plans and resources required to bring the acquired Avendo technology to commercial viability and compared these costs to the expected net present value of the discounted future cash flows. As a result of management’s analysis, it was determined that we would not undertake to fully commercialize the product, under current circumstances. As a result, an impairment charge of $2,755,446 was required on the basis that the carrying value of goodwill exceeded its fair value.
| 7. |
ACCOUNTS
RECEIVABLE
|
|
2004
|
2003
|
||||||
|
Accounts
receivable – trade
|
$
|
1,076,013
|
$
|
1,925,336
|
|||
|
Scientific
research tax credit receivable
|
215,966
|
—
|
|||||
|
Other
receivables
|
23,739
|
14,977
|
|||||
|
Allowance
for doubtful accounts
|
(243,066
|
)
|
(34,887
|
)
|
|||
|
$
|
1,056,103
|
$
|
1,921,975
|
||||
| 8. |
INVENTORIES
|
|
2004
|
2003
|
||||||
|
Finished
products
|
$
|
1,239,278
|
$
|
1,306,580
|
|||
|
Raw
materials
|
314,777
|
36,330
|
|||||
|
Valuation
allowance
|
(610,411
|
)
|
(376,477
|
)
|
|||
|
$
|
943,644
|
$
|
966,433
|
||||
| 9. |
NOTE
RECEIVABLE
|
On
February 28, 2001, the Company purchased a promissory note from Platinum
Communications Corporation (“Platinum”) in the amount of approximately $65,601
(Can $100,000). The note is secured by certain assets of Platinum, bears
interest at Canadian prime rate plus 2% and is repayable in 20 equal monthly
instalments commencing March 1, 2002. In March 2004, Platinum made all payments
required to retire the loan.
| 10. |
PROPERTY,
PLANT AND EQUIPMENT
|
|
Cost
|
Accumulated
Depreciation
|
Net
Book Value 2004
|
Cost
|
Accumulated
Depreciation
|
Net
Book Value 2003
|
||||||||||||||
|
Computer
software
|
$
|
936,902
|
$
|
921,626
|
$
|
15,276
|
$
|
916,902
|
$
|
911,576
|
$
|
5,326
|
|||||||
|
Computer
equipment
|
1,161,264
|
1,043,560
|
117,704
|
1,112,321
|
977,431
|
134,890
|
|||||||||||||
|
Lab
equipment and tools
|
1,102,475
|
1,035,144
|
67,331
|
1,047,150
|
923,920
|
123,230
|
|||||||||||||
|
Equipment
and fixtures
|
323,285
|
272,672
|
50,613
|
339,071
|
274,464
|
64,607
|
|||||||||||||
|
Assets
held for lease
|
84,824
|
55,136
|
29,688
|
84,824
|
38,171
|
46,653
|
|||||||||||||
|
Leasehold
improvements
|
27,150
|
12,699
|
14,451
|
83,177
|
50,394
|
32,783
|
|||||||||||||
|
|
$
|
3,635,900
|
$
|
3,340,837
|
$
|
295,063
|
$
|
3,583,445
|
$
|
3,175,956
|
$
|
407,489
|
F-E13
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
Capital
leases - computer equipment includes $nil (2003 - $24,123) net of accumulated
depreciation of $211,529 (2003 - $187,407), Lab Equipment and tools includes
$410 (2003 - $23,622) net of accumulated depreciation of $350,175 (2003 -
$326,963) and Equipment and fixtures includes $6,434 (2003 - $725) net of
accumulated depreciation of $919 (2003 - $15,723).
The
assets held for lease consist of a communication tower and wireless
communications equipment which have been leased to a customer on a fixed
three-year term. Unless terminated the lease automatically renews for an
additional three-year term. The minimum lease payments receivable under the
contracts are $16,700 in 2005.
| 11. |
ACCOUNTS
PAYABLE AND ACCRUED
LIABILITIES
|
|
2004
|
2003
|
||||||
|
Accounts
payable
|
$
|
888,974
|
$
|
1,415,770
|
|||
|
Accrued
development costs
|
317,126
|
3,179
|
|||||
|
Accrued
salaries and benefits
|
269,645
|
372,072
|
|||||
|
Accrued
royalties
|
107,610
|
69,744
|
|||||
|
Accrued
warranty
|
103,319
|
110,060
|
|||||
|
Accrued
audit and tax
|
74,546
|
100,000
|
|||||
|
Other
accrued liabilities
|
318,844
|
259,113
|
|||||
|
$
|
2,080,064
|
$
|
2,329,938
|
||||
| 12. |
DERIVATIVE
FINANCIAL
INSTRUMENTS
|
|
2004
|
2003
|
||||||
|
Warrant
liability
|
$
|
157,352
|
$
|
2,123,856
|
|||
|
Embedded
derivatives
|
485,555
|
220,000
|
|||||
|
$
|
642,907
|
$
|
2,343,856
|
||||
| A |
Warrants
|
The
Company has several series of warrants outstanding at December 31, 2004 as
follows:
|
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Life
|
|||||
|
$0.273
|
881,443
|
55
months
|
|||||
|
$4.10
|
300,000
|
42
months
|
|||||
|
$5.00
|
214,893
|
22
months
|
|||||
|
$17.10
|
87,719
|
17
months
|
|||||
|
$28.00
|
96,154
|
11
months
|
|||||
|
$30.50
|
2,500
|
11
months
|
|||||
|
$0.273
- $30.50
|
1,582,709
|
||||||
F-E14
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
Effective
with the issuance of the Convertible Debentures (See Note 13) on July 13, 2003,
the Company no longer controlled the ability to physically or net share settle
any other derivative financial instruments, representing principally warrants
to
acquire common stock, previously executed. As a result, the fair values of
the
then outstanding warrants, amounting to $4,753,467, were reclassified from
stockholders’ equity (deficit) to derivative financial instrument liabilities.
These instruments are adjusted to fair value until the Company’s ability to
settle on a physical or net-share basis is regained, at which time the fair
value of the warrants would be reclassified to stockholders’ equity (deficit).
The Company has classified the derivative financial instruments as current
liabilities as the holders have the rights to convert at any time.
The
fair
value of each of the warrants was calculated as of December 31, 2004 and 2003,
using the Black-Scholes pricing model, using their remaining term to expiry
and
the following other inputs:
|
2004
|
2003
|
|
|
Dividend
yield
|
—
|
—
|
|
Volatility
|
95%
|
121%
|
|
Risk-free
interest rate
|
2.67%
- 3.60%
|
.91%
- 3.27%
|
|
B
|
Embedded
Derivatives
|
Included
in the Company’s Convertible Debentures are provisions, including the conversion
feature, that meet the definition of embedded derivatives, as defined in
SFAS
133 and EITF 00-19. In such instances, net-cash settlement is assumed for
financial accounting and reporting, even when the terms of the underlying
contracts do not provide for net-cash settlement. Such financial instruments
are
initially recorded at fair value with subsequent changes to the fair value
charged (credited) to operations each reporting period.
The
Company’s convertible debentures do include a net-cash settlement provision,
limiting the amount payable upon conversion to 120% of the face value of
the
debenture. As such, the Company has recorded the fair value of the liability
for
the underlying derivative financial instruments at fair value determined
to be
20% of the face value of the convertible debentures
outstanding.
| 13. |
CONVERTIBLE
DEBENTURES
|
| i) |
November
15, 2004 Issue – On
November 15, 2004, the Company issued convertible debentures, at
a 6%
discount, in the aggregate principal amount of $531,250 to Crescent
International Ltd. and Palisades Master Fund and received cash proceeds
of
$500,000, before cash fees of $49,000. The debt is unsecured, has
no
stated interest rate and matures in three years. In conjunction with
the
convertible debentures, the Company issued Series T warrants to purchase
510,818 shares of common stock at a price of $0.273 per share with
a term
of five years. Assuming a net-cash settlement basis, the fair value
of the
warrants and the embedded derivatives were first determined with
the
remaining proceeds being allocated to the
debenture.
|
The
convertible debentures are initially convertible into shares of common stock
at
$0.286. If, after April 14, 2005, the price of the Company’s common stock is
less than $0.3432, upon a request for conversion, the Company, at its option,
may either a) pay cash equal to 120% of the face value of the note or b) issue
conversion shares based on a conversion price equal to 90% of the average of
the
lowest three Closing Bid Prices during the 20 Trading Day period immediately
preceding the Conversion Date, as defined in the agreement. The
convertible debentures are not convertible into a fixed or determinable number
of shares. The Series T warrants also have a net share settlement
feature.
In
conjunction with this financing, certain anti-dilution provisions in the
Company’s convertible debentures, issued April 23, 2004 and July 14, 2003, and
its Series R and S warrants were triggered. As a result, the set conversion
price of the April 23, 2004 and July 14, 2003 convertible debentures was reset
from $2.175 to $0.286 and the exercise price of the Series R and S warrants
was
reset from $2.076 to $0.273.
F-E15
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
| ii) |
April
23, 2004 Issue –
On
April 23, 2004, the Company issued convertible debentures, at a 6%
discount, in the aggregate principal amount of $2,125,000 to Crescent
International Ltd. and Palisades Master Fund and received cash proceeds
of
$2,000,000, before cash fees of $100,000. The debt is unsecured,
has no
stated interest rate and matures in three years. In conjunction with
the
convertible debentures, the Company issued Series S warrants to purchase
268,715 shares of common stock at a price of $2.076 per share, reset
to
$0.273 on November 15, 2004, with a term of five years. Assuming
a
net-cash settlement basis, the fair value of the warrants and the
embedded
derivatives were first determined with the remaining proceeds being
allocated to the debenture.
|
The
convertible debentures are initially convertible into shares of common stock
at
$2.175, reset to $0.286 on November 15, 2004. If, after September 23, 2004,
the
price of the Company’s common stock is less than $2.61, reset to $0.3432 on
November 15, 2004, upon a request for conversion, the Company, at its option,
may either a) pay cash equal to 120% of the face value of the note or b) issue
conversion shares based on a conversion price equal to 93% of the average of
the
lowest three Closing Bid Prices during the 20 Trading Day period immediately
preceding the Conversion Date, as defined in the agreement. The
convertible debentures are not convertible into a fixed or determinable number
of shares. The Series S warrants also have a net share settlement
feature.
In
conjunction with this financing, certain anti-dilution provisions in the
Company’s convertible debentures, issued July 14, 2003, and Series R warrants
were triggered. As a result, the set conversion price of the July 2003
convertible debentures was reset from $4.318 to $2.175 and the exercise price
of
the Series R warrants was reset from $4.121 to $2.076.
|
iii)
|
July
14, 2003 Issue – On
July 14, 2003, the Company issued convertible debentures, at a 6%
discount, in the aggregate principal amount of $1,600,000 to two
investment companies and received cash proceeds of $1,504,000, before
cash
fees of $87,120. The debt is unsecured, has no stated interest rate
and
matures in three years. In conjunction with the convertible debentures,
the Company issued Series R warrants to purchase 101,910 shares of
common
stock at a price of $4.121 per share, most recently reset to $0.273
on
November 15, 2004, with a term of five years. Assuming a net-cash
settlement basis, the fair value of the warrants and the embedded
derivatives were first determined with the remaining proceeds being
allocated to the debenture.
|
The
convertible debentures are initially convertible into shares of common stock
at
$4.318, most recently reset to $0.286 on November 15, 2004. However, upon
a
request for conversion, if the price of the Company’s common stock at the time
of the request is less than $5.182, most recently reset to $0.3432 on November
15, 2004, the Company, at its option, may either a) pay cash equal to 120%
of
the face value of the note or b) issue conversion shares based on a conversion
price equal to 95% of the average of the lowest three Closing Bid Prices
during
the 20 Trading Day period immediately preceding the Conversion Date, as defined
in the agreement. The convertible debentures are not convertible into a fixed
or
determinable number of shares. The
Series R warrants also have a net share settlement
feature.
|
iv)
|
Allocation
of net proceeds – The
net proceeds of the transactions have been allocated to the primary
financial instruments as follows:
|
|
November
2004
|
April
2004
|
July
2003
|
||||||||
|
Convertible
debentures
|
$
|
287,810
|
$
|
1,145,125
|
$
|
828,010
|
||||
|
Warrants
|
105,940
|
429,875
|
355,990
|
|||||||
|
Derivative
financial instruments
|
106,250
|
425,000
|
320,000
|
|||||||
|
Deferred
financing costs
|
(49,000
|
)
|
(100,000
|
)
|
(87,120
|
)
|
||||
|
Net
cash proceeds
|
$
|
451,000
|
$
|
1,900,000
|
$
|
1,416,880
|
F-E16
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
|
v)
|
Conversions –
During
2004, convertible debentures in an aggregate nominal value of $1,328,474
were converted to 2,084,021 shares of common stock. For the year
ended
December 31, 2004, $367,863 in non-cash financing expenses was charged
to
the statement of loss. These expenses included those relating to
accretion
of the convertible debentures and the amortization of deferred financing
expenses.
|
During
2003, convertible debentures in an aggregate nominal value of $500,000 were
converted to 224,849 shares of common stock. For the year ended December 31,
2003, $125,067 in non-cash financing expenses were charged to the statement
of
loss. These expenses included the accretion of the convertible debentures and
the amortization of deferred financing expenses.
|
vi)
|
Amounts
outstanding at December 31, 2004 and
2003
|
The
amounts of convertible debentures outstanding at December 31, 2004 and 2003
are
as follows:
|
2004
|
2003
|
||||||
|
Face
amount
|
$
|
2,427,776
|
$
|
1,100,000
|
|||
|
Less
- unamortized discounts
|
(851,792
|
)
|
(451,411
|
)
|
|||
|
Net
carrying value
|
$
|
1,575,984
|
$
|
648,589
|
|||
| The convertible debentures mature as follows: | |||||||
|
2005
|
$ |
—
|
|||||
|
2006
|
500,000
|
||||||
|
2007
|
1,927,776
|
||||||
|
Total
|
$
|
2,427,776
|
|||||
| 14. |
SHAREHOLDERS’
EQUITY
|
| A |
Authorized
share capital
|
Preferred
shares issuable in series, par value of $0.01 - 5,000,000 shares
Common
shares, par value of $0.001 - 400,000,000 shares
| B |
Issued
share capital
|
| i) |
Warrants
issued in connection with Convertible promissory
notes –
On December 8, 2000, the Company issued 246,154 Series
J and
2,500 Series M common stock purchase warrants in connection with
its
issuance of convertible promissory notes. On December 14, 2001,
150,000 of
the Series J warrants were returned for cancellation in connection
with
the Company’s shareholders’ rights offering. The Series J warrants are
exercisable at $28.00 per share, expire December 7, 2005 and have
a
cashless exercise feature. The Series M warrants are exercisable
at $30.50
per share and expire on December 7,
2005.
|
F-E17
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
|
ii)
|
Issue
of Convertible Preferred Stock – On
June 4, 2001, the Company issued 30,000 shares of Series D 5% convertible
preferred stock, with a par value of $0.01 per share and Series
N warrants
to purchase 87,719 shares of common stock, to Crescent International
Ltd.
(“Crescent”) for cash consideration of $3,000,000, less cash expenses of
$423,285 and the $22,007 fair value of 6,140 Series M-2 warrants
issued to
the Company’s investment bankers. Based upon the fair value of the
underlying instruments, $2,215,798 of the total proceeds, net of
costs,
was allocated to preferred shares and $338,910 was allocated to
the Series
N warrants. The Series D 5% convertible preferred stock had a liquidation
preference of $100 per share.
The beneficial conversion feature
(BCF)
embedded in the convertible preferred stock was calculated to be
$1,043,832 using the intrinsic value of the feature based on the
most
beneficial conversion available to the investor on the commitment
date.
The shares of preferred stock were accreted by $1,043,832, to their
redemption value, with a corresponding charge to accumulated
deficit.
The Series D convertible preferred
stock is
convertible to shares of common stock at the liquidation preference
value
divided by the lesser of; a) $13.772 or b) 95% of the average of
the
lowest three consecutive closing bid prices during the twenty-two
trading
day period immediately preceding the Conversion Date. The Series
N
warrants have a term of five years and an exercise price of $17.10
per
share and contain a cashless exercise feature. The Series M-2 warrants
have expired without being exercised.
During 2003, the remaining 16,700
shares of
the Series D 5% convertible preferred stock were converted to 1,578,139
shares of common stock.
|
| iii) |
Shareholders’
Rights Offering – On
December 14, 2001, the Company issued 1,067,592 common shares and
Series P
warrants to purchase 1,067,592 common shares, at $5.00 per share,
under a
Shareholders’ rights offering. During 2004, 136 warrants were exercised to
purchase 136 common shares for cash proceeds of $680. The remainder
of the
warrants expired on December 13,
2004.
|
| iv) |
Warrants
issued in connection with Promissory Notes – On
October 19, 2001 and November 5, 2001, the Company issued 179,418
and
35,475 Class O common stock purchase warrants, respectively, related
to
the sale of promissory notes to the Company’s senior management team,
certain directors and significant accredited shareholders. The
Warrants
are exercisable at a price of $5.00 for a period of five years,
have a
cashless exercise feature and, in addition to regular terms and
conditions, have a special adjustment clause in the event of a
consolidation or reverse split of the Company’s common
stock.
|
| C |
Employee
Stock Option Plans
|
Employee
Stock Option (1997) Plan –
During
1997, the Company authorized an Employee Stock Option Plan for a total of
500,000 common shares that may be awarded to employees and certain consultants.
During 1998, the Company amended the plan to authorize an additional 125,000
common shares. Each option under the incentive plan allows for the purchase
of
one common share and expires not later than three years from the date granted.
The options are subject to various vesting and performance requirements as
outlined in the plan and any unvested options may be cancelled if employment
is
terminated. Generally, for employees the options vest at 5% per complete month
from date of award and for non-employees are earned out over their contract
period.
F-E18
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
On
July
7, 2000, at the Company’s annual general meeting of shareholders, a resolution
was passed extending the life of all the outstanding options awarded to the
then
current employees and non-employee consultants under the Company’s Employee
Stock Option (1997) Plan.
A
modification that either renews a fixed award or extends the award’s period
(life) results in a new measurement of compensation cost as if the award were
newly granted. Accordingly, for the fixed awards to employees, the difference
between the fair market value of the shares of Common Stock at the time of
the
extension and the time of the original award was recorded as a compensation
expense to the Company.
During
2004, employees exercised none of the extended options (2003- none). During
2004
options to purchase 101,000 (2003 - 4,300) shares of Common Stock were returned
for cancellation or expired unexercised.
1999
Incentive and Nonqualified Stock Option Plan –
During
1999, the Company authorized a new option plan for a total of 300,000 common
shares that may be awarded to the employees and certain consultants. Each option
under the incentive plan allows for the purchase of one common share, which
expires not later than ten years from the date of grant. The options are subject
to various vesting and performance requirements as outlined in the plan and
any
unvested options may be cancelled if employment is terminated. Generally, for
employees the options vest equally over a three year period following the date
of award.
Employee
Stock Option (2000) Plan –
During
2000, the Company authorized a new option plan for a total of 600,000 common
shares that may be awarded to the employees and certain consultants. Each option
under the incentive plan allows for the purchase of one common share, which
expires not later than ten years from the date of grant. The options are subject
to various vesting and performance requirements as outlined in the plan and
any
unvested options may be cancelled if employment is terminated. Generally, for
employees, the options vest equally over a three year period following the
date
of award.
Employee
Stock Option (2002) Plan –
During
2002, the Company authorized a new option plan for a total of 600,000 common
shares that may be awarded to the employees and certain consultants. Each option
under the incentive plan allows for the purchase of one common share, which
expires not later than ten years from the date of grant. The options are subject
to various vesting and performance requirements as outlined in the plan and
any
unvested options may be cancelled if employment is terminated. Generally, for
employees, the options vest equally over a three year period following the
date
of award.
On
November 6, 2002, principally as compensation for accepting salary deferrals
or
reductions, the Board of Directors of the Company awarded 252,500 stock options,
exercisable at $0.10 per share, to the Company's staff and certain management.
These options vest equally over four quarters and were recorded as compensation
options. As such, the intrinsic value on the date of grant of $204,000 was
recorded as additional paid in capital in shareholders’ equity with a
corresponding charge to deferred compensation. The deferred compensation charge
was amortized in the consolidated statement of loss over the vesting period.
During
2004, options to purchase 2,500 (2003 - 17,500) shares of Common Stock expired
unexercised. In 2003, the Company recorded selling, general and administration
expense related to these options of $159,260.
F-E19
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
Stock
options to employees, directors and consultants are summarized as
follows:
|
Granted
to Employees and Directors
|
Number
|
Exercisable
|
Weighted
Average Exercise Price
|
|||||||
|
Balance
at December 31, 2002
|
1,134,257
|
666,617
|
$
|
20.50
|
||||||
|
Granted
to employees and directors @ $1.00 - $4.00
|
99,135
|
3.50
|
||||||||
|
Cancelled
on termination
|
(76,589
|
)
|
25.60
|
|||||||
|
Exercised
|
(41,792
|
)
|
0.10
|
|||||||
|
Balance
at December 31, 2003
|
1,115,011
|
911,758
|
$
|
19.40
|
||||||
|
Granted
to employees and directors @ $2.50 - $2.70
|
950
|
2.63
|
||||||||
|
Returned
for cancellation by directors and officers
|
(433,950
|
)
|
40.69
|
|||||||
|
Cancelled
on termination
|
(135,968
|
)
|
10.02
|
|||||||
|
Exercised
|
(40,382
|
)
|
0.16
|
|||||||
|
Balance
at December 31, 2004
|
505,661
|
467,465
|
$
|
4.58
|
||||||
|
Granted
to Consultants
|
Number
|
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|||||
|
Balance
at December 31, 2002
|
31,934
|
31,934
|
$
|
6.70
|
||||||
|
Granted
to consultants
|
—
|
—
|
||||||||
|
Cancelled
|
(31,934
|
)
|
6.70
|
|||||||
|
Exercised
|
—
|
—
|
||||||||
|
Balance
at December 31, 2003 and 2004
|
—
|
—
|
—
|
|||||||
|
Range
of Exercise Prices
|
Number
Outstanding at December 31, 2004
|
Weighted
Average Exercise Price of Outstanding Options
|
Weighted
Average Remaining Life (months)
|
Number
Exercisable at December 31, 2004
|
Weighted
Average Exercise Price of Exercisable Options
|
|||||||||||
|
$0.10
|
153,125
|
$
|
0.10
|
95
|
153,125
|
$
|
0.10
|
|||||||||
|
$1.00
- $1.60
|
76,233
|
1.60
|
86
|
46,400
|
1.60
|
|||||||||||
|
$2.10
- $3.90
|
30,513
|
3.16
|
104
|
22,150
|
2.96
|
|||||||||||
|
$4.30
|
109,000
|
4.30
|
82
|
109,000
|
4.30
|
|||||||||||
|
$5.60
|
100,000
|
5.60
|
66
|
100,000
|
5.60
|
|||||||||||
|
$9.10
- $19.10
|
13,929
|
12.60
|
68
|
13,929
|
12.60
|
|||||||||||
|
$20.00
- $94.40
|
22,861
|
38.42
|
68
|
22,861
|
38.42
|
|||||||||||
|
$0.10
- $94.40
|
505,661
|
$
|
4.58
|
84
|
467,465
|
$
|
4.79
|
|||||||||
The
weighted average exercise price for the exercisable options for 2003 was
$16.70.
F-E20
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
Fixed
Option Awards –
For
disclosure purposes, the fair value of each stock option granted to employees
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for stock options granted
in 2004: nil annual dividends (2003 - nil), expected volatility of 90% (2003
-
90%), risk-free interest of 4.50% (2003 - 4.50%) and expected life of five
years
(2003 - five years). The Company estimates that approximately 20% of options
will expire prior to exercise. The weighted average fair value of the stock
options granted in 2004 was $1.51 (2003 - $2.00).
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company’s stock option plans have characteristics significantly different
from those of traded options, and because change in the subjective input
assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
D Employee
Stock Purchase (2000) Plan
During
2000, the Company authorized a new employee stock purchase plan for a total
of
300,000 common shares that may be purchased by employees at 85% of the lower
of
the closing price of the Company’s common stock at the beginning or ending date
of each plan period. In 2004, the Company sold 17,875 shares of common stock
for
cash proceeds of $24,310. In 2003, the Company sold 34,117 shares of common
stock for cash proceeds of $35,245.
| 15. |
COMMITMENTS
AND CONTINGENCIES
|
|
Obligation
under Capital Lease
|
||||
|
2004
|
||||
|
Gross
lease commitments:
|
||||
|
2005
|
3,680
|
|||
|
2006
|
2,453
|
|||
|
6,133
|
||||
|
Less:
Imputed interest
|
1,498
|
|||
|
4,635
|
||||
|
Less:
Current portion
|
2,781
|
|||
|
Long-term
obligation under capital leases
|
$
|
1,854
|
||
|
Operating
Leases
|
||||
|
2005
|
$
|
398,758
|
||
|
2006
|
391,884
|
|||
|
2007
|
392,192
|
|||
|
2008
|
391,054
|
|||
|
2009
|
157,725
|
|||
|
Thereafter
|
—
|
|||
|
$
|
1,731,613
|
|||
F-E21
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
The
Company rents office space with remaining terms of up to five years. The Company
incurred rental expenses in 2004 of $396,279 (2003 - $381,247).
Contract
Manufacturer
The
Company provides its contract manufacturer with ongoing production forecasts
to
enable it to forecast and procure required parts. Under the terms of the
Agreement with the contract manufacturer, the Company has committed to assume
liability for all parts required to manufacture the Company’s forecast products
for the next 13 weeks and all final assembly costs for the forecast products
for
the next 4 weeks, on a rolling basis. These obligations amount to approximately
$700,000. Total purchases from contract manufacturers in 2004 were $2,755,458
(2003 - $5,454,789). Management believes that, should it be necessary, they
could find alternative contract manufacturers without significant disruption
to
the business.
A
letter
of credit has been issued to the contract manufacturer in the amount of $100,000
at December 31, 2004. The letter of credit secures the Company’s payment
obligation under the Agreement and expires in December 2005. The Company has
pledged cash to the bank as collateral for the letter of credit in the same
amount as the letter of credit. This pledge has been classified as restricted
cash.
Development
Contractors
The
Company employs outside contractors to assist in the design and development
of
its products. At December 31, 2004, the Company had entered into development
contracts with one of its contractors, in the amount of $745,000, of which
$582,500 was expensed in the year ended December 31, 2004. The contract calls
for the payment of progress payments against specific milestones over the course
of the contracts.
Employment
Agreements
The
Company has entered into employment agreements with certain key employees.
These
agreements include provisions relating to salaries and bonuses, severance
payments and non-competition among others.
