Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
____________
Commission file number 0-29944
INFOWAVE SOFTWARE, INC.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
British Columbia, Canada 98 0183915
- ------------------------------- -------------------------------------
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
200 - 4664 Lougheed Highway
Burnaby, British Columbia, Canada V5C 5T5
(Address of principal executive offices)
Registrant's telephone number: (604) 473-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------ ------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares
----------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes [ ] No [X]
Aggregate market value of the registrant's Common Shares held by non-affiliates
as of June 28, 2002 was approximately US$7,634,571. The number of the
Registrant's Common Shares outstanding as of March 26, 2003, was 66,659,578.
================================================================================
Table of Contents
Part I............................................................................................................1
Item 1: Business..................................................................................................1
Item 2: Properties...............................................................................................15
Item 3: Legal Proceedings........................................................................................15
Item 4: Submission of Matters to a Vote of Security Holders......................................................16
Item 5: Market for Registrants Common Equity and Related Stockholder Matters.....................................16
Item 6: Selected Financial Data..................................................................................19
Item 7: Managements' Discussion and Analysis of Financial Condition and Results of Operations....................20
Item 7A: Quantitative and Qualitative Disclosure about Market Risk...............................................27
Item 8: Financial Statements and Supplementary Data..............................................................27
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................57
Part III.........................................................................................................57
Item 10: Directors and Officers of the Registrant................................................................57
Item 11: Executive Compensation..................................................................................59
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..........62
Item 13: Certain Relationships and Related Transactions..........................................................63
Item 14: Controls and Procedures.................................................................................64
Part IV..........................................................................................................64
Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................65
PART I
Item 1: Business
Forward-Looking Statements
Statements in this Annual Report about future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in any forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors listed in "Risk Factors".
In some cases, forward-looking statements can be identified by the use of words
such as "may", "will", "should", "could", "expect", "plan", "intend",
"anticipate", "believe", "estimate", "predict", "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements or other future events.
Moreover, neither the Company nor anyone else assumes responsibility for the
accuracy or completeness of forward-looking statements. The Company is under no
duty to update any of its forward-looking statements after the date of this
Annual Report. The reader should not place undue reliance on forward-looking
statements.
All dollar amounts noted in this Annual Report are in U.S. dollars unless
otherwise noted.
THE COMPANY
Infowave Software, Inc. ("Infowave" or the "Company") develops, markets and
sells infrastructure software solutions that facilitate wireless computing for
individuals, workgroups, enterprises and network operators. Focused on enabling
the wireless workplace since 1993, Infowave's product solutions connect workers
wirelessly in real-time to their corporate data, enabling businesses to
communicate more easily, deliver effective customer service and conduct more
business from any location. The Company provides a complete range of wireless
solutions, ranging from the individual email service of Symmetry Pro, to
workgroups and enterprises served by Infowave Mobile Messaging. The Company also
offers the Wireless Business Engine(TM), a wireless platform for large
corporations that provides access to email and collaboration tools, corporate
intranets, the Internet, Web-enabled applications and legacy and client/server
applications from a wide range of wireless devices such as handheld computers,
laptops, PDAs and emerging integrated phone devices.
The Company is amalgamated under the Company Act (British Columbia). The
Company's head office and development facilities are located at The Infowave
Building, Suite 200, 4664 Lougheed Highway, Burnaby, British Columbia, Canada,
V5C 5T5 (telephone 604.473.3600). The Company's registered office is at Suite
2600, Three Bentall Centre, 595 Burrard Street, PO Box 49314, Vancouver, British
Columbia, Canada, V7X 1L3. The Company's wholly owned subsidiary, Infowave USA
Inc., is incorporated under the laws of the State of Washington. The Company
operates a sales office in London, England at Cardinal Point, Park Road,
Rickmansworth, Hertfordshire WD3 1RE 4JS (telephone + 44 (1923) 432 632). The
Company also has a master reseller agreement with an agency for Continental
Europe located at Dreimuhlenstrabe 27, 80476 Munchen / Munich, Germany
(telephone 49 89 767368-94).
GENERAL DEVELOPMENT OF THE BUSINESS
The Company was originally formed in 1984 as GDT Softworks Inc. under the laws
of the Province of British Columbia, Canada. Initially focused on developing
printer driver solutions, the Company expanded its focus to include developing
wireless messaging software in 1993.
1
By 1996, the Company began to operate its wireless business (the "Wireless
Division") and its printer driver business (the "Imaging Division") as distinct
operating divisions. The Company's name was changed to Infowave Wireless
Messaging Incorporated in 1997 and to Infowave Software, Inc. in 1998. In 2000,
the Company focused its time and resources solely on the Wireless Division and
sold off the Imaging Division effective August 31, 2000. The development of the
Company's wireless business is described below under "Business of the Company".
In February 2001, Mr. Thomas Koll was appointed Chief Executive Officer of the
Company. Mr. Koll joined Infowave from Microsoft Corporation, where he held
several executive positions in the US and Europe from 1989 to 2001. Most
recently, he was Vice President of Microsoft's Network Solutions Group where he
was responsible for, among other things, Microsoft's worldwide business with
telecommunications companies in the wireless markets. Mr. Koll transitioned to
Chairman of the Board of Directors in April 2002.
In March 2002, the Company entered into a Strategic Alliance and Sales agreement
with Compaq Computer Corporation (now known as Hewlett-Packard Company or "HP").
Under the continuing agreement, HP and Infowave agreed to collaborate on joint
marketing activities, and HP agreed to make commercially reasonable efforts to
bundle certain of Infowave's products with certain of their products. Concurrent
with the signing of that agreement, HP made available to the Company, a
three-year $2 million revolving loan facility, convertible at HP's option into
Infowave Common Shares at a price of $1.00 per share. Infowave has also granted
HP the ability to have an observer attend meetings of the Board of Directors.
Throughout 2002, the Company released new versions of its software as well as
launched several new products to appeal to a broader wireless market. Infowave's
products provide value to individual professional consumers, to business
workgroups and enterprises, to large corporations, as well as to the network
operators (carriers).
The Company announced on January 9, 2003, that it entered into agreements with
Microsoft Corporation under which the two companies will non-exclusively develop
and market solutions for mobile network operators based on the Windows Powered
Microsoft mobile device platforms. Infowave and Microsoft will work together to
offer mobile operators complete solutions focused on Microsoft Windows Powered
devices and designed to increase subscriber adoption and consumption of wireless
data. In the first stage of development, Infowave will add support for the
Windows Powered Smartphone to its Symmetry(TM) Pro desktop personal e-mail
solution, its Infowave Mobile Messaging server product and its Mobile
Application Gateway solution suite for mobile network operators. Microsoft and
Infowave will cooperate on joint marketing and sales initiatives into the mobile
operator community. In addition, Infowave will make its Symmetry Pro product
available to Microsoft device original equipment manufacturers (OEMs).
BUSINESS OF THE COMPANY
Company Overview
The Company's flagship commercial software product is the Infowave Wireless
Business Engine, which is an infrastructure solution for extending corporate
information and applications out to mobile workers. The Infowave Wireless
Business Engine has a modular architecture optimized for enterprise applications
and supports multiple devices, networks, platforms and applications.
Consequently, the mobile worker is given greater choices and flexibility while
providing the enterprise with centralized management, scalability, security and
encryption to protect, extend and leverage existing corporate investments in
information technology. The Company's software solution, extending from mobile
devices to enterprise servers, creates a wireless Virtual Private Network
("VPN") that offers a very high level of security.
2
The functionality of the Infowave Wireless Business Engine extends to Infowave's
suite of application connectors including the Exchange Connector (which provides
access to Microsoft(R) Exchange(R) data), the Web Connector (which provides
access to corporate intranets, web-enabled applications and the Internet), and
the Open Application Connector (which provides access to client server and
legacy applications). These application connectors connect enterprise software,
such as Microsoft(R) Exchange(R), to the Wireless Business Engine so that the
enterprise software can be operated wirelessly.
The Company launched several new products during 2002 to significantly broaden
the range of product offerings and reach a wider market audience. "Symmetry Pro"
was released in January 2002 as a desktop based wireless service for individual
professional consumers using both Palm & PocketPC powered devices. The launch of
Infowave "Mobile Messaging - Enterprise Edition", followed in September 2002, as
a server based solution for ten or more users within an organization. For
organizations with a few as five users, Infowave "Mobile Messaging - Workgroup
Edition" was also offered in November 2002 as a desktop service based
application solution for simple deployment
Infowave also formed a new Network Operator business initiative. Its goals are
to help network operators leverage off their significant existing data
investments, by offering compelling products to increase data subscription
rates, and value added services to their customers.
Infowave also launched the Mobile Application Gateway (the "Gateway") as a
revenue generating solution for network operators (carriers). The new wireless
services platform provides network operators a turnkey solution opportunity for
their customers, to capitalize immediately on offering wireless access to
corporate information including e-mail and calendar with Infowave branded
solutions. Infowave announced a licensing agreement in June 2002 with Asia's
network operator Hong Kong CSL to offer Symmetry branded products ("1010
Office") to their customers. In October 2002, Infowave announced that Swiss
wireless network service provider sunrise/tdc Switzerland AG ("sunrise") also
selected Infowave's Gateway to provide wireless e-mail solutions for its
subscribers.
Infowave utilizes value-added resellers, systems integrators and application
service providers to sell its product and services to both enterprises and
individual users. The Company also has Original Equipment Manufacturer ("OEM")
relationships with hardware and software vendors to develop proprietary or
private-label wireless solutions. The Company's revenue is primarily derived
from the sale of client access licenses, annual maintenance and support
agreements and OEM-related engineering fees for customization and branding.