Litigation
As
of
December 31, 2004, there are no litigation matters outstanding against the
Company.
| 16. |
SUPPLEMENTARY
DISCLOSURE OF CASH FLOW
INFORMATION
|
|
2004
|
2003
|
||||||
|
Net
changes in working capital items relating to
operations
|
|||||||
|
Restricted
cash
|
$
|
1,233
|
$
|
—
|
|||
|
Accounts
receivable
|
901,468
|
(431,645
|
)
|
||||
|
Note
receivable
|
—
|
12,063
|
|||||
|
Prepaid
expenses and other assets
|
10,024
|
46,666
|
|||||
|
Inventories
|
17,709
|
501,591
|
|||||
|
Accounts
payable and accrued liabilities
|
(343,225
|
)
|
(891,984
|
)
|
|||
|
Deferred
revenue
|
(35,060
|
)
|
173,970
|
||||
|
$
|
552,149
|
$
|
(589,339
|
)
|
|||
F-E22
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
|
Cash
paid during the year for:
|
|||||||
|
Interest
|
$
|
2,818
|
$
|
3,824
|
|||
|
Non-cash
investing and financing activities
|
|||||||
|
Capital
lease additions
|
—
|
7,764
|
|||||
|
Disposal
of capital lease
|
—
|
5,779
|
|||||
| 17. |
RELATED
PARTY TRANSACTIONS
|
During
2004, a total of $35,667 (2003 - $40,125) was paid or payable to directors
and
officers or to companies related to them for their management and administrative
services.
| 18. |
NON-CASH
INTEREST EXPENSES
|
|
2004
|
2003
|
||||||
|
Accretion
of discounts on convertible debentures
|
$
|
279,644
|
$
|
88,889
|
|||
|
Amortization
of deferred financing expense
|
88,219
|
36,178
|
|||||
|
Non-cash
interest expenses
|
$
|
367,863
|
$
|
125,067
|
|||
| 19. |
INCOME
TAXES
|
Net
loss
(income) before income tax expense for each year is summarized as
follows:
|
2004
|
2003
|
||||||
|
United
States
|
$
|
368,264
|
$
|
1,806,849
|
|||
|
Canada
|
1,365,840
|
(46,392
|
)
|
||||
|
Australia
|
(95,044
|
)
|
(174,151
|
)
|
|||
|
Net
loss before income taxes
|
$
|
1,639,060
|
$
|
1,586,306
|
|||
|
US
statutory rate at 35%
|
$
|
574,000
|
$
|
555,000
|
|||
|
Amounts
permanently not recordable for income tax purposes
|
1,631,000
|
191,000
|
|||||
|
Foreign
income tax rate differential
|
110,000
|
(5,000
|
)
|
||||
|
Net
operating loss and temporary differences for which
|
|||||||
|
no
benefit was recognized
|
(2,315,000
|
)
|
(741,000
|
)
|
|||
|
Deferred
income tax recovery
|
$
|
—
|
$
|
—
|
|||
|
Deferred
income tax assets/(liabilities) consist of the following:
|
|||||||
|
2004
|
2003
|
||||||
|
Net
operating loss carry forwards
|
$
|
15,895,000
|
$
|
15,611,000
|
|||
|
Property,
plant and equipment
|
178,000
|
187,000
|
|||||
|
Other
|
85,000
|
15,000
|
|||||
|
Net
deferred income tax assets
|
16,158,000
|
15,813,000
|
|||||
|
Valuation
allowance
|
(16,158,000
|
)
|
(15,813,000
|
)
|
|||
|
|
$ | — |
$
|
—
|
F-E23
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
The
Company provides a valuation allowance for deferred income tax assets when
it is
more likely than not that some portion or all of the net deferred income tax
assets will not be realized. Based on a number of factors, including the lack
of
a history of profits and that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology,
management believes that there is sufficient uncertainty regarding the
realization of deferred income tax assets that a full valuation allowance has
been provided. The deferred income tax valuation allowance increased in 2004
by
$345,000 (2003 - $150,000).
As
of
December 31, 2004, the Company had available net operating loss carry forwards
for United States, Canadian and Australian purposes of approximately
$28,449,000, $21,263,000 and $656,000, respectively. The United States net
operating loss carry forwards begin to expire in 2008, $689,000 of Canadian
net
operating loss carry forwards expired in 2004 and will continue to expire
thereafter and the Australian net operating losses begin to expire in 2020.
The
net operating losses are subject to certain Canadian and United States
restrictions that may apply on any change in the control of the Company and
which could adversely affect the amounts and benefits to be derived
therefrom.
| 20. |
LOSS
PER SHARE
|
The
warrants, which could result in the issue of 1,582,709 additional shares of
common stock (Note 12C) and the options, which could result in the issue of
505,661 additional shares of common stock (Note 12E) have not been included
in
the loss per share calculation as they are anti-dilutive.
|
Year
ended December 31, 2004
|
||||||||||
|
Loss
(Numerator)
|
Shares
(Denominator)
|
Per
Share Amount
|
||||||||
|
Basic
and diluted loss per share
|
||||||||||
|
Loss
attributable to common shareholders
|
$
|
1,639,060
|
15,139,018
|
$
|
0.11
|
|||||
|
Year
ended December 31, 2003
|
||||||||||
|
Loss
(Numerator)
|
Shares
(Denominator)
|
Per
Share Amount
|
||||||||
|
Basic
and diluted loss per share
|
||||||||||
|
Loss
attributable to common shareholders
|
$
|
1,586,306
|
13,068,331
|
$
|
0.12
|
|||||
F-E24
WaveRider
Communications Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2004 and 2003
| 21. |
SEGMENT
INFORMATION
|
INDUSTRY
SEGMENTS
The
Company operates in one industry segment: wireless data communications products.
GEOGRAPHIC
SEGMENTS
The
Company operated in the following geographic segments;
|
Year
Ended December 31,
|
|||||||
|
Revenue
by region
|
2004
|
2003
|
|||||
|
United
States
|
$
|
5,202,639
|
$
|
8,868,019
|
|||
|
Australia
|
3,045,407
|
2,114,437
|
|||||
|
Canada
|
736,729
|
1,508,029
|
|||||
|
Rest
of world
|
556,829
|
588,070
|
|||||
|
$
|
9,541,604
|
$
|
13,078,555
|
||||
|
Year
ended December 31, 2004
|
||||||||||
|
Canada
|
Australia
|
Total
|
||||||||
|
Property,
plant and equipment
|
$
|
193,195
|
$
|
101,868
|
$
|
295,063
|
||||
|
Year
ended December 31, 2003
|
||||||||||
|
Canada
|
Australia
|
Total
|
||||||||
|
Property,
plant and equipment
|
$
|
308,163
|
$
|
99,326
|
$
|
407,489
|
||||
| 22. |
COMPARATIVE
FIGURES
|
Certain
comparative amounts have been reclassified to correspond with the current year's
presentation.
| 23. |
SUBSEQUENT
EVENTS
|
| i) |
Conversions
of convertible debentures subsequent to December 31, 2004 –
Subsequent
to December 31, 2004, convertible debentures with an aggregate nominal
value of $423,794 were converted to 4,254,753 shares of common
stock.
|
| ii) |
Change
in employment contract – On
February 9, 2005, Mr. Bruce Sinclair and the board of directors agreed
to
an amendment to Mr. Sinclair's employment contract. In exchange for
a
reduction in the severance allowance contained in the contract, reducing
the commitment from three years' salary to one year's pay on termination,
the board awarded Mr. Sinclair employee stock options to purchase
500,000
shares of common stock, at the then market price of $0.19 per
share.
|
F-E25
ANNEX
A-1
Agreement
and Plan of Merger
AGREEMENT
AND PLAN OF MERGER
THIS
AGREEMENT AND PLAN OF MERGER, dated as of January 3, 2006 (this “Agreement”),
is
made and entered into by and among WAVE WIRELESS CORPORATION, a Delaware
corporation (“Parent”),
WAVE
ACQUISITION CORPORATION, a Nevada corporation and a wholly owned subsidiary
of
Parent (“Merger
Sub”),
and
WAVERIDER COMMUNICATIONS INC., a Nevada corporation (the “Company”).
Capitalized terms used and not otherwise defined herein shall have the
respective meanings given to such terms in Article
VII
hereof.
WHEREAS,
the Board of Directors of each of the Company, Parent and Merger Sub has, by
resolutions duly adopted, declared that the merger of Merger Sub with and into
the Company (the “Merger”)
upon
the terms and subject to the conditions set forth in this Agreement and the
other transactions contemplated by this Agreement are advisable, the Board
of
Directors of Parent has approved this Agreement and the Board of Directors
of
each of the Company and Merger Sub has adopted this Agreement.
WHEREAS,
the Company, Parent and Merger Sub desire to make certain representations,
warranties, covenants and agreements, as set forth in this
Agreement.
NOW,
THEREFORE, in consideration of the premises, and of the representations,
warranties, covenants and agreements contained herein, the parties hereto agree
as follows:
ARTICLE
I
THE
MERGER
1.1 The
Merger.
Upon
the terms and subject to the conditions set forth in this Agreement, at the
Effective Time (as defined in Section
1.3),
Merger
Sub shall be merged with and into the Company and the separate corporate
existence of Merger Sub shall thereupon cease. The Company shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
“Surviving
Corporation”).
At
the Effective Time, the Merger shall have the effects specified in Section
92A.250 of the Nevada Revised Statutes. (“NRS”).
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises
of
the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.2 Closing.
The
closing of the Merger (the “Closing”)
shall
take place (i) at the principal executive offices of Parent, 1996 Lundy Avenue,
San Jose, California at 9:00 A.M. on the fifth business day following the day
on
which the last to be satisfied or waived of the conditions set forth in
Article
V
(other
than those conditions that by their terms are to be satisfied at the Closing,
but subject to the satisfaction or waiver of those conditions) shall be
satisfied or waived in accordance with this Agreement or (ii) at such other
place and time or on such other date as the Company and Parent may agree in
writing (the “Closing
Date”).
1.3 Effective
Time.
As soon
as practicable following the Closing, the Company and Parent will cause Articles
of Merger (the “Articles
of Merger”)
to be
executed and filed with the Secretary of State of the State of Nevada as
provided in Section 92A.200 of the NRS. The Merger shall become effective on
the
date on which the Articles of Merger have been filed with the Secretary of
State
of the State of Nevada or at such later time as may be agreed by the parties
in
writing and specified in the Articles of Merger (the “Effective
Time”).
Annex
A-1
Page
1
1.4 Articles
of Incorporation; Bylaws; Directors and Officers.
(a) At
the
Effective Time, the articles of incorporation of Merger Sub (the “Charter”)
shall
be the articles of incorporation of the Surviving Corporation until thereafter
duly amended as provided therein or in accordance with applicable
law.
(b) At
the
Effective Time, the bylaws of Merger Sub in effect at the Effective Time shall
be the bylaws of the Surviving Corporation (the “Bylaws”)
until
thereafter amended as provided therein or in accordance with applicable
Law.
(c) The
sole
initial director and sole initial officer of Merger Sub shall be Daniel W.
Rumsey. At the Effective Time, the officers and directors of the Surviving
Corporation shall be appointed by Parent to serve in such capacities until
their
successors shall have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Charter
and
the Bylaws.
1.5 Effect
on Capital Stock.
(a) Conversion
of Company Capital Stock.
At the
Effective Time, by virtue of the Merger and without any further action on the
part of Parent, Merger Sub, the Company or any stockholder of the
Company:
(i) Any
shares of common stock, par value $0.001 per share, of the Company
(“Company
Common Stock”)
held
by any wholly owned Subsidiary of the Company immediately prior to the Effective
Time (or held in the Company’s treasury) shall be canceled and retired and shall
cease to exist, and no consideration shall be delivered in exchange
therefor.
(ii) Any
shares of Company Common Stock held by Parent, Merger Sub or any other
wholly-owned Subsidiary of Parent immediately prior to the Effective Time shall
be canceled and retired and shall cease to exist, and no consideration shall
be
delivered in exchange therefor. Any options, warrants, convertible securities
or
other rights to acquire Company Common Stock held by Parent, Merger Sub or
any
other wholly-owned Subsidiary of Parent immediately prior to the Effective
Time
shall be terminated and be of no further force or effect, and no consideration
shall be delivered in exchange therefor; provided, however, any issued and
outstanding Bridge Notes shall result in a Bridge Note adjustment as set forth
in Section 1.5(c)(iii) below.
(iii) Each
share of Company Preferred Stock outstanding and held of record by Crescent
immediately prior to the Effective Time shall be converted into the right to
receive a number of shares of Parent Preferred Stock, which shall be convertible
into a number of shares of Parent Common Stock equal to the number of shares
of
Parent Common Stock that would have been issued to Crescent in the Merger if
Crescent had converted all of its shares of Company Preferred Stock into shares
of Company Common Stock immediately prior to the Effective Time.
Annex
A-1
Page
2
(iv) Except
as
provided in clauses (i) and (ii) above and subject to Sections
1.5(b),
(c),
(d) and
(e),
each
share of Company Common Stock outstanding immediately prior to the Effective
Time shall be converted into the right to receive a number of shares of common
stock, par value $0.0001 per share, of Parent (the “Parent
Common Stock”)
equal
to the Exchange Ratio (as defined herein) such that the total number of shares
of Parent Common Stock issued in connection with the Merger, including, without
limitation, the shares of Parent Common Stock issuable upon conversion of the
Parent Preferred Stock issued to Crescent in the Merger (collectively, the
“Merger
Consideration”),
shall
equal fifty-percent (50%) of Parent’s Fully Diluted Shares Outstanding
immediately after the Effective Time. By way of example, as of the date hereof
and based upon the Fully Diluted Shares Outstanding of Parent and the Fully
Diluted Shares Outstanding of the Company, each as set forth on Schedule
1.5,
the
“Exchange
Ratio”
shall
initially be 1.2179, subject to adjustment at the Closing as provided in
Sections
1.5(b)
and
(c).
(b) Adjustments
to Exchange Ratio.
If,
during the period from the date of this Agreement through the Effective Time,
(i) the outstanding shares of Company Common Stock or Parent Common Stock are
changed into a different number or class of shares by reason of any stock split,
division or subdivision of shares, stock dividend, reverse stock split,
consolidation of shares, reclassification, recapitalization or other similar
transaction or event, or (ii) the number of Fully Diluted Shares Outstanding
of
Parent or the Company is changed from the number set forth on Schedule
1.5
due to
(x) the issuance of additional debt or equity securities in connection with
any
financing transaction entered into by Parent or the Company prior to the
Effective Time, (y) the exercise or conversion of any outstanding convertible
securities into shares of Parent Common Stock or Company Common Stock prior
to
the Effective Time, including, without limitation, the conversion of any
convertible debentures currently held by Crescent, or SDS Capital Group or
its
affiliates, or (z) any variance between the weighted average closing price
of
Parent Common Stock as set forth on Schedule 1.5 and the weighted average
closing price of Parent Common Stock during the 10 trading days immediately
preceding the Closing Date (for the purpose of calculating the Fully Diluted
Shares Outstanding for Parent and Company pursuant to the treasury stock
method), then in each such case (subclauses (i) and (ii) above), the Exchange
Ratio shall be equitably adjusted such that the total Merger Consideration
issued by Parent in the Merger equals 50% of Parent’s Fully Diluted Shares
Outstanding immediately after the Effective Time.
(c) Further
Adjustments to Exchange Ratio.
After
giving effect to the Exchange Ratio adjustments provided in Section
1.5(b),
the
Exchange Ratio shall be adjusted further as follows:
(i) Parent
Net Working Capital Adjustment.
If
Parent’s Closing Net Working Capital is greater or less than its Required Net
Working Capital, then the Exchange Ratio shall be adjusted on the Closing Date
as follows: in the event of a positive / (negative) variance, the Exchange
Ratio
shall be reduced / (increased) by an amount equal to (x) the difference between
Parent’s Closing Net Working Capital and Required Net Working Capital, divided
by (y) the weighted average closing price of Parent Common Stock during the
10
trading days immediately preceding the Closing Date, and dividing the quotient
so obtained by (z) the Company’s Fully Diluted Shares Outstanding on the Closing
Date.
(ii) Company
Net Working Capital Adjustment.
If the
Company’s Closing Net Working Capital is greater or less than its Required Net
Working Capital, then the Exchange Ratio shall be adjusted on the Closing Date
as follows: in the event of a positive / (negative) variance, the Exchange
Ratio
shall be increased / (reduced) by an amount equal to (x) the difference between
the Company’s Closing Net Working Capital and Required Net Working Capital,
divided by (y) the weighted average closing price of Parent Common Stock during
the 10 trading days immediately preceding the Closing Date, and dividing the
quotient so obtained by (z) the Company’s Fully Diluted Shares Outstanding on
the Closing Date. The parties agree and acknowledge that Bridge Notes shall
not
be included in the Company Net Working Capital, since the issuance of such
Bridge Notes shall result in a Bridge Note Adjustment, as set forth
below.
Annex
A-1
Page
3
(iii) Bridge
Note Adjustment.
With
respect to Bridge Notes issued by Company prior to the Closing Date, the
Exchange Ratio shall be reduced on the Closing Date by an amount equal to (x)
the aggregate face value of all outstanding or previously converted Bridge
Notes
issued prior to the Closing Date plus any accrued and unpaid interest thereon,
divided by (y) the product of (1) eighty-five percent (85%) of the weighted
average closing price of Parent Common Stock during the 10 trading days
immediately prior to the Closing Date, and (2) the Exchange Ratio (as adjusted
pursuant to Section
1.5(b)
and
Sections
1.5(c)(i)
and
(ii)
above),
and dividing the quotient so obtained by (z) the Company’s Fully Diluted Shares
Outstanding on the Closing Date. All Bridge Notes remaining on the Closing
Date
shall be cancelled.
(d) Unvested
Stock.
If any
shares of Company Common Stock outstanding immediately prior to the Effective
Time are unvested or are subject to a repurchase option, risk of forfeiture
or
other condition under any applicable restricted stock purchase agreement or
other agreement with the Company, then: (i) the shares of Parent Common Stock
issued in exchange for such shares of Company Common Stock will also be unvested
and subject to the same repurchase option, risk of forfeiture or other
condition; and (ii) the certificates representing such shares of Parent Common
Stock may accordingly be marked with appropriate legends. Prior to the Effective
Time, the Company shall take all such action as may be necessary to ensure
that,
from and after the Effective Time, Parent is entitled to exercise any such
repurchase option or other right set forth in any such restricted stock purchase
agreement or other agreement.
(e) No
Fractional Shares.
No
fractional shares of Parent Common Stock shall be issued in connection with
the
Merger, and no certificates or scrip for any such fractional shares shall be
issued. Any holder of Company Common Stock who would otherwise be entitled
to
receive a fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock issuable to such holder) shall, in
lieu
of such fraction of a share and upon surrender of such holder’s Company Stock
Certificate(s) (as defined in Section
1.6),
be
paid in cash the dollar amount (rounded to the nearest whole cent), without
interest, determined by multiplying such fraction by the closing price of a
share of Parent Common Stock on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. (the “OTC
Bulletin Board”)
on the
date the Merger becomes effective.
Annex
A-1
Page
4
(f) Stock
Options and Warrants.
At the
Effective Time (i) all options to purchase Company Common Stock then outstanding
(the “Company
Options”),
including options issued under the Company’s Employee Stock Option (1997) Plan,
the 1999 Incentive and Nonqualified Stock Option Plan, the Employee Stock Option
(2000) Plan and the Employee Stock Option (2002) Plan (collectively, the
“Company
Stock Option Plans”),
and
(ii) all warrants to purchase Company Common Stock then outstanding (the
“Company
Warrants”),
shall
be assumed by Parent in accordance with Section 4.10.
(g) Capital
Stock of Merger Sub.
Each
share of common stock, par value $0.0001 per share, of Merger Sub issued and
outstanding immediately prior to the Effective Time shall be converted into
and
exchanged for one validly issued, fully paid and nonassessable share of common
stock, par value $0.0001 per share, of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall, as
of
the Effective Time, evidence ownership of such shares of common stock of the
Surviving Corporation.
1.6 Closing
of the Company’s Transfer Books.
At the
Effective Time: (a) all shares of Company Common Stock outstanding immediately
prior to the Effective Time shall automatically be canceled and retired and
shall cease to exist (in exchange for the right to receive the applicable
consideration set forth in, and subject to, Sections
1.5
and
1.7),
and
all holders of certificates representing shares of Company Common Stock that
were outstanding immediately prior to the Effective Time shall cease to have
any
rights as stockholders of the Company; and (b) the stock transfer books of
the
Company shall be closed with respect to all shares of Company Common Stock
outstanding immediately prior to the Effective Time. No further transfer of
any
such shares of Company Common Stock shall be made on such stock transfer books
after the Effective Time. If, after the Effective Time, a valid certificate
previously representing any shares of Company Common Stock outstanding
immediately prior to the Effective Time (a “Company
Stock Certificate”)
is
presented to the Exchange Agent (as defined in Section
1.7)
or to
the Surviving Corporation or Parent, such Company Stock Certificate shall be
canceled and shall be exchanged as provided in Section
1.7.
1.7 Exchange
of Company Stock Certificates.
(a) Exchange
Agent; Exchange Fund.
Parent’s transfer agent shall act as exchange agent in the Merger (the
“Exchange
Agent”).
As
promptly as practicable after the Effective Time, Parent shall deposit with
the
Exchange Agent: (i) certificates representing the shares of Parent Common Stock
issuable pursuant to Section
1.5(a)(iv);
and
(ii) cash sufficient to make payments in lieu of fractional shares in accordance
with Section
1.5(d).
The
shares of Parent Common Stock and cash amounts so deposited with the Exchange
Agent, together with any dividends or distributions received by the Exchange
Agent with respect to such shares of Parent Common Stock, are referred to
collectively as the “Exchange
Fund.”
Annex
A-1
Page
5
(b) Exchange
Procedures.
As
promptly as practicable after the Effective Time, the Exchange Agent will mail
to the Persons who were record holders of Company Common Stock immediately
prior
to the Effective Time: (i) a letter of transmittal in customary form and
containing such provisions as Parent may reasonably specify and the Company
shall reasonably approve prior to the Effective Time (including a provision
confirming that delivery of Company Stock Certificates shall be effected, and
risk of loss and title to Company Stock Certificates shall pass, only upon
delivery of such Company Stock Certificates to the Exchange Agent); and (ii)
instructions for use in effecting the surrender of Company Stock Certificates
in
exchange for certificates representing Parent Common Stock. Upon surrender
of a
Company Stock Certificate to the Exchange Agent for exchange, together with
a
duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent: (A) the holder of such
Company Stock Certificate shall be entitled to receive in exchange therefor
a
certificate representing the number of whole shares of Parent Common Stock
that
such holder has the right to receive pursuant to the provisions of Section
1.5
(and
cash in lieu of any fractional share of Parent Common Stock); and (B) the
Company Stock Certificate so surrendered shall be canceled. Until surrendered
as
contemplated by this Section
1.7(b),
each
Company Stock Certificate shall be deemed, from and after the Effective Time,
to
represent only the right to receive shares of Parent Common Stock (and cash
in
lieu of any fractional share of Parent Common Stock) as contemplated by
Section
1.5.
If any
Company Stock Certificate shall have been lost, stolen or destroyed, Parent
may,
in its reasonable discretion and as a condition to the issuance of any
certificate representing Parent Common Stock, require the owner of such lost,
stolen or destroyed Company Stock Certificate to provide an appropriate
affidavit and to deliver a bond (in such sum as Parent may reasonably direct)
as
indemnity against any claim that may be made against the Exchange Agent, Parent
or the Surviving Corporation with respect to such Company Stock
Certificate.
(c) Distributions
With Respect to Unexchanged Shares.
No
dividends or other distributions declared or made with respect to Parent Common
Stock with a record date after the Effective Time shall be paid or otherwise
delivered to the holder of any unsurrendered Company Stock Certificate with
respect to the shares of Parent Common Stock that such holder has the right
to
receive in the Merger until such holder surrenders such Company Stock
Certificate in accordance with this Section
1.7.
Subject
to the requirements of applicable Law (including applicable abandoned property,
escheat or similar laws), following surrender of any such Company Stock
Certificate, the Exchange Agent will deliver to the record holder thereof,
without interest: (i) a certificate representing the number of whole shares
of
Parent Common Stock issued in exchange therefor along with cash in lieu of
any
fractional share pursuant to Section
1.5(d)
and the
amount of any such dividends or other distributions with a record date after
the
Effective Time (and with a payment date prior to the date of surrender of such
Company Stock Certificate) payable with respect to such whole shares of Parent
Common Stock; and (ii) on the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time (and with
a
payment date on or subsequent to the date of surrender of such Company Stock
Certificate) payable with respect to such whole shares of Parent Common
Stock.
(d) Termination
of Exchange Fund.
Any
portion of the Exchange Fund that remains undistributed to holders of Company
Stock Certificates as of the date 180 days after the date on which the Merger
becomes effective shall be delivered to Parent upon demand, and any holders
of
Company Stock Certificates who have not theretofore surrendered their Company
Stock Certificates in accordance with this Section
1.7
shall
thereafter look only to Parent for satisfaction of their claims for Parent
Common Stock, cash in lieu of fractional shares of Parent Common Stock and
any
dividends or distributions with respect to shares of Parent Common
Stock.
Annex
A-1
Page
6
(e) Required
Withholding.
Each of
the Exchange Agent, Parent and the Surviving Corporation shall be entitled
to
deduct and withhold from any consideration payable or otherwise deliverable
pursuant to this Agreement to any holder or former holder of Company Common
Stock such amounts as may be required to be deducted or withheld from such
consideration under the Internal Revenue Code of 1986, as amended (the “Code”)
or any provision of state, local or foreign tax law or under any other
applicable Legal Requirement. To the extent such amounts are so deducted or
withheld, such amounts shall be treated for all purposes under this Agreement
as
having been paid to the Person to whom such amounts would otherwise have been
paid.
(f) No
Liability.
Neither
Parent nor the Surviving Corporation shall be liable to any holder or former
holder of Company Common Stock or to any other Person with respect to any shares
of Parent Common Stock (or dividends or distributions with respect thereto),
or
for any cash amounts, delivered to any public official pursuant to any
applicable abandoned property law, escheat law or other similar requirement
of
applicable Law.
1.8 Affiliates.
Notwithstanding anything herein to the contrary, to the fullest extent permitted
by Law, no certificates representing shares of Parent Common Stock shall be
delivered to a Person who may be deemed an “affiliate” of the Company in
accordance with Section
4.13
for
purposes of Rule 145 under the Securities Act, until such Person has executed
and delivered an Affiliate Agreement (as defined in Section
4.13)
to
Parent.
1.9 Further
Action.
If, at
any time after the Effective Time, any further action is determined by Parent
or
the Surviving Corporation to be necessary or desirable to carry out the purposes
of this Agreement or to vest the Surviving Corporation with full right, title
and possession of and to all rights and property of Merger Sub and the Company,
the officers and directors of the Surviving Corporation and Parent shall be
fully authorized (in the name of Merger Sub, in the name of the Company and
otherwise) to take such action.
ARTICLE
II
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
Company represents and warrants to Parent and Merger Sub, as follows (it being
understood that each representation and warranty contained in this Article
II
is
subject to: (a) the exceptions and disclosures set forth in the section of
the
Company Disclosure Schedule corresponding to the particular Section in this
Article
II
in which
such representation and warranty appears; (b) any exceptions or disclosures
explicitly cross-referenced in such section of the Company Disclosure Schedule
by reference to another section of the Company Disclosure Schedule; and (c)
any
exception or disclosure set forth in any other section of the Company Disclosure
Schedule to the extent it is reasonably apparent from the wording of such
exception or disclosure that such exception or disclosure is intended to qualify
such representation and warranty):
Annex
A-1
Page
7
2.1 Organization
and Qualification.