The Company's current customers and commercial alliances include HP, AT&T
Wireless Services ("AT&T Wireless"), Rogers AT&T Wireless (Canada), ("Rogers
AT&T"), and TELUS Mobility ("Telus"). HP is currently reselling the Company's
software as a stand-alone product or with HP's Proliant Servers, iPAQnet Mobile
Intranet and iPAQnet Mobile Email Pocket PC. HP has also selected the Company's
products for internal deployment. Any future revenue from HP will depend upon
HP's success in reselling the Company's products through its various sales
channels. Each of AT&T Wireless, Rogers AT&T and TELUS Mobility has selected the
Company's products for internal deployment and are engaged in joint marketing
activities.
Market Opportunity
The wireless "middleware" industry represents an opportunity in the enterprise
software market that ties together several major trends that have developed over
the past decade:
o The deployment of back-end applications within the corporate Local
Area Network ("LAN") such as Enterprise Resource Planning ("ERP"),
Sales Force Automation ("SFA"), Groupware (Email, Personal Information
Management) and Customer Relationship Management ("CRM") services has
helped to drive increased productivity and efficiency within the
enterprise.
3
o The increase in the number of mobile workers has expanded the virtual
office beyond the physical plant.
o The integration of the Internet and the extension of back-end database
applications to the Internet/Intranet have enabled web-based access to
mission-critical data.
o The increase in mobile device sales among professionals has driven the
demand for remote, wireless access to corporate data.
o The coming to market of new integrated PDA / phone devices being
offered by different manufacturers powered by various operating
systems.
Middleware is a general term for any programming that serves to "glue together"
or mediate between two separate and usually pre-existing software programs.
Messaging is a common service provided by middleware programs so that different
applications can communicate. Wireless middleware enables remote connectivity to
the corporate LAN without being physically connected to the network, just as the
cell phone removed the physical restraints of being connected to a land-based
telephone line.
Infowave believes that providing wireless access to corporate data provides the
following advantages:
o Improved productivity and efficiency by enabling mobile workers to
stay connected to mission-critical data at all times, either in the
field or at home.
o Leveraging existing hardware and software investments by extending
these applications out of the office and into the field.
o Improved revenue generation by selling the right product to the right
customer at the right time.
o Cost savings by providing faster and less expensive means to interact
with employees and clients, and by lowering customer acquisition costs
by reaching a wider audience unconstrained by time and place.
o Competitive advantage by being able to respond to customer
queries/concerns in a more timely and effective manner
The Company's objective is to become the leading provider of wireless
infrastructure software solutions to the enterprise through a two-pronged sales
strategy:
o First, selling wireless application solutions to Network Operators to
assist them in bringing comprehensive wireless data solutions to
market.
o Secondly, selling wireless software to corporate and enterprise
customers alongside strategic partners such as HP and wireless carrier
partners such as AT&T Wireless, T-Mobile USA, Vodafone UK, sunrise,
Rogers AT&T and TELUS Mobility.
In order to stimulate sales of our enterprise portfolio during the past fiscal
year, the Company developed a pilot project program designed to make our
solution easy to trial. Many companies want to "try before you buy" which
results in a trial implementation pilot project prior to making a major
commitment to wireless therefore extending the sales cycles. The Company
initiated pilots with enterprise customers during 2002 and remains actively
engaged in over a dozen pilot projects with enterprise customers.
In the Network Operator market, Infowave offers the Mobile Application Gateway,
a services platform designed specifically to assist network operators in
bringing wireless data applications to market. The solution allows for network
operator branded offerings and takes advantage of a network operator's existing
customer base, strong brand, network infrastructure and extensive distribution
channels to sell-through an Infowave-powered solution to business customers.
With their recent investments in upgrading their networks, network operators are
seeking compelling applications to include as part of their wireless data
offering. Infowave provides network operators with the critical applications
that allow them to go to market with solutions for their business customers.
4
Infowave Products
Infowave Wireless Business Engine
The Infowave Wireless Business Engine is a wireless platform installed on the
server and designed to support a suite of application connectors suitable for
most enterprises. The Infowave Wireless Business Engine provides end-to-end
security, data transport and bandwidth optimizations, session reliability, and
multiple device and network support. Application connectors allow applications
already being used by an enterprise behind a firewall to be accessed by the
Infowave Wireless Business Engine. Infowave is currently shipping three
application connectors: Exchange Connector, Web Connector and Open Application
Connector ("Connectors"). Infowave has also developed its messaging connector
platform to include support for the Lotus(R) Domino market.
The Infowave Wireless Business Engine also creates an efficient wireless Virtual
Private Network and improves remote dial-up connections by optimizing slower
dialup (landline) connections into enterprise accounts and Wide Area Networks.
As a result, mobile workers have fast, secure and feature-rich access to
corporate data over either a wired or a wireless connection. The Infowave
Wireless Business Engine is also network independent, allowing users to optimize
their access to information over most major wireless data networks, including
CDPD, CDMA, GRPS, GSM and Mobitex. The Company is currently developing the
Infowave Wireless Business Engine to support additional 2.5G and new 3G
networks.
The Infowave Wireless Business Engine also includes a client software component
for mobile computing devices using a Windows operating system. The client
software is installed on the wireless device and enables a secure wireless
connection that extends through a wireless carrier, over the Internet and into
the Infowave Wireless Business Engine installed at the enterprise or service
provider. The client and server software manages the connection to ensure
security, reliability, and optimization of all data sent and received.
Infowave's client software has been developed to work with Windows
95/98/NT/2000/XP and Windows CE / Pocket PC.
The Company generates revenue through the sale of end-user licenses, with the
price for each license varying based upon the number of Connectors purchased.
Preferential pricing is available for large enterprise site licenses. In
addition to one-time software license fees, the Company charges annual
maintenance and support fees. The Company also charges fees for installation
services, training and professional services such as customization of its
software products.
Infowave has developed Connectors for the Infowave Wireless Business Engine that
address the three areas of enterprise data: Messaging - Exchange Connector,
Intranet/Web - Web Connector and Client Server/Legacy - Open Application
Connector. The Connectors are plugged into the Infowave Wireless Business Engine
allowing IT managers to easily and efficiently manage the solution. Unlike many
other wireless solutions that allow users to access only a subset of the
features associated with an application, Infowave's Connectors allow users to
gain access to the application as if they were in their office connected to
their corporate network. Many corporate applications, such as ERP and CRM, have
traditionally been accessed only through fast networks on full workstation
computers and have not been well suited for smaller devices in a mobile
environment. However, each Connector developed by Infowave extends the entire
application to the wireless device.
Exchange Connector
Infowave's Exchange Connector is an application connector that provides wireless
access to Microsoft Exchange servers using Microsoft Outlook client software.
Rather than plugging into a phone jack, users simply turn on their portable
computing device and launch Infowave's software. The user then opens Microsoft
Outlook, types a regular username and password and is connected wirelessly and
securely to Microsoft(R) Exchange(R). An important and timesaving feature of
Exchange Connector is that it does not require a traditional synchronization
procedure before enabling communication. All unread email in the
5
corporate message store is immediately pushed out to the end-user and all
outgoing email in the user's outbox is immediately sent. All data transmission
is encrypted and compressed for speed and security. Infowave's Exchange
Connector also features real-time synchronization capability - all incoming
messages are stored to Microsoft Outlook and can be accessed when the user
disconnects from the network. This capability gives end users online and offline
access to data and allows productivity in situations such as on an airplane or
when out of a wireless network coverage area. The user requires no unique
training because Microsoft Outlook is used in the same way in the mobile
environment as it would on a desktop. Similarly, the IT manager requires little
training as he or she manages users through existing standard management
utilities.
Lotus(R) Notes(R) and Domino(R) Connectors
The Company offers a bundled solution which integrates third party software that
enables wireless access to Lotus Notes(R) and Domino(R). This opens up a whole
new opportunity for Lotus Notes users by delivering a rich client, real-time
wireless solution that they can use to access information securely, reliably and
with optimized performance. Similar to the Exchange Connector, mobile Lotus
Notes users are freed from limiting landline connections. The new Domino
Connector will give mobile workers the ability to access their corporate
Domino-based email, calendar, to do lists and address book in real-time using a
spectrum of wireless devices including laptops, Internet-ready mobile phones,
and handheld computers. The Domino Connector will provide the same high level of
security, reliability, optimization and network/device support that the Wireless
Business Engine currently offers for Microsoft(R) Exchange(R) and
Internet/Intranet access.
Web Connector
Infowave's Web Connector is an application connector which is directed towards
the growing demand for secure, wireless access to the Internet, corporate
Intranets and extranets and web-based enterprise applications using standard web
browsers on mobile computing devices. This application connector is important
because enterprises are using Intranets to host information such as customer and
sales data, service records and other back-end databases that employees,
partners, customers and management access and share regularly. Upon installation
of the Web Connector, mobile workers are able to attain secure, reliable
wireless access to this information. Enterprises can then leverage their
existing applications, network architecture and important corporate information.
The Enterprise's security policies and procedures for Internet and Intranet
access are seamlessly extended to mobile users using the Infowave Wireless
Business Engine and do not require any modifications or changes to the way in
which these may be currently implemented.
Open Application Connector
The Open Application Connector and a corresponding software development kit are
designed to enable enterprises to independently develop solutions to wirelessly
enable their legacy client/server applications using the Wireless Business
Engine. The Infowave Open Application Connector leverages the security and
optimization of the Infowave Wireless Business Engine and is intended to help
provide a common platform for wireless access to all primary corporate
applications, including CRM and ERP. With the addition of the Open Application
Connector, Infowave offers a broad ranging enterprise solution enabling access
to an array of corporate data including: messaging, Intranet/Web and client
server/legacy applications.
Symmetry Pro
In January of 2002, Infowave released Symmetry Pro, a wireless software service
for individual Palm and PocketPC powered device users. Symmetry Pro enables
users to wirelessly access Microsoft(R) Exchange(R) corporate email, contacts,
attachments and calendar information. The service can be purchased and activated
by the end-user, generally without the assistance of his or her enterprise's
6
information technology department. It requires installation of Infowave's
software on both of the client desktop and mobile device, as well as
subscription to the Infowave Symmetry Pro service. Symmetry Pro is marketed
directly by Infowave, through value added resellers and through global network
operators under branded offerings.
The Symmetry Pro service redirects email and other personal information
management ("PIM") information from the user's desktop computer to a Symmetry
Pro gateway (server) managed by Infowave or other secure third-party providers.
The gateway manages the flow of information between the user's mobile device and
desktop. Unlike Infowave's traditional software revenue model, Symmetry Pro is
sold as a service billed either as an annual subscription or as a monthly
recurring service charge for each user. Revenues from Symmetry Pro are
recognized in straight-line amortization over the period of the service
contract. The client component of Symmetry Pro is distributed through various
VAR's, and can be downloaded for a free 14 days trial directly from the
Company's website at www.symmetrypro.com.
Infowave Mobile Messaging - Enterprise Edition
In September of 2002, Infowave launched Infowave Mobile Messaging Enterprise
Edition as a server based wireless software solution that enables organizations
with ten or more mobile employees to instantly access their Microsoft Exchange
corporate e-mail and calendar anywhere, using any PocketPC or Palm device.
Infowave Mobile Messaging redirects email and other PIM information from the
user's desktop computer to an Infowave Gateway or other secure third-party
providers. The gateway manages the flow of information between the user's mobile
device and desktop. The software is easy to install and is developed with both
the mobile users and the IT manager in mind.
Key Features and Benefits for the Mobile Organization -
o Instant and intuitive access to email - users get up and running with
no training required.
o Supports e-mail attachments - users are more responsive while away
from their desk
o Wireless propagation of message state - message states are changed on
the Exchange server
o User profile management - filter messages, meeting requests, and
message truncation
o Highly secure - uses the latest in security technology including
end-to-end AES cryptography
o Ease of installation and maintenance - automated installation and
simple administration
o Scalability from workgroups to large companies - supports thousands of
users & multiple servers
o Supports a broad range of devices & networks - removes the guesswork
from IT managers
The product is sold as a package of software licenses, along with technical
support and an annual service fee that will activate the product for one year
from purchase. Infowave Mobile Messaging Enterprise Edition is marketed directly
by Infowave, through value added resellers, and through global network operators
under branded offerings. The product can be downloaded for a free 14 days trial
directly from the Company's website at www.infowave.com
Infowave Mobile Messaging - Workgroup Edition
In November of 2002, Infowave released another complementary wireless software
solution for organizations with fewer than ten mobile employees. The Workgroup
Edition offers the same broad range of features as the Enterprise Edition, with
the added IT simplicity for workgroups.
The Workgroup Edition installs as a service on a single desktop and does not
require any installation, administration or maintenance assistance from IT
resources. This allows small and medium sized business or a single department to
independently adopt a wireless email and solution.
7
The product is sold as an initial package of software licenses, along with
technical support and an annual service fee that will activate the product for
one year from purchase. Infowave Mobile Messaging Workgroup Edition is marketed
directly by Infowave, through value added resellers, and through global network
operators under branded offerings. The product can also be downloaded for a free
14 days trial directly from the Company's website at www.infowave.com
Infowave Mobile Operator Solution Suite
In October of 2002, the Company announced the launch of the Infowave Mobile
Operation Solution Suite that establishes a services platform for network
operators to offer wireless data solutions directly for their own corporate
customers on a variety of handheld devices. Starting with wireless e-mail and
calendar for Microsoft(R) Exchange(R), network operators can provide a turnkey
messaging application as part of their portfolio of wireless data services.
Available as either an Infowave-hosted model or deployed in the network
operator's own data centre, the Gateway solution can be installed quickly to
support a network operator's marketing initiatives. Infowave offers a
comprehensive "Go-to-Market" solution with its Symmetry Pro, Mobile Messaging
Enterprise & Workgroup Edition branded offerings that will appeal to virtually
every segment of the business market.
The Gateway is marketed and sold directly by Infowave to network operators as a
complete solution suite to offer compelling products to its customers and
generate additional revenues. Network operators can acquire the Gateway in a
variety of flexible configurations including hosted and non-hosted models, and
shared value-added services revenue.
Product Summary
- ------------------------------------------------------------------------------------------------------------------------
Infowave Product Target Market Requirements / Features
- ------------------------------------------------------------------------------------------------------------------------
Symmetry Pro Individual Professional User Installs easily on user's desktop. Utilizes
secure AES encryption technology
- ------------------------------------------------------------------------------------------------------------------------
Mobile Messaging Companies with more than ten users Installs on the server with simple
Enterprise Edition administration, AES security encryption
- ------------------------------------------------------------------------------------------------------------------------
Mobile Messaging Companies with fewer than 10 users Installs on a single desktop within the
Workgroup Edition workgroup, no IT resources required
- ------------------------------------------------------------------------------------------------------------------------
Wireless Business Engine Large Corporations with a complete Installs with the server environment behind
wireless enterprise strategy. Fast, the corporate firewall. High security with
secure, reliable wireless access to MS Certicom 163-bit ECC algorithm & DESX
Exchange, Lotus Notes, and other encryption. Efficient data compression
corporate applications such as CRM and optimization and connection fault tolerance.
SFA tools.
- ------------------------------------------------------------------------------------------------------------------------
Mobile Operator Network Mobile Operators wanting to Hosted and non-hosted data gateway
Solution Suite increase revenues by offering configurations available. Rapid go-to-market
value-added wireless data services
for strategy with a full range of secure,
Infowave their customers, drive adoption
of new branded products. integrated
devices and increase mobile data activations.
- ------------------------------------------------------------------------------------------------------------------------
Distribution Channels
Resellers
Infowave entered into a worldwide reseller agreement with Compaq (now HP) in
April 2000. HP professional services organization has 65,000 highly skilled
professionals in over 200 countries that can bring Infowave's products into
their vast installed base of accounts. Infowave's relationship with HP
8
brings a global installation, integration and support infrastructure with the
Company having direct access to over 1,600 HP resellers. In March 2002, the
Company entered into the HP Strategic Alliance and Sales Agreement that builds
on previous sales, marketing and services agreements established between HP and
Infowave over the past two years. Under the terms of this agreement, HP and
Infowave will collaborate on a comprehensive marketing and communication program
and a sales engagement strategy designed to generate demand for software and
services. In addition to specific initiatives already underway, such as HP's
recent Wireless Enterprise Framework announcement, HP has agreed to make
commercially reasonable efforts to include certain Infowave software solutions
and documentation with certain HP product and service offerings.
The HP Strategic Alliance and Sales Agreement also contains various other terms
intended to expand and strengthen the relationship between the two companies.
Infowave and HP have agreed to participate in certain co-development projects
for new technology solutions with Infowave providing HP with a volume pricing
incentive. Infowave will showcase HP products and services at promotional events
and will provide HP with the opportunity to deliver presentations at these
events. Infowave and HP will explore methods of developing additional
partnerships between their respective existing strategic relationships.
Any future revenue from HP will depend upon HP's success in reselling the
Company's products through its various sales channels and upon HP continuing to
resell such products. There can be no assurance, however, that this relationship
with HP will prove successful or will generate material revenues for the
Company. See "Risk Factors - Reliance on HP."
Infowave has developed an Authorized Partner Program for regional or specialty
channel partners. This standardized program is designed to allow the Company to
scale its relationships with many reseller partners and drive further revenue
opportunities and market penetration. Infowave resellers include Handango,
Rogers AT&T and MobilePlanet in North America and Airlan Data, Data Link and
Getronics NV in Europe. Any future revenue from these resellers will depend upon
their success in reselling the Company's products through their various sales
channels and upon these resellers continuing to resell such products. See "Risk
Factors - Reliance on Key Third-Party Relationships."
The Germany sales office was re-organized in July 2002 to form an independent
master value-added reseller ("MVAR") who is paid commissions for sales brought
in for the geographic region. There can be no assurance, however, that this new
relationship will prove successful or will generate material revenues for the
Company.
OEM and Embedded Partners
Infowave is working to establish Original Equipment Manufacturers ("OEM") and
bundling agreements with hardware manufacturers (device, server, infrastructure)
and enterprise software vendors (such as CRM, ERP, etc.). The intent is for
Infowave products and technology to be embedded for distribution and
installation with partner products.
Marketing Alliances
Infowave has entered into a select number of marketing alliances with carriers,
hardware companies, and other software companies. Marketing alliance partners do
not resell the Company's products, but rather engage in joint marketing
initiatives such as customer referrals, events, and direct mail activities that
create sales leads for Infowave. Infowave is engaged in marketing activities
with companies such as Microsoft, HP, T-Mobile, AT&T Wireless (US), Rogers AT&T
and Telus.
Competition
The emerging wireless marketplace is presenting a variety of choices in wireless
products that are required to satisfy the diverse needs of enterprises and their
different classes of mobile workers. Infowave has attempted to differentiate
itself by offering intelligent support for multiple devices, platforms,
networks, applications, and services with centralized management. Infowave
believes this approach will
9
allow enterprise customers to optimize choice while leveraging their existing
investments in hardware, software and training. Furthermore, Infowave has
attempted to provide enterprise-grade security and optimization along with
real-time access to both corporate applications and the Internet.
Proprietary Protection
Infowave's software solutions are protected by certain intellectual property
rights and by a combination of copyright, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to establish and
maintain its rights. Infowave has also applied for several patents in the United
States, which are currently in process. As part of its confidentiality
procedures, the Company generally enters into a non-disclosure and
confidentiality agreement with all its employees and each of its consultants and
specifically with any third-party that would have access to the source code for
the Company's software products. As well, the Company strictly limits access to
and distribution of its software in executable code form.
Infowave has trademarks for or has applied for a trademark for "Infowave,"
"Symmetry", "Wireless Business Engine", "Infowave Wireless Enabler", the "I
Design" design mark and the Circle within a Circle design. Infowave has Canadian
and U.S. copyrights for "Infowave for Exchange", "Infowave for the Net" and
"Symmetry".
However, there can be no assurance that the measures taken by the Company to
protect its intellectual property rights will adequately protect those rights.