Each of
the Company and its Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has full corporate power and authority to conduct its business
as and to the extent now conducted and to own, use and lease its assets and
properties. Each of the Company and its Subsidiaries is duly qualified, licensed
or admitted to do business and is in good standing in each jurisdiction in
which
the ownership, use or leasing of its assets and properties, or the conduct
or
nature of its business, makes such qualification, licensing or admission
necessary, except for such failures to be so qualified, licensed or admitted
and
in good standing which, individually or in the aggregate, do not have and could
not be reasonably expected to have a material adverse effect on the Company
and
its Subsidiaries taken as a whole. Section 2.1 of the Company Disclosure
Schedule sets forth the name and jurisdiction of incorporation of each
Subsidiary of the Company. The Company has delivered or made available to Parent
and Merger Sub true and complete copies of the articles of incorporation and
bylaws of the Company and similar governing instruments of each of its
Subsidiaries, each as amended to date, and each such instrument is in full
force
and effect. Neither the Company nor any of its Subsidiaries is in violation
of
any of the provisions of its articles of incorporation or bylaws or equivalent
governing instruments.
2.2 Capitalization.
(a) The
authorized capital stock of the Company consists of 400,000,000 shares of
Company Common Stock and 5,000,000 shares of preferred stock, par value $0.001
per share (“Company
Preferred Stock”).
As of
the close of business on November 30, 2005, 32,007,381 shares of Company Common
Stock were issued and outstanding and no shares of Company Common Stock were
held by the Company or any Subsidiary of the Company. As of the date hereof,
no
shares of Company Preferred Stock are issued or outstanding.
(b) As
of
November 30, 2005, (i) 625,000 shares of Company Common Stock were reserved
for
issuance and 252,356 shares were issuable upon exercise of outstanding stock
options granted under the Company’s Employee Stock Option (1997) Plan, (ii)
300,000 shares of Company Common Stock were reserved for issuance and 280,795
shares were issuable upon exercise of outstanding stock options granted under
the Company’s 1999 Incentive and Nonqualified Stock Option Plan, (iii) 600,000
shares of Company Common Stock were reserved for issuance and 502,761 shares
were issuable upon exercise of outstanding stock options granted under the
Company’s Employee Stock Option (2000) Plan, and (iv) 600,000 shares of Company
Common Stock were reserved for issuance and 450,000 shares were issuable upon
exercise of outstanding stock options granted under the Company’s Employee Stock
Option (2002) Plan. Except as set forth in the immediately preceding two
sentences or on Section 2.2 of the Company Disclosure schedules, no shares
of
capital stock or other equity securities of the Company are issued, reserved
for
issuance or outstanding. All of the outstanding shares of the Company’s capital
stock have been duly authorized and validly issued and are fully paid and
nonassessable. All shares of Company Common Stock issuable pursuant to the
Company ESPP and issuable upon exercise of Company Options and Company Warrants,
when issued in accordance with the terms thereof, will be duly authorized,
validly issued, fully paid and nonassessable.
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(c) Section
2.2 of the Company Disclosure Schedule sets forth for each outstanding Company
Stock Option and for each outstanding Company Warrant as of the date hereof,
(i)
the name of the holder of such Company Stock Option or Company Warrant, (ii)
the
Company Stock Option Plan pursuant to which such option was issued, if
applicable, (iii) the number of shares of Company Common Stock issuable upon
the
exercise of such Company Stock Option or Company Warrant, (iv) the exercise
price of such Company Stock Option or Company Warrant, and (v) the date on
which
such Company Stock Option or Company Warrant was granted. Notwithstanding the
foregoing, the Company Disclosure Schedule shall only set forth individually
Company Warrants or Company Stock Options with an exercise price of $1.00 or
less. With respect to Company Stock Options or Company Warrants with an exercise
price exceeding $1.00, the Company Disclosure Schedule shall only set forth
the
number of shares of Company Common Stock issuable upon the exercise of such
Company Stock Options or Company Warrants.
(d) Except
as
disclosed in this Section 2.2 or on Section 2.2 of the Company Disclosure
Schedules, there are no options, warrants, equity securities or similar
ownership interests, calls, rights (including preemptive rights), commitments
or
agreements of any character to which the Company or any of its Subsidiaries
is a
party or by which it is bound obligating the Company or any of its Subsidiaries
to issue, deliver or sell, or cause to be issued, delivered or sold, or
repurchase, redeem or otherwise acquire, or cause the repurchase, redemption
or
acquisition, of any shares of capital stock of the Company or any of its
Subsidiaries or obligating the Company or any of its Subsidiaries to grant,
extend, accelerate the vesting of or enter into any such option, warrant, equity
security or similar ownership interest, call, right, commitment or agreement.
There are no registration rights and there are no voting trusts, proxies or
other agreements or understandings with respect to the registration or voting
of
any equity security of any class of the Company or any of its
Subsidiaries.
2.3 Authority.
The
Company has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company, subject only to the approval and adoption of this
Agreement and the approval of the Merger by the Company’s stockholders and the
filing of the Articles of Merger pursuant to Section 92A.200 of the
NRS.
2.4 Binding
Effect.
This
Agreement has been duly executed and delivered by the Company and, assuming
the
due authorization, execution and delivery by Parent and Merger Sub, constitutes
a valid and binding obligation of the Company, enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy and other
similar laws and general principles of equity.
2.5 Non-Contravention;
Approvals and Consents.
(a) The
execution and delivery of this Agreement by the Company do not, and the
performance by the Company of its obligations hereunder and the consummation
of
the transactions contemplated hereby will not, (i) conflict with or violate
the
articles of incorporation or bylaws of the Company or the equivalent
organizational documents of any of its Subsidiaries, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger
by
the Company’s stockholders as contemplated in Section
4.5
(the
“Company
Stockholder Approval”)
and
compliance with the requirements set forth in paragraph (b) below, conflict
with
or violate any Law or Order applicable to the Company or any of its Subsidiaries
or by which its or any of their respective properties is bound or affected,
or
(iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or impair the
Company’s rights or alter the rights or obligations of the Company or any third
party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien on any
of
the properties, including any leased real property, or assets of the Company
or
any of its Subsidiaries pursuant to, any Company Material Contract. Section
2.5(a) of the Company Disclosure Schedule lists all consents, waivers and
approvals under any Company Material Contract required to be obtained (other
than those already obtained) in connection with the consummation of the
transactions contemplated hereby, which, if not obtained, would have a material
adverse effect on the Company or the Surviving Corporation or have a material
adverse effect on the ability of the parties to consummate the
Merger.
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(b) No
consent, approval, order or authorization of, or registration, declaration
or
filing with any Governmental Entity is required by or with respect to the
Company or any of its Subsidiaries in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby,
except for (i) the filing of the Articles of Merger with the Secretary of State
of the State of Nevada, (ii) the filing of the proxy statement/prospectus to
be
sent to the stockholders of the Company in connection with the meeting of the
Company’s stockholders to consider the approval and adoption of this Agreement
and approval of the Merger (the “Proxy
Statement/Prospectus”)
with
the United States Securities and Exchange Commission (the “SEC”)
in
accordance with the Exchange Act, to be included in the Registration Statement
on Form S-4 (the “Registration
Statement”)
to be
filed by Parent with the SEC in accordance with the Securities Act, and the
effectiveness of the Registration Statement, and (iii) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws, the OTC Bulletin
Board and the HSR Act, and the comparable laws of any foreign country reasonably
determined by the parties to be required (such consents, approvals, orders,
authorizations, registrations, declarations and filings described in clauses
(i)
through (iii) above being referred to herein as the “Necessary
Consents”);
and
(iv) such other consents, approvals, orders, authorizations, registrations,
declarations and filings which, if not obtained or made, would not be material
to the Company or Parent or have a material adverse effect on the ability of
the
parties to consummate the Merger.
2.6 SEC
Filings; Financial Statements.
(a) The
Company has delivered (or made available on the SEC website) to Parent accurate
and complete copies of all registration statements, proxy statements and other
statements, reports, schedules, forms and other documents filed by the Company
with, and all Company Certifications (as defined below) filed or furnished
by
the Company with or to, the SEC since January 1, 2002, including all amendments
thereto (collectively, the “Company
SEC Documents”).
All
statements, reports, schedules, forms and other documents required to have
been
filed or furnished by the Company with or to the SEC since January 1, 2002
have
been so filed or furnished on a timely basis. None of the Company’s Subsidiaries
is required to file or furnish any documents with or to the SEC. As of the
time
it was filed with or furnished to the SEC: (i) each of the Company SEC Documents
complied as to form in all material respects with the applicable requirements
of
the Securities Act or the Exchange Act (as the case may be); and (ii) none
of
the Company SEC Documents contained any untrue statement of a material fact
or
omitted to state a material fact required to be stated therein or necessary
in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except to the extent corrected: (A) in
the
case of Company SEC Documents filed or furnished on or prior to the date of
this
Agreement that were amended or superseded on or prior to the date of this
Agreement, by the filing or furnishing of the applicable amending or superseding
Company SEC Document; and (B) in the case of Company SEC Documents filed or
furnished after the date of this Agreement that are amended or superseded prior
to the Effective Time, by the filing or furnishing of the applicable amending
or
superseding Company SEC Document. Each of the certifications and statements
relating to the Company SEC Documents required by Rule 13a-14 under the Exchange
Act (collectively, the “Company
Certifications”)
is
accurate and complete, and complied as to form and content with all applicable
Laws in effect at the time each such Company Certification was filed with or
furnished to the SEC.
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(b) The
Company and its Subsidiaries maintain disclosure controls and procedures
required by Rule 13a-15 under the Exchange Act. Such disclosure controls and
procedures are designed to ensure that all material information concerning
the
Company and its Subsidiaries required to be disclosed by the Company in the
reports that it is required to file, submit or furnish under the Exchange Act
is
recorded, processed, summarized and reported on a timely basis to the
individuals responsible for the preparation of such reports. The Company has
delivered or made available to Parent accurate and complete copies of all
material policies, manuals and other documents promulgating, such disclosure
controls and procedures. The Company is, and has at all times since January
1,
2000 been, in compliance with the applicable listing and other rules and
regulations of the OTC Bulletin Board and has not since January 1, 2000 received
any notice from the OTC Bulletin Board asserting any non-compliance with any
of
such rules and regulations.
(c) The
financial statements (including any related notes) contained or incorporated
by
reference in the Company SEC Documents: (i) complied as to form in all material
respects with the published rules and regulations of the SEC applicable thereto;
(ii) were prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered, and (iii) fairly present in all material
respects the consolidated financial position of the Company and its Subsidiaries
as of the respective dates thereof and the consolidated results of operations
and cash flows of the Company and its Subsidiaries for the periods covered
thereby. No financial statements of any Person other than the Company and its
Subsidiaries are required by GAAP to be included in the consolidated financial
statements of the Company.
(d) The
Company has delivered or made available to Parent the unaudited consolidated
balance sheet (including the notes thereto) of the Company and its Subsidiaries
as of September 30, 2005 (the “Company
Balance Sheet”)
and
the unaudited consolidated statement of income (including the notes thereto)
of
the Company and its Subsidiaries for the fiscal year then ended (together with
the Company Balance Sheet, the “Company
Financial Statements”).
The
Company Financial Statements: (i) were prepared in accordance with GAAP applied
on a basis consistent with the basis on which the financial statements contained
in the Company SEC Documents were prepared; and (ii) fairly present in all
material respects the condensed, unaudited consolidated financial position
of
the Company and its Subsidiaries as of September 30, 2005 and the condensed,
unaudited consolidated results of operations of the Company and its Subsidiaries
for the fiscal year then ended.
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(e) The
Company’s auditor has, at all times since the date of enactment of the
Sarbanes-Oxley Act, been: (i) a registered public accounting firm (as defined
in
Section 2(a)(12) of the Sarbanes-Oxley Act); (ii) “independent” with respect to
the Company within the meaning of Regulation S-X under the Exchange Act; and
(iii) in compliance with subsections (g) through (l) of Section 10A of the
Exchange Act and the rules and regulations promulgated by the SEC and the Public
Company Accounting Oversight Board thereunder. All non-audit services (as
defined in Section 2(a)(8) of the Sarbanes-Oxley Act) performed by the Company’s
auditors for the Company and its Subsidiaries were approved as required by
Section 202 of the Sarbanes-Oxley Act.
(f) Other
than as disclosed in the Company SEC Documents, there are no securitization
transactions or “off-balance sheet arrangements” (as defined in Item 303(c) of
Regulation S-K under the Exchange Act) currently in effect and no such
transactions or arrangements have been effected by the Company or any of its
Subsidiaries since January 1, 2000.
2.7 Absence
of Certain Changes or Events.
(a) Since
the
date of the Company Balance Sheet, there has not been: (i) any material adverse
effect on the Company, (ii) any change by the Company in its accounting methods,
principles or practices, except as required by concurrent changes in GAAP or
the
rules and regulations promulgated by the SEC, (iii) any revaluation by the
Company of any of its assets including writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the ordinary
course of business, or (iv) any split, combination or reclassification of the
capital stock of the Company or any of its Subsidiaries.
(b) From
December 31, 2004 until the date of this Agreement, the Company and its
Subsidiaries have not taken or legally committed to take any of the actions
specified in Sections
4.3(a)
through
(r).
2.8 Absence
of Undisclosed Liabilities.
Except
for matters reflected or reserved against in the Company Balance Sheet, neither
the Company nor any of its Subsidiaries had as of the date of the Company
Balance Sheet, or has incurred since such date, any liabilities or obligations
(whether absolute, accrued, contingent, fixed or otherwise, or whether due
or to
become due) of any nature that would be required by GAAP to be reflected on
the
Company Balance Sheet, other than liabilities and obligations that (i) were
incurred in the ordinary course of business consistent with past practice and
(ii) have not been, and could not be reasonably expected to be, individually
or
in the aggregate, materially adverse to the Company and its Subsidiaries taken
as a whole.
2.9 Legal
Proceedings.
Except
as disclosed in the Company SEC Documents filed prior to the date of this
Agreement, (a) there are no actions, suits, arbitrations or proceedings pending
or, to the knowledge of the Company or any of its Subsidiaries, threatened
against, relating to or affecting, nor to the knowledge of the Company or any
of
its Subsidiaries are there any investigations or audits by a Governmental Entity
pending or threatened against, relating to or affecting, the Company or any
of
its Subsidiaries or any of their respective assets and properties which, if
determined adversely to the Company or any of its Subsidiaries, individually
or
in the aggregate, could be reasonably expected to have a material adverse effect
on the Company and its Subsidiaries taken as a whole or on the ability of the
Company to consummate the transactions contemplated by this Agreement, and,
to
the knowledge of the Company or any of its Subsidiaries, there are no facts
or
circumstances known to the Company or any of its Subsidiaries that could be
reasonably expected to give rise to any such action, suit, arbitration,
proceeding, investigation or audit, and (b) neither the Company nor any of
its
Subsidiaries is subject to any Order that, individually or in the aggregate,
has
or could be reasonably expected to have a material adverse effect on the Company
and its Subsidiaries taken as a whole or on the ability of the Company to
consummate the transactions contemplated by this Agreement.
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2.10 Tangible
Property and Assets.
Except
as disclosed in the Company SEC Documents filed prior to the date of this
Agreement, the Company and its Subsidiaries have good and marketable title
to,
or have valid leasehold interests in or valid rights under contract to use,
all
tangible property and assets used in and, individually or in the aggregate,
material to the conduct of the businesses of the Company and its Subsidiaries
taken as a whole, free and clear of all Liens other than (i) any statutory
Lien
arising in the ordinary course of business by operation of law with respect
to a
liability that is not yet due or delinquent and (ii) any minor imperfection
of
title or similar Lien which individually or in the aggregate with all other
such
Liens does not materially impair the value of the property or asset subject
to
such Lien or the use of such property or asset in the conduct of the business
of
the Company or any such Subsidiary. All such property and assets are, in all
material respects, in good working order and condition, ordinary wear and tear
excepted, and adequate and suitable for the purposes for which they are
presently being used.
2.11 Intellectual
Property Rights.
The
Company and its Subsidiaries have all right, title and interest in, or a valid
and binding license to use, all Company IP individually or in the aggregate
material to the conduct of the businesses of the Company and its Subsidiaries
taken as a whole. Neither the Company nor any Subsidiary of the Company is
in
default (or with the giving of notice or lapse of time or both, would be in
default) in any material respect under any license to use such Company IP,
such
Company IP is not being infringed by any third party, and neither the Company
nor any Subsidiary of the Company is infringing any Intellectual Property Rights
of any third party, except for such defaults and infringements which,
individually or in the aggregate, do not have and could not be reasonably
expected to have a material adverse effect on the Company and its Subsidiaries
taken as a whole.
2.12 Real
Property.
(a) The
Company and each of its Subsidiaries has good, marketable and indefeasible
fee
title to their respective Owned Real Properties, free and clear of any Liens,
other than Liens for current taxes not yet due and payable and Liens that have
arisen in the ordinary course of business and that do not (in any case or in
the
aggregate) materially detract from the value of the assets subject thereto
or
materially impair the operations of the Company or any of its
Subsidiaries.
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(b) Section
2.12 of the Company Disclosure Schedule sets forth an accurate and complete
list
of each lease pursuant to which any real property is being leased to the Company
or any of its Subsidiaries.
(c) Section
2.12 of the Company Disclosure Schedule contains an accurate and complete list
of all subleases, occupancy agreements and other Company Contracts granting
to
any Person (other than the Company or any of its Subsidiaries) a right of use
or
occupancy of any Owned Real Property and Leased Real Property of the
Company.
2.13 Compliance;
Permits.
(a) Neither
the Company nor any of its Subsidiaries nor the conduct of their respective
businesses is, in any material respect, in conflict with, or in default or,
to
the knowledge of the Company or any of its Subsidiaries, violation of, any
Law
applicable to the Company or any of its Subsidiaries or by which its or any
of
their respective businesses or properties is bound or affected. No investigation
or review by any Governmental Entity is pending or, to the knowledge of the
Company, threatened against the Company or any of its Subsidiaries, nor has
any
Governmental Entity indicated to the Company or any of its Subsidiaries an
intention to conduct the same. There is no Order binding upon the Company or
any
of its Subsidiaries which has or could reasonably be expected to have the effect
of prohibiting or materially impairing any business practice of the Company
or
any of its Subsidiaries, any acquisition of material property by the Company
or
any of its Subsidiaries or the conduct of business by the Company or any of
its
Subsidiaries as currently conducted or presently proposed to be
conducted.
(b) The
Company and its Subsidiaries hold all permits, licenses, variances, exemptions,
orders and approvals from Governmental Entities that are material to the
operation of the business of the Company and its Subsidiaries (collectively,
the
“Company
Permits”).
The
Company and its Subsidiaries are in compliance in all material respects with
the
terms of the Company Permits.
2.14 Company
Material Contracts.
Neither
the Company nor any of its Subsidiaries, nor, to the Company’s knowledge, any
other party to a Company Material Contract, is in material breach, violation
or
default under, and neither the Company nor any of its Subsidiaries has received
written notice that it has breached, violated or defaulted under, any of the
material terms or conditions of any Company Material Contract in such a manner
as would permit any other party to cancel or terminate any such Company Material
Contract, or would permit any other party to seek material damages or other
material remedies (for any or all of such breaches, violations or defaults,
in
the aggregate).
2.15 Taxes.
(a) The
Company and each of its Subsidiaries has filed all tax returns and reports
required to be filed by it through the date hereof and will timely file any
such
returns or reports required to be filed on or prior to the Closing Date, and
such returns and reports accurately reflect all taxes, charges and assessments
owed by the Company and its Subsidiaries. Section 2.15(a) of the Company
Disclosure Schedule (i) lists every federal, state, local and foreign
jurisdiction in which the Company and its Subsidiaries are subject to Tax,
and
indicates those Tax Returns that have been examined or audited and indicates
those Tax Returns that currently are the subject of examination or
audit.
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(b) No
extension or waiver of any statute of limitations has been requested of or
granted by the Company or any of its Subsidiaries with respect to any Tax for
any period, and no extension or waiver of time within which to file any Tax
Return has been requested by or granted to the Company or any of its
Subsidiaries.
(c) No
deficiency, delinquency, or default for any Taxes relating to the Company or
any
its Subsidiaries or its receipts, income, sales transactions or other business
activities has been claimed, proposed or assessed against the Company or any
of
its Subsidiaries nor has the Company or any of its Subsidiaries received notice
of any such deficiency, delinquency, or default; and there is no audit,
examination, investigation, claim, assessment, action, suit, proceeding, lien
or
encumbrance in effect, pending or proposed by any tax authority with respect
to
any such Taxes or with respect to any Tax Return of the Company or any of its
Subsidiaries. There are no Liens for Taxes (other than for current Taxes not
yet
due and payable) on any of the assets and properties of the Company and its
Subsidiaries.
(d) The
Company and each of its Subsidiaries has withheld and paid all Taxes required
to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or third
party.
(e) There
is
no tax ruling, request for ruling, or settlement, compromise, closing or Tax
collection agreement in effect or pending which does or could affect the
liability of the Company or any of its Subsidiaries for Taxes for any period
after the Closing Date.
(f) Neither
the Company nor any of its Subsidiaries has (i) been a member of an Affiliated
Group filing a consolidated federal Tax Return or (ii) incurred any liability
for the Taxes of any Person under Section 1.1502-6 of the Treasury Regulations,
under any provision of state, local or foreign law similar to Section 1.1502-6
of the Treasury Regulations, as a transferee or successor, by contract, or
otherwise.
(g) Neither
the Company nor any of its Subsidiaries is obligated to make any payments,
or is
a party to any agreement that under any circumstances could obligate the Company
or any of its Subsidiaries to make any payments, that are not or would not
be
deductible under Section 162(m) or Section 280G of the Code.
(h) None
of
the assets of the Company and its Subsidiaries (i) consists of or secures any
indebtedness, the interest on which is exempt from Tax; (ii) is “tax exempt use
property” within the meaning of Section 168(h) of the Code; or (iii) will as of
the Closing Date be subject to any “safe harbor lease” within the meaning of
former Section 168(f)(8) of the Internal Revenue Code of 1954.
2.16 Labor
and Employment Matters.
(a) The
Company and each of its Subsidiaries (i) has withheld and paid to the
appropriate Governmental Entities, or is withholding for payment not yet due
to
such entities, all amounts required to be withheld from its employees; (ii)
is
not liable for any arrears of wages, Taxes, penalties or other sums for failure
to comply with any of the foregoing; and (iii) has complied in all material
respects with all applicable Laws relating to the employment of labor, including
Title VII of the Federal Civil Rights Act of 1964, as amended, the Occupational
Safety and Health Act, and those relating to hours, wages, collective bargaining
and the payment and withholding of Taxes and other sums as required by
appropriate authorities.
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(b) Neither
the Company nor any of its Subsidiaries is a party to any collective bargaining
agreement or other labor contract applicable to the employees of the Company
or
any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is
subject to any (i) unfair labor practice complaint pending before the National
Labor Relations Board or any other federal, state, local or foreign agency,
(ii)
pending or threatened labor strike, slowdown, work stoppage, lockout, or other
organized labor disturbance, or threat thereof, (iii) pending grievance
proceeding, (iv) pending representation question respecting the employees of
the
Company or any of its Subsidiaries, (v) pending arbitration proceeding arising
out of or under any collective bargaining agreement or (vi) attempt by any
union
to represent employees of the Company or any of its Subsidiaries as a collective
bargaining agent.
(c) None
of
the current or former independent contractors of the Company or any of its
Subsidiaries could be reclassified as an employee, except as would not have
and
would not reasonably be expected to have or result in a material adverse effect
on the Company and its Subsidiaries.
2.17 Employees.
Section
2.17 of the Company Disclosure Schedule sets forth a list of the names of all
employees of the Company and its Subsidiaries currently employed in connection
with its and their respective businesses (collectively, the “Employees”)
and
indicates the current salary or wage rate of each such Employee. All of such
salaries, wages and benefits will be paid by the Company and its Subsidiaries
when due for all periods through the Closing Date. Section 2.17 of the Company
Disclosure Schedule sets forth a list of all Employees terminated by the Company
and its Subsidiaries since the date 90 days prior to the date hereof. The
employment of each Employee is terminable at will.
2.18 Employee
Benefit Plans.
(a) Section
2.18(a) of the Company Disclosure Schedule sets forth a true and complete list
of all Company Benefit Plans and identifies each such Company Benefit Plan
as
either an “employee welfare benefit plan,” as defined in ERISA Section 3(1) (a
“Welfare
Plan”)
or an
“employee pension benefit plan”, as defined in ERISA Section 3(2) (a
“Pension
Plan”);
provided, however, that the term “Pension Plan” shall not include any Company
Benefit Plan that is a “multiemployer plan” within the meaning of ERISA Section
3(37) (a “Multiemployer
Plan”).
(b) The
Company has delivered or made available to Parent true and complete copies
of:
(i) all plan texts, agreements and material employee communications relating
to
each Company Benefit Plan; (ii) all summary plan descriptions (whether or not
required to be furnished pursuant to ERISA), the most recent annual report
(including all schedules thereto) and the most recent annual and periodic
accounting and financial statements of related plan assets with respect to
each
Pension Plan and Welfare Plan; and (iii) the most recent determination letter
received from the Internal Revenue Service with respect to each Pension
Plan.
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(c) To
the
knowledge of the Company or any of its Subsidiaries, no event has occurred
(and
there exists no condition or set of circumstances) in connection with any
Company Benefit Plan that could subject Parent, Merger Sub, the Company, the
Surviving Corporation or any Company Benefit Plan, directly or indirectly,
to
any liability under ERISA, the Code or any other law, regulation or governmental
order applicable to any Company Benefit Plan.
(d) Each
Company Benefit Plan (other than any Multiemployer Plan) conforms to, and its
administration is in compliance with, all applicable laws and regulations,
including but not limited to, ERISA and the Code, and no fiduciary of any
Company Benefit Plan has taken any action that could result in such fiduciary
being liable for the payment of damages under ERISA Section 409 and that would
result in any liability for Parent, Merger Sub, the Company or the Surviving
Corporation.
(e) Each
Pension Plan that is intended to qualify under Section 401(a) or 403(a) of
the
Code is so qualified and has received a favorable determination letter from
the
Internal Revenue Service with respect to such qualification, its related trust
has been determined to be exempt from taxation under Section 501(a) of the
Code,
and nothing has occurred since the date of such letter that could adversely
affect such qualification or exemption.
(f) Each
Company Benefit Plan (other than any Multiemployer Plan) has been maintained
in
accordance with its terms, and there are no pending or, to the knowledge of
the
Company or any of its Subsidiaries, threatened claims, lawsuits or arbitrations
(other than routine claims for benefits) that have been asserted or instituted
against or with respect to any such Company Benefit Plan or the assets of any
of
the trusts under any such Company Benefit Plan.
(g) There
has
been no failure to comply with applicable ERISA or other requirements as to
the
filing of reports, documents and notices with the Secretary of Labor, the
Secretary of the Treasury and the Pension Benefit Guaranty Corporation
(“PBGC”)
that
could subject any Company Benefit Plan (other than any Multiemployer Plan),
any
fiduciary thereof, Parent, Merger Sub, the Company or the Surviving Corporation
to a penalty, and any requirement of the furnishing of such documents to
participants or beneficiaries, due before the Closing Date, has been or will
be
complied with by all of the Company Benefit Plans prior to the
Closing.
(h) No
“prohibited transaction,” as such term is defined in Code Section 4975 and ERISA
Section 406, has occurred with respect to any Company Benefit Plan (other than
a
Multiemployer Plan) that could subject such Company Benefit Plan, any fiduciary
thereof, Parent, Merger Sub, the Company or the Surviving Corporation to a
penalty for such prohibited transaction imposed by ERISA Section 502 or a
material tax imposed by Code Section 4975.
(i) Any
bond
required by applicable provisions of ERISA with respect to any Company Benefit
Plan (other than a Multiemployer Plan) has been obtained and is in full force
and effect.
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(j) No
“reportable event,” as such term is defined in ERISA Section 4043, has occurred
or is continuing with respect to any Pension Plan.
(k) No
Pension Plan that is or was subject to Title IV of ERISA has been terminated;
no
proceeding has been initiated to terminate any such Plan; and neither the
Company nor any of its Subsidiaries has incurred, and does not reasonably expect
to incur, any liability, whether to the PBGC or otherwise, except for required
premium payments, which payments have been made when due, with respect to the
termination of any Pension Plan. No event has occurred (and there exists no
condition or set of circumstances) that presents a material risk of the partial
termination of any Pension Plan.
(l) No
Company Benefit Plan provides medical or death benefits (whether or not insured)
with respect to current or former employees of the Company or any of its
Subsidiaries beyond their retirement or other termination of service (other
than
(i) coverage mandated by law or (ii) death benefits under any Pension
Plan).
(m) There
are
no unfunded benefit obligations arising in any jurisdiction.
(n) The
consummation of the transactions contemplated hereby will not (i) entitle any
current or former employee of the Company or any of its Subsidiaries to
severance pay, unemployment compensation or any similar payment, or (ii)
accelerate the time of payment or vesting, or increase the amount of any
compensation due to any such employee or former employee.
(o) The
Company has provided (or has caused the applicable Company Benefit Plans to
provide) and will continue to provide (or cause the applicable Company Benefit
Plans to provide) for “continuation coverage” to or for the benefit of each
“covered employee” and each “qualified beneficiary” entitled thereto (as such
terms are defined in Code Section 4980B) and shall otherwise comply in all
respects with the requirements (including, but not limited to, notice
requirements) of Code Section 4980B as to each such covered employee and each
such qualified beneficiary with respect to whom a “qualifying event” (as defined
in Code Section 4980B) has occurred (or will occur) through the
Closing.
(p) Section
2.18(p) of the Company Disclosure Schedule sets forth a true and correct list
of
all Multiemployer Plans to which the Company has contributed, or is required
to
contribute, since January 1, 2003. To the Company’s knowledge, each such
Multiemployer Plan has been maintained in substantial compliance with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations, including, but not limited to, ERISA and the Code. To the Company’s
knowledge, no “prohibited transaction,” as defined in ERISA Section 406 or Code
Section 4975, has occurred in connection with any such Multiemployer Plan.
The
Company shall have made, on or prior to the Closing, all contributions required
to be made to each such Multiemployer Plan.
(q) Section
2.18(q) of the Company Disclosure Schedule sets forth accurately, for each
Multiemployer Plan, (i) the amount of contributions by the Company and its
Subsidiaries to such plan for the prior two plan years and (ii) the amount
of
withdrawal liability as determined under Section 4201 of ERISA that the Company
and its Subsidiaries would incur if any of them withdrew from such plan in
a
complete withdrawal as of the date listed in Section 2.18(q) of the Company
Disclosure Schedule. With respect to any Multiemployer Plan, neither the Company
nor any of its Subsidiaries has incurred or otherwise become liable for, or
is
reasonably expected to incur or become liable for, a “complete withdrawal” or
“partial withdrawal,” as such terms are defined in Sections 4203 and 4205 of
ERISA, respectively, with respect to events that have occurred before or as
of
the Closing.
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(r) Except
as
set forth in Section 2.18(a) of the Company Disclosure Schedule, the Company
and
its Subsidiaries do not have any medical, dental, disability or life insurance
programs, or stock option, incentive or deferred compensation plans or other
similar fringe or employee benefit plans, programs or arrangements for the
benefit of their respective employees.
2.19 Environmental
Matters.
(a) Hazardous
Material.
No
underground storage tanks and no amount of any substance that has been
designated by any Governmental Entity or by applicable federal, state or local
law to be radioactive, toxic, hazardous or otherwise a danger to health or
the
environment, including PCBs, asbestos, petroleum, urea-formaldehyde and all
substances listed as hazardous substances pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended,
or
defined as a hazardous waste pursuant to the United States Resource Conservation
and Recovery Act of 1976, as amended, and the regulations promulgated pursuant
to said laws, but excluding office and janitorial supplies (“Hazardous
Materials”),
are
present, as a result of the actions of the Company, or its Subsidiaries or
any
affiliate of the Company, or, to the knowledge of the Company, as a result
of
any actions of any third party or otherwise, in, on or under any property,
including the land and the improvements, ground water and surface water thereof,
that the Company or any of its Subsidiaries has at any time owned, operated,
occupied or leased.
(b) Hazardous
Materials Activities.
Neither
the Company nor any of its Subsidiaries has transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to any
Hazardous Materials in violation of any law in effect on or before the Closing
Date, and neither the Company nor any of its Subsidiaries has disposed of,
transported, sold, used, released, exposed its employees or others to or
manufactured any product containing any Hazardous Material (collectively,
“Hazardous
Materials Activities”)
in
violation of any law, rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect on or prior to the Closing Date to prohibit,
regulate or control Hazardous Materials or any Hazardous Materials
Activities.
(c) Permits.
The
Company and its Subsidiaries currently hold all environmental approvals,
permits, licenses, clearances and consents (the “Environmental
Permits”)
necessary for the conduct of the Company’s and its Subsidiaries’ Hazardous
Materials Activities and other businesses of the Company and its Subsidiaries
as
such activities and businesses are currently being conducted, except where
the
failure to hold such Environmental Permits could not be reasonably expected
to
result in a material liability to the Company and its Subsidiaries taken as
a
whole.
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(d) Environmental
Liabilities.
No
action, proceeding, revocation proceeding, amendment procedure, writ, injunction
or claim is pending, or to the Company’s knowledge, threatened concerning any
Environmental Permit, Hazardous Material or any Hazardous Materials Activity
of
the Company or any of its Subsidiaries.
2.20 Statements;
Proxy Statement/Prospectus.
None of
the information supplied or to be supplied by the Company for inclusion or
incorporation by reference in (a) the Registration Statement will, at the time
it becomes effective under the Securities Act, contain any untrue statement
of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading and (b)
the
proxy statement/prospectus to be sent to the stockholders of the Company in
connection with the Company Stockholder Meeting (as defined in Section
4.5(a))
(such
proxy statement/prospectus as amended or supplemented is referred to herein
as
the “Proxy
Statement/Prospectus”)
shall
not, on the date the Proxy Statement/Prospectus is first mailed to the Company’s
stockholders or at the time of the Company Stockholder Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in
light of the circumstances under which they are made, not misleading. If at
any
time before the Effective Time, any event relating to the Company or any of
its
affiliates, officers or directors should be discovered by the Company which
should be set forth in a supplement to the Proxy Statement/Prospectus, the
Company shall promptly inform Parent. Notwithstanding the foregoing, the Company
makes no representation or warranty with respect to any information supplied
or
to be supplied by Parent or Merger Sub that is, will be, or is required to
be,
contained in any of the foregoing documents.
2.21 Certain
Business Practices.
Neither
the Company nor any of its Subsidiaries, and, to the knowledge of the Company,
no Representative of the Company or any of its Subsidiaries with respect to
any
matter relating to the Company or any of its Subsidiaries, has: (a) used any
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity; (b) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns or violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or (c) made any other unlawful
payment.
2.22 Interested
Party Transactions.
Except
as disclosed in the Company SEC Documents, neither the Company nor any of its
Subsidiaries is indebted to any director or officer of the Company or any of
its
Subsidiaries (except for amounts due as normal salaries and bonuses and in
reimbursement of ordinary expenses), and no such person is indebted to the
Company or any of its Subsidiaries, and there are no other transactions of
the
type required to be disclosed pursuant to Items 402 or 404 of Regulation S-K
under the Securities Act and the Exchange Act.
2.23 Insurance.
The
Company and each of its Subsidiaries has policies of insurance and bonds of
the
type and in amounts customarily carried by persons conducting businesses or
owning assets similar to those of the Company and its Subsidiaries. There is
no
claim pending under any of such policies or bonds as to which coverage has
been
questioned, denied or disputed by the underwriters of such policies or bonds.
All premiums due and payable under all such policies and bonds have been paid
and the Company and its Subsidiaries are otherwise in compliance in all material
respects with the terms of such policies and bonds. Company has no knowledge
of
any threatened termination of, or material premium increase with respect to,
any
of such policies.
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2.24 Minute
Books.
The
minute books of the Company and its Subsidiaries made available to Parent
contain a complete and accurate summary of all meetings of directors and
stockholders or actions by written consent of the Company and the respective
Subsidiaries during the past three years and through the date of this Agreement,
and reflect all transactions referred to in such minutes accurately in all
material respects.
2.25 Vote
Required.
The
affirmative vote of the holders of at least a majority of the shares of Company
Common Stock outstanding on the record date set for the Company Stockholders
Meeting is the only vote of the holders of any of Company’s capital stock
necessary to approve this Agreement and the transactions contemplated hereby.
2.26 Brokers’
and Finders’ Fees.
The
Company has not incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders’ fees or agents’ commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF PARENT
Parent
represents and warrants to the Company, as follows (it being understood that
each representation and warranty contained in this Article
III
is
subject to: (a) the exceptions and disclosures set forth in the section of
the
Parent Disclosure Schedule corresponding to the particular Section in this
Article
III
in which
such representation and warranty appears; (b) any exceptions or disclosures
explicitly cross-referenced in such section of the Parent Disclosure Schedule
by
reference to another section of the Parent Disclosure Schedule; and (c) any
exception or disclosure set forth in any other section of the Parent Disclosure
Schedule to the extent it is reasonably apparent from the wording of such
exception or disclosure that such exception or disclosure is intended to qualify
such representation and warranty):
3.1 Organization
and Qualification.
Each of
Parent and Merger Sub is a corporation duly organized, validly existing and
in
good standing under the laws of its jurisdiction of incorporation and has full
corporate power and authority to conduct its business as and to the extent
now
conducted and to own, use and lease its assets and properties. Parent and each
of its Subsidiaries is duly qualified, licensed or admitted to do business
and
is in good standing in each jurisdiction in which the ownership, use or leasing
of its assets and properties, or the conduct or nature of its business, makes
such qualification, licensing or admission necessary, except for such failures
to be so qualified, licensed or admitted and in good standing which,
individually or in the aggregate, do not have and could not be reasonably
expected to have a material adverse effect on Parent and its Subsidiaries taken
as a whole. Section 3.1 of the Parent Disclosure Schedule sets forth the name
and jurisdiction of incorporation of each Subsidiary of Parent. Parent has
delivered or made available to the Company true and complete copies of the
certificate of incorporation and bylaws of Parent and similar governing
instruments of each of its Subsidiaries, as amended to date, and each such
instrument is in full force and effect. Neither Parent nor any of its
Subsidiaries is in violation of any of the provisions of its certificate of
incorporation or bylaws or equivalent governing instruments.
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3.2 Capitalization.
(a) The
authorized capital stock of Parent consists of 250,000,000 shares of Parent
Common Stock and 2,000,000 shares of preferred stock, par value $0.0001 per
share (“Parent
Preferred Stock”),
of
which (i) 500,000 shares are designated Series A Junior Participating Preferred
Stock, none of which are issued or outstanding, (ii) 2,000 shares are designated
as Series E Convertible Preferred Stock, of which approximately 923 shares
are
issued and outstanding, (iii) 250 shares are designated as Series F Convertible
Preferred Stock, of which 194 shares are issued and outstanding, and (iv) 10,000
shares are designated as Series G Convertible Preferred Stock, of which
approximately 6,579 shares are issued and outstanding. As of the close of
business on November 30, 2005, 20,929,673 shares of Parent Common Stock were
issued and outstanding and no shares of Parent Common Stock were held by Parent
or any Subsidiary of Parent.
(b) As
of
November 30, 2005, (i) 270,000 shares of Parent Common Stock were reserved
for
issuance (ii) 2,291,669 shares were issuable upon exercise of outstanding stock
options granted under Parent’s 2004 Equity Incentive Plan (the “2004
Equity Incentive Plan”);
805,860 shares were issuable upon exercise of outstanding stock options granted
under Parent’s 1995 Stock Incentive Plan (the “1995 Stock Incentive Plan”); and
(iii) Parent had reserved for issuance 13,671,488 shares of Parent Common Stock
issuable upon exercise of outstanding warrants to purchase shares of Parent
Common Stock (the “Parent
Warrants”).
As of
November 30, 2005, (w) approximately 1,846,262 shares of Parent Common Stock
were issuable upon conversion of Parent’s Series E Convertible Preferred Stock,
(x) 4,740,000 shares of Parent Common Stock were issuable upon conversion of
Parent’s Series F Convertible Preferred Stock, and (y) approximately 13,157,560
shares of Parent Common Stock were issuable upon conversion of Parent’s Series G
Convertible Preferred Stock. Except as set forth in the immediately preceding
two sentences, no shares of capital stock or other equity securities of Parent
are issued, reserved for issuance or outstanding. All of the outstanding shares
of Parent’s capital stock have been duly authorized and validly issued and are
fully paid and nonassessable. All shares of Parent Common Stock issuable
pursuant to the 2004 Equity Incentive Plan and 1995 Stock Option/Stock Issuance
Plan, issuable upon exercise of Parent Warrants, issuable upon conversion of
the
outstanding Parent Preferred Stock and issuable as payment of principal and
interest under certain of Parent’s outstanding promissory notes, when issued in
accordance with the terms thereof, will be duly authorized, validly issued,
fully paid and nonassessable.
(c) Except
as
set forth in Section
3.2(b)
above,
there are no options, warrants, equity securities or similar ownership
interests, calls, rights (including preemptive rights), commitments or
agreements of any character to which Parent or any of its Subsidiaries is a
party or by which it is bound, obligating Parent or any of its Subsidiaries
to
issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase,
redeem or otherwise acquire, or cause the repurchase, redemption or acquisition,
of any shares of capital stock of Parent or any of its Subsidiaries or
obligating Parent or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security or similar
ownership interest, call, right, commitment or agreement. There are no
registration rights and there are no voting trusts, proxies or other agreements
or understandings with respect to the registration or voting of any equity
security of any class of Parent or any of its Subsidiaries.
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3.3 Authority.
Each of
Parent and Merger Sub has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby.
The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and Merger Sub, subject only to the
filing of the Articles of Merger pursuant to Section 92A.200 of the
NRS.
3.4 Binding
Effect.
This
Agreement has been duly executed and delivered by each of Parent and Merger
Sub
and, assuming the due authorization, execution and delivery by the Company,
constitutes a valid and binding obligation of each of Parent and Merger Sub,
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy and other similar laws and general principles of
equity.
3.5 Non-Contravention;
Approvals and Consents.
(a) The
execution and delivery of this Agreement by Parent and Merger Sub do not, and
the performance by Parent and Merger Sub of their respective obligations
hereunder and the consummation of the transactions contemplated hereby will
not,
(i) conflict with or violate the certificate of incorporation or bylaws of
Parent, the articles of incorporation or bylaws of Merger Sub or the equivalent
organizational documents of any other Subsidiary of Parent, (ii) subject to
compliance with the requirements set forth in paragraph (b) below, conflict
with
or violate any Law or Order applicable to Parent, Merger Sub or any other
Subsidiary of Parent or by which any of their respective properties is bound
or
affected, or (iii) result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or
impair Parent’s rights or alter the rights or obligations of Parent or any third
party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien on any
of
the properties, including any leased real property, or assets of Parent or
any
of its Subsidiaries pursuant to, any Parent Material Contract. Section 3.5(a)
of
the Parent Disclosure Schedule lists all consents, waivers and approvals under
any Parent Material Contract required to be obtained (other than those already
obtained) in connection with the consummation of the transactions contemplated
hereby, which, if not obtained, would have a material adverse effect on Parent
or any of its Subsidiaries or have a material adverse effect on the ability
of
the parties to consummate the Merger.
(b) No
consent, approval, order or authorization of, or registration, declaration
or
filing with any Governmental Entity is required by or with respect to Parent
or
any of its Subsidiaries in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for (i) the Necessary Consents and (ii) such other consents, approvals, orders,
authorizations, registrations, declarations and filings which, if not obtained
or made, would not be material to the Company or Parent or have a material
adverse effect on the ability of the parties to consummate the
Merger.
3.6 SEC
Filings; Financial Statements.
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(a) Parent
has delivered (or made available on the SEC website) to the Company accurate
and
complete copies of all registration statements, proxy statements and other
statements, reports, schedules, forms and other documents filed by Parent with,
and all Parent Certifications (as defined below) filed or furnished by Parent
with or to, the SEC since January 1, 2002, including all amendments thereto
(collectively, the “Parent
SEC Documents”).
All
statements, reports, schedules, forms and other documents required to have
been
filed or furnished by Parent with or to the SEC since January 1, 2002 have
been
so filed or furnished on a timely basis. None of Parent’s Subsidiaries is
required to file or furnish any documents with or to the SEC. As of the time
it
was filed with or furnished to the SEC: (i) each of the Parent SEC Documents
complied as to form in all material respects with the applicable requirements
of
the Securities Act or the Exchange Act (as the case may be); and (ii) none
of
the Parent SEC Documents contained any untrue statement of a material fact
or
omitted to state a material fact required to be stated therein or necessary
in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except to the extent corrected: (A) in
the
case of Parent SEC Documents filed or furnished on or prior to the date of
this
Agreement that were amended or superseded on or prior to the date of this
Agreement, by the filing or furnishing of the applicable amending or superseding
Parent SEC Document; and (B) in the case of Parent SEC Documents filed or
furnished after the date of this Agreement that are amended or superseded prior
to the Effective Time, by the filing or furnishing of the applicable amending
or
superseding Parent SEC Document. Each of the certifications and statements
relating to the Parent SEC Documents required by Rule 13a-14 under the Exchange
Act (collectively, the “Parent
Certifications”)
is
accurate and complete, and complied as to form and content with all applicable
Laws in effect at the time each such Parent Certification was filed with or
furnished to the SEC.
(b) Parent
and its Subsidiaries maintain disclosure controls and procedures required by
Rule 13a-15 under the Exchange Act. Such disclosure controls and procedures
are
designed to ensure that all material information concerning Parent and its
Subsidiaries required to be disclosed by Parent in the reports that it is
required to file, submit or furnish under the Exchange Act is recorded,
processed, summarized and reported on a timely basis to the individuals
responsible for the preparation of such reports. Parent has delivered or made
available to the Company accurate and complete copies of all material policies,
manuals and other documents promulgating, such disclosure controls and
procedures. Parent is, and has at all times since January 1, 2000 been, in
compliance with the applicable listing and other rules and regulations of the
OTC Bulletin Board and has not since January 1, 2000 received any notice from
the OTC Bulletin Board asserting any non-compliance with any of such rules
and
regulations.
(c) The
financial statements (including any related notes) contained or incorporated
by
reference in the Parent SEC Documents: (i) complied as to form in all material
respects with the published rules and regulations of the SEC applicable thereto;
(ii) were prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered, and (iii) fairly present in all material
respects the consolidated financial position of Parent and its Subsidiaries
as
of the respective dates thereof and the consolidated results of operations
and
cash flows of Parent and its Subsidiaries for the periods covered thereby.
No
financial statements of any Person other than Parent and its Subsidiaries are
required by GAAP to be included in the consolidated financial statements of
Parent.
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(d) Parent
has delivered or made available to the Company the unaudited consolidated
balance sheet (including the notes thereto) of Parent and its Subsidiaries
as of
September 30, 2005 (the “Parent
Balance Sheet”)
and
the unaudited consolidated statement of income (including the notes thereto)
of
Parent and its Subsidiaries for the fiscal period then ended (together with
the
Parent Balance Sheet, the “Parent
Financial Statements”).
The
Parent Financial Statements: (i) were prepared in accordance with GAAP applied
on a basis consistent with the basis on which the financial statements contained
in the Parent SEC Documents were prepared; and (ii) fairly present in all
material respects the condensed, unaudited consolidated financial position
of
Parent and its Subsidiaries as of September 30, 2005 and the condensed,
unaudited consolidated results of operations of Parent and its Subsidiaries
for
the fiscal year then ended.
(e) Parent’s
auditor has, at all times since the date of enactment of the Sarbanes-Oxley
Act,
been: (i) a registered public accounting firm (as defined in Section 2(a)(12)
of
the Sarbanes-Oxley Act); (ii) “independent” with respect to Parent within the
meaning of Regulation S-X under the Exchange Act; and (iii) in compliance with
subsections (g) through (l) of Section 10A of the Exchange Act and the rules
and
regulations promulgated by the SEC and the Public Company Accounting Oversight
Board thereunder. All non-audit services (as defined in Section 2(a)(8) of
the
Sarbanes-Oxley Act) performed by Parent’s auditors for Parent and its
Subsidiaries were approved as required by Section 202 of the Sarbanes-Oxley
Act.
(f) Other
than as disclosed in the Parent SEC Documents, there are no securitization
transactions or “off-balance sheet arrangements” (as defined in Item 303(c) of
Regulation S-K under the Exchange Act) currently in effect and no such
transactions or arrangements have been effected by Parent or any of its
Subsidiaries since January 1, 2000.
3.7 Absence
of Certain Changes or Events.
(a) Since
the
date of the Parent Balance Sheet, there has not been: (i) any material adverse
effect on Parent, (ii) any change by Parent in its accounting methods,
principles or practices, except as required by concurrent changes in GAAP or
the
rules and regulations promulgated by the SEC, (iii) any revaluation by Parent
of
any of its assets including writing down the value of capitalized inventory
or
writing off notes or accounts receivable other than in the ordinary course
of
business, or (iv) any split, combination or reclassification of the capital
stock of Parent or any of its Subsidiaries.
(b) From
December 31, 2004 until the date of this Agreement, Parent and its Subsidiaries
have not taken or legally committed to take any of the actions specified in
Sections
4.2(a)
through
(r).
3.8 Absence
of Undisclosed Liabilities.
Except
for matters reflected or reserved against in the Parent Balance Sheet, neither
Parent nor any of its Subsidiaries had as of the date of the Parent Balance
Sheet, or has incurred since such date, any liabilities or obligations (whether
absolute, accrued, contingent, fixed or otherwise, or whether due or to become
due) of any nature that would be required by GAAP to be reflected on the Parent
Balance Sheet, other than liabilities and obligations that (i) were incurred
in
the ordinary course of business consistent with past practice and (ii) have
not
been, and could not be reasonably expected to be, individually or in the
aggregate, materially adverse to Parent and its Subsidiaries taken as a
whole.
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3.9 Legal
Proceedings.
Except
as disclosed in the Parent SEC Documents filed prior to the date of this
Agreement, (a) there are no actions, suits, arbitrations or proceedings pending
or, to the knowledge of Parent or any of its Subsidiaries, threatened against,
relating to or affecting, nor to the knowledge of Parent or any of its
Subsidiaries are there any investigations or audits by a Governmental Entity
pending or threatened against, relating to or affecting, Parent or any of its
Subsidiaries or any of their respective assets and properties which, if
determined adversely to Parent or any of its Subsidiaries, individually or
in
the aggregate, could be reasonably expected to have a material adverse effect
on
Parent and its Subsidiaries taken as a whole or on the ability of Parent to
consummate the transactions contemplated by this Agreement, and, to the
knowledge of the Company or any of its Subsidiaries, there are no facts or
circumstances known to Parent or any of its Subsidiaries that could be
reasonably expected to give rise to any such action, suit, arbitration,
proceeding, investigation or audit, and (b) neither Parent nor any of its
Subsidiaries is subject to any Order that, individually or in the aggregate,
has
or could be reasonably expected to have a material adverse effect on Parent
and
its Subsidiaries taken as a whole or on the ability of Parent to consummate
the
transactions contemplated by this Agreement.
3.10 Tangible
Property and Assets.
Except
as disclosed in the Parent SEC Documents filed prior to the date of this
Agreement, Parent and its Subsidiaries have good and marketable title to, or
have valid leasehold interests in or valid rights under contract to use, all
tangible property and assets used in and, individually or in the aggregate,
material to the conduct of the businesses of Parent and its Subsidiaries taken
as a whole, free and clear of all Liens other than (i) any statutory Lien
arising in the ordinary course of business by operation of law with respect
to a
liability that is not yet due or delinquent and (ii) any minor imperfection
of
title or similar Lien which individually or in the aggregate with all other
such
Liens does not materially impair the value of the property or asset subject
to
such Lien or the use of such property or asset in the conduct of the business
of
Parent or any such Subsidiary. All such property and assets are, in all material
respects, in good working order and condition, ordinary wear and tear excepted,
and adequate and suitable for the purposes for which they are presently being
used.
3.11 Intellectual
Property Rights.
Parent
and its Subsidiaries have all right, title and interest in, or a valid and
binding license to use, all Parent IP individually or in the aggregate material
to the conduct of the businesses of Parent and its Subsidiaries taken as a
whole. Neither Parent nor any Subsidiary of Parent is in default (or with the
giving of notice or lapse of time or both, would be in default) in any material
respect under any license to use such Parent IP, such Parent IP is not being
infringed by any third party, and neither Parent nor any Subsidiary of Parent
is
infringing any Intellectual Property Rights of any third party, except for
such
defaults and infringements which, individually or in the aggregate, do not
have
and could not be reasonably expected to have a material adverse effect on Parent
and its Subsidiaries taken as a whole.
3.12 Real
Property.
(a) Parent
and each of its Subsidiaries has good, marketable and indefeasible fee title
to
their respective Owned Real Properties, free and clear of any Liens, other
than
Liens for current taxes not yet due and payable and Liens that have arisen
in
the ordinary course of business and that do not (in any case or in the
aggregate) materially detract from the value of the assets subject thereto
or
materially impair the operations of Parent or any of its
Subsidiaries.
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(b) Section
3.12(b) of the Parent Disclosure Schedule sets forth an accurate and complete
list of each lease pursuant to which any real property is being leased to the
Parent or any of its Subsidiaries.
(c) Section
3.12(c) of the Parent Disclosure Schedule contains an accurate and complete
list
of all subleases, occupancy agreements and other Parent Contracts granting
to
any Person (other than the Parent or any of its Subsidiaries) a right of use
or
occupancy of any Owned Real Property and Leased Real Property of
Parent.
3.13 Compliance;
Permits.
(a) Neither
Parent nor any of its Subsidiaries nor the conduct of their respective
businesses is, in any material respect, in conflict with, or in default or,
to
the knowledge of the Company or any of its Subsidiaries, violation of, any
Law
applicable to Parent or any of its Subsidiaries or by which its or any of their
respective businesses or properties is bound or affected. No investigation
or
review by any Governmental Entity is pending or, to the knowledge of Parent,
threatened against Parent or any of its Subsidiaries, nor has any Governmental
Entity indicated to Parent or any of its Subsidiaries an intention to conduct
the same. There is no Order binding upon Parent or any of its Subsidiaries
which
has or could reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of Parent or any of its Subsidiaries,
any acquisition of material property by Parent or any of its Subsidiaries or
the
conduct of business by Parent or any of its Subsidiaries as currently conducted
or presently proposed to be conducted.