See "Legal Matters".
Although Infowave believes it has the right to use all of the intellectual
property incorporated in its products, third parties may claim that the
Company's products violate their proprietary rights, including copyrights and
patents. If any such claims are made and found to be valid, the Company may have
to re-engineer its products or obtain licenses from third parties to continue
offering its products. Any efforts to re-engineer its products or obtain
licenses from third parties may not be successful and could substantially
increase the Company's costs and have a material adverse effect on the business,
financial condition and results of operations of the Company. See "Risk Factors
- - Intellectual Property Protection" and "Legal Matters".
Staff Headcount
As at December 31, 2002, the Company had a total of 41 full time staff with
approximately fifty percent engaged in research and development activities. The
Company's research and development employees are primarily software developers,
many with extensive experience in the wireless area. The Company currently
believes that there are sufficient available resources in the labour marketplace
to meet its short-term needs.
Risk Factors
In addition to the other information contained in this Annual Report, readers
should carefully consider the following risk factors that may have a material
adverse effect on the Company's business, financial condition or results of
operation.
History of Losses
The Company is not currently profitable and incurred operating losses from
continuing operations (which excludes the discontinued operations of the Imaging
Division) calculated in accordance with Canadian Generally Accepted Accounting
Principles of $9,763,740, $19,413,246 and $16,969,282 for the years ended
December 31, 2002, 2001 and 2000 respectively. The Company anticipates that its
expenses may increase as the Company continues to increase its research and
development, sales and marketing and
10
general and administrative expenses. The Company cannot predict if it will ever
achieve profitability, and if it does, it may not be able to sustain or increase
profitability. The auditor's report on the Company's 2002 consolidated financial
statements, comments which states that the financial statements are affected by
conditions and events that cast substantial doubt on the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustment that might result from the outcome of that uncertainty.
Wireless Industry Growth
There can be no assurance that the market for the Company's existing or proposed
wireless software products will grow, that firms within the industry will adopt
the Company's software products for integration with their wireless data
communications solutions, or that the Company will be successful in
independently establishing product markets for its wireless software products.
If the various markets in which the Company's software products compete fail to
grow, or grow more slowly than the Company currently anticipates, or if the
Company were unable to establish product markets for its new software products,
the Company's business, results of operation and financial condition would be
materially adversely affected.
Reliance on New Technologies
The wireless data communications market is characterized by rapidly changing
technology and evolving industry standards. Therefore, it is difficult to
predict the rate at which the market for the Company's wireless software
products will grow, if at all. If the market fails to grow, or grows more slowly
than anticipated, the Company will be materially adversely affected. Even if the
market does grow, there can be no assurance that the Company's products will
achieve commercial success. The Company may find itself competing in the market
for wireless mobile computing software against other companies with
significantly greater financial, marketing and other resources. Such competitors
may be able to institute and sustain price wars, or imitate the features of the
Company's wireless mobile computing software, thereby reducing prices and thus,
the Company's revenues and share of the market.
In addition, the Company's competitors may develop alternative technologies that
gain broader market acceptance than the Company's software solutions. As a
result, the life cycle of the Company's software solutions is difficult to
estimate. The Company may need to develop and introduce new products and
enhancements to its existing solutions on a timely basis to keep pace with
technological developments, evolving industry standards, changing customer
requirements and competitive technologies that may render its solution obsolete.
These research and development efforts may require the Company to expend
significant capital and other resources. In addition, as a result of the
complexities inherent in the Company's solutions, major enhancements or
improvements will require long development and testing periods. If the Company
fails to develop products and services in a timely fashion, or if it does not
enhance its products to meet evolving customer needs and industry standards,
including security technology, it may not remain competitive or it may sell its
solutions.
Product Improvements
The Company will be at risk if it is unable to continually upgrade and improve
its software products, or to develop new software products. The software
industry is characterized by a constant flow of new or improved products, which
quickly render existing software products obsolete. The Company's competitors
may develop technically superior and/or comparable products at the same or lower
priced software that would have a materially adverse effect on the Company.
Additional Financing
The Company may not have sufficient capital to fund its own operations without
raising additional capital, and/or implementing additional reductions in
expenses. Further reductions in expenses may negatively
11
impact the Company's ability to grow the business. No assurance can be given
that any additional financing required would be available, or that additional
financing will be available on terms that may be advantageous to existing
shareholders. Such financing, to the extent that it is available may result in
substantial dilution to shareholders. To the extent such financing is not
available, the Company may not be able to, or may be delayed in, continuing to
commercialize its software products and services.
Reliance on Microsoft
Some of the Company's wireless software products wirelessly enable the
functionality of Microsoft Exchange. Microsoft may make changes to its products
that would require Infowave to similarly make changes to its software to
maintain functionality. The Company is aware that Microsoft has developed its
own wireless functionality for Microsoft Exchange. There is no assurance that
the Company can maintain any required upgrades to its software to remain
relevant and competitive.
The Company announced in January 2003, that it will collaborate with Microsoft
to develop and market solutions for mobile network operators based on the
Windows Powered Microsoft mobile device platforms. There is no assurance that
this collaboration will be successful, or that material revenues will be
generated from the relationship.
Reliance on HP
The Company entered into a Strategic Alliance and Sales Agreement and a
Worldwide Reseller Agreement with HP on March 8, 2002. Under these agreements,
the Company's software is sold both as a stand-alone product and bundled with
HP's Proliant Servers, and iPAQnet Mobile Intranet and iPAQnet Mobile Email
Pocket PC. There is no assurance, however, that this relationship with HP will
prove to be successful or result in material revenues for the Company.
Management of Growth
The Company has had a history of expanding rapidly. This growth, as well as any
future growth, has placed a significant strain on the Company's resources. The
Company's ability to achieve and maintain profitability, if at all, will depend
on its ability to manage growth effectively, to implement and expand operational
and customer support systems, and to hire additional personnel. The Company may
not be able to augment or improve existing systems and controls or implement new
systems and controls to respond to any future growth. In addition, future growth
may result in increased responsibilities for management personnel, which may
limit their ability to effectively manage the Company's business.
Reliance on Key Personnel and Consultants
The Company is currently dependent upon its senior management, board of
directors and consultants, the loss of any of which may significantly affect the
performance of the Company and its ability to carry out the successful
development and commercialization of its software products and services. Failure
to retain management, directors and consultants or to attract and retain
additional key employees with necessary skills could have a material adverse
impact upon the Company's growth and profitability. The Company may be required
to recruit additional software development personnel, and expand its sales force
and customer support functions as well as train, motivate and manage its
employees. The Company's ability to assimilate new personnel will be critical to
its performance. Competition for qualified software development personnel and
other professionals is expected to increase. There can be no assurance that the
Company will be able to recruit the personnel required to execute its programs
or to manage these changes successfully.
12
Reliance on Key Third-Party Relationships
The Company relies on key third-party relationships, including its relationships
with resellers and OEMs, for marketing and sales of its software products. These
third parties are not within the control of the Company, may not be obligated to
purchase software products from the Company and may also represent and sell
competing software products. The loss of any of these third-party relationships,
the failure of such parties to perform under agreements with the Company or the
inability of the Company to attract and retain new resellers or OEMs with the
technical, industry and application experience required to market and sell the
Company's software products successfully could have a material adverse effect on
the Company.
Competition
A number of competitors have substantially greater financial, technical and
marketing resources than the Company. In addition, the market for wireless
mobile computing software products continues to develop, and additional
competitors with substantially greater financial, technical and marketing
resources than the Company may enter the market and competition may intensify.
Current or future competitors may develop software products that are superior to
the Company's software products or achieve greater market acceptance.
Product Defects
The Company's complex software products may contain undetected errors or defects
when first introduced or as new versions are released. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new software products after commencement of
commercial shipments resulting in product recalls and market rejection of the
Company's software products and resulting in damage to the Company's reputation,
as well as lost revenue, diverted development resources and increased support
costs.
Intellectual Property Protection
The Company considers its software products and trademarks to be of value and
important to its business. The Company relies principally upon a combination of
copyright, trademark and trade secret laws, non-disclosure agreements and other
contractual provisions to establish and maintain its rights. The Company has
several patent applications pending. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or obtain and
use information that the Company regards as proprietary. There can be no
assurance that the steps taken by the Company to protect its proprietary
information will prevent misappropriation of such information. The cost of
litigation necessary to enforce the Company's proprietary rights may be
prohibitive. Such steps may not preclude competitors from developing confusingly
similar brand names or promotional materials or developing software products and
services similar to those of the Company.
Although the Company believes that it has the right to use all of the
intellectual property incorporated in its software products, third parties may
claim that the Company's software products violate their proprietary rights,
including copyrights and patents. If any such claims are made and found to be
valid, the Company may have to reengineer its software products or obtain
licenses from third parties to continue offering its software products. Any
efforts to re-engineer its' software products or obtain licenses from third
parties may not be successful and could substantially increase the Company's
costs and have a material adverse effect on the business, financial condition
and results of operations of the Company.
Foreign Exchange Rate Exposure
The majority of the Company's revenue is denominated in U.S. dollars. The
Company does not engage in currency hedging activities to limit the risks of
exchange rate fluctuations. As a result, changes in the
13
relative value of the U.S. dollar to the Canadian dollar and other foreign
currencies will affect the Company's revenues and operating margins. The impact
of future exchange rate fluctuations between the U.S. dollar and the Canadian
dollar or other foreign currencies on revenues and operating margins cannot be
accurately predicted and could have a material adverse effect on the Company.
Enforcement of Civil Liabilities
The Company is a corporation incorporated under the laws of British Columbia,
Canada. A number of the Company's directors and professional advisors are
residing in Canada or outside of the U.S. All or a substantial portion of the
assets of such persons are or may be located outside of the U.S. It may be
difficult to effect service of process within the United States upon the Company
or upon such directors or professional advisors or to realize in the U.S. upon
judgments of U.S. courts predicated upon civil liability of the Company or such
persons under U.S. federal securities laws. The Company has been advised that
there is doubt as to whether Canadian courts would (i) enforce judgments of U.S.
courts obtained against the Company or such directors or professional advisors
predicated solely upon the civil liabilities provisions of U.S. federal
securities laws, or (ii) impose liability in original actions against the
Company or such directors and professional advisors predicated solely upon such
U.S. laws. However, a judgment against the Company predicated solely upon civil
liabilities provisions of such U.S. federal securities laws may be enforceable
in Canada if the U.S. court in which such judgment was obtained has a basis for
jurisdiction in that matter that would be recognized by a Canadian court.
Potential Fluctuations in Quarterly Financial Results
The Company's financial results vary from quarter to quarter based on factors
such as the timing of significant orders and contract completions and the timing
of new product introductions. Any significant fluctuation in revenue could
materially adversely affect the Company.
Change in Sales Strategy and Reliance on a Small Number of Customers
A significant proportion of the Company's revenues are from a small number of
customers with large orders. For 2002, revenue from three customers represented
approximately 63% of revenues. During 2001, four customers accounted for
approximately 61% of revenues. The Company has focused on larger Fortune 500
opportunities that have the potential for significant sales. Visibility for the
timing of closing such deals is difficult, and the Company may experience swings
in revenue, as single large opportunities can materially affect the revenue
results of any quarter, and it is difficult to accurately predict revenue timing
with these opportunities.
Introduction of New Products and Sales Mixture
Infowave launched a series of new products during the year to broaden and appeal
to virtually every segment of the business market: Symmetry Pro, Symmetry Pro
Enterprise, Symmetry Pro Workgroup and Symmetry Mobile Application Gateway. It
is too early at this time to determine how the market will accept the products
or whether a significant amount of revenue will be generated from these
products.
Certain Shareholders May Exercise Control Over Matters Voting Upon by the
Shareholders
Certain of the Company's officers, directors and entities affiliated with the
Company together beneficially owned a significant portion of the Company's
outstanding common shares as of December 31, 2002. While these shareholders do
not hold a majority of the Company's outstanding common shares, they may be able
to exercise significant influence over matters requiring shareholder approval,
including the election of directors and the approval of mergers, consolidations
and sales of the Company's assets. This may prevent or discourage tender offers
for the Company's common shares.
14
Possible Market Volatility
The market price for the Common Shares may be subject to significant volatility.
Quarterly operating results of the Company or of other companies involved in the
wireless industry specifically or technology industries generally, changes in
general conditions in the North American economy, the financial markets in North
America, failure to meet the projections of securities analysts or other
developments affecting the Company or its competitors could cause the market
price of the Common Shares to fluctuate substantially. In addition, in recent
years, the stock market has experienced extreme price and volume fluctuations.
This volatility has had a significant effect on the market prices of securities
of many companies for reasons unrelated to their operating performance.
Affects of Restructuring Activities
Beginning in the prior fiscal year and continuing into the past fiscal year, the
Company reduced its workforce from approximately 122 to 41 employees. There have
been and may continue to be substantial costs associated with this workforce
reduction related to severance and other employee-related costs and the
Company's restructuring plan may yield unanticipated consequences, such as
attrition beyond its planned reduction in workforce. This workforce reduction
has placed an increased burden on the Company's administrative, operational and
financial resources and has resulted in increased responsibilities for each of
its management personnel. As a result, the Company's ability to respond to
unexpected challenges may be impaired and it may be unable to take advantage of
new opportunities.
In addition, many of the employees who were terminated possessed specific
knowledge or expertise, and that knowledge or expertise may prove to have been
important to the Company's operations. In that case, their absence may create
significant difficulties. Further, the reduction in workforce may reduce
employee morale and may create concern among potential and existing employees
about job security at the Company, which may lead to difficulty in hiring and
increased turnover in its current workforce, and divert management's attention.
In addition, this headcount reduction may subject the Company to the risk of
litigation, which could result in substantial costs to it and could divert
management's time and attention away from business operations. Any failure by
the Company to properly manage this rapid change in workforce could impair its
ability to efficiently manage its business to maintain and develop important
relationships with third-parties and to attract and retain customers. It could
also cause the Company to incur higher operating costs and delays in the
execution of its business plan or in the reporting or tracking of its financial
results.
Item 2: Properties
The Company owns no real property. Pursuant to a lease agreement entered into on
July 1, 2002 which expires June 30, 2008, the Company currently leases 12,416
square feet of office space in Burnaby, British Columbia, which the Company uses
as its corporate, administrative, and research and development offices.
Pursuant to a lease agreement that expires March 31, 2005, the Company leases
7,329 square feet of office space in Bothell, Washington, the former sales and
marketing office of the Company, which the Company currently sublets to a third
party.
Item 3: Legal Proceedings
The Company received a letter dated September 17, 2001 from Glenayre
Electronics, Inc. ("Glenayre") informing the Company that Glenayre requires
indemnity under certain agreements Infowave has with Glenayre. A statement of
claim was received on June 24, 2002 from Glenayre seeking payment of legal and
other expenses for approximately $658,000 in connection with a previous settled
lawsuit between Glenayre and another unrelated third party. The Company does not
believe there was any infringement of intellectual property rights of any third
party. The dispute was settled on October 30, 2002, where
15
Infowave agreed to pay Glenayre $130,000 in cash plus warrants to purchase up to
20,000 Infowave common shares, exercisable at a price of CDN $0.22 per common
share for two years from the date of issue, and Glenayre has agreed to consent
to the dismissal of its claim.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 2002.
PART II
Item 5: Market for Registrants Common Equity and Related Stockholder Matters
Common Shares
The Common Shares of the Company are currently traded on the TSX (formerly The
Toronto Stock Exchange) (the "TSX") under the symbol "IW". The Common Shares
were listed on the TSX on October 14, 1999. Prior to listing on the TSX, the
Common Shares were listed on the Vancouver Stock Exchange (the "VSE") on October
14, 1997 and were de-listed from the VSE on November 26, 1999. The Common Shares
do not currently trade on any exchange in the United States. The following table
sets forth the high and low closing sale prices, as reported by the TSX, of the
Common Shares for the calendar quarters indicated.
Price Range Of Common Shares
High Low
(CDN$) (CDN$)
------ ------
2001
----
Q1: Jan - Mar 7.90 2.40
Q2: Apr - Jun 4.35 2.05
Q3: Jul - Sep 2.60 0.36
Q4: Oct - Dec 1.86 0.38
2002
----
Q1: Jan - Mar 1.99 0.45
Q2: Apr - Jun 0.60 0.17
Q3: Jul - Sep 0.22 0.12
Q4: Oct - Dec 0.50 0.10
As of March 26, 2003, there were 66,659,578 Common Shares issued and
outstanding. At such date, there were approximately 141 shareholders of record,
but this number includes those shares held in street or nominee names.
Dividends
The Company has not paid any dividends to date and it does not foresee the
declaration or payment of any dividends on the Common Shares in the near future.
Any decision to pay dividends on the Common Shares will be made by the board of
directors on the basis of the Company's earnings, financial requirements and
other conditions existing at such future time.
Equity Compensation Plan
The following table provides information about the Company's common stock that
me be issued upon the exercise of options and rights under all of the Company's
existing equity compensation plans as of December 31, 2002.
16
- ---------------------------------------------------------------------------------------------------------------------
Number of securities Number of securities
to be issued upon Weighted-average remaining available for
exercise of exercise price of future issuance under
Plan Category outstanding options, outstanding options, equity compensation
warrants and rights warrants and rights plans (excluding
warrants and rights warrants and rights securities reflected
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans 5,255,183 $1.78 3,022,531
approved by security holders
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans not - nil - - nil - - nil -
approved by security holders
- ---------------------------------------------------------------------------------------------------------------------
Total 5,255,183 $1.78 3,022,531
- ---------------------------------------------------------------------------------------------------------------------
Private Placement
On December 9, 2002, the Company issued of 8,500,000 units (the "Units") at a
price of $0.13 (Cdn $0.20) per Unit for gross proceeds of $1,078,065 (Cdn
$1,700,000) to persons outside the United States. Each Unit consisted of one
common share and one half of one common share purchase warrant of the Company.
Each whole warrant entitles the holder to acquire one common share for a period
of two years from the closing date at a price of $0.15 (Cdn $0.24) per common
share. The common shares and warrants comprising the Units are subject to a
four-month hold period. The agent for the offering was paid a cash commission
equal to 7.5% of the gross proceeds from the offering and 850,000 agent's
warrants (the "Agent's Warrants"). Each Agent's Warrant entitles the agent to
acquire one common share for a period of two years from the closing at a price
of $0.15 (Cdn $0.24) per common share. In addition, Infowave issued 185,000
Units to the agent as a corporate finance fee in connection with the offering.
As of December 31, 2002, none of the share purchase warrants or Agents' warrants
had been exercised. These securities were issued in reliance upon the exclusion
from registration available under Regulation 5 of the Securities Act of 1933, as
amended.
Convertible Loan/Credit Facility
The Company has entered into a convertible loan agreement dated March 8, 2002
with HP (the "HP Loan Agreement"). Under the terms of the HP Loan Agreement, HP
has made available to the Company a revolving loan (the "HP Loan") of up to $2
million expiring on March 8, 2005. The principal amount outstanding from time to
time under the HP Loan bears interest at the Canadian prime rate plus 3.25% and
may be converted into Common Shares at a price of $1.00 per share, subject to
adjustment in certain circumstances. The HP Loan is secured by substantially all
of the Company's assets, excluding intellectual property. The Company has also
granted HP a non-exclusive licence to certain aspects of the Company's
intellectual property in order to ensure that the Company fulfils its
obligations under the HP Strategic Alliance and Sales Agreement and other
agreements with HP. The Company may terminate the HP Loan Agreement at any time
provided that no amounts are outstanding or payable under the HP Loan. As at the
date of filing, the Company has not borrowed any amount under the HP Loan.