(b) Parent
and its Subsidiaries hold all permits, licenses, variances, exemptions, orders
and approvals from Governmental Entities that are material to the operation
of
the business of Parent and its Subsidiaries (collectively, the “Parent
Permits”).
Parent and its Subsidiaries are in compliance in all material respects with
the
terms of the Parent Permits.
3.14 Parent
Material Contracts.
Except
as set forth on Section 3.14 of the Parent Disclosure Schedule, neither Parent
nor any of its Subsidiaries, nor, to Parent’s knowledge, any other party to a
Parent Material Contract, is in material breach, violation or default under,
and
neither Parent nor any of its Subsidiaries has received written notice that
it
has breached, violated or defaulted under, any of the material terms or
conditions of any Parent Material Contract in such a manner as would permit
any
other party to cancel or terminate any such Parent Material Contract, or would
permit any other party to seek material damages or other material remedies
(for
any or all of such breaches, violations or defaults, in the
aggregate).
3.15 Taxes.
(a) Parent
and each of its Subsidiaries has filed all tax returns and reports required
to
be filed by it through the date hereof and will timely file any such returns
or
reports required to be filed on or prior to the Closing Date, and such returns
and reports accurately reflect all taxes, charges and assessments owed by Parent
and its Subsidiaries. Section 3.15(a) of the Parent Disclosure Schedule (i)
lists every federal, state, local and foreign jurisdiction in which Parent
and
its Subsidiaries are subject to Tax, and (ii) indicates those Tax Returns that
have been examined or audited and indicates those Tax Returns that currently
are
the subject of examination or audit.
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(b) No
extension or waiver of any statute of limitations has been requested of or
granted by Parent or any of its Subsidiaries with respect to any Tax for any
period, and no extension or waiver of time within which to file any Tax Return
has been requested by or granted to Parent or any of its
Subsidiaries.
(c) No
deficiency, delinquency, or default for any Taxes relating to Parent or any
its
Subsidiaries or its receipts, income, sales transactions or other business
activities has been claimed, proposed or assessed against Parent or any of
its
Subsidiaries nor has Parent or any of its Subsidiaries received notice of any
such deficiency, delinquency, or default; and there is no audit, examination,
investigation, claim, assessment, action, suit, proceeding, lien or encumbrance
in effect, pending or proposed by any tax authority with respect to any such
Taxes or with respect to any Tax Return of Parent or any of its Subsidiaries.
There are no Liens for Taxes (other than for current Taxes not yet due and
payable) on any of the assets and properties of Parent and its
Subsidiaries.
(d) Parent
and each of its Subsidiaries has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or third party.
(e) There
is
no tax ruling, request for ruling, or settlement, compromise, closing or Tax
collection agreement in effect or pending which does or could affect the
liability of Parent or any of its Subsidiaries for Taxes for any period after
the Closing Date.
(f) Neither
Parent nor any of its Subsidiaries has (i) been a member of an Affiliated Group
filing a consolidated federal Tax Return or (ii) incurred any liability for
the
Taxes of any Person under Section 1.1502-6 of the Treasury Regulations, under
any provision of state, local or foreign law similar to Section 1.1502-6 of
the
Treasury Regulations, as a transferee or successor, by contract, or
otherwise.
(g) Neither
Parent nor any of its Subsidiaries is obligated to make any payments, or is
a
party to any agreement that under any circumstances could obligate Parent or
any
of its Subsidiaries to make any payments, that are not or would not be
deductible under Section 162(m) or Section 280G of the Code.
(h) None
of
the assets of Parent and its Subsidiaries (i) consists of or secures any
indebtedness, the interest on which is exempt from Tax; (ii) is “tax exempt use
property” within the meaning of Section 168(h) of the Code; or (iii) will as of
the Closing Date be subject to any “safe harbor lease” within the meaning of
former Section 168(f)(8) of the Internal Revenue Code of 1954.
3.16 Labor
and Employment Matters.
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(a) Parent
and each of its Subsidiaries (i) has withheld and paid to the appropriate
Governmental Entities, or is withholding for payment not yet due to such
entities, all amounts required to be withheld from its employees; (ii) is not
liable for any arrears of wages, Taxes, penalties or other sums for failure
to
comply with any of the foregoing; and (iii) has complied in all material
respects with all applicable Laws relating to the employment of labor, including
Title VII of the Federal Civil Rights Act of 1964, as amended, the Occupational
Safety and Health Act, and those relating to hours, wages, collective bargaining
and the payment and withholding of Taxes and other sums as required by
appropriate authorities.
(b) Neither
Parent nor any of its Subsidiaries is a party to any collective bargaining
agreement or other labor contract applicable to the employees of Parent or
any
of its Subsidiaries. Neither Parent nor any of its Subsidiaries is subject
to
any (i) unfair labor practice complaint pending before the National Labor
Relations Board or any other federal, state, local or foreign agency, (ii)
pending or threatened labor strike, slowdown, work stoppage, lockout, or other
organized labor disturbance, or threat thereof, (iii) pending grievance
proceeding, (iv) pending representation question respecting the employees of
Parent or any of its Subsidiaries, (v) pending arbitration proceeding arising
out of or under any collective bargaining agreement or (vi) attempt by any
union
to represent employees of Parent or any of its Subsidiaries as a collective
bargaining agent.
(c) None
of
the current or former independent contractors of Parent or any of its
Subsidiaries could be reclassified as an employee, except as would not have
and
would not reasonably be expected to have or result in a material adverse effect
on Parent and its Subsidiaries.
3.17 Employees.
Section
3.17 of the Parent Disclosure Schedule sets forth a list of the names of all
employees of the Parent and its Subsidiaries currently employed in connection
with its and their respective businesses (collectively, the “Employees”)
and
indicates the current salary or wage rate of each such Employee. All of such
salaries, wages and benefits will be paid by the Parent and its Subsidiaries
when due for all periods through the Closing Date. Section 3.17 of the Parent
Disclosure Schedule sets forth a list of all Employees terminated by the Parent
and its Subsidiaries since the date 90 days prior to the date hereof. The
employment of each Employee is terminable at will.
3.18 Employee
Benefit Plans.
(a) Section
3.18(a) of the Parent Disclosure Schedule sets forth a true and complete list
of
all Parent Benefit Plans and identifies each such Parent Benefit Plan as either
a Welfare Plan or a Pension Plan.
(b) Parent
has delivered or made available to the Company true and complete copies of:
(i)
all plan texts, agreements and material employee communications relating to
each
Parent Benefit Plan; (ii) all summary plan descriptions (whether or not required
to be furnished pursuant to ERISA), the most recent annual report (including
all
schedules thereto) and the most recent annual and periodic accounting and
financial statements of related plan assets with respect to each Pension Plan
and Welfare Plan; and (iii) the most recent determination letter received from
the Internal Revenue Service with respect to each Pension Plan.
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(c) To
the
knowledge of the Company or any of its Subsidiaries, no event has occurred
(and
there exists no condition or set of circumstances) in connection with any Parent
Benefit Plan that could subject Parent, Merger Sub, the Company, the Surviving
Corporation or any Parent Benefit Plan, directly or indirectly, to any liability
under ERISA, the Code or any other law, regulation or governmental order
applicable to any Parent Benefit Plan.
(d) Each
Parent Benefit Plan (other than any Multiemployer Plan) conforms to, and its
administration is in compliance with, all applicable laws and regulations,
including but not limited to, ERISA and the Code, and no fiduciary of any Parent
Benefit Plan has taken any action that could result in such fiduciary being
liable for the payment of damages under ERISA Section 409 and that would result
in any liability for Parent, Merger Sub, the Company or the Surviving
Corporation.
(e) Each
Pension Plan that is intended to qualify under Section 401(a) or 403(a) of
the
Code is so qualified and has received a favorable determination letter from
the
Internal Revenue Service with respect to such qualification, its related trust
has been determined to be exempt from taxation under Section 501(a) of the
Code,
and nothing has occurred since the date of such letter that could adversely
affect such qualification or exemption.
(f) Each
Parent Benefit Plan (other than any Multiemployer Plan) has been maintained
in
accordance with its terms, and there are no pending or, to the knowledge of
the
Company or any of its Subsidiaries, threatened claims, lawsuits or arbitrations
(other than routine claims for benefits) that have been asserted or instituted
against or with respect to any such Parent Benefit Plan or the assets of any
of
the trusts under any such Parent Benefit Plan.
(g) There
has
been no failure to comply with applicable ERISA or other requirements as to
the
filing of reports, documents and notices with the Secretary of Labor, the
Secretary of the Treasury and the PBGC that could subject any Parent Benefit
Plan (other than any Multiemployer Plan), any fiduciary thereof, Parent, Merger
Sub, the Company or the Surviving Corporation to a penalty, and any requirement
of the furnishing of such documents to participants or beneficiaries, due before
the Closing Date, has been or will be complied with by all of the Parent Benefit
Plans prior to the Closing.
(h) No
“prohibited transaction,” as such term is defined in Code Section 4975 and ERISA
Section 406, has occurred with respect to any Parent Benefit Plan (other than
a
Multiemployer Plan) that could subject such Parent Benefit Plan, any fiduciary
thereof, Parent, Merger Sub, the Company or the Surviving Corporation to a
penalty for such prohibited transaction imposed by ERISA Section 502 or a
material tax imposed by Code Section 4975.
(i) Any
bond
required by applicable provisions of ERISA with respect to any Parent Benefit
Plan (other than a Multiemployer Plan) has been obtained and is in full force
and effect.
(j) No
“reportable event,” as such term is defined in ERISA Section 4043, has occurred
or is continuing with respect to any Pension Plan.
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(k) No
Pension Plan that is or was subject to Title IV of ERISA has been terminated;
no
proceeding has been initiated to terminate any such plan; and neither Parent
nor
any of its Subsidiaries has incurred, and does not reasonably expect to incur,
any liability, whether to the PBGC or otherwise, except for required premium
payments, which payments have been made when due, with respect to the
termination of any Pension Plan. No event has occurred (and there exists no
condition or set of circumstances) that presents a material risk of the partial
termination of any Pension Plan.
(l) No
Parent
Benefit Plan provides medical or death benefits (whether or not insured) with
respect to current or former employees of Parent or any of its Subsidiaries
beyond their retirement or other termination of service (other than (i) coverage
mandated by law or (ii) death benefits under any Pension Plan).
(m) There
are
no unfunded benefit obligations arising in any jurisdiction.
(n) The
consummation of the transactions contemplated hereby will not (i) entitle any
current or former employee of the Parent or any of its Subsidiaries to severance
pay, unemployment compensation or any similar payment, or (ii) accelerate the
time of payment or vesting, or increase the amount of any compensation due
to
any such employee or former employee.
(o) Section
3.18(o) of the Parent Disclosure Schedule sets forth a true and correct list
of
all Multiemployer Plans to which Parent has contributed, or is required to
contribute, since January 1, 2003. To Parent’s knowledge, each such
Multiemployer Plan has been maintained in substantial compliance with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations, including, but not limited to, ERISA and the Code. To Parent’s
knowledge, no “prohibited transaction,” as defined in ERISA Section 406 or Code
Section 4975, has occurred in connection with any such Multiemployer Plan.
Parent shall have made, on or prior to the Closing, all contributions required
to be made to each such Multiemployer Plan.
(p) Section
3.18(p) of the Parent Disclosure Schedule sets forth accurately, for each
Multiemployer Plan, (i) the amount of contributions by the Parent and its
Subsidiaries to such plan for the prior two plan years and (ii) the amount
of
withdrawal liability as determined under Section 4201 of ERISA that the Parent
and its Subsidiaries would incur if any of them withdrew from such plan in
a
complete withdrawal as of the date listed in Section 3.18(p) of the Parent
Disclosure Schedule. With respect to any Multiemployer Plan, neither the Parent
nor any of its Subsidiaries has incurred or otherwise become liable for, or
is
reasonably expected to incur or become liable for, a “complete withdrawal” or
“partial withdrawal,” as such terms are defined in Sections 4203 and 4205 of
ERISA, respectively, with respect to events that have occurred before or as
of
the Closing.
(q) Except
as
set forth in Section 3.18(q) of the Parent Disclosure Schedule, Parent and
its
Subsidiaries do not have any medical, dental, disability or life insurance
programs, or stock option, incentive or deferred compensation plans or other
similar fringe or employee benefit plans, programs or arrangements for the
benefit of their respective employees.
3.19 Environmental
Matters.
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(a) Hazardous
Material.
No
underground storage tanks and no amount of any Hazardous Materials are present,
as a result of the actions of Parent, its Subsidiaries or any affiliate of
Parent, or, to the knowledge of Parent, as a result of any actions of any third
party or otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that Parent or any of
its
Subsidiaries has at any time owned, operated, occupied or leased.
(b) Hazardous
Materials Activities.
Neither
Parent nor any of its Subsidiaries has engaged in any Hazardous Materials
Activities in violation of any law, rule, regulation, treaty or statute
promulgated by any Governmental Entity in effect on or prior to the Closing
Date
to prohibit, regulate or control Hazardous Materials or any Hazardous Materials
Activities.
(c) Permits.
Parent
and its Subsidiaries currently hold all Environmental Permits necessary for
the
conduct of Parent’s and its Subsidiaries’ Hazardous Materials Activities and
other businesses of Parent and its Subsidiaries as such activities and
businesses are currently being conducted, except where the failure to hold
such
Environmental Permits could not be reasonably expected to result in a material
liability to Parent and its Subsidiaries taken as a whole.
(d) Environmental
Liabilities.
No
action, proceeding, revocation proceeding, amendment procedure, writ, injunction
or claim is pending, or to Parent’s knowledge, threatened concerning any
Environmental Permit, Hazardous Material or any Hazardous Materials Activity
of
Parent or any of its Subsidiaries.
3.20 Statements;
Proxy Statement/Prospectus.
None of
the information supplied or to be supplied by Parent for inclusion or
incorporation by reference in (a) the Registration Statement will, at the time
it becomes effective under the Securities Act, contain any untrue statement
of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading and (b)
the
Proxy Statement/Prospectus to be sent to the stockholders of the Company in
connection with the Company Stockholder Meeting shall not, on the date the
Proxy
Statement/Prospectus is first mailed to the Company’s stockholders or at the
time of the Company Stockholder Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Registration
Statement will comply as to form in all material respects with the provisions
of
the Securities Act and the rules and regulations thereunder. If at any time
before the Effective Time, any event relating to Parent or any of its
affiliates, officers or directors should be discovered by Parent which should
be
set forth in a supplement to the Proxy Statement/Prospectus, Parent shall
promptly inform the Company. Notwithstanding the foregoing, Parent makes no
representation or warranty with respect to any information supplied or to be
supplied by the Company that is, will be, or is required to be, contained in
any
of the foregoing documents.
3.21 Certain
Business Practices.
Neither
Parent nor any of its Subsidiaries, and, to the knowledge of Parent, no
Representative of Parent or any of its Subsidiaries with respect to any matter
relating to Parent or any of its Subsidiaries, has: (a) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity; (b) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties
or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or (c) made any other unlawful payment.
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3.22 Interested
Party Transactions.
Except
as disclosed in the Parent SEC Documents, neither the Parent nor any of its
subsidiaries is indebted to any director or officer of the Parent or any of
its
Subsidiaries (except for amounts due as normal salaries and bonuses and in
reimbursement of ordinary expenses), and no such person is indebted to the
Parent or any of its Subsidiaries, and there are no other transactions of the
type required to be disclosed pursuant to Items 402 or 404 of Regulation S-K
under the Securities Act and the Exchange Act.
3.23 Insurance.
Parent
and each of its Subsidiaries have policies of insurance and bonds of the type
and in amounts customarily carried by persons conducting businesses or owning
assets similar to those of the Parent and its Subsidiaries. There is no claim
pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds.
All premiums due and payable under all such policies and bonds have been paid
and Parent and its Subsidiaries are otherwise in compliance in all material
respects with the terms of such policies and bonds. Parent has no knowledge
of
any threatened termination of, or material premium increase with respect to,
any
of such policies.
3.24 Minute
Books.
The
minute books of Parent and its subsidiaries made available to the Company
contain a complete and accurate summary of all meetings of directors and
stockholders or actions by written consent of Parent and the respective
subsidiaries during the past three years and through the date of this Agreement,
and reflect all transactions referred to in such minutes accurately in all
material respects.
3.25 Brokers’
and Finders’ Fees.
Except
for fees payable to Burnham Hill Partners pursuant to an engagement letter
agreement dated June 8, 2005, (true and correct copies of which have been
delivered to the Company), Parent has not incurred, nor will it incur, directly
or indirectly, any liability for brokerage or finders’ fees or agents’
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
ARTICLE
IV
COVENANTS
4.1 Confidentiality;
Access and Investigation; No Modification of Representations, Warranties or
Covenants.
(a) Confidentiality.
The
parties acknowledge that Parent and the Company have previously executed a
Confidentiality Agreement, dated August 26, 2005 (the “Confidentiality
Agreement”),
which
will continue in full force and effect in accordance with its
terms.
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(b) During
the period commencing on the date hereof and ending as of the earlier of the
Effective Time or the termination of this Agreement (the “Pre-Closing
Period”),
each
party hereto shall, and shall cause its respective Representatives to: (a)
provide each other party hereto and such other party’s Representatives with
reasonable access during normal business hours to the Representatives, personnel
and assets and to all existing books, records, Tax Returns, work papers and
other documents and information relating to itself and its Subsidiaries; and
(b)
provide such other party and such other party’s Representatives with such copies
of the existing books, records, Tax Returns, work papers and other documents
and
information relating to itself and its Subsidiaries as such other party may
reasonably request. During the Pre-Closing Period, each party hereto shall,
and
shall cause its Representatives and the Representatives of its Subsidiaries
to,
permit each other party’s senior officers to meet, upon reasonable notice and
during normal business hours, with the chief financial officer and other
officers of such party responsible for such party's financial statements and
the
internal controls of such party and its Subsidiaries to discuss such matters
as
such other party may deem necessary or appropriate in order to enable such
other
party to satisfy its obligations under the Sarbanes-Oxley Act and the rules
and
regulations relating thereto. Any information provided pursuant to this Section
4.1(b) shall be subject to the Confidentiality Agreement.
(c) No
Modification of Representations and Warranties or Covenants.
No
information or knowledge obtained in any investigation or notification pursuant
to this Section 4.1 or Section 4.8 shall affect or be deemed to modify any
representation or warranty contained herein, the covenants or agreements of
the
parties hereto or the conditions to the obligations of the parties hereto under
this Agreement.
4.2 Conduct
of Business by Parent.
During
the Pre-Closing Period, Parent (which for the purposes of this Section 4.2
shall
include Parent and each of its Subsidiaries) agrees, except (a) as required
by
law, (b) as specifically provided in this Agreement or Section 4.2 of the Parent
Disclosure Schedule or (c) to the extent that the Company shall otherwise
consent in writing, to carry on its business in the ordinary course, in
substantially the same manner as heretofore conducted and in compliance with
all
applicable laws and regulations, to pay its debts and taxes when due subject
to
good faith disputes over such debts or taxes, to pay or perform other material
obligations when due, subject to good faith disputes over such obligations,
and
use its commercially reasonable efforts consistent with past practices and
policies to preserve intact its present business organization, keep available
the services of its present officers and employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees
and
others with which it has business dealings. In addition, except (i) as required
by law, (ii) as specifically provided in this Agreement or Section 4.2 of the
Parent Disclosure Schedule or (iii) to the extent that the Company shall
otherwise consent in writing, Parent shall not do any of the following and
shall
prevent its Subsidiaries from doing any of the following:
(a) Except
pursuant to the terms of the 2004 Equity Incentive Plan or written agreements
outstanding on the date hereof and disclosed to the Company in Section 4.2(a)
of
the Parent Disclosure Schedule, accelerate, amend, modify or waive any stock
repurchase rights; accelerate, amend or modify the period of exercisability
or
other material terms of options, warrants or restricted stock; reprice or
exchange options or warrants granted under any employee, consultant or director
stock plans or otherwise; or authorize cash payments in exchange for any
options, warrants or restricted stock granted under any of such plans or
otherwise;
(b) Enter
into any material partnership arrangements, joint development agreements or
strategic alliances;
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(c) Grant
any
severance or termination pay (cash, equity or otherwise) to any officer or
employee except pursuant to written agreements outstanding or policies existing
on the date hereof and as disclosed in Section 4.2(c) of the Parent Disclosure
Schedule or otherwise immaterial in amount (not to exceed $15,000 individually
and $150,000 in the aggregate), or adopt any new severance plan or amend or
modify or alter in any manner any severance plan, agreement or arrangement
existing on the date hereof;
(d) Transfer
or license to any person or entity or otherwise extend, amend or modify in
any
material respect any rights to the Parent IP, or enter into any agreements
or
make other commitments or arrangements to grant, transfer or license to any
person future patent rights, other than non-exclusive licenses granted to
customers, resellers and end users in the ordinary course of business consistent
with past practices;
(e) Declare,
set aside or pay any dividends on or make any other distributions (whether
in
cash, stock, equity securities or property) in respect of any capital stock
or
split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for any capital stock;
(f) Purchase,
redeem or otherwise acquire, directly or indirectly, any shares of capital
stock
of Parent or its Subsidiaries, except repurchases of unvested shares at cost
in
connection with the termination of an employment relationship with any employee
pursuant to stock option or purchase agreements in effect on the date
hereof;
(g) Except
as
contemplated by Section
4.18,
issue,
deliver, sell, authorize, pledge or otherwise encumber any shares of capital
stock or any securities convertible into shares of capital stock, or
subscriptions, rights, warrants or options to acquire any shares of capital
stock or any securities convertible into shares of capital stock, or enter
into
or amend, modify or consent to other agreements or commitments of any character
obligating it to issue any such shares or convertible securities, other than
(i)
the issuance, delivery and/or sale of shares of Parent Common Stock pursuant
to
the exercise of stock options or warrants therefor outstanding as of the date
of
this Agreement, (ii) the issuance of Parent Common Stock upon the conversion
of
Parent Preferred Stock, and (iii) the issuance of Parent Common Stock as payment
of principal and interest under certain of Parent’s outstanding promissory
notes;
(h) Cause,
permit or propose any amendments to the certificate of incorporation or bylaws
of Parent (or similar governing instruments of any Subsidiaries);
(i) Acquire
or agree to acquire by merging or consolidating with, or by purchasing any
equity interest in or a material portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to
the
business of Parent, other than in the ordinary course of business consistent
with past practice;
(j) Sell,
lease, license, encumber, convey, assign, sublicense or otherwise dispose of
or
transfer, in whole or in part, any properties or assets or any interest therein
(other than those transfers or licenses permitted by Section
4.2(d))
except
for sales, leases, licenses, encumbrances, conveyances, assignments,
sublicenses, dispositions or other transfers (i) in the ordinary course of
business consistent with past practice or (ii) of property or assets that are
not material, individually or in the aggregate, to the business of
Parent;
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(k) Except
as
contemplated by Section
4.18,
incur
any indebtedness for borrowed money or guarantee any such indebtedness of
another person, issue or sell any debt securities or options, warrants, calls
or
other rights to acquire any debt securities of Parent, enter into any “keep
well” or other agreement to maintain any financial statement condition or enter
into any arrangement having the economic effect of any of the foregoing other
than (i) in connection with the financing of ordinary course trade payables
consistent with past practice or (ii) pursuant to existing credit facilities
in
the ordinary course of business;
(l) Adopt
or
amend any Parent Benefit Plan or employee stock purchase or employee stock
option plan, or enter into any employment contract or collective bargaining
agreement (other than offer letters and letter agreements entered into in the
ordinary course of business consistent with past practice with employees who
are
terminable “at will”), pay any special bonus or special remuneration (cash,
equity or otherwise) to any director, employee or consultant, or increase the
salaries or wage rates or fringe benefits (including rights to severance or
indemnification) of its directors, officers, employees or consultants except
payment of bonuses or increases in salaries or wage rates or fringe benefits
to
non-officer employees or consultants in the ordinary course of business
consistent with past practice;
(m) Make
payments outside of the ordinary course of business in excess of $75,000 in
the
aggregate;
(n) Except
in
the ordinary course of business consistent with past practice, modify, amend
or
terminate any Parent Material Contract or waive, delay the exercise of, release
or assign any material rights or material claims thereunder;
(o) Revalue
any of its assets or, except as required by GAAP, adopt or change any accounting
methods, principles or practices;
(p) Except
as
contemplated by Section
4.18,
incur
or enter into any agreement or commitment in excess of $100,000
individually;
(q) Hire
any
employee or consultant with an annual compensation level in excess of
$75,000;
(r) Pay,
discharge or satisfy any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction of amounts in the ordinary course of business, or
as
otherwise disclosed in the Parent Disclosure Schedule; or
(s) Agree
(in
writing or otherwise) to take any of the actions described in Sections
4.2(a)
through
(r)
above.
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4.3 Conduct
of Business by the Company.