Under the terms of the HP Loan Agreement, the Company may borrow amounts from
time to time provided that certain working capital conditions are met. Until
December 31, 2002, the Company may draw down amounts not to exceed 150% of the
total amount of the Company's cash, cash equivalents and net accounts receivable
from HP. During the remainder of the term of the HP Loan, the Company may draw
down amounts not to exceed the Company's working capital (as defined in the HP
Loan Agreement) from time to time.
17
So long as the HP Loan Agreement remains in effect or the HP Strategic Alliance
and Sales Agreement remains in effect, the Company shall permit HP to have an
observer attend each meeting of the Board of Directors of the Company. In
addition, so long as the HP Loan Agreement remains in effect or the HP Strategic
Alliance and Sales Agreement remains in effect, the Company shall not: (i) issue
any equity or debt security to, or incur any other indebtedness to, any of Dell,
Hewlett Packard, IBM, Sun, Palm or Handspring (each, a "Specified Person"); (ii)
issue or invest in any equity or debt security to form, create or participate in
any partnership, joint venture or other corporate business enterprise with any
Specified Person; (iii) allow any director, officer, employee, agent or other
representative of any Specified Person to attend meetings of the Company's Board
of Directors or any committee thereof or any advisory committee as a
non-director representative; and (iv) vote or cause to be voted any of its
securities having the power to vote in the election of directors in favour of
the election of any director, officer, employee, agent or other representative
of a Specified Person to the Company's Board of Directors.
Exchange Controls
Canada has no system of exchange controls. There are no exchange restrictions on
borrowing from foreign countries or on the remittance of dividends, interest,
royalties and similar payments, management fees, loan repayments, settlement of
trade debts, or the repatriation of capital. However, any dividends remitted to
U.S. Holders, as defined below, will be subject to withholding tax. See the
heading "Taxation" below.
Taxation
Canadian Federal Income Tax Considerations
The following summarizes certain Canadian federal income tax considerations
generally applicable to the holding and disposition of Common Shares by a holder
(a) who, for the purposes of the Income Tax Act (Canada) (the "Tax Act"), is not
resident in Canada, deals at arm's length with the Company, is not affiliated
with the Company, holds the Common Shares as capital property, is not a
"financial institution" and does not use or hold the Common Shares in the course
of carrying on, or otherwise in connection with, a business in Canada, and (b)
who, for the purposes of the Canada-United States Income Tax Convention (the
"Treaty"), is a resident of the United States, has never been a resident of
Canada, and has not held or used (and does not hold or use) Common Shares in
connection with a permanent establishment or fixed base in Canada. Each such
holder who meets all such criteria in clauses (a) and (b) is referred to herein
as a "U.S. Holder." Except as otherwise expressly provided, the summary does not
deal with special situations, such as particular circumstances of traders or
dealers, limited liability companies, tax-exempt entities, insurers, financial
institutions (including those to which the mark-to-market provisions of the Tax
Act apply), or otherwise.
This summary is based on the current provisions of the Tax Act and the
regulations there under, all proposed amendments to the Tax Act and regulations
publicly announced by the Minister of Finance (Canada) to the date hereof, the
current provisions of the Treaty and the current administrative practices of the
Canada Customs and Revenue Agency, formerly known as Revenue Canada. It has been
assumed that all currently proposed amendments will be enacted as proposed and
that there will be no other relevant change in any governing law, the Treaty or
administrative policy, although no assurance can be given in these respects.
This summary does not take into account provincial, U.S. or other foreign income
tax considerations, which may differ significantly from those discussed herein.
This summary is not exhaustive of all possible Canadian income tax consequences.
It is not intended as legal or tax advice to any particular holder and should
not be so construed. The tax consequences to any particular holder will vary
according to the status of that holder as an individual, trust, corporation or
member of a partnership, the jurisdictions in which that holder is subject to
taxation and, generally, according to that holder's particular circumstances.
Each holder should consult the holder's own tax advisors with respect to the
income tax consequences applicable to the holder's own particular circumstances.
18
Dividends
Dividends deemed both paid or credited to U.S. Holder by the Company are subject
to Canadian withholding tax. Under the Treaty, the rate of withholding tax on
dividends paid or credited to a U.S. Holder is generally limited to 15% of the
gross dividend (or 5% in the case of corporate shareholders owning at least 10%
of our voting shares).
Disposition
A U.S. Holder is not subject to tax under the Tax Act in respect of a capital
gain realized on the disposition of a Common Share in the open market unless the
share is "taxable Canadian property" to the holder thereof and the U.S. Holder
is not entitled to relief under the Treaty.
A Common Share will be taxable Canadian property to a U.S. Holder if, at any
time during the 5 year period ending at the time of disposition, the U.S. Holder
or persons with whom the U.S. Holder did not deal at arm's length (or the U.S.
Holder together with such persons) owned, or had options, warrants or other
rights to acquire, 25% or more of our issued shares of any class or series. In
the case of a U.S. Holder to whom Common Shares represent taxable Canadian
property, no tax under the Tax Act will be payable on a capital gain realized on
a disposition of such shares in the open market by reason of the Treaty unless
the value of such shares is derived principally from real property situated in
Canada. The Company believes that the value of our Common Shares is not derived
principally from real property situated in Canada, and that no tax will
therefore be payable under the Tax Act on a capital gain realized by a U.S.
Holder on a disposition of Common Shares in the open market.
Item 6: Selected Financial Data
Set forth below is certain selected financial information of the Company for
each year in the five-year period ended December 31, 2002. The selected annual
financial information is derived from the Company's audited financial
statements. Annual sales for years 1999 and 1998 relate only to the Wireless
Division and exclude the Imaging Division. The selected financial information
for the eight quarters prior to December 31, 2002 is derived from the unaudited
quarterly financial statements of the Company. The Company's financial
statements are expressed in United States dollars and prepared in accordance
with Canadian Generally Accepted Accounting Principles ("GAAP"), which are not
materially different from United States GAAP except as explained in note 15 of
the financial statements included in "Item 8. Financial Statements and
Supplementary Data." The information below should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" along with the financial statements and notes thereto.
- ----------------------------------------------------------------------------------------------------------------------
Canadian GAAP Years Ended December 31 (audited)
- ----------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------------
Income Statement Data
Sales $ 170,911 $ 355,001 $ 1,513,557 $ 3,189,253 $ 1,821,041
Loss for the year 1,206,266 3,288,251 17,988,868 20,860,436 9,716,065
Loss per share 0.09 0.21 0.90 0.90 0.18
Balance Sheet Data
Total assets 6,687,941 8,054,492 12,445,349 13,657,675 4,158,757
Long term obligations - - - - -
Share capital 6,798,707 12,526,949 35,148,040 42,447,141 56,539,360
Cash dividends declared per - - - - -
Common Share
- ----------------------------------------------------------------------------------------------------------------------
19
- ----------------------------------------------------------------------------------------------------------------------
United States GAAP
- ----------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------------
Income Statement Data
Sales $ 176,509 $ 355,001 $ 1,513,557 $ 3,189,253 $ 1,821,041
Loss for the year 1,440,052 3,344,326 18,198,480 20,986,922 9,716,065
Loss per share 0.12 0.21 0.90 0.79 0.17
Balance Sheet Data
Total assets 6,546,596 8,020,392 12,445,349 13,657,675 4,158,757
Long term obligations - - - - -
Share capital $ 7,416,454 $13,325,591 $36,192,899 $43,618,486 $57,710,705
Cash dividends declared per - - - - -
Common Share
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Canadian GAAP Quarter Ended (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2001 2001 2001 2002 2002 2002 2002
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- ----------------------------------------------------------------------------------------------------------------------------------
Income Statement
Sales $ 857,764 $ 873,340 $ 923,282 $ 534,867 $ 325,261 $ 517,977 $ 676,415 $ 301,388
Loss for the period 4,820,124 6,006,086 5,208,856 4,825,370 3,376,025 4,234,514 1,069,608 1,035,918
Loss per share 0.22 0.26 0.22 0.21 0.09 0.07 0.02 0.02
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
United States GAAP Quarter Ended (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2001 2001 2001 2002 2002 2002 2002
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- ----------------------------------------------------------------------------------------------------------------------------------
Income Statement
Sales $ 857,764 $ 873,340 $ 923,282 $ 534,867 $ 325,261 $ 517,977 $ 676,415 $ 301,388
Loss for the period 4,943,854 6,006,086 5,208,856 4,828,126 3,376,025 4,234,514 1,069,608 1,035,918
Net loss per share 0.22 0.26 0.22 0.21 0.09 0.07 0.02 0.02
- ----------------------------------------------------------------------------------------------------------------------------------
Item 7: Managements' Discussion and Analysis of Financial
Condition and Results of Operations
Investors should read the following in conjunction with the audited financial
statements and notes thereto included in Item 8 of this Annual Report and the
quarterly and selected financial information included in Item 6.
Corporate Summary
The Company entered into the Compaq (now HP) Strategic Alliance and Sales
Agreement in March 2002. In conjunction with the expanded business relation, HP
agreed to provide Infowave with up to $2 million in the form of a revolving
loan, convertible at HP's option into Common Shares of the Company at $1.00 per
share.
George Reznik joined Infowave as Chief Financial Officer on March 1, 2002. The
economic environment during 2002 was very challenging as evidenced by the
turmoil in the financial markets and the continued sluggishness in the IT
spending environment. In order to preserve capital, the Company restructured its
business during the 2002-Q2 to significantly reduce its cost structure and
increase operational efficiencies.
Thomas Koll was appointed Chairman of the Board on April 24, 2002. At the same
time, a newly named executive management structure was formed in April 2002
called the Office of the President, charged with
20
the day-to-day operations of the Company. The members of this group comprise
George Reznik (CFO), Sal Visca (CTO), and Jim McIntosh (Director).
The Company reduced total headcount and reduced required office space
accordingly. The sales office in Germany was closed and transitioned to become
an independent Master Reseller for the Company. The office in Bellevue,
Washington was closed and the office space in the Burnaby, Canada office was
significantly reduced.
Prior to the restructuring, 2002-Q1 operating expenses net of depreciation &
amortization were $3.2 million. A total restructuring charge of $1,415,380 was
recorded during three months ended June 30, 2002. After the restructuring,
operating expenses net of depreciation & amortization were reduced by 66% to
$1.1 million for 2002-Q4. The Company continues to manage operating costs very
prudently.
In July 2002, Bill Tam was appointed Executive Vice President of Sales and
Marketing, and member of the Office of the President. Mr. Tam leads the
company's sales, business development and marketing initiatives.
While Infowave made progress over the past 2002 fiscal year regarding its new
Network Operator business initiative, expanded product offering and prudent
expense management, revenue declined for the year ended December 31, 2002 over
the prior year.
Management believes there are several events that will increase market growth
and acceptance of wireless solutions in 2003. These includes the commercial
launch of 2.5G and 3.0G networks, and general availability of new integrated
wireless devices such as the Handspring Treo and `smartphone' devices from
several vendors. These new devices and faster networks will provide the end-user
with more service options and functionality than have been previously available.
The Company has launched several new products to appeal to a broader range of
the wireless data market. Despite these trends, management is aware of revenue
risks associated with an emerging market. Revenue targets could be negatively
affected by delays in the deployment of such networks, changes in technologies
and consumer preferences. Management also recognizes that, as the market for
wireless solutions grows, new entrants and competitors will emerge.
Quarter Ended December 31, 2002 Compared to Quarters Ended December 31, 2001 and
September 30, 2002
Revenue for the fourth quarter of 2002 was $301,388, a decrease of 44% from
$534,867 for the same period in 2001, and a decrease of 55% from $676,415 for
the third quarter of 2002. Management believes a largely weaker global economy
continues to restrict general corporate year on year spending on IT initiatives.
Many companies require implementation of pilot project trials prior to making a
significant purchase of wireless technologies. This results in extended sales
cycles and greater uncertainty for timing the closing of deals. Although the
Company was successful in converting a major enterprise customer pilot project
into a large purchase in the previous quarter, there were a smaller number of
conversions during the fourth quarter with many customers extending their trials
of Infowave's software solution.
The Company cannot anticipate when pilots may convert to sales and there is a
limited history to judge the market's acceptance of the newly launched Symmetry
Pro products. Revenues for a given quarter are difficult to estimate and may
swing materially from each period.
Gross margins for the fourth quarter were 87%, compared to 87% in the comparable
period in 2001, and 67% in the third quarter of 2002. Gross margins will
fluctuate depending on the product revenue mix and on the sales of third party
products.
Research and development ("R&D") expenses were $357,036, a 62% decrease from
$933,469 in the fourth quarter of 2001, and a 17% decrease from $430,822 in the
third quarter of 2002. Reductions in R&D expense from the fourth quarter of 2001
to the fourth quarter of 2002 were achieved through headcount and contract
personnel reductions. The Company has focussed R&D efforts on projects that, in
its opinion, had the greatest potential to positively impact revenue in the
short to mid-term.
21
Sales and Marketing ("S&M") expenses were $453,498 a 74% decrease from
$1,749,265, in the fourth quarter of 2001, and a 24% decrease from $597,865 in
the third quarter of 2002. Reductions in S&M expenses were achieved through
headcount reductions as well as significantly reduced expenses related to
marketing, advertising and other public relations activity where the Company did
not believe that, in the short term, such investments would result in a
commensurate increase in revenue.
General & Administration ("G&A") expenses were $321,600, a 70% decrease from
$1,072,797 the fourth quarter of 2001, and a 17% decrease from $386,442 in the
prior quarter. Year to year reduction in G&A expenses were largely attributable
to a reduced number of personnel.
Depreciation and amortization costs totaled $165,609 in the fourth quarter of
2002 compared to $483,152 in the fourth quarter of 2001 and $273,998 in the
third quarter of 2002. The year-over-year trend decrease is attributable to
reduced capital asset acquisitions during 2002.
Interest and other income for the fourth quarter of 2002 was $11,113 compared to
$12,610 in the fourth quarter of 2001 and $13,623 in the third quarter of 2002.
Fluctuations between this quarter and prior quarters are attributable to changes
in cash and short-term investment balances as well as to a decrease in interest
rates offered on short-term investments.
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Total revenue for the year ended December 31, 2002 was $1,821,041 representing a
decline of 43% from $3,189,253 in 2001. Included with 2001 were amounts for
contract services of approximately $570,000 derived under contract agreement
with Intel, for which no revenues were generated for during 2002.
Three customers accounted for approximately 63% of 2002 revenue, compared with
four customers accounting for 61% of 2001 revenue.
Approximately 55% of the Company's 2002 revenue was from customers in the United
States, 14% from customers in Canada and 31% from customers in Europe. This
compares to 71% from the United States, 26% from Canada and 3% from Europe in
2001. The Company does not currently experience any revenue fluctuations on a
seasonal basis.
Gross margins for the current year were 78%, compared to 87% in 2001.
Total operating expenses (comprised of research and development, sales and
marketing, administration and excludes restructuring and depreciation charges)
for 2002 were $8,377,072 compared to $19,101,409 for 2002. Total operating
expenses excluded restructuring charges incurred in the year of $1,415,380 for
2002 and $1,253,707 for 2001. The Company's expense rate was significantly
higher in the first half of 2002, which was prior to the implementation of a
cost-reduction initiative. At the end of the year, company headcount was 41,
compared to 122 at the end of 2001.
In 2002, the Company charged restructuring costs of $1,415,380 related to the
expense reduction initiative commencing early 2002 as described earlier. This
included employee severance payments to 49 individuals of $354,834, lease
termination costs of $282,793 related to the Bellevue, WA office and write downs
of fixed assets of $777,753.
Research & Development ("R&D") expenses were $2,505,329, a decrease of 54% from
$5,394,684 in 2001. The decrease in total R&D expense is primarily a result of
reductions in R&D expense in the latter half of the year were achieved through
headcount reductions and reductions in the amounts spent on contract personnel,
as the Company focussed R&D efforts on projects that, in its opinion, had the
greatest potential to positively impact revenue in the short to mid-term.
Sales & Marketing ("S&M") expenses were $3,855,068, a 59% decrease from
$9,298,149 in 2001. The decrease in total S&M expense is primarily due to
headcount reductions, reductions in marketing, advertising and other public
relations programs over the latter half of the year.
22
General & Administrative ("G&A") expenses were $2,016,675, a 54% decrease from
$4,408,576 in 2001. Cost savings were achieved from reductions in headcount on a
year-over-year basis.
Depreciation and amortization costs totaled $1,383,675 in 2002 compared to
$1,831,301 in 2001. The year-over-year decrease is attributable to a lack of
capital asset acquisitions during the year.
Interest and other income for 2002 was $47,675 compared to $258,792 in 2001. The
reduction in income is attributable to a decline in cash and short-term
investment balances as well as to a decrease in interest rates offered on
short-term investments.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Total revenue for the year ended December 31, 2001 was $3,189,253, an increase
of 111% from $1,513,557 in 2000. In fiscal 2000, approximately 57% of revenue
was derived under an agreement with Intel. This contribution declined throughout
2001 and comprised 18% of full-year revenue. By the fourth quarter of 2001, it
represented 4%. Not including the Intel revenue, the Company's core business
grew by 300%.
In addition to the revenue obtained from Intel, three other customers accounted
for greater than 10% of 2001 revenue. In total, these four customers accounted
for 61% of 2001 revenue. No single customer accounted for greater than 20% of
revenues. This compares to 2000, where sales to Intel represented 57% of
revenue.
71% of the Company's 2001 revenue was from customers in the United States, 26%
from customers in Canada and 3% from customers in Europe. This compares to 96%
from the United States, 4% from Canada and 0% from Europe in 2000. The Company
does not currently experience any revenue fluctuations on a seasonal basis.
Gross margins for the year were 87%, compared to 80% in 2000. During 2001, the
Company reclassified sales commissions as costs of goods sold. Previous year
comparisons are restated to reflect this change. The Company also reduced its
sales commission structure in 2001, resulting in increased margins in 2001
compared to 2000. Management expects that gross margins will fluctuate between
80% and 85%, depending on the revenue mix.
Total operating expenses (comprised of research and development, sales and
marketing and administration) for 2001 were $19,101,409 compared to $17,484,802,
which included a one-time $4 million branding and advertising campaign in 2000.
The Company's expense rate was significantly higher in the first half of 2001,
which was prior to the implementation of a cost-reduction initiative. At
mid-year, company headcount peaked at 192, compared to 122 at the end of 2001
and 147 at the end of 2000. Therefore the Company believes that quarterly
comparisons as described above, are more relevant and can be better relied upon
as a future predictor of expense levels.
R&D expenses were $5,394,684, an increase of 55% from $3,487,624 in 2000. Total
R&D headcount was 55 at December 31, 2001, compared to 67 at December 31, 2000.
The increase in total R&D expense is primarily a result of increased headcount
and associated expenses in the first half of 2001, which peaked at 89 at the end
of the first quarter and was 85 at the end of the second quarter. Reductions in
R&D expense in the latter half of the year were achieved through headcount
reductions and reductions in the amounts spent on contract personnel, as the
Company focussed R&D efforts on projects which, had the greatest potential to
positively impact revenue in the short to mid-term.
S&M expenses were $9,298,149, a 17% decrease from $11,183,483 in 2000. A
one-time marketing and branding campaign of approximately $4 million impacted
expenses in 2000. Excluding this expense, S&M expenses increased approximately
29%. Total S&M headcount was 52 at December 31, 2001, compared to 56 at December
31, 2000. The increase in expenses was attributable to headcount additions in
the first half of 2001, which peaked at 82 at June 30, 2001. Expenses also
increased as a result of expansion into Europe through the opening of offices in
London, England and Munich, Germany. These increased
23
expenditures were partially offset in the latter half of the year through
headcount reductions and reductions in marketing, advertising and other public
relations programs.