During
the Pre-Closing Period, the Company (which for the purposes of this Section
4.3
shall
include the Company and each of its Subsidiaries) agrees, except (a) as required
by law, (b) as specifically provided in this Agreement or Section 4.3 of the
Company Disclosure Schedule or (c) to the extent that Parent shall otherwise
consent in writing, to carry on its business in the ordinary course, in
substantially the same manner as heretofore conducted and in compliance with
all
applicable laws and regulations, to pay its debts and taxes when due subject
to
good faith disputes over such debts or taxes, to pay or perform other material
obligations when due, subject to good faith disputes over such obligations,
and
use its commercially reasonable efforts consistent with past practices and
policies to preserve intact its present business organization, keep available
the services of its present officers and employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees
and
others with which it has business dealings. In addition, except (i) as required
by law, (ii) as specifically provided in this Agreement or Section 4.3 of the
Company Disclosure Schedule (iii) as required by its existing debenture
agreements or (iv) to the extent that Parent shall otherwise consent in writing,
the Company shall not do any of the following and shall prevent its Subsidiaries
from doing any of the following:
(a) Except
pursuant to the terms of the Company Stock Option Plans or written agreements
outstanding on the date hereof and disclosed to Parent in Section 4.3(a) of
the
Company Disclosure Schedule, accelerate, amend, modify or waive any stock
repurchase rights; accelerate, amend or modify the period of exercisability
or
other material terms of options, warrants or restricted stock; reprice or
exchange options or warrants granted under any employee, consultant or director
stock plans or otherwise; or authorize cash payments in exchange for any
options, warrants or restricted stock granted under any of such plans or
otherwise;
(b) Enter
into any material partnership arrangements, joint development agreements or
strategic alliances;
(c) Grant
any
severance or termination pay (cash, equity or otherwise) to any officer or
employee except pursuant to written agreements outstanding or policies existing
on the date hereof and as disclosed in Section 4.3(c) of the Company Disclosure
Schedule or otherwise immaterial in amount (not to exceed $15,000 individually
and $150,000 in the aggregate), or adopt any new severance plan or amend or
modify or alter in any manner any severance plan, agreement or arrangement
existing on the date hereof;
(d) Transfer
or license to any person or entity or otherwise extend, amend or modify in
any
material respect any rights to the Company IP, or enter into any agreements
or
make other commitments or arrangements to grant, transfer or license to any
person future patent rights, other than non-exclusive licenses granted to
customers, resellers and end users in the ordinary course of business consistent
with past practices;
(e) Declare,
set aside or pay any dividends on or make any other distributions (whether
in
cash, stock, equity securities or property) in respect of any capital stock
or
split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for any capital stock;
(f) Purchase,
redeem or otherwise acquire, directly or indirectly, any shares of capital
stock
of the Company or its Subsidiaries, except repurchases of unvested shares at
cost in connection with the termination of an employment relationship with
any
employee pursuant to stock option or purchase agreements in effect on the date
hereof;
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(g) Except
as
contemplated by Section
4.18,
issue,
deliver, sell, authorize, pledge or otherwise encumber any shares of capital
stock or any securities convertible into shares of capital stock, or
subscriptions, rights, warrants or options to acquire any shares of capital
stock or any securities convertible into shares of capital stock, or enter
into
or amend, modify or consent to other agreements or commitments of any character
obligating it to issue any such shares or convertible securities, other than
(i)
the issuance, delivery and/or sale of shares of Company Common Stock pursuant
to
the exercise of stock options or warrants therefor outstanding as of the date
of
this Agreement, and (ii) the issuance, delivery and/or sale of shares of Parent
Common Stock pursuant to the Company ESPP;
(h) Cause,
permit or propose any amendments to the certificate of incorporation or bylaws
of the Company (or similar governing instruments of any
Subsidiaries);
(i) Acquire
or agree to acquire by merging or consolidating with, or by purchasing any
equity interest in or a material portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to
the
business of the Company, other than in the ordinary course of business
consistent with past practice;
(j) Sell,
lease, license, encumber, convey, assign, sublicense or otherwise dispose of
or
transfer, in whole or in part, any properties or assets or any interest therein
(other than those transfers or licenses permitted by Section
4.3(d))
except
for sales, leases, licenses, encumbrances, conveyances, assignments,
sublicenses, dispositions or other transfers (i) in the ordinary course of
business consistent with past practice or (ii) of property or assets that are
not material, individually or in the aggregate, to the business of the
Company;
(k) Except
as
contemplated by Section
4.18,
incur
any indebtedness for borrowed money or guarantee any such indebtedness of
another person, issue or sell any debt securities or options, warrants, calls
or
other rights to acquire any debt securities of the Company, enter into any
“keep
well” or other agreement to maintain any financial statement condition or enter
into any arrangement having the economic effect of any of the foregoing other
than (i) in connection with the financing of ordinary course trade payables
consistent with past practice or (ii) pursuant to existing credit facilities
in
the ordinary course of business;
(l) Adopt
or
amend any Company Benefit Plan or employee stock purchase or employee stock
option plan, or enter into any employment contract or collective bargaining
agreement (other than offer letters and letter agreements entered into in the
ordinary course of business consistent with past practice with employees who
are
terminable “at will”), pay any special bonus or special remuneration (cash,
equity or otherwise) to any director, employee or consultant, or increase the
salaries or wage rates or fringe benefits (including rights to severance or
indemnification) of its directors, officers, employees or consultants except
payment of bonuses or increases in salaries or wage rates or fringe benefits
to
non-officer employees or consultants in the ordinary course of business
consistent with past practice;
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(m) Make
payments outside of the ordinary course of business in excess of $75,000 in
the
aggregate;
(n) Except
in
the ordinary course of business consistent with past practice, modify, amend
or
terminate any Company Material Contract or waive, delay the exercise of, release
or assign any material rights or material claims thereunder;
(o) Revalue
any of its assets or, except as required by GAAP, adopt or change any accounting
methods, principles or practices;
(p) Except
as
contemplated by Section
4.18,
incur
or enter into any agreement or commitment in excess of $100,000
individually;
(q) Hire
any
employee or consultant with an annual compensation level in excess of
$75,000;
(r) Pay,
discharge or satisfy any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction of amounts in the ordinary course of business;
or
(s) Agree
(in
writing or otherwise) to take any of the actions described in Sections
4.3(a)
through
(r)
above.
4.4 Proxy
Statement/Prospectus; Registration Statement.
As
promptly as practicable after the execution of this Agreement, Parent and the
Company will prepare and file with the SEC the Proxy Statement/Prospectus,
and
Parent will prepare and file with the SEC the Registration Statement in which
the Proxy Statement/Prospectus is to be included as a prospectus. Parent, the
Company and Merger Sub will provide each other with any information with respect
to it which may be required or appropriate for inclusion in the Proxy
Statement/Prospectus and the Registration Statement, or in any amendments or
supplements thereto, and cause its counsel and auditors to cooperate with the
other’s counsel and auditors in the preparation and filing of the Proxy
Statement/Prospectus and the Registration Statement pursuant to this
Section
4.4.
Each of
Parent and the Company will respond to any comments from the SEC, will use
its
best efforts to cause the Registration Statement to be declared effective under
the Securities Act as promptly as practicable after such filing and to keep
the
Registration Statement effective as long as is necessary to consummate the
Merger and the transactions contemplated hereby. Each of Parent and the Company
will notify the other promptly upon the receipt of any comments from the SEC
or
its staff in connection with the filing of, or amendments or supplements to,
the
Registration Statement and/or the Proxy Statement/Prospectus. Whenever any
event
occurs which is required to be set forth in an amendment or supplement to the
Proxy Statement/Prospectus or the Registration Statement, Parent or the Company,
as the case may be, will promptly inform the other of such occurrence and
cooperate in filing with the SEC or its staff and/or mailing to stockholders
of
the Company such amendment or supplement. Each of Parent and the Company shall
cooperate and provide the other with a reasonable opportunity to review and
comment on any amendment or supplement to the Registration Statement and Proxy
Statement/Prospectus prior to filing such with the SEC, and will provide each
other with a copy of all such filings made with the SEC. The Company will cause
the Proxy Statement/Prospectus to be mailed to its stockholders at the earliest
practicable time after the Registration Statement is declared effective by
the
SEC. Each of the parties hereto shall cause the Proxy Statement/Prospectus
and
the Registration Statement, as applicable, to comply as to form and substance
as
to such party in all material respects with the applicable requirements of
(i)
the Exchange Act, (ii) the Securities Act, and (iii) the rules and regulations
of the OTC Bulletin Board. Without in any way limiting or affecting the
requirements of Section
4.5(b),
nothing
in this Agreement shall preclude either Parent or the Company from including
in
the Proxy Statement/Prospectus or any amendment or supplement thereto any
information that it reasonably determines is required to be disclosed pursuant
to applicable securities laws.
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4.5 Meeting
of Company Stockholders; Company Board Recommendation.
(a)
Meeting of Company Stockholders.
Promptly after the date hereof, the Company will take all action necessary
or
advisable in accordance with Chapters 78 and 92A of the NRS (“Nevada
Corporate Law”)
and
its articles of incorporation and bylaws to call, hold and convene a meeting
of
the Company’s stockholders to consider the approval and adoption of this
Agreement and approval of the Merger (the “Company
Stockholder Meeting”)
as
promptly as practicable. Subject to Section
4.6(d),
the
Company will use its best efforts to solicit from its stockholders proxies
in
favor of the approval and adoption of this Agreement and approval of the Merger,
and will take all other action necessary or advisable to secure the vote or
consent of its stockholders required by the rules of the OTC Bulletin Board,
Nevada Corporate Law and its articles of incorporation and bylaws to obtain
such
approvals. Notwithstanding anything to the contrary contained in this Agreement,
the Company may adjourn or postpone the Company Stockholder Meeting to the
extent necessary to facilitate the provision of any necessary supplement or
amendment to the Proxy Statement/Prospectus, provided that such supplement
or
amendment is provided to its respective stockholders in advance of the vote
to
be taken at such meeting or, if as of the time for which the Company Stockholder
Meeting is originally scheduled (as set forth in the Proxy Statement/Prospectus)
there are insufficient shares of Company Common Stock represented (either in
person or by proxy) to constitute a quorum necessary to conduct the business
of
the Company Stockholder Meeting. The Company shall ensure that the Company
Stockholder Meeting is called, noticed, convened, held and conducted, and that
all proxies solicited by it in connection with the Company Stockholder Meeting
are solicited in compliance with Nevada Corporate Law, its articles of
incorporation and bylaws, the rules of the OTC Bulletin Board and all other
applicable Laws.
(b) Board
Recommendation.
Subject
to Section
4.6(d),
except
to the extent that the Board of Directors of the Company, or if applicable,
a
committee thereof, determines in good faith after consulting with and receiving
the advice of its outside legal counsel, that taking or failing to take such
action is reasonably likely to result in a breach of its fiduciary duties under
applicable law: (i) the Board of Directors of the Company shall recommend the
approval and adoption of this Agreement and the approval of the Merger by the
stockholders of the Company (the “Company
Board Recommendation”),
(ii)
the Proxy Statement/Prospectus shall include a statement to the effect that
the
Board of Directors of the Company has made the Company Board Recommendation
and
(iii) neither the Board of Directors of the Company nor any committee thereof
shall withdraw, amend or modify, or propose or resolve to withdraw, amend or
modify in a manner adverse to Parent, the Company Board
Recommendation.
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4.6 Acquisition
Proposals.
(a) No
Solicitation.
Subject
to Section
4.6(c),
each of
Parent and the Company agrees that neither it nor any of its Subsidiaries shall,
nor shall it or any of its Subsidiaries authorize or permit any of their
respective Representatives to, and that it shall use commercially reasonable
efforts to cause its and its Subsidiaries’ non-officer employees and other
agents not to (and shall not authorize any of them to) directly or indirectly:
(i) solicit, initiate, knowingly encourage, knowingly facilitate or knowingly
induce any inquiry with respect to, or the making, submission or announcement
of, any Acquisition Proposal (as defined in Section
4.6(g))
with
respect to itself, (ii) participate in any negotiations regarding, or furnish
to
any Person any nonpublic information with respect to, or knowingly take any
other action to facilitate any inquiries or the making of any proposal that
constitutes or may reasonably be expected to lead to, any Acquisition Proposal
with respect to itself, (iii) engage in discussions with any Person with respect
to any Acquisition Proposal with respect to itself, except as to the existence
of the terms contained in this Section
4.6,
(iv)
release or permit the release of any Person from, or waive or permit the waiver
of any provision of, any confidentiality, nondisclosure or similar agreement
(other than as required pursuant to the terms thereof as in effect on the date
hereof) under which it or any of its subsidiaries has any rights, or fail to
use
commercially reasonable efforts to enforce or cause to be enforced in all
material respects each such agreement at the request of Parent (in the case
of
an agreement under which the Company has any rights) or the Company (in the
case
of an agreement under which Parent has any rights), (v) approve, endorse or
recommend any Acquisition Proposal with respect to itself (except to the extent
specifically permitted pursuant to Section
4.6(d)),
(vi)
approve any transaction under Section 78.438 of the NRS or Section 203 of the
Delaware General Corporation Law, (vii) approve of any Person becoming an
“interested stockholder” under Section 78.438 of the NRS or Section 203 of the
Delaware General Corporation Law or (viii) enter into any letter of intent
or
similar document or any contract, agreement or commitment contemplating or
otherwise relating to any Acquisition Proposal or transaction contemplated
thereby with respect to itself. Each of Parent and the Company agrees that
it
and its Subsidiaries shall, and it shall cause its and its Subsidiaries’
Representatives to, and it shall use commercially reasonable efforts to cause
its and its Subsidiaries’ non-officer employees and other agents to immediately
cease any and all existing activities, discussions or negotiations with any
third parties conducted heretofore with respect to any Acquisition Proposal
with
respect to itself. Each of Parent and the Company agrees that it will promptly
request each Person that has entered into a confidentiality agreement with
Parent or the Company in connection with its consideration of an Acquisition
Proposal or equity investment to return all confidential information heretofore
furnished to such Person by or on behalf of Parent or the Company or any of
their Subsidiaries, as the case may be.
(b) Notification
of Unsolicited Acquisition Proposals.
(i) As
promptly as practicable (but in any event within one business day) after any
of
Parent’s or the Company’s respective Representatives receives or becomes aware
of the receipt of any Acquisition Proposal by Parent or the Company, as the
case
may be, or any request for nonpublic information or inquiry which Parent or
the
Company, as the case may be reasonably believes could lead to an Acquisition
Proposal, Parent or the Company, as the case may be, shall provide the other
party hereto with written notice of the material terms and conditions of such
Acquisition Proposal, request or inquiry, and the identity of the Person or
group making any such Acquisition Proposal, request or inquiry and a copy of
all
written materials provided in connection with such Acquisition Proposal, request
or inquiry. The recipient of the Acquisition Proposal, request or inquiry shall
keep the other party hereto informed as promptly as practicable (but in any
event within one business day) in all material respects of the status and
details (including all amendments or proposed amendments) of any such
Acquisition Proposal, request or inquiry and shall promptly (but in any event
within one business day) provide to the other party hereto a copy of all written
and electronic materials subsequently provided in connection with such
Acquisition Proposal, request or inquiry.
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(ii) Parent
or
the Company, as the case may be, shall provide the other party with 48 hours
prior notice (or such lesser prior notice as is provided to the members of
its
Board of Directors) of any meeting of its Board of Directors at which its Board
of Directors is reasonably expected to consider any Acquisition
Proposal.
(c) Superior
Offers.
Notwithstanding anything to the contrary contained in Section
4.6(a),
in the
event that the Company receives an Acquisition Proposal that constitutes or
that
the Board of Directors of the Company determines in good faith is reasonably
likely to result in a Superior Offer (as defined in Section
4.6(g))
with
respect to itself, it may, at any time prior to obtaining the Company
Stockholder Approval (but in no event after obtaining the Company Stockholder
Approval), take the following actions (but only (i) if the Company has not
breached Section
4.6(a)
in
connection with the Superior Offer and (ii) to the extent that the Company’s
Board of Directors believes in good faith, after consulting with and receiving
the advice of its outside legal counsel, that failure to take any such action
is
reasonably likely to result in a breach of its fiduciary obligations under
applicable law):
(i) Furnish
nonpublic information to the third party making such Acquisition Proposal,
provided that (i) (A) at least one business day prior to furnishing any such
nonpublic information to such party, the Company gives Parent written notice
of
its intention to furnish nonpublic information and (B) the Company receives
from
the third party an executed confidentiality agreement, the terms of which are
at
least as restrictive as the terms contained in any confidentiality agreement
between the Company and Parent, and (ii) contemporaneously with furnishing
any
such nonpublic information to such third party, the Company furnishes such
nonpublic information to Parent (to the extent such nonpublic information has
not been previously so furnished); and
(ii) Engage
in
discussions or negotiations with the third party with respect to the Superior
Offer, provided that at least 48 hours prior to entering into negotiations
with
such third party, the Company gives Parent written notice of its intention
to
enter into negotiations with such third party.
(d) Change
of Recommendation.
Notwithstanding the provisions of Section
4.5(a) or (b),
in
response to the receipt of a Superior Offer, the Board of Directors of the
Company may withdraw, amend or modify the Company Board Recommendation and,
in
the case of a Superior Offer that is a tender or exchange offer made directly
to
its stockholders, may recommend that its stockholders accept the tender or
exchange offer (any of the foregoing actions in response to the receipt of
a
Superior Offer, whether by a Board of Directors or a committee thereof, a
“Change
of Recommendation”),
if:
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(i) it
determines in good faith after consulting with and receiving the advice of
its
outside legal counsel that taking or failing to take such action is reasonably
likely to result in a breach of its fiduciary duties under applicable law;
and
(ii) the
Company shall have (A) at least five business days prior to a Change of
Recommendation provided to Parent written notice which shall state expressly
(1)
that it has received such Superior Offer, (2) the material terms and conditions
of such Superior Offer and the identity of the Person or group making the
Superior Offer, (3) that it intends to effect a Change of Recommendation and
the
manner in which it intends to do so, (B) provided to Parent a copy of all
written and electronic materials delivered to the Person or group making the
Superior Offer it has received, and (C) made available to Parent all materials
and information made available to the Person or group making the Superior Offer
it has received.
(e) Continuing
Obligation to Call, Hold and Convene Company Stockholder Meeting; No Other
Vote.
Notwithstanding anything to the contrary contained in this Agreement, the
obligation of the Company to call, give notice of, convene and hold the Company
Stockholder Meeting shall not be limited or otherwise affected by the
commencement, disclosure, announcement or submission to the Company of any
Acquisition Proposal with respect to it, or by any Change of Recommendation
and
the Company shall not submit to the vote of its stockholders any Acquisition
Proposal or publicly propose to do so.
(f) Compliance
with Tender Offer Rules.
Nothing
contained in this Agreement shall prohibit the Company or its Board of Directors
from taking and disclosing to its stockholders a position contemplated by Rules
14d-9 and 14e-2(a) under the Exchange Act; provided, that the content of any
such disclosure thereunder shall be subject to the terms of this Section
4.6.
Without
limiting the foregoing proviso, the Company shall not make a Change of
Recommendation unless specifically permitted pursuant to the terms of
Section
4.6(d).
(g) Certain
Definitions.
For
purposes of this Agreement, the following terms shall have the following
meanings:
(i) “Acquisition
Proposal”
means,
with respect to any party, any offer or proposal, relating to any transaction
or
series of related transactions involving: (A) any purchase or acquisition by
any
Person or “group” (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) of more than a 15% interest in the total
outstanding voting securities of such party or any tender offer or exchange
offer or other proposed acquisition of voting securities of such party that,
if
consummated, would result in any Person or “group” beneficially owning 15% or
more of the total outstanding voting securities of such party, (B) any merger,
consolidation, business combination or similar transaction in which the
stockholders of such party immediately preceding such transaction hold, directly
or indirectly, less than 85% of the equity interests in the surviving or
resulting entity of such transaction or in any parent entity immediately
following such transaction, (C) any purchase from such party of more than a
15%
interest in the total outstanding voting securities of such party or the
granting or issuance of rights to acquire more than a 15% interest in the total
outstanding voting securities of such party, including pursuant to options,
warrants or similar rights to purchase voting securities or the issuance of
debt
or other instruments convertible, exchangeable or exercisable for voting
securities of such party, or (D) any sale, lease (other than in the ordinary
course of business), transfer, distribution, acquisition or disposition of
more
than 15% of the assets of such party (including its subsidiaries taken as a
whole).
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(ii) “Superior
Offer”
means
an unsolicited, bona fide written Acquisition Proposal made by a third party
after the date hereof on terms that the Board of Directors of the Company
believes in good faith (after consultation with its outside legal counsel and
financial advisor), taking into account, among other things, all legal,
financial, regulatory and other aspects of the Acquisition Proposal and the
Person making the offer and the strategic and other benefits of the Merger,
(i)
is reasonably capable of being consummated on the terms proposed, and (ii)
if
consummated on such terms would result in a transaction more favorable, from
a
financial point of view, to the Company’s stockholders (in their capacities as
stockholders) than the terms of the Merger. For the purposes of this definition,
the term “Acquisition Proposal” shall have the meaning assigned to such term in
Section
4.6(g)(i),
except
that references to “15%” therein shall be deemed to be references to
“50%”.
4.7 Public
Disclosure.
Without
limiting any other provision of this Agreement, Parent and the Company will
consult with each other and agree before issuing any press release or otherwise
making any public statement with respect to the Merger, this Agreement or any
Acquisition Proposal and will not issue any such press release or make any
such
public statement prior to such consultation and agreement, except as may be
required by applicable Law. Notwithstanding the provisions of this Section
4.7,
in the
event that there has been a Change of Recommendation pursuant to Section
4.6(d),
neither
Parent nor the Company shall have any further obligation to consult with each
other, and agree, before issuing any press release or otherwise making any
public statement with respect to the Merger, this Agreement or any Acquisition
Proposal.
4.8 Notification
of Certain Matters.
(a) By
Parent.
Parent
shall give prompt notice to the Company when and if Parent becomes aware that
any representation or warranty made by it contained in this Agreement has become
untrue or inaccurate, or that it has failed to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement, in each case, such that the conditions set forth in Section
5.3(a)
or
(b)
would
not be satisfied.
(b) By
the
Company.
The
Company shall give prompt notice to Parent when and if the Company becomes
aware
that any representation or warranty made by it contained in this Agreement
has
become untrue or inaccurate, or that it has failed to comply with or satisfy
any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement, in each case, such that the conditions set forth in Section
5.2(a)
or
(b)
would
not be satisfied.
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4.9 Third
Party Consents; Termination of Certain Agreements.
As soon
as practicable following the date hereof, Parent and the Company will each
use
commercially reasonable efforts to obtain any material consents, waivers and
approvals under any of its or its subsidiaries’ respective Contracts required to
be obtained in connection with the consummation of the transactions contemplated
hereby.
4.10 Stock
Options and Employee Benefits.
(a) Assumption
of Stock Options.
At the
Effective Time, each then outstanding Company Stock Option, whether or not
exercisable at the Effective Time and regardless of the respective exercise
prices thereof, will be assumed by Parent. Each Company Stock Option so assumed
by Parent under this Agreement will continue to have, and be subject to, the
same terms and conditions set forth in the applicable Company Stock Option
Plan
(and any applicable stock option agreement relating to such Company Stock
Option) immediately prior to the Effective Time (including any repurchase rights
or vesting provisions), except that (i) each Company Stock Option will be
exercisable (or will become exercisable in accordance with its terms) for that
number of whole shares of Parent Common Stock equal to the product of the number
of shares of Company Common Stock that were issuable upon exercise of such
Company Stock Option immediately prior to the Effective Time multiplied by
the
Exchange Ratio, as adjusted, rounded down to the nearest whole number of shares
of Parent Common Stock and (ii) the per share exercise price for the shares
of
Parent Common Stock issuable upon exercise of such assumed Company Stock Option
will be equal to the quotient determined by dividing the exercise price per
share of Company Common Stock at which such Company Stock Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, as adjusted,
rounded up to the nearest whole cent. Each assumed Company Stock Option shall
be
vested immediately following the Effective Time as to the same percentage of
the
total number of shares subject thereto as it was vested immediately prior to
the
Effective Time.
(b) Incentive
Stock Options.
It is
intended that the Company Stock Options assumed by Parent shall (i) qualify
following the Effective Time as incentive stock options as defined in Section
422 of the Code to the extent that such Company Stock Options qualified as
incentive stock options immediately prior to the Effective Time and (ii) not
be
treated as deferred compensation under Section 409A of the Code, and the
provisions of this Section 4.10 shall be applied consistent with such
intent.
(c) Assumption
of Warrants.
At the
Effective Time, each then outstanding Company Warrant, whether or not
exercisable at the Effective Time and regardless of the respective exercise
prices thereof, will be assumed by Parent. Each Company Warrant so assumed
by
Parent under this Agreement will continue to have, and be subject to, the same
terms and conditions set forth in the applicable Company Warrant immediately
prior to the Effective Time, except that (i) each Company Warrant will be
exercisable (or will become exercisable in accordance with its terms) for that
number of whole shares of Parent Common Stock equal to the product of the number
of shares of Company Common Stock that were issuable upon exercise of such
Company Warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio, as adjusted, rounded down to the nearest whole number of shares
of Parent Common Stock and (ii) the per share exercise price for the shares
of
Parent Common Stock issuable upon exercise of such assumed Company Warrant
will
be equal to the quotient determined by dividing the exercise price per share
of
Company Common Stock at which such Company Warrant was exercisable immediately
prior to the Effective Time by the Exchange Ratio, as adjusted, rounded up
to
the nearest whole cent.
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(d) Treatment
of Company 401(k) Plan.
If
requested by Parent by written notice, the Company shall terminate any and
all
401(k) plans effective no later than the day immediately preceding the Closing
Date. The Company shall not issue any shares of Company Common Stock as matching
contributions under any Company 401(k) plan. If Parent provides such written
notice to the Company, the Company shall provide Parent with evidence that
all
such 401(k) plans have been terminated (effective no later than the day
immediately preceding the Closing Date) pursuant to resolutions of the Company’s
Board of Directors. The form and substance of such resolutions shall be subject
to review and approval by Parent. The Company shall also take such other actions
in furtherance of terminating such 401(k) plans as Parent may reasonably
require.
(e) Benefits
Generally.
From
and after the Closing Date, Parent or its affiliates shall provide to the
employees of the Company and its affiliates who continue employment with the
Company or any of its affiliates (“Continuing
Employees”)
benefits that are substantially similar, in the aggregate, to the benefits
offered to similarly situated employees of Parent. To the extent permitted
by
applicable laws and applicable tax qualification requirements (and subject
to
any generally applicable break in service or similar rule), Parent shall cause
Continuing Employees to be credited with service with the Company for purposes
of eligibility and vesting under any Parent 401(k) plan. Nothing in this Section
4.10(e) shall be construed to entitle any Continuing Employee to continue his
or
her employment with the Company or any of its affiliates.
(f) Form
S-8.
Parent
agrees to file a registration statement on Form S-8 for the shares of Parent
Common Stock issuable upon exercise of the assumed Company Stock Options as
soon
as reasonably practicable after the Effective Time and shall maintain the
effectiveness of such registration statement thereafter for so long as any
of
such stock options remain outstanding.
(g) Termination
of Company ESPP.
Prior
to the Closing, the Company shall take all such action as may be necessary
or
appropriate to terminate the Company ESPP, such that on an after the Closing
Date, the Company ESPP shall be of no further force or effect.
4.11 Directors
and Officers of Parent.
(a) As
of the
Effective Time, (i) George P. Roberts and R. Craig Roos shall resign as
directors of Parent, and Parent shall increase the size of its board of
directors from five members to seven members; and (b) the board of directors
of
Parent shall appoint Charles W. Brown, Michael Milligan, Michael Chevalier
and
D. Bruce Sinclair (the “Director
Designees”)
to
serve as directors of Parent until their successors shall have been duly elected
or appointed and qualified or until their earlier death, resignation or removal
in accordance with the certificate of incorporation and bylaws of Parent. The
three members of Parent’s board of directors who will continue to serve as
directors of Parent after the Effective Time shall have the right to appoint
the
Chairman of the Board of Directors of Parent at the first meeting of the Board
of Directors following the Closing, to serve until the first anniversary of
the
Closing Date, or until his successor is duly elected or appointed.
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(b) As
of the
Effective Time, (a) Daniel W. Rumsey shall resign as Acting Chief Executive
Officer and Interim Chief Financial Officer of Parent and (b) the Board of
Directors of Parent shall appoint Charles W. Brown to serve as Chief Executive
Officer of Parent and T. Scott Worthington to serve as Chief Financial Officer
of Parent.
4.12 Resignation
of Directors and Officers of the Company.
The
Company shall obtain and deliver to Parent at or prior to the Effective Time
the
resignations of such directors and officers of the Company as are necessary
to
constitute the Board of Directors of the Surviving Corporation as set forth
on
Schedule
1.4,
and to
cause the Surviving Corporation to have the same officers as
Parent.
4.13 Affiliates.
Not
later than 30 days prior to the Effective Time, the Company shall deliver to
Parent a letter identifying all persons who, in the judgment of the Company,
may
be deemed at the time this Agreement is submitted to the stockholders of the
Company for the Company Stockholder Approval, “affiliates” of the Company for
purposes of Rule 145 under the Securities Act and applicable SEC rules and
regulations, and such list shall be updated as necessary to reflect changes
from
the date thereof. The Company shall cause each person identified on such list
to
deliver to Parent not less than 15 days prior to the Effective Time, a written
agreement, in substantially the form attached hereto as Exhibit
A
(an
“Affiliate
Agreement”).
Parent will give stop transfer instructions to its transfer agent with respect
to any Parent Common Stock received pursuant to the Merger by any stockholder
of
the Company who may reasonably be deemed to be an affiliate of the Company
for
purposes of Rule 145 under the Securities Act and there will be placed on the
certificates representing such Parent Common Stock, or any substitutions
therefor, a legend stating in substance that the shares were issued in a
transaction to which Rule 145 under the Securities Act applies and may only
be
transferred (a) in conformity with Rule 145 or (b) in accordance with a written
opinion of counsel, reasonably acceptable to Parent in form and substance,
that
such transfer is exempt from registration under the Securities Act.
4.14 Section
16 Matters.
Prior
to the Effective Time, each of Parent and the Company shall take all such steps
as may be required to cause any dispositions of Company Common Stock (including
derivative securities with respect to Company Common Stock) or acquisitions
of
Parent Common Stock (including derivative securities with respect to Parent
Common Stock) resulting from the transactions contemplated by Article
I
by each
individual who is subject to the reporting requirements of Section 16(a) of
the
Exchange Act, to be exempt under Rule 16b-3 promulgated under the Exchange
Act,
such steps to be taken in accordance with the guidance provided by the
SEC.
4.15 FIRPTA
Matters.
At the
Closing, (a) the Company shall deliver to Parent a statement (in such form
as
may be reasonably requested by counsel to Parent) conforming to the requirements
of Section 1.897 - 2(h)(1)(i) of the Treasury Regulations, and (b) the Company
shall deliver to the IRS the notification required under Section 1.897 - 2(h)(2)
of the Treasury Regulations.
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4.16 [RESERVED]
4.17 Conversion
of Debentures.
(a) Prior
to
the Effective Time, all outstanding convertible notes issued by the Company
which are convertible into shares of Company Common Stock shall be converted
into Company Common Stock or other securities of the Company, on such terms
as
may be agreed upon by the Company, the holders of such notes, and
Parent.
(b) Prior
to
the Effective Time, one-half of all outstanding convertible notes issued by
Parent held by SDS Capital Group or its affiliates which are convertible into
shares of Parent Common Stock shall be converted into Parent Common Stock or
other securities of Parent, on such terms as may be agreed upon by Parent,
the
holders of such notes, and the Company.
4.18 Bridge
Financing.
Prior
to the Effective Time, each of Parent and the Company may incur additional
indebtedness or sell and issue additional shares of its capital stock for the
purpose of raising sufficient additional capital so that each of Parent and
the
Company shall have adequate working capital to satisfy their respective working
capital requirements prior to Closing; provided, however, that the Exchange
Ratio shall be adjusted in accordance with Sections
1.5(b)
and
(c).
4.19 Indemnification
and Liability Insurance. Parent
agrees that all rights to indemnification now existing in favor of the directors
or officers of Company and its subsidiaries as provided in their respective
charters and bylaws shall become obligations of the Surviving Corporation
following the Merger and shall continue in full force and effect, to the fullest
extent permitted by applicable law, for a period of five (5) years from the
Effective Time with respect to matters occurring prior to the Effective Time.
Prior to the Effective Time, Merger Sub or, if so requested by Parent, Company,
shall purchase a “Tail Policy” or “Run-Off Coverage” (as those terms are
hereafter defined) for the benefit of the directors and officers of Company
upon
the terms and conditions set forth below. For the purpose of this Section
4.19,
a Tail
Policy or Run-off Coverage shall mean a policy insuring directors and officers
of Company from claims brought after termination or expiration of Company’s
current directors’ and officers’ liability policy where the events giving rise
to such claims occurred prior to such termination or expiration.
(a) The
term
or duration of the Tail Policy or Run-Off Coverage shall be three (3) years
(without regard to cost) or such longer term as can be purchased for premiums
not to exceed $50,000 in total; and
(b) Except
as
set forth above, or as otherwise consented to in writing by Parent and Company,
the Tail Policy or Run-Off Coverage shall provide coverage limits for claims
and
contain such other terms and conditions as are substantially similar to
Company’s current directors’ and officers’ liability insurance
policy.
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ARTICLE
V
CONDITIONS
PRECEDENT TO THE MERGER
5.1 Conditions
to Obligations of Each Party to Effect the Merger.
The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions, any of which may be waived, in writing, by mutual
agreement of Parent and the Company:
(a) Stockholder
Approval.
The
Company Stockholder Approval shall have been obtained.
(b) No
Injunctions or Restraints; Illegality.
No Laws
shall have been adopted or promulgated, and no temporary restraining order,
preliminary or permanent injunction or other order, judgment, decision, opinion
or decree shall have been issued by a court or other Governmental Entity of
competent jurisdiction having the effect of making the Merger illegal or
otherwise prohibiting or unduly delaying consummation of the
Merger.
(c) Registration
Statement Effective; Proxy Statement/Prospectus.
The SEC
shall have declared the Registration Statement effective. No stop order
suspending the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose, and no similar
proceeding in respect of the Proxy Statement/Prospectus, shall have been
initiated or threatened in writing by the SEC.
5.2 Additional
Conditions to Obligations of Parent and Merger Sub.
The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations
and Warranties.
The
representations and warranties of the Company contained in this Agreement shall
be true and correct on and as of the Closing Date as though made on and as
of
such date (except in the case of representations and warranties that speak
as of
a particular date, which shall be true and correct in all material respects
as
of such date) except where the failure of such representations and warranties
to
be so true and correct does not have, and is not likely to have, individually
or
in the aggregate, a material adverse effect on the Company, and Parent shall
have received a certificate to such effect signed on behalf of the Company
by
its Chief Executive Officer and Chief Financial Officer.
(b) Agreements
and Covenants.
The
Company shall have performed or complied with the agreements and covenants
required by this Agreement to be performed or complied with in all material
respects by it on or prior to the Closing Date, and Parent shall have received
a
certificate to such effect signed on behalf of the Company by its Chief
Executive Officer and Chief Financial Officer.
(c) No
Material Change.
From
the period beginning on the date of this Agreement, there shall not have been
any state of facts, events, changes, effects, developments, conditions or
occurrences that, individually or in the aggregate, have had or would reasonably
be expected to have a material adverse effect on the Company.
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(d) Consents
and Approvals.
All
waivers, licenses, agreements, permits, consents, approvals and authorizations
of third parties and Governmental Entities and any modifications or amendments
to existing agreements with third parties required to be obtained by the Company
in order to consummate the Merger shall have been obtained and shall be in
full
force and effect and without conditions or limitations which unreasonably
restrict the ability of the parties hereto to consummate the
Merger.
5.3 Additional
Conditions to Obligations of the Company.
The
obligations of the Company to consummate and effect the Merger shall be subject
to the satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the
Company:
(a) Representations
and Warranties.
The
representations and warranties of Parent contained in this Agreement shall
be
true and correct on and as of the Closing Date as though made on and as of
such
date (except in the case of representations and warranties that speak as of
a
particular date, which shall be true and correct in all material respects as
of
such date) except where the failure of such representations and warranties
to be
so true and correct does not have, and is not likely to have, individually
or in
the aggregate, a material adverse effect on Parent, and the Company shall have
received a certificate to such effect signed on behalf of Parent by its Acting
Chief Executive Officer and Interim Chief Financial Officer.
(b) Agreements
and Covenants.
Parent
shall have performed or complied with the agreements and covenants required
by
this Agreement to be performed or complied with in all material respects by
it
on or prior to the Closing Date, and the Company shall have received a
certificate to such effect signed on behalf of Parent by its Acting Chief
Executive Officer and Interim Chief Financial Officer.
(c) No
Material Change.
From
the period beginning on the date of this Agreement, there shall not have been
any state of facts, events, changes, effects, developments, conditions or
occurrences that, individually or in the aggregate, have had or would reasonably
be expected to have a material adverse effect on Parent.
(d) Consents
and Approvals.
All
waivers, licenses, agreements, permits, consents, approvals and authorizations
of third parties and Governmental Entities and any modifications or amendments
to existing agreements with third parties required to be obtained by Parent
in
order to consummate the Merger shall have been obtained and shall be in full
force and effect and without conditions or limitations which unreasonably
restrict the ability of the parties hereto to consummate the
Merger.
ARTICLE
VI
TERMINATION
6.1 Termination.
This
Agreement may be terminated at any time prior to the Effective Time (whether
before or after the Company Stockholder Approval is obtained):
(a) by
the
mutual written consent of Parent and the Company, duly authorized by their
respective Boards of Directors;
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(b) by
either
Parent or the Company if:
(i) the
Merger shall not have been consummated by April 30, 2006 (the “End
Date”);
provided, however, that a party shall not be permitted to terminate this
Agreement pursuant to this Section
6.1(b)
if the
failure to consummate the Merger by the End Date is caused by a breach by such
party of any covenant or obligation in this Agreement required to be performed
by such party at or prior to the Effective Time;
(ii) a
court
of competent jurisdiction or other Governmental Entity shall have issued a
final
and nonappealable Order, or shall have taken any other final and nonappealable
action, having the effect of permanently restraining, enjoining or otherwise
prohibiting the consummation of the Merger;
(iii) the
Company Stockholder Approval is not obtained at the Company Stockholder
Meeting;
(c) by
Parent
if:
(i) the
Company shall have breached or failed to perform in any material respect any
of
its representations, warranties or covenants contained in this Agreement, which
breach or failure to perform (A) is incapable of being cured by the Company
prior to the End Date or is not cured by the earlier of (x) 30 days following
written notice to the Company by Parent of such breach or (y) the End Date,
and
(B) would result in a failure of any condition set forth in Section
5.2(a)
or
(b);
or
(ii) the
Board
of Directors of the Company shall (A) fail to authorize, approve or recommend
the Merger, or (B) effect a Change in Recommendation or, in the case of an
Acquisition Proposal made by way of a tender offer or exchange offer, fail
to
recommend that the Company’s stockholders reject such tender offer or exchange
offer within the ten business day period specified in Section 14e-2(a) under
the
Exchange Act;
(d) by
the
Company if:
(i) Parent
shall have breached or failed to perform in any material respect any of its
representations, warranties or covenants contained in this Agreement, which
breach or failure to perform (A) is incapable of being cured by Parent prior
to
the End Date or is not cured by the earlier of (x) 30 days following written
notice to Parent by the Company of such breach or (y) the End Date, and (B)
would result in a failure of any condition set forth in Section
5.3(a)
or
(b);
or
(ii) the
Board
of Directors of the Company makes a Change of Recommendation in accordance
with
Section
4.6(d).
6.2 Effect
of Termination.
In the
event of any termination of this Agreement as provided in Section
6.1,
the
obligations of the parties hereunder shall terminate and there shall be no
liability on the part of any party hereto with respect thereto, except for
the
provisions of this Section
6.2,
Section
6.3
and
Article
VIII,
each of
which shall remain in full force and effect; provided, however, that no party
hereto shall be relieved or released from any liability or damages arising
from
a willful breach of any provision of this Agreement.
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6.3 Termination
Fee.
(a) If
this
Agreement is terminated by either Parent or the Company as a result of a
Superior Offer, such party shall pay to the other party a fee equal to $300,000;
and in the event this Agreement is terminated by either Parent or the Company
pursuant to any of the following provisions, a fee shall be paid by the
terminating party to the other party equal to one-hundred and ten percent (110%)
of such other Party’s actual out of pocket costs and expenses, not to exceed
$250,000 (in either event, the “Termination
Fee”),
which
Termination Fee shall be the non-terminating party’s sole remedy with respect to
the termination of this Agreement except in the case of any willful breach
of
this Agreement by the terminating party:
(i) Section
6.1(c);
or
(ii) Section
6.1(d).
(b) If
the
terminating party is required to pay the other party a Termination Fee, such
Termination Fee shall be payable immediately prior to termination of this
Agreement in the event of termination, and not later than one business day
after
the receipt by the non-terminating party of a notice of termination from the
terminating party, in each case by wire transfer of immediately available funds
to an account designated by the non-terminating party.
(c) Parent
and Company each agree that the agreements contained in this Section
6.3
are an
integral part of the transaction contemplated by this Agreement, and that,
without these agreements, the such parties would not enter into this Agreement;
accordingly, if the terminating party fails promptly to pay any amounts due
under this Section
6.3
and, in
order to obtain such payment, the other party commences a suit that results
in a
judgment against the terminating party for such amounts, the terminating party
shall pay interest on such amounts from the date payment of such amounts were
due to the date of actual payment at the prime rate of Citibank, N.A. in effect
on the date such payment was due, together with the costs and expenses of the
non-terminating party (including reasonable legal fees and expenses) in
connection with such suit.
ARTICLE
VII
DEFINITIONS
“Affiliated
Group”
means
any affiliated group within the meaning of Section 1504 of the
Code.
“Benefit
Plan”
means
any plan, agreement, arrangement or commitment (whether provided by insurance,
self-insurance or otherwise) that is an employment, consulting or deferred
compensation agreement; or an executive compensation, incentive, bonus, employee
pension, profit sharing, savings, retirement, stock option, stock purchase,
or
severance pay plan; or a life, health, post-retirement benefit, worker’s
compensation, unemployment benefit, disability or accident plan; or a holiday,
vacation, leave of absence, annual or other bonus practice; or expense
reimbursement, automobile or other transportation allowance; or other employee
benefit plan, agreement, arrangement or commitment, including, without
limitation, any “employee benefit plan,” as defined in section 3(3) of
ERISA.
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“Bridge
Notes”
means
all promissory notes issued by the Company to Parent during the period between
December 1, 2005 and the Closing Date, which evidence the Company’s obligation
to repay amounts loaned to the Company by Parent to fund the Company’s working
capital requirements through the Closing Date.
“Closing
Net Working Capital,”
with
respect to Parent or the Company, means the actual net working capital of such
party on December 31, 2005.
“Company
Benefit Plan”
means
any Benefit Plan maintained by the Company or any of its Subsidiaries or with
respect to which the Company or any of its Subsidiaries has or in the future
may
have, any contribution or other liability or obligation with respect to any
current or former employees (or their beneficiaries) of the Company or any
of
its Subsidiaries.
“Company
Contract”
means
any Contract: (a) to which the Company or any of its Subsidiaries is a party;
(b) by which the Company or any of its Subsidiaries is bound; (c) under which
the Company or any of its Subsidiaries is a beneficiary; or (d) under which
the
Company or any of its Subsidiaries has any right, any liability or any potential
liability.
“Company
Disclosure Schedule”
means
the written disclosure schedules, dated as of the date hereof and certified
by a
duly authorized officer of the Company, including all exhibits thereto, that
have been prepared by the Company and delivered to Parent upon the execution
of
this Agreement.
“Company
ESPP” means the Company Employee Stock Purchase (2000) Plan dated June 23,
2000.
“Company
IP”
means
all Intellectual Property Rights in or to the Company Products and all other
Intellectual Property Rights and Intellectual Property that are material to
the
business of the Company and its Subsidiaries as currently conducted with respect
to which the Company or any of its Subsidiaries has (or purports to have) an
ownership interest or an exclusive license or similar exclusive
right.
“Company
Material Contract”
means
any Company Contract that is required to be attached as an exhibit to any
Company SEC Document pursuant to Item 601(b)(10) of Regulation S-K under the
Exchange Act.
“Company
Preferred Stock”
means
the preferred stock, par value $0.001 per share, of the Company outstanding
and
held of record by Crescent immediately prior to the Effective Time.
“Company
Product”
means
any product or service developed, manufactured, marketed, distributed, provided,
leased, licensed or sold, directly or indirectly, by or on behalf of the Company
or any of its Subsidiaries that is material to the business of the Company
or
any of its Subsidiaries as currently conducted, including any software
(regardless of whether such software is owned by the Company or any of its
Subsidiaries or licensed to the Company or any of its Subsidiaries by a third
party) contained or included in or provided with any such product or service
or
used in the development, manufacturing, maintenance, repair, support, testing
or
performance of any such product or service.
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“Contract”
means
any legally binding written, oral or other agreement, contract, subcontract,
lease, understanding, arrangement, instrument, note, option, warranty, purchase
order, license, sublicense, insurance policy or commitment or undertaking of
any
nature.
“Crescent”
means
Crescent International Ltd. and/or its affiliates.
“ERISA”
means
the Employee Retirement Income Security Act of 1974, as amended.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“Fully
Diluted Shares Outstanding,”
with
respect to Parent or the Company, means the sum of (x) the total number of
outstanding shares of Parent Common Stock or Company Common Stock (as the case
may be), (y) the total number of shares of Parent Common Stock or Company Common
Stock (as the case may be) issuable upon exercise of all in-the-money options
and warrants to purchase Parent Common Stock or Company Common Stock (as the
case may be), determined in accordance with the treasury stock method, and
(z)
the total number of shares of Parent Common Stock and Company Common Stock
issuable upon conversion of all other convertible securities, other than options
and warrants, of Parent or the Company (as the case may be); provided, however,
that the Fully Diluted Shares Outstanding of the Company shall not include
any
shares of Company Common Stock issued or issuable to Parent upon conversion
of
the Bridge Notes.
“GAAP”
shall
mean generally accepted accounting principles in the United States.
“Governmental
Entity”
means
any domestic or foreign governmental or regulatory authority, agency,
commission, body, court or other legislative, executive or judicial governmental
entity.
“HSR
Act”
means
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
“Intellectual
Property”
means
any and all algorithms, apparatus, databases, data collections, diagrams,
formulae, inventions (whether or not patentable), know-how, logos, marks
(including brand names, product names, logos, and slogans), methods, processes,
proprietary information, protocols, schematics, specifications, software,
software code (in any form, including source code and executable or object
code), techniques, user interfaces, URLs, web sites, works of authorship and
other forms of technology (whether or not embodied in any tangible form and
including all tangible embodiments of the foregoing, such as instruction
manuals, laboratory notebooks, prototypes, samples, studies and
summaries).
“Intellectual
Property Rights”
means
all of the following types of rights, which may exist or be created under the
laws of any jurisdiction in the world: (a) rights associated with works of
authorship, including exclusive exploitation rights, copyrights, moral rights
and mask works; (b) trademark, trade name and domain name rights and similar
rights; (c) trade secret rights; (d) patent and industrial property rights;
(e)
other proprietary rights in Intellectual Property; and (f) rights in or relating
to registrations, renewals, extensions, combinations, divisions and reissues
of,
and applications for, any of the rights referred to in clauses (a) through
(e)
above.
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“Knowledge”
means
such party’s actual knowledge after reasonable inquiry of executive officers and
directors within the meaning of Rule 405 under the Securities Act.
“Law”
means
any federal, state, local or foreign law, statute or ordinance, common law,
or
any rule, regulation, standard, judgment, order, writ, injunction, decree,
arbitration award, agency requirement, license or permit of any Governmental
Entity.
“Leased
Real Property”
means,
with respect to any Person, all real property leased to such
Person.
“Lien”
means
any lien, claim, mortgage, encumbrance, pledge, security interest or charge
of
any kind.
“Material,”
“materially
adverse”
and
“material
adverse affect.”
As
used in this Agreement, any reference to any event, change or effect being
“material” or “materially adverse” or having a “material adverse effect” on or
with respect to an entity (or group of entities taken as a whole) means such
event, change or effect is material or materially adverse, as the case may
be,
to the business, condition (financial or otherwise), properties, assets
(including intangible assets), liabilities (including contingent liabilities),
prospects or results of operations of such entity (or, if with respect thereto,
of such group of entities taken as a whole).
“Order”
means
any judgment, decree, order, writ, permit or license of any court, tribunal,
arbitrator, authority, agency, commission, official or other instrumentality
of
any Governmental Authority.
“Owned
Real Property”
means,
with respect to any Person, all real property owned by such Person and all
buildings, structures, fixtures and other improvements located on such real
property.
“Parent
Benefit Plan”
means
any Benefit Plan maintained by Parent or any of its Subsidiaries or with respect
to which Parent or any of its Subsidiaries has or in the future may have, any
contribution or other liability or obligation with respect to any current or
former employees (or their beneficiaries) of Parent or any of its
Subsidiaries.
“Parent
Contract”
means
any Contract: (a) to which Parent or any of its Subsidiaries is a party; (b)
by
which Parent or any of its Subsidiaries is bound; (c) under which Parent or
any
of its Subsidiaries is a beneficiary; or (d) under which Parent or any of its
Subsidiaries has any right, any liability or any potential
liability.
“Parent
Disclosure Schedule”
means
the written disclosure schedules, dated as of the date hereof and certified
by a
duly authorized officer of Parent, including all exhibits thereto, that have
been prepared by Parent and delivered to the Company upon the execution of
this
Agreement.
Annex
A-1
Page
55
“Parent
IP”
means
all Intellectual Property Rights in or to the Parent Products and all other
Intellectual Property Rights and Intellectual Property that are material to
the
business of Parent and its Subsidiaries as currently conducted with respect
to
which Parent or any of its Subsidiaries has (or purports to have) an ownership
interest or an exclusive license or similar exclusive right.
“Parent
Material Contract”
means
any Parent Contract that is required to be attached as an exhibit to any Parent
SEC Document pursuant to Item 601(b)(10) of Regulation S-K under the Exchange
Act.
“Parent
Product”
means
any product or service developed, manufactured, marketed, distributed, provided,
leased, licensed or sold, directly or indirectly, by or on behalf of Parent
or
any of its Subsidiaries that is material to the business of Parent or any of
its
Subsidiaries as currently conducted, including any software (regardless of
whether such software is owned by Parent or any of its Subsidiaries or licensed
to Parent or any of its Subsidiaries by a third party) contained or included
in
or provided with any such product or service or used in the development,
manufacturing, maintenance, repair, support, testing or performance of any
such
product or service.
“Parent
Preferred Stock”
means
a
series of preferred stock, par value $0.0001 per share, of Parent which shall
be
convertible into shares of Parent Common Stock and have such other rights,
preferences and privileges as may be mutually acceptable to Parent, the Company
and Crescent.
“Person”
means
any individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any company limited by shares, limited
liability company or joint stock company), firm, society or other enterprise,
association, organization, Governmental Entity or other entity.
“Representative”
means,
with respect to any Person, any director, officer, other employee, agent,
attorney, accountant, advisor or other representative of such
Person.
“Required
Net Working Capital,”
with
respect to Parent or the Company, means such party’s actual net working capital
as of September 30, 2005 plus an amount equal to $1,000,000 less then actual
cash reflected on such party’s balance sheet on such date.
“Sarbanes-Oxley
Act”
means
the Sarbanes-Oxley Act of 2002, as it may be amended from time to
time.
“Securities
Act”
means
the Securities Act of 1933, as amended.
“Subsidiary”
means,
with respect to any party, any corporation or other entity, whether incorporated
or unincorporated, of which more than fifty percent (50%) of either the equity
interests in, or the voting control of, such corporation or other entity is,
directly or indirectly, beneficially owned by such party.
Annex
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56
“Tax”
or
“Taxes”
means
(whether or not disputed) taxes of any kind, levies or other like assessments,
customs, duties, imposts, charges or fees, including, without limitation, Income
Taxes, gross receipts, ad valorem, value added, excise, real property, personal
property, occupancy, asset, sales, use, license, payroll, transaction, capital,
capital stock, net worth, estimated, withholding, employment, social security,
unemployment, unemployment compensation, workers’ compensation, disability,
utility, severance, production, environmental, energy, business, occupation,
mercantile, franchise, premium, profits, windfall profits, documentary, stamp,
registration, transfer and gains taxes, toll charges (for example, toll charges
under Sections 367 and 1492 of the Code), or other taxes of any kind whatsoever,
imposed by or payable to the United States, or any state, country, local or
foreign government or subdivision, instrumentality, authority or agency thereof
or under any treaty, convention or compact between or among any of them, and
in
each instance such term shall include any interest (including interest on
deferred tax liability under Section 453A(c) of the Code and “look-back”
interest under Section 460 of the IRC and similar amounts of interest imposed
by
the IRC), penalties, additions to tax or similar charges imposed in lieu of
a
tax or attributable to any tax.
“Tax
Return”
means
any return, declaration, report, claim for refund, information return or
statement that relates to Taxes, including any schedule or attachment thereto
and any amendment thereof.
ARTICLE
VIII
MISCELLANEOUS
8.1 Survival.
The
representations and warranties of Parent and the Company contained in this
Agreement, or any certificate or instrument delivered pursuant to this
Agreement, shall terminate at the Effective Time, and only the covenants that
by
their terms survive the Effective Time and this Article VIII shall survive
the
Effective Time.
8.2 Notices.
All
notices and other communications hereunder shall be in writing and shall be
deemed duly given (a) on the date of delivery if delivered personally, (b)
on
the date of confirmation of receipt (or, the first business day following such
receipt if such date is not a business day) of transmission by telecopy or
telefacsimile or (c) on the date of confirmation of receipt (or, the first
business day following such receipt if such date is not a business day) if
delivered by a nationally recognized courier service. All notices hereunder
shall be delivered as set forth below, or pursuant to such other instructions
as
may be designated in writing by the party to receive such notice.
(a) if
to
Parent:
Wave
Wireless Corporation
1996
Lundy Avenue
San
Jose,
CA 95131
Facsimile:
(408) 943-4305
Attention:
Acting Chief Executive Officer
with
a
copy (which shall not constitute notice) to:
Annex
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57
Procopio,
Cory, Hargreaves & Savitch LLP
530
B
Street, Suite 2100
San
Diego, CA 92101
Facsimile:
(619) 398-0114
Attention:
John C. Lee, Esq.
(b) if
to the
Company:
WaveRider
Communications Inc.
255
Consumers Road, Suite 500
Toronto,
Ontario
Canada
M2J 1R4
Facsimile:
(416) 502-2968
Attention:
Chief Executive Officer
with
a
copy (which shall not constitute notice) to:
Foley
Hoag LLP
Seaport
World Trade Center West
155
Seaport Boulevard
Boston,
MA 02210
Facsimile:
(617) 832-7000
Attention:
David A. Broadwin, Esq.
8.3 Counterparts;
Effectiveness.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed to be an original but all of which shall constitute one and the same
instrument. This Agreement shall become effective when each party hereto has
received counterparts signed and delivered (by facsimile or otherwise) by all
of
the other parties hereto.
8.4 Entire
Agreement; Third Party Beneficiaries.
(a) This
Agreement (including the exhibits and the parties’ disclosure schedules hereto)
and the Confidentiality Agreement constitute the entire agreement, and supersede
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof and thereof.
(b) This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any Person not a party to this Agreement any rights, benefits
or remedies of any nature whatsoever.
8.5 Severability.
If any
term or other provision of this Agreement is invalid, illegal or incapable
of
being enforced by any law or public policy, all other terms and provisions
of
this Agreement shall nevertheless remain in full force and effect so long as
the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner materially adverse to any party. Notwithstanding the
foregoing, upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated
to
the greatest extent possible.
Annex
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58
8.6 Assignment.
Neither
this Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by any of the parties, in whole or in part (whether by operation
of
law or otherwise), without the prior written consent of the other parties,
and
any attempt to make any such assignment without such consent shall be null
and
void. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
8.7 Amendment.
Subject
to applicable Law, this Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any
time
before or after obtaining the Company Stockholder Approval; provided, that
after
obtaining the Company Stockholder Approval, no amendment shall be made which
by
Law or in accordance with the rules of the OTC Bulletin Board requires further
approval by the stockholders of the Company without such further stockholder
approval. This Agreement may be not amended except by execution of an instrument
in writing signed on behalf of each of Parent and the Company.