G&A expenses were $4,408,576, a 57% increase from $2,813,695 in 2000. Total G&A
headcount was 15 at December 31, 2001, compared to 24 at December 31, 2000. Cost
savings achieved from reductions in headcount on a year-over-year basis was
offset by the addition of a US-based Chief Executive Officer and increased
executive compensation. Salary and other expense for G&A totalled $1.9 million
in 2001 compared to $0.8 million in 2000. G&A expenses also increased as a
result of increased professional fees resulting from various corporate
initiatives, including the filing of several patent applications.
In 2001, the Company charged restructuring costs of $1,253,707 related to the
expense reduction initiative commencing mid-2001 as described earlier. This
included employee severance payments to 57 individuals of $497,442, lease
termination costs of $468,680 related to the Bothell, WA office and write-downs
of unrecoverable leasehold improvements of $287,585, primarily to the Bothell,
WA office.
Depreciation and amortization costs totalled $1,831,301 in 2001 compared to
$700,045 in 2000. The year-over-year increase is attributable to capital asset
acquisitions during the year.
Interest and other income for 2001 was $258,792 compared to $713,365 in 2000.
The reduction in income is attributable to a decline in cash and short-term
investment balances as well as to a decrease in interest rates offered on
short-term investments. The company also charged $1,705,982 of interest and
financing costs during the year, primarily consisting of amortization of the
fair value of warrants granted as compensation for the credit facility as
described in Note 8(d)(iii) to the financial statements and interest costs
associated with the utilization of the credit facility.
Liquidity and Capital Resources
During 2002, the Company raised net funds of $1,031,657 through offerings of its
equity securities, net of issue costs.
The Company used $7,333,750 in operations during 2002, primarily due to the
$9,716,065 loss from continuing operations.
Net cash for investing activities was $133,885, which largely consisted of
nominal capital expenditures during the year.
At December 31, 2002, the Company's cash, cash equivalents and short-term
investments totalled $3,111,543. Included in this total amount is security of
$150,000 held in short term investments to support a lease obligation. Also
included in this total amount is $350,000 being held as allocated funds for
potential severance, as related to previously initiated business restructuring
during the current year. The Company does not engage in any foreign exchange or
other hedging activities, and is not a counter party to any derivative
securities transactions.
At December 31, 2002, the Company held accounts receivable of $394,712 net of
allowances for doubtful accounts of $67,125.
In conjunction with the signing of a Strategic Partnership and Sales Agreement
in March, the Company entered into a convertible loan agreement with HP (as
previously discussed). Under this convertible loan agreement, HP will provide
Infowave with a convertible revolving loan of up to $2 million. The principal
amount outstanding under the loan may be converted into Common Shares at a price
of $1.00 per share, at any time up to March 8, 2005, subject to adjustment in
certain circumstances. Infowave may draw down amounts under the loan at anytime
provided that certain standard working capital conditions are met. The principal
amount outstanding bears interest at the prime rate plus 3.25%. Certain assets
of Infowave, excluding its intellectual property, secure the convertible loan.
Infowave has also granted HP the right to have observers attend meetings of the
Board of Directors.
24
The Company has entered into lease agreements for premises and services. These
leases have been treated as operating leases for accounting purposes. The
approximate annual payment commitments for the next following years are:
$495,155 (2003), $313,211 (2004), $217,568 (2005), $185,687 (2006) and $278,530
(after 2006).
During the year ended December 31, 2002, the Company made operating lease
payments totalling approximately $683,000 (2001 - $829,000; 2000 - $702,000).
The Company may also encounter opportunities for acquisitions, or other business
initiatives that require significant cash commitments, or unanticipated problems
or expenses that could result in a requirement for additional cash. There can be
no assurance that additional financing will be available on terms favourable to
the Company or its shareholders, or on any terms at all. The inability to obtain
such financing would have a material adverse impact on the Company's operations.
To the extent that such financing is available, it may result in substantial
dilution to existing shareholders.
Critical Accounting Policies
Continuing operations
These financial statements have been prepared on a going concern basis
notwithstanding the fact that the Company has experienced operating losses and
negative cash flows from operations during each of the three years ended
December 31, 2002. To date, the Company has financed its continuing operations
through revenue, the issuance of common shares, and from cash flows from its
former Imaging Division. Continued operations of the Company will depend upon
the attainment of profitable operations, which may require the successful
completion of external financing arrangements.
Basis of presentation
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in Canada and include the accounts of
the Company and its wholly owned subsidiary company, Infowave USA Inc., which
was incorporated on July 1, 2000. All material intercompany transactions and
balances have been eliminated on consolidation. Material differences between the
accounting principles used in these financial statements and accounting
principles generally accepted in the United States are disclosed in financial
statements note 15.
Translation of foreign currency
These consolidated financial statements are presented in United States dollars
although the Company uses the Canadian dollar as its functional currency. The
Canadian dollar functional currency financial statements are translated into
U.S. dollars using the current rate method. Under this method, assets and
liabilities are translated at rates of exchange in effect at the balance sheet
date. Revenues and expenses are translated at rates in effect at the time of the
transaction. Any gains or losses from this translation are included in a
separate cumulative translation adjustment account in shareholders' equity on
the balance sheet. Prior to 1999, these financial statements were reported in
Canadian dollars. The change in reporting currency was accounted for by the
translation of convenience method with no retroactive effect.
The financial statements of the Company's integrated foreign subsidiary,
Infowave USA Inc. have been translated into the Canadian dollar functional
currency using the temporal method. Under this method, the financial statements
are translated as follows: monetary assets and liabilities at the rate in effect
on the balance sheet date; non-monetary assets and liabilities at the rate in
effect on the transaction date; and revenues and expenses at the average rate
for the period. Gains and losses on translation are included in results from
operations.
25
Sources of Revenue and Revenue Recognition Policy
Revenues are derived from the sale of licenses and services and maintenance.
License and maintenance revenues are normally generated from licensing our
products to end-users and value added resellers. Service revenues are generated
from consulting services sold to end-users.
License revenues are recognized on delivery of our solutions to the customer
when all of the following conditions have been satisfied (SOP 97-2):
o There is persuasive evidence of an arrangement
o The fee is fixed or determinable and
o The collection of the license fee is probable
Revenues for multiple-element arrangements (which may include software licenses,
maintenance and consulting services) are allocated among the component elements
based upon the relative fair value of each element. The fair value of each
element is determined by the price charged by us when that element is sold
separately.
The Company sells through resellers with arrangements that provide a fee payable
based on a percentage of list prices. The Company recognizes revenue of only the
net fee payable to us from the reseller upon sell-through to the end customer.
The Company generally sells first year maintenance with new sales of software
licenses. Maintenance revenue is recognized over the term of the maintenance
contract that is typically one year.
The Company also recognizes revenue on the percentage of completion basis for
certain software development contracts. The Company estimates the portion of
each contract that has been completed based on time and resources already
utilized and are still required for completion of the work. Unforeseen costs
could arise in the development process that could materially impact our
measurement of overall contract progress and the percentage of the contract
completed, both of which enter into the measurement of revenue to be recognized.
Income Taxes
The consolidated financial statements reflect a full valuation allowance against
the net future income tax assets based on the Company's assessment that it is
not more likely than not to be able to utilize certain deductions before their
expiry. The Company's assessment is based on a judgement of estimated loss
before such deductions. Changes in the timing of the recognition and amount of
revenues and expenses in the future may impact the Company's ability to utilize
these deductions.
Recent accounting pronouncements:
In April 2002, the FASB issued SFAS 145 "Rescission of SFAS 4, 44 and 64,
Amendment of SFAS 13 and Technical Corrections." This standard rescinds SFAS 4,
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. The standard also amends SFAS 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The adoption
of this standard has had no impact on the Company's financial position, cash
flows or results of operations.
In July 2002, the FASB issued SFAS 146 "Accounting for Costs Associated with
Exit or Disposal Activities." This standard addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs
26
Incurred in a Restructuring)." The principal difference is that SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred versus on the date of an
entity's commitment to an exit plan. SFAS 146 also establishes that fair value
is the objective for initial measurement of the liability. The adoption of this
standard on January 1, 2003, will have a material impact the timing of
recognition of any future restructuring activities in the Company's financial
position, cash flows or results of operations.
In November 2002, the EITF reached a consensus on Issue 00-21,"Multiple Element
Arrangements". This issue addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services and/or rights
to use assets. The guidance can affect the timing of revenue recognition for
such arrangements. The final consensus will be applicable to agreements entered
into after June 15, 2003. The Company does not expect this issue to have a
material impact on its financial position, cash flows or results of operations
as the Company follows SOP 97-2 for recognition of their software sales.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
Although the Company reports in United States dollars, it conducts most of its
transactions in Canadian dollars and therefore uses the Canadian dollar as its
base currency of measurement. This results in an exposure to foreign currency
gains and losses on the resulting U.S. dollar denominated cash, accounts
receivable, and accounts payable balances. As of December 31, 2002, the Company
has not engaged in any derivative hedging activities on foreign currency
transactions and/or balances. Although foreign currency gains and losses have
not historically been material, fluctuations in exchange rates between the
United States dollar and other foreign currencies and the Canadian dollar could
materially affect the Company's results of operations. To the extent that the
Company implements hedging activities in the future with respect to foreign
currency exchange transactions, there can be no assurance that the Company will
be successful in such hedging activities.
While the Company believes that inflation has not had a material adverse effect
on its results of operations, there can be no assurance that inflation will not
have a material adverse effect on the Company's results of operations in the
future.
Item 8: Financial Statements and Supplementary Data
Financial Statements
(Expressed in United States dollars)
INFOWAVE SOFTWARE, INC.
Years ended December 31, 2002, 2001 and 2000
27
AUDITORS' REPORT TO SHAREHOLDERS
We have audited the consolidated balance sheets of Infowave Software, Inc. as at
December 31, 2002 and 2001 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three-year period ended
December 31, 2002. These financial