8.8 Extension;
Waiver.
At any
time prior to the Effective Time, either party hereto, by action taken or
authorized by its respective Board of Directors, may, to the extent permitted
by
applicable Law, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed
on
behalf of such party. Delay in exercising any right under this Agreement shall
not constitute a waiver of such right.
8.9 Fees
and Expenses.
Subject
to Section
6.3,
whether
or not the Merger is consummated, all Expenses (as defined herein) incurred
in
connection with this Agreement and the transactions contemplated hereby shall
be
paid by the party incurring such Expenses. As used in this Agreement,
“Expenses”
includes all out-of-pocket expenses (including, without limitation, all fees
and
expenses of counsel, accountants, investment bankers, experts and consultants
to
a party hereto and its affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of this Agreement and the transactions contemplated
hereby, including the preparation, printing, filing and mailing, as the case
may
be, of the Proxy Statement/Prospectus and the Registration Statement and any
amendments or supplements thereto, and the solicitation of the Company
Stockholder Approval and all other matters related to the transactions
contemplated hereby.
8.10 Remedies;
Specific Performance.
Except
as otherwise provided herein, any and all remedies herein expressly conferred
upon a party will be deemed cumulative with and not exclusive of any other
remedy conferred hereby, or by law or equity upon such party, and the exercise
by a party of any one remedy will not preclude the exercise of any other remedy.
The parties hereto agree that irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction,
this
being in addition to any other remedy to which they are entitled at law or
in
equity.
Annex
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59
8.11 Governing
Law.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of Delaware, regardless of the laws that might otherwise govern under
applicable principles of conflicts of law thereof.
8.12 Rules
of Construction.
The
parties hereto agree that they have been represented by counsel during the
negotiation and execution of this Agreement and, therefore, waive the
application of any law, regulation, holding or rule of construction providing
that ambiguities in an agreement or other document will be construed against
the
party drafting such agreement or document.
8.13 Waiver
of Jury Trial.
EACH
PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE)
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY PARTY IN
THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
[SIGNATURE
PAGE FOLLOWS]
Annex
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60
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
| “Company” | ||
|
WAVERIDER
COMMUNICATIONS INC.,
a Nevada corporation
|
||
| |
|
|
| By: | /s/ Charles W. Brown | |
|
Name: Charles W. Brown |
||
|
Title: Chief Executive
Officer
|
||
| “Parent” | ||
|
WAVE
WIRELESS CORPORATION,
a Delaware corporation
|
||
| |
|
|
| By: | /s/ Daniel W. Rumsey | |
|
Name: Daniel W. Rumsey |
||
| Title: Acting Chief Executive Officer | ||
| “Merger Sub” | ||
|
WAVE
ACQUISITION CORPORATION,
a Nevada corporation
|
||
| |
|
|
| By: | /s/ Daniel W. Rumsey | |
|
Name: Daniel W. Rumsey |
||
| Title: Chief Executive Officer | ||
Annex
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61
ANNEX
A-2
Amendment
to Agreement and Plan of Merger
AMENDMENT
TO AGREEMENT AND PLAN OF MERGER
THIS
AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of January __, 2006 (this
“Amendment”),
is
made and entered into by and among WAVE WIRELESS CORPORATION, a Delaware
corporation (“Parent”),
WAVE
ACQUISITION CORPORATION, a Nevada corporation (“Merger
Sub”),
and
WAVERIDER COMMUNICATIONS INC., a Nevada corporation (the “Company”),
with
reference to the following facts:
A. Parent,
Merger Sub and the Company are parties to that certain Agreement and Plan of
Merger, dated as of January 3, 2006 (the “Merger
Agreement”).
Capitalized terms used and not otherwise defined in this Amendment shall have
the same respective meanings given to such terms in the Merger
Agreement.
B. Parent,
Merger Sub and the Company desire to amend the Merger Agreement as set forth
herein.
NOW,
THEREFORE, the parties hereto, intending to be legally bound hereby, agree
as
follows:
1. Amendment
to Section 1.5(a)(iii).
Section
1.5(a)(iii) of the Merger Agreement is hereby amended and restated in its
entirety as follows:
All
of
the Company’s convertible debentures and all of the shares of Company Preferred
Stock outstanding and held of record by Crescent immediately prior to the
Effective Time shall be converted into the right to receive a number of shares
of Parent Preferred Stock and warrants to purchase a number of shares of common
stock, par value $0.0001 per share, of Parent (the “Parent
Common Stock”)
in
accordance with the terms and conditions set forth in that certain Amendment
Agreement, dated as of January 26, 2006, by and between Crescent and the
Company.
2. Amendment
to Section 1.5(a)(iv).
Section
1.5(a)(iv) of the Merger Agreement is hereby amended and restated in its
entirety as follows:
Except
as
provided in clauses (i) and (ii) above and subject to Sections
1.5(b),
(c),
(d)
and
(e),
each
share of Company Common Stock outstanding immediately prior to the Effective
Time shall be converted into the right to receive a number of shares of Parent
Common Stock equal to the Exchange Ratio (as defined herein) such that the
total
number of shares of Parent Common Stock issued or issuable in connection with
the Merger (including, without limitation, the shares of Parent Common Stock
issuable upon (A) exercise of all Company Options and Company Warrants assumed
by Parent pursuant to Section
1.5(f),
and (B)
conversion and exercise of all Parent Preferred Stock and warrants to purchase
Parent Common Stock issued to Crescent pursuant to Section
1.5(a)(iii))
(collectively, the “Merger
Consideration”),
shall
equal fifty-percent (50%) of Parent’s Fully Diluted Shares Outstanding
immediately after the Effective Time. By way of example, as of the date hereof
and based upon the Fully Diluted Shares Outstanding of Parent and the Fully
Diluted Shares Outstanding of the Company, each as set forth on Schedule
1.5,
the
“Exchange
Ratio”
shall
initially be 1.2179, subject to adjustment at the Closing as provided in
Sections
1.5(b)
and
(c).
Annex
A-2
Page
1
3. Amendment
to Section 4.17(a).
Section
4.17(a) of the Merger Agreement is hereby amended and restated in its entirety
as follows:
[RESERVED]
4. Amendment
to Definition of “Parent Preferred Stock”.
The
definition of the term “Parent Preferred Stock” in Article VII of the Merger
Agreement is hereby amended and restated in its entirety as
follows:
“Parent
Preferred Stock”
means
one or more series of preferred stock, par value $0.0001 per share, of Parent
which shall be convertible into shares of Parent Common Stock and have such
other rights, preferences and privileges as may be mutually acceptable to
Parent, the Company and Crescent.
5. Effect.
Except
as and to the extent amended by this Amendment, the Merger Agreement shall
remain in full force and effect.
6. Counterparts.
This
Amendment may be executed in two or more counterparts and via facsimile, each
of
which shall be considered an original instrument, but all of which together
shall be considered one and the same agreement, and shall become binding when
one or more counterparts have been and executed and delivered by each of the
parties hereto.
[SIGNATURE
PAGE FOLLOWS]
Annex
A-2
Page
2
IN
WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of
the
date first above written.
| “Company” | ||
| WAVERIDER COMMUNICATIONS INC., a Nevada corporation | ||
| |
|
|
| By: | /s/ Charles W. Brown | |
|
Name: Charles W. Brown |
||
| Title: Chief Executive Officer | ||
| “Parent” | ||
| WAVE WIRELESS CORPORATION, a Delaware corporation | ||
| |
|
|
| By: | /s/ Daniel W. Rumsey | |
|
Name: Daniel W. Rumsey |
||
| Title: Acting Chief Executive Officer | ||
| “Merger Sub” | ||
| WAVE ACQUISITION CORPORATION, a Nevada corporation | ||
| |
|
|
| By: | /s/ Daniel W. Rumsey | |
|
Name: Daniel W. Rumsey |
||
| Title: Chief Executive Officer | ||
Annex
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ANNEX
B
Nevada
Revised Statutes Sections 92A.300 to 92A.500
Rights
of Dissenting Owners
NRS
92A.300 Definitions. As used in NRS 92A.300 to 92A.500, inclusive, unless the
context otherwise requires, the words and terms defined in NRS 92A.305 to
92A.335, inclusive, have the meanings ascribed to them in those
sections.
(Added
to
NRS by 1995, 2086)
NRS
92A.305 “Beneficial stockholder” defined. “Beneficial stockholder” means a
person who is a beneficial owner of shares held in a voting trust or by a
nominee as the stockholder of record.
(Added
to
NRS by 1995, 2087)
NRS
92A.310 “Corporate action” defined. “Corporate action” means the action of a
domestic corporation.
(Added
to
NRS by 1995, 2087)
NRS
92A.315 “Dissenter” defined. “Dissenter” means a stockholder who is entitled to
dissent from a domestic corporation’s action under NRS 92A.380 and who exercises
that right when and in the manner required by NRS 92A.400 to 92A.480,
inclusive.
(Added
to
NRS by 1995, 2087; A 1999, 1631)
NRS
92A.320 “Fair value” defined. “Fair value,” with respect to a dissenter’s
shares, means the value of the shares immediately before the effectuation of
the
corporate action to which he objects, excluding any appreciation or depreciation
in anticipation of the corporate action unless exclusion would be
inequitable.
(Added
to
NRS by 1995, 2087)
NRS
92A.325 “Stockholder” defined. “Stockholder” means a stockholder of record or a
beneficial stockholder of a domestic corporation.
(Added
to
NRS by 1995, 2087)
Annex
B
Page
1
NRS
92A.330 “Stockholder of record” defined. “Stockholder of record” means the
person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee’s certificate on file with the domestic
corporation.
(Added
to
NRS by 1995, 2087)
NRS
92A.335 “Subject corporation” defined. “Subject corporation” means the domestic
corporation which is the issuer of the shares held by a dissenter before the
corporate action creating the dissenter’s rights becomes effective or the
surviving or acquiring entity of that issuer after the corporate action becomes
effective.
(Added
to
NRS by 1995, 2087)
NRS
92A.340 Computation of interest. Interest payable pursuant to NRS 92A.300 to
92A.500, inclusive, must be computed from the effective date of the action
until
the date of payment, at the average rate currently paid by the entity on its
principal bank loans or, if it has no bank loans, at a rate that is fair and
equitable under all of the circumstances.
(Added
to
NRS by 1995, 2087)
NRS
92A.350 Rights of dissenting partner of domestic limited partnership. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange,
may
provide that contractual rights with respect to the partnership interest of
a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with
any
merger or exchange in which the domestic limited partnership is a constituent
entity.
(Added
to
NRS by 1995, 2088)
NRS
92A.360 Rights of dissenting member of domestic limited-liability company.
The
articles of organization or operating agreement of a domestic limited-liability
company or, unless otherwise provided in the articles of organization or
operating agreement, an agreement of merger or exchange, may provide that
contractual rights with respect to the interest of a dissenting member are
available in connection with any merger or exchange in which the domestic
limited-liability company is a constituent entity.
(Added
to
NRS by 1995, 2088)
Annex
B
Page
2
NRS
92A.370 Rights of dissenting member of domestic nonprofit
corporation.
1.
Except
as otherwise provided in subsection 2, and unless otherwise provided in the
articles or bylaws, any member of any constituent domestic nonprofit corporation
who voted against the merger may, without prior notice, but within 30 days
after
the effective date of the merger, resign from membership and is thereby excused
from all contractual obligations to the constituent or surviving corporations
which did not occur before his resignation and is thereby entitled to those
rights, if any, which would have existed if there had been no merger and the
membership had been terminated or the member had been expelled.
2.
Unless
otherwise provided in its articles of incorporation or bylaws, no member of
a
domestic nonprofit corporation, including, but not limited to, a cooperative
corporation, which supplies services described in chapter 704 of NRS to its
members only, and no person who is a member of a domestic nonprofit corporation
as a condition of or by reason of the ownership of an interest in real property,
may resign and dissent pursuant to subsection 1.
(Added
to
NRS by 1995, 2088)
NRS
92A.380 Right of stockholder to dissent from certain corporate actions and
to
obtain payment for shares.
1.
Except
as otherwise provided in NRS 92A.370 and 92A.390, any stockholder is entitled
to
dissent from, and obtain payment of the fair value of his shares in the event
of
any of the following corporate actions:
(a)
Consummation of a conversion or plan of merger to which the domestic corporation
is a constituent entity:
(1)
If approval by the stockholders is required for the conversion or merger by
NRS
92A.120 to 92A.160, inclusive, or the articles of incorporation, regardless
of
whether the stockholder is entitled to vote on the conversion or plan of merger;
or
(2)
If
the domestic corporation is a subsidiary and is merged with its parent pursuant
to NRS 92A.180.
(b)
Consummation of a plan of exchange to which the domestic corporation is a
constituent entity as the corporation whose subject owner’s interests will be
acquired, if his shares are to be acquired in the plan of exchange.
(c)
Any
corporate action taken pursuant to a vote of the stockholders to the extent
that
the articles of incorporation, bylaws or a resolution of the board of directors
provides that voting or nonvoting stockholders are entitled to dissent and
obtain payment for their shares.
Annex
B
Page
3
2.
A
stockholder who is entitled to dissent and obtain payment pursuant to NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to
him
or the domestic corporation.
(Added
to
NRS by 1995, 2087; A 2001, 1414, 3199; 2003, 3189)
NRS
92A.390 Limitations on right of dissent: Stockholders of certain classes or
series; action of stockholders not required for plan of merger.
1.
There
is no right of dissent with respect to a plan of merger or exchange in favor
of
stockholders of any class or series which, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting at
which the plan of merger or exchange is to be acted on, were either listed
on a
national securities exchange, included in the national market system by the
National Association of Securities Dealers, Inc., or held by at least 2,000
stockholders of record, unless:
(a)
The
articles of incorporation of the corporation issuing the shares provide
otherwise; or
(b)
The
holders of the class or series are required under the plan of merger or exchange
to accept for the shares anything except:
(1)
Cash,
owner’s interests or owner’s interests and cash in lieu of fractional owner’s
interests of:
(I)
The
surviving or acquiring entity; or
(II)
Any
other entity which, at the effective date of the plan of merger or exchange,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
of record by a least 2,000 holders of owner’s interests of record;
or
(2)
A
combination of cash and owner’s interests of the kind described in
sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph
(b).
2.
There
is no right of dissent for any holders of stock of the surviving domestic
corporation if the plan of merger does not require action of the stockholders
of
the surviving domestic corporation under NRS 92A.130.
(Added
to
NRS by 1995, 2088)
NRS
92A.400 Limitations on right of dissent: Assertion as to portions only to shares
registered to stockholder; assertion by beneficial stockholder.
Annex
B
Page
4
1.
A
stockholder of record may assert dissenter’s rights as to fewer than all of the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the subject corporation in
writing of the name and address of each person on whose behalf he asserts
dissenter’s rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
2.
A
beneficial stockholder may assert dissenter’s rights as to shares held on his
behalf only if:
(a)
He
submits to the subject corporation the written consent of the stockholder of
record to the dissent not later than the time the beneficial stockholder asserts
dissenter’s rights; and
(b)
He
does so with respect to all shares of which he is the beneficial stockholder
or
over which he has power to direct the vote.
(Added
to
NRS by 1995, 2089)
NRS
92A.410 Notification of stockholders regarding right of dissent.
1.
If a
proposed corporate action creating dissenters’ rights is submitted to a vote at
a stockholders’ meeting, the notice of the meeting must state that stockholders
are or may be entitled to assert dissenters’ rights under NRS 92A.300 to
92A.500, inclusive, and be accompanied by a copy of those sections.
2.
If the
corporate action creating dissenters’ rights is taken by written consent of the
stockholders or without a vote of the stockholders, the domestic corporation
shall notify in writing all stockholders entitled to assert dissenters’ rights
that the action was taken and send them the dissenter’s notice described in NRS
92A.430.
(Added
to
NRS by 1995, 2089; A 1997, 730)
NRS
92A.420 Prerequisites to demand for payment for shares.
1.
If a
proposed corporate action creating dissenters’ rights is submitted to a vote at
a stockholders’ meeting, a stockholder who wishes to assert dissenter’s
rights:
(a)
Must
deliver to the subject corporation, before the vote is taken, written notice
of
his intent to demand payment for his shares if the proposed action is
effectuated; and
(b)
Must
not vote his shares in favor of the proposed action.
2.
A
stockholder who does not satisfy the requirements of subsection 1 and NRS
92A.400 is not entitled to payment for his shares under this
chapter.
(Added
to
NRS by 1995, 2089; 1999, 1631)
Annex
B
Page
5
NRS
92A.430 Dissenter’s notice: Delivery to stockholders entitled to assert rights;
contents.
1.
If a
proposed corporate action creating dissenters’ rights is authorized at a
stockholders’ meeting, the subject corporation shall deliver a written
dissenter’s notice to all stockholders who satisfied the requirements to assert
those rights.
2.
The
dissenter’s notice must be sent no later than 10 days after the effectuation of
the corporate action, and must:
(a)
State
where the demand for payment must be sent and where and when certificates,
if
any, for shares must be deposited;
(b)
Inform the holders of shares not represented by certificates to what extent
the
transfer of the shares will be restricted after the demand for payment is
received;
(c)
Supply a form for demanding payment that includes the date of the first
announcement to the news media or to the stockholders of the terms of the
proposed action and requires that the person asserting dissenter’s rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
(d)
Set a
date by which the subject corporation must receive the demand for payment,
which
may not be less than 30 nor more than 60 days after the date the notice is
delivered; and
(e)
Be
accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
(Added
to
NRS by 1995, 2089)
NRS
92A.440 Demand for payment and deposit of certificates; retention of rights
of
stockholder.
1.
A
stockholder to whom a dissenter’s notice is sent must:
(a)
Demand payment;
(b)
Certify whether he or the beneficial owner on whose behalf he is dissenting,
as
the case may be, acquired beneficial ownership of the shares before the date
required to be set forth in the dissenter’s notice for this certification;
and
(c)
Deposit his certificates, if any, in accordance with the terms of the
notice.
2.
The
stockholder who demands payment and deposits his certificates, if any, before
the proposed corporate action is taken retains all other rights of a stockholder
until those rights are cancelled or modified by the taking of the proposed
corporate action.
Annex
B
Page
6
3.
The
stockholder who does not demand payment or deposit his certificates where
required, each by the date set forth in the dissenter’s notice, is not entitled
to payment for his shares under this chapter.
(Added
to
NRS by 1995, 2090; A 1997, 730; 2003, 3189)
NRS
92A.450 Uncertificated shares: Authority to restrict transfer after demand
for
payment; retention of rights of stockholder.
1.
The
subject corporation may restrict the transfer of shares not represented by
a
certificate from the date the demand for their payment is received.
2.
The
person for whom dissenter’s rights are asserted as to shares not represented by
a certificate retains all other rights of a stockholder until those rights
are
cancelled or modified by the taking of the proposed corporate
action.
(Added
to
NRS by 1995, 2090)
NRS
92A.460 Payment for shares: General requirements.
1.
Except
as otherwise provided in NRS 92A.470, within 30 days after receipt of a demand
for payment, the subject corporation shall pay each dissenter who complied
with
NRS 92A.440 the amount the subject corporation estimates to be the fair value
of
his shares, plus accrued interest. The obligation of the subject corporation
under this subsection may be enforced by the district court:
(a)
Of
the county where the corporation’s registered office is located; or
(b)
At
the election of any dissenter residing or having its registered office in this
State, of the county where the dissenter resides or has its registered office.
The court shall dispose of the complaint promptly.
2.
The
payment must be accompanied by:
(a)
The
subject corporation’s balance sheet as of the end of a fiscal year ending not
more than 16 months before the date of payment, a statement of income for that
year, a statement of changes in the stockholders’ equity for that year and the
latest available interim financial statements, if any;
(b)
A
statement of the subject corporation’s estimate of the fair value of the
shares;
(c)
An
explanation of how the interest was calculated;
(d)
A
statement of the dissenter’s rights to demand payment under NRS 92A.480;
and
Annex
B
Page
7
(e)
A
copy of NRS 92A.300 to 92A.500, inclusive.
(Added
to
NRS by 1995, 2090)
NRS
92A.470 Payment for shares: Shares acquired on or after date of dissenter’s
notice.
1.
A
subject corporation may elect to withhold payment from a dissenter unless he
was
the beneficial owner of the shares before the date set forth in the dissenter’s
notice as the date of the first announcement to the news media or to the
stockholders of the terms of the proposed action.
2.
To the
extent the subject corporation elects to withhold payment, after taking the
proposed action, it shall estimate the fair value of the shares, plus accrued
interest, and shall offer to pay this amount to each dissenter who agrees to
accept it in full satisfaction of his demand. The subject corporation shall
send
with its offer a statement of its estimate of the fair value of the shares,
an
explanation of how the interest was calculated, and a statement of the
dissenters’ right to demand payment pursuant to NRS 92A.480.
(Added
to
NRS by 1995, 2091)
NRS
92A.480 Dissenter’s estimate of fair value: Notification of subject corporation;
demand for payment of estimate.
1.
A
dissenter may notify the subject corporation in writing of his own estimate
of
the fair value of his shares and the amount of interest due, and demand payment
of his estimate, less any payment pursuant to NRS 92A.460, or reject the offer
pursuant to NRS 92A.470 and demand payment of the fair value of his shares
and
interest due, if he believes that the amount paid pursuant to NRS 92A.460 or
offered pursuant to NRS 92A.470 is less than the fair value of his shares or
that the interest due is incorrectly calculated.
2.
A
dissenter waives his right to demand payment pursuant to this section unless
he
notifies the subject corporation of his demand in writing within 30 days after
the subject corporation made or offered payment for his shares.
(Added
to
NRS by 1995, 2091)
NRS
92A.490 Legal proceeding to determine fair value: Duties of subject corporation;
powers of court; rights of dissenter.
1.
If a
demand for payment remains unsettled, the subject corporation shall commence
a
proceeding within 60 days after receiving the demand and petition the court
to
determine the fair value of the shares and accrued interest. If the subject
corporation does not commence the proceeding within the 60-day period, it shall
pay each dissenter whose demand remains unsettled the amount
demanded.
Annex
B
Page
8
2.
A
subject corporation shall commence the proceeding in the district court of
the
county where its registered office is located. If the subject corporation is
a
foreign entity without a resident agent in the State, it shall commence the
proceeding in the county where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign entity was
located.
3.
The
subject corporation shall make all dissenters, whether or not residents of
Nevada, whose demands remain unsettled, parties to the proceeding as in an
action against their shares. All parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4.
The
jurisdiction of the court in which the proceeding is commenced under subsection
2 is plenary and exclusive. The court may appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of
fair
value. The appraisers have the powers described in the order appointing them,
or
any amendment thereto. The dissenters are entitled to the same discovery rights
as parties in other civil proceedings.
5.
Each
dissenter who is made a party to the proceeding is entitled to a
judgment:
(a)
For
the amount, if any, by which the court finds the fair value of his shares,
plus
interest, exceeds the amount paid by the subject corporation; or
(b)
For
the fair value, plus accrued interest, of his after-acquired shares for which
the subject corporation elected to withhold payment pursuant to NRS
92A.470.
(Added
to
NRS by 1995, 2091)
NRS
92A.500 Legal proceeding to determine fair value: Assessment of costs and
fees.
1.
The
court in a proceeding to determine fair value shall determine all of the costs
of the proceeding, including the reasonable compensation and expenses of any
appraisers appointed by the court. The court shall assess the costs against
the
subject corporation, except that the court may assess costs against all or
some
of the dissenters, in amounts the court finds equitable, to the extent the
court
finds the dissenters acted arbitrarily, vexatiously or not in good faith in
demanding payment.
2.
The
court may also assess the fees and expenses of the counsel and experts for
the
respective parties, in amounts the court finds equitable:
(a)
Against the subject corporation and in favor of all dissenters if the court
finds the subject corporation did not substantially comply with the requirements
of NRS 92A.300 to 92A.500, inclusive; or
Annex
B
Page
9
(b)
Against either the subject corporation or a dissenter in favor of any other
party, if the court finds that the party against whom the fees and expenses
are
assessed acted arbitrarily, vexatiously or not in good faith with respect to
the
rights provided by NRS 92A.300 to 92A.500, inclusive.
3.
If the
court finds that the services of counsel for any dissenter were of substantial
benefit to other dissenters similarly situated, and that the fees for those
services should not be assessed against the subject corporation, the court
may
award to those counsel reasonable fees to be paid out of the amounts awarded
to
the dissenters who were benefited.
4.
In a
proceeding commenced pursuant to NRS 92A.460, the court may assess the costs
against the subject corporation, except that the court may assess costs against
all or some of the dissenters who are parties to the proceeding, in amounts
the
court finds equitable, to the extent the court finds that such parties did
not
act in good faith in instituting the proceeding.
5.
This
section does not preclude any party in a proceeding commenced pursuant to NRS
92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68 or NRS
17.115.
(Added
to
NRS by 1995, 2092)
Annex
B
Page
10
FORM
OF PROXY
WAVERIDER
COMMUNICATIONS INC.
| PROXY |
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS
|
The
undersigned hereby appoints T. Scott Worthington and Charles W. Brown, and
each
of them, as proxies, with full power of substitution, and hereby authorizes
them
to represent and vote, as designated below, all shares of the Common Stock
of
WaveRider Communications Inc., a Nevada corporation (the "Company"), held of
record by the undersigned on February 8, 2006 at the Special Meeting of
Shareholders (the "Special Meeting") to be held at 255 Consumers Road, Suite
500, Toronto, Ontario Canada M2J 1R4, on March 20, 2006, at 2:00 p.m, local
time, or at any adjournment or postponement thereof, upon the matters set forth
below, all in accordance with and as more fully described in the accompanying
Notice of Special Meeting of Shareholders and Proxy Statement, receipt of which
is hereby acknowledged.
| 1. |
PROPOSAL
TO APPROVE and adopt the Agreement and Plan of Merger, dated as
of January
3, 2006, as amended, among Wave Wireless Corporation, WaveRider
Communications Inc. and Wave Acquisition Corporation, and to approve
the
merger contemplated by the Agreement and Plan of Merger, as
amended.
|
o
FOR o
AGAINST o
ABSTAIN
| 2. |
PROPOSAL
TO APPROVE any motion for adjournment or postponement of the special
meeting to another time or place to permit, among other things, further
solicitation of proxies if necessary to establish a quorum or to
obtain
additional votes in favor of Proposal
1.
|
o
FOR o
AGAINST o
ABSTAIN
THIS
PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND APPROVE THE
MERGER AND FOR THE PROPOSAL TO PERMIT ADJOURNMENT OR POSTPONEMENT OF THE
WAVERIDER SPECIAL MEETING.
Please
complete, sign and date this proxy where indicated and return it promptly
to:
Mr.
T.
Scott Worthington, Vice President and Chief Financial Officer
WaveRider
Communications Inc., 255 Consumers Road, Suite 500, Toronto, Ontario Canada
M2J
1R4
| Date: _____________________, 2006 |
Signature:
|
||
|
Name
(Print):
|
|||
|
Signature
(if held jointly):
|
|||
|
Name
(Print - if held jointly)
|
|
Registered
Address:
|
|
(Please sign above exactly as the shares are issued. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person.